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
June 30, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from _____________________ to _____________________
Commission File Number 34-022552
RAILTEX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-1948121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4040 Broadway, Suite 200
SAN ANTONIO, TEXAS 78209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (210) 841-7600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of the Registrant's Common Stock as
of July 31, 1999: 9,293,214.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
1999 1998(1) 1999 1998(1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES ................................. $ 44,920 $ 39,135 $ 90,325 $ 77,547
OPERATING EXPENSES:
Transportation .................................. 15,242 13,322 30,635 27,216
General and administrative ...................... 8,278 6,971 16,348 12,471
Equipment ....................................... 5,009 4,790 10,396 9,205
Maintenance of way .............................. 4,270 4,157 8,920 8,737
Depreciation and amortization ................... 4,053 3,399 8,193 6,662
-------- -------- -------- --------
Total operating expenses ..................... 36,852 32,639 74,492 64,291
-------- -------- -------- --------
OPERATING INCOME ................................... 8,068 6,496 15,833 13,256
INTEREST EXPENSE ................................... (2,651) (2,669) (5,324) (5,356)
OTHER INCOME ....................................... 386 202 1,020 548
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE ......................... 5,803 4,029 11,529 8,448
INCOME TAXES ....................................... (2,320) (1,402) (4,668) (3,182)
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE ................ $ 3,483 $ 2,627 $ 6,861 $ 5,266
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) ...... -- -- -- (1,703)
-------- -------- -------- --------
NET INCOME ......................................... $ 3,483 $ 2,627 $ 6,861 $ 3,563
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE ............. $ 0.38 $ 0.29 $ 0.74 $ 0.58
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) ... -- -- -- (0.19)
-------- -------- -------- --------
TOTAL ........................................... $ 0.38 $ 0.29 $ 0.74 $ 0.39
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
BASIC COMMON SHARES OUTSTANDING ................. 9,286 9,189 9,281 9,180
DILUTED EARNINGS PER SHARE:
BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE ............. $ 0.37 $ 0.28 $ 0.74 $ 0.57
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) ... -- -- -- (0.18)
-------- -------- -------- --------
TOTAL ........................................... $ 0.37 $ 0.28 $ 0.74 $ 0.39
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
DILUTED COMMON SHARES OUTSTANDING ............... 9,350 9,238 9,336 9,234
</TABLE>
(1) Restated to reflect adoption of SOP 98-5 as of January 1, 1998.
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- --------------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 5,103 $ 1,243
Accounts receivable, less doubtful receivables of $1,202; $844 in 1998 30,872 33,866
Prepaid expenses and other current assets ............................ 4,566 4,848
Deferred tax assets, net ............................................. 1,906 1,906
--------- ---------
Total current assets .............................................. 42,447 41,863
--------- ---------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$59,780; $54,194 in 1998 ............................................. 289,845 291,779
--------- ---------
OTHER ASSETS:
Investments in Brazilian railroad companies .......................... 19,994 19,994
Other, net ........................................................... 13,527 8,709
--------- ---------
Total other assets ................................................ 33,521 28,703
--------- ---------
Total assets ...................................................... $ 365,813 $ 362,345
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable ............................................. $ -- $ 215
Current portion of long-term debt .................................... 1,140 8,568
Accounts payable ..................................................... 27,627 20,574
Accrued liabilities .................................................. 16,339 17,729
--------- ---------
Total current liabilities ......................................... 45,106 47,086
DEFERRED INCOME TAXES, NET .............................................. 30,449 30,294
LONG-TERM DEBT, LESS CURRENT PORTION .................................... 121,776 122,982
OTHER LIABILITIES ....................................................... 5,482 6,835
--------- ---------
Total liabilities ................................................. 202,813 207,197
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN BRAZILIAN INVESTMENT ............................... 11,000 11,000
--------- ---------
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 9,286,126; 9,273,963 in 1998 ........................... 929 927
Paid-in capital ...................................................... 85,190 85,115
Retained earnings .................................................... 66,839 59,976
Deferred compensation ................................................ (830) (948)
Accumulated other comprehensive income ............................... (128) (922)
--------- ---------
Total shareholders' equity ........................................ 152,000 144,148
--------- ---------
Total liabilities and shareholders' equity ........................ $ 365,813 $ 362,345
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
1999 1998(1)
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................................... $ 6,861 $ 3,563
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 8,193 6,662
Deferred income taxes ........................................................ 20 1,368
Amortization of deferred financing costs ..................................... 229 195
Provision for losses on accounts receivable .................................. 284 6
Gain on sale of assets ....................................................... (1,836) (409)
Cumulative effect of a change in accounting principle ........................ -- 2,747
Other ........................................................................ 224 32
Changes in working capital:
Accounts receivable ........................................................ 2,710 6,175
Prepaid expenses ........................................................... (184) 545
Accounts payable and accrued liabilities ................................... (1,539) (8,301)
-------- --------
Net cash provided by operating activities .................................... 14,962 12,583
-------- --------
INVESTING ACTIVITIES:
Purchase of investment in Central Properties, Inc. .............................. -- (14,020)
Purchase of property and equipment .............................................. (12,808) (16,405)
Proceeds from sale of property and equipment .................................... 11,060 457
Decrease (increase) in other long-term assets ................................... 615 (349)
-------- --------
Net cash used in investing activities ........................................ (1,133) (30,317)
-------- --------
FINANCING ACTIVITIES:
Payments of short-term notes payable, net ....................................... (215) (570)
Proceeds from long-term debt .................................................... -- 19,500
Principal payments on long-term debt ............................................ (2,929) (1,387)
Net (decrease) increase in working capital facility ............................. (6,555) 1,000
Issuance of common stock pursuant to stock options .............................. 82 247
Deferred financing costs ........................................................ (758) (3)
-------- --------
Net cash (used in) provided by financing activities .......................... (10,375) 18,787
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................ 406 (28)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................ 3,860 1,025
CASH AND CASH EQUIVALENTS, beginning of period ..................................... 1,243 570
-------- --------
CASH AND CASH EQUIVALENTS, end of period ........................................... $ 5,103 $ 1,595
======== ========
</TABLE>
(1) Restated to reflect adoption of SOP 98-5 as of January 1, 1998.
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, 1998. 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 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Initial application of this
statement should be as of the beginning of an entity's fiscal quarter. Earlier
application of this statement is encouraged, but it is permitted only as of the
beginning of any fiscal quarter that begins after the issuance of this
statement. In June 1999, FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137
delays the effective date of SFAS 133 to June 15, 2000. The Company believes the
adoption of this statement will not have a material impact on the financial
condition or results of operations of the Company.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires costs associated with start-up activities to be
expensed as incurred. SOP 98-5 was effective for financial statements for fiscal
years beginning after December 15, 1998. The Company adopted SOP 98-5 for the
year ended December 31, 1998. This adoption resulted in the recognition of a
non-recurring charge of approximately $1,703,000 (net of income taxes) entitled,
"Cumulative effect of a change in accounting principle (net of income taxes)" in
the accompanying consolidated financial statements. Prior to the adoption of SOP
98-5, the Company capitalized the costs associated with start-up activities,
including the acquisition of new railroad properties, and amortized those costs
over five years. Prospectively, the Company's results of operations will reflect
higher costs associated with the acquisition of new railroad properties in the
period of acquisition.
5
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
3. EARNINGS PER SHARE
The following is a reconciliation of the numerators and the denominators
of the basic and diluted earnings per share computations (in thousands, except
per share amounts).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ---------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income before cumulative effect of
a change in accounting principle ......... $3,483 $2,627 $6,861 $ 5,266
Cumulative effect of a change in
accounting principle (net of income taxes) -- -- -- (1,703)
------ ------ ------ ---------
Net income .................................. $3,483 $2,627 $6,861 $ 3,563
====== ====== ====== =========
DENOMINATOR:
Weighted average number of basic shares of
common stock outstanding ................. 9,286 9,189 9,281 9,180
Effect of dilutive stock options ............ 64 49 55 54
------ ------ ------ ---------
Weighted average number of diluted shares of
common stock outstanding ................. 9,350 9,238 9,336 9,234
====== ====== ====== =========
BASIC EARNINGS PER SHARE:
Before cumulative effect of
a change in accounting principle ......... $ 0.38 $ 0.29 $ 0.74 $ 0.58
Cumulative effect of a change in
accounting principle (net of income taxes) -- -- -- (0.19)
------ ------ ------ ---------
Total ....................................... $ 0.38 $ 0.29 $ 0.74 $ 0.39
====== ====== ====== =========
DILUTED EARNINGS PER SHARE:
Before cumulative effect of
a change in accounting principle ......... $ 0.37 $ 0.28 $ 0.74 $ 0.57
Cumulative effect of a change in
accounting principle (net of income taxes) -- -- -- (0.18)
------ ------ ------ ---------
Total ....................................... $ 0.37 $ 0.28 $ 0.74 $ 0.39
====== ====== ====== =========
</TABLE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- -------
<S> <C> <C>
Cash paid during the period for:
Interest ............................................... $5,676 $5,275
Income taxes ........................................... 2,295 1,775
Non-cash investing and financing activities:
Capital leases ......................................... 31 905
Grants ................................................. 5,931 149
Tax benefit from exercise of non-qualified stock options 37 76
Amortization of deferred compensation .................. 118 --
</TABLE>
6
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
5. 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 is exposed to fluctuations in diesel fuel prices, as an
increase in the price of diesel fuel would result in lower earnings and
increased cash outflows. The Company has entered into several commodity collar
transactions to hedge market risks of diesel fuel prices. The Company entered
into a collar which was effective July 1, 1998 and terminated June 30, 1999
which represented notional amounts totaling 225,000 gallons per month with a cap
price of $0.5600 per gallon and a floor price of $0.4490 per gallon. In February
1999, the Company entered into two additional contracts to hedge its market risk
from diesel fuel prices. The first consisted of three monthly swap agreements
which fixed the price of 725,000 gallons of diesel fuel in April, May and June
1999 at $0.3215, $0.3280 and $0.3375 per gallon, respectively. The second is a
cap which fixes the price of 725,000 gallons of diesel fuel per month for the
period July 1999 to June 2000 at $0.4500 per gallon. The cost of the cap was
approximately $209,000, which will be amortized over the period covered by the
cap. The cap, which expires in June 2000, hedges approximately 60% of the
Company's estimated monthly diesel fuel consumption.
6. LONG-TERM DEBT
In April 1999, the Company completed the refinancing and expansion of its
senior revolving credit facility to $175 million. The three year agreement
consists of a syndicate of ten banks, led by Chase Bank of Texas, N.A., who
serves as administrative agent. The facility allows for an equivalent of U.S.
$20 million to be allocated for use in Canada. The facility will be used to
finance acquisitions, capital expenditures, working capital and other general
corporate purposes. Interest payment periods range from one month to six months
depending on the type of loan. Interest rates also vary depending on the type of
loan. All borrowings become due and payable in April 2002. The unused portion of
the refinanced senior revolving credit facility is subject to a commitment fee
based on certain financial ratios.
7. DIVESTITURES
In April 1999, the Company completed the divestiture of the Northeast
Kansas & Missouri Railroad to Union Pacific, for approximately $3.2 million. The
Company also completed the divestiture of the assets of the New Orleans Lower
Coast Railroad to the New Orleans & Gulf Coast Railway Company for approximately
$5.2 million. In June 1999, the Company sold the assets of the Greenville
Northern Railroad for approximately $1.3 million.
8. RESTRICTED STOCK AWARDS
In 1998, the Company, under the 1993 Stock Plan, as amended ("Plan"),
granted 80,000 restricted shares in the form of the Company's common stock to
several key executives. The restricted shares vest ratably over three to five
years or immediately in the event of a change in control, death, disability or
termination, other than for cause. The unvested portion of the restricted shares
forfeit if the key executives are terminated for cause during the restriction
period. The awards were recorded at the fair market value of the Company's
common stock on the date of grant as deferred compensation and will be amortized
over the restriction period. For the three and six months ended June 30, 1999,
the Company recorded compensation expense of $62,579 and $111,283, respectively.
There was no compensation expense recorded for the three and six months ended
June 30, 1998.
7
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
9. 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
purchases of Central Properties, Inc. ("CPI") and Indiana & Ohio Rail Corp.
("IORC"), which were structured as acquisitions 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 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 $2.0 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.
In August 1999, one of the Company's railroads received notice from the
Utah Transit Authority ("UTA") that it has exercised its right to repurchase the
operating easement for approximately $5,000. Concurrently, UTA and Utah Railway
Company, UTA's designated freight operator, have filed with the STB for approval
to terminate the Company's common carrier authority at this railroad and to
obtain common carrier authority for Utah Railway Company. While the Company is
contesting the repurchase and these STB filings, the Company does not believe
the termination of the operating easement, if successful, will have a material
adverse effect on its financial condition and results of operations.
In October 1998, the UTA asserted a claim for contribution against one of
the Company's railroads under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") relating to certain pollution existing
at one of UTA's rail yards over which the Company has an operating easement. The
Company believes it is not a potentially responsible party under CERCLA and
believes it is contractually indemnified against such claim. The amount of
contribution being sought by the UTA is unknown at this time.
Under certain limited circumstances, two of the Company's railroads may be
repurchased by the selling carrier for their original purchase prices.
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 was the provision by the plaintiff of labor and
materials to the Company's railroad in connection with a train derailment in
August 1996, which derailment the Company believes was caused primarily by the
plaintiff. In March 1997, the Company filed a complaint in Federal Court for
approximately $700,000 incurred by the Company in connection with such
derailment and the plaintiff's State claim was combined in the Federal
litigation. In August 1999, the case went to trial and the jury ruled in favor
of the plaintiff. The verdict will not have a material adverse effect on the
Company's financial condition and results of operations.
8
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
The Company is currently subject to a number of claims and legal actions
that arose in the ordinary course of business, including Federal Employers'
Liability Act 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. However, 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.
10. COMPREHENSIVE INCOME
The Company has chosen to disclose comprehensive income in the
Consolidated Statements of Shareholders' Equity. For purposes of SFAS 130, the
Company's other comprehensive income or loss was comprised of net currency
translation adjustments. Paragraph 9(f) of Statement 109 "prohibits recognition
of a deferred tax liability or asset for differences related to assets and
liabilities that under FASB Statement No. 52, `Foreign Currency Translation,'
are remeasured from the local currency into the functional currency using
historical rates". Therefore, other comprehensive income is not being shown net
of tax.
11. SEGMENT INFORMATION
The following table presents information about the Company by geographic
area (in thousands).
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
1999 1998
-------- --------
Total Revenues:
United States ....................... $ 80,030 $ 70,375
Canada .............................. 10,212 7,172
Other foreign ....................... 83 --
-------- --------
Total .......................... $ 90,325 $ 77,547
======== ========
Operating Income:
United States ....................... $ 13,262 $ 11,111
Canada .............................. 2,489 2,075
Other foreign ....................... 82 70
-------- --------
Total .......................... $ 15,833 $ 13,256
======== ========
Assets:
United States ....................... $281,115 $266,412
Canada .............................. 20,901 19,155
Other foreign ....................... 19,994 17,967
-------- --------
Total .......................... $322,010 $303,534
======== ========
9
<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 within the
meaning of 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 and that involve known and unknown risks and
uncertainties. 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, currency risks, competitive factors, industry
performance, general economic conditions, customer relations, relationships with
vendors, changes in fuel prices, the interest rate environment, legislative
and/or regulatory developments, seasonality, technological change, changes in
industry practices, one time events, natural events, such as floods and
earthquakes, the effect of labor stoppages, the impact of Year 2000 system
problems, Class I congestion issues, environmental investigations, other types
of claims and litigation, 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 undertakes no obligation
to update, and the Company does not have a policy of updating or revising, these
forward-looking statements.
GENERAL
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, depending upon the economic and strategic considerations of the
divesting carriers. These arrangements typically relate only to the physical
assets of the railroad property; the Company typically does not contractually
assume any of the operations or liabilities of the divesting carriers. After
acquiring the right to operate a railroad property, 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, including any additions to those properties made during the year.
"New Railroad Properties" for each period are railroad properties which the
Company began operating after the start of the prior year.
For the three and six months ended June 30, 1999 compared to the three and
six months ended June 30, 1998, New Railroad Properties include the Central
Railroad of Indianapolis ("CERA") and the Central Railroad of Indiana ("CIND").
For the three and six months ended June 30, 1999 compared to the three and six
months ended June 30, 1998, Comparable Railroad Properties include the additions
of the Guelph Line and the North Dallas Lines.
10
<PAGE>
RECENT DEVELOPMENTS
In April 1999, the Company successfully completed the refinancing and
expansion of its senior revolving credit facility to $175 million. The three
year agreement consists of a syndicate of ten banks, led by Chase Bank of Texas,
N.A., who serves as administrative agent. The facility allows for an equivalent
of U.S. $20 million to be allocated for use in Canada. The unused portion of the
refinanced senior revolving credit facility is subject to a commitment fee based
on certain financial ratios.
In April 1999, the Company completed the divestiture of the Northeast
Kansas & Missouri Railroad ("NEKM") to Union Pacific ("UP"), for approximately
$3.2 million. The Company also completed the divestiture of the assets of the
New Orleans Lower Coast Railroad ("NOLR") to the New Orleans & Gulf Coast
Railway Company for approximately $5.2 million. In June 1999, the Company sold
the assets of the Greenville Northern Railroad for $1.3 million.
The Company, through its wholly-owned subsidiary, RailTex International
Holdings ("RIHI"), currently owns a 51.5% interest in RailTex Global
Investments, LLC ("LLC"), which owns equity interests in the Ferrovia Centro
Atlantica, S.A. ("FCA") and the Ferrovia Sul Atlantico, S.A. ("FSA"), which
operate railroads in Brazil. The continuing economic uncertainty existing in
Brazil has impacted the ability of FCA and FSA to finance short-term capital
needs. During the first and second quarters of 1999 the Board of Directors of
FSA implemented two calls for additional capital contributions from existing
shareholders; one to finance certain railroad acquisitions and a second to
refinance short-term debt. The LLC did not participate in the first capital
call, but participated in the second. As a result, its equity percentage in FSA
was diluted to approximately 1.7%. In July 1999, the Board of Directors of FCA
initiated a capital call. The LLC has not yet determined whether it will
participate in the call. The respective Boards of Directors of FCA and FSA may
implement additional capital contribution calls from existing shareholders in
the future. The LLC may or may not choose to participate in such capital calls.
In the event that the LLC does not participate, its equity percentage could be
further diluted.
In June 1999, CSX Transportation, Inc. ("CSX") and Norfolk Southern
Railway Company ("NS") took over ownership of Consolidated Rail Corporation
("Conrail"). As a result of the merger, both CSX and NS experienced traffic
congestion. The Company felt the effects of this congestion in Ohio, Michigan,
New England, Pittsburgh and South Carolina resulting from car supply issues and
delivery delays. Additionally, revenues were lost in the month of June due to
shippers switching to other modes of transportation to avoid service problems
caused by the congestion. The Company expects the traffic patterns will revert
back to normal in Michigan, Pittsburgh and South Carolina in the third quarter
of 1999. The Company is monitoring the situation closely in Ohio and New England
and is unable to predict at this time if the congestion issues caused by the
Conrail merger will have a material adverse affect on the Company's results of
operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
The Company's net income for the three months ended June 30, 1999
increased by approximately $856,000 to $3.5 million from $2.6 million in the
prior year period. Basic earnings per share increased to $0.38 per share from
$0.29 per share in the prior year period and diluted earnings per share
increased to $0.37 per share from $0.28 in the prior year period.
OPERATING REVENUES. Operating revenues for the three months ended June 30,
1999 increased by $5.8 million, or 14.8%, to $44.9 million from $39.1 million in
the prior year period. Carloads transported increased by 17,107 carloads, or
12.7%, to 151,841 carloads from 134,734 carloads in the prior year period.
11
<PAGE>
Freight revenues for the three months ended June 30, 1999 increased by
$5.2 million, or 15.3%, to $39.0 million from $33.8 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 June 30, 1999 and 1998.
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
(DOLLARS IN THOUSANDS, EXCEPT PER CARLOAD AMOUNTS)
<TABLE>
<CAPTION>
AVERAGE FREIGHT
REVENUES PER
FREIGHT REVENUES CARLOADS CARLOAD(1)
-------------------------------------- -------------------------------------- ---------------
1999 1998 1999 1998 1999 1998
----------------- ----------------- ----------------- ----------------- ------ -------
COMMODITY GROUP
- --------------- % OF % OF % OF % OF
DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products .... $ 7,557 19.4% $ 7,215 21.4% 18,816 12.4% 17,907 13.3% $ 402 $ 403
Coal .......................... 4,987 12.8 4,442 13.1 26,384 17.4 23,366 17.3 189 190
Chemicals ..................... 4,876 12.5 4,244 12.6 14,434 9.5 12,984 9.6 338 327
Scrap metal & metal products .. 3,365 8.6 2,827 8.4 11,655 7.7 10,678 7.9 289 265
Scrap paper & paper products .. 3,131 8.0 2,898 8.6 9,874 6.5 8,666 6.4 317 334
Farm products ................. 2,819 7.2 2,314 6.8 12,602 8.3 9,265 6.9 224 250
Railroad equipment ............ 2,594 6.7 1,797 5.3 19,636 12.9 16,647 12.4 132 108
Food products ................. 1,910 4.9 1,818 5.4 7,086 4.7 6,884 5.1 270 264
Autos ......................... 1,847 4.7 1,122 3.3 9,386 6.2 6,658 4.9 197 168
Non-metallic ores ............. 1,797 4.6 1,591 4.7 10,399 6.8 9,324 6.9 173 171
Minerals & stone .............. 1,736 4.5 1,526 4.5 5,113 3.4 4,483 3.3 339 340
Petroleum products ............ 1,171 3.0 978 2.9 2,793 1.8 2,996 2.2 419 326
Other ......................... 1,176 3.1 1,022 3.0 3,663 2.4 4,876 3.8 321 210
------- ------- ------- ------- ------- ------- ------- -------
Total .................... $38,966 100.0% $33,794 100.0% 151,841 100.0% 134,734 100.0% $ 257 $ 251
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------------
(1) Calculated as freight revenues divided by carloads.
The increase in freight revenues and carloadings is primarily due to
increases in railroad equipment which benefited from a move that existed for a
full quarter in 1999 versus only a portion of the quarter in 1998. Additionally,
autos, chemicals and scrap metal and metal products increased due to new
business, coal increased as a result of more spot moves and farm products
increased due to a strong grain season in Ohio and Indiana.
Non-freight revenues for the three months ended June 30, 1999 increased by
approximately $613,000, or 11.5%, to $6.0 million from $5.3 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 13.3% and 13.6% of
operating revenues in the three months ended June 30, 1999 and 1998,
respectively. The increase in non-freight revenues is primarily due to a gain on
sale of operating assets.
OPERATING EXPENSES. Operating expenses for the three months ended June 30,
1999 increased by $4.2 million, or 12.9%, to $36.9 million from $32.6 million in
the prior year period. The Company's operating ratio (operating expenses divided
by operating revenues) decreased for the period to 82.0% from 83.4% in the prior
year period, primarily a result of decreases in diesel fuel expense, casualties
and insurance and materials expense.
12
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during the three month periods ended June 30, 1999 and 1998, in dollars
and as a percentage of operating revenues.
OPERATING EXPENSES COMPARISON
(dollars in thousands)
1999 1998
------------------ ------------------
% OF % OF
OPERATING OPERATING
DOLLARS REVENUES DOLLARS REVENUES
--------- -------- ------- --------
Labor and benefits .............. $13,981 31.1% $12,048 30.7%
Equipment rents ................. 4,784 10.7 4,491 11.4
Depreciation and amortization ... 4,053 9.0 3,399 8.8
Diesel fuel ..................... 2,340 5.2 2,453 6.3
Purchased services .............. 3,665 8.2 2,765 7.1
Casualties and insurance ........ 1,714 3.8 1,863 4.8
Materials ....................... 1,539 3.4 1,640 4.2
Joint facilities ................ 1,224 2.7 1,073 2.7
Other ........................... 3,552 7.9 2,907 7.4
------- ---- ------- ----
Total ........................ $36,852 82.0% $32,639 83.4%
======= ==== ======= ====
Labor and benefits for the three months ended June 30, 1999 increased by
$1.9 million, or 16.0%, to $14.0 million from $12.0 million in the prior year
period. The increase in labor and benefits is primarily a result of the
acquisition of new properties and compensation expense recorded as a result of
restricted stock awards and performance shares.
Equipment rents for the three months ended June 30, 1999 increased by
approximately $293,000, or 6.5%, to $4.8 million from $4.5 million in the prior
year period. The increase in equipment rents is primarily attributable to an
increase in car hire expense, offset by a decrease in locomotive lease expense.
Depreciation and amortization for the three months ended June 30, 1999
increased by approximately $654,000, or 19.2%, to $4.1 million from $3.4 million
in the prior year period. The increase in depreciation and amortization is
primarily a result of capital asset additions for locomotives, information
systems and track and roadbed.
Diesel fuel expense for the three months ended June 30, 1999 decreased by
approximately $113,000, or 4.6%, to $2.3 million from $2.5 million in the prior
year period. The decrease in diesel fuel expense is primarily a result of the
receipt of approximately $220,000 from one of the Company's diesel fuel
contracts partially offset by a slight increase in diesel fuel prices.
Purchased services for the three months ended June 30, 1999 increased by
approximately $900,000, or 32.5%, to $3.7 million from $2.8 million in the prior
year period. The increase in purchased services is primarily a result of
increased information technology expense coupled with an increase in contract
labor at one of the Company's new properties.
Casualties and insurance expense for the three months ended June 30, 1999
decreased by approximately $149,000, or 8.0%, to $1.7 million from $1.9 million
in the prior year period. The decrease in casualties and insurance expense is a
result of decreased derailment costs.
Materials expense for the three months ended June 30, 1999 decreased by
approximately $101,000, or 6.2%, to $1.5 million from $1.6 million in the prior
year period. The decrease in materials expense is primarily due to a decrease in
locomotive and car repair materials.
13
<PAGE>
Joint facilities expense for the three months ended June 30, 1999
increased by approximately $151,000 or 14.1%, to $1.2 million from $1.1 million
in the prior year period, due primarily to one of the Company's new properties.
Other expenses for the three months ended June 30, 1999 increased by
approximately $645,000, or 22.2%, to $3.6 million from $2.9 million in the prior
year period. The increase in other expenses is primarily attributable to
increases in property taxes and bad debt expenses.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
1999 compared to the three months ended June 30, 1998 remained relatively flat,
decreasing by approximately $18,000.
OTHER INCOME. For the three months ended June 30, 1999, other income was
approximately $386,000 as compared to approximately $202,000 in the prior year
period primarily due to higher income from the sale of non-operating assets for
the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30,
1998
The Company's net income for the six months ended June 30, 1999 increased
by $3.3 million to $6.9 million from $3.6 million in the prior year period.
Basic and diluted earnings per share increased to $0.74 per share from $0.39 per
share in the prior year period.
OPERATING REVENUES. Operating revenues for the six months ended June 30,
1999 increased by $12.8 million, or 16.5%, to $90.3 million from $77.5 million
in the prior year period. Carloads transported increased by 45,715 carloads, or
17.5%, to 307,242 carloads from 261,527 carloads in the prior year period.
Freight revenues for the six months ended June 30, 1999 increased by $10.1
million, or 15.1%, to $77.1 million from $67.0 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 six months ended
June 30, 1999 and 1998.
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
(DOLLARS IN THOUSANDS, EXCEPT PER CARLOAD AMOUNTS)
<TABLE>
<CAPTION>
AVERAGE FREIGHT
REVENUES PER
FREIGHT REVENUES CARLOADS CARLOAD(1)
-------------------------------------- --------------------------------------- ---------------
1999 1998 1999 1998 1999 1998
----------------- ----------------- ------------------ ------------------ ------ ------
COMMODITY GROUP
- --------------- % OF % OF % OF % OF
DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL
------- ----- ------- ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products . $14,337 18.6% $13,863 20.7% 35,951 11.7% 34,754 13.3% $ 399 $ 399
Chemicals .................. 9,751 12.7 8,313 12.4 29,469 9.6 25,700 9.8 331 323
Coal ....................... 9,621 12.5 8,945 13.4 52,685 17.1 49,227 18.8 183 182
Scrap paper & paper products 6,302 8.2 5,805 8.7 19,886 6.5 17,475 6.7 317 332
Scrap metal & metal products 6,394 8.3 5,849 8.7 22,460 7.3 21,268 8.1 285 275
Farm products .............. 6,363 8.3 5,073 7.6 27,989 9.1 20,129 7.7 227 252
Railroad equipment ......... 5,532 7.2 2,857 4.3 42,150 13.7 23,648 9.0 131 121
Autos ...................... 3,793 4.9 2,528 3.8 19,398 6.3 14,572 5.6 196 173
Food products .............. 3,649 4.7 3,494 5.2 13,547 4.4 13,121 5.0 269 266
Non-metallic ores .......... 3,528 4.6 3,118 4.7 20,040 6.5 17,353 6.6 176 180
Minerals & stone ........... 3,283 4.3 2,758 4.1 9,921 3.2 8,079 3.1 331 341
Petroleum products ......... 2,272 2.9 2,289 3.4 6,035 2.0 6,565 2.5 377 349
Other ...................... 2,253 2.8 2,086 3.0 7,711 2.6 9,636 3.8 292 216
------- ----- ------- ----- ------- ----- ------- -------
Total ................. $77,078 100.0% $66,978 100.0% 307,242 100.0% 261,527 100.0% $ 251 $ 256
======= ===== ======= ===== ======= ===== ======= =======
</TABLE>
- ---------------
(1) Calculated as freight revenues divided by carloads.
14
<PAGE>
The increase in freight revenues and carloadings is primarily due to
increases in railroad equipment which benefited from a move that existed for a
full six months in 1999 versus only a portion of the six months in 1998.
Additionally, chemicals and farm products increased due to new business with
existing customers and the acquisition of CIND and CERA . Autos increased due to
an increase in traffic from existing customers.
Non-freight revenues for the six months ended June 30, 1999 increased by
$2.7 million, or 25.3%, to $13.2 million from $10.6 million in the prior year
period. Non-freight revenues include joint facilities, switching, demurrage, car
hire and car repair services performed for third parties and lease income. These
non-freight revenues contributed 14.7% and 13.6% of operating revenues in the
six months ended June 30, 1999 and 1998, respectively. The increase in
non-freight revenues is primarily due to gains on sale of operating assets.
OPERATING EXPENSES. Operating expenses for the six months ended June 30,
1999 increased by $10.2 million, or 15.9%, to $74.5 million from $64.3 million
in the prior year period. The Company's operating ratio (operating expenses
divided by operating revenues) decreased for the period to 82.5% from 82.9% in
the prior year period, primarily a result of decreases in diesel fuel expense.
The following table sets forth a comparison of the Company's operating
expenses during the six month periods ended June 30, 1999 and 1998, in dollars
and as a percentage of operating revenues.
OPERATING EXPENSES COMPARISON
(dollars in thousands)
1999 1998
--------------------- ----------------------
% OF % OF
OPERATING OPERATING
DOLLARS REVENUES DOLLARS REVENUES
--------- ---------- -------- -----------
Labor and benefits ............. $27,751 30.7% $23,889 30.8%
Equipment rents ................ 9,925 11.0 8,791 11.3
Depreciation and amortization .. 8,193 9.1 6,662 8.6
Diesel fuel .................... 4,859 5.4 5,104 6.6
Purchased services ............. 6,922 7.7 5,021 6.5
Casualties and insurance ....... 3,940 4.4 3,383 4.4
Materials ...................... 3,074 3.4 3,036 3.9
Joint facilities ............... 2,464 2.7 2,336 3.0
Other .......................... 7,364 8.1 6,069 7.8
------- ------- ------- -------
Total ....................... $74,492 82.5% $64,291 82.9%
======= ======= ======= =======
Labor and benefits for the six months ended June 30, 1999 increased by
$3.9 million, or 16.2%, to $27.8 million from $23.9 million in the prior year
period. The increase in labor and benefits is primarily a result of compensation
expense recorded as a result of restricted stock awards and performance shares,
an increase in business, and the acquisition of new properties.
Equipment rents for the six months ended June 30, 1999 increased by $1.1
million, or 12.9%, to $9.9 million from $8.8 million in the prior year period.
The increase in equipment rents is primarily attributable to an increase in car
hire expense.
Depreciation and amortization for the six months ended June 30, 1999
increased by $1.5 million, or 23.0%, to $8.2 million from $6.7 million in the
prior year period. The increase in depreciation and amortization is primarily a
result of capital asset additions for locomotives, information systems and track
and roadbed.
Diesel fuel expense for the six months ended June 30, 1999 decreased by
approximately $245,000, or 4.8%, to $4.9 million from $5.1 million in the prior
year period. The decrease in diesel fuel expense is primarily a result of the
receipt of approximately $290,000 from one of the Company's diesel fuel
contracts partially offset by a slight increase in diesel fuel prices.
15
<PAGE>
Purchased services for the six months ended June 30, 1999 increased by
$1.9 million, or 37.9%, to $6.9 million from $5.0 million in the prior year
period. The increase in purchased services is primarily a result of increased
information technology expense coupled with an increase in contract labor at one
of the Company's new properties.
Casualties and insurance expense for the six months ended June 30, 1999
increased by approximately $557,000, or 16.5%, to $3.9 million from $3.4 million
in the prior year period. The increase in casualties and insurance expense is a
result of increased derailment costs.
Materials expense for the six months ended June 30, 1999 increased by
approximately $38,000, or 1.3%, to $3.1 million from $3.0 million in the prior
year period. The increase in materials expense is primarily due to an increase
in locomotive materials coupled with more activity as a result of new properties
offset by a decrease in car repair materials.
Joint facilities expense for the six months ended June 30, 1999 increased
by approximately $128,000 or 5.5%, to $2.5 million from $2.3 million in the
prior year period, due primarily to new properties.
Other expenses for the six months ended June 30, 1999 increased by $1.3
million, or 21.3%, to $7.4 million from $6.1 million in the prior year period.
The increase in other expenses is primarily attributable to increases in
property taxes, bad debt expenses, and the addition of new properties.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
compared to the six months ended June 30, 1998 remained relatively flat,
decreasing by approximately $32,000.
OTHER INCOME. For the six months ended June 30, 1999, other income was
$1.0 million as compared to approximately $548,000 in the prior year period
primarily due to higher gain from the sale of non-operating assets for the six
months ended June 30, 1999.
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 six months ended June 30, 1999, the Company generated cash from
operations of $15.0 million which was primarily used to fund capital
expenditures as follows (in thousands):
Track.......................................... $ 8,207
Locomotives.................................... 3,229
Technology..................................... 384
Other.......................................... 988
--------
$ 12,808
========
At June 30, 1999, the Company had long-term senior debt, capital leases
and senior subordinated debt outstanding totaling, in U.S. Dollars, $122.9
million, which constituted 44.7% of its total capitalization. Comparable figures
at December 31, 1998 were $131.6 million and 47.7%, respectively.
At June 30, 1999, availability under the Company's $175.0 million senior
revolving credit facility was $160.9 million. The unused portion of all of the
Company's senior revolving credit facility is subject to a 0.30% to 0.50%
commitment fee based on certain financial ratios.
The Company currently anticipates that its total maintenance capital
expenditure requirements in 1999 for track, locomotives and equipment will be
approximately $20.0 million, which includes the $12.8 million already funded.
Additionally, computer hardware, software and related capital expenditures are
currently expected to be approximately $2.0 million.
16
<PAGE>
In April 1999, the Company completed the divestiture of the NEKM to UP for
approximately $3.2 million. The Company also completed the divestiture of the
assets of NOLR to New Orleans & Gulf Coast Railway Company for approximately
$5.2 million. In June 1999, the Company sold the assets of the Greenville
Northern Railroad for $1.3 million. Proceeds from these transactions were used
to reduce long-term debt and for general corporate purposes.
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 interest. At June 30, 1999, the Company was in compliance with
all such covenants.
The Company believes its cash flow from operations together with the amounts
available under its senior revolving credit facility will allow it to meet its
liquidity and capital expenditure requirements for railroads it currently
operates through the expiration of the facility in April 2002.
INFLATION
In recent years, inflation has not had a significant impact on the
Company's operations. The Company's contracts with connecting carriers typically
include clauses that adjust the Company's per car fees based on the Surface
Transportation Board's ("STB") cost or inflation indices.
SEASONALITY
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 June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Initial application of this
statement should be as of the beginning of an entity's fiscal quarter. Earlier
application of this statement is encouraged, but it is permitted only as of the
beginning of any fiscal quarter that begins after the issuance of this
statement. In June 1999 FASB issued Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays
the effective date of SFAS 133 to June 15, 2000. The Company believes the
adoption of this statement will not have a material impact on the financial
condition or results of operations of the Company.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP
98-5"). SOP 98-5 requires costs associated with start-up activities to be
expensed as incurred. SOP 98-5 was effective for financial statements for fiscal
years beginning after December 15, 1998. The Company adopted SOP 98-5 for the
year ended December 31, 1998. This adoption resulted in the recognition of a
non-recurring charge of approximately $1,703,000 (net of income taxes) entitled,
"Cumulative effect of a change in accounting principle (net of income taxes)" in
the accompanying consolidated financial statements. Prior to the adoption of SOP
98-5, the Company capitalized the costs associated with start-up activities,
including the acquisition of new railroad properties, and amortized those costs
over five years. Prospectively, the Company's results of operations will reflect
higher costs associated with the acquisition of new railroad properties in the
period of acquisition.
17
<PAGE>
YEAR 2000 COMPLIANCE
The Company has completed its assessment of its Year 2000 compliance. This
assessment included a review of all of the Company's information technology
systems. The Company currently believes that its largest information technology
applications are Year 2000 compliant. However, the Company will continue to
conduct testing on certain of those systems through September 1999. The Company
has determined that certain components of its information technology
infrastructure are not Year 2000 compliant. These components include servers,
components of its wide area network and certain personal computer software
packages. The Company plans to upgrade all of these non-compliant components to
make them Year 2000 compliant by November 1999. The total estimated external
cost associated with these upgrades are approximately $300,000, of which
approximately $245,000 has already been incurred. Internal costs associated with
these upgrades primarily consist of payroll and related costs for Company
employees and the portion of the EDS information technology outsourcing fees
allocated to Year 2000 remediation. Such costs total approximately $650,000, of
which about one-half has been incurred.
The Company has also evaluated its non-information technology systems that
use micro controllers, such as locomotives, railroad crossing signals, telephone
systems, dispatching systems and other railroad equipment, that may be subject
to Year 2000 risk. The Company believes that its locomotives, railroad crossing
signals and the majority of its telephone systems, dispatching systems and other
railroad equipment are Year 2000 compliant. However, the Company has determined
that certain telephone systems, dispatching systems and other railroad equipment
are not Year 2000 compliant. The Company plans to replace the non-compliant
telephone systems, dispatching systems and other railroad equipment by October
1999 at a total estimated external cost of $275,000, of which $140,000 has
already been incurred. Internal costs associated with these upgrades are not
expected to be significant.
All affected systems of the Company are scheduled to be Year 2000
compliant, tested and verified by November 30, 1999; however, the Company cannot
guarantee that none of its systems will malfunction. As a precaution against
railroad crossing signals that may malfunction as a result of the Year 2000
problem, the first train or inspection vehicle through all railroad crossings on
RailTex tracks after December 31, 1999 will operate under a "Stop and Flag"
order. This order requires the train or inspection vehicle to stop at each
railroad crossing, determine if the railroad crossing signal is working and in
the event that it is not working, have a person control traffic through the
crossing with the use of flags. Any malfunctioning railroad crossing signals
that are discovered as a result of this process will be replaced by the Company.
As an additional part of its assessment, the Company has been
investigating the Year 2000 compliance status of its vendors and customers. The
Company has completed its assessment of the status of its product vendors and
the results of that compliance are included in the above disclosures. The
Company has determined that approximately 65% of its service vendors and
customers are or expect to become Year 2000 compliant. The Company has been
unable to determine the status of the remaining 35% of its service vendors and
customers due to unresponsiveness. However, the Company is continuing to contact
the unresponsive service vendors and customers in order to determine their Year
2000 compliance status. If any of the Company's significant vendors or
customers fail to successfully and timely achieve Year 2000 compliance, the
Company's business or operations may be adversely affected.
The Company is a member of the American Association of Railroad's Rail
Industry Year 2000 Coordination Task Force, which was formed to share Year 2000
issues related to the railroad industry, to help test for Year 2000 compliance
and to help implement Year 2000 compliance changes. The Company, and the
railroad industry as a whole, are susceptible to increased risks, including
significant business interruption, should any of the Class I railroads fail to
timely achieve Year 2000 compliance.
The above disclosure concerning the Company's Year 2000 compliance, and
that of its vendors and customers, contains "forward-looking" statements that
are based upon the beliefs of the Company's management and are subject to all of
the qualifications set forth at the beginning of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(A). The Annual Meeting of Shareholders was held on May 26, 1999.
(B). In accordance with the bylaws of the Company, the following directors were
elected to serve for a three year term expiring in 2002 and until their
respective successors are elected and qualified:
Laura D. Davies
Bruce M. Flohr
Palmer L. Moe
In accordance with the bylaws of the Company, the following director was
elected to serve for a two year term expiring in 2001 and until his
respective successor is elected and qualified:
Ronald A. Rittenmeyer
(C).(1). The directors named in (B.) above were elected by the following votes:
NOMINEE FOR WITHHELD
------- --------- --------
Laura D. Davies 8,514,200 66,872
Bruce M. Flohr 8,517,035 64,037
Palmer L. Moe 8,523,574 57,498
Ronald A. Rittenmeyer 8,522,850 58,222
(C).(2). A majority of the shares were voted to increase by 400,000 the maximum
number of shares of Common Stock issuable under the Company's 1993
Stock Plan, as amended. The vote was 7,019,731 for, 1,545,776 against,
and 15,565 abstentions.
(C).(3). A majority of shares were voted to approve Arthur Andersen LLP as the
Company's auditors for the 1999 fiscal year. The vote was 8,546,691
for, 24,865 against, and 9,516 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------
10.30 Form of Amended 1993 Stock Plan of the Company
27.1 Financial Data Schedule.
(B). REPORTS ON FORM 8-K:
None.
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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: August 13, 1999 By: /s/ JOSEPH P. JAHNKE
Name: JOSEPH P. JAHNKE
Title: Senior Vice President-Finance
and Chief Financial Officer
20
EXHIBIT 10.30
RAILTEX, INC.
1993 STOCK PLAN
1. PURPOSE. This 1993 Stock Plan, as amended, (the "Plan") is intended to
provide incentives (a) to the officers and other employees of RailTex, Inc. (the
"Company"), its parent (if any) and any present or future subsidiaries of the
Company (collectively, "Related Corporations") by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which qualify as "incentive stock options" under Section 422A(b) of
the Internal Revenue Code of 1986 (the "Code") ("ISO" or "ISOs"); (b) to
directors, officers, employees and consultants of the Company and Related
Corporations, or any other person or entity, by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified
Options"); (c) to directors, officers, employees and consultants of the Company
and Related Corporations, or any other person or entity, by providing them with
awards of stock in the Company ("Awards"); (d) to directors, officers, employees
and consultants of the Company and Related Corporations, or any other person or
entity, by providing them with Stock Appreciation Rights ("SAR" or "SARs") in
tandem with, or independently of, options granted hereunder; (e) to directors,
officers, employees and consultants of the Company and Related Corporations, or
any other person or entity, by providing them with performance awards in the
form of units ("Units") representing phantom shares of stock ("phantom share" or
"phantom shares"), each Unit representing one phantom share; (f) to directors,
officers, employees and consultants of the Company and Related Corporations, or
any other person or entity, by providing them with opportunities to make direct
purchases of stock in the Company ("Purchases"); and (g) to outside directors by
providing each of them with annual grants of ten-year options to purchase 3,000
shares of Common Stock ("Outside Directors' Options").
ISOs, Non-Qualified Options and Outside Directors' Options are referred to
hereafter individually as an "Option" and collectively as "Options." Options,
Awards, SARs, Units and authorizations to make Purchases are referred to
hereafter collectively as "Stock Rights." Recipients of such Stock Rights are
hereafter referred to individually as an "Optionee" and collectively as
"Optionees." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation" respectively, as those terms are
defined in Section 425 of the Code.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by (i) to
the extent required by Section 162(m) of the Code and Rule 16b-3, or any
successor or amended rule ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), by two or more outside
directors of the Board of Directors (the "Board") or (ii) in all other cases by
such administrator or administrators as the Board may designate (collectively,
the "Administrators"). The term "outside director" shall mean (i) for purposes
of the preceding sentence, "outside director" as defined in Section 162(m) of
the Code, and the rules and regulations promulgated thereunder, and a
"non-employee director" as defined under Rule 16b-3, and (ii) for all other
purposes of the Plan, as a director who is not a full-time employee of the
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Company or any of the Related Corporations. Subject to terms of the Plan, the
applicable Administrator shall have the authority to (i) determine the employees
of the Company and Related Corporations (from among the class of employees
eligible under paragraph 1 to receive ISOs) to whom ISOs may be granted and to
determine (from among the class of individuals and entities eligible under
paragraph 1 to receive Non-Qualified Options, Awards, SARs and Units and to make
Purchases) to whom Non-Qualified Options, Awards, SARs, Units and authorizations
to make Purchases may be granted; (ii) determine the time or times at which
Options, Awards, SARs or Units may be granted or Purchases made; (iii) determine
the option price of shares subject to each Option (subject to the requirements
of paragraph 4 with respect to ISOs and paragraph 5 with respect to
Non-Qualified Options); (iv) determine the purchase price of shares subject to
each Purchase; (v) determine whether each Option granted shall be an ISO or a
Non-Qualified Option; (vi) determine the time or times when each Option shall
become exercisable and the duration of the exercise period (subject to paragraph
4 with respect to ISOs and paragraph 5 with respect to Non-Qualified Options);
(vii) determine whether restrictions such as repurchase options are to be
imposed on shares subject to Stock Rights and the nature of such restrictions,
if any; and (viii) interpret the Plan and prescribe and rescind rules and
regulations relating to it; however, neither (a) the Board nor the applicable
Administrator shall have any authority to determine whether or when an outside
director shall receive or exercise Outside Directors' Options (or to determine
the exercise price of such Outside Directors' Options) other than to ensure
compliance with the terms of the Plan with respect to Outside Directors' Options
or (b) neither the Board nor the applicable Administrator shall have any
authority to reprice to a lower exercise price any Option issued pursuant to the
Plan without the prior affirmative vote of the holders of a majority of the
shares of the Common Stock present, in person or by proxy, and voting at a
meeting of the shareholders. With respect to persons subject to Section 16 of
the 1934 Act, transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3. To the extent any provision of the Plan or
action by the applicable Administrator fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
applicable Administrator. The interpretation and construction by the applicable
Administrator of any provisions of the Plan or of any Stock Right granted under
it shall be final unless otherwise determined by the Board. Administrators or
the Board may from time to time adopt such rules and regulations for carrying
out the Plan as they may deem best. No member of the Board, any Administrator
nor the Company shall be liable for any action or determination made in good
faith with respect to the Plan or any Stock Right granted under it.
3. STOCK. The stock subject to the Stock Rights shall be authorized but
unissued shares of the Company's Common Stock, par value $.10 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares of Common Stock which may be issued
pursuant to the Plan is 1,650,000; PROVIDED, HOWEVER, that in no event shall the
number of shares of Common Stock subject to, and issued upon the exercise of,
ISOs exceed 1,650,000 in the aggregate; PROVIDED FURTHER that the aggregate
number of shares of Common Stock subject to, and issuable or issued under, the
Plan and the shares of Common Stock subject to the Company's outstanding options
to purchase 306,168 shares of Common Stock that were granted outside of the Plan
shall not exceed 1,650,000; PROVIDED FURTHER that the maximum number of shares
of Common Stock issuable under the Plan to any employee in any calendar year
shall not exceed 1,650,000; and PROVIDED FURTHER that the 400,000 additional
shares of Common Stock authorized for issuance under the Plan by the
shareholders at the Company's Annual Meeting of Shareholders on May 26, 1999,
may only be issued as Options, and not as any other Stock Rights, under the
Plan. The number of shares authorized for the grant of Stock Rights under the
Plan shall be subject to adjustment as provided in
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paragraph 10. If any Option or any other Stock Right granted under the Plan
shall expire or terminate for any reason without having been exercised in full
or shall cease for any reason to be exercisable in whole or in part, or if the
Company shall reacquire any unvested shares issued pursuant to any Stock Right
the unpurchased shares subject to such Options or Stock Rights and any unvested
shares so reacquired by the Company shall again be available for grants of Stock
Rights under the Plan to the extent permitted by Rule 16b-3.
4. ISO PROVISIONS. Any of the following provisions shall have no force or
effect if its inclusion in the Plan is not necessary for Options issued as ISOs
to qualify as ISOs pursuant to the Code and the regulations issued thereunder.
A. GRANT OF ISO. All ISOs shall be granted under the Plan within ten
(10) years of the date of the Plan's adoption by the Board or the date the Plan
receives the requisite shareholder approval, whichever is earlier.
B. MINIMUM OPTION PRICE FOR ISOS.
(i) The price per share specified in the agreement
relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the
date of such grant. In the case of an ISO to be granted to an
employee owning stock representing more than ten percent of
the total combined voting power of all classes of stock of the
Company or any Related Corporation, the price per share
specified in the agreement relating to such ISO shall not be
less than 110 percent of the fair market value per share of
Common Stock on the date of grant.
(ii) In no event shall the aggregate fair market value
(determined at the time an ISO is granted) of Common Stock for
which ISOs granted to any employee are exercisable for the
first time by such employee during any calendar year (under
all stock option plans of the Company and any Related
Corporation) exceed $100,000.
(iii) If, at the time an ISO is granted under the Plan,
the Company's Common Stock is publicly traded, "fair market
value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are
available prior to the date such Option is granted and shall
mean (a) the last reported sales price of the Common Stock on
the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (b) the last reported sale
price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded
on a national securities exchange; or (c) the closing bid
price (or the average of bid prices) last quoted (on that
date) by an established
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<PAGE>
quotation service for over-the-counter securities, if the
Common Stock is not reported on the NASDAQ National Market
List. However, if the Common Stock is not publicly traded at
the time an ISO is granted under the Plan, "fair market value"
shall be deemed to be the fair market value of the Common
Stock as determined by the applicable Administrator after
taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and
offer prices of the Common Stock in private transactions
negotiated at arm's length.
C. DURATION OF ISOS. Subject to earlier termination as provided in
subparagraphs F and G hereunder, each ISO shall expire on the date specified by
the applicable Administrator, but not more than (i) ten years from the date of
grant in the case of ISOs generally, and (ii) five years from the date of grant
in the case of ISOs granted to an employee owning stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or any Related Corporation. Subject to the foregoing provisions and such
earlier termination as provided in said subparagraphs E and F, the term of each
ISO shall be the term set forth in the original instrument granting such ISO,
except with respect to any part of such ISO that is converted into a
Non-Qualified Option pursuant to subparagraph K below.
D. ELIGIBLE EMPLOYEES. ISOs may be granted to any employee of the
Company or any Related Corporation. Those officers and directors of the Company
who are not employees may not be granted ISOs under the Plan.
E. ACCELERATION OF EXERCISE OF ISOS. The Administrator shall not,
without the consent of the Optionee, accelerate the exercise date of any
installment of any ISO granted to any employee (and not previously converted
into a Non-Qualified Option pursuant to subparagraph K below) if such
acceleration would violate the annual vesting limitation contained in Section
422A(d) of the Code, as described in subparagraph B(ii) hereinabove.
F. EFFECT OF TERMINATION OF EMPLOYMENT ON ISOS. If an ISO Optionee
ceases to be employed by the Company or any Related Corporation other than by
reason of death or disability (as such term is defined in subparagraph I
hereunder), any ISO granted to such Optionee within the six-month period
immediately preceding such termination shall be cancelled forthwith. With
respect to any ISOs granted to such Optionee more than six months prior to such
termination, no further installments of such ISOs shall become exercisable and
his ISOs shall terminate after the passage of 60 days from the date of
termination of his employment, but in no event later than on their specified
expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
subparagraph K below. Leave of absence with the written approval of the
applicable Administrator shall not be considered an interruption of employment
under the Plan, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the employee
after the approved period of absence. Employment shall also be considered as
continuing uninterrupted during any other bona fide leave of absence (such as
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<PAGE>
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such Optionee's right to reemployment is guaranteed by
statute. ISOs granted under the Plan shall not be affected by any change of
employment within or among the Company and Related Corporations, so long as the
Optionee continues to be an employee of the Company or any Related Corporation.
G. EFFECT OF DEATH OR DISABILITY ON ISOS. If an Optionee ceases to
be employed by the Company or any Related Corporation by reason of his death,
any ISO of his may be exercised, to the extent of the number of shares with
respect to which he could have exercised it on the date of his death, by his
estate, personal representative or beneficiary who has acquired the ISO by will
or by the laws of descent and distribution, at any time prior to the earlier of
the date specified in the ISO agreement, the ISO's specified expiration date or
one year of the death of the Optionee.
If an Optionee ceases to be employed by the Company and all Related
Corporations by reason of his disability, he shall have the right to exercise
any ISO held by him on the date of termination of employment, to the extent of
the number of shares with respect to which he could have exercised it on that
date, at any time prior to the earlier of the date specified in the ISO
agreement, the ISO's specified expiration date or one year from the date of the
termination of the Optionee's employment. For the purposes of the Plan, the term
"disability" shall mean "permanent and total disability" as defined in Section
22(e)(3) of the Code or successor statute.
H. ADJUSTMENTS. Any adjustment made pursuant to paragraphs 10(A) or
(B) with respect to ISOs shall be made only after the applicable Administrator,
after consulting with counsel for the Company, determines whether such
adjustments would constitute a "modification" of such ISOs (as that term is
defined in Section 425 of the Code) or would cause any adverse tax consequences
for the holders of such ISOs. If the applicable Administrator determines that
such adjustments made with respect to ISOs would constitute a modification of
such ISOs, it may refrain from making such adjustments.
I. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITIONS. Each employee
who receives an ISO must agree to notify the Company in writing immediately
after the employee makes a "disqualifying disposition" of any Common Stock
acquired pursuant to the exercise of an ISO. A "disqualifying disposition" is
any disposition (including any sale) of such Common Stock before the later of
(a) two years after the date the employee was granted the ISO or (b) one year
after the date the employee acquired Common Stock by exercising the ISO. If the
employee has died before such stock is sold, these holding period requirements
do not apply and no Disqualifying Disposition can occur thereafter.
J. OTHER REQUIREMENTS. ISOs shall be issued subject to such
additional requirements as may be imposed from time to time by the Code or the
regulations issued thereunder.
K. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF
ISOS. The
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applicable Administrator, at the written request of any Optionee, may in its
discretion take such actions as may be necessary to convert such Optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the Optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but not be limited to, extending the exercise period
or reducing the exercise price of the appropriate installments of such Options.
At the time of such conversion, the applicable Administrator (with the consent
of the Optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the applicable Administrator in its discretion may
determine, provided that such conditions shall not be inconsistent with the
provisions of paragraph 5 or any other paragraph of the Plan. Nothing in the
Plan shall be deemed to give any Optionee the right to have such Optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Administrator takes appropriate action. The applicable
Administrator, with the consent of the Optionee, may also terminate any portion
of any ISO that has not been exercised at the time of such termination.
5. NON-QUALIFIED OPTIONS.
A. MINIMUM OPTION PRICE. The price per share specified in the
agreement relating to each Non-Qualified Option granted under the Plan shall not
be less than the fair market value per share of Common Stock on the date of such
grant. If, at the time a Non-Qualified Option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such Non-Qualified Option is
granted and shall mean (i) the last reported sales price of the Common Stock on
the principal national securities exchange on which the Common Stock is traded,
if the Common Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or the average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the NASDAQ
National Market List. However, if the Common Stock is not publicly traded at the
time a Non-Qualified Option is granted under the Plan, "fair market value" shall
be deemed to be the fair market value of the Common Stock as determined by the
applicable Administrator after taking into consideration all factors which it
deems appropriate, including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at arm's length.
B. DURATION OF NON-QUALIFIED OPTIONS. Each Non-Qualified Option
shall expire on the date specified by the applicable Administrator, but not more
than ten (10) years from the date of grant.
C. VESTING OF NON-QUALIFIED OPTIONS. Subject to any longer or
shorter vesting period and any termination provisions which the applicable
Administrator may impose, a
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Non-Qualified Option shall be exercisable as follows: (i) 20% of the shares
under the Non-Qualified Option shall be exercisable one calendar year after the
date of its grant, (ii) an additional 20% of the shares under the Non-Qualified
Option shall be exercisable two calendar years after the date of its grant,
(iii) an additional 20% of the shares under the Non-Qualified Option shall be
exercisable three calendar years after the date of its grant, (iv) an additional
20% of the shares under the Non-Qualified Option shall be exercisable four
calendar years after the date of its grant, and (v) the last 20% of the shares
under the Non-Qualified Option shall be exercisable five calendar years after
the date of its grant.
D. MAINTAIN NON-ISO STATUS. If the applicable Administrator
determines to issue a Non-Qualified Option, it shall take whatever actions it
deems necessary, under Section 422A of the Code and the regulations promulgated
thereunder, to ensure that such Non-Qualified Option is not treated as an ISO.
6. STOCK APPRECIATION RIGHTS. At the discretion of the applicable
Administrator, Options granted under this Plan may be granted in tandem with
SARs ("tandem SARS"), or SARs may be granted independently of and not in tandem
with any Option ("naked SARs"). SARs will become exercisable at such time or
times, and on such conditions, as the applicable Administrator may specify; the
applicable Administrator may impose conditions upon the grant or exercise of any
SAR, which conditions may include a condition that the SAR may only be exercised
in accordance with rules and regulations adopted by the applicable Administrator
from time to time. Such rules and regulations may govern the right to exercise
the SAR granted prior to the adoption or amendment of such rules and regulations
as well as SAR rights granted thereafter.
A. TANDEM SARS.
(i) Any tandem SAR granted with an ISO may be granted
only at the date of grant of such ISO. Any tandem SAR granted
with a Non-Qualified Option may be granted either at or after
the time such Option is granted. A tandem SAR is the right of
an Optionee, without payment to the Company (except for
applicable withholding taxes), to receive the excess of the
fair market value (as defined in subparagraph 4(B)(iii)) per
share on the date on which such SAR is exercised over the
option price per share as provided in the relating underlying
Option. A tandem SAR granted with an ISO may be exercised only
when the fair market value (as defined in subparagraph
4(B)(iii)) per share of the Common Stock subject to the ISO
exceeds the per share exercise price of the ISO. A tandem SAR
granted with an Option shall pertain to, and be granted only
in conjunction with, the related underlying Option granted
under this Plan and shall be exercisable and exercised only to
the extent that the underlying Option is exercisable. The
number of shares of Common Stock subject to such tandem SAR
shall be all or part of the shares subject to such Option as
determined by the applicable Administrator. The tandem SAR
shall either
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become fully or partially non-exercisable and shall then be
fully or partially forfeited if the exercisable portion, or
any part thereof, of the underlying Option is exercised and
vice versa.
(ii) Subject to any restrictions or conditions imposed
by the applicable Administrator, a tandem SAR may be exercised
by the Optionee as to a number of shares of Common Stock under
its related Option only upon the surrender of the
then-exercisable portion of the related Option covering a like
number of shares of Common Stock. Upon the exercise of a
tandem SAR and the surrender of the exercisable portion of the
related Option, the Optionee shall be awarded cash, shares of
Common Stock or a combination of shares and cash at the
discretion of the applicable Administrator. The award shall
have a total value equal to the product obtained by
multiplying (1) the excess of the fair market value per share
on the date on which such tandem SAR is exercised over the
Option price per share by (2) the number of shares subject to
the exercisable portion of the related Option so surrendered.
B. NAKED SARS.
(i) A naked SAR may be granted irrespective of whether
the recipient holds, is being granted, or has been granted any
options under any stock plan of the Company. A naked SAR may
be granted irrespective of whether the recipient holds, is
being granted, or has been granted any tandem SARs. A naked
SAR may be made exercisable without regard to the
exercisability of any option.
(ii) With respect to the exercise of any naked SAR, the
term "Spread" as used in this paragraph 6 shall mean an amount
equal to the product computed by multiplying (1) the excess of
(A) the fair market value per share of Common Stock of the
Company on the date such naked SAR is exercised over (B) the
price designated by the applicable Administrator (the "Award
Price") by (2) the number of shares with respect to which such
naked SAR is being exercised.
C. GENERAL PROVISIONS.
(i) The applicable Administrator may specify that a SAR
shall be exercisable for cash, for shares, for a combination
of cash or shares, or in cash or shares at the holder's
option. On the exercise of a SAR, the holder thereof, except
as provided in subparagraphs (ii) and (iii) of this paragraph
6(C), shall be entitled to receive either:
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(a) if the exercise is for shares, a number of shares
equal to the quotient computed by dividing the Spread by
the fair market value per share on the date of exercise
of the SAR, PROVIDED, HOWEVER, that in lieu of
fractional shares the Company shall pay cash equal to
the same fraction of the fair market value per share on
the date of exercise of the SAR; or
(b) if the exercise is for cash, an amount in cash equal
to the Spread; or
(c) if the exercise is partly for cash and partly for
shares, a combination of cash in the amount specified in
such SAR holder's notice of exercise, and a number of
shares calculated as provided in clause (a) of this
subparagraph (i), after reducing the Spread by such cash
amount, plus cash in lieu of any fractional share as
provided above.
(ii) Notwithstanding the provisions of subparagraph (i)
of this paragraph 6(C) the applicable Administrator shall have
sole discretion to consent to or disapprove, in whole or in
part, any permitted election or the right without election of
a holder of a SAR to receive cash upon the exercise of a SAR
("Cash Election"). Such consent or disapproval may be given at
any time after the Cash Election to which it relates. If the
applicable Administrator shall disapprove a Cash Election, in
lieu of paying the cash (or any portion thereof) specified in
such Cash Election, the Administrator shall determine the
amount of cash, if any, to be paid pursuant to such Cash
Election and shall issue a number of shares calculated as
provided in clause (a) of subparagraph (i) of this paragraph
6(C), after reducing the Spread by such cash to be paid plus
cash in lieu of any fractional share.
(iii) SARs granted or to be granted to officers or
directors of the Company under the Plan shall be subject to
the following additional provisions: (a) no grant shall be
made unless and until the Company has been subject to the
reporting requirements of Section 13(a) of the 1934 Act for at
least a year and has filed all reports and statements required
to be filed pursuant to such Section for that year; and (b) no
Cash Election may be made (and no related Option exercised)
during the six months after grant, except in the event of the
death or disability of the holder. The Company intends that
this subparagraph (iii) shall comply with the requirements of
Rule 16b-3. Should any provision of this subparagraph (iii) be
unnecessary to comply with the requirements of the said Rule
16b-3, the Board may amend this Plan to add to or modify the
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provisions of this Plan accordingly.
(iv) Except as otherwise provided by the applicable
Administrator, no SAR shall be transferable except by will or
by the laws of descent and distribution. During the life of a
holder of a SAR, the SAR shall be exercisable only by him or
his guardian or legal representative.
(v) A person exercising a SAR for shares shall not be
treated as having become the registered owner of any shares
issued on such exercise until such shares are delivered to
him.
(vi) Each SAR shall be on such terms and conditions
(including additional terms and conditions) not inconsistent
with this Plan as the applicable Administrator may determine.
(vii) To exercise a SAR, the holder shall (i) give
written notice thereof to the Company addressed to the
Secretary of the Company by delivery to RailTex, Inc. at 4040
Broadway, Suite 200, San Antonio, Texas 78209, and by
specifying therein the amount he elects (if such election is
permitted under the terms of the SAR) to receive in cash, if
any, and the amount he elects (if such election is permitted
under the terms of the SAR) to receive in shares and (ii)
deliver to the Company such written representations,
warranties and covenants as may be required by the Company or
Company counsel. The date of exercise of a SAR shall be the
date on which the Company shall have received the notice
referred to in the first sentence of this subparagraph (vii).
(viii) The number of shares awardable to an Optionee
with respect to the noncash portion of a SAR shall be
determined by dividing such noncash portion by the fair market
value per share (as determined in accordance with subparagraph
4(B)(iii)) on the exercise date. No fractional shares shall be
issued. Any fractional shares which, but for this subparagraph
(viii), would have been issued to an Optionee pursuant to a
SAR, shall be deemed to have been issued and immediately sold
to the Company for their fair market value, and the Optionee
shall receive from the Company cash in lieu of such fractional
shares.
7. UNITS. At the discretion of the applicable Administrator, performance
awards in the form of Units may be granted either independently of or in tandem
with a Stock Right granted hereunder, to such extent as determined by the
applicable Administrator, except that such Units shall not be granted in tandem
with ISOs granted under the Plan. Units granted hereunder may be based on such
factors as changes in the market price for shares of Common Stock of the
Company, personal performance of the recipient of such Units or of his division
or department,
10
<PAGE>
the performance of the Related Corporation by which he is employed, or any other
factors or criteria set by the applicable Administrator. Units shall have such
other terms and conditions as the applicable Administrator shall determine and
shall be payable in such form as such Administrator may determine including, for
example, payment in shares of the Company's Common Stock.
8. OUTSIDE DIRECTORS' OPTIONS.
A. GRANT. On January 1 of each calendar year after the date the Plan
is approved by the shareholders of the Company, each outside director then
serving shall receive an option to purchase 3,000 shares of Common Stock
(individually, an "Outside Director's Option," and collectively, "Outside
Directors' Options").
B. MINIMUM PURCHASE PRICE. The exercise price per share of the
Outside Directors' Options shall not be less than the fair market value per
share of Common Stock on the date of such grant. If, at the time an Outside
Director's Option is granted under the Plan, the Company's Common Stock is
publicly traded, "fair market value" shall be determined as of the last business
day for which the prices or quotes discussed in this sentence are available
prior to the date such Outside Director's Option is granted and shall mean (i)
the last reported sales price of the Common Stock on the principal national
securities exchange on which the Common Stock is traded, if the Common Stock is
then traded on a national securities exchange; or (ii) the last reported sale
price (on that date) of the Common Stock on the NASDAQ National Market List, if
the Common Stock is not then traded on a national securities exchange; or (iii)
the closing bid price (or the average of bid prices) last quoted (on that date)
by an established quotation service for over-the-counter securities, if the
Common Stock is not reported on the NASDAQ National Market List. However, if the
Common Stock is not publicly traded at the time an Outside Director's Option is
granted under the Plan, "fair market value" shall be the average of the three
most recent sale and offer prices of the Common Stock in private transactions
negotiated at arm's length.
C. DURATION OF OUTSIDE DIRECTORS' OPTIONS. Each Outside Director's
Option shall expire ten (10) years from the date of grant and, subject to any
shorter vesting period and any termination provisions which the applicable
Administrator may impose, each Outside Director's Option shall be exercisable as
follows: (i) 33.33% of the shares under the Outside Directors' Option shall be
exercisable one calendar year after the date of its grant, (ii) an additional
33.33% of the shares under the Outside Directors' Option shall be exercisable
two calendar years after the date of its grant, and (iii) the last 33.33% of the
shares under the Outside Directors' Option shall be exercisable three calendar
years after the date of its grant.
D. EXERCISE. An outside director may exercise an Outside Director's
Option, if exercisable, by providing written notice to the Company addressed to
the Secretary of the Company at 4040 Broadway, Suite 200, San Antonio, Texas
78209. The written notice shall specify the number of options being exercised,
and by paying the full exercise price. The written notice shall also include
such written representations, warranties and covenants as may be required by the
Company, Company counsel or the applicable Administrator.
E. MAINTAIN NON-ISO STATUS. The applicable Administrator shall take
whatever actions it deems necessary, under Section 422A of the Code and the
regulations
11
<PAGE>
promulgated thereunder, to ensure that any such Outside Director's Option is not
treated as an ISO.
F. HOLDING PERIOD AND TERMINATION. An outside director may not
dispose of any shares acquired as a result of the exercise of an Outside
Director's Option until six months after the date of the "grant" of the Outside
Director's Option, as determined in accordance with Rule 16(b)-3. Upon the
termination of the Plan or the unavailability of shares of Common Stock for
issuance under the Plan, no additional Outside Directors' Options shall be
granted.
9. WRITTEN AGREEMENTS. Stock Rights shall be evidenced by instruments
(which need not be identical) in such forms as the applicable Administrator may
from time to time approve. Such instruments shall conform to such terms,
conditions and provisions as are applicable hereunder and may contain such other
terms and conditions and provisions as the applicable Administrator deems
advisable which are not inconsistent with the Plan, including restrictions
applicable to shares of Common Stock issuable upon exercise of Stock Rights and
the payment, if applicable, of any legal form of consideration (including,
without limitation, whether payment must be in cash or by tendering shares of
Common Stock). A Stock Right may provide for acceleration of exercise in the
event of a change in control of the Company, in the discretion of and as defined
by the applicable Administrator. The applicable Administrator may from time to
time confer authority and responsibility on one or more of its own members
and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
10. ADJUSTMENTS. Upon the happening of any of the following described
events, an Optionee's rights with respect to Options granted to him hereunder,
and the recipient's rights with respect to Common Stock to be acquired (or used
for measurement purposes) pursuant to the exercise of SARs or Units, or to be
acquired pursuant to a Purchase or Award hereunder, shall be adjusted as
hereinafter provided, unless otherwise specifically provided, in addition or to
the contrary, in the written agreement between the recipient and the Company
relating to such Stock Right.
A. CERTAIN CORPORATE EVENTS. In the event shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares or
if, upon a merger, consolidation, reorganization, split-up, liquidation,
combination, recapitalization or the like of the Company, the shares of Common
Stock shall be exchanged for other securities of the Company or of another
corporation, each grantee of a Stock Right shall be entitled, subject to the
conditions herein stated, to purchase (or have used for measurement purposes)
such number of shares of Common Stock or amount of other securities of the
Company or such other corporation as were exchangeable for the number of shares
of Common Stock which such grantee would have been entitled to purchase (or have
used for measurement purposes) except for such action, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or exchange.
12
<PAGE>
B. STOCK DIVIDENDS. In the event the Company shall issue any of its
shares as a stock dividend upon or with respect to the shares of stock of the
class which at the time shall be subject to a Stock Right hereunder, each
grantee upon exercising a Stock Right shall be entitled to receive (for the
purchase price paid upon such exercise) (or have used for measurement purposes)
the shares or other consideration as to which he is exercising his Stock Right
and, in addition thereto (at no additional cost), such number of shares of the
class or classes in which such stock dividend or dividends were declared or
paid, and such amount of cash in lieu of fractional shares, or other
consideration as he would have received if he had been the holder of the shares
as to which he is exercising (or which are used for measurement in connection
with) his Stock Right at all times between the date of grant of such Stock Right
and the date of its exercise.
C. NEW SECURITIES. If any person or entity owning restricted Common
Stock obtained by exercise of a Stock Right made hereunder receives new or
additional or different shares or securities ("New Securities") in connection
with a corporate transaction described in subparagraph A above or a stock
dividend described in subparagraph B above as a result of owning such restricted
Common Stock, such New Securities shall be subject to all of the conditions and
restrictions applicable to the restricted Common Stock with respect to which
such New Securities were issued.
D. CASH DIVIDENDS. No adjustments shall be made for dividends paid
in cash or in property other than securities of the Company, unless specified to
the contrary by the applicable Administrator in the instrument evidencing such
Stock Right.
E. FRACTIONAL SHARES. No fractional shares shall actually be issued
under the Plan. Any fractional shares which, but for this subparagraph E, would
have been issued to a grantee pursuant to a Stock Right shall be deemed to have
been issued and immediately sold to the Company for their fair market value, and
the grantee shall receive from the Company cash in lieu of such fractional
shares.
F. ADJUSTMENTS. Upon the happening of any of the foregoing events
described in subparagraphs A or B above, the class and aggregate number of
shares set forth in paragraph 3 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Board shall determine the specific adjustments to be made under this
paragraph 10 and, subject to paragraph 4(H), its determination shall be
conclusive.
11. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercised as specified in the written instrument
granting such Stock Right, which instrument may specify any legal method of
exercise and any method of payment of the exercise price, including, without
limitation, the payment of the exercise price by tendering outstanding shares of
Common Stock or shares of Common Stock received upon exercise of a Stock Right.
The holder of a Stock Right exercisable for shares shall not have the rights of
a shareholder with
13
<PAGE>
respect to the shares covered by his Stock Right until the date of issuance of a
stock certificate to him for such shares. Except as expressly provided above in
paragraph 10 with respect to changes in capitalization and stock dividends, no
adjustment shall be made for dividends or similar rights for which the record
date is before the date such stock certificate is issued.
12. TRANSFERABILITY OF STOCK RIGHTS. Except as otherwise provided in the
Plan or by the applicable Administrator, no Stock Right granted under the Plan
shall be transferrable by an Optionee other than by (i) will or the laws of
descent and distribution, or (ii) pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder.
13. TERM OF THE PLAN. This Plan was adopted by the Board on September 13,
1993, effective September 13, 1993, subject to approval of the Plan by the
holders of a majority of the outstanding shares of the Company at the next
meeting of shareholders present in person or by proxy at the next meeting of
shareholders. Stock Rights may be granted under the Plan at any time after
September 13, 1993, even if prior to the date of shareholder approval of the
Plan; PROVIDED, HOWEVER, that such date shall not be prior to the date on which
the applicable Administrators acts to approve the grant or award. If the
requisite shareholder approval is not obtained by September 13, 1994, any grants
of ISOs under the Plan and any grants of Stock Rights to officers and directors,
as the case may be, made prior to that date will be automatically rescinded.
14. TERMINATION; AMENDMENT. The Board may terminate or amend the Plan in
any respect at any time, except that (i) no amendment requiring shareholder
approval under provisions of the Code and related regulations relating to ISOs
or under the law will be effective without approval of shareholders as required
and within the times set by such rules and (ii) no amendment to Paragraph 2(b)
of the Plan shall be made without the prior affirmative vote of the holders of a
majority of the shares of the Common Stock present, in person or by proxy, and
voting at a meeting of the shareholders.
15. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Stock Rights authorized under the Plan shall be used
for general corporate purposes.
16. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
17. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, an Outside Director's Option, the grant of an Award, the
making of a Purchase of Common Stock for less than its fair market value, the
making of a Disqualifying Disposition (as defined in paragraph 4(I)), the
vesting of restricted Common Stock acquired on the exercise of a Stock Right
hereunder, or any other event in connection with a Stock Right, the Company, in
accordance with Section 3402(a) of the Code, may require the Optionee, Award
recipient, purchaser, or holder or exerciser of a Stock Right to pay additional
withholding taxes in respect of the amount that is considered compensation
includable in such person's gross income.
14
<PAGE>
18. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan
and the instruments evidencing Stock Rights shall be governed by the laws of the
State of Texas. In construing this Plan, the singular shall include the plural
and the masculine gender shall include the feminine and neuter, unless the
context otherwise requires.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
C0NSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,103
<SECURITIES> 0
<RECEIVABLES> 32,074
<ALLOWANCES> 1,202
<INVENTORY> 0
<CURRENT-ASSETS> 42,447
<PP&E> 349,625
<DEPRECIATION> 59,780
<TOTAL-ASSETS> 365,813
<CURRENT-LIABILITIES> 45,106
<BONDS> 127,916
0
0
<COMMON> 929
<OTHER-SE> 151,071
<TOTAL-LIABILITY-AND-EQUITY> 365,813
<SALES> 0
<TOTAL-REVENUES> 90,325
<CGS> 0
<TOTAL-COSTS> 74,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284
<INTEREST-EXPENSE> 5,324
<INCOME-PRETAX> 11,529
<INCOME-TAX> 4,668
<INCOME-CONTINUING> 6,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,861
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.74
</TABLE>
