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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 0-20618
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RAILAMERICA, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0328006
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(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification Number)
301 Yamato Road, Suite 1190
Boca Raton, Florida 33431
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 994-6015
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Common Stock Purchase Rights
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 24, 1999 computed by reference to the average bid
and asked prices of registrant's common stock reported on NASDAQ on such date
was $63,300,000.
The number of shares outstanding of registrant's Common Stock, $.001
par value per share, as of March 25, 1999 was 11,144,319.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for the Annual Meeting of Shareholders
to be held June 24, 1999 (the "Definitive Proxy Statement") to be filed with the
Commission pursuant to Regulation 14A is incorporated by reference into Part III
of this Form 10-K.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 24
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis 27
Item 8. Financial Statements 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits and Reports on Form 8-K 43
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
RailAmerica, Inc. (together with its consolidated subsidiaries, the
"Company") is a leading operator of short line freight railroads in the United
States, based on total track miles, and an operator of a regional freight
railroad in the Republic of Chile. The Company is also a leading manufacturer of
specialized truck trailers through its wholly-owned subsidiary, Kalyn/Siebert,
Inc. ("KSI"), with production facilities in Gatesville, Texas and
Trois-Rivieres, Quebec, Canada. In addition, the Company holds a minority
interest in the Great Southern Railway Limited consortium, which operates a
4000-mile transcontinental passenger rail service in Australia. Segment and
geographic information called for in item 1 is set forth in Note 20 of Notes to
Consolidated Financial Statements and is incorporated herein by reference.
RailAmerica's core business is the acquisition and operation of short line and
regional railroads. The Company has grown rapidly through acquisitions since
December 31, 1994, at which time it operated only 300 miles of track and
employed 220 full-time employees. At December 31, 1998, the Company operated
approximately 2,400 miles of rail line, including approximately 1,000 miles in
North America and over 1,400 miles in Chile. At December 31, 1998, the Company
employed 652 full-time employees.
The Company plans to continue to acquire short line railroads in North
America from Class I railroads as well as from other short line operators. The
Company also continues to evaluate opportunities to acquire regional railroads
in foreign markets that are being privatized by foreign governments.
Additionally, the Company will consider other strategic acquisitions in the
specialty trailer manufacturing industry.
Since industry deregulation in 1980, major North American railroads
have streamlined their operations by systematically divesting themselves of
branch lines to smaller rail operators that have advantageous cost structures.
The divestiture activity has accelerated in recent years as a result of the
consolidation of Class I railroads which has led to the disposition of redundant
and light-density routes. Similarly, an increasing number of foreign governments
are seeking to encourage private investment in infrastructure and stimulate
economic activity by privatizing their national rail systems through sale or by
concession to qualified operators. The Company's acquisition strategy as
described above is exemplified by: (i) the purchase, in April 1998, through the
Company's wholly-owned subsidiary, Saginaw Valley Railway Company ("SGVY"), of a
51-mile rail line in Michigan, (ii) the long term lease/purchase agreement to
operate a 13-mile rail line in California in August 1998, through the Company's
new subsidiary, Ventura County Railroad Company, Inc. ("VCRR"), (iii) the
purchase, in January 1999, through the Company's newly-formed subsidiary,
Esquimalt and Nanaimo Railway Company, of a 181-mile rail line in British
Columbia, Canada, and (iv) the selection, in February 1999, of a consortium in
which the Company is expected to be a majority partner as the successful bidder
for V/Line Freight Corporation, the rail freight business of Australia's
Victorian Government. The rail line in Victoria, Australia consists of
approximately
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3,000 miles of track.
The Company believes that it is well-positioned to take advantage of
the opportunities emerging in the North American and international rail
industries. The Company has developed a disciplined evaluation and acquisition
program, identifying rail properties that can be acquired on attractive terms
and can be improved by the implementation of RailAmerica's operating practices
when applied to the rail properties acquired by the Company. These practices
have had the effect of increasing traffic while reducing expenses through
introduction of operating efficiencies and customer service programs. The
Company believes that it has become a desirable partner for Class I railroads as
a result of its ability to pursue and consummate acquisitions swiftly and
operate the rail lines more efficiently.
The Company expanded its trailer manufacturing operations through the
purchase, in January 1998, by the Company's wholly-owned subsidiary, KSI, of
Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc., forming a new
subsidiary, Kalyn/Siebert Canada, Inc. ("KSC"). KSC is a manufacturer of
specialty bulk-hauling truck trailers located in Trois-Rivieres, Quebec, Canada.
In January 1999, the Company completed an $11.6 million private
offering of convertible redeemable preferred stock, and, in March 1999, the
Company completed a $12.5 million private offering of restricted common stock.
See details in Liquidity and Capital Resources section.
The Company's business as of December 31, 1998 was conducted through
eighteen wholly-owned consolidated subsidiaries - Huron and Eastern Railway
Company, Inc. ("HESR"), SGVY, KSI, KSC, Otter Tail Valley Railroad Company
("OTVR"), South Central Tennessee Railroad Corporation ("SCTR"), Delaware Valley
Railway Company, Inc. ("DVRC"), RailAmerica Intermodal Services, Inc. ("RIS"),
Dakota Rail, Inc. ("Dakota Rail"), RailAmerica Equipment Corporation ("REC"),
West Texas and Lubbock Railroad Company, Inc. ("WTLR"), Cascade and Columbia
River Railroad Company ("CCRR"), Minnesota Northern Railroad ("MNR"),
RailAmerica de Chile, S.A ("RDC"), Steel City Carriers, Inc. ("Steel City
Carriers"), St. Croix Valley Railroad Company ("SCXY"), RailAmerica Australia
Pty. Limited ("RAA"), and VCRR. All references to the operations of the
"Company" discussed in this Form 10-K describe the operations of its
subsidiaries.
The Company was incorporated in Delaware on March 31, 1992 as a holding
company for two pre-existing railroad companies - HESR and SGVY. The Company's
principal executive office is located at 301 Yamato Road, Suite 1190, Boca
Raton, Florida 33431, and its telephone number at that location is (561)
994-6015.
RAILROAD INDUSTRY OVERVIEW
The U.S. railroad industry is dominated by nine Class I railroads,
which operated approximately 122,000 miles of track at December 31, 1997 (the
most recent year for which data is available) and represented approximately
$32.3 billion, or approximately 91.4%, of total rail industry
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operating revenue of $35.3 billion in 1997. In addition to large railroad
operators, at year end 1997 there were more than 500 short line and regional
railroads, which generated approximately $3.0 billion of operating revenue in
1997 and operated approximately 50,000 miles of track at December 31, 1997.
Reflecting downsizing of major rail carriers, the proportion of total track
miles operated by short line and regional railroads in the United States
increased to 29.0% of total railroad industry track miles in 1997 from
approximately 17.0% in 1986. The railroad industry in the United States has
undergone significant change since the passage of the Staggers Rail Act of 1980
(the "Staggers Rail Act"), which deregulated the pricing and types of services
provided by railroads. Since 1980, Class I railroads in the United States and
Canada have systematically divested themselves of branch lines to smaller rail
operators. As a result, more than 300 short line and regional railroads
operating approximately 27,000 miles of track have been created since 1980 to
serve shippers on such lines. The divestiture has accelerated in recent years as
a result of the consolidation and merger activity among Class I railroads, which
has led to the sale of overlapping routes.
As a result of deregulation, major railroads have been able to
concentrate their management and marketing attention on core, long-haul routes,
while divesting (through sale or lease) many of their low-density branch lines
to smaller and more cost-efficient freight railroad operators such as the
Company. The major railroads have derived significant benefits from the
divesting of branch lines to short line operators. Divesting these branch lines
allows major railroads to minimize incremental capital expenditures, increase
traffic density, improve railcar utilization and avoid rail line abandonment.
Because of the focus of short line railroads on increasing traffic volume
through increased customer service and more efficient operations, traffic volume
on short line railroads frequently increases after divestiture. Consequently,
these transactions often result in net increases in divesting carriers' freight
traffic because much of the business originating or terminating on branch lines
feeds into divesting carriers' core routes.
GROWTH STRATEGY
- NORTH AMERICAN ACQUISITIONS. RailAmerica plans to continue to acquire
short line and regional railroads that become available as a result of
rationalizations and divestitures in North America, especially in
geographic regions where the Company can "cluster" a number of acquired
rail lines to achieve economies of scale.
- INTERNATIONAL ACQUISITIONS. RailAmerica plans to acquire additional
foreign regional railroads that become available as a result of
governmental privatization, primarily through joint ventures with local
partners familiar with market conditions in the region. International
rail acquisitions often offer the Company better growth opportunities
due to their lack of historical operating efficiencies typical of
government entities.
- EXPANSION OF MANUFACTURING OPERATIONS. RailAmerica plans to investigate
additional specialized truck trailer manufacturing opportunities as
they become available.
- FOCUSED SALES AND MARKETING. RailAmerica continues to increase traffic
from existing,
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former and new customers in each of its markets through the aggressive
marketing of its enhanced customer service, renegotiation of rates
where prudent and implementation of other incentive arrangements for
shippers. Once RailAmerica reestablishes frequent service for a newly
acquired railroad, it markets its newly restored service to existing
customers as well as to customers who may have dropped service when the
former owner had operational control.
- OPERATING EFFICIENCY. The Company improves its operating efficiency
through rationalized staffing, incentivized local management and staff,
centralized purchasing and corporate services, efficient equipment
utilization and outsourced maintenance.
The Company acquires rail properties by purchase of assets, lease or
operating contract. Typically, the Company bids against other short line and
regional operators for available properties. The structure of each transaction
is determined by the seller based upon economic and strategic considerations. In
addition to the financial terms of the transaction, the Company believes sellers
consider more subjective criteria such as a prospective acquirer's operating
experience, its reputation among shippers, and its ability to close a
transaction and commence operations smoothly. The Company believes it has
established an excellent record in each of these areas. In addition, by growing
revenues on its acquired lines and providing improved service to shippers, the
Company is able to provide increased revenue to the Class I carriers that
connect with its lines. The Company believes this ability to provide increased
revenue to Class I carriers is an advantage in bidding for properties.
RAILROAD OPERATIONS
GENERAL
The Company provides rail service to on-line customers through the
coordination of the railroad's general manager, marketing manager and customer
service center. Rail service for the customer is scheduled by the general
manager with the assistance of customer service personnel. Due to the Company's
flexibility in providing service, customers can initiate unscheduled rail
service on short notice by contacting the railroad's customer service center.
The general manager schedules the days' train service and provides a manifest to
the two-man crew. The crew's manifest contains information regarding the number
and type of cars to drop off and/or pick up at a customer's siding, customer
requirements concerning time of pick up and/or delivery and interchange
schedules. The two-man crew, consisting of transportation specialists, operates
the locomotive and couples and uncouples railcars along the line. Since crews
are paid a salary rather than an hourly wage, they are readily available to
provide service on an as-needed basis. Payment for rail services is coordinated
with the customer through the Company's customer service center or with the
Class I interchange partner.
The Company provides the locomotive service and, in certain instances,
the rail cars needed to move the customer's product. Maintenance of the rail
line, including capital improvements,
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normal track and roadbed maintenance, signal maintenance and bridge repair, is
performed by the Company or, where efficiencies are gained, a maintenance
contractor. The Company has full-time locomotive mechanics, under the
supervision of the Company's Chief Mechanical Officer, available to maintain the
locomotive and maintenance equipment, perform car inspections and perform
running repairs on cars.
Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along a
rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other rail
carriers. Bridge traffic neither originates nor terminates on a rail carrier's
line, but rather passes over the line from one connecting carrier to another.
Interline traffic generated over 95% of the Company's total freight revenues in
1998.
Flexibility with respect to work assignments is a key element of the
Company's operating strategy and contributes significantly to operational
productivity. All of the Company's railroad personnel are trained in a wide
range of skills necessary for short line operations. Employees can be assigned
to tasks on an as-needed basis because the Company is not bound by traditional
railroad industry craft and work distinctions (pursuant to which railroad
employees are assigned to tasks based upon narrowly defined job descriptions).
The Company believes the organization of its railroads into relatively small
work groups encourages greater team effort and permits more clearly defined
responsibility and accountability than is obtainable by large, more centrally
managed railroads.
Each of the Company's short line railroads maintains a
performance-based profit-sharing program through which a portion of a railroad's
operating profits is distributed to its employees. Profit-sharing programs are
administered by corporate headquarters and the general managers and
distributions are made in part on the basis of meeting railroad operating
targets and in part on individual performance. The general managers also
participate in quarterly performance-based profit-sharing programs.
MARKETING
The Company focuses on providing rail service to its customers that is
easily accessible, reliable and cost-effective. Following commencement of
operations by RailAmerica, the Company's railroads generally have attracted
increased rail shipments from existing customers and obtained traffic from new
customers who had not previously shipped by rail or had ceased rail shipments.
The Company believes its ability to generate additional traffic is enhanced by
its marketing efforts which are aimed at identifying and responding quickly to
the individual business needs of customers along its rail lines. As part of its
marketing efforts, the Company often schedules more frequent rail service, helps
customers negotiate price and service levels with connecting carriers and
assists customers in obtaining the quantity and type of rail equipment required
for their operations. The Company also provides non-scheduled train service on
short notice to accommodate customers' special or emergency needs.
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The Company's decentralized management structure is an important
element of its marketing strategy. Significant discretion with respect to sales
and marketing activities is given to the Company's domestic regional marketing
managers and its international marketing manager. Each regional marketing
manager works closely with personnel of the Company's railroads and with other
members of senior management to develop marketing plans to increase shipments
from existing customers and to develop business from new customers. The Company
also works with the marketing staffs of the connecting Class I carriers to
develop an appropriate array of rail-oriented proposals to meet customers' needs
and with industrial development organizations to locate new rail users. The
Company considers all of its employees to be customer service representatives
and encourages them to initiate and maintain regular contact with shippers.
CUSTOMERS
In 1998, the Company served more than 200 customers domestically who
shipped and/or received a wide variety of products. The Company's railroads are
typically the only rail carriers directly serving their customers. Although most
of the Company's domestic railroads have a well-diversified customer base,
several of the smaller rail lines have one or two dominant customers. In 1998,
the Company's 10 largest domestic customers accounted for approximately 45% of
domestic transportation revenue. There is no single customer which represented
more than 10% of the Company's domestic transportation revenue. The Company had
four customers who each represented more than 10% of the international
transportation revenue. The customers represented 22%, 22%, 18% and 14% of
international transportation revenue.
COMMODITIES
The Company provides its customers with local rail freight services
accessing the nationwide rail systems both domestically and internationally. The
Company hauls products for its customers based upon market demands in its local
operating areas. The following table sets forth by number and percentage the
total carloads of each of the principal commodities hauled by the Company's
railroads during the years ended December 31, 1998, 1997 and 1996.
CARLOADS CARRIED BY COMMODITY GROUP
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- ------------------------- -------------------------
COMMODITY CARLOADS % OF TOTAL CARLOADS % OF TOTAL CARLOADS % OF TOTAL
- ----------------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
IRON ORE 62,037 53% 19,493 28% 0 0%
AGRICULTURE 15,423 13% 13,297 19% 9,624 37%
WOOD PRODUCTS 9,153 8% 9,797 14% 5,021 19%
FOOD PRODUCTS 7,521 6% 5,425 8% 1,762 7%
BALLAST/STONE 4,147 4% 3,957 6% 437 2%
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- ------------------------- -------------------------
COMMODITY CARLOADS % OF TOTAL CARLOADS % OF TOTAL CARLOADS % OF TOTAL
- ----------------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
FERTILIZER 4,308 4% 3,900 6% 2,511 10%
COAL 4,898 4% 3,877 6% 832 3%
COPPER 1,188 1% 2,785 4% 0 0%
STEEL 1,695 1% 1,732 3% 1,584 6%
SODIUM SULFATE 732 0.5% 1,290 2% 1,237 5%
PROPANE 1,161 1% 0 0% 0 0%
AUTO PARTS 683 0.5% 755 1% 904 3%
PLASTICS 628 0.5% 574 1% 551 2%
OTHER 3,961 3.5% 2,258 3% 1,408 5%
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TOTAL 117,535 100% 69,140 100% 25,871 100%
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</TABLE>
EMPLOYEES
As of December 31, 1998, the Company had approximately 104 full-time
rail employees in North America and 210 full-time rail employees in Chile.
Temporary lay-offs of personnel and hiring of part-time or short-term employees
are sometimes required to adjust to the Company's somewhat seasonal operations.
As of December 31, 1998, the Company had 8 employees who were subject to
contract negotiations with the United Transportation Union. No contract has been
signed to date.
SAFETY
An important component of the Company's operating strategy is
conducting safe railroad operations for the benefit and protection of employees,
customers and the communities served by the Company's railroads. The Company's
safety program, led by the Director of Rules, Safety and Training, involves all
of the Company's employees and is administered on a daily basis by each Regional
Vice President. Operating personnel are trained and certified in train
operations, hazardous materials handling, proper radio procedures and all other
areas subject to governmental rules and regulations. Each employee involved in
train operations is subject to pre-employment and random drug testing whether or
not required by federal regulation.
The Company believes that each of its railroads complies fully with
federal, state and local regulations. Additionally, each railroad is given
flexibility to develop more stringent safety rules based on local requirements
or practices. The Company also participates in governmental and industry
sponsored safety programs including Operation Lifesaver (the national grade
crossing awareness program) and the American Short Line Railroad Association
Safety Committee.
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COMPETITION
In acquiring rail properties, the Company competes with other short
line and regional railroad operators, some of which are larger and have greater
resources than the Company. Competition for rail properties is based primarily
upon price, operating history and financing capability. The Company believes its
established reputation as a successful acquirer and operator of short line rail
properties, in combination with its managerial and financial resources,
effectively positions it to take advantage of future acquisition opportunities.
The Company's railroads are typically the only rail carriers directly
serving their customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a lesser
extent, ship and barge operators. The extent of this competition varies
significantly among the Company's railroads. Competition is based primarily upon
the rate charged and the transit time required, as well as the quality and
reliability of the service provided, for an origin-to-destination package. To
the extent other carriers are involved in transporting a shipment, the Company
cannot control the cost and quality of service. Cost reductions achieved by
major rail carriers over the past several years have generally improved their
ability to compete with alternate modes of transportation.
ACQUISITION OF SGVY BROWN CITY SUBDIVISION
In April 1998, the Company, through its wholly-owned subsidiary, SGVY,
acquired from CSX Transportation, Inc. ("CSXT") a 51 mile rail line located in
Michigan's "Thumb" region. The line runs from just east of Saginaw to Brown
City, Michigan and handles traffic such as grain, corn, fertilizer and soybeans.
The line connects with SGVY's sister railroad, HESR, at Vassar, Michigan and
interchanges with CSXT at Saginaw.
ACQUISITION OF VENTURA COUNTY RAILROAD COMPANY, INC.
In August 1998, the Company, through its newly formed, wholly-owned
subsidiary, VCRR, entered into a long term lease/purchase agreement to operate a
13-mile rail line serving the Port of Hueneme and the Oxnard Harbor District in
Oxnard, California, located approximately 50 miles north of Los Angeles. VCRR
handles ship-to-rail port traffic which includes finished autos, chemicals,
plastic and paper products. Traffic from this line interchanges with the Union
Pacific Railroad at Oxnard.
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RAILROAD PROPERTIES
The following table sets forth certain information with respect to the
railroad properties that the Company owned as of December 31, 1998:
<TABLE>
<CAPTION>
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Date of Track Principal
Railroad Acquisition Miles Structure Location Commodities
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Huron and Eastern March 1986 83 Owned Michigan Agricultural products, sugar
Railway (Huron Division) products, fertilizer, scrap
steel, auto parts, aggregates
- ---------------------------------------------------------------------------------------------------------------------------
Huron and Eastern May 1988 55 Owned Michigan Agricultural products, sugar
Railway (Saginaw 45 Leased products, fertilizer, scrap
Division) steel, auto parts, aggregates
- ---------------------------------------------------------------------------------------------------------------------------
Saginaw Valley Railway Jan. 1991 10 Owned Michigan Agricultural products,
Apr. 1998 51 Owned fertilizer
- ---------------------------------------------------------------------------------------------------------------------------
South Central Tennessee Feb. 1994 49 Leased Tennessee Wood products, frozen
Railroad 3 Trackage potatoes, newsprint,
rights plastics, steel
- ---------------------------------------------------------------------------------------------------------------------------
Delaware Valley Railway July 1994 45 Easement Pennsylvania Agricultural and steel
10 Lease Delaware products, iron and wood
products
- ---------------------------------------------------------------------------------------------------------------------------
Dakota Rail Sept. 1995 44 Contract Minnesota Plastics, lumber, scrap steel,
for Deed chemicals
- ---------------------------------------------------------------------------------------------------------------------------
West Texas & Lubbock Nov. 1995 104 Owned Texas Fertilizer, sodium sulfate,
Railroad 4 Trackage chemical, cotton and cotton
rights products
- ---------------------------------------------------------------------------------------------------------------------------
Cascade and Columbia Sept. 1996 131 Owned Washington Wood products, limestone,
River Railroad 6 Trackage paper products, agricultural
rights products
- ---------------------------------------------------------------------------------------------------------------------------
Otter Tail Valley Railroad Oct. 1996 72 Owned Minnesota Coal, agricultural products,
fertilizer
- ---------------------------------------------------------------------------------------------------------------------------
Minnesota Northern Dec. 1996 174 Owned Minnesota Agricultural products, sugar
Railroad 47 Trackage products, fertilizer, coal,
rights aggregates
- ---------------------------------------------------------------------------------------------------------------------------
Ferronor Feb. 1997 1,400 Majority Chile Iron ore, copper, limestone,
owned propane, sugar products
- ---------------------------------------------------------------------------------------------------------------------------
St. Croix Valley Railroad Aug. 1997 44 Owned Minnesota Agricultural products,
16 Trackage fertilizer, plastics
rights
- ---------------------------------------------------------------------------------------------------------------------------
Great Southern Railway Oct. 1997 Minority Southern Passenger
Interest Australia
- ---------------------------------------------------------------------------------------------------------------------------
Ventura County Railroad Aug. 1988 13 Leased California Auto products, wood
products
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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TRAILER MANUFACTURING OPERATIONS
KSI, located in Gatesville, Texas, was established in 1968 and
manufactures a broad range of specialty truck trailers. KSI products are
marketed to customers in the construction, trucking, agricultural, railroad,
utility, and oil industries. In addition, a substantial portion of KSI's sales
are to the military and several other local and federal government agencies.
KSI's product mix has shifted towards sales of heavy equipment and
specialty trailers. Previously located in Stockton, California, Siebert
manufactured a highly specialized detachable goose neck trailer constructed of
high yield steel. The Siebert products include up to 300-ton capacity units. The
trailer types in the heavy equipment category include specialized trailers (such
as car haulers, truck haulers, and jeep haulers), fixed neck low bed, detachable
low bed, flats and platforms, drops and double drops, folding neck low-bed, and
used trailers.
In January 1998, the Company, through its wholly-owned subsidiary, KSI,
acquired all of the outstanding stock of Fabrex, Inc. and its affiliate,
Services Remorques Plus, Inc. Fabrex's operations have been combined into KSC, a
wholly-owned subsidiary of KSI. KSC is a manufacturer of specialty bulk-hauling
truck trailers located in Trois-Rivieres, Quebec, Canada. KSC's products are
marketed to the solid waste, agricultural and construction industries.
At the date of its acquisition , Fabrex, founded in 1985, employed 50
people in its 45,000 square foot manufacturing facility located in Trios
Rivieres, Quebec, Canada, midway between Montreal and Quebec City. In April
1998, KSC purchased an additional 105,000 square-foot manufacturing facility
located adjacent to KSC's existing plant in Trois-Rivieres, Quebec, Canada. In
order to meet production requirements in conjunction with the plant expansion,
KSC hired an additional 70 employees in 1998.
PRODUCTS
The majority of KSI's sales are based on existing KSI trailer designs
which are modified with standard options. However, approximately 20% of trailers
sold must be customized to satisfy customers' specifications. KSI's "Pro
Engineer" 3-D based solid modeler drafting system and computer aided drafting
system "CAD" allows its engineers to readily modify trailer component design and
generate new designs, based on customer needs.
KSI manufactures an extensive variety of light, medium and heavy duty
truck trailers. The
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Company's products include the following:
- FLATBED TRAILERS. Flatbed trailers, also known as platform trailers,
are generally used to carry loads such as steel and building materials.
The Company produces a wide variety of flatbed trailers, including
straight frames, drop frames and multi-axle units for specialized
loads. KSI's leading product in this category is the KDP-80, a 48 foot
drop deck flatbed trailer which is purchased primarily by commercial
customers. This trailer has a 10 foot spread on the tandem axle which
allows more weight per axle than narrower tandems.
- LOWBED TRAILERS. Lowbed trailers, also known as lowboy trailers or
California legals, generally haul heavy equipment such as electrical
transformers or grain silos. Lowbed trailers are equipped with up to 18
axles and have the capacity to haul up to 300 ton loads. Heavy
equipment lowbeds are used by heavy haulers, specialized carriers and
riggers, larger construction and engineering firms and
highly-specialized members of the aerospace and automotive industries.
The products constituting this category include the following trailers:
fixed neck lowbed, folding neck lowbed, detachable lowbed, and the
mechanical removable gooseneck, which is KSI's leading trailer by sales
in this product line.
- OTHER PRODUCTS. KSI manufactures a sliding-axle trailer which can be
used to transport heavy equipment such as forklifts and similar
equipment. KSI also manufactures a specialty van trailer for the United
States Tank Automotive Command ("TACOM") which has special dolly-style
suspensions and removable landing gear so that it can be shipped on
military transport cargo planes. These specialty van trailers can be
used for tactical combat purposes or as storage containers. Other
specialty products include tilt trailers, special event trailers,
protected vans and oil field trailers.
- PARTS AND ACCESSORIES. Replacement parts and accessories are primarily
sold to dealers.
From time to time, KSI is also involved in the limited sale of used
trailers, which are supplied primarily by trade-ins from its new trailer
customers. The Company sells most of its used trailers through its authorized
dealers.
KSI generally provides customers with a five-year limited warranty
on trailer mainframes and a one-year limited warranty against defects in
material and workmanship with respect to its products. KSI's warranty costs have
historically been less than one percent of net sales per year.
KSC produces specialty bulk-hauling truck trailers used in the
solid-waste, agricultural, and construction industries. Historically,
approximately 85% of KSC's sales are transfer trailers and 80% of these are made
in aluminum. KSC began producing dump trailers in 1995. In 1997, these trailers
represented approximately 15% of KSC's sales. The dump trailers consist of
approximately 70% aluminum and 30% steel. During the second half of 1998, KSC
began producing KSI flatbed trailers in its newly acquired facility.
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<PAGE> 14
MANUFACTURING AND ENGINEERING
KSI considers the engineering expertise, combined with the
manufacturing experience of its work force, to be key competitive advantages.
KSI utilizes this experience in its marketing by including manufacturing
personnel in initial meetings with potential KSI customers to assist in defining
and meeting the customer's objectives. This team approach often results in new
and unique ways to satisfy customer needs and facilitates effective
communication throughout the organization.
Each of KSI's trailers is manufactured from highly customized designs
based on detailed customer specifications of each aspect of the trailer,
including dimensions, structural requirements, fabrication materials, component
parts and accessories. KSI's "Pro-Engineer" 3-D solid modeler drafting system
and CAD allows its engineers to readily modify trailer component designs and
generate new designs based on customer needs.
KSI builds all the structural parts of its trailers using steel bars
and plates. The major manufacturing steps include cutting, bending and welding
of steel and, once assembled, cleaning and painting. The axles and running gears
are purchased as sub-assemblies which are integrated into the KSI trailer
design. KSI contracts out any necessary machining. KSI exercises strict quality
control by screening suppliers and conducting inspections throughout the
production process.
KSI's ability to manufacture trailers is dependent upon receiving
supplies or components and raw materials from a limited number of sources. To
date, KSI has experienced no material difficulties in procuring supplies,
components or materials. However, if deliveries of such items are delayed, KSI's
production ability may be decreased which could have a negative effect on KSI's
and the Company's results of operations.
KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on an 25.5 acre site,
which were constructed between 1969 and 1997. KSI's manufacturing properties
serve as collateral for the Company's financing with National Bank of Canada.
The Company expects that this site will be able to meet its manufacturing goals
for the foreseeable future.
At acquisition date, Fabrex, was producing its trailers at a 45,000
square foot manufacturing facility located in Trios Rivieres, Quebec, Canada,
midway between Montreal and Quebec City. In April 1998, KSC purchased an
additional 105,000 square-foot manufacturing facility located adjacent to KSC's
existing plant in Trois-Rivieres, Quebec, Canada.
MARKETING AND DISTRIBUTION
KSI's marketing strategy is focused on offering a broad range of
high-quality, customized trailers manufactured to the design specifications of
its customers. These products are marketed and distributed through a network of
approximately 140 independent dealers throughout North America and through a
direct sales force. During 1998 approximately 50% of independent dealers
maintained
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<PAGE> 15
inventories of KSI trailers.
Presently, up to 75% of all of KSI's commercial sales are made to
dealers, with the balance representing direct retail sales by its sales force.
KSI's sales staff consists of a vice president, five sales managers, and an
advertising manager. The sales staff is supported by registered mechanical
design engineers and draftsmen. Sales leads are generated through literature
mailings, trade show exhibitions, dealers, repeat customers, and word-of-mouth.
In addition, KSI places advertisements in trade publications such as MY LITTLE
SALESMAN, AMERICAN TRUCKER, LIFTING & TRANSPORTATION INTERNATIONAL, TRUCK MARKET
NEWS, MACHINERY TRADER, AMERICAN TOWMAN, TRUCK NEWS (CANADA), TRUCK & TRAILER
(CANADA) AND CONSTRUCTION PUBLIC WORKS (LATIN AMERICA). In recent years, KSI has
begun shifting resources from advertising to trade shows, which management
believes is a more cost effective method of maintaining KSI's name and
reputation and developing sales leads. KSI currently participates in
approximately five trade shows per year.
In certain circumstances, KSI will enter into agreements with its
dealers to stimulate and facilitate the sale and financing of its new and used
trailers. During the first quarter of 1995, KSI entered into a Wholesale and
Retail Financing Agreement with Associates Commercial Corporation and Associates
Commercial Corporation of Canada, Ltd. to stimulate and facilitate the sale and
financing of its new and used trailers. In addition, in December 1996, the
Company entered into an agreement with Newcourt Financial Ltd. in order to
provide wholesale and retail financing for its dealers located in Canada. Each
of these agreements provides floor plan financing for eligible dealers and lease
and/or purchase financing for end market purchasers.
KSC sells direct to customers with one salesman in Toronto who handles
Ontario and western Canada and one in Montreal who handles Quebec and maritime
provinces. In the United States the majority of sales are done through a network
of a dozen distributors. KSC also had access to KSI's extensive dealer base in
the United Stated starting in 1998.
CUSTOMERS
KSI serves a diversified customer base operating in the construction,
trucking, agricultural, railroad, utility and oil industries. Since 1990,
commercial sales have accounted for approximately two-thirds of KSI's revenues
with military or governmental agency sales representing the balance. As a result
of extensive prototype testing by TACOM and the federal government budgetary
impasse during early 1996, sales to governmental accounts represented a
disproportionately low percentage of KSI's revenue for 1996. In 1998, sales to
the federal government accounted for nearly 50% of total net sales as a result
of new contracts awarded in 1997 and 1998.
The majority of sales in the government segment are to the General
Services Administration ("GSA"), the purchasing arm of most non-military
agencies, and to TACOM, which consolidates purchases for various branches of the
military. KSI has been awarded "Blue Ribbon Contractor" status with TACOM. As a
result of this status, KSI receives a 10% preference on bids for certain
contracts. Sales to governmental agencies represented 48%, 37% and 20% of KSI's
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<PAGE> 16
manufacturing revenue for the years ended December 31, 1998, 1997 and 1996. A
substantial decrease in orders by the GSA and/or TACOM could have a material
adverse effect on KSI's business and results of operations.
In April 1998, KSI received a new order, valued at approximately $3.6
million, for semi-trailer vans under its existing contract with TACOM.
In July 1998, KSI received two new orders from the United States
Government, valued at approximately $8.8 million. The first order, through KSI's
existing requirements contract with the GSA, is valued at approximately $5.3
million and calls for the production of 101 folding goose neck level deck
trailers for the United States Army. The second order is valued at approximately
$3.5 million and calls for the production of approximately 111 low-bed trailers
for TACOM over three years. Production on both orders commenced in the fourth
quarter of 1998, with delivery starting early in 1999.
In December 1998, KSI received another new order from TACOM valued at
approximately $5.2 million. The contract calls for the production of 71 tactical
van trailers over fifteen months. Production commenced in the fourth quarter of
1998, with delivery starting early in 1999.
KSC's trailers are used in the solid-waste, agricultural and
construction industries. Waste disposal companies are KSC's largest market
segment. In addition, during the second half of 1998 KSC began producing and
marketing KSI type flatbed trailers.
BACKLOG. As of December 31, 1998, KSI's backlog of orders was
approximately $18.3 million, compared to $19.7 million as of December 31, 1997.
As of December 31, 1998, KSC's backlog of orders was approximately $3.7 million.
KSI and KSC include in its backlog only those orders for trailers for which a
confirmed customer order has been received. KSI manufactures trailers mostly to
customer or dealer orders and does not typically maintain an inventory of
"stock" trailers in anticipation of future orders.
COMPETITION. The Company faces significant competition in the truck
trailer manufacturing industry which is highly competitive and has relatively
low barriers to entry. The Company competes with a number of other trailer
manufacturers, some of which have greater financial resources and higher sales
than KSI. Furthermore, the Company's products compete with alternative forms of
shipping, such as intermodal containers. There can be no assurance that the
Company will be able to continue to compete effectively with existing or
potential competitors or alternative forms of shipping containers.
EMPLOYEES
As of December 31, 1998, KSI had 182 full-time employees in the trailer
manufacturing operation and approximately 17 part-time employees. None of the
KSI employees are subject to a collective bargaining agreement. As of December
31, 1998, KSC had 120 full-time employees in
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<PAGE> 17
the trailer manufacturing operation of which 89 are subject to a collective
bargaining agreement.
MOTOR CARRIER OPERATIONS
On February 10, 1995, the Company acquired substantially all of the
assets of Steel City, a regional motor carrier located in Sault Ste. Marie,
Ontario, Canada. Since the Company's acquisition of Steel City, its financial
performance and development have not measured up to the Company's expectations
for the business. Accordingly, in March 1997 the Company adopted a formal plan
to discontinue its motor carrier operations and refocus the Company's efforts on
expanding its railroad and manufacturing operations. The Company's Board of
Directors approved the plan of discontinuance on March 20, 1997.
Effective December 1, 1998, the Company ceased all motor carrier
operations and leased substantially all of the operating assets of Steel City
Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario,
Canada-based Contrans Corporation. The leases are for a period of 18 to 24
months. In addition, the Company has entered into an agreement to sell its
Ontario real estate that was previously used in its motor carrier operations.
REGULATION
OVERVIEW. In addition to environmental safety and other regulations
applicable to all businesses, the Company's railroad subsidiaries are subject to
regulations of numerous government agencies, including (i) regulation by the
Surface Transportation Board ("STB") and the Federal Railroad Administration
("FRA"); (ii) certain labor related statutes including the Railway Labor Act,
Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the
Federal Employer's Liability Act, and (iii) regulation by agencies in the states
in which the Company does business. Additionally, the Company is subject to STB
regulation in its acquisition of new railroad properties. As a result of the
Staggers Rail Act amendments to the Interstate Commerce Act in 1980 and
enactment of the ICC Termination Act of 1995, there has been a significant
relaxation in regulation governing rail carriers, which management believes has
greatly simplified the purchase and sale of shortline railroad properties and
expedited the closing of such transactions. The Company believes its operations
are in material compliance with all such regulations.
STB. The STB has jurisdiction over, among other matters, the
construction, acquisition, or abandonment of rail lines, the consolidation or
merger of railroads, the assumption of control of one carrier (including
railroads and interstate motor and water carriers) by another carrier (or an
entity controlling another carrier), the use by one railroad of another
railroad's tracks ("trackage rights"), the rates charged by railroads for their
transportation services, and the service of rail carriers. Legislation enacted
in 1995 replaced the Interstate Commerce Commission ("ICC") with the STB and
abolished labor protective conditions applicable to numerous types of rail
transactions. Today, most transactions involving shortline railroads are no
longer subject to protective conditions for adversely affected employees by
labor agencies. Certain types of transactions involving mid-size "regional
railroads" (annual revenues between $20 million and $250 million) are still
subject to
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<PAGE> 18
limited labor protective conditions for adversely affected employees (in absence
of any other arrangements negotiated between management and labor, affected
employees receive one year's severance pay upon consummation of acquisition
transactions).
While imposition of labor protective conditions on line sales and
transfers does not subject a rail line buyer to the seller's collective
bargaining agreements, rates of pay, and other labor practices and does not
unionize the buyer's operating and maintenance employees, it entitles employees
of buyer or seller who are "adversely affected" by the transaction in terms of
job loss, pay cuts, loss of overtime, loss of hours, loss of benefits, and
moving expenses, to receive payments over a period of four years representing
compensation for those losses. Generally, in a line sale or transfer, only the
seller's or transferor's employees are affected.
As a result of the 1980 Staggers Rail Act, railroads have received
considerable rate and market flexibility including the ability to obtain
wholesale exemptions from numerous provisions of the Interstate Commerce Act.
Under the Staggers Rail Act, all containerized and truck trailer traffic handled
by railroads was deregulated. On regulated traffic, railroads and shippers are
permitted to enter into contracts for rates and provision of transportation
services without the need to file tariffs. Moreover, on regulated traffic, the
Staggers Rail Act amendments have allowed railroads considerable freedom to
raise or lower rates without objection from captive shippers. While the ICC
termination retained maximum rate regulation on traffic over which railroads
have exclusive control, the new law relieved railroads from the requirements of
filing tariffs and rate contracts with the STB on all traffic other than
agricultural products.
FUTURE OF THE STB. Under the ICC Termination Act the STB is presently
funded through September 30, 1999. It is unclear whether the STB will be
reauthorized in its present form.
FRA. The FRA regulates railroad safety and equipment standards,
including track maintenance, handling of hazardous shipments, locomotive and
rail car inspection and repair requirements, and operating practices and crew
qualifications.
STATES. Under the ICC Termination Act states lost their jurisdiction
over economic regulation of intrastate transportation. All states retain some
jurisdiction over safety related matters.
EMPLOYEES; LABOR CONSIDERATIONS
As of December 31, 1998, the Company had approximately 444 full-time
employees in North America. Approximately 89 of the Company's employees are
members of a union and are employed at KSC. Approximately 46 of KSC's employees
are members of the Federation Inter-Provinciale des Ouvriers en Electricite
(F.I.P.O.E.), which was accredited in Canada in 1988. The other 43 of KSC's
union employees are members of the L'Association des employes de production de
Kalyn Siebert Canada, Inc. (A.E.P.K.), which was accredited in August 1998.
The Company's railroad operations are somewhat seasonal. Most
agricultural shipments
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<PAGE> 19
occur from September through May, and much of the Company's track maintenance is
performed in the summer months. Temporary layoffs of personnel, hiring of
part-time or short-term employees, or use of independent contractors are
sometimes required to adjust to the seasonal nature of track maintenance work
and other business requirements. As of December 31, 1998 the Company had 104
full-time railroad employees, 302 full-time employees in the trailer
manufacturing division, one full-time employee in the motor carrier operations
and 38 corporate and/or support employees.
Ferronor operated with approximately 350 employees as of the date that
the Company acquired majority ownership. As contemplated by management,
significant reductions in the work force have been effectuated and the current
workforce is approximately 210 employees.
ITEM 2. DESCRIPTION OF PROPERTY
MICHIGAN RAILROAD PROPERTIES
The majority of the Company's 199 miles of Michigan rail line consists
of 90 pound or heavier welded and jointed rail. The Company's track standards
allow for maximum operating speeds ranging from 10 m.p.h. to 25 m.p.h. The
Company owns approximately 1,260 acres of operating and non-operating real
estate in Michigan. The Company's Michigan rail properties serve as collateral
for the Company's $55 million Revolving Loan Agreement with the National Bank of
Canada et al (the "Revolver") (See Note 10 to Notes to Consolidated Financial
Statements).
The Company built its Eastern regional headquarters office in Vassar,
Michigan during 1997. This office building is 6,800 square feet and houses
management, dispatching, engineering, real property management, accounting and
marketing personnel. The Company owns a locomotive shop which was constructed in
1987, and a maintenance-of-way equipment repair building completed in 1989,
which also serves as a satellite operations center.
TENNESSEE RAILROAD PROPERTIES
SCTR leases approximately 49 miles of rail line and approximately 450
acres of related real estate from the South Central Tennessee Railroad
Authority. The lease was extended in February 1997 until 2004 and provides for
base lease payments of $1,300 per month. The Company has the option to purchase
the rail line and real estate for one dollar throughout the term of the lease.
SCTR owns a locomotive shop and general office facility in Centerville,
Tennessee which houses all of its operating personnel. SCTR also owns related
maintenance and office equipment. The Company's rights to the lease of the SCTR
property, as well as all the common stock of SCTR owned by the Company and
SCTR's other equipment, serve as collateral under the Company's financing
arrangements with General Electric Capital Corporation obtained in connection
with the Company's acquisition of SCTR. This financing is being refinanced
during 1999. (See Note 10 to Notes to Consolidated Financial Statements).
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DELAWARE AND PENNSYLVANIA RAILROAD PROPERTIES
DVRC operates approximately 55 miles of rail line, consisting of 45
miles located in southeastern Pennsylvania, and 10 miles of contiguous line
which extends into the State of Delaware, where the Company interchanges with
CSX Transportation at Elsmere, Delaware. The Pennsylvania rail line is operated
pursuant to an agreement between DVRC and the Commonwealth of Pennsylvania. The
rail line in Delaware was operated by DVRC pursuant to a 10-year lease with the
Wilmington & Northern Railroad Company. DVRC terminated that lease on June 30,
1996 and has since been operating over that rail segment on a month-to-month
basis. DVRC has received grants from the Commonwealth of Pennsylvania for track
maintenance and improvements from 1994 through 1998 which require local
matching.
MINNESOTA RAILROAD PROPERTIES
Dakota Rail operates approximately 44 miles of rail line between
Hutchinson and Wayzata, Minnesota. The rail line is being purchased pursuant to
a contract for deed from the State of Minnesota. Dakota Rail also owns certain
non-operating real estate parcels. Total land both operating and non-operating
owned by Dakota Rail equals approximately 580 acres. In addition to the rail
line and land, Dakota Rail also owns six buildings, consisting of two depots,
two diesel houses and two other buildings.
MNR currently operates over 221 miles of rail line of which it owns
approximately 174 miles and has trackage rights over 47 miles. The rail line
includes five branch lines, divided into seven segments in northern Minnesota.
MNR also owns approximately 2,600 acres of operating and non-operating land. MNR
sold approximately 30 miles of rail line in December 1996. MNR's rail properties
serve as collateral for the Revolver (See Note 10 to Notes to Consolidated
Financial Statements).
OTVR owns 72 miles of rail line in Western Minnesota from Fergus Falls,
Minnesota to an interchange with Burlington Northern Santa Fe near Fargo, North
Dakota. The total land owned by OTVR is approximately 1,080 acres. In addition
to the rail line and land, OTVR owns a depot building in Fergus Falls. OTVR's
railroad properties serve as collateral for the Company's Revolver (See Note 10
to Notes to Consolidated Financial Statements).
SCXY operates over 60 miles of rail line of which it owns 44 miles and
has trackage rights over 16 miles. The rail line includes two branch lines in
and around Hinckley, Minnesota.
TEXAS RAILROAD PROPERTIES
WTLR owns approximately 104 miles of rail line, extending from the City
of Lubbock to both Seagraves and Whiteface. The total land owned by WTLR is
approximately 1,500 acres. In addition to the rail line and land, WTLR owns four
buildings. These buildings consist of an office building in Lubbock used as the
railroad general offices, a one story storefront office building, and
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<PAGE> 21
a maintenance building and storage shed, all in Brownfield, Texas. The Company's
Texas railroad properties serve as collateral for the Revolver (See Note 10 to
Notes to Consolidated Financial Statements).
WASHINGTON RAILROAD PROPERTIES
CCRR owns 131 miles of rail line between Oroville and Wenatchee,
Washington. CCRR also has trackage rights over 6 miles of rail line near
Wenatchee. Total land owned by CCRR is approximately 1,600 acres. In addition to
the rail line and land, CCRR owns three buildings. These buildings consist of an
office building, a maintenance-of-way shop/storage building and a locomotive
shop, all of which are located in Omak, Washington. The Company's Washington
railroad properties serve as collateral for the Revolver. (See Note 10 to Notes
to Consolidated Financial Statements).
CALIFORNIA RAILROAD PROPERTIES
In August 1998, the Company, through its newly formed, wholly-owned
subsidiary, Ventura County Railroad Company, Inc. ("VCRR"), entered into a long
term lease/purchase agreement to operate a 13-mile rail line serving the Port of
Hueneme and the Oxnard Harbor District in Oxnard, California, located
approximately 50 miles north of Los Angeles. VCRR's general offices are located
at the Port of Hueneme.
CHILEAN RAILROAD PROPERTIES
In February 1997, the Company, through a newly formed, wholly-owned
subsidiary, RailAmerica de Chile S.A., acquired 55% of the outstanding voting
stock of Ferronor. Ferronor owns and operates approximately 1,400 miles of rail
line serving northern Chile. RailAmerica was joined in the purchase of Ferronor
by APCO, a family-owned Chilean transportation and distribution company.
Ferronor operates the only north-south railroad in northern Chile,
extending from La Calera near Santiago, where it connects with Chile's southern
railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique,
approximately 120 miles south of the Peruvian border. It also operates several
east-west branch lines that link a number of iron, copper and limestone mines
and production facilities with several Chilean Pacific port cities. Ferronor
also serves Argentina and Bolivia through traffic interchanged with the General
Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia.
TEXAS MANUFACTURING PROPERTIES
KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on an 25.5-acre site,
which were constructed over the period from 1969 to 1997. The Company's Texas
manufacturing properties serve as collateral for the Revolver (See Note 10 to
Notes to Consolidated Financial Statements).
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QUEBEC, CANADA MANUFACTURING PROPERTIES
KSC's manufacturing operations are conducted in two Company owned
buildings, totaling approximately 150,000 square feet on a 36.7-acre site. The
Company's Quebec manufacturing properties serve as collateral for certain term
financings (See Note 10 to Notes to Consolidated Financial Statements).
ONTARIO, CANADA MOTOR CARRIER PROPERTIES
Steel City Carriers operates from a terminal it owns in Sault Ste.
Marie, Ontario, Canada, which includes an office building housing administrative
and dispatch offices, fabricating and service and a shop building. The service
facility has three bays which provide adequate space for repairs and maintenance
of Steel City Carriers' tractors and trailers as well as some owner-operators'
tractors. A 5-1/2 acre lot provides adequate space for the normal loading,
unloading, movement and parking of tractors and trailers as well as for
temporarily storing and transferring some shipments. The Company has entered
into an agreement to sell the real estate and anticipates the sale closing in 12
to 24 months. The Company's Ontario properties serve as collateral for the
Revolver (See Note 10 to Notes to Consolidated Financial Statements).
ROLLING STOCK
As of December 31, 1998, the Company's domestic railroad rolling stock
consisted of 47 locomotives and 992 freight cars, some of which were owned and
some of which are leased from third parties. Most of the Company's rail cars are
subject to fixed monthly lease payments which are offset, in part, by fees
charged by the Company to connecting railroads and shippers. The Company owns
138 tank cars that it has leased to various shippers. The tank cars serve as
collateral for term financing agreements. Certain of the Company's locomotives
are owned by the Company and serve as collateral under various financing
agreements (See Note 8 to Notes to Consolidated Financial Statements). The
Company also owns various other equipment used in the maintenance and operation
of its railroads. The following tables summarize the composition of the
Company's domestic railroad equipment fleet as of December 31, 1998:
FREIGHT CARS
-----------------------------------
TYPE OWNED LEASED TOTAL
---- ----- ------ -----
Covered hopper cars -- 458 458
Open top hopper cars 5 184 189
Tank cars 138 -- 138
Box cars -- 59 59
Wood chip cars -- 78 78
Center-beam flat cars -- 60 60
Flat cars 10 -- 10
--- --- ---
153 839 992
=== === ===
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LOCOMOTIVES
---------------------------------
HORSEPOWER/UNIT OWNED LEASED TOTAL
--------------- ----- ----- -----
Over 2000 2 0 2
1500 to 2000 22 14 36
Under 1500 9 0 9
-- -- --
33 14 47
== == ==
As of December 31, 1998, Ferronor owned approximately 32 locomotives
and 810 rail cars in Chile.
Based on current and forecasted traffic levels on the Company's
railroads, management believes that its present equipment, combined with the
availability of other rail cars for hire, is adequate to support its operations.
Management believes that the Company's insurance coverage with respect to its
property and equipment is adequate.
ADMINISTRATIVE OFFICES
The Company maintains its principal executive office in Boca Raton,
Florida. This office consists of approximately 7,250 square feet and is leased
through January 2001. The lease calls for monthly rental payments of
approximately $13,000 with annual increases. In July 1998, the Company purchased
a 59,500 square foot office building, located in Boca Raton, Florida, for
approximately $4.6 million. Approximately 17,500 square feet of this building is
to be used as the Company's new corporate headquarters. The Company is expected
to take occupancy during the second quarter of 1999. The remaining 42,000 square
feet of space is currently leased to a single tenant. In addition, the Company
subleases a corporate office in San Francisco, California, consisting of
approximately 1,000 square feet and leased through June 2001, with lease
payments of approximately $550 per month.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims some of which are currently
pending. Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance, and it is reasonably
possible that some of these matters may be decided unfavorably to the Company.
It is the opinion of management that the ultimate liability, if any, with
respect to these matters will not be material. Other than ordinary routine
litigation incidental to the Company's business, no other litigation exists.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective March 6, 1997, the Company's common stock began trading on
the Nasdaq National Market under the symbol "Rail". Prior to March 6, 1997, the
Company's common stock traded on the Nasdaq SmallCap Market tier of The Nasdaq
Stock Market. Set forth below is high and low bid information for the common
stock as reported on the NASDAQ system for each quarter of 1997 and 1998. All
such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
High Sales Price Low Sales Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1997
- ------------------------------------------------------------------------------------------------
First Quarter $ 6 1/8 $ 4 5/8
- ------------------------------------------------------------------------------------------------
Second Quarter 5 4 1/4
- ------------------------------------------------------------------------------------------------
Third Quarter 6 5/16 4 1/8
- ------------------------------------------------------------------------------------------------
Fourth Quarter 7 3/8 5 3/8
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
High Sales Price Low Sales Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1998
First Quarter $ 7 23/32 $ 6
- ------------------------------------------------------------------------------------------------
Second Quarter 7 3/16 5 15/16
- ------------------------------------------------------------------------------------------------
Third Quarter 6 3/8 5
- ------------------------------------------------------------------------------------------------
Fourth Quarter 8 3/4 5 5/16
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
High Sales Price Low Sales Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1999
- ------------------------------------------------------------------------------------------------
First Quarter (through March 25) $10 3/4 $ 7 1/4
- ------------------------------------------------------------------------------------------------
</TABLE>
As of March 25, 1999, there were 303 holders of record of the common
stock and approximately 3,000 beneficial stockholders. The Company has never
declared or paid a dividend on its common stock. The ability of the Company to
pay dividends in the future will depend on, among other things, restrictive
covenants contained in loan or other agreements to which the Company may be
subject.
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<PAGE> 25
In December 1998 and January 1999, the Company sold an aggregate of
468,000 shares of its Series A Convertible Redeemable Preferred Stock, $.01 par
value (the "Series A Preferred Stock"), in a private offering to accredited
investors for an aggregate purchase price of $11,610,000 pursuant to Section
4(2) and/or 3(b) of the Securities Act of 1933, as amended (the "Securities
Act"), and Regulation D promulgated thereunder. The Company paid aggregate
concessions and fees of $822,700 to the placement agent in connection with the
offering. The Series A Preferred Stock has a liquidation value of $25.00 per
share, pays cumulative annual dividends of 7.5% payable in cash, semi-annually
in arrears and is non-voting. The Series A Preferred Stock is convertible, at
the option of each holder, into shares of common stock at a conversion price of
$8.25, subject to adjustment under certain circumstances. The Company is
required to redeem the outstanding shares of Series A Preferred Stock on
December 31, 2003, at a redemption price equal to the liquidation value, plus
accrued and unpaid dividends. The Company has the right to redeem the
outstanding shares of Series A Preferred Stock under certain circumstances.
In March 1999, the Company sold an aggregate of 1.4 million shares of
its common stock and warrants (the "1999 Warrants") to purchase 210,000 shares
of common stock in a private offering to accredited investors for an aggregate
purchase price of $12.5 million pursuant to Section 4(2) and/or 3(b) of the
Securities Act and Regulation D promulgated thereunder. The Company paid
aggregate concessions and fees of $437,000 to the placement agent in connection
with the offering. The 1999 Warrants are exercisable during the one-year period
following consummation at $10.125 per share, subject to adjustment under certain
circumstances.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the financial statements and the notes thereto included elsewhere in this
Annual Report on Form 10-K. The statement of operations data for the years ended
December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998
and 1997 are derived from, and are qualified by reference to, audited financial
statements included elsewhere herein and should be read in conjunction with
those financial statements and the notes thereto. The statement of operations
data set forth below for the periods ended December 31, 1995 and 1994 and the
balance sheet data as of December 31, 1996, 1995 and 1994 are derived from the
audited financial statements of the Company not included herein (In thousands,
except operating data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue $ 14,724 $ 25,078 $ 25,658 $ 47,437 $ 77,144
Operating income 2,229 3,188 3,873 7,319 12,642
Income from
continuing operations 920 1,126 1,080 2,634 4,466
Basic earnings per
common share from
continuing operations $ 0.30 $ 0.10 $ 0.22 $ 0.32 $ 0.47
Diluted earnings per common
share from continuing
operations $ 0.27 $ 0.10 $ 0.21 $ 0.30 $ 0.44
Weighted average
common shares 4,608 4,504 4,966 8,304 9,553
BALANCE SHEET DATA
Total Assets $ 24,876 $ 40,064 $ 71,565 $100,835 $145,230
Long-term debt, including
current maturities 10,407 18,151 40,154 47,798 71,815
Subordinated debt,
including current maturities 2,062 5,569 3,690 3,478 908
Redeemable convertible
preferred stock 1,017 -- -- -- 6,882
Stockholders' Equity 6,408 9,149 15,992 26,814 34,760
OPERATING DATA
Freight carloads 15,614 18,505 25,871 69,140 117,535
Track mileage 299 450 930 2,330 2,400
Trailer units sold 887 875 547 730 1,129
Number of full time
employees 220 265 275 542 652
</TABLE>
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company's principal operations include the operation of domestic
short line railroads, international regional railroads and trailer
manufacturing. The Company hauls various products, which historically have
consisted primarily of agricultural commodities, for its customers corresponding
to their local operating areas. The Company's trailer manufacturing division,
located in Texas and Trois-Rivieres, Quebec, Canada, manufactures a broad range
of specialty truck trailers which are marketed to a customer base from the
commercial and government sectors.
The Company's operating revenues increased by $29.7 million, or 62.6%
to $77.1 million for the year ended December 31, 1998 from $47.4 million for the
year ended December 31, 1997. Operating expenses increased by $24.4 million, or
60.7% to $64.5 million for the year ended December 31, 1998 from $40.1 million
for the year ended December 31, 1997. Other expenses, net increased by $2.9
million, or 77.5% to $6.6 million for the year ended December 31, 1998 from $3.7
million for the year ended December 31, 1997. Income from continuing operations
increased by $1.8 million, or 69.6% to $4.5 million for the year ended December
31, 1998 from $2.6 million for the year ended December 31, 1997. Increases in
revenue, operating expenses, other expenses and income were due primarily to the
inclusion of the motor carrier division in continuing operations for nine months
of 1998, the commencement of shipments on several large new contracts at
Ferronor in 1998, the acquisition of KSC and the growth of the trailer
manufacturing operations.
Set forth below is a discussion of the results of operations for the
Company's railroad operations, trailer manufacturing operations and corporate
overhead and other.
RESULTS OF DOMESTIC RAILROAD OPERATIONS
The discussion of results of operations that follows reflects the
consolidated results of the Company's domestic railroad operations for the years
ended December 31, 1998, 1997 and 1996. The results of operations include the
operations of Evansville Terminal Company from July 1, 1996 to September 30,
1997, CCRR from September 6, 1996, OTVR from October 1, 1996, Gettysburg Railway
and Gettysburg Scenic Rail Tours, Inc. ("GSRT") from November 18, 1996 to
October 31, 1997, MNR from December 28, 1996 , SCXY from September 8, 1997, and
VCRR from September 1, 1998. As a result, the results of operations for the year
ended December 31, 1998 are not comparable to the prior year periods in certain
material respects.
27
<PAGE> 28
The following table sets forth the operating revenues and expenses for
the Company's domestic railroad operations for the periods indicated. All
results of operations discussed in this section are for the Company's domestic
railroads only, unless indicated (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Operating Revenue:
Transportation revenue $15,388 $14,737 $ 9,783
Other revenue 802 1,277 1,921
------- ------- -------
Total operating revenue 16,190 16,014 11,704
------- ------- -------
Operating Expenses:
Maintenance of way 1,974 2,231 1,310
Maintenance of equipment 675 678 625
Transportation 3,605 3,799 2,075
Equipment rental 347 599 388
Selling, general and administrative 3,095 2,457 1,381
Depreciation and amortization 1,570 1,337 961
------- ------- -------
Total operating expenses 11,266 11,101 6,740
------- ------- -------
Operating income 4,924 4,913 4,964
Interest and other expense 2,852 2,842 1,308
------- ------- -------
Income before income taxes $ 2,072 $ 2,071 $ 3,656
======= ======= =======
</TABLE>
COMPARISON OF DOMESTIC RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
OPERATING REVENUES. Transportation revenues increased $0.7 million, or
4.4%, to $15.4 million for the year ended December 31, 1998 from $14.7 million
for the year ended December 31, 1997. The domestic transportation revenue per
carload decreased to $303 from $308 per car primarily due to the difference in
product mix hauled between 1998 and 1997. Domestic carloads handled totaled
49,519 for the year ended December 31, 1998, an increase of 3,312, or 7.2%,
compared to 46,207 for the year ended December 31, 1997.
Other revenues decreased by approximately $0.5 million, or 37.2%, to
$0.8 million for the year ended December 31, 1998 from $1.3 million for the year
ended December 31, 1997. Other revenues for 1998 and 1997 consist of gain on
sales of railroad assets, easement sales, railroad lease and rental income and
other miscellaneous income. The decrease was primarily due to certain gains on
sale of assets during 1997 with no corresponding sales of assets in 1998.
OPERATING EXPENSES. Operating expenses increased by $0.2 million, or
1.8%, to $11.3 million for the year ended December 31, 1998 from $11.1 million
for the year ended December 31, 1997. Operating expenses, as a percentage of
transportation revenue, were 73.2% and 75.3% for 1998 and 1997, respectively.
Management anticipates the operating expenses, as a percentage of transportation
revenue to remain fairly constant at the current level for the next twelve
months exclusive of seasonality.
28
<PAGE> 29
Maintenance of way expenses decreased approximately $0.2 million, or
11.5%, to $2.0 million for the year ended December 31, 1998 from $2.2 million
for the year ended December 31, 1997 primarily due to increased track work being
performed as part of scheduled maintenance programs at WTLR and HESR during
1997.
Maintenance of equipment expenses remained fairly constant at $0.7
million for the years ended December 31, 1998 and 1997.
Transportation expense decreased approximately $0.2 million, or 5.1%,
to $3.6 million for the year ended December 31, 1998 from $3.8 million for the
year ended December 31, 1997 primarily due to the dispositions of ETC,
Gettysburg Railway and GSRT in 1997.
Equipment rental decreased approximately $0.3 million, or 42.0%, to
approximately $0.3 million for the year ended December 31, 1998 from $0.6
million for the year ended December 31, 1997. The decrease is primarily due to
increased utilization of the Company's leased railcar fleet. CCRR and MNR
equipment rental expenses decreased by 78.8% and 137.4% respectively due to
increased earnings offsetting equipment rental expense on their railcar fleets.
Selling, general and administrative expenses increased approximately
$0.6 million, or 26.0%, to $3.1 million for the year ended December 31, 1998
from $2.5 million for the year ended December 31, 1997. MNR had selling, general
and administrative expenses of approximately $0.5 million in 1998 compared to
$0.3 million for the year ended December 31, 1997, an increase of approximately
$0.2 million. OTVR had selling, general and administrative expenses of
approximately $0.3 million in 1998 compared to $0.2 million for the year ended
December 31, 1997, an increase of approximately $0.1 million. SCXY had selling,
general and administrative expenses of $0.1 million for the year ended December
31, 1998, an increase of $0.1 million from $15,000 in 1997.
Depreciation and amortization increased approximately $0.3 million, or
17.4%, to $1.6 million for the year ended December 31, 1998 from $1.3 million
for the year ended December 31, 1997.
INTEREST AND OTHER EXPENSES. Interest and other expenses remained
fairly constant at approximately $2.9 million for the years ended December 31,
1998 and 1997.
COMPARISON OF DOMESTIC RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
OPERATING REVENUES. Transportation revenues increased $5.0 million, or
50.6%, to $14.7 million for the year ended December 31, 1997 from $9.8 million
for the year ended December 31, 1996. CCRR, which was acquired in September
1996, had transportation revenue of approximately $2.6 million for 1997 and
approximately $0.7 million for the four months ended December 31, 1996, an
increase of $1.9 million. MNR, which was acquired in December 1996, had
transportation revenue of approximately $2.2 million for the year ended December
31, 1997. OTVR, which was
29
<PAGE> 30
acquired in September 1996, had transportation revenue of approximately $1.8
million for the year ended December 31, 1997, compared to $0.6 million for the
four month period ended December 31, 1996, an increase of $1.2 million.
Gettysburg Railway, which was acquired in November 1996, had transportation
revenue of approximately $0.4 million for the year ended December 31, 1997.
These increases in transportation revenue were partially offset by a decrease of
approximately $0.2 million in revenue from HESR resulting from decreased
agricultural shipments in early 1997 compared to early 1996. Additionally,
transportation revenue from SCTR decreased approximately $0.4 million due to a
decrease in demurrage revenue charged to a shipper. The domestic transportation
revenue per carload decreased to $308 from $378 per car primarily due to the
acquisitions during 1996 of railroads with lower rates per carload than the
Company's existing railroads. Domestic carloads handled totaled 46,207 for the
year ended December 31, 1997, an increase of 20,336, or 78.6%, compared to
25,871 for the year ended December 31, 1996. The increase was primarily the
result of the Company's acquisitions of MNR, which handled 10,477 carloads in
1997, CCRR, which handled 7,631 carloads in 1997, OTVR, which handled 5,776
carloads in 1997, and Gettysburg Railway, which handled 1,206 carloads in 1997.
These increased car loadings were partially offset by a decrease of 541 carloads
from HESR.
Other revenues decreased by approximately $0.6 million, or 33.5%, to
$1.3 million for the year ended December 31, 1997 from $1.9 million for the year
ended December 31, 1996. Other revenues for 1997 and 1996 consisted of gain on
sales of railroad assets, easement sales, railroad lease and rental income and
other miscellaneous income.
OPERATING EXPENSES. Operating expenses increased by $4.4 million, or
64.7%, to $11.1 million for the year ended December 31, 1997 from $6.7 million
for the year ended December 31, 1996. Operating expenses, as a percentage of
transportation revenue, were 75.3% and 68.9% for 1997 and 1996, respectively.
The change was primarily due to higher maintenance of way expenses caused by an
unusually harsh winter in Minnesota and Michigan in the first quarter of 1997
and higher operating ratios for certain of the recent acquisitions as compared
to the Company's existing railroads.
Maintenance of way expenses increased approximately $0.9 million, or
70.3%, to $2.2 million for the year ended December 31, 1997 from $1.3 million
for the year ended December 31, 1996 primarily due to certain acquisitions which
occurred in 1996. MNR had maintenance of way expenses of approximately $0.5
million for the year ended December 31, 1997. CCRR had maintenance of way
expenses of approximately $0.2 million for 1997, compared to maintenance of way
expenses of approximately $57,000 for the four months ended December 31, 1996,
an increase of $0.2 million. Gettysburg Railway had maintenance of way expenses
of approximately $0.1 million for the year ended December 31, 1997, compared to
$10,000 for the four months ended December 31, 1996. In addition to the above
acquisitions, WTLR's and HESR's maintenance of way expenses increased
approximately $74,000 and $0.1 million, respectively, from 1996 to 1997 due to
increased track work being performed as part of scheduled maintenance programs.
Maintenance of equipment expenses increased by approximately $53,000,
or 8.5%, to $0.68
30
<PAGE> 31
million for the year ended December 31, 1997 from $0.63 million for the year
ended December 31, 1996 primarily due to certain acquisitions which occurred in
the second half of 1996.
Transportation expense increased approximately $1.7 million, or 83.1%,
to $3.8 million for the year ended December 31, 1997, from $2.1 million for the
year ended December 31, 1996 primarily due to certain acquisitions in the second
half of 1996. MNR had transportation expenses of approximately $0.7 million in
1997. CCRR had transportation expenses of approximately $0.5 million for the
year ended December 31, 1997, compared to $0.1 million for the four months ended
December 31, 1996, an increase of $0.3 million. OTVR had transportation expenses
of approximately $0.3 million for the year ended December 31, 1997, compared to
$59,000 in the three months ended December 31, 1996, an increase of
approximately $0.3 million. Gettysburg Railway and GSRT combined had
transportation expenses of $0.3 million for the year ended December 31, 1997.
Equipment rental increased approximately $0.2 million, or 54.4%, to
$0.6 million for the year ended December 31, 1997, from $0.4 million for the
year ended December 31, 1996.
Selling, general and administrative expenses increased approximately
$1.1 million, or 77.9%, to $2.5 million for the year ended December 31, 1997,
from $1.4 million for the year ended December 31, 1996 primarily due to certain
acquisitions in the second half of 1996. MNR had selling, general and
administrative expenses of approximately $0.3 million in 1997. CCRR had selling,
general and administrative expenses of approximately $0.4 million for the year
ended December 31, 1997, compared to $0.1 million for the four months ended
December 31, 1996, an increase of $0.3 million. OTVR had selling, general and
administrative expenses of approximately $0.2 million for the year ended
December 31, 1997, compared to $44,000 in the three months ended December 31,
1996, an increase of approximately $0.1 million. Gettysburg Railway had selling,
general and administrative expenses of $0.1 million for the year ended December
31, 1997.
Depreciation and amortization increased approximately $0.4 million, or
39.1%, to $1.3 million for the year ended December 31, 1997 from $1.0 million
for the year ended December 31, 1996 primarily due to certain acquisitions in
the second half of 1996.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased by
approximately $1.5 million, or 117.3%, to $2.8 million for the year ended
December 31, 1997 from $1.3 million for the year ended December 31, 1996. Such
increase was primarily due to the financing of the acquisitions of CCRR, MNR,
OTVR and Gettysburg Railway. The increase in interest expense from the year
ended December 31, 1996 to the year ended December 31, 1997 attributable to
these four acquisitions was $0.5 million, $0.5 million, $0.4 million and $0.1
million, respectively.
RESULTS OF INTERNATIONAL RAILROAD OPERATIONS
FERRONOR. On February 19, 1997, the Company acquired a 55% equity
interest in Ferronor, a 1,400 mile regional railroad in the Republic of Chile.
The operations of Ferronor have been
31
<PAGE> 32
included in the consolidated operations of the Company from March 1, 1997. As a
result, the results of operations for the year ended December 31, 1998 are not
comparable to the corresponding prior year in certain material respects.
The following table sets forth the operating revenues and expenses for
the Company's international railroad operations, which consist of Ferronor and
RDC, for the periods indicated. All results of operations discussed in this
section are for the Company's international railroads only, unless otherwise
indicated. (In thousands)
For the Year Ended
Ended December 31,
1998 1997
-------- --------
Revenue:
Transportation revenue $ 14,915 $ 7,287
Other revenue 1,009 775
-------- --------
Total revenue 15,924 8,062
-------- --------
Operating Expenses:
Transportation 8,982 5,113
General and administrative 1,724 1,137
Depreciation and amortization 706 267
-------- --------
Total operating expenses 11,412 6,517
-------- --------
Operating income 4,512 1,545
Other income (expense) (1,257) 319
Minority interest in earnings (1,672) (851)
-------- --------
Income before income taxes $ 1,583 $ 1,013
======== ========
COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997.
OPERATING REVENUES. Transportation revenue increased by $7.6 million, or 104.7%,
to $14.9 million for the year ended December 31, 1998 from $7.3 million for the
year ended December 31, 1997. Ferronor's carloads handled totaled 68,016 for the
year ended December 31, 1998, an increase of 45,083, or 196.6%, compared to
22,933 carloads for the year ended December 31, 1997. The increase was partially
due to the prior year period including only ten months of operations. In
addition, Ferronor began moving iron ore out of the El Algarrabo mine in late
March 1998 and the Los Colorados mine in July 1998. These moves have
significantly increased Ferronor's car loadings and operating revenue.
OPERATING EXPENSES. Operating expenses increased by approximately $4.9
million, or 75.1%, to $11.4 million for the year ended December 31, 1998 from
$6.5 million for the year ended December 31, 1997. The increase was partially
due to the prior year period including only ten months of operations in addition
to Ferronor commencing movement of iron ore out of the El Algarrabo mine in late
March 1998 and the Los Colorados mine in July 1998. Operating expenses, as a
percentage of transportation revenue, were 76.5% and 89.4% for the years ended
December 31,
32
<PAGE> 33
1998 and 1997, respectively. The improvement is primarily due to cost reductions
implemented by the Company including a reduction in employees.
OTHER INCOME (EXPENSE). Other income (expense) decreased by approximately
$1.6 million to $(1.3) million for the year ended December 31, 1998 from $0.3
million for the year ended December 31, 1997. The primary reasons for the
decrease are the interest expense on the capital project financings and certain
gains on sale of assets recognized in 1997 with no corresponding gains in 1998.
RESULTS OF TRAILER MANUFACTURING OPERATIONS
The discussion of results of operations that follows reflects the
results of KSI for the periods indicated and KSC from January 1, 1998, the
effective date of the Company's acquisition of Fabrex, Inc. and its affiliate.
As a result, the results of operations for the year ended December 31, 1998 are
not comparable to the corresponding prior years in certain material respects.
The following table sets forth the income and expense items of the Company's
trailer manufacturing operations for the years ended December 31, 1998, 1997 and
1996 and the percentage relationship of income and expense items to net sales
(in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $39,887 100% $22,941 100% $13,638 100%
Cost of goods sold 28,583 71.7% 16,544 72.1% 10,448 76.6%
------- ------- -------
Gross profit 11,304 28.3% 6,397 27.9% 3,190 23.4%
Selling, general and
administrative 3,324 8.3% 1,969 8.6% 1,400 10.3%
Depreciation and amortization 835 2.1% 473 2.1% 433 3.2%
------- ------- -------
Income from operations 7,145 17.9% 3,955 17.2% 1,357 10.0%
Other expenses (net) 222 0.6% 230 1.0% 348 2.6%
------- ------- -------
Income before income taxes $ 6,923 17.4% $ 3,725 16.2% $ 1,009 7.4%
======= ======= =======
</TABLE>
COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased approximately $17.0 million, or 73.9%,
to $39.9 million for the year ended December 31, 1998 from $22.9 million for the
year ended December 31, 1997. The net sales increase consisted of $10.2 million
in sales from KSC in 1998 and an increase of $6.8 million in KSI's sales. KSI
sold 895 trailers for the year ended December 31, 1998 and 730 trailers for the
year ended December 31, 1997. The increase in KSI's sales volume increased net
sales by
33
<PAGE> 34
approximately $5.0 million. KSC sold 234 trailers for the year ended December
31, 1998. KSI's average price per trailer sold was approximately $34,700 for the
year ended December 31, 1998 and approximately $30,500 for the year ended
December 31, 1997. The increase in average price per trailer increased KSI's
sales by approximately $1.8 million. Sales to governmental agencies represented
48% and 37% of KSI's net sales for 1998 and 1997, respectively. KSI's backlog as
of December 31, 1997 was approximately $18.3 million compared to $19.7 million
at December 31, 1997. KSC's backlog as of December 31, 1998 was approximately
$3.7 million.
COST OF GOODS SOLD. Cost of goods sold increased by approximately $12.0
million, or 72.8%, to $28.6 million for the year ended December 31, 1998 from
$16.6 million for the year ended December 31, 1997. The cost of goods sold
increase consisted of $8.4 million from KSC in 1998 and an increase of $3.6
million in KSI's cost of goods sold. Cost of goods sold was 71.7% for the year
ended December 31, 1998 compared to 72.1% for the year ended December 31, 1997.
KSI's and KSC's cost of goods sold were 68.2% and 81.7%, respectively, for 1998.
Management anticipates gross profit as a percentage of net revenue to remain
fairly constant over the next twelve months.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $1.3 million, or 68.8%, to
$3.3 million for the year ended December 31, 1998 from $2.0 million for the year
ended December 31, 1997. KSC's selling, general and administrative expenses were
$0.9 million for 1998, while KSI's selling, general and administrative expenses
increased $0.4 million for 1998. The increase was primarily related to KSI's
increased sales during the year as discussed above.
COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased approximately $9.3 million, or 68.2%, to
$22.9 million for the year ended December 31, 1997 from $13.6 million for the
year ended December 31, 1996. Net sales consist of trailer sales, part sales and
repair income. Trailer sales represented approximately 96% of the net sales in
both 1997 and 1996. KSI sold 730 trailers for the year ended December 31, 1997
and 547 trailers for the year ended December 31, 1996. The increase in sales
volume increased net sales by approximately $4.4 million. The average price per
trailer sold was approximately $30,500 for the year ended December 31, 1997 and
approximately $24,000 for the year ended December 31, 1996. The increase in
average price per trailer increased net sales by approximately $4.8 million.
Sales to governmental agencies represented 37% and 20% of KSI's net sales for
1997 and 1996, respectively. During the first half of 1996, KSI was in the
process of building five prototype trailers in connection with the $27 million
October 1995 TACOM contract. Full production under the contract began during the
first quarter of 1997. The increase in sales for 1997 compared to 1996 was
principally production under such contract. KSI produced 105 Tactical Vans under
the TACOM contract during 1997. KSI's backlog as of December 31, 1997 was
approximately $19.7 million compared to $8.6 million at December 31, 1996.
34
<PAGE> 35
COST OF GOODS SOLD. Cost of goods sold increased by approximately $6.1
million, or 58.2%, to $16.5 million for the year ended December 31, 1997 from
$10.4 million for the year ended December 31, 1996. Cost of goods sold was 72.1%
for the year ended December 31, 1997 compared to 76.6% for the year ended
December 31, 1996. The decrease was partially due to certain fixed costs of
manufacturing being spread over a larger revenue base in 1997. Additionally,
government orders represented a higher percentage of sales in 1997 than in 1996.
Commercial trailers have more variations in design which generally require
greater expertise in the manufacturing process. Government contracts are
typically for larger quantities of similar style trailers. This creates greater
economies of scale in the production process which translates into a relatively
lower cost per unit produced. Historically, commercial sales have had a higher
cost of goods sold and lower gross profit margins than government sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $0.6 million, or 40.9%, from
$1.4 million for the year ended December 31, 1996 to $2.0 million for the year
ended December 31, 1997. The increase was primarily related to KSI's increased
sales during the year as discussed above.
RESULTS OF MOTOR CARRIER OPERATIONS
The discussion of results of operations that follows reflects the
results of Steel City Carriers and RIS for the years ended December 31, 1998,
1997 and 1996. Since the Company's acquisition of Steel City Carriers in
February 1995, its performance and development have not met the Company's
expectations. Accordingly, in March 1997 the Company adopted a formal plan to
discontinue its motor carrier operations and refocus the Company's efforts on
expanding its core railroad operations. The Company's Board of Directors
approved the plan of discontinuance on March 20, 1997. Motor Carrier operations
are included as discontinued operations for the first quarter of 1998 and for
all of 1997 and 1996. Motor Carrier operations are included in continuing
operations from April 1, 1998 to December 31, 1998.
Effective December 1, 1998, the Company ceased all motor carrier
operations and leased substantially all of the operating assets of Steel City
Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario,
Canada-based Contrans Corporation. The leases are for a period of 18 to 24
months. In addition, the Company has entered into an agreement to sell its
Ontario real estate that was previously used in the motor carrier operations.
35
<PAGE> 36
The following table sets forth the operating revenues and expenses for
the Company's motor carrier operations for the years ended December 31, 1998 and
1997.
For the Year Ended
December 31,
1998 1997
------- -------
Transportation revenue $ 6,080 $ 7,133
Operating expenses:
Transportation 5,279 6,348
General and administrative 620 599
Depreciation and amortization 401 1,120
------- -------
Total operating expenses 6,300 8,067
------- -------
Operating income (expense) (220) (934)
Other expense (317) (187)
------- -------
Loss before income taxes ($ 537) ($1,121)
======= =======
COMPARISON OF MOTOR CARRIER OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
The results of motor carrier operations have been included in continuing
operations commencing April 1, 1998, as disposal of the segment was not
completed within twelve months. The results of motor carrier operations have
been included as discontinued operations for the year ended December 31, 1997,
as previously reported.
OPERATING REVENUE. Operating revenue decreased $1.0 million, or 14.8%, to
$6.1 million for the year ended December 31, 1998 from $7.1 million for the year
ended December 31, 1997. The decrease was primarily due to Steel City ceasing
motor carrier operations effective November 30, 1998 and due to a temporary shut
down at one of Steel City's largest customers during the third quarter of 1998.
OPERATING EXPENSES. Operating expenses decreased $1.8 million, or 21.9%,
to $6.3 million for the year ended December 31, 1998 from $8.1 million for the
year ended December 31, 1997. Operating expenses, as a percentage of operating
revenue, were 103.6% and 113.1% for the years ended December 31, 1998 and 1997,
respectively.
Transportation expense decreased $1.0 million, or 16.8%, to $5.3 million
for the year ended December 31, 1998 from $6.3 million for the year ended
December 31, 1997. The decrease was primarily due to variable costs related to
the decreased level of operating revenue.
General and administrative expenses remained fairly constant at $0.6
million for the years ended December 31, 1998 and 1997.
Depreciation and amortization decreased $0.7 million, or 64.2%, to $0.4
million for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. During 1997, the Company wrote off goodwill of
approximately $0.7 million.
Other expense increased $0.1 million, or 69.5%, to $0.3 million for the
year ended December 31, 1998 from $0.2 million for the year ended December 31,
1997.
36
<PAGE> 37
Loss from discontinued operations increased by $0.1 million to $0.7
million for the year ended December 31, 1997 from $0.6 million for the year
ended December 31, 1996.
CORPORATE OVERHEAD
Corporate overhead, which benefits all of the Company's business
segments, has not been allocated to the business segments for this analysis.
Corporate overhead services performed for the Company's subsidiaries include
overall strategic planning, marketing, accounting, finance, cash management,
payroll, engineering and tax return preparation. The Company believes that this
presentation will facilitate a better understanding of the changes in the
results of the Company's operations. Corporate overhead, which is included in
selling, general and administrative expenses in the consolidated statements of
income, increased $0.9 million, or 28.0%, to $4.1 million for the year ended
December 31, 1998 from $3.2 million for the year ended December 31, 1997.
Corporate overhead increased $0.7 million, or 28.2%, to $3.2 million for the
year ended December 31, 1997 from $2.5 million for the year ended December 31,
1996. The increases in each of the specified periods were related to the
additional costs incurred to manage the acquired subsidiaries and to establish a
strong management team to handle the Company's continued growth.
LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS
The discussion of liquidity and capital resources that follows reflects
the consolidated results of the Company, including all subsidiaries.
The Company's cash provided by operating activities was $5.7 million for
the year ended December 31, 1998.
Cash used in investing activities was $30.7 million for the year ended
December 31, 1998. The primary use of cash during 1998 was for the purchase of
property, plant and equipment with an aggregate cost of approximately $28.1
million. Over $12.7 million of these purchases were by Ferronor to upgrade its
track in anticipation of the new contracts which began in the second half of
1998. The Company also purchased a 59,000 square foot office building for
approximately $4.6 million to accommodate its growth. KSC has purchased and is
equipping an additional plant for over $2.8 million. SGVY acquired additional
track at over $1.1 million, and the acquisition of KSC used $1.7 million in
cash.
Cash provided by financing activities was $26.9 million for 1998,
consisting of net borrowings of approximately $17.0 million and net proceeds of
approximately $7.5 million from the sale of convertible preferred stock.
The Company's long term debt represents financing of property and
equipment, as well as the acquisition financing for Ferronor, SCTR, KSI, Steel
City Carriers, WTLR, CCRR, MNR, and OTVR. Certain of this indebtedness was
refinanced under the Revolver. The Revolver bears interest, at the option of the
Company, at either the bank's prime rate plus 0.25% or the one, three or six
37
<PAGE> 38
month LIBOR plus 2.5%. At December 31, 1998, $44.2 million was outstanding under
the revolver. The Revolver is collateralized by substantially all of the assets
of the Company, KSI, HESR, SGVY, RIS, CCRR, Steel City Carriers, WTLR, OTVR,
MNR, SCXY, and VCRR.
On May 3, 1997, the Revolver was increased from $25 million to $40
million by National Bank of Canada and Comerica Bank N.A., and on June 16, 1998,
the Revolver was increased from $40 million to $55 million by National Bank of
Canada, Comerica Bank N.A. and Southtrust Bank, N.A. at which time the maturity
date was extended to May 2001.
On September 30, 1998, the Company accepted a proposal by National
Bank of Canada as agent to increase the Revolver to $100 million for purposes of
future acquisitions of transportation related businesses. The Company
anticipates the increase to be closed in the second quarter of 1999.
As of December 31, 1998, the Company had working capital of $14.6 million
compared to working capital of $5.2 million as of December 31, 1997. Cash on
hand as of December 31, 1998 was $5.8 million compared to $3.7 million as of
December 31, 1997. The Company's cash flows from operations and borrowings
historically have been sufficient, and are currently sufficient to meet its
ongoing operating requirements, capital expenditures for property, plant and
equipment, and to satisfy the Company's interest requirements.
In January 1999, the Company completed a private offering of $11.6
million of its Series A Convertible Redeemable Preferred Stock ("Preferred
Stock"). The Company sold 464,400 shares of its Preferred Stock at a price of
$25 per share. The Preferred Stock pays annual dividends of 7.5%, is convertible
into shares of the Company's common stock at a price of $8.25 per share and is
non-voting. The Preferred Stock is mandatorily redeemable 5 years from its
issuance. The December 31, 1998 balance sheet includes 300,600 shares which were
issued during 1998. The remainder of the shares were issued in January 1999. The
carrying value of the Preferred Stock is the par value less issuance costs. The
issuance costs will be amortized on a straight-line basis over the life of the
Preferred Stock.
In March 1999, the Company completed a private offering of approximately
$12.5 million of restricted Common Stock. Pursuant to the offering, the Company
sold approximately 1.4 million shares of its $.001 par value common stock at a
price of $8.8125 per share and issued approximately 210,000 warrants to purchase
an equivalent number of shares of common stock at an exercise price of $10.125
per share within one year of the transaction's closing date. First London acted
as placement agent and received approximately $0.4 million in fees and cost
reimbursement and one-year warrants to purchase 141,653 shares of Common Stock
at an exercise price of $10.125.
A majority of the proceeds from the two private offerings were used to
fund a $19 million deposit with the government of Victoria, Australia. This
deposit will be used as part of the purchase price of the V/Line Freight
Corporation, which is anticipated to close in the second quarter of 1999.
The Company expects that its future cash flows will be sufficient for its
current and contemplated operations for at least the next twelve months, and
will be used for, among other things, anticipated capital expenditures for the
upgrading of existing rail lines and purchases of locomotives and equipment of
approximately $2.8 million and capital expenditures at KSI of approximately $0.3
million. In addition, the Company anticipates capital expenditures of
38
<PAGE> 39
approximately $13.2 million over the next three years related to new Ferronor
contracts received since its acquisition by the Company. Ferronor closed on a
debt financing in the first quarter of 1999 that will be used to fund certain of
the capital expenditures. Additionally, Ferronor has a commitment letter to fund
the remainder of the expansion and anticipates closing on this financing during
1999. The Company also is in the process of purchasing and equipping an
additional facility in Quebec, Canada for its newly purchased specialty trailer
manufacturer. The costs of this project are estimated at an additional $2.5
million. The Company anticipates this project will be funded through the
issuance of additional debt. The Company anticipates spending approximately $1.5
million over the next six months to refurbish the office building that it
purchased in July 1998. The Company anticipates financing this project through
its Revolver. The Company does not presently anticipate any other significant
capital expenditures over the next twelve months. To the extent possible, the
Company will seek to finance any further acquisitions of property, plant and
equipment in order to allow its cash flow from operations to be devoted to other
uses, including debt reduction and acquisition requirements.
The Company's long-term business strategy includes the selective
acquisition of additional transportation-related businesses. Accordingly, the
Company may require additional equity and/or debt capital in order to consummate
acquisitions or undertake major development activities. It is impossible to
predict the amount of capital that may be required for such acquisitions or
development, and there is no assurance that sufficient financing for such
activities will be available on terms acceptable to the Company, if at all. As
of March 1, 1999, the Company had approximately $0.2 million of availability
under the Revolver. As noted above, in September 1998, the Company accepted a
proposal by National Bank of Canada as agent to increase the Revolver to $100
million for purposes of future acquisitions of transportation related
businesses.
INFLATION
Inflation in recent years has not had a significant impact on the
Company's operations. The Company believes that inflation will not adversely
affect the Company in the future unless it increases substantially and the
Company is unable to pass through the increases in its freight rates and trailer
prices.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date "00" as the Year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, inability to interchange information with connecting
railroads or engage in similar normal business activities.
Many of our systems and related software are currently Year 2000
compliant and we have a
39
<PAGE> 40
program in place designed to bring the remaining software and systems into Year
2000 compliance in time to minimize any significant detrimental affect on
operations. We are utilizing internal personnel and outside vendors to identify
Year 2000 problems, modify and/or update programs and hardware and test the
modifications.
We rely on third parties, particularly the Class I railroads, for much of
our information in our domestic rail operations. In addition, our trailer
manufacturing segment relies heavily on third party suppliers for its raw
materials. We have initiated efforts to evaluate the status of these suppliers'
efforts and to determine alternatives and contingency plan requirements. An
inability of a connecting railroad to process information could cause delays in
services to customers and the inability of the Company to invoice and collect on
shipments. Failure of a third party supplier to deliver materials to our
manufacturing facilities could cause either a slow down in production and/or a
temporary shut down of the facility.
The total costs associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 Project is approximately
$0.25 million. The total amount expended through December 31, 1998 is
approximately $0.2 million.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of the program as
scheduled, the possibility of significant interruptions of normal operations
should be minimized.
Readers are cautioned that forward-looking statements contained in this
Impact of Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation Reform Act of 1995"
which follows below in this section.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
the cost of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company anticipates that the adoption of
this statement will not have a material affect on the Company's results of
operations or its financial position.
40
<PAGE> 41
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events, including: statements regarding further growth in
transportation-related assets; the acquisition of additional railroads and other
transportation-related companies; the increased usage of the Company's existing
rail lines; the growth of gross revenues; and the sufficiency of the Company's
cash flows for the Company's future liquidity and capital resource needs. The
Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following:
decline in demand for transportation services; the effect of economic conditions
generally and particularly in the markets served by the Company; the Company's
dependence upon obtaining future government contracts; the Company's dependence
upon the agricultural industry as a significant user of the Company's rail
services; the Company's dependence upon the availability of financing for
acquisitions of railroads and other transportation-related companies; a decline
in the market acceptability of railroad services; an organization or
unionization of a material segment of the Company's employee base; the effect of
competitive pricing; and the regulation of the Company by federal, state and
local regulatory authorities. Any material adverse change in the financial
condition or results of operations of KSI would have a material adverse impact
on the Company. Results actually achieved thus may differ materially from
expected results included in these statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, the accompanying
notes thereto and the independent auditor's report are included as part of this
Form 10-K and immediately follow the signature page of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, executive officers and nominees of the
Company is hereby incorporated by reference from the Company's definitive proxy
statement relating to its 1999 Annual Meeting of Shareholders to be filed with
the Commission pursuant to Regulation 14A on or before April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the executive compensation of the Company is
hereby incorporated by reference from the Company's definitive proxy statement
relating to its 1999 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation 14A on or before April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its 1999 Annual Meeting of Shareholders to be filed with the Commission
pursuant to Regulation 14A on or before April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions of
the Company is hereby incorporated by reference from the Company's definitive
proxy statement relating to its 1999 Annual Meeting of Shareholders to be filed
with the Commission pursuant to Regulation 14A on or before April 30, 1999.
42
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Registrant, as
amended(3)
3.2 By-laws of Registrant(1)
4.1 Form of Common Stock Rights Agreement, dated as of January 6, 1998,
between the Registrant and American Stock Transfer & Trust
Company(10)
4.2 Certificate of Designation of Series A Convertible Redeemable
Preferred Stock
10.35 Employment Agreement between Robert B. Coward and Kalyn/Siebert,
Incorporated.(2)
10.40 Asset Purchase Agreement, dated October 11, 1995, by and among
Seagraves, Whiteface & Lubbock Railroad Co., American Railway
Corporation, TEMCO Corporation and RailAmerica, Inc.(4)
10.41 Employment Agreement between Gary O. Marino and RailAmerica,
Inc.(11)+
10.43 Stock Option Agreement, dated November 11, 1994, between
RailAmerica, Inc. and Gary O. Marino(11)+
10.45 RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan(3)
10.46 RailAmerica, Inc. 1995 Employee Stock Purchase Plan(3)
10.47 RailAmerica, Inc. Corporate Senior Executive Bonus Plan(3)+
10.54 Asset Purchase Agreement, dated August 5, 1996, by and among
Burlington Northern Railroad Company and Cascade and Columbia river
Railroad Company, a subsidiary of RailAmerica, Inc.(5)
10.55 Confidential Private Placement Memorandum dated September 20,
1996.(6)
10.56 Stock Purchase Agreement, dated as of September 20, 1996, by and
among Otter Tail Valley Railroad Company, Inc. and Dakota Rail,
Inc.(7)
10.57 First Amendment to Loan Agreement relating to $55,000,000 Revolving
Line of Credit/Term Loan Facility, dated June 16, 1998, by and
between National Bank of Canada, Comerica Bank, RailAmerica, Inc.,
Kalyn/Siebert, Incorporated, RailAmerica Intermodal Services, Inc.,
RailAmerica Carriers, Inc., Steel City Carriers, Inc., Saginaw
Valley Railway Company, Inc., Huron and Eastern Railway Company,
Inc., West Texas and Lubbock Railroad Company, Inc., Plainview
Terminal Company, Cascade and Columbia River Railroad Company, Inc.,
Otter Tail Valley Railroad Company, Inc., Minnesota Northern
Railroad Company, Inc., St. Croix Valley Railroad Company, and
Delaware Valley Railway Company, Inc.
10.58 Agreement for sale of certain assets, rights and obligations of
Burlington Northern Railroad Company to Minnesota Northern Railroad,
Inc.(8)
10.59 RailAmerica, Inc. Nonqualified Deferred Compensation Trust(8)+
10.60 Nonqualified Deferred Compensation Agreement between RailAmerica,
Inc. and Gary O. Marino(8)+
10.63 RailAmerica, Inc. 1998 Executive Incentive Compensation Plan(9)+
21 Subsidiaries of Registrant(11)
27 Financial Data Schedule
- ----------
43
<PAGE> 44
(1) Incorporated by reference to the same exhibit number filed as part of
the Registrant's Registration Statement on Form S-1, Registration No.
33-49026.
(2) Incorporated by reference to the same exhibit number filed as part of
the Registrant's Post-Effective Amendment No. 2 on Form SB-2, dated
October 17, 1994, Registration No. 33-49026.
(3) Incorporated by reference to the same exhibit number filed as part of
the Company's Form 10-QSB for the quarter ended September 30, 1995,
filed with the Securities and Exchange Commission on November 12, 1995.
(4) Incorporated by reference to the same exhibit number filed as part of
the Company's Form 10-KSB for the year ended December 31, 1995, filed
with the Securities and Exchange Commission on April 12, 1996.
(5) Incorporated by reference to the exhibit 2.1 filed as part of the
Company's Form 8-K as of September 6, 1996, filed with the Securities
and Exchange Commission on September 12, 1996.
(6) Incorporated by reference to the exhibit A filed as part of the
Company's Form 8-K as of September 30, 1996, filed with the Securities
and Exchange Commission on October 17, 1996.
(7) Incorporated by reference to the exhibit 2.1 filed as part of the
Company's Form 8-K as of October 11, 1996, filed with the Securities
and Exchange Commission on October 25, 1996.
(8) Incorporated by reference to the same exhibit number filed as part of
the Company's Form 10-KSB for year ended December 31, 1995, filed with
the Securities and Exchange Commission on March 31, 1997.
(9) Incorporated by reference to the Appendix A of the Company's Proxy
Statement filed with the Security and Exchange Commission on June 2,
1997.
(10) Incorporated by reference to exhibit No. 4.1 filed as part of the
Registrant's Statement on Form 8-A, filed with the Securities and
Exchange Commission on January 6, 1998.
(11) Incorporated by reference to the same exhibit number filed as part of
the Company's Form 10-Q for the quarter ended March 31, 1998, filed
with the Securities and Exchange Commission on May 14, 1998.
+ Executive Compensation Plan or Arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1998.
44
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
RAILAMERICA, INC.
By: /s/ Gary O. Marino
---------------------------------------
Gary O. Marino, Chief Executive Officer
(Principal Financial officer)
By: /s/ Larry W. Bush
---------------------------------------
Larry W. Bush, Controller
(Principal Accounting Officer)
Dated March 26, 1999
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Gary O. Marino Chairman, President, Chief Executive March 26, 1999
- ------------------------------ Officer and Director
Gary O. Marino
/s/ Donald D. Redfearn Executive Vice President, Secretary March 26, 1999
- ------------------------------ and Director
Donald D. Redfearn
/s/ John H. Marino Assistant Secretary and Director March 26, 1999
- ------------------------------
John H. Marino
/s/ Douglas R. Nichols Director March 26, 1999
- ------------------------------
Douglas R. Nichols
/s/ Richard Rampell Director March 26, 1999
- ------------------------------
Richard Rampell
/s/ Charles Swinburn Director March 26, 1999
- ------------------------------
Charles Swinburn
/s/ John M. Sullivan Director March 26, 1999
- ------------------------------
John M. Sullivan
</TABLE>
45
<PAGE> 46
RAILAMERICA, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS
-------
The following consolidated financial statements of RailAmerica, Inc. and
Subsidiaries are referred to in Item 7:
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Income - For the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statement of Stockholders' Equity - For the Years
Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-33
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
RailAmerica, Inc. and Subsidiaries
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of RailAmerica, Inc. and its
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Empresa De Transporte Ferroviario, S.A., a 55% owned subsidiary of the Company,
which statements reflect total assets of $74,306,000 at December 31, 1998, and
total revenues of $15,312,000 for the year ended December 31, 1998. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Empresa De Transporte Ferroviario S.A., is based solely on
the report of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Ft. Lauderdale, Florida
March 12, 1999
F-2
<PAGE> 48
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,760,342 $ 3,745,534
Accounts receivable 11,047,536 8,388,291
Notes receivable 859,378 1,103,409
Inventories 13,579,286 5,013,106
Other current assets 1,666,093 497,207
------------- -------------
Total current assets 32,912,635 18,747,547
Property, plant and equipment, net 101,833,373 74,900,836
Notes receivable, less current portions 1,284,200 1,339,169
Investment in Great Southern Railway Limited 1,938,942 1,789,995
Deposit on asset purchase agreement 1,962,067 --
Other assets 3,056,755 2,021,433
Excess of cost over net assets of companies acquired, net 2,241,964 2,036,023
------------- -------------
Total assets $ 145,229,936 $ 100,835,003
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,804,217 $ 3,923,036
Current maturities of subordinated debt 244,542 212,392
Accounts payable 10,124,714 6,084,119
Accrued expenses 4,132,892 3,327,497
------------- -------------
Total current liabilities 18,306,365 13,547,044
------------- -------------
Long-term debt, less current maturities 68,010,338 43,875,163
Subordinated debt, less current maturities 663,948 3,265,490
Other liabilities - deferred income 427,288 --
Deferred income taxes 8,242,000 7,067,237
Minority interest 7,937,992 6,266,243
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par value
1,000,000 shares authorized; 300,600 outstanding
as of December 31, 1998; $25 liquidation value 6,881,684 --
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 shares authorized;
10,207,477 issued and 9,631,188 outstanding at December 31, 1998;
9,129,564 issued and 8,858,375 outstanding at December 31, 1997 10,207 9,130
Additional paid-in capital 28,277,533 23,350,732
Retained earnings 9,285,122 4,883,973
Accumulated other comprehensive income 470,820 15,373
Less treasury stock (576,289 and 271,189 shares, respectively, at cost) (3,283,361) (1,445,382)
------------- -------------
Total stockholders' equity 34,760,321 26,813,826
------------- -------------
Total liabilities and stockholders' equity $ 145,229,936 $ 100,835,003
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE> 49
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Transportation - railroad $ 30,303,562 $ 22,023,717 $ 9,783,041
Manufacturing 39,887,348 22,941,068 13,637,978
Other 2,700,421 2,472,188 2,237,222
Motor Carrier 4,252,329 -- --
------------ ------------ ------------
Total operating revenue 77,143,660 47,436,973 25,658,241
------------ ------------ ------------
Operating expenses:
Transportation - railroad 15,702,487 12,502,153 4,397,884
Cost of goods sold - manufacturing 28,582,699 16,544,423 10,447,827
Selling, general and administrative 12,399,427 8,809,547 5,413,153
Depreciation and amortization 3,378,714 2,261,467 1,526,510
Motor Carrier 4,438,039 -- --
------------ ------------ ------------
Total operating expenses 64,501,366 40,117,590 21,785,374
------------ ------------ ------------
Operating income 12,642,294 7,319,383 3,872,867
Interest expense (4,947,209) (3,533,920) (2,078,383)
Other income (expense) 13,055 663,128 (8,642)
Minority interest in income of subsidiary (1,671,750) (851,243) --
------------ ------------ ------------
Income from continuing operations before
income taxes 6,036,390 3,597,348 1,785,842
Provision for income taxes 1,570,000 963,382 705,405
------------ ------------ ------------
Income from continuing operations 4,466,390 2,633,966 1,080,437
Discontinued operations
Estimated loss on disposal of discontinued
Motor Carrier segment (net of income tax
benefit of $277,000) -- (452,402) --
Loss from operations of discontinued Motor
Carrier segment, three months ended March 31,
1998 and years ended December 31, 1997 and1996
(Less applicable income tax benefit of $40,000,
$149,000 and $322,000, respectively) (65,241) (242,365) (575,558)
------------ ------------ ------------
Net Income $ 4,401,149 $ 1,939,199 $ 504,879
============ ============ ============
Basic earnings per common share
Continuing operations $ 0.47 $ 0.32 $ 0.22
Discontinued operations (0.01) (0.09) (0.12)
------------ ------------ ------------
Net income $ 0.46 $ 0.23 $ 0.10
============ ============ ============
Diluted earnings per common share
Continuing operations $ 0.44 $ 0.30 $ 0.21
Discontinued operations (0.00) (0.08) (0.11)
------------ ------------ ------------
Net income $ 0.44 $ 0.22 $ 0.10
============ ============ ============
Weighted average common shares outstanding:
Basic 9,552,866 8,303,938 4,966,296
============ ============ ============
Diluted 10,306,873 9,396,483 5,113,508
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE> 50
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Stockholders' Equity
----------------------------------------------------------------------------
Number of Additional Common
Shares Par Paid-in Stock Retained
Issued Value Capital Subscribed Earnings
---------- ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 4,848,991 $ 4,849 $ 7,599,313 $ -- $2,439,895
Net income -- -- -- -- 504,879
Issuance of common stock 1,263,919 1,264 4,128,735 -- --
Purchase of treasury stock -- -- -- -- --
Exercise of stock options 12,500 12 44,988 -- --
Subscription of common stock -- -- -- 2,340,000 --
Cumulative translation -- -- -- -- --
---------- ------- ----------- ----------- ----------
Balance, December 31, 1996 6,125,410 6,125 11,773,036 2,340,000 2,944,774
Net income -- -- -- -- 1,939,199
Issuance of common stock 1,720,627 1,721 7,163,206 (2,340,000) --
Treasury stock received for
sales of subsidiaries -- -- -- -- --
Stock incentive plan issuance -- -- -- -- --
Exercise of stock options 202,933 203 747,837 -- --
Exercise of warrants 1,080,594 1,081 3,666,653 -- --
---------- ------- ----------- ----------- ----------
Balance, December 31, 1997 9,129,564 9,130 23,350,732 -- 4,883,973
Net income -- -- -- -- 4,401,149
Other comprehensive income
Cumulative translation -- -- -- -- --
Total comprehensive income
Issuance of common stock 138,786 138 677,039 -- --
Purchase of treasury stock -- -- -- -- --
Exercise of stock options 237,950 238 870,637 -- --
Tax benefit exercise of options -- -- 178,000 -- --
Exercise of warrants 167,000 167 934,501 -- --
Conversion of debt 534,177 534 2,266,624 -- --
---------- ------- ----------- ----------- ----------
Balance, December 31, 1998 10,207,477 $10,207 $28,277,533 $ -- $9,285,122
========== ======= =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
-----------------------------------------------
Accumulated
Other
Comprehensive Treasury
Income Shares Total
--------- ----------- ------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 70,355 $ (965,753) $ 9,148,659
Net income -- -- 504,879
Issuance of common stock -- -- 4,129,999
Purchase of treasury stock -- (173,516) (173,516)
Exercise of stock options -- -- 45,000
Subscription of common stock -- -- 2,340,000
Cumulative translation (2,914) -- (2,914)
--------- ----------- ------------
Balance, December 31, 1996 67,441 (1,139,269) 15,992,107
Net income -- -- 1,939,199
Issuance of common stock -- -- 4,824,927
Treasury stock received for
sales of subsidiaries -- (479,629) (479,629)
Stock incentive plan issuance -- 173,516 173,516
Exercise of stock options -- -- 748,040
Exercise of warrants -- -- 3,667,734
Cumulative translation (52,068) -- (52,068)
--------- ----------- ------------
Balance, December 31, 1997 15,373 (1,445,382) 26,813,826
Net income -- -- 4,401,149
Other comprehensive income
Cumulative translation 455,447 -- 455,447
------------
Total comprehensive income 4,856,596
------------
Issuance of common stock -- -- 677,177
Purchase of treasury stock -- (1,837,979) (1,837,979)
Exercise of stock options -- -- 870,875
Tax benefit exercise of options -- -- 178,000
Exercise of warrants -- -- 934,668
Conversion of debt -- -- 2,267,158
--------- ----------- ------------
Balance, December 31, 1998 $ 470,820 $(3,283,361) $ 34,760,321
========= =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE> 51
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,401,149 $ 1,939,199 $ 504,879
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,156,546 3,053,728 2,047,684
Minority interest in income of subsidiary 1,671,750 851,243 --
Sale of properties (76,791) (608,380) 455,932
Write-off of excess of costs over net assets -- 729,681 --
Write-off of deferred acquisition costs 176,179 76,292 138,010
Deferred income taxes 912,967 382,122 263,668
Employee stock grants -- 15,188 48,554
Forgiveness of debt (32,809) -- (20,576)
Changes in operating assets and liabilities,
net of acquisitions and dispositions:
Accounts receivable (885,983) (3,037,697) (1,816,862)
Inventories (6,921,847) (1,294,501) 291,825
Other current assets (1,157,666) 124,247 (41,203)
Accounts payable 2,410,602 (606,499) 1,031,238
Accrued expenses 720,498 714,409 (583,557)
Deposits and other 368,477 (47,264) (113,853)
------------ ------------ ------------
Net cash provided by operating activities 5,743,071 2,291,768 2,205,739
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (28,128,546) (7,455,848) (4,487,909)
Proceeds from sale of properties 1,806,127 331,654 --
Acquisitions, net of cash acquired (1,757,033) (7,389,903) (103,908)
Deposit on purchase agreement (1,962,067) -- --
Investment in Great Southern Railway -- (596,665) --
Loan receivable from Great Southern Railway -- (1,193,330) --
Deferred acquisition costs and other (612,956) (457,168) (825,026)
------------ ------------ ------------
Net cash used in investing activities (30,654,475) (16,761,260) (5,416,843)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 56,006,737 31,453,500 10,033,070
Principal payments on debt and capital leases (35,723,969) (25,449,364) (12,503,210)
Sale convertible preferred stock 7,515,000 -- --
Sale of common stock 1,032,168 8,163,962 6,421,445
Proceeds from exercise of stock options 870,875 748,041 45,000
Purchase of treasury stock (1,837,979) -- (173,516)
Decrease in restricted stock -- -- 175,000
Deferred financing costs paid (603,549) (286,724) (98,741)
Deferred loan costs paid (333,071) (294,361) (296,838)
------------ ------------ ------------
Net cash provided by financing activities 26,926,212 14,335,054 3,602,210
------------ ------------ ------------
Net increase (decrease) in cash 2,014,808 (134,438) 391,106
Cash, beginning of period 3,745,534 3,879,972 3,488,866
------------ ------------ ------------
Cash, end of period $ 5,760,342 $ 3,745,534 $ 3,879,972
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE> 52
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of RailAmerica, Inc. and all of its majority-owned subsidiaries (the
"Company"). All significant intercompany transactions have been
eliminated in the preparation of the consolidated financial statements.
During 1998, the Company formed wholly-owned subsidiaries Kalyn/Siebert
Canada, Inc. ("KSC") and Ventura County Railway Company, Inc. ("VCRR").
The Company's principal operations include rail transportation and
manufacturing. The Company hauls varied products for its customers
corresponding to their local operating areas, primarily agricultural
commodities in Michigan and Texas and iron ore in Chile. The Company's
production facilities, in Texas and Quebec, manufacture a broad range
of specialty truck trailers which are marketed to a customer base from
the private, commercial and government sectors.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Inventories
Inventories are stated at the lower of cost or market, net of advances
related to materials acquired, with cost determined using the average
cost method. Also, included in inventory are replacement or repair
parts for equipment and track that are charged to property, plant and
equipment when utilized.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company maintains its cash in demand deposit accounts which at
times may exceed FDIC insurance limits. As of December 31, 1998, the
Company had approximately $4.7 million of cash in excess of FDIC
insurance limits.
F-7
<PAGE> 53
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition
Transportation - The Company recognizes transportation revenue after
services are provided. For the years ended December 31, 1998, 1997 and
1996, approximately 62%, 59% and 34%, respectively, of the Company's
domestic railroad transportation revenue was derived from interchanging
traffic with BNSF and for the years ended December 31, 1998, 1997 and
1996, approximately 30%, 32% and 51%, respectively, from interchanging
traffic with CSX. The Company had four customers who each represented
more than 10% of the international transportation revenue.
Commercial Trailer Sales
The Company recognizes revenue from the commercial (non-governmental)
sale of trailers when title and risk of ownership are transferred to
the customer, which generally is upon shipment or customer pick-up. In
certain instances prior to shipment or customer pick-up, the Company
receives full payment for a trailer. At that time, the Company issues a
certificate of title or statement of origin to the customer and revenue
is recognized. In these cases, the customer has made a fixed, written
commitment to purchase, the trailer has been completed and is available
for pick-up or delivery, and the customer has requested the Company to
hold the trailer until the customer determines the most economical
means of taking possession. In such cases, the Company has no further
obligation except to segregate the trailer and hold it for a short
period of time, as is customary in the industry, generally less than
one month, until pick-up or delivery. Trailers are built to customer
specifications and no right of return or exchange privileges are
granted. Accordingly, no provision for sales allowances or returns is
recorded.
Governmental Trailer Sales
The Company recognizes revenue from the sale of trailers to
governmental agencies when title and risks of ownership are
transferred, which is upon completion, inspection and acceptance of
trailers by the governmental agency. At that time, the governmental
agency has made a fixed written commitment to purchase in the form of a
contract, the trailer has been completed and is available for pick-up
or delivery, and the governmental agency has requested the Company to
hold the trailer until the governmental agency determines the
appropriate means of taking possession. The Company has no further
obligation except to segregate the trailer and hold it for a short
period of time, as is customary in the industry, generally less than
one month, until pick-up or delivery. The trailers are built to the
government's specifications pursuant to a written contract and are
inspected and accepted for delivery by the governmental agency. The
contract terms provide for prepayments by the government of up to 90%
of the trailer's cost. These prepayments are recorded as advances
against the inventory. Sales to governmental agencies represented 35%,
37% and 20% of the Company's manufacturing revenue for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-8
<PAGE> 54
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. Costs
assigned to property purchased as part of an acquisition are based on
the fair value of such assets on the date of acquisition. Improvements
are capitalized, and expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses on sales and
retirements of properties are included in the determination of the
results of operations.
Depreciation has been computed using the straight-line method for
financial reporting purposes based on estimated useful lives as
follows:
Buildings and improvements 20-33 years
Railroad track and improvements 3-40 years
Locomotives, transportation and other equipment 5-20 years
Office equipment 5-10 years
The Company re-evaluated the estimated remaining useful lives of its
property, plant and equipment during 1996 and made an adjustment in the
fourth quarter of $280,000 to reduce depreciation.
Income Taxes
The Company utilizes the liability method of accounting for deferred
income taxes. This method requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been included in the financial statement or tax returns. Under
this method, deferred tax assets and liabilities are determined based
on the difference between the financial and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are also
established for the future tax benefits of loss and credit carryovers.
Treasury Stock Repurchase Program
On August 24, 1998, the Company announced that its Board of Directors
authorized management to purchase up to 1,000,000 shares of its common
stock. Purchases will be made from time to time in the open market and
will continue until all of such shares are purchased or until the
Company determines to terminate the repurchase program. As of December
31, 1998, the Company had purchased 305,100 shares with a total cost of
$1.8 million.
F-9
<PAGE> 55
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Excess of Cost Over Net Assets of Companies Acquired
The acquisitions of Kalyn/Siebert, Inc. ("Kalyn") and KSC resulted in
purchase price in excess of the fair market value of net assets
acquired in the amounts of approximately $2.5 million and $0.3 million,
respectively, which is reflected in the balance sheet at December 31,
1998, net of accumulated amortization of $0.6 million. These amounts
are being amortized on a straight-line basis over twenty years. The
Company periodically evaluates the carrying value and the periods of
amortization based on the current and expected future cash flows of the
entities giving rise to the excess of cost over net assets acquired.
The acquisition of Steel City Carriers resulted in purchase price in
excess of the fair market value of net assets acquired of approximately
$0.9 million (see disclosure below). Amortization expense related to
the excess of cost over net assets of companies acquired for the years
ended December 31, 1998, 1997 and 1996 were approximately $0.13, $0.20,
and $0.19 million, respectively.
Profit Sharing Plan
The Company maintains a contributory profit sharing plan as defined
under Section 401(k) of the U.S. Internal Revenue Code. The Company
made contributions to this plan at a rate of 50% of the employees
contribution up to a maximum annual contribution of $1,500 per eligible
employee. An employee becomes 100% vested with respect to the employer
contributions after completing six years of service. Employer
contributions during the years ended December 31, 1998, 1997 and 1996
were approximately $154,000, $90,000 and $61,000, respectively.
Foreign Currency Translation
The financial position and results of operations of the Company's
Canadian, Chilean and Australian subsidiaries are measured using local
currency as the functional currency. Assets and liabilities of
operations denominated in foreign currencies are translated into U.S.
dollars at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing during the
year. The resulting translation gains and losses are charged directly
to accumulated other comprehensive income, a component of stockholders'
equity, and are not included in net income until realized through sale
or liquidation of the investment
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive
income is defined as the change in stockholders' equity during a period
from transactions from nonowner sources. Comprehensive income consists
of net income and other comprehensive income, which includes all other
nonowner changes in stockholders' equity.
F-10
<PAGE> 56
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position
No 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5).
SOP 98-5 requires the cost of start-up activities and organization
costs to be expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. The
Company anticipates that the adoption of this statement will not have a
material affect on the Company's results of operations or its financial
position.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the
presentation adopted in 1998.
2. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", which requires the
presentation of both basic and diluted earnings per share. For the
years ended December 31, 1998 and 1997, basic earnings per share is
computed using the weighted average number of common shares outstanding
during the year. Diluted earnings per share is computed using the sum
of the weighted average number of common shares outstanding plus common
stock equivalents arising out of stock options, warrants and
convertible debt. Earnings per share information for all periods have
been restated to conform to the requirements of the standard.
For the year ended December 31, 1996, basic earnings per common share
are based on the weighted average number of common shares outstanding
during the year. Assumed exercise of stock options and assumed
conversion of the convertible debt were anti-dilutive and have been
excluded from the weighted average shares outstanding for diluted
earnings per share.
The following is a summary of the net income available for common
stockholders and weighted average shares for the diluted calculation
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net income from continuing operations $ 4,466 $2,634 $1,080
Interest from convertible debt 84 152 --
------- ------ ------
Net income available to common stockholders $ 4,550 $2,786 $1,080
======= ====== ======
Weighted average shares outstanding 9,553 8,304 4,966
Assumed conversion of options and warrants 225 283 148
Assumed conversion of convertible debt 529 809 --
------- ------ ------
Weighted average shares outstanding 10,307 9,396 5,114
======= ====== ======
</TABLE>
F-11
<PAGE> 57
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
3. DISCONTINUED OPERATIONS:
In March 1997, the Company adopted a formal plan to discontinue its
motor carrier division. The motor carrier division consists of Steel
City Carriers and RailAmerica Intermodal Services, both wholly-owned
subsidiaries of the Company. During the fourth quarter of 1997, the
Company re-evaluated the carrying amount of Steel City Carriers' assets
and recorded an impairment charge of approximately $730,000. This
amount was determined based on what the Company believes it will
recover through the final disposition of the remaining assets.
Operating results of the discontinued operations, as shown below,
include the operations of the Motor Carrier segment for the three
months ended March 31, 1998 and the years ended December 31, 1997 and
1996. The motor carrier operations have been included in continuing
operations for the nine months ended December 31, 1998, since the
disposition of the segment was not completed by April 1998.
Effective December 1, 1998, the Company ceased all motor carrier
operations and leased substantially all of the operating assets of
Steel City Carriers, Ltd. to Laidlaw Carriers, Inc., an operating
subsidiary of Ontario, Canada-based Contrans Corporation. The leases
are for a period of 18 to 24 months. In addition, the Company has
entered into an agreement to sell its Ontario real estate that was
previously used in its motor carrier operations.
Total assets in this division as of December 31, 1997 and 1996 were
$5.1 million and $6.2 million, respectively. Total liabilities in this
division as of December 31, 1997 and 1996 were $5.2 million and $5.4
million, respectively.
<TABLE>
<CAPTION>
Nine months Three Months
Ended Ended
12/31/98* 3/31/98* 1997 1996
--------- -------- ---- ----
(Thousands)
<S> <C> <C> <C> <C>
Revenues $ 4,252 $ 1,827 $ 7,133 $ 7,216
Depreciation and amortization 306 95 1,121 365
Operating loss (186) (35) (934) (492)
Interest expense (241) (70) (284) (276)
Loss before taxes (433) (105) (1,121) (898)
Benefit for income taxes 164 40 426 322
Net loss $ (269) $ (65) $ (695) $ (576)
</TABLE>
* - First three months of 1998 results of operations are included in
discontinued operations. The last nine months of 1998 results of
operations are included in continuing operations.
F-12
<PAGE> 58
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
4. ACQUISITIONS:
In January 1998, the Company acquired, through its wholly-owned subsidiary
Kalyn, all of the outstanding stock of Canadian truck trailer manufacturer
Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc.
(collectively "Fabrex") for approximately $1.5 million in cash and 70,000
shares of RailAmerica common stock, $.001 par value ("Common Stock"), and
assumption of approximately $1.0 million of long-term debt. Fabrex's
operations have been combined into KSC, a wholly-owned subsidiary of
Kalyn. This acquisition has been accounted for as a purchase and its
results have been consolidated since January 1, 1998. Fabrex, a
manufacturer of specialty bulk-hauling truck trailers used in the solid
waste, agricultural and construction industries, was founded in 1985 and
is located in Trois Rivieres, Quebec.
In August 1998, the Company, through its newly formed, wholly-owned
subsidiary, VCRR, entered into a long term lease/purchase agreement to
operate a 13-mile rail line serving the Port of Hueneme and the Oxnard
Harbor District in Oxnard, California, located approximately 50 miles
north of Los Angeles. VCRR's operations commenced September 1, 1998 and
are included in the results of domestic rail operations as of that date.
On February 19, 1997, the Company acquired, through its wholly-owned
subsidiary, RailAmerica de Chile, S.A., a majority interest in Ferronor, a
1,400 mile railroad serving northern Chile. The Company was joined in the
purchase of Ferronor by Andres Pirrazzoli y Cia, Ltda ("APCO"). The
purchase price paid by RailAmerica/APCO for substantially all of the stock
of Ferronor, was approximately $12.3 million and was funded 55% by
RailAmerica and 45% by APCO. This acquisition has been accounted for as a
purchase and Ferronor's results have been consolidated since the
acquisition.
In accordance with the Shareholders' Agreement between RailAmerica and
APCO, RailAmerica controls the appointment of a majority of the Board of
Directors of Ferronor, including the Chairman. APCO maintains certain
minority rights under the shareholders Agreement, such as the right to
request the General Manager's removal under certain circumstances. In
accordance with EITF 96-16, the Company considered these minority rights
in determining whether to consolidate Ferronor and has concluded that
consolidation is appropriate based upon the Company's ownership position,
and its level of control of the Board of Directors and senior management.
On October 11, 1996, the Company, through its wholly-owned subsidiary
Dakota Rail, Inc. ("Dakota"), completed the purchase of all of the
outstanding stock of Otter Tail Valley Railroad, Inc. ("OTVR"). The
acquisition was accounted for as a purchase. Accordingly, the purchase
price, which amounted to approximately $4.25 million, was allocated to the
assets acquired and liabilities assumed based on the fair values of the
assets acquired at the date of acquisition. The results of OTVR have been
consolidated with those of the Company commencing as of October 1, 1996.
F-13
<PAGE> 59
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
4. ACQUISITIONS, continued
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisitions of Ferronor and Fabrex had
occurred at the beginning of 1997 and do not purport to be indicative of
what would have occurred had the acquisitions been made as of those dates
or of results which may occur in the future. (In thousands except net
income per share)
1997
----
Transportation and other revenues $56,720
Income from continuing operations
before income taxes $ 3,690
Net income $ 1,897
Net income per share $ .23
The significant adjustments related to the above years represent the
inclusion of depreciation differences on the revaluation of property,
plant and equipment, additional interest expense based on an increase in
long-term obligations, amortization of intangible assets and the related
income tax effects.
5. GREAT SOUTHERN RAILWAY LIMITED
On October 31, 1997, the Company acquired a minority interest, of
approximately 11.4%, in the Great Southern Railway Limited ("GSR"). GSR
completed the acquisition of the assets and business comprising the
passenger rail service of the Australian National Railway Commission. The
Company has invested $0.6 million in equity of GSR, $1.2 million in
uncollateralized subordinated notes (the "Notes") and received 98,736
options for stock exercise upon the earlier of three years from closing
date or the date GSR is admitted to the Australian Stock Exchange. The
options expire in five years. If all options are exercised, the Company's
ownership interest would be diluted to approximately 10.6%. The Company
cannot dispose of its stock investment for a period of two years. The
Notes bear interest at 21% and mature October 31, 2007. Interest is paid
quarterly based upon available cash flow, will be recorded as interest
income as it is received, as it is non-cumulative. Both these amounts are
included in long term assets on the consolidated balance sheet. The Notes
approximate fair value as of December 31, 1998 based upon the recent
nature of the transaction. Due to additional capital contributions during
1998 by certain of GSR's owners the Company's ownership interest was
reduced to 10.5%.
F-14
<PAGE> 60
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
6. INVENTORIES:
Inventories consist of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Raw materials $ 5,207,154 $ 3,404,234
Work in process 2,504,344 1,109,318
Finished goods 2,225,223 300,853
Replacement or repair parts for equipment
and road property 3,647,885 1,054,830
------------ -----------
13,584,606 5,869,235
Less, advances related to materials (5,320) (856,129)
------------ -----------
Inventories in excess of contract advances $ 13,579,286 $ 5,013,106
============ ===========
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Land $ 19,427,529 $17,360,124
Buildings and improvements 11,225,554 4,526,069
Railroad track and improvements 44,700,349 38,997,858
Locomotives, transportation and other equipment 36,582,042 21,255,647
------------ -----------
111,935,474 82,139,698
Less accumulated depreciation 10,102,101 7,238,862
------------ -----------
$101,833,373 $74,900,836
============ ===========
</TABLE>
Depreciation expense was approximately $3.5 million, $2.4 million and
$1.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
8. OTHER ASSETS:
Other assets consist of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred loan costs, net $ 636,733 $ 949,940
Deferred acquisition costs 871,422 488,633
Deferred financing costs -- 49,377
Immigrant Investor loan (see also Note 10) 955,198 --
Deposits and other 593,402 533,483
---------- ----------
$3,056,755 $2,021,433
========== ==========
</TABLE>
Deferred loan costs are being amortized utilizing the interest method
over the term of the respective term loans.
F-15
<PAGE> 61
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
8. OTHER ASSETS, continued
Deferred acquisition and financing costs include costs incurred
associated with the investigation of potential acquisitions and also
costs related to capital raising. These costs will be allocated to the
assets acquired and liabilities assumed upon consummation of successful
acquisitions or financings or against the proceeds received from
capital raised. Costs related to potential acquisitions or financing
are charged to operations in the quarter in which the investigation of,
or negotiation is terminated.
The deposit on asset purchase agreement included on the balance sheet
is a down payment on the E&N Railroad Company Ltd of $1.9 million as of
December 31, 1998. See Note 21 subsequent events.
9. RELATED PARTY TRANSACTIONS:
First London Securities Corporation ("First London"), of which Douglas
Nichols, a director of the Company, is President and principal
shareholder, served as the exclusive placement agent for the Company's
private placement which had a final close in January 1999. A portion of
the private placement was received by the Company and closed in
December 1998 (see Note 12 Redeemable Preferred stock). First London
received a total of $822,700 in placement fees and cost reimbursements
during December 1998 and the first quarter of 1999 on this transaction
and one-year warrants to purchase 140,727 shares of Common Stock at an
exercise price of $8.25 per share.
First London also served as exclusive placement agent for the Company's
private placement which closed September 1996 and the Company's private
placement which closed in January 1997. First London received as part
of the September 1996 private placement a $225,000 placement fee,
$45,000 nonaccountable expense fee and one-year warrants to purchase
125,000 shares of Common Stock at an exercise price of $4.60 per share.
First London exercised its option on these warrants on September 30,
1997. First London received as part of the January 1997 private
placement a $375,750 placement fee, $75,150 nonaccountable expense fee
and one-year warrants to purchase 167,000 shares of Common Stock at an
exercise price of $5.75 per share. First London exercised its option on
these warrants in January 1998.
During 1997, the Company sold all the outstanding stock of its
wholly-owned subsidiary Huron Distribution Services to a company owned
by its Vice Chairman. The sale price was approximately $50,000, which
consisted of cash and 10,085 shares of the Company's common stock
valued at $44,629. A gain of approximately $17,000 was recognized on
the transaction and is included in other income (expense) in the
consolidated income statement for 1997.
F-16
<PAGE> 62
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
9. RELATED PARTY TRANSACTIONS, continued
During 1997, the Company sold all the outstanding stock of its
wholly-owned subsidiary Evansville Terminal Company ("ETC") to a group
of investors which included a company owned by its Vice Chairman. This
company owns a minority interest in ETC. The sale price was
approximately $540,000, which consisted of cash, a short-term note, a
$450,000 purchase money mortgage with interest at 8% and a maturity of
October 2002 and 8,502 shares of the Company's common stock valued at
$50,000. A gain of approximately $10,000 was recognized on the
transaction and is included in other income (expense) in the
consolidated income statement for 1997.
During 1997, the Company sold all the outstanding stock of its
wholly-owned subsidiary Gettysburg Scenic Rail Tours, Inc. ("GSRT"),
certain railroad equipment and substantially all the assets of
Gettysburg Railway ("GBR") to a company owned by its Vice Chairman. The
sale price for GSRT and the railroad equipment was $500,000, which
consisted of cash and 62,602 shares of the Company's common stock
valued at $385,000. A gain of approximately $240,000 was recognized on
the transaction and is included in other income (expense) in the
consolidated income statement for 1997. The sale price for
substantially all of the assets of GBR was $1.45 million, which
consisted of cash, an $800,000 promissory note due June 30, 1998 and a
$350,000 mortgage note, which calls for monthly payments of $3,037, at
an interest rate of 8.5% with a maturity of June 30, 2003. A gain of
approximately $170,000 was recognized on the transaction and is
included in other operating income in the consolidated income
statement. The $800,000 promissory notes maturity date was extended
until June 1999.
As of December 31, 1998, $0.8 million of notes receivable from related
parties is included in current assets and $0.35 million of notes
receivable from related parties is included in notes receivable, less
current portions on the consolidated balance sheet.
10 . LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
1998 1997
----------- -----------
<S> <C> <C>
Revolving line of credit. See below $44,207,128 $34,717,857
Note payable, financial institution, bearing interest at 9.50%, due in
fixed monthly installments of $24,516 (including interest), with a
final payment of $554,076 in February 1999. Certain equipment,
inventory, accounts receivable, capital leases and South Central
Tennessee Railroad Corp. ("SCTR") common stock serve as
collateral. See refinancing below. 574,047 801,815
</TABLE>
F-17
<PAGE> 63
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
10. LONG-TERM DEBT, continued
<TABLE>
<S> <C> <C>
Equipment note, with interest imputed at 9.92%, due in fixed monthly
installments of $7,055 (including interest), with a final payment
of $153,177 in March 1998. Certain equipment serves as collateral -- 170,191
Equipment notes, with interest imputed at 9.06%, due in fixed monthly
installments of $9,812 (including interest) through October 2003
Certain locomotives and flat cars serve as collateral 517,392 584,892
Equipment note, with interest imputed at 8.33%, due in fixed monthly
installments of $16,441 (including interest) through March 2003
Certain tank cars serve as collateral 952,554 1,065,298
Equipment notes, with interest imputed at rates from 8.76% to 11.63%,
due in fixed monthly installments of $29,765 (including interest)
with varying maturities through October 2003. Certain railroad
equipment serves as collateral 846,561 1,089,853
Equipment note payable, bearing interest at 8.89%, due in fixed monthly
installments of $27,250 (including interest) through December 2000
with final payment of $140,026 due January 2001. Certain equipment
serves as collateral 614,517 958,821
Equipment notes, bearing interest rates from 8.19% to 10.65%, due in
fixed monthly installments of $22,525 (including interest) with
varying maturities through April 2002. Certain equipment serves as collateral 556,011 775,252
Equipment notes, with interest imputed at rates from 8.12% to 8.29%,
due in fixed monthly installments of $16,741 (including interest)
with varying maturities through November 2004. Certain locomotives
and tank cars serve as collateral 968,757 1,080,809
Equipment note payable, bearing interest at 9.4%, due in fixed monthly
installments of $2,409 (including interest) through
October 1998. Certain equipment serves as collateral -- 23,082
Burlington Northern Santa Fe ("BNSF") rail facilities installment
purchase obligation, annual payments of $250,000, including
interest at 10%, maturing in October 2116. If car loads at OTVR
fall below 7,250 in a year, BNSF will credit payments
on this debt at a rate of $250 per car 2,139,105 2,171,914
</TABLE>
F-18
<PAGE> 64
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
10. LONG-TERM DEBT, continued
<TABLE>
<S> <C> <C>
Contract for deed, principal due at the earlier of December 1, 2008 or
180 days following the date that rail service ceases to be
provided on the Minnesota line operated by Dakota. The Contract
for deed is non-interest bearing and is discounted to yield 9%
The unamortized discount at December 31, 1998 and 1997 is $785,670
and $833,699, respectively. Railroad property serves as collateral 575,187 529,136
Note payable to the State of Minnesota, payable in quarterly
installments of $6,024 through July 1, 2004. The note is
non-interest bearing and is discounted to yield 9%. The
unamortized discount at December 31, 1998 and 1997 is $28,895 and
$39,018, respectively. Railroad property and equipment serves as collateral 103,635 117,609
Note payable to the Central Prairie Rail Shippers Corporation, payable
in quarterly installments with final payment due not later than
September 13, 2000. The note is non-interest bearing and is
discounted to yield 9%. The unamortized discount at December 31,
1997 is $305. Railroad property and equipment serve as collateral -- 12,623
Note payable to the State of Michigan, payable in quarterly
installments of 2.5% original loan for a period of 10 years
The non-interest bearing note is for railroad improvements 680,690 --
Term loan facility with National Bank of Canada and Development Bank
of Canada, bearing interest ranging from 6.5% to 7.7%,
payable in fixed monthly installments of $17,633
(including interest) maturing with a final payment of $1,181,403
due in July 2003. Certain KSC assets serve as collateral 2,027,781 --
Immigrant investor loan, non-interest bearing, maturing in April 2002,
secured by a long-term investment (see also Note 8) The note is
discounted to yield 9%. The unamortized discount at December 31, 1998
is $184,227 955,198 --
Operating credit facility, bearing interest at the Canadian Prime
rate plus 0.25%, with a maturity of March 2003 2,131,697 --
Lines of credit, ranging in monthly interest rates from
0.66% to 1.37%, maturing from 30 to 90 days 1,481,000 1,989,000
Lines of credit with Banco de Desarrollo, see below 7,782,000 --
Note payable to Compania Minera del Pacifico, bearing interest at LIBOR
plus 2.5% due in monthly installments (including interest)maturing
in 2003. Certain Ferronor assets serve as collateral 2,822,000 --
Capital lease obligations 1,458,895 1,710,046
</TABLE>
F-19
<PAGE> 65
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
10. LONG-TERM DEBT, continued
<TABLE>
<S> <C> <C>
Other long-term debt 420,400 --
----------- -----------
71,814,555 47,798,198
Less current maturities 3,804,217 3,923,036
----------- -----------
Long-term debt, less current maturities $68,010,338 $43,875,162
=========== ===========
</TABLE>
Ferronor refinanced certain short-term debt as of January 28, 1999 with
Banco de Desarrollo. These amounts are included in long-term debt as of
December 31, 1998. The refinancing consists of two credit lines. The
first credit line is a $5.0 million facility which bears interest at
the interbank cost plus 1.75% with interest to be paid over 120 equal
monthly installments and principal to be paid over 96 equal
installments beginning two years from the funding. The second credit
line is a $7.7 million facility which bears interest at LIBOR plus
2.75% and is payable in 120 equal monthly installments (including
interest).
During February 1999, a lump sum payment of $554,000 was due on the
South Central Tennessee Railroad acquisition financing. The amount is
being refinanced into a $2.4 million term loan and is expected to close
in April 1999. The financing is at an interest rate of 7.5% due in 84
equal monthly installments of principal and interest of $30,876 with a
lump-sum payment of $590,750 in March 2006. The debt is included as
long-term on the consolidated balance sheet.
On September 29, 1995, the Company entered into a revolving credit loan
facility ("Revolver") with National Bank of Canada ("NBC"). In October
1996, May 1997 and June 1998, the Company closed on $10 million, $15
million and $15 million increases in its Revolver, respectively. The
Revolver's maturity date was extended to June 2001. The Revolver is
currently $55 million. The Revolver bears interest at either the bank's
prime rate (which was 8.25% at December 31, 1998) plus 0.25% or the
one, three or six month LIBOR plus 2.5%, at the option of the Company.
The Revolver is collateralized by substantially all the assets of the
Company and certain subsidiaries.
In November 1998, the Company received a commitment letter to increase
the Revolver up to $100 million. The increase is anticipated to close
in the second quarter of 1999.
The Revolver includes restrictive covenants prohibiting the Company
from incurring debt, except liabilities incurred in the normal course
of business, guaranteeing the payment of an obligation of a third
party, and selling, transferring or otherwise assigning substantially
all of its assets. The Revolver also contains certain financial
covenants which include requiring the Company to maintain a maximum
debt to tangible net worth and interest coverage ratios. The Revolver
restricts payment of dividends on the Company's Common Stock. As of
December 31, 1998, the Company's Revolver was substantially fully
funded based upon the collateral pledged at that time. The Company had
an additional $7.0 million of availability for future purchases or
acquisitions.
F-20
<PAGE> 66
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
10. LONG-TERM DEBT, continued
In December 1996, the Company entered into an acquisition financing
transaction with Comerica Bank N.A. ("Comerica") to acquire rail lines
in Minnesota from BNSF. The interest rate on the financing was at the
prime rate (8.5% at December 31, 1996) plus one percent and was
scheduled to mature in 90 days from closing. During May 1997, the
Company increased its Revolver from $25 million to $40 million by
bringing Comerica as an additional lender into the Revolver. The
acquisition loan was rolled into the Revolver.
The aggregate annual maturities of long-term debt are as follows net of
discount amortization:
1999 $ 3,804,217
2000 3,074,132
2001 46,747,764
2002 2,850,101
2003 5,280,710
Thereafter 10,057,631
------------
$ 71,814,555
============
During the years ended December 31, 1998, 1997 and 1996 interest of
approximately $465,000, $69,000 and $41,000, respectively, was
capitalized.
Capital Leases
The Company entered into equipment finance leases for certain tractors,
trailers and other equipment expiring at various times through 2003.
These leases are accounted for as capital leases. The financing of the
purchase of the tractors, trailers and equipment under these capital
leases was capitalized using the interest rate appropriate at the
inception of the respective leases. The Company also leased certain
railroad properties under a capital lease which was due to expire in
1998. The lease was renegotiated and now matures in January 2004 and
calls for monthly payments of $1,300. The following is an analysis of
the Company's assets under capital leases at December 31, 1998:
Transportation equipment under capital leases $ 3,046,304
Less accumulated amortization 405,744
-----------
$ 2,640,560
===========
F-21
<PAGE> 67
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
10. LONG-TERM DEBT, continued
Minimum annual lease commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
1999 $ 548,957 $ 2,839,204
2000 372,684 2,055,713
2001 391,715 1,648,268
2002 188,811 1,260,553
2003 53,394 891,553
Thereafter -- 1,271,917
---------- -----------
Total 1,555,561 $ 9,967,208
===========
Less amount representing interest 96,666
----------
Present value of future minimum 1,458,895
lease payments
Less current portion 490,835
----------
Noncurrent portion $ 968,060
==========
</TABLE>
Rental expense under operating leases was approximately $2.7 million,
$0.9 million and $0.8 million for the years ended December 31, 1998,
1997 and 1996, respectively.
11. SUBORDINATED DEBT:
Subordinated debt consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Convertible subordinated debentures, bearing interest at the prime rate
(which was 8.5% at December 31, 1998) adjusted annually, payable
semi-annually. Principal payments are due in 20 equal quarterly
installments beginning November 1999. Convertible into common
stock of the Company at $2.25 beginning August 31, 1995. $357,000
were converted during 1998. $ 643,000 $1,000,000
Subordinated debentures, bearing interest at the prime
rate adjusted annually, payable semi-annually.
Principal payments are due in 20 equal quarterly
installments beginning May 1995. 265,490 477,882
Series A Convertible Subordinated debentures, bearing interest at 8%
payable semi-annually on January 1 and July 1. Convertible into
common stock of the Company at $5.48 per share beginning
January 1, 1996. The entire balance was converted during 1998. -- 2,000,000
---------- ----------
908,490 3,447,882
Less current maturities 244,542 212,392
---------- ----------
$ 663,948 $3,265,490
========== ==========
</TABLE>
F-22
<PAGE> 68
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
11. SUBORDINATED DEBT, continued
The aggregate annual maturities of subordinated debt are as follows:
1999 $ 244,542
2000 181,698
2001 128,600
2002 128,600
2003 128,600
Thereafter 96,450
---------
$ 908,490
=========
12. REDEEMABLE PREFERRED STOCK:
In January 1999, the Company completed a private offering of $11.6
million of its Series A Convertible Redeemable Preferred Stock
("Preferred Stock"). The Company sold 464,400 shares of its Preferred
Stock at a price of $25 per share. The Preferred Stock pays annual
dividends of 7.5%, is convertible into shares of the Company's common
stock at a price of $8.25 per share and is non-voting. The Preferred
Stock is mandatorily redeemable 5 years from its issuance. The December
31, 1998 balance sheet includes 300,600 shares which were issued during
1998. The remainder of the shares were issued in January 1999. The
carrying value of the Preferred Stock is the par value less issuance
costs. The issuance costs will be amortized on a straight-line basis
over the life of the Preferred Stock.
13. OTHER REVENUE:
Other revenue as of December 31, 1998, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gain on sale of properties and
easements $ 695,158 $1,250,699 $1,498,738
Rental income 1,484,390 857,486 577,712
Other 520,873 364,003 160,772
---------- ---------- ----------
$2,700,421 $2,472,188 $2,237,222
========== ========== ==========
</TABLE>
F-23
<PAGE> 69
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
14. INCOME TAX PROVISION:
The provision for income taxes for the years ended December 31, 1998,
1997 and 1996 consists of:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Federal income taxes:
Current $ 232,200 $ 0 $ 45,000
Deferred 1,038,800 708,382 411,405
----------- --------- ---------
1,271,000 708,382 456,405
----------- --------- ---------
State income taxes:
Current 281,000 161,000 75,000
Deferred (55,000) (26,000) 4,000
----------- --------- ---------
226,000 135,000 79,000
----------- --------- ---------
Foreign income taxes:
Current 33,000 -- --
Deferred -- (306,000) (152,000)
----------- --------- ---------
Total income tax provision $ 1,530,000 $ 537,382 $ 383,405
=========== ========= =========
</TABLE>
The following summarizes the total income tax provisions for each of
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<S> <C> <C> <C>
Continuing operations $ 1,570,000 $ 963,382 $ 705,405
Discontinued operations (40,000) (426,000) (322,000)
----------- --------- ---------
Total income tax provision $ 1,530,000 $ 537,382 $ 383,405
=========== ========= =========
</TABLE>
The Company joins in the filing of a consolidated U.S. income tax
return with its domestic subsidiaries. For state income tax purposes,
the Company and each of its domestic subsidiaries generally file on a
separate return basis in the states in which they do business. The
Company's Canadian subsidiaries, RailAmerica Carriers, Steel City
Carriers and KSC, file Canadian and provincial income tax returns. The
Company's majority owned subsidiary, Ferronor, and its wholly-owned
subsidiary, RailAmerica de Chile, file Chilean income tax returns.
F-24
<PAGE> 70
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
14. INCOME TAX PROVISION, continued
The differences between the U.S. federal statutory tax rate and the
Company's effective rate from continuing operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Income tax provision, at 35% $ 2,112,737 $ 1,259,072 $ 625,045
Statutory federal Surtax exemption (60,363) (35,972) (17,858)
State income tax, net of federal benefit 147,000 90,000 51,350
Benefit due to Difference between U.S. &
Chilean tax rates (316,000) (192,000) 0
Benefit due to Utilization of Chilean Net
Operating Loss Carryforwards (306,000) (152,000) 0
Provision due to Difference between U.S. &
Canadian tax rates 14,000 0 0
Benefit due to Reduction in Canadian tax
rate for manufacturing companies (42,000) 0 0
Non-deductible expenses, net 45,000 33,000 45,100
Other, net 93,626 60,282 1,768
Valuation allowance (118,000) (99,000) --
----------- ----------- ---------
$ 1,570,000 $ 963,382 $ 705,405
=========== =========== =========
</TABLE>
The components of deferred income tax assets and liabilities as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carry forwards $ 2,798,000 $ 2,240,000
Alternative minimum tax credit 766,000 495,000
Other 205,000 0
----------- -----------
Total deferred assets 3,769,000 2,735,000
Less: valuation allowance (491,000) (609,000)
----------- -----------
Total deferred assets, net 3,278,000 2,126,000
Deferred tax liabilities:
Depreciation and amortization 8,912,000 6,492,237
Land 2,427,000 2,427,000
Installment Sales 181,000 226,000
Other 0 48,000
----------- -----------
Net deferred tax liability $(8,242,000) $(7,067,237)
=========== ===========
</TABLE>
The liability method of accounting for deferred income taxes requires a
valuation allowance against deferred tax assets if, based on the weight
of available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. It is management's belief
that it is more likely than not that a portion of the deferred tax
assets will not be realized. The Company has established a valuation
allowance of $491,000 at December 31, 1998 and $609,000 at December 31,
1997, respectively. The valuation allowance at December 31, 1998 is
comprised of $125,000, which relates to prior and current year state
net operating losses, and $366,000, which relates to prior and current
year Chilean net operating losses from Ferronor.
F-25
<PAGE> 71
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
14. INCOME TAX PROVISION, continued
No provision was made in 1998 for U.S. income taxes on undistributed
earnings of the Chilean subsidiaries as it is the intention of
management to utilize those earnings in the Chilean operations for an
indefinite period of time.
As part of certain acquisitions, the Company acquired net operating
loss carry forwards for federal and state income tax purposes. The
utilization of the acquired tax loss carry forwards is further limited
by the Internal Revenue Code Section 382 to approximately $100,000 each
year. The tax loss carry forwards expire in the years 2001 through
2010.
15. COMPREHENSIVE INCOME
For the Company, other comprehensive income consists of foreign
currency translation adjustments that amounted to $455,447 and
($52,068) for the years ended December 31, 1998 and 1997, respectively.
Comprehensive income for the years ended December 31, 1998 and 1997
amounted to $4,856,596 and $1,887,131, respectively. The cumulative
adjustment amount previously reported as a separate component of
stockholders' equity is now included in accumulated other comprehensive
income in the Consolidated Balance Sheets.
16. STOCK OPTIONS:
In July 1992, the Company implemented a stock option plan (the "1992
Plan") for certain officers, consultants, employees and outside
directors of the Company. The aggregate number of shares which may be
issued pursuant to the 1992 Plan is 250,000 shares which are
exercisable at date of grant and have a ten year life.
Effective January 1, 1995, the Company implemented two new stock option
plans: the 1995 Stock Incentive Plan and the 1995 Non-Employee Director
Stock Option Plan. Each plan calls for 250,000 shares to be reserved
for future issuance. Options granted under the Stock Incentive Plan are
exercisable at the date of grant. Options granted under the
Non-Employee Director Stock Option Plan are 1/3 exercisable at the date
of grant, 1/3 exercisable at the first anniversary of the grant date
and 1/3 exercisable at the second anniversary of the grant date. All
the options granted under the Stock Incentive Plan and Non-Employee
Director Stock Option Plan have a ten year life from the date of grant.
In June 1997, the Company's stockholders approved a 750,000 increase in
the number of shares of common stock reserved for issuance pursuant to
the Company's 1995 Stock Incentive Plan, bringing total shares reserved
under this plan to 1,000,000.
F-26
<PAGE> 72
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
16. STOCK OPTIONS, continued
During June 1998, the Company implemented the 1998 Omnibus Executive
Incentive Compensation Plan ("1998 Plan"). The 1998 Plan supersedes the
1992 Plan, the 1995 Stock Incentive Plan and the 1995 Non-Employee
Director Stock Option Plan. The 1998 Plan provides for grants of stock
options, stock appreciation rights, restricted stock, deferred stock,
other stock-related awards and performance or annual incentive awards.
The aggregate number of shares to be issued pursuant to the 1998 Plan
are 930,000 shares. Options for 76,000 shares of common stock of the
Company, at an exercise price of $6.125, were issued pursuant to the
1998 Plan as of July 1, 1998. These options vest ratably over a three
year period on each anniversary date and mature June 30, 2008.
During November 1994, the Company's Board of Directors approved an
employment arrangement with Mr. Gary Marino for him to serve as Chief
Executive Officer of the Company and its subsidiaries. Mr. Marino's
arrangement provided that he be granted non-qualified options to
purchase an aggregate of 350,000 shares of common stock of the Company
at varying exercise prices and exercise dates. Options for 87,500
shares at an exercise price of $3.10, the fair market value of the
common stock at the time the Board of Directors approved the
arrangement, and 87,500 shares at an exercise price of $3.40 were
immediately exercisable upon Mr. Marino's execution of his written
employment agreement. Additional options for 87,500 shares became
exercisable under the employment agreement on each of March 1, 1996 and
1997 at exercise prices equal to $3.75 and $4.15 per share,
respectively. The Company recognized no compensation expense since the
exercise prices at the date of grant were either equal to or in excess
of the fair market value. Mr. Marino's options have a ten year life
from the date of grant and expire November 11, 2004.
Effective January 1, 1998, Mr. Marino entered into a new employment
agreement with the Company. The new agreement provides that he is
granted non-qualified options to purchase 300,000 shares of common
stock of the Company at exercise prices varying from $7.25 to $9.50.
All of the options are immediately exercisable and expire ten years
from the grant date.
Additionally during 1996, the Company issued, options to purchase an
aggregate of 90,000 shares of common stock to certain employees at
exercise prices equal to $3.65 per share for 10,000 of the options and
$5.00 per share for the remaining 80,000 options. All of the options
are exercisable immediately and have a ten year life from the date of
the grant.
In July 1998, the Company issued, options to purchase an aggregate of
150,000 shares of common stock to certain employees at exercise prices
equal to $6.125 per share. The options vest ratably over a three year
period on each anniversary date and mature June 30, 2008.
F-27
<PAGE> 73
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
16. STOCK OPTIONS, continued
The Company has adopted the disclosure-only provisions of Statements of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly, no compensation costs have been recognized
for the stock options issued during 1998, 1997 and 1996 as all stock
options were granted with an exercise price at least equal to the
market price on the date of grant. Had compensation cost for the
Company's stock options issued been determined based on the fair value
at the grant date for awards in 1998, 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Net income - as reported $ 4,401,149 $ 1,939,199 $ 504,879
============== =============== ===========
Net income - pro forma $ 3,561,620 $ 1,152,411 $ 17,005
============== =============== ===========
Basic net income per share - as reported $ 0.47 $ 0.23 $ 0.10
============== =============== ===========
Basic net income (loss) per share -
pro forma $ 0.37 $ 0.14 $ 0.00
============== =============== ===========
</TABLE>
These calculations only take into account the options issued since
January 1, 1995. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option- pricing model with
the following weighted-average assumptions used for grants in 1998,
1997 and 1996: dividend yield 0.0%; expected volatility of 45%-55%;
risk-free interest rate of 5.50% -7.8%; and expected lives of 10 years.
The weighted average fair value of options granted for 1998, 1997 and
1996 were $3.97, $3.08, and $2.65, respectively.
Information regarding the above options for 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at January 1, 1996 848,500 $ 3.66
Granted 295,000 $ 3.96
Exercised 12,500 $ 3.60
Forfeited 7,000 $ 3.50
Outstanding at December 31, 1996 1,124,000 $ 3.74
Granted 363,500 $ 5.00
Exercised 202,933 $ 3.69
Forfeited 33,667 $ 4.21
Outstanding at December 31, 1997 1,250,900 $ 4.10
Granted 551,000 $ 7.35
Exercised 237,950 $ 3.66
Forfeited 78,450 $ 3.58
Outstanding at December 31, 1998 1,485,500 $ 5.40
</TABLE>
F-28
<PAGE> 74
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
16. STOCK OPTIONS, continued
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF OPTIONS LIFE PRICE OF OPTIONS PRICE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.40-$5.00 934,500 6.98 $4.26 934,500 $4.26
$5.01-$7.00 251,000 9.50 $6.13 -- --
$7.01-$9.50 300,000 9.00 $8.38 300,000 $8.38
--------- ---------
1,485,500 1,234,500
========= =========
</TABLE>
In January 1995, the Company established an Employee Stock Purchase
Plan open to all full-time employees. Each employee may have payroll
deductions as a percentage of their compensation, not to exceed $25,000
per year. The purchase price equals 85% of the fair market value of a
share of the Company's Common Stock on January 1 or December 31, of any
given year, whichever is lower. For the years ended December 31, 1998,
1997 and 1996, 18,289, 23,433 and 17,897 shares of common stock,
respectively, were sold to employees under this plan.
17. NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company issued 4,200 shares of common stock to employees in the
first quarter of 1996. The Company issued 20,000 shares of common stock
to the Company's Chief Executive Officer for a $95,000 note receivable
during 1997. The Company issued 30,000 shares of common stock to the
Company's Chief Executive Officer for a $97,500 note receivable during
1998. Additionally, the Company issued 9,719 shares of common stock to
certain employees in the first quarter of 1996 and the first quarter of
1997 pursuant to employment contracts.
The Company issued 50,000 shares of common stock, 47,000 were treasury
stock, to employees of Kalyn during 1997 pursuant to a stock incentive
plan.
The Company incurred approximately $1.3 million, $2.0 million and $16.1
million in debt to acquire property, plant and equipment during 1998 ,
1997 and 1996, respectively. These amounts included acquisition of a
131 mile rail line in Washington, 234 miles of rail line in Minnesota,
140 tank cars and other transportation equipment including locomotives,
tractor and trailers.
F-29
<PAGE> 75
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
17. NONCASH INVESTING AND FINANCING ACTIVITIES, continued
The Company assumed $2.2 million of long-term debt and $3.7 million of
deferred tax liabilities related to the acquisition of OTVR in 1996.
The Company assumed $4.7 million in liabilities related to the
acquisition of Ferronor in 1997.
Cash paid for interest during 1998, 1997 and 1996 was $5.7 million,
$3.9 million and $2.4 million, respectively. Cash paid for income taxes
during 1998, 1997 and 1996 was $0.2 million, $0.2 million and $0.6
million, respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Management believes that the fair value of its long-term debt
approximates its carrying value for the revolving line of credit based
on the variable nature of the financing and for all other long-term
debt based on current borrowing rates available with similar terms and
maturities.
19. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims which are pending or
could be asserted against the Company. Litigation is subject to many
uncertainties, the outcome of individual litigated matters is not
predictable with assurance, and it is reasonably possible that some of
these matters may be decided unfavorably to the Company. It is the
opinion of management that the ultimate liability, if any, with respect
to these matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Effective January 23, 1995, the Company, through its wholly-owned
subsidiary Kalyn, entered into a Wholesale and Retail Financing
Agreement with Associates Commercial Corporation. Kalyn entered into an
additional financing agreement with NewCourt Financial USA, Inc. during
1996. The agreements provide for dealer and customer financing and for
the repurchase of products sold in the event of default by the customer
or dealer to the finance company. The Company is obligated to
repurchase a maximum of $300,000 and $200,000, respectively, in the
aggregate on the agreements. Since inception of the Agreements, there
have been no defaults which would have required the Company to
repurchase products sold.
F-30
<PAGE> 76
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
20. SEGMENT INFORMATION:
The Company's continuing operations have been classified into two
business segments: rail transportation and manufacturing. The rail
transportation segment includes the operations of the Company's
railroad subsidiaries and the manufacturing segment includes the
operations of Kalyn, KSC and RailAmerica Equipment Corporation. All of
the Company's continuing operations for 1996 were in the United States.
During 1997 the Company acquired operations in Chile and a minority
interest in Australian operations and during 1998 the Company's
Canadian operations were reclassified into continuing operations.
Business segment information for the year ended December 31, 1998, 1997
and 1996 (dollar amounts in thousands):
YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
RAIL MOTOR CORPORATE
CONSOLIDATED TRANSPORTATION MANUFACTURING CARRIER OVERHEAD
------------ -------------- ------------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 77,144 $32,402 $40,490 $ 4,252 $ --
Operating income (loss) $ 12,642 $ 9,436 $ 7,389 $ (186) $ (3,997)
Identifiable assets $145,230 $93,473 $24,890 $ 3,017 $ 23,850
Depreciation and
amortization $ 3,685 $ 2,276 $ 964 $ 306 $ 139
Capital expenditures $ 29,382 $19,280 $ 3,584 $ 1,354 $ 5,164
Interest expense $ 4,947 $ 3,611 $ 619 $ 241 $ 476
</TABLE>
YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
RAIL CORPORATE
CONSOLIDATED TRANSPORTATION MANUFACTURING OVERHEAD
------------ -------------- ------------- --------
<S> <C> <C> <C> <C>
Revenue $47,437 $24,076 $23,361 $ --
Operating income (loss) $ 7,319 $ 6,458 $ 4,119 $(3,258)
Identifiable assets $96,800 $76,249 $14,653 $ 5,898
Depreciation and
amortization $ 2,261 $ 1,604 $ 567 $ 90
Capital expenditures $ 9,443 $ 7,597 $ 1,696 $ 150
Interest expense $ 3,534 $ 3,081 $ 372 $ 81
</TABLE>
YEAR ENDED DECEMBER 31, 1996:
<TABLE>
<CAPTION>
RAIL CORPORATE
CONSOLIDATED TRANSPORTATION MANUFACTURING OVERHEAD
------------ -------------- ------------- --------
<S> <C> <C> <C> <C>
Revenue $25,658 $11,704 $13,954 $ --
Operating income (loss) $ 3,873 $ 4,978 $ 1,473 $(2,578)
Identifiable assets $66,152 $46,129 $12,932 $ 7,091
Depreciation and
amortization $ 1,527 $ 991 $ 490 $ 46
Capital expenditures $29,766 $26,849 $ 2,809 $ 108
Interest expense $ 2,078 $ 1,318 $ 476 $ 284
</TABLE>
F-31
<PAGE> 77
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
20. SEGMENT INFORMATION, Continued
Geographical segment information for the years ended December 31, 1998
and 1997 (dollar amounts in thousands):
YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA
------------ ------------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue $ 77,144 $46,722 $14,498 $15,924 $ --
Operating income $ 12,642 $ 7,474 $ 657 $ 4,512 $ --
Identifiable assets $145,230 $91,577 $13,873 $37,786 $1,995
Depreciation and
amortization $ 3,685 $ 2,382 $ 597 $ 706 $ --
Capital expenditures $ 29,382 $12,400 $ 4,225 $12,757 $ --
</TABLE>
YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
CONSOLIDATED UNITED STATES CHILE AUSTRALIA
------------ ------------- ------- ---------
<S> <C> <C> <C> <C>
Revenue $47,437 $39,375 $ 8,062 $ --
Operating income $ 7,319 $ 5,774 $ 1,545 $ --
Identifiable assets $96,800 $73,685 $21,261 $1,854
Depreciation and
amortization $ 2,261 $ 1,994 $ 267 $ --
Capital expenditures $ 9,443 $ 7,493 $ 1,950 $ --
</TABLE>
Identifiable assets consist of $96.8 million from continuing operations
and $4.0 million from discontinued operations (not included in above
amounts).
21. SUBSEQUENT EVENTS:
In January 1999, the Company through a newly formed subsidiary E&N
Railway Company LTD. acquired the 290 km Esquimalt and Nanaimo Railway
("E&N") from the Canadian Pacific Railway ("CPR"). The transaction
includes the sale of 109-km section of rail line between Port Alberni
and Nanaimo. In addition, CPR is leasing to the Company the Victoria to
Nanaimo and Parksville to Courtenay segments, about 181 km, to enable
E&N to continue to provide freight and passenger rail service to
Vancouver Island.
E&N provides freight and passenger service between Victoria and
Courtenay, and freight service between Port Alberni and Nanaimo, on
British Columbia's Vancouver Island.
In February 1999, Freight Victoria, a consortium in which the Company
is a majority partner, was selected as the successful bidder for V/Line
Freight Corporation ("V/Line Freight"). V/Line Freight, the rail
freight business of Australia's Victorian government, provides services
across southeastern Australia over 2,793 miles of track. This sale by
the Victorian government is a continuation of Australia's privatization
process of its rail system. The Company has made a non-refundable
deposit of approximately $19 million for V/Line Freight and anticipates
closing on the transaction during the second quarter of 1999.
F-32
<PAGE> 78
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
21. SUBSEQUENT EVENTS, continued
In March 1999, the Company completed a private offering of
approximately $12.5 million of restricted Common Stock. Pursuant to the
offering, the Company sold approximately 1.4 million shares of its
common stock at a price of $8.8125 per share and issued approximately
210,000 warrants to purchase an equivalent number of shares of common
stock at an exercise price of $10.125 per share within one year of the
transaction's closing date. First London acted as placement agent and
received approximately $0.4 million in fees and cost reimbursement and
one-year warrants to purchase 141,653 shares of Common Stock at an
exercise price of $10.125.
22. UNAUDITED QUARTERLY FINANCIAL DATA:
Quarterly financial data for 1998 in as follows (in thousands except
per share amounts)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenue $14,436 $20,192 $20,974 $21,542
Operating income $ 2,018 $ 3,258 $ 3,656 $ 3,710
Income from
continuing operations $ 668 $ 1,398 $ 1,426 $ 974
Basic net income from
continuing operations per share $ 0.07 $ 0.15 $ 0.15 $ 0.10
Diluted net income from
continuing operations per share $ 0.07 $ 0.14 $ 0.14 $ 0.09
</TABLE>
Quarterly financial data for 1997 in as follows (in thousands except
per share amounts)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------ ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenue $8,734 $11,596 $13,134 $13,973
Operating income $ 992 $ 1,451 $ 1,957 $ 2,920
Net income from
continuing operations $ 113 $ 364 $ 937 $ 1,220
Basic net income from
continuing operations per share $ 0.02 $ 0.04 $ 0.11 $ 0.14
Diluted net income from
continuing operations per share $ 0.01 $ 0.04 $ 0.10 $ 0.13
</TABLE>
F-33
<PAGE> 1
EXHIBIT 4.2
CERTIFICATE OF AMENDMENT
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
RAILAMERICA, INC.
(PURSUANT TO SECTION 151 OF THE
DELAWARE GENERAL CORPORATION LAW)
------------------------------------
RailAmerica, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
Business Corporation Law by unanimous written consent dated December 28, 1998:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation of the Corporation, the Board of Directors hereby creates a
Series A Convertible Redeemable Preferred Stock, $.001 par value per share (the
"Series A Preferred Stock"), of the Corporation and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
and limitations thereof as follows:
Series A Convertible Redeemable Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Convertible Redeemable Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 1,000,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding and no increase shall increase the number of
shares of Series A Preferred Stock above the total number of authorized shares.
Section 2. RANK. The Series A Preferred Stock shall rank as to
distributions of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary: (i) senior to all of the
Corporation's common stock, par value $.001 per share (the "Common Stock"); (ii)
senior to any class or series of capital stock of the Corporation hereafter
created specifically ranking by its terms junior to the Series A Preferred Stock
(collectively, with the Common Stock, "Junior Securities" or "Junior Stock");
and (iii) on parity with any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms on parity with the Series A
Preferred Stock ("Parity Securities" or "Parity Stock"). While any shares of
Series A Preferred Stock are outstanding, no Parity Securities or
<PAGE> 2
equity securities senior to the Series A Preferred Stock shall be authorized or
issued without the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of the Series
A Preferred Stock, voting as a class. This prohibition shall not include the
authorization or issuance of any form of debt securities or instruments to a
bank or other institution.
Section 3. DIVIDENDS.
(a) The holders of the Series A Preferred Stock shall
be entitled to receive out of funds of the Corporation legally available for
payment cash dividends, payable semi-annually in arrears, at the rate of $1.875
per share per annum, payable in cash. Dividends on the Series A Preferred Stock
shall accrue from the date of issuance or thereafter, from the most recent date
on which dividends were payable, and shall be payable semi-annually on, June 30
and December 31 of each year (each a "Dividend Payment Date"), commencing on
June 30, 1999; provided, however, that if any such day is a non-business day,
the Dividend Payment Date will be the next business day. Each declared dividend
shall be payable to holders of record as they appear at the close of business on
the stock books of the Corporation on May 10 and December 10 of each year (each
of such dates a "Record Date"). Semi-annual dividend periods (each a "Dividend
Period") shall commence on and include the 1st day of July and January of each
year and shall end on and include the day next preceding the next following
Dividend Payment Date.
(b) No dividends shall be declared or paid or set
apart for payment on any Common Stock, Parity Stock or Junior Stock during any
semi-annual period unless full dividends on the Series A Preferred Stock for all
Dividend Periods ending prior to or during such semi-annual period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment. When dividends are not so paid in
full (or a sum sufficient for such full payment is not so set apart) upon the
Series A Preferred Stock and any other Parity Stock, dividends upon the Series A
Preferred Stock and dividends on such other Parity Stock payable during such
semi-annual period shall be declared pro rata so that the amount of such
dividends so payable per share on the Series A Preferred Stock and such other
Parity Stock shall in all cases bear to each other the same ratio that full
dividends on the shares of Series A Preferred Stock and full dividends, if any,
on shares of such other Parity Stock, bear to each other. If full dividends on
the Series A Preferred Stock have not been declared and paid or set apart for
payment, no dividend or distribution, other than in shares of Junior Stock, may
be declared, set aside or paid on any shares of Junior Stock. Holders of the
Series A Preferred Stock shall not be entitled to any dividends, whether payable
in cash, property or stock, in excess of the dividends provided for herein. No
interest or sum of money in lieu of interest shall be payable in respect of any
declared dividend payment or payments on the Series A Preferred Stock which may
be in arrears. As used herein, the phrase "set apart" in respect of the payment
of dividends shall require deposit of any funds in a bank or trust company in a
separate deposit account maintained for the benefit of the holders of the Series
A Preferred Stock.
Section 4. VOTING RIGHTS. The holders of Series A Preferred Stock will
have no voting rights except as required by law, except that the affirmative
vote of the holders of a majority of the outstanding shares of Series A
Preferred Stock is necessary for the issuance of Senior Securities or Parity
Securities, the authorization or issuance of securities convertible into such
Senior Securities or Parity Securities, or the amendment to the Corporation's
Certificate of Incorporation so as to adversely affect the Series A Preferred
Stock, or waiver of any other covenants.
2
<PAGE> 3
To the extent that under Delaware law the vote of the holders of shares
of Series A Preferred Stock, voting separately as a class, is required to
authorize a given action of the Corporation, the affirmative vote or consent of
the holders of at least a majority of the outstanding shares of the Series A
Preferred Stock shall constitute the approval of such action by the class.
Section 5. CONVERSION. Subject to and upon compliance with this Section
5, the holders of shares of Series A Preferred Stock shall have conversion
rights as follows:
(a) OPTIONAL CONVERSION. Each holder of a share of
Series A Preferred Stock shall have the right, at any time, at the office of the
Corporation or any transfer agent for the Series A Preferred Stock, to convert
such share of Series A Preferred Stock into that number of fully paid and
nonassessable shares of Common Stock equal to $25.00 divided by the Conversion
Price of such share of Series A Preferred Stock as set forth in Section 6
hereof. The number of share of Common Stock into which the Series A Preferred
Stock may be invested is hereinafter referred to as the "Conversion Rate."
(b) MECHANICS OF CONVERSION. In order to convert
shares of Series A Preferred Stock into shares of Common Stock, the holder of
shares of Series A Preferred Stock shall (i) fax or otherwise deliver a copy of
the fully executed notice of conversion in the form attached hereto as Exhibit A
("Notice of Conversion") to the Corporation at its principal office and to the
office of its designated transfer agent that such holder elects to convert the
same, which notice shall specify the number of shares of Series A Preferred
Stock to be converted and shall contain the Conversion Price (together with a
copy of the first page of each certificate to be converted) prior to 5:00 p.m.,
Eastern Standard time (the "Conversion Notice Deadline") on the date of
conversion specified on the Notice of Conversion and (ii) surrender the original
certificate or certificates for the shares of Series A Preferred Stock to be
converted, duly endorsed, and deliver the original Notice of Conversion by
either overnight courier or two-day courier, to the principal office of the
Corporation or to the office of its designated transfer agent; provided,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series A Preferred Stock are delivered to
the Corporation or its transfer agent as provided above. Upon receipt by the
Corporation of evidence of the loss, theft, destruction or mutilation of any
certificate representing shares of Series A Preferred Stock, and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Corporation, and upon surrender and cancellation of any certificate
representing shares of Series A Preferred Stock, if mutilated, the Corporation
shall execute and deliver a new certificate of like tenor and date. No
fractional shares of Common Stock shall be issued upon conversion of the Series
A Preferred Stock. In lieu of any fractional share to which the holder of shares
of Series A Preferred Stock would otherwise be entitled, the Corporation shall
pay cash to such holder in an amount equal to such fraction multiplied by the
Conversion Price then in effect. In the case of a dispute as to the calculation
of the Conversion Rate, the Corporation's calculation shall be deemed conclusive
absent manifest error.
The Corporation shall use all reasonable efforts to issue and deliver
within seven (7) business days after delivery to the Corporation of the
certificates representing the shares of Series A Preferred Stock to be
converted, or after such agreement and indemnification, to such holder of Series
A Preferred Stock at the address of the holder on the books of the Corporation,
a certificate or certificates for the number of shares of Common Stock to which
the holder shall be entitled as aforesaid. The date on which conversion occurs
(the "Date of Conversion") shall be deemed to be the date set forth in such
Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is delivered to and received
3
<PAGE> 4
by the Corporation before 5:00 p.m., Eastern Standard time, on the Date of
Conversion, and (ii) that the original stock certificates representing the
shares of Series A Preferred Stock to be converted are received by the
Corporation or the transfer agent within two (2) business days thereafter. The
person or persons entitled to receive the shares of Series A Preferred Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on the Date of Conversion. If
the original certificates representing the shares of Series A Preferred Stock to
be converted are not received by the Corporation or the transfer agent within
two (2) business days after the Date of Conversion or if the facsimile of the
Notice of Conversion is not received by the Corporation or its transfer agent
prior to the Conversion Notice Deadline, the Notice of Conversion, at the
Corporation's option, may be declared null and void.
Following any conversion of shares of Series A Preferred Stock, such
shares of Series A Preferred Stock shall no longer be outstanding and all rights
of a holder with respect to the shares surrendered for conversion shall
immediately terminate except for the right to receive Common Stock.
(c) RESERVATION OF SHARES. The Corporation shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all then outstanding shares of Series
A Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of Series A Preferred Stock, the Corporation will take
such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
Section 6. CONVERSION PRICE. The "Conversion Price" per share of the
Series A Preferred Stock shall be $8.25, subject to adjustment as set forth
below.
(a) If, prior to the conversion of all outstanding
shares of Series A Preferred Stock, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend or other similar event, the
Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares or other similar event, the Conversion Price shall be
proportionately increased.
(b) Subject to Section 8(c) hereof, if, prior to the
conversion of all outstanding shares of Series A Preferred Stock, there shall be
any merger, consolidation, exchange of shares, recapitalization, reorganization
or other similar event, as a result of which shares of Common Stock of the
Corporation shall be changed into the same or a different number of shares of
the same or another class or classes of stock or securities of the Corporation
or another entity, then the holders of shares of Series A Preferred Stock shall
thereafter have the right to purchase and receive upon conversion of Series A
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such shares of stock and/or securities as may be
issued or payable with respect to or in exchange for the number of shares of
Common Stock immediately theretofore purchasable and receivable upon the
conversion of the Series A Preferred Stock held by such holders had such merger,
consolidation, exchange of shares, recapitalization or reorganization not taken
place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of the holders of the Series A Preferred Stock to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of
4
<PAGE> 5
the Conversion Price and of the number of shares issuable upon conversion of the
Series A Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this subsection 6(b) unless the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligation to deliver to the holders of the Series A Preferred Stock such shares
of stock and/or securities as, in accordance with the foregoing provisions, the
holders of the Series A Preferred Stock may be entitled to purchase.
(c) No adjustment of the Conversion Price shall be
made in an amount less than $.01 per share.
(d) Upon any adjustment of the Conversion Price, then
and in each case the Corporation shall give written notice thereof, by first
class mail, postage prepaid, addressed to each holder of shares of the Series A
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
Section 7. STATUS OF CONVERTED OR REACQUIRED SHARES. Any shares of
Series A Preferred Stock converted into shares of Common Stock pursuant to
Section 5 hereof or purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after the conversion or
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Series A Preferred Stock and may be reissued
as part of a new series of preferred stock subject to the conditions and
restrictions on issuance set forth herein, in the Certificate of Incorporation,
or in any other Certificate of Designation creating a series of preferred stock
or any similar stock or as otherwise required by law.
Section 8. LIQUIDATION, DISSOLUTION OR CHANGE OF CONTROL.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
shares of Series A Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to stockholders under
applicable law, prior and in preference to any distribution to holders of the
Common Stock or any Junior Securities but in parity with any distribution to
holders of Parity Securities, an amount of $25.00 per share (the "Liquidation
Value"), plus a sum equal to all dividends accrued on such shares (whether or
not declared) and unpaid for the then current Dividend Period. If upon the
occurrence of such event, the assets and funds to be distributed among the
holders of shares of Series A Preferred Stock and Parity Securities shall be
insufficient to permit the payment to such holders of the full preferential
amounts due to the holders of shares of Series A Preferred Stock and Parity
Securities, respectively, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed among the holders of
shares of Series A Preferred Stock and Parity Securities, pro rata, based on the
respective liquidation amounts to which each such series of stock is entitled by
the Corporation's Certificate of Incorporation and any certificate of
designation of preferences.
(b) Upon the completion of the distribution required
by subsection 8(a) above, if assets remain in the Corporation, they shall be
distributed to holders of Parity Securities (unless holders of Parity Securities
have received distributions pursuant to subsection 8(a)) and Junior Securities
in accordance with the Corporation's Certificate of Incorporation, including any
duly adopted certificate(s) of designation of preferences.
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<PAGE> 6
(c) (i) Upon a Change of Control (as defined below)
of the Corporation, each holder of the Series A Preferred Stock will have the
option to require the Corporation to repurchase such holder's shares of Series A
Preferred Stock at a price per share equal to the Liquidation Value plus any
accrued and unpaid dividends. A "Change of Control" shall have occurred: (A)
when any person or group is or becomes the beneficial owner of 50% or more of
the then outstanding voting shares of the Corporation, (B) when, during any
period of two consecutive years after the initial closing of the offering of the
Series A Preferred Stock, individuals who at the beginning of such period
constituted the Corporation's Board of Directors, or whose nomination for
election by the Corporation's stockholders was approved by a vote of a majority
of the directors of the Corporation then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the directors then in office or (C) upon any sale, transfer or other
conveyance of all or substantially all of the assets of the Corporation.
(ii) Upon the occurrence of a Change of
Control, the Corporation will offer to repurchase (the "Change of
Control Purchase Offer") all outstanding shares of Series A Preferred
Stock, and each holder of outstanding shares of Series A Preferred
Stock will have the right to require that the Company repurchase such
holder's shares of Series A Preferred Stock, at the price set forth in
clause (i) of this subsection 8(c). Within 30 days following any Change
of Control, the Corporation shall mail a notice, by first class mail,
to each holder of record of Series A Preferred Stock (a "Change of
Control Notice"), at his address of record, stating:
(A) that a Change of Control has
occurred and that such holder has the right to
require the Corporation to purchase such holder's
shares of Series A Preferred Stock at the price set
forth above;
(B) the circumstances and relevant
facts regarding such Change of Control;
(C) the date on which the
Corporation will repurchase any shares of Series A
Preferred Stock which the holders require the
Corporation to repurchase in accordance with this
subsection 8(c), which date shall be no earlier than
30 days nor later than 60 days from the date such
Change of Control Notice is mailed (the "Change of
Control Purchase Date");
(D) that, unless the Corporation
defaults in making such payment, any shares of Series
A Preferred Stock accepted for payment pursuant to
the Change of Control Purchase Offer shall cease to
accrue dividends after the Change of Control Purchase
Date;
(E) that holders of Series A
Preferred Stock electing to have their shares
repurchased pursuant to any Change of Control
Purchase Offer shall be required to surrender the
original certificates for the shares of Series A
Preferred Stock at the address specified in the
notice, at least three business days before the
Change of Control Purchase Date; and
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<PAGE> 7
(F) that the holders of Series A
Preferred Stock shall be entitled to withdraw their
election if the Corporation receives, not later than
the last business day prior to the Change of Control
Purchase Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the
holder, the number of shares of Series A Preferred
Stock the holder delivered for repurchase and a
statement that such holder is withdrawing his
election to have such shares repurchased.
(iii) Each holder of shares of Series A
Preferred Stock electing to have such shares purchased by the
Corporation pursuant to this subsection 8(c) shall deliver to the
Corporation at its principal office, at least three business days prior
to the Change of Control Purchase Date, the original certificate or
certificate(s) for the shares to be purchased duly endorsed, together
with written notice to the Corporation specifying the number of shares
of Series A Preferred Stock to be purchased. Holders of Series A
Preferred Stock will be entitled to withdraw their election if the
Corporation receives, not later than one business day prior to the
Change of Control Purchase Date, a telegram, facsimile transmission or
letter, at its principal office, setting forth the name of the holder,
the number of shares of Series A Preferred Stock which were delivered
by the holder for purchase by the Corporation and a statement that such
holder is withdrawing his election to have such shares purchased.
(iv) Promptly following the Change of
Control Purchase Date, the Corporation will mail or deliver to each
holder of shares of Series A Preferred Stock who properly tendered such
shares to the Corporation for purchase pursuant to this subsection 8(c)
and did not withdraw such holder's election, at his address of record,
an amount equal to the purchase price for the shares of Series A
Preferred Stock so delivered for purchase as set forth in this
subsection 8(c). Unless the Corporation shall have defaulted in the
payment of the purchase price for shares of Series A Preferred Stock
tendered for purchase by the Corporation, all rights of the holders of
such shares (except the right to receive the purchase price therefor)
shall cease with respect to such shares on the Change of Control
Purchase Date and such shares shall not, after the Change of Control
Purchase Date, be deemed to be outstanding and shall not have the
status of Series A Preferred Stock.
(v) The Corporation will comply, to the
extent applicable, with the requirements of Section 14(e) of the
Securities Exchange Act of 1934, as amended, and any other applicable
securities laws or regulations in connection with the repurchase of
Series A Preferred Stock pursuant to this subsection 8(c). To the
extent that the provisions of any securities laws or regulations
conflict with the provisions of this subsection 8(c), the Corporation
will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this Section
by virtue thereof.
Section 9. CONSOLIDATION, MERGER, ETC. Except as set forth in Section
8(c) hereof, in the event of a merger, reorganization, recapitalization or
similar event of or with respect to the Corporation (a "Corporate Change")
(other than a Corporate Change in which all or substantially all of the
consideration received by the holders of the Corporation's equity securities
upon such Corporate Change consists of cash or assets other than securities
issued by the acquiring entity or any affiliate thereof), the Series A Preferred
Stock shall be assumed by the acquiring entity and thereafter the Series A
Preferred Stock shall be convertible into such class and type of securities as
the holder of shares of Series A
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<PAGE> 8
Preferred Stock would have received had such holder converted the Series A
Preferred Stock immediately prior to such Corporate Change.
Section 10. REDEMPTION.
(a) OPTIONAL REDEMPTION. If the average closing price
of the Common Stock, as reported on the Nasdaq Stock Market, equals or exceeds
150% of the Conversion Price for any ten (10) trading days within a thirty (30)
consecutive trading day period, the Corporation may, at its option, redeem the
Series A Preferred Stock, at a redemption price per share equal to the
Liquidation Value plus accrued and unpaid dividends. Each holder of Series A
Preferred Stock will be given notice of such redemption and will have the right
to convert the Series A Preferred Stock into shares of Common Stock prior to the
redemption date specified in such notice.
(b) MANDATORY REDEMPTION. The Corporation will be
required to redeem the outstanding shares of Series A Preferred Stock on
December 31, 2003, at a redemption price per share equal to the Liquidation
Value plus accrued and unpaid dividends.
(c) MECHANICS OF REDEMPTION. Notice of redemption of
the Series A Preferred Stock, specifying the redemption date and place of
redemption, shall be given by first class mail to each holder of record of the
shares to be redeemed, at his address of record, not less than 30 nor more than
60 calendar days prior to the date upon which the Corporation shall redeem the
Series A Preferred Stock (the "Redemption Date"). Each such notice shall also
specify the redemption price applicable to the shares to be redeemed. If less
than all the shares owned by such holder are then to be redeemed, the notice
shall also specify the number of shares thereof which are to be redeemed and the
fact that a new certificate or certificates representing any unredeemed shares
shall be issued without cost to such holder.
(i) Notice of redemption of shares of the
Series A Preferred Stock having been given as provided in Section
10(b), then unless the Corporation shall have defaulted in the payment
of the redemption price and all accrued and unpaid dividends (whether
or not declared), all rights of the holders thereof (except the right
to receive the redemption price and all accrued and unpaid dividends,
whether or not declared) shall cease with respect to such shares on the
Redemption Date and such shares shall not, after the Redemption Date,
be deemed to be outstanding and shall not have the status of Series A
Preferred Stock. In case fewer than all the shares represented by any
such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares without cost to the holder thereof.
(ii) Shares of the Series A Preferred Stock
are not subject or entitled to the benefit of a sinking fund.
(iii) Notwithstanding the foregoing, if
notice of redemption shall have been given pursuant to this Section 10
and any holder of the Series A Preferred Stock shall, prior to the
close of business on the date three business days next preceding the
Redemption Date, give written notice to the Corporation pursuant to
Section 5 hereof of the conversion of any or all of the shares held by
the holder (accompanied by a certificate or certificates for such
shares, duly endorsed or assigned to the Corporation), then the
redemption shall not become effective as to such shares and the
conversion shall become effective as provided in Section 5.
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<PAGE> 9
IN WITNESS WHEREOF, this Certificate of Designation has been executed
on behalf of the Corporation by its Chairman of the Board this 29th day of
December, 1998.
RAILAMERICA, INC.
By: /s/ GARY O. MARINO
---------------------------------
Gary O. Marino
Chairman of the Board of Directors
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<PAGE> 10
EXHIBIT A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER
IN ORDER TO CONVERT THE SERIES A PREFERRED STOCK)
The undersigned hereby irrevocably elects to convert ______ shares of
Series A Preferred Stock, represented by stock certificate No(s).
________________ (the "Series A Preferred Stock Certificates") into shares of
common stock ("Common Stock") of RailAmerica, Inc. (the "Corporation") according
to the conditions of the Certificate of Designation of Series A Preferred Stock,
as of the date written below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto. No fee will be charged to the holder for any conversion,
except for transfer taxes, if any.
The undersigned represents and warrants that all offers and sales by
the undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Series A Preferred Stock shall be made pursuant to
registration of such shares of Common Stock under the Securities Act of 1933, as
amended, or pursuant to an exemption from registration under such Act.
Conversion Calculations:
Date of Conversion
Applicable Conversion Price
Signature
Name
Address:
*No shares of Common Stock will be issued until the original Series A Preferred
Stock Certificate(s) to be converted and the Notice of Conversion are received
by the Corporation or its designated Transfer Agent. The original Stock
Certificate(s) representing the Series A Preferred Stock to be converted and the
Notice of Conversion must be received by the Corporation or its designated
Transfer Agent by the second business day following the Date of Conversion, or
the Notice of Conversion, at the Corporation's option, may be declared null and
void.
<PAGE> 1
EXHIBIT 10.57
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT is made and entered into as of
the 16th day of June, 1998, by and among RAILAMERICA, INC., a Delaware
corporation, KALYN/SIEBERT INCORPORATED, a Texas corporation, RAILAMERICA
INTERMODAL SERVICES, INC., a Delaware corporation, RAILAMERICA CARRIERS INC., a
corporation organized under the laws of the Province of Ontario, STEEL CITY
CARRIERS INC., a corporation organized under the laws of the Province of
Ontario, SAGINAW VALLEY RAILWAY COMPANY, INC., a Delaware corporation, HURON AND
EASTERN RAILWAY COMPANY, INC., a Michigan corporation, WEST TEXAS AND LUBBOCK
RAILROAD COMPANY, INC., a Texas corporation, PLAINVIEW TERMINAL COMPANY, a Texas
corporation, CASCADE AND COLUMBIA RIVER RAILROAD COMPANY, a Delaware
corporation, OTTER TAIL VALLEY RAILROAD COMPANY, INC., a Minnesota corporation,
MINNESOTA NORTHERN RAILROAD, INC., a Delaware corporation, and DELAWARE VALLEY
RAILWAY COMPANY, INC., a Delaware corporation (collectively, the "Initial
Borrowers"), and ST. CROIX VALLEY RAILROAD COMPANY, a Delaware corporation ("St.
Croix"; collectively with Initial Borrowers, the "Borrower" or "Borrowers"),
NATIONAL BANK OF CANADA, a Canadian Chartered Bank, as agent (the "Agent"), and
NATIONAL BANK OF CANADA, a Canadian Chartered Bank ("NBC"), and COMERICA BANK, a
Michigan Banking Corporation ("Comerica"; Comerica and NBC being referred to
herein collectively as the "Initial Lenders"), and SOUTHTRUST BANK, NATIONAL
ASSOCIATION, a national banking association ("SouthTrust"; collectively with the
Initial Lenders, the "Lender" or "Lenders").
W I T N E S S E T H:
WHEREAS, the Initial Borrowers, the Agent and the Initial Lenders
previously entered into that certain Loan Agreement dated as of May 23, 1997
(the "Loan Agreement");
WHEREAS, SouthTrust and Agent have executed a Lender Joinder Agreement
dated as of even date herewith, pursuant to which SouthTrust has become an
Additional Lender under the Loan Agreement;
WHEREAS, St. Croix and Agent have executed a Borrower Joinder Agreement
dated as of even date herewith, pursuant to which St. Croix has become an
Additional Borrower under the Loan Agreement;
WHEREAS, the Borrowers have requested, and the Lenders have agreed, to
modify the Initial Loans and make an Additional Loan in the amount of Fifteen
Million Dollars ($15,000,000.00), such that the Loans, as modified and
increased, shall be in the aggregate amount of Fifty-five Million Dollars
($55,000,000.00), subject to the terms and conditions contained herein and in
the Loan Agreement; and
WHEREAS, the parties hereto wish to amend the Loan Agreement as
provided herein.
<PAGE> 2
NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in consideration of the loans or extensions of credit
heretofore now or hereafter made or to be made for the benefit of the Borrower
by the Lender, the parties do hereby agree as follows:
1. The Borrowers and the Lenders agree that the recitals set forth above
are true, correct, and complete, and are hereby incorporated herein.
2. All capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement.
3. Subparagraph (f) of Section 1.2 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(f) "ADVANCE": A disbursement by the Lenders of a portion of the
Loan proceeds to be utilized by the Borrowers for the purposes
set forth in Section 2.1 of this Agreement.
4. Subparagraph (n) of Section 1.2 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(n) "CHANGE DATE": June 16, 1999, the date upon which the
outstanding principal balances of the Loans shall convert from
revolving lines of credit to term loans, as more fully set
forth in the Notes.
5. Subparagraph (s) of Section 1.2 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(s) "COMERICA NOTE": A Modification Master Revolving/Term
Promissory Note in the amount of Fifteen Million and 00/100
Dollars ($15,000,000.00) from Borrowers to Comerica dated as
of June 16, 1998, and any modifications, amendments or
renewals thereof, evidencing a portion of the Loans.
6. Subparagraph (aa) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(aa) "FRANCHISES": All franchises, sanctions, rights, licenses,
privileges and operating agreements or authorities, third
party agreements and interchange agreements, including without
limitation agreement(s) (direct and indirect) between
Borrowers or any of them and the State of Michigan Department
of Transportation, to operate over 206 miles of track, or
thereabouts, agreement(s) (direct and indirect) between
Borrowers or any of them and the State of Texas Department of
Transportation, to operate over 131 miles of track, or
thereabouts, agreement(s) (direct and
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<PAGE> 3
indirect) between Borrowers or any of them and the State of
Washington Department of Transportation, to operate over 131
miles of track, or thereabouts, agreement(s) (direct and
indirect) between Borrowers or any of them and the State of
Minnesota Department of Transportation, to operate over 279
miles of tract, or thereabouts, and agreement(s) (direct and
indirect) between Borrowers or any of them and the State of
Pennsylvania Department of Transportation, to operate over 23
miles of track, or thereabouts.
7. Subparagraph (dd) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(dd) "GETTYSBURG MORTGAGE DOCUMENTS": Collectively, Mortgage Deed
and Security Agreements and Assignments of Rents, Leases and
Deposits, as modified by Mortgage Modification Agreements, and
as the same may be further amended from time to time, from
Delaware to Agent, which partially secure the Notes to the
extent of $1,250,000.00, and are valid first liens on the
Gettysburg Real Property and the personal property associated
therewith, together with UCC-1 Financing Statements and other
documents associated therewith.
8. Subparagraph (ww) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(ww) "MATURITY DATE": June 16, 2001, upon which date the entire
principal balance and accrued interest and all other
applicable charges under the Loans shall become due and
payable in full.
9. Subparagraph (xx) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(xx) "MICHIGAN EPA AUDIT": Copies of all existing Phase I and, if
applicable, Phase II environmental audits and assessments,
certified to Agent, and other reports and evidence of any
remediation which has been effectuated to date with respect to
the Michigan Real Property and the Huron and Eastern Real
Property, together with any new environmental audits of the
Michigan Real Property and the Huron and Eastern Real Property
required by Agent, the results of which must be satisfactory
to the Majority Lenders in their sole and absolute discretion.
10. Subparagraph (yy) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(yy) "MICHIGAN MORTGAGE DOCUMENTS": Collectively, (A) (Railroad)
Mortgage and Security Agreements and Assignments of Rents,
Leases and Deposits, as modified by Mortgage Modification
Agreements and Receipts for Future Advance, Mortgage
Modification and Spreader Agreements, and as the same may be
further
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<PAGE> 4
amended from time to time, from Saginaw and Huron, as
applicable, to Agent, which secure the Notes to the extent of
$13,000,000.00 and are valid first liens on the Michigan Real
Property and the personal property associated therewith,
together with UCC-1 Financing Statements and other documents
associated therewith, and (B) a Mortgage and Security
Agreement, as the same may be amended from time to time, from
Huron to Agent, which secures the Notes to the extent of
$440,000.00 and is a valid first lien on the Huron and Eastern
Real Property and the personal property associated therewith,
together with UCC-1 Financing Statements and other documents
associated therewith.
11. Subparagraph (zz) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(zz) "MICHIGAN REAL PROPERTY": Collectively, certain real property
lying and being situate in Lapeer County, Michigan, Saginaw
County, Michigan, and Tuscola County, Michigan owned by
Saginaw, and, real property lying and being situate in Saginaw
County, Michigan, Tuscola County, Michigan, Huron County,
Michigan and Sanilac County, Michigan owned by Huron, more
particularly described on Composite Exhibit "F" appended
hereto and made a part hereof.
12. Subparagraph (ccc) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(ccc) "MINNESOTA MORTGAGE DOCUMENTS": Collectively, a Mortgage,
Security Agreement and Fixture Financing Statement and an
Assignment of Rents, Leases and Deposits from Minnesota to
Comerica, as assigned by Comerica to Agent, and as modified by
an Amendment No. 1 to Mortgage, Security Agreement and Fixture
Financing Statement and an Amendment No. 1 to Assignment of
Rents, Leases and Deposits, as further modified by an
Amendment No. 2 to Mortgage, Security Agreement and Fixture
Financing Statement and an Amendment No. 2 to Assignment of
Rents, Leases and Deposits, and as the same may be further
amended from time to time, which partially secure the Notes to
the extent of $1,500,000.00, and are valid first liens on the
Minnesota Real Property and the personal property associated
therewith, together with UCC-1 Financing Statements, UCC-2
Fixture Financing Statements, UCC-3 Assignment and Amendment
Statements and other documents associated therewith.
13. Subparagraph (eee) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(eee) "MINNESOTA REAL PROPERTY": Collectively, certain real property
lying and being situate in Red Lake County, Polk County,
Norman County, Pennington County, Marshall County, Roseau
County, Pine County, Chisago County, and Kanabec
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<PAGE> 5
County, Minnesota, as more particularly described on Exhibit
"G" appended hereto and made a part hereof.
14. Subparagraph (fff) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(fff) "MORTGAGE DOCUMENTS": Collectively, the Gettysburg Mortgage
Documents, the Michigan Mortgage Documents, the Minnesota
Mortgage Documents, the Ontario Mortgage Documents, the Texas
Deed of Trust Documents, the Washington Deed of Trust
Documents and the West Texas and Lubbock Deed of Trust
Documents.
15. Subparagraph (ggg) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(ggg) "NBC NOTE": A Modification Master Revolving/Term Promissory
Note in the amount of Twenty-five Million and 00/100 Dollars
($25,000,000.00) from Borrowers to NBC dated as of June 16,
1998, and any modifications, amendments or renewals thereof,
evidencing a portion of the Loans.
16. Subparagraph (hhh) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(hhh) "NOTE" or "NOTES": Collectively the Comerica Note, the NBC
Note, the SouthTrust Note and the Additional Notes, which
Notes are cross-defaulted and cross-collateralized.
17. Subparagraph (qqq) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(qqq) "PURCHASE AGREEMENTS": Collectively, the Cascade Purchase
Agreement, the Minnesota Purchase Agreement, the CSX Purchase
Agreement, the St. Croix Purchase Agreement and the Delaware
Valley Purchase Agreement.
18. Subparagraph (sss) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(sss) "RAILROAD TRACKAGE APPRAISAL": Collectively, (i) that certain
Railroad Trackage appraisal prepared by Rail Associated
Services, Inc. dated December 27, 1993, as updated by Main
Line Management Services, Inc., by two (2) updates, both
updates dated August 30, 1996, (ii) that certain Development
of Net Liquidation Value Appraisal prepared by Main Line
Management Services, Inc., dated October 17, 1995, as updated
by Main Line Management Services, Inc., by virtue of update
dated August 16, 1996, (iii) that certain Fair Market Value of
Real Property prepared by Main Line Management Services, Inc.,
dated August 13,
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<PAGE> 6
1996, (iv) that certain fair market value appraisal of the
railroad trackage owned by Minnesota and prepared by Main Line
Management Services, Inc., dated December 12, 1996, (v) that
certain Development of Net Liquidation Value Appraisal
prepared by Main Line Management Services, Inc., dated
December 14, 1995, (vi) that certain Railroad Trackage
Appraisal prepared by Main Line Management Services, Inc.
dated March 20, 1998 (updating a Railroad Trackage Appraisal
prepared by Main Line Management Services, Inc. dated
September, 1995), and (vii) that certain Evaluation Study of
the North Branch and Mora Branch (railroad trackage appraisal)
prepared by Main Line Management Services, Inc. dated
September 8, 1997; provided, however, that Majority Lenders
reserve the right to require Borrowers to provide Agent with
updated appraisals of the same at any time during the term of
the Loans (provided, however, that unless an Event of Default
shall have occurred and be continuing, that said appraisals
shall be limited to one (1) appraisal per year), said
appraisals to be performed at Borrowers' sole cost and
expense.
19. Subparagraph (uuu) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(uuu) "REAL ESTATE APPRAISALS". Satisfactory fair market value
appraisals of each of the Texas Real Property, the Michigan
Real Property, the Huron and Eastern Real Property, the
Minnesota Real Property, the Ontario Real Property, the
Washington Real Property, and the West Texas and Lubbock Real
Property.
20. Subparagraph (dddd) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(dddd) "TEXAS DEED OF TRUST DOCUMENTS": A Deed of Trust, Assignment
of Leases and Rents and Security Agreement, as modified by a
Deed of Trust, Assignment of Leases and Rents and Security
Agreement Modification Agreement, and as the same may be
further amended from time to time, from Kalyn to Agent, which
secures the Notes to the extent of $2,045,000.00, which is a
valid first lien on the Texas Real Property and the personal
property associated therewith, together with UCC-1 Financing
Statements and other documents associated therewith.
21. Subparagraph (hhhh) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(hhhh) "WASHINGTON DEED OF TRUST DOCUMENTS": Collectively a Deed of
Trust Agreement and an Assignment of Rents, Leases and
Deposits from Cascade to Agent, as modified by a Receipt for
Future Advance and Deed of Trust Modification Agreement, and
as the same may be further amended from time to time, which
secure the Notes to the extent of $12,000,000.00 and are valid
first liens on the Washington Real Property and the personal
property associated
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<PAGE> 7
therewith, together with UCC-1 Financing Statements and other
documents associated therewith.
22. Subparagraph (kkkk) of Section 1.2 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(kkkk) "WEST TEXAS AND LUBBOCK DEED OF TRUST DOCUMENTS": A Deed of
Trust, Assignments of Leases and Rents and Security Agreement,
as modified by a Receipt for Future Advance, Deed of Trust,
Assignment of Leases and Rents and Security Agreement
Modification Agreement, and as the same may be further amended
from time to time, from West Texas to Agent which secure the
Notes to the extent of $7,250,000.00 and are valid first liens
on the West Texas and Lubbock Real Property and the personal
property associated therewith, together with UCC-1 Financing
Statements and other documents associated therewith.
23. The following subparagraphs are hereby added to Section 1.2 of the Loan
Agreement effective from and after the date hereof:
(mmmm) "CSX PURCHASE AGREEMENT": That certain Purchase and
Sale Agreement dated April 13, 1998, between Saginaw
and CSX Transportation, Inc., a Virginia corporation
(as the same may be amended from time to time).
(nnnn) "DELAWARE VALLEY PURCHASE AGREEMENT": Collectively,
that certain Option to Purchase Agreement between
Delaware and James Cornell dated November 15, 1996,
and that certain Indemnification Agreement between
Gettysburg Railroad Company and Sloan Cornell dated
November 15, 1996 (as the same may be amended from
time to time).
(oooo) "ST. CROIX PURCHASE AGREEMENT": That certain
Agreement for Sale of Certain Assets, Rights and
Obligations of The Burlington Northern and Santa Fe
Railway Company to St. Croix Valley Railroad Company
dated as of August 22, 1997 (as the same may be
amended from time to time).
(pppp) "HURON AND EASTERN REAL PROPERTY": Certain real
property lying and being situate in Tuscola County,
Michigan owned by Huron, more particularly described
on Exhibit "R" appended hereto and made a part
hereof.
(qqqq) "SOUTHTRUST NOTE": A Master Revolving/Term Promissory
Note in the amount of Fifteen Million and 00/100
Dollars ($15,000,000.00) from Borrowers to SouthTrust
dated as of June 16, 1998, and any modifications,
amendments or renewals thereof, evidencing a portion
of the Loans.
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(rrrr) "LOCOMOTIVE APPRAISAL": That certain appraisal of
locomotives prepared by Norman W. Seip & Associates
dated May 12, 1998.
24. Exhibit "F" of the Loan Agreement is hereby amended to (a) add the real
property described on Exhibit "F-1" attached hereto and made a part
hereof, and (b) delete the real property described on Exhibit "F-2"
attached hereto and made a part hereof, effective from and after the
date hereof.
25. Exhibit "G" of the Loan Agreement is hereby amended to add the real
property easement described on Exhibit "G" attached hereto and made a
part hereof, effective from and after the date hereof.
26. Exhibit "I" of the Loan Agreement is hereby amended and restated so
that, from and after the date hereof, it shall read in its entirety as
provided on Exhibit "I" attached hereto and made a part hereof.
27. Composite Exhibit "J" of the Loan Agreement is hereby amended to add
the Railroad Trackage described on Composite Exhibit "J" attached
hereto and made a part hereof, effective from and after the date
hereof.
28. Exhibit "R" attached hereto and made a part hereof is hereby added to
the Loan Agreement as Exhibit "R", effective from and after the date
hereof:
29. Section 2.1 of the Loan Agreement is hereby amended and restated so
that, from and after the date hereof, it shall read in its entirety as
follows:
2.1 Provided there does not exist an Event of Default, and no
event with which notice or lapse of time or both would become
such an Event of Default, and subject to the terms and
provisions of this Agreement, Lenders will under the Notes,
lend or advance for the account of Borrowers from time to
time, and, Borrowers may borrow, repay and re-borrow (provided
that unless Borrowers intend to pay and satisfy the Loans in
full, Borrowers shall not reduce the outstanding principal
balance under any of the Notes to a sum of less than
$1,000.00) such amounts as may be required for the purpose of
(a) refinancing an existing Twenty-Five Million and 00/100
Dollar ($25,000,000.00) line of credit/term loan facility
currently outstanding and due and owing by certain of the
Borrowers to NBC, (b) refinancing an existing Fifteen Million
and 00/100 Dollar ($15,000,000.00) line of credit/term loan
facility currently outstanding and due and owing by certain of
the Borrowers to Comerica, (c) supporting short term working
capital requirements of the Borrowers, and, (d) providing for
the financing of future acquisitions by one or more of the
Borrowers or by an entity owned by or affiliated with one or
more of the Borrowers (hereinafter referred to as an
"Affiliate") of transportation related businesses, said
acquisitions to be subject to review by Lenders, and, in the
case of acquisitions requiring Acquisition
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Advances (as hereinafter defined) in excess of One Million and
00/100 Dollars ($1,000,000.00) to be subject to the consent of
the Majority Lenders, which consent shall not be unreasonably
withheld; provided further that the assets acquired pursuant
to an acquisition financed by Lenders shall be subject to a
negative pledge, or in the event the pro-forma asset ratio
coverage of the Borrowers immediately after the time of the
Acquisition Advance does not meet the required Minimum Asset
Ratio of not less than 1.4 to 1, pledged in favor of Agent as
security for the Loans, not exceeding in the aggregate an
amount equal to (i) the Eligible Receivables, less such
reserves as the Majority Lenders, in their reasonable
discretion elect to establish, provided further that a
receivable may be devalued in such amount as shall be
determined by the Majority Lenders in their reasonable
discretion due to "Dilution" which is defined as and is the
result of non-cash credits posted against the receivable which
results in payment or other satisfaction of all or any portion
of the receivable for reasons other than full payment of the
receivable in cash, together with an amount equal to (ii) the
Eligible Inventory, together with an amount equal to (iii) the
appraised aggregate fair market value of the Real Property as
determined by (A) that certain Real Property "Market Value"
Appraisal dated May 9, 1994, as updated by appraisal update
dated August 19, 1996, both the Appraisal and the update
prepared by M.B. Valuation Services, Inc. in connection with
the Texas Real Property, (B) that certain Appraisal of
Corridors, Land and Buildings, HURON AND EASTERN RAILWAY
COMPANY, INC., SAGINAW VALLEY RAILWAY COMPANY, INC., State of
Michigan, dated February 28, 1994 prepared by Oetzel Hanton
Williams in connection with the Michigan Real Property, said
appraisals updated by two (2) appraisal updates prepared by
Main Line Management Services, Inc., both updates dated August
30, 1996, (C) that certain Appraisal of Commercial Property
located at 710 Second Line West, Sault Ste. Marie, Ontario,
prepared by Area Real Estate Appraisals, Inc. dated August
1994 in connection with the Ontario Real Property, (D) that
certain Development of Net Liquidation Value Appraisal
prepared by Main Line Management Services, Inc., dated October
17, 1995, as updated by update appraisal prepared by Main Line
Management Services, Inc., dated August 16, 1996, in
connection with the West Texas and Lubbock Real Property, (E)
that certain Fair Market Value of Real Property prepared
by Main Line Management Services, Inc., dated August 13, 1996,
in connection with the Washington Real Property, (F) that
certain Fair Market Value Appraisal of the Minnesota Real
Property and the Minnesota Railroad Trackage prepared by Main
Line Management Services, Inc., dated December 12, 1996, in
connection with the Minnesota Real Property, (G) that certain
Development of Net Liquidation Value Appraisal prepared by
Main Line Management Services, Inc., dated December 14, 1995,
in connection with the Gettysburg Real Property, (H) That
certain Complete Summary Appraisal of RailAmerica, Inc., 101
Enterprise Drive, Vassar, Michigan dated May 11, 1998,
prepared by Johnson Appraisals, in connection with the Huron
and Eastern Real Property, (I) that certain Limited Appraisal
Summary Report, Subject Property: Minnesota
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<PAGE> 10
Northern Railroad Locomotive Repair Facility, Crookston,
Minnesota dated April 28, 1998, prepared by Agassiz Appraisal
and Consulting Services, Inc., in connection with the
Minnesota Real Property (the "Minnesota Appraisal"), (J) that
certain Railroad Trackage Appraisal prepared by Main Line
Management Services, Inc. dated March 20, 1998 (updating a
Railroad Trackage Appraisal prepared by Main Line Management
Services, Inc. dated September, 1995), in connection with the
Michigan Real Property, (K) that certain Complete Summary
Appraisal of Locomotive Maintenance Facility, 828 Omak Avenue,
Omak, Washington (File #98-11-8786) dated June 1, 1998,
prepared by Pacific Appraisal Associates, P.L.L.C., in
connection with the Washington Real Property (the "Washington
Appraisal"), and (M) Summary Appraisal of an Industrial
Property Located at 6010 Brownfield Highway, Lubbock, Texas
dated April 2, 1998, prepared by Harris Appraisal Company,
Inc., in connection with the West Texas and Lubbock Real
Property (the "West Texas Appraisal") (it being acknowledged
that no valuation attributed to (1) any of the Railroad
Trackage as set forth in the above set forth Real Estate
Appraisals or (2) any of the underlying land as set forth in
the Minnesota Appraisal, the Washington Appraisal or the West
Texas Appraisal, shall be included within the valuation
attributable to the Real Property), which (aggregate) fair
market value as determined by the above set forth appraisals
is subject to adjustment by the Majority Lenders, together
with an amount equal to (iv) the forced liquidation value of
the Machinery and Equipment as determined by (A) a Machinery
and Equipment appraisal prepared by Truck Locators, Inc. dated
January 20, 1995 (related to Steel City), and (B) an appraisal
prepared by Norman W. Seip & Associates dated May 12, 1998
(related to locomotives), which (aggregate) forced liquidation
value is subject to adjustment by the Lenders, together with
an amount equal to (v) the net liquidation value of the
Railroad Trackage as determined by the Railroad Trackage
Appraisal (it being acknowledged that (a) no value attributed
to any of the Real Property as set forth in the Railroad
Trackage Appraisal shall be included in the valuation
attributable to the Railroad Trackage and (b) upon such time
as the Borrowers (or any of them) apply to the Surface
Transportation Board and/or applicable governmental agencies
of the State of Minnesota for abandonment of any railroad
lines operated by St. Croix in the State of Minnesota (it
being further acknowledged that the Borrowers are obligated to
immediately notify the Agent of any proposed abandonment), the
value of the Railroad Trackage owned by St. Croix shall be
reduced by an amount equal to the amount required to be paid
by St. Croix under the terms of the St. Croix Purchase
Agreement upon abandonment), which net liquidation value is
subject to adjustment by the Majority Lenders, all of the
above set forth appraisals and values to be subject to
adjustment by the Majority Lenders, such that the final
amounts of the fair market values, the forced liquidation
values and the net liquidation value, shall be determined by
the Majority Lenders in their reasonable discretion (the
"Borrowing Base"); or, the aggregate sum of Fifty-Five Million
and 00/100 Dollars ($55,000,000.00), whichever is less,
provided that in connection with the Loans, that up to Five
Million Five Hundred Thousand and 00/100 Dollars
($5,500,000.00) of the Loans
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<PAGE> 11
may be used for the issuance of Letters of Credit, provided,
however, that collateral for the Letters of Credit will be one
hundred (100%) percent reserved and will reduce availability
for direct borrowings under the Loans on a dollar-for-dollar
basis in an amount equal to the face amount of the Letters of
Credit outstanding, and provided further that the outstanding
amount of the Loans shall in no event exceed the maximum sum
of Fifty-Five Million and 00/100 Dollars ($55,000,000.00),
provided further, that at no time shall the Borrowing Base
divided by the total outstanding principal amount of the Loans
(the "Minimum Asset Ratio") be less than 1.4 to 1, and in the
event that the Minimum Asset Ratio is less than 1.4 to 1, then
the outstanding principal balance of the Loans must be reduced
by the amount necessary to achieve a Minimum Asset Ratio of
equal to or greater than 1.4 to 1. The principal payment
necessary to effectuate such reduction shall be due and
payable in full on DEMAND.
Advances will be made based on the most recent "Minimum Asset
Ratio Certificate" submitted by Borrowers to Agent, which must
be submitted by Borrowers to Agent no less than one (1) time
in each month within thirty (30) days of the end of the prior
month evidencing the Minimum Asset Ratio for the immediately
preceding month, provided however, that the Minimum Asset
Ratio Certificate must also be submitted by Borrowers to Agent
each time an Advance or an Acquisition Advance is requested,
reflecting the above borrowing formula. The form of Minimum
Asset Ratio Certificate is attached hereto and made a part
hereof as Exhibit "N".
In connection with any requests for an Acquisition Advance in
an amount in excess of One Million and 00/100 Dollars
($1,000,000.00), said request shall be subject to the approval
of the Majority Lenders, which approval will not be
unreasonably withheld. ADDITIONALLY, ALL ACQUISITIONS IN AN
AMOUNT IN EXCESS OF ONE MILLION AND 00/100 DOLLARS
($1,000,000.00) BY ONE OR MORE OF THE BORROWERS OR BY AN
AFFILIATE OF TRANSPORTATION RELATED BUSINESSES OR ANY OTHER
BUSINESSES MUST BE APPROVED BY THE MAJORITY LENDERS, WHICH
APPROVAL WILL NOT BE UNREASONABLY WITHHELD; PROVIDED, HOWEVER,
THAT ACQUISITIONS IN AN AMOUNT OF TWENTY MILLION AND 00/100
DOLLARS ($20,000,000.00) OR LESS WHICH ARE FUNDED UTILIZING
MONEY RAISED THROUGH PUBLIC OFFERINGS, PRIVATE PLACEMENTS OR
SUBORDINATED DEBT SHALL ONLY REQUIRE NOTIFICATION TO THE
LENDERS, BUT NOT THE APPROVAL OF THE MAJORITY LENDERS, SO LONG
AS NO MONETARY DEFAULT OR EVENT OF DEFAULT HAS OCCURRED AND IS
THEN CONTINUING, AND SUCH ACQUISITION (AND THE FUNDING
THEREFOR) WILL NOT RESULT IN A DEFAULT UNDER ANY FINANCIAL
COVENANTS OR RESULT IN ANY OTHER MONETARY DEFAULT OR EVENT OF
DEFAULT. NOTWITHSTANDING THE FOREGOING, ACQUISITIONS IN AN
AMOUNT IN EXCESS OF TWENTY
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<PAGE> 12
MILLION DOLLARS ($20,000,000.00) BY ONE OR MORE OF THE
BORROWERS OR BY AN AFFILIATE OF TRANSPORTATION RELATED
BUSINESSES OR ANY OTHER BUSINESSES MUST BE APPROVED BY THE
MAJORITY LENDERS, WHICH APPROVAL WILL NOT BE UNREASONABLY
WITHHELD. In connection with the same, Borrowers shall provide
to Agent at the time of the request for an Acquisition Advance
or at the time Borrowers notify the Lenders or seek approval
from the Lenders in connection with a proposed acquisition by
any of the Borrowers, as applicable, certified copies of the
Contract for Purchase and Sale and all associated
documentation associated with the applicable Borrower's
acquisition of a transportation related business, including,
without limitation, all contracts, breakout of purchase price,
cash flow analysis, projected income from the acquisition,
historical performance of the business being acquired, and all
appraisals and environmental audits related to the property
being acquired by a Borrower or an affiliate of a Borrower.
Based upon Lenders' review of all of the above, the Majority
Lenders may effectuate or not effectuate the Acquisition
Advance or approve or not approve the acquisition, as
applicable, in Lenders' reasonable discretion. Lenders shall
approve or not approve each request for an Acquisition
Advance, or approve or not approve an acquisition, as
applicable, no later than five (5) business days after the
time that Agent has received the last item required to be
reviewed by Lenders in connection with the applied for
Acquisition Advance or approval of an acquisition, as
applicable. Lenders shall approve or not approve each request
for a Collateralized Acquisition Advance no later ten (10)
business days after the time that Agent has received the last
item required to be reviewed by Lenders in connection with the
applied for Collateralized Acquisition Advance. Borrowers
shall additionally provide to Agent copies of all closing
documentation associated with the acquisition and sale at the
time of the closing of said acquisition and shall execute
and/or provide all documentation required by Lenders and their
counsel (including, without limitation, mortgages, deeds of
trust, security agreements, reaffirmations, collateral
assignments, UCC-1 financing statements, UCC-3 statements of
change, lien searches and opinions of Borrowers' counsel), in
order to evidence and perfect Agent's security interest in the
newly acquired assets.
30. It is acknowledged and agreed by the Borrowers and the Lenders that, in
addition to the Loan Closing Fee specified in Subparagraph (a) of
Section 2.2 of the Loan Agreement (which has already been paid), in
connection with the transactions contemplated herein, an additional
Loan Closing Fee shall be due and owing from Borrowers in the amount of
Thirty-Seven Thousand Five Hundred and 00/100 Dollars ($37,500.00),
which shall be paid to Agent, for pro-rata distribution to the Lenders,
upon the closing of the transactions contemplated herein.
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<PAGE> 13
31. Subparagraph (c) of Section 2.2 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(c) UNUSED LINE FEE: An unused line fee shall be charged in
connection with the Loans, such that the unused portion of the
Loans shall be subject to an annual fee of one-eighth of one
percent (.125%) per annum, to be calculated and payable to
Agent upon a quarterly basis, for pro-rata distribution to the
Lenders.
32. Subparagraph (d) of Section 2.2 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(d) ADMINISTRATIVE FEE - COLLATERALIZED ACQUISITION ADVANCES:
Intentionally deleted.
33. Section 3.3 of the Loan Agreement is hereby amended and restated so
that, from and after the date hereof, it shall read in its entirety as
follows:
3.3 Notwithstanding anything to the contrary set forth above, and
as set forth in Section 2.1 above, in connection with any
requests for an Acquisition Advance in excess of One Million
and 00/100 Dollars ($1,000,000.00), said request shall be
subject to approval by the Majority Lenders, which approval
will not be unreasonably withheld. In connection with the
same, Borrowers shall provide Agent at the time of the request
for an Acquisition Advance certified copies of the Contract
for Purchase and Sale and all associated documentation
associated with the applicable Borrower's acquisition of a
transportation related business, which shall be purchased (in
part) from the proceeds of the Acquisition Advance, including
without limitation, all contracts, breakout of purchase price,
cash flow analysis, projected income from the acquisition and
historical performance of the business being acquired. Based
upon Lenders' review of all of the above, Lenders may
effectuate or not effectuate the Acquisition Advance in
Lenders' reasonable discretion. Lenders shall approve or not
approve each request for an Acquisition Advance no later than
five (5) Business Days, and shall approve or not approve each
request for a Collateralized Acquisition Advance no later than
ten (10) Business Days, after the time that Agent receives the
last item required to be reviewed by Lenders in connection
with the applied for Acquisition Advance or Collateralized
Acquisition Advance, as applicable. Borrowers shall
additionally provide to Agent copies of all closing
documentation associated with the acquisition and sale at the
time of the closing of said acquisition and shall execute all
documentation required by the Majority Lenders, including,
without limitation, execution of a Borrower Joinder Agreement
by an Additional Borrower, in order to evidence and perfect
Agent's and Lenders' security interest in the newly acquired
assets.
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34. Section 4.1 of the Loan Agreement is hereby amended and restated so
that, from and after the date hereof, it shall read in its entirety as
follows:
4.1 LETTERS OF CREDIT. The Issuing Lender agrees, subject to the
terms and conditions of this Agreement, upon request of the
Borrowers to issue from time to time for the account of the
Borrowers Letters of Credit upon delivery to the Issuing
Lender of an Application and Agreement for Letter of Credit
relating thereto in form and content acceptable to the Issuing
Lender; provided, that (i) the face amount of Letters of
Credit outstanding shall not exceed Five Million Five Hundred
Thousand Dollars ($5,500,000.00) and (ii) no Letter of Credit
shall be issued if, after giving effect thereto, the face
amount of Letters of Credit outstanding plus the outstanding
principal balance of the Loans shall exceed the Borrowing
Base. No Letter of Credit shall have an expiry date (including
all rights of Borrowers or any beneficiary named in such
Letter of Credit to require renewal) or payment date occurring
later than the earlier to occur of (a) (i) in the case of
standby Letters of Credit, one (1) year after the date of its
issuance and (ii) in the case of documentary Letters of
Credit, one hundred twenty (120) days after the date of its
issuance or (b) the Maturity Date.
35. Subparagraph (d) of Section 6.1 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(d) MACHINERY AND EQUIPMENT APPRAISALS. Agent hereby acknowledges
receipt of the Truck Locators, Inc. Appraisal and the
Locomotive Appraisal; provided however, that Lenders reserve
the right to require Borrowers to provide Agent with updated
appraisals of the Machinery and Equipment at any time during
the term of the Loans (provided however, that unless an Event
of Default shall have occurred and be continuing, or unless
Borrowers are refinancing Machinery and Equipment in
accordance with the terms set forth in the Security
Agreements, that said appraisals shall be limited to one (1)
appraisal per year), said appraisals to be performed at
Borrowers' sole cost and expense.
36. Subparagraph (e) of Section 6.1 of the Loan Agreement is hereby amended
and restated so that, from and after the date hereof, it shall read in
its entirety as follows:
(e) REAL ESTATE APPRAISALS. Satisfactory fair market value
appraisals of each of the Texas Real Property, the Michigan
Real Property, the Huron and Eastern Real Property, the
Ontario Real Property, the Gettysburg Real Property, the West
Texas and Lubbock Real Property, the Minnesota Real Property
and the Washington Real Property; provided however, that
Lenders reserve the right to require Borrowers to provide
Agent with updated appraisals of the Real Property, or any
portion thereof, at any time during the term of the Loans
(provided however, that unless an Event of Default shall have
occurred and be continuing, that said
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<PAGE> 15
appraisals shall be limited to one (1) appraisal per year),
said appraisals to be performed at Borrowers' sole cost and
expense.
37. Article 7 of the Loan Agreement is hereby amended and restated so that,
from and after the date hereof, it shall read in its entirety as
follows:
Article 7
USE OF LOAN PROCEEDS; MARGIN STOCK
The Borrowers desire to obtain extensions of credit of up to
Fifty-five Million and 00/100 Dollars ($55,000,000.00) from the Lenders
to be utilized by the Borrowers for the purposes set forth in Section
2.1 of this Agreement. Borrowers do not own any margin securities and
no portion of any Advance or Acquisition Advance or any of the Loans
will be used for the purpose of reducing or retiring any indebtedness
which was originally incurred by any of the Borrowers to purchase or
carry any margin securities, and neither the making of any and all
loans, Advances and Acquisition Advances nor the use of the proceeds
thereof will violate or be inconsistent with the provisions of
Regulations G, T, U or X of the Board of Governors of the Federal
Reserve System of the United States.
38. Section 10.15 of the Loan Agreement is hereby amended and restated so
that, from and after the date hereof, it shall read in its entirety as
follows:
10.15 In connection with the Locomotive Appraisal, the Railroad
Trackage Appraisal, the Truck Locators, Inc. Appraisal and the
Real Estate Appraisals, Borrowers shall provide to the Agent
updated appraisals of all or any of the same as required by
the Majority Lenders at any time during the term of the Loans
(provided however, that unless an Event of Default shall have
occurred and be continuing, or unless Borrowers are
refinancing Machinery and Equipment in accordance with the
terms set forth in the Security Agreements, that each of the
above set forth appraisals shall be limited to one (1)
re-appraisal per year), said appraisals to be performed at
Borrowers' sole cost and expense. Additionally, Borrowers
shall have the right to obtain updated appraisals of all or
any of the above set forth appraisals for the purpose of
determining the then current value of the assets which are
re-appraised in order to apply for an increased amount of
availability under the Loans. Said re-appraisals shall be
performed at Borrowers' sole cost and expense, and, must be in
form and content acceptable to the Majority Lenders in their
sole discretion. The re-appraisal must additionally be based
upon the same standards as the initial appraisal related to
the property which is being appraised was based (e.g., if the
original appraisal was based on a forced liquidation
valuation, the new appraisal must also be based upon a forced
liquidation valuation; if the original appraisal was based
upon a fair market valuation, the new appraisal must be based
upon a fair market valuation). The determination as to
availability under the Loans, based upon said re-appraisal(s),
shall be determined by the Majority Lenders in
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<PAGE> 16
their sole discretion; provided further, that it is
acknowledged by Borrowers that in the event that said
re-appraisal indicates a diminution in value of the
reappraised assets that availability under the Loans will be
reduced accordingly.
39. Subparagraph (g) of Section 10.16 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(g) Borrowers shall at all times maintain a Tangible Net Worth
(which is defined as net worth plus subordinated debt, less
goodwill and other intangibles) of not less than Twenty-Two
Million and 00/100 Dollars ($22,000,000.00) plus (a) annual
net income for each fiscal year ended, beginning with the
fiscal year ending December 31, 1997, of Seven Hundred Fifty
Thousand and 00/100 Dollars ($750,000.00), it being
acknowledged that Borrower's annual net income must be in
excess of Seven Hundred Fifty Thousand and 00/100 Dollars
($750,000.00) in each fiscal year, plus (b) seventy-five
percent (75%) of the aggregate net proceeds of any
subordinated debt or equity offerings. Additionally, excluding
Canada, at all times foreign investments, advances, joint
ventures, and other similar investments outside of the United
States cannot exceed fifty percent (50%) of the Borrowers'
consolidated Tangible Net Worth.
40. Subparagraph (l) of Section 10.16 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(l) Borrowers shall maintain a Cash Flow Coverage Ratio (which is
defined as average total senior funded debt over the last
twelve (12) month period divided by earnings before interest,
taxes, depreciation and amortization) calculated on a rolling
twelve (12) month basis of not greater than 4.0 to 1 from the
quarter ending March 31, 1998, and at all times thereafter.
41. The following Section 10.22 is hereby added to the Loan Agreement,
effective from and after the date hereof:
10.22 Borrowers shall take all actions necessary to assure that
Borrowers' computer based systems are able to operate and
effectively process data including dates on and after January
1, 2000. At the request of Agent, Borrowers shall provide
Agent assurance acceptable to Agent of Borrowers' Year 2000
compatibility. Borrowers hereby covenant and agree that all of
Borrowers' information systems, including without limitation
all computer hardware and software, networks, databases, and
all other electronic data storage, retrieval and computation
hardware, software and devices of any kind (collectively, the
"Information Systems"), have been and/or will be updated and
modified to accommodate and conform to the Year 2000 date
change, and are and/or will be in full compliance with any and
all federal, state
16
<PAGE> 17
and local laws, regulations and ordinances relating to the
same, whether now in effect, or hereafter enacted
(collectively, the "Information System Laws").
Borrowers hereby jointly and severally agree, unconditionally,
absolutely, and irrevocably, to indemnify, defend, and hold
harmless Agent and Lenders, their affiliates, successors,
assigns, and their officers, directors, employees, and agents
against and in respect of any loss, liability, cost, injury,
expense, or damage of any and every kind whatsoever (including
without limitation, court costs and attorneys' fees and
expenses) which at any time or from time to time may be
suffered or incurred, directly or indirectly, in connection
with, with respect to, or as a direct or indirect result of
the failure of Borrowers to update or modify their Information
Systems to accommodate and conform to the Year 2000 date
change and/or fully comply with all Information System Laws
including, without limitation, any losses, liabilities,
damages, injuries, costs, expenses, or claims asserted or
arising under the Information System Laws, whether now known
or unknown.
42. The following Section 10.23 is hereby added to the Loan Agreement,
effective from and after the date hereof:
10.23 BORROWERS AND LENDERS ACKNOWLEDGE THAT THE MINNESOTA
DEPARTMENT OF REVENUE MAY ASSERT THE POSITION THAT LIMITATION
OF THE INDEBTEDNESS SECURED BY THE MINNESOTA MORTGAGE
DOCUMENTS REQUIRES THAT THE MINNESOTA MORTGAGE DOCUMENTS BE
RELEASED OR BE DEEMED RELEASED AT SUCH TIME AS THE LENDERS
HAVE RECEIVED ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
($1,500,000.00) IN REPAYMENT OF PRINCIPAL UNDER THE LOANS,
NOTWITHSTANDING ANY OTHER ALLOCATION OF FUNDS AGREED TO BY
BORROWERS AND LENDERS. NOTWITHSTANDING ANY POSITION OF THE
MINNESOTA DEPARTMENT OF REVENUE CONCERNING THIS MATTER,
BORROWERS HEREBY WAIVE ANY AND ALL CLAIMS ANY OF THEM MAY NOW
OR HEREAFTER HAVE TO CHALLENGE THE VALIDITY OF THE MINNESOTA
MORTGAGE DOCUMENTS AS A RESULT OF THE LIMITATION OF THE
INDEBTEDNESS SECURED BY THE MINNESOTA MORTGAGE DOCUMENTS AND
THE REPAYMENT OF ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
($1,500,000.00) OF PRINCIPAL UNDER THE LOANS, AND BORROWERS
FURTHER AGREE THAT THE MINNESOTA MORTGAGE DOCUMENTS SHALL ONLY
BE RELEASED UPON SATISFACTION OF THE TERMS AND CONDITIONS
CONTAINED THEREIN AND IN THE OTHER LOAN DOCUMENTS.
43. Section 14.6 of the Loan Agreement is hereby amended and restated so
that, from and after the date hereof, it shall read in its entirety as
follows:
17
<PAGE> 18
14.6 AGENT'S FEES. Commencing on July 1, 1998, and on the first day
of each quarter thereafter, the Borrowers shall pay to the
Agent such agent fees as are set forth in and in accordance
with the terms and provisions of the Credit Facility Letter
dated February 24, 1998, all of which agent fees shall be
retained by the Agent and not distributed pro-rata to the
Lenders.
44. Subparagraph (b) of Section 17.9 of the Loan Agreement is hereby
amended and restated so that, from and after the date hereof, it shall
read in its entirety as follows:
(b) Initial
Borrowers: RAILAMERICA, INC.
KALYN/SIEBERT INCORPORATED
RAILAMERICA INTERMODAL SERVICES, INC.
RAILAMERICA CARRIERS INC.
STEEL CITY CARRIERS INC.
SAGINAW VALLEY RAILWAY COMPANY, INC.
HURON AND EASTERN RAILWAY COMPANY, INC.
WEST TEXAS AND LUBBOCK RAILROAD COMPANY
PLAINVIEW TERMINAL COMPANY
CASCADE AND COLUMBIA RIVER RAILROAD COMPANY
OTTER TAIL VALLEY RAILROAD COMPANY, INC.
MINNESOTA NORTHERN RAILROAD, INC.
DELAWARE VALLEY RAILWAY COMPANY
301 Yamato Road
Suite 1190
Boca Raton, Florida 33431
Attn: Gary Marino
With a copy to: SCOTT G. WILLIAMS, ESQUIRE
SHUTTS & BOWEN
One Clearlake Centre
Suite 500
250 Australian Avenue South
West Palm Beach, Florida 33402-3555
45. The following Subparagraph (e) is hereby added to Section 17.9 of the
Loan Agreement, effective from and after the date hereof:
(e) Additional
Borrowers: Such addresses as are specified on the
Borrower Joinder Agreements executed by
the Additional Borrowers.
18
<PAGE> 19
46. WAIVER AND RELEASE. AS A MATERIAL INDUCEMENT FOR THE LENDERS TO EXECUTE
THIS AMENDMENT, THE BORROWERS DO HEREBY RELEASE, WAIVE, DISCHARGE,
COVENANT NOT TO SUE, ACQUIT, SATISFY AND FOREVER DISCHARGE THE AGENT
AND LENDERS, THEIR OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS
AND THEIR AFFILIATES AND ASSIGNS FROM ANY AND ALL LIABILITY, CLAIMS,
COUNTERCLAIMS, DEFENSES, ACTIONS, CAUSES OF ACTION, SUITS,
CONTROVERSIES, AGREEMENTS, PROMISES AND DEMANDS WHATSOEVER IN LAW OR IN
EQUITY WHICH THE BORROWERS EVER HAD, NOW HAVE, OR WHICH ANY PERSONAL
REPRESENTATIVE, SUCCESSOR, HEIR OR ASSIGN OF THE BORROWERS HEREAFTER
CAN, SHALL OR MAY HAVE AGAINST THE AGENT OR THE LENDERS, THEIR
OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS AND AGENTS, AND THEIR
AFFILIATES AND ASSIGNS, FOR, UPON OR BY REASON OF ANY MATTER, CAUSE OR
THING WHATSOEVER, THROUGH THE DATE HEREOF. THE BORROWERS FURTHER
EXPRESSLY COVENANT WITH AND WARRANT UNTO THE LENDERS AND THEIR
AFFILIATES AND ASSIGNS, THAT THERE EXIST NO CLAIMS, COUNTERCLAIMS,
DEFENSES, OBJECTIONS, OFFSETS OR CLAIMS OF OFFSET AGAINST THE LENDERS
OR THE OBLIGATION OF THE BORROWERS TO PAY THE LENDERS ALL AMOUNTS OWING
UNDER THE NOTES, THE LOAN AGREEMENT AND ALL ASSOCIATED LOAN DOCUMENTS
AS AND WHEN THE SAME BECOME DUE AND PAYABLE.
47. REAFFIRMATION BY BORROWERS. THE BORROWERS ACKNOWLEDGE AND REAFFIRM THAT
ALL WARRANTIES, REPRESENTATIONS, AFFIRMATIVE COVENANTS AND NEGATIVE
COVENANTS SET FORTH IN THE LOAN AGREEMENT REMAIN IN FULL FORCE AND
EFFECT ON THE DATE HEREOF AS IF MADE ON THE DATE HEREOF.
48. AMENDED AGREEMENT. THIS AGREEMENT AMENDS THE LOAN AGREEMENT, AND THE
BORROWERS ACKNOWLEDGE AND AGREE THAT THE SECURITY INTERESTS, RIGHTS,
DUTIES, AND OBLIGATIONS OF THE BORROWERS AND THE LENDERS CREATED BY THE
LOAN AGREEMENT ARE NOT EXTINGUISHED, BUT ARE REAFFIRMED AND REMAIN IN
FULL FORCE AND EFFECT AS PROVIDED IN THE LOAN AGREEMENT. IN THE EVENT
OF ANY CONFLICT BETWEEN THE TERMS AND PROVISIONS OF THE LOAN AGREEMENT
AND THE TERMS AND PROVISIONS OF THIS AMENDMENT, THE TERMS AND
PROVISIONS OF THIS AMENDMENT SHALL CONTROL AND PREVAIL.
19
<PAGE> 20
INTENTIONALLY LEFT BLANK
20
<PAGE> 21
WAIVER OF JURY TRIAL. THE AGENT, THE LENDERS AND THE BORROWERS HEREBY
MUTUALLY, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY MAY HAVE
TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREON OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED OR TO
BE EXECUTED IN CONJUNCTION HEREWITH, UNDER ANY OF THE LOAN DOCUMENTS, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR
ACTIONS OF ANY PARTY. THE BORROWERS ACKNOWLEDGE THAT THIS WAIVER OF JURY TRIAL
IS A MATERIAL INDUCEMENT TO THE AGENT AND THE LENDERS IN ACCEPTING THIS
AGREEMENT, AND, THAT THE AGENT AND THE LENDERS WOULD NOT HAVE ACCEPTED THIS
AGREEMENT WITHOUT THIS JURY TRIAL WAIVER, AND, THAT THE BORROWERS HAVE BEEN
REPRESENTED BY AN ATTORNEY OR HAVE HAD AN OPPORTUNITY TO CONSULT WITH AN
ATTORNEY REGARDING THIS JURY TRIAL WAIVER, AND, UNDERSTAND THE LEGAL EFFECT OF
THIS JURY TRIAL WAIVER.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Loan Agreement as of the day and year first above written.
Witnesses BORROWERS:
RAILAMERICA, INC., a Delaware
corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
KALYN/SIEBERT INCORPORATED, a
Texas corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Vice President
(Corporate Seal)
SIGNATURE PAGE NO. 1 TO FIRST AMENDMENT TO
LOAN AGREEMENT DATED AS OF JUNE 16, 1998
<PAGE> 22
RAILAMERICA INTERMODAL SERVICES, INC., a
Delaware corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
RAILAMERICA CARRIERS INC.,
a corporation organized under the laws
of the Province of Ontario
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Vice President
(Corporate Seal)
STEEL CITY CARRIERS INC., a
corporation organized under the
laws of the Province of Ontario
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Vice President
(Corporate Seal)
SAGINAW VALLEY RAILWAY
COMPANY, INC., a Delaware corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
SIGNATURE PAGE NO. 2 TO FIRST AMENDMENT TO
LOAN AGREEMENT DATED AS OF JUNE 16, 1998
<PAGE> 23
HURON AND EASTERN RAILWAY
COMPANY, INC., a Michigan
corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
WEST TEXAS AND LUBBOCK
RAILROAD COMPANY, INC., a Texas
corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
PLAINVIEW TERMINAL COMPANY, a Texas
corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
CASCADE AND COLUMBIA RIVER
RAILROAD COMPANY, a Delaware
corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
SIGNATURE PAGE NO. 3 TO FIRST AMENDMENT TO
LOAN AGREEMENT DATED AS OF JUNE 16, 1998
<PAGE> 24
OTTER TAIL VALLEY RAILROAD
COMPANY, INC., a Minnesota
corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
MINNESOTA NORTHERN RAILROAD, INC., a
Delaware corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
DELAWARE VALLEY RAILWAY COMPANY, INC., a
Delaware corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
ST. CROIX VALLEY RAILROAD
COMPANY, a Delaware corporation
- ---------------------------
- --------------------------- By: /s/ Donald D. Redfearn
-----------------------------
DONALD D. REDFEARN,
Executive Vice President
(Corporate Seal)
SIGNATURE PAGE NO. 4 TO FIRST AMENDMENT TO
LOAN AGREEMENT DATED AS OF JUNE 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,760,342
<SECURITIES> 0
<RECEIVABLES> 11,047,536
<ALLOWANCES> 0
<INVENTORY> 13,579,286
<CURRENT-ASSETS> 32,912,635
<PP&E> 101,833,373
<DEPRECIATION> 0
<TOTAL-ASSETS> 145,229,936
<CURRENT-LIABILITIES> 18,306,365
<BONDS> 68,010,338
6,881,684
0
<COMMON> 10,207
<OTHER-SE> 27,868,430
<TOTAL-LIABILITY-AND-EQUITY> 145,229,936
<SALES> 39,887,348
<TOTAL-REVENUES> 77,143,660
<CGS> 28,582,699
<TOTAL-COSTS> 64,501,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,947,209
<INCOME-PRETAX> 6,036,390
<INCOME-TAX> 1,570,000
<INCOME-CONTINUING> 4,466,300
<DISCONTINUED> (65,241)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,401,149
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.44
</TABLE>
