<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
Commission File No. 0-20618
RAILAMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 65-0328006
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5300 BROKEN SOUND BLVD., N.W. BOCA RATON, FL 33487
(Address of principal executive offices)
(Zip Code)
(561) 994-6015
(Issuer's telephone number)
Check whether the registrant (1) 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 [XX] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Common Stock, par value $.001 - 11,645,652 shares as of November 12, 1999
<PAGE> 2
RAILAMERICA, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 1
Consolidated Statements of Income - For the nine and three
months ended September 30, 1999 and 1998 2
Consolidated Statement of Stockholders' Equity - For the year
ended December 31, 1998 and the nine months ended
September 30, 1999 3
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3 Market Risk Disclosure 32
PART II OTHER INFORMATION
Item 2 Changes in Securities 33
Item 5 Other Information 33
Item 6 Exhibits and Reports on Form 8-K 34
Signatures
</TABLE>
<PAGE> 3
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 13,899,057 $ 5,760,342
Accounts and notes receivable 34,734,285 11,906,914
Inventories 17,695,706 13,579,286
Other current assets 3,576,121 1,666,093
------------- -------------
Total current assets 69,905,169 32,912,635
Property, plant and equipment, net 345,347,279 101,833,373
Notes receivable, less current portion 1,275,400 1,284,200
Investment in affiliates 6,409,471 1,938,942
Other assets 10,221,279 5,018,822
Excess of cost over net assets of companies acquired, net 2,157,232 2,241,964
------------- -------------
Total assets $ 435,315,830 $ 145,229,936
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,166,092 $ 3,804,217
Current maturities of subordinated debt 106,196 244,542
Accounts payable 25,976,917 10,124,714
Accrued expenses and income taxes payable 13,648,443 4,132,892
------------- -------------
Total current liabilities 45,897,648 18,306,365
------------- -------------
Long-term debt, less current maturities 151,388,050 68,010,338
Subordinated debt, less current maturities 100,000,000 53,098
Convertible subordinated debt, less current maturities 24,284,816 610,850
Other liabilities 18,059,256 427,288
Deferred income taxes 12,966,054 8,242,000
Minority interest 9,028,793 7,937,992
Commitments and contingencies
Redeemable convertible preferred stock, $0.01 par value, $25 liquidation value,
1,000,000 shares authorized;
460,400 and 300,600 outstanding, respectively 10,695,369 6,881,684
Stockholders' equity:
Common stock, $0.001 par value, 30,000,000 shares authorized; 12,360,574
issued and 11,669,485 outstanding at September 30, 1999;
10,207,477 issued and 9,631,188 outstanding at December 31, 1998 12,361 10,207
Additional paid-in capital 49,997,172 28,277,533
Retained earnings 15,751,532 9,285,122
Accumulated other comprehensive income 1,557,853 470,820
Treasury stock (692,089 and 576,289 shares, respectively, at cost) (4,323,074) (3,283,361)
------------- -------------
Total stockholders' equity 62,995,844 34,760,321
------------- -------------
Total liabilities and stockholders' equity $ 435,315,830 $ 145,229,936
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
1
<PAGE> 4
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATION STATEMENTS OF INCOME
For the nine and three months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenue:
Transportation - railroad $ 37,658,680 $ 8,868,419 $ 72,504,684 $ 21,352,090
Transportation - motor carrier -- 1,459,643 -- 3,277,588
Manufacturing 10,902,489 10,126,386 33,858,750 29,784,931
Other 1,242,210 519,779 4,709,720 1,187,968
------------- ------------- ------------- -------------
Total operating revenue 49,803,379 20,974,227 111,073,154 55,602,577
------------- ------------- ------------- -------------
Operating expenses:
Transportation - railroad 24,677,741 4,749,144 46,465,060 10,916,954
Transportation - motor carrier -- 1,293,555 -- 2,888,068
Cost of goods sold - manufacturing 8,105,305 6,919,321 25,097,789 21,149,602
Selling, general and administrative 5,544,200 3,287,378 15,149,635 9,052,623
Depreciation and amortization 3,312,543 1,068,401 6,549,331 2,662,970
------------- ------------- ------------- -------------
Total operating expenses 41,639,789 17,317,799 93,261,816 46,670,217
------------- ------------- ------------- -------------
Operating income 8,163,590 3,656,428 17,811,338 8,932,360
Interest and other expense (4,752,663) (1,022,138) (8,361,185) (2,481,735)
Amortization of deferred loan costs (1,356,670) (147,337) (2,361,481) (356,375)
Foreign exchange (loss) (1,452,362) -- (214,170) --
Minority interest in income of subsidiary (710,100) (570,150) (1,090,800) (1,437,750)
------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income taxes (108,205) 1,916,803 5,783,702 4,656,500
(Benefit) provision for income taxes (3,395,512) 490,622 (1,454,511) 1,164,928
------------- ------------- ------------- -------------
Income from continuing operations 3,287,307 1,426,181 7,238,213 3,491,572
Discontinued operations:
Loss from operations of discontinued
Motor Carrier segment (less applicable
income tax benefit of $40,000) -- -- -- (65,241)
------------- ------------- ------------- -------------
Net income $ 3,287,307 $ 1,426,181 $ 7,238,213 $ 3,426,331
============= ============= ============= =============
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations available
to common stockholders (basic) $ 3,022,300 $ 1,426,181 $ 6,466,410 $ 3,491,572
============= ============= ============= =============
Basic earnings per common share
Continuing operations $ 0.26 $ 0.15 $ 0.59 $ 0.37
Discontinued operations 0.00 0.00 0.00 (0.01)
------------- ------------- ------------- -------------
Net income $ 0.26 $ 0.15 $ 0.59 $ 0.36
============= ============= ============= =============
Diluted earnings per common share
Continuing operations $ 0.23 $ 0.14 $ 0.55 $ 0.35
Discontinued operations 0.00 0.00 0.00 (0.01)
------------- ------------- ------------- -------------
Net income $ 0.23 $ 0.14 $ 0.55 $ 0.34
============= ============= ============= =============
Weighted average common shares outstanding:
Basic 11,466,301 9,781,752 11,018,079 9,508,970
============= ============= ============= =============
Diluted 15,503,800 10,350,482 12,789,091 10,338,020
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE> 5
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1998, and the nine months ended
September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Stockholders' Equity
---------------------------------------------------------------------------------------------------
Number of Additional Other
Shares Par Paid-in Retained Comprehensive Treasury
Issued Value Capital Earnings Income Stock Total
----------- ------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 9,129,564 $ 9,130 $ 23,350,732 $ 4,883,973 $ 15,373 $ (1,445,382) $ 26,813,826
Net income -- -- -- 4,401,149 -- -- 4,401,149
Other comprehensive income
Cumulative translation -- -- -- -- 455,447 455,447
------------
Total comprehensive income 4,856,596
------------
Issuance of common stock 138,786 138 677,039 -- -- -- 677,177
Purchase of treasury stock -- -- -- -- -- (1,837,979) (1,837,979)
Exercise of stock options 237,950 238 870,637 -- -- -- 870,875
Tax benefit exercise of options -- -- 178,000 -- -- -- 178,000
Exercise of warrants 167,000 167 934,501 -- -- -- 934,668
Conversion of debt 534,177 534 2,266,624 -- -- -- 2,267,158
----------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 10,207,477 10,207 28,277,533 9,285,122 470,820 (3,283,361) 34,760,321
Net income -- -- -- 7,238,313 -- -- 7,238,313
Other comprehensive income
Cumulative translation -- -- -- -- 1,087,033 -- 1,087,033
------------
Total comprehensive income 8,325,246
------------
Issuance of common stock 1,437,888 1,438 12,019,660 -- -- -- 12,021,098
Purchase of treasury stock -- -- -- -- -- (1,039,713) (1,039,713)
Exercise of stock options 139,501 140 571,585 -- -- -- 571,725
Conversion of debt 563,520 564 3,332,268 -- -- -- 3,332,832
Conversion of preferred stock 12,188 12 93,049 -- -- -- 93,061
Issuance of warrants -- -- 5,703,077 -- -- -- 5,703,077
Preferred stock dividends
and accretion -- -- -- (771,803) -- -- (771,803)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1999 12,360,574 $ 12,361 $ 49,997,172 $ 15,751,532 $ 1,557,853 $ (4,323,074) $ 62,995,844
=========== ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE> 6
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,238,213 $ 3,426,331
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,655,465 3,061,196
Minority interest in income of subsidiary 1,090,801 1,437,750
Equity interest in earnings of affiliate (109,020) --
Loss (gain) on sale or disposal of properties 326,872 (48,659)
Write-off of deferred acquisition costs 18,410 109,756
Deferred income taxes (2,472,172) 768,995
Changes in operating assets and liabilities,
net of acquisitions and dispositions:
Accounts receivable 1,325,253 (2,762,467)
Inventories 189,987 (6,105,481)
Other current assets (1,409,828) (1,337,805)
Accounts payable 4,283,586 5,573,953
Accrued expenses (1,697,363) 1,213,380
Other liabilities (486,364) --
Deposits and other 790,869 131,163
------------- -------------
Net cash provided by operating activities 17,744,710 5,468,112
------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (36,211,729) (23,885,220)
Proceeds from sale of properties 116,755 1,681,229
Acquisitions, net of cash acquired (8,453,218) (1,722,428)
Deferred acquisition costs and other (78,657) (257,857)
------------- -------------
Net cash used in investing activities (44,626,849) (24,184,276)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 159,318,871 42,632,181
Principal payments on long-term debt (136,694,015) (26,925,936)
Sale of convertible preferred stock 4,095,000 --
Sale of common stock 11,868,058 1,032,168
Proceeds from exercise of stock options 571,725 799,875
Preferred stock dividends paid (411,399) --
Purchase of treasury stock (1,039,713) (711,385)
Deferred financing costs paid (333,400) (873)
Deferred loan costs paid (2,329,327) (331,469)
------------- -------------
Net cash provided by financing activities 35,045,800 16,494,561
------------- -------------
Net increase (decrease) in cash 8,163,661 (2,221,603)
Effect of exchange rates on cash (24,946) --
Cash, beginning of period 5,760,342 3,745,534
------------- -------------
Cash, end of period $ 13,899,057 $ 1,523,931
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of Management, the consolidated financial statements
contain all adjustments of a recurring nature, and disclosures
necessary to present fairly the financial position of the Company as of
September 30, 1999 and December 31, 1998, and the results of operations
and cash flows for the nine and three months ended September 30, 1999
and 1998.
The accounting principles which materially affect the financial
position, results of operations and cash flows of the Company are set
forth in Notes to the Consolidated Financial Statements which are
included in the Company's 1998 annual report on Form 10-K. Capitalized
terms used but not otherwise defined herein have the meanings set forth
in the Company's 1998 annual report on Form 10-K.
2. EARNINGS PER SHARE:
For the nine and three months ended September 30, 1999 and 1998, basic
earnings per share is computed using the weighted average number of
common shares outstanding during the period. Net income available to
common stockholders is reduced by preferred stock dividends and
accretion for the basic earnings per share computation.
For the nine and three months ended September 30, 1999 and 1998,
diluted earnings per share is based on the sum of the weighted average
number of common shares outstanding plus common stock equivalents
arising out of stock options, warrants and convertible securities.
5
<PAGE> 7
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. EARNINGS PER SHARE, continued
The following is a summary of the income available for common
stockholders and weighted average shares (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
----------------- ----------------
1999 1998 1999 1998
------- -------- ------ --------
<S> <C> <C> <C> <C>
Income from continuing operations $ 3,287 $ 1,426 $7,238 $3,492
Preferred stock dividends and accretion (265) -- (772) --
------- ------- ------ ------
Income from continuing operations available
to common stockholders (basic) 3,022 1,426 6,466 3,492
Interest from convertible debt 213 12 282 75
Preferred stock dividends and accretion 265 -- 334 --
------- ------- ------ ------
Income from continuing operations available
to common stockholders (diluted) $ 3,500 $ 1,438 $7,082 $3,567
======= ======= ====== ======
Weighted average shares outstanding (basic) 11,466 9,782 11,018 9,509
Assumed conversion of options and warrants 433 171 403 220
Assumed conversion of convertible securities 3,604 397 1,368 609
------- ------- ------ ------
Weighted average shares outstanding (diluted) 15,503 10,350 12,789 10,338
======= ======= ====== ======
Certain options and warrants are anti-dilutive and not included in the diluted earnings per share computation.
</TABLE>
3. INVENTORIES:
Inventories consist of the following as of September 30, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 7,799,571 $ 5,207,154
Work in process 1,717,736 2,499,024
Finished goods 822,604 2,225,223
Replacement or repair parts for equipment
and road property 7,355,795 3,647,885
------------ ------------
Inventories in excess of contract advances $ 17,695,706 $ 13,579,286
============ ============
</TABLE>
6
<PAGE> 8
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. ACQUISITIONS:
On April 30, 1999, the Company, through its wholly owned Australian
subsidiary, Freight Victoria Limited ("Freight Victoria"), completed the
acquisition of the assets and liabilities comprising the railroad
freight business of V/Line Freight Corporation ("VLF"), a corporation
established by the Government of the State of Victoria, Australia. VLF
was established in March 1997 as part of Victoria's public
transportation privatization process and assumed many of the activities
formerly carried out by the V/Line Freight business unit of the Public
Transportation Corporation of the Government of Victoria.
Under the Sale of Assets Agreement (the "Agreement") dated February 22,
1999 by and between the Company, Freight Victoria and VLF, Freight
Victoria acquired all of the locomotives, wagons, motor vehicles,
equipment, stock, spare parts inventory and accounts receivable, certain
business, brand and trade names and trade marks, and the outstanding
business contracts of VLF for a purchase price of AUD$73.4 million in
cash (approximately U.S.$49.0 million). The purchase price has been
allocated to assets acquired. In connection with the acquisition,
Freight Victoria also entered into other agreements, including a primary
infrastructure lease (the "Infrastructure Lease") with the Director of
Public Transport of Australia and various facilities leases, access
agreements, maintenance and service agreements and other miscellaneous
agreements. Pursuant to the Infrastructure Lease, Freight Victoria
received a 45-year lease of the non-electrified intrastate Victorian
railway tracks and infrastructure. Pursuant to certain other agreements,
Freight Victoria is responsible for, among other things, track and
rolling stock maintenance, train control, access to the railway
infrastructure by other rail operators and safety and signaling. Under a
letter issued by Freight Victoria in connection with its bid for the VLF
business, Freight Victoria prepaid in cash the net present value of the
rental payments for the Infrastructure Lease totaling AUD$89.7 million
(approximately U.S.$60.0 million). Freight Victoria commenced operations
of the rail-based freight business on May 1, 1999.
On September 3, 1999, the Company, through its wholly-owned subsidiary,
Florida Rail Lines, Inc., completed the acquisition of all the
outstanding common stock of The Toledo, Peoria and Western Railroad
Corporation ("TPW") from CSX Transportation, Delaware Ostego
Corporation, and other shareholders for an aggregate purchase price of
$18 million (including the repayment of indebtedness), subject to
certain adjustments. The Company funded the acquisition through its
revolving line of credit. TPW is headquartered in East Peoria, Illinois
and provides rail freight services to customers in the Midwest United
States and operates over rail lines running from Fort Madison, Iowa
across North Central Illinois to Logansport, Indiana. TPW has certain
unsettled litigation and contingencies outstanding whose ultimate
outcome will impact the purchase price allocation.
7
<PAGE> 9
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. ACQUISITIONS, continued
On July 26, 1999, the Company acquired approximately 98% of the
outstanding shares of RaiLink Ltd ("RaiLink"). Through the Company's
wholly-owned Canadian subsidiary, RL Acquisition Corp., the Company
commenced an all cash-bid in May 1999 for all of the common shares of
RaiLink at a price of CDN$8.75 per share pursuant to a Pre-Acquisition
Agreement dated May 17, 1999 between the Company and RaiLink. RaiLink
had approximately 8.36 million common shares outstanding on a fully
diluted basis, giving the transaction an equity value of approximately
CDN$73.2 million (approximately USD$49.8 million). As more than 90% of
the outstanding shares were acquired under the offer, the Company
acquired the remainder of the shares pursuant to the compulsory
acquisition provisions of applicable Canadian law. RaiLink is a
regional railway company based in Edmonton, Alberta and provides
freight transportation services to the national railways of Canada and
to a wide variety of shippers. RaiLink and its 26.3% owned affiliate,
Quebec Railway Corporation, currently operate 11 regional railways
covering approximately 2,500 miles of track in Alberta, the Northwest
Territories, Ontario, Quebec and New Brunswick. A portion of the
funding for the transaction was provided by a consortium of banks with
National Bank of Canada, as agent, through an increase in the Company's
revolving line of credit from $85 million to $125 million. The balance
of the funding came from a private offering of the Company's junior
convertible subordinated debt.
These acquisitions have been accounted for as purchases and the results
have been consolidated since their respective acquisition dates. The
final purchase price allocation will be based upon a final
determination of the fair values of the net assets acquired. The
following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred at the beginning of
the period presented and do not purport to be indicative of what would
have occurred had the acquisitions been made as of that date or results
which may occur in the future (in thousands except per share data).
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1999 1998
----------- ----------
<S> <C> <C>
Revenue $173,315 $152,364
Income (loss) from continuing operations
before income taxes $ 1,970 $ (4,634)
Net income (loss) $ 4,817 $ (2,926)
Net income (loss) per share $ 0.37 $ (0.37)
</TABLE>
8
<PAGE> 10
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following as of September
30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------------------ ----------------
<S> <C> <C>
Land $ 30,916,828 $ 19,427,529
Buildings and improvements 13,817,826 11,225,554
Railroad track and improvements 138,628,601 44,700,349
Locomotives, transportation and other equipment 178,342,435 36,582,042
------------ -------------
361,705,690 111,935,474
Less accumulated depreciation 16,358,411 10,102,101
------------ -------------
$345,347,279 $101,833,373
============ ============
</TABLE>
In January 1999, the Company through a newly formed subsidiary E&N
Railway Company Ltd. ("ENR") acquired certain assets of the Esquimalt
and Nanaimo Railway ("E&N") from the Canadian Pacific Railway ("CPR").
The transaction included the purchase of a 68-mile section of rail line
between Port Alberni, British Columbia and Nanaimo, British Columbia and
the lease of a 113-mile section of rail line from Victoria-to-Nanaimo
and from Parksville- to-Courtenay on British Columbia's Vancouver
Island. The purchase of the assets of the E&N Railway accounted for
approximately $10.8 million of fixed asset additions for the quarter
ended March 31, 1999.
6. OTHER ASSETS:
Other assets consist of the following as of September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred loan costs, net $ 8,095,083 $ 636,733
Deferred acquisition costs 281,006 871,422
Immigrant Investor note 1,043,273 955,198
Deposits and other 801,917 2,555,469
------------ -----------
$ 10,221,279 $ 5,018,822
============ ===========
</TABLE>
The increase in deferred loan costs relates primarily to fees paid and
costs of warrants issued related to the financing of the Freight
Victoria acquisition and the expansion of the Company's revolving line
of credit. For further details see note 7.
9
<PAGE> 11
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. DEBT:
To facilitate the acquisition of VLF, Freight Victoria obtained a $100
million bridge loan from Barclays Bank PLC under a senior secured loan
facility. Upon the execution of the facility, the Company issued to
Barclays Bank PLC warrants to acquire 750,000 shares of the Company's
Common Stock at an exercise price of $9.75 per share.
The bridge loan is due and payable on April 30, 2000. The Company has
the option to convert the bridge loan into a term loan which would
mature April 30, 2009. If the Company exercises the option to convert
the bridge loan it will be required to pay a 1% fee of the converted
balance in additional fees and issue warrants equal to 10% of the
Company's outstanding common stock. The bridge loan bears interest at a
rate equal to the London Interbank Offered Rate plus the applicable
margin. The applicable margin initially is 500 basis points and
increases by 50 basis points every 90 days. The Company has agreed with
Barclays Bank PLC that if the bridge loan is not repaid by November 30,
1999 the Company has to issue 50,000 warrants and the interest rate
increases by 200 basis points. If the bridge loan converts to a term
loan, the lender will have the right to elect to fix the interest rate.
The bridge loan is guaranteed by RailAmerica, Inc. and is
collateralized by liens on all of the assets of Freight Victoria and by
a pledge of the stock of certain of the Company's other subsidiaries.
The facility agreement contains significant restrictions on RailAmerica
and its subsidiaries that are a party to the agreement, including
without limitation restrictions on additional indebtedness, liens,
sales of assets and capital expenditures. The Company is pursuing its
available alternatives for refinancing the bridge loan.
In addition to the bridge loan the Company issued AUD$6 million
(approximately U.S. $4.0 million) in convertible debt to certain
vendors of Freight Victoria ("Vendor Debt"). The Vendor Debt is
convertible into the Company's common stock at the current market price
or convertible into Freight Victoria stock at the option of the
Company. The Company also issued $2.64 million of convertible debt in
lieu of cash payments for fees owed to its investment banker in the
transaction. The convertible debt bears interest at 6%, is convertible
into the Company's common stock at $9.83 per share and was converted in
July 1999 into 272,415 shares of common stock.
On July 23, 1999, the Company's Revolver was increased to $125 million
by a consortium of banks with National Bank of Canada, as agent. 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 month LIBOR plus
2.5%. The maturity date of the Revolver was extended to April 2002.
10
<PAGE> 12
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. DEBT, continued
In August 1999, the Company issued $22.5 million aggregate principal
amount of its junior convertible subordinated debentures. Interest on
the debentures accrues at the rate of 6% per annum and is payable
semi-annually, commencing January 31, 2000. The debentures are
convertible, at the option of the holder, into shares of RailAmerica at
a conversion price of $10, subjected to adjustment in selected
circumstances. The debentures mature on July 31, 2004, are general
unsecured obligations and rank subordinate in right of payment to all
senior indebtedness. At RailAmerica's option, the debentures may be
redeemed at par, plus accrued but unpaid interest thereon to the date
of redemption, in whole or in part, if the closing price of
RailAmerica's common stock is above 200% of the conversion price for 10
consecutive trading days.
In the third quarter of 1999, $415,000 of convertible subordinated
debentures, which represented all of the remaining outstanding
convertible debt related to the Kalyn/Siebert, Inc. acquisition in
1994, were converted into 188,362 shares of Common Stock.
8. COMMON STOCK TRANSACTIONS:
In March 1999, the Company completed a private placement 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
212,000 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 Securities Corporation, of
which Douglas Nichols, a director of the Company, is President and
principal shareholder, acted as placement agent and received
approximately $0.4 million in fees and cost reimbursement and one-year
warrants to purchase 141,504 shares of the Company's common stock at an
exercise price of $10.125.
In August 1999, the Company issued warrants to purchase an aggregate of
676,363 shares of common stock to the investors in the private offering
of $22.5 million principal amount of its junior convertible
subordinated debentures described in Note 7. The warrants are
exercisable during the five-year period ending August 5, 2004 at an
exercise price of $10.50 per share, subject to adjustment under
selected circumstances. Warrants to purchase 200,000 shares of common
stock at an exercise price of $10.50 per share during the two-year
period ending July 31, 2001 were issued in connection with the private
offering to the placement agent.
11
<PAGE> 13
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. INCOME TAX PROVISION:
The Company recognized $3.1 million of income tax benefit as a result
of legislation passed in Australia during the third quarter of 1999.
The Company's Australian subsidiary may now deduct, for tax purposes,
a larger amount of depreciation than is reported for financial
statement purposes. Additionally, the difference between the U.S.
federal statutory tax rate and the Company's effective rate from
continuing operations is due to the Chilean tax rate on income from
Ferronor and the Company's valuation allowance on Ferronor's net
operating loss carry forward.
10. NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company obtained a $100 million bridge loan to acquire the assets
of Freight Victoria as described in Note 7. A majority of the loan was
paid directly to the Victorian government for the purchase. A $3.0
million fee was paid to Barclays bank. Warrants valued at approximately
$3.0 million were issued in conjunction with the acquisition. The
Company also issued $2.64 million of convertible debt to its investment
banker in the transaction for fees in lieu of a cash payment In the
third quarter, the $2,640,000 of convertible debt was subsequently
converted into 272,415 shares of Common Stock. Also in the third
quarter of 1999, $415,000 of convertible subordinated debentures were
converted into 188,362 shares of Common Stock.
The Company had a deposit of $1,962,067 on its books at December 31,
1998. This amount was used to purchase rail assets in British Columbia,
Canada in January of 1999.
In July 1999, the Company assumed $4.6 million of long-term debt as
part of its acquisition of RaiLink Ltd. Warrants valued at
approximately $2.7 million were issued in conjunction with the private
offering of the Company's junior convertible subordinated debentures in
August 1999.
11. DISCONTINUED OPERATIONS:
Operating results of the discontinued operations, as shown below,
include the operations of the Motor Carrier division for the three
months ended March 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-based Contrans Corporation and
other third parties. 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.
12
<PAGE> 14
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. DISCONTINUED OPERATIONS, continued
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
------------------
(Thousands)
<S> <C>
Revenues $ 1,827
Depreciation and amortization 95
Operating income (loss) (35)
Loss before taxes (105)
Benefit for income taxes 40
Net loss $ (65)
</TABLE>
12. SEGMENT INFORMATION:
The Company's continuing operations have been classified into three
business segments: North American railroads, international railroads
and manufacturing. Business segment information for the nine months
ended September 30, 1999 and 1998(amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
North
International American
Consolidated Rail Rail Manufacturing Other
------------ ---- ---- ------------- -----
<S> <C> <C> <C> <C> <C>
Revenue $111,073 $ 52,691 $ 23,035 $ 33,859 $ 1,488
Operating income (loss) $ 17,811 $ 10,476 $ 4,918 $ 5,210 $ (2,793)
Identifiable assets $435,316 $209,035 $164,766 $ 29,169 $ 32,346
Depreciation and
Amortization $ 6,549 $ 3,008 $ 2,096 $ 778 $ 667
Capital expenditures $ 36,212 $ 18,840 $ 14,432 $ 595 $ 2,345
Interest expense $ 9,318 $ 5,246 $ 3,027 $ 178 $ 867
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
North
International American
Consolidated Rail Rail Manufacturing Other
------------ ---- ---- ------------- -----
<S> <C> <C> <C> <C> <C>
Revenue $ 55,602 $ 10,328 $ 11,629 $ 29,785 $ 3,860
Operating income (loss) $ 8,932 $ 2,591 $ 3,359 $ 5,524 $ (2,542)
Identifiable assets $135,097 $ 37,926 $ 31,306 $ 21,795 $ 44,070
Depreciation and
Amortization $ 2,663 $ 471 $ 1,160 $ 633 $ 399
Capital expenditures $ 23,885 $ 10,447 $ 4,705 $ 2,662 $ 6,071
Interest expense $ 3,598 $ 583 $ 2,153 $ 298 $ 564
</TABLE>
13
<PAGE> 15
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. SEGMENT INFORMATION, continued
Geographical segment information for the nine months ended September
30, 1999 and 1998 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
Consolidated United States Canada Chile Australia
------------ ------------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue $111,073 $ 36,361 $ 22,021 $ 13,938 $ 38,753
Operating income $ 17,811 $ 5,225 $ 2,110 $ 2,446 $ 8,030
Identifiable assets $435,316 $117,446 $108,835 $ 48,900 $160,135
Depreciation and
Amortization $ 6,549 $ 2,053 $ 1,488 $ 819 $ 2,189
Capital expenditures $ 36,212 $ 5,926 $ 11,446 $ 10,412 $ 8,428
Interest expense $ 9,318 $ 2,477 $ 1,595 $ 892 $ 4,354
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
Consolidated United States Canada Chile Australia
------------ ------------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
Revenue $ 55,602 $ 33,998 $ 11,276 $ 10,328 $ --
Operating income $ 8,932 $ 5,487 $ 854 $ 2,591 $ --
Identifiable assets $135,097 $ 82,344 $ 14,827 $ 35,935 $ 1,991
Depreciation and
Amortization $ 2,663 $ 1,759 $ 433 $ 471 $ --
Capital expenditures $ 23,885 $ 10,135 $ 3,303 $ 10,447 $ --
Interest expense $ 3,598 $ 2,787 $ 229 $ 582 $ --
</TABLE>
13. SUBSEQUENT EVENTS:
On October 14, 1999, the Company, and its wholly owned subsidiary,
Cotton Acquisition Corp., entered into an agreement and plan of merger
(the "Merger Agreement") with RailTex, Inc. ("RailTex"), providing for
the acquisition by the Company of all of the outstanding common stock
of RailTex for an aggregate purchase price of approximately $325
million (including the assumption of RailTex's outstanding long term
debt). Pursuant to the acquisition, RailTex's shareholders will receive
$13.50 in cash and two-thirds of a share of the Company's common stock
in exchange for each share of RailTex stock. It is anticipated that
following the acquisition, RailTex shareholders will own approximately
35% of the combined company. The transaction, which is expected to
close in early 2000, is subject to shareholder approval by both
companies, any necessary regulatory approvals and other customary
closing conditions. RailTex is headquartered in San Antonio, Texas and
operates approximately 4,100 route miles of rail line concentrated in
the Southeastern, Midwestern, Great Lakes and New England regions of
the United States and Eastern Canada.
In connection with the Merger Agreement, the Company has received a
commitment from Donaldson, Lufkin & Jenrette ("DLJ") to finance the
acquisition, refinance existing debt of the Company, refinance existing
debt of RailTex and provide working capital. DLJ's financing
commitment provides for three senior secured facilities: (1) a $185.0
million six-year Term A loan facility, (2) a $200.0 million seven-year
Term B loan facility, and (3) a $50.0 million six-year revolving credit
facility. In addition, the DLJ financing commitment provides for the
issuance of $95.0 million of subordinated increasing rate notes as
bridge financing if other cash proceeds are not raised. The Company
may also sell certain assets to facilitate the transaction. There can
be no assurance that the financing contemplated by the DLJ financing
commitment will be consummated. If the Company does not consummate
financing pursuant to the DLJ financing commitment and alternate
financing is unavailable upon terms acceptable to the Company, the
Company will be unable to complete the Merger with RailTex and will be
in default of the Merger Agreement.
On November 12, 1999, management adopted a plan to sell its specialty
truck trailer manufacturing subsidiary business, Kalyn/Siebert and
retained the investment banking firm of ING Barings LLC to facilitate
the sale. At this time, management is unable to estimate the proceeds
to be received from such sale nor whether such sale will be completed
within one year, although management does not believe the Company will
incur a loss from the sale. Accordingly, the results of operations of
Kalyn/Siebert continue to be presented in the Company's results from
continuing operations.
14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
RailAmerica, Inc. (together with its consolidated subsidiaries, the
"Company") is an international owner and operator of freight railroads. The
Company operates 25 railroads over approximately 8,400 miles of track in the
United States, Australia, Canada and the Republic of Chile. RailAmerica also
owns a specialty truck trailer manufacturer, Kalyn/Siebert, Inc. ("KSI") with
production facilities located in Gatesville, Texas and Trois Rivieres, Quebec,
Canada.
The Company's historical growth has resulted primarily from the
execution of its acquisition strategy and internal growth. In accordance with
its acquisition strategy, in January 1999, the Company, through a newly formed
subsidiary E&N Railway Company Ltd. ("ENR"), acquired certain assets of the
Esquimalt and Nanaimo Railway ("E&N") from the Canadian Pacific Railway ("CPR").
The transaction included the sale of a 68-mile section of rail line between Port
Alberni and Nanaimo and the lease of a 113-mile section of rail line from
Victoria-to-Nanaimo and from Parksville-to- Courtenay on British Columbia's
Vancouver Island. On April 30, 1999, the Company, through its wholly-owned
subsidiary, Freight Victoria, acquired certain assets of the V/Line Freight
Corporation railroad in Australia. The transaction included the purchase of 107
locomotives and over 2,600 rail cars, which provide rail freight service
across southeastern Australia over approximately 3,000 miles of track. The track
and real estate are being leased from the Victorian government on a long-term
basis. Freight Victoria commenced operations on May 1, 1999. In July 1999, the
Company acquired RaiLink, Ltd., based in Edmonton, Alberta, Canada. RaiLink
operates or has equity interests in eleven regional/short line railroads
covering approximately 2,500 miles of rail lines in the province of Alberta, the
Northwest Territories, Ontario, Quebec and New Brunswick. In September 1999, the
Company acquired the Toledo, Peoria and Western Railroad ("TP&W"), headquartered
in Peoria, Illinois. TP&W is a 369-mile railroad running from Fort Madison, Iowa
across north central Illinois to Logansport, Indiana.
Set forth below is a discussion of the results of operations for the
Company's North American railroad operations, International railroad operations,
trailer manufacturing operations and corporate overhead.
NORTH AMERICAN RAILROAD OPERATIONS
The Company's North American railroad subsidiaries operated
approximately 4,000 miles of rail line as of September 30, 1999. These consist
of: (i) 187 miles of rail line which it owns in Michigan; (ii) 4 miles of
trackage rights and 45 miles of rail line which are owned by the State of
Michigan and operated pursuant to an agreement with Michigan Department of
Transportation; (iii) 49 miles of rail line leased from the South Central
Tennessee Railroad Authority near Nashville, Tennessee and 3 miles of trackage
rights; (iv) 44 miles of rail line which the Company is operating pursuant to a
contract with the State of Minnesota; (v) 104 miles of rail line which it owns
and 4
15
<PAGE> 17
miles of trackage rights in West Texas; (vi) 131 miles of rail line which it
owns and 6 miles of trackage rights in the state of Washington; (vii) 72 miles
of rail line which it owns in central Minnesota; (viii) 204 miles of rail line
it owns in northern Minnesota and 37 miles of trackage rights; (ix) 44 miles of
rail line it owns in central Minnesota and 16 miles of trackage rights; (x) 13
miles it leases in Southern California; (xi) a 68-mile section of owned rail
line and a 113-mile section of leased rail line on Vancouver Island, British
Columbia, Canada; (xii)2,500 miles of rail lines in the province of Alberta, the
Northwest Territories, Ontario, Quebec and New Brunswick; and (xiii) a 369-mile
railroad running from Fort Madison, Iowa across north central Illinois to
Logansport, Indiana.
The Company provides its customers with local rail freight services
with access to the nation's rail system for delivery of products both
domestically and internationally. The Company hauls varied products for its
customers based upon market demands in each customer's local operating area. The
Company's haulage of products in Michigan includes agricultural commodities,
automotive parts, chemicals and fertilizer, ballast and other stone products.
The Company's haulage of products in Tennessee includes wood chips, paper,
chemicals and processed food products. The Company's haulage of products in
Minnesota includes plastics, lumber, denatured alcohol, scrap iron and steel.
The Company's haulage of products in Texas consists of cotton, sodium sulfate,
chemicals, fertilizer, scrap iron and steel. The Company's haulage of products
in Washington consists of wood chips, lumber, minerals, cement and various
agricultural products. The Company's haulage of products in California includes
autos, wood, paper and food products. The Company's haulage of products on
Vancouver Island, British Columbia, Canada consists of forest/paper products,
mineral, and chemical products. ENR also operates a rail passenger service on
Vancouver Island pursuant to an agreement with VIA Rail. The Company's haulage
of products in Alberta, the Northwest Territories, Ontario, Quebec and New
Brunswick includes forest products, grain and other agricultural products,
chemicals and metal ores. The Company's haulage of products in Iowa, Illinois
and Indiana includes grain and grain products, auto parts, chemicals, coal,
fertilizer, food products, steel, and double-stack intermodal traffic.
RESULTS OF NORTH AMERICAN RAILROAD OPERATIONS
The discussion of results of operations that follows reflects the
consolidated results of the Company's North American railroad operations for the
nine and three months ended September 30, 1999 and 1998. The results of North
American railroad operations include the operations of ENR and Ventura County
Railway ("VCRR") from January 1, 1999 to September 30, 1999, the results of
operations of RaiLink from August 1, 1999 to September 30, 1999, and the results
of operations of the Toledo Western and Peoria Railroad (TPW) from September 1,
1999 to September 30, 1999. As a result, the results of operations for the nine
and three months ended September 30, 1999 are not comparable to the
corresponding period of the prior year in certain material respects and are not
indicative of the results which would have occurred had the acquisitions been
consummated at the beginning of the respective periods.
The following table sets forth the operating revenues and expenses for
the Company's North American railroad operations for the periods indicated. All
results of operations discussed in this section are for the Company's North
American railroads only, unless otherwise indicated (in thousands).
16
<PAGE> 18
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenue:
Transportation revenue $ 10,865 $ 4,047 $ 21,570 $ 11,061
Other revenue 716 217 1,464 568
--------- ------- -------- ---------
Total revenue 11,581 4,264 23,034 11,629
--------- ------- -------- ---------
Operating Expenses:
Maintenance of way 1,689 480 3,394 1,475
Maintenance of equipment 616 160 1,064 502
Transportation 3,665 905 6,318 2,535
Equipment rental 364 153 653 445
General and administrative 1,873 773 4,591 2,153
Depreciation and amortization 1,076 415 2,096 1,160
--------- ------- -------- ---------
Total operating expenses 9,283 2,886 18,116 8,270
--------- ------- -------- ---------
Operating income 2,298 1,378 4,918 3,359
Interest and other expenses 1,412 757 2,888 2,177
--------- ------- -------- ---------
Income before income taxes $ 886 $ 621 $ 2,030 $ 1,182
========= ======= ======== =========
</TABLE>
COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998.
OPERATING REVENUES. Transportation revenue increased by $10.5 million, or
95.0%, to $21.6 million for the nine months ended September 30, 1999 from $11.1
million for the nine months ended September 30, 1998. The increase was primarily
due to increased carloads related to the acquisitions. The North American
transportation revenue per carload decreased from $317 to $259 primarily due to
the acquisition of a rail line in Canada that hauls a significant amount of
bridge traffic at a lower rate per car than the Company's other rail lines.
North American carloads handled totaled 78,023 for the nine months ended
September 30, 1999, an increase of 43,135, or 123.6%, compared to 34,888
carloads in the prior year period. The increase was primarily due to the
acquisitions of ENR, VCRR, RaiLink, and TPW which moved 42,033 carloads for the
nine month period ended September 30, 1999. The Company's "same railroad" car
loadings increased by 3% for the nine month period ending September 30, 1999
compared to the nine month period ended September 30, 1998.
Other revenues increased by $0.9 million, or 157.7%, for the nine months
ended September 30, 1999 compared to the prior year period. Other revenues for
the nine months ended September 30, 1999 and 1998 consist of gain on sales of
railroad assets, easement sales, railroad lease and rental income and other
miscellaneous income. The increase was primarily due to the acquisitions of ENR
and RaiLink which had $0.4 million and $0.3 million, respectively, in other
revenue for the nine month period ended September 30, 1999.
17
<PAGE> 19
OPERATING EXPENSES. Operating expenses increased by $9.8 million, or
119.4%, to $18.1 million for the nine months ended September 30, 1999 from $8.3
million for the nine months ended September 30, 1998. The increase was primarily
due to the acquisitions of ENR, RaiLink, TPW and VCRR which had $3.6 million,
$4.3 million, $0.8 million and $0.5 million, respectively, in operating expenses
for the nine month period ended September 30, 1999 and the write-off of $0.6
million in costs related to the discontinuance of the Delaware Valley Railway
("DVRC"). Operating expenses, as a percentage of transportation revenue, were
84.0% and 74.8% for the nine months ended September 30, 1999 and 1998,
respectively. Exclusive of the write-off of costs at DVRC, the operating ratio
was 81.0% Management anticipates an improvement in the operating ratio over the
next twelve months, exclusive of seasonality, as the new operations get
assimilated into the Company's North American operations.
Maintenance of way expenses increased by $1.9 million, or 130.1%, to $3.4
million for the nine months ended September 30, 1999 from $1.5 million for the
nine months ended September 30, 1998. The increase was primarily due to the
maintenance of way expenses at ENR, RaiLink and TPW of $0.6 million, $0.9
million and $0.1 million, respectively, for the nine month period ended
September 30, 1999.
Maintenance of equipment expenses increased by $0.6 million, or 111.8%,
to $1.1 million for the nine months ended September 30, 1999 from $0.5 million
for the nine months ended September 30, 1998. The increase was primarily due to
the maintenance of equipment expenses at ENR, RaiLink and TPW of $0.1 million,
$0.3 million and $0.1 million, respectively, for the nine month period ended
September 30, 1999.
Transportation expense increased by $3.8 million, or 149.2%, to $6.3
million for the nine months ended September 30, 1999 from $2.5 million for the
nine months ended September 30, 1998. The increase was primarily due to
transportation expenses at ENR, VCRR, RaiLink, and TPW, which had $1.1 million,
$0.2 million, $1.9 million and $0.4 million, respectively, for the nine month
period ended September 30, 1999.
Equipment rental increased by $0.3 million, or 46.8%, to $0.7 million for
the nine months ended September 30, 1999 from $0.4 million for the nine months
ended September 30, 1998.
General and administrative expenses increased by $2.4 million, or 113.3%,
to $4.6 million for the nine months ended September 30, 1999 from $2.2 million
for the nine months ended September 30, 1998. The increase was primarily due to
general and administrative expenses at ENR and RaiLink, which had $0.8 million
and $0.7 million, respectively, for the nine month period ended September 30,
1999 and the write-off of costs at DVRC of $0.5 million.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased by
approximately $0.7 million, or 32.7%, to $2.9 million for the nine months ended
September 30, 1999 from $2.2 million for the nine months ended September 30,
1998. The increase in interest expense is primarily due to funding of the
acquisitions of ENR and RaiLink.
18
<PAGE> 20
COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998.
OPERATING REVENUES. Transportation revenue increased by $6.9 million, or
168.4%, to $10.9 million for the three months ended September 30, 1999 from $4.0
million for the three months ended September 30, 1998. The increase was
primarily due to increased carloads related to the acquisitions. The North
American transportation revenue per carload decreased to $215 from $309
primarily due to the acquisition of a rail line in Canada that hauls a
significant amount of bridge traffic at a lower rate per car than the Company's
existing rail lines. North American carloads handled totaled 48,114 for the
three months ended September 30, 1999, an increase of 35,017, or 267.4%,
compared to 13,097 carloads in the prior year period. The increase was partially
due to the acquisitions of ENR, RaiLink and TPW, which moved 2,014 carloads,
27,404 carloads and 3,687 carloads, respectively, for the three month period
ended September 30, 1999. The Company's "same railroad" car loadings decreased
by 8% from the third quarter of 1998 to the third quarter of 1999 due primarily
to decreases in car loadings at the Company's Michigan and Minnesota railroads.
Other revenues increased by $0.5 million, or 230.4%, to $0.7 million for
the three months ended September 30, 1999 from $0.2 million for the three months
ended September 30, 1998. The increase was primarily due to other revenue
generated at ENR and RaiLink, which had $0.1 million and $0.3 million,
respectively, for the three month period ended September 30, 1999. Other
revenues for the three months ended September 30, 1999 and 1998 consist of gains
on sales of railroad assets, railroad lease and rental income and other
miscellaneous income.
OPERATING EXPENSES. Operating expenses increased by $6.4 million, or
221.6%, to $9.3 million for the three months ended September 30, 1999 from $2.9
million for the three months ended September 30, 1998. The increase was
primarily due to the acquisitions of ENR, RaiLink and TPW which had $1.4
million, $4.3 million and $0.8 million, respectively, in operating expenses for
the three months ended September 30, 1999. Operating expenses, as a percentage
of transportation revenue, were 85.4% and 71.3% for the three months ended
September 30, 1999 and 1998, respectively. The increase in operating ratio
primarily relates to certain start-up costs at RaiLink and TPW and the
relatively higher operating ratios on these new rail lines as compared to the
Company's previously existing rail lines.
Maintenance of way expenses increased by $1.2 million, or 251.7%, to $1.7
million for the three months ended September 30, 1999 from $0.5 million for the
three months ended September 30, 1998. The increase was primarily due to
maintenance of way expenses at ENR, RaiLink and TPW of $0.2 million, $0.9
million and $0.1 million for the three months ended September 30, 1999,
respectively.
Maintenance of equipment expenses increased by $0.4 million, or 285.7%,
to $0.6 million for the three months ended September 30, 1999 from $0.2 million
for the three months ended September 30, 1998. The increase was primarily due to
maintenance of equipment expenses at RaiLink and TPW of $0.3 million and $0.1
million for the three months ended September 30, 1999, respectively.
Transportation expense increased by $2.8 million, or 304.7%, to $3.7
million for the three months ended September 30, 1999 from $0.9 million for the
three months ended September 30, 1998. The increase is due primarily to the
transportation expenses at ENR, RaiLink and TPW of
19
<PAGE> 21
$0.4 million, $1.9 million and $0.4 million, respectively for the three months
ended September 30, 1999.
Equipment rental increased by $0.2 million, or 137.8%, to $0.4 million
for the three months ended September 30, 1999 from $0.2 million for the three
months ended September 30, 1998.
Selling, general and administrative expenses increased by $1.1 million,
or 142.4%, to $1.9 million for the three months ended September 30, 1999 from
$0.8 million for the three months ended September 30, 1998. The increase was
primarily due to the selling, general and administrative expenses at ENR,
RaiLink and TPW of $0.3 million, $0.7 million and $0.1 million, respectively,
for the three months ended September 30, 1999.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased by
$0.6 million, or 86.4%, to $1.4 million for the three months ended September 30,
1999 from $0.8 million for the three months ended September 30, 1998. The
increase in interest expense was primarily due to funding of the acquisitions of
ENR and RaiLink during the third quarter of 1999.
INTERNATIONAL RAILROAD OPERATIONS
FERRONOR. 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 Empresa de Transporte Ferrovario, S.A. ("Ferronor").
Ferronor owns and operates approximately 1,400 miles of rail line serving
northern Chile. The Company was joined in the purchase of Ferronor by Andres
Pirazzoli y Cia, Ltda. ("APCO"), a 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.
FREIGHT VICTORIA. On April 30, 1999, the Company, through its wholly
owned Australian subsidiary, Freight Victoria Limited ("Freight Victoria"),
completed the acquisition of the assets and liabilities comprising the railroad
freight business of V/Line Freight Corporation ("VLF"), a corporation
established by the Government of the State of Victoria, Australia. VLF was
established in March 1997 as part of Victoria's public transportation
privatization process and assumed many of the activities formerly carried out by
the V/Line Freight business unit of the Public Transportation Corporation of the
Government of Victoria.
Under the Sale of Assets Agreement (the "Agreement") dated February 22,
1999 by and between the Company, Freight Victoria and VLF, Freight Victoria
acquired all of the locomotives, wagons, motor vehicles, equipment, stock, spare
parts inventory and accounts receivable, certain business, brand and trade names
and trade marks, and the outstanding business contracts of VLF. In connection
with the acquisition, Freight Victoria also entered into other agreements,
including a
20
<PAGE> 22
primary infrastructure lease (the "Infrastructure Lease") with the Director of
Public Transport of Australia and various facilities leases, access agreements,
maintenance and service agreements and other miscellaneous agreements. Pursuant
to the Infrastructure Lease, Freight Victoria received a 45-year lease of the
non-electrified intrastate Victorian railway tracks and infrastructure, a
network consisting of over 3,000 miles of track. Pursuant to certain other
agreements, Freight Victoria is responsible for, among other things, track and
rolling stock maintenance, train control, access to the railway infrastructure
by other rail operators and safety and signaling. Under a letter issued by
Freight Victoria in connection with its bid for the VLF business, Freight
Victoria prepaid in cash the net present value of the rental payments for the
Infrastructure Lease. Freight Victoria commenced operations of the rail-based
freight business on May 1, 1999.
The following table sets forth the operating revenues and expenses for
the Company's international railroad operations for the periods indicated. All
results of operations discussed in this section are for the Company's
international railroads only, unless otherwise indicated. The results of
international railroad operations include the operations of Freight Victoria
from May 1, 1999 to September 30, 1999. As a result, the results of operations
for the nine and three months ended September 30, 1999 are not comparable to the
corresponding period of the prior year in certain material respects and are not
indicative of the results which would have occurred had the acquisitions been
consummated at the beginning of the respective periods. (in thousands).
<TABLE>
<CAPTION>
For the Three Month For the Nine Months
Ended September 30, Ended September 30,
---------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Transportation revenue $ 26,794 $ 4,821 $ 50,934 $ 10,291
Other revenue 137 16 1,757 37
-------- ------- -------- --------
Total revenue 26,931 4,837 52,691 10,328
-------- ------- -------- --------
Operating Expenses:
Transportation 18,385 3,022 35,037 5,859
General and administrative 1,450 424 4,171 1,407
Depreciation and amortization 1,751 222 3,008 471
-------- ------- -------- --------
Total operating expenses 21,586 3,668 42,216 7,737
-------- ------- -------- --------
Operating income 5,345 1,169 10,475 2,591
Other income (expense) (5,457) 34 (6,967) 330
Minority interest in earnings (710) (570) (1,091) (1,437)
-------- ------- -------- --------
Income (loss) before income taxes $ (822) $ 633 $ 2,417 $ 1,484
======== ======== ======== ========
</TABLE>
COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998.
FERRONOR.
OPERATING REVENUES. Transportation revenue increased by $3.5 million, or
34.0%, to $13.8 million for the nine months ended September 30, 1999 from $10.3
million for the nine months ended September 30, 1998. Ferronor's carloads
handled totaled 68,788 for the nine months ended September 30, 1999, an increase
of 17,962, or 35.3%, compared to 50,826 carloads in the nine
21
<PAGE> 23
months ended September 30, 1998. The increase in both carloads and revenue is
due 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. These increases were
offset slightly by a decrease in the international traffic out of Argentina and
Bolivia due to the slow down in the world economy in the second quarter of 1999.
OPERATING EXPENSES. Operating expenses increased by $3.7 million, or
49.5%, to $11.2 million for the nine months ended September 30, 1999 from $7.5
million for the nine months ended September 30, 1998. The increase was due 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 81.0% and 72.6% for the nine months
ended September 30, 1999 and 1998, respectively.
OTHER INCOME (EXPENSE). Other income (expense) increased by $0.3 million,
or 30.2%, to an expense of $1.4 million for the nine months ended September 30,
1999 from $1.1 million in expense for the nine months ended September 30, 1998.
The increase is primarily due to interest on long term debt incurred for project
financing related to the two new mine operations.
FREIGHT VICTORIA
OPERATING REVENUES. Operating revenues were $38.8 million for the period
May 1, 1999 through September 30, 1999. These revenues consisted of $29.3
million of freight revenue, $7.9 million of track access fees and $1.6 million
of other operating revenue.
OPERATING EXPENSES. Operating expenses were $30.8 million for the period
May 1, 1999 through September 30, 1999. These expenses consisted of $5.6 million
of maintenance of way costs, $2.2 million of maintenance of equipment costs,
$18.5 million in transportation costs, $2.3 million of general and
administrative costs and $2.2 million in depreciation. Freight Victoria's
operating ratio for the five-month period was 79.4%.
OTHER INCOME (EXPENSE). Other income (expense) was a net expense of $6.4
million. This amount consisted of $4.4 million in interest expense, $1.8 million
in amortization of funding costs related to the bridge financing and $0.2
million in exchange rate loss. The exchange rate loss relates to the $100
million bridge loan financing which is borrowed in U.S. dollars while Freight
Victoria's functional currency is the Australian dollar.
COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998.
FERRONOR
OPERATING REVENUES. Transportation revenue increased by $0.8 million,
or 15.7%, to $5.6 million for the three months ended September 30, 1999 from
$4.8 million for the three months ended September 30, 1998. Ferronor's carloads
handled totaled 25,377 for the three months ended September 30, 1999, a increase
of 8,210, or 47.8%, compared to 17,167 carloads in the three months ended
September 30, 1998.
22
<PAGE> 24
OPERATING EXPENSES. Operating expenses increased by $0.9 million, or
25.9%, to $4.5 million for the three months ended September 30, 1999 from $3.6
million for the three months ended September 30, 1998. The increase was due to
Ferronor commencing movement of iron ore out of the Los Colorados mine in July
1998. Operating expenses, as a percentage of transportation revenue, were 81.3%
and 74.5% for the three months ended September 30, 1999 and 1998, respectively.
OTHER INCOME (EXPENSE). Other (expense) decreased by $0.3 million, or
67.7%, to an expense of $0.2 million for the three months ended September 30,
1999 from $0.5 million in expense for the three months ended September 30, 1998.
FREIGHT VICTORIA
OPERATING REVENUES. Operating revenues were $21.4 million for the three
months ended September 30, 1999. These revenues consisted of $13.3 million of
freight revenue, $7.9 million of track access fees and $0.2 million of other
operating revenue.
OPERATING EXPENSES. Operating expenses were $16.9 million for the three
months ended September 30, 1999. These expenses consisted of $3.8 million of
maintenance of way costs, $1.0 million of maintenance of equipment costs, $9.9
million in transportation costs, $0.7 million of general and administrative
costs and $1.5 million in depreciation. Freight Victoria's operating ratio for
the three months ended September 30, 1999 was 79.3%.
OTHER INCOME (EXPENSE). Other income (expense) was an expense of $5.9
million. This amount consisted of $2.8 million in interest expense, $1.1 million
in amortization of funding costs related to the bridge financing and $2.0
million in exchange rate loss. The exchange rate loss for the three months ended
September 30, 1999 relates to the $100 million bridge loan financing which is
borrowed in U.S. dollars while Freight Victoria's functional currency is the
Australian dollar.
TRAILER MANUFACTURING OPERATIONS
The discussion of results of operations that follows reflects the results
of Kalyn/Siebert, Inc. ("KSI") and Kalyn/Siebert Canada ("KSC") for the periods
indicated. During the second quarter of 1999, KSI's assets and operations were
moved into a Texas limited partnership, Kalyn/Siebert L.P. KSI is the 1% general
partner and a newly formed, wholly-owned subsidiary of the Company, KS Boca,
Inc., is the 99% limited partner.
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.
Government sales represented approximately 40.0% of KSI's sales for the first
nine months of 1999 and 25.9% of total manufacturing sales for the first nine
months of 1999. Management anticipates that the percentage
23
<PAGE> 25
of sales to government agencies will remain relatively constant over the next
several years based upon contracts that KSI entered into with such entities.
KSC, located in Trois Rivieres, Quebec, was established in 1985 and manufactures
bulk-hauling truck trailers. KSC products are marketed to the solid waste,
agricultural and construction industries.
KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on a 25.5 acre site, which
were constructed over the period 1969 to 1997. KSI builds all the structural
parts of its trailers using primarily steel bars and plates. The major
manufacturing steps include cutting, bending and welding of steel and, once
assembled, sand blasting, 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.
KSC's manufacturing operations are conducted in two Company owned
buildings, totaling approximately 150,000 square feet on a 36.7-acre site.
On November 12, 1999, management adopted a plan to sell its specialty
truck trailer manufacturing subsidiary business, Kalyn/Siebert and retained the
investment banking firm of ING Barings LLC to facilitate the sale. At this
time, management is unable to estimate the proceeds to be received from such
sale nor whether such sale will be completed within one year, although
management does not believe the Company will incur a loss from the sale.
Accordingly, the result of operations of Kalyn/Siebert continue to be presented
in the Company's results from continuing operations.
COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
The following table sets forth the income and expense items for the nine
months ended September 30, 1999 and 1998 and the percentage relationship of
income and expense items to net sales for the periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $33,859 100.0% $29,785 100.0%
Cost of goods sold 25,098 74.1% 21,150 71.0%
------- ------ ------- ------
Gross profit 8,761 25.9% 8,635 29.0%
Selling, general and
administrative expenses 2,772 8.2% 2,478 8.3%
Depreciation and amortization 778 2.3% 633 2.1%
-------- ----- ------- -----
Income from operations 5,211 15.4% 5,524 18.5%
Interest and other income(expense) 112 0.3% (274) 0.9%
------- ----- ------- -----
Income before taxes $ 5,323 15.7% $ 5,250 17.6%
======= ===== ======= =====
</TABLE>
NET SALES. Net sales increased by $4.1 million, or 13.7%, to $33.9
million for the nine months ended September 30, 1999 from $29.8 million for the
nine months ended September 30, 1998. The net sales increase consisted of an
increase of $0.1 million in KSI's sales and $4.0 million in KSC's sales. The
increase was primarily due to trailers produced in the KSC facility acquired in
April 1998. KSI sold 552 trailers for the nine months ended September 30, 1999
and 662 trailers for the nine months ended September 30, 1998. KSC sold 329
trailers for the nine months ended September 30, 1999 and 174 trailers for the
nine months ended September 30, 1998. KSI's average price per trailer sold was
approximately $41,900 for the nine months ended September 30,1999 and $32,900
for the nine months ended September 30, 1998. KSC's average price per trailer
sold was approximately $31,800 for the nine months ended September 30,1999 and
$40,300 for the nine
24
<PAGE> 26
months ended September 30, 1998. The decrease in average price per trailer is
due to the changing mix in production at KSC. They are currently producing more
flat-bed trailers than they were in 1998 and they have a lower price per unit.
Sales to governmental agencies represented 40.0% and 35.9% of KSI's net sales
for the nine months ended September 30, 1999 and 1998, respectively. The trailer
manufacturing division had a backlog of orders consisting of approximately $15.7
million at September 30, 1999 compared to $22.5 million at September 30, 1998.
COST OF GOODS SOLD. Cost of goods sold increased by a $4.0 million, or
18.7% to $25.1 million for the nine months ended September 30, 1999 from $21.1
million for the nine months ended September 30, 1998. The cost of goods sold
increase consisted of an increase of $4.0 million in KSC's cost of goods sold.
Cost of goods sold was 74.1% of net sales for the nine months ended September
30, 1999 compared to 71.0% for the nine months ended September 30, 1998. The
increase was due to a higher percentage of sales being from KSC, which has a
lower gross profit margin on its trailer sales then KSI. KSI's and KSC's cost of
goods sold were 68.3% and 84.8%, respectively, for the nine months ended
September 30, 1999, compared to 68.6% and 77.4% for the nine months ended
September 30, 1998. KSC's cost of goods sold percentage was higher in 1999 due
to the utilization of the new facility being at a lower rate than the old KSC
facility and also the change in trailer production mix.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased slightly to $2.8 million for the nine months
ended September 30, 1999 from $2.5 million for the nine months ended September
30, 1998 but decreased slightly as a percentage of sales. KSI's and KSC's
selling, general and administrative expenses were $1.9 million and $0.9 million,
respectively, for the nine months ended September 30, 1999.
COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
The following table sets forth the income and expense items for the
three months ended September 30, 1999 and 1998 and the percentage relationship
of income and expense items to net sales for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $10,902 100.0% $10,126 100.0%
Cost of goods sold 8,105 74.3% 6,919 68.3%
------- ----- ------- -----
Gross profit 2,797 25.7% 3,207 31.7%
Selling, general and
administrative expenses 972 8.9% 877 8.7%
Depreciation and amortization 261 2.4% 254 2.5%
------- ----- ------- -----
Income from operations 1,564 14.3% 2,076 20.5%
Interest and other expenses (37) 0.3% (115) 1.1%
------- ----- ------- -----
Income before taxes $ 1,527 14.0% $ 1,961 19.4%
======= ===== ======= =====
</TABLE>
25
<PAGE> 27
NET SALES. Net sales increased by $0.8 million, or 7.7%, to $10.9
million for the three months ended September 30, 1999 from $10.1 million for the
three months ended September 30, 1998. The net sales increase consisted of a
decrease of $0.4 million in KSI's sales and an increase of $1.2 million in KSC's
sales. The increase was primarily due to trailers produced in the KSC facility
acquired in April 1998. KSI sold 152 trailers for the three months ended
September 30, 1999 and 211 trailers for the three months ended September 30,
1998. KSC sold 114 trailers for the three months ended September 30, 1999 and 69
trailers for the three months ended September 30, 1998. KSI's average price per
trailer sold was approximately $47,000 for the three months ended September 30,
1999 and $34,900 for the three months ended September 30, 1998. KSC's average
price per trailer sold was approximately $31,100 for the three months ended
September 30,1999 and $34,700 for the three months ended September 30, 1998.
Sales to governmental agencies represented 30.4% and 48.8% of KSI's net sales
for the three months ended September 30, 1999 and 1998, respectively.
COST OF GOODS SOLD. Cost of goods sold increased by $1.2 million, or
17.1% to $8.1 million for the three months ended September 30, 1999 from $6.9
million for the three months ended September 30, 1998. The cost of goods sold
increase consisted of an increase of $1.2 million in KSC's cost of goods sold.
Cost of goods sold was 74.3% of net sales for the three months ended September
30, 1999 compared to 68.3% for the three months ended September 30, 1998. KSI's
and KSC's cost of goods sold were 68.2% and 85.7%, respectively, for the three
months ended September 30, 1999, compared to 65.1% and 77.3% for the three
months ended September 30, 1998. KSC's cost of goods sold percentage was higher
in 1999 due to the utilization of the new facility being at a lower rate than
the old KSC facility and also the change in trailer production mix.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased to $1.0 million for the three months ended
September 30, 1999 from $0.9 million for the three months ended September 30,
1998 but remained fairly constant as a percentage of sales. KSI's and KSC's
selling, general and administrative expenses were $0.7 million and $0.3 million,
respectively, for the three months ended September 30, 1999.
CORPORATE OVERHEAD
CORPORATE OVERHEAD. Corporate overhead, which benefits all of the
Company's segments, has not been allocated to the business segments for this
analysis. Corporate overhead services include overall strategic planning,
marketing, accounting, legal services, finance, cash management, payroll,
engineering, tax return preparation, investor relations, etc. 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 approximately $0.8 million, or 29.8%, to $3.5
million for the nine months ended September 30, 1999 from $2.7 million for the
nine months ended September 30, 1998. The increase was primarily due to costs
associated with managing and overseeing the new operations acquired within the
last twelve months.
26
<PAGE> 28
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 $17.7 million
for the nine months ended September 30, 1999. This amount includes $7.2 million
in net income, $8.7 million in depreciation and amortization and an increase in
accounts payable of $4.3 million.
Cash used in investing activities was $44.6 million for the nine months
ended September 30, 1999. The Company's main use of cash during the first nine
months of 1999 was $8.5 million for acquisitions and $36.2 million for the
purchase of property, plant and equipment. Approximately $10.8 million of these
purchases were for the purchase of the assets of the E&N Railway.
The Company's cash provided by financing activities was $35.0 million
for the nine months ended September 30, 1999 consisting of the net proceeds of
approximately $11.9 million from the private placement of restricted common
stock and $4.1 million from the sale of preferred stock. In addition, the
Company's net borrowings increased by $22.6 million primarily due to the above
mentioned purchase of E&N assets and certain acquisitions.
The Company's long term debt represents financing of property and
equipment, as well as the acquisition financing for many of the Company's
subsidiaries. Certain of this indebtedness was refinanced through the Company's
revolving line of credit (the "Revolver"). The Revolver is collateralized by
substantially all of the assets of the Company and certain of its subsidiaries.
On July 23, 1999, the Company's Revolver was increased from $85
million to $125 million by a consortium of banks with National Bank of Canada,
as agent. 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 month LIBOR plus 2.5%.
The maturity date of the Revolver was extended to July 2002.
To facilitate the acquisition of VLF, Freight Victoria obtained a $100
million bridge loan from Barclays Bank PLC under a senior secured loan facility.
Upon the execution of the facility, the Company issued to Barclays Bank PLC
warrants to acquire 750,000 shares of the Company's Common Stock at an exercise
price of $9.75 per share.
The bridge loan is due and payable on April 30, 2000. The Company has
the option to convert the bridge loan into a term loan which would mature April
30, 2009. If the Company exercises the option to convert the bridge loan, on
April 30, 2000, it will be required to pay a 1% fee of the converted balance in
additional fees and issue warrants equal to 10% of the Company's outstanding
common stock. The bridge loan bears interest at a rate equal to the London
Interbank Offered Rate plus the applicable margin. The applicable margin
initially is 500 basis points and increases by 50 basis points every 90 days.
The Company has agreed with Barclays Bank PLC that if the bridge loan is not
repaid by November 30, 1999 the Company will issue 50,000 warrants and
27
<PAGE> 29
the interest rate increases by 200 basis points. If the bridge loan converts to
a term loan, the lender will have the right to elect to fix the interest rate.
The bridge loan is guaranteed by the Company and is collateralized by liens on
all of the assets of Freight Victoria and by a pledge of the stock of certain of
the Company's subsidiaries. The facility agreement contains significant
restrictions on RailAmerica and its subsidiaries that are a party to the
agreement, including without limitation restrictions on additional indebtedness,
liens, sales of assets and capital expenditures. The Company is pursuing its
available alternatives for refinancing the bridge loan.
In August 1999, the Company issued $22.5 million aggregate principal
amount of its junior convertible subordinated debentures. Interest on the
debentures accrues at the rate of 6% per annum and is payable semi-annually,
commencing January 31, 2000. The debentures are convertible, at the option of
the holder, into shares of RailAmerica at a conversion price of $10, subjected
to adjustment in selected circumstances. The debentures mature on July 31, 2004,
are general unsecured obligations and rank subordinate in right of payment to
all senior indebtedness. At RailAmerica's option, the debentures may be redeemed
at par, plus accrued but unpaid interest thereon to the date of redemption, in
whole or in part, if the closing price of RailAmerica's common stock is above
200% of the conversion price for 10 consecutive trading days.
As of September 30, 1999, the Company had working capital of $24.0
million compared to working capital of $14.6 million as of December 31, 1998.
Cash on hand as of September 30, 1999 was $13.9 million compared to $5.8 million
as of December 31, 1998. The increases in working capital and cash primarily
related to the acquisition of Freight Victoria. The Company's cash flows from
operations historically have been sufficient to meet its ongoing operating
requirements, capital expenditures for property, plant, and equipment, and to
satisfy the Company's interest requirements.
The Company has entered into an Agreement and Plan of Merger (the
"Merger Agreement") with RailTex and a wholly-owned subsidiary of the Company
whereby the Company will acquire through a merger all of the stock of RailTex
for a purchase price of $13.50 per share plus two-thirds of a share of the
Company's common stock, subject to reallocation under specified circumstances.
The Company has received a commitment from Donaldson, Lufkin & Jenrette
("DLJ") to finance the acquisition, refinance existing debt of the Company,
refinance existing debt of RailTex and provide working capital. DLJ's financing
commitment provides for three senior secured facilities: (1) a $185.0 million
six-year Term A loan facility, (2) a $200.0 million seven-year Term B loan
facility, and (3) a $50.0 million six-year revolving credit facility. In
addition, the DLJ financing commitment provides for the issuance of $95.0
million of subordinated increasing rate notes as bridge financing if other cash
proceeds are not raised. The Company may also sell certain assets to facilitate
the transaction. There can be no assurance that the financing contemplated by
the DLJ financing commitment will be consummated. If the Company does not
consummate financing pursuant to the DLJ financing commitment and alternate
financing is unavailable upon terms acceptable to the Company, the Company will
be unable to complete the Merger with RailTex and will be in default of the
Merger Agreement.
Assuming the merger is completed and the financing contemplated by the
DLJ financing commitment is consummated, the Company expects that its future
cash flows will be sufficient for its current and contemplated operations for at
least the next twelve months. The Company anticipates using cash flows and
borrowings to consummate the RailTex merger and anticipated capital expenditures
for the upgrading of existing rail lines and purchases of locomotives and
equipment of approximately $3.6 million and capital expenditures at KSI of
approximately $0.3 million. In addition, the Company anticipates capital
expenditures of approximately $10.0 million over the next twelve months
primarily 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 loan commitment to fund the remainder of the expansion and
anticipates closing on this financing later in 1999. The Company anticipates
spending approximately $0.5 million over the next six months to refurbish the
office building that it purchased in July 1998. The Company has a firm
commitment to refinance the building on a permanent basis. The financing is
anticipated to close in the fourth quarter of 1999. Freight Victoria's capital
expenditures are estimated to be $10.0 million over the next twelve months and
the Company anticipates paying for these through cash generated from Freight
Victoria's operations. RaiLink and TPW's capital expenditures are estimated to
be $4.9 million and $2.8 million, respectively, over the next twelve months and
the Company anticipates paying for these through cash generated from operations
supplemented by borrowings on the 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
28
<PAGE> 30
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
an acquisition 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 November 12, 1999, the Company had approximately $4.8 million of availability
under the Revolver.
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 such 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 program in place designed to bring the remaining
software and systems into Year 2000 compliance in time to minimize any
significant detrimental effect 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.
29
<PAGE> 31
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
$0.5 million. The total amount expended through September 30, 1999 is
approximately $0.45 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. The discussions above also include our recent acquisitions
Freight Victoria, RaiLink and TPW.
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.
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; the inability to integrate acquired businesses; and the
regulation of the Company by federal, state, local and foreign regulatory
authorities. Any material adverse change in the financial condition or results
of operations of KSI or Freight Victoria would have a material adverse
30
<PAGE> 32
impact on the Company. Results actually achieved thus may differ materially from
expected results included in these statements.
ITEM 3. MARKET RISK DISCLOSURE
The Company has exposure to market risk for changes in interest rates
relating to certain of its debt obligations. The Revolver's interest rate is
tied to either the bank's prime rate or LIBOR at the option of the Company. The
Revolver had a balance of approximately $117.7 million as of September 30, 1999.
Interest on the $100 million bridge loan used for the acquisition of V/Line
Freight is tied to London Interbank Offered Rate. Certain of the Company's debt
in its Chilean subsidiary has interest rates which are tied to LIBOR.
The $100 million bridge loan is between Barclays Bank PLC and Freight
Victoria, an Australian company. In connection with this loan, matters arise
with respect to financial accounting and reporting for foreign currency
translation. Therefore, the Company has exposure to fluctuations in the value of
the Australian dollar.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, the Company sold $22.5 million of its 6% junior
convertible subordinated debentures which mature on July 31, 2004. The
debentures are convertible, at the option of the holder, into shares of the
Company's common stock at a conversion price per share of $10.00, subject to
adjustment in specified circumstances. At the Company's option, the debentures
may be redeemed at par, plus accrued and unpaid interest thereon to the date of
redemption, in whole or in part, if the closing price of the common stock is
above 200% of the conversion price for ten consecutive trading days. In addition
to these debentures, investors received warrants to purchase an aggregate of
676,363 shares of common stock at an exercise price of $10.50 per share, subject
to adjustment in specified circumstances. These warrants expire on August 5,
2004. Stonegate Securities, Inc. acted as placement agent to assist in offering
these debentures to accredited investors. The Company believes the sale of these
debentures and warrants is exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act") and Regulation D
promulgated thereunder.
In connection with the private placement of 6% junior convertible
subordinated debentures, the Company issued warrants to purchase an aggregate of
200,000 shares of common stock, at an exercise price of $10.50 per share to
Stonegate Securities, Inc. These warrants expire on July 31, 2001. The Company
believes the sale of these warrants is exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
ITEM 5. OTHER INFORMATION
On September 3, 1999, the Company, through its wholly-owned subsidiary,
Florida Rail Lines, Inc., completed the acquisition of all the outstanding
common stock of The Toledo, Peoria and Western Railroad Corporation ("TPW") from
CSX Transportation, Delaware Ostego Corporation, and other shareholders for an
aggregate purchase price of $18 million (including the repayment of
indebtedness), subject to certain adjustments. The Company funded the
acquisition through its revolving line of credit. TPW is headquartered in East
Peoria, Illinois and provides rail freight services to customers in the Midwest
United States and operates over rail lines running from Fort Madison, Iowa
across North Central Illinois to Logansport, Indiana.
On October 14, 1999, the Company, and its wholly owned subsidiary,
Cotton Acquisition Corp., entered into an agreement and plan of merger with
RailTex, Inc. ("RailTex"), providing for the acquisition by the Company of all
of the outstanding common stock of RailTex for an aggregate purchase price of
approximately $325 million (including the assumption of RailTex's outstanding
long term debt). Pursuant to the acquisition, RailTex's shareholders will
receive $13.50 in cash and two-thirds of a share of the Company's common stock
in exchange for each share of RailTex stock. It is anticipated that following
the acquisition, RailTex shareholders will own approximately 35% of the combined
company. The transaction, which is expected to close in early 2000, is subject
to shareholder approval by both companies, any necessary regulatory approvals
and other customary closing conditions. RailTex is headquartered in San Antonio,
Texas and operates approximately 4,100 route miles of rail line concentrated in
the southeastern, Midwestern, Great Lakes and New England regions of the United
States and Eastern Canada.
On November 12, 1999, management adopted a plan to sell is specialty
truck trailer manufacturing subsidiary business, Kalyn/Siebert and retained the
investment banking firm of ING Barings LLC to facilitate the sale. At this
time, management is unable to estimate the proceeds to be received from such
sale nor whether such sale will be completed within one year, although
management does not believe the Company will incur a loss from the sale.
Accordingly, the result of operations of Kalyn/Siebert continue to be presented
in the Company's results from continuing operations.
31
<PAGE> 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the quarter
ended September 30, 1999:
1. Current Report on Form 8-K, dated September 3, 1999, was filed
with the Securities and Exchange Commission on September 20, 1999
in connection with the Company's acquisition of the railroad
freight business of The Toledo, Peoria and Western Railroad
Corporation.
2. A Current Report on Form 8-K, dated July 26, 1999, was filed with
the Securities and Exchange Commission on August 6, 1999 in
connection with the Company's acquisition of the railroad freight
business of RaiLink, Ltd. An amendment to the Form 8-K was filed
with the Securities and Exchange Commission on October 5, 1999.
3. A Current Report on Form 8-K/A, dated July 14, 1999, was filed
with the Securities and Exchange Commission on July 16, 1999 in
connection with the Company's acquisition of the railroad freight
business of V/Line Freight Corporation.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RAILAMERICA, INC.
Date: November 15, 1999
By: /s/ Gary O. Marino
-----------------------------
Gary O. Marino as Chairman,
Chief Executive Officer and as
Principal Financial Officer
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