<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) AUGUST 31, 2000
RAILAMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
<TABLE>
<S> <C>
0-20618 65-0328006
(Commission File Number) (IRS Employer Identification No.)
</TABLE>
5300 BROKEN SOUND BLVD., N.W.
BOCA RATON, FLORIDA 33487
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code (561) 994-6015
N/A
(Former name or former address, if changed since last report)
--------------------------------------------------------------------------------
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<PAGE> 2
ITEM 5. OTHER EVENTS.
Attached hereto as exhibit 7(a) are the audited consolidated financial
statements of RailTex, Inc., a Texas corporation ("RailTex") and RailTex's
subsidiaries as of December 31, 1999 and 1998 and for the years ended December
31, 1999, 1998 and 1997. On February 4, 2000, RailAmerica, Inc., a Delaware
corporation (the "Registrant"), acquired all of the issued and outstanding
shares (the "Shares") of capital stock of RailTex, pursuant to the merger (the
"Merger") of Cotton Acquisition Corp., a Texas corporation wholly owned by the
Registrant ("Merger Sub"), with and into RailTex.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Attached hereto as exhibit 7(a) and incorporated herein by reference:
Report of Independent Public Accountants
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- For the Years Ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
Not applicable
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Arthur Andersen LLP
</TABLE>
2
<PAGE> 3
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.
<TABLE>
<S> <C>
By: /s/ DONALD D. REDFEARN
----------------------------------------------------
Name: Donald D. Redfearn
Its: Chief Administrative Officer, Executive
Dated: August 31, 2000 Vice President and Secretary
</TABLE>
3
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To RailTex, Inc.:
We have audited the accompanying consolidated balance sheets of RailTex,
Inc. (a Texas corporation), and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RailTex,
Inc., and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
San Antonio, Texas
February 17, 2000
F-1
<PAGE> 5
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES.......................................... $177,845 $161,020 $148,791
OPERATING EXPENSES:
Transportation............................................ 57,716 53,485 50,870
General and administrative................................ 36,437 30,855 30,701
Equipment................................................. 19,256 18,837 17,830
Maintenance of way........................................ 17,091 15,933 13,449
Depreciation and amortization............................. 16,693 14,258 12,940
-------- -------- --------
Total operating expenses.......................... 147,193 133,368 125,790
-------- -------- --------
OPERATING INCOME............................................ 30,652 27,652 23,001
INTEREST EXPENSE............................................ (10,435) (11,236) (10,527)
OTHER INCOME, NET........................................... 3,051 4,215 4,198
-------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE................................... 23,268 20,631 16,672
INCOME TAXES................................................ (9,389) (7,853) (6,048)
-------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE...................................... 13,879 12,778 10,624
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET
OF INCOME TAXES).......................................... -- (1,703) --
-------- -------- --------
NET INCOME.................................................. $ 13,879 $ 11,075 $ 10,624
======== ======== ========
BASIC EARNINGS PER SHARE:
NET INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE....................... $ 1.49 $ 1.39 $ 1.16
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET
OF INCOME TAXES).......................................... -- (0.19) --
-------- -------- --------
NET INCOME................................................ $ 1.49 $ 1.20 $ 1.16
======== ======== ========
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OF COMMON STOCK OUTSTANDING................................. 9,285 9,205 9,153
DILUTED EARNINGS PER SHARE:
NET INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE....................... $ 1.48 $ 1.38 $ 1.15
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET
OF INCOME TAXES)....................................... -- (0.18) --
-------- -------- --------
NET INCOME................................................ $ 1.48 $ 1.20 $ 1.15
======== ======== ========
WEIGHTED AVERAGE NUMBER OF DILUTED
SHARES OF COMMON STOCK OUTSTANDING.......................... 9,388 9,251 9,222
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 6
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,801 $ 1,243
Accounts receivable, less doubtful receivables of $884 in
1999; $844 in 1998..................................... 31,239 35,478
Prepaid expenses and other current assets................. 1,919 2,387
Inventories............................................... 852 849
Deferred tax assets, net.................................. 1,569 1,906
-------- --------
Total current assets.............................. 37,380 41,863
-------- --------
PROPERTY AND EQUIPMENT, NET................................. 293,971 291,779
-------- --------
OTHER ASSETS:
Investments in Brazilian railroad companies............... 21,095 19,994
Other, net................................................ 12,724 8,709
-------- --------
Total other assets................................ 33,819 28,703
-------- --------
Total assets...................................... $365,170 $362,345
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable.................................. $ -- $ 215
Current portion of long-term debt......................... 1,010 8,568
Accounts payable.......................................... 18,000 20,574
Accrued liabilities....................................... 18,004 17,729
-------- --------
Total current liabilities......................... 37,014 47,086
DEFERRED INCOME TAXES, NET.................................. 31,272 30,294
LONG-TERM DEBT, LESS CURRENT PORTION........................ 111,475 122,982
OTHER LIABILITIES........................................... 13,977 6,835
-------- --------
Total liabilities................................. 193,738 207,197
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN BRAZILIAN INVESTMENTS.................. 11,561 11,000
-------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock; $1.00 par value; 10 million shares
authorized;
no shares issued or outstanding........................ -- --
Common Stock; $.10 par value; 30 million shares
authorized;
issued and outstanding 9,293,314 in 1999; 9,273,963 in
1998.................................................. 929 927
Paid-in capital........................................... 86,095 85,115
Retained earnings......................................... 73,855 59,976
Deferred compensation..................................... (1,201) (948)
Accumulated other comprehensive income.................... 193 (922)
-------- --------
Total shareholders' equity........................ 159,871 144,148
-------- --------
Total liabilities and shareholders' equity........ $365,170 $362,345
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 7
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
SHARES OTHER TOTAL
ISSUED AND $.10 PAR PAID-IN RETAINED DEFERRED COMPREHENSIVE SHAREHOLDERS'
OUTSTANDING VALUE CAPITAL EARNINGS COMPENSATION INCOME EQUITY
----------- --------- ------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996.......... 9,124 $912 $83,629 $38,277 $ -- $(115) $122,703
Comprehensive income:
Net income........................ -- -- -- 10,624 -- -- 10,624
Foreign currency translation...... -- -- -- -- -- (243) (243)
----- ---- ------- ------- ------- ----- --------
Total comprehensive
income.................... -- -- -- 10,624 -- (243) 10,381
Exercise of stock options......... 37 4 170 -- -- -- 174
----- ---- ------- ------- ------- ----- --------
BALANCE, December 31, 1997.......... 9,161 916 83,799 48,901 -- (358) 133,258
Comprehensive income:
Net income........................ -- -- -- 11,075 -- -- 11,075
Foreign currency translation...... -- -- -- -- -- (564) (564)
----- ---- ------- ------- ------- ----- --------
Total comprehensive
income.................... -- -- -- 11,075 -- (564) 10,511
Exercise of stock options......... 33 3 326 -- -- -- 329
Restricted stock awards........... 80 8 990 -- (998) -- --
Amortization of deferred
compensation.................... -- -- -- -- 50 -- 50
----- ---- ------- ------- ------- ----- --------
BALANCE, December 31, 1998.......... 9,274 927 85,115 59,976 (948) (922) 144,148
Comprehensive income:
Net income........................ -- -- -- 13,879 -- -- 13,879
Foreign currency translation...... -- -- -- -- -- 1,115 1,115
----- ---- ------- ------- ------- ----- --------
Total comprehensive
income.................... -- -- -- 13,879 -- 1,115 14,994
Exercise of stock options......... 19 2 129 -- -- -- 131
Performance stock awards.......... -- -- 851 -- (851) -- --
Amortization of deferred
compensation.................... -- -- -- -- 598 -- 598
----- ---- ------- ------- ------- ----- --------
BALANCE, December 31, 1999.......... 9,293 $929 $86,095 $73,855 $(1,201) $ 193 $159,871
===== ==== ======= ======= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 8
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $13,879 $11,075 $10,624
Adjustments to reconcile net income to net cash provided
by
operating activities:
Cumulative effect of a change in accounting
principle............................................ -- 2,747 --
Depreciation and amortization.......................... 16,693 14,258 12,940
Deferred income taxes.................................. 1,315 5,432 2,182
Provision for losses on accounts receivable............ 427 187 638
Amortization of deferred financing costs............... 452 388 384
Gain on sale of assets................................. (3,041) (1,867) (6,771)
Gain on sale of subsidiary............................. (511) -- --
Gain on sale of minority interest...................... -- (2,045) --
Write down of investments.............................. -- -- 2,100
Other.................................................. 579 82 (275)
Changes in working capital:
Accounts receivable.................................. 3,812 (2,565) (5,975)
Prepaid expenses and other current assets............ 207 (22) (59)
Accounts payable and accrued liabilities............. (1,157) 777 10,109
------- ------- -------
Net cash provided by operating activities....... 32,655 28,447 25,897
------- ------- -------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (24,919) (30,320) (35,507)
Proceeds from sale of property and equipment.............. 12,339 2,288 7,327
Proceeds from sale of subsidiary.......................... 675 -- --
Purchase of new properties and related equipment and other
costs.................................................. -- (13,096) (25,978)
Investment in Brazilian railroad companies................ (540) -- (1,362)
Sale of preferred shares in Brazilian railroad company.... -- -- 2,758
Proceeds from sale of minority interest................... -- 10,861 --
Organization and acquisition costs........................ 18 (79) (97)
Decrease (increase) in other long-term assets............. 547 (1,617) (152)
------- ------- -------
Net cash used in investing activities........... (11,880) (31,963) (53,011)
------- ------- -------
FINANCING ACTIVITIES:
(Decrease) increase in short-term notes payable........... (215) (355) 218
Proceeds from long-term debt.............................. 272 21,900 75,000
Principal payments on long-term debt and capital leases... (3,469) (16,687) (53,398)
Net (decrease) increase in working capital facilities..... (16,593) (750) 4,000
Deferred financing costs.................................. (848) (3) (369)
Issuance of common stock.................................. 76 247 74
------- ------- -------
Net cash (used in) provided by financing
activities................................... (20,777) 4,352 25,525
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 560 (163) 51
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 558 673 (1,538)
CASH AND CASH EQUIVALENTS, beginning of year................ 1,243 570 2,108
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,801 $ 1,243 $ 570
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 9
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
RailTex, Inc. (a Texas corporation) and its wholly-owned subsidiaries.
References to "RailTex" or the "Company" mean RailTex, Inc. and, unless the
context indicates otherwise, its consolidated subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The Company is an operator of short line railroads in North America. Its
holdings include short line railroads concentrated in the Southeastern, Great
Lakes region, New England and Central United States as well as Eastern Canada.
During 1999, the Company owned investments in two Brazilian railroad companies
which were sold in January 2000 (See Note 5).
The Company's strategy is to grow through (i) the creation of new business
and improvement in operating performance of newly added and currently operated
properties and (ii) additions to and divestitures from its portfolio of short
line railroad properties, primarily through strategic acquisitions of Class I
railroad branch lines or existing short line properties, and divestiture of
non-strategic lines to smaller, independently operated short line companies.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS AND CONSOLIDATED STATEMENTS OF CASH FLOWS
All short-term investments which mature in less than 90 days when purchased
are considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.......................................... $10,534 $11,207 $8,962
Income taxes...................................... 7,358 2,514 2,604
Non-cash investing and financing activities:
Grants............................................ 6,652 2,918 352
Capital leases.................................... 31 1,959 1,844
Tax benefit from exercise of non-qualified stock
options......................................... 61 76 100
Amortization of deferred compensation............. 598 50 --
Liabilities and long-term debt assumed in connection
with the acquisition of railroad companies:
Fair value of assets acquired..................... -- 15,809 --
Cash paid for capital stock....................... -- 14,003 --
------- ------- ------
Liabilities and long-term debt assumed............ $ -- $ 1,806 $ --
======= ======= ======
</TABLE>
F-6
<PAGE> 10
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost. Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments are
capitalized; routine maintenance and repairs, which do not improve the asset or
extend asset lives, are charged to expense when incurred. Gains or losses on
sales or other dispositions are credited or charged to income. Depreciation is
computed using the straight-line method over periods ranging from 8 to 30 years
for roadway and structures, 3 to 15 years for locomotives and other railroad
equipment and 3 to 10 years for other non-railroad equipment. Leasehold
improvements are amortized over the life of the lease or the service lives of
the improvements, whichever is shorter.
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets To Be Disposed Of."
This statement requires the recognition of an impairment loss on a long-lived
asset held for use when events and circumstances indicate that the estimate of
undiscounted future cash flows expected to be generated by the asset are less
than its carrying amount. The Company recorded an impairment loss totaling
approximately $375,000 related to one of its railroad properties for the year
ended December 31, 1998. For the years ended December 31, 1999 and 1997, no
impairment loss was recorded.
INVESTMENTS IN BRAZILIAN RAILROAD COMPANIES
Investments in Brazilian railroad companies represent minority interest in
Ferrovia Centro Atlantica, S.A. ("FCA") and America Latina Logistica, S.A.
("ALL"), the parent corporation of Ferrovia Sul Atlantico, S.A. ("FSA"), are
accounted for using the cost method of accounting and are valued at the lower of
cost or market.
OTHER ASSETS
At December 31, 1999, other assets primarily include a note receivable of
$5.0 million, interest at LIBOR plus 2.0%, goodwill, and deferred financing
costs, while at December 31, 1998, other assets primarily include goodwill and
deferred financing costs. Goodwill is amortized over 30 years. Financing costs
are amortized over the related loan terms using the effective interest method.
Amortization of these costs is included in interest expense. Prior to the
Company's adoption of Statement of Position 98-5 in 1998, "Reporting on the
Costs of Start-up Activities" ("SOP 98-5") (see further discussion below), the
Company capitalized the costs associated with start-up activities, including the
acquisition of new railroads, and these costs were amortized using the
straight-line method over five years. Amortization of goodwill, financing,
organization and acquisition costs totaled approximately $648,000, $478,000 and
$1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Accumulated amortization of these costs was approximately $3.2 million and $2.6
million at December 31, 1999 and 1998, respectively.
DEFERRED GRANT REVENUE
Included in other liabilities at December 31, 1999 and 1998 is $6.3 million
and $4.4 million, respectively, of deferred grant revenue. Deferred grant
revenue represents economic development funds contributed to the Company by
government entities for track rehabilitation. Deferred grants are being
amortized to income over the life of the assets acquired with the funds.
Also included in other liabilities at December 31, 1999 and 1998 is $8.0
million and $2.7 million, respectively, of deferred revenue contributed to the
Company by one of its customers for rehabilitation of track used to serve this
customer. The deferred revenue is being amortized to income over 15 years, the
life of the service contract with the customer. The assets acquired are being
depreciated over 30 years. As a result, the Company recognized income, in excess
of depreciation, of approximately $221,000 in 1999. There was no income
recognized in 1998 as the asset had not been placed in service.
F-7
<PAGE> 11
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Freight revenues are recognized as shipments initially move onto the
Company's tracks, which, due to the relatively short length of haul, is not
materially different from the recognition of revenues as shipments progress.
Non-freight revenues, including joint facilities, switching, demurrage, car hire
and car repair services, are recognized as the service is performed.
INCOME TAXES
The Company files consolidated U.S. Federal income tax returns which
include all of its U.S. subsidiaries and separate Canadian federal income tax
returns for each Canadian subsidiary. Deferred income taxes are provided when
certain revenues and expenses are reported in periods which are different for
financial reporting purposes than for income tax reporting purposes.
Deferred tax liabilities and assets are recorded based on the enacted
income tax rates which are expected to be in effect in the periods in which the
deferred tax liability or asset is expected to be settled or realized. A change
in the tax laws or rates results in adjustments to the deferred tax liabilities
and assets. The effect of such adjustments is included in income in the period
in which the tax laws or rates are changed.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's Canadian
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities of operations denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at year-end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation gains and losses are charged directly to
foreign currency translation, a component of shareholders' equity, and are not
included in net income until realized through sale or liquidation of the
investment.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS AND MAJOR CUSTOMERS
The Company regularly grants trade credit to all of its customers. In
addition, the Company grants trade credit to other railroads through the routine
interchange of traffic. The Company's accounts receivable are well diversified
except for a concentration of accounts receivable with some Class I railroads.
The Company's management believes these Class I railroads are large, financially
strong companies, and thus believe the Company's exposure to credit risk is
minimal. Approximately 16% and 15% of the Company's accounts receivable were due
from one Class I railroad at December 31, 1999 and 1998, respectively. No other
customer individually accounted for more than 10% of the Company's accounts
receivable balance at December 31, 1999 or 1998.
During 1999, the Company served more than 1,100 customers who shipped and
received a wide variety of products. Although most of the Company's railroads
have a well-diversified customer base, several have one or two dominant
customers. The Company's largest customer in 1999, 1998 and 1997 was Canadian
National Railways ("CN"), representing 6.7%, 7.0% and 8.1% of operating
revenues, respectively.
PRICE RISK MANAGEMENT ACTIVITIES
The Company historically has hedged certain anticipated transactions.
Interest rate swaps and diesel fuel price contracts with third parties are used
to hedge interest rates and diesel fuel costs. Hedges of anticipated
transactions are accounted for under the deferral method with gains and losses
on these transactions recognized in interest expense and operating expenses, as
applicable, when the hedged
F-8
<PAGE> 12
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction occurs. The Company does not currently hold or issue financial
instruments for trading purposes.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. As issued, this statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Initial application of this
statement was to become effective for the Company's financial statements
beginning January 1, 2000. However, in June 1999, FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133" which delayed for one year the effective date of SFAS 133. The Company
believes the adoption of this statement will not have a material impact on the
financial condition or results of operations of the Company.
In April 1998, the Accounting Standards Executive Committee issued SOP
98-5. SOP 98-5 requires costs associated with start-up activities to be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company adopted SOP 98-5 for the year
ended December 31, 1998. This adoption resulted in the recognition of a
non-recurring charge of approximately $1,703,000 (net of income taxes) entitled,
"Cumulative effect of a change in accounting principle (net of income taxes)" in
the accompanying consolidated financial statements. Prior to the adoption of SOP
98-5, the Company capitalized the costs associated with start-up activities,
including the acquisition of new railroad properties, and amortized those costs
over five years. Prospectively, the Company's results of operations will reflect
higher costs associated with the acquisition of new railroad properties in the
period of acquisition.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to
conform with the current period presentation.
2. RELATED PARTY TRANSACTIONS
The Company purchases, in the normal course of business, various parts for
locomotives and grade crossing signals from certain subsidiaries of Harmon
Industries, Inc., of which the Company's Founder and Chairman Emeritus is a
director. Purchases from subsidiaries of Harmon Industries, Inc. for the years
ended December 31, 1999, 1998 and 1997 totaled approximately $584,000,
$1,200,000 and $462,000, respectively.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
F-9
<PAGE> 13
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"), which was effective for fiscal years
ending after December 15, 1997. Basic earnings per share is determined by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is determined by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period. Stock options with an
exercise price below fair market value for any of the periods presented are
considered common stock equivalents.
The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per share computations (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NUMERATOR:
Net income before cumulative effect of a change in
accounting principle............................. $13,879 $12,778 $10,624
Cumulative effect of a change in accounting
principle
(net of income taxes)............................ -- (1,703) --
------- ------- -------
Net income.......................................... $13,879 $11,075 $10,624
======= ======= =======
DENOMINATOR:
Weighted average number of basic share of common
stock outstanding................................ 9,285 9,205 9,153
EFFECT OF DILUTIVE SECURITIES:
Stock options....................................... 79 46 69
Performance stock................................... 24 -- --
------- ------- -------
103 46 69
Weighted average number of diluted shares of common
stock outstanding................................ 9,388 9,251 9,222
======= ======= =======
BASIC EARNINGS PER SHARE:
Net income before cumulative effect of a change in
accounting principle............................. $ 1.49 $ 1.39 $ 1.16
Cumulative effect of a change in accounting
principle
(net of income taxes)............................ -- (0.19) --
------- ------- -------
Total....................................... $ 1.49 $ 1.20 $ 1.16
======= ======= =======
DILUTED EARNINGS PER SHARE:
Net income before cumulative effect of a change in
accounting principle............................. $ 1.48 $ 1.38 $ 1.15
Cumulative effect of a change in accounting
principle
(net of income taxes)............................ -- (0.18) --
------- ------- -------
Total....................................... $ 1.48 $ 1.20 $ 1.15
======= ======= =======
</TABLE>
F-10
<PAGE> 14
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Roadway and structures...................................... $272,479 $263,541
Locomotives and other railroad equipment.................... 67,547 61,831
Office furniture and other equipment........................ 14,948 13,751
Equipment and vehicles held under capital leases............ 5,733 5,730
Vehicles.................................................... 1,167 1,120
-------- --------
361,874 345,973
Less accumulated depreciation and amortization.............. (67,903) (54,194)
-------- --------
$293,971 $291,779
======== ========
</TABLE>
5. INVESTMENTS IN BRAZILIAN RAILROAD COMPANIES
At December 31, 1999, the Company owned a 50.5% membership interest
totaling $9.5 million in RailTex Global Investments, LLC, a limited liability
company that owned shares in FCA and ALL. In January 2000, RailTex sold its
interests in FCA and ALL and as a result, the Company no longer owns any
interests in any Brazilian company (See Note 18).
6. SHORT-TERM NOTES PAYABLE
At December 31, 1999, the Company had no outstanding unsecured short-term
notes payable to insurance companies. At December 31, 1998, the Company had
outstanding unsecured short-term notes payable to insurance companies totaling
approximately $215,000. The notes bore interest at 7.75% and were due in monthly
installments of principal and interest totaling approximately $37,000 through
June 1999. The weighted average interest rate for the short-term notes payable
was 7.2% for the year ended December 31, 1998.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
F-11
<PAGE> 15
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Senior unsecured notes payable to two institutions; interest
at 7.44%; interest only due semiannually; principal
balance payable through six annual mandatory prepayments
beginning July 2007....................................... $ 50,000 $ 50,000
Senior unsecured notes payable to four institutions;
interest at 7.23%; interest only due semiannually;
principal balance due September 2005...................... 40,000 40,000
Senior unsecured notes payable to banks; interest is
variable (LIBOR based weighted average interest rate of
6.46% on $18.3 million in borrowings and U.S. prime based
interest rate of 7.75% on $0.3 million in borrowings at
December 31, 1998); interest due monthly; principal
partially due through quarterly principal payments through
April 2002, with remaining balance due April 2002......... -- 18,575
Senior unsecured notes payable to two institutions; interest
at 9.21%; interest only due semiannually; principal
balance of $6.9 million and $3.5 million due September
2005 and October 2005, respectively....................... 10,388 9,756
Senior unsecured subordinated notes; interest at 12.0%;
interest only due semiannually; principal balance of $2.5
million and $2.5 million due January 2001 and January
2002, respectively........................................ 5,000 5,000
Senior unsecured notes payable to banks; interest is
variable (Prime based 8.75% on $1.0 million and LIBOR
based 7.73% on $3.0 million at December 31, 1999);
interest payment periods range from one month to six
months depending on type of loan; all borrowings due April
2002...................................................... 4,000 --
Senior unsecured notes payable to banks; interest is
variable (LIBOR based weighted average interest rate of
6.375% at December 31, 1998); interest only due monthly
through April 1999, when all borrowings become due........ -- 2,000
Senior unsecured notes payable to banks; interest is
variable (90 day Canadian BA rate of 6.145% at December
31, 1998); interest only due monthly through April 1999,
when all borrowings become due............................ -- 1,951
Capital lease obligations; interest at rates ranging from
7.25% to 8.5% at December 31, 1999 and 1998; payable in
variable monthly installments through August 2003......... 2,402 3,513
Other, primarily due to state agencies; interest at rates
ranging from 5.0% to 7.9% at December 31, 1999 and 1998;
payable in variable installments through March 2011....... 695 755
-------- --------
Total long-term debt........................................ 112,485 131,550
Less current portion........................................ (1,010) (8,568)
-------- --------
Long-term debt, less current portion........................ $111,475 $122,982
======== ========
</TABLE>
In April 1999, the Company completed the refinancing and expansion of its
senior revolving credit facility to $175 million. The refinancing and expansion
replaced the Company's previous U.S. and
F-12
<PAGE> 16
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Canadian credit agreements, which expired in April 1999. The three year
agreement consists of a syndicate of ten banks, led by Chase Bank of Texas,
N.A., who serves as administrative agent. The facility allows for an equivalent
of U.S. $20 million to be allocated for use in Canada. The facility will be used
to finance acquisitions, capital expenditures, working capital and other general
corporate purposes. Interest payment periods range from one month to six months
depending on the type of loan. Interest rates also vary depending on the type of
loan. All borrowings become due and payable in April 2002. The unused portion of
the refinanced Senior Bank Facility is subject to a 0.30% to 0.50% commitment
fee based on certain ratios.
At December 31, 1999 and 1998, the Company had a $300,000 letter of credit
("LOC") outstanding under its credit facilities, in place at the time. This LOC
collateralizes a loan from the State of Michigan that financed specific capital
improvements.
Covenants contained in the agreements evidencing the Company's senior bank,
senior unsecured and senior subordinated debt prohibit the Company from paying
dividends on its capital stock and limit its ability to incur additional
indebtedness, create liens on its assets, make capital expenditures and
repurchase shares of its capital stock or any outstanding options or other
rights to acquire capital stock of the Company. The Company is also limited in
its ability to make loans, investments or guarantees. Additionally, the Company
is required to maintain a minimum tangible net worth and certain ratios of
leverage and cash flow to interest. At December 31, 1999, the Company was in
compliance with all covenants. As a result of the Company's merger with
RailAmerica, Inc. ("RailAmerica"), all long-term debt, except capital leases,
were paid in full subsequent to December 31, 1999 (See Note 18).
Maturities of long-term debt were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C>
2000........................................................ $ 1,010
2001........................................................ 3,385
2002........................................................ 7,076
2003........................................................ 217
2004........................................................ 77
Thereafter.................................................. 100,720
--------
Total............................................. $112,485
========
</TABLE>
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company historically has hedged certain anticipated transactions.
Interest rate swaps and diesel fuel price collar contracts with third parties
are used to hedge interest rates and diesel fuel costs. Hedges of anticipated
transactions are accounted for under the deferral method with gains and losses
on these transactions recognized in interest expense and operating expenses when
the hedged transaction occurs. The Company does not currently hold or issue
financial instruments for trading purposes.
The Company is exposed to fluctuations in diesel fuel prices, as an
increase in the price of diesel fuel would result in lower earnings and
increased cash outflows. The Company has entered into several commodity collar
transactions to hedge market risks of diesel fuel prices. The first collar was
effective April 1, 1998 and terminated March 31, 1999 and represented notional
amounts totaling 225,000 gallons per month with a cap price of $0.5600 per
gallon and a floor price of $0.4375 per gallon. The second collar was effective
July 1, 1998 and terminated June 30, 1999 and represented notional amounts
totaling 225,000 gallons per month with a cap price of $0.5600 per gallon and a
floor price of $0.4490 per gallon.
In February 1999, the Company entered into two additional contracts to
hedge its market risk from diesel fuel prices. The first consisted of three
monthly swap agreements which fix the price of 725,000
F-13
<PAGE> 17
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gallons of diesel fuel in April, May and June 1999 at $0.3215, $0.3280 and
$0.3375 per gallon, respectively. The second is a cap which fixes the price of
725,000 gallons of diesel fuel per month for the period July 1999 to June 2000
at $0.4500 per gallon. The cost of the cap was approximately $209,000, which
will be amortized over the period covered by the cap. The cap which expires in
June 2000, hedges approximately 60% of the Company's estimated monthly diesel
fuel consumption.
At December 31, 1999 and 1998, the Company had not entered into any
interest rate swaps contracts.
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments held by the Company:
Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.
Accrued interest payable: The carrying amount approximates fair value as
the majority of interest payments are made monthly or semiannually.
Long-term investment: The carrying value approximates fair value based on
discounted cash flows.
Long-term debt, senior subordinated debt and senior notes payable: The
fair value of the Company's long-term debt, senior subordinated debt and senior
notes payable is based on secondary market indicators. Since the Company's debt
is not quoted, estimates are based on each obligation's characteristics,
including remaining maturities, interest rates, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair
value.
Commodity collar transactions: The fair value of commodity collar
transactions is the amount at which they could be settled, based on estimates
obtained from dealers. The unrealized gain on the commodity collar transaction
at December 31, 1999 was approximately $766,000 and the unrealized loss on the
commodity collar transaction at December 31, 1998 was approximately $249,000.
10. EMPLOYEE BENEFITS
STOCK BASED COMPENSATION
Stock Options
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), was issued. SFAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company adopted SFAS
123 effective January 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by SFAS 123.
The Company grants non-qualified stock options to outside Directors and key
employees of the Company. In September 1993, the Board of Directors and
shareholders of the Company approved an equity incentive plan ("1993 Plan"). In
June 1996, the 1993 Plan was amended to (i) increase the maximum number of
shares of Common Stock issuable under the 1993 Plan from 750,000 to 1,250,000,
without reduction for the number of shares issued upon exercise of options
granted outside of the 1993
F-14
<PAGE> 18
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan; (ii) extend the exercise period for Outside Director's Options from two to
ten years and increase the number of shares which may be purchased under Outside
Director's Options from 2,000 to 3,000; (iii) specify 1,250,000 shares as the
maximum number of shares issuable under the 1993 Plan to any employee in any
year; (iv) permit the 1993 Plan administrator to specify shorter vesting periods
for non-qualified options; and (v) clarify that cashless exercises of stock
rights are permitted under the 1993 Plan. In May 1999, the shareholders of the
Company voted to increase the maximum number of shares of Common Stock issuable
under the 1993 Plan from 1,250,000 to 1,650,000, without reduction for the
number of shares issued upon exercise of options granted outside of the 1993
Plan.
Under the Company's stock option plan, options have been granted to outside
directors and certain key employees of the Company at prices equal to or more
than the fair market value of the Company's stock on the date of grant and
expire 10 years from the date of grant, unless specified otherwise. Stock
options granted to outside directors are exercisable immediately and stock
options granted to key employees vest at a rate of 20% per year, unless
specified otherwise.
A summary of the status of the Company's 1993 Plan, as amended, for the
years ended December 31, 1999, 1998 and 1997, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of the year.... 854,614 $13.60 581,783 $18.07 743,954 $19.00
Granted............................... 215,197 13.46 710,216 13.42 188,973 19.31
Exercised............................. (19,351) 3.73 (33,039) 7.49 (58,667) 4.71
Forfeited............................. (105,692) 11.93 (404,346) 20.22 (292,477) 23.93
-------- -------- --------
Outstanding, end of year.............. 944,768 13.95 854,614 13.60 581,783 18.07
======== ======== ========
Options exercisable end of year....... 311,416 $13.68 194,654 $13.33 245,940 $13.50
======== ====== ======== ====== ======== ======
Weighted average fair value of options
granted during year................. $ 8.31 $ 8.41 $12.66
====== ====== ======
</TABLE>
The following table summarizes the information about the 1993 Plan options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.74- 8.80........................ 94,890 1.83 $ 6.37 94,890 $ 6.37
$10.88-11.94........................ 259,205 8.91 11.84 59,491 5.78
$14.00-18.50........................ 511,514 7.87 14.47 85,764 14.77
$24.25-27.75........................ 79,159 5.49 26.56 71,271 26.60
------- -------
944,768 7.35 $13.95 311,416 $13.68
======= =======
</TABLE>
In November 1998, the Board of Directors of the Company granted employee
stock options to its current employee option holders other than its then
Chairman of the Board and its Chief Executive Officer at an exercise price of
$11.9375 per share, the then current market value of the Company's common stock.
The options vest over five years in accordance with the Company's 1993 Plan, as
amended. In order to
F-15
<PAGE> 19
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obtain the newly granted stock options the employees were required to tender all
previously granted employee options for cancellation. As to any employee, the
amount of shares included under the new options were reduced from the number of
shares covered by the canceled options by the same percentage as the new option
exercise price was less than the canceled option exercise price. The reduction
in the number of options outstanding and the reduced exercise price is reflected
in the tables above.
Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its 1993 Plan. Had
compensation cost for the Company's stock-based compensation plans been
determined on the fair value of the grant dates for awards under those plans
consistent with the method of SFAS 123, the Company's net income, earnings per
basic share and earnings per diluted share would have decreased to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported...................................... $13,879 $11,075 $10,624
Pro forma........................................ 12,378 $ 9,362 $ 9,289
Basic earnings per share:
As reported...................................... $ 1.49 $ 1.20 $ 1.16
Pro forma........................................ $ 1.33 $ 1.02 $ 1.01
Diluted earnings per share:
As reported...................................... $ 1.48 $ 1.20 $ 1.15
Pro forma........................................ $ 1.32 $ 1.01 $ 1.01
</TABLE>
The fair value of each option grant is estimated on the date of grant using
an option-pricing model similar to Black-Scholes with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively:
Dividend yield of 0.0% for all years; expected volatility of 48.1%, 42.0%
and 42.2%; risk-free interest rates of 7.7%, 5.6% and 6.5%; and expected lives
of 7.6, 10 and 10 years for December 31, 1999, 1998 and 1997, respectively.
Restricted Stock
In 1998, the Company, under the 1993 Plan, granted 80,000 restricted shares
in the form of the Company's common stock to key executives. Of the 80,000
restricted shares awarded in 1998, 30,000 vest ratably over three years and
50,000 vest ratably over five years. The restricted shares will also vest in the
event of a change in control or termination, not for cause. The unvested portion
of the restricted shares forfeit if the key executive is terminated for cause
during the restriction period. The awards were recorded at the fair market value
of the Company's common stock on the date of grant as deferred compensation and
will be amortized over the restriction period. For the years ended December 31,
1999 and 1998, the Company recorded compensation expense of approximately
$243,000 and $50,000, respectively. For the year ended December 31, 1999, 20,000
of the 80,000 restricted shares vested.
PERFORMANCE STOCK
Performance shares were awarded to certain key employees in 1998, through
the 1993 Plan. Employees must be employed by the Company at the end of three
years from the date of the award to receive the performance shares. During the
three-year period, the number of shares to be awarded can increase by a maximum
of 200.0% or decrease to zero as determined by the Company's total shareholder
return as compared to benchmarks, as defined in the plan.
F-16
<PAGE> 20
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company, under the 1993, granted performance shares to key
executives in 1999. The performance shares vest over a three-year period
depending on whether certain earnings per share and return on capital targets
are met, as defined. The performance shares cliff vest seven years from the date
of grant. If the earnings per share and return on capital targets are met, the
executives must be employed by the Company at the end of three years from the
date of the award to receive the performance shares. If the earnings per share
and return on capital targets are not met, the executive must be employed by the
Company at the end of seven years from the date of the award to receive the
performance shares.
As of December 31, 1999 and 1998, a total of 56,716 and 20,457 performance
shares were outstanding, respectively. At December 31, 1999, the Company
recorded compensation expense related to the performance shares of approximately
$355,000. There was no compensation expense recorded at December 31, 1998
related to the performance shares.
On February 4, 2000, the Company was acquired by a wholly-owned subsidiary
of RailAmerica. As a result of the acquisition, all stock options, restricted
stock and performance stock under the 1993 Plan became fully exercisable and
vested. All stock options, restricted stock and performance stock outstanding
immediately prior to closing were canceled. Each stock option holder received an
amount in cash equal to $13.50 minus the exercise price of the stock option plus
two-thirds of a share of RailAmerica stock in exchange for each share of RailTex
stock. Restricted stock and performance stock holders received an amount in cash
of $13.50 per share plus two-thirds of a share of RailAmerica stock in exchange
for each share of RailTex stock (See Note 18).
CASH BASED COMPENSATION
The Company has various performance-based, cash incentive compensation
programs which include all employees. Total cash incentive compensation of
approximately $5.2 million, $3.6 million and $3.1 million was awarded under the
various incentive compensation programs in 1999, 1998 and 1997, respectively.
RETIREMENT PLANS
The Company has a 401(k) profit sharing plan ("401(k) Plan") for all
eligible employees of the Company, as defined in the 401(k) Plan document. The
401(k) Plan qualifies under Section 401(k) of the Internal Revenue Code as a
salary reduction plan. Employees may elect to contribute a certain percentage of
their salary on a before-tax basis. Employees are immediately fully vested in
their contributions and begin vesting in employer contributions after one year
of service, as defined in the 401(k) Plan document. The 401(k) Plan is a defined
contribution plan with employer contributions made solely at the discretion of
the Board of Directors.
Effective July 1, 1995, the 401(k) Plan was amended to provide for a
Company matching contribution for certain employees of RailTex, Inc., the parent
company, who are not covered under the Railroad Retirement and Railroad
Unemployment Insurance Acts ("The Retirement Acts"). The Company matches
employee contributions, for these employees, at the rate of 200.0% on employee
contributions up to 5.0% of eligible compensation. Employees begin vesting in
the employer matching contributions after one year of service. Company matching
contributions to the 401(k) Plan totaled approximately $327,000, $314,000 and
$230,000 in 1999, 1998 and 1997, respectively.
EMPLOYEE OPEN MARKET STOCK PURCHASE PLAN
The Company had an Employee Open Market Stock Purchase Plan ("Stock
Purchase Plan"), which was canceled in October 1999 when the Company announced
plans to merge with RailAmerica. The purpose of the Stock Purchase Plan was to
allow employees of the Company to participate in the
F-17
<PAGE> 21
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's future. The Stock Purchase Plan was a payroll deduction plan which
permits employees who meet specified length of service requirements to purchase
shares, on an after-tax basis, of the Company's common stock on the open market
at prevailing market prices. The Company paid the brokerage commissions on all
purchases and incurred the administrative expenses associated with the Stock
Purchase Plan. Stock Purchase Plan expenses in 1999, 1998 and 1997 were not
material.
EXECUTIVE DEFERRED COMPENSATION
During 1995, the Company implemented an Executive Deferred Compensation
Plan wherein certain key employees were provided with life insurance protection
in an amount sufficient to provide supplemental income, based upon a percentage
of the employee's base salary, at retirement.
The Executive Deferred Compensation Plan was funded through the purchase of
split-dollar life insurance contracts. Upon death or retirement, the participant
or the participant's estate was to reimburse the Company for all policy premiums
paid. Also, should employment terminate prior to death or retirement, the
participant could forfeit, at the discretion of the Compensation Committee, any
future rights in the insurance policy. Effective January 1, 1999, the Executive
Deferred Compensation Plan was modified and all split-dollar life insurance
contracts, except two policies for two former executives, were canceled and
replaced with a new Executive Deferred Compensation Plan. Under the new plan,
each executive is entitled to 1% of their gross annual salary as deferred
compensation. Premiums paid for the split dollar life insurance contracts for
1999, 1998 and 1997 were approximately $149,000, $407,000 and $311,000,
respectively. The combined cash surrender value of these policies was
approximately $526,000 and $859,000 at December 31, 1999 and 1998, respectively.
As a result of RailAmerica's acquisition of RailTex, which was effective
February 4, 2000, the two remaining split-dollar life insurance policies were
transferred to the two former executives and the deferred compensation that had
been accrued through February 4, 2000 under the new Executive Deferred
Compensation Plan was paid to each executive.
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company does not provide post-retirement or post-employment benefits to
its employees.
F-18
<PAGE> 22
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Income tax expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States:
Federal --
Current....................................... $5,181 $1,486 $2,358
Deferred...................................... 1,349 4,672 1,837
------ ------ ------
6,530 6,158 4,195
------ ------ ------
State --
Current....................................... 1,337 (180) 965
Deferred...................................... (270) 970 36
------ ------ ------
1,067 790 1,001
------ ------ ------
Foreign:
Current....................................... 1,556 635 543
Deferred...................................... 236 270 309
------ ------ ------
1,792 905 852
------ ------ ------
$9,389 $7,853 $6,048
Tax effect of change in accounting principle......... -- (1,044) --
------ ------ ------
$9,389 $6,809 $6,048
====== ====== ======
</TABLE>
The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax liability
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Differences in property depreciation and amortization....... $36,488 $33,009
Accruals and reserves not deducted for tax purposes until
paid or realized.......................................... (1,982) (1,333)
Federal benefit of state taxes.............................. (724) (890)
Charitable contribution carryforward........................ (609) (1,291)
AMT credit carryforward..................................... -- (993)
Deferred revenue............................................ (3,470) --
Other items, net............................................ -- (114)
------- -------
Net deferred tax liability............................. $29,703 $28,388
======= =======
</TABLE>
At December 31, 1999 and 1998, there were no valuation allowances against
deferred tax assets.
The Company has not provided any U.S. deferred income taxes or Canadian
withholding taxes on the undistributed earnings of its Canadian subsidiaries
based on the determination that such earnings will be indefinitely reinvested.
At December 31, 1999, the cumulative undistributed earnings of these
subsidiaries were approximately $10.2 million. If such earnings were not
considered indefinitely reinvested, deferred U.S. and Canadian withholding taxes
would have been provided after consideration of foreign tax credits. However,
determination of the amount of deferred federal income taxes and Canadian
withholding taxes is not practical.
F-19
<PAGE> 23
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the U.S. statutory tax rate to the effective income
tax rate follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States statutory rate................................ 35.0% 35.0% 35.0%
Effect of foreign operations................................ 1.8 1.0 1.3
State income taxes, net of federal income tax benefit....... 3.0 4.8 5.0
Contribution for tax purposes, net of valuation allowance... -- -- (5.0)
Reversal of valuation allowance............................. -- (2.5) --
Other, net.................................................. 0.5 (0.2) --
---- ---- ----
40.3% 38.1% 36.3%
==== ==== ====
</TABLE>
12. LEASES
Operating lease expense for the years ended December 31, 1999, 1998 and
1997 totaled approximately $5.1 million, $7.6 million and $6.1 million,
respectively.
The minimum future lease payments for equipment and facilities under
non-cancelable leases are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FOR THE YEARS ENDED DECEMBER 31, LEASES LEASES
-------------------------------- --------- -------
<S> <C> <C>
2000........................................................ $ 4,285 $1,090
2001........................................................ 2,937 902
2002........................................................ 2,885 536
2003........................................................ 2,752 146
2004........................................................ 2,635 --
Thereafter.................................................. 7,909 --
------- ------
Total minimum payments............................ $23,403 2,674
=======
Less amount representing interest at rates ranging from
7.25% to 8.5%.......................................... 272
------
Present value of minimum lease payments................... $2,402
======
</TABLE>
The Company has entered into various lease agreements covering certain of
its railroad properties. For railroad properties it leases, the Company
ordinarily assumes all operating and financial responsibilities, including
maintenance, payment of property taxes and regulatory compliance, upon
commencement date. Lease payments on three railroad properties leased from one
major railroad are structured to ensure that the Company interchanges an
agreed-upon percentage of outbound carloads with the lessor railroad. Under
these leases, no payments to the lessor are required as long as a minimum
percentage of traffic volume is interchanged with the lessor; therefore, the
Company controls, to some extent, the amounts which may be payable under these
leases. If the minimum percentage of traffic volume interchanged with the lessor
is not met, the amounts which may be payable under these leases could be
significant and have an adverse effect on the Company. These leases are subject
to an initial 20 year term with one or more renewal terms at the Company's
option. In addition, lease payments on five properties leased from two other
major railroads are subject to reduction from the base rate, down to zero,
depending upon the level of traffic interchanged with the lessors. The maximum
aggregate annual base rate lease payments under these leases is approximately
$1.7 million. These leases have initial lease terms of 5 to 20 years and leases
on four of the five properties include purchase options which may be exercised
by the Company after one to three years of operation. To date, no payments have
been required under any of the Company's railroad property
F-20
<PAGE> 24
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases. Therefore, the above table does not include any rentals pertaining to
the Company's railroad property leases.
13. COMMITMENTS AND CONTINGENCIES
The Company has added railroad properties to its portfolio through the
purchase of track and roadbed, lease of such assets and contracts to operate
such assets under management agreements. These arrangements typically relate
only to the physical assets of the railroad property and, except for the
purchases of Central Properties, Inc. ("CPI") and Indiana & Ohio Rail Corp.
("IORC") (See Note 14), which were structured as acquisitions of stock, the
Company typically does not contractually assume any of the operations or
liabilities of the divesting carriers.
Rail properties operated by the Company under management agreements
typically have initial ten year terms followed by either a purchase option or
one or more renewal terms at the Company's option. These operating contracts
typically require that the Company assume all operating and financial
responsibilities for freight operations on the property, including maintenance,
payment of property taxes and regulatory compliance. Payments by the Company for
the right to conduct rail operations on these properties are typically
calculated as a percentage of revenues from the respective properties.
In August 1995, the Company entered into a ten year Information Technology
Services Agreement ("ITS Agreement") with Electronic Data Systems Corporation
("EDS"). Under the ITS Agreement, EDS is responsible for the management
information systems of the Company, including developing, obtaining licenses for
and maintaining new software for the Company, coordinating the acquisition and
maintenance of computers and related equipment and coordinating the maintenance
of the Company's existing software. The Company currently pays EDS $2.0 million
annually which is subject to annual escalation based on the Consumer Price
Index. The ITS Agreement is subject to earlier termination under certain limited
conditions.
The Company maintains insurance to cover costs associated with personal
injury, including death, and property damage, including derailments. The
Company's liability policies, which include third party property damage, are
currently subject to a self-insured retention of $500,000 per occurrence. With
respect to its transportation of hazardous commodities, the Company's liability
policies cover sudden releases of hazardous materials, including expenses
related to evacuation. Personal injuries associated with grade crossing
accidents and damage to property of shippers are also covered under the
Company's liability policies. The Company's property damage policies, which
cover owned/leased property, are currently subject to a self-insured retention
of $150,000 per occurrence.
The Company's railroad employees are covered by the Federal Employers'
Liability Act ("FELA"), a fault-based system under which injuries and deaths of
railroad employees are settled by negotiation or litigation based on the
comparative negligence of the employee and the employer. FELA-related claims are
covered under the Company's liability insurance policies.
The Company is currently subject to a number of claims and legal actions
that arose in the ordinary course of business, including FELA claims by its
employees and personal injury claims (including wrongful death claims) by third
parties. The Company believes these claims, taking into account reserves and
applicable insurance, will not have a material adverse effect on the Company.
However, adverse judgments in these claims, individually or in the aggregate, in
excess of related reserves and applicable insurance, could have a materially
adverse effect on the Company's financial condition and results of its
operations.
F-21
<PAGE> 25
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. ACQUISITIONS AND DIVESTITURES
In September 1999, the Company sold 100% of the stock of the Salt Lake City
Southern Railroad for $675,000.
In June 1999, the Company sold the assets of the Greenville Northern
Railroad for approximately $1.3 million.
In April 1999, the Company completed the divestiture of the Northeast
Kansas & Missouri Railroad to Union Pacific ("UP") for approximately $3.2
million. The Company also completed the divestiture of the assets of the New
Orleans Lower Coast Railroad to the New Orleans & Gulf Coast Railway Company for
approximately $5.2 million.
In January 1999, a wholly-owned subsidiary of the Company, the Dallas
Garland and Northeast Railroad ("DGNO") commenced operations on 89 miles of rail
line north of Dallas, Texas ("North Dallas Lines") under a lease arrangement
with UP. The North Dallas Lines connect to and are operated as part of the DGNO.
In November 1998, a wholly-owned subsidiary of the Company, Goderich-Exeter
Railway ("GEXR") commenced operations on the Guelph Line under a lease
arrangement with CN. The Guelph Line is a 99 mile rail line that operates
between Silver and London, Ontario and connects with the GEXR at Stratford,
Ontario.
In September 1998, the Company acquired approximately 10 miles of track in
two separate five mile sections from the Burlington Northern and Santa Fe
Railway ("BNSF") for approximately $810,000. One section is in Carthage,
Missouri and the other is in Joplin, Missouri. Both sections are being operated
as part of the Company's Missouri & Northern Arkansas Railroad ("MNAR").
In June 1998, the Company acquired 100% of the outstanding stock of CPI.
The stock was originally held in a voting trust pending Surface Transportation
Board ("STB") approval, which was received effective July 1998. CPI was a
privately held company which owned 100% of the stock of two railroads in Ohio
and Indiana. The Central Railroad of Indianapolis ("CERA") operates almost 92
miles of rail line in north central Indiana under lease and trackage rights
arrangements. The Central Railroad of Indiana ("CIND") owns and operates 81
miles of rail line between Cincinnati, Ohio and Shelbyville, Indiana. The
purchase price was approximately $14.3 million including an approximately $14.0
million cash payment and the assumption of approximately $266,000 of long-term
debt. The Company began actively operating the two railroads in August 1998.
The following unaudited pro forma results of operations for the years ended
December 31, 1998 and 1997, assumes the acquisition of the CPI occurred as of
the beginning of the respective periods (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Operating revenues.......................................... $163,953 $155,790
======== ========
Net income.................................................. $ 10,214 $ 11,716
======== ========
Basic earnings per share.................................... $ 1.11 $ 1.28
======== ========
Diluted earnings per share.................................. $ 1.10 $ 1.27
======== ========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as depreciation expense as a result of a
step-up in the basis of fixed assets and an
F-22
<PAGE> 26
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustment of depreciable lives, additional amortization expense as a result of
organization costs and increased interest expense on acquisition debt. The
unaudited pro forma information is not necessarily indicative of the results
that would have occurred had such transactions actually taken place at the
beginning of the periods specified, nor does such information purport to project
the results of operations for any future date or period.
In February 1997, a wholly-owned subsidiary of the Indiana & Ohio Rail
Corp., Indiana & Ohio Railway Company ("IORY"), purchased substantially all of
the assets of the former DTI from the Grand Trunk Western Railroad, Inc., a
subsidiary of CN. IORY acquired 146 miles of track for approximately $22.0
million and, with trackage rights, operates over 255 miles of track between
Detroit, Michigan and Cincinnati, Ohio. IORY committed to return the former DTI
track to Federal Railroad Administration Class IV standards, over a three year
period. This rehabilitation project was completed during the year ended December
31, 1998. In addition,$5.0 million of the purchase price was reimbursed to the
Company due to certain levels of carloadings not achieved within a specified
time period, as detailed in the purchase and sale agreement.
15. COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive Income is defined as
the total of net income and all other changes in equity of an enterprise that
result from transactions and other economic events of a reporting period other
than transactions with owners. The Company has chosen to disclose comprehensive
income in the Consolidated Statements of Shareholders' Equity. For purposes of
SFAS 130, the Company's other comprehensive income or loss was comprised of net
currency translation adjustments. Paragraph 9(f) of Statement 109 "prohibits
recognition of a deferred tax liability or asset for differences related to
assets and liabilities that under FASB Statement No. 52, "Foreign Currency
Translation,' are remeasured from the local currency into the functional
currency using historical rates". Therefore, other comprehensive income is not
being shown net of tax.
16. SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for reporting information about operating segments in annual and
interim financial statements, requiring that public business enterprises report
financial and descriptive information about its reportable segments based on a
management approach. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
In applying the requirements of this statement, each of the Company's geographic
areas described below were determined to be an operating segment as defined by
the statement, but have been aggregated as allowed by the statement for
reporting purposes. As a result, the Company continues to have one reportable
segment, which is the operation of short line railroads.
F-23
<PAGE> 27
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information about the Company by geographic
area (in thousands). Identifiable Assets include property and equipment,
intangible assets and other long-term assets, excluding organization and
acquisition costs and deferred financing costs.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total Revenues:
United States................................. $157,640 $146,358 $134,496
Canada........................................ 20,122 13,841 13,855
Other foreign................................. 83 821 440
-------- -------- --------
Total.................................... $177,845 $161,020 $148,791
======== ======== ========
Operating Income:
United States................................. $ 25,319 $ 23,463 $ 19,225
Canada........................................ 5,320 3,307 3,906
Other foreign................................. 13 882 (130)
-------- -------- --------
Total.................................... $ 30,652 $ 27,652 $ 23,001
======== ======== ========
Identifiable Assets:
United States................................. $284,220 $280,717 $244,034
Canada........................................ 21,257 18,855 19,293
Other foreign................................. 21,095 20,133 18,367
-------- -------- --------
Total.................................... $326,572 $319,705 $281,694
======== ======== ========
</TABLE>
During 1999, the Company served more than 1,100 customers who shipped and
received a wide variety of products. Although most of the Company's railroads
have a well-diversified customer base, several have one or two dominant
customers. The Company's largest customer in 1999, 1998 and 1997 was CN,
representing 6.7%, 7.0% and 8.1% of operating revenues, respectively.
F-24
<PAGE> 28
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. GUARANTOR FINANCIAL STATEMENT INFORMATION
In anticipation of being a guarantor of debt, below are consolidating
financial statements of the Guarantor Subsidiaries, Non-Guarantor Subsidiaries
and the Company on a consolidated basis. Guarantor Subsidiaries include the
parent company, RailTex, and all U.S. subsidiaries. Non-Guarantor Subsidiaries
include all Canadian subsidiaries. Operating revenue and operating expense
eliminations are due to inter-company leases for locomotives and equipment
between the Guarantor parent and the non-guarantor subsidiaries.
CONSOLIDATING STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
GUARANTOR NON-
PARENT AND GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES............................... $159,238 $ 19,720 $ (1,113) $177,845
OPERATING EXPENSES:
Transportation................................. 51,570 7,145 (999) 57,716
General and administrative..................... 34,688 1,749 -- 36,437
Equipment...................................... 16,641 2,632 (17) 19,256
Maintenance of way............................. 15,130 2,058 (97) 17,091
Depreciation and amortization.................. 15,875 818 -- 16,693
-------- -------- -------- --------
Total operating expenses............... 133,904 14,402 (1,113) 147,193
-------- -------- -------- --------
OPERATING INCOME................................. 25,334 5,318 -- 30,652
INTEREST EXPENSE................................. (9,273) (1,162) -- (10,435)
INCOME FROM SUBSIDIARIES......................... 2,124 -- (2,124) --
OTHER INCOME, NET................................ 3,291 (240) -- 3,051
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE............ 21,476 3,916 (2,124) 23,268
INCOME TAXES..................................... (7,597) (1,792) -- (9,389)
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE................. 13,879 2,124 (2,124) 13,879
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAXES)................ -- -- -- --
-------- -------- -------- --------
NET INCOME....................................... $ 13,879 $ 2,124 $ (2,124) $ 13,879
======== ======== ======== ========
</TABLE>
F-25
<PAGE> 29
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 160 $ 1,641 $ -- $ 1,801
Accounts receivable.......................... 29,092 2,147 -- 31,239
Intercompany accounts receivable............. -- 3,384 (3,384) --
Prepaid expense and other current assets..... 1,923 (4) -- 1,919
Inventories.................................. 650 202 -- 852
Deferred tax assets, net..................... 1,569 -- -- 1,569
-------- ------- -------- ------------
Total current assets................. 33,394 7,370 (3,384) 37,380
-------- ------- -------- ------------
PROPERTY AND EQUIPMENT, NET.................... 272,714 21,257 -- 293,971
-------- ------- -------- ------------
OTHER ASSETS:
Investments in Brazilian railroad
companies................................. 21,095 -- -- 21,095
Other, net................................... 25,118 116 (12,510) 12,724
-------- ------- -------- ------------
Total other assets................... 46,213 116 (12,510) 33,819
-------- ------- -------- ------------
Total assets......................... $352,321 $28,743 $(15,894) $ 365,170
======== ======= ======== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payables.................... $ -- $ -- $ -- $ --
Current portion of long-term debt............ 1,010 -- -- 1,010
Accounts payable............................. 16,384 1,616 -- 18,000
Intercompany accounts payable................ 3,384 -- (3,384) --
Accrued liabilities.......................... 16,191 1,813 -- 18,004
-------- ------- -------- ------------
Total current liabilities............ 36,969 3,429 (3,384) 37,014
-------- ------- -------- ------------
DEFERRED INCOME TAXES, NET..................... 29,048 2,224 -- 31,272
LONG-TERM DEBT, LESS CURRENT PORTION........... 101,088 10,387 -- 111,475
OTHER LIABILITIES.............................. 13,977 -- -- 13,977
-------- ------- -------- ------------
Total liabilities.................... 181,082 16,040 (3,384) 193,738
-------- ------- -------- ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN BRAZILIAN
INVESTMENTS.................................. 11,561 -- -- 11,561
-------- ------- -------- ------------
SHAREHOLDERS' EQUITY:
Preferred Stock.............................. -- -- -- --
Common Stock................................. 929 73 (73) 929
Paid-in capital.............................. 86,095 2,252 (2,252) 86,095
Retained earnings............................ 73,855 10,185 (10,185) 73,855
Deferred compensation........................ (1,201) -- -- (1,201)
Accumulated other comprehensive income....... -- 193 -- 193
-------- ------- -------- ------------
Total shareholders' equity........... 159,678 12,703 (12,510) 159,871
-------- ------- -------- ------------
Total liabilities and shareholders'
equity............................. $352,321 $28,743 $(15,894) $ 365,170
======== ======= ======== ============
</TABLE>
F-26
<PAGE> 30
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 13,879 $ 2,124 $ (2,124) $ 13,879
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 15,875 818 -- 16,693
Deferred income taxes................................... 952 363 -- 1,315
Provision for losses on accounts receivable............. 271 156 -- 427
Amortization of deferred financing costs................ 404 48 -- 452
Income from subsidiaries................................ (2,124) -- 2,124 --
Gain on sale of assets.................................. (3,005) (36) -- (3,041)
Gain on sale of subsidiary.............................. (511) -- -- (511)
Other................................................... 566 13 -- 579
Change in working capital:
Accounts receivable, including intercompany accounts
receivable.......................................... 4,112 (1,100) 800 3,812
Prepaid expenses and other current assets............. 188 19 -- 207
Accounts payable and accrued liabilities, including
intercompany accounts payable....................... (1,641) 1,284 (800) (1,157)
-------- ------- -------- ------------
Net cash provided by operating activities......... 28,966 3,689 -- 32,655
-------- ------- -------- ------------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (22,829) (2,090) -- (24,919)
Proceeds from sale of property and equipment.............. 12,301 38 -- 12,339
Proceeds from sale of subsidiary.......................... 675 -- -- 675
Investment in Brazilian railroad company.................. (540) -- -- (540)
Organization and acquisition costs........................ -- 18 -- 18
Decrease in other long-term assets........................ 547 -- -- 547
-------- ------- -------- ------------
Net cash used in investing activities............. (9,846) (2,034) -- (11,880)
-------- ------- -------- ------------
FINANCING ACTIVITIES:
Decrease in short-term notes payable...................... (215) -- -- (215)
Proceeds from long-term debt.............................. 272 -- -- 272
Principal payments on long-term debt and capital leases... (3,469) -- -- (3,469)
Net decrease in working capital facilities................ (14,581) (2,012) -- (16,593)
Deferred financing costs.................................. (768) (80) -- (848)
Issuance of common stock.................................. 76 -- -- 76
-------- ------- -------- ------------
Net cash used in financing activities............. (18,685) (2,092) -- (20,777)
-------- ------- -------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... -- 560 -- 560
-------- ------- -------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 435 123 -- 558
CASH AND CASH EQUIVALENTS, beginning of year................ (275) 1,518 -- 1,243
-------- ------- -------- ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 160 $ 1,641 $ -- $ 1,801
======== ======= ======== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 9,347 $ 1,187 -- $ 10,534
Income taxes.............................................. 6,734 624 -- 7,358
Non-cash investing and financing activities:
Grants.................................................... 6,652 -- -- 6,652
Capital leases............................................ 31 -- -- 31
Tax benefit from exercise of non-qualified stock
options................................................. 61 -- -- 61
Amortization of deferred compensation..................... 598 -- -- 598
</TABLE>
F-27
<PAGE> 31
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES............................. $147,943 $ 13,532 $ (455) $161,020
OPERATING EXPENSES:
Transportation............................... 48,944 4,911 (370) 53,485
General and administrative................... 29,680 1,173 2 30,855
Equipment.................................... 16,728 2,117 (8) 18,837
Maintenance of way........................... 14,730 1,282 (79) 15,933
Depreciation and amortization................ 13,516 742 -- 14,258
-------- -------- -------- --------
Total operating expenses............. 123,598 10,225 (455) 133,368
-------- -------- -------- --------
OPERATING INCOME............................... 24,345 3,307 -- 27,652
INTEREST EXPENSE............................... (10,104) (1,132) -- (11,236)
INCOME FROM SUBSIDIARIES....................... 987 -- (987) --
OTHER INCOME, NET.............................. 4,427 (212) -- 4,215
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE... 19,655 1,963 (987) 20,631
INCOME TAXES................................... (6,948) (905) -- (7,853)
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE...................... 12,707 1,058 (987) 12,778
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAXES).............. (1,632) (71) -- (1,703)
-------- -------- -------- --------
NET INCOME..................................... $ 11,075 $ 987 $ (987) $ 11,075
======== ======== ======== ========
</TABLE>
F-28
<PAGE> 32
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ (275) $ 1,518 $ -- $ 1,243
Accounts receivable............................... 33,137 2,341 -- 35,478
Intercompany accounts receivable.................. 337 2,245 (2,582) --
Prepaid expense and other current assets.......... 2,276 111 -- 2,387
Inventories....................................... 742 107 -- 849
Deferred tax assets, net.......................... 1,906 -- -- 1,906
-------- -------- -------- --------
Total current assets...................... 38,123 6,322 (2,582) 41,863
-------- -------- -------- --------
PROPERTY AND EQUIPMENT, NET......................... 273,029 18,750 -- 291,779
-------- -------- -------- --------
OTHER ASSETS:
Investments in Brazilian railroad companies....... 19,994 -- -- 19,994
Other, net........................................ 18,991 104 (10,386) 8,709
-------- -------- -------- --------
Total other assets........................ 38,985 104 (10,386) 28,703
-------- -------- -------- --------
Total assets.............................. $350,137 $ 25,176 $(12,968) $362,345
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payables......................... $ 215 $ -- $ -- $ 215
Current portion of long-term debt................. 6,617 1,951 -- 8,568
Accounts payable.................................. 19,779 795 -- 20,574
Intercompany accounts payable..................... 2,245 337 (2,582) --
Accrued liabilities............................... 16,716 1,013 -- 17,729
-------- -------- -------- --------
Total current liabilities................. 45,572 4,096 (2,582) 47,086
-------- -------- -------- --------
DEFERRED INCOME TAXES, NET.......................... 28,434 1,860 -- 30,294
LONG-TERM DEBT, LESS CURRENT PORTION................ 113,226 9,756 -- 122,982
OTHER LIABILITIES................................... 6,835 -- -- 6,835
-------- -------- -------- --------
Total liabilities......................... 194,067 15,712 (2,582) 207,197
-------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN BRAZILIAN INVESTMENTS.......... 11,000 -- -- 11,000
-------- -------- -------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock................................... -- -- -- --
Common Stock...................................... 927 73 (73) 927
Paid-in capital................................... 85,115 2,252 (2,252) 85,115
Retained earnings................................. 59,976 8,061 (8,061) 59,976
Deferred compensation............................. (948) -- -- (948)
Accumulated other comprehensive income............ -- (922) -- (922)
-------- -------- -------- --------
Total shareholders' equity................ 145,070 9,464 (10,386) 144,148
-------- -------- -------- --------
Total liabilities and shareholders'
equity.................................. $350,137 $ 25,176 $(12,968) $362,345
======== ======== ======== ========
</TABLE>
F-29
<PAGE> 33
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 11,075 $ 987 $ (987) $ 11,075
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of a change in accounting principle... 2,633 114 -- 2,747
Depreciation and amortization........................... 13,516 742 -- 14,258
Deferred income taxes................................... 5,161 271 -- 5,432
Provision for losses on accounts receivable............. 155 32 -- 187
Amortization of deferred financing costs................ 351 37 -- 388
Income from subsidiaries................................ (987) -- 987 --
Gain on sale of assets.................................. (1,867) -- -- (1,867)
Gain on sale of minority interest....................... (2,045) -- -- (2,045)
Other................................................... 32 50 -- 82
Change in working capital:
Accounts receivable, including intercompany accounts
payable............................................. (871) (665) (1,029) (2,565)
Prepaid expenses and other current assets............. 24 (46) -- (22)
Accounts payable and accrued liabilities, including
intercompany accounts payable....................... 1,299 (1,551) 1,029 777
-------- -------- -------- --------
Net cash provided by operating activities......... 28,476 (29) -- 28,447
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (28,597) (1,723) -- (30,320)
Proceeds from sale of property and equipment.............. 2,288 -- -- 2,288
Purchase of new properties and related equipment and other
costs................................................... (13,096) -- -- (13,096)
Proceeds from sale of minority interest................... 10,861 -- -- 10,861
Organization and acquisition costs........................ (58) (21) -- (79)
Increase in other long-term assets........................ (1,637) 20 -- (1,617)
-------- -------- -------- --------
Net cash used in investing activities............. (30,239) (1,724) -- (31,963)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Decrease in short-term notes payable...................... (355) -- -- (355)
Proceeds from long-term debt.............................. 21,900 -- -- 21,900
Principal payments on long-term debt and capital leases... (16,687) -- -- (16,687)
Net decrease in working capital facilities................ (2,000) 1,250 -- (750)
Deferred financing costs.................................. -- (3) -- (3)
Issuance of common stock.................................. 247 -- -- 247
-------- -------- -------- --------
Net cash provided by financing activities......... 3,105 1,247 -- 4,352
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... -- (163) -- (163)
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 1,342 (669) -- 673
CASH AND CASH EQUIVALENTS, beginning of year................ (1,617) 2,187 -- 570
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ (275) $ 1,518 $ -- $ 1,243
======== ======== ======== ========
</TABLE>
(continued)
F-30
<PAGE> 34
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 10,100 $ 1,107 $ -- $ 11,207
Income taxes.............................................. 1,816 698 -- 2,514
Non-cash investing and financing activities:
Grants.................................................... 2,918 -- -- 2,918
Capital Leases............................................ 1,959 -- -- 1,959
Tax benefit from exercise of non-qualified stock
options................................................. 76 -- -- 76
Amortization of deferred compensation..................... 50 -- -- 50
Liabilities and long-term debt assumed in connection with
the acquisition of railroad companies:
Fair value of assets acquired............................. 15,809 -- -- 15,809
Cash paid for capital stock............................... 14,003 -- -- 14,003
-------- -------- -------- --------
Liabilities and long-term debt assumed.................... $ 1,806 $ -- $ -- $ 1,806
======== ======== ======== ========
</TABLE>
F-31
<PAGE> 35
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES.................................. $135,625 $ 13,611 $ (445) $148,791
OPERATING EXPENSES:
Transportation.................................... 46,434 4,809 (373) 50,870
General and administrative........................ 29,753 961 (13) 30,701
Equipment......................................... 15,776 2,062 (8) 17,830
Maintenance of Way................................ 12,444 1,056 (51) 13,449
Depreciation and amortization..................... 12,124 816 -- 12,940
-------- -------- -------- --------
Total operating expenses.................. 116,531 9,704 (445) 125,790
-------- -------- -------- --------
OPERATING INCOME.................................... 19,094 3,907 -- 23,001
INTEREST EXPENSE.................................... (8,616) (1,911) -- (10,527)
INCOME FROM SUBSIDIARIES............................ 975 -- (975) --
OTHER INCOME, NET................................... 4,367 (169) -- 4,198
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE.................. 15,820 1,827 (975) 16,672
INCOME TAXES........................................ (5,196) (852) -- (6,048)
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.............................. 10,624 975 (975) 10,624
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAXES)................... -- -- -- --
-------- -------- -------- --------
NET INCOME.......................................... $ 10,624 $ 975 $ (975) $ 10,624
======== ======== ======== ========
</TABLE>
F-32
<PAGE> 36
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
GUARANTOR
PARENT AND NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 10,624 $ 975 $ (975) $ 10,624
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 12,124 816 -- 12,940
Deferred income taxes................................... 1,942 240 -- 2,182
Provision for losses on accounts receivable............. 637 1 -- 638
Amortization of deferred financing costs................ 335 49 -- 384
Income from subsidiaries................................ (975) -- 975 --
Gain on sale of assets.................................. (6,771) -- -- (6,771)
Write down of investments............................... 2,100 -- -- 2,100
Other................................................... (272) (3) -- (275)
Change in working capital:
Accounts receivable, including intercompany accounts
receivable.......................................... (4,999) (501) (475) (5,975)
Prepaid expenses and other current assets............. (126) 67 -- (59)
Accounts payable and accrued liabilities, including
intercompany accounts payable....................... 9,576 58 475 10,109
-------- -------- -------- --------
Net cash provided by operating activities......... 24,195 1,702 -- 25,897
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (34,199) (1,308) -- (35,507)
Proceeds from sale of property and equipment.............. 7,327 -- -- 7,327
Purchase of new properties and related equipment and other
costs................................................... (25,978) -- -- (25,978)
Investment in Brazilian railroad companies................ (1,362) -- -- (1,362)
Sale of preferred shares in Brazilian railroad company.... 2,758 -- -- 2,758
Organization and acquisition costs........................ (53) (44) -- (97)
Increase in other long-term assets........................ (167) 15 -- (152)
-------- -------- -------- --------
Net cash used in investing activities............. (51,674) (1,337) -- (53,011)
-------- -------- -------- --------
FINANCING ACTIVITIES
Increase in short-term notes payable...................... 218 -- -- 218
Proceeds from long-term debt.............................. 74,790 210 -- 75,000
Principal payments on long-term debt and capital leases... (52,456) (942) -- (53,398)
Net Increase in working capital facilities................ 4,000 -- -- 4,000
Deferred financing costs.................................. (367) (2) -- (369)
Issuance of common stock.................................. 74 -- -- 74
-------- -------- -------- --------
Net cash provided by financing activities......... 26,259 (734) -- 25,525
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... -- 51 -- 51
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (1,220) (318) -- (1,538)
CASH AND CASH EQUIVALENTS, beginning of year................ (397) 2,505 -- 2,108
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ (1,617) $ 2,187 $ -- $ 570
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 7,069 $ 1,893 -- $ 8,962
Income taxes.............................................. 1,678 926 -- 2,604
Non-cash investing and financing activities
Grants.................................................... 352 -- -- 352
Capital Leases............................................ 1,844 -- -- 1,844
Tax benefit from exercise of non-qualified stock
options................................................. 100 -- -- 100
</TABLE>
F-33
<PAGE> 37
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENTS
In January 2000, RailTex Global Investments, LLC ("LLC"), a limited
liability company in which the Company owns a 50.5% membership interest, sold
all of its shares in FCA to existing shareholders for U.S. $6.4 million. Also in
January, RailTex International Holdings, Inc. ("RIHI"), a wholly-owned
subsidiary of RailTex, sold all of its remaining membership interest in the LLC
and, thus, indirectly, the LLC's shares in America Latina Logistica, S.A.
("ALL"), the parent corporation of FSA, to Global Environmental Fund ("GEF") for
U.S. $3.4 million. Concurrent with the sale of RailTex's ALL shares to GEF,
RailTex's obligations to repurchase any of the Brazilian interests previously
sold to GEF terminated. The Company received total proceeds on both of these
transactions of U.S. $9.8 million, which were used to reduce its senior credit
facilities and for general corporate purposes. RailTex recorded a gain of U.S.
$130,000, or $0.01 per share, from these transactions in the month of January
2000.
On February 4, 2000, RailAmerica acquired all of the outstanding stock of
RailTex for approximately $325 million, including the assumption of all of the
Company's outstanding long-term debt. Each outstanding share of common stock of
the Company was converted into the right to receive (i) $13.50 in cash, and (ii)
0.666667 shares of common stock, par value $0.001 per share of RailAmerica
common stock. As a result of the acquisition, RailTex became a wholly-owned
operating subsidiary of RailAmerica.
F-34
