<PAGE> 1
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) February 4, 2000
------------------------------
RAILAMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-20618 65-0328006
- ----------------------------------- -----------------------------------
(Commission File Number) (IRS Employer Identification No.)
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)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
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, Inc., a Texas corporation ("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. Pursuant
to the Merger, each Share was converted into the right to receive (the "Merger
Consideration") (i) $13.50 in cash, without interest, and (ii) 0.66666667 shares
of the Registrant's common stock, par value $.001. The Merger Consideration was
determined though negotiations between the Registrant and RailTex. The board of
directors of each of the Registrant and RailTex received an opinion that the
Merger Consideration was fair from a financial point of view. The Merger is
expected to be accounted for as a purchase.
Financing for the Merger is being provided by Donaldson, Lufkin and
Jenrette Securities Corporation ("DLJ"). The financing will consist, in part, of
the following senior secured credit facilities: a Term A loan in the amount of
$125,000,000 bearing interest initially at a rate of LIBOR plus 3.0%, a Term B
loan in the amount of $205,000,000 bearing interest initially at a rate of LIBOR
plus 3.25%, a U.S. Revolving loan in the amount of $30,000,000 bearing interest
initially at a rate of LIBOR plus 3.0%, a Canadian revolving loan in the amount
of $10,000,000 bearing interest initially at a rate of LIBOR plus 3.0%, and an
Australian revolving loan in the amount of $10,000,000 bearing interest
initially at a rate of LIBOR plus 3.0%. In addition, the Merger is also being
financed by the issuance of $95,000,000 of 13% Senior Subordinated Increasing
Rate Bridge Notes (the "Senior Sub Bridge Notes") and $55,000,000 of 15%
Increasing Rate Asset Bridge Notes (the "Asset Bridge Notes" and, together with
the Senior Sub Bridge Notes, the "Bridge Notes"). The Bridge Notes will be
issued by a subsidiary of the Registrant with the Registrant guaranteeing, on a
subordinated basis, the obligations of the subsidiary under the Bridge Purchase
Agreement. The Registrant expects to redeem the Asset Bridge Notes with the
proceeds derived from the proposed sale of Kalyn/Siebert, Inc. ("Kalyn"), the
Registrant's truck trailer manufacturer subsidiary. On November 12, 1999, the
Registrant announced its intention to sell Kalyn.
The Merger was consummated pursuant to the terms of an Agreement and
Plan of Merger, dated as of October 14, 1999, by and among the Registrant,
Merger Sub and RailTex. Effective at the Closing, the separate corporate
existence of Merger Sub ceased. RailTex, the surviving corporation of the
Merger, continues to be governed by the laws of the State of Texas. In
connection with the Merger, Ronald A. Rittenmeyer, a former executive officer
and director of RailTex, entered into a non-competition agreement with
Registrant.
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, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Unaudited Consolidated Statements of Income for the three and nine
month periods ended September 30, 1999 and 1998
Unaudited Consolidated Balance Sheets as of September 30, 1999
and 1998
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998
Unaudited Notes to Consolidated Financial Statements
2
<PAGE> 3
(b) Pro Forma Financial Information.
Attached hereto as exhibit 7(b) and incorporated herein by reference:
Unaudited Pro Forma Consolidated Balance Sheet as of September 30,
1999.
Unaudited Pro Forma Condensed Combined Statement of Income for the Nine
Months ended September 30, 1999.
Unaudited Pro Forma Condensed Combined Statement of Income for Year
ended December 31, 1998.
Notes to pro forma consolidated financial statements.
3
<PAGE> 4
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.
Dated: February 4, 2000 By: /s/ Gary O. Marino
--------------------------------------
Name: Gary O. Marino
Its: Chairman, Chief Executive Officer
and President
4
<PAGE> 5
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of RailTex, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
January 27, 1999
5
<PAGE> 6
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES ............................... $ 161,020 $ 148,791 $ 121,106
OPERATING EXPENSES:
Transportation ................................ 56,852 54,361 39,006
General and administrative .................... 26,675 26,367 20,948
Equipment ..................................... 18,937 17,954 15,718
Maintenance of way ............................ 16,646 14,168 13,246
Depreciation and amortization ................. 14,258 12,940 10,147
--------- --------- ---------
Total operating expenses ................... 133,368 125,790 99,065
--------- --------- ---------
OPERATING INCOME ................................. 27,652 23,001 22,041
INTEREST EXPENSE ................................. (11,236) (10,527) (6,893)
OTHER INCOME, NET ................................ 4,215 4,198 1,521
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ....... 20,631 16,672 16,669
INCOME TAXES ..................................... (7,853) (6,048) (6,708)
--------- --------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ................... 12,778 10,624 9,961
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) ....... (1,703) -- --
--------- --------- ---------
NET INCOME ....................................... $ 11,075 $ 10,624 $ 9,961
========= ========= =========
BASIC EARNINGS PER SHARE:
NET INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE ........... $ 1.39 $ 1.16 $ 1.09
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) .... (0.19) -- --
--------- --------- ---------
NET INCOME .................................... $ 1.20 $ 1.16 $ 1.09
========= ========= =========
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OF COMMON STOCK OUTSTANDING ...................... 9,205 9,153 9,112
DILUTED EARNINGS PER SHARE:
NET INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE ........... $ 1.38 $ 1.15 $ 1.08
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) .... (0.18) -- --
--------- --------- ---------
NET INCOME .................................... $ 1.20 $ 1.15 $ 1.08
========= ========= =========
WEIGHTED AVERAGE NUMBER OF DILUTED
SHARES OF COMMON STOCK OUTSTANDING ............... 9,251 9,222 9,231
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 1,243 $ 570
Accounts receivable, less doubtful receivables of $844 in 1998; $1,563 in 1997 .. 33,866 32,171
Prepaid expenses and other current assets ....................................... 4,848 2,527
Deferred tax assets, net ........................................................ 1,906 1,777
--------- ---------
Total current assets ......................................................... 41,863 37,045
--------- ---------
PROPERTY AND EQUIPMENT, NET ........................................................ 291,779 259,444
--------- ---------
OTHER ASSETS:
Investments in Brazilian railroad companies ..................................... 19,994 17,809
Other, net ...................................................................... 8,709 5,610
--------- ---------
Total other assets ........................................................... 28,703 23,419
--------- ---------
Total assets ................................................................. $ 362,345 $ 319,908
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable ........................................................ $ 215 $ 384
Current portion of long-term debt ............................................... 8,568 7,763
Accounts payable ................................................................ 20,574 18,829
Accrued liabilities ............................................................. 17,729 17,434
--------- ---------
Total current liabilities .................................................... 47,086 44,410
DEFERRED INCOME TAXES, NET ......................................................... 30,294 20,521
LONG-TERM DEBT, LESS CURRENT PORTION ............................................... 122,982 117,893
OTHER LIABILITIES .................................................................. 6,835 3,826
--------- ---------
Total liabilities ............................................................ 207,197 186,650
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN BRAZILIAN INVESTMENT .......................................... 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 9,273,963 in 1998; 9,160,924 in 1997 ................... 927 916
Paid-in capital ................................................................. 85,115 83,799
Retained earnings ............................................................... 59,976 48,901
Deferred compensation ........................................................... (948) --
Accumulated other comprehensive income .......................................... (922) (358)
--------- ---------
Total shareholders' equity ................................................... 144,148 133,258
--------- ---------
Total liabilities and shareholders' equity ................................... $ 362,345 $ 319,908
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES $.10 OTHER TOTAL
ISSUED AND 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, 1995 ............ 9,111 $ 911 $83,439 $ 28,316 $ -- $ (64) $ 112,602
Comprehensive income:
Net income ......................... -- -- -- 9,961 -- -- 9,961
Foreign currency translation ....... -- -- -- -- -- (51) (51)
----------- ----- ------- -------- --------- ---------- -----------
Total comprehensive income ....... -- -- -- 9,961 -- (51) 9,910
Exercise of stock options .......... 13 1 190 -- -- -- 191
----------- ----- ------- -------- --------- ---------- -----------
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
=========== ===== ======= ======== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE> 9
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................................... $ 11,075 $ 10,624 $ 9,961
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 ................................................... 14,258 12,940 10,147
Deferred income taxes ........................................................... 5,432 2,182 3,424
Provision for losses on accounts receivable ..................................... 187 638 783
Amortization of deferred financing costs ........................................ 388 384 348
Gain on sale of assets .......................................................... (1,867) (6,771) (1,280)
Gain on sale of minority interest ............................................... (2,045) -- --
Write down of investments ....................................................... -- 2,100 --
Other ........................................................................... 82 (275) --
Changes in working capital--
Accounts receivable .......................................................... (952) (5,975) (6,950)
Prepaid expenses and other current assets .................................... (1,635) (59) 51
Accounts payable and accrued liabilities ..................................... 777 10,109 7,035
-------- -------- --------
Net cash provided by operating activities ....................................... 28,447 25,897 23,519
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment ................................................. (30,320) (35,507) (21,393)
Proceeds from sale of property and equipment ....................................... 2,288 7,327 2,354
Purchase of new properties and related equipment and other costs ................... (13,096) (25,978) (16,682)
Purchase of investments in Brazilian railroad companies and related costs .......... -- (1,362) (21,775)
Sale of preferred shares in Brazilian railroad company ............................. -- 2,758 --
Proceeds from sale of minority interest ............................................ 10,861 -- --
Organization and acquisition costs ................................................. (79) (97) (88)
Increase in other long-term assets ................................................. (1,617) (152) (917)
-------- -------- --------
Net cash used in investing activities ........................................... (31,963) (53,011) (58,501)
-------- -------- --------
FINANCING ACTIVITIES:
(Decrease) increase in short-term notes payable .................................... (355) 218 (937)
Proceeds from long-term debt ....................................................... 21,900 75,000 41,569
Principal payments on long-term debt and capital leases ............................ (16,687) (53,398) (5,197)
Net (decrease) increase in working capital facilities .............................. (750) 4,000 --
Deferred financing costs ........................................................... (3) (369) (465)
Issuance of common stock ........................................................... 247 74 25
-------- -------- --------
Net cash provided by financing activities ....................................... 4,352 25,525 34,995
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................... (163) 51 (35)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................... 673 (1,538) (22)
CASH AND CASH EQUIVALENTS, beginning of year .......................................... 570 2,108 2,130
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ................................................ $ 1,243 $ 570 $ 2,108
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
9
<PAGE> 10
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. 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 and
Midwestern United States, in the Great Lakes and New England regions of the
United States and in Eastern Canada. The Company also owns investments in two
Brazilian railroads and provides management consulting services in Kazakhstan.
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.
10
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RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest ............................................................................ $11,207 $8,962 $ 5,795
Income taxes ........................................................................ 2,514 2,604 2,008
Non-cash investing and financing activities:
Grants .............................................................................. 2,918 352 859
Capital leases ...................................................................... 1,959 1,844 599
Tax benefit from exercise of non-qualified stock options ............................ 76 100 83
Amortization of deferred compensation ............................................... 50 -- --
Liabilities and long-term debt assumed in connection with the acquisition of
railroad companies:
Fair value of assets acquired ...................................................... $15,809 $ -- $17,669
Cash paid for capital stock ........................................................ 14,003 -- 8,873
------- ------ -------
Liabilities and long-term debt assumed ............................................. $ 1,806 $ -- $ 8,796
======= ====== =======
</TABLE>
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.
INVESTMENTS IN BRAZILIAN RAILROAD COMPANIES
Investments in Brazilian railroad companies represent minority interest
in Ferrovia Centro Atlantica, S.A. ("FCA") and Ferrovia Sul Atlantico, S.A.
("FSA") (see Note 5), are accounted for using the cost method of accounting and
are valued at the lower of cost or market.
11
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RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
OTHER ASSETS
At December 31, 1998, other assets primarily included deferred
financing costs, while at December 31, 1997 other assets also included
organization and acquisition costs. Financing costs are amortized over the
related loan terms using the effective interest method. Amortization of these
costs is included in interest expense. Organization and acquisition costs are
direct costs incurred in acquiring and licensing operating properties and
consist of directly attributable legal and other costs. Prior to the Company's
adoption of Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5") (see further discussion below), these costs were
amortized using the straight-line method over five years. Amortization of
financing and organization and acquisition costs totaled approximately $0.4
million, $1.6 million and $1.3 million for the years ended December 31, 1998,
1997 and 1996, respectively. Accumulated amortization of these costs was
approximately $2.5 million and $7.1 million at December 31, 1998 and 1997,
respectively.
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
cumulative translation adjustment, 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 20% of the Company's accounts receivable were due
from one Class I railroad at December 31, 1998 and 1997, respectively. No other
customer individually accounted for more than 10% of the Company's accounts
receivable balance at December 31, 1998 or 1997.
12
<PAGE> 13
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
During 1998, 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 1998 and 1997 was Canadian
National Railways ("CN"), representing 7.0% and 8.1% of operating revenues,
respectively. The Company's largest customer in 1996 was Indianapolis Power &
Light Company, representing 4.6% of operating revenues.
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 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 Consolidated Balance Sheet and measure those instruments at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this statement should be
as of the beginning of an entity's fiscal quarter. Earlier application of this
statement is encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after the issuance of this statement. 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, although earlier application is encouraged.
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.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits". The Company does not provide post-retirement or
post-employment benefits to its employees.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The Company adopted this statement for the year ended December 31, 1998.
13
<PAGE> 14
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted this statement for the year ended December 31, 1998 as an integral part
of Consolidated Shareholder's Equity, (see Note 16).
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting
and reporting standards for, among other things, the transfer and servicing of
financial assets, such as factoring receivables with recourse. This statement is
effective for transfers and servicing of financial assets occurring after
December 31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" ("SFAS 127"). SFAS 127 moved the
effective date of the provisions under SFAS 125 to some, but not all, transfers
and servicing of assets occurring after December 31, 1997. The Company's
adoption of this statement did not have an impact on its financial condition or
results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period financial
statements 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, 1998, 1997 and 1996 totaled approximately $1,219,000,
$462,000 and $586,000, respectively.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
14
<PAGE> 15
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. As a result, the Company's reported
earnings per share for 1996 was restated. 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,
------------------------------------
1998 1997 1996
---------- ------- ------
<S> <C> <C> <C>
NUMERATOR:
Net income before cumulative effect of a change in accounting principle ............... $ 12,778 $10,624 $9,961
Cumulative effect of a change in accounting principle (net of income taxes) ........... (1,703) -- --
---------- ------- -------
Net income ............................................................................ $ 11,075 $10,624 $9,961
========== ======= =======
DENOMINATOR:
Weighted average number of basic share of common stock outstanding .................... 9,205 9,153 9,112
Effect of dilutive stock options ...................................................... 46 69 119
---------- ------- -------
Weighted average number of diluted shares of common stock outstanding ................. 9,251 9,222 9,231
========== ======= ======
BASIC EARNINGS PER SHARE:
Before cumulative effect of a change in accounting principle .......................... $ 1.39 $ 1.16 $ 1.09
Cumulative effect of a change in accounting principle (net of income taxes) ........... (0.19) -- --
---------- ------- ------
Total ................................................................................. $ 1.20 $ 1.16 $ 1.09
========== ======= ======
DILUTED EARNINGS PER SHARE:
Before cumulative effect of a change in accounting principle .......................... $ 1.38 $ 1.15 $ 1.08
Cumulative effect of a change in accounting principle (net of income taxes) ........... (0.18) -- --
---------- ------- ------
Total ................................................................................. $ 1.20 $ 1.15 $ 1.08
========== ======= ======
</TABLE>
The effect of this accounting change on previously reported earnings
per share ("EPS") data was as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Primary EPS, as reported ................................ $ 1.08
Effect of SFAS 128 ...................................... .01
--------
Basic EPS, as restated .................................. $ 1.09
========
Fully diluted EPS, as reported .......................... $ 1.08
Effect of SFAS 128 ...................................... --
--------
Diluted EPS, as restated ................................ $ 1.08
========
</TABLE>
15
<PAGE> 16
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,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Roadway and structures ...................................... $ 263,541 $ 227,455
Locomotives and other railroad equipment .................... 61,831 55,171
Office furniture and other equipment ........................ 13,751 11,487
Equipment and vehicles held under capital leases (see Note 7) 5,730 5,264
Vehicles .................................................... 1,120 1,189
--------- ---------
345,973 300,566
Less accumulated depreciation and amortization .............. (54,194) (41,122)
--------- ---------
$ 291,779 $ 259,444
========= =========
</TABLE>
5. INVESTMENTS IN BRAZILIAN RAILROAD COMPANIES
In June 1996, a newly formed wholly-owned subsidiary of the Company,
RailTex International Holdings, Inc. ("RIHI"), purchased an investment, totaling
approximately Brazilian Reals ("R") 16.0 million (U.S. $16.1 million), in FCA,
which was awarded a 30 year concession to operate the 4,400 mile Center Eastern
Network of the Brazilian federal railroad. The purchase price of the concession,
which was the government's minimum bid price, was approximately R316.9 million
(U.S. $318.0 million). The Brazilian government structured the transaction as a
30 year concession with a 20.0% down payment and future lease payments due in
quarterly installments after an initial two year grace period.
In December 1996, RIHI purchased an approximate 6% interest, for
approximately R5.4 million (U.S. $5.2 million), in FSA, which was awarded a
concession to operate the 4,200 mile Southern Network of the Brazilian federal
railroad. The purchase price of the concession was approximately R216.6 million
(U.S. $208.0 million). The Brazilian government structured the transaction as a
30 year concession with a down payment consisting of a 20.0% installment and a
payment consisting of 100.0% of the difference between the Brazilian
government's minimum bid price and the purchase price. The remainder of the
purchase price is structured as lease payments due in quarterly installments
after an initial two year grace period.
RIHI's initial investments in FCA and FSA were funded by borrowings
under the Company's U.S. Acquisition Facility, as defined in Note 7. In February
1997, RIHI sold 2.8 million shares of preferred stock in FCA for approximately
R2.9 million (U.S. $2.8 million), of which it used approximately R1.4 million
(U.S. $1.3 million) to fund a portion of the investments in FSA.
RIHI accounts for the FCA and FSA investments under the cost method of
accounting. In the fourth quarter of 1997, the Company recorded a write down of
its investments in FCA and FSA totaling approximately $2.1 million before tax
and approximately $1.4 million after tax, or $0.15 per basic and diluted share,
reflecting the effect of the devaluation in the Brazilian Real.
The continuing economic uncertainty existing in Brazil has impacted the
ability of FCA and FSA to finance short-term capital needs. As a result, during
1998 the Board of Directors of FSA implemented a call for additional capital
contributions from existing shareholders. The Company did not participate in the
capital call and, as a result, its equity percentage in FSA was diluted. The
respective Boards of Directors of FCA and FSA may implement additional capital
contribution calls from existing shareholders in the future. The Company may or
may not choose to participate in such capital calls. In the event that the
Company does not participate, its equity percentage could be further diluted.
16
<PAGE> 17
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In November 1998, RIHI signed an agreement to sell a 49.5% interest in
its Brazilian railroad investments to Global Environment Fund ("GEF"), a
Washington, D.C. based investment fund, for approximately $11.0 million. RIHI
will retain the remaining 50.5% interest; however, under the related agreement
RIHI can be required to repurchase GEF's shares after five years at a price
equal to the lower of 95% of the appraised fair market value or certain collar
amounts provided for in the related agreement. The transaction closed on
December 31, 1998 and RailTex recorded a gain totaling approximately $2.0
million before tax and approximately $1.3 million after tax, or $0.14 per basic
and diluted share, on the transaction. This gain is included within "Other
income, net" in the accompanying consolidated statement of income. Proceeds from
the transaction were used to reduce amounts outstanding on the Company's senior
credit facilities.
Including the effects of the FSA capital call and the divestiture to
GEF, at December 31, 1998 RIHI owned approximately 5.0% and 2.1% of the
outstanding stock of FCA and FSA, respectively.
6. SHORT-TERM NOTES PAYABLE
As of December 31, 1998 and 1997, the Company had outstanding unsecured
short term notes payable to insurance companies totaling approximately $215,000
and $384,000, respectively. The notes bear interest at 7.75% and 6.92%,
respectively, and are due in monthly installments of principal and interest
totaling approximately $37,000 and $67,000 through June 1999 and 1998,
respectively. For the years ended December 31, 1998 and 1997, the weighted
average interest rate for the short term notes payable was 7.2% and 6.7%,
respectively.
17
<PAGE> 18
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,
--------------------------
1998 1997
--------- ---------
<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 (U.S. Acquisition Facility); 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; LIBOR based weighted average
interest rate of 7.66% at December 31, 1997); interest due monthly;
principal partially due through quarterly principal payments through April 2002, with
remaining balance due April 2002 ............................................................ 18,575 11,956
Senior unsecured notes payable to two institutions; interest at 9.21%; interest
only due semiannually; principal balance of $6.5 million and $3.3 million due
September 2005 and October 2005, respectively ................................................ 9,756 10,499
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 (U.S. Working Capital Facility); interest is
variable (LIBOR based weighted average interest rate of 6.375% and 7.85% at
December 31, 1998 and 1997, respectively); interest only due monthly
through April 1999, when all borrowings become due .......................................... 2,000 4,000
Senior unsecured notes payable to banks (Canadian Working Capital Facility);
interest is variable (90 day Canadian BA rate of 6.145% and 5.25% at
December 31, 1998 and 1997, respectively; interest only due monthly through
April 1999, when all borrowings become due .................................................. 1,951 769
Senior unsecured notes payable to banks (Canadian Acquisition Facility); interest is
variable; interest due monthly; principal partially due through quarterly
principal payments through April 2002, with remaining balance due April 2002 ................ -- --
Capital lease obligations; interest at rates ranging from 7.25% to 8.5% at December
31, 1998; payable in variable monthly installments through September 2000 ................... 3,513 2,890
Other, primarily due to state agencies; interest at rates ranging from 5.0% to 7.9%
at December 31, 1998; payable in variable installments through January 2008 ................. 755 542
--------- ---------
Total long-term debt ........................................................................... 131,550 125,656
Less current portion ........................................................................... (8,568) (7,763)
--------- ---------
Long-term debt, less current portion ........................................................... $ 122,982 $ 117,893
========= =========
</TABLE>
At December 31, 1998, the Company had a $300,000 letter of credit ("LOC")
outstanding under its U.S. Working Capital Facility, as defined below. This LOC
collateralizes a loan under a state program to encourage railroad capital
improvement projects.
18
<PAGE> 19
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In July 1997, the Company completed a $50.0 million private placement
of senior unsecured notes with two institutions. The proceeds were used to
reduce outstanding bank debt under the U.S. Acquisition Facility, as defined
below.
In May 1996, the Company entered into a U.S. credit agreement
consisting of a $10.0 million U.S. working capital facility ("U.S. Working
Capital Facility") and a $75.0 million U.S. acquisition facility ("U.S.
Acquisition Facility"). In September 1998, the terms of the credit agreement
were amended to increase the U.S. Working Capital Facility to $15.0 million and
decrease the U.S. Acquisition Facility to $70.0 million. The Company may borrow
under the U.S. Working Capital Facility to provide working capital and may
borrow under the U.S. Acquisition Facility to finance acquisitions of property
and equipment which meet criteria as defined in the related credit agreement.
The facilities expire on April 30, 1999. Interest is payable monthly under the
U.S. Working Capital Facility until April 30, 1999, when all borrowings become
due. Interest only is payable monthly on new borrowings under the U.S.
Acquisition Facility until April 30 of each year, when all such borrowings are
rolled into a term note. Term notes are amortized over a six year period;
however, all borrowings are due not later than April 30, 2002. Both the U.S.
Working Capital Facility and U.S. Acquisition Facility bear interest based on
stated borrowing margins, as defined in the related credit agreement, over the
London Interbank Offered Rate ("LIBOR") or at the U.S. prime rate. The borrowing
margins are based on a matrix dependent upon the Company's funded debt to EBITDA
ratio and are adjusted quarterly. At December 31, 1998, availability under the
U.S. Working Capital Facility and U.S. Acquisition Facility was approximately
$12.7 million and $51.4 million, respectively. The unused portion of these
facilities is subject to a 0.25% commitment fee.
In June 1996, a wholly-owned subsidiary of the Company, RailTex Canada,
Inc. ("RCI") entered into a Canadian credit agreement consisting of a CDN $5.0
million Canadian working capital facility ("Canadian Working Capital Facility")
and a CDN $25.0 million Canadian acquisition facility ("Canadian Acquisition
Facility"). The Canadian credit agreements contain terms and conditions similar
to the U.S. agreements and expire April 30, 1999. The Canadian facilities bear
interest based on stated borrowing margins, as defined in the related credit
agreements, over the Canadian bankers acceptance rate ("BA Rate") or at the
Canadian prime rate. The borrowing margins are based on a matrix dependent upon
the Company's funded debt to EBITDA and are adjusted quarterly. RailTex, Inc.,
the parent company, is a guarantor of the Canadian credit facilities. At
December 31, 1998, availability under the Canadian Working Capital Facility was
approximately CDN $2.0 million (U.S. $1.3 million). There were no borrowings
under the Canadian Acquisition Facility at December 31, 1998. The unused portion
of these facilities is subject to a 0.25% commitment fee.
The Company believes that the U.S. Working Capital Facility, U.S.
Acquisition Facility, Canadian Working Capital Facility and Canadian Acquisition
Facility will be renewed and extended upon their expiration in April 1999.
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 debt service. At December 31, 1998, the Company was in
compliance with all covenants.
19
<PAGE> 20
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Maturities of long-term debt were as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 ........................... $ 8,568
2000 ........................... 4,642
2001 ........................... 6,981
2002 ........................... 6,668
2003 ........................... 4,553
Thereafter ..................... 100,138
--------
Total .................... $131,550
========
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
At December 31, 1998, the Company had entered into two commodity collar
transactions to hedge market risks of diesel fuel prices. The first collar was
effective April 1, 1998 and terminates March 31, 1999 and represents 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. This transaction hedges
approximately 18% of the Company's estimated monthly diesel fuel consumption.
The second collar is effective July 1, 1998 and terminates June 30, 1999 and
represents 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. This transaction
hedges approximately 18% of the Company's estimated monthly diesel fuel
consumption. The Company realizes any gains or losses resulting from fuel price
fluctuations and related collar transactions each period. There is no carrying
value recorded on the balance sheet from the collar transactions.
In February 1999, the Company entered into two additional contracts to
hedge its market risk from diesel fuel prices. The first consists of three
monthly swap agreements which fix the price of 725,000 gallons of diesel fuel in
April, May and June 1999 at $0.3215, $0.3280 and $0.3375 per gallon,
respectively. The second is a cap which fixes the price of 725,000 gallons of
diesel fuel per month for the period July 1999 to June 2000 at $0.4500 per
gallon. The cost of the cap was approximately $209,000, which will be amortized
over the period covered by the cap. These transactions hedge approximately 57%
of the Company's estimated monthly diesel fuel consumption.
At December 31, 1998 and 1997, the Company had not entered into any
interest rate swaps contracts. In December 1997, the Company terminated a
Canadian dollar based interest rate swap agreement scheduled to expire in 1999
by paying approximately CDN $420,000 (U.S. $303,000).
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 instrument 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.
20
<PAGE> 21
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 loss on the commodity collar transactions
at December 31, 1998 and 1997 was approximately $249,000 and $76,000,
respectively.
10. EMPLOYEE BENEFITS
STOCK OPTIONS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), was issued. FAS 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, FAS 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 FAS
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 FAS 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 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.
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. 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.
21
<PAGE> 22
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
A summary of the status of the Company's 1993 Plan, as amended, for the
years ended December 31, 1998, 1997 and 1996, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
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 ........................ 581,783 $ 18.07 743,954 $ 19.00 399,792 $ 13.94
Granted ................................................... 710,216 13.42 188,973 19.31 455,750 24.08
Exercised ................................................. (33,039) 7.49 (58,667) 4.71 (13,684) 7.92
Forfeited ................................................. (404,346) 20.22 (292,477) 23.93 (97,904) 23.51
-------- -------- --------
Outstanding, end of year .................................. 854,614 13.60 581,783 18.07 743,954 19.00
======== ======== ========
Options exercisable end of year ........................... 194,654 $ 13.33 245,940 $ 13.50 222,918 $ 8.95
======== ======== ======== ======== ======== =======
Weighted average fair value of options granted during
year .................................................... $ 8.41 $ 12.66 $ 15.64
======== ======== =======
</TABLE>
The following table summarizes the information about the 1993 Plan
options outstanding at December 31, 1998:
<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 .................. 114,243 2.44 $ 5.93 114,243 $ 5.93
$11.94 - 18.50 ................. 661,214 9.67 13.37 19,040 15.20
$24.25 - 27.75 ................. 79,157 6.49 26.56 61,371 26.53
----------- -----------
854,614 8.41 $ 13.60 194,654 $ 13.33
=========== ===========
</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 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):
22
<PAGE> 23
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported ............ $ 11,075 $ 10,624 $ 9,961
Pro forma .............. $ 9,362 $ 9,289 $ 8,173
Basic earnings per share:
As reported ............ $ 1.20 $ 1.16 $ 1.09
Pro forma .............. $ 1.02 $ 1.01 $ 0.90
Diluted earnings per share:
As reported ............ $ 1.20 $ 1.15 $ 1.08
Pro forma .............. $ 1.01 $ 1.01 $ 0.89
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively:
Dividend yield of 0.0% for all years; expected volatility of 42.0%,
42.2% and 42.5%; risk-free interest rates of 5.6%, 6.5% and 6.1%; and expected
lives of 10, 10, and 8.4 years.
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 year
ended December 31, 1998, the Company recorded compensation expense of
approximately $50,000.
EMPLOYEE BONUS PROGRAM
The Company has various performance-based, cash incentive compensation
programs which include all employees. Total cash incentive compensation of
approximately $3,591,000, $3,081,000 and $2,350,000 was awarded under the
various incentive compensation programs in 1998, 1997 and 1996, respectively.
In addition, headquarters' senior management, railroad general managers
and executive management are also awarded, through the 1993 Plan, stock options
and performance shares on an annual basis. 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. As of December 31, 1998, a total of 20,457 performance shares were
outstanding for potential future distribution in the year 2001. At December 31,
1998, the Company had not recorded any compensation expense related to the
performance shares. In addition to stock options and performance shares, certain
key executives were also awarded restricted shares in the form of the Company's
common stock as discussed above.
23
<PAGE> 24
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 $314,000, $230,000 and
$134,000 in 1998, 1997 and 1996, respectively.
EMPLOYEE OPEN MARKET STOCK PURCHASE PLAN
The Company has an Employee Open Market Stock Purchase Plan ("Stock
Purchase Plan"). The purpose of the Stock Purchase Plan is to allow employees of
the Company to participate in the Company's future. The Stock Purchase Plan is 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 pays
the brokerage commissions on all purchases and incurs the administrative
expenses associated with the Stock Purchase Plan. Stock Purchase Plan expenses
in 1998, 1997 and 1996 were not material.
EXECUTIVE DEFERRED COMPENSATION
During 1995, the Company implemented an Executive Deferred Compensation
Plan wherein certain key employees are 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 is funded through the purchase
of split-dollar life insurance contracts. Upon death or retirement, the
participant or the participant's estate must reimburse the Company for all
policy premiums paid. Also, should employment terminate prior to death or
retirement, the participant may forfeit, at the discretion of the Compensation
Committee, any future rights in the insurance policy. Premiums paid under this
Plan for 1998, 1997 and 1996 were approximately $407,000, $311,000 and $309,000,
respectively. The combined cash surrender value of these policies was
approximately $859,000 and $468,000 at December 31, 1998 and 1997, respectively.
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company does not provide post-retirement or post-employment
benefits to its employees.
24
<PAGE> 25
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,
--------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
United States:
Federal--
Current ..................................... $ 1,486 $2,358 $1,702
Deferred .................................... 4,672 1,837 2,941
------- ------ ------
6,158 4,195 4,643
------- ------ ------
State--
Current ..................................... (180) 965 771
Deferred .................................... 970 36 140
------- ------ ------
790 1,001 911
------- ------ ------
Foreign:
Current ..................................... 635 543 811
Deferred .................................... 270 309 343
------- ------ ------
905 852 1,154
------- ------ ------
$ 7,853 $6,048 $6,708
Tax effect of change in accounting principle ...... (1,044) -- --
------- ------ ------
$ 6,809 $6,048 $6,708
======= ====== ======
</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,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Differences in depreciation and amortization ..................... $ 33,009 $ 22,462
Accruals and reserves not deducted for tax purposes until paid
or realized ................................................... (1,333) (2,566)
Federal benefit of state taxes ................................... (890) (379)
Charitable contribution carryforward ............................. (1,291) (1,206)
AMT credit carryforward .......................................... (993) --
Valuation allowance .............................................. -- 450
Other items, net ................................................. (114) (17)
-------- --------
Net deferred tax liability .................................. $ 28,388 $ 18,744
======== ========
</TABLE>
There were no valuation allowances against deferred tax assets at
December 31, 1998. However, the Company had recorded a valuation allowance of
$450,000 against its charitable contribution carryforward at December 31, 1997,
that was fully reversed in 1998.
25
<PAGE> 26
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,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States statutory rate ............................ 35.0% 35.0% 34.3%
Effect of foreign operations ............................ 1.0 1.3 0.9
State income taxes, net of federal income tax benefit ... 4.8 5.0 5.0
Contribution for tax purposes, net of valuation allowance -- (5.0) --
Reversal of valuation allowance ......................... (2.5) -- --
Other, net .............................................. (0.2) -- --
------ ------ ------
38.1% 36.3% 40.2%
====== ====== ======
</TABLE>
12. LEASES
Operating lease expense for the years ended December 31, 1998, 1997 and
1996 totaled approximately $7,550,000, $6,080,000 and $4,929,000, 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>
1999 .................................................. $ 5,034 $ 1,390
2000 .................................................. 4,170 1,073
2001 .................................................. 2,844 885
2002 .................................................. 2,673 519
2003 .................................................. 2,557 150
Thereafter ............................................ 10,141 --
--------- -------
Total minimum payments ................................ $ 27,419 4,017
========= =======
Less amount representing interest at rates ranging
from 7.25% to 8.5% ................................ -- 504
--------- -------
Present value of minimum lease payments ............. -- $ 3,513
========= =======
</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 leases. Therefore,
the above table does not include any rentals pertaining to the Company's
railroad property leases.
26
<PAGE> 27
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 15), 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 $1.8 million annually which is subject to annual escalation based on the
Consumer Price Index. The ITS Agreement is subject to earlier termination under
certain limited conditions.
In October 1998, the Utah Transit Authority ("UTA") asserted a claim
for contribution against one of the Company's railroads under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") relating to
certain pollution existing at one of UTA's rail yards over which the Company has
an operating easement. The Company believes it is not a potentially responsible
party under CERCLA and believes it is contractually indemnified against such
claim. The amount of contribution being sought by the UTA is unknown at this
time.
Under certain limited circumstances, two of the Company's railroads may
be repurchased by the selling carrier for their original purchase prices. It is
management's opinion that the likelihood of these properties being repurchased
is remote.
In December 1996, a corporation filed a construction lien against one
of the Company's railroads in the amount of approximately $600,000. The alleged
basis for the construction lien is the provision by the plaintiff of labor and
materials to the Company's railroad in connection with a train derailment in
August 1996, which derailment the Company believes was caused primarily by the
plaintiff. In March 1997, the Company filed a complaint in Federal Court for
approximately $700,000 incurred by the Company in connection with such
derailment and the plaintiff's State claim was combined in the Federal
litigation. The Company is vigorously pursuing its claim and defending the
plaintiff's claim. Trial was originally scheduled for December 1998, but was
rescheduled to July 1999. The Company is unable to predict the outcome of the
trial; however, the Company believes it is adequately reserved to cover any
losses it may incur in connection with this matter. In addition, any loss in
excess of the Company's self-insured retention of $500,000 will be covered by
its insurance.
27
<PAGE> 28
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 $100,000 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.
14. ACQUISITIONS
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.
28
<PAGE> 29
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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"). This
acquisition was funded through borrowings under the Company's U.S. Acquisition
Facility and was accounted for as a purchase of assets.
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.
This acquisition was funded by borrowings under the Company's U.S. Acquisition
Facility and was accounted for using the purchase method of accounting.
The following unaudited pro forma results of operations for the years
ended December 31, 1998 and 1997, assumes the acquisition of the CPI occured 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 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 Canadian National Railways ("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, up to
approximately $5.0 million of the purchase price is subject to reimbursement if
certain levels of carloadings are not achieved within a specified time period,
as detailed in the purchase and sale agreement. The Company expects to recover
approximately $2.1 million plus interest related to this reimbursement agreement
during the first quarter of 1999. The DTI acquisition was funded through
borrowings under the Company's U.S. Acquisition Facility and was accounted for
as a purchase of assets.
29
<PAGE> 30
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
In December 1996, a wholly-owned subsidiary of the Company, the
Pittsburgh Industrial Railroad, Inc. ("PIRR"), purchased from Consolidated Rail
Corporation ("Conrail") certain assets consisting of 42 miles of track located
in the Pittsburgh metropolitan area. The purchase price was approximately $3.0
million and was funded by borrowings under the Company's U.S. Acquisition
Facility. This transaction was accounted for as a purchase of assets.
In November 1996, a newly formed wholly-owned subsidiary of the
Company, the Ontario L'Orignal Railway, Inc. ("OLOR"), purchased from CN certain
assets consisting of 26 miles of track in eastern Ontario, Canada. The OLOR was
granted rights by CN to operate the property and commenced operations in
November 1996. The acquisition closed in December 1996. The purchase price was
approximately CDN $1.1 million (U.S. $800,000) and was funded by borrowings
under the Company's Canadian Acquisition Facility. This transaction was
accounted for as a purchase of assets.
In September 1996, a newly formed wholly-owned subsidiary of the
Company, Connecticut Southern Railroad, Inc. ("CSOR"), purchased from Conrail
certain assets including 23 miles of rail segments located in Connecticut and
six locomotives. The CSOR was also granted rights to operate over an additional
55 miles of track, from just north of New Haven, Connecticut to Springfield,
Massachusetts, under a freight operating agreement with Amtrak. The purchase
price, approximately $3.5 million, was funded by borrowings under the Company's
U.S. Acquisition Facility. This transaction was accounted for as a purchase of
assets.
In June 1996, the Company acquired 100% of the outstanding stock of the
Indiana & Ohio Rail Corp. ("INOH"), an existing short line railroad
headquartered in Cincinnati, Ohio. Through its subsidiaries, the INOH operates
ten line segments totaling 230 miles of track in southwestern Ohio and
southeastern Indiana. The purchase price was approximately $12.4 million
including an approximate $8.9 million cash payment and the assumption of
approximately $3.5 million of long-term debt, of which approximately $2.1
million was paid down after completion of the acquisition. This acquisition was
funded by borrowings under the Company's U.S. Acquisition Facility and was
accounted for using the purchase method of accounting.
The following unaudited pro forma results of operations for the years
ended December 31, 1996 and 1995, assumes the acquisition of the INOH occurred
as of the beginning of the respective periods (in thousands, except per share
amounts).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Operating revenues ..................... $ 123,848 $ 115,034
=========== ===========
Net income ............................. $ 9,828 $ 7,253
=========== ===========
Basic earnings per share ............... $ 1.08 $ 0.83
=========== ===========
Diluted earnings per share ............. $ 1.06 $ 0.82
=========== ===========
</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 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.
30
<PAGE> 31
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 shortline railroads.
The following table presents information about the Company by
geographic area (in thousands).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Total Revenues:
United States .......... $146,358 $ 134,496 $105,971
Canada ................. 13,841 13,855 14,230
Other foreign .......... 821 440 905
-------- --------- --------
Total ............. $161,020 $ 148,791 $121,106
======== ========= ========
Operating Income:
United States .......... $ 23,463 $ 19,225 $ 16,985
Canada ................. 3,307 3,906 4,243
Other foreign .......... 882 (130) 813
-------- --------- --------
Total ............. $ 27,652 $ 23,001 $ 22,041
======== ========= ========
Assets:
United States .......... $280,717 $ 244,034 $194,330
Canada ................. 18,855 19,293 19,587
Other foreign .......... 20,133 18,367 21,790
-------- --------- --------
Total ............. $319,705 $ 281,694 $235,707
======== ========= ========
</TABLE>
During 1998, 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 1998 and 1997 was Canadian
National Railways ("CN"), representing 7.0% and 8.1% of operating revenues,
respectively. The Company's largest customer in 1996 was Indianapolis Power &
Light Company, representing 4.6% of operating revenues.
31
<PAGE> 32
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
17. SUBSEQUENT EVENTS
On January 13, 1999, the Brazilian government began to allow the
Brazilian currency (Real) to trade freely against the U.S. dollar. As of March
1, 1999, the Real had devalued approximately 43% versus the U.S. dollar. As a
result of the devaluation, the Company may establish a non-cash reserve against
the value of its Brazilian investments at the end of the first quarter of 1999.
The Company will determine the amount of the reserve based upon a review of the
Brazilian railroad operations and of the devaluation of the Real. This reserve
could adversely affect the Company's financial position and the results of its
operations.
In January 1999, a wholly-owned subsidiary of the Company, the Dallas,
Garland and Northeastern Railroad ("DGNO") commenced operations on 89 miles of
rail line north of Dallas, Texas ("North Dallas Lines") under a lease
arrangement with Union Pacific Railroad. The North Dallas Lines connect to and
will be operated as part of the DGNO.
32
<PAGE> 33
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
1999 1998 (1) 1999 1998 (1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES.................................................... $ 44,125 $ 40,027 $134,449 $117,574
OPERATING EXPENSES:
Transportation..................................................... 13,910 13,560 44,544 40,775
General and administrative......................................... 9,943 7,506 26,291 19,979
Equipment.......................................................... 4,442 4,836 14,838 14,040
Maintenance of way................................................. 4,079 3,465 12,999 12,202
Depreciation and amortization...................................... 4,122 3,703 12,315 10,366
-------- --------- --------- -----------
Total operating expenses........................................ 36,496 33,070 110,987 97,362
-------- --------- --------- -----------
OPERATING INCOME...................................................... 7,629 6,957 23,462 20,212
INTEREST EXPENSE...................................................... (2,580) (2,959) (7,903) (8,316)
OTHER INCOME.......................................................... 1,149 1,033 2,168 1,580
-------- --------- --------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE............................................ 6,198 5,031 17,727 13,476
INCOME TAXES.......................................................... (2,505) (1,998) (7,173) (5,178)
-------- --------- --------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE................................... $ 3,693 $ 3,033 $ 10,554 $ 8,298
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES)......................... -- -- -- (1,703)
-------- --------- --------- -----------
NET INCOME............................................................ $ 3,693 $ 3,033 $ 10,554 $ 6,595
======== ========= ========= =========
BASIC EARNINGS PER SHARE:
BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE................................ $ 0.40 $ 0.33 $ 1.15 $ 0.91
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES)...................... -- -- -- (0.19)
--------- --------- --------- -----------
TOTAL.............................................................. $ 0.40 $ 0.33 $ 1.15 $ 0.72
========= ========= ========= ===========
WEIGHTED AVERAGE NUMBER OF
BASIC COMMON SHARES OUTSTANDING.................................... 9,216 9,204 9,206 9,188
DILUTED EARNINGS PER SHARE:
BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE................................ $ 0.39 $ 0.33 $ 1.13 $ 0.89
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES)...................... -- -- -- (0.18)
--------- --------- --------- -----------
TOTAL.............................................................. $ 0.39 $ 0.33 $ 1.13 $ 0.71
========= ========= ========== ==========
WEIGHTED AVERAGE NUMBER OF
DILUTED COMMON SHARES OUTSTANDING.................................. 9,385 9,246 9,359 9,239
</TABLE>
(1) Restated to reflect adoption of SOP 98-5 as of January 1, 1998.
The accompanying notes are an integral part of these consolidated
financial statements.
33
<PAGE> 34
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 2,701 $ 1,243
Accounts receivable, less doubtful receivables of $1,350; $844 in 1998.................... 34,067 33,866
Prepaid expenses and other current assets................................................. 4,839 4,848
Deferred tax assets, net.................................................................. 1,906 1,906
----------- -----------
Total current assets................................................................... 43,513 41,863
----------- -----------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$63,753; $54,194 in 1998.................................................................. 290,563 291,779
---------- ----------
OTHER ASSETS:
Investments in Brazilian railroad companies............................................... 21,090 19,994
Other, net................................................................................ 13,042 8,709
----------- -----------
Total other assets..................................................................... 34,132 28,703
----------- -----------
Total assets........................................................................... $ 368,208 $ 362,345
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable.................................................................. $ -- $ 215
Current portion of long-term debt......................................................... 1,068 8,568
Accounts payable.......................................................................... 20,952 20,574
Accrued liabilities....................................................................... 16,391 17,729
----------- -----------
Total current liabilities.............................................................. 38,411 47,086
DEFERRED INCOME TAXES, NET................................................................... 28,832 30,294
LONG-TERM DEBT, LESS CURRENT PORTION......................................................... 120,528 122,982
OTHER LIABILITIES............................................................................ 13,445 6,835
----------- -----------
Total liabilities...................................................................... 201,216 207,197
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN BRAZILIAN INVESTMENT.................................................... 11,560 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; 9,273,963 in 1998................................................ 930 927
Paid-in capital........................................................................... 85,314 85,115
Retained earnings......................................................................... 70,532 59,976
Deferred compensation..................................................................... (839) (948)
Accumulated other comprehensive income.................................................... (505) (922)
---------- ----------
Total shareholders' equity............................................................. 155,432 144,148
---------- ----------
Total liabilities and shareholders' equity............................................. $ 368,208 $ 362,345
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
34
<PAGE> 35
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1999 1998 (1)
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................................................... $ 10,554 $ 6,595
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................... 12,315 10,366
Deferred income taxes....................................................................... (1,549) 3,916
Amortization of deferred financing costs.................................................... 338 291
Provision for losses on accounts receivable................................................. 471 13
Gain on sale of assets...................................................................... (2,752) (1,389)
Gain on sale of subsidiary.................................................................. (511) --
Cumulative effect of a change in accounting principle....................................... -- 2,747
Other....................................................................................... 148 54
Changes in working capital:
Accounts receivable....................................................................... (672) 4,044
Prepaid expenses.......................................................................... (248) (1,665)
Accounts payable and accrued liabilities.................................................. 181 (10,372)
--------- --------
Net cash provided by operating activities................................................... 18,275 14,600
--------- --------
INVESTING ACTIVITIES:
Purchase of investment in Central Properties, Inc.............................................. -- (13,096)
Purchase of property and equipment............................................................. (18,403) (24,701)
Proceeds from sale of property and equipment................................................... 12,074 1,523
Proceeds from sale of subsidiary............................................................... 675 --
Investment in Brazilian railroads.............................................................. (537) --
Decrease (increase) in other long-term assets.................................................. 712 (582)
--------- --------
Net cash used in investing activities....................................................... (5,479) (36,856)
--------- --------
FINANCING ACTIVITIES:
Payments of short-term notes payable, net...................................................... (215) (247)
Proceeds from long-term debt................................................................... 272 21,900
Principal payments on long-term debt........................................................... (3,227) (2,566)
Net (decrease) increase in working capital facility............................................ (7,555) 4,298
Issuance of common stock pursuant to stock options............................................. 76 247
Deferred financing costs....................................................................... (828) (3)
--------- --------
Net cash (used in) provided by financing activities......................................... (11,477) 23,629
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................................... 139 (11)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................................... 1,458 1,362
CASH AND CASH EQUIVALENTS, beginning of period.................................................... 1,243 570
--------- --------
CASH AND CASH EQUIVALENTS, end of period.......................................................... $ 2,701 $ 1,932
========= ========
</TABLE>
(1) Restated to reflect adoption of SOP 98-5 as of January 1, 1998.
The accompanying notes are an integral part of these
consolidated financial statements.
35
<PAGE> 36
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim consolidated financial statements presented herein include
the accounts of RailTex, Inc. and its wholly-owned subsidiaries. References to
"RailTex" or the "Company" mean RailTex, Inc. and, unless the context indicates
otherwise, its consolidated subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation. These interim
consolidated financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). All adjustments have been made to the accompanying interim
consolidated financial statements which are, in the opinion of the Company's
management, necessary for a fair presentation of the Company's operating
results. All adjustments are of a normal recurring nature. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. It is recommended that these
interim consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
results of operations for any interim period are not necessarily indicative of
the results of operations for the entire year. Certain reclassifications have
been made in the prior period financial statements to conform with the current
period presentation.
2. RECENTLY ISSUED PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Initial application of this
statement should be as of the beginning of an entity's fiscal quarter. Earlier
application of this statement is encouraged, but it is permitted only as of the
beginning of any fiscal quarter that begins after the issuance of this
statement. In June 1999, FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137
delays the effective date of SFAS 133 to June 15, 2000. The Company believes the
adoption of this statement will not have a material impact on the financial
condition or results of operations of the Company.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires costs associated with start-up activities to be
expensed as incurred. SOP 98-5 was effective for financial statements for fiscal
years beginning after December 15, 1998. The Company adopted SOP 98-5 for the
year ended December 31, 1998. This adoption resulted in the recognition of a
non-recurring charge of approximately $1,703,000 (net of income taxes) entitled,
"Cumulative effect of a change in accounting principle (net of income taxes)" in
the accompanying consolidated financial statements. Prior to the adoption of SOP
98-5, the Company capitalized the costs associated with start-up activities,
including the acquisition of new railroad properties, and amortized those costs
over five years. Prospectively, the Company's results of operations will reflect
higher costs associated with the acquisition of new railroad properties in the
period of acquisition.
36
<PAGE> 37
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. EARNINGS PER SHARE
The following is a reconciliation of the numerators and the
denominators of the basic and diluted earnings per share computations (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income before cumulative effect of
a change in accounting principle.................................. $ 3,693 $3,033 $10,554 $8,298
Cumulative effect of a change in
accounting principle (net of income taxes)........................ -- -- -- (1,703)
------- ------ ------- ------
Net income........................................................... $ 3,693 $3,033 $10,554 $6,595
======= ====== ======= ======
DENOMINATOR:
Weighted average number of basic shares of
common stock outstanding.......................................... 9,216 9,204 9,206 9,188
EFFECT OF DILUTIVE SECURITIES:
Stock options........................................................ 72 42 62 51
Restricted stock..................................................... 75 -- 75 --
Performance shares................................................... 22 -- 16 --
------- ------ ------- ------
169 42 153 51
Weighted average number of diluted shares of
common stock outstanding.......................................... 9,385 9,246 9,359 9,239
======= ======= ======= ======
BASIC EARNINGS PER SHARE:
Before cumulative effect of
a change in accounting principle.................................. $ 0.40 $ 0.33 $ 1.15 $ 0.91
Cumulative effect of a change in
accounting principle (net of income taxes)........................ -- -- -- (0.19)
------- ------ ------- ------
Total................................................................ $ 0.40 $ 0.33 $ 1.15 $ 0.72
======= ======= ======= ======
DILUTED EARNINGS PER SHARE:
Before cumulative effect of
a change in accounting principle.................................. $ 0.39 $ 0.33 $ 1.13 $ 0.89
Cumulative effect of a change in
accounting principle (net of income taxes)........................ -- -- -- (0.18)
------- ------ ------- ------
Total................................................................ $ 0.39 $ 0.33 $ 1.13 $ 0.71
======= ======= ======= ======
</TABLE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1999 1998
------------ ---------
<S> <C> <C>
Cash paid during the period for:
Interest....................................................................................... $ 10,259 $ 6,514
Income taxes................................................................................... 5,265 2,192
Non-cash investing and financing activities:
Capital leases................................................................................. 31 1,475
Grants......................................................................................... 5,751 184
Tax benefit from exercise of non-qualified stock options....................................... 65 76
Amortization of deferred compensation ......................................................... 312 22
</TABLE>
37
<PAGE> 38
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. DERIVATIVE ACCOUNTING PRINCIPLES
The Company historically has hedged certain anticipated transactions.
Interest rate swaps and diesel fuel price collar contracts with third parties
are used to hedge interest rates and diesel fuel costs. Hedges of anticipated
transactions are accounted for under the deferral method with gains and losses
on these transactions recognized in interest expense and operating expenses when
the hedged transaction occurs. The Company does not currently hold or issue
financial instruments for trading purposes.
The Company is exposed to fluctuations in diesel fuel prices, as an
increase in the price of diesel fuel would result in lower earnings and
increased cash outflows. The Company has entered into a cap which fixes the
price of 725,000 gallons of diesel fuel per month for the period July 1999 to
June 2000 at $0.4500 per gallon. The cost of the cap was approximately $209,000,
which will be amortized over the period covered by the cap. The cap, which
expires in June 2000, hedges approximately 60% of the Company's estimated
monthly diesel fuel consumption.
6. DIVESTITURE
In September 1999, the Company sold 100% of the stock of the Salt Lake
City Southern Railroad ("SLCS") for $675,000.
7. RESTRICTED STOCK AWARDS
In 1998, the Company, under the 1993 Stock Plan, as amended ("Plan"),
granted 80,000 restricted shares, of which 5,000 vested and were issued in the
third quarter ended September 30, 1999, in the form of the Company's common
stock to several key executives. The restricted shares vest ratably over three
to five years or immediately in the event of a change in control, death,
disability or termination, other than for cause. The unvested portion of the
restricted shares forfeit if the key executives are terminated for cause during
the restriction period. The awards were recorded at the fair market value of the
Company's common stock on the date of grant as deferred compensation and will be
amortized over the restriction period. For the three and nine months ended
September 30, 1999, the Company recorded compensation expense of $62,579 and
$187,737, respectively. For the three and nine months ended September 30, 1998,
the Company recorded compensation expense of $11,979.
8. COMMITMENTS AND CONTINGENCIES
The Company has added railroad properties to its portfolio through the
purchase of track and roadbed, lease of such assets and contracts to operate
such assets under management agreements. These arrangements typically relate
only to the physical assets of the railroad property and, except for the
purchases of Central Properties, Inc. ("CPI") and Indiana & Ohio Rail Corp.
("IORC"), which were structured as acquisitions of stock, the Company typically
does not contractually assume any of the operations or liabilities of the
divesting carriers.
Rail properties operated by the Company under management agreements
typically have initial ten year terms followed by either a purchase option or
one or more renewal terms at the Company's option. These operating contracts
typically require that the Company assume all operating and financial
responsibilities for freight operations on the property, including maintenance,
payment of property taxes and regulatory compliance. Payments by the Company for
the right to conduct rail operations on these properties are typically
calculated as a percentage of revenues from the respective properties.
38
<PAGE> 39
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In August 1995, the Company entered into a ten year Information
Technology Services Agreement ("ITS Agreement") with Electronic Data Systems
Corporation ("EDS"). Under the ITS Agreement, EDS is responsible for the
management information systems of the Company, including developing, obtaining
licenses for and maintaining new software for the Company, coordinating the
acquisition and maintenance of computers and related equipment and coordinating
the maintenance of the Company's existing software. The Company currently pays
EDS $2.0 million annually which is subject to annual escalation based on the
Consumer Price Index. The ITS Agreement is subject to earlier termination under
certain limited conditions.
In August 1999, SLCS received notice from the Utah Transit Authority
("UTA") that it had exercised its right to repurchase the operating easement for
approximately $5,000. In September 1999, the Company sold the stock of SLCS to
the Utah Railway Company. In connection with this sale, the UTA's right to
repurchase the line was withdrawn.
In October 1998, the UTA asserted a claim for contribution against SLCS
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") relating to certain pollution existing at one of UTA's rail yards
over which the SLCS had an operating easement. In September 1999, the Company
sold the stock of SLCS to the Utah Railway Company. As a result, this claim no
longer exists against a subsidiary of the Company.
The Company is currently subject to a number of claims and legal
actions that arose in the ordinary course of business, including Federal
Employers' Liability Act claims by its employees and personal injury claims
(including wrongful death claims) by third parties. The Company believes these
claims, taking into account reserves and applicable insurance, will not have a
material adverse effect on the Company. However, adverse judgments in these
claims, individually or in the aggregate, in excess of related reserves and
applicable insurance, could have a materially adverse effect on the Company's
financial condition and results of its operations.
9. COMPREHENSIVE INCOME
The Company has chosen to disclose comprehensive income in the
Consolidated Statements of Shareholders' Equity. For purposes of SFAS 130, the
Company's other comprehensive income or loss was comprised of net currency
translation adjustments. Paragraph 9(f) of Statement 109 "prohibits recognition
of a deferred tax liability or asset for differences related to assets and
liabilities that under FASB Statement No. 52, `Foreign Currency Translation,'
are remeasured from the local currency into the functional currency using
historical rates". Therefore, other comprehensive income is not being shown net
of tax.
39
<PAGE> 40
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10. SEGMENT INFORMATION
The following table presents information about the Company by
geographic area (in thousands).
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Total Revenues:
United States ....................... $119,057 $107,516
Canada .............................. 15,309 10,058
Other foreign ....................... 83 --
-------- --------
Total .......................... $134,449 $117,574
======== ========
Operating Income:
United States ....................... $ 19,488 $ 17,594
Canada .............................. 3,943 2,557
Other foreign ....................... 31 61
-------- --------
Total .......................... $ 23,462 $ 20,212
======== ========
Assets:
United States ....................... $292,082 $275,694
Canada .............................. 20,619 18,593
Other foreign ....................... 21,090 17,810
-------- --------
Total .......................... $333,791 $312,097
======== ========
</TABLE>
11. SUBSEQUENT EVENTS
In November 1999, RailTex Global Investments, LLC ("LLC"), a limited
liability company in which the Company owns a 50.5% membership interest, entered
into a Memorandum of Understanding to sell all of its shares in Ferrovia
Centro-Atlantica, S.A. ("FCA") to existing FCA shareholders for R$10.93 million
(or approximately U.S.$5.6 million at prevailing exchange rates). Also in
November, RailTex International Holdings, Inc. ("RIHI"), a wholly-owned
subsidiary of RailTex, entered into a Purchase Agreement to sell all of its
membership interest in the LLC and, thus, indirectly the LLC's shares in America
Latina Logistica, S.A. ("ALL") to Global Environment Fund ("GEF") for U.S.
$3.375 million. RailTex will record an approximate U.S. $600,000 loss (or
U.S.$0.04 per share) on these transactions in the fourth quarter, depending on
the then prevailing exchange rate at the time of the FCA transaction and the
total expenses of the transactions. Concurrent with the sale of RailTex's ALL
shares to GEF, RailTex's obligation to repurchase the Brazilian interests
previously sold to GEF will terminate. Proceeds from the sales will be used to
reduce RailTex's senior credit facilities and for general corporate purposes.
The FCA transaction is subject, among other things, to the approval of the
Brazilian Ministry of Transportation and the negotiation and execution of
definitive agreements. RailTex anticipates the closing of the FCA transaction by
the end of the year. The ALL transaction is subject, among other things, to the
closing of the FCA transaction, the approval of the Brazilian Ministry of
Transportation and the approval of the Investment Committee of GEF. RailTex
anticipates the closing of the ALL transaction to occur shortly after the
closing of the FCA transaction. FCA is the exclusive concessionaire of the
former 4,400 mile Center-Eastern Network of the Brazilian federal railroad. ALL
is the parent corporation of Ferrovia Sul Atlantico, S.A. ("FSA"), the exclusive
concessionaire of the former 4,200 mile Southern Network of the Brazilian
federal railroad. After the closing of both of these transactions, RailTex will
not own any interests in any Brazilian company.
40
<PAGE> 41
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
On October 14, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with RailAmerica, Inc., a Delaware corporation
("RailAmerica") and Cotton Acquisition Corp., a Texas corporation and a wholly-
owned subsidiary of RailAmerica ("Merger Sub"). Pursuant to the terms and
subject to the satisfaction of the conditions in the Merger Agreement, Merger
Sub will merge with and into the Company (the "Merger"), with the Company as the
surviving corporation, and RailAmerica will acquire all of the outstanding stock
of the Company for approximately $325 million, including the assumption of all
of the Company's outstanding long-term debt. As a result of the Merger, each
outstanding share of common stock of the Company will be converted into the
right to receive (i) $13.50 in cash, and (ii) 0.66666667 shares of common stock,
par value $0.001 per share ("RailAmerica Common Stock"), of RailAmerica. The
amount of cash consideration and stock consideration will be reallocated to
provide for less cash and more stock if the Company does not sell certain
specified assets for net proceeds of at least $9.0 million. The consummation of
the Merger, which is expected to occur in early 2000, is contingent upon the
approval of the Merger by the Company's shareholders, the approval of the
issuance of RailAmerica Common Stock in the Merger by RailAmerica's
shareholders, the receipt of any necessary regulatory approvals, including the
Surface Transportation Board, and other customary closing conditions.
41
<PAGE> 42
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
RailAmerica will account for the merger under the purchase method of
accounting and will allocate the consideration it pays in the merger to the
assets it acquires and the liabilities it assumes based on their estimated fair
values. The pro forma adjustments are preliminary and are based on management's
estimates of the value of RailTex's tangible and intangible assets. In addition,
RailAmerica management is assessing and formulating its integration plans. The
finalization of these plans could result in a material change to the estimates
used in the preparation of the pro forma financial data.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
RAILAMERICA(A) RAILTEX(A) ADJUSTMENTS BALANCES
-------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash........................................................ $ 13,899 $ 2,701 $ (11,900)(b) $ (700)
(4,000)(c)
Accounts and notes receivable............................... 34,734 34,067 68,801
Inventories................................................. 17,696 17,696
Other current assets........................................ 3,576 6,745 10,321
-------- -------- --------- --------
Total current assets................................ 69,905 43,513 (15,900) 97,518
Property, plant and equipment, net.......................... 345,347 290,563 74,865(b) 710,775
Notes receivable, less current portion...................... 1,275 1,275
Investment in affiliates.................................... 6,409 6,409
Excess of cost over net assets of companies acquired........ 2,157 2,157
Other assets................................................ 10,222 34,132 (21,090)(b) 22,066
(6,145)(b)
13,042(c)
(8,095)(d)
-------- -------- --------- --------
Total assets........................................ $435,315 $368,208 $ 36,677 $840,200
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long term debt........................ $ 6,272 $ 1,068 $ (1,068)(b) $ 14,522
5,250(c)
Accounts payable............................................ 25,977 20,952 46,929
Accrued expenses............................................ 13,648 16,391 9,400(b) 39,439
-------- -------- --------- --------
Total current liabilities........................... 45,897 38,411 16,582 100,890
-------- -------- --------- --------
Long-term debt.............................................. 251,388 120,528 114,743(b) 495,701
13,042(c)
(4,000)(c)
Convertible debt............................................ 24,285 24,285
Other liabilities........................................... 18,059 13,445 31,504
Deferred income taxes....................................... 12,966 28,832 23,673(b) 65,471
Minority interest........................................... 9,029 11,560 (11,560)(b) 9,029
Redeemable convertible preferred stock...................... 10,695 10,695
Stockholders' equity:
Common stock.............................................. 12 930 (930)(e) 19
7(b)
Additional paid in capital................................ 49,997 85,314 (85,314)(e) 101,214
51,217(b)
Retained earnings......................................... 15,752 70,532 (70,532)(e) 4,157
(11,595)(d)
Accumulated other comprehensive income.................... 1,558 (1,344) 1,344(e) 1,558
Less treasury stock....................................... (4,323) (4,323)
-------- -------- --------- --------
Total stockholders' equity.......................... 62,996 155,432 (115,803) 102,625
-------- -------- --------- --------
Total liabilities and stockholders' equity.................. $435,315 $368,208 $ 36,667 $840,200
======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
42
<PAGE> 43
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOLEDO,
V/LINE FREIGHT PEORIA AND PRO FORMA
RAILAMERICA(A) CORPORATION(B) RAILINK LTD.(C) WESTERN(D) RAILTEX(A) ADJUSTMENTS
-------------- -------------- ---------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Transportation -- railroad..... $72,505 $24,302 $18,806 $6,509 $134,449 5,747(e)
Manufacturing.................. 33,859 -- -- -- -- --
Other.......................... 4,710 4,529 1,176 1,173 -- --
------- ------- ------- ------ -------- --------
Total operating
revenue................ 111,074 28,831 19,982 7,682 134,449 5,747
------- ------- ------- ------ -------- --------
Operating expenses:
Transportation -- railroad..... 46,465 31,291 11,888 5,900 72,381 (3,094)(f)
Cost of goods sold --
manufacturing................ 25,098 -- -- -- -- --
Selling, general and
administrative............... 15,150 -- 3,915 1,244 26,291 (443)(g)
(938)(h)
(5,087)(i)
Depreciation and
amortization................. 6,549 1,230 2,113 681 12,315 1,206(j)
(302)(k)
(309)(l)
264(m)
------- ------- ------- ------ -------- --------
Total operating
expenses............... 93,262 32,521 17,916 7,825 110,987 (8,703)
------- ------- ------- ------ -------- --------
Operating income
(loss)................. 17,812 (3,690) 2,066 (143) 23,462 14,450
Interest and other expense....... (10,936) (234) (662) (519) (5,735) (3,963)(n)
(2,832)(o)
(506)(p)
(10,965)(q)
(2,733)(r)
(1,862)(s)
Minority interest in income of
subsidiary..................... (1,091) -- -- -- -- --
------- ------- ------- ------ -------- --------
Income (loss) before income
taxes...................... 5,785 (3,924) 1,404 (662) 17,727 (8,412)
(Benefit) Provision for income
taxes.......................... (1,454) -- 629 (224) 7,173 (4,939)(t)
------- ------- ------- ------ -------- --------
Net income (loss)........ $ 7,239 $(3,924) $ 775 $ (438) $ 10,554 (3,473)
======= ======= ======= ====== ======== ========
Weighted average shares
outstanding
Basic.......................... 11,018 7,192(u)
======= ========
Diluted........................ 12,789 9,300(v)
======= ========
Earnings per share -- Basic...... $ 0.59
=======
Earnings per share -- Diluted.... $ 0.55
=======
<CAPTION>
CONSOLIDATED
BALANCES
------------
<S> <C>
Operating revenues:
Transportation -- railroad..... $262,318
Manufacturing.................. 33,859
Other.......................... 11,588
--------
Total operating
revenue................ 307,765
--------
Operating expenses:
Transportation -- railroad..... 164,831
Cost of goods sold --
manufacturing................ 25,098
Selling, general and
administrative............... 40,132
Depreciation and
amortization................. 23,747
--------
Total operating
expenses............... 253,807
--------
Operating income
(loss)................. 53,958
Interest and other expense....... (40,948)
Minority interest in income of
subsidiary..................... (1,091)
--------
Income (loss) before income
taxes...................... 11,918
(Benefit) Provision for income
taxes.......................... 1,185
--------
Net income (loss)........ 10,732
========
Weighted average shares
outstanding
Basic.......................... 18,210
========
Diluted........................ 22,089
========
Earnings per share -- Basic...... $ 0.55
========
Earnings per share -- Diluted.... $ 0.49
========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
43
<PAGE> 44
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOLEDO,
V/LINE FREIGHT PEORIA AND
RAILAMERICA(A) CORPORATION(B) RAILINK LTD.(C) WESTERN(D) RAILTEX(A)
-------------- ----------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Transportation -- railroad... $30,304 $ 60,410 $25,470 $13,058 $161,020
Manufacturing................ 39,887 -- -- -- --
Other........................ 2,700 13,124 1,587 333 --
Motor Carrier................ 4,252 -- -- -- --
------- -------- ------- ------- --------
Total operating
revenue.............. 77,143 73,534 27,057 13,391 161,020
------- -------- ------- ------- --------
Operating expenses:
Transportation -- railroad... 15,702 80,334 17,447 8,170 92,435
Cost of goods sold --
manufacturing.............. 28,583 -- -- -- --
Selling, general and
administrative............. 12,399 -- 4,033 1,553 26,675
Depreciation and
amortization............... 3,379 2,781 3,024 1,004 14,258
Motor Carrier................ 4,438 -- -- -- --
------- -------- ------- ------- --------
Total operating
expenses............. 64,501 83,115 24,504 10,727 133,368
------- -------- ------- ------- --------
Operating income... 12,642 (9,581) 2,553 2,664 27,652
Interest and other expense..... (4,934) (630) (421) (685) (7,021)
Minority interest in income of
subsidiary................... (1,672) -- -- -- --
------- -------- ------- ------- --------
Income before income
taxes.................. 6,036 (10,211) 2,132 1,979 20,631
Provision for income taxes..... 1,570 -- 887 655 7,853
------- -------- ------- ------- --------
Net income......... $ 4,466 $(10,211) $ 1,245 $ 1,324 $ 12,778
======= ======== ======= ======= ========
Weighted average shares
outstanding:
Basic........................ 9,553
=======
Diluted...................... 10,307
=======
Earnings per share -- Basic.... $ 0.47
=======
Earnings per share --Diluted... $ 0.44
=======
<CAPTION>
PRO FORMA CONSOLIDATED
ADJUSTMENTS BALANCES
----------- ------------
<S> <C> <C>
Operating revenues:
Transportation -- railroad... 16,548(e) 306,810
Manufacturing................ -- 39,887
Other........................ -- 17,744
Motor Carrier................ -- 4,252
-------- --------
Total operating
revenue.............. 16,548 368,693
-------- --------
Operating expenses:
Transportation -- railroad... (8,330)(f) 205,758
Cost of goods sold --
manufacturing.............. -- 28,583
Selling, general and
administrative............. -- 37,094
(783)(h)
(6,783)(i)
Depreciation and
amortization............... 4,298(j) 29,744
(98)(k)
(483)(l)
1,581(m)
Motor Carrier................ -- 4,438
-------- --------
Total operating
expenses............. (10,598) 305,618
-------- --------
Operating income... 27,146 63,075
Interest and other expense..... (11,947)(n) (52,360)
(5,233)(o)
(780)(p)
(11,933)(q)
(3,644)(r)
(5,132)(s)
Minority interest in income of
subsidiary................... -- (1,672)
-------- --------
Income before income
taxes.................. (11,523) 9,044
Provision for income taxes..... (8,315)(t) 2,650
-------- --------
Net income......... (3,209) 6,393
======== ========
Weighted average shares
outstanding:
Basic........................ 8,241(u) 17,794
======== ========
Diluted...................... 7,712(v) 18,019
======== ========
Earnings per share -- Basic.... $ 0.30
========
Earnings per share --Diluted... $ 0.30
========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
44
<PAGE> 45
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
BALANCE SHEET:
(a) Represents the historical balance sheet as of September 30, 1999.
(b) Represents the following estimated adjustments to reflect the acquisition
of RailTex, Inc. (the final purchase price allocation will be based upon a
final determination of the fair values of the net assets acquired):
<TABLE>
<S> <C>
Purchase price $189.6 million
Refinance of existing debt $121.6 million
Estimated acquisition related costs and expenses $ 12.0 million
------
Total purchase price $323.2 million
Sources of purchase price:
Issuance of 6.8 million shares of RailAmerica common stock $ 51.2 million
New bank facility $240.0 million
Available cash $ 11.9 million
Proceeds from stock options $ 11.1 million
Assumed sale by RailTex of specified interests $ 9.0 million
------
Total sources $323.2 million
</TABLE>
Under the terms of the merger agreement, if RailTex has not sold its
interest in specified investments, the $9.0 million of cash consideration
will be paid through the issuance of additional shares of RailAmerica
common stock.
Adjustments to historical financial statements of RailTex:
<TABLE>
<S> <C>
Property, plant and equipment $74.9 million
Goodwill $(4.8) million
Elimination of specified investments $(21.1) million
Elimination of RailTex deferred financing costs $(1.3) million
Accrued liabilities $(9.4) million
Deferred tax liability $(23.7) million
Elimination of minority interest related to specified
entities $11.6 million
Additional equity eliminated from assumed exercise of stock
options $11.1 million
</TABLE>
Accrued liabilities represent severance costs which RailAmerica has accrued
in accordance with EITF No. 95-3, "Recognition of Liabilities in Connection
with a Purchase Business Combination."
(c) Represents the refinancing of the existing RailAmerica long-term debt
including all related financing costs incurred by RailAmerica estimated at
$11.1 million, which includes costs relating to the refinancing of existing
RailAmerica long-term debt, as well as financing the acquisition of
RailTex.
<TABLE>
<S> <C>
Existing RailAmerica long-term debt $257.7 million
Deferred financing costs $ 13.0 million
Reduction from available cash $ (4.0) million
------
Total new RailAmerica long-term debt $266.7 million
</TABLE>
45
<PAGE> 46
(d) Represents the write-off of $8.1 million of existing debt issuance costs
which will be refinanced in connection with the acquisition of RailTex and
$3.5 million of costs to extinguish certain indebtedness.
(e) Reflects elimination of RailTex, Inc.'s historical equity accounts.
STATEMENT OF INCOME:
(a) Reflects the historical consolidated statement of income for the twelve
months ended December 31, 1998 and the nine months ended September 30,
1999.
(b) Reflects the historical consolidated statement of income for the twelve
months ended December 31, 1998 and the four months ended April 30, 1999.
(c) Reflects the historical consolidated statement of income for the twelve
months ended December 31, 1998 and the seven months ended July 31, 1999.
(d) Reflects the historical consolidated statement of income for the twelve
months ended December 31, 1998 and the eight months ended August 31, 1999.
(e) Reflects revenue from track access fees at V/Line Freight Corporation based
upon the kilometers traveled times the agreed upon rate from other
railroads with access to V/Line Freight's tracks.
(f) Reflects the reduction of V/Line Freight expenses resulting from the
following: (i) outsourcing some maintenance functions, (ii)
reimbursement of some maintenance costs from a third party and
(iii) capitalization of track improvements.
(g) Reflects the elimination of costs incurred by RaiLink in connection with
RailAmerica's acquisition of RaiLink. These costs had been expensed by
RaiLink during 1999. No costs were incurred in 1998 relating to the
RailAmerica acquisition.
(h) Reflects a reduction in RaiLink costs resulting from the following: (i)
elimination of duplicative senior management positions, (ii) reduction in
fuel costs based upon RailAmerica's negotiated prices and (iii) elimination
of fees paid to directors of RaiLink and related expenses.
(i) Reflects a reduction in RailTex costs resulting from the following (i)
elimination of duplicative management positions as well as RailTex's
Chairman Emeritus, (ii) elimination of fees paid to directors of RailTex
and related costs and (iii) elimination of certain duplicative public
company costs.
(j) Reflects the increased depreciation and amortization due to the revaluation
of V/Line Freight's property, plant and equipment and infrastructure lease.
(k) Reflects the decreased depreciation and amortization due to the revaluation
of RaiLink's property, plant and equipment.
(l) Reflects the decreased depreciation and amortization due to the revaluation
of Toledo, Peoria and Western's property, plant and equipment.
(m) Reflects the increased depreciation and amortization due to the revaluation
of RailTex, Inc.'s property, plant and equipment.
46
<PAGE> 47
(n) Reflects the increased interest expense on the V/Line Freight acquisition
from a bridge loan and convertible debt issued less the elimination of
historical interest expense. The interest rates and debt balances are as
follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
-------------------------
INTEREST BEGINNING DECEMBER 31, APRIL 30,
RATE PRINCIPAL AMOUNT 1998 1999
-------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Bridge loan.................... 13.0% $95.0 million $12,350,000 $4,117,000
Convertible debt............... 6.0% $ 4.0 million 227,000 80,000
Less: Historical interest
expense on extinguished
debt......................... (630,000) (234,000)
----------- ----------
$11,947,000 $3,963,000
=========== ==========
</TABLE>
(o) Reflects the increased interest expense on the RaiLink Ltd. acquisition
from borrowing under a new bank facility and convertible debt issued in a
private placement less the elimination of interest on liabilities not
assumed. The interest rates and debt balances are as follows for the seven
months ended July 31, 1999:
<TABLE>
<CAPTION>
INTEREST BEGINNING INTEREST
RATE PRINCIPAL AMOUNT EXPENSE
-------- ---------------- ----------
<S> <C> <C> <C>
Bank facility.......................... 9.5% $48.1 million $2,608,000
Convertible debt....................... 8.0% $13.3 million 624,000
Existing debt assumed.................. Various $ 8.8 million 262,000
Less: Historical interest expense on
extinguished debt.................... (662,000)
----------
$2,832,000
==========
</TABLE>
The interest rate and debt balances for the year ended December 31, 1998:
<TABLE>
<CAPTION>
INTEREST BEGINNING INTEREST
RATE PRINCIPAL AMOUNT EXPENSE
-------- ---------------- ----------
<S> <C> <C> <C>
Bank facility.......................... 9.5% $48.1 million $4,616,000
Convertible debt....................... 8.0% $13.3 million 1,069,000
Existing debt assumed.................. Various $ 4.0 million 258,000
Less: Historical interest expense on
extinguished debt.................... (710,000)
----------
$5,233,000
==========
</TABLE>
The effect of a 1/8% increase in interest rates on the new bank facility
would result in an increase in interest expense of $71,000 and $122,000 for the
seven months ended July 31, 1999 and the year ended December 31, 1998,
respectively,
(p) Reflects the increased interest expense on the Toledo, Peoria and Western
acquisition from borrowing under a new bank facility and convertible debt
issued in a private placement less the
47
<PAGE> 48
elimination of interest on liabilities not assumed. The interest rates and
debt balances are as follows for the eight months ended August 31, 1999:
<TABLE>
<CAPTION>
INTEREST BEGINNING INTEREST
RATE PRINCIPAL AMOUNT EXPENSE
-------- ---------------- ----------
<S> <C> <C> <C>
Bank facility.......................... 9.5% $ 9.7 million $ 613,000
Convertible debt....................... 8.0% $ 8.1 million 430,000
Less: Historical interest expense on
extinguished debt.................... (537,000)
----------
$ 506,000
==========
</TABLE>
The interest rate and debt balances for the year ended December 31, 1998:
<TABLE>
<CAPTION>
INTEREST BEGINNING INTEREST
RATE PRINCIPAL AMOUNT EXPENSE
-------- ---------------- ----------
<S> <C> <C> <C>
Bank facility.......................... 9.5% $ 9.4 million $ 889,000
Convertible debt....................... 8.0% $ 8.1 million 645,000
Less: Historical interest expense on
extinguished debt.................... (754,000)
----------
$ 780,000
==========
</TABLE>
The effect of a 1/8% increase in interest rates on the new bank facility
would result in an increase in interest expense of $8,000 and $12,000 for the
eight months ended August 31, 1999 and the year ended December 31, 1998,
respectively,
(q) Reflects the increased interest expense on the RailTex, Inc. acquisition
from borrowing under a new bank facility less the elimination of interest
on liabilities not assumed. The interest rates and debt balances are as
follows:
<TABLE>
<CAPTION>
INTEREST BEGINNING DECEMBER 31, SEPTEMBER 30,
RATE PRINCIPAL AMOUNT 1998 1999
-------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Bank facility................. 9.5% $243.8 million $23,169,000 $19,658,000
Less: Historical interest
expense on extinguished
debt........................ (11,236,000) (7,903,000)
----------- -----------
$11,933,000 $11,755,000
=========== ===========
</TABLE>
The effect of a 1/8% increase in interest rates on the new bank facility
would result in an increase in interest expense of $229,000 and $305,000 for the
nine months ended September 30, 1999 and the year ended December 31, 1998,
respectively. The pro forma adjustment assumes $385.0 million was borrowed under
senior secured financing and $95.0 million was borrowed under bridge financing.
However, if the amount of bridge financing is increased to $155.0 million, a
portion of the deferred financing costs would be amortized over a shorter
period.
(r) Reflects the increase in interest expense from the replacement of $61.9
million in RailAmerica's revolver with the new bank facility.
(s) Reflects net increase in amortization of deferred loan costs as a result of
the new bank facility used to finance the above acquisitions as well as the
RailAmerica debt refinancing.
(t) Reflects the income tax effect to the pro forma adjustments at an assumed
income tax rate of 36% for V/Line Freight, 44.4% for RaiLink Ltd. and 40%
for both Toledo, Peoria and Western and RailTex, Inc.
48
<PAGE> 49
PER SHARE DATA:
(u) The weighted average shares -- basic gives effect to the 1.4 million shares
issued by RailAmerica, Inc. in a private placement to partially fund the
V/Line Freight acquisition and the 6.8 million shares assumed issued by
RailAmerica, Inc. to partially fund the RailTex, Inc. acquisition.
(v) The weighted average shares -- diluted gives effect to the stock issuances
reference in the basic calculation as well as two additional private
placements, which occurred during 1999, as if they occurred at the
beginning of the respective periods.
(1) 464,400 shares of redeemable convertible preferred stock with a $25
liquidation value and a conversion price of $8.25.
(2) $22.5 million of 6% junior convertible subordinated debentures,
convertible at $10 per share.
Pro forma net income (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Income from continuing operations.................... $ 6,393 $10,732
Preferred stock dividends and accretion.............. (1,064) (794)
------- -------
Income from continuing operations available to
common stockholders (basic)........................ 5,329 9,938
Interest on convertible debt......................... --* 855
Preferred stock dividends and accretion.............. --* --**
------- -------
Income from continuing operations available to
common stockholders (diluted)...................... $ 5,329 $10,793
======= =======
Weighted average shares outstanding (basic).......... 17,794 18,210
Assumed exercise of options and warrants............. 225 403
Assumed conversion of convertible securities......... --* 3,476
------- -------
Weighted average shares outstanding (diluted)........ 18,019 22,089
======= =======
</TABLE>
* Convertible securities are anti-dilutive and not included in the computation
on a diluted basis.
** Convertible preferred stock is anti-dilutive and not included in the
computation on a diluted basis.
49
