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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 2000
REGISTRATION STATEMENT NO. 333-93885
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RAILAMERICA, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 65-0328006
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
<TABLE>
<CAPTION>
GARY O. MARINO
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
RAILAMERICA, INC. RAILAMERICA, INC.
5300 BROKEN SOUND BLVD., N.W. 5300 BROKEN SOUND BLVD., N.W.
BOCA RATON, FLORIDA 33487 BOCA RATON, FLORIDA 33487
(561) 994-6015 (561) 994-6015
<S> <C>
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices) Include Area Code, of Agent for Service)
</TABLE>
Copies of Communications to:
GARY M. EPSTEIN, ESQ.
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE, SUITE 2200
MIAMI, FLORIDA 33131
(305) 579-0500
(FACSIMILE) (305) 579-0717
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO
THE PUBLIC: From time to time after this Registration
Statement becomes effective.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered only
in connection with dividend or interest reinvestment plans, check the following
box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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PROSPECTUS
1,173,456 SHARES
RAILAMERICA, INC.
COMMON STOCK
The selling shareholders are offering up to 1,173,456 shares of our
common stock which they acquired in connection with our acquisiton of all of
the outstanding common stock of RailTex, Inc. Under our merger agreement with
RailTex, we paid $13.50 in cash and 0.66666667 shares of our common stock
for each share of RailTex common stock.
Our common stock is listed for trading on the Nasdaq National Market
under the symbol "RAIL." On February 3, 2000, the last reported sales price
of our common stock on the Nasdaq National Market was $7.75 per share.
The selling shareholders may offer shares through public or private
transactions, on or off the Nasdaq National Market, at prevailing prices or at
privately negotiated prices. The selling shareholders may make sales directly to
purchasers or through agents, dealers or underwriters.
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SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT THE FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER
REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------
This prospectus is dated February 4, 2000.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THE PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
TABLE OF CONTENTS
PAGE
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Prospectus Summary........................................... 1
Risk Factors................................................. 4
Use of Proceeds.............................................. 14
Selling Shareholders......................................... 14
Plan of Distribution........................................ 15
Legal Matters............................................... 16
Experts..................................................... 16
Where You Can Find More Information......................... 16
RailTex Financial Statements................................ F-1
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PROSPECTUS SUMMARY
This summary highlights selected information and does not contain all
the information that is important to you. We urge you to read the entire
prospectus and the documents we have referred you to in "Where You Can Find More
Information" on page 16 for more information about our company and our financial
statements. You should pay special attention to the risks of investing in our
common stock discussed under "Risk Factors."
RAILAMERICA
OUR BUSINESS
We are a leading owner and operator of short line and regional freight
railroads. We own and operate, or have a significant equity interest in, 50
freight railroads with approximately 12,500 miles of track in the United States,
Australia, Canada and Chile. We are also a leading manufacturer of specialized
truck trailers for U.S. governmental and commercial customers.
OUR RAILROAD OPERATIONS
We have grown rapidly through acquisitions of short line railroads in
North America and newly privatized regional railroads internationally. Pro forma
revenue from railroad operations for the nine months ended September 30, 1999
after giving effect to our completed 1999 acquisitions and the RailTex
acquisition was $262.3 million, compared to our actual 1998 annual revenue from
railroad operations of $30 million. We expect to continue to grow our business
by making additional acquisitions and by increasing revenues and improving
operating margins generated from railroads that we currently own.
OUR OPERATING STRENGTHS. We have grown successfully because:
o We select and acquire appropriate acquisition candidates in new
and existing markets. We believe that sellers, when they evaluate
potential acquirers, consider, in addition to price, criteria
such as a prospective acquirer's operating experience, its
reputation among shippers and its ability to close a transaction
and commence operations smoothly. We believe that we have
established an excellent record in each of these areas.
o We increase rail freight traffic from existing, former and new
customers in each of our markets through the aggressive marketing
of our enhanced customer service, renegotiation of rates where
prudent, and implementation of other incentive arrangements for
shippers.
o We reduce costs and control expenses through rationalized
staffing, centralized purchasing and corporate administrative
services, efficient equipment deployment and utilization and,
where appropriate, outsourced maintenance. When we acquire a new
railroad within an existing market, we capitalize on operating
efficiencies resulting from the presence of our other railroads
within that market.
o We select and motivate effective management through our centrally
supported and locally executed management philosophy. We reward
productivity through separate performance-based, incentive
compensation programs for a significant number of our railroads.
o We enhance customer service and make it responsive to the needs
of local customers by upgrading and providing specialized
equipment and by increasing reliability and frequency of service.
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OUR RECENT ACQUISITIONS. Since January 1, 1999 we completed the
following acquisitions:
o in February 2000, we acquired RailTex, Inc., a leading owner
of short line freight 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, with
approximately 4,100 miles of freight rail lines, for total
consideration of approximately $139.0 million in cash and
6,635,212 shares of our common stock;
o in April 1999, we acquired the business of V/Line Freight
Corporation, the freight railroad of Australia's Victorian
Government, with approximately 3,150 miles of rail lines in
Australia, for total consideration of $103 million; we operate
this business through our wholly owned subsidiary, Freight
Victoria Limited;
o in July 1999, we acquired RaiLink Ltd., the third largest freight
rail system in Canada; it owns or operates approximately 1,620
miles of rail lines and has an approximately 26% interest in a
railroad company operating another 740 miles; the aggregate
purchase price was $71 million, including the repayment of debt;
o in September 1999, we acquired The Toledo, Peoria and Western
Railroad Corporation, a regional freight railroad with 369 miles
of rail lines in the central United States, for an aggregate
purchase price of $18 million, including the assumption of debt;
and
o in January 1999, we acquired the Esquimalt and Nanaimo Railroad,
a 181 mile rail line in British Columbia, Canada, which operates
as E&N Railway Corporation, for an aggregate purchase price of
$11 million.
ACQUISITION OPPORTUNITIES. We plan to continue to expand our rail
operations through selective acquisitions of rail properties.
o In North America, we plan to continue to acquire short line and
regional railroads; we believe they may become available as a
result of (1) sales by other short line and regional owners and
operators, (2) divestitures resulting from the consolidation of
larger owners and operators, and (3) rationalizations and
divestitures by Class I carriers;
o Outside North America, we plan to acquire regional railroads that
become available primarily as a result of governmental
privatizations, either alone or through joint ventures with local
partners familiar with market conditions in the region.
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OUR TRUCK TRAILER MANUFACTURING OPERATIONS
In addition to our railroad operations, we also manufacture specialized
truck trailers through our wholly-owned subsidiary, Kalyn/Siebert L.P. Kalyn
manufactures specialty and custom truck trailers for U.S. governmental and
commercial customers. Kalyn's profit margins typically exceed those of
manufacturers of commodity or stock trailers because its trailers are designed,
built or modified to meet customer specifications. This allows greater pricing
flexibility and reduced inventory requirements. Our trailer manufacturing
operations generated approximately $39.9 million in revenue in 1998 and $33.9
million in revenue for the nine months ended September 30, 1999. These results
include Kalyn's January 1998 acquisition of a Canadian manufacturer of
lightweight aluminum specialty bulk-handling trailers used in the solid waste,
agricultural and construction industries.
On November 12, 1999, we announced our intention to sell Kalyn. We
retained the investment banking firm ING Barings LLC to facilitate the sale. At
this time we are unable to predict if and when this sale will be completed.
RECENT DEVELOPMENTS
In connection with our acquisition of RailTex, we financed the
acquisition, refinanced substantially all of our debt and refinanced
substantially all of RailTex's debt through the following credit facilities:
o a $50.0 million revolving credit facility which includes $10.0
million of Canadian dollar denominated funds and $10.0 million of
Australian dollar denominated funds, with an initial interest rate
of LIBOR plus 3.0% and a maturity date of December 31, 2005;
o a $125.0 million term credit facility, with an initial interest
rate of LIBOR plus 3.0% and a maturity date of December 31, 2005;
o a $205.0 million term credit facility, with an initial interest
rate of LIBOR plus 3.25% and a maturity date of December 31, 2006;
o a $95.0 million subordinated increasing rate note facility, with
an initial interest rate of 13% and a maturity date of
February 4, 2001, which may be extended under specified
conditions for an additional six months; and
o a $55.0 million asset sale bridge note facility, with an initial
interest rate of 15% and a maturity date of February 4, 2001,
which may be extended under specified conditions for an additional
six months.
CORPORATE INFORMATION
We are a Delaware corporation with our principal executive offices
located at 5300 Broken Sound Boulevard, N.W., Boca Raton, Florida 33487. Our
telephone number is (561) 994-6015.
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. If any of the following risks occurs, our business,
financial condition or results of operations could be adversely affected. In
that case, the trading price of our common stock could decline, and you might
lose all or part of your investment.
OUR INABILITY TO SUCCESSFULLY INTEGRATE THE BUSINESSES WE HAVE ACQUIRED COULD
HAVE ADVERSE CONSEQUENCES ON OUR BUSINESS.
We have experienced significant growth through acquisitions.
Acquisitions result in greater administrative burdens and operating costs and,
to the extent financed with debt, additional interest costs. We cannot assure
you that we will be able to successfully manage or integrate the acquired
companies or businesses, including RailTex and the four companies acquired by us
in 1999. The process of combining RailTex into our operations and integrating
our other acquired businesses may be disruptive to our business and may cause an
interruption of, or a loss of momentum in, our business as a result of the
following difficulties, among others:
o loss of key employees or customers;
o possible inconsistencies in standards, controls, procedures and
policies among the combined companies and the need to implement
company-wide financial, accounting, information and other systems;
o failure to maintain the quality of services that the companies have
historically provided;
o the need to coordinate geographically diverse organizations; and
o the diversion of management's attention from our day-to-day
business as a result of the need to deal with the above disruptions
and difficulties and the need to add management resources to do so.
These disruptions and difficulties, if they occur, may cause us to fail
to realize the cost savings, revenue enhancements and other benefits that we
currently expect to result from that integration and may cause material adverse
short- and long-term effects on our operating results and financial condition.
IF WE ARE UNSUCCESSFUL IN CONTINUING OUR ACQUISITION PROGRAM OUR BUSINESS MAY BE
ADVERSELY AFFECTED.
The success of our acquisition program will depend on, among other
things:
o the availability of suitable candidates;
o our ability to value those candidates accurately and negotiate favorable
terms for those acquisitions;
o the availability of funds to finance acquisitions; and
o the availability of management resources to oversee the integration and
operation of the acquired businesses.
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Financing for acquisitions may come from several sources, including
cash on hand and proceeds from the incurrence of indebtedness or the issuance of
additional common stock, preferred stock, convertible debt or other securities.
The issuance of any additional securities could, among other things:
o result in substantial dilution of the percentage ownership of our
stockholders at the time of issuance;
o result in substantial dilution of our earnings per share;
o adversely affect the prevailing market price for our common stock; and
o in the case of debt securities, result in increased indebtedness, which
could negatively affect our liquidity and operating flexibility.
WE HAVE SUBSTANTIAL DEBT AND DEBT SERVICE REQUIREMENTS WHICH COULD HAVE ADVERSE
CONSEQUENCES ON OUR BUSINESS.
As of September 30, 1999, on a pro forma basis after giving effect to
our recent acquisitions including the acquisition of RailTex, our total debt was
approximately $531.5 million. In connection with the RailTex acquisition, we
entered into the following financing arrangements:
o $330.0 million of senior secured term loan facilities;
o $50.0 million of senior secured revolving loan facilities;
o a $95.0 million subordinated increasing rate note facility; and
o a $55.0 million asset sale bridge note facility.
As a result of the financing, we have incurred significant debt and debt service
obligations. The degree to which we are leveraged could have important
consequences, including the following:
o our ability to borrow additional amounts for working capital, capital
expenditures, potential acquisition opportunities, general corporate
purposes and other purposes may be limited or financing may not be
available on terms favorable to us or at all;
o a substantial portion of our cash flows from operations must be used to
pay our interest expense, pay our preferred stock dividends and repay
our debt, which would reduce the funds that would otherwise be
available to us for our operations and future business opportunities;
o we may be more vulnerable to economic downturns, may be limited in
our ability to withstand competitive pressures and may have reduced
flexibility in responding to changing business, regulatory and
economic conditions; and
o fluctuations in market interest rates will affect the cost of our
borrowings to the extent not covered by interest rate hedge
agreements because interest under a portion of our new credit
facilities is to be payable at variable rates.
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Our ability to service our indebtedness will depend on our future
performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors. A number of these factors are
beyond our control. If we become unable to service our indebtedness, we will be
forced to pursue one or more alternative strategies, such as selling assets,
restructuring or refinancing our indebtedness or seeking additional equity
capital, which may substantially dilute the ownership interest of holders of our
common stock. We cannot assure you that any of these strategies could be
effected on satisfactory terms, if at all.
OUR CREDIT FACILITIES CONTAIN COVENANTS THAT SIGNIFICANTLY RESTRICT OUR
OPERATIONS.
Our credit facilities contain numerous covenants imposing significant
financial and operating restrictions on our business. These covenants place
restrictions on our ability to, among other things:
o incur more debt;
o pay dividends, redeem or repurchase our stock or make other
distributions;
o make acquisitions or investments;
o use assets as security in other transactions;
o enter into transactions with affiliates;
o merge or consolidate with others;
o dispose of assets or use asset sale proceeds;
o create liens on our assets; and
o extend credit.
Our credit facilities also contain financial covenants that require us
to meet a number of financial ratios and tests. Our ability to meet these ratios
and tests and to comply with other provisions of our credit facilities can be
affected by events beyond our control. Our failure to comply with the
obligations in our credit facilities could result in an event of default under
these facilities, which, if not cured or waived, could permit acceleration of
the indebtedness under the credit facilities or our other indebtedness which
could have a material adverse effect on us.
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IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY, WE MAY NOT BE ABLE
TO REPAY OR REFINANCE OUR DEBT.
We may not be able to successfully implement our business strategy or
realize our anticipated financial results. Accordingly, our cash flows and
capital resources may not be sufficient to pay interest on our indebtedness, pay
our preferred stock dividends and/or repay our debt. Failure to pay our interest
expense or make our principal payments would result in a default. A default, if
not waived, could result in acceleration of our indebtedness, in which case the
debt would become immediately due and payable. If this occurs, we may be forced
to reduce capital expenditures, delay implementation of our business strategy,
sell assets, obtain additional equity capital or refinance or restructure all or
a portion of our outstanding debt. In the event that we are unable to do so, we
may be left without sufficient liquidity and we may not be able to repay our
debt and the lenders will be able to foreclose on our assets. Even if new
financing is available, it may not be on terms that are acceptable to us.
WE MAY NOT REALIZE THE ANTICIPATED COST SAVINGS AND OTHER BENEFITS FROM OUR
ANTICIPATED MERGER WITH RAILTEX.
Even if we are able to integrate our operations with RailTex's
operations successfully, the integration may not result in the realization of
the full benefits of the cost savings, revenue enhancements or other benefits
that we currently expect to result. If we achieve these benefits, they may not
be achieved within the anticipated time frame. The cost savings and other
synergies from the merger may be offset by:
o costs incurred in integrating the companies; and
o increases in other expenses, operating losses or problems in the
business unrelated to the merger.
WE FACE COMPETITION FROM OTHER MODES OF TRANSPORTATION AND FROM OTHER RAIL
OPERATORS.
Our primary source of competition in our rail operations comes from
the trucking industry. While we must build or acquire and maintain our rail
system, trucks are able to use public roadways. Any future expenditures
materially increasing the roadway system in the locations in which we operate,
or legislation granting materially greater latitude for trucks with respect to
size or weight limitations, could have a material adverse effect on our results
of operations and financial condition.
In addition, we compete for acquisitions with other rail operators.
Some of these competitors are larger and have significantly greater resources
than we do and may possess greater local market knowledge as well.
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The truck trailer manufacturing industry is highly competitive and has
relatively low barriers to entry. Kalyn competes with a number of other trailer
manufacturers, some of which are larger and have greater financial resources
than Kalyn. Furthermore, Kalyn's products compete with alternative forms of
shipping, such as intermodal containers. We cannot assure you that Kalyn will be
able to continue to compete effectively for existing or potential customers or
with alternative forms of shipping containers.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY NEGATIVE CONDITIONS IN THE
AGRICULTURAL INDUSTRY BECAUSE A SUBSTANTIAL PORTION OF OUR RAILROAD TRAFFIC
CONSISTS OF AGRICULTURAL COMMODITIES.
Factors that negatively affect the agricultural industry in the
regions in which we operate could have a material adverse effect on our results
of operations and financial condition. These factors include weather
conditions, export and domestic demand and total world supply, and fluctuations
in agricultural prices. We believe that agricultural commodities will continue
to represent a principal component of our rail traffic base in the near future.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS IN FOREIGN COUNTRIES.
We have railroad operations in Australia, Chile, Canada and Mexico. We
may also consider acquisitions in other foreign countries. The risks of doing
business in foreign countries include:
o adverse changes in the economy of those countries;
o adverse effects of currency exchange controls;
o restrictions on the withdrawal of foreign investment and earnings;
o government policies against ownership of businesses by non-nationals;
and
o the potential instability of foreign governments.
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Our operations in foreign countries are also subject to economic
uncertainties, including among others, risk of renegotiation or modification of
existing agreements or arrangements with governmental authorities, exportation
and transportation tariffs, foreign exchange restrictions and changes in
taxation structure.
BECAUSE SOME OF OUR SIGNIFICANT SUBSIDIARIES TRANSACT BUSINESS IN FOREIGN
CURRENCIES, FUTURE EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS.
While our operations are predominantly in U.S. dollars, some of our
significant subsidiaries transact business in foreign currencies, including the
Australian dollar, the Canadian dollar and the Chilean peso. Changes in the
relation of these and other currencies to the U.S. dollar could affect our
revenues, result in exchange losses and result in the writedown of our
investments in those foreign countries. The impact of future exchange rate
fluctuations on our results of operations cannot be accurately predicted. We do
not engage or intend to engage in hedging. However, if circumstances change, we
may seek to limit our exposure to the risk of currency fluctuations by engaging
in hedging or other transactions. These transactions could expose us to
substantial risk of loss. We cannot assure you that we will successfully manage
our exposure to currency fluctuations.
YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four to define the applicable year. If our
computer programs with date-sensitive functions are not Year 2000 compliant,
they may recognize a date "00" as the Year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, inability to interchange information with connecting railroads or
engage in similar normal business activities.
As of the date of this offering memorandum, we have not experienced any
immediate adverse impact on our operations from the transition to the Year 2000.
We cannot assure you that our operations have not been affected in a manner that
is not yet apparent or in a manner that will arise in the future. In addition,
certain computer programs that were date sensitive to the Year 2000 may not have
been programmed to process the Year 2000 as a leap year, and negative effects
from this remain unknown. As a result, we will continue to monitor our Year 2000
compliance and the Year 2000 compliance of our suppliers and customers. However,
we do not anticipate any Year 2000 problems that are reasonably likely to have a
material adverse effect on our operations.
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WE ARE SUBJECT TO SIGNIFICANT GOVERNMENTAL REGULATION OF OUR RAILROAD AND
MANUFACTURING OPERATIONS AND THE FAILURE TO COMPLY WITH THESE REGULATIONS COULD
HAVE A MATERIAL ADVERSE EFFECT ON US.
We are subject to governmental regulation by a number of foreign,
federal, state and local regulatory authorities with respect to our railroad
and manufacturing operations, the rates we charge and a variety of health,
safety, labor, environmental and other matters. Governments may change the
legislative framework within which we operate without providing us with any
recourse for any adverse effects that the change may have on our business.
Also, some of the regulations require us to obtain and maintain various
licenses, permits and other authorizations and we cannot be sure that we will
continue to be able to do so.
Additionally, in Australia, where a significant portion of our
operations are located, the applicable legislative framework enables third
party rail operators to gain access to the railway infrastructure on which we
operate. As part of this regime, we have executed, and we may be required to
execute access agreements governing access to the railway infrastructure. We
may be required to make significant expenditures and to incur significant
expenses in order to comply with the applicable regulatory framework and these
access agreements.
WE MAY BE REQUIRED TO PAY PENALTY FEES UNDER SOME CIRCUMSTANCES TO A THIRD
PARTY RAIL OPERATOR THAT HAS ACCESS TO THE AUSTRALIAN RAILWAYS.
An access agreement with a third party rail operator in Australia
contains penalty provisions if trains using the railway infrastructure are
delayed, early or cancelled under a variety of circumstances. The formulas for
calculation of the penalty are complex. The penalties apply unless the penalty
event is primarily due to force majeure, which includes events such as natural
disasters, war, changes in applicable laws, power shortages and Year 2000
events. We cannot assure you that we will not incur significant penalties under
the Australian access agreement.
WE COULD INCUR SIGNIFICANT COSTS FOR VIOLATIONS OF APPLICABLE ENVIRONMENTAL
LAWS AND REGULATIONS.
Our railroad and manufacturing operations and real estate ownership are
subject to extensive foreign, federal, state and local environmental laws and
regulations concerning, among other things, emissions to the air, discharges to
waters, and the handling, storage, transportation and disposal of waste and
other materials. We may be subject to allegations or findings to the effect that
we have violated these laws or regulations. We could incur significant costs as
a result. We may be required to incur significant expenses to remediate this
contamination. Some reports prepared in connection with the recent acquisitions
of the business of V/Line Freight Corporation and The Toledo, Peoria and Western
Railroad Corporation identified a number of contaminated sites on the properties
leased or licensed to us, which we may be required to remediate. In addition,
some transactions, including our merger with RailTex, may subject us to various
requirements to investigate and remediate contamination at other properties.
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BECAUSE WE DEPEND ON CLASS I CARRIERS FOR OUR NORTH AMERICAN OPERATIONS, OUR
BUSINESS AND FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED IF OUR RELATIONSHIPS
WITH THEM DETERIORATE.
The railroad industry in the United States and Canada is dominated by
a small number of Class I carriers that have substantial market control and
negotiating leverage. Almost all of the traffic on our North American railroads
is interchanged with Class I carriers. A decision by any of these Class I
carriers to discontinue transporting commodities or to use alternate modes of
transportation, such as motor carriers, could have a material adverse effect on
our business and results of operations. Our ability to provide rail service to
our customers in North America depends in large part upon our ability to
maintain cooperative relationships with Class I carriers with respect to, among
other matters, freight rates, car supply, reciprocal switching, interchange and
trackage rights. A deterioration in the operations of or service provided by
those interchange partners, or in our relationship with our interchange
partners, would adversely affect our business. In addition, much of the freight
transported by our railroads in North America moves on railcars supplied by
Class I carriers. If the number of railcars supplied by Class I carriers is
insufficient, we might not be able to obtain replacement railcars on favorable
terms and shippers may seek alternative forms of transportation.
Portions of our North American rail properties are operated under
leases, operating agreements or trackage rights agreements with Class I
carriers. Failure of our railroads to comply with these leases and agreements
in all material respects could result in the loss of operating rights with
respect to these rail properties, which would adversely affect our results of
operations and financial condition. In addition, traditionally Class I carriers
also have been significant sources of business for us, as well as sources of
potential acquisition candidates as they continue to divest themselves of
branch lines to smaller rail operators. Because we depend on Class I carriers
for our North American operations, our business and financial results may be
adversely affected if our relationships with them deteriorate.
BECAUSE OUR TRAILER MANUFACTURING OPERATIONS DEPEND ON GOVERNMENT PURCHASES,
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF ORDERS PLACED BY GOVERNMENT ENTITIES
DECREASE.
For the years ended December 31, 1997 and 1998, approximately 37% and
35%, respectively, of Kalyn's revenue was derived from sales of truck trailers
to U.S. governmental customers. For the nine months ended September 30, 1999,
approximately 26% of Kalyn's revenue was derived from sales to these customers.
The majority of these sales are to the General Services Administration, known as
the GSA, the purchasing arm of non-military agencies, and to the United States
Tank Automotive Command, known as TACOM, a Department of Defense unit
established to consolidate purchases for various branches of the military.
Budget reductions or other factors may cause the GSA or TACOM to substantially
decrease their orders for new trailers which could have a material adverse
affect on our business and results of operations.
BECAUSE THE INDUSTRY DEMAND FOR TRUCK TRAILERS IS CYCLICAL, FUTURE ECONOMIC
DOWNTURNS OR CYCLICAL DECREASES IN DEMAND FOR TRUCK TRAILERS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Unit sales of new truck trailers have historically been subject to
substantial variation. Sales of new truck trailers have historically been
subject to a five- to seven-year replacement cycle. Additionally, periods of
economic recession in the United States have previously resulted in declines in
the profitability of the trucking industry. Future decreases in the demand for
truck trailers due to economic downturns or cyclical decreases would likely
have a material adverse effect on our business and results of operations.
In November 1999, we announced our intention to sell Kalyn, our
specialty truck trailer manufacturing business. Kalyn has historically been a
significant source of revenues and cash flows for us. The sale of Kalyn would
reduce our leverage and debt service obligations but also eliminate the cash
flows from Kalyn's operations and reduce our diversification.
11
<PAGE> 15
A LONG-TERM INTERRUPTION IN THE OPERATION OF OUR PLANTS FROM A NATURAL DISASTER
OR OTHER CAUSES, WHETHER OR NOT COVERED BY INSURANCE, COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our trailer manufacturing operations consist of two facilities in Texas
and Canada which operate at approximately 80% and 50% of their respective
capacities. Although we believe that our manufacturing capacity could be
increased through the expansion of our manufacturing facilities or the addition
of a partial second work shift, these capacity increases would increase the
marginal cost of producing truck trailers. Sustained growth of production and,
in turn, net sales of our manufacturing operations are dependent on our ability
to increase production efficiency. In the years ended December 31, 1996 through
1998, sales from our trailer manufacturing operations accounted for between 48%
and 53% of our total revenue. For the nine months ended September 30, 1999
on a pro forma basis after giving effect to our recent acquisitions, however,
sales from our trailer manufacturing operations accounted for only 11% of our
total revenue. A long-term interruption in the operation of our plants from a
natural disaster or other causes, whether or not covered by insurance, could
have a material adverse effect on our business and results of operations.
SOME OF OUR EMPLOYEES BELONG TO LABOR UNIONS AND STRIKES OR WORK STOPPAGES
COULD ADVERSELY AFFECT OUR OPERATIONS.
We are a party to collective bargaining agreements with various labor
unions in the United States, Australia, Chile and Canada. Some of these
agreements expire within the next two years. Our inability to negotiate
acceptable contracts with these unions could result in, among other things,
strikes, work stoppages or other slowdowns by the affected workers. If the
unionized workers were to engage in a strike, work stoppage or other slowdown,
or other employees were to become unionized, we could experience a significant
disruption of our operations and higher ongoing labor costs.
WE MAY FACE LIABILITY FOR CASUALTY LOSSES THAT ARE NOT COVERED BY INSURANCE.
We have obtained insurance coverage for losses arising from personal
injury and for property damage in the event of derailments or other accidents
or occurrences. However, losses or other liabilities may arise that are not
covered by insurance. In addition, under catastrophic circumstances our
liability could exceed our insurance limits. Insurance is available from a
limited number of insurers and may not continue to be available or, if
available, may not be obtainable on terms acceptable to us.
12
<PAGE> 16
MANY SHARES OF OUR COMMON STOCK ARE ELIGIBLE FOR FUTURE SALE WHICH MAY
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.
Of the approximately 11.7 million shares of common stock issued and
outstanding, we believe that approximately 9.9 million of the shares are
freely tradable without restriction or further registration under the
Securities Act, excluding any shares held or purchased by one of our
"affiliates" (in general, a person who has a control relationship with us). We
believe the approximately 1.8 million shares of common stock remaining are
"restricted securities", as that term is defined under Rule 144 promulgated
under the Securities Act, and may be resold thereafter in compliance with Rule
144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned those shares for
one year, may sell in the open market within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of our common stock or (ii) the average weekly trading volume in our
common stock on The Nasdaq National Market during the four calendar weeks
preceding that sale. Sales under Rule 144 are also subject to limitations on the
manner of sale, notice requirements and availability of current public
information about us. A person or group who is deemed not to have been an
"affiliate" of ours at any time during the 90 days preceding a sale by that
person and who has beneficially owned his shares for at least two years, will be
able to sell his shares in the public market under Rule 144(k) without regard to
the volume limitations, manner of sale provisions, notice requirements or
availability of current information referred to above. Restricted shares
properly sold in reliance upon Rule 144 are thereafter freely tradeable without
restrictions or registration under the Securities Act, unless thereafter held by
an "affiliate" of ours.
The possibility that substantial amounts of our common stock may be
issued or freely resold in the public market may adversely affect prevailing
market prices for our common stock, even if our business is doing well. As of
February 4, 2000, we had 18,546,181 shares of common stock issued and
outstanding and approximately 8.5 million shares of common stock reserved for
issuance.
WE ARE REQUIRED TO ISSUE WARRANTS WHICH WILL BE DILUTIVE TO OUR OTHER
SHAREHOLDERS
A portion of our financing from DLJ consists of bridge financing and
asset bridge notes. In connection with such financing, we have agreed to issue
warrants to the lenders to acquire an aggregate of 3.5% of our fully diluted
common stock for the bridge financing and warrants to acquire an aggregate of
2.0% of our fully diluted common stock for the asset bridge notes, which
warrants will be held in escrow. If the bridge financing is then outstanding,
one-eighth of the total number of bridge financing warrants will be released to
the lenders every 90 days following the first anniversary of the closing of
the bridge financing. Additionally, if the asset bridge notes are then
outstanding, 50% of the total bridge asset warrants will be released to the
lenders 180 days following the closing of the asset bridge note financing, 25%
will be released on the 270th day and the remaining 25% will be released on the
360th day following closing. Any warrants which have not been released to the
lenders upon payment in full of the bridge financing and asset bridge notes will
be terminated. The warrants will be exercisable at the fair market value of our
common stock and will expire seven years after the date of issuance. If the
warrants are issued, our stockholders may suffer dilution and the market price
of our common stock may be adversely affected.
13
<PAGE> 17
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of any of the
securities being offered by the selling shareholders under this prospectus.
Expenses expected to be incurred by us in connection with this
offering are estimated to be approximately $45,000.
SELLING SHAREHOLDERS
The selling shareholders acquired the 1,173,456 shares of common
stock being offered by this prospectus in connection with our acquisition of all
of the outstanding common stock of RailTex. Under our merger agreement with
RailTex, we paid $13.50 in cash and 0.66666667 shares of our common stock for
each share of RailTex common stock.
Except as described in this paragraph, none of the selling shareholders
listed below have been officers, directors, or employees of ours, nor have they
had a material relationship with us beyond their investment in, or receipt of,
our securities. However, Ferd. C. Meyer, Jr. and William G. Pagonis will become
members of our board of directors upon completion of the merger. In addition
John M. Hovis will become an employee, and Thomas W. Arnst and Joseph P. Jahnke
have entered into consulting arrangements with us.
The following table sets forth certain information with respect to the
amount of shares of our common stock that will be beneficially owned by the
named selling shareholders upon the completion of the merger. The percentages
listed below are adjusted to reflect the sale of the shares of common stock
offered.
<TABLE>
<CAPTION>
OWNERSHIP OF SHARES OF
COMMON STOCK PRIOR
TO OFFERING
-------------------- NUMBER OF OWNERSHIP OF
SHARES OF SHARES OF COMMON
COMMON STOCK AFTER OFFERING**
COMMON STOCK ----------------------
SELLING SHAREHOLDER SHARES PERCENTAGE OFFERED SHARES PERCENTAGE
------------------- ------- ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Bruce M. Flohr 196,725 1.1% 196,725 0 *
Robert R. Lende 98,187 * 98,187 0 *
Laura D. Davies 50,719 * 50,719 0 *
Robert M. Ayres, Jr. 133,582 * 133,582 0 *
Ferd. C. Meyer, Jr. 14,633 * 14,633 0 *
Heather J. Gradison 9,400 * 9,400 0 *
Palmer L. Moe 14,212 * 14,212 0 *
William G. Pagonis 2,000 * 2,000 0 *
Ronald A. Rittenmeyer 284,386 1.5% 284,386 0 *
Joseph P. Jahnke 37,336 * 37,336 0 *
Thomas W. Arnst 53,194 * 53,194 0 *
John M. Hovis 60,926 * 60,926 0 *
Julie B. Herbort 6,926 * 6,926 0 *
The Lende Foundation 5,000 * 5,000 0 *
Ferd. C. Meyer III 133 * 133 0 *
Marron C. Meyer 133 * 133 0 *
Jeanie Francis Flohr 316 * 316 0 *
Megan Lennie Flohr 316 * 316 0 *
Flohr Family Foundation 102,666 * 102,666 0 *
Bruce M. Flohr and
Janet Lennie Flohr 102,666 * 102,666 0 *
Charitable Remainder Unitrust
</TABLE>
- --------------------
* Indicates less than 1%
** Assumes all of the shares of common stock registered hereby are sold.
14
<PAGE> 18
PLAN OF DISTRIBUTION
GENERAL
TRANSACTIONS. The selling shareholders may offer and sell their shares
of common stock in one or more of the following transactions:
o on the Nasdaq National Market,
o in the over-the-counter market,
o in negotiated transactions, or
o in a combination of any of these transactions.
PRICES. The selling shareholders may sell their shares of common stock
at any of the following prices:
o fixed prices which may be changed,
o market prices prevailing at the time of sale,
o prices related to prevailing market prices, or
o negotiated prices.
DIRECT SALES; AGENTS, DEALERS AND UNDERWRITERS. The selling
shareholders may effect transactions by selling the shares of common stock in
any of the following ways:
o directly to purchasers, or
o to or through agents, dealers or underwriters designated from time to
time.
Agents, dealers or underwriters may receive compensation in the form
of underwriting discounts, concessions or commissions from the selling
shareholders and/or the purchasers of shares for whom they act as agent or to
whom they sell as principals, or both. The selling shareholders and any agents,
dealers or underwriters that act in connection with the sale of shares might be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any discount or commission received by them and any profit
on the resale of shares as principal might be deemed to be underwriting
discounts or commissions under the Securities Act.
SUPPLEMENTS. To the extent required, we will set forth in a supplement
to this prospectus filed with the SEC the number of shares to be sold, the
purchase price and public offering price, the name or names of any agent,
dealer or underwriter, and any applicable commissions or discounts with respect
to a particular offering.
STATE SECURITIES LAW. Under the securities laws of some states, the
selling shareholders may only sell the shares in those states through
registered or licensed brokers or dealers. In addition, in some states the
selling shareholders may not sell the shares unless they have been registered
or qualified for sale in that state or an exemption from registration or
qualification is available and is satisfied.
EXPENSES; INDEMNIFICATION. We will not receive any of the proceeds
from the sale of the shares of common stock sold by the selling shareholders
and will bear all expenses related to the registration of this offering but
will not pay for any underwriting commissions, fees or discounts, if any. We
will indemnify the selling shareholders against some civil liabilities,
including some liabilities which may arise under the Securities Act.
15
<PAGE> 19
LEGAL MATTERS
Greenberg Traurig, P.A., of Miami, Florida, has passed upon the
validity of the issuance of our shares of common stock offered in this
prospectus.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for the
three years in the period ended December 31, 1998, incorporated by reference
from our Annual Report on Form 10-K in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent public accountants, as set forth in
their reports. In those reports, that firm states that with respect to Empresa
De Transporte Ferroviario S.A., its opinion is based on the reports of other
independent accountants, namely Arthur Andersen-Langton Clarke, a member firm of
Andersen Worldwide SC. The financial statements referred to above have been
included herein in reliance upon the authority of those firms as experts in
accounting and auditing.
The financial statements of V/Line Freight Corporation as of June 30,
1998 and for the year then ended, incorporated into this prospectus by reference
from our Current Report on Form 8-K/A, filed with the SEC on July 16, 1999, have
been so incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of RaiLink Ltd. as of December 31, 1998 and
for the year then ended, incorporated into this prospectus by reference from our
Current Report on Form 8-K/A, dated October 5, 1999, have been so incorporated
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of The Toledo, Peoria and Western Railroad as
of December 31, 1998 and for the year then ended, incorporated into this
prospectus by reference from RailAmerica's Current Report on Form 8-K/A, dated
November 12, 1999, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon, and are included in reliance upon such
report, given on the authority of such firm as experts in accounting and
auditing.
The financial statements of RailTex are included in this prospectus and
elsewhere in this registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document that we file
at the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also inspect our filings at the regional offices of the SEC
located at 7 World Trade Center, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings are also available to the public at the SEC's
web site at http://www.sec.gov. You can also inspect reports and other
information we file at the offices of The Nasdaq Stock Market, Inc., 1735 K
Street, Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" some of the documents
that we file with it into this prospectus, which means:
o incorporated documents are considered part of this prospectus;
o we can disclose important information to you by referring you to those
documents; and
o information that we file with the SEC will automatically update and
supersede this incorporated information.
16
<PAGE> 20
We incorporate by reference the documents listed below, which were
filed with the SEC under the Securities Exchange Act of 1934:
o our annual report on Form 10-K for the year ended December 31, 1998;
o our quarterly reports on Form 10-Q for the periods ended March 31,
1999, June 30, 1999 and September 30, 1999;
o our current reports on Form 8-K dated May 17, 1999 (as amended
July 16, 1999), August 6, 1999 (as amended October 5, 1999),
September 20, 1999 (as amended November 12, 1999), October 19, 1999,
November 12, 1999, January 26, 2000 and February 4, 2000; and
o our joint proxy statement prospectus on Form S-4 filed on December 29,
1999.
We also incorporate by reference each of the following documents that
we will file with the SEC after the date of this prospectus:
o our report on Form 8-K to be filed upon completion of the merger with
RailTex;
o any reports filed under Sections 13(a) and (c) of the Securities
Exchange Act;
o definitive proxy or information statements filed under Section 14 of
the Securities Exchange Act in connection with any subsequent
stockholders' meetings; and
o any reports filed under Section 15(d) of the Securities Exchange Act.
You should assume that the information appearing in this prospectus is
accurate as of the date of this prospectus only. Our business, financial
position and results of operations may have changed since that date. You may
request a copy of any filings referred to above (excluding exhibits), at no
cost, by contacting us at the following address:
RailAmerica, Inc.
5300 Broken Sound Boulevard, N.W.,
Boca Raton, Florida 33487
(561) 994-6015
Attn: Donald D. Redfearn, Secretary
17
<PAGE> 21
RAILTEX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RAILTEX, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants....................................................................... F-2
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996......................... F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997
and 1996................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996..................... F-6
Notes to Consolidated Financial Statements..................................................................... F-7
Consolidated Statements of Income for the three and nine month periods ended September 30, 1999 and 1998....... F-30
Consolidated Balance Sheets as of September 30, 1999 and 1998.................................................. F-31
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998.................... F-32
Notes to Consoidated Financial Statements...................................................................... F-33
</TABLE>
F-1
<PAGE> 22
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
F-2
<PAGE> 23
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.
F-3
<PAGE> 24
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.
F-4
<PAGE> 25
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.
F-5
<PAGE> 26
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.
F-6
<PAGE> 27
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.
F-7
<PAGE> 28
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.
F-8
<PAGE> 29
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.
F-9
<PAGE> 30
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.
F-10
<PAGE> 31
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.
F-11
<PAGE> 32
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>
F-12
<PAGE> 33
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.
F-13
<PAGE> 34
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.
F-14
<PAGE> 35
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.
F-15
<PAGE> 36
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.
F-16
<PAGE> 37
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.
F-17
<PAGE> 38
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.
F-18
<PAGE> 39
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):
F-19
<PAGE> 40
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
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
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.
F-20
<PAGE> 41
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.
F-21
<PAGE> 42
RAILTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
11. INCOME TAXES
Income tax expense consisted of the following (in thousands):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997 1996
------- ------ ------
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
======= ====== ======
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.
F-22
<PAGE> 43
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):
OPERATING CAPITAL
FOR THE YEARS ENDED DECEMBER 31, LEASES LEASES
-------------------------------- --------- -------
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
========= =======
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.
F-23
<PAGE> 44
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.
F-24
<PAGE> 45
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.
F-25
<PAGE> 46
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).
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
(Unaudited)
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
=========== ===========
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.
F-26
<PAGE> 47
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).
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
----------- -----------
(Unaudited)
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
=========== ===========
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.
F-27
<PAGE> 48
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).
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- --------- --------
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
======== ========= ========
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.
F-28
<PAGE> 49
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.
F-29
<PAGE> 50
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.
F-30
<PAGE> 51
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.
F-31
<PAGE> 52
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.
F-32
<PAGE> 53
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.
F-33
<PAGE> 54
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>
F-34
<PAGE> 55
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.
F-35
<PAGE> 56
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.
F-36
<PAGE> 57
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).
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1999 1998
-------- --------
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
======== ========
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.
F-37
<PAGE> 58
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.
F-38
<PAGE> 59
================================================================================
1,173,456 SHARES
RAILAMERICA, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
FEBRUARY 4, 2000
================================================================================
<PAGE> 60
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the costs and expenses (subject to
future contingencies) incurred or expected to be incurred by the Registrant in
connection with the offering. The Registrant has agreed to pay all the costs
and expenses of this offering.
Securities and Exchange Commission Registration Fee............... $ 3,136
Accounting Fees and Expenses...................................... 15,000
Legal Fees and Expenses........................................... 20,000
Printing Expenses................................................. 6,000
Miscellaneous..................................................... 864
---------
Total.................................................... $ 45,000
=========
- ---------------------
(1) The amounts set forth above, except for the SEC fee, are in each case
estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant has authority under Section 145 of the Delaware General
Corporation Law to indemnify its directors and officers to the extent provided
for in such statute. The Registrant's Amended and Restated Certificate of
Incorporation provides for indemnification of the Registrant's officers and
directors to the extent permitted under the Delaware General Corporation Law.
The Registrant's Amended and Restated Certificate of Incorporation
limits the liability of Directors to the maximum extent permitted by Delaware
General Corporation Law. Delaware law provides that the directors of a
corporation will not be personally liable to such corporation or its
stockholders for monetary damages for breach of their fiduciary duties as
directors, except for liability (i) for any breach of their duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law;
or (iv) for any transaction from which the director derives an improper
personal benefit. The Registrant's Amended and Restated Certificate of
Incorporation provides that the Registrant shall indemnify its Directors and
officers to the fullest extent permitted by Delaware law, except against
actions by the Registrant approved by the Board of Directors, and requires the
Registrant to advance expenses to such Directors and officers to defend any
action for which rights of indemnification are provided in the Certificate of
Incorporation, and also permits the Board of Directors to grant such rights to
its employees and agents.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-1
<PAGE> 61
ITEM 16. EXHIBITS
The following exhibits are included as part of this Registration
Statement:
EXHIBITS DESCRIPTION
-------- -----------
5.1 Opinion of Greenberg Traurig, P.A.
23.1 Consent of Greenberg Traurig, P.A. (contained in exhibit
5.1)
23.2 Consent of PricewaterhouseCoopers LLP (RailAmerica, Inc.)
23.3 Consent of Arthur Andersen Langton Clarke (Ferronor)
23.4 Consent of PricewaterhouseCoopers LLP (V/Line Freight Corporation)
23.5 Consent of PricewaterhouseCoopers LLP (RaiLink)
23.6 Consent of Ernst & Young LLP (Toledo, Peoria & Western)
23.7 Consent of Arthur Andersen LLP (RailTex)
*24.1 Power of Attorney (filed with signature page)
- -----------
* previously filed
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;"
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purposes of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE> 62
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements
and information are contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the Form
F-3.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boca Raton, State of
Florida, on the 4th day of February, 2000.
RAILAMERICA, INC.
By: /s/ Gary O. Marino
-----------------------------------------------
Gary O. Marino
Chairman, Chief Executive Officer and President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act, this Amendment
No. 1 to Registration Statement on Form S-3 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
** Chairman of the Board, Chief Executive February 4, 2000
- ---------------------------------------- Officer and President (Principal
Gary O. Marino Executive Officer and Chief Financial
Officer)
** Executive Vice President, Secretary and February 4, 2000
- ---------------------------------------- Director
Donald D. Redfearn
** Assistant Secretary and Director February 4, 2000
- ----------------------------------------
John H. Marino
** Director February 4, 2000
- ----------------------------------------
Douglas R. Nichols
** Director February 4, 2000
- ----------------------------------------
Richard Rampell
** Director February 4, 2000
- ----------------------------------------
Charles Swinburn
** Director February 4, 2000
- ----------------------------------------
John M. Sullivan
**By: /s/ Gary O. Marino
----------------------------------
Gary O. Marino
Attorney-in-fact
</TABLE>
II-4
<PAGE> 1
EXHIBIT 5.1
GREENBERG TRAURIG, P.A.
FEBRUARY 4, 2000
RailAmerica, Inc.
5300 Broken Sound Boulevard, N.W.
Boca Raton, Florida 33487
Ladies and Gentlemen:
We have acted as counsel for RailAmerica, Inc., a Delaware corporation
(the "Company"), in connection with the Company's Registration Statement on Form
S-3 (the "Registration Statement") being filed by the Company under the
Securities Act of 1933, as amended, with respect to 1,173,456 shares (the
"Shares") of the Company's common stock, par value $.001 per share (the "Common
Stock"), which may be disposed of from time to time by the selling shareholders
(the "Selling Shareholders") named therein. The shares of Common Stock offered
thereby will be acquired by the Selling Shareholders in connection with a
transaction in which the Company will acquire all of the outstanding shares of
common stock of RailTex, Inc. ( "RailTex") and, holders of each share of RailTex
common stock will receive $13.50 in cash and 0.66666667 shares of the common
stock of RailAmerica, subject to reallocation if RailTex fails to sell specified
assets for net proceeds of at least $9.0 million.
In connection with the preparation of the Registration Statement and
this opinion letter, we have examined, considered and relied upon the following
documents (collectively, the "Documents"): the Agreement and Plan of Merger
dated October 14, 1999 (the "Merger Agreement"), by and among RailAmerica,
Cotton Acquisition Corp. and RailTex; the Company's Certificate of Incorporation
(as amended) as filed with the Secretary of State of the State of Delaware; the
Company's bylaws and resolutions adopted by the Company's Board of Directors;
and such other documents and matters of law as we have considered necessary or
appropriate for the expression of the opinions contained herein.
In rendering the opinions set forth below, we have assumed without
investigation the genuineness of all signatures and the authenticity of all
documents submitted to us as originals, the conformity to authentic original
documents of all documents submitted to us as copies, and the veracity of the
Documents. As to questions of fact material to the opinions hereinafter
expressed, we have relied upon the representations and warranties of the
Company made in the Documents.
Based solely upon and subject to the Documents, and subject to the
qualifications set forth below, we are of the opinion that the Shares to be sold
by the Selling Shareholders pursuant to the Registration Statement have been
duly authorized and are, or when issued pursuant to the terms of the Merger
Agreement will be, validly issued and are, or when issued in accordance with the
terms thereof will be, fully paid and nonassessable.
Although we have acted as counsel to the Company in connection with
certain other matters, our engagement is limited to certain matters about which
we have been consulted. Consequently, there may exist matters of a legal nature
involving the Company in connection with which we have not been consulted and
have not represented the Company. This opinion letter is limited to the matters
stated herein and no opinions may be implied or inferred beyond the matters
expressly stated herein. The opinions expressed herein are as of the date
hereof, and we assume no obligation to update or supplement such opinions to
reflect any facts or circumstances that may hereafter come to our attention or
any changes in law that may hereafter occur.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus contained in the Registration Statement. In giving
<PAGE> 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus contained in the Registration Statement. In giving
such consent, we do not admit that we come within the category of persons whose
consent is required by Section 7 of the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
Very truly yours,
GREENBERG TRAURIG, P.A.
By: /s/ Fern S. Watts
------------------------
Fern S. Watts
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-3 (Registration No. 333-93885) of our
report dated March 12, 1999, relating to the financial statements which appear
in RailAmerica, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998. We also consent to the reference to our Firm under the heading
"Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Ft. Lauderdale, Florida
February 4, 2000
<PAGE> 1
EXHIBIT 23.3
February 4, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants, we hereby consent to the incorporation by reference
in this Registration Statement, Amendment No. 1 on Form S-3 of our report dated
March 12, 1999, on our audits of the financial statements of Ferronor S.A. (a
Chilean corporation and subsidiary of RailAmerica) included in the RailAmerica,
Inc. Form 10-K for the year ended December 31, 1998, and to all references to
our firm included in this Registration Statement.
ARTHUR ANDERSEN-LANGTON CLARKE
Charles A. Bunce
Santiago, Chile
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-3 (Registration No. 333-93885) of our
report dated July 14, 1999, relating to the financial statements of V/Line
Freight Corporation as of June 30, 1998 and for the year then ended, which
appear in RailAmerica, Inc.'s Current Report on Form 8-K/A dated July 16, 1999.
We also consent to the reference to our Firm under the heading "Experts" in such
Registration Statement.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 4, 2000
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
the Registration Statement on Form S-3 (Registration No. 333-93885) of our
report dated March 5, 1999, relating to the financial statements of RaiLink,
Inc. as of December 31, 1998 and for the year then ended, which appear in
RailAmerica, Inc.'s Current Report on Form 8-K/A dated October 5, 1999. We also
consent to the reference to our Firm under the heading "Experts" in such
Registration Statement.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 4, 2000
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 19, 1999, with respect to the financial
statements of The Toledo, Peoria and Western Railroad incorporated by reference
in the Registration Statement (Amendment No. 1 to Form S-3 No. 333-93885 dated
February 4, 2000) of RailAmerica, Inc. for the registration of 1,173,456 shares
of its common stock.
Ernst & Young, LLP
Syracuse, New York
February 2, 2000
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 27, 1999 on the consolidated financial statements of RailTex, Inc.
and subsidiaries as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996 and to all references to our Firm included in
this registration statement.
Arthur Andersen LLP
San Antonio, Texas
February 4, 2000
