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Railamerica Inc/DE · 10-K · For 12/31/02

Filed On 3/27/03, 9:18am ET   ·   Accession Number 1169232-3-2313   ·   SEC File 0-20618

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 3/27/03  Railamerica Inc/DE                10-K       12/31/02    8:398K                                   Edgar Ease Svc Bureau/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         78    467K 
 2: EX-10.86    Amendment No. 1 to Credit Agreement                   65     51K 
 3: EX-10.87    Deferred Compensation Plan                            27     88K 
 4: EX-10.88    Adoption Agreement                                    27     60K 
 5: EX-21       Subsidiaries of Registrant                             3     21K 
 6: EX-23.1     Consent of Pricewaterhousecoopers LLP                  1      6K 
 7: EX-99.1     Peo Certification                                      1      6K 
 8: EX-99.2     Pfo Certification                                      1      6K 


10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
12Ferronor
13Item 2. Properties
16Item 3. Legal Proceedings
17Item 4. Submission of Matters to A Vote of Security Holders
"Item 5. Market for Common Equity and Related Stockholder Matters
18Item 6. Selected Financial Data
"Factors affecting our operating results, business prospects and market price of stock
21Item 7. Management's Discussion and Analysis
26Operating Revenues
30Discontinued operations
34Item 7a. Market Risk
35Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
36Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"Item 13. Certain Relationships and Related Transactions
"Item 14. Controls and Procedures
37Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
44Report of Independent Certified Public Accountants
49Notes to Consolidated Financial Statements
"Property, plant and equipment
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U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 Commission File Number 0-20618 ---------- RAILAMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 65-0328006 (State or Other Jurisdiction (IRS Employer of Incorporation) Identification Number) 5300 BROKEN SOUND BLVD, N.W. BOCA RATON, FLORIDA 33487 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (561) 994-6015 Securities Registered Pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.001 Par Value New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Check whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes |X| No |_| The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2002 computed by reference to the average bid and asked prices of registrant's common stock reported on the New York Stock Exchange on such date was $335.8 million. The number of shares outstanding of registrant's Common Stock, $.001 par value per share, as of March 20, 2003 was 31,797,083. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (Items 10, 11, 12 and 13) will be incorporated by reference from the registrant's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A. 1
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TABLE OF CONTENTS PAGE ---- PART I Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis 21 Item 7a. Market Risk 34 Item 8. Financial Statements 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 PART III Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management 36 Item 13. Certain Relationships and Related Transactions 36 Item 14. Controls and Procedures 36 PART IV Item 15. Exhibits and Reports on Form 8-K 37 Signatures 40 2
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This Form 10-K contains certain "forward-looking" statements within the meaning of The Private Securities Litigation Reform Act of 1995 and information relating to RailAmerica, Inc. and its subsidiaries that are based on the beliefs of our management and that involve known and unknown risks and uncertainties. When used in this report, the terms "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to us or our subsidiaries or our management, are intended to identify forward-looking statements. These statements reflect the current risks, uncertainties and assumptions related to various factors including, without limitation, currency risk, competitive factors, general economic conditions, customer relations, fuel costs, the interest rate environment, governmental regulation and supervision, the inability to successfully integrate acquired operations, the ability to successfully market and sell non-core properties and assets, the ability to service debt, one-time events and other factors described under the heading "Factors affecting our operating results, business prospects and market price of stock" and elsewhere in this report and in other filings made by us with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, believed, estimated or intended. We undertake no obligation to update, and we do not have a policy of updating or revising, these forward-looking statements. Except where the context otherwise requires, the terms "we," "us," or "our" refer to the business of RailAmerica, Inc. and its consolidated subsidiaries. PART I  ITEM 1. BUSINESS GENERAL We are the largest owner and operator of short line freight railroads in North America and a leading owner and operator of regional freight railroads in Australia and Chile. We own, lease or operate a diversified portfolio of 49 railroads with approximately 12,900 miles of track located in the United States, Australia, Canada, Chile and Argentina. Through our diversified portfolio of rail lines, we operate in numerous geographic regions with varying concentrations of commodities hauled. In January 2003, we announced our intention to sell our 55% equity interest in our Chilean railroad operation, Ferronor. As a result, Ferronor has been presented as a discontinued operation in our financial statements. We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing railroad companies. Our principal executive office is located at 5300 Broken Sound Blvd, N.W., Boca Raton, Florida 33487, and our telephone number at that location is (561) 994-6015. Our Internet website address is www.railamerica.com. We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (SEC). We also make available on our website other reports filed with the SEC under the Securities Exchange Act of 1934, as amended, including proxy statements and reports filed by officers and directors under Section 16(a) of that Act. These reports may be found by selecting the option entitled "SEC FILINGS" in the "INVESTOR RELATIONS" section on our website. Information contained in or connected to our website is not part of this report. 3
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During the past six years, we have grown significantly through the following acquisitions: o In February 1997, we acquired a 55% equity interest in Ferronor, a Chilean regional railroad, for $7.2 million. o In April 1999, we acquired Freight Australia, an Australian regional railroad, for $103 million. o In July 1999, we acquired RaiLink, Inc., a holding company that owned or had equity interests in 11 Canadian railroads, for $49.8 million. o In September 1999, we acquired the Toledo, Peoria, and Western Railroad, for $17.4 million. o In February 2000, we acquired RailTex, Inc., a holding company that owned 25 railroads in the United States and Canada, for $294.2 million. o In January 2002, we acquired StatesRail, Inc. ("StatesRail"), a holding company of 8 railroads in the United States, for $90 million. o In January 2002, we acquired ParkSierra Corp. ("ParkSierra"), a holding company of 3 railroads in the United States, for $48 million. BUSINESS STRATEGY INCREASE REVENUE THROUGH FOCUSED MARKETING EFFORTS AND RELIABLE RAIL SERVICE. In North America and Australia, we strive to increase our revenues through focused marketing efforts and cost effective and reliable service. In North America, we work with customers, industrial development organizations and our Class I interchange partners to develop transportation solutions to meet the needs of our customers. We specialize in developing customer-driven solutions for logistical issues, with local and regional marketing representatives working directly with customers to ensure that rail transportation services meet their needs. The operating focus of our North American railroads is on meeting and exceeding the customer's expectations by providing frequent, dependable rail service at reasonable rates. In Australia, we market our services to potential customers across the continent, primarily in eastern Australia, as the open access rules allow us to operate over the track owned by other transportation companies. To supplement grain revenue, we are aggressively seeking to diversify our commodity base and regions served. We have recently signed new long-term contracts based in New South Wales that should add $50 million in revenue over the next three to five years and are in the process of soliciting transportation contracts from coal shippers in the Hunter Valley region and other potential customers. REDUCE DEBT TO INDUSTRY AVERAGE. At December 31, 2002, our net debt to total capitalization, excluding accumulated other comprehensive loss, was 63%. Our goal is to reduce this amount to 50% by the end of 2004. We intend to accomplish this through our recently announced $100 million asset rationalization plan, retention of earnings and generation of free cash flow. Our asset rationalization plan includes the sale of our 55% equity interest in Ferronor, our Chilean railroad, as well as the sale of other non-strategic and non-core assets in North America and Australia. CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Since 1997, we have made seven significant acquisitions of railroad companies, which owned or had equity interests in 50 railroads for total consideration in excess of $600 million. All of these railroads have been successfully integrated into our operations and in total have added in excess of 11,000 miles of track to our operations and in excess of $400 million in revenues. In North America, we seek acquisition candidates that enable us to form geographic clusters of short lines, thereby affording economies of scale as well as marketing and operating synergies. We also seek properties where operating efficiencies can be realized from professional management techniques and asset rationalization, thereby enabling the target railroad to reduce operating costs and improve service. The resultant competitive pricing and better service, coupled with a focused sales and marketing effort, typically yields customer loyalty and increased carloads. Acquisition opportunities in North America generally come from three sources. First, certain Class I railroads have stated an intent to sell certain branch lines over the next several years. We believe, based on our strong operating performance and relationships with the Class I railroads, we are a logical choice to acquire some of these properties. Second, as the short line industry itself continues to consolidate, we believe we are in an excellent position to acquire other short lines or groups of short lines because of our industry reputation, demonstrated access to capital, breadth of geographic coverage and ability to efficiently evaluate and negotiate prospective transactions. Third, as industrial companies divest of their railroad operations we believe our cost-effective and customer oriented approach makes us a strong candidate to acquire some of these railroads. 4
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We continue to monitor acquisition candidates in economically and politically stable international markets as a result of an increasing number of governments seeking to privatize their national rail systems. In acquiring rail properties, we compete with other short line and regional railroad operators, some of which have greater financial resources than we do. Competition for rail properties is based primarily upon price, operating history and financing capability. We believe our established reputation as a successful acquirer and operator of short line rail properties, combined with our managerial resources, effectively positions us to take advantage of future acquisition opportunities. NORTH AMERICAN RAILROADS We currently own, lease or operate 46 rail properties in North America, of which 45 are short line railroads that provide transportation services for both on-line customers and Class I railroads that interchange with our rail lines. Short line railroads are typically less than 350 miles long, serve a particular class of customers in a small geographic area and interchange with Class I railroads. Short line rail operators primarily serve customers on their line by transporting products to and from the Class I interchanges. Each of our North American rail lines is typically the only rail carrier directly serving its customers. The ability to haul heavy and large quantities of freight as part of a long-distance haul makes our rail services generally a more effective, lower-cost alternative to other modes of transportation, including motor carriers. In addition to our 45 short line railroads, we operate one tourist railroad. UNITED STATES. We own, lease or operate 37 short line rail properties and one tourist railroad in the United States with approximately 6,500 miles of track. Our properties are geographically diversified and operate in 26 states. We have clusters of rail properties in the Southeastern, Southwestern, Midwestern, Great Lakes, New England and Pacific Coast regions of the United States. We believe that this cluster strategy provides economies of scale and helps achieve operational synergies. CANADA. We own, lease or operate 8 short line rail properties in Canada with approximately 1,800 miles of track. Our Canadian properties are geographically diversified and operate in five provinces and the Northwest territories. INDUSTRY OVERVIEW The U.S. railroad industry is dominated by major Class I railroads, which operated approximately 98,000 miles of track in 2001. In addition to large railroad operators, there were more than 560 short line and regional railroads, which operated approximately 45,000 miles of track in 2001. The railroad industry is subject to regulations of various government agencies, primarily the Surface Transportation Board, or STB. For regulatory purposes, the STB classifies railroads into three groups: Class I, Class II and Class III, based on annual operating revenue. For 2001, the Class I railroads had operating revenues of at least $266.7 million, Class II railroads had revenues of $21.3 million to $266.6 million, and Class III railroads had revenues of less than $21.3 million (these thresholds are adjusted annually for inflation). In compiling data on the U.S. railroad industry, the Association of American Railroads, or AAR, uses the STB's revenue threshold for Class I railroads. Regionals are railroads operating at least 350 miles of rail line and/or having revenues between $40 million and the Class I revenue threshold. Locals are railroads falling below the Regional criteria, plus switching and terminal railroads. 2001 INDUSTRY OVERVIEW Number of 2001 Revenues Type of Railroad Carriers Miles Operated (in billions) % of Revenues ---------------- --------- -------------- ------------- ------------- Class I 8 97,631 $33.5 91.5% Regional 34 17,439 1.6 4.4 Local 529 27,563 1.5 4.1 --- ------- ----- ----- Total 571 142,633 $36.6 100.0% === ======= ===== ===== 5
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As a result of deregulation in 1980, Class I railroads have been able to concentrate on core, long-haul routes, while divesting many of their low-density branch lines to smaller and more cost-efficient freight railroad operators such as our company. Divesting branch lines allows Class I railroads to increase traffic density, improve railcar utilization and avoid rail line abandonment. Because of the focus by short line railroads on increasing traffic volume through increased customer service and more efficient operations, traffic volume on short line railroads frequently increases after divestiture by Class I operators. Consequently, these transactions often result in net increases in the divesting carriers' freight traffic because much of the business originating or terminating on branch lines feeds into divesting carriers' core routes. SALES AND MARKETING We focus on providing rail service to our customers that is easily accessible, reliable and cost-effective. In many cases, we believe customer service and sales and marketing at railroads that we have acquired have been neglected by the previous owners. We purchased several of our rail lines from Class I railroads. Due to the size of the Class I railroads and their concentration on long-haul traffic, we believe the Class I operators typically have not effectively marketed to customers on these branch line operations. Following commencement of operations, our railroads generally have attracted increased rail shipments from existing customers and obtained traffic from new customers who had not previously shipped by rail or had ceased rail shipments. We believe our ability to generate additional traffic is enhanced by our marketing efforts which are aimed at identifying and responding quickly to the individual business needs of customers along our rail lines. As part of our marketing efforts, we often schedule more frequent rail service, help customers negotiate price and service levels with interchange partners and assist customers in obtaining the quantity and type of rail equipment required for their operations. We also provide non-scheduled train service on short notice to accommodate customers' special or emergency needs. Our decentralized management structure is an important element of our marketing strategy. We give significant discretion with respect to sales and marketing activities to our North American regional marketing managers. Each regional marketing manager works closely with personnel of our railroads and with other members of senior management to develop marketing plans to increase shipments from existing customers and to develop business from new customers. We also work with the marketing staffs of the connecting Class I carriers to develop an appropriate array of rail-oriented proposals to meet customers' needs and with industrial development organizations to locate new rail users. We consider all of our employees to be customer service representatives and encourage them to initiate and maintain regular contact with shippers. Rail traffic may be categorized as interline, local or bridge traffic. Interline traffic either originates or terminates with customers located along a rail line and is interchanged with other rail carriers. Local traffic both originates and terminates on the same rail line and does not involve other carriers. Bridge traffic passes over the line from one connecting rail carrier to another. Interline and local traffic generated 87%, 84% and 86% of our total freight revenue in 2002, 2001, and 2000, respectively. We believe that high levels of interline and local traffic provide us with greater stability of revenues because this traffic represents shipments to or from customers located along our lines and cannot be easily diverted to other rail carriers, unlike bridge traffic. Our railroads compete directly with other modes of transportation, principally motor carriers and, to a lesser extent, ship and barge operators. The extent of this competition varies significantly among our railroads. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided, for an origin-to-destination package. To the extent other carriers are involved in transporting a shipment, we cannot control the cost and quality of service. Cost reductions achieved by major rail carriers over the past several years have generally improved their ability to compete with alternate modes of transportation. 6
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The following table summarizes freight revenue by type of traffic carried by our North American railroads in 2002, 2001 and 2000 in dollars and as a percent of total freight revenue. NORTH AMERICA FREIGHT REVENUE (DOLLARS IN THOUSANDS) [Download Table] 2002 2001 2000 ------------------ ------------------ ------------------ $ % $ % $ % -------- ----- -------- ----- -------- ----- Interline $235,408 81.5% $165,821 76.5% $146,184 72.0% Local 16,924 5.9% 16,044 7.4% 27,404 13.5% Bridge 36,430 12.6% 34,901 16.1% 29,396 14.5% -------- ----- -------- ----- -------- ----- $288,762 100.0% $216,766 100.0% $202,984 100.0% ======== ===== ======== ===== ======== ===== All of our short line properties interchange traffic with Class I railroads. The following table summarizes our significant connecting carriers in 2002, 2001 and 2000 by freight revenues and carloads as a percentage of total interchanged (interline and bridge) traffic. NORTH AMERICA INTERCHANGED TRAFFIC [Enlarge/Download Table] 2002 2001 2000 -------------------- -------------------- -------------------- Revenues Carloads Revenues Carloads Revenues Carloads -------- -------- -------- -------- -------- -------- Union Pacific Railroad 30.2% 28.3% 22.2% 23.2% 24.0% 21.8% Canadian National Railway 22.2% 19.9% 30.4% 26.1% 24.7% 24.7% CSX Transportation 15.4% 13.4% 16.0% 12.9% 18.9% 15.0% Burlington Northern Santa Fe Railway 13.3% 14.5% 6.2% 5.9% 8.5% 7.3% Canadian Pacific Railway 8.7% 11.3% 12.8% 16.6% 10.3% 16.6% Norfolk Southern 4.6% 5.3% 5.6% 6.9% 7.2% 7.3% All other railroads 5.6% 7.3% 6.8% 8.4% 6.4% 7.3% ----- ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== ===== Charges for interchanged traffic are generally billed to the customers by the connecting carrier and cover the entire transportation of a shipment from origin to destination, including the portion that travels over our lines. Our revenues from this traffic are generally collected through fees paid directly to us by the connecting carriers rather than by customers on our lines and are payable regardless of whether the connecting carriers are able to collect from the customers. The fees payable by connecting carriers are set forth in contracts entered into by each of our railroads with their respective connecting carriers and are generally subject to periodic adjustments. In 2002, we served approximately 1,600 customers in North America. These customers shipped and/or received a wide variety of products. Although most of our North American railroads have a well-diversified customer base, several of the smaller rail lines have one or two dominant customers. In 2002, our 10 largest North American customers accounted for approximately 27% of North American transportation revenue, as compared to 25% of North American transportation revenue in 2001. 7
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The following table sets forth by number and percentage the carloads hauled by our North American railroads during the years ended December 31, 2002, 2001 and 2000. CARLOADS CARRIED BY COMMODITY GROUP [Enlarge/Download Table] 2002 2001 2000 ------------------ ----------------- ------------------ COMMODITY GROUP Carloads % Carloads % Carloads % --------------------------------- -------- ----- ------- ----- -------- ----- Agricultural & Farm Products 95,005 8.5% 80,835 9.1% 76,593 9.0% Autos 43,843 4.0% 45,962 5.2% 47,900 5.7% Chemicals 84,935 7.6% 66,915 7.5% 66,827 8.0% Coal 128,540 11.5% 95,433 10.7% 71,945 8.6% Food Products 62,471 5.6% 40,988 4.6% 39,313 4.7% Intermodal 39,538 3.5% 42,253 4.7% 30,134 3.6% Lumber & Forest Products 124,025 11.1% 88,351 9.9% 90,102 10.7% Metals 80,117 7.3% 52,184 5.8% 61,049 7.3% Metallic/Non-metallic Ores 55,260 5.0% 45,658 5.1% 36,780 4.4% Minerals 45,995 4.1% 19,424 2.2% 16,393 2.0% Paper Products 94,528 8.5% 64,914 7.3% 59,124 7.0% Petroleum Products 47,252 4.3% 28,593 3.2% 26,840 3.2% Railroad Equipment/Bridge Traffic 186,388 16.7% 200,565 22.5% 192,323 22.9% Other 26,028 2.3% 19,243 2.2% 24,128 2.9% --------- ----- ------- ----- ------- ----- Total 1,113,925 100.0% 891,318 100.0% 839,451 100.0% ========= ===== ======= ===== ======= ===== EMPLOYEES Currently, we have approximately 1,600 full-time railroad employees and 125 full-time corporate employees in North America. Approximately 760 of these employees are subject to collective bargaining agreements. SAFETY We endeavor to conduct safe railroad operations for the benefit and protection of employees, customers and the communities served by our railroads. Our safety program, led by the Vice President of Safety and Operating Practices, involves all of our employees and is administered by each Regional Vice President. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to governmental rules and regulations. Each U.S. employee involved in train operations is subject to pre-employment and random drug testing whether or not required by federal regulation. We believe that each of our North American railroads complies in all material respects with federal, state, provincial and local regulations. Additionally, each railroad is given flexibility to develop more stringent safety rules based on local requirements or practices. We also participate in committees of the AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the national grade crossing awareness program) and the American Short Line and Regional Railroad Association Safety Committee. REGULATION UNITED STATES. Our subsidiaries in the United States are subject to various safety and other laws and regulations by numerous government agencies, including (1) regulation by the STB, and the Federal Railroad Administration, or FRA, (2) labor related statutes including the Railway Labor Act, Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the Federal Employer's Liability Act, and (3) some limited regulation by agencies in the states in which we do business. The STB, established by the ICC Termination Act of 1995, has jurisdiction over, among other matters, the construction, acquisition, or abandonment of rail lines, the consolidation or merger of railroads, the assumption of control of one railroad by another railroad, the use by one railroad of another railroad's tracks through lease, joint use or trackage rights, the rates charged for their transportation services, and the service provided by rail carriers. As a result of the 1980 Staggers Rail Act, railroads have received considerable rate and market flexibility including the ability to obtain wholesale exemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized and truck trailer traffic handled by railroads. Requirements for the creation of new short line railroads or the expansion of existing short line railroads were substantially expedited and simplified under the 8
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exemption process. On regulated traffic, railroads and shippers are permitted to enter into contracts for rates and provision of transportation services without the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable freedom to raise or lower rates without objection from captive shippers. While the ICC Termination Act retained maximum rate regulation on traffic over which railroads have exclusive control, the new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB on all traffic other than agricultural products. The FRA regulates railroad safety and equipment standards, including track maintenance, handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and operating practices and crew qualifications. CANADA. Our Canadian railroad subsidiaries are subject to regulation by various governmental departments and regulatory agencies at the federal or provincial level depending on whether the railroad in question falls within federal or provincial jurisdiction. A Canadian railroad generally falls within the jurisdiction of federal regulation if the railroad crosses provincial or international borders or if the Parliament of Canada has declared the railroad to be a federal work or undertaking and in selected other circumstances. Any company which proposes to construct or operate a railway in Canada which falls within federal jurisdiction is required to obtain a certificate of fitness under the Canada Transportation Act, or CTA. Under the CTA, the sale of a federally regulated railroad line is not subject to federal approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a federal railway. Federal railroads are governed by federal labor relations laws. Short line railroads located within the boundaries of a single province which do not otherwise fall within the federal jurisdiction are regulated by the laws of the province in question, including laws as to licensing and labor relations. Most of Canada's ten provinces have enacted new legislation, which is more favorable to the operation of short line railroads than previous provincial laws. Many of the provinces require as a condition of licensing under the short line railroads acts that the licensees comply with federal regulations applicable to safety and other matters and remain subject to inspection by federal railway inspectors. Under some provincial legislation, the sale of a provincially regulated railroad line is not subject to provincial approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a provincial railway. Acquisition of additional railroad operations in Canada, whether federally or provincially regulated, may be subject to review by the Investment Canada Act, or ICA, a federal statute which applies to every acquisition of a Canadian business or establishment of a new Canadian business by a non-Canadian. Whether or not an acquisition is subject to review under the ICA is dependent on the book value of the assets of the Canadian business being acquired. Acquisitions that are subject to review must, before their completion, satisfy the Minister responsible for administering the ICA that the acquisition is of net benefit to Canada. Any contemplated acquisitions may also be subject to the provisions of the Competition Act federal antitrust legislation of general application. The Competition Act contains merger control provisions which apply to certain acquisitions. As a result, acquisitions exceeding specified asset and/or revenue thresholds may be subject to pre-merger notification and subsequent substantive review prior to their completion. FREIGHT AUSTRALIA We own Freight Australia, a regional freight railroad operating in and around the State of Victoria, Australia. Freight Australia was purchased from the Government of the State of Victoria, Australia on April 30, 1999 for total consideration of approximately $103 million. Freight Australia operates over 3,150 miles of track under a 45 year lease from the State of Victoria. 9
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INDUSTRY OVERVIEW The demographics and geography of Australia dictate that the freight transport business is characterized by long distances and low volumes of freight. Industrial flows tend to relate to production cycles and agricultural product flows are seasonal and driven by export shipping schedules. Generally, the pattern of surface freight movement in Australia comprises: o bulk materials and grains from inland areas, usually to the closest port or processing plant o inputs to the resources industries from coastal industrial centers, ports and cities to the interior o general freight from coastal industrial centers, ports and cities to the interior, and o interstate freight, comprising manufactured goods, steel, paper and general freight between capital cities, and to and from major industrial centers. In recent years, the Australian rail freight sector's share of the total freight market has been maintained despite growth in road transport, largely because of the growth in Australia's coal and mineral exports. Over a period of 30 years, rail movements of these commodities have increased almost eightfold. Major changes have taken place in the rail industry over the last decade, partly as a result of the privatization of government-owned railways and the entry of private sector participants in accordance with the competitive neutrality provisions of the national Competition Principles Agreement. The private sector has taken an increasingly larger role through outsourcing of non-core activities by railway operators. The railway network in Australia contains approximately 25,000 miles of track, of which approximately 21,000 miles is track used for general and bulk freight and passenger services. The remaining 4,000 miles are private sector owned and operated, and principally serve Australia's mining and primary production industries. SALES AND MARKETING Freight Australia focuses on providing door-to-door rail service to customers that is easily accessible, reliable and cost-effective since truck and other rail operators are the principle competition. Due to surplus assets and the open access to trackage outside of Victoria, we have been able to market to customers across the Australian continent effectively. Following commencement of operations, Freight Australia has attracted increased rail shipments from existing customers and obtained traffic from new customers who had not previously shipped by rail or had ceased rail shipments. We believe that our ability to generate additional traffic is enhanced by our marketing efforts, which are aimed at identifying and responding quickly to the individual business needs of customers along the rail lines. As part of our marketing efforts, we often schedule more frequent rail service. Freight Australia also provides non-scheduled train service on short notice to accommodate customers' special or emergency needs. Our decentralized management structure is an important element of our marketing strategy. We give significant discretion with respect to sales and marketing activities to our marketing managers. Each marketing manager works closely with personnel in other departments to develop marketing plans to increase shipments from existing customers and to develop business from new customers. We consider all of our employees to be customer service representatives and encourage them to initiate and maintain regular contact with shippers. Freight Australia's customers span a variety of industries, with particular emphasis on companies in the Australian agricultural industry for whom we carry bulk grain and other agricultural products. One customer, AWB Limited, represented 25% of Freight Australia's transportation revenue for the year ended 2002, 28% for the year ended 2001 and 25% for the year ended 2000. Additionally, track access fees from V/Line Passenger represented 15% of Freight Australia's operating revenue in 2002, 13% in 2001, and 15% in 2000. 10
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The following table sets forth by dollar amount (in thousands) and percentage Freight Australia's transportation and infrastructure revenue for the years ended December 31, 2002, 2001 and 2000. [Enlarge/Download Table] 2002 2001 2000 ----------------- ----------------- ----------------- US$ US$ US$ Amount % Amount % Amount % ------- ----- ------- ----- ------- ----- Agricultural products $36,913 40% $46,265 47% $45,440 46% Track access fees 18,074 20% 15,367 16% 16,309 16% Intermodal containers 12,950 14% 9,742 10% 13,148 13% Fast Track parcel service 6,924 8% 8,235 8% 8,210 8% Bulk (i.e., cement, gypsum, stone, logs) 9,174 10% 10,595 11% 9,932 11% Interstate 7,626 8% 8,428 8% 5,954 6% ------- ----- ------- ----- ------- ----- Total transportation and infrastructure revenue $91,661 100.0% $98,632 100.0% $98,993 100.0% ======= ===== ======= ===== ======= ===== Freight Australia competes directly with other railroads in the open access Australian railway network as well as with other modes of transportation, principally motor carriers and, to a lesser extent, ship operators. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided, for an origin-to-destination package. To the extent other carriers are involved in transporting a shipment, we cannot control the cost and quality of service. Cost reductions achieved by Freight Australia over the past several years have generally improved its ability to compete with alternate modes of transportation. EMPLOYEES Freight Australia currently has approximately 705 employees. Most of these employees are subject to collective bargaining agreements. SAFETY Freight Australia endeavors to conduct safe railroad operations for the benefit and protection of employees, customers and communities we serve. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to governmental rules and regulations. Each employee involved in train operations is subject to pre-employment and random drug testing whether or not required by federal or state regulation. We believe that Freight Australia complies in all material respects with federal, state and local regulations. Freight Australia holds Rail Safety Accreditation in accordance with Australian Standards Regulations 4292 in Victoria, New South Wales, and South Australia. We also participate in several governmental and industry sponsored safety programs. REGULATION Freight Australia is subject to regulation in the State of Victoria by the Office of the Regulator-General. The Office of the Regulator-General, known as ORG, was established by the Office of the Regulator-General Act. The purpose of the ORG is to create a regulatory framework for regulated industries which promotes and safeguards competition and fair and efficient market conduct or, if there is no competitive market, promotes the simulation of competitive market conduct and the prevention of misuse of monopoly power. These objectives were expanded by the Victorian Government in the Rail Corporations Act 1996 to ensure that rail users have fair and reasonable access to declared railway services. The Rail Corporations Act 1996, known as RCA, regulates the operation of the State of Victoria's passenger trains and trams and rail network. Part 2A of the RCA outlines an access regime, which potentially applies to railways and rail infrastructure and gives power to the ORG to regulate access to relevant services. At present, however, no rail transport services have been declared to be subject to the regime. If there were any, ORG could set the terms and conditions of access. The Secretary to the Department of Infrastructure may take disciplinary action against an accredited (licensed to provide certain services) railroad if the railroad has failed to comply with the requirements of accreditation or has permitted an unsafe practice or acted negligently. Disciplinary action, which the Secretary may take, includes disqualifying the railroad from 11
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holding an accreditation for a period specified by the Secretary, suspension of the accreditation, early expiry of the accreditation and immediate or future cancellation of the accreditation. The Transport Act contains detailed provisions authorizing the Secretary of the Department of the Infrastructure to carry out inspections and giving inspectors powers to enter and inspect premises (including, testing equipment and seizing property if appropriate). All actions must be reasonably necessary to determine compliance with the Transport Act. A search warrant or prior written consent of the occupier is necessary for entry into premises. The Secretary must conduct safety audits of every person accredited at least once every twelve months, to ensure that the accredited person is complying with the requirements of accreditation. The Secretary may charge the accredited person a fee for the safety audit service, subject to the limits set out in the relevant regulations. An accredited person has a duty to inquire into accidents and incidents.  FERRONOR Ferronor owns and operates the only north-south railroad in northern Chile, extending from La Calera near Santiago, where it connects with Chile's southern railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique, approximately 120 miles south of the Peruvian border. It also operates several east-west branch lines that link a number of iron, copper and mineral salt mines and production facilities with several Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia through traffic interchanged with the Belgrano Cargas Railroad and the Antofagasta (Chile)-Bolivia Railway. In addition, commencing in 2002, Ferronor began operating the Potrerillos Railway, a customer-owned 57 mile freight railroad. In January 2003, we announced our intention to sell our 55% equity interest in Ferronor. As a result, Ferronor has been presented as a discontinued operation in our financial statements. 12
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 ITEM 2. PROPERTIES NORTH AMERICAN RAILROAD PROPERTIES The following table sets forth information with respect to the North American railroad properties that we owned as of March 22, 2003: [Enlarge/Download Table] DATE OF TRACK PRINCIPAL RAILROAD ACQUISITION MILES STRUCTURE LOCATION COMMODITIES -------- ----------- ----- --------- -------- ----------- Alabama and Gulf Coast Railway Jan. 2002 141 Owned, Alabama, Forest and paper products, Trackage rights Florida chemicals, food products Arizona & California Railroad Jan. 2002 297 Owned, Arizona, Cement, asphalt, forest Trackage rights California products, steel Arizona Eastern Railway Jan. 2002 135 Owned Arizona Copper cathode and related materials California Northern Railroad Jan. 2002 255 Leased, California Oil/gas transmission pipe, Trackage rights minerals, beer, food products, grains Cape Breton & Central Nova Feb. 2000 245 Owned Nova Scotia Coal, paper, chemicals Scotia Railway Carolina Piedmont Railroad Feb. 2000 49 Owned South Carolina Chemicals, metal products, clay, food products Cascade and Columbia River Sept. 1996 130 Owned; Washington Lumber & wood products, Railroad Trackage rights minerals, agricultural products Central Oregon & Pacific Feb. 2000 449 Owned; Leased; Oregon, Lumber & wood products, Railroad Trackage rights California paper, chemicals Central Railroad of Indiana Feb. 2000 81 Owned Indiana, Ohio Chemicals, minerals, clay, food products Central Railroad of Feb. 2000 73 Leased; Indiana Farm and food products, Indianapolis Trackage rights chemicals, metals Central Western July 1999 21 Owned Alberta Agricultural products Connecticut Southern Feb. 2000 78 Owned; Connecticut Lumber & wood products, Trackage rights paper products, chemicals, bridge traffic Dallas Consolidated Feb. 2000 294 Leased Texas Farm & food products, (Dallas, Garland & paper products, railroad Northeastern Railroad and equipment, chemicals, Texas Northeastern Railroad) autos E&N Railway Jan. 1999 61 Owned British Paper products, minerals, 120 Leased Columbia chemicals Eastern Alabama Railway Jan. 2002 25 Owned Alabama Minerals Goderich-Exeter Railway Feb. 2000 159 Owned; Ontario Auto parts, farm Leased products, chemicals Huron and Eastern Railway March 1986 171 Owned; Michigan Agricultural products May 1988 leased; Trackage rights Ohio Consolidated Feb. 2000 577 Owned; Michigan, Autos, bridge traffic (Indiana & Ohio Railway and Leased Ohio, Indiana agricultural products, Indiana & Ohio Central Railroad) chemicals, pulpboard 13
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[Enlarge/Download Table] DATE OF TRACK PRINCIPAL RAILROAD ACQUISITION MILES STRUCTURE LOCATION COMMODITIES -------- ----------- ----- --------- -------- ----------- Indiana Southern Railroad Feb. 2000 176 Owned; Indiana Coal, farm products, Trackage rights chemicals Kiamichi Railroad Jan. 2002 230 Owned, Arkansas, Steel, coal, aggregates, Trackage rights Oklahoma, cement, food items, forest Texas products, paper products Kyle Railroad Jan. 2002 692 Owned Colorado, Agricultural products, coal, Kansas, asphalt, aggregates Nebraska Lahaina, Kaanapali & Pacific Railroad Jan. 2002 6 Owned Hawaii Tourists Lakeland & Waterways July 1999 120 Owned Alberta Forest products, agricultural products, petroleum coke, bridge traffic Mackenzie Northern July 1999 650 Owned Alberta, Fuel, forest products, Northwest agricultural products, Territory chemicals Michigan Consolidated Feb. 2000 118 Owned Michigan Agricultural products, (Mid-Michigan Railroad, auto parts, fertilizer Grand Rapids Eastern Railroad, and Michigan Shore Railroad) Missouri & Northern Feb. 2000 527 Owned; leased; Missouri, Coal, farm products, Arkansas Railroad trackage rights Arkansas, food products, Kansas minerals, roofing material New England Central Feb. 2000 343 Owned; Vermont, New Lumber & wood products, Railroad Leased Hampshire, paper products, plastic, Massachusetts, coal, copper, bridge Connecticut traffic Ottawa Valley Railway July 1999 389 Leased Ontario Bridge traffic, acid, copper concentrates, chemicals Otter Tail Valley Railroad Oct. 1996 72 Owned Minnesota Coal, agricultural products, fertilizer Puget Sound and Pacific Railroad Jan. 2002 150 Owned, Washington Forest products, chemicals, Trackage rights grains, fertilizers, metal products Saginaw Valley Railway Jan. 1991 57 Owned Michigan Agricultural products, Apr. 1998 fertilizer , stone San Diego & Imperial Feb. 2000 124 Trackage rights California, Petroleum, paper Valley Railroad Mexico products, non-metallic ores, lumber San Joaquin Valley Railroad Jan. 2002 341 Owned, California Consumer products, citrus Trackage rights and food products, paper products, metals, petro- chemical products San Pedro & Southwestern Railroad Jan. 2002 78 Owned Arizona Lime, nitrogen, fertilizer South Carolina Central Feb. 2000 97 Owned South Carolina Chemicals, metals, coal, Railroad paper products, waste Southern Ontario Railway July 1999 54 Leased Ontario Fuel, metals, agricultural products 14
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[Enlarge/Download Table] DATE OF TRACK PRINCIPAL RAILROAD ACQUISITION MILES STRUCTURE LOCATION COMMODITIES -------- ----------- ----- --------- -------- ----------- Toledo, Peoria and Western Sept. 1999 369 Owned; Indiana, Intermodal, agricultural Railroad Trackage Illinois, Iowa products, fertilizers, rights chemicals Ventura County Railroad Aug. 1998 13 Leased California Automobiles, chemicals, paper products Virginia Consolidated Feb. 2000 211 Leased; Virginia, Coal, lumber, metals (Chesapeake & Albermarle Owned North Carolina Railroad, North Carolina & Virginia Railroad, and Virginia Southern Railroad) West Texas & Lubbock Nov. 1995 104 Owned Texas Fertilizer, chemicals, Railroad cotton products, scrap iron, steel ----- Total track miles 8,282 ===== AUSTRALIAN RAILROAD PROPERTIES On April 30, 1999, through our wholly owned subsidiary Freight Australia, we prepaid a 45-year lease to operate 3,150 miles of track in the State of Victoria, Australia. Freight Australia's principal commodity is agricultural products for use in southwestern Australia as well as export markets. CHILEAN RAILROAD PROPERTIES In Chile, Ferronor owns and/or operates approximately 1,500 miles of track, extending from La Calera in the south, to its northern terminus at Iquique. It also operates several east-west branch lines that link a number of iron, copper and mineral salt mines and production facilities with several Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia through traffic interchanged with the Belgrano Cargas Railroad and the Antofagasta (Chile)-Bolivia Railway. In 2002, Ferronor commenced operating the Potrerillos Railway, a customer-owned 57 mile railroad. NORTH AMERICAN ROLLING STOCK The following tables summarize the current composition of our North American railroad equipment fleet. FREIGHT CARS TYPE OWNED LEASED TOTAL ---- ----- ------------ ----- Covered hopper cars 147 2,425 2,572 Open top hopper cars 91 262 353 Box cars 103 2,302 2,405 Flat cars 214 1,122 1,336 Tank cars 6 0 6 Gondolas 3 383 386 Passenger car 17 0 17 ----- ----- ----- 581 6,494 7,075 ===== ===== ===== LOCOMOTIVES HORSEPOWER/UNIT OWNED LEASED TOTAL --------------- ----- ------------ ----- Over 2000 102 248 350 1500 to 2000 61 55 116 Under 1500 10 19 29 ----- ----- ----- 173 322 495 ===== ===== ===== 15
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INTERNATIONAL ROLLING STOCK The following tables summarize the current composition of our Australian and Chilean railroad equipment fleet. We own all of our international equipment fleet. FREIGHT CARS TYPE CHILE AUSTRALIA TOTAL ---- ----- ------------ ----- Covered hopper cars 0 1,111 1,111 Open top hopper cars 223 88 311 Box cars 145 275 420 Intermodal containers 87 685 772 Tank cars 34 79 113 Flat cars 0 217 217 Gondolas 65 73 138 ----- ----- ----- 554 2,528 3,082 ===== ===== ===== LOCOMOTIVES HORSEPOWER/UNIT CHILE AUSTRALIA TOTAL --------------- ----- ------------ ----- Over 2000 0 32 32 1500 to 2000 2 25 27 Under 1500 40 50 90 ----- ----- ----- 42 107 149 ===== ===== ===== Based on current and forecasted traffic levels on our railroads, management believes that our present equipment, combined with the availability of other rail cars and/or locomotives for hire, is adequate to support our operations. We believe that our insurance coverage with respect to our property and equipment is adequate. ADMINISTRATIVE OFFICES AND OTHER We own a 59,500 square foot office building, located in Boca Raton, Florida, where our executive offices are located. Of this space, approximately 12,600 square feet are leased to third parties. In addition, we lease approximately 21,000 square feet of office space in San Antonio, Texas for $500,000 annually. The lease expires December 31, 2005. Freight Australia's administrative office is in Melbourne, Australia. Freight Australia leases approximately 20,000 square feet of space from the Victorian Government for $200,000 annually. The lease expires May 31, 2004. Ferronor's administrative office is in Coquimbo, Chile, where Ferronor owns a three-story 21,600 square foot office building.  ITEM 3. LEGAL PROCEEDINGS In the ordinary course of conducting our business, we become involved in various legal actions and other claims some of which are currently pending. Litigation is subject to many uncertainties and we may be unable to accurately predict the outcome of individual litigated matters. Some of these matters possibly may be decided unfavorably to us. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not be material. Other than ordinary routine litigation incidental to our business, no other litigation exists. In 2000, certain parties filed property damage claims totaling approximately $32.5 million against RaiLink Ltd. And RaiLink Canada Ltd., wholly-owned subsidiaries of RailAmerica, Inc., and others in connection with fires that allegedly occurred in 1998. We are vigorously defending these claims and have insurance coverage to approximately $13.0 million to cover these claims. It is the opinion of management that the ultimate liability, if any, with respect to these matters will fall 16
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within the insurance coverage and that these claims will not have a material adverse effect on our financial position, results of operations or cash flows.  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2002. PART II  ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock began trading on the New York Stock Exchange (NYSE) on January 2, 2002 under the symbol "RRA". Prior to January 2, 2002, our common stock traded on the Nasdaq National Market (Nasdaq) under the symbol "RAIL". Set forth below is high and low price information for the common stock as reported on the Nasdaq and NYSE for each period presented. 2001 High Sales Price Low Sales Price -------------- ---------------- --------------- First Quarter $10.250 $ 7.500 Second Quarter 13.750 9.563 Third Quarter 14.250 10.050 Fourth Quarter 15.250 9.750 ------- ------- 2002 High Sales Price Low Sales Price -------------- ---------------- --------------- First Quarter $14.640 $ 9.230 Second Quarter 11.310 8.500 Third Quarter 10.850 6.900 Fourth Quarter 8.200 6.500 ------- ------- 2003 High Sales Price Low Sales Price -------------- ---------------- --------------- First Quarter (through March 24) $ 7.65 $ 4.44 ------- ------- As of March 24, 2003, there were 553 holders of record of the common stock. We have never declared or paid a dividend on our common stock. Our senior credit agreement and the indenture governing our senior subordinated notes limit our ability to pay dividends. 17
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 ITEM 6. SELECTED FINANCIAL DATA The results of our continuing operations for the years ended December 31, 2002, 2001 and 2000 include the results of certain railroads from the dates they were acquired as follows: StatesRail, effective January 4, 2002; ParkSierra, effective January 8, 2002; RailTex, effective February 1, 2000; Freight Australia, effective April 30, 1999; RaiLink, effective August 1, 1999; and TPW, effective September 1, 1999. The income statement data for the years ended December 31, 2002, 2001 and 2000 and the balance sheet data at December 31, 2002 and 2001 are derived from, and are qualified by reference to, audited financial statements included elsewhere in this report and should be read in conjunction with those financial statements and the notes thereto. The income statement data set forth below for the periods ended December 31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999 and 1998 are derived from our financial statements not included (in thousands, except operating and per share data). Ferronor has been presented as a discontinued operation. [Enlarge/Download Table] AS OF AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- -------- --------- INCOME STATEMENT DATA Operating revenue $ 428,243 $ 347,546 $ 334,615 $109,845 $ 23,212 Operating income 70,505 71,225 67,438 21,463 1,269 Income (loss) from continuing operations 5,263 15,792 8,359 4,585 (1,467) Basic earnings (loss) per common share from continuing operations $ 0.16 $ 0.72 $ 0.43 $ 0.32 $ (0.15) Diluted earnings (loss) per common share from continuing operations $ 0.16 $ 0.66 $ 0.42 $ 0.32 $ (0.15) Weighted average common shares - Basic 32,047 21,510 18,040 11,090 9,553 Weighted average common shares - Diluted 32,620 25,350 18,267 11,665 9,553 BALANCE SHEET DATA Total assets $1,106,553 $ 891,168 $ 839,703 $443,929 $ 130,964 Long-term obligations, including current maturities 387,321 301,687 358,856 162,827 66,327 Subordinated debt 141,331 144,988 141,411 122,449 -- Redeemable convertible preferred stock -- -- 6,613 8,830 -- Stockholders' equity 278,903 220,959 123,434 69,467 34,760 OPERATING DATA Freight carloads 1,314,794 1,113,028 1,042,987 300,412 49,519 Track mileage 12,800 11,000 11,000 8,400 2,400 Number of full time employees 2,676 2,180 2,230 1,707 652  FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF STOCK Substantial Debt and Debt Service. As of December 31, 2002, we had substantial indebtedness, and, as a result, we incur significant interest expense. The degree to which we are leveraged could have important consequences, including the following: - our ability to obtain additional financing in the future for capital expenditures, potential acquisitions, and other purposes may be limited or financing may not be available on terms favorable to us or at all; - a substantial portion of our cash flows from operations must be used to pay our interest expense and repay our debt, which would reduce the funds that would otherwise be available to us for our operations and future business opportunities; and - fluctuations in market interest rates will affect the cost of our borrowings to the extent not covered by interest rate hedge agreements because the interest under our credit facilities is payable at variable rates. A default could result in acceleration of our indebtedness. If this occurs, our business and financial condition may be materially adversely affected. 18
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While as of December 31, 2002, we had no borrowings under our revolving credit facility, this facility allows us to borrow a total of $100 million and we may borrow up to an additional $100 million of term debt in connection with acquisitions if we meet specified conditions. Covenant Restrictions. Our credit facilities and the indenture governing our senior subordinated notes contain numerous covenants imposing restrictions on our ability to, among other things: - incur more debt; - pay dividends, redeem or repurchase our stock or make other distributions; - make acquisitions or investments; - use assets as security in other transactions; - enter into transactions with affiliates; - merge or consolidate with others; - dispose of assets or use asset sale proceeds; - create liens on our assets; and - extend credit. In addition, our credit facilities also contain financial covenants that require us to meet a number of financial ratios and tests. Our failure to comply with the obligations in our credit facilities and indenture could result in an event of default under the credit facilities or the indenture, which, if not cured or waived, could permit acceleration of the indebtedness or our other indebtedness, or result in the same consequences as a default in payment as described in the previous risk factor. Fuel Costs. Fuel costs were approximately 6.9% of our historical revenues for the year ended December 31, 2002, 8.1% for the year ended December 31, 2001 and 8.7% for the year ended December 31, 2000. Fuel prices and supplies are influenced significantly by international political and economic circumstances. If a fuel supply shortage or unusual price volatility were to arise for any reason, higher fuel prices would materially affect our operating results. While we elected to hedge approximately 35% of our anticipated North American fuel needs for 2003, 65% of those needs remain unhedged. Acquisitions and Integration. We have acquired many railroads since we commenced operations in 1992 and intend to continue to maintain an acquisition program. Acquisitions result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs. The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our business. If these disruptions and difficulties occur, they 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. 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 result in dilution to our stockholders. Foreign Operations. We have railroad operations in Australia, Chile and Canada. We may also consider acquisitions in other foreign countries. The risks of doing business in foreign countries include: - adverse changes in the economy of those countries; - exchange rate fluctuations; 19
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- adverse effects of currency exchange controls; - restrictions on the withdrawal of foreign investment and earnings; - government policies against ownership of businesses by non-nationals; - the potential instability of foreign governments; and - 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. Reliance on Australian Agriculture. Factors that negatively affect the agricultural industry in the regions in which Freight Australia operates could have a material adverse effect on our results of operations and financial condition. These factors include drought or other weather conditions, export and domestic demand and total world supply, and fluctuations in agricultural prices. For the year ended December 31, 2001 approximately 45% of Freight Australia's revenues and for the year ended December 31, 2002 approximately 39% of Freight Australia's revenues were derived from the agricultural industry. Our 2002 results of operations were significantly adversely impacted by a severe drought in Australia. We expect the drought to continue to adversely affect our business in 2003. As a result, Freight Australia will continue to be affected by unfavorable conditions affecting the agricultural industry in areas served by Freight Australia. Environmental and Other Governmental Regulation. Our railroad and real estate ownership are subject to extensive foreign, federal, state and local environmental laws and regulations. We could incur significant costs as a result of any allegations or findings to the effect that we have violated, or are strictly liable under these laws or regulations. We may be required to incur significant expenses to investigate and remediate environmental contamination. We are also subject to governmental regulation by a significant number of foreign, federal, state and local regulatory authorities with respect to our railroad operations and a variety of health, safety, labor, environmental, maintenance and other matters. Our failure to comply with applicable laws and regulations could have a material adverse effect on us. Continuing Relationships with Class I Carriers. 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. 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. Class I carriers are also 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 those carriers were to deteriorate. Risks of Our Australian Operations. In addition to the risks described above, our Australian operations are subject to the following risks and uncertainties: - The applicable legislative framework enables third party rail operators to gain access to the railway infrastructure on which we operate for access fees. Because of this regulatory framework, we may lose customers or be forced to reduce rates to compete with third party rail operators. - Our access agreement with V/Line Passenger in Australia contains penalty provisions if trains using the railway infrastructure are delayed, early or cancelled under a variety of circumstances resulting from our actions. - The director of public transport for the State of Victoria, Australia may terminate our long-term railway infrastructure lease in specified circumstances, including: (1) if we fail to maintain all necessary accreditations; (2) if we fail to maintain railway infrastructure; and (3) if we fail to maintain insurance. 20
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Our Australian subsidiary generates approximately 19% of its total revenues under a five-year arrangement with AWB, Limited, the sole exporter of Australian wheat. AWB, Limited may terminate the agreement under specified limited circumstances.  ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL We are the world's largest short line and regional freight railroad operator. We own 49 railroads operating approximately 12,900 route miles in the United States, Canada, Chile, Argentina and Australia. In North America, we operate in 26 states, five Canadian provinces and the Northwest Territories. In January 2003, we announced our intent to sell our 55% equity interest in Ferronor, our Chilean railroad operations. Accordingly, the results of operations for the years presented have been reclassified to discontinued operations. Our principal business consists of the operations of North American short line freight railroads and international regional railroads. During 2002, excluding Ferronor, 78% of our revenues were derived from railroad operations in North America while 22% of revenues were derived from our international railroad operations based in Australia. Our North American rail group operates 46 railroads. Each of these railroads operates independently with their own customer base. While these railroads are spread out geographically and carry diverse commodities, bridge traffic accounted for 17%, coal accounted for 12%, and lumber and forest products accounted for 11% of our carloads in North America during 2002. As a percentage of revenues, which is impacted by several factors including the length of the haul, bridge traffic generated 8%, coal generated 8%, and lumber and forest products generated 17% of our North American freight revenues. Bridge traffic, which neither originates or terminates on our line, generally has a lower rate per carload. Freight Australia, our Australian regional railroad, has two primary sources of revenues. The first is freight revenues, which comprises 78% of Freight Australia's total revenues. Freight Australia hauls various commodities over its line including agricultural products, cement, gypsum, stone and logs. Agricultural products comprised approximately 39% of Freight Australia's total revenues in 2002. The level of revenues from agricultural products is highly dependent on the annual grain harvest in the State of Victoria. The grain harvest in the fourth quarter of 2002 was very poor due to the worst drought in many years in the grain regions served by Freight Australia. As a result, revenues from transporting grain were 21% lower in 2002 than in 2001. To partially offset this decrease in revenues and to reduce our dependence on grain business, Freight Australia has pursued and been awarded several new long-term contracts to move a variety of other commodity types. It is anticipated that these new contracts should add approximately $50 million of new revenues over the next three to five years. The second source of revenue is access fees paid to us by other passenger or freight operators for the right to operate over our railroad. These amounts accounted for 19% of Freight Australia's revenues in 2002. In addition to our railroad operations, we have historically generated gains through asset sales. Through our various North American railroads, we own 8,300 miles of track and 63,000 acres of land. We continually review our portfolio of railroads and look to sell entire railroads, portions of railroads or underutilized real estate where holding such assets does not meet our internal criteria. During 2002, we generated net gains of $9.2 million. These gains are included in operating income in our consolidated statements of income. In January 2002, we acquired all of the stock of StatesRail, which owned and operated eight railroads (including seven freight railroads and a tourist railroad in Hawaii) with 1,647 miles of track in eleven states. Total consideration for the acquisition was $90 million, consisting of $67 million in cash and $23 million in our common stock (1.7 million shares). Also, in January 2002, we acquired all of the stock of ParkSierra, which owned and operated three freight railroads with 703 miles of track in four western states. Total consideration for the acquisition was $48 million, consisting of $23 million in cash and $25 million in our common stock (1.8 million shares). In February 2000, we acquired RailTex, which owned and operated 25 railroads with over 4,100 miles of track in North America. Total consideration for the acquisition was $294 million, consisting of $128 million in cash, assumption of $105 million in debt and 6.6 million shares of our common stock valued at $61 million. 21
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In December 2000, we sold our specialty truck trailer manufacturing operations for $39 million. This segment is presented as a discontinued operation for each period presented. Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The critical financial statement accounts that are subject to significant estimation are reserves for litigation, casualty and environmental matters, Australian long service leave, deferred income taxes and property, plant and equipment. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies,"an accrual for a loss contingency is established if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred or an asset has been impaired. These estimates have been developed in consultation with outside counsel handling our defense in these matters and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Subsequent changes to those estimates are reflected in our statement of operations in the period of the change. Freight Australia maintains a long service leave program for its employees. Under the program, an employee is entitled to paid leave of up to 13 weeks after they have performed 10 years of service. Key assumptions in estimating this liability are the discount rate, annual rate of increase in compensation levels, employee turnover and the number of years before employees use the accrued leave. Deferred taxes are recognized based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish an additional valuation allowance against a portion of our deferred tax asset, resulting in an increase in our effective tax rate and an adverse impact on earnings. Property, plant and equipment comprised 82% of our total assets as of December 31, 2002. These assets are stated at cost, less accumulated depreciation. We use the group method of depreciation under which a single depreciation rate is applied to the gross investment in our track assets. Upon normal sale or retirement of track assets, cost less net salvage value is charged to accumulated depreciation and no gain or loss is recognized. Expenditures that increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. We periodically review the carrying value of our long-lived assets for impairment. This review is based upon our projections of anticipated future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. For a complete description of our accounting policies, see Note 1 to our consolidated financial statements. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes beginning on Page F-1. On a consolidated basis, we recorded net income for 2002 of $2.2 million, or $0.07 per diluted share, compared with net income for 2001 of $17.0 million, or $0.71 per diluted share. Our operating revenues increased $80.7 million, or 23%, to $428.2 million in 2002 from $347.5 million in 2001. The acquisitions of ParkSierra and StatesRail contributed $90.3 million to operating revenues for the year. This increase was partially offset by a decrease of $6.5 million in operating revenues from Freight Australia primarily due to the drought in Australia and a $3.1 million decrease from the disposal of Georgia Southwestern Railroad. Operating income decreased $0.7 million, or 1%, to $70.5 million from $71.2 million in 2001 primarily 22
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due to a decrease of $17.0 million in Freight Australia's operating income and $6.4 million due to failed bid costs and restructuring charges, partially offset by the acquisitions of ParkSierra and StatesRail, which contributed $25.2 million to operating income. Interest expense, including amortization of deferred financing costs, decreased $7.3 million, or 14%, to $43.4 million for the year ended December 31, 2002 from $50.7 million in 2001 primarily due to a general decrease in interest rates and the refinancing of our senior debt in May 2002, which resulted in a lower interest rate to us. In connection with our debt refinancing in May 2002, we recorded a charge to other income (expense) of $19.1 million for the write-off of our interest rate swaps and other refinancing related costs and we recorded a charge of $4.5 million, after tax, as an extraordinary item for the write-off of the unamortized deferred loan costs from the terminated credit facility, which was originally entered into in 2000. NORTH AMERICAN RAILROAD OPERATIONS Our historical results of operations for our North American railroads include the operations of our acquired railroads from the dates of acquisition as follows: NAME OF RAILROAD DATE OF ACQUISITION ---------------- ------------------- RailTex properties (25 railroads) February 2000 StatesRail (8 railroads) January 2002 ParkSierra (3 railroads) January 2002 We disposed of certain railroads as follows: NAME OF RAILROAD DATE OF DISPOSITION ---------------- ------------------- Minnesota Northern Railroad August 2000 St. Croix Valley Railroad August 2000 South Central Tennessee Railroad December 2000 Pittsburgh Industrial Railroad December 2000 Ontario L'Orignal Railway December 2000 Dakota Rail, Inc. December 2001 Georgia Southwestern Railroad March 2002 Texas New Mexico Railroad May 2002 As a result, the results of operations for the years ended December 31, 2002, 2001 and 2000 are not comparable in various material respects and are not indicative of the results which would have occurred had the acquisitions or dispositions been completed at the beginning of the periods presented. COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 The following table sets forth the operating revenues and expenses (in thousands) for our North American railroad operations for the periods indicated. [Download Table] For the year ended For the year ended December 31, 2002 December 31, 2001 ------------------ ------------------ Total operating revenue $332,992 100.0% $245,426 100.0% -------- ----- -------- ----- Operating expenses: Maintenance of way 34,590 10.5% 23,477 9.5% Maintenance of equipment 30,094 9.0% 20,984 8.5% Transportation 87,817 26.4% 69,932 28.5% Equipment rental 19,103 5.7% 15,136 6.2% Selling, general and administrative 55,678 16.7% 39,962 16.3% Depreciation and amortization 21,699 6.5% 15,915 6.5% -------- ----- -------- ----- Total operating expenses 248,981 74.8% 185,406 75.5% -------- ----- -------- ----- Operating income $ 84,011 25.2% $ 60,020 24.5% ======== ===== ======== ----- 23
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OPERATING REVENUES. Operating revenue increased by $87.6 million, or 36%, to $333.0 million for the year ended December 31, 2002 from $245.4 million for the year ended December 31, 2001 while carloads increased 25% to 1,113,925 in 2002 from 891,318 in 2001. These increases are primarily due to the acquisitions of ParkSierra and StatesRail. Excluding revenues of $91.4 million in 2002 and $5.0 million in 2001 for the acquisitions of ParkSierra and StatesRail and the dispositions of the Texas New Mexico Railroad and Georgia Southwestern Railroad, operating revenues increased $1.1 million or 1% while carloads decreased by 13,696 or 2%. The increase in "same railroad" revenues, while carloads declined, is due to a change in commodity mix. While lower rated bridge traffic declined 14,177 carloads in 2002, certain other commodities, such as metals, increased from 2001. The average rate per carload increased in 2002 to $259 from $243 in 2001. The increase in the average rate per carload is due to the acquisitions of ParkSierra and StatesRail which, on average, have a higher rate per carload as well as the change in mix of commodities as previously discussed. The following table compares North American freight revenues, carloads and average freight revenue per carload for the years ended December 31, 2002 and 2001: [Enlarge/Download Table] (dollars in thousands, except average For the year ended For the year ended rate per carload) December 31, 2002 December 31, 2001 ----------------- ----------------- Freight Average rate Freight Average rate Revenues Carloads per carload Revenues Carloads per carload -------- -------- ------------ -------- -------- ------------ Agricultural & Farm Products $ 27,877 95,005 $293 $ 20,524 80,835 $254 Autos 9,842 43,843 224 9,982 45,962 217 Chemicals 28,305 84,935 333 22,907 66,915 342 Coal 22,261 128,540 173 18,956 95,433 199 Food Products 19,817 62,471 317 11,956 40,988 292 Intermodal 4,082 39,538 103 4,859 42,253 115 Lumber & Forest Products 48,632 124,025 392 35,929 88,351 407 Metals 24,400 80,117 305 14,645 52,184 281 Metallic/Non-metallic Ores 14,196 55,260 257 11,074 45,658 243 Minerals 16,983 45,995 369 7,299 19,424 376 Paper Products 26,240 94,528 278 20,764 64,914 320 Petroleum Products 16,194 47,252 343 9,819 28,593 343 Railroad Equipment/Bridge Traffic 22,275 186,388 120 22,979 200,565 115 Other 7,658 26,028 294 5,073 19,243 264 -------- --------- ---- -------- ------- ---- Total $288,762 1,113,925 $259 $216,766 891,318 $243 ======== ========= ==== ======== ======= ==== Lumber and forest products revenues were $48.6 million in the year ended December 31, 2002 compared to $35.9 million in the year ended December 31, 2001, an increase of $12.7 million or 35%. This increase consists of $11.2 million from the acquisitions of ParkSierra and StatesRail and an increase of $1.5 million from the existing North American railroad operations resulting from new business secured from forest product customers in Alberta and Oregon. Agricultural and farm products revenues were $27.9 million in the year ended December 31, 2002 compared to $20.5 million in the year ended December 31, 2001, an increase of $7.4 million or 36%. This increase is primarily the result of the acquisitions of ParkSierra and StatesRail. Paper products revenues were $26.2 million in the year ended December 31, 2002 compared to $20.8 million in the year ended December 31, 2001, an increase of $5.4 million or 26%. This increase consists of $7.6 million from the acquisitions of ParkSierra and StatesRail and an increase of $0.6 million from the existing North American railroad operations, partially offset by a decrease of $2.7 million from divested North American operations. The increase of $0.6 million from existing North American railroad operations is due to new business obtained in Oregon and Alberta. Metal revenues were $24.4 million in the year ended December 31, 2002 compared to $14.6 million in the year ended December 31, 2001, an increase of $9.8 million or 67%. This increase consists of $6.7 million from the acquisitions of ParkSierra and StatesRail and an increase of $3.1 million from the existing North American railroad operations resulting from increased carloads from new business secured in North Carolina and our new steel train service in Southern Ontario. 24
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Food products revenues were $19.8 million in the year ended December 31, 2002 compared to $12.0 million in the year ended December 31, 2001, an increase of $7.8 million or 66%. This increase consists of $8.3 million from the acquisitions of ParkSierra and StatesRail partially offset by a decrease of $0.7 million from divested North American operations. Mineral revenues were $17.0 million in the year ended December 31, 2002 compared to $7.3 million in the year ended December 31, 2001, an increase of $9.7 million or 133%. This increase is due to the acquisitions of ParkSierra and StatesRail. Petroleum products revenues were $16.2 million in the year ended December 31, 2002 compared to $9.8 million in the year ended December 31, 2001, an increase of $6.4 million or 65%. This increase consists of $5.1 million from the acquisitions of ParkSierra and StatesRail and an increase of $1.3 million from the existing North American railroad operations due to new customers in New England and new business secured to diamond mines in the Canadian Northwest territories. Coal revenues were $22.3 million in the year ended December 31, 2002 compared to $19.0 million in the year ended December 31, 2001, an increase of $3.3 million or 17%. This increase is due to the acquisitions of ParkSierra and StatesRail. Chemicals revenues were $28.3 million in the year ended December 31, 2002 compared to $22.9 million in the year ended December 31, 2001, an increase of $5.4 million or 24%. This increase is due to the acquisitions of ParkSierra and StatesRail. Bridge traffic revenues were $22.3 million in the year ended December 31, 2002 compared to $23.0 million in the year ended December 31, 2001, a decrease of $0.7 million or 3%. This decrease is due to the reduction of volume associated with one of our railroads in eastern Canada during the third and fourth quarter of 2002. The change in the remaining commodities is primarily due to the acquisitions of ParkSierra and StatesRail. OPERATING EXPENSES. Total operating expenses increased by $63.6 million, or 34%, to $249.0 million for the year ended December 31, 2002 from $185.4 million for the year ended December 31, 2001. The increase in operating expenses is primarily due to ParkSierra and StatesRail. The operating ratios, defined as total operating expenses divided by total revenues, were 74.8% and 75.5% for the years ended December 31, 2002 and 2001, respectively. MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage of revenues to 10.5% in 2002 from 9.5% in 2001, primarily due to the reduction of an environmental liability in 2001 of $1.9 million due to changes in environmental regulations. MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense, which includes locomotive lease expense, increased as a percentage of revenues to 9.0% in 2002 from 8.5% in 2001. The increase is primarily due to car repairs on equipment used by StatesRail properties. TRANSPORTATION. Transportation expenses decreased as a percentage of revenues to 26.4% in 2002 from 28.5% in 2001. Of this decrease, lower fuel prices accounted for 1.0 percentage point as fuel costs were 87 cents per gallon in 2002 compared to $1.00 per gallon in 2001. Lower labor costs accounted for the other 1.1 percentage points. Labor costs were lower due to strict cost control measures implemented in 2002. EQUIPMENT RENTAL. Equipment rental expenses decreased as a percentage of revenues to 5.7% in 2002 from 6.2% in 2001, due to improved management of leased cars. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased as a percentage of revenues to 16.7% in 2002 from 16.3% in 2001 due to higher labor and insurance costs. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense remained constant in 2002 from 2001 at 6.5% of revenues. 25
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COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 The following table sets forth the operating revenues and expenses (in thousands) for our North American railroad operations for the years ended December 31, 2001 and 2000. [Download Table] For the year ended For the year ended December 31, 2001 December 31, 2000 ------------------ ------------------ Total operating revenue $245,426 100.0% $231,445 100.0% -------- ----- -------- ----- Operating expenses: Maintenance of way 23,477 9.5% 25,448 11.0% Maintenance of equipment 20,984 8.5% 13,101 5.7% Transportation 69,932 28.5% 70,958 30.7% Equipment rental 15,136 6.2% 15,842 6.8% Selling, general and administrative 39,962 16.3% 41,062 17.7% Depreciation and amortization 15,915 6.5% 16,430 7.1% -------- ----- -------- ----- Total operating expenses 185,406 75.5% 182,841 79.0% -------- ----- -------- ----- Operating income $ 60,020 24.5% $ 48,604 21.0% ======== ----- ======== -----  OPERATING REVENUES. Operating revenue increased by $14.0 million, or 6%, to $245.4 million for the year ended December 31, 2001 from $231.4 million for the year ended December 31, 2000 while carloads increased 6% to 891,318 in 2001 from 839,451 in 2000. The increases in revenues and carloads was primarily due to the inclusion of the RailTex properties for twelve months in 2001 compared to eleven months in 2000, partially offset by the sale of certain railroads in 2000 and the 4% decline in the Canadian dollar in 2001 compared to 2000. On a "same railroad" basis, including the RailTex properties on a pro forma basis from January 2000 and excluding the sold railroads, carloads and revenues both increased 4% in 2001. Increased coal shipments were primarily responsible for the increase. Transportation revenue per carload increased to $243 in 2001 from $242 in 2000. The following table compares North American freight revenues, carloads and average freight revenue per carload for the years ended December 31, 2001 and 2000: [Enlarge/Download Table] (dollars in thousands, except average For the year ended For the year ended rate per carload) December 31, 2001 December 31, 2000 ------------------ ------------------ Freight Average rate Freight Average rate Revenues Carloads per carload Revenues Carloads per carload -------- -------- ------------ -------- -------- ------------ Agricultural & Farm Products $ 20,524 80,835 $254 $ 19,235 76,593 $251 Autos 9,982 45,962 217 9,797 47,900 205 Chemicals 22,907 66,915 342 22,135 66,827 331 Coal 18,956 95,433 199 15,612 71,945 217 Food Products 11,956 40,988 292 10,710 39,313 272 Intermodal 4,859 42,253 115 4,076 30,134 135 Lumber & Forest Products 35,929 88,351 407 34,866 90,102 387 Metals 14,645 52,184 281 13,683 61,049 224 Metallic/Non-metallic Ores 11,074 45,658 243 8,796 36,780 239 Minerals 7,299 19,424 376 6,237 16,393 380 Paper Products 20,764 64,914 320 19,229 59,124 325 Petroleum Products 9,819 28,593 343 9,686 26,840 361 Railroad Equipment/Bridge Traffic 22,979 200,565 115 23,603 192,323 123 Other 5,073 19,243 264 5,319 24,128 220 -------- ------- ---- -------- ------- ---- Total $216,766 891,318 $243 $202,984 839,451 $242 ======== ======= ==== ======== ======= ==== Coal revenues were $19.0 million in the year ended December 31, 2001 compared to $15.6 million in the year ended December 31, 2000, an increase of $3.4 million or 21%. This increase was due to new business in Indiana and increased moves for utilities in Minnesota. 26
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Agricultural and farm products revenues were $20.5 million in the year ended December 31, 2001 compared to $19.2 million in the year ended December 31, 2000, an increase of $1.3 million or 7%. This increase was primarily due to the inclusion of the RailTex properties for twelve months in 2001 compared to eleven months in 2000, partially offset by a decrease of $0.9 million from divested North American operations. Paper products revenues were $20.8 million in the year ended December 31, 2001 compared to $19.2 million in the year ended December 31, 2000, an increase of $1.6 million or 8%. This increase was primarily due to the inclusion of the RailTex properties for twelve months in 2001 compared to eleven months in 2000, partially offset by a decrease of $0.4 million from divested North American operations. Metallic and non-metallic ore revenues were $11.1 million in the year ended December 31, 2001 compared to $8.8 million in the year ended December 31, 2000, an increase of $2.3 million or 26%. This increase was due to new business in Texas and an increase in salt movements in Southern Ontario. Food products revenues were $12.0 million in the year ended December 31, 2001 compared to $10.7 million in the year ended December 31, 2000, an increase of $1.3 million or 12%. This increase was primarily due to the inclusion of the RailTex properties for twelve months in 2001 compared to eleven months in 2000, partially offset by a decrease of $0.4 million from divested North American operations. The change in the remaining commodities was primarily due to the inclusion of the RailTex properties for twelve months in 2001 compared to eleven months in 2000. OPERATING EXPENSES. Total operating expenses increased by $2.6 million, or 1%, to $185.4 million for the year ended December 31, 2001 from $182.8 million for the year ended December 31, 2000. The operating ratios were 75.5% and 79.0% for the years ended December 31, 2001 and 2000, respectively. MAINTENANCE OF WAY. Maintenance of way expenses decreased $1.9 million, or 8%, to $23.5 million in 2001 from $25.4 million in 2000. This decrease is primarily due to the reduction of an environmental liability in 2001 of $1.9 million due to changes in environmental regulations. MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense, which includes locomotive lease expense, increased $7.9 million, or 60%, to $21.0 million in 2001 from $13.1 million in 2000. This increase is primarily due to our sale-leaseback transactions which we consummated in December 2000 and June 2001. Additional rent from these two transactions was approximately $4.0 million in 2001. In addition, in connection with our locomotive fleet rationalization and upgrade program, we leased additional locomotives in 2001 to replace existing older, less powerful locomotives. TRANSPORTATION. Transportation expenses decreased $1.1 million, or 1%, to $69.9 million in 2001 from $71.0 million in 2000. The decrease in transportation expenses is primarily due to lower fuel costs in 2001 as our average price per gallon was $1.00 in 2001 compared to $1.07 in 2000, resulting in a $1.5 million savings. In addition, our fleet rationalization and upgrade program resulted in more efficient locomotives and lower operating costs. 27
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INTERNATIONAL RAILROAD OPERATIONS In January 2003, we announced our intent to sell our 55% equity interest in Ferronor, the Chilean railroad operations. Accordingly, the results of operations for the years presented have been reclassified to discontinued operations. COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 The following table sets forth the operating revenues and expenses (in thousands) for our international railroad operations for the years ended December 31, 2002 and 2001. 2002 2001 ------- -------- Revenues: $94,915 $101,430 ------- -------- Operating expenses: Transportation 70,952 66,575 Selling, general and administrative 8,010 5,870 Depreciation and amortization 10,855 6,932 ------- -------- Total operating expenses 89,817 79,377 ------- -------- Operating income $ 5,098 $ 22,053 ======= ========  OPERATING REVENUES. Operating revenues decreased $6.5 million, or 6%, to $94.9 million for the year ended December 31, 2002 from $101.4 million for the year ended December 31, 2001. Freight Australia benefited from an increase in the Australian dollar against the U.S. dollar to 54 cents in 2002 from 52 cents in 2001, increasing revenues by $4.5 million in 2002. This was more than offset by lower grain traffic compared to 2001 as a result of the drought in Australia. Freight Australia's carloads were 200,869 for the year ended December 31, 2002, a decrease of 20,841, or 9%, compared to 221,710 for the year ended December 31, 2001. Revenue per carload was $366 for 2002 versus $376 for 2001. The following table compares international freight revenues, carloads and average freight revenue per carload for the years ended December 31, 2002 and 2001: [Enlarge/Download Table] (dollars in thousands, except average For the year ended For the year ended rate per carload) December 31, 2002 December 31, 2001 ------------------ ------------------ Freight Average rate Freight Average rate Revenues Carloads per carload Revenues Carloads per carload -------- -------- ------------ -------- -------- ------------ Agricultural & Farm Products $36,597 75,207 $487 $46,040 97,003 $475 Chemicals 316 1,013 311 225 737 305 Coal 7 38 195 244 681 358 Intermodal 27,500 83,331 330 26,405 82,474 320 Lumber & Forest Products 1,630 5,017 325 4,725 9,475 499 Minerals 4,960 18,793 264 3,692 16,076 230 Paper Products 1,274 13,492 94 1,109 11,426 97 Petroleum Products 1,284 3,889 330 786 3,435 229 Other 19 89 217 40 403 99 ------- ------- ---- ------- ------- ---- Total $73,587 200,869 $366 $83,266 221,710 $376 ======= ======= ==== ======= ======= ==== Agricultural and farm products revenues were $36.6 million in the year ended December 31, 2002 compared to $46.0 million in the year ended December 31, 2001, a decrease of $9.4 million or 21%. This decrease is primarily due to the drought in Australia. In 2002, Freight Australia transported 3.7 million tons of grain compared to 5.0 million tons of grain in 2001. We are estimating that Freight Australia will transport 2.0 million tons of grain in 2003 as the impact of the drought will be felt for the entire year. We believe, however, that Freight Australia will transport between 4.0 million and 5.0 million tons of grain in 2004 if normal harvest conditions return in Australia. Lumber and forest products revenues were $1.6 million in the year ended December 31, 2002 compared to $4.7 million in the year ended December 31, 2001, a decrease of $3.1 million or 66%. The decrease is due to a decline in demand for export wood chips from Australia. 28
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Minerals revenues were $5.0 million in the year ended December 31, 2002 compared to $3.7 million in the year ended December 31, 2001, an increase of $1.3 million or 34%. This increase is primarily due to a new contract to extend a cement haul in Australia. OPERATING EXPENSES. Operating expenses increased $10.4 million, or 13%, to $89.8 million for the year ended December 31, 2002 from $79.4 million for the year ended December 31, 2001. An increase in the Australian dollar against the U.S. Dollar, as noted above, increased total operating expenses by $4.3 million. The remaining increase was due to higher labor, insurance, maintenance and depreciation expense. These increases were partially offset by reductions in transportation costs directly related to the decrease in grain traffic in 2002. The operating ratio for Freight Australia was 94.6% in 2002 compared to 78.3% in 2001 due to the decreased carloads and the increased operating expenses as discussed above. COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 2001 2000 -------- -------- Revenues: $101,430 $102,204 -------- -------- Operating expenses: Transportation 66,575 70,118 Selling, general and administrative 5,870 6,284 Depreciation and amortization 6,932 5,438 -------- -------- Total operating expenses 79,377 81,840 -------- -------- Operating income $ 22,053 $ 20,364 ======== ========  OPERATING REVENUES. Operating revenues decreased $0.8 million, or 1%, to $101.4 million for the year ended December 31, 2001 from $102.2 million for the year ended December 31, 2000. Freight Australia's carloads were 221,710 for the year ended December 31, 2001, an increase of 18,174, or 9%, compared to 203,536 for the year ended December 31, 2000. Freight Australia's revenue per carload was $376 for 2001 versus $406 for 2000. The decrease in Freight Australia's revenues and revenue per carload was primarily due to an 11% decline in the Australian dollar in 2001 compared to 2000. The increase in the carloads in 2001 was due to the strong grain harvest in Victoria. The decline in the value of the Australian dollar relative to the U.S. dollar in 2001 compared to 2000 impacted Freight Australia's revenues by $12.6 million. The following table compares international freight revenues, carloads, and average freight revenue per carload for the years ended December 31, 2001 and 2000: [Enlarge/Download Table] (dollars in thousands, except average For the year ended For the year ended rate per carload) December 31, 2001 December 31, 2000 ------------------ ------------------ Freight Average rate Freight Average rate Revenues Carloads per carload Revenues Carloads per carload -------- -------- ------------ -------- -------- ------------ Agricultural & Farm Products $46,040 97,003 $475 $45,123 80,835 $558 Chemicals 225 737 305 315 861 366 Coal 244 681 358 764 2,557 299 Intermodal 26,405 82,474 320 27,312 74,379 367 Lumber & Forest Products 4,725 9,475 499 3,111 14,386 216 Minerals 3,692 16,076 230 4,068 17,076 238 Paper Products 1,109 11,426 97 1,093 10,286 106 Petroleum Products 786 3,435 229 894 3,152 284 Other 40 403 99 1 4 177 ------- ------- ---- ------- ------- ---- Total $83,266 221,710 $376 $82,681 203,536 $406 ======= ======= ==== ======= ======= ==== Agricultural and farm products revenues were $46.0 million in the year ended December 31, 2001 compared to $45.1 million in the year ended December 31, 2000, an increase of $0.9 million or 2%. This increase was primarily due to a strong grain harvest in 2001, partially offset by the weaker Australian dollar in 2001. Intermodal revenues were $26.4 million in the year ended December 31, 2001 compared to $27.3 million in the year ended 29
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December 31, 2000, a decrease of $0.9 million or 3%. This decrease was due to the lower Australian Dollar in 2001. OPERATING EXPENSES. Operating expenses decreased $2.5 million, or 3%, to $79.4 million for the year ended December 31, 2001 from $81.8 million for the year ended December 31, 2000. The decrease in operating expenses was primarily due to the 11% decline in the Australian dollar, which reduced operating expenses by $9.8 million. Partially offsetting this decrease was an increase in 2001 of depreciation and amortization due to the extensive capital work done on the locomotive fleet and track since we purchased the railroad from the government in 1999. The operating ratio improved to 78.3% in 2001 from 80.1% in 2000 due to the increased carloads and the relatively fixed nature of many of the expenses. CORPORATE OVERHEAD AND OTHER CORPORATE OVERHEAD. Corporate overhead services performed for our subsidiaries include executive management, overall strategic planning, accounting, finance, legal, cash management, information technology, human resources, payroll and tax. Corporate overhead, which is included in selling, general and administrative expenses in the consolidated statements of income, increased $10.0 million, or 62%, to $26.1 million for the year ended December 31, 2002 from $16.1 million for the year ended December 31, 2001. Approximately $3.3 million of the increase is due primarily to the write-off of the failed bid costs in connection with the proposed acquisition of National Rail and FreightCorp, two government-owned railroads in Australia. In addition, we recorded a $1.4 million charge in 2002 relating to the consolidation of the accounting and human resource functions from San Antonio to Boca Raton and a $1.0 million restructuring charge relating to the termination of certain executives in December 2002. The remaining increase was due to increased headcount in 2002 to support the ParkSierra and StatesRail acquisitions. For the year ended December 31, 2001, corporate overhead increased $3.7 million, or 30%, to $16.1 million from $12.4 million for the year ended December 31, 2000. This increase was related to the additional costs incurred to manage the acquired railroads and to establish a strong management team to handle our continued growth. ASSET RATIONALIZATION PLAN. As part of our strategic plan, we continually review our portfolio for under performing, non-core or non-strategic assets that can be sold. Net gains on sales of assets were $9.2 million for the year ended December 31, 2002. This gain primarily relates to the sale of the Georgia Southwestern Railroad in March 2002 resulting in a gain of $4.5 million and a sale of right-of-ways resulting in a gain of $3.5 million. In December 2001, we sold Dakota Rail, Inc. and certain other assets for $9.8 million. The proceeds from these transactions were used to reduce our long-term debt and for general working capital purposes. The net gains in 2001 were $6.4 million compared to $11.2 million in 2000. TERMINATED MOTOR CARRIER OPERATIONS. During the year ended December 31, 2002, we recorded a charge of $1.3 million for the write-off of the remaining assets from the motor carrier division. INTEREST EXPENSE. Interest expense, including amortization of financing costs, decreased from $53.9 million in 2000 to $50.7 million in 2001 and continued to decrease to $43.4 million in 2002. The decrease in interest expense from 2000 to 2001 is primarily due to reduction of our long-term debt and a decrease in base interest rates. The decrease in interest expense from 2001 to 2002 is primarily due to the refinancing of our senior debt in May 2002, which resulted in a lower interest rate. FINANCING COSTS AND OTHER INCOME (EXPENSE). In connection with the May 2002 refinancing of our senior debt, we terminated our existing interest rate swaps. Because these hedging instruments were designated as hedges of the cash flows under the previous senior debt facility, SFAS No. 133 requires the entire balance in other accumulated comprehensive loss to be charged to earnings. Accordingly, a charge of $17.1 million was recorded in other income (expense) during the year ended December 31, 2002. We also incurred a charge of $2.0 million during 2002 to write-off other refinancing related costs incurred in connection with our May 2002 refinancing. INCOME TAXES. Our effective tax rates in 2002 and 2001 were 35.5% and 22.5%, respectively. In 2001, we recorded a benefit of $3.1 million from a reduction in the Canadian federal and provincial tax rates. We believe our effective rate in 2003 will be approximately 37%.  DISCONTINUED OPERATIONS. In January 2003, we announced our intent to sell our 55% equity interest in Ferronor. Accordingly, we reclassified the operating results of Ferronor for each of the years presented to discontinued operations. As such, the income statements for the years ended 2002, 2001 and 2000, include $1.0 million, $1.5 million, and $1.2 million, (net of tax) respectively, of income from discontinued operations for Ferronor. We expect to sell our 55% equity interest in Ferronor in 2003 and use the proceeds of the sale to retire debt. In May 2002, we sold the Texas New Mexico Railroad for $2.3 30
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million resulting in a net gain of $1.3 million ($0.8 million, after tax). The gain has been included in discontinued operations. In December 2000, we sold our specialty truck trailer manufacturing operations for $38.5 million resulting in a gain of approximately $11.5 million, net of income taxes. In connection with the acquisition of RailTex, we refinanced our investment in our trailer manufacturing operations resulting in additional interest expense of $7.3 million in 2000. EXTRAORDINARY LOSS. In connection with the refinancing of our senior debt in May 2002, we wrote off the unamortized balance of the deferred loan costs relating to our old senior credit facility. The total charge of $6.6 million ($4.5 million, after tax) was included as an extraordinary charge. In connection with the reduction of our senior debt in July and August 2001, we recorded an extraordinary charge of $0.2 million for the year ended December 31, 2001. Pursuant to the refinancing of our debt in February 2000, we recorded an extraordinary charge for the year ended December 31, 2000 for the loss on early extinguishment of debt of $2.9 million. In connection with the issuance of subordinated debt in August 2000 we recorded an extraordinary charge of $1.1 million for early extinguishment of debt. CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In 2000, we recorded a $2.3 million charge associated with a change in accounting principle. This charge resulted from a beneficial conversion feature associated with warrants in connection with the junior convertible subordinated debentures issued in 1999. This was a result of a change during 2000 of the applicable accounting literature. LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS The discussion of liquidity and capital resources that follows reflects our consolidated results and includes all subsidiaries. Our principal source of liquidity is cash generated from operations. In addition, we may fund any additional liquidity requirements through borrowings under our $100 million revolving credit facility. Operating Activities Our cash provided by operating activities was $38.6 million for the year ended December 31, 2002. This amount consists of $2.2 million in net income, $41.3 million in depreciation and amortization and $25.4 million of refinancing related charges, partially offset by $9.7 million of asset sale gains (including the sale of discontinued operations) and $23.5 million of changes in working capital accounts. Excluding the payments for the termination of the interest rate swaps of $17.1 million, which are classified as an operating activity pursuant to SFAS No.104, cash flows from operations would have been $55.7 million, which is comparable to $55.0 million in 2001. Investing Activities Cash used in investing activities was $150.1 million for the year ended December 31, 2002 compared to $46.7 million in 2001. The increase of $103.4 million is primarily due to the use of cash for the purchase of ParkSierra and StatesRail which totaled $89.4 million. In addition, capital expenditures for the year were $65.7 million or $4.0 million higher than 2001. Asset sale proceeds were $9.3 million for the year ended 2002 compared to $18.5 million in 2001. We expect capital expenditures in 2003 to be approximately $71 million, including Ferronor, a discontinued operation. Ferronor's capital expenditures were $2 million in 2002 and are expected to be $7.0 million in 2003. Financing Activities Cash provided by financing activities was $79.3 million for 2002 compared to $39.4 million in 2001. The increase of $39.9 million is primarily due to $50 million of borrowings to finance the acquisitions of ParkSierra and StatesRail and an additional $50 million of borrowings in connection with the refinancing of the senior credit facility in May 2002, partially offset by the new financing costs totaling $15.4 million and common stock repurchases of $5.0 million. Under our existing senior debt facilities, our principal repayments will be $3.8 million in 2003. In May 2002, we refinanced our senior credit facility. The new senior credit facility requires 1% annual principal amortization and provides (1) a $265 million U.S. Term Loan, (2) a $50 million Canadian Term Loan, (3) a $60 million Australian Term Loan and (4) a $100 million revolving credit facility which includes $82.5 million of U.S. dollar denominated loans, $10 million of Canadian dollar denominated loans and $7.5 million of Australian dollar denominated loans. The U.S. Term Loan, the Canadian Term Loan and the Australian Term Loan mature on May 23, 2009 and the revolver loans mature on May 23, 2008. In addition, we may incur additional indebtedness under the credit facility consisting of up to $100 million 31
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aggregate principal amount of additional term loans subject to the satisfaction of certain conditions set forth in the credit agreement including consent of the Administrative Agent and the Joint Lead Arrangers under the credit facility and the satisfaction of all financial covenants set forth in the credit facility on a pro forma basis on the date of the additional borrowing. At our option, the new senior credit facilities bear interest at either (1) the alternative base rate (defined as the greater of (i) UBS AG's prime rate and (ii) the Federal Funds Effective Rate plus 0.50%) if such loan is a Term Loan or U.S. Revolving Loan or the Canadian Prime Rate (defined as the greater of (i) UBS AG's Canadian prime rate and (ii) the average rate for 30 day Canadian Dollar bankers' acceptances plus 1.0% per annum) if such loan is a Canadian revolving loan plus 1.00% for the revolving credit facilities and 1.50% for the Term Loan facility, or (2) the reserve-adjusted LIBO rate (or, in the case of Australian revolving loans, the BBSY Rate) plus 2.00% for the revolving credit facility and 2.50% for the term loan facilities; provided, that the additional amounts added to the alternative base rate and the LIBO rate for the revolving credit facilities and the term loan facilities discussed above will be subject to adjustment based on changes in our leverage ratio effective two fiscal quarters after the closing of the new senior credit facilities. At December 31, 2002 the interest rate on the term loan facilities was LIBOR plus 2.50%, or 4.00%. The default rate under the new senior credit facility is 2.0% above the otherwise applicable rate. The U.S. Term Loan and the U.S. dollar denominated revolver are collateralized by the assets of and guaranteed by RailAmerica, Inc. and its U.S. subsidiaries, the Canadian Term Loan and the Canadian dollar denominated revolver are collateralized by the assets of and guaranteed by RailAmerica, Inc. and its U.S. and Canadian subsidiaries, and the Australian Term Loan and the Australian dollar denominated revolver are collateralized by the assets of and guaranteed by RailAmerica, Inc. and its U.S. and Australian Subsidiaries. The assets of Ferronor, as well as any other subsidiaries designated in the future as unrestricted subsidiaries, are not pledged under this agreement. Ferronor has not guaranteed and any other unrestricted subsidiaries are not required to guarantee any of the obligations under the credit facility. The loans were provided by a syndicate of banks with Morgan Stanley Senior Funding, Inc., as syndication agent, UBS AG, Stamford Branch, as administrative agent and The Bank of Nova Scotia, as collateral agent. In connection with the refinancing of the senior credit facility in May 2002, we terminated our interest rate swap agreements resulting in a cash payment of $17.1 million. Additionally, as required under our new senior credit facility, we entered into two step-up collars for a total notional amount of $75 million with an effective date of November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the LIBOR component of our interest rates can fluctuate within specified ranges. From November 24, 2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify and are accounted for as cash flow hedges under SFAS No. 133. As of December 31, 2002, the fair value of these collars was a net liability of $1.9 million. On November 8, 2002, we entered into two interest rate swaps for a total amount of $300 million for the period commencing December 5, 2002 through December 5, 2003. Under the terms of the interest rate swaps, the LIBOR component of our interest rate is fixed at 1.62% on $300 million of debt. The swaps qualify and are accounted for as cash flow hedges under SFAS No. 133. At December 31, 2002, the fair value of these swaps was a net liability of $0.6 million. The May 2002 senior credit facility and the indenture governing our senior subordinated notes include numerous covenants imposing significant financial and operating restrictions on RailAmerica, Inc. The covenants limit our ability to, among other things: incur more debt or prepay existing debt, redeem or repurchase our common stock, pay dividends or make other distributions, make acquisitions or investments, use assets as security in other transactions, enter into transactions with affiliates, merge or consolidate with others, dispose of assets or use asset sale proceeds, create liens on our assets, make certain payments or capital expenditures and extend credit. In addition, the senior credit facility also contains 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 the new senior credit facility can be affected by events beyond our control. Failure to comply with the obligations in the new senior credit facility could result in an event of default under the new senior credit facility, which, if not cured or waived, could permit acceleration of the indebtedness or other indebtedness which could have a material adverse effect on us. We were in compliance with each of these covenants as of December 31, 2002. In August 2000, RailAmerica Transportation Corp., our wholly-owned subsidiary, sold units consisting of $130.0 million of 12-7/8% senior subordinated notes due 2010 and warrants to purchase 1,411,414 shares of our common stock. Our U.S. subsidiaries are guarantors of the senior subordinated notes. 32
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In February 2000, we entered into a credit agreement and two bridge notes in connection with the acquisition of RailTex and the refinancing of most of our and RailTex's existing debt. The credit agreement provided (i) a $125 million Term A loan, bearing interest at LIBOR plus 2.50% (4.44% at December 31, 2001), (ii) a $205 million Term B loan, initially bearing interest at LIBOR plus 3.25% (5.19% at December 31, 2001), and (iii) a $50 million revolving credit facility which includes $30 million of U.S. dollar denominated loans, $10 million of Canadian dollar denominated loans and $10 million of Australian dollar denominated loans with an interest rate of LIBOR plus 2.50%. All of the capital stock of RailAmerica, Inc.'s U.S. subsidiaries, 65% of the capital stock of the Canadian and Australian subsidiaries and the majority of the assets of RailAmerica, Inc.'s subsidiaries served as collateral for the senior credit facilities. In January 2002, in connection with the acquisitions of ParkSierra and StatesRail, we borrowed an additional $50 million under this senior credit facility. The credit agreement and the two bridge notes have all been repaid. Our long-term business strategy includes the selective acquisition or disposition of transportation-related businesses. Accordingly, we may require additional equity and/or debt capital in order to consummate acquisitions or undertake major business development activities. It is impossible to predict the amount of capital that may be required for such acquisitions or business development, and whether sufficient financing for such activities will be available on terms acceptable to us, if at all. As of December 31, 2002, we had working capital of $20 million compared to $30 million as of December 31, 2001. This decrease is primarily due to the private placement of common stock in December 2001, in which we raised $51 million. These funds were subsequently used to fund the acquisitions of ParkSierra and StatesRail in January 2002, thus decreasing our cash balance and reducing our working capital balance. Our cash flows from operations and borrowings under our credit agreements historically have been sufficient to meet our ongoing operating requirements, capital expenditures for property, plant and equipment, and to satisfy our debt service requirements. Two primary uses of the cash provided by our operations are capital expenditures and debt service. The following table represents the minimum future payments on our existing long-term debt and lease obligations: [Enlarge/Download Table] 2004 - 2006 - After TOTAL 2003 2005 2007 2007 -------- ------- ------- ------- -------- Long-term debt $385,701 $ 4,120 $ 8,300 $ 8,388 $364,893 Subordinated debt $141,331 $ 0 $21,107 $ 0 $120,224 Capital lease obligations $ 1,620 $ 80 $ 492 $ 648 $ 400 Operating lease obligations $ 97,970 $19,417 $33,701 $27,016 $ 17,836 Long-term debt of discontinued operations $ 20,840 $ 6,743 $ 5,248 $ 4,243 $ 4,606 Total contractual cash obligations $647,462 $30,360 $68,848 $40,295 $507,959 Common Stock Repurchases Program We occasionally repurchase our common stock under our share repurchase program. These repurchases are limited to $5 million per year pursuant to our borrowing arrangements. In July 2002, our board of directors authorized a 2 million share repurchase program through December 31, 2003, subject to restrictions under our borrowing arrangements. During the year ended December 31, 2002, we repurchased 530,500 shares at a total cost of $4.9 million. RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 142, goodwill and identifiable intangible assets with an indefinite life will no longer be amortized; however, both goodwill and other intangible assets will need to be tested at least annually for impairment. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets, excluding goodwill and intangible assets, to be held and used or disposed of. While the adoption of these pronouncements did 33
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not have a material impact on our consolidated financial statements, SFAS No. 144 will require us to report the results of operations of a railroad that has been disposed of or is being held for disposal in discontinued operations. In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for the fiscal year beginning January 1, 2003, and requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We believe the adoption of this pronouncement will not have a material impact on our financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, requires that debt extinguishments used as part of a company's risk management strategy should not be classified as an extraordinary item. The requirement to reclassify debt extinguishments is effective for fiscal years beginning after May 15, 2002. We will adopt SFAS No. 145 on January 1, 2003 and reclassify $4.5 million and $0.2 million of extraordinary charges, net of tax, to continuing operations in 2002 and 2001, respectively. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146, which is effective for exit or disposal activities initiated after December 31, 2002, requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when the liability is incurred rather than when management commits to an exit or disposal plan. We believe the adoption of this pronouncement will not have a material impact on our financial statements. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," which is effective for guarantees issued or modified after December 31, 2002. This Interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. This Interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. We believe the adoption of this pronouncement will not have a material impact on our financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which is effective for fiscal years ending after December 15, 2002, provides alternative methods of transition for voluntary changes to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure in both annual and interim financial statements about the method used on reported results. The adoption of this pronouncement did not have a material impact on our financial statements. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which is effective immediately for variable interest entities created after January 31, 2003, and applies in the first interim period beginning after June 15, 2003 for variable interest entities created before February 1, 2003. FIN 46 addresses the consolidation of variable interest entities through identification of a primary beneficiary. We believe the adoption of this pronouncement will not have a material impact on our financial statements.  ITEM 7a. MARKET RISK We currently use derivatives to hedge against increases in fuel prices and interest rates. We formally document the relationship between the hedging instrument and the hedged items, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as cash flow hedges to specific assets or liabilities on the balance sheet, commitments or forecasted transactions. When we enter into a derivative contract, and at least quarterly, we assess whether the derivative item is effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in Accumulated Other Comprehensive Loss, a separate component of Stockholders' Equity, and reclassified into earnings in the period during which the hedge transaction affects earnings. We monitor our hedging positions and credit ratings of our counterparties and do not anticipate losses due to counterparty nonperformance. 34
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FOREIGN CURRENCY. Our foreign currency risk arises from owning and operating railroads in Canada, Chile and Australia. As of December 31, 2002, we had not entered into any currency hedging transactions to manage this risk. A decrease in either the Canadian dollar or the Australian dollar would negatively impact our reported revenues and earnings for the affected period. During 2002, the Australian dollar increased 5% while the Canadian dollar declined 1%. This led to a net increase of $3.7 million in reported revenues and $0.1 million increase in reported operating income, in 2002, compared to 2001. A majority of our revenue and debt in Chile is denominated to the U.S. dollar and therefore, we are not negatively impacted by a decline in the value of the Chilean peso. INTEREST RATES. Our interest rate risk results from issuing variable rate debt obligations, as an increase in interest rates would result in lower earnings and increased cash outflows. In June 2002, as required under our new senior credit facility, we entered into two step-up collars for a total notional amount of $75 million with an effective date of November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the LIBOR component of our interest rates can fluctuate within specified ranges. From November 24, 2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify and are accounted for as cash flow hedges under SFAS No. 133. On November 8, 2002, we entered into two interest rate swaps for a total amount of $300 million for the period commencing December 5, 2002 through December 5, 2003. The swaps qualify and are accounted for as cash flow hedges under SFAS No. 133. Under the terms of the interest rate swaps, the LIBOR component of our interest rate is fixed at 1.62% on $300 million of debt. DIESEL FUEL. We are 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. Fuel costs represented 7% of total revenues during the year ended December 31, 2002. Due to the significance of fuel costs to our operations and the historical volatility of fuel prices, we maintain a program to hedge against fluctuations in the price of our diesel fuel purchases. Each one-cent change in the price of fuel would result in a $0.4 million change in fuel expense on an annual basis. The fuel-hedging program includes the use of derivatives that are accounted for as cash flow hedges. As of December 31, 2002, we had entered into fuel swap agreements to hedge the equivalent of 750,000 gallons per month in 2003 (35% of estimated North American consumption) at an average price of 66 cents per gallon, excluding transportation and taxes.  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of RailAmerica, the accompanying notes thereto and the independent accountants' reports are included as part of this Form 10-K and immediately follow the signature page of this Form 10-K.  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 35
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PART III  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors, executive officers and nominees is incorporated by reference from our definitive proxy statement relating to our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 2003.  ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from our definitive proxy statement relating to our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 2003.  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information concerning security ownership and securities issuable under equity compensation plans is incorporated by reference from our definitive proxy statement relating to our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 2003.  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference from our definitive proxy statement relating to our 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 2003.  ITEM 14. CONTROLS AND PROCEDURES As of a date within 90 days of this report, our chief executive officer and chief financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Management and PricewaterhouseCoopers have advised the audit committee of our board of directors that during the course of the audit, they noted deficiencies in internal controls of our Australian subsidiary relating to procedures for determining which costs spent on improvements to track structure, locomotives and freight cars qualified for capitalization under our policies. PricewaterhouseCoopers has advised the audit committee that these internal control deficiencies constitute a material weakness as defined by Statement of Auditing Standards No. 60. We have performed substantial additional procedures designed to ensure that these internal control deficiencies do not lead to material misstatements in our consolidated financial statements and to enable the completion of PricewaterhouseCoopers' audit of our consolidated financial statements, notwithstanding the presence of the internal control weaknesses noted above. We are in the process of implementing corrective actions as of the date of this annual report on Form 10-K to address these issues, and are evaluating implementation of the following corrective actions as well as additional procedures: o Reorganization of the financial accounting responsibilities; o Developing a pre-approval process for capital projects in Australia similar to our process in the United States; o Modifying the software which tracks individual jobs on our locomotives and railcars to provide better information to the accounting department; and o Instituting new requirements for invoicing and documentation of outsourced track maintenance and improvements in Australia. Based upon this evaluation and the additional procedures performed, our CEO and CFO concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by rules and forms promulgated under that act. We will continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, and will take further action as appropriate. 36
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PART IV  ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Amended and Restated Agreement and Plan of Merger, dated as of November 26, 2001 by and among RailAmerica, Inc., ParkSierra Acquisition Corp. and ParkSierra Corp. (30) 2.2 Merger Agreement, dated as of October 12, 2001, among RailAmerica, Inc., StatesRail Acquisition Corp. and StatesRail, Inc. (32) 2.3 Stock Purchase Agreement, dated October 12, 2001, among RailAmerica, Inc., New StatesRail Holdings, Inc., StatesRail L.L.C., West Texas and Lubbock Railroad Company, Inc. and the Members of StatesRail L.L.C. (32) 2.4 Letter Agreement, dated as of October 12, 2001 between the parties to Exhibits 2.2 and 2.3 above. (32) 3.1 Amended and Restated Certificate of Incorporation of Registrant, as amended (2) 3.2 By-laws of RailAmerica, Inc. (1) 3.3 Certificate Of Amendment to Amended and Restated Certificate of Incorporation of RailAmerica, Inc. (31) 4.1 Form of Common Stock Purchase Rights Agreement, dated as of January 6, 1998, between RailAmerica, Inc. and American Stock Transfer & Trust Company (6) 4.2 Certificate of Designation of Series A Convertible Redeemable Preferred Stock (19) 4.3 Third Amendment to the Rights Agreement, dated as of January 13, 2000, between RailAmerica, Inc. and American Stock Transfer & Trust Company (10) 4.6 Fourth Amendment to the Rights Agreement, dated as of April 13, 2000, between RailAmerica, Inc. and American Stock Transfer and Trust Company (21) 4.7 Waiver and Supplemental Agreement, dated as of April 13, 2000, among RailAmerica, Inc. and EGS Associates, L.P., EGS Partners, L.L.C., BEV Partners, L.P., Jonas Partners, L.P., EGS Management, L.L.C., William Ehrman, Frederic Greenberg, Jonas Gerstl and Juli Oliver (22) 4.8 Indenture, dated as of August 14, 2000, between RailAmerica Transportation Corp., the Guarantors named therein and Wells Fargo Bank Minnesota, N.A. (24) 4.9 Warrant Agreement, dated August 14, 2000, between RailAmerica, Inc. and Wells Fargo Bank Minnesota, N.A. (26) 4.10 Warrant Registration Rights Agreement, dated August 14, 2000, between RailAmerica, Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Barclays Bank PLC and Scotia Capital (USA) Inc. (27) 4.11 Form of Placement Agent Warrant, dated as of June 2001. (32) 4.12 Form of Placement Agent Warrant, dated as of December 2001. (32) 4.13 First Supplemental Indenture (32) 4.14 Second Supplemental Indenture (32) 37
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10.43 Stock Option Agreement, dated November 11, 1994, between RailAmerica, Inc. and Gary O. Marino (7)+ 10.45 RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan (2) 10.46 RailAmerica, Inc. 1995 Employee Stock Purchase Plan (2) 10.47 RailAmerica, Inc. Corporate Senior Executive Bonus Plan (2)+ 10.59 RailAmerica, Inc. Nonqualified Deferred Compensation Trust (5)+ 10.60 Nonqualified Deferred Compensation Agreement between RailAmerica, Inc. and Gary O. Marino (5)+ 10.63 RailAmerica, Inc. 1998 Executive Incentive Compensation Plan (7)+ 10.80 Form of Change in Control Agreements between RailAmerica, Inc. and certain executive officers (32) 10.81 Service Agreement, dated April 4, 2001, between RailAmerica, Inc. and Marinus van Onselen and first amendment thereto. (32) 10.82 Amended and Restated Executive Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Gary O. Marino. (32) 10.83 Amended and Restated Executive Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Donald D. Redfearn. (32) 10.84 Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Gary M. Spiegel. (32) 10.85 Credit agreement, dated as of May 23, 2002 among RailAmerica, Inc., Palm Beach Rail Holdings, Inc., RailAmerica Transportation Corp., as borrower, RailAmerica Canada Corp., as the Canadian term Borrower, Railink Ltd., as the Canadian revolver Borrower, RailAmerica Australia Finance Pty., Ltd., as the Australian Term Borrower, Freight Victoria Limited and RailAmerica Australia Pty., Ltd., as the Australian Revolver Borrowers, various financial institutions from time to time parties hereto, as the lenders, UBS Warburg LLC and Morgan Stanley Senior Funding, Inc., as Joint Lead Arrangers and Bookrunners, Morgan Stanley Denior Funding, Inc., as Syndication Agent for the lenders, UBS AG, Stamford Branch, as the Administrative Agent for the lenders, The Bank of Nova Scotia , as Collateral Agent for the lenders, and The Bank of Nova Scotia and Credit Lyonnais New York Branch, as the Document Agents for the lenders. (33) 10.86 Amendment No. 1 to Credit Agreement 10.87 Deferred Compensation Plan, as amended 10.88 Adoption Agreement relating to Deferred Compensation Plan, as amended 21.1 Subsidiaries of Registrant 23.1 Consent of PricewaterhouseCoopers LLP 99.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 99.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. 38
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(1) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Registration Statement on Form S-1, Registration No. 33-49026. (2) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Form 10-QSB for the quarter ended September 30, 1995, filed with the Securities and Exchange Commission on November 12, 1995. (5) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Form 10-KSB for year ended December 31, 1995, filed with the Securities and Exchange Commission on March 31, 1997. (6) Incorporated by reference to exhibit No. 4.1 filed as part of RailAmerica, Inc.'s Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on January 8, 1998. (7) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Form 10-Q for the quarter ended March 31, 1998, filed with the Securities and Exchange Commission on May 14, 1998. (10) Incorporated by reference to exhibit 4.1 filed as part of RailAmerica, Inc.'s Form 8-K as of January 13, 2000, filed with the Securities and Exchange Commission on January 26, 2000. (12) Incorporated by reference to exhibit 10.2 filed as part of RailAmerica, Inc.'s Form 8-K as of April 30, 1999, filed with the Securities and Exchange Commission on May 18, 1999. (19) Incorporated by reference to the exhibit of the same number filed as part of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 1998 filed with the Securities and Exchange Commission on March 31, 1999. (20) Incorporated by reference to the exhibit of the same number filed as part of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission on March 30, 2000. (21) Incorporated by reference to Exhibit 4.1 filed as part of RailAmerica, Inc.'s Form 8-K, dated April 13, 2000. (22) Incorporated by reference to Exhibit 4.2 filed as part of RailAmerica, Inc.'s Form 8-K, dated April 13, 2000. (24) Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica, Inc.'s Registration Statement on Form S-4, Registration No. 333-45196. (26) Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica, Inc.'s Registration Statement on Form S-3, Registration No. 333-45200. (27) Incorporated by reference to the Exhibit 4.2 filed as part of RailAmerica, Inc.'s Registration Statement on Form S-3, Registration No. 333-45200. (30) Incorporated by reference to the Annex A, filed as part of RailAmerica, Inc.'s Registration Statement on Form S-4, Registration No. 333-75290. (31) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission on April 2, 2001. (32) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on April 1, 2002. (33) Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.'s Form 10-Q for the quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 14, 2002. + Executive Compensation Plan or Arrangement. (b) Reports on Form 8-K. Registrant filed no reports on Form 8-K during the fourth quarter of the year ended December 31, 2002. 39
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAILAMERICA, INC. By: /s/ GARY O. MARINO -------------------- Gary O. Marino, Chairman, President and Chief Executive Officer By: /s/ MICHAEL J. HOWE --------------------- Michael J. Howe, Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ ROBERT J. RABIN --------------------- Robert J. Rabin, Vice President and Corporate Controller (Principal Accounting Officer) Dated March 27, 2003 In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. [Download Table] SIGNATURES TITLE DATE ---------- ----- ---- /s/ GARY O. MARINO Chairman, President, Chief Executive March 27, 2003 ------------------------ Officer and Director Gary O. Marino /s/ DONALD D. REDFEARN Chief Administrative Officer, Executive March 27, 2003 ------------------------ Vice President, Secretary and Director Donald D. Redfearn /s/ JOHN H. MARINO Assistant Secretary and Director March 27, 2003 ------------------------ John H. Marino /s/ DOUGLAS R. NICHOLS Director March 27, 2003 ------------------------ Douglas R. Nichols /s/ RICHARD RAMPELL Director March 27, 2003 ------------------------ Richard Rampell /s/ CHARLES SWINBURN Director March 27, 2003 ------------------------ Charles Swinburn /s/ JOHN M. SULLIVAN Director March 27, 2003 ------------------------ John M. Sullivan /s/ FERD C. MEYER, JR. Director March 27, 2003 ------------------------ Ferd C. Meyer, Jr. /s/ WILLIAM G. PAGONIS Director March 27, 2003 ------------------------ William G. Pagonis 40
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CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER I, Gary O. Marino, certify that: 1. I have reviewed this annual report on Form 10-K of RailAmerica, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: i) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; ii) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and iii) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): i) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Gary O. Marino ---------------------------- Gary O. Marino Chief Executive Officer Date: March 27, 2003 41
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CERTIFICATE OF THE CHIEF FINANCIAL OFFICER I, Michael J. Howe, certify that: 1. I have reviewed this annual report on Form 10-K of RailAmerica, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: i) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; ii) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and iii) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): ii) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Michael J. Howe ---------------------------- Michael J. Howe Chief Financial Officer Date: March 27, 2003 42
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RAILAMERICA, INC. AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS The following consolidated financial statements of RailAmerica, Inc. and Subsidiaries are referred to in Item 8: PAGES ----- Report of Independent Certified Public Accountants................ F-2 Consolidated Balance Sheets - December 31, 2002 and 2001.......... F-3 Consolidated Statements of Income - For the Years Ended December 31, 2002, 2001 and 2000........................... F-4 Consolidated Statements of Stockholders' Equity - For the Years Ended December 31, 2002, 2001 and 2000..................... F-5 Consolidated Statements of Cash Flows - For the Years Ended December 31, 2002, 2001 and 2000........................... F-6 Notes to Consolidated Financial Statements........................ F-7-F-36 F-1
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 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of RailAmerica, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of RailAmerica, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 14, the Company changed its method of accounting for derivative instruments and hedging activities in 2001. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Miami, Florida March 3, 2003 F-2
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RAILAMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS [Enlarge/Download Table] DECEMBER 31, 2002 2001 --------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents ........................................... $ 28,887 $ 59,761 Restricted cash in escrow ........................................... 371 2,418 Accounts and notes receivable, net of allowance of $406 and $571, respectively ..................................... 63,463 54,278 Current assets of discontinued operations ........................... 5,834 -- Other current assets ................................................ 22,429 14,204 ----------- --------- Total current assets ............................................ 120,984 130,661 Property, plant and equipment, net ......................................... 904,253 738,775 Long-term assets of discontinued operations ................................ 50,355 -- Other assets ............................................................... 30,961 21,732 ----------- --------- Total assets .................................................... $ 1,106,553 $ 891,168 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt ................................ $ 4,200 $ 24,484 Accounts payable .................................................... 46,722 36,035 Accrued expenses .................................................... 38,420 39,889 Current liabilities of discontinued operations ...................... 11,624 -- ----------- --------- Total current liabilities ....................................... 100,966 100,408 Long-term debt, less current maturities .................................... 383,121 277,203 Subordinated debt .......................................................... 141,331 144,988 Deferred income taxes ...................................................... 150,159 96,822 Long-term liabilities of discontinued operations ........................... 27,283 -- Other liabilities .......................................................... 24,790 50,788 ----------- --------- 827,650 670,209 ----------- --------- Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value, 60,000,000 shares authorized; 31,879,602 shares issued and outstanding at December 31, 2002 and 28,842,090 shares issued and outstanding at December 31, 2001 ... 32 29 Additional paid in capital ................................................. 261,372 224,248 Retained earnings .......................................................... 48,055 45,902 Accumulated other comprehensive loss ....................................... (30,556) (49,220) ----------- --------- Total stockholders' equity ...................................... 278,903 220,959 ----------- --------- Total liabilities and stockholders' equity ...................... $ 1,106,553 $ 891,168 =========== ========= The accompanying Notes are an integral part of the Consolidated Financial Statements. F-3
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RAILAMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME [Enlarge/Download Table] FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA) Operating revenue .................................................... $ 428,243 $ 347,546 $ 334,615 --------- --------- --------- Operating expenses: Transportation ..................................................... 242,555 196,105 195,467 Selling, general and administrative ................................ 89,784 61,982 59,484 Net gain on sale and impairment of assets .......................... (9,155) (6,422) (11,184) Terminated motor carrier operations, net ........................... 1,396 263 88 Depreciation and amortization ...................................... 33,158 24,393 23,322 --------- --------- --------- Total operating expenses ......................................... 357,738 276,321 267,177 --------- --------- --------- Operating income ................................................. 70,505 71,225 67,438 Interest expense, including amortization costs of $4,686, $4,410, and $4,854, respectively ........................... (43,441) (50,714) (53,912) Other income (expense) ............................................... (18,908) 178 (2,267) --------- --------- --------- Income from continuing operations before income taxes .............. 8,156 20,689 11,259 Provision for income taxes ........................................... 2,893 4,897 2,900 --------- --------- --------- Income from continuing operations .................................. 5,263 15,792 8,359 Discontinued operations: Net gain on disposal of discontinued business (net of income taxes of $161 and $6,850, respectively) ........................ 387 -- 11,527 Income (loss) from operations of discontinued business (net of income taxes of ($10), $108, and ($1,600), respectively) .................................................. 984 1,482 (1,977) --------- --------- --------- Income before extraordinary item and cumulative effect of accounting change ........................................... 6,634 17,274 17,909 Extraordinary loss from early extinguishment of debt (net of income taxes of ($2,167), ($142) and ($2,200), respectively) ... (4,481) (236) (3,996) Cumulative effect of accounting change ............................. -- -- (2,252) --------- --------- --------- Net income .................................................... $ 2,153 $ 17,038 $ 11,661 ========= ========= ========= Net income available to common stockholders .......................... $ 2,153 $ 16,740 $ 10,991 Basic earnings per common share: Continuing operations .............................................. $ 0.16 $ 0.72 $ 0.43 Discontinued operations ............................................ 0.04 0.07 0.52 Extraordinary item ................................................. (0.13) (0.01) (0.22) Cumulative effect of accounting change ............................. -- -- (0.12) --------- --------- --------- Net income ....................................................... $ 0.07 $ 0.78 $ 0.61 ========= ========= ========= Diluted earnings per common share: Continuing operations .............................................. $ 0.16 $ 0.66 $ 0.42 Discontinued operations ............................................ 0.04 0.06 0.52 Extraordinary item ................................................. (0.13) (0.01) (0.22) Cumulative effect of accounting change ............................. -- -- (0.12) --------- --------- --------- Net income ....................................................... $ 0.07 $ 0.71 $ 0.60 ========= ========= ========= Weighted average common shares outstanding: Basic .............................................................. 32,047 21,510 18,040 Diluted ............................................................ 32,620 25,350 18,267 The accompanying Notes are an integral part of the Consolidated Financial Statements. F-4
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RAILAMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [Enlarge/Download Table] STOCKHOLDERS' EQUITY -------------------------------------------------------------------------- Number of Additional Other FOR THE YEARS ENDED DECEMBER 31, Shares Par Paid-In Retained Comprehensive 2002, 2001 AND 2000 Issued Value Capital Earnings Income (Loss) Total --------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Balance, January 1, 2000 ............................ 12,611 $ 13 $ 47,797 $ 18,171 $ 3,486 $ 69,467 Net income .......................................... -- -- -- 11,661 -- 11,661 Cumulative translation adjustments .................. -- -- -- -- (27,735) (27,735) --------- Total comprehensive loss .................. (16,074) --------- Issuance of common stock ............................ 6,652 7 60,917 -- -- 60,924 Exercise of stock options ........................... 49 -- 269 -- -- 269 Conversion of redeemable securities ................. 339 -- 2,669 -- -- 2,669 Warrants issued ..................................... -- -- 8,841 -- -- 8,841 Purchase of treasury stock .......................... -- -- (1,992) -- -- (1,992) Retirement of treasury stock ........................ (1,028) (1) 1 -- -- -- Preferred stock dividends and accretion ............. -- -- -- (670) -- (670) --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 .......................... 18,623 19 118,502 29,162 (24,249) 123,434 Net income .......................................... -- -- -- 17,038 -- 17,038 Cumulative effect of adopting SFAS 133, net ......... -- -- -- -- (4,388) (4,388) Change in market value of derivative instruments, net .................................. -- -- -- -- (5,008) (5,008) Cumulative translation adjustments .................. -- -- -- -- (15,575) (15,575) --------- Total comprehensive loss ................ (7,933) --------- Issuance of common stock ............................ 8,176 8 89,728 -- -- 89,736 Exercise of stock options ........................... 1,334 1 8,342 -- -- 8,343 Tax benefit on exercise of options and Warrants .......................................... -- -- 2,633 -- -- 2,633 Conversion of redeemable securities ................. 882 1 7,030 -- -- 7,031 Purchase of treasury stock .......................... (173) -- (1,987) -- -- (1,987) Preferred stock dividends and accretion ............. -- -- -- (298) -- (298) --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 .......................... 28,842 29 224,248 45,902 (49,220) 220,959 Net income .......................................... -- -- -- 2,153 -- 2,153 Change in market value of derivative instruments, net .................................. -- -- -- -- (2,472) (2,472) Realized loss on derivatives designated as hedges, net of tax ....................................... -- -- -- -- 10,737 10,737 Cumulative translation adjustments .................. -- -- -- -- 10,399 10,399 --------- Total comprehensive income .............. 18,664 --------- Issuance of common stock ............................ 3,485 3 41,144 -- -- 41,147 Exercise of stock options ........................... 83 -- 589 -- -- 589 Tax benefit on exercise of options and warrants ..... -- -- 109 -- -- 109 Warrants issued ..................................... -- -- 204 -- -- 204 Purchase of treasury stock .......................... (530) -- (4,922) -- -- (4,922) --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 .......................... 31,880 $ 32 $ 261,372 $ 48,055 $(30,556) $ 278,903 --------------------------------------------------------------------------------------------------------------------------------- The accompanying Notes are an integral part of the Consolidated Financial Statements. F-5
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RAILAMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000 ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 2,153 $ 17,038 $ 11,661 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................... 41,251 32,011 34,566 Financing costs ....................................... 25,433 378 4,857 Interest paid in kind ................................. -- -- 5,806 Equity interest in earnings of affiliate .............. -- -- (554) Net gain on sale or disposal of properties ............ (9,705) (6,434) (29,554) Cumulative effect of accounting change ................ -- -- 2,252 Deferred income taxes ................................. 2,218 2,926 (2,797) Other ................................................. 742 1,350 995 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable ................................ 2,766 5,298 3,654 Other current assets ............................... 673 8,587 2,455 Accounts payable ................................... (5,640) 1,172 2,239 Accrued expenses ................................... (9,919) (12,485) 5,759 Other assets and liabilities ....................... (11,365) 5,129 3,094 ---------------------------------------------------------------------------------------------------- Net cash provided by operating activities ....... 38,607 54,970 44,433 ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment ................. (65,682) (61,675) (62,499) Proceeds from sale of properties and investments .......... 9,291 18,502 96,654 Acquisitions, net of cash acquired ........................ (89,359) -- (148,922) Change in restricted cash in escrow ....................... 1,357 1,046 (4,539) Deferred acquisition costs and other ...................... (5,680) (4,577) (2,711) ---------------------------------------------------------------------------------------------------- Net cash used in investing activities ........... (150,073) (46,704) (122,017) ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt .................. 457,870 85,590 549,235 Principal payments on long-term debt ...................... (358,639) (142,088) (448,107) Sale of common stock ...................................... -- 89,736 -- Proceeds from exercise of stock options ................... 386 8,343 234 Preferred stock dividends paid ............................ -- (241) (289) Purchase of treasury stock ................................ (4,922) (1,987) (1,992) Deferred financing costs paid ............................. (15,383) -- (18,980) ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities ....... 79,312 39,353 80,101 ---------------------------------------------------------------------------------------------------- Effect of exchange rates on cash .......................... 1,280 (948) (1,025) ---------------------------------------------------------------------------------------------------- Net increase (decrease) in cash ........................... (30,874) 46,671 1,492 Cash, beginning of period ................................. 59,761 13,090 11,598 ---------------------------------------------------------------------------------------------------- Cash, end of period ....................................... $ 28,887 $ 59,761 $ 13,090 ---------------------------------------------------------------------------------------------------- The accompanying Notes are an integral part of the Consolidated Financial Statements. F-6
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of RailAmerica, Inc. and all of its subsidiaries (the "Company"). All of RailAmerica's consolidated subsidiaries are wholly-owned except Empresa De Transporte Ferroviario S.A. ("Ferronor"), a Chilean railroad, in which the Company has a 55% equity interest. All intercompany balances and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the 2002 presentation. In January 2003, the Company announced its intention to sell its 55% equity interest in Ferronor, its Chilean railroad operations. As a result, Ferronor has been presented as a discontinued operation in the financial statements. The Company's principal operations consist of rail freight transportation in North America, Chile, Argentina and Australia. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in demand deposit accounts, which at times may exceed insurance limits. As of December 31, 2002, the Company had approximately $28 million of cash in excess of insurance limits.  PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, which are recorded at historical cost, are depreciated and amortized on a straight-line basis over their estimated useful lives. Costs assigned to property purchased as part of an acquisition are based on the fair value of such assets on the date of acquisition. The Company self-constructs portions of its track structure and rebuilds certain of its rolling stock. In addition to direct labor and material, certain indirect costs are capitalized. Expenditures which significantly increase asset values or extend useful lives are capitalized. Repairs and maintenance expenditures are charged to operating expense when the work is performed. The Company uses the group method of depreciation under which a single depreciation rate is applied to the gross investment in its track assets. Upon normal sale or retirement of track assets, cost less net salvage value is charged to accumulated depreciation and no gain or loss is recognized. The Company periodically reviews its assets for impairment by comparing the projected undiscounted cash flows of those assets to their recorded amounts. Impairment charges are based on the excess of the recorded amounts over their estimated fair value, as measured by the discounted cash flows. The Company incurs certain direct labor, contract service and other costs associated with the development and installation of internal-use computer software. Costs for newly developed software or significant enhancements to existing software are capitalized. Research, preliminary project, operations, maintenance and training costs are charged to operating expense when the work is performed. F-7
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Depreciation has been computed using the straight-line method based on estimated useful lives as follows: Buildings and improvements 20-33 years Railroad track 30-40 years Railroad track improvements 3-10 years Locomotives, transportation and other equipment 5-30 years Office equipment and capitalized software 5-10 years INCOME TAXES The Company utilizes the liability method of accounting for deferred income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are also established for the future tax benefits of loss and credit carryovers. The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. REVENUE RECOGNITION The Company recognizes transportation revenue after the freight has been moved from origin to destination. Other revenue is recognized as service is performed. FOREIGN CURRENCY TRANSLATION The financial statements and transactions of the Company's foreign operations are maintained in their local currency, which is their functional currency, except for Chile, where the U.S. dollar is used as the functional currency. Where local currencies are used, assets and liabilities are translated at current exchange rates in effect at the balance sheet date. Translation adjustments, which result from the process of translating the financial statements into U.S. dollars, are accumulated in the cumulative translation adjustment account, which is a component of accumulated other comprehensive loss in stockholders' equity. Revenues and expenses are translated at the average exchange rate for each period. Gains and losses from foreign currency transactions are included in net income. At December 31, 2002, accumulated other comprehensive loss included ($29.4) million of cumulative translation adjustments. STOCK-BASED COMPENSATION As of December 31, 2002, the Company has three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock -Based Compensation," to stock-based employee compensation. F-8
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued [Enlarge/Download Table] Year Ended December 31, ---------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Net income, as reported ............................................ $ 2,153 $ 17,038 $ 11,661 Less: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects ............................................................ (4,257) (4,349) (3,585) ---------- ---------- ---------- Pro forma net income (loss) ........................................ $ (2,104) $ 12,689 $ 8,076 ========== ========== ========== Earnings (loss) per share: Basic-as reported .............................................. $ 0.07 $ 0.78 $ 0.61 ---------- ---------- ---------- Basic-pro forma ................................................ $ (0.07) $ 0.58 $ 0.41 ---------- ---------- ---------- Diluted-as reported ............................................ $ 0.07 $ 0.71 $ 0.60 ---------- ---------- ---------- Diluted-pro forma .............................................. $ (0.07) $ 0.54 $ 0.41 ---------- ---------- ---------- RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 142, goodwill and identifiable intangible assets with an indefinite life will no longer be amortized; however, both goodwill and other intangible assets will need to be tested at least annually for impairment. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets, excluding goodwill and intangible assets, to be held and used or disposed of. While the adoption of these pronouncements did not have a material impact on the Company's consolidated financial statements, SFAS No. 144 will require the Company to report the results of operations of a railroad that has been disposed of or is being held for disposal in discontinued operations. In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for the Company's fiscal year beginning January 1, 2003, and requires the Company to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Company believes the adoption of this pronouncement will not have a material impact on its financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, requires that debt extinguishments used as part of a company's risk management strategy should not be classified as an extraordinary item. The requirement to reclassify debt extinguishments is effective for fiscal years beginning after May 15, 2002. The Company will adopt SFAS No. 145 on January 1, 2003 and reclassify $4.5 million and $0.2 million of extraordinary charges, net of tax, to continuing operations in 2002 and 2001, respectively. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146, which is effective for exit or disposal activities initiated after December 31, 2002, requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when the liability is incurred rather than when management commits to an exit or disposal plan. The Company believes the adoption of this pronouncement will not have a material impact on its financial statements. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," which is effective for guarantees issued or modified after December 31, 2002. This Interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations F-9
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued under guarantees. This Interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. The Company believes the adoption of this pronouncement will not have a material impact on its financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which is effective for fiscal years ending after December 15, 2002, provides alternative methods of transition for voluntary changes to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure in both annual and interim financial statements about the method used on reported results. The adoption of this pronouncement did not have a material impact on its financial statements. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which is effective immediately for variable interest entities created after January 31, 2003, and applies in the first interim period beginning after June 15, 2003 for variable interest entities created before February 1, 2003. FIN 46 addresses the consolidation of variable interest entities through identification of a primary beneficiary. The Company believes the adoption of this pronouncement will not have a material impact on its financial statements. 2. EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year while income from continuing operations is reduced by preferred stock dividends and accretion. Diluted earnings per share is calculated using the sum of the weighted average number of common shares outstanding plus potentially dilutive common shares arising out of stock options, warrants and convertible securities. Options and warrants totaling 4.4 million, 1.2 million and 4.3 million were excluded from the diluted earnings per share calculation for the years ended December 31, 2002, 2001 and 2000, respectively, as well as assumed conversion of $21.8 million (2.2 million shares) of convertible debentures in 2002 and $29.2 million (3.1 million shares) of convertible preferred stock and convertible debentures in 2000, as such securities were anti-dilutive. The following is a summary of the income from continuing operations available for common stockholders and weighted average shares outstanding (in thousands): [Download Table] Year Ended December 31, -------------------------------- 2002 2001 2000 ------- -------- -------- Income from continuing operations ............... $ 5,263 $ 15,792 $ 8,359 Preferred stock dividends and accretion ......... -- (298) (670) ------- -------- -------- Income from continuing operations available to common stockholders (basic) .............. 5,263 15,494 7,689 Interest on convertible debt .................... -- 1,044 -- Preferred stock dividends and accretion ......... -- 298 -- ------- -------- -------- Income from continuing operations available to common stockholders (diluted) ............ $ 5,263 $ 16,836 $ 7,689 ======= ======== ======== Weighted average shares outstanding (basic) ..... 32,047 21,510 18,040 Assumed conversion: Options and warrants ........................ 573 1,196 227 Convertible debentures and preferred stock .. -- 2,644 -- ------- -------- -------- Weighted average shares outstanding (diluted) ... 32,620 25,350 18,267 ======= ======== ======== F-10
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS In January 2003, the Company announced its intent to sell its 55% equity interest in Ferronor, its Chilean railroad operations. The Company expects to sell this ownership interest within the next twelve months, therefore, the results of operations are reported in discontinued operations, net of applicable income taxes, for all periods presented. In addition, the liabilities and assets of Ferronor have been reclassified as assets and liabilities of discontinued operations on the December 31, 2002 balance sheet (see Note 8 for description of long-term debt). Gains realized on the sale of this business will be reported in the period in which the divestiture is complete. The results of operations for Ferronor were as follows (in thousands): [Enlarge/Download Table] For the twelve months ended December 31, 2002 2001 2000 ------- -------- -------- Operating revenue $22,619 $ 22,085 $ 22,873 Income from discontinued operations $ 974 $ 1,590 $ 1,299 Income tax benefit (provision) 10 (108) (50) ------- -------- -------- Income from discontinued operations, net of tax $ 984 $ 1,482 $ 1,249 ======= ======== ======== The major classes of assets and liabilities for Ferronor were as follows (in thousands): For the twelve months ended December 31, 2002 2001 ------- ------- Accounts receivable, net $ 3,767 $ 3,496 Inventory 939 976 Other current assets 1,128 1,215 ------- ------- Total current assets 5,834 5,687 Property, plant and equipment, net 49,857 49,621 Other assets 498 250 ------- ------- Total assets $56,189 $55,558 ======= ======= Current maturities of long- term debt $ 6,743 $ 6,853 Accounts payable 2,003 1,962 Accrued expenses 2,878 3,413 ------- ------- Total current liabilities 11,624 12,228 Long-term debt, less current maturities 12,427 17,230 Subordinated debt 1,670 2,147 Minority interest and other liabilities 13,186 11,709 ------- ------- Total liabilities $38,907 $43,314 ======= ======= In February 2000, the Company finalized its plan to sell its trailer manufacturing operations which consisted of Kalyn/Siebert, L.P. ("KSLP") and Kalyn/Siebert Canada ("KSC"). This business has been accounted for as a discontinued operation and results of operations have been excluded from continuing operations in the consolidated statements of operations for all periods presented. In December 2000, the Company sold KSLP for $32.5 million in cash, including $3.5 million which was in escrow at December 31, 2000. A gain of $21.0 million was recognized. In December 2000, the Company sold substantially all of the assets and business of KSC for $6 million in cash, including $2 million which F-11
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS, continued was in escrow at December 31, 2000. A loss of $2.6 million was recognized. As of December 31, 2002 and 2001, $0 and $2.2 million remained in escrow under terms of the sale agreements. Total revenue for the trailer manufacturing business was $34.7 million for the year ended December 31, 2000. Interest expense of $7.3 million was charged to the manufacturing business in 2000, representing the interest expense for the portion of the asset sale bridge note, which was repaid with the proceeds from the sale of the trailer manufacturing business. Loss before income taxes for the trailer manufacturing business was $4.9 million for the year ended December 31, 2000. 4. ACQUISITIONS On January 4, 2002, the Company acquired StatesRail, Inc. ("StatesRail"), a privately owned group of railroads headquartered in Dallas, Texas, which owned and operated eight railroads (including seven freight railroads and a tourist railroad in Hawaii) with 1,647 miles of track in 11 states. Total consideration for the acquisition was $90 million, consisting of $67 million in cash and 1.7 million shares of the Company's common stock valued at $23 million. At December 31, 2002 there was $4.0 million in escrow outstanding relating to the purchase. The following table presents the balances of each major asset and liability caption of StatesRail as of the acquisition date (in thousands): StatesRail, Inc. January 4, 2002 ---------------- --------------- Cash $ 105 Accounts receivable, net 9,062 Other current assets 2,128 -------- Total current assets 11,295 Property, plant, and equipment, net 110,883 Other assets 4,000 -------- Total assets $126,178 ======== Current portion of long-term debt $ 60 Accounts payable 4,622 Accrued expenses 9,079 -------- Total current liabilities 13,761 Long-term debt 1,457 Deferred income taxes 25,907 -------- Total liabilities $ 41,125 ======== F-12
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACQUISITIONS, continued On January 8, 2002, the Company acquired ParkSierra Corp. ("ParkSierra"), a privately owned group of railroads headquartered in Napa, California, which owned and operated three freight railroads with 703 miles of track in four western states. Total consideration for the acquisition was $48 million, consisting of $23 million in cash and 1.8 million shares of the Company's common stock valued at $25 million. At December 31, 2002 there was $2.1 million in escrow outstanding relating to the purchase. The following table presents the balances of each major asset and liability caption of ParkSierra as of the acquisition date (in thousands): ParkSierra Corp. January 8, 2002 ---------------- --------------- Cash $ 899 Accounts receivable, net 3,793 Other current assets 1,664 ------- Total current assets 6,356 Property, plant, and equipment, net 62,226 ------- Total assets $68,582 ======= Accounts payable $ 1,937 Accrued expenses 1,266 ------- Total current liabilities 3,203 Deferred income taxes 19,055 Other long-term liabilities 108 ------- Total liabilities $22,366 ======= The cash components of the StatesRail and ParkSierra acquisitions were financed through available cash and an additional $50 million term loan under the Company's prior senior credit facility (see Note 8). The results of operations of StatesRail and ParkSierra have been included in the Company's consolidated financial statements since the dates of their respective acquisitions. The following unaudited pro forma summary presents the consolidated results of operations for the Company as if the acquisitions of StatesRail and ParkSierra had occurred at the beginning of 2001 and does not purport to be indicative of what would have occurred had the acquisition been made as of that date or results which may occur in the future (in thousands, except per share data). [Download Table] For the Twelve Months Ended December 31, 2001 -------------- Operating revenue ...................................... $431,735 Income from continuing operations ...................... $ 26,125 Net income ............................................. $ 27,607 Income from continuing operations per share - diluted .. $ 0.86 Net income per share - diluted ......................... $ 0.91 In January 2002, the Company submitted a bid for the acquisition of National Rail and FreightCorp, two government-owned railroads in Australia. Subsequently, the Company was notified that another entity was awarded the bid. Accordingly, the Company recorded a charge in selling, general and administrative expense during the year ended 2002 of $3.3 million for the direct costs incurred in preparing, submitting and financing the bid. F-13
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACQUISITIONS, continued On February 4, 2000, the Company acquired RailTex, Inc. for $128 million in cash, assumption of $105.3 million in debt and 6.6 million shares of the Company's common stock valued at $60.9 million. RailTex, the operator of 25 railroads with over 4,100 miles of rail lines in North America, became a wholly-owned subsidiary of the Company. As part of the purchase price and in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination", the Company recorded liabilities of $11.2 million which related to severance and change of control payments to former RailTex employees. The separation cost activity was as follows (in thousands): Separation Costs ---------------- Balance February 2, 2000 ............ $ 11,200 Payments ............................ (8,259) -------- Balance December 31, 2000 ........... 2,941 Payments ............................ (1,154) Adjustment to purchase price ........ (729) -------- Balance December 31, 2001 ........... 1,058 Payments ............................ (240) -------- Balance December 31, 2002 ........... $ 818 ======== The RailTex acquisition was accounted for as a purchase and its results were included since the date of acquisition. On a pro forma basis (unaudited), as if the acquisition of RailTex had occurred on January 1, 2000, the Company's operating revenue, income from continuing operations and diluted earnings per share would have been $372.0 million, $11.7 million and $0.57, respectively. This does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2000 or of results which may occur in the future. 5. DISPOSITIONS In December 2002, the Company sold a right-of-way in South Carolina for total consideration of $4.25 million consisting of cash of $1.05 million and a short-term note of $3.2 million. The short-term note bears interest at 7.5% and is due on October, 31, 2003. The net gain on the transaction was $3.5 million. In May 2002, the Company sold the Texas New Mexico Railroad and certain operating assets for total consideration of $2.25 million consisting of cash of $0.55 million, a short-term note of $0.85 million and a long-term note of $0.85 million, resulting in a net gain of $0.8 million which is included in discontinued operations. The results of operations for the Texas New Mexico Railroad were not material. The short-term note accrued interest at 10% and was due on November 15, 2002 and the long-term note accrues interest at 7% and is due on May 24, 2007. In December 2002, $0.4 million was paid on the short-term note, $0.15 million was added to the long-term note due on May 24, 2007 and the remaining balance of $0.3 million was extended until December 11, 2006 at an interest rate of 7%. In March 2002, the Company sold the Georgia Southwestern Railroad and certain operating assets for total consideration of $7.1 million, including a long-term note for $0.8 million, resulting in a gain of $4.5 million. The note receivable bears interest at 5% and is due February 28, 2007. The results of operations for the Georgia Southwestern Railroad were not material. During 2001, the Company sold Dakota Rail, Inc. for $7.6 million, resulting in a net gain of $3.9 million. In addition, the Company sold other non-core assets resulting in a net gain of $2.5 million. During 2000, the Company sold several railroads and other non-core assets for total proceeds of $44.0 million, resulting in a net gain of $11.2 million. F-14
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER BALANCE SHEET DATA Other current assets consist of the following as of December 31, 2002 and 2001 (in thousands): 2002 2001 ------- ------- Track supplies ................... $13,889 $ 7,702 Prepaid expenses and other ....... 8,540 6,502 ------- ------- $22,429 $14,204 ======= ======= Accrued expenses consist of the following as of December 31, 2002 and 2001 (in thousands): 2002 2001 ------- ------- Accrued interest expense ......... $ 8,254 $ 8,382 Accrued compensation and benefits 8,625 5,893 Other accrued liabilities ........ 21,541 25,614 ------- ------- $38,420 $39,889 ======= ======= 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following as of December 31, 2002 and 2001 (in thousands): 2002 2001 -------- -------- Land ............................. $182,004 $133,643 Buildings and improvements ....... 18,747 15,963 Railroad track and improvements 638,743 504,491 Locomotives, transportation and other equipment ................. 152,426 147,489 -------- -------- 991,920 801,586 Less: accumulated depreciation ... 87,667 62,811 -------- -------- $904,253 $738,775 ======== ======== The Company completed $8.4 million in locomotive sale/leaseback transactions in 2001. 8. LONG-TERM DEBT AND LEASES Long-term debt consists of the following as of December 31, 2002 and 2001 (in thousands): [Download Table] 2002 2001 -------- -------- Senior credit facilities, see below ................... $375,000 $267,752 Credit facility with Banco de Desarrollo (Ferronor) ... -- 11,678 Credit facility with Banco Security (Ferronor) ........ -- 7,325 Other long-term debt .................................. 12,321 14,932 -------- -------- 387,321 301,687 Less current maturities ............................... 4,200 24,484 -------- -------- Long-term debt, less current maturities ........... $383,121 $277,203 ======== ======== In May 2002, the Company refinanced its senior credit facility, including $50 million borrowed in connection with the January 2002 acquisitions of ParkSierra and StatesRail. The new senior debt facility includes a $375 million Term B loan facility consisting of $265 million of U.S. Term Loans, $50 million of Canadian Term Loans and $60 million of Australia Term Loans with a 1% annual principal amortization for seven years and the balance due in 2009, and a $100 million revolver with sub-limits equal to $82.5 million in the United States, $10 million in Canada and $7.5 million in Australia. The revolver is due in F-15
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES, continued 2008. The interest rate on the Term B debt and the revolver is LIBOR + 2.50% (4.00% at December 31, 2002). There were no outstanding balances under the revolver at December 31, 2002. The senior credit facility is collateralized by substantially all of the assets of the Company, excluding its investment in Ferronor. The senior credit facility and the indenture governing our senior subordinated notes include numerous covenants imposing significant financial and operating restrictions on the Company. The covenants limit the Company's ability to, among other things: incur more debt or prepay existing debt, redeem or repurchase the Company's common stock, pay dividends or make other distributions, make acquisitions or investments, use assets as security in other transactions, enter into transactions with affiliates, merge or consolidate with others, dispose of assets or use asset sale proceeds, create liens on the Company's assets, make certain payments or capital expenditures and extend credit. In addition, the senior credit facility also contains financial covenants that require the Company to meet a number of financial ratios and tests. The Company was in compliance with each of these covenants as of December 31, 2002. During the year ended December 31, 2001, the Company prepaid $19.1 million of long-term debt with cash received from the sale of common stock. Based on this reduction, an extraordinary charge of approximately $0.2 million, net of income tax of $0.1 million, was recorded in the third quarter of 2001 from the write-off of deferred loan costs from this early extinguishment of debt. In February 2000, the Company entered into a credit agreement and two bridge notes in connection with the acquisition of RailTex and the refinancing of most of the Company's and RailTex's existing debt. The credit agreement provided (i) a $125 million Term A loan, bearing interest at LIBOR plus 2.50% (4.44% at December 31, 2001), (ii) a $205 million Term B loan, initially bearing interest at LIBOR plus 3.25% (5.19% at December 31, 2001), and (iii) a $50 million revolving credit facility which included $30 million of U.S. dollar denominated loans, $10 million of Canadian dollar denominated loans and $10 million of Australian dollar denominated loans with an interest rate of LIBOR plus 2.50%. All of the capital stock of the Company's U.S. subsidiaries, 65% of the capital stock of the Canadian and Australian subsidiaries and the majority of the assets of the Company's subsidiaries served as collateral for the senior credit facilities. These term loans were repaid in connection with the May 2002 refinancing discussed above. In connection with the February 2000 debt refinancing, the Company recorded an extraordinary charge of $2.2 million for early extinguishments of debt, net of income taxes. The aggregate annual maturities of long-term debt are as follows (in thousands): 2003 ..................................... $ 4,200 2004 ..................................... 4,344 2005 ..................................... 4,448 2006 ..................................... 4,493 2007 ..................................... 4,543 Thereafter ............................... 365,293 -------- $387,321 ======== During the years ended December 31, 2002, 2001 and 2000 interest of approximately $584, $668, and $1,257, respectively, was capitalized for on-going capital improvement projects. On May 4, 2000, the Company entered into two interest rate swap agreements for a total notional amount of $212.5 million. The agreements, which had a term of three years, required the Company to pay a fixed interest rate of 7.23% while receiving a variable interest rate equal to the 90 day LIBOR rate. In May 2001, the interest rate swap agreements were extended for two years and the fixed pay rate was reduced to 6.723%. In connection with the refinancing in May 2002, the Company terminated these existing interest F-16
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES, continued rate swaps. Because these hedging instruments were designated as hedges of the cash flows under the previous senior debt facility, SFAS No. 133 required the entire balance in other accumulated comprehensive loss to be charged to earnings. Accordingly, a charge of $17.1 million was recorded in other income (expense) during the year ended December 31, 2002. In addition, the Company recorded an extraordinary charge of $4.5 million, net of income taxes of $2.2 million, to write off the unamortized deferred loan costs relating to the prior senior credit facility, as of the date of refinancing. In connection with the refinancing of the senior credit facility in May, the Company, as required under its new senior credit facility, entered into two step-up collars for a total notional amount of $75 million with an effective date of November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the LIBOR component of the Company's interest rates can fluctuate within specified ranges. From November 24, 2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify and are accounted for as cash flow hedges under SFAS No. 133. On November 8, 2002, the Company entered into two interest rate swaps for a total amount of $300 million for the period commencing December 5, 2002 through December 5, 2003. Under the terms of the interest rate swaps, the LIBOR component of the Company's interest rate is fixed at 1.62% on $300 million of debt. The swaps qualify and are accounted for as cash flow hedges under SFAS No. 133. Leases The Company has several equipment finance leases for equipment. Certain of these leases are accounted for as capital leases and are presented separately below. The minimum annual lease commitments at December 31, 2002 are as follows (in thousands): CAPITAL OPERATING LEASES LEASES ------- --------- 2003 ............................. $ 80 $19,417 2004 ............................. 204 17,238 2005 ............................. 288 16,463 2006 ............................. 311 14,425 2007 ............................. 337 12,591 Thereafter ....................... 400 17,836 ------- ------- $ 1,620 $97,970 ======= ======= Rental expense under operating leases was approximately $24.4 million, $16.0 million, and $9.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. F-17
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES, continued The following table presents Ferronor's long-term debt balances, which are included in Long-term liabilities of discontinued operations in the balance sheet for the year ended December 31, 2002 (in thousands): [Download Table] 2002 2001 ------- ------- Credit facility with Banco de Desarrollo, see below ... 9,491 11,678 Credit facility with Banco Security, interest rate rate of 4.50% - 7.00% ................................. 5,813 7,325 Other long-term debt .................................. 3,866 5,080 ------- ------- 19,170 24,083 Less current maturities ............................... 6,743 6,853 ------- ------- Long-term debt, less current maturities ........... $12,427 $17,230 ======= ======= In February 1999, Ferronor refinanced certain short-term debt with Banco de Desarrollo. The refinancing consists of two credit lines. The first credit line is a $5.0 million facility which bears interest at the interbank cost plus 1.75% (9.05% at December 31, 2002) with interest to be paid over 120 equal monthly installments and principal to be paid over 96 equal installments beginning two years from the funding. The second credit line is a $7.7 million facility which bears interest at LIBOR plus 2.75% (4.25% at December 31, 2002) and is payable in 120 equal monthly installments (including interest). 9. SUBORDINATED DEBT In August 2000, RailAmerica Transportation Corp. ("RTC"), a wholly-owned subsidiary of the Company, sold units consisting of $130.0 million of 12-7/8% senior subordinated notes due 2010 and warrants to purchase 1,411,414 shares of the Company's common stock in a private offering, for gross proceeds of $122.2 million after deducting the initial purchasers' discount. All of the Company's U.S. subsidiaries are guarantors of the senior subordinated notes. The net proceeds received from the issuance of the units were used to pay $115.0 million of then-existing debt and approximately $1.8 million of term loans under the Company's senior credit facilities, resulting in an extraordinary charge of $1.8 million, net of taxes, associated with the early extinguishment of debt. The warrants, which have an exercise price of $6.60 per share and expire on August 15, 2010, were valued at $5.1 million and are being amortized as additional interest expense over ten years, the term of the senior subordinated notes. Prior to August 15, 2003, the Company may redeem up to 35% of the senior subordinated notes at a redemption price of 112.875% of their principal amount with the proceeds from an equity offering. From August 16, 2003 through August 14, 2005, the Company may not redeem the senior subordinated notes and subsequent to August 14, 2005, the Company may redeem the senior subordinated notes for 106.438% of their principal amount. The premium reduces annually on a sliding scale until they may be redeemed at their principal amount commencing August 15, 2008. In June 2000, the Company engaged an investment banking firm to assist the Company's Board of Directors in evaluating the issuance of the senior subordinated notes, for which it issued three-year warrants to purchase 150,000 shares of the Company's common stock. Of these warrants, 75,000 are at an exercise price of $5.50 and 75,000 are at an exercise price of $6.50. These warrants were exercised during 2001. In August 1999, the Company issued $22.5 million aggregate principal amount of junior convertible subordinated debentures. Interest on the debentures accrues at the rate of 6% per annum and is payable F-18
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. SUBORDINATED DEBT, continued semi-annually. The debentures are convertible, at the option of the holder, into shares of RailAmerica at a conversion price of $10. The debentures which mature on July 31, 2004, are general unsecured obligations and rank subordinate in right of payment to all senior indebtedness. At RailAmerica's option, the debentures may be redeemed at par plus accrued interest, in whole or in part, if the closing price of RailAmerica's common stock is above $20 for 10 consecutive trading days. During 2001 and 2000, $0.39 million and $0.35 million, respectively, of the junior convertible subordinated debentures were converted into common stock. The Company recognized a $2.3 million charge in the fourth quarter of 2000 for the beneficial conversion feature included in the junior convertible subordinated debentures. This charge is shown as the cumulative effect of an accounting change. 10. COMMON STOCK TRANSACTIONS In December 2001, the Company closed on the private placement sale of 4.3 million shares of its common stock for $12.50 per share, resulting in net proceeds of $51.5 million. The proceeds from this private placement were used to finance the StatesRail and ParkSierra acquisitions, which are described in Note 4, as well as the reduction of debt and other general corporate purposes. In connection with this private placement, the Company issued 18-month warrants to purchase 100,000 shares of common stock at an exercise price of $13.75 per share to the placement agents. In June 2001, the Company closed on the private placement sale of 3.8 million shares of its common stock for $10.75 per share, resulting in net proceeds of $38.2 million. The proceeds from this private placement were used to reduce debt and for general corporate purposes. In connection with this private placement, the Company issued 18-month warrants to purchase 200,000 shares of common stock at an exercise price of $11.825 per share to the placement agents. The Company occasionally repurchases its common stock under its share repurchase program. Such repurchases are limited to $5 million per year pursuant to its borrowing arrangements. In July 2002, the Board of Directors authorized a 2 million share repurchase program through December 31, 2003, subject to restrictions under the Company's borrowing arrangements. During the year ended December 31, 2002, the Company repurchased 530,500 shares at a total cost of $4.9 million. As of December 31, 2002, the Company has a total of 3,069,564 warrants outstanding with exercise prices ranging from $6.60 to $13.75 and with expiration dates ranging from March 26, 2003 to August 15, 2010. 11. INCOME TAX PROVISION Income from continuing operations before income taxes for the years ended December 31, 2002, 2001 and 2000 consists of (in thousands): 2002 2001 2000 ------- ------- -------- Domestic ................ $ 1,608 $ 5,743 $(19,539) Foreign subsidiaries .... 6,548 14,946 30,798 ------- ------- -------- $ 8,156 $20,689 $ 11,259 ======= ======= ======== F-19
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAX PROVISION, continued The provision for income taxes for the years ended December 31, 2002, 2001 and 2000 consists of (in thousands): 2002 2001 2000 ------- ------- ------- Federal income taxes: Current .................... $ -- $ -- $ 334 Deferred ................... (2,341) 801 2,494 ------- ------- ------- (2,341) 801 2,828 ------- ------- ------- State income taxes: Current .................... 1,140 437 700 Deferred ................... (795) 565 (1,548) ------- ------- ------- 345 1,002 (848) ------- ------- ------- Foreign income taxes Current .................... 2,140 1,500 2,435 Deferred ................... 733 4,737 1,535 Change in tax law .......... -- (3,177) -- ------- ------- ------- 2,873 3,060 3,970 ------- ------- ------- Total income tax provision ... $ 877 $ 4,863 $ 5,950 ======= ======= ======= The following summarizes the total income tax provisions for each of the years ended December 31, 2002, 2001 and 2000 (in thousands): 2002 2001 2000 ------- ------- ------- Continuing operations ........ $ 2,893 $ 4,897 $ 2,900 Discontinued operations ...... 151 108 5,250 Extraordinary item ........... (2,167) (142) (2,200) ------- ------- ------- Total income tax provision ... $ 877 $ 4,863 $ 5,950 ======= ======= ======= The differences between the U.S. federal statutory tax rate and the Company's effective rate from continuing operations are as follows (in thousands): [Download Table] 2002 2001 2000 ------- ------- ------- Income tax provision, at 35% ................... $ 2,854 $ 7,242 $ 3,951 Net benefit due to difference between U.S. & Foreign tax rates .......................... 155 (408) (15) Net benefit due to tax law changes in Canada ... -- (3,177) -- Amortization of non-deductible warrants ........ -- -- (602) Permanent differences .......................... (815) -- -- State income taxes, net ........................ (785) -- -- Other, net ..................................... (208) 610 (345) Valuation allowance ............................ 1,692 630 (89) ------- ------- ------- Tax provision .................................. $ 2,893 $ 4,897 $ 2,900 ======= ======= ======= The Company files a consolidated U.S. income tax return with its domestic subsidiaries. For state income tax purposes, the Company and each of its domestic subsidiaries generally file on a separate return basis in the states in which they do business. The Company's foreign subsidiaries file income tax returns in their respective jurisdictions. F-20
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAX PROVISION, continued The components of deferred income tax assets and liabilities as of December 31, 2002 and 2001 are as follows (in thousands): 2002 2001 --------- --------- Deferred tax assets: Net operating loss carryforward ...... $ 44,346 $ 26,178 Alternative minimum tax credit ....... 783 783 Accrued expenses ..................... 5,889 12,973 Other ................................ -- 24 --------- --------- Total deferred tax assets ........ 51,018 39,958 Less: valuation allowance ............ (5,563) (3,357) --------- --------- Total deferred tax assets, net ... 45,455 36,601 Deferred tax liabilities: Property, plant and equipment ........ 195,543 132,806 Deferred revenue ..................... 71 617 Net deferred tax liability ....... $(150,159) $ (96,822) ========= ========= The liability method of accounting for deferred income taxes requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. It is management's belief that it is more likely than not that a portion of the deferred tax assets will not be realized. The Company has established a valuation allowance of $5.6 million at December 31, 2002 and $3.4 million at December 31, 2001. The following is a summary of net operating loss carryforwards by jurisdiction as of December 31, 2002 (in thousands): AMOUNT EXPIRATION PERIOD ------- ----------------- U.S. - Federal $ 72,942 2011 - 2022 U.S. - State 164,037 2003 - 2022 Luxembourg 21 None Australia 34,656 None Canada 6,569 2003 - 2009 -------- $278,225 ======== As part of certain acquisitions, the Company acquired net operating loss carryforwards for federal and state income tax purposes. The utilization of the acquired tax loss carryforwards may be limited by the Internal Revenue Code Section 382. These tax loss carryforwards expire in the years 2003 through 2020. No provision was made in 2002 for U.S. income taxes on undistributed earnings of the Canadian or Australian subsidiaries as it is the intention of management to utilize those earnings in their respective operations for an indefinite period of time. 12. STOCK OPTIONS The Company has stock option plans under which employees and non-employee directors may be granted options to purchase shares of the Company's common stock at the fair market value at the date of grant. Options generally vest in two or three years and expire in ten years from the date of the grant. The Company has adopted the disclosure-only provisions of SFAS No. 123. See Note 1 for the total compensation costs that would have been recognized in 2002, 2001, and 2000 if the stock options issued were valued based on the fair value at the grant date. F-21
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK OPTIONS, continued 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 2002, 2001 and 2000: dividend yield 0.0%, 0.0% and 0.0%; expected volatility of 46%, 41% and 41%; risk-free interest rate of 3.0%, 4.6% and 6.5%; and expected lives of 5, 5 and 5 years. The weighted average fair value of options granted for 2002, 2001 and 2000 were $4.52, $5.03, and $4.75, respectively. Information regarding the above options for 2002, 2001 and 2000 is as follows: [Download Table] WEIGHTED WEIGHTED NUMBER OF AVERAGE NUMBER OF AVERAGE OUTSTANDING EXERCISE SHARES EXERCISE SHARES PRICE EXERCISABLE PRICE ----------- -------- ----------- -------- Outstanding at January 1, 2000 .... 1,840,000 $ 6.34 Granted ........................... 1,882,558 $ 8.08 Exercised ......................... (48,969) $ 4.78 Forfeited ......................... (222,498) $ 7.64 --------- --------- Outstanding at December 31, 2000 .. 3,451,091 $ 7.23 1,937,858 $6.50 ========= Granted ........................... 1,494,289 $11.72 Exercised ......................... (936,223) $ 5.31 Forfeited ......................... (62,855) $ 7.74 --------- --------- Outstanding at December 31, 2001 .. 3,946,302 $ 9.37 2,557,233 $8.70 --------- ========= Granted ........................... 1,876,000 $10.31 Exercised ......................... (82,912) $ 6.79 Forfeited ......................... (98,159) $11.02 --------- --------- Outstanding at December 31, 2002 .. 5,641,231 $ 9.69 3,921,857 $9.25 --------- ========= Authorized at December 31, 2002 ... 6,113,893 ========= The following table summarizes information about stock options outstanding at December 31, 2002: [Enlarge/Download Table] OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICE OF OPTIONS LIFE PRICE OF OPTIONS PRICE ------------- ---------- ----------- -------- ---------- -------- $3.50-$5.00 178,200 3.19 $ 4.53 178,200 $ 4.53 $5.01-$7.50 483,577 6.65 $ 6.52 483,577 $ 6.52 $7.51-$10.00 1,813,954 6.64 $ 8.77 1,777,892 $ 8.78 $10.01-$14.45 3,165,500 9.07 $11.00 1,482,188 $11.28 --------- ---------- 5,641,231 3,921,857 ========= ========== The Company maintains an Employee Stock Purchase Plan for all full-time employees. Each employee may have payroll deductions as a percentage of their compensation, not to exceed $25,000 per year. The purchase price equals 85% of the fair market value of a share of the Company's common stock on certain dates during the year. For the years ended December 31, 2002, 2001 and 2000, 25,081, 21,943 and 11,749 shares of common stock, respectively, were sold to employees under this plan. F-22
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. NON-CASH INVESTING AND FINANCING ACTIVITIES Cash paid for interest from continuing operations during 2002, 2001 and 2000 was $41.0 million, $54.6 million and $41.2 million, respectively. Cash paid (received) for income taxes during 2002, 2001 and 2000 was $0.2 million, $(1.1) million and $4.0 million, respectively. The following table summarizes the net cash used in acquisitions, net of cash acquired, for the years ended December 31, 2002, 2001, and 2000 (in thousands): [Download Table] 2002 2001 2000 --------- ----- --------- Common stock issued for businesses acquired ...... $ 40,905 $ -- $ 60,773 Debt issued for business acquired ................ -- -- 105,376 Details of acquisitions: Working capital components, other than cash .. 316 -- 6,109 Property and equipment ....................... (173,099) -- (390,468) Other assets ................................. (9) -- (6,980) Goodwill ..................................... (4,000) -- -- Notes payable and loans payable .............. 1,565 -- 3,148 Deferred income taxes payable ................ 44,963 -- 73,120 --------- ----- --------- Net cash used in acquisitions .................... $ (89,359) $ -- $(148,922) ========= ===== ========= 14. FAIR VALUE OF FINANCIAL INSTRUMENTS On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and recorded a cumulative transition charge of $4.4 million, net of tax, to Accumulated Other Comprehensive Loss ("AOCL"). The standard requires that all derivatives be recorded on the balance sheet at fair value and establishes criteria for documentation and measurement of hedging activities. The Company currently uses derivatives to hedge against increases in fuel prices and interest rates. The Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as cash flow hedges to specific assets or liabilities on the balance sheet, commitments or forecasted transactions. The Company assesses at the time a derivative contract is entered into, and at least quarterly, whether the derivative item is effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in AOCL as a separate component of Stockholders' Equity and reclassified into earnings in the period during which the hedge transaction affects earnings. The Company monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. Fuel costs represented 7% of total revenues during 2002. Due to the significance of fuel expenses to the operations of the Company and the historical volatility of fuel prices, the Company periodically hedges against fluctuations in the price of its fuel purchases. Each one-cent increase in the price of fuel would result in $0.4 million of additional fuel expense on a monthly basis. The fuel hedging program includes the use of derivatives that are accounted for as cash flow hedges. As of December 31, 2002, the Company entered into a fuel swap agreement to hedge 750,000 gallons per month F-23
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued in 2003 (35% of estimated North American consumption) at an average price of 66 cents per gallon, excluding transportation and taxes. The fair value of the fuel swap was a net receivable of 0.8 million at December 31, 2002. Interest on the Company's senior credit facility is payable at variable rates indexed to LIBOR. To partially mitigate the volatility of LIBOR, the Company entered into two interest rate swaps in May 2000. These swaps were accounted for as cash flow hedges under SFAS No. 133 and qualified for the short cut method of recognition. The interest rate swaps locked in a LIBOR rate of 7.23% on $212.5 million of debt for a three-year period. In 2001, the Company extended the interest rate swaps for two years and reduced the LIBOR rate to 6.723%. As noted in Note 8, the Company terminated its interest rate swaps and reclassified $17.1 million from accumulated other comprehensive loss against earnings during the year ended 2002, in connection with the refinancing of the senior credit facility. In June 2002, the Company, as required under its new senior credit facility, entered into two step-up collars for a total notional amount of $75 million with an effective date of November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the LIBOR component of the Company's interest rates can fluctuate within specified ranges. From November 24, 2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify and are accounted for as cash flow hedges under SFAS No. 133. The fair value of these collars was a net liability of $1.9 million at December 31, 2002. On November 8, 2002, the Company entered into two interest rate swaps for a total amount of $300 million for the period commencing December 5, 2002 through December 5, 2003. Under the terms of the interest rate swaps, the LIBOR component of the Company's interest rate is fixed at 1.62% on $300 million of debt. The swaps qualify and are accounted for as cash flow hedges under SFAS No. 133. The fair value of these swaps was a net liability of $0.6 million at December 31, 2002. Were the Company to refinance the debt with terms different than the terms of the debt currently hedged, the hedged transaction would no longer be effective and any deferred gains or losses would be immediately recognized into income. Fluctuations in the market interest rate will affect the cost of our remaining borrowings. Excluding the impact of our interest rate hedges, a 1% increase in interest rates would result in a $3.8 million increase in interest expense. At December 31, 2002, AOCL included a $1.7 million charge, net of taxes, relating to the interest rate collars and swaps. Management believes that the fair value of its senior long-term debt approximates its carrying value based on the variable rate nature of the financing, and for all other long-term debt based on current borrowing rates available with similar terms and maturities. The fair value of the senior subordinated notes is $136.5 million as of December 31, 2002, based on the quoted market price. F-24
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION AND OTHER BENEFIT PROGRAMS The Company maintains a pension plan for a majority of its Canadian railroad employees, with both defined benefit and defined contribution components. DEFINED BENEFIT - The defined benefit component applies to approximately 60 employees who transferred employment directly from Canadian Pacific Railway Company ("CPR") to a subsidiary of RailLink, Ltd. The defined benefit portion of the plan is a mirror plan of CPR's defined benefit plan. The employees that transferred and joined the mirror plan were entitled to transfer or buy back prior years of service. As part of the arrangement, CPR transferred to the Company the appropriate value of each employee's pension entitlement. The following chart summarizes the benefit obligations, assets, funded status and rate assumptions associated with the defined benefit plan for the years ended December 31, 2002 and December 31, 2001 (in thousands): [Enlarge/Download Table] January 1, 2002 to January 1, 2001 to January 1, 2000 to December 31, 2002 December 31, 2001 December 31, 2000 ----------------- ----------------- ----------------- EXCHANGE RATE BEGINNING OF YEAR ................... $ 0.63 $ 0.67 $ 0.69 EXCHANGE RATE END OF YEAR ......................... $ 0.63 $ 0.63 $ 0.67 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of period ......... $ 3,282 $ 3,114 $ 2,853 Service cost ...................................... 64 60 62 Interest cost ..................................... 230 205 194 Plan participants' contributions .................. 96 89 91 Actuarial loss .................................... 244 0 0 Benefits paid ..................................... (6) 0 (3) Foreign currency exchange rate changes ............ 0 (186) (83) ------- ------- ------- Benefit obligation at end of period ............... $ 3,910 $ 3,282 $ 3,114 ======= ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of period .. $ 3,164 $ 3,201 $ 2,655 Actual return on plan assets ...................... (291) (54) 388 Employer contribution ............................. 100 101 106 Plan participants' contributions .................. 97 106 132 Benefits paid ..................................... (6) 0 (3) Foreign currency exchange rate changes ............ 0 (190) (77) ------- ------- ------- Fair value of plan assets at end of period ........ $ 3,064 $ 3,164 $ 3,201 ======= ======= ======= Funded status - (accrued) benefit cost ............ $ (846) $ (118) $ 87 ======= ======= ======= ASSUMPTIONS Discount rate ..................................... 6.50% 7.00% 7.00% Expected return on plan assets .................... 7.00% 8.00% 8.00% Rate of compensation increase ..................... 4.00% 4.50% 4.50% COMPONENTS OF NET PERIODIC BENEFIT COST IN PERIOD Service cost ...................................... $ 64 $ 60 $ 62 Interest cost ..................................... 230 205 194 Expected return on plan assets .................... (222) (241) (206) Amortization of prior service cost ................ 15 15 16 ------- ------- ------- Net periodic pension cost ......................... $ 87 $ 39 $ 66 ======= ======= ======= F-25
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION AND OTHER BENEFIT PROGRAMS, continued Freight Australia's employees participate in the Victorian government's superannuation funds. The contributions made by Freight Australia are as follows for the year ended December 31, 2002, 2001 and December 31, 2000 (in thousands): 2002 2001 2000 ------ ------ ------ Total contributions ...... $2,012 $1,566 $1,536 ====== ====== ====== DEFINED CONTRIBUTION - The defined contribution component applies to a majority of the Company's Canadian railroad employees that are not covered by the defined benefit component. The Company contributes 3% of a participating employee's salary to the plan. Pension expense for the year ended December 31, 2002, 2001 and 2000 for the defined contribution members was $0.5 million, $0.3 million and $0.2 million, respectively. PROFIT SHARING PLAN - The Company maintains a contributory profit sharing plan as defined under Section 401(k) of the U.S. Internal Revenue Code. The Company made contributions to this plan at a rate of 50% of the employees' contribution up to a maximum annual contribution of $1,500 per eligible employee. An employee becomes 100% vested with respect to the employer contributions after completing five years of service. Employer contributions during the years ended December 31, 2002, 2001 and 2000 were approximately $644,000, $484,000 and $286,000, respectively. 16. COMMITMENTS AND CONTINGENCIES In 2000, certain parties filed property damage claims totaling approximately $32.5 million against RaiLink Ltd. and RaiLink Canada Ltd., wholly-owned subsidiaries of RailAmerica, and others in connection with fires that allegedly occurred in 1998. The Company is vigorously defending these claims, and has insurance coverage to approximately $13.0 million to cover these claims. It is the opinion of management that the ultimate liability, if any, with respect to these matters will fall within the insurance coverage and that these claims will not have a material adverse effect on the Company's financial position, results of operations or cash flows. In the ordinary course of conducting its business, the Company becomes involved in various legal actions and other claims, which are pending or could be asserted against the Company. Litigation is subject to many uncertainties, the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of these matters may be decided unfavorably to the Company. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company has a $4.7 million contingent obligation, under certain events of default or if line abandonment occurs, to the Canadian National Railroad in connection with its properties. The contingent obligation bears no interest and has no pre-defined terms of payment or maturity. The Company's operations are subject to extensive environmental regulation. The Company records liabilities for remediation and restoration costs related to past activities when the Company's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company's recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. During the fourth quarter of 2001, the Company reduced its environmental liability by $1.9 million due to a change in environmental regulations. The remaining liabilities are not material. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. F-26
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. SEGMENT INFORMATION The Company's continuing operations have been classified into two business segments: North American rail transportation and International rail transportation. The North American rail transportation segment includes the operations of the Company's railroad subsidiaries in the United States and Canada, as well as corporate expenses. The international segment has been restated for the exclusion of the Chilean operations except for total assets and capital expenditures, due to its reclassification to discontinued operations. Business and geographical segment information for the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands): YEAR ENDED DECEMBER 31, 2002: [Enlarge/Download Table] NORTH AMERICA INTERNATIONAL ------------- ------------- CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA ------------ ------------- -------- ------- --------- Revenue ................ $ 428,243 $274,251 $ 59,077 $ -- $ 94,915 Depreciation and amortization ......... $ 33,158 $ 18,428 $ 3,875 $ -- $ 10,855 Income before income taxes ......... $ 8,156 $ 1,608 $ 4,404 $ -- $ 2,144 Interest expense ....... $ 43,441 $ 37,073 $ 3,414 $ -- $ 2,954 Total assets ........... $1,106,553 $715,615 $141,853 $56,189 $192,876 Capital expenditures ... $ 65,682 $ 37,980 $ 8,587 $ 2,021 $ 17,094 YEAR ENDED DECEMBER 31, 2001: [Enlarge/Download Table] NORTH AMERICA INTERNATIONAL ------------- ------------- CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA ------------ ------------- -------- ------- --------- Revenue ................ $ 347,546 $184,216 $ 61,900 $ -- $101,430 Depreciation and amortization ......... $ 24,393 $ 13,938 $ 3,523 $ -- $ 6,932 Income before income taxes ......... $ 20,689 $ 5,743 $ 2,271 $ -- $ 12,675 Interest expense ....... $ 50,714 $ 43,893 $ 6,565 $ -- $ 256 Total assets ........... $ 891,168 $630,607 $ 87,952 $59,342 $113,267 Capital expenditures ... $ 61,675 $ 29,148 $ 9,869 $ 2,444 $ 20,214 YEAR ENDED DECEMBER 31, 2000: [Enlarge/Download Table] NORTH AMERICA INTERNATIONAL ------------- ------------- CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA ------------ ------------- -------- ------- --------- Revenue ................ $ 334,615 $169,354 $ 63,057 $ -- $102,204 Depreciation and amortization ......... $ 23,322 $ 14,052 $ 3,832 $ -- $ 5,438 Income (loss) before income taxes ......... $ 11,259 $(19,539) $ 13,752 $ -- $ 17,046 Interest expense ....... $ 53,912 $ 53,010 $ 431 $ -- $ 471 Total assets ........... $ 839,703 $635,746 $ 83,724 $57,629 $ 62,604 Capital expenditures ... $ 62,499 $ 24,566 $ 9,570 $10,018 $ 18,345 F-27
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. UNAUDITED QUARTERLY FINANCIAL DATA All quarterly financial data has been restated for the inclusion of Ferronor's results in discontinued operations. Quarterly financial data for 2002 is as follows (in thousands, except per share amounts): [Download Table] FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- --------- -------- -------- Operating revenue ................... $105,811 $ 109,766 $108,488 $104,178 Operating income .................... $ 19,574 $ 20,538 $ 17,761 $ 12,632 Income(loss) from continuing operations ........................ $ 4,899 $ (7,094) $ 5,582 $ 1,876 Net income (loss) ................... $ 5,143 $ (10,725) $ 5,913 $ 1,822 Basic income (loss) from continuing operations per share ... $ 0.15 $ (0.22) $ 0.17 $ 0.06 Diluted income (loss) from continuing operations per share ... $ 0.15 $ (0.22) $ 0.17 $ 0.06 Quarterly financial data for 2001 is as follows (in thousands, except per share amounts): [Download Table] FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- --------- -------- -------- Operating revenue ................... $ 85,875 $ 88,008 $ 87,842 $ 85,821 Operating income .................... $ 17,008 $ 18,888 $ 18,794 $ 16,535 Income from continuing operations ........................ $ 2,408 $ 3,734 $ 4,626 $ 5,024 Net income .......................... $ 2,787 $ 4,153 $ 4,919 $ 5,179 Basic income from continuing operations per share ... $ 0.13 $ 0.20 $ 0.19 $ 0.20 Diluted income from continuing operations per share ... $ 0.12 $ 0.19 $ 0.18 $ 0.19 F-28
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION In August 2000, RailAmerica Transportation Corp. ("Issuer"), a wholly-owned subsidiary of RailAmerica, Inc. ("Parent"), sold units including 12 7/8% senior subordinated notes, which are registered with the Securities and Exchange Commission. The notes are guaranteed by the Parent, the domestic subsidiaries of the Issuer and Palm Beach Rail Holdings, Inc. RAILAMERICA, INC. Consolidating Balance Sheet At December 31, 2002 (in thousands) [Enlarge/Download Table] NON COMPANY GUARANTOR GUARANTOR ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------ ------------ ------------ ASSETS Current Assets: Cash ................................... $ -- $ 8,895 $ 369 $ 19,623 $ -- $ 28,887 Cash held in escrow .................... -- 245 -- 126 -- 371 Accounts and notes receivable .......... -- 654 39,984 22,825 -- 63,463 Current assets of discontinued operations ........................... -- -- -- 5,834 5,834 Other current assets ................... -- 3,243 13,660 5,526 -- 22,429 --------- --------- -------- --------- --------- ----------- Total current assets ............. -- 13,037 54,013 53,934 -- 120,984 --------- --------- -------- --------- --------- ----------- Property, plant and equipment, net ....... 42 1,374 620,534 282,303 -- 904,253 Long-term assets of discontinued operations ............................. -- -- 50,355 50,355 Other assets ............................. 16,892 1,163 8,136 4,770 -- 30,961 Investment in and advances to affiliates . 292,664 272,696 112,671 (4,623) (673,409) -- --------- --------- -------- --------- --------- ----------- Total assets ..................... $ 309,598 $ 288,271 $795,354 $ 386,739 $(673,409) $ 1,106,553 ========= ========= ======== ========= ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ... $ 2,650 $ -- $ 450 $ 1,100 $ -- $ 4,200 Accounts payable ....................... 149 988 30,512 15,073 -- 46,722 Accrued expenses ....................... 7,135 3,020 21,558 6,707 -- 38,420 Current liabilities of discontinued operations ........................... -- -- -- 11,624 -- 11,624 --------- --------- -------- --------- --------- ----------- Total current liabilities ........ 9,934 4,008 52,520 34,504 -- 100,966 --------- --------- -------- --------- --------- ----------- Long-term debt, less current maturities .. 262,350 -- 11,871 108,900 -- 383,121 Subordinated debt ........................ 120,224 21,107 -- -- -- 141,331 Deferred income taxes .................... (20,251) (15,747) 154,331 31,826 -- 150,159 Long-term liabilities of discontinued operations ............................. -- -- -- 27,283 -- 27,283 Other liabilities ........................ 2,504 -- 7,803 14,483 -- 24,790 Stockholders' equity: Common stock ........................... -- 32 3,263 63,589 (66,852) 32 Additional paid-in capital ............. 758 261,372 433,564 66,715 (501,037) 261,372 Retained earnings ...................... (64,268) 48,055 131,527 53,003 (120,262) 48,055 Accumulated other comprehensive Income .............................. (1,653) (30,556) 475 (13,564) 14,742 (30,556) --------- --------- -------- --------- --------- ----------- Total stockholders' equity ....... (65,163) 278,903 568,829 169,743 (673,409) 278,903 --------- --------- -------- --------- --------- ----------- Total liabilities and stockholders' equity ........... $ 309,598 $ 288,271 $795,354 $ 386,739 $(673,409) $ 1,106,553 ========= ========= ======== ========= ========= =========== F-29
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC. Consolidating Statement of Income For the year ended December 31, 2002 (in thousands) [Enlarge/Download Table] NON COMPANY GUARANTOR GUARANTOR ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------ ------------ ------------ Operating revenue ........................ $ -- $ -- $274,251 $ 153,992 $ -- $ 428,243 --------- --------- -------- --------- --------- ----------- Operating expenses: Transportation ......................... -- -- 138,367 104,188 -- 242,555 Selling, general and administrative .... 187 25,230 51,100 13,267 -- 89,784 Gain on sale and impairment of assets (net) ........................ -- 101 (9,191) (65) -- (9,155) Terminated motor carrier operations, net .................................. -- -- -- 1,396 1,396 Depreciation and amortization .......... 92 200 18,136 14,730 -- 33,158 --------- --------- -------- --------- --------- ----------- Total operating expenses ......... 279 25,531 198,412 133,516 -- 357,738 --------- --------- -------- --------- --------- ----------- Operating (loss) income .......... (279) (25,531) 75,839 20,476 -- 70,505 Interest expense ......................... (11,744) (1,532) (23,797) (6,368) -- (43,441) Equity in earnings of subsidiaries ....... 24,921 (701) -- -- (24,220) -- Other income (expense) ................... (18,911) 21,001 (14,158) (6,840) -- (18,908) --------- --------- -------- --------- --------- ----------- Income from continuing operations before income taxes .. (6,013) (6,763) 37,884 7,268 (24,220) 8,156 Provision for income taxes ............... (10,517) (8,916) 18,924 3,402 -- 2,893 --------- --------- -------- --------- --------- ----------- Income from continuing operations .. 4,504 2,153 18,960 3,866 (24,220) 5,263 Gain from sale of discontinued operations (net of tax) .................. -- -- 387 -- -- 387 Income from discontinued operations (net of tax) .................................. -- -- -- 984 -- 984 Extraordinary loss from early extinguishment of debt (net of tax) ... (4,481) -- -- -- -- (4,481) --------- --------- -------- --------- --------- ----------- Net income ....................... $ 23 $ 2,153 $ 19,347 $ 4,850 $ (24,220) $ 2,153 ========= ========= ======== ========= ========= =========== F-30
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC. Consolidating Statement of Cash Flows For the year ended December 31, 2002 (in thousands) [Enlarge/Download Table] Non Company Guarantor Guarantor Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated --------- --------- ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income ............................. $ 23 $ 2,153 $ 19,347 $ 4,850 $ (24,220) $ 2,153 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...... 3,795 955 18,162 18,339 -- 41,251 Financing costs .................... 25,433 -- -- -- -- 25,433 Equity in earnings of subsidiaries . (24,921) 701 -- -- 24,220 -- Gain on sale or disposal of properties ....................... -- 101 (10,588) 782 -- (9,705) Deferred income taxes .............. (12,306) (8,962) 20,142 3,344 -- 2,218 Other .............................. -- 1,417 10 (685) -- 742 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable ............. -- (1,151) 4,780 (863) -- 2,766 Other current assets ............ 22 2,483 (1,555) (277) -- 673 Accounts payable ................ -- (727) (4,776) (137) -- (5,640) Accrued expenses ................ (1,777) (1,751) (2,167) (4,224) -- (9,919) Other assets and liabilities .... (17,057) 4,210 (1,739) 3,221 -- (11,365) --------- --------- -------- --------- --------- ----------- Net cash provided by (used in) operating activities .... (26,788) (571) 41,616 24,350 -- 38,607 --------- --------- -------- --------- --------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment ............................ -- (646) (37,334) (27,702) -- (65,682) Proceeds from sale of properties ....... -- 963 7,963 365 -- 9,291 Acquisitions, net of cash acquired ..... -- -- (89,359) -- -- (89,359) Change in restricted cash in escrow .... -- -- 1,357 -- -- 1,357 Deferred acquisition costs and other ... -- (3,008) -- (2,672) -- (5,680) --------- --------- -------- --------- --------- ----------- Net cash used in investing activities ................... -- (2,691) (117,373) (30,009) -- (150,073) --------- --------- -------- --------- --------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt ................................. 343,500 -- 556 113,814 -- 457,870 Principal payments on long-term debt ... (346,254) -- (883) (11,502) -- (358,639) Disbursements/receipts on intercompany debt ................................. 44,925 (21,356) 76,408 (99,977) -- -- Proceeds from exercise of stock options and warrants ................. -- 385 -- -- -- 385 Purchase of treasury stock ............. -- (4,921) -- -- -- (4,921) Deferred financing costs paid .......... (15,383) -- -- -- -- (15,383) --------- --------- -------- --------- --------- ----------- Net cash provided by (used in) financing activities ......... 26,788 (25,892) 76,081 2,335 -- 79,312 --------- --------- -------- --------- --------- ----------- Effect of exchange rates on cash ......... -- -- -- 1,280 -- 1,280 --------- --------- -------- --------- --------- ----------- Net (decrease) increase in cash .......... -- (29,154) 324 (2,044) -- (30,874) Cash, beginning of period ................ -- 38,049 45 21,667 -- 59,761 --------- --------- -------- --------- --------- ----------- Cash, end of period ...................... $ -- $ 8,895 $ 369 $ 19,623 $ -- $ 28,887 ========= ========= ======== ========= ========= =========== F-31
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC. Consolidating Balance Sheet At December 31, 2001 (in thousands) [Enlarge/Download Table] NON COMPANY GUARANTOR GUARANTOR ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------ ------------ ------------ ASSETS Current Assets: Cash ................................... $ -- $ 38,049 $ 457 $ 21,254 $ -- $ 59,761 Cash held in escrow .................... -- 245 2,000 173 -- 2,418 Accounts and notes receivable .......... -- 911 29,353 24,014 -- 54,278 Other current assets ................... 11 1,344 5,801 7,048 -- 14,204 --------- --------- -------- --------- --------- ----------- Total current assets ............. 11 40,550 37,611 52,489 -- 130,661 --------- --------- -------- --------- --------- ----------- Property, plant and equipment, net ....... 48 929 434,137 303,662 -- 738,775 Other assets ............................. 12,884 3,518 (5,180) 10,510 -- 21,732 Investment in and advances to affiliates . 344,002 187,223 29,965 (113,810) (447,380) -- --------- --------- -------- --------- --------- ----------- Total assets ..................... $ 356,945 $ 232,220 $496,533 $ 252,850 $(447,380) $ 891,168 ========= ========= ======== ========= ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ... $ 16,635 $ -- $ 2,695 $ 6,853 $ (1,699) $ 24,484 Accounts payable ....................... -- 1,831 15,667 18,536 -- 36,035 Accrued expenses ....................... 7,638 1,356 18,635 12,260 -- 39,889 --------- --------- -------- --------- --------- ----------- Total current liabilities ........ 24,273 3,187 36,997 37,649 (1,699) 100,408 --------- --------- -------- --------- --------- ----------- Long-term debt, less current maturities .. 251,117 -- 8,842 17,244 -- 277,203 Subordinated debt ........................ 118,942 20,679 -- 5,367 -- 144,988 Deferred income taxes .................... (28,978) (12,607) 108,991 29,417 -- 96,822 Minority interest and other liabilities .. 15,155 2 20,317 20,729 (5,415) 50,788 Stockholders' equity: Common stock ........................... -- 29 5,565 62,035 (67,600) 29 Additional paid-in capital ............. -- 224,248 278,322 45,623 (323,945) 224,248 Retained earnings ...................... (14,118) 45,902 37,499 50,826 (74,207) 45,902 Accumulated other comprehensive Income .............................. (9,446) (49,220) -- (16,040) 25,486 (49,220) --------- --------- -------- --------- --------- ----------- Total stockholders' equity ....... (23,564) 220,959 321,386 142,444 (440,266) 220,959 --------- --------- -------- --------- --------- ----------- Total liabilities and stockholders' equity ........... $ 356,945 $ 232,220 $496,533 $ 252,850 $(447,380) $ 891,168 ========= ========= ======== ========= ========= =========== F-32
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC Consolidating Statement of Income For the Year Ended December 31, 2001 (in thousands) [Enlarge/Download Table] NON COMPANY GUARANTOR GUARANTOR ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------ ------------ ------------ Operating revenue ........................ $ -- $ 1,776 $182,047 $ 163,723 $ -- $ 347,546 --------- --------- -------- --------- --------- ----------- Operating expenses: Transportation ......................... -- -- 94,379 101,726 -- 196,105 Selling, general and administrative .... 185 15,077 32,184 14,536 -- 61,982 Gain on sale and impairment of assets (net) ......................... 26 -- (6,440) (8) -- (6,422) Terminated motor carrier operations, net .................................. -- -- -- 263 -- 263 Depreciation and amortization .......... 1,031 130 12,777 10,455 -- 24,393 --------- --------- -------- --------- --------- ----------- Total operating expenses ........... 1,242 15,207 132,900 126,972 -- 276,321 --------- --------- -------- --------- --------- ----------- Operating (loss) income ............ (1,242) (13,431) 49,147 36,751 -- 71,225 Interest expense ......................... (14,522) (1,581) (23,854) (10,757) -- (50,714) Equity in earnings of subsidiaries ....... 25,253 12,614 -- -- (37,867) -- Minority interest and other income (expense) .............................. -- 15,064 (7,490) (7,396) -- 178 --------- --------- -------- --------- --------- ----------- Income from continuing operations before income taxes ..... 9,489 12,666 17,803 18,598 (37,867) 20,689 Provision for income taxes ............... (3,099) (4,371) 5,114 7,253 -- 4,897 --------- --------- -------- --------- --------- ----------- Income from continuing operations .. 12,588 17,037 12,689 11,345 (37,867) 15,792 Income from discontinued operations (net of tax) ................................ -- -- -- 1,482 -- 1,482 Extraordinary loss from early extinguishment of debt (net of tax) .... (238) -- -- -- -- (236) --------- --------- -------- --------- --------- ----------- Net income ....................... $ 12,352 $ 17,037 $ 12,689 $ 12,827 $ (37,867) $ 17,038 ========= ========= ======== ========= ========= =========== F-33
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC. Consolidating Statement of Cash Flows For the Year Ended December 31, 2001 (in thousands) [Enlarge/Download Table] Non Company Guarantor Guarantor Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated --------- --------- ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income ............................. $ 12,352 $ 17,037 $ 12,689 $ 12,827 $ (37,867) $ 17,038 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...... 4,584 891 13,853 12,682 -- 32,011 Write-off of deferred loan costs ... 378 -- -- -- -- 378 Equity in earnings of subsidiaries . (25,253) (12,614) -- -- 37,867 -- Gain on sale or disposal of properties ....................... -- -- (6,428) (6) -- (6,434) Deferred income taxes .............. (3,244) (4,371) 3,904 6,637 -- 2,926 Other .............................. -- -- -- 1,350 -- 1,350 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable .............. 11 1,038 3,450 799 -- 5,298 Other current assets ............. 12 (515) 5,049 4,041 -- 8,587 Accounts payable ................. (74) 1,294 4,356 (4,404) -- 1,172 Accrued expenses ................. (2,249) 218 (11,397) 942 -- (12,485) Other assets and liabilities ..... 92 340 3,819 878 -- 5,129 --------- --------- -------- --------- --------- ----------- Net cash provided by (used in) operating activities ......... (13,390) 3,318 29,297 35,745 -- 54,970 --------- --------- -------- --------- --------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment ............................ (7) (421) (30,674) (30,573) -- (61,675) Proceeds from sale of properties ....... -- -- 13,592 4,910 -- 18,502 Change in restricted cash in escrow .... -- (245) 1,291 -- -- 1,046 Deferred acquisition costs and other ... -- (2,319) 42 (2,300) -- (4,577) --------- --------- -------- --------- --------- ----------- Net cash used in investing activities ................... (7) (2,985) (15,749) (27,962) -- (46,703) --------- --------- -------- --------- --------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt ................................. 84,800 -- 649 141 -- 85,590 Principal payments on long-term debt ... (136,762) -- (5,326) -- -- (142,088) Disbursements/receipts on intercompany debt ................................. 65,360 (58,142) (11,357) 4,139 -- -- Sale of Common Stock ................... -- 89,736 -- -- -- 89,736 Proceeds from exercise of stock options and warrants ................. -- 8,343 -- -- -- 8,343 Preferred stock dividends paid ......... -- (241) -- -- -- (241) Purchase of treasury stock ............. -- (1,987) -- -- -- (1,987) Deferred financing costs paid .......... -- -- -- -- -- -- --------- --------- -------- --------- --------- ----------- Net cash provided by (used in) financing activities ......... 13,398 37,709 (16,034) 4,280 -- 39,353 --------- --------- -------- --------- --------- ----------- Effect of exchange rates on cash ......... -- -- -- (948) -- (948) --------- --------- -------- --------- --------- ----------- Net (decrease) increase in cash .......... -- 38,042 (2,487) 11,115 -- 47,671 Cash, beginning of period ................ -- 7 2,944 10,139 -- 13,090 --------- --------- -------- --------- --------- ----------- Cash, end of period ...................... $ -- $ 38,049 $ 457 $ 21,254 $ -- $ 59,761 ========= ========= ======== ========= ========= =========== F-34
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC. Consolidating Statement of Income For the Year Ended December 31, 2000 (in thousands) [Enlarge/Download Table] Non Company Guarantor Guarantor Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated --------- --------- ------------ ------------ ------------ ------------ Operating revenue ........................ $ -- $ 594 $169,353 $ 165,261 $ (593) $ 334,615 --------- --------- -------- --------- --------- ----------- Operating expenses: Transportation ......................... -- -- 87,897 107,570 -- 195,467 Selling, general and administrative .... 530 11,730 34,090 13,727 (593) 59,484 Gain on sale and impairment of assets (net) ................................ (762) -- (10,753) 331 -- (11,184) Terminated motor carrier operations, net .................................. -- -- -- 88 -- 88 Depreciation and amortization .......... 944 121 12,987 9,270 -- 23,322 --------- --------- -------- --------- --------- ----------- Total operating expenses ........... 712 11,851 124,221 130,986 (593) 267,177 --------- --------- -------- --------- --------- ----------- Operating income ................... (712) (11,257) 45,132 34,275 -- 67,438 Interest expense ......................... (48,428) (1,910) (2,247) (1,327) -- (53,912) Interest in equity of subsidiaries ....... 55,891 25,301 -- -- (81,192) -- Minority interest and other income (expense) .............................. -- 7 223 (2,497) -- (2,267) --------- --------- -------- --------- --------- ----------- Income from continuing operations before income taxes ................ 6,751 12,141 43,108 30,451 (81,192) 11,259 Provision for income taxes ............... (11,548) (3,093) 10,130 7,411 -- 2,900 --------- --------- -------- --------- --------- ----------- Income from continuing operations ... 18,299 15,234 32,978 23,040 (81,192) 8,359 Discontinued operations: Gain on disposal of discontinued segment (net of tax) ................. -- -- 13,527 (2,000) -- 11,527 Loss from operations of discontinued segment (net of tax) ................. -- -- (5,077) 3,100 -- (1,977) Extraordinary loss from early extinguishment of debt (net of tax) .. (1,299) (1,321) (1,376) -- -- (3,996) Cumulative effect of accounting change . -- (2,252) -- -- -- (2,252) --------- --------- -------- --------- --------- ----------- Net income ....................... $ 17,000 $ 11,661 $ 40,052 $ 24,140 $ (81,192) $ 11,661 ========= ========= ======== ========= ========= =========== F-35
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RAILAMERICA, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC. Consolidating Statement of Cash Flows For the Year Ended December 31, 2000 (In thousands) [Enlarge/Download Table] Non Company Guarantor Guarantor Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated --------- --------- ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) ...................... $ 17,000 $ 11,661 $ 40,052 $ 24,140 $ (81,192) $ 11,661 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...... 4,594 1,236 15,751 12,985 -- 34,566 Financing costs .................... 1,615 1,353 735 1,154 -- 4,857 Interest paid in kind .............. -- -- 5,806 -- -- 5,806 Equity interest in earnings of affiliate ........................ (55,891) (25,301) -- (554) 81,192 (554) (Gain) loss on sale or disposal of properties ....................... (762) -- (31,857) 3,065 -- (29,554) Cumulative effect of accounting change ........................... -- 2,252 -- -- -- 2,252 Deferred income taxes .............. (13,984) (4,431) 20,549 (4,931) -- (2,797) Other .............................. -- -- -- 995 -- 995 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable .............. (356) 745 (2,676) 5,941 -- 3,654 Other current assets ............. (23) (388) (1,802) 4,668 -- 2,455 Accounts payable ................. 74 (240) (2,977) 5,382 -- 2,239 Accrued expenses ................. 9,889 295 (2,562) (1,863) -- 5,759 Other assets and liabilities ..... 263 (1,552) 4,279 104 -- 3,094 --------- --------- -------- --------- --------- ----------- Net cash provided by operating activities ................... (37,581) (14,370) 45,297 51,088 -- 44,433 --------- --------- -------- --------- --------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment ............................ (52) (26) (24,034) (38,387) -- (62,499) Proceeds from sale of properties ....... -- -- 80,976 15,678 -- 96,654 Acquisitions, net of cash acquired ..... -- -- (148,922) -- -- (148,922) Change in cash in escrow ............... -- -- (2,507) (2,032) -- (4,539) Deferred acquisition costs and other ... -- (2,711) -- -- -- (2,711) --------- --------- -------- --------- --------- ----------- Net cash used in investing activities ................... (52) (2,737) (94,486) (24,742) -- (122,017) --------- --------- -------- --------- --------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt ................................. 539,150 986 6,040 3,059 -- 549,235 Principal payments on long-term debt ... (97,186) (11,699) (156,010) (183,212) -- (448,107) Disbursements/receipts on intercompany debt ................................. (385,991) 29,805 201,256 154,930 -- -- Proceeds from exercise of stock options .............................. -- 234 -- -- -- 234 Preferred stock dividends paid ......... -- (289) -- -- -- (289) Purchase of treasury stock ............. -- (1,992) -- -- -- (1,992) Deferred financing costs paid .......... (18,340) (23) (617) -- -- (18,980) --------- --------- -------- --------- --------- ----------- Net cash provided by financing activities ................... 37,633 17,022 50,669 (25,223) -- 80,101 --------- --------- -------- --------- --------- ----------- Effect of exchange rates on cash ......... -- -- -- (1,025) -- (1,025) --------- --------- -------- --------- --------- ----------- Net (decrease) increase in cash .......... -- (85) 1,480 98 -- 1,492 Cash, beginning of period ................ -- 92 1,464 10,042 -- 11,598 --------- --------- -------- --------- --------- ----------- Cash, end of period ...................... $ -- $ 7 $ 2,943 $ 10,140 $ -- $ 13,090 ========= ========= ======== ========= ========= =========== F-36

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10-K Filing   Date First   Last      Other Filings
3/31/923
11/11/9438
9/30/9539
11/12/9539
12/31/9539
3/31/973910-Q, 10-Q/A, 10KSB, NT 10-Q
1/6/9837
1/8/98398-A12G, 8-K
3/31/983910-K, 10-Q
5/14/983910-Q
12/31/98183910-K
3/31/993910-K, 10-Q, 10-Q/A
4/30/999398-K, 8-K/A, DEF 14A
5/18/99398-K
8/1/9918
9/1/9918
12/31/99183910-K, 10-K/A
1/1/004767
1/13/0037398-K
1/26/00398-A12G/A, 8-K
2/1/0018
2/2/0056
2/4/00563, 8-K, S-3/A
3/30/003910-K
4/13/0037398-K
5/4/0058
8/14/003710-Q, 3
12/31/0087810-K405
1/1/016567
4/2/013910-K405
4/4/0138
10/12/0137
11/26/0137
12/31/0187610-K405, 4
1/1/023367
1/2/02178-K
1/4/0218548-K, S-3/A
1/8/021855
4/1/023910-K405
5/15/023451
5/23/0238
6/30/0213910-Q, 4
8/14/02394
11/8/023266
11/15/0256
11/24/023266
12/5/023266
12/15/023452
For The Period Ended12/31/02173
1/1/033451
1/31/033452
2/1/033452
3/3/0344
3/20/031
3/22/0313
3/24/0317
3/26/0361
Filed On / Filed As Of3/27/034042
4/30/0336
5/24/033266
6/15/033452
8/15/0360
8/16/0360
11/24/033266
12/5/033266
12/31/03336110-K, 5
5/24/043266
5/31/0416
7/31/0461
11/24/043266
8/14/0560
12/31/051610-K
12/11/0656
2/28/0756
5/24/0756
5/23/0831
8/15/0860
5/23/0931
8/15/106061
 
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