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Railamerica Inc/DE · 10-K · For 12/31/98

Filed On 3/31/99   ·   Accession Number 950144-99-3732   ·   SEC File 0-20618

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

 3/31/99  Railamerica Inc/DE                10-K       12/31/98    4:292K                                   Bowne of Atlanta Inc/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Railamerica, Inc. Form 10-K 12-31-98                  78    372K 
 2: EX-4.2      Certificate of Designation                            10     42K 
 3: EX-10.57    First Amendment to Loan Agreement                     24     88K 
 4: EX-27       Financail Data Schedule                                1      6K 


10-K   —   Railamerica, Inc. Form 10-K 12-31-98
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
17Stb
18Fra
19Item 2. Description of Property
23Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
24Item 5. Market for Common Equity and Related Stockholder Matters
26Item 6. Selected Financial Data
27Item 7. Management's Discussion and Analysis
41Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
42Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
43Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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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, 1998 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) 301 Yamato Road, Suite 1190 Boca Raton, Florida 33431 --------------------------------------- --------------------- (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: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Common Stock Purchase Rights 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. ( ) The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 24, 1999 computed by reference to the average bid and asked prices of registrant's common stock reported on NASDAQ on such date was $63,300,000. The number of shares outstanding of registrant's Common Stock, $.001 par value per share, as of March 25, 1999 was 11,144,319. DOCUMENTS INCORPORATED BY REFERENCE The registrant's proxy statement for the Annual Meeting of Shareholders to be held June 24, 1999 (the "Definitive Proxy Statement") to be filed with the Commission pursuant to Regulation 14A is incorporated by reference into Part III of this Form 10-K. ================================================================================
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TABLE OF CONTENTS [Download Table] PAGE ---- PART I Item 1. Business 3 Item 2. Properties 19 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 PART II Item 5. Market for Common Equity and Related Stockholder Matters 24 Item 6. Selected Financial Data 26 Item 7. Management's Discussion and Analysis 27 Item 8. Financial Statements 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41 PART III Item 10. Directors and Executive Officers of the Registrant 42 Item 11. Executive Compensation 42 Item 12. Security Ownership of Certain Beneficial Owners and Management 42 Item 13. Certain Relationships and Related Transactions 42 PART IV Item 14. Exhibits and Reports on Form 8-K 43 2
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PART I  ITEM 1. BUSINESS GENERAL RailAmerica, Inc. (together with its consolidated subsidiaries, the "Company") is a leading operator of short line freight railroads in the United States, based on total track miles, and an operator of a regional freight railroad in the Republic of Chile. The Company is also a leading manufacturer of specialized truck trailers through its wholly-owned subsidiary, Kalyn/Siebert, Inc. ("KSI"), with production facilities in Gatesville, Texas and Trois-Rivieres, Quebec, Canada. In addition, the Company holds a minority interest in the Great Southern Railway Limited consortium, which operates a 4000-mile transcontinental passenger rail service in Australia. Segment and geographic information called for in item 1 is set forth in Note 20 of Notes to Consolidated Financial Statements and is incorporated herein by reference. RailAmerica's core business is the acquisition and operation of short line and regional railroads. The Company has grown rapidly through acquisitions since December 31, 1994, at which time it operated only 300 miles of track and employed 220 full-time employees. At December 31, 1998, the Company operated approximately 2,400 miles of rail line, including approximately 1,000 miles in North America and over 1,400 miles in Chile. At December 31, 1998, the Company employed 652 full-time employees. The Company plans to continue to acquire short line railroads in North America from Class I railroads as well as from other short line operators. The Company also continues to evaluate opportunities to acquire regional railroads in foreign markets that are being privatized by foreign governments. Additionally, the Company will consider other strategic acquisitions in the specialty trailer manufacturing industry. Since industry deregulation in 1980, major North American railroads have streamlined their operations by systematically divesting themselves of branch lines to smaller rail operators that have advantageous cost structures. The divestiture activity has accelerated in recent years as a result of the consolidation of Class I railroads which has led to the disposition of redundant and light-density routes. Similarly, an increasing number of foreign governments are seeking to encourage private investment in infrastructure and stimulate economic activity by privatizing their national rail systems through sale or by concession to qualified operators. The Company's acquisition strategy as described above is exemplified by: (i) the purchase, in April 1998, through the Company's wholly-owned subsidiary, Saginaw Valley Railway Company ("SGVY"), of a 51-mile rail line in Michigan, (ii) the long term lease/purchase agreement to operate a 13-mile rail line in California in August 1998, through the Company's new subsidiary, Ventura County Railroad Company, Inc. ("VCRR"), (iii) the purchase, in January 1999, through the Company's newly-formed subsidiary, Esquimalt and Nanaimo Railway Company, of a 181-mile rail line in British Columbia, Canada, and (iv) the selection, in February 1999, of a consortium in which the Company is expected to be a majority partner as the successful bidder for V/Line Freight Corporation, the rail freight business of Australia's Victorian Government. The rail line in Victoria, Australia consists of approximately 3
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3,000 miles of track. The Company believes that it is well-positioned to take advantage of the opportunities emerging in the North American and international rail industries. The Company has developed a disciplined evaluation and acquisition program, identifying rail properties that can be acquired on attractive terms and can be improved by the implementation of RailAmerica's operating practices when applied to the rail properties acquired by the Company. These practices have had the effect of increasing traffic while reducing expenses through introduction of operating efficiencies and customer service programs. The Company believes that it has become a desirable partner for Class I railroads as a result of its ability to pursue and consummate acquisitions swiftly and operate the rail lines more efficiently. The Company expanded its trailer manufacturing operations through the purchase, in January 1998, by the Company's wholly-owned subsidiary, KSI, of Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc., forming a new subsidiary, Kalyn/Siebert Canada, Inc. ("KSC"). KSC is a manufacturer of specialty bulk-hauling truck trailers located in Trois-Rivieres, Quebec, Canada. In January 1999, the Company completed an $11.6 million private offering of convertible redeemable preferred stock, and, in March 1999, the Company completed a $12.5 million private offering of restricted common stock. See details in Liquidity and Capital Resources section. The Company's business as of December 31, 1998 was conducted through eighteen wholly-owned consolidated subsidiaries - Huron and Eastern Railway Company, Inc. ("HESR"), SGVY, KSI, KSC, Otter Tail Valley Railroad Company ("OTVR"), South Central Tennessee Railroad Corporation ("SCTR"), Delaware Valley Railway Company, Inc. ("DVRC"), RailAmerica Intermodal Services, Inc. ("RIS"), Dakota Rail, Inc. ("Dakota Rail"), RailAmerica Equipment Corporation ("REC"), West Texas and Lubbock Railroad Company, Inc. ("WTLR"), Cascade and Columbia River Railroad Company ("CCRR"), Minnesota Northern Railroad ("MNR"), RailAmerica de Chile, S.A ("RDC"), Steel City Carriers, Inc. ("Steel City Carriers"), St. Croix Valley Railroad Company ("SCXY"), RailAmerica Australia Pty. Limited ("RAA"), and VCRR. All references to the operations of the "Company" discussed in this Form 10-K describe the operations of its subsidiaries. The Company was incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing railroad companies - HESR and SGVY. The Company's principal executive office is located at 301 Yamato Road, Suite 1190, Boca Raton, Florida 33431, and its telephone number at that location is (561) 994-6015. RAILROAD INDUSTRY OVERVIEW The U.S. railroad industry is dominated by nine Class I railroads, which operated approximately 122,000 miles of track at December 31, 1997 (the most recent year for which data is available) and represented approximately $32.3 billion, or approximately 91.4%, of total rail industry 4
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operating revenue of $35.3 billion in 1997. In addition to large railroad operators, at year end 1997 there were more than 500 short line and regional railroads, which generated approximately $3.0 billion of operating revenue in 1997 and operated approximately 50,000 miles of track at December 31, 1997. Reflecting downsizing of major rail carriers, the proportion of total track miles operated by short line and regional railroads in the United States increased to 29.0% of total railroad industry track miles in 1997 from approximately 17.0% in 1986. The railroad industry in the United States has undergone significant change since the passage of the Staggers Rail Act of 1980 (the "Staggers Rail Act"), which deregulated the pricing and types of services provided by railroads. Since 1980, Class I railroads in the United States and Canada have systematically divested themselves of branch lines to smaller rail operators. As a result, more than 300 short line and regional railroads operating approximately 27,000 miles of track have been created since 1980 to serve shippers on such lines. The divestiture has accelerated in recent years as a result of the consolidation and merger activity among Class I railroads, which has led to the sale of overlapping routes. As a result of deregulation, major railroads have been able to concentrate their management and marketing attention on core, long-haul routes, while divesting (through sale or lease) many of their low-density branch lines to smaller and more cost-efficient freight railroad operators such as the Company. The major railroads have derived significant benefits from the divesting of branch lines to short line operators. Divesting these branch lines allows major railroads to minimize incremental capital expenditures, increase traffic density, improve railcar utilization and avoid rail line abandonment. Because of the focus of 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. Consequently, these transactions often result in net increases in divesting carriers' freight traffic because much of the business originating or terminating on branch lines feeds into divesting carriers' core routes. GROWTH STRATEGY - NORTH AMERICAN ACQUISITIONS. RailAmerica plans to continue to acquire short line and regional railroads that become available as a result of rationalizations and divestitures in North America, especially in geographic regions where the Company can "cluster" a number of acquired rail lines to achieve economies of scale. - INTERNATIONAL ACQUISITIONS. RailAmerica plans to acquire additional foreign regional railroads that become available as a result of governmental privatization, primarily through joint ventures with local partners familiar with market conditions in the region. International rail acquisitions often offer the Company better growth opportunities due to their lack of historical operating efficiencies typical of government entities. - EXPANSION OF MANUFACTURING OPERATIONS. RailAmerica plans to investigate additional specialized truck trailer manufacturing opportunities as they become available. - FOCUSED SALES AND MARKETING. RailAmerica continues to increase traffic from existing, 5
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former and new customers in each of its markets through the aggressive marketing of its enhanced customer service, renegotiation of rates where prudent and implementation of other incentive arrangements for shippers. Once RailAmerica reestablishes frequent service for a newly acquired railroad, it markets its newly restored service to existing customers as well as to customers who may have dropped service when the former owner had operational control. - OPERATING EFFICIENCY. The Company improves its operating efficiency through rationalized staffing, incentivized local management and staff, centralized purchasing and corporate services, efficient equipment utilization and outsourced maintenance. The Company acquires rail properties by purchase of assets, lease or operating contract. Typically, the Company bids against other short line and regional operators for available properties. The structure of each transaction is determined by the seller based upon economic and strategic considerations. In addition to the financial terms of the transaction, the Company believes sellers consider more subjective criteria such as a prospective acquirer's operating experience, its reputation among shippers, and its ability to close a transaction and commence operations smoothly. The Company believes it has established an excellent record in each of these areas. In addition, by growing revenues on its acquired lines and providing improved service to shippers, the Company is able to provide increased revenue to the Class I carriers that connect with its lines. The Company believes this ability to provide increased revenue to Class I carriers is an advantage in bidding for properties. RAILROAD OPERATIONS GENERAL The Company provides rail service to on-line customers through the coordination of the railroad's general manager, marketing manager and customer service center. Rail service for the customer is scheduled by the general manager with the assistance of customer service personnel. Due to the Company's flexibility in providing service, customers can initiate unscheduled rail service on short notice by contacting the railroad's customer service center. The general manager schedules the days' train service and provides a manifest to the two-man crew. The crew's manifest contains information regarding the number and type of cars to drop off and/or pick up at a customer's siding, customer requirements concerning time of pick up and/or delivery and interchange schedules. The two-man crew, consisting of transportation specialists, operates the locomotive and couples and uncouples railcars along the line. Since crews are paid a salary rather than an hourly wage, they are readily available to provide service on an as-needed basis. Payment for rail services is coordinated with the customer through the Company's customer service center or with the Class I interchange partner. The Company provides the locomotive service and, in certain instances, the rail cars needed to move the customer's product. Maintenance of the rail line, including capital improvements, 6
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normal track and roadbed maintenance, signal maintenance and bridge repair, is performed by the Company or, where efficiencies are gained, a maintenance contractor. The Company has full-time locomotive mechanics, under the supervision of the Company's Chief Mechanical Officer, available to maintain the locomotive and maintenance equipment, perform car inspections and perform running repairs on cars. 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 rail carriers. Bridge traffic neither originates nor terminates on a rail carrier's line, but rather passes over the line from one connecting carrier to another. Interline traffic generated over 95% of the Company's total freight revenues in 1998. Flexibility with respect to work assignments is a key element of the Company's operating strategy and contributes significantly to operational productivity. All of the Company's railroad personnel are trained in a wide range of skills necessary for short line operations. Employees can be assigned to tasks on an as-needed basis because the Company is not bound by traditional railroad industry craft and work distinctions (pursuant to which railroad employees are assigned to tasks based upon narrowly defined job descriptions). The Company believes the organization of its railroads into relatively small work groups encourages greater team effort and permits more clearly defined responsibility and accountability than is obtainable by large, more centrally managed railroads. Each of the Company's short line railroads maintains a performance-based profit-sharing program through which a portion of a railroad's operating profits is distributed to its employees. Profit-sharing programs are administered by corporate headquarters and the general managers and distributions are made in part on the basis of meeting railroad operating targets and in part on individual performance. The general managers also participate in quarterly performance-based profit-sharing programs. MARKETING The Company focuses on providing rail service to its customers that is easily accessible, reliable and cost-effective. Following commencement of operations by RailAmerica, the Company's 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. The Company believes its ability to generate additional traffic is enhanced by its marketing efforts which are aimed at identifying and responding quickly to the individual business needs of customers along its rail lines. As part of its marketing efforts, the Company often schedules more frequent rail service, helps customers negotiate price and service levels with connecting carriers and assists customers in obtaining the quantity and type of rail equipment required for their operations. The Company also provides non-scheduled train service on short notice to accommodate customers' special or emergency needs. 7
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The Company's decentralized management structure is an important element of its marketing strategy. Significant discretion with respect to sales and marketing activities is given to the Company's domestic regional marketing managers and its international marketing manager. Each regional marketing manager works closely with personnel of the Company's 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. The Company also works 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. The Company considers all of its employees to be customer service representatives and encourages them to initiate and maintain regular contact with shippers. CUSTOMERS In 1998, the Company served more than 200 customers domestically who shipped and/or received a wide variety of products. The Company's railroads are typically the only rail carriers directly serving their customers. Although most of the Company's domestic railroads have a well-diversified customer base, several of the smaller rail lines have one or two dominant customers. In 1998, the Company's 10 largest domestic customers accounted for approximately 45% of domestic transportation revenue. There is no single customer which represented more than 10% of the Company's domestic transportation revenue. The Company had four customers who each represented more than 10% of the international transportation revenue. The customers represented 22%, 22%, 18% and 14% of international transportation revenue. COMMODITIES The Company provides its customers with local rail freight services accessing the nationwide rail systems both domestically and internationally. The Company hauls products for its customers based upon market demands in its local operating areas. The following table sets forth by number and percentage the total carloads of each of the principal commodities hauled by the Company's railroads during the years ended December 31, 1998, 1997 and 1996. CARLOADS CARRIED BY COMMODITY GROUP [Enlarge/Download Table] YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------- ------------------------- ------------------------- COMMODITY CARLOADS % OF TOTAL CARLOADS % OF TOTAL CARLOADS % OF TOTAL ----------------- -------- ---------- -------- ---------- -------- ---------- IRON ORE 62,037 53% 19,493 28% 0 0% AGRICULTURE 15,423 13% 13,297 19% 9,624 37% WOOD PRODUCTS 9,153 8% 9,797 14% 5,021 19% FOOD PRODUCTS 7,521 6% 5,425 8% 1,762 7% BALLAST/STONE 4,147 4% 3,957 6% 437 2% 8
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[Enlarge/Download Table] YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------- ------------------------- ------------------------- COMMODITY CARLOADS % OF TOTAL CARLOADS % OF TOTAL CARLOADS % OF TOTAL ----------------- -------- ---------- -------- ---------- -------- ---------- FERTILIZER 4,308 4% 3,900 6% 2,511 10% COAL 4,898 4% 3,877 6% 832 3% COPPER 1,188 1% 2,785 4% 0 0% STEEL 1,695 1% 1,732 3% 1,584 6% SODIUM SULFATE 732 0.5% 1,290 2% 1,237 5% PROPANE 1,161 1% 0 0% 0 0% AUTO PARTS 683 0.5% 755 1% 904 3% PLASTICS 628 0.5% 574 1% 551 2% OTHER 3,961 3.5% 2,258 3% 1,408 5% ------- ------ ------ TOTAL 117,535 100% 69,140 100% 25,871 100% ======= ====== ====== EMPLOYEES As of December 31, 1998, the Company had approximately 104 full-time rail employees in North America and 210 full-time rail employees in Chile. Temporary lay-offs of personnel and hiring of part-time or short-term employees are sometimes required to adjust to the Company's somewhat seasonal operations. As of December 31, 1998, the Company had 8 employees who were subject to contract negotiations with the United Transportation Union. No contract has been signed to date. SAFETY An important component of the Company's operating strategy is conducting safe railroad operations for the benefit and protection of employees, customers and the communities served by the Company's railroads. The Company's safety program, led by the Director of Rules, Safety and Training, involves all of the Company's employees and is administered on a daily basis by each Regional Vice President. Operating personnel are trained and certified in train operations, hazardous materials handling, proper radio procedures 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 regulation. The Company believes that each of its railroads complies fully with federal, state and local regulations. Additionally, each railroad is given flexibility to develop more stringent safety rules based on local requirements or practices. The Company also participates in governmental and industry sponsored safety programs including Operation Lifesaver (the national grade crossing awareness program) and the American Short Line Railroad Association Safety Committee. 9
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COMPETITION In acquiring rail properties, the Company competes with other short line and regional railroad operators, some of which are larger and have greater resources than the Company. Competition for rail properties is based primarily upon price, operating history and financing capability. The Company believes its established reputation as a successful acquirer and operator of short line rail properties, in combination with its managerial and financial resources, effectively positions it to take advantage of future acquisition opportunities. The Company's railroads are typically the only rail carriers directly serving their customers; however, the Company's 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 the Company's 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, the Company 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. ACQUISITION OF SGVY BROWN CITY SUBDIVISION In April 1998, the Company, through its wholly-owned subsidiary, SGVY, acquired from CSX Transportation, Inc. ("CSXT") a 51 mile rail line located in Michigan's "Thumb" region. The line runs from just east of Saginaw to Brown City, Michigan and handles traffic such as grain, corn, fertilizer and soybeans. The line connects with SGVY's sister railroad, HESR, at Vassar, Michigan and interchanges with CSXT at Saginaw. ACQUISITION OF VENTURA COUNTY RAILROAD COMPANY, INC. In August 1998, the Company, through its newly formed, wholly-owned subsidiary, VCRR, entered into a long term lease/purchase agreement to operate a 13-mile rail line serving the Port of Hueneme and the Oxnard Harbor District in Oxnard, California, located approximately 50 miles north of Los Angeles. VCRR handles ship-to-rail port traffic which includes finished autos, chemicals, plastic and paper products. Traffic from this line interchanges with the Union Pacific Railroad at Oxnard. 10
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RAILROAD PROPERTIES The following table sets forth certain information with respect to the railroad properties that the Company owned as of December 31, 1998: [Enlarge/Download Table] --------------------------------------------------------------------------------------------------------------------------- Date of Track Principal Railroad Acquisition Miles Structure Location Commodities --------------------------------------------------------------------------------------------------------------------------- Huron and Eastern March 1986 83 Owned Michigan Agricultural products, sugar Railway (Huron Division) products, fertilizer, scrap steel, auto parts, aggregates --------------------------------------------------------------------------------------------------------------------------- Huron and Eastern May 1988 55 Owned Michigan Agricultural products, sugar Railway (Saginaw 45 Leased products, fertilizer, scrap Division) steel, auto parts, aggregates --------------------------------------------------------------------------------------------------------------------------- Saginaw Valley Railway Jan. 1991 10 Owned Michigan Agricultural products, Apr. 1998 51 Owned fertilizer --------------------------------------------------------------------------------------------------------------------------- South Central Tennessee Feb. 1994 49 Leased Tennessee Wood products, frozen Railroad 3 Trackage potatoes, newsprint, rights plastics, steel --------------------------------------------------------------------------------------------------------------------------- Delaware Valley Railway July 1994 45 Easement Pennsylvania Agricultural and steel 10 Lease Delaware products, iron and wood products --------------------------------------------------------------------------------------------------------------------------- Dakota Rail Sept. 1995 44 Contract Minnesota Plastics, lumber, scrap steel, for Deed chemicals --------------------------------------------------------------------------------------------------------------------------- West Texas & Lubbock Nov. 1995 104 Owned Texas Fertilizer, sodium sulfate, Railroad 4 Trackage chemical, cotton and cotton rights products --------------------------------------------------------------------------------------------------------------------------- Cascade and Columbia Sept. 1996 131 Owned Washington Wood products, limestone, River Railroad 6 Trackage paper products, agricultural rights products --------------------------------------------------------------------------------------------------------------------------- Otter Tail Valley Railroad Oct. 1996 72 Owned Minnesota Coal, agricultural products, fertilizer --------------------------------------------------------------------------------------------------------------------------- Minnesota Northern Dec. 1996 174 Owned Minnesota Agricultural products, sugar Railroad 47 Trackage products, fertilizer, coal, rights aggregates --------------------------------------------------------------------------------------------------------------------------- Ferronor Feb. 1997 1,400 Majority Chile Iron ore, copper, limestone, owned propane, sugar products --------------------------------------------------------------------------------------------------------------------------- St. Croix Valley Railroad Aug. 1997 44 Owned Minnesota Agricultural products, 16 Trackage fertilizer, plastics rights --------------------------------------------------------------------------------------------------------------------------- Great Southern Railway Oct. 1997 Minority Southern Passenger Interest Australia --------------------------------------------------------------------------------------------------------------------------- Ventura County Railroad Aug. 1988 13 Leased California Auto products, wood products --------------------------------------------------------------------------------------------------------------------------- 11
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TRAILER MANUFACTURING OPERATIONS KSI, located in Gatesville, Texas, was established in 1968 and manufactures a broad range of specialty truck trailers. KSI products are marketed to customers in the construction, trucking, agricultural, railroad, utility, and oil industries. In addition, a substantial portion of KSI's sales are to the military and several other local and federal government agencies. KSI's product mix has shifted towards sales of heavy equipment and specialty trailers. Previously located in Stockton, California, Siebert manufactured a highly specialized detachable goose neck trailer constructed of high yield steel. The Siebert products include up to 300-ton capacity units. The trailer types in the heavy equipment category include specialized trailers (such as car haulers, truck haulers, and jeep haulers), fixed neck low bed, detachable low bed, flats and platforms, drops and double drops, folding neck low-bed, and used trailers. In January 1998, the Company, through its wholly-owned subsidiary, KSI, acquired all of the outstanding stock of Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc. Fabrex's operations have been combined into KSC, a wholly-owned subsidiary of KSI. KSC is a manufacturer of specialty bulk-hauling truck trailers located in Trois-Rivieres, Quebec, Canada. KSC's products are marketed to the solid waste, agricultural and construction industries. At the date of its acquisition , Fabrex, founded in 1985, employed 50 people in its 45,000 square foot manufacturing facility located in Trios Rivieres, Quebec, Canada, midway between Montreal and Quebec City. In April 1998, KSC purchased an additional 105,000 square-foot manufacturing facility located adjacent to KSC's existing plant in Trois-Rivieres, Quebec, Canada. In order to meet production requirements in conjunction with the plant expansion, KSC hired an additional 70 employees in 1998. PRODUCTS The majority of KSI's sales are based on existing KSI trailer designs which are modified with standard options. However, approximately 20% of trailers sold must be customized to satisfy customers' specifications. KSI's "Pro Engineer" 3-D based solid modeler drafting system and computer aided drafting system "CAD" allows its engineers to readily modify trailer component design and generate new designs, based on customer needs. KSI manufactures an extensive variety of light, medium and heavy duty truck trailers. The 12
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Company's products include the following: - FLATBED TRAILERS. Flatbed trailers, also known as platform trailers, are generally used to carry loads such as steel and building materials. The Company produces a wide variety of flatbed trailers, including straight frames, drop frames and multi-axle units for specialized loads. KSI's leading product in this category is the KDP-80, a 48 foot drop deck flatbed trailer which is purchased primarily by commercial customers. This trailer has a 10 foot spread on the tandem axle which allows more weight per axle than narrower tandems. - LOWBED TRAILERS. Lowbed trailers, also known as lowboy trailers or California legals, generally haul heavy equipment such as electrical transformers or grain silos. Lowbed trailers are equipped with up to 18 axles and have the capacity to haul up to 300 ton loads. Heavy equipment lowbeds are used by heavy haulers, specialized carriers and riggers, larger construction and engineering firms and highly-specialized members of the aerospace and automotive industries. The products constituting this category include the following trailers: fixed neck lowbed, folding neck lowbed, detachable lowbed, and the mechanical removable gooseneck, which is KSI's leading trailer by sales in this product line. - OTHER PRODUCTS. KSI manufactures a sliding-axle trailer which can be used to transport heavy equipment such as forklifts and similar equipment. KSI also manufactures a specialty van trailer for the United States Tank Automotive Command ("TACOM") which has special dolly-style suspensions and removable landing gear so that it can be shipped on military transport cargo planes. These specialty van trailers can be used for tactical combat purposes or as storage containers. Other specialty products include tilt trailers, special event trailers, protected vans and oil field trailers. - PARTS AND ACCESSORIES. Replacement parts and accessories are primarily sold to dealers. From time to time, KSI is also involved in the limited sale of used trailers, which are supplied primarily by trade-ins from its new trailer customers. The Company sells most of its used trailers through its authorized dealers. KSI generally provides customers with a five-year limited warranty on trailer mainframes and a one-year limited warranty against defects in material and workmanship with respect to its products. KSI's warranty costs have historically been less than one percent of net sales per year. KSC produces specialty bulk-hauling truck trailers used in the solid-waste, agricultural, and construction industries. Historically, approximately 85% of KSC's sales are transfer trailers and 80% of these are made in aluminum. KSC began producing dump trailers in 1995. In 1997, these trailers represented approximately 15% of KSC's sales. The dump trailers consist of approximately 70% aluminum and 30% steel. During the second half of 1998, KSC began producing KSI flatbed trailers in its newly acquired facility. 13
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MANUFACTURING AND ENGINEERING KSI considers the engineering expertise, combined with the manufacturing experience of its work force, to be key competitive advantages. KSI utilizes this experience in its marketing by including manufacturing personnel in initial meetings with potential KSI customers to assist in defining and meeting the customer's objectives. This team approach often results in new and unique ways to satisfy customer needs and facilitates effective communication throughout the organization. Each of KSI's trailers is manufactured from highly customized designs based on detailed customer specifications of each aspect of the trailer, including dimensions, structural requirements, fabrication materials, component parts and accessories. KSI's "Pro-Engineer" 3-D solid modeler drafting system and CAD allows its engineers to readily modify trailer component designs and generate new designs based on customer needs. KSI builds all the structural parts of its trailers using steel bars and plates. The major manufacturing steps include cutting, bending and welding of steel and, once assembled, cleaning and painting. The axles and running gears are purchased as sub-assemblies which are integrated into the KSI trailer design. KSI contracts out any necessary machining. KSI exercises strict quality control by screening suppliers and conducting inspections throughout the production process. KSI's ability to manufacture trailers is dependent upon receiving supplies or components and raw materials from a limited number of sources. To date, KSI has experienced no material difficulties in procuring supplies, components or materials. However, if deliveries of such items are delayed, KSI's production ability may be decreased which could have a negative effect on KSI's and the Company's results of operations. KSI's manufacturing operations are conducted in thirteen Company owned buildings, totaling approximately 198,000 square feet on an 25.5 acre site, which were constructed between 1969 and 1997. KSI's manufacturing properties serve as collateral for the Company's financing with National Bank of Canada. The Company expects that this site will be able to meet its manufacturing goals for the foreseeable future. At acquisition date, Fabrex, was producing its trailers at a 45,000 square foot manufacturing facility located in Trios Rivieres, Quebec, Canada, midway between Montreal and Quebec City. In April 1998, KSC purchased an additional 105,000 square-foot manufacturing facility located adjacent to KSC's existing plant in Trois-Rivieres, Quebec, Canada. MARKETING AND DISTRIBUTION KSI's marketing strategy is focused on offering a broad range of high-quality, customized trailers manufactured to the design specifications of its customers. These products are marketed and distributed through a network of approximately 140 independent dealers throughout North America and through a direct sales force. During 1998 approximately 50% of independent dealers maintained 14
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inventories of KSI trailers. Presently, up to 75% of all of KSI's commercial sales are made to dealers, with the balance representing direct retail sales by its sales force. KSI's sales staff consists of a vice president, five sales managers, and an advertising manager. The sales staff is supported by registered mechanical design engineers and draftsmen. Sales leads are generated through literature mailings, trade show exhibitions, dealers, repeat customers, and word-of-mouth. In addition, KSI places advertisements in trade publications such as MY LITTLE SALESMAN, AMERICAN TRUCKER, LIFTING & TRANSPORTATION INTERNATIONAL, TRUCK MARKET NEWS, MACHINERY TRADER, AMERICAN TOWMAN, TRUCK NEWS (CANADA), TRUCK & TRAILER (CANADA) AND CONSTRUCTION PUBLIC WORKS (LATIN AMERICA). In recent years, KSI has begun shifting resources from advertising to trade shows, which management believes is a more cost effective method of maintaining KSI's name and reputation and developing sales leads. KSI currently participates in approximately five trade shows per year. In certain circumstances, KSI will enter into agreements with its dealers to stimulate and facilitate the sale and financing of its new and used trailers. During the first quarter of 1995, KSI entered into a Wholesale and Retail Financing Agreement with Associates Commercial Corporation and Associates Commercial Corporation of Canada, Ltd. to stimulate and facilitate the sale and financing of its new and used trailers. In addition, in December 1996, the Company entered into an agreement with Newcourt Financial Ltd. in order to provide wholesale and retail financing for its dealers located in Canada. Each of these agreements provides floor plan financing for eligible dealers and lease and/or purchase financing for end market purchasers. KSC sells direct to customers with one salesman in Toronto who handles Ontario and western Canada and one in Montreal who handles Quebec and maritime provinces. In the United States the majority of sales are done through a network of a dozen distributors. KSC also had access to KSI's extensive dealer base in the United Stated starting in 1998. CUSTOMERS KSI serves a diversified customer base operating in the construction, trucking, agricultural, railroad, utility and oil industries. Since 1990, commercial sales have accounted for approximately two-thirds of KSI's revenues with military or governmental agency sales representing the balance. As a result of extensive prototype testing by TACOM and the federal government budgetary impasse during early 1996, sales to governmental accounts represented a disproportionately low percentage of KSI's revenue for 1996. In 1998, sales to the federal government accounted for nearly 50% of total net sales as a result of new contracts awarded in 1997 and 1998. The majority of sales in the government segment are to the General Services Administration ("GSA"), the purchasing arm of most non-military agencies, and to TACOM, which consolidates purchases for various branches of the military. KSI has been awarded "Blue Ribbon Contractor" status with TACOM. As a result of this status, KSI receives a 10% preference on bids for certain contracts. Sales to governmental agencies represented 48%, 37% and 20% of KSI's 15
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manufacturing revenue for the years ended December 31, 1998, 1997 and 1996. A substantial decrease in orders by the GSA and/or TACOM could have a material adverse effect on KSI's business and results of operations. In April 1998, KSI received a new order, valued at approximately $3.6 million, for semi-trailer vans under its existing contract with TACOM. In July 1998, KSI received two new orders from the United States Government, valued at approximately $8.8 million. The first order, through KSI's existing requirements contract with the GSA, is valued at approximately $5.3 million and calls for the production of 101 folding goose neck level deck trailers for the United States Army. The second order is valued at approximately $3.5 million and calls for the production of approximately 111 low-bed trailers for TACOM over three years. Production on both orders commenced in the fourth quarter of 1998, with delivery starting early in 1999. In December 1998, KSI received another new order from TACOM valued at approximately $5.2 million. The contract calls for the production of 71 tactical van trailers over fifteen months. Production commenced in the fourth quarter of 1998, with delivery starting early in 1999. KSC's trailers are used in the solid-waste, agricultural and construction industries. Waste disposal companies are KSC's largest market segment. In addition, during the second half of 1998 KSC began producing and marketing KSI type flatbed trailers. BACKLOG. As of December 31, 1998, KSI's backlog of orders was approximately $18.3 million, compared to $19.7 million as of December 31, 1997. As of December 31, 1998, KSC's backlog of orders was approximately $3.7 million. KSI and KSC include in its backlog only those orders for trailers for which a confirmed customer order has been received. KSI manufactures trailers mostly to customer or dealer orders and does not typically maintain an inventory of "stock" trailers in anticipation of future orders. COMPETITION. The Company faces significant competition in the truck trailer manufacturing industry which is highly competitive and has relatively low barriers to entry. The Company competes with a number of other trailer manufacturers, some of which have greater financial resources and higher sales than KSI. Furthermore, the Company's products compete with alternative forms of shipping, such as intermodal containers. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors or alternative forms of shipping containers. EMPLOYEES As of December 31, 1998, KSI had 182 full-time employees in the trailer manufacturing operation and approximately 17 part-time employees. None of the KSI employees are subject to a collective bargaining agreement. As of December 31, 1998, KSC had 120 full-time employees in 16
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the trailer manufacturing operation of which 89 are subject to a collective bargaining agreement. MOTOR CARRIER OPERATIONS On February 10, 1995, the Company acquired substantially all of the assets of Steel City, a regional motor carrier located in Sault Ste. Marie, Ontario, Canada. Since the Company's acquisition of Steel City, its financial performance and development have not measured up to the Company's expectations for the business. Accordingly, in March 1997 the Company adopted a formal plan to discontinue its motor carrier operations and refocus the Company's efforts on expanding its railroad and manufacturing operations. The Company's Board of Directors approved the plan of discontinuance on March 20, 1997. Effective December 1, 1998, the Company ceased all motor carrier operations and leased substantially all of the operating assets of Steel City Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario, Canada-based Contrans Corporation. The leases are for a period of 18 to 24 months. In addition, the Company has entered into an agreement to sell its Ontario real estate that was previously used in its motor carrier operations. REGULATION OVERVIEW. In addition to environmental safety and other regulations applicable to all businesses, the Company's railroad subsidiaries are subject to regulations of numerous government agencies, including (i) regulation by the Surface Transportation Board ("STB") and the Federal Railroad Administration ("FRA"); (ii) certain labor related statutes including the Railway Labor Act, Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the Federal Employer's Liability Act, and (iii) regulation by agencies in the states in which the Company does business. Additionally, the Company is subject to STB regulation in its acquisition of new railroad properties. As a result of the Staggers Rail Act amendments to the Interstate Commerce Act in 1980 and enactment of the ICC Termination Act of 1995, there has been a significant relaxation in regulation governing rail carriers, which management believes has greatly simplified the purchase and sale of shortline railroad properties and expedited the closing of such transactions. The Company believes its operations are in material compliance with all such regulations.  STB. The STB 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 carrier (including railroads and interstate motor and water carriers) by another carrier (or an entity controlling another carrier), the use by one railroad of another railroad's tracks ("trackage rights"), the rates charged by railroads for their transportation services, and the service of rail carriers. Legislation enacted in 1995 replaced the Interstate Commerce Commission ("ICC") with the STB and abolished labor protective conditions applicable to numerous types of rail transactions. Today, most transactions involving shortline railroads are no longer subject to protective conditions for adversely affected employees by labor agencies. Certain types of transactions involving mid-size "regional railroads" (annual revenues between $20 million and $250 million) are still subject to 17
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limited labor protective conditions for adversely affected employees (in absence of any other arrangements negotiated between management and labor, affected employees receive one year's severance pay upon consummation of acquisition transactions). While imposition of labor protective conditions on line sales and transfers does not subject a rail line buyer to the seller's collective bargaining agreements, rates of pay, and other labor practices and does not unionize the buyer's operating and maintenance employees, it entitles employees of buyer or seller who are "adversely affected" by the transaction in terms of job loss, pay cuts, loss of overtime, loss of hours, loss of benefits, and moving expenses, to receive payments over a period of four years representing compensation for those losses. Generally, in a line sale or transfer, only the seller's or transferor's employees are affected. 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. Under the Staggers Rail Act, all containerized and truck trailer traffic handled by railroads was deregulated. 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 amendments have allowed railroads considerable freedom to raise or lower rates without objection from captive shippers. While the ICC termination 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. FUTURE OF THE STB. Under the ICC Termination Act the STB is presently funded through September 30, 1999. It is unclear whether the STB will be reauthorized in its present form.  FRA. 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. STATES. Under the ICC Termination Act states lost their jurisdiction over economic regulation of intrastate transportation. All states retain some jurisdiction over safety related matters. EMPLOYEES; LABOR CONSIDERATIONS As of December 31, 1998, the Company had approximately 444 full-time employees in North America. Approximately 89 of the Company's employees are members of a union and are employed at KSC. Approximately 46 of KSC's employees are members of the Federation Inter-Provinciale des Ouvriers en Electricite (F.I.P.O.E.), which was accredited in Canada in 1988. The other 43 of KSC's union employees are members of the L'Association des employes de production de Kalyn Siebert Canada, Inc. (A.E.P.K.), which was accredited in August 1998. The Company's railroad operations are somewhat seasonal. Most agricultural shipments 18
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occur from September through May, and much of the Company's track maintenance is performed in the summer months. Temporary layoffs of personnel, hiring of part-time or short-term employees, or use of independent contractors are sometimes required to adjust to the seasonal nature of track maintenance work and other business requirements. As of December 31, 1998 the Company had 104 full-time railroad employees, 302 full-time employees in the trailer manufacturing division, one full-time employee in the motor carrier operations and 38 corporate and/or support employees. Ferronor operated with approximately 350 employees as of the date that the Company acquired majority ownership. As contemplated by management, significant reductions in the work force have been effectuated and the current workforce is approximately 210 employees.  ITEM 2. DESCRIPTION OF PROPERTY MICHIGAN RAILROAD PROPERTIES The majority of the Company's 199 miles of Michigan rail line consists of 90 pound or heavier welded and jointed rail. The Company's track standards allow for maximum operating speeds ranging from 10 m.p.h. to 25 m.p.h. The Company owns approximately 1,260 acres of operating and non-operating real estate in Michigan. The Company's Michigan rail properties serve as collateral for the Company's $55 million Revolving Loan Agreement with the National Bank of Canada et al (the "Revolver") (See Note 10 to Notes to Consolidated Financial Statements). The Company built its Eastern regional headquarters office in Vassar, Michigan during 1997. This office building is 6,800 square feet and houses management, dispatching, engineering, real property management, accounting and marketing personnel. The Company owns a locomotive shop which was constructed in 1987, and a maintenance-of-way equipment repair building completed in 1989, which also serves as a satellite operations center. TENNESSEE RAILROAD PROPERTIES SCTR leases approximately 49 miles of rail line and approximately 450 acres of related real estate from the South Central Tennessee Railroad Authority. The lease was extended in February 1997 until 2004 and provides for base lease payments of $1,300 per month. The Company has the option to purchase the rail line and real estate for one dollar throughout the term of the lease. SCTR owns a locomotive shop and general office facility in Centerville, Tennessee which houses all of its operating personnel. SCTR also owns related maintenance and office equipment. The Company's rights to the lease of the SCTR property, as well as all the common stock of SCTR owned by the Company and SCTR's other equipment, serve as collateral under the Company's financing arrangements with General Electric Capital Corporation obtained in connection with the Company's acquisition of SCTR. This financing is being refinanced during 1999. (See Note 10 to Notes to Consolidated Financial Statements). 19
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DELAWARE AND PENNSYLVANIA RAILROAD PROPERTIES DVRC operates approximately 55 miles of rail line, consisting of 45 miles located in southeastern Pennsylvania, and 10 miles of contiguous line which extends into the State of Delaware, where the Company interchanges with CSX Transportation at Elsmere, Delaware. The Pennsylvania rail line is operated pursuant to an agreement between DVRC and the Commonwealth of Pennsylvania. The rail line in Delaware was operated by DVRC pursuant to a 10-year lease with the Wilmington & Northern Railroad Company. DVRC terminated that lease on June 30, 1996 and has since been operating over that rail segment on a month-to-month basis. DVRC has received grants from the Commonwealth of Pennsylvania for track maintenance and improvements from 1994 through 1998 which require local matching. MINNESOTA RAILROAD PROPERTIES Dakota Rail operates approximately 44 miles of rail line between Hutchinson and Wayzata, Minnesota. The rail line is being purchased pursuant to a contract for deed from the State of Minnesota. Dakota Rail also owns certain non-operating real estate parcels. Total land both operating and non-operating owned by Dakota Rail equals approximately 580 acres. In addition to the rail line and land, Dakota Rail also owns six buildings, consisting of two depots, two diesel houses and two other buildings. MNR currently operates over 221 miles of rail line of which it owns approximately 174 miles and has trackage rights over 47 miles. The rail line includes five branch lines, divided into seven segments in northern Minnesota. MNR also owns approximately 2,600 acres of operating and non-operating land. MNR sold approximately 30 miles of rail line in December 1996. MNR's rail properties serve as collateral for the Revolver (See Note 10 to Notes to Consolidated Financial Statements). OTVR owns 72 miles of rail line in Western Minnesota from Fergus Falls, Minnesota to an interchange with Burlington Northern Santa Fe near Fargo, North Dakota. The total land owned by OTVR is approximately 1,080 acres. In addition to the rail line and land, OTVR owns a depot building in Fergus Falls. OTVR's railroad properties serve as collateral for the Company's Revolver (See Note 10 to Notes to Consolidated Financial Statements). SCXY operates over 60 miles of rail line of which it owns 44 miles and has trackage rights over 16 miles. The rail line includes two branch lines in and around Hinckley, Minnesota. TEXAS RAILROAD PROPERTIES WTLR owns approximately 104 miles of rail line, extending from the City of Lubbock to both Seagraves and Whiteface. The total land owned by WTLR is approximately 1,500 acres. In addition to the rail line and land, WTLR owns four buildings. These buildings consist of an office building in Lubbock used as the railroad general offices, a one story storefront office building, and 20
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a maintenance building and storage shed, all in Brownfield, Texas. The Company's Texas railroad properties serve as collateral for the Revolver (See Note 10 to Notes to Consolidated Financial Statements). WASHINGTON RAILROAD PROPERTIES CCRR owns 131 miles of rail line between Oroville and Wenatchee, Washington. CCRR also has trackage rights over 6 miles of rail line near Wenatchee. Total land owned by CCRR is approximately 1,600 acres. In addition to the rail line and land, CCRR owns three buildings. These buildings consist of an office building, a maintenance-of-way shop/storage building and a locomotive shop, all of which are located in Omak, Washington. The Company's Washington railroad properties serve as collateral for the Revolver. (See Note 10 to Notes to Consolidated Financial Statements). CALIFORNIA RAILROAD PROPERTIES In August 1998, the Company, through its newly formed, wholly-owned subsidiary, Ventura County Railroad Company, Inc. ("VCRR"), entered into a long term lease/purchase agreement to operate a 13-mile rail line serving the Port of Hueneme and the Oxnard Harbor District in Oxnard, California, located approximately 50 miles north of Los Angeles. VCRR's general offices are located at the Port of Hueneme. CHILEAN RAILROAD PROPERTIES In February 1997, the Company, through a newly formed, wholly-owned subsidiary, RailAmerica de Chile S.A., acquired 55% of the outstanding voting stock of Ferronor. Ferronor owns and operates approximately 1,400 miles of rail line serving northern Chile. RailAmerica was joined in the purchase of Ferronor by APCO, a family-owned Chilean transportation and distribution company. Ferronor operates the only north-south railroad in northern Chile, extending from La Calera near Santiago, where it connects with Chile's southern railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique, approximately 120 miles south of the Peruvian border. It also operates several east-west branch lines that link a number of iron, copper and limestone mines and production facilities with several Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia through traffic interchanged with the General Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia. TEXAS MANUFACTURING PROPERTIES KSI's manufacturing operations are conducted in thirteen Company owned buildings, totaling approximately 198,000 square feet on an 25.5-acre site, which were constructed over the period from 1969 to 1997. The Company's Texas manufacturing properties serve as collateral for the Revolver (See Note 10 to Notes to Consolidated Financial Statements). 21
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QUEBEC, CANADA MANUFACTURING PROPERTIES KSC's manufacturing operations are conducted in two Company owned buildings, totaling approximately 150,000 square feet on a 36.7-acre site. The Company's Quebec manufacturing properties serve as collateral for certain term financings (See Note 10 to Notes to Consolidated Financial Statements). ONTARIO, CANADA MOTOR CARRIER PROPERTIES Steel City Carriers operates from a terminal it owns in Sault Ste. Marie, Ontario, Canada, which includes an office building housing administrative and dispatch offices, fabricating and service and a shop building. The service facility has three bays which provide adequate space for repairs and maintenance of Steel City Carriers' tractors and trailers as well as some owner-operators' tractors. A 5-1/2 acre lot provides adequate space for the normal loading, unloading, movement and parking of tractors and trailers as well as for temporarily storing and transferring some shipments. The Company has entered into an agreement to sell the real estate and anticipates the sale closing in 12 to 24 months. The Company's Ontario properties serve as collateral for the Revolver (See Note 10 to Notes to Consolidated Financial Statements). ROLLING STOCK As of December 31, 1998, the Company's domestic railroad rolling stock consisted of 47 locomotives and 992 freight cars, some of which were owned and some of which are leased from third parties. Most of the Company's rail cars are subject to fixed monthly lease payments which are offset, in part, by fees charged by the Company to connecting railroads and shippers. The Company owns 138 tank cars that it has leased to various shippers. The tank cars serve as collateral for term financing agreements. Certain of the Company's locomotives are owned by the Company and serve as collateral under various financing agreements (See Note 8 to Notes to Consolidated Financial Statements). The Company also owns various other equipment used in the maintenance and operation of its railroads. The following tables summarize the composition of the Company's domestic railroad equipment fleet as of December 31, 1998: FREIGHT CARS ----------------------------------- TYPE OWNED LEASED TOTAL ---- ----- ------ ----- Covered hopper cars -- 458 458 Open top hopper cars 5 184 189 Tank cars 138 -- 138 Box cars -- 59 59 Wood chip cars -- 78 78 Center-beam flat cars -- 60 60 Flat cars 10 -- 10 --- --- --- 153 839 992 === === === 22
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LOCOMOTIVES --------------------------------- HORSEPOWER/UNIT OWNED LEASED TOTAL --------------- ----- ----- ----- Over 2000 2 0 2 1500 to 2000 22 14 36 Under 1500 9 0 9 -- -- -- 33 14 47 == == == As of December 31, 1998, Ferronor owned approximately 32 locomotives and 810 rail cars in Chile. Based on current and forecasted traffic levels on the Company's railroads, management believes that its present equipment, combined with the availability of other rail cars for hire, is adequate to support its operations. Management believes that the Company's insurance coverage with respect to its property and equipment is adequate. ADMINISTRATIVE OFFICES The Company maintains its principal executive office in Boca Raton, Florida. This office consists of approximately 7,250 square feet and is leased through January 2001. The lease calls for monthly rental payments of approximately $13,000 with annual increases. In July 1998, the Company purchased a 59,500 square foot office building, located in Boca Raton, Florida, for approximately $4.6 million. Approximately 17,500 square feet of this building is to be used as the Company's new corporate headquarters. The Company is expected to take occupancy during the second quarter of 1999. The remaining 42,000 square feet of space is currently leased to a single tenant. In addition, the Company subleases a corporate office in San Francisco, California, consisting of approximately 1,000 square feet and leased through June 2001, with lease payments of approximately $550 per month.  ITEM 3. LEGAL PROCEEDINGS In the ordinary course of conducting its business, the Company becomes involved in various legal actions and other claims some of which are currently pending. 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 be material. Other than ordinary routine litigation incidental to the Company's business, no other litigation exists.  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 1998. 23
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PART II  ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective March 6, 1997, the Company's common stock began trading on the Nasdaq National Market under the symbol "Rail". Prior to March 6, 1997, the Company's common stock traded on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market. Set forth below is high and low bid information for the common stock as reported on the NASDAQ system for each quarter of 1997 and 1998. All such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not reflect actual transactions. [Enlarge/Download Table] ------------------------------------------------------------------------------------------------ High Sales Price Low Sales Price ------------------------------------------------------------------------------------------------ 1997 ------------------------------------------------------------------------------------------------ First Quarter $ 6 1/8 $ 4 5/8 ------------------------------------------------------------------------------------------------ Second Quarter 5 4 1/4 ------------------------------------------------------------------------------------------------ Third Quarter 6 5/16 4 1/8 ------------------------------------------------------------------------------------------------ Fourth Quarter 7 3/8 5 3/8 ------------------------------------------------------------------------------------------------ [Enlarge/Download Table] ------------------------------------------------------------------------------------------------ High Sales Price Low Sales Price ------------------------------------------------------------------------------------------------ 1998 First Quarter $ 7 23/32 $ 6 ------------------------------------------------------------------------------------------------ Second Quarter 7 3/16 5 15/16 ------------------------------------------------------------------------------------------------ Third Quarter 6 3/8 5 ------------------------------------------------------------------------------------------------ Fourth Quarter 8 3/4 5 5/16 ------------------------------------------------------------------------------------------------ [Enlarge/Download Table] ------------------------------------------------------------------------------------------------ High Sales Price Low Sales Price ------------------------------------------------------------------------------------------------ 1999 ------------------------------------------------------------------------------------------------ First Quarter (through March 25) $10 3/4 $ 7 1/4 ------------------------------------------------------------------------------------------------ As of March 25, 1999, there were 303 holders of record of the common stock and approximately 3,000 beneficial stockholders. The Company has never declared or paid a dividend on its common stock. The ability of the Company to pay dividends in the future will depend on, among other things, restrictive covenants contained in loan or other agreements to which the Company may be subject. 24
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In December 1998 and January 1999, the Company sold an aggregate of 468,000 shares of its Series A Convertible Redeemable Preferred Stock, $.01 par value (the "Series A Preferred Stock"), in a private offering to accredited investors for an aggregate purchase price of $11,610,000 pursuant to Section 4(2) and/or 3(b) of the Securities Act of 1933, as amended (the "Securities Act"), and Regulation D promulgated thereunder. The Company paid aggregate concessions and fees of $822,700 to the placement agent in connection with the offering. The Series A Preferred Stock has a liquidation value of $25.00 per share, pays cumulative annual dividends of 7.5% payable in cash, semi-annually in arrears and is non-voting. The Series A Preferred Stock is convertible, at the option of each holder, into shares of common stock at a conversion price of $8.25, subject to adjustment under certain circumstances. The Company is required to redeem the outstanding shares of Series A Preferred Stock on December 31, 2003, at a redemption price equal to the liquidation value, plus accrued and unpaid dividends. The Company has the right to redeem the outstanding shares of Series A Preferred Stock under certain circumstances. In March 1999, the Company sold an aggregate of 1.4 million shares of its common stock and warrants (the "1999 Warrants") to purchase 210,000 shares of common stock in a private offering to accredited investors for an aggregate purchase price of $12.5 million pursuant to Section 4(2) and/or 3(b) of the Securities Act and Regulation D promulgated thereunder. The Company paid aggregate concessions and fees of $437,000 to the placement agent in connection with the offering. The 1999 Warrants are exercisable during the one-year period following consummation at $10.125 per share, subject to adjustment under certain circumstances. 25
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 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998 and 1997 are derived from, and are qualified by reference to, audited financial statements included elsewhere herein and should be read in conjunction with those financial statements and the notes thereto. The statement of operations data set forth below for the periods ended December 31, 1995 and 1994 and the balance sheet data as of December 31, 1996, 1995 and 1994 are derived from the audited financial statements of the Company not included herein (In thousands, except operating data). [Enlarge/Download Table] YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- INCOME STATEMENT DATA Operating revenue $ 14,724 $ 25,078 $ 25,658 $ 47,437 $ 77,144 Operating income 2,229 3,188 3,873 7,319 12,642 Income from continuing operations 920 1,126 1,080 2,634 4,466 Basic earnings per common share from continuing operations $ 0.30 $ 0.10 $ 0.22 $ 0.32 $ 0.47 Diluted earnings per common share from continuing operations $ 0.27 $ 0.10 $ 0.21 $ 0.30 $ 0.44 Weighted average common shares 4,608 4,504 4,966 8,304 9,553 BALANCE SHEET DATA Total Assets $ 24,876 $ 40,064 $ 71,565 $100,835 $145,230 Long-term debt, including current maturities 10,407 18,151 40,154 47,798 71,815 Subordinated debt, including current maturities 2,062 5,569 3,690 3,478 908 Redeemable convertible preferred stock 1,017 -- -- -- 6,882 Stockholders' Equity 6,408 9,149 15,992 26,814 34,760 OPERATING DATA Freight carloads 15,614 18,505 25,871 69,140 117,535 Track mileage 299 450 930 2,330 2,400 Trailer units sold 887 875 547 730 1,129 Number of full time employees 220 265 275 542 652 26
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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL The Company's principal operations include the operation of domestic short line railroads, international regional railroads and trailer manufacturing. The Company hauls various products, which historically have consisted primarily of agricultural commodities, for its customers corresponding to their local operating areas. The Company's trailer manufacturing division, located in Texas and Trois-Rivieres, Quebec, Canada, manufactures a broad range of specialty truck trailers which are marketed to a customer base from the commercial and government sectors. The Company's operating revenues increased by $29.7 million, or 62.6% to $77.1 million for the year ended December 31, 1998 from $47.4 million for the year ended December 31, 1997. Operating expenses increased by $24.4 million, or 60.7% to $64.5 million for the year ended December 31, 1998 from $40.1 million for the year ended December 31, 1997. Other expenses, net increased by $2.9 million, or 77.5% to $6.6 million for the year ended December 31, 1998 from $3.7 million for the year ended December 31, 1997. Income from continuing operations increased by $1.8 million, or 69.6% to $4.5 million for the year ended December 31, 1998 from $2.6 million for the year ended December 31, 1997. Increases in revenue, operating expenses, other expenses and income were due primarily to the inclusion of the motor carrier division in continuing operations for nine months of 1998, the commencement of shipments on several large new contracts at Ferronor in 1998, the acquisition of KSC and the growth of the trailer manufacturing operations. Set forth below is a discussion of the results of operations for the Company's railroad operations, trailer manufacturing operations and corporate overhead and other. RESULTS OF DOMESTIC RAILROAD OPERATIONS The discussion of results of operations that follows reflects the consolidated results of the Company's domestic railroad operations for the years ended December 31, 1998, 1997 and 1996. The results of operations include the operations of Evansville Terminal Company from July 1, 1996 to September 30, 1997, CCRR from September 6, 1996, OTVR from October 1, 1996, Gettysburg Railway and Gettysburg Scenic Rail Tours, Inc. ("GSRT") from November 18, 1996 to October 31, 1997, MNR from December 28, 1996 , SCXY from September 8, 1997, and VCRR from September 1, 1998. As a result, the results of operations for the year ended December 31, 1998 are not comparable to the prior year periods in certain material respects. 27
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The following table sets forth the operating revenues and expenses for the Company's domestic railroad operations for the periods indicated. All results of operations discussed in this section are for the Company's domestic railroads only, unless indicated (in thousands). [Download Table] YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- ------- Operating Revenue: Transportation revenue $15,388 $14,737 $ 9,783 Other revenue 802 1,277 1,921 ------- ------- ------- Total operating revenue 16,190 16,014 11,704 ------- ------- ------- Operating Expenses: Maintenance of way 1,974 2,231 1,310 Maintenance of equipment 675 678 625 Transportation 3,605 3,799 2,075 Equipment rental 347 599 388 Selling, general and administrative 3,095 2,457 1,381 Depreciation and amortization 1,570 1,337 961 ------- ------- ------- Total operating expenses 11,266 11,101 6,740 ------- ------- ------- Operating income 4,924 4,913 4,964 Interest and other expense 2,852 2,842 1,308 ------- ------- ------- Income before income taxes $ 2,072 $ 2,071 $ 3,656 ======= ======= ======= COMPARISON OF DOMESTIC RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 OPERATING REVENUES. Transportation revenues increased $0.7 million, or 4.4%, to $15.4 million for the year ended December 31, 1998 from $14.7 million for the year ended December 31, 1997. The domestic transportation revenue per carload decreased to $303 from $308 per car primarily due to the difference in product mix hauled between 1998 and 1997. Domestic carloads handled totaled 49,519 for the year ended December 31, 1998, an increase of 3,312, or 7.2%, compared to 46,207 for the year ended December 31, 1997. Other revenues decreased by approximately $0.5 million, or 37.2%, to $0.8 million for the year ended December 31, 1998 from $1.3 million for the year ended December 31, 1997. Other revenues for 1998 and 1997 consist of gain on sales of railroad assets, easement sales, railroad lease and rental income and other miscellaneous income. The decrease was primarily due to certain gains on sale of assets during 1997 with no corresponding sales of assets in 1998. OPERATING EXPENSES. Operating expenses increased by $0.2 million, or 1.8%, to $11.3 million for the year ended December 31, 1998 from $11.1 million for the year ended December 31, 1997. Operating expenses, as a percentage of transportation revenue, were 73.2% and 75.3% for 1998 and 1997, respectively. Management anticipates the operating expenses, as a percentage of transportation revenue to remain fairly constant at the current level for the next twelve months exclusive of seasonality. 28
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Maintenance of way expenses decreased approximately $0.2 million, or 11.5%, to $2.0 million for the year ended December 31, 1998 from $2.2 million for the year ended December 31, 1997 primarily due to increased track work being performed as part of scheduled maintenance programs at WTLR and HESR during 1997. Maintenance of equipment expenses remained fairly constant at $0.7 million for the years ended December 31, 1998 and 1997. Transportation expense decreased approximately $0.2 million, or 5.1%, to $3.6 million for the year ended December 31, 1998 from $3.8 million for the year ended December 31, 1997 primarily due to the dispositions of ETC, Gettysburg Railway and GSRT in 1997. Equipment rental decreased approximately $0.3 million, or 42.0%, to approximately $0.3 million for the year ended December 31, 1998 from $0.6 million for the year ended December 31, 1997. The decrease is primarily due to increased utilization of the Company's leased railcar fleet. CCRR and MNR equipment rental expenses decreased by 78.8% and 137.4% respectively due to increased earnings offsetting equipment rental expense on their railcar fleets. Selling, general and administrative expenses increased approximately $0.6 million, or 26.0%, to $3.1 million for the year ended December 31, 1998 from $2.5 million for the year ended December 31, 1997. MNR had selling, general and administrative expenses of approximately $0.5 million in 1998 compared to $0.3 million for the year ended December 31, 1997, an increase of approximately $0.2 million. OTVR had selling, general and administrative expenses of approximately $0.3 million in 1998 compared to $0.2 million for the year ended December 31, 1997, an increase of approximately $0.1 million. SCXY had selling, general and administrative expenses of $0.1 million for the year ended December 31, 1998, an increase of $0.1 million from $15,000 in 1997. Depreciation and amortization increased approximately $0.3 million, or 17.4%, to $1.6 million for the year ended December 31, 1998 from $1.3 million for the year ended December 31, 1997. INTEREST AND OTHER EXPENSES. Interest and other expenses remained fairly constant at approximately $2.9 million for the years ended December 31, 1998 and 1997. COMPARISON OF DOMESTIC RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 OPERATING REVENUES. Transportation revenues increased $5.0 million, or 50.6%, to $14.7 million for the year ended December 31, 1997 from $9.8 million for the year ended December 31, 1996. CCRR, which was acquired in September 1996, had transportation revenue of approximately $2.6 million for 1997 and approximately $0.7 million for the four months ended December 31, 1996, an increase of $1.9 million. MNR, which was acquired in December 1996, had transportation revenue of approximately $2.2 million for the year ended December 31, 1997. OTVR, which was 29
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acquired in September 1996, had transportation revenue of approximately $1.8 million for the year ended December 31, 1997, compared to $0.6 million for the four month period ended December 31, 1996, an increase of $1.2 million. Gettysburg Railway, which was acquired in November 1996, had transportation revenue of approximately $0.4 million for the year ended December 31, 1997. These increases in transportation revenue were partially offset by a decrease of approximately $0.2 million in revenue from HESR resulting from decreased agricultural shipments in early 1997 compared to early 1996. Additionally, transportation revenue from SCTR decreased approximately $0.4 million due to a decrease in demurrage revenue charged to a shipper. The domestic transportation revenue per carload decreased to $308 from $378 per car primarily due to the acquisitions during 1996 of railroads with lower rates per carload than the Company's existing railroads. Domestic carloads handled totaled 46,207 for the year ended December 31, 1997, an increase of 20,336, or 78.6%, compared to 25,871 for the year ended December 31, 1996. The increase was primarily the result of the Company's acquisitions of MNR, which handled 10,477 carloads in 1997, CCRR, which handled 7,631 carloads in 1997, OTVR, which handled 5,776 carloads in 1997, and Gettysburg Railway, which handled 1,206 carloads in 1997. These increased car loadings were partially offset by a decrease of 541 carloads from HESR. Other revenues decreased by approximately $0.6 million, or 33.5%, to $1.3 million for the year ended December 31, 1997 from $1.9 million for the year ended December 31, 1996. Other revenues for 1997 and 1996 consisted of gain on sales of railroad assets, easement sales, railroad lease and rental income and other miscellaneous income. OPERATING EXPENSES. Operating expenses increased by $4.4 million, or 64.7%, to $11.1 million for the year ended December 31, 1997 from $6.7 million for the year ended December 31, 1996. Operating expenses, as a percentage of transportation revenue, were 75.3% and 68.9% for 1997 and 1996, respectively. The change was primarily due to higher maintenance of way expenses caused by an unusually harsh winter in Minnesota and Michigan in the first quarter of 1997 and higher operating ratios for certain of the recent acquisitions as compared to the Company's existing railroads. Maintenance of way expenses increased approximately $0.9 million, or 70.3%, to $2.2 million for the year ended December 31, 1997 from $1.3 million for the year ended December 31, 1996 primarily due to certain acquisitions which occurred in 1996. MNR had maintenance of way expenses of approximately $0.5 million for the year ended December 31, 1997. CCRR had maintenance of way expenses of approximately $0.2 million for 1997, compared to maintenance of way expenses of approximately $57,000 for the four months ended December 31, 1996, an increase of $0.2 million. Gettysburg Railway had maintenance of way expenses of approximately $0.1 million for the year ended December 31, 1997, compared to $10,000 for the four months ended December 31, 1996. In addition to the above acquisitions, WTLR's and HESR's maintenance of way expenses increased approximately $74,000 and $0.1 million, respectively, from 1996 to 1997 due to increased track work being performed as part of scheduled maintenance programs. Maintenance of equipment expenses increased by approximately $53,000, or 8.5%, to $0.68 30
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million for the year ended December 31, 1997 from $0.63 million for the year ended December 31, 1996 primarily due to certain acquisitions which occurred in the second half of 1996. Transportation expense increased approximately $1.7 million, or 83.1%, to $3.8 million for the year ended December 31, 1997, from $2.1 million for the year ended December 31, 1996 primarily due to certain acquisitions in the second half of 1996. MNR had transportation expenses of approximately $0.7 million in 1997. CCRR had transportation expenses of approximately $0.5 million for the year ended December 31, 1997, compared to $0.1 million for the four months ended December 31, 1996, an increase of $0.3 million. OTVR had transportation expenses of approximately $0.3 million for the year ended December 31, 1997, compared to $59,000 in the three months ended December 31, 1996, an increase of approximately $0.3 million. Gettysburg Railway and GSRT combined had transportation expenses of $0.3 million for the year ended December 31, 1997. Equipment rental increased approximately $0.2 million, or 54.4%, to $0.6 million for the year ended December 31, 1997, from $0.4 million for the year ended December 31, 1996. Selling, general and administrative expenses increased approximately $1.1 million, or 77.9%, to $2.5 million for the year ended December 31, 1997, from $1.4 million for the year ended December 31, 1996 primarily due to certain acquisitions in the second half of 1996. MNR had selling, general and administrative expenses of approximately $0.3 million in 1997. CCRR had selling, general and administrative expenses of approximately $0.4 million for the year ended December 31, 1997, compared to $0.1 million for the four months ended December 31, 1996, an increase of $0.3 million. OTVR had selling, general and administrative expenses of approximately $0.2 million for the year ended December 31, 1997, compared to $44,000 in the three months ended December 31, 1996, an increase of approximately $0.1 million. Gettysburg Railway had selling, general and administrative expenses of $0.1 million for the year ended December 31, 1997. Depreciation and amortization increased approximately $0.4 million, or 39.1%, to $1.3 million for the year ended December 31, 1997 from $1.0 million for the year ended December 31, 1996 primarily due to certain acquisitions in the second half of 1996. INTEREST AND OTHER EXPENSES. Interest and other expenses increased by approximately $1.5 million, or 117.3%, to $2.8 million for the year ended December 31, 1997 from $1.3 million for the year ended December 31, 1996. Such increase was primarily due to the financing of the acquisitions of CCRR, MNR, OTVR and Gettysburg Railway. The increase in interest expense from the year ended December 31, 1996 to the year ended December 31, 1997 attributable to these four acquisitions was $0.5 million, $0.5 million, $0.4 million and $0.1 million, respectively. RESULTS OF INTERNATIONAL RAILROAD OPERATIONS FERRONOR. On February 19, 1997, the Company acquired a 55% equity interest in Ferronor, a 1,400 mile regional railroad in the Republic of Chile. The operations of Ferronor have been 31
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included in the consolidated operations of the Company from March 1, 1997. As a result, the results of operations for the year ended December 31, 1998 are not comparable to the corresponding prior year in certain material respects. The following table sets forth the operating revenues and expenses for the Company's international railroad operations, which consist of Ferronor and RDC, for the periods indicated. All results of operations discussed in this section are for the Company's international railroads only, unless otherwise indicated. (In thousands) For the Year Ended Ended December 31, 1998 1997 -------- -------- Revenue: Transportation revenue $ 14,915 $ 7,287 Other revenue 1,009 775 -------- -------- Total revenue 15,924 8,062 -------- -------- Operating Expenses: Transportation 8,982 5,113 General and administrative 1,724 1,137 Depreciation and amortization 706 267 -------- -------- Total operating expenses 11,412 6,517 -------- -------- Operating income 4,512 1,545 Other income (expense) (1,257) 319 Minority interest in earnings (1,672) (851) -------- -------- Income before income taxes $ 1,583 $ 1,013 ======== ======== COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997. OPERATING REVENUES. Transportation revenue increased by $7.6 million, or 104.7%, to $14.9 million for the year ended December 31, 1998 from $7.3 million for the year ended December 31, 1997. Ferronor's carloads handled totaled 68,016 for the year ended December 31, 1998, an increase of 45,083, or 196.6%, compared to 22,933 carloads for the year ended December 31, 1997. The increase was partially due to the prior year period including only ten months of operations. In addition, Ferronor began moving iron ore out of the El Algarrabo mine in late March 1998 and the Los Colorados mine in July 1998. These moves have significantly increased Ferronor's car loadings and operating revenue. OPERATING EXPENSES. Operating expenses increased by approximately $4.9 million, or 75.1%, to $11.4 million for the year ended December 31, 1998 from $6.5 million for the year ended December 31, 1997. The increase was partially due to the prior year period including only ten months of operations in addition to Ferronor commencing movement of iron ore out of the El Algarrabo mine in late March 1998 and the Los Colorados mine in July 1998. Operating expenses, as a percentage of transportation revenue, were 76.5% and 89.4% for the years ended December 31, 32
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1998 and 1997, respectively. The improvement is primarily due to cost reductions implemented by the Company including a reduction in employees. OTHER INCOME (EXPENSE). Other income (expense) decreased by approximately $1.6 million to $(1.3) million for the year ended December 31, 1998 from $0.3 million for the year ended December 31, 1997. The primary reasons for the decrease are the interest expense on the capital project financings and certain gains on sale of assets recognized in 1997 with no corresponding gains in 1998. RESULTS OF TRAILER MANUFACTURING OPERATIONS The discussion of results of operations that follows reflects the results of KSI for the periods indicated and KSC from January 1, 1998, the effective date of the Company's acquisition of Fabrex, Inc. and its affiliate. As a result, the results of operations for the year ended December 31, 1998 are not comparable to the corresponding prior years in certain material respects. The following table sets forth the income and expense items of the Company's trailer manufacturing operations for the years ended December 31, 1998, 1997 and 1996 and the percentage relationship of income and expense items to net sales (in thousands): [Enlarge/Download Table] FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996 ------------------- ------------------- ------------------- Net sales $39,887 100% $22,941 100% $13,638 100% Cost of goods sold 28,583 71.7% 16,544 72.1% 10,448 76.6% ------- ------- ------- Gross profit 11,304 28.3% 6,397 27.9% 3,190 23.4% Selling, general and administrative 3,324 8.3% 1,969 8.6% 1,400 10.3% Depreciation and amortization 835 2.1% 473 2.1% 433 3.2% ------- ------- ------- Income from operations 7,145 17.9% 3,955 17.2% 1,357 10.0% Other expenses (net) 222 0.6% 230 1.0% 348 2.6% ------- ------- ------- Income before income taxes $ 6,923 17.4% $ 3,725 16.2% $ 1,009 7.4% ======= ======= ======= COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 NET SALES. Net sales increased approximately $17.0 million, or 73.9%, to $39.9 million for the year ended December 31, 1998 from $22.9 million for the year ended December 31, 1997. The net sales increase consisted of $10.2 million in sales from KSC in 1998 and an increase of $6.8 million in KSI's sales. KSI sold 895 trailers for the year ended December 31, 1998 and 730 trailers for the year ended December 31, 1997. The increase in KSI's sales volume increased net sales by 33
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approximately $5.0 million. KSC sold 234 trailers for the year ended December 31, 1998. KSI's average price per trailer sold was approximately $34,700 for the year ended December 31, 1998 and approximately $30,500 for the year ended December 31, 1997. The increase in average price per trailer increased KSI's sales by approximately $1.8 million. Sales to governmental agencies represented 48% and 37% of KSI's net sales for 1998 and 1997, respectively. KSI's backlog as of December 31, 1997 was approximately $18.3 million compared to $19.7 million at December 31, 1997. KSC's backlog as of December 31, 1998 was approximately $3.7 million. COST OF GOODS SOLD. Cost of goods sold increased by approximately $12.0 million, or 72.8%, to $28.6 million for the year ended December 31, 1998 from $16.6 million for the year ended December 31, 1997. The cost of goods sold increase consisted of $8.4 million from KSC in 1998 and an increase of $3.6 million in KSI's cost of goods sold. Cost of goods sold was 71.7% for the year ended December 31, 1998 compared to 72.1% for the year ended December 31, 1997. KSI's and KSC's cost of goods sold were 68.2% and 81.7%, respectively, for 1998. Management anticipates gross profit as a percentage of net revenue to remain fairly constant over the next twelve months. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by approximately $1.3 million, or 68.8%, to $3.3 million for the year ended December 31, 1998 from $2.0 million for the year ended December 31, 1997. KSC's selling, general and administrative expenses were $0.9 million for 1998, while KSI's selling, general and administrative expenses increased $0.4 million for 1998. The increase was primarily related to KSI's increased sales during the year as discussed above. COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 NET SALES. Net sales increased approximately $9.3 million, or 68.2%, to $22.9 million for the year ended December 31, 1997 from $13.6 million for the year ended December 31, 1996. Net sales consist of trailer sales, part sales and repair income. Trailer sales represented approximately 96% of the net sales in both 1997 and 1996. KSI sold 730 trailers for the year ended December 31, 1997 and 547 trailers for the year ended December 31, 1996. The increase in sales volume increased net sales by approximately $4.4 million. The average price per trailer sold was approximately $30,500 for the year ended December 31, 1997 and approximately $24,000 for the year ended December 31, 1996. The increase in average price per trailer increased net sales by approximately $4.8 million. Sales to governmental agencies represented 37% and 20% of KSI's net sales for 1997 and 1996, respectively. During the first half of 1996, KSI was in the process of building five prototype trailers in connection with the $27 million October 1995 TACOM contract. Full production under the contract began during the first quarter of 1997. The increase in sales for 1997 compared to 1996 was principally production under such contract. KSI produced 105 Tactical Vans under the TACOM contract during 1997. KSI's backlog as of December 31, 1997 was approximately $19.7 million compared to $8.6 million at December 31, 1996. 34
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COST OF GOODS SOLD. Cost of goods sold increased by approximately $6.1 million, or 58.2%, to $16.5 million for the year ended December 31, 1997 from $10.4 million for the year ended December 31, 1996. Cost of goods sold was 72.1% for the year ended December 31, 1997 compared to 76.6% for the year ended December 31, 1996. The decrease was partially due to certain fixed costs of manufacturing being spread over a larger revenue base in 1997. Additionally, government orders represented a higher percentage of sales in 1997 than in 1996. Commercial trailers have more variations in design which generally require greater expertise in the manufacturing process. Government contracts are typically for larger quantities of similar style trailers. This creates greater economies of scale in the production process which translates into a relatively lower cost per unit produced. Historically, commercial sales have had a higher cost of goods sold and lower gross profit margins than government sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by approximately $0.6 million, or 40.9%, from $1.4 million for the year ended December 31, 1996 to $2.0 million for the year ended December 31, 1997. The increase was primarily related to KSI's increased sales during the year as discussed above. RESULTS OF MOTOR CARRIER OPERATIONS The discussion of results of operations that follows reflects the results of Steel City Carriers and RIS for the years ended December 31, 1998, 1997 and 1996. Since the Company's acquisition of Steel City Carriers in February 1995, its performance and development have not met the Company's expectations. Accordingly, in March 1997 the Company adopted a formal plan to discontinue its motor carrier operations and refocus the Company's efforts on expanding its core railroad operations. The Company's Board of Directors approved the plan of discontinuance on March 20, 1997. Motor Carrier operations are included as discontinued operations for the first quarter of 1998 and for all of 1997 and 1996. Motor Carrier operations are included in continuing operations from April 1, 1998 to December 31, 1998. Effective December 1, 1998, the Company ceased all motor carrier operations and leased substantially all of the operating assets of Steel City Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario, Canada-based Contrans Corporation. The leases are for a period of 18 to 24 months. In addition, the Company has entered into an agreement to sell its Ontario real estate that was previously used in the motor carrier operations. 35
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The following table sets forth the operating revenues and expenses for the Company's motor carrier operations for the years ended December 31, 1998 and 1997. For the Year Ended December 31, 1998 1997 ------- ------- Transportation revenue $ 6,080 $ 7,133 Operating expenses: Transportation 5,279 6,348 General and administrative 620 599 Depreciation and amortization 401 1,120 ------- ------- Total operating expenses 6,300 8,067 ------- ------- Operating income (expense) (220) (934) Other expense (317) (187) ------- ------- Loss before income taxes ($ 537) ($1,121) ======= ======= COMPARISON OF MOTOR CARRIER OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 The results of motor carrier operations have been included in continuing operations commencing April 1, 1998, as disposal of the segment was not completed within twelve months. The results of motor carrier operations have been included as discontinued operations for the year ended December 31, 1997, as previously reported. OPERATING REVENUE. Operating revenue decreased $1.0 million, or 14.8%, to $6.1 million for the year ended December 31, 1998 from $7.1 million for the year ended December 31, 1997. The decrease was primarily due to Steel City ceasing motor carrier operations effective November 30, 1998 and due to a temporary shut down at one of Steel City's largest customers during the third quarter of 1998. OPERATING EXPENSES. Operating expenses decreased $1.8 million, or 21.9%, to $6.3 million for the year ended December 31, 1998 from $8.1 million for the year ended December 31, 1997. Operating expenses, as a percentage of operating revenue, were 103.6% and 113.1% for the years ended December 31, 1998 and 1997, respectively. Transportation expense decreased $1.0 million, or 16.8%, to $5.3 million for the year ended December 31, 1998 from $6.3 million for the year ended December 31, 1997. The decrease was primarily due to variable costs related to the decreased level of operating revenue. General and administrative expenses remained fairly constant at $0.6 million for the years ended December 31, 1998 and 1997. Depreciation and amortization decreased $0.7 million, or 64.2%, to $0.4 million for the year ended December 31, 1998 from $1.1 million for the year ended December 31, 1997. During 1997, the Company wrote off goodwill of approximately $0.7 million. Other expense increased $0.1 million, or 69.5%, to $0.3 million for the year ended December 31, 1998 from $0.2 million for the year ended December 31, 1997. 36
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Loss from discontinued operations increased by $0.1 million to $0.7 million for the year ended December 31, 1997 from $0.6 million for the year ended December 31, 1996. CORPORATE OVERHEAD Corporate overhead, which benefits all of the Company's business segments, has not been allocated to the business segments for this analysis. Corporate overhead services performed for the Company's subsidiaries include overall strategic planning, marketing, accounting, finance, cash management, payroll, engineering and tax return preparation. The Company believes that this presentation will facilitate a better understanding of the changes in the results of the Company's operations. Corporate overhead, which is included in selling, general and administrative expenses in the consolidated statements of income, increased $0.9 million, or 28.0%, to $4.1 million for the year ended December 31, 1998 from $3.2 million for the year ended December 31, 1997. Corporate overhead increased $0.7 million, or 28.2%, to $3.2 million for the year ended December 31, 1997 from $2.5 million for the year ended December 31, 1996. The increases in each of the specified periods were related to the additional costs incurred to manage the acquired subsidiaries and to establish a strong management team to handle the Company's continued growth. LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS The discussion of liquidity and capital resources that follows reflects the consolidated results of the Company, including all subsidiaries. The Company's cash provided by operating activities was $5.7 million for the year ended December 31, 1998. Cash used in investing activities was $30.7 million for the year ended December 31, 1998. The primary use of cash during 1998 was for the purchase of property, plant and equipment with an aggregate cost of approximately $28.1 million. Over $12.7 million of these purchases were by Ferronor to upgrade its track in anticipation of the new contracts which began in the second half of 1998. The Company also purchased a 59,000 square foot office building for approximately $4.6 million to accommodate its growth. KSC has purchased and is equipping an additional plant for over $2.8 million. SGVY acquired additional track at over $1.1 million, and the acquisition of KSC used $1.7 million in cash. Cash provided by financing activities was $26.9 million for 1998, consisting of net borrowings of approximately $17.0 million and net proceeds of approximately $7.5 million from the sale of convertible preferred stock. The Company's long term debt represents financing of property and equipment, as well as the acquisition financing for Ferronor, SCTR, KSI, Steel City Carriers, WTLR, CCRR, MNR, and OTVR. Certain of this indebtedness was refinanced under the Revolver. The Revolver bears interest, at the option of the Company, at either the bank's prime rate plus 0.25% or the one, three or six 37
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month LIBOR plus 2.5%. At December 31, 1998, $44.2 million was outstanding under the revolver. The Revolver is collateralized by substantially all of the assets of the Company, KSI, HESR, SGVY, RIS, CCRR, Steel City Carriers, WTLR, OTVR, MNR, SCXY, and VCRR. On May 3, 1997, the Revolver was increased from $25 million to $40 million by National Bank of Canada and Comerica Bank N.A., and on June 16, 1998, the Revolver was increased from $40 million to $55 million by National Bank of Canada, Comerica Bank N.A. and Southtrust Bank, N.A. at which time the maturity date was extended to May 2001. On September 30, 1998, the Company accepted a proposal by National Bank of Canada as agent to increase the Revolver to $100 million for purposes of future acquisitions of transportation related businesses. The Company anticipates the increase to be closed in the second quarter of 1999. As of December 31, 1998, the Company had working capital of $14.6 million compared to working capital of $5.2 million as of December 31, 1997. Cash on hand as of December 31, 1998 was $5.8 million compared to $3.7 million as of December 31, 1997. The Company's cash flows from operations and borrowings historically have been sufficient, and are currently sufficient to meet its ongoing operating requirements, capital expenditures for property, plant and equipment, and to satisfy the Company's interest requirements. In January 1999, the Company completed a private offering of $11.6 million of its Series A Convertible Redeemable Preferred Stock ("Preferred Stock"). The Company sold 464,400 shares of its Preferred Stock at a price of $25 per share. The Preferred Stock pays annual dividends of 7.5%, is convertible into shares of the Company's common stock at a price of $8.25 per share and is non-voting. The Preferred Stock is mandatorily redeemable 5 years from its issuance. The December 31, 1998 balance sheet includes 300,600 shares which were issued during 1998. The remainder of the shares were issued in January 1999. The carrying value of the Preferred Stock is the par value less issuance costs. The issuance costs will be amortized on a straight-line basis over the life of the Preferred Stock. In March 1999, the Company completed a private offering of approximately $12.5 million of restricted Common Stock. Pursuant to the offering, the Company sold approximately 1.4 million shares of its $.001 par value common stock at a price of $8.8125 per share and issued approximately 210,000 warrants to purchase an equivalent number of shares of common stock at an exercise price of $10.125 per share within one year of the transaction's closing date. First London acted as placement agent and received approximately $0.4 million in fees and cost reimbursement and one-year warrants to purchase 141,653 shares of Common Stock at an exercise price of $10.125. A majority of the proceeds from the two private offerings were used to fund a $19 million deposit with the government of Victoria, Australia. This deposit will be used as part of the purchase price of the V/Line Freight Corporation, which is anticipated to close in the second quarter of 1999. The Company expects that its future cash flows will be sufficient for its current and contemplated operations for at least the next twelve months, and will be used for, among other things, anticipated capital expenditures for the upgrading of existing rail lines and purchases of locomotives and equipment of approximately $2.8 million and capital expenditures at KSI of approximately $0.3 million. In addition, the Company anticipates capital expenditures of 38
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approximately $13.2 million over the next three years related to new Ferronor contracts received since its acquisition by the Company. Ferronor closed on a debt financing in the first quarter of 1999 that will be used to fund certain of the capital expenditures. Additionally, Ferronor has a commitment letter to fund the remainder of the expansion and anticipates closing on this financing during 1999. The Company also is in the process of purchasing and equipping an additional facility in Quebec, Canada for its newly purchased specialty trailer manufacturer. The costs of this project are estimated at an additional $2.5 million. The Company anticipates this project will be funded through the issuance of additional debt. The Company anticipates spending approximately $1.5 million over the next six months to refurbish the office building that it purchased in July 1998. The Company anticipates financing this project through its Revolver. The Company does not presently anticipate any other significant capital expenditures over the next twelve months. To the extent possible, the Company will seek to finance any further acquisitions of property, plant and equipment in order to allow its cash flow from operations to be devoted to other uses, including debt reduction and acquisition requirements. The Company's long-term business strategy includes the selective acquisition of additional transportation-related businesses. Accordingly, the Company may require additional equity and/or debt capital in order to consummate acquisitions or undertake major development activities. It is impossible to predict the amount of capital that may be required for such acquisitions or development, and there is no assurance that sufficient financing for such activities will be available on terms acceptable to the Company, if at all. As of March 1, 1999, the Company had approximately $0.2 million of availability under the Revolver. As noted above, in September 1998, the Company accepted a proposal by National Bank of Canada as agent to increase the Revolver to $100 million for purposes of future acquisitions of transportation related businesses. INFLATION Inflation in recent years has not had a significant impact on the Company's operations. The Company believes that inflation will not adversely affect the Company in the future unless it increases substantially and the Company is unable to pass through the increases in its freight rates and trailer prices. IMPACT OF YEAR 2000 The "Year 2000 Issue" is the result of computer programs that were written using two digits rather than four to define the applicable year. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, inability to interchange information with connecting railroads or engage in similar normal business activities. Many of our systems and related software are currently Year 2000 compliant and we have a 39
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program in place designed to bring the remaining software and systems into Year 2000 compliance in time to minimize any significant detrimental affect on operations. We are utilizing internal personnel and outside vendors to identify Year 2000 problems, modify and/or update programs and hardware and test the modifications. We rely on third parties, particularly the Class I railroads, for much of our information in our domestic rail operations. In addition, our trailer manufacturing segment relies heavily on third party suppliers for its raw materials. We have initiated efforts to evaluate the status of these suppliers' efforts and to determine alternatives and contingency plan requirements. An inability of a connecting railroad to process information could cause delays in services to customers and the inability of the Company to invoice and collect on shipments. Failure of a third party supplier to deliver materials to our manufacturing facilities could cause either a slow down in production and/or a temporary shut down of the facility. The total costs associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The estimated total cost of the Year 2000 Project is approximately $0.25 million. The total amount expended through December 31, 1998 is approximately $0.2 million. The failure to correct a material Year 2000 problem could result in an interruption in, or failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company believes that, with the implementation of new business systems and completion of the program as scheduled, the possibility of significant interruptions of normal operations should be minimized. Readers are cautioned that forward-looking statements contained in this Impact of Year 2000 discussion should be read in conjunction with the Company's disclosures under the heading "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995" which follows below in this section. NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires the cost of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company anticipates that the adoption of this statement will not have a material affect on the Company's results of operations or its financial position. 40
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The foregoing Management's Discussion and Analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including: statements regarding further growth in transportation-related assets; the acquisition of additional railroads and other transportation-related companies; the increased usage of the Company's existing rail lines; the growth of gross revenues; and the sufficiency of the Company's cash flows for the Company's future liquidity and capital resource needs. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the following: decline in demand for transportation services; the effect of economic conditions generally and particularly in the markets served by the Company; the Company's dependence upon obtaining future government contracts; the Company's dependence upon the agricultural industry as a significant user of the Company's rail services; the Company's dependence upon the availability of financing for acquisitions of railroads and other transportation-related companies; a decline in the market acceptability of railroad services; an organization or unionization of a material segment of the Company's employee base; the effect of competitive pricing; and the regulation of the Company by federal, state and local regulatory authorities. Any material adverse change in the financial condition or results of operations of KSI would have a material adverse impact on the Company. Results actually achieved thus may differ materially from expected results included in these statements.  ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company, the accompanying notes thereto and the independent auditor's report 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. 41
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PART III  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors, executive officers and nominees of the Company is hereby incorporated by reference from the Company's definitive proxy statement relating to its 1999 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 1999.  ITEM 11. EXECUTIVE COMPENSATION Information concerning the executive compensation of the Company is hereby incorporated by reference from the Company's definitive proxy statement relating to its 1999 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 1999.  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the security ownership of the Company is hereby incorporated by reference from the Company's definitive proxy statement relating to its 1999 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 1999.  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions of the Company is hereby incorporated by reference from the Company's definitive proxy statement relating to its 1999 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A on or before April 30, 1999. 42
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PART IV  ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of Registrant, as amended(3) 3.2 By-laws of Registrant(1) 4.1 Form of Common Stock Rights Agreement, dated as of January 6, 1998, between the Registrant and American Stock Transfer & Trust Company(10) 4.2 Certificate of Designation of Series A Convertible Redeemable Preferred Stock 10.35 Employment Agreement between Robert B. Coward and Kalyn/Siebert, Incorporated.(2) 10.40 Asset Purchase Agreement, dated October 11, 1995, by and among Seagraves, Whiteface & Lubbock Railroad Co., American Railway Corporation, TEMCO Corporation and RailAmerica, Inc.(4) 10.41 Employment Agreement between Gary O. Marino and RailAmerica, Inc.(11)+ 10.43 Stock Option Agreement, dated November 11, 1994, between RailAmerica, Inc. and Gary O. Marino(11)+ 10.45 RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan(3) 10.46 RailAmerica, Inc. 1995 Employee Stock Purchase Plan(3) 10.47 RailAmerica, Inc. Corporate Senior Executive Bonus Plan(3)+ 10.54 Asset Purchase Agreement, dated August 5, 1996, by and among Burlington Northern Railroad Company and Cascade and Columbia river Railroad Company, a subsidiary of RailAmerica, Inc.(5) 10.55 Confidential Private Placement Memorandum dated September 20, 1996.(6) 10.56 Stock Purchase Agreement, dated as of September 20, 1996, by and among Otter Tail Valley Railroad Company, Inc. and Dakota Rail, Inc.(7) 10.57 First Amendment to Loan Agreement relating to $55,000,000 Revolving Line of Credit/Term Loan Facility, dated June 16, 1998, by and between National Bank of Canada, Comerica Bank, RailAmerica, Inc., Kalyn/Siebert, Incorporated, RailAmerica Intermodal Services, Inc., RailAmerica Carriers, Inc., Steel City Carriers, Inc., Saginaw Valley Railway Company, Inc., Huron and Eastern Railway Company, Inc., West Texas and Lubbock Railroad Company, Inc., Plainview Terminal Company, Cascade and Columbia River Railroad Company, Inc., Otter Tail Valley Railroad Company, Inc., Minnesota Northern Railroad Company, Inc., St. Croix Valley Railroad Company, and Delaware Valley Railway Company, Inc. 10.58 Agreement for sale of certain assets, rights and obligations of Burlington Northern Railroad Company to Minnesota Northern Railroad, Inc.(8) 10.59 RailAmerica, Inc. Nonqualified Deferred Compensation Trust(8)+ 10.60 Nonqualified Deferred Compensation Agreement between RailAmerica, Inc. and Gary O. Marino(8)+ 10.63 RailAmerica, Inc. 1998 Executive Incentive Compensation Plan(9)+ 21 Subsidiaries of Registrant(11) 27 Financial Data Schedule ---------- 43
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(1) Incorporated by reference to the same exhibit number filed as part of the Registrant's Registration Statement on Form S-1, Registration No. 33-49026. (2) Incorporated by reference to the same exhibit number filed as part of the Registrant's Post-Effective Amendment No. 2 on Form SB-2, dated October 17, 1994, Registration No. 33-49026. (3) Incorporated by reference to the same exhibit number filed as part of the Company's Form 10-QSB for the quarter ended September 30, 1995, filed with the Securities and Exchange Commission on November 12, 1995. (4) Incorporated by reference to the same exhibit number filed as part of the Company's Form 10-KSB for the year ended December 31, 1995, filed with the Securities and Exchange Commission on April 12, 1996. (5) Incorporated by reference to the exhibit 2.1 filed as part of the Company's Form 8-K as of September 6, 1996, filed with the Securities and Exchange Commission on September 12, 1996. (6) Incorporated by reference to the exhibit A filed as part of the Company's Form 8-K as of September 30, 1996, filed with the Securities and Exchange Commission on October 17, 1996. (7) Incorporated by reference to the exhibit 2.1 filed as part of the Company's Form 8-K as of October 11, 1996, filed with the Securities and Exchange Commission on October 25, 1996. (8) Incorporated by reference to the same exhibit number filed as part of the Company's Form 10-KSB for year ended December 31, 1995, filed with the Securities and Exchange Commission on March 31, 1997. (9) Incorporated by reference to the Appendix A of the Company's Proxy Statement filed with the Security and Exchange Commission on June 2, 1997. (10) Incorporated by reference to exhibit No. 4.1 filed as part of the Registrant's Statement on Form 8-A, filed with the Securities and Exchange Commission on January 6, 1998. (11) Incorporated by reference to the same exhibit number filed as part of the Company's Form 10-Q for the quarter ended March 31, 1998, filed with the Securities and Exchange Commission on May 14, 1998. + Executive Compensation Plan or Arrangement. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of 1998. 44
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SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange act of 1934, the Company 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, Chief Executive Officer (Principal Financial officer) By: /s/ Larry W. Bush --------------------------------------- Larry W. Bush, Controller (Principal Accounting Officer) Dated March 26, 1999 In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. [Enlarge/Download Table] SIGNATURES TITLE DATE ---------- ----- ---- /s/ Gary O. Marino Chairman, President, Chief Executive March 26, 1999 ------------------------------ Officer and Director Gary O. Marino /s/ Donald D. Redfearn Executive Vice President, Secretary March 26, 1999 ------------------------------ and Director Donald D. Redfearn /s/ John H. Marino Assistant Secretary and Director March 26, 1999 ------------------------------ John H. Marino /s/ Douglas R. Nichols Director March 26, 1999 ------------------------------ Douglas R. Nichols /s/ Richard Rampell Director March 26, 1999 ------------------------------ Richard Rampell /s/ Charles Swinburn Director March 26, 1999 ------------------------------ Charles Swinburn /s/ John M. Sullivan Director March 26, 1999 ------------------------------ John M. Sullivan 45
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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 7: [Download Table] PAGES ----- Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets - December 31, 1998 and 1997 F-3 Consolidated Statements of Income - For the Years Ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statement of Stockholders' Equity - For the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 - F-33 F-1
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders of RailAmerica, Inc. and Subsidiaries In our opinion, based upon our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of RailAmerica, Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 did not audit the financial statements of Empresa De Transporte Ferroviario, S.A., a 55% owned subsidiary of the Company, which statements reflect total assets of $74,306,000 at December 31, 1998, and total revenues of $15,312,000 for the year ended December 31, 1998. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Empresa De Transporte Ferroviario S.A., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards 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 and the report of other auditors provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Ft. Lauderdale, Florida March 12, 1999 F-2
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RAILAMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 [Enlarge/Download Table] 1998 1997 ------------- ------------- ASSETS Current assets: Cash $ 5,760,342 $ 3,745,534 Accounts receivable 11,047,536 8,388,291 Notes receivable 859,378 1,103,409 Inventories 13,579,286 5,013,106 Other current assets 1,666,093 497,207 ------------- ------------- Total current assets 32,912,635 18,747,547 Property, plant and equipment, net 101,833,373 74,900,836 Notes receivable, less current portions 1,284,200 1,339,169 Investment in Great Southern Railway Limited 1,938,942 1,789,995 Deposit on asset purchase agreement 1,962,067 -- Other assets 3,056,755 2,021,433 Excess of cost over net assets of companies acquired, net 2,241,964 2,036,023 ------------- ------------- Total assets $ 145,229,936 $ 100,835,003 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 3,804,217 $ 3,923,036 Current maturities of subordinated debt 244,542 212,392 Accounts payable 10,124,714 6,084,119 Accrued expenses 4,132,892 3,327,497 ------------- ------------- Total current liabilities 18,306,365 13,547,044 ------------- ------------- Long-term debt, less current maturities 68,010,338 43,875,163 Subordinated debt, less current maturities 663,948 3,265,490 Other liabilities - deferred income 427,288 -- Deferred income taxes 8,242,000 7,067,237 Minority interest 7,937,992 6,266,243 Commitments and contingencies Redeemable convertible preferred stock, $.01 par value 1,000,000 shares authorized; 300,600 outstanding as of December 31, 1998; $25 liquidation value 6,881,684 -- Stockholders' equity: Common stock, $.001 par value, 30,000,000 shares authorized; 10,207,477 issued and 9,631,188 outstanding at December 31, 1998; 9,129,564 issued and 8,858,375 outstanding at December 31, 1997 10,207 9,130 Additional paid-in capital 28,277,533 23,350,732 Retained earnings 9,285,122 4,883,973 Accumulated other comprehensive income 470,820 15,373 Less treasury stock (576,289 and 271,189 shares, respectively, at cost) (3,283,361) (1,445,382) ------------- ------------- Total stockholders' equity 34,760,321 26,813,826 ------------- ------------- Total liabilities and stockholders' equity $ 145,229,936 $ 100,835,003 ============= ============= 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 For the years ended December 31, 1998, 1997 and 1996 [Enlarge/Download Table] 1998 1997 1996 ------------ ------------ ------------ Operating revenues: Transportation - railroad $ 30,303,562 $ 22,023,717 $ 9,783,041 Manufacturing 39,887,348 22,941,068 13,637,978 Other 2,700,421 2,472,188 2,237,222 Motor Carrier 4,252,329 -- -- ------------ ------------ ------------ Total operating revenue 77,143,660 47,436,973 25,658,241 ------------ ------------ ------------ Operating expenses: Transportation - railroad 15,702,487 12,502,153 4,397,884 Cost of goods sold - manufacturing 28,582,699 16,544,423 10,447,827 Selling, general and administrative 12,399,427 8,809,547 5,413,153 Depreciation and amortization 3,378,714 2,261,467 1,526,510 Motor Carrier 4,438,039 -- -- ------------ ------------ ------------ Total operating expenses 64,501,366 40,117,590 21,785,374 ------------ ------------ ------------ Operating income 12,642,294 7,319,383 3,872,867 Interest expense (4,947,209) (3,533,920) (2,078,383) Other income (expense) 13,055 663,128 (8,642) Minority interest in income of subsidiary (1,671,750) (851,243) -- ------------ ------------ ------------ Income from continuing operations before income taxes 6,036,390 3,597,348 1,785,842 Provision for income taxes 1,570,000 963,382 705,405 ------------ ------------ ------------ Income from continuing operations 4,466,390 2,633,966 1,080,437 Discontinued operations Estimated loss on disposal of discontinued Motor Carrier segment (net of income tax benefit of $277,000) -- (452,402) -- Loss from operations of discontinued Motor Carrier segment, three months ended March 31, 1998 and years ended December 31, 1997 and1996 (Less applicable income tax benefit of $40,000, $149,000 and $322,000, respectively) (65,241) (242,365) (575,558) ------------ ------------ ------------ Net Income $ 4,401,149 $ 1,939,199 $ 504,879 ============ ============ ============ Basic earnings per common share Continuing operations $ 0.47 $ 0.32 $ 0.22 Discontinued operations (0.01) (0.09) (0.12) ------------ ------------ ------------ Net income $ 0.46 $ 0.23 $ 0.10 ============ ============ ============ Diluted earnings per common share Continuing operations $ 0.44 $ 0.30 $ 0.21 Discontinued operations (0.00) (0.08) (0.11) ------------ ------------ ------------ Net income $ 0.44 $ 0.22 $ 0.10 ============ ============ ============ Weighted average common shares outstanding: Basic 9,552,866 8,303,938 4,966,296 ============ ============ ============ Diluted 10,306,873 9,396,483 5,113,508 ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-4
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RAILAMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 [Enlarge/Download Table] Stockholders' Equity ---------------------------------------------------------------------------- Number of Additional Common Shares Par Paid-in Stock Retained Issued Value Capital Subscribed Earnings ---------- ------- ----------- ----------- ---------- Balance, January 1, 1996 4,848,991 $ 4,849 $ 7,599,313 $ -- $2,439,895 Net income -- -- -- -- 504,879 Issuance of common stock 1,263,919 1,264 4,128,735 -- -- Purchase of treasury stock -- -- -- -- -- Exercise of stock options 12,500 12 44,988 -- -- Subscription of common stock -- -- -- 2,340,000 -- Cumulative translation -- -- -- -- -- ---------- ------- ----------- ----------- ---------- Balance, December 31, 1996 6,125,410 6,125 11,773,036 2,340,000 2,944,774 Net income -- -- -- -- 1,939,199 Issuance of common stock 1,720,627 1,721 7,163,206 (2,340,000) -- Treasury stock received for sales of subsidiaries -- -- -- -- -- Stock incentive plan issuance -- -- -- -- -- Exercise of stock options 202,933 203 747,837 -- -- Exercise of warrants 1,080,594 1,081 3,666,653 -- -- ---------- ------- ----------- ----------- ---------- Balance, December 31, 1997 9,129,564 9,130 23,350,732 -- 4,883,973 Net income -- -- -- -- 4,401,149 Other comprehensive income Cumulative translation -- -- -- -- -- Total comprehensive income Issuance of common stock 138,786 138 677,039 -- -- Purchase of treasury stock -- -- -- -- -- Exercise of stock options 237,950 238 870,637 -- -- Tax benefit exercise of options -- -- 178,000 -- -- Exercise of warrants 167,000 167 934,501 -- -- Conversion of debt 534,177 534 2,266,624 -- -- ---------- ------- ----------- ----------- ---------- Balance, December 31, 1998 10,207,477 $10,207 $28,277,533 $ -- $9,285,122 ========== ======= =========== =========== ========== [Download Table] Stockholders' Equity ----------------------------------------------- Accumulated Other Comprehensive Treasury Income Shares Total --------- ----------- ------------ Balance, January 1, 1996 $ 70,355 $ (965,753) $ 9,148,659 Net income -- -- 504,879 Issuance of common stock -- -- 4,129,999 Purchase of treasury stock -- (173,516) (173,516) Exercise of stock options -- -- 45,000 Subscription of common stock -- -- 2,340,000 Cumulative translation (2,914) -- (2,914) --------- ----------- ------------ Balance, December 31, 1996 67,441 (1,139,269) 15,992,107 Net income -- -- 1,939,199 Issuance of common stock -- -- 4,824,927 Treasury stock received for sales of subsidiaries -- (479,629) (479,629) Stock incentive plan issuance -- 173,516 173,516 Exercise of stock options -- -- 748,040 Exercise of warrants -- -- 3,667,734 Cumulative translation (52,068) -- (52,068) --------- ----------- ------------ Balance, December 31, 1997 15,373 (1,445,382) 26,813,826 Net income -- -- 4,401,149 Other comprehensive income Cumulative translation 455,447 -- 455,447 ------------ Total comprehensive income 4,856,596 ------------ Issuance of common stock -- -- 677,177 Purchase of treasury stock -- (1,837,979) (1,837,979) Exercise of stock options -- -- 870,875 Tax benefit exercise of options -- -- 178,000 Exercise of warrants -- -- 934,668 Conversion of debt -- -- 2,267,158 --------- ----------- ------------ Balance, December 31, 1998 $ 470,820 $(3,283,361) $ 34,760,321 ========= =========== ============ 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 For the years ended December 31, 1998, 1997 and 1996 [Enlarge/Download Table] 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 4,401,149 $ 1,939,199 $ 504,879 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,156,546 3,053,728 2,047,684 Minority interest in income of subsidiary 1,671,750 851,243 -- Sale of properties (76,791) (608,380) 455,932 Write-off of excess of costs over net assets -- 729,681 -- Write-off of deferred acquisition costs 176,179 76,292 138,010 Deferred income taxes 912,967 382,122 263,668 Employee stock grants -- 15,188 48,554 Forgiveness of debt (32,809) -- (20,576) Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable (885,983) (3,037,697) (1,816,862) Inventories (6,921,847) (1,294,501) 291,825 Other current assets (1,157,666) 124,247 (41,203) Accounts payable 2,410,602 (606,499) 1,031,238 Accrued expenses 720,498 714,409 (583,557) Deposits and other 368,477 (47,264) (113,853) ------------ ------------ ------------ Net cash provided by operating activities 5,743,071 2,291,768 2,205,739 ------------ ------------ ------------ Cash flows from investing activities: Purchase of property, plant and equipment (28,128,546) (7,455,848) (4,487,909) Proceeds from sale of properties 1,806,127 331,654 -- Acquisitions, net of cash acquired (1,757,033) (7,389,903) (103,908) Deposit on purchase agreement (1,962,067) -- -- Investment in Great Southern Railway -- (596,665) -- Loan receivable from Great Southern Railway -- (1,193,330) -- Deferred acquisition costs and other (612,956) (457,168) (825,026) ------------ ------------ ------------ Net cash used in investing activities (30,654,475) (16,761,260) (5,416,843) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt 56,006,737 31,453,500 10,033,070 Principal payments on debt and capital leases (35,723,969) (25,449,364) (12,503,210) Sale convertible preferred stock 7,515,000 -- -- Sale of common stock 1,032,168 8,163,962 6,421,445 Proceeds from exercise of stock options 870,875 748,041 45,000 Purchase of treasury stock (1,837,979) -- (173,516) Decrease in restricted stock -- -- 175,000 Deferred financing costs paid (603,549) (286,724) (98,741) Deferred loan costs paid (333,071) (294,361) (296,838) ------------ ------------ ------------ Net cash provided by financing activities 26,926,212 14,335,054 3,602,210 ------------ ------------ ------------ Net increase (decrease) in cash 2,014,808 (134,438) 391,106 Cash, beginning of period 3,745,534 3,879,972 3,488,866 ------------ ------------ ------------ Cash, end of period $ 5,760,342 $ 3,745,534 $ 3,879,972 ============ ============ ============ 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 majority-owned subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in the preparation of the consolidated financial statements. During 1998, the Company formed wholly-owned subsidiaries Kalyn/Siebert Canada, Inc. ("KSC") and Ventura County Railway Company, Inc. ("VCRR"). The Company's principal operations include rail transportation and manufacturing. The Company hauls varied products for its customers corresponding to their local operating areas, primarily agricultural commodities in Michigan and Texas and iron ore in Chile. The Company's production facilities, in Texas and Quebec, manufacture a broad range of specialty truck trailers which are marketed to a customer base from the private, commercial and government sectors. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market, net of advances related to materials acquired, with cost determined using the average cost method. Also, included in inventory are replacement or repair parts for equipment and track that are charged to property, plant and equipment when utilized. Cash and Cash Equivalents The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. Concentration of Credit Risk The Company maintains its cash in demand deposit accounts which at times may exceed FDIC insurance limits. As of December 31, 1998, the Company had approximately $4.7 million of cash in excess of FDIC insurance limits. F-7
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Revenue Recognition Transportation - The Company recognizes transportation revenue after services are provided. For the years ended December 31, 1998, 1997 and 1996, approximately 62%, 59% and 34%, respectively, of the Company's domestic railroad transportation revenue was derived from interchanging traffic with BNSF and for the years ended December 31, 1998, 1997 and 1996, approximately 30%, 32% and 51%, respectively, from interchanging traffic with CSX. The Company had four customers who each represented more than 10% of the international transportation revenue. Commercial Trailer Sales The Company recognizes revenue from the commercial (non-governmental) sale of trailers when title and risk of ownership are transferred to the customer, which generally is upon shipment or customer pick-up. In certain instances prior to shipment or customer pick-up, the Company receives full payment for a trailer. At that time, the Company issues a certificate of title or statement of origin to the customer and revenue is recognized. In these cases, the customer has made a fixed, written commitment to purchase, the trailer has been completed and is available for pick-up or delivery, and the customer has requested the Company to hold the trailer until the customer determines the most economical means of taking possession. In such cases, the Company has no further obligation except to segregate the trailer and hold it for a short period of time, as is customary in the industry, generally less than one month, until pick-up or delivery. Trailers are built to customer specifications and no right of return or exchange privileges are granted. Accordingly, no provision for sales allowances or returns is recorded. Governmental Trailer Sales The Company recognizes revenue from the sale of trailers to governmental agencies when title and risks of ownership are transferred, which is upon completion, inspection and acceptance of trailers by the governmental agency. At that time, the governmental agency has made a fixed written commitment to purchase in the form of a contract, the trailer has been completed and is available for pick-up or delivery, and the governmental agency has requested the Company to hold the trailer until the governmental agency determines the appropriate means of taking possession. The Company has no further obligation except to segregate the trailer and hold it for a short period of time, as is customary in the industry, generally less than one month, until pick-up or delivery. The trailers are built to the government's specifications pursuant to a written contract and are inspected and accepted for delivery by the governmental agency. The contract terms provide for prepayments by the government of up to 90% of the trailer's cost. These prepayments are recorded as advances against the inventory. Sales to governmental agencies represented 35%, 37% and 20% of the Company's manufacturing revenue for the years ended December 31, 1998, 1997 and 1996, respectively. F-8
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Property, Plant and Equipment Property, plant and equipment are recorded at historical cost. Costs assigned to property purchased as part of an acquisition are based on the fair value of such assets on the date of acquisition. Improvements are capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses on sales and retirements of properties are included in the determination of the results of operations. Depreciation has been computed using the straight-line method for financial reporting purposes based on estimated useful lives as follows: Buildings and improvements 20-33 years Railroad track and improvements 3-40 years Locomotives, transportation and other equipment 5-20 years Office equipment 5-10 years The Company re-evaluated the estimated remaining useful lives of its property, plant and equipment during 1996 and made an adjustment in the fourth quarter of $280,000 to reduce depreciation. 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 statement 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. Treasury Stock Repurchase Program On August 24, 1998, the Company announced that its Board of Directors authorized management to purchase up to 1,000,000 shares of its common stock. Purchases will be made from time to time in the open market and will continue until all of such shares are purchased or until the Company determines to terminate the repurchase program. As of December 31, 1998, the Company had purchased 305,100 shares with a total cost of $1.8 million. F-9
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Excess of Cost Over Net Assets of Companies Acquired The acquisitions of Kalyn/Siebert, Inc. ("Kalyn") and KSC resulted in purchase price in excess of the fair market value of net assets acquired in the amounts of approximately $2.5 million and $0.3 million, respectively, which is reflected in the balance sheet at December 31, 1998, net of accumulated amortization of $0.6 million. These amounts are being amortized on a straight-line basis over twenty years. The Company periodically evaluates the carrying value and the periods of amortization based on the current and expected future cash flows of the entities giving rise to the excess of cost over net assets acquired. The acquisition of Steel City Carriers resulted in purchase price in excess of the fair market value of net assets acquired of approximately $0.9 million (see disclosure below). Amortization expense related to the excess of cost over net assets of companies acquired for the years ended December 31, 1998, 1997 and 1996 were approximately $0.13, $0.20, and $0.19 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 six years of service. Employer contributions during the years ended December 31, 1998, 1997 and 1996 were approximately $154,000, $90,000 and $61,000, respectively. Foreign Currency Translation The financial position and results of operations of the Company's Canadian, Chilean and Australian subsidiaries are measured using local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at year-end, while revenues and expenses are translated at average exchange rates prevailing during the year. The resulting translation gains and losses are charged directly to accumulated other comprehensive income, a component of stockholders' equity, and are not included in net income until realized through sale or liquidation of the investment On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which established standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income is defined as the change in stockholders' equity during a period from transactions from nonowner sources. Comprehensive income consists of net income and other comprehensive income, which includes all other nonowner changes in stockholders' equity. F-10
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Recent Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires the cost of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company anticipates that the adoption of this statement will not have a material affect on the Company's results of operations or its financial position. Reclassifications Certain 1997 and 1996 amounts have been reclassified to conform to the presentation adopted in 1998. 2. EARNINGS PER SHARE In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share", which requires the presentation of both basic and diluted earnings per share. For the years ended December 31, 1998 and 1997, basic earnings per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed using the sum of the weighted average number of common shares outstanding plus common stock equivalents arising out of stock options, warrants and convertible debt. Earnings per share information for all periods have been restated to conform to the requirements of the standard. For the year ended December 31, 1996, basic earnings per common share are based on the weighted average number of common shares outstanding during the year. Assumed exercise of stock options and assumed conversion of the convertible debt were anti-dilutive and have been excluded from the weighted average shares outstanding for diluted earnings per share. The following is a summary of the net income available for common stockholders and weighted average shares for the diluted calculation (in thousands): [Download Table] 1998 1997 1996 ------- ------ ------ Net income from continuing operations $ 4,466 $2,634 $1,080 Interest from convertible debt 84 152 -- ------- ------ ------ Net income available to common stockholders $ 4,550 $2,786 $1,080 ======= ====== ====== Weighted average shares outstanding 9,553 8,304 4,966 Assumed conversion of options and warrants 225 283 148 Assumed conversion of convertible debt 529 809 -- ------- ------ ------ Weighted average shares outstanding 10,307 9,396 5,114 ======= ====== ====== F-11
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 3. DISCONTINUED OPERATIONS: In March 1997, the Company adopted a formal plan to discontinue its motor carrier division. The motor carrier division consists of Steel City Carriers and RailAmerica Intermodal Services, both wholly-owned subsidiaries of the Company. During the fourth quarter of 1997, the Company re-evaluated the carrying amount of Steel City Carriers' assets and recorded an impairment charge of approximately $730,000. This amount was determined based on what the Company believes it will recover through the final disposition of the remaining assets. Operating results of the discontinued operations, as shown below, include the operations of the Motor Carrier segment for the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996. The motor carrier operations have been included in continuing operations for the nine months ended December 31, 1998, since the disposition of the segment was not completed by April 1998. Effective December 1, 1998, the Company ceased all motor carrier operations and leased substantially all of the operating assets of Steel City Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario, Canada-based Contrans Corporation. The leases are for a period of 18 to 24 months. In addition, the Company has entered into an agreement to sell its Ontario real estate that was previously used in its motor carrier operations. Total assets in this division as of December 31, 1997 and 1996 were $5.1 million and $6.2 million, respectively. Total liabilities in this division as of December 31, 1997 and 1996 were $5.2 million and $5.4 million, respectively. [Download Table] Nine months Three Months Ended Ended 12/31/98* 3/31/98* 1997 1996 --------- -------- ---- ---- (Thousands) Revenues $ 4,252 $ 1,827 $ 7,133 $ 7,216 Depreciation and amortization 306 95 1,121 365 Operating loss (186) (35) (934) (492) Interest expense (241) (70) (284) (276) Loss before taxes (433) (105) (1,121) (898) Benefit for income taxes 164 40 426 322 Net loss $ (269) $ (65) $ (695) $ (576) * - First three months of 1998 results of operations are included in discontinued operations. The last nine months of 1998 results of operations are included in continuing operations. F-12
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 4. ACQUISITIONS: In January 1998, the Company acquired, through its wholly-owned subsidiary Kalyn, all of the outstanding stock of Canadian truck trailer manufacturer Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc. (collectively "Fabrex") for approximately $1.5 million in cash and 70,000 shares of RailAmerica common stock, $.001 par value ("Common Stock"), and assumption of approximately $1.0 million of long-term debt. Fabrex's operations have been combined into KSC, a wholly-owned subsidiary of Kalyn. This acquisition has been accounted for as a purchase and its results have been consolidated since January 1, 1998. Fabrex, a manufacturer of specialty bulk-hauling truck trailers used in the solid waste, agricultural and construction industries, was founded in 1985 and is located in Trois Rivieres, Quebec. In August 1998, the Company, through its newly formed, wholly-owned subsidiary, VCRR, entered into a long term lease/purchase agreement to operate a 13-mile rail line serving the Port of Hueneme and the Oxnard Harbor District in Oxnard, California, located approximately 50 miles north of Los Angeles. VCRR's operations commenced September 1, 1998 and are included in the results of domestic rail operations as of that date. On February 19, 1997, the Company acquired, through its wholly-owned subsidiary, RailAmerica de Chile, S.A., a majority interest in Ferronor, a 1,400 mile railroad serving northern Chile. The Company was joined in the purchase of Ferronor by Andres Pirrazzoli y Cia, Ltda ("APCO"). The purchase price paid by RailAmerica/APCO for substantially all of the stock of Ferronor, was approximately $12.3 million and was funded 55% by RailAmerica and 45% by APCO. This acquisition has been accounted for as a purchase and Ferronor's results have been consolidated since the acquisition. In accordance with the Shareholders' Agreement between RailAmerica and APCO, RailAmerica controls the appointment of a majority of the Board of Directors of Ferronor, including the Chairman. APCO maintains certain minority rights under the shareholders Agreement, such as the right to request the General Manager's removal under certain circumstances. In accordance with EITF 96-16, the Company considered these minority rights in determining whether to consolidate Ferronor and has concluded that consolidation is appropriate based upon the Company's ownership position, and its level of control of the Board of Directors and senior management. On October 11, 1996, the Company, through its wholly-owned subsidiary Dakota Rail, Inc. ("Dakota"), completed the purchase of all of the outstanding stock of Otter Tail Valley Railroad, Inc. ("OTVR"). The acquisition was accounted for as a purchase. Accordingly, the purchase price, which amounted to approximately $4.25 million, was allocated to the assets acquired and liabilities assumed based on the fair values of the assets acquired at the date of acquisition. The results of OTVR have been consolidated with those of the Company commencing as of October 1, 1996. F-13
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 4. ACQUISITIONS, continued The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions of Ferronor and Fabrex had occurred at the beginning of 1997 and do not purport to be indicative of what would have occurred had the acquisitions been made as of those dates or of results which may occur in the future. (In thousands except net income per share) 1997 ---- Transportation and other revenues $56,720 Income from continuing operations before income taxes $ 3,690 Net income $ 1,897 Net income per share $ .23 The significant adjustments related to the above years represent the inclusion of depreciation differences on the revaluation of property, plant and equipment, additional interest expense based on an increase in long-term obligations, amortization of intangible assets and the related income tax effects. 5. GREAT SOUTHERN RAILWAY LIMITED On October 31, 1997, the Company acquired a minority interest, of approximately 11.4%, in the Great Southern Railway Limited ("GSR"). GSR completed the acquisition of the assets and business comprising the passenger rail service of the Australian National Railway Commission. The Company has invested $0.6 million in equity of GSR, $1.2 million in uncollateralized subordinated notes (the "Notes") and received 98,736 options for stock exercise upon the earlier of three years from closing date or the date GSR is admitted to the Australian Stock Exchange. The options expire in five years. If all options are exercised, the Company's ownership interest would be diluted to approximately 10.6%. The Company cannot dispose of its stock investment for a period of two years. The Notes bear interest at 21% and mature October 31, 2007. Interest is paid quarterly based upon available cash flow, will be recorded as interest income as it is received, as it is non-cumulative. Both these amounts are included in long term assets on the consolidated balance sheet. The Notes approximate fair value as of December 31, 1998 based upon the recent nature of the transaction. Due to additional capital contributions during 1998 by certain of GSR's owners the Company's ownership interest was reduced to 10.5%. F-14
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 6. INVENTORIES: Inventories consist of the following as of December 31, 1998 and 1997: [Download Table] 1998 1997 ------------ ----------- Raw materials $ 5,207,154 $ 3,404,234 Work in process 2,504,344 1,109,318 Finished goods 2,225,223 300,853 Replacement or repair parts for equipment and road property 3,647,885 1,054,830 ------------ ----------- 13,584,606 5,869,235 Less, advances related to materials (5,320) (856,129) ------------ ----------- Inventories in excess of contract advances $ 13,579,286 $ 5,013,106 ============ =========== 7. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following as of December 31, 1998 and 1997: [Download Table] 1998 1997 ------------ ----------- Land $ 19,427,529 $17,360,124 Buildings and improvements 11,225,554 4,526,069 Railroad track and improvements 44,700,349 38,997,858 Locomotives, transportation and other equipment 36,582,042 21,255,647 ------------ ----------- 111,935,474 82,139,698 Less accumulated depreciation 10,102,101 7,238,862 ------------ ----------- $101,833,373 $74,900,836 ============ =========== Depreciation expense was approximately $3.5 million, $2.4 million and $1.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. 8. OTHER ASSETS: Other assets consist of the following as of December 31, 1998 and 1997: [Download Table] 1998 1997 ---------- ---------- Deferred loan costs, net $ 636,733 $ 949,940 Deferred acquisition costs 871,422 488,633 Deferred financing costs -- 49,377 Immigrant Investor loan (see also Note 10) 955,198 -- Deposits and other 593,402 533,483 ---------- ---------- $3,056,755 $2,021,433 ========== ========== Deferred loan costs are being amortized utilizing the interest method over the term of the respective term loans. F-15
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 8. OTHER ASSETS, continued Deferred acquisition and financing costs include costs incurred associated with the investigation of potential acquisitions and also costs related to capital raising. These costs will be allocated to the assets acquired and liabilities assumed upon consummation of successful acquisitions or financings or against the proceeds received from capital raised. Costs related to potential acquisitions or financing are charged to operations in the quarter in which the investigation of, or negotiation is terminated. The deposit on asset purchase agreement included on the balance sheet is a down payment on the E&N Railroad Company Ltd of $1.9 million as of December 31, 1998. See Note 21 subsequent events. 9. RELATED PARTY TRANSACTIONS: First London Securities Corporation ("First London"), of which Douglas Nichols, a director of the Company, is President and principal shareholder, served as the exclusive placement agent for the Company's private placement which had a final close in January 1999. A portion of the private placement was received by the Company and closed in December 1998 (see Note 12 Redeemable Preferred stock). First London received a total of $822,700 in placement fees and cost reimbursements during December 1998 and the first quarter of 1999 on this transaction and one-year warrants to purchase 140,727 shares of Common Stock at an exercise price of $8.25 per share. First London also served as exclusive placement agent for the Company's private placement which closed September 1996 and the Company's private placement which closed in January 1997. First London received as part of the September 1996 private placement a $225,000 placement fee, $45,000 nonaccountable expense fee and one-year warrants to purchase 125,000 shares of Common Stock at an exercise price of $4.60 per share. First London exercised its option on these warrants on September 30, 1997. First London received as part of the January 1997 private placement a $375,750 placement fee, $75,150 nonaccountable expense fee and one-year warrants to purchase 167,000 shares of Common Stock at an exercise price of $5.75 per share. First London exercised its option on these warrants in January 1998. During 1997, the Company sold all the outstanding stock of its wholly-owned subsidiary Huron Distribution Services to a company owned by its Vice Chairman. The sale price was approximately $50,000, which consisted of cash and 10,085 shares of the Company's common stock valued at $44,629. A gain of approximately $17,000 was recognized on the transaction and is included in other income (expense) in the consolidated income statement for 1997. F-16
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 9. RELATED PARTY TRANSACTIONS, continued During 1997, the Company sold all the outstanding stock of its wholly-owned subsidiary Evansville Terminal Company ("ETC") to a group of investors which included a company owned by its Vice Chairman. This company owns a minority interest in ETC. The sale price was approximately $540,000, which consisted of cash, a short-term note, a $450,000 purchase money mortgage with interest at 8% and a maturity of October 2002 and 8,502 shares of the Company's common stock valued at $50,000. A gain of approximately $10,000 was recognized on the transaction and is included in other income (expense) in the consolidated income statement for 1997. During 1997, the Company sold all the outstanding stock of its wholly-owned subsidiary Gettysburg Scenic Rail Tours, Inc. ("GSRT"), certain railroad equipment and substantially all the assets of Gettysburg Railway ("GBR") to a company owned by its Vice Chairman. The sale price for GSRT and the railroad equipment was $500,000, which consisted of cash and 62,602 shares of the Company's common stock valued at $385,000. A gain of approximately $240,000 was recognized on the transaction and is included in other income (expense) in the consolidated income statement for 1997. The sale price for substantially all of the assets of GBR was $1.45 million, which consisted of cash, an $800,000 promissory note due June 30, 1998 and a $350,000 mortgage note, which calls for monthly payments of $3,037, at an interest rate of 8.5% with a maturity of June 30, 2003. A gain of approximately $170,000 was recognized on the transaction and is included in other operating income in the consolidated income statement. The $800,000 promissory notes maturity date was extended until June 1999. As of December 31, 1998, $0.8 million of notes receivable from related parties is included in current assets and $0.35 million of notes receivable from related parties is included in notes receivable, less current portions on the consolidated balance sheet. 10 . LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1998 and 1997: [Enlarge/Download Table] 1998 1997 ----------- ----------- Revolving line of credit. See below $44,207,128 $34,717,857 Note payable, financial institution, bearing interest at 9.50%, due in fixed monthly installments of $24,516 (including interest), with a final payment of $554,076 in February 1999. Certain equipment, inventory, accounts receivable, capital leases and South Central Tennessee Railroad Corp. ("SCTR") common stock serve as collateral. See refinancing below. 574,047 801,815 F-17
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 10. LONG-TERM DEBT, continued [Enlarge/Download Table] Equipment note, with interest imputed at 9.92%, due in fixed monthly installments of $7,055 (including interest), with a final payment of $153,177 in March 1998. Certain equipment serves as collateral -- 170,191 Equipment notes, with interest imputed at 9.06%, due in fixed monthly installments of $9,812 (including interest) through October 2003 Certain locomotives and flat cars serve as collateral 517,392 584,892 Equipment note, with interest imputed at 8.33%, due in fixed monthly installments of $16,441 (including interest) through March 2003 Certain tank cars serve as collateral 952,554 1,065,298 Equipment notes, with interest imputed at rates from 8.76% to 11.63%, due in fixed monthly installments of $29,765 (including interest) with varying maturities through October 2003. Certain railroad equipment serves as collateral 846,561 1,089,853 Equipment note payable, bearing interest at 8.89%, due in fixed monthly installments of $27,250 (including interest) through December 2000 with final payment of $140,026 due January 2001. Certain equipment serves as collateral 614,517 958,821 Equipment notes, bearing interest rates from 8.19% to 10.65%, due in fixed monthly installments of $22,525 (including interest) with varying maturities through April 2002. Certain equipment serves as collateral 556,011 775,252 Equipment notes, with interest imputed at rates from 8.12% to 8.29%, due in fixed monthly installments of $16,741 (including interest) with varying maturities through November 2004. Certain locomotives and tank cars serve as collateral 968,757 1,080,809 Equipment note payable, bearing interest at 9.4%, due in fixed monthly installments of $2,409 (including interest) through October 1998. Certain equipment serves as collateral -- 23,082 Burlington Northern Santa Fe ("BNSF") rail facilities installment purchase obligation, annual payments of $250,000, including interest at 10%, maturing in October 2116. If car loads at OTVR fall below 7,250 in a year, BNSF will credit payments on this debt at a rate of $250 per car 2,139,105 2,171,914 F-18
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 10. LONG-TERM DEBT, continued [Enlarge/Download Table] Contract for deed, principal due at the earlier of December 1, 2008 or 180 days following the date that rail service ceases to be provided on the Minnesota line operated by Dakota. The Contract for deed is non-interest bearing and is discounted to yield 9% The unamortized discount at December 31, 1998 and 1997 is $785,670 and $833,699, respectively. Railroad property serves as collateral 575,187 529,136 Note payable to the State of Minnesota, payable in quarterly installments of $6,024 through July 1, 2004. The note is non-interest bearing and is discounted to yield 9%. The unamortized discount at December 31, 1998 and 1997 is $28,895 and $39,018, respectively. Railroad property and equipment serves as collateral 103,635 117,609 Note payable to the Central Prairie Rail Shippers Corporation, payable in quarterly installments with final payment due not later than September 13, 2000. The note is non-interest bearing and is discounted to yield 9%. The unamortized discount at December 31, 1997 is $305. Railroad property and equipment serve as collateral -- 12,623 Note payable to the State of Michigan, payable in quarterly installments of 2.5% original loan for a period of 10 years The non-interest bearing note is for railroad improvements 680,690 -- Term loan facility with National Bank of Canada and Development Bank of Canada, bearing interest ranging from 6.5% to 7.7%, payable in fixed monthly installments of $17,633 (including interest) maturing with a final payment of $1,181,403 due in July 2003. Certain KSC assets serve as collateral 2,027,781 -- Immigrant investor loan, non-interest bearing, maturing in April 2002, secured by a long-term investment (see also Note 8) The note is discounted to yield 9%. The unamortized discount at December 31, 1998 is $184,227 955,198 -- Operating credit facility, bearing interest at the Canadian Prime rate plus 0.25%, with a maturity of March 2003 2,131,697 -- Lines of credit, ranging in monthly interest rates from 0.66% to 1.37%, maturing from 30 to 90 days 1,481,000 1,989,000 Lines of credit with Banco de Desarrollo, see below 7,782,000 -- Note payable to Compania Minera del Pacifico, bearing interest at LIBOR plus 2.5% due in monthly installments (including interest)maturing in 2003. Certain Ferronor assets serve as collateral 2,822,000 -- Capital lease obligations 1,458,895 1,710,046 F-19
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 10. LONG-TERM DEBT, continued [Download Table] Other long-term debt 420,400 -- ----------- ----------- 71,814,555 47,798,198 Less current maturities 3,804,217 3,923,036 ----------- ----------- Long-term debt, less current maturities $68,010,338 $43,875,162 =========== =========== Ferronor refinanced certain short-term debt as of January 28, 1999 with Banco de Desarrollo. These amounts are included in long-term debt as of December 31, 1998. 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% 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% and is payable in 120 equal monthly installments (including interest). During February 1999, a lump sum payment of $554,000 was due on the South Central Tennessee Railroad acquisition financing. The amount is being refinanced into a $2.4 million term loan and is expected to close in April 1999. The financing is at an interest rate of 7.5% due in 84 equal monthly installments of principal and interest of $30,876 with a lump-sum payment of $590,750 in March 2006. The debt is included as long-term on the consolidated balance sheet. On September 29, 1995, the Company entered into a revolving credit loan facility ("Revolver") with National Bank of Canada ("NBC"). In October 1996, May 1997 and June 1998, the Company closed on $10 million, $15 million and $15 million increases in its Revolver, respectively. The Revolver's maturity date was extended to June 2001. The Revolver is currently $55 million. The Revolver bears interest at either the bank's prime rate (which was 8.25% at December 31, 1998) plus 0.25% or the one, three or six month LIBOR plus 2.5%, at the option of the Company. The Revolver is collateralized by substantially all the assets of the Company and certain subsidiaries. In November 1998, the Company received a commitment letter to increase the Revolver up to $100 million. The increase is anticipated to close in the second quarter of 1999. The Revolver includes restrictive covenants prohibiting the Company from incurring debt, except liabilities incurred in the normal course of business, guaranteeing the payment of an obligation of a third party, and selling, transferring or otherwise assigning substantially all of its assets. The Revolver also contains certain financial covenants which include requiring the Company to maintain a maximum debt to tangible net worth and interest coverage ratios. The Revolver restricts payment of dividends on the Company's Common Stock. As of December 31, 1998, the Company's Revolver was substantially fully funded based upon the collateral pledged at that time. The Company had an additional $7.0 million of availability for future purchases or acquisitions. F-20
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 10. LONG-TERM DEBT, continued In December 1996, the Company entered into an acquisition financing transaction with Comerica Bank N.A. ("Comerica") to acquire rail lines in Minnesota from BNSF. The interest rate on the financing was at the prime rate (8.5% at December 31, 1996) plus one percent and was scheduled to mature in 90 days from closing. During May 1997, the Company increased its Revolver from $25 million to $40 million by bringing Comerica as an additional lender into the Revolver. The acquisition loan was rolled into the Revolver. The aggregate annual maturities of long-term debt are as follows net of discount amortization: 1999 $ 3,804,217 2000 3,074,132 2001 46,747,764 2002 2,850,101 2003 5,280,710 Thereafter 10,057,631 ------------ $ 71,814,555 ============ During the years ended December 31, 1998, 1997 and 1996 interest of approximately $465,000, $69,000 and $41,000, respectively, was capitalized. Capital Leases The Company entered into equipment finance leases for certain tractors, trailers and other equipment expiring at various times through 2003. These leases are accounted for as capital leases. The financing of the purchase of the tractors, trailers and equipment under these capital leases was capitalized using the interest rate appropriate at the inception of the respective leases. The Company also leased certain railroad properties under a capital lease which was due to expire in 1998. The lease was renegotiated and now matures in January 2004 and calls for monthly payments of $1,300. The following is an analysis of the Company's assets under capital leases at December 31, 1998: Transportation equipment under capital leases $ 3,046,304 Less accumulated amortization 405,744 ----------- $ 2,640,560 =========== F-21
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 10. LONG-TERM DEBT, continued Minimum annual lease commitments at December 31, 1998 are as follows: [Download Table] CAPITAL OPERATING LEASES LEASES ---------- ----------- 1999 $ 548,957 $ 2,839,204 2000 372,684 2,055,713 2001 391,715 1,648,268 2002 188,811 1,260,553 2003 53,394 891,553 Thereafter -- 1,271,917 ---------- ----------- Total 1,555,561 $ 9,967,208 =========== Less amount representing interest 96,666 ---------- Present value of future minimum 1,458,895 lease payments Less current portion 490,835 ---------- Noncurrent portion $ 968,060 ========== Rental expense under operating leases was approximately $2.7 million, $0.9 million and $0.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. 11. SUBORDINATED DEBT: Subordinated debt consists of the following at December 31, 1998 and 1997: [Enlarge/Download Table] 1998 1997 ---------- ---------- Convertible subordinated debentures, bearing interest at the prime rate (which was 8.5% at December 31, 1998) adjusted annually, payable semi-annually. Principal payments are due in 20 equal quarterly installments beginning November 1999. Convertible into common stock of the Company at $2.25 beginning August 31, 1995. $357,000 were converted during 1998. $ 643,000 $1,000,000 Subordinated debentures, bearing interest at the prime rate adjusted annually, payable semi-annually. Principal payments are due in 20 equal quarterly installments beginning May 1995. 265,490 477,882 Series A Convertible Subordinated debentures, bearing interest at 8% payable semi-annually on January 1 and July 1. Convertible into common stock of the Company at $5.48 per share beginning January 1, 1996. The entire balance was converted during 1998. -- 2,000,000 ---------- ---------- 908,490 3,447,882 Less current maturities 244,542 212,392 ---------- ---------- $ 663,948 $3,265,490 ========== ========== F-22
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 11. SUBORDINATED DEBT, continued The aggregate annual maturities of subordinated debt are as follows: 1999 $ 244,542 2000 181,698 2001 128,600 2002 128,600 2003 128,600 Thereafter 96,450 --------- $ 908,490 ========= 12. REDEEMABLE PREFERRED STOCK: In January 1999, the Company completed a private offering of $11.6 million of its Series A Convertible Redeemable Preferred Stock ("Preferred Stock"). The Company sold 464,400 shares of its Preferred Stock at a price of $25 per share. The Preferred Stock pays annual dividends of 7.5%, is convertible into shares of the Company's common stock at a price of $8.25 per share and is non-voting. The Preferred Stock is mandatorily redeemable 5 years from its issuance. The December 31, 1998 balance sheet includes 300,600 shares which were issued during 1998. The remainder of the shares were issued in January 1999. The carrying value of the Preferred Stock is the par value less issuance costs. The issuance costs will be amortized on a straight-line basis over the life of the Preferred Stock. 13. OTHER REVENUE: Other revenue as of December 31, 1998, 1997 and 1996 consisted of the following: [Download Table] 1998 1997 1996 ---------- ---------- ---------- Gain on sale of properties and easements $ 695,158 $1,250,699 $1,498,738 Rental income 1,484,390 857,486 577,712 Other 520,873 364,003 160,772 ---------- ---------- ---------- $2,700,421 $2,472,188 $2,237,222 ========== ========== ========== F-23
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 14. INCOME TAX PROVISION: The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 consists of: [Download Table] 1998 1997 1996 ----------- --------- --------- Federal income taxes: Current $ 232,200 $ 0 $ 45,000 Deferred 1,038,800 708,382 411,405 ----------- --------- --------- 1,271,000 708,382 456,405 ----------- --------- --------- State income taxes: Current 281,000 161,000 75,000 Deferred (55,000) (26,000) 4,000 ----------- --------- --------- 226,000 135,000 79,000 ----------- --------- --------- Foreign income taxes: Current 33,000 -- -- Deferred -- (306,000) (152,000) ----------- --------- --------- Total income tax provision $ 1,530,000 $ 537,382 $ 383,405 =========== ========= ========= The following summarizes the total income tax provisions for each of the years ended December 31, 1998, 1997 and 1996: [Download Table] Continuing operations $ 1,570,000 $ 963,382 $ 705,405 Discontinued operations (40,000) (426,000) (322,000) ----------- --------- --------- Total income tax provision $ 1,530,000 $ 537,382 $ 383,405 =========== ========= ========= The Company joins in the filing of 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 Canadian subsidiaries, RailAmerica Carriers, Steel City Carriers and KSC, file Canadian and provincial income tax returns. The Company's majority owned subsidiary, Ferronor, and its wholly-owned subsidiary, RailAmerica de Chile, file Chilean income tax returns. F-24
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 14. INCOME TAX PROVISION, continued The differences between the U.S. federal statutory tax rate and the Company's effective rate from continuing operations are as follows: [Download Table] 1998 1997 1996 ----------- ----------- --------- Income tax provision, at 35% $ 2,112,737 $ 1,259,072 $ 625,045 Statutory federal Surtax exemption (60,363) (35,972) (17,858) State income tax, net of federal benefit 147,000 90,000 51,350 Benefit due to Difference between U.S. & Chilean tax rates (316,000) (192,000) 0 Benefit due to Utilization of Chilean Net Operating Loss Carryforwards (306,000) (152,000) 0 Provision due to Difference between U.S. & Canadian tax rates 14,000 0 0 Benefit due to Reduction in Canadian tax rate for manufacturing companies (42,000) 0 0 Non-deductible expenses, net 45,000 33,000 45,100 Other, net 93,626 60,282 1,768 Valuation allowance (118,000) (99,000) -- ----------- ----------- --------- $ 1,570,000 $ 963,382 $ 705,405 =========== =========== ========= The components of deferred income tax assets and liabilities as of December 31, 1998 and 1997 are as follows: [Download Table] Deferred tax assets: 1998 1997 ----------- ----------- Net operating loss carry forwards $ 2,798,000 $ 2,240,000 Alternative minimum tax credit 766,000 495,000 Other 205,000 0 ----------- ----------- Total deferred assets 3,769,000 2,735,000 Less: valuation allowance (491,000) (609,000) ----------- ----------- Total deferred assets, net 3,278,000 2,126,000 Deferred tax liabilities: Depreciation and amortization 8,912,000 6,492,237 Land 2,427,000 2,427,000 Installment Sales 181,000 226,000 Other 0 48,000 ----------- ----------- Net deferred tax liability $(8,242,000) $(7,067,237) =========== =========== 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 $491,000 at December 31, 1998 and $609,000 at December 31, 1997, respectively. The valuation allowance at December 31, 1998 is comprised of $125,000, which relates to prior and current year state net operating losses, and $366,000, which relates to prior and current year Chilean net operating losses from Ferronor. F-25
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 14. INCOME TAX PROVISION, continued No provision was made in 1998 for U.S. income taxes on undistributed earnings of the Chilean subsidiaries as it is the intention of management to utilize those earnings in the Chilean operations for an indefinite period of time. As part of certain acquisitions, the Company acquired net operating loss carry forwards for federal and state income tax purposes. The utilization of the acquired tax loss carry forwards is further limited by the Internal Revenue Code Section 382 to approximately $100,000 each year. The tax loss carry forwards expire in the years 2001 through 2010. 15. COMPREHENSIVE INCOME For the Company, other comprehensive income consists of foreign currency translation adjustments that amounted to $455,447 and ($52,068) for the years ended December 31, 1998 and 1997, respectively. Comprehensive income for the years ended December 31, 1998 and 1997 amounted to $4,856,596 and $1,887,131, respectively. The cumulative adjustment amount previously reported as a separate component of stockholders' equity is now included in accumulated other comprehensive income in the Consolidated Balance Sheets. 16. STOCK OPTIONS: In July 1992, the Company implemented a stock option plan (the "1992 Plan") for certain officers, consultants, employees and outside directors of the Company. The aggregate number of shares which may be issued pursuant to the 1992 Plan is 250,000 shares which are exercisable at date of grant and have a ten year life. Effective January 1, 1995, the Company implemented two new stock option plans: the 1995 Stock Incentive Plan and the 1995 Non-Employee Director Stock Option Plan. Each plan calls for 250,000 shares to be reserved for future issuance. Options granted under the Stock Incentive Plan are exercisable at the date of grant. Options granted under the Non-Employee Director Stock Option Plan are 1/3 exercisable at the date of grant, 1/3 exercisable at the first anniversary of the grant date and 1/3 exercisable at the second anniversary of the grant date. All the options granted under the Stock Incentive Plan and Non-Employee Director Stock Option Plan have a ten year life from the date of grant. In June 1997, the Company's stockholders approved a 750,000 increase in the number of shares of common stock reserved for issuance pursuant to the Company's 1995 Stock Incentive Plan, bringing total shares reserved under this plan to 1,000,000. F-26
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 16. STOCK OPTIONS, continued During June 1998, the Company implemented the 1998 Omnibus Executive Incentive Compensation Plan ("1998 Plan"). The 1998 Plan supersedes the 1992 Plan, the 1995 Stock Incentive Plan and the 1995 Non-Employee Director Stock Option Plan. The 1998 Plan provides for grants of stock options, stock appreciation rights, restricted stock, deferred stock, other stock-related awards and performance or annual incentive awards. The aggregate number of shares to be issued pursuant to the 1998 Plan are 930,000 shares. Options for 76,000 shares of common stock of the Company, at an exercise price of $6.125, were issued pursuant to the 1998 Plan as of July 1, 1998. These options vest ratably over a three year period on each anniversary date and mature June 30, 2008. During November 1994, the Company's Board of Directors approved an employment arrangement with Mr. Gary Marino for him to serve as Chief Executive Officer of the Company and its subsidiaries. Mr. Marino's arrangement provided that he be granted non-qualified options to purchase an aggregate of 350,000 shares of common stock of the Company at varying exercise prices and exercise dates. Options for 87,500 shares at an exercise price of $3.10, the fair market value of the common stock at the time the Board of Directors approved the arrangement, and 87,500 shares at an exercise price of $3.40 were immediately exercisable upon Mr. Marino's execution of his written employment agreement. Additional options for 87,500 shares became exercisable under the employment agreement on each of March 1, 1996 and 1997 at exercise prices equal to $3.75 and $4.15 per share, respectively. The Company recognized no compensation expense since the exercise prices at the date of grant were either equal to or in excess of the fair market value. Mr. Marino's options have a ten year life from the date of grant and expire November 11, 2004. Effective January 1, 1998, Mr. Marino entered into a new employment agreement with the Company. The new agreement provides that he is granted non-qualified options to purchase 300,000 shares of common stock of the Company at exercise prices varying from $7.25 to $9.50. All of the options are immediately exercisable and expire ten years from the grant date. Additionally during 1996, the Company issued, options to purchase an aggregate of 90,000 shares of common stock to certain employees at exercise prices equal to $3.65 per share for 10,000 of the options and $5.00 per share for the remaining 80,000 options. All of the options are exercisable immediately and have a ten year life from the date of the grant. In July 1998, the Company issued, options to purchase an aggregate of 150,000 shares of common stock to certain employees at exercise prices equal to $6.125 per share. The options vest ratably over a three year period on each anniversary date and mature June 30, 2008. F-27
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 16. STOCK OPTIONS, continued The Company has adopted the disclosure-only provisions of Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation costs have been recognized for the stock options issued during 1998, 1997 and 1996 as all stock options were granted with an exercise price at least equal to the market price on the date of grant. Had compensation cost for the Company's stock options issued been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: [Enlarge/Download Table] 1998 1997 1996 -------------- --------------- -------------- Net income - as reported $ 4,401,149 $ 1,939,199 $ 504,879 ============== =============== =========== Net income - pro forma $ 3,561,620 $ 1,152,411 $ 17,005 ============== =============== =========== Basic net income per share - as reported $ 0.47 $ 0.23 $ 0.10 ============== =============== =========== Basic net income (loss) per share - pro forma $ 0.37 $ 0.14 $ 0.00 ============== =============== =========== These calculations only take into account the options issued since January 1, 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: dividend yield 0.0%; expected volatility of 45%-55%; risk-free interest rate of 5.50% -7.8%; and expected lives of 10 years. The weighted average fair value of options granted for 1998, 1997 and 1996 were $3.97, $3.08, and $2.65, respectively. Information regarding the above options for 1998, 1997 and 1996 is as follows: [Download Table] WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- Outstanding at January 1, 1996 848,500 $ 3.66 Granted 295,000 $ 3.96 Exercised 12,500 $ 3.60 Forfeited 7,000 $ 3.50 Outstanding at December 31, 1996 1,124,000 $ 3.74 Granted 363,500 $ 5.00 Exercised 202,933 $ 3.69 Forfeited 33,667 $ 4.21 Outstanding at December 31, 1997 1,250,900 $ 4.10 Granted 551,000 $ 7.35 Exercised 237,950 $ 3.66 Forfeited 78,450 $ 3.58 Outstanding at December 31, 1998 1,485,500 $ 5.40 F-28
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 16. STOCK OPTIONS, continued The following table summarizes information about stock options outstanding at December 31, 1998: [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 ------------------------------------------------------------------------------------------------- $3.40-$5.00 934,500 6.98 $4.26 934,500 $4.26 $5.01-$7.00 251,000 9.50 $6.13 -- -- $7.01-$9.50 300,000 9.00 $8.38 300,000 $8.38 --------- --------- 1,485,500 1,234,500 ========= ========= In January 1995, the Company established an Employee Stock Purchase Plan open to 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 January 1 or December 31, of any given year, whichever is lower. For the years ended December 31, 1998, 1997 and 1996, 18,289, 23,433 and 17,897 shares of common stock, respectively, were sold to employees under this plan. 17. NONCASH INVESTING AND FINANCING ACTIVITIES: The Company issued 4,200 shares of common stock to employees in the first quarter of 1996. The Company issued 20,000 shares of common stock to the Company's Chief Executive Officer for a $95,000 note receivable during 1997. The Company issued 30,000 shares of common stock to the Company's Chief Executive Officer for a $97,500 note receivable during 1998. Additionally, the Company issued 9,719 shares of common stock to certain employees in the first quarter of 1996 and the first quarter of 1997 pursuant to employment contracts. The Company issued 50,000 shares of common stock, 47,000 were treasury stock, to employees of Kalyn during 1997 pursuant to a stock incentive plan. The Company incurred approximately $1.3 million, $2.0 million and $16.1 million in debt to acquire property, plant and equipment during 1998 , 1997 and 1996, respectively. These amounts included acquisition of a 131 mile rail line in Washington, 234 miles of rail line in Minnesota, 140 tank cars and other transportation equipment including locomotives, tractor and trailers. F-29
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 17. NONCASH INVESTING AND FINANCING ACTIVITIES, continued The Company assumed $2.2 million of long-term debt and $3.7 million of deferred tax liabilities related to the acquisition of OTVR in 1996. The Company assumed $4.7 million in liabilities related to the acquisition of Ferronor in 1997. Cash paid for interest during 1998, 1997 and 1996 was $5.7 million, $3.9 million and $2.4 million, respectively. Cash paid for income taxes during 1998, 1997 and 1996 was $0.2 million, $0.2 million and $0.6 million, respectively. 18. FAIR VALUE OF FINANCIAL INSTRUMENTS: Management believes that the fair value of its long-term debt approximates its carrying value for the revolving line of credit based on the variable nature of the financing and for all other long-term debt based on current borrowing rates available with similar terms and maturities. 19. COMMITMENTS AND CONTINGENCIES: 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. Effective January 23, 1995, the Company, through its wholly-owned subsidiary Kalyn, entered into a Wholesale and Retail Financing Agreement with Associates Commercial Corporation. Kalyn entered into an additional financing agreement with NewCourt Financial USA, Inc. during 1996. The agreements provide for dealer and customer financing and for the repurchase of products sold in the event of default by the customer or dealer to the finance company. The Company is obligated to repurchase a maximum of $300,000 and $200,000, respectively, in the aggregate on the agreements. Since inception of the Agreements, there have been no defaults which would have required the Company to repurchase products sold. F-30
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 20. SEGMENT INFORMATION: The Company's continuing operations have been classified into two business segments: rail transportation and manufacturing. The rail transportation segment includes the operations of the Company's railroad subsidiaries and the manufacturing segment includes the operations of Kalyn, KSC and RailAmerica Equipment Corporation. All of the Company's continuing operations for 1996 were in the United States. During 1997 the Company acquired operations in Chile and a minority interest in Australian operations and during 1998 the Company's Canadian operations were reclassified into continuing operations. Business segment information for the year ended December 31, 1998, 1997 and 1996 (dollar amounts in thousands): YEAR ENDED DECEMBER 31, 1998: [Enlarge/Download Table] RAIL MOTOR CORPORATE CONSOLIDATED TRANSPORTATION MANUFACTURING CARRIER OVERHEAD ------------ -------------- ------------- ------- -------- Revenue $ 77,144 $32,402 $40,490 $ 4,252 $ -- Operating income (loss) $ 12,642 $ 9,436 $ 7,389 $ (186) $ (3,997) Identifiable assets $145,230 $93,473 $24,890 $ 3,017 $ 23,850 Depreciation and amortization $ 3,685 $ 2,276 $ 964 $ 306 $ 139 Capital expenditures $ 29,382 $19,280 $ 3,584 $ 1,354 $ 5,164 Interest expense $ 4,947 $ 3,611 $ 619 $ 241 $ 476 YEAR ENDED DECEMBER 31, 1997: [Download Table] RAIL CORPORATE CONSOLIDATED TRANSPORTATION MANUFACTURING OVERHEAD ------------ -------------- ------------- -------- Revenue $47,437 $24,076 $23,361 $ -- Operating income (loss) $ 7,319 $ 6,458 $ 4,119 $(3,258) Identifiable assets $96,800 $76,249 $14,653 $ 5,898 Depreciation and amortization $ 2,261 $ 1,604 $ 567 $ 90 Capital expenditures $ 9,443 $ 7,597 $ 1,696 $ 150 Interest expense $ 3,534 $ 3,081 $ 372 $ 81 YEAR ENDED DECEMBER 31, 1996: [Download Table] RAIL CORPORATE CONSOLIDATED TRANSPORTATION MANUFACTURING OVERHEAD ------------ -------------- ------------- -------- Revenue $25,658 $11,704 $13,954 $ -- Operating income (loss) $ 3,873 $ 4,978 $ 1,473 $(2,578) Identifiable assets $66,152 $46,129 $12,932 $ 7,091 Depreciation and amortization $ 1,527 $ 991 $ 490 $ 46 Capital expenditures $29,766 $26,849 $ 2,809 $ 108 Interest expense $ 2,078 $ 1,318 $ 476 $ 284 F-31
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 20. SEGMENT INFORMATION, Continued Geographical segment information for the years ended December 31, 1998 and 1997 (dollar amounts in thousands): YEAR ENDED DECEMBER 31, 1998: [Download Table] CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA ------------ ------------- ------ ----- --------- Revenue $ 77,144 $46,722 $14,498 $15,924 $ -- Operating income $ 12,642 $ 7,474 $ 657 $ 4,512 $ -- Identifiable assets $145,230 $91,577 $13,873 $37,786 $1,995 Depreciation and amortization $ 3,685 $ 2,382 $ 597 $ 706 $ -- Capital expenditures $ 29,382 $12,400 $ 4,225 $12,757 $ -- YEAR ENDED DECEMBER 31, 1997: [Download Table] CONSOLIDATED UNITED STATES CHILE AUSTRALIA ------------ ------------- ------- --------- Revenue $47,437 $39,375 $ 8,062 $ -- Operating income $ 7,319 $ 5,774 $ 1,545 $ -- Identifiable assets $96,800 $73,685 $21,261 $1,854 Depreciation and amortization $ 2,261 $ 1,994 $ 267 $ -- Capital expenditures $ 9,443 $ 7,493 $ 1,950 $ -- Identifiable assets consist of $96.8 million from continuing operations and $4.0 million from discontinued operations (not included in above amounts). 21. SUBSEQUENT EVENTS: In January 1999, the Company through a newly formed subsidiary E&N Railway Company LTD. acquired the 290 km Esquimalt and Nanaimo Railway ("E&N") from the Canadian Pacific Railway ("CPR"). The transaction includes the sale of 109-km section of rail line between Port Alberni and Nanaimo. In addition, CPR is leasing to the Company the Victoria to Nanaimo and Parksville to Courtenay segments, about 181 km, to enable E&N to continue to provide freight and passenger rail service to Vancouver Island. E&N provides freight and passenger service between Victoria and Courtenay, and freight service between Port Alberni and Nanaimo, on British Columbia's Vancouver Island. In February 1999, Freight Victoria, a consortium in which the Company is a majority partner, was selected as the successful bidder for V/Line Freight Corporation ("V/Line Freight"). V/Line Freight, the rail freight business of Australia's Victorian government, provides services across southeastern Australia over 2,793 miles of track. This sale by the Victorian government is a continuation of Australia's privatization process of its rail system. The Company has made a non-refundable deposit of approximately $19 million for V/Line Freight and anticipates closing on the transaction during the second quarter of 1999. F-32
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RAILAMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------- 21. SUBSEQUENT EVENTS, continued In March 1999, the Company completed a private offering of approximately $12.5 million of restricted Common Stock. Pursuant to the offering, the Company sold approximately 1.4 million shares of its common stock at a price of $8.8125 per share and issued approximately 210,000 warrants to purchase an equivalent number of shares of common stock at an exercise price of $10.125 per share within one year of the transaction's closing date. First London acted as placement agent and received approximately $0.4 million in fees and cost reimbursement and one-year warrants to purchase 141,653 shares of Common Stock at an exercise price of $10.125. 22. UNAUDITED QUARTERLY FINANCIAL DATA: Quarterly financial data for 1998 in as follows (in thousands except per share amounts) [Download Table] FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Operating revenue $14,436 $20,192 $20,974 $21,542 Operating income $ 2,018 $ 3,258 $ 3,656 $ 3,710 Income from continuing operations $ 668 $ 1,398 $ 1,426 $ 974 Basic net income from continuing operations per share $ 0.07 $ 0.15 $ 0.15 $ 0.10 Diluted net income from continuing operations per share $ 0.07 $ 0.14 $ 0.14 $ 0.09 Quarterly financial data for 1997 in as follows (in thousands except per share amounts) [Download Table] FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------ ------- ------- ------- Operating revenue $8,734 $11,596 $13,134 $13,973 Operating income $ 992 $ 1,451 $ 1,957 $ 2,920 Net income from continuing operations $ 113 $ 364 $ 937 $ 1,220 Basic net income from continuing operations per share $ 0.02 $ 0.04 $ 0.11 $ 0.14 Diluted net income from continuing operations per share $ 0.01 $ 0.04 $ 0.10 $ 0.13 F-33

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10-K Filing   Date First   Last      Other Filings
3/31/924
10/17/9444
11/11/9443
12/31/94326
1/1/957173
1/23/9575
2/10/9517
8/31/9567
9/29/9565
9/30/9544
10/11/9543
11/12/9544
12/31/952644
1/1/965067
3/1/9672
4/12/9644
6/30/962010QSB
7/1/9627
8/5/9643
9/6/9627448-K
9/12/96448-K
9/20/9643
9/30/964410-C, 10QSB, 8-K
10/1/962758
10/11/9644588-K, 8-K/A
10/17/964410-C, 8-K
10/25/96448-K
11/18/9627
12/28/9627
12/31/9687610KSB, 10KSB/A
2/19/9731588-K, S-8
3/1/973272
3/6/97248-K
3/20/971735
3/31/974410-Q, 10-Q/A, 10KSB, NT 10-Q
5/3/9738
6/2/9744DEF 14A
9/8/9727
9/30/97276110-Q
10/31/972759
12/31/9747710-K
1/1/983372
1/6/984344
3/31/98445710-K, 10-Q
4/1/983536
5/14/984410-Q
6/16/983843
6/30/986210-Q
7/1/9872
8/24/9854
9/1/982758
9/30/983810-Q
11/30/9836
12/1/981757
12/15/984056
For The Period Ended12/31/98177
1/28/9965
3/1/9939
3/12/9947
3/24/991
3/25/99124
3/26/9945
Filed On / Filed As Of3/31/9910-Q, 10-Q/A
4/30/99428-K, 8-K/A, DEF 14A
6/24/991DEF 14A
9/30/991810-Q
9/13/0064
6/30/036210-Q
12/31/032510-K, 5
7/1/04644, 8-K
11/11/0472
10/31/0759
6/30/0872
12/1/0864
 
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