Registrant’s telephone number, including area code: (561) 994-6015
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 Par Value
New York Stock Exchange
Common Stock Purchase Rights
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not 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. o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or
non-accelerated filer (as defined in Exchange Act Rule 12b-2)
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June30, 2005 computed by reference to the average bid and asked prices of registrant’s common stock
reported on the New York Stock Exchange on such date was $455.3 million.
The number of shares outstanding of registrant’s Common Stock, $.001 par value per share, as of
March 10, 2006 was 38,826,067.
The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by
reference from the registrant’s Definitive Proxy Statement for its 2006 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A.
This Form 10-K contains certain “forward-looking” statements within the meaning of The Private
Securities Litigation Reform Act of 1995 and information relating to RailAmerica, Inc. and its
subsidiaries that are based on the beliefs of our management and that involve known and unknown
risks and uncertainties. When used in this report, the terms “anticipate,”“believe,”“estimate,”“expect” and “intend” and words or phrases of similar import, as they relate to us or our
subsidiaries or our management, are intended to identify forward-looking statements. These
statements reflect the current risks, uncertainties and assumptions related to various factors
including, without limitation, currency risk, casualties, Class I congestion, competitive factors,
general economic conditions, customer relations, fuel costs, the interest rate environment,
governmental regulation and supervision, the inability to successfully integrate acquired
operations, weather, failure to service debt, one-time events, tax benefits and other factors
described under the heading “Risk Factors” and elsewhere in this report and in other filings made
by us with the Securities and Exchange Commission. Based upon changing conditions, should any one
or more of these risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described in this report as anticipated,
believed, estimated or intended. We undertake no obligation to update, and we do not have a policy
of updating or revising, these forward-looking statements. Except where the context otherwise
requires, the terms “RailAmerica,”“we,”“us,” or “our” refer to the business of RailAmerica, Inc.
and its consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We are a leading owner and operator of short line and regional freight railroads in North
America. We own, lease and/or operate a diversified portfolio of 43 railroads with approximately
8,000 miles of track located in the United States and Canada. Through our diversified portfolio of
rail lines, we operate in numerous geographic regions with varying concentrations of commodities
hauled. We seek to grow both through the expansion of the traffic base on our existing railroads
and acquisitions of additional North American railroads.
Pursuant to this strategy, we have completed the following acquisitions since 2000:
•
In February 2000, we acquired RailTex, Inc., a holding company that owned 25
railroads in the United States and Canada, for $294.2 million.
•
In January 2002, we acquired StatesRail, Inc., a holding company of 8 railroads in
the United States, for $84.4 million.
•
In January 2002, we acquired ParkSierra Corp., a holding company of 3 railroads in
the United States, for $46.2 million.
•
In May 2003, we acquired/leased a branch line in Alabama and Mississippi that is
contiguous to our existing Alabama and Gulf Coast Railway for $15.1 million.
•
In June 2003, we acquired the San Luis & Rio Grande Railroad, a branch line in Colorado, for $7.2 million.
•
In January 2004, we acquired the Central Michigan Railway for $25.3 million.
•
In August 2004, we commenced operations under a 20 year lease agreement of the
Chicago, Fort Wayne & Eastern Railroad, for an initial lease payment of $10.0 million.
•
In October 2004, we acquired the Midland Subdivision in Ohio for $8.6 million.
•
In September 2005, we commenced operations under a 25 year lease agreement for the
Fremont, Michigan Line.
•
In September 2005, we acquired the Alcoa Railroad Group, comprising four railroads
in the U.S., for $77.8 million.
In addition, as part of our strategy, we continually review our portfolio of railroads. Our
review is based on past and projected cash flows, infrastructure needs, marketing opportunities,
operating complexity, as well as other qualitative factors.
Based on these reviews, we have divested the following railroads since 2000:
•
August 2000, Minnesota Northern Railroad and the St. Croix Valley Railroad
January 2006, Mackenzie Northern Railway, Lakeland & Waterways Railway and Central
Western Railway, collectively referred to as the Alberta Railroad Properties
We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing
railroad companies. Our principal executive office is located at 5300 Broken Sound Blvd, N.W., BocaRaton, Florida33487, and our telephone number at that location is (561) 994-6015.
Our Internet website address is www.railamerica.com. We make available free of charge, on or
through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to these reports. The SEC maintains an Internet site that
contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov. We also make available on our website other
reports filed with the SEC under the Securities Exchange Act of 1934, as amended, including proxy
statements and reports filed by officers and directors under Section 16(a) of that Act. These
reports may be found by selecting the option entitled “SEC FILINGS” in the “INVESTOR RELATIONS”
section on our website. Additionally, our corporate governance guidelines, board committee
charters, code of business conduct and ethics and code of ethics for principal executive officers
and senior financial officers are available on our website and in print to any stockholder who
requests them. Information contained in or connected to our website is not part of this report.
BUSINESS STRATEGY
OPERATING SAFELY AND EFFICIENTLY. We are focused on operating safe railroads in an efficient
manner. Through training, supervision and safety programs, we have reduced our Federal Railroad
Administration, or FRA, personal injury frequency ratio from 5.83 in 1999 to 2.24 in 2005. The FRA
personal injury frequency ratio is measured as reportable injuries per 200,000 man hours worked.
In addition, we manage each of our railroads as an individual profit center allowing local
management to make decisions on how to operate the railroad efficiently and profitably. We support
the individual railroad operations with centralized purchasing, accounting, human resources,
information technology, legal and other services, allowing us to realize synergies and economies of
scale based on our size.
PROVIDING SUPERIOR CUSTOMER SERVICE. We strive to increase our revenue by providing
consistent, innovative, cost-efficient and reliable service to our customers. We work with
customers, potential customers, industrial development organizations and our Class I interchange
partners to develop creative transportation solutions. Our decentralized management structure is
an important element of our marketing strategy. We give significant discretion with respect to
sales and marketing activities to our local marketing managers and the General Managers of each
railroad. As part of our marketing efforts, we often schedule more frequent rail service, help
customers negotiate price and service levels with interchange partners and assist customers in
obtaining the quantity and type of rail equipment required for their operations. We occasionally
provide non-scheduled train service on short notice to accommodate customers’ special or emergency
needs. We consider all of our employees to be customer service representatives and encourage them
to initiate and maintain regular contact with shippers.
CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Over the last eleven years, we have completed
twenty-nine acquisitions of railroad companies which owned or had equity interests in 65 railroads,
for total consideration in excess of $780 million.
We seek acquisition candidates that enable us to form geographic clusters of short lines,
thereby affording management economies of scale as well as marketing and operating synergies. To be
considered by us, acquisition candidates must typically be profitable, generate strong cash flows,
have potential for further growth and possess well-maintained infrastructures.
Acquisition opportunities in North America generally come from three sources. First, certain
of the Class I railroads have been selling or leasing branch lines over the past several years. We
entered into a lease for a branch line from CSX during 2005. We believe, based on our strong
operating performance and relationships with the Class I railroads, we are a logical choice to
acquire additional properties in the future. Second, as the short line industry itself continues to
consolidate, we believe our industry reputation, demonstrated access to capital, breadth of
geographic coverage and ability to efficiently evaluate and negotiate prospective transactions
place us in a good position to acquire other independent short lines or short line holding
companies. Third, as industrial companies sell their railroad operations, we believe our
cost-effective and customer oriented approach makes us a strong candidate to acquire these
railroads. We acquired four short line railroads from Alcoa, Inc. during 2005.
In acquiring rail properties, we compete with other railroad operators, some of which have
greater financial resources than we do. Competition for rail properties is based primarily upon
price, operating history and financing capability. We believe our established reputation as a
successful acquirer and operator of short line rail properties, combined with our managerial
resources, effectively positions us to successfully compete for future acquisition opportunities.
ANALYZE AND DIVEST OF POOR PERFORMING RAILROADS. We continually review our portfolio of
railroads. Our review is done based on past and projected cash flows, infrastructure needs,
marketing opportunities, operating complexity, as well as other qualitative factors. If after
performing our analysis, we determine that a railroad is not meeting our internal criteria for
continued ownership we develop a strategy to improve the operations of the railroad either through
changes in the operating plan and/or new marketing initiatives. These changes are made working in
conjunction with our Class I interchange partners. If, after a period of time, the railroad
continues to not meet our internal criteria, we consider other strategic options for the railroad,
including divestiture.
INDUSTRY OVERVIEW
The U.S. railroad industry is dominated by Class I railroads, that operated approximately
97,500 miles of track in 2004. In addition to large railroad operators, there were more than 540
short line and regional railroads, operating approximately 43,000 miles of track in 2004.
The railroad industry is subject to regulation by various government agencies, including the
Surface Transportation Board, or STB. For regulatory purposes, the STB classifies railroads into
three groups: Class I, Class II and Class III, based on annual operating revenue. For 2004, the
Class I railroads each had operating revenue of at least $289.4 million, Class II railroads each
had revenue of $23.1 million to $289.3 million, and Class III railroads each had revenue of less
than $23.1 million. These thresholds are adjusted annually for inflation.
In compiling data on the U.S. railroad industry, the Association of American Railroads, or
AAR, uses the STB’s revenue threshold for Class I railroads. Regionals are railroads operating at
least 350 miles of rail line and/or having revenues between $40 million and the Class I revenue
threshold. Locals are railroads falling below the Regional criteria, plus switching and terminal
railroads.
2004 UNITED STATES INDUSTRY OVERVIEW
Number of
2004 Revenue
Type of Railroad
Carriers
Miles Operated
(in billions)
% of Revenue
Class I
7
97,496
$
39.1
92.9
%
Regional
31
15,641
1.4
3.3
Local
518
27,109
1.6
3.8
Total
556
140,246
$
42.1
100.0
%
As a result of deregulation in 1980, Class I railroads have been able to concentrate on core,
long-haul routes, while selling or leasing many of their low-density branch lines to smaller and
more cost-efficient freight railroad operators such as our
company. Divesting branch lines allows Class I railroads to increase car velocity, focus
investment on their core network, lower their cost structure and focus on the long-haul versus
short-haul business. Because of the focus by short line railroads on increasing traffic volume
through increased customer service and more efficient operations, traffic volume on short line
railroads normally increases after divestiture by Class I railroads. Consequently, these
transactions often result in net increases in the divesting carriers’ freight traffic because much
of the business originating or terminating on branch lines feeds into divesting carriers’ core
routes.
In 2005 the majority of the Class I railroad short line spin-offs were derived from CSX
Transportation and Burlington Northern Santa Fe Railway. The other Class I railroads created a
limited number of short line railroad opportunities. Class I railroads have been divesting short
line candidates via a variety of means: (a) outright sale for cash consideration, (b) lease of the
railroad right-of-way for a period ranging from 10 to 25 years, or (c) lease of the land and a sale
of the track and track-related structures. Currently, the Class I railroads appear to favor leases
over sales.
RAILROAD OPERATIONS
We currently own, lease or operate 43 rail properties in North America, of which 42 are short
line freight railroads that provide transportation services for both on-line customers and Class I
railroads that interchange with our rail lines. Short line railroads are typically less than 350
miles long, serve a particular class of customers in a small geographic area and interchange with
Class I railroads. Short line rail operators primarily serve customers on their line by
transporting products to and from interchange points with the Class I railroads. Each of our North
American rail lines is typically the only rail carrier directly serving its customers. The ability
to haul heavy and large quantities of freight as part of a long-distance haul makes our rail
services generally a more effective, lower-cost alternative to other modes of transportation,
including motor carriers. In addition to our 42 short line railroads, we operate a tourist
railroad in Hawaii.
UNITED STATES. We own, lease or operate 37 short line rail properties and one tourist railroad
in the United States with approximately 7,000 miles of track. Our railroads are geographically
diversified and operate in 26 states. We have clusters of rail properties in the Southeastern,
Southwestern, Midwestern, Great Lakes, New England and Pacific Coast regions of the United States.
We believe that this cluster strategy provides economies of scale and helps achieve marketing and
operational synergies.
CANADA. We own, lease or operate 5 short line rail properties in Canada with approximately
1,000 miles of track. Our Canadian properties are geographically diversified and operate in four
provinces.
RAIL TRAFFIC
Rail traffic may be categorized as interline, local or bridge traffic. Interline traffic
either originates or terminates with customers located along a rail line and is interchanged with
other rail carriers. Local traffic both originates and terminates on the same rail line and does
not involve other carriers. Bridge traffic passes over the line from one connecting rail carrier to
another without the carload originating or terminating on the line.
Interline and local traffic combined generated 89%, 88% and 87% of our total freight revenue
in 2005, 2004 and 2003, respectively. We believe that high levels of interline and local traffic
provide us with greater stability of revenue because this traffic represents shipments to or from
customers located along our lines and cannot be easily diverted to other rail carriers, unlike
bridge traffic.
In addition to competition with other rail carriers, our railroads compete directly with other
modes of transportation, principally motor carriers and, to a lesser extent, ship and barge
operators. The extent of this competition varies significantly among our railroads. Competition is
based primarily upon the rate charged and the transit time required, as well as the quality and
reliability of the service provided for an origin-to-destination package. To the extent other
carriers are involved in transporting a shipment, we cannot unilaterally control the rate 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.
The following table summarizes freight revenue by type of traffic carried by our North
American railroads in 2005, 2004 and 2003 in dollars and as a percentage of total freight revenue.
FREIGHT REVENUE
(DOLLARS IN THOUSANDS)
2005
2004
2003
$
%
$
%
$
%
Interline
$
318,754
84.3
%
$
272,988
82.6
%
$
238,832
82.6
%
Local
17,562
4.6
%
17,679
5.4
%
12,735
4.4
%
Bridge
41,784
11.1
%
39,714
12.0
%
37,661
13.0
%
$
378,100
100.0
%
$
330,381
100.0
%
$
289,228
100.0
%
All of our short line properties interchange traffic with Class I railroads. The
following table summarizes our significant connecting carriers in 2005, 2004 and 2003 by freight
revenue and carloads as a percentage of total interchanged (interline and bridge) traffic.
INTERCHANGED TRAFFIC
2005
2004
2003
Revenue
Carloads
Revenue
Carloads
Revenue
Carloads
Union Pacific Railroad
26.8
%
25.4
%
28.7
%
27.3
%
31.1
%
28.5
%
CSX Transportation
19.5
%
17.2
%
19.1
%
16.1
%
18.9
%
15.1
%
Canadian National Railway
16.2
%
14.7
%
17.3
%
16.8
%
14.5
%
14.3
%
Burlington Northern Santa Fe Railway
13.5
%
11.8
%
14.2
%
12.2
%
14.4
%
15.1
%
Canadian Pacific
7.0
%
13.8
%
6.4
%
12.0
%
7.3
%
12.3
%
Norfolk Southern
5.7
%
6.8
%
5.9
%
7.1
%
5.4
%
6.0
%
All other railroads
11.3
%
10.3
%
8.4
%
8.5
%
8.4
%
8.7
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Charges for interchanged traffic are generally billed to the customers by the connecting
carrier and cover the entire transportation cost from origin to destination, including the portion
that travels over our lines. Our revenue is generally paid directly to us by the connecting
carriers rather than by customers and is payable regardless of whether the connecting carriers are
able to collect from the customers. The revenue payable by connecting carriers is set forth in
contracts entered into by each of our railroads with their respective connecting carriers and is
generally subject to periodic inflation-related adjustments.
In 2005, we served approximately 1,700 customers in North America. These customers shipped
and/or received a wide variety of products. Although most of our North American railroads have a
well-diversified customer base, several of the smaller rail lines have one or two dominant
customers. In 2005, 2004 and 2003, our ten largest North American customers accounted for
approximately 25%, 24% and 26% of our North American transportation revenue, respectively. No
individual customer accounted for more than 10% of our revenue for the years ended 2005, 2004 and
2003.
The following table sets forth, by number and percentage, the carloads hauled by our North
American railroads during the years ended December 31, 2005, 2004 and 2003.
CARLOADS CARRIED BY COMMODITY GROUP
2005
2004
2003
Commodity Group
Carloads
%
Carloads
%
Carloads
%
Agricultural & Farm Products
106,043
8
%
97,397
8
%
90,463
8
%
Autos
24,619
2
%
28,034
2
%
33,888
3
%
Chemicals
112,475
9
%
103,410
9
%
82,383
8
%
Coal
150,344
12
%
149,584
13
%
142,928
13
%
Food Products
87,973
7
%
79,618
7
%
63,192
6
%
Intermodal
33,444
3
%
35,231
3
%
35,618
3
%
Lumber & Forest Products
126,421
10
%
119,012
10
%
115,482
11
%
Metals
98,874
8
%
88,309
8
%
84,907
8
%
Metallic/Non-metallic Ores
69,090
6
%
59,835
5
%
51,278
5
%
Minerals
59,700
5
%
53,093
5
%
48,796
4
%
Paper Products
89,899
7
%
88,552
7
%
81,745
7
%
Petroleum Products
48,260
4
%
44,730
4
%
39,027
4
%
Railroad Equipment/Bridge Traffic
201,275
16
%
191,237
16
%
178,167
17
%
Other
40,618
3
%
36,010
3
%
29,718
3
%
Total
1,249,035
100
%
1,174,052
100
%
1,077,592
100
%
EMPLOYEES
Currently, we have approximately 2,000 full-time employees, including 110 full-time
corporate employees. Approximately 900 of our railroad employees are subject to collective
bargaining agreements.
SAFETY
We endeavor to conduct safe railroad operations for the benefit and protection of employees,
customers and the communities served by our railroads. Our safety program, led by our Vice
President of Safety and Operating Practices, involves all of our employees and is administered by
each Regional Vice President. Operating personnel are trained and certified in train operations,
hazardous materials handling, personal safety and all other areas subject to governmental rules and
regulations. Each U.S. employee involved in train operations is subject to pre-employment and
random drug testing whether or not required by federal regulation. We believe that each of our
North American railroads complies in all material respects with federal, state, provincial and
local regulations. Additionally, each railroad is given flexibility to develop more stringent
safety rules based on local requirements or practices. We also participate in committees of the
AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the
national grade crossing awareness program) and the American Short Line and Regional Railroad
Association Safety Committee. Our FRA reportable injury frequency ratio, measured as reportable
injuries per 200,000 man hours worked, was 2.24 in 2005 as compared to 2.80 in 2004. For 2005, the
industry average for all railroads was 2.28 while the industry average for short line railroads was
3.49.
UNITED STATES. Our subsidiaries in the United States are subject to various safety and other
laws and regulations administered by numerous government agencies, including (1) regulation by the
STB, successor to the Interstate Commerce Commission, and the FRA, (2) labor related statutes
including the Railway Labor Act, the Railroad Retirement Act, the Railroad Unemployment Insurance
Act, and the Federal Employer’s Liability Act, and (3) some limited regulation by agencies in the
states in which we do business.
The STB, established by the ICC Termination Act of 1995, has jurisdiction over, among other
matters, the construction, acquisition, or abandonment of rail lines, the consolidation or merger
of railroads, the assumption of control of one railroad by another railroad, the use by one
railroad of another railroad’s tracks through lease, joint use or trackage rights, the rates
charged for their transportation services, and the service provided by rail carriers.
As a result of the 1980 Staggers Rail Act, railroads have received considerable rate and
market flexibility including the ability to obtain wholesale exemptions from numerous provisions of
the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized
and truck trailer traffic handled by railroads. Requirements for the creation of new short line
railroads or the expansion of existing short line railroads were substantially expedited and
simplified under the exemption process. On regulated traffic, railroads and shippers are permitted
to enter into contracts for rates and provision of transportation services without the need to file
tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable
freedom to raise or lower rates without objection from captive shippers. While the ICC Termination
Act retained maximum rate regulation on traffic over which railroads have exclusive control, the
new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB
on all traffic other than agricultural products.
The FRA regulates railroad safety and equipment standards, including track maintenance,
handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and
operating practices and crew qualifications.
CANADA. Our Canadian railroad subsidiaries are subject to regulation by various governmental
departments and regulatory agencies at the federal or provincial level depending on whether the
railroad in question falls within federal or provincial jurisdiction. A Canadian railroad generally
falls within the jurisdiction of federal regulation if the railroad crosses provincial or
international borders or if the Parliament of Canada has declared the railroad to be a federal work
or undertaking and in selected other circumstances. Any company which proposes to construct or
operate a railway in Canada which falls within federal jurisdiction is required to obtain a
certificate of fitness under the Canada Transportation Act, or CTA. Under the CTA, the sale of a
federally regulated railroad line is not subject to federal approval, although a process of
advertising and negotiating may be required in connection with any proposed discontinuance of a
federal railway. Federal railroads are governed by federal labor relations laws.
Short line railroads located within the boundaries of a single province which do not otherwise
fall within the federal jurisdiction are regulated by the laws of the province in question,
including laws as to licensing and labor relations. Most of Canada’s ten provinces have enacted new
legislation, which is more favorable to the operation of short line railroads than previous
provincial laws. Many of the provinces require as a condition of licensing under the short line
railroads acts that the licensees comply with federal regulations applicable to safety and other
matters and remain subject to inspection by federal railway inspectors. Under some provincial
legislation, the sale of a provincially regulated railroad line is not subject to provincial
approval, although a process of advertising and negotiating may be required in connection with any
proposed discontinuance of a provincial railway.
Acquisition of additional railroad operations in Canada, whether federally or provincially
regulated, may be subject to review under the Investment Canada Act, or ICA, a federal statute
which applies to the acquisition of a Canadian business or establishment of a new Canadian business
by a non-Canadian. In the case of an acquisition that is subject to review, the non-Canadian
investor must observe a statutory waiting period prior to completion and satisfy the Minister
responsible for the administration of the ICA that the investment will be of net benefit to Canada,
giving regard to certain evaluative factors set out in the legislation.
Any contemplated acquisitions may also be subject to the provisions of the Competition Act
(Canada), or CA. The CA contains provisions relating to premerger notification as well as
substantive merger provisions. An acquisition that exceeds certain financial thresholds set out in
the CA may be subject to notification and observance of a statutory waiting period prior to
completion, during which time the Commissioner of Competition (the “Commissioner”) will evaluate
the impact of the
acquisition upon competition. In addition, the Commissioner has the jurisdiction under the CA
to review an acquisition that is a “merger” within the meaning of the CA in certain circumstances,
even where notification is not filed.
RAILROAD RETIREMENT
Railroad industry personnel are covered by the Railroad Retirement System instead of Social
Security. Our contributions under the Railroad Retirement System have been approximately triple
those of employees in industries covered by Social Security. The Railroad Retirement System, funded
primarily by payroll taxes on covered employers and employees, includes a benefit roughly
equivalent to Social Security (Tier I), an additional benefit similar to that allowed in some
private defined-benefit plans (Tier II), and other benefits. For 2005, the Railroad Retirement
System required up to a 20.25 percent contribution by railroad employers on eligible wages, while
the Social Security and Medicare Acts only required a 7.65 percent contribution on similar wage
bases.
ITEM 1A. RISK FACTORS
We
have substantial debt and debt service requirements which could have adverse consequences on our
business. As of December 31, 2005, we had indebtedness of $433.9 million and, as a result, we incur
significant interest expense. The degree to which we are leveraged could have important
consequences, including the following:
—
our ability to obtain additional financing in the future for capital expenditures,
potential acquisitions, and other purposes may be limited or financing may not be available
on terms favorable to us or at all;
—
a substantial portion of our cash flow from operations must be used to pay our interest
expense and repay our debt, which reduces the funds that would otherwise be available to us
for our operations and future business opportunities; and
—
fluctuations in market interest rates will affect the cost of our borrowings to the
extent not covered by interest rate hedge agreements because our credit facilities bear
interest at variable rates and only a portion of our borrowings are covered by hedge
agreements.
A default could result in acceleration of our indebtedness and permit our senior lenders to
foreclose on our assets. Our competitors may operate on a less leveraged basis and may have
significantly greater operating and financing flexibility than we do.
As of December 31, 2005, we had $5.0 million of outstanding borrowings under our revolving
credit facility. This facility allows us to borrow a total of $100 million for any purpose and we
may borrow up to an additional $25 million of term debt in connection with acquisitions if we meet
specified conditions. If new debt is added to our current debt levels, the related risks that we
face would intensify. As of March 10, 2006, we had $1.5 million outstanding under the revolving
credit facility.
The
credit agreement governing our senior credit facilities contains covenants that
significantly restrict our operations. Our credit facilities contain numerous covenants imposing
restrictions on our ability to, among other things:
Our credit facilities also contain financial covenants that require us to meet a number of
financial ratios and tests. Our failure to comply with the obligations in our credit facilities
could result in events of default under the credit facilities, which, if not cured or waived, could
permit acceleration of our indebtedness, allowing our senior lenders to foreclose on our assets.
Rising fuel costs could materially adversely affect our business. Fuel costs were
approximately 11% of our revenue for the year ended December 31, 2005, 9% for the year ended
December 31, 2004 and 7% for the year ended December 31, 2003. Fuel prices and supplies are
influenced significantly by international, political and economic circumstances. If fuel supply
shortages or unusual price volatility were to arise for any reason, the resulting higher fuel
prices would significantly increase our operating costs. During 2005, we offset a portion of
higher fuel costs through our fuel surcharge program. However, to the extent that we are unable to
maintain and expand the existing fuel surcharge program, increases in fuel prices could have an
adverse effect on our operating results, financial condition or liquidity.
As part of our railroad operations, we frequently transport hazardous materials. We are
required to transport hazardous materials to the extent of our common carrier obligation. An
accidental release of hazardous materials could result in significant loss of life and extensive
property damage. The associated costs could have an adverse effect on our operating results,
financial condition or liquidity.
The availability of qualified personnel and an aging workforce may adversely affect our
operations. Changes in demographics, training requirements and the availability of qualified
personnel, particularly train crew members, could negatively affect our service levels. Our
efforts to attract and retain qualified personnel may be hindered due to increased demand in the
job market. Unpredictable increases in demand for rail services may exacerbate these risks and may
have an adverse effect on our operating results, financial condition or liquidity.
Some of our employees belong to labor unions and strikes or work stoppages could adversely
affect our operations. Many of our employees are union-represented. Our union employees
work under collective bargaining agreements with various labor organizations. Our inability to
negotiate acceptable contracts with these unions could result in, among other things, strikes, work
stoppages or other slowdowns by the affected workers. If our union-represented employees were to
engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or
their terms and conditions in future labor agreements were renegotiated, we could experience
significant disruption of our operations higher ongoing labor costs.
Our inability to integrate acquired businesses successfully could have adverse consequences
for our business. Our acquisition program could be materially
affected by the availability of suitable candidates and competition
from other companies for the purchase of available candidates. We have acquired many railroads since we commenced operations in 1992 and intend
to continue our acquisition program. The success of our acquisition program will depend on, among
other things the availability of suitable candidates and competition from other companies for the
purchase of available candidates. Financing for acquisitions may come from several sources,
including cash on hand and proceeds from the incurrence of indebtedness or the issuance of
additional common stock, preferred stock, convertible debt or other securities. The issuance of any
additional securities could result in dilution to our stockholders.
Acquisitions result in greater administrative burdens and operating costs and, to the extent
financed with debt, additional interest costs. The process of integrating our acquired businesses
may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our
business.
If these disruptions and difficulties occur, they may cause us to fail to realize the cost
savings, revenue enhancements and other benefits that we expected to result from an acquisition and
may cause material adverse short and long-term effects on our operating results and financial
condition.
Because we depend on Class I railroads for our operations, our business and financial results
may be adversely affected if our relationships with Class I carriers deteriorates. The railroad
industry in the United States and Canada is dominated by a small number of Class I carriers that
have substantial market control and negotiating leverage. Almost all of the traffic on our North
American railroads is interchanged with Class I carriers. Our ability to provide rail service to
our customers in North America depends in large part upon our ability to maintain cooperative
relationships with Class I carriers with respect to, among other matters, freight rates, car
supply, reciprocal switching, interchange, trackage rights and fuel surcharges. In addition, loss
of customers or service interruptions or delays by our Class I interchange partners relating to
customers who ship over our track, may decrease our revenue.
Class I carriers are also sources of potential acquisition candidates as they continue to
divest branch lines. Failure to maintain good relationships may adversely affect our ability to
negotiate acquisitions of branch lines.
We are subject to the risks of doing business in foreign countries. We currently have railroad
operations in Canada. The risks of doing business in foreign countries include:
—
adverse changes in the economy of those countries;
—
exchange rate fluctuations;
—
government policies against ownership of businesses by non-nationals; and
—
economic uncertainties including, among others, risk of renegotiation or modification of existing agreements or
arrangements with governmental authorities, exportation and transportation tariffs, foreign exchange restrictions and
changes in taxation structure.
We are subject to significant governmental and environmental regulation of our railroad
operations. The failure to comply with environmental and other governmental regulations could have
a material adverse effect on us. Our railroad and real
estate ownership is subject to extensive
foreign, federal, state and local environmental laws and regulations. We could incur significant
costs as a result of any allegations or findings to the effect that we have violated or are
strictly liable under these laws or regulations. We may be required to incur significant expenses
to investigate and remediate environmental contamination. We are also subject to governmental
regulation by a significant number of foreign, federal, state and local regulatory authorities with
respect to our railroad operations and a variety of health, safety, labor, environmental,
maintenance and other matters. Our failure to comply with applicable laws and regulations could
have a material adverse effect on us.
A
downturn in the economy could negatively affect demand for
our services. Several of the commodities we transport come from industries with cyclical business
operations. As a result, prolonged negative changes in domestic and global economic conditions
affecting the producers and consumers of the commodities carried by us may decrease our revenue.
Severe
weather and natural disasters could disrupt normal business operations, which could
result in increased costs and liabilities and decreases in revenues. Severe weather conditions and
other natural phenomena, including earthquakes, hurricanes, fires and floods, may cause significant
business interruptions and result in increased costs, increased liabilities and decreased revenue.
We may face liability for casualty losses which are not covered by insurance. We have
obtained insurance coverage for losses sustained by our railroads arising from personal injury and
for property damage in the event of derailments or other incidents. Personal injury claims made by
our railroad employees are subject to the Federal Employers’ Liability Act (“FELA”), rather than
state workers’ compensation laws. Currently, we are responsible for the first $750,000 of
expenditures per each incident under our general liability insurance policy and $1 million of
expenditures per each incident under our property insurance policy. In addition, in each policy
period, under our general liability insurance policy we are responsible for the first $1 million of
expenditures, in the aggregate, on any incidents in excess of $750,000. Severe accidents or
personal injuries could cause our liability to exceed our insurance limits which might have a
material adverse effect on our business and financial condition. Our annual insurance limits are
$100 million and $15 million on liability and property, respectively. In addition, adverse events
directly and indirectly applicable to us, including such things as derailments, accidents,
discharge of toxic waste, or other like occurrences in the industry, can be expected to result in
increases in our insurance premiums and/or
our self insured retentions and could result in limitations to the coverage under our existing
policies. We are currently involved in discussions with our insurers on the renewal of, and
adjustments to our insurance coverage, which would revise some terms of coverage for future
occurrences.
Future acts of terrorism or war, as well as the threat of war, may cause significant
disruptions in our business operations. Terrorist attacks, such as those that occurred on
September 11, 2001, as well as the more recent attacks on the transportation systems in Madrid and
London, any government response to those types of attacks and war or risk of war may adversely
affect our results of operations, financial condition or liquidity. Our rail lines and facilities
could be direct targets or indirect casualties of an act or acts of terror, which could cause
significant business interruption and result in increased costs and liabilities and decreased
revenues, which could have an adverse effect on our operating results and financial condition. Such
effects could be magnified where releases of hazardous materials are involved. Any act of terror,
retaliatory strike, sustained military campaign or war or risk of war
may have an adverse effect on
our operating results and financial condition by causing or resulting in unpredictable operating or
financial conditions, including disruptions of rail lines, volatility or sustained increase of fuel
prices, fuel shortages, general economic decline and instability or weakness of financial markets
which could restrict our ability to raise capital. In addition, insurance premiums charged for some
or all of our coverage could increase dramatically or certain coverage may not be available to us
in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
RAILROAD PROPERTIES
We operate over 8,000 miles of track in North America. The following map displays all of our
North American railroad properties as of March 10, 2006:
The following tables summarize the composition, as of December 31, 2005, of our railroad
equipment fleet.
FREIGHT CARS
TYPE
OWNED
LEASED
TOTAL
Covered hopper cars
32
2,943
2,975
Open top hopper cars
105
135
240
Box cars
37
2,662
2,699
Flat cars
193
2,035
2,228
Tank cars
6
4
10
Gondolas
3
650
653
Passenger cars
10
0
10
386
8,429
8,815
LOCOMOTIVES
HORSEPOWER/UNIT
OWNED
LEASED
TOTAL
Over 2,000
13
186
199
1,500 to 2,000
85
183
268
Under 1,500
17
15
32
115
384
499
As noted above, over 75% of our locomotive fleet is leased on terms ranging from
month-to-month to 10 years. The remaining lease terms for 53% of our locomotives end within the
next three years. We will need to either renew these leases, exercise our purchase options where
possible, or find other locomotives to replace them at the end of the lease term.
Based on current and forecasted traffic levels on our railroads, management believes that our
present equipment, combined with the availability of other rail cars and/or locomotives for hire,
is adequate to support our operations. We believe that our insurance coverage with respect to our
property and equipment is adequate.
ADMINISTRATIVE OFFICES AND OTHER
We own a 59,500 square foot office building, located in Boca Raton, Florida, where our
executive offices are located. Of this space, 7,900 square feet are leased to a third party. In
addition, we lease approximately 10,000 square feet of office space in San Antonio, Texas for
approximately $135,000 annually. The lease expires December 31, 2009.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting our business, we become involved in various legal actions
and other claims, some of which are currently pending. Litigation is subject to many uncertainties
and we may be unable to accurately predict the outcome of individual litigated matters. Some of
these matters may be decided unfavorably to us. It is the opinion of management that the ultimate
liability, if any, with respect to these matters will not be material. We are not involved in any
litigation other than routine litigation incidental to our business.
On October 26, 2004 a train operated by our subsidiary, the Central Oregon Pacific Rail, or
CORP, derailed at Cow Creek Canyon in Oregon, resulting in the discharge of diesel fluid into Cow
Creek. The CORP immediately initiated a remediation process and followed proper clean-up
procedures. Although there was no long-term environmental impact resulting from the diesel spill,
the United States Attorney’s Office for the District of Oregon and the Environmental Protection
Agency have undertaken an investigation into the derailment to determine whether there has been a
violation of the Clean Water Act, and have issued subpoenas to us and the CORP. At this time, the
U.S. Attorney’s office has not informed us whether it will proceed with a prosecution. We recently
learned that the EPA intends to interview some employees for purposes of assisting the government
in deciding whether to prosecute. We cannot predict presently whether
the government will pursue criminal proceedings seeking penalties or
other remedial action.
On February 7, 2005, the Surface Transportation Board entered an Order setting the terms for
sale of our Toledo, Peoria &Western Railway’s 76 mile La Harpe – Hollis Line in western central
Illinois to Keokuk Junction Railway Company, or KJRY, as a result of KJRY’s application under the
Feeder Line Statute, 49 USC sec. 10907. We believe that the STB-ordered sale of the line at the
mandated price of $4.2 million was not in accordance with the rules and regulations governing such
STB
action and did not reflect the line’s value or adequately compensate us as required by these
rules and regulations. As a result, we have appealed the Order to the U.S. Circuit Court of
Appeals. We are unable to predict the outcome of this appeal, however, we do not believe the final
outcome of this matter will materially affect our financial position, results of operations or cash
flows.
On August 28, 2005, a railcar containing styrene located on our Indiana & Ohio Railway (I&O
Railway) property in Cincinnati, Ohio, began venting, due to a chemical reaction. Styrene is a
potentially hazardous chemical used to make plastics, rubber and resin. In response to the
incident, local public officials temporarily evacuated residents and businesses from the immediate
area until public authorities confirmed that the tank car no longer posed a threat. As a result of
the incident, several civil lawsuits have been filed against us and others connected to the tank
car. Motions for class action certification have been filed but remain pending. In cooperation
with our insurer, we have paid settlements to a substantial number of affected residents and
businesses. The incident has also triggered inquiries from the Federal Railroad Administration
(FRA) and other federal, state and local authorities charged with investigating such incidents. We
anticipate that regulatory sanctions and fines will be assessed against our I&O Railway as a result
of this incident. Because of the chemical release, the Ohio EPA, the US EPA, the State of Ohio and
the City of Cincinnati are cooperating in a joint investigation of the incident, which we believe
to be nearly complete. Should this investigation lead to environmental crime charges against our
I&O Railway, potential fines upon conviction could range widely and could be material. While we
are unable to predict with certainty the outcome of the various matters pending, during the third
quarter of 2005 we estimated that our cost for this incident will be $2.3 million, inclusive of the
possible regulatory sanctions noted above.
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 2005.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock began trading on the New York Stock Exchange (NYSE) on January 2, 2002 under
the symbol “RRA”. Prior to January 2, 2002, our common stock traded on the Nasdaq National Market
(Nasdaq) under the symbol “RAIL”.
Description of Common Stock
A total of 60 million shares of common stock is authorized, of which 38,688,496 shares were
outstanding as of December 31, 2005. Each share is entitled to one vote in all matters requiring a
vote of shareholders. As of March 10, 2006, there were approximately 523 holders of record and we
believe at least 6,100 beneficial owners of our common stock. Weighted average common shares
outstanding used in the calculation of diluted earnings per share was approximately 38 million as
of December 31, 2005, and is expected to increase in 2006 due to anticipated stock option exercises
and other incentive programs.
We have never declared or paid a dividend on our common stock. Our senior credit agreement
prevents us from paying cash dividends.
Set forth below is high and low price information for our common stock as reported on the NYSE
for each period presented.
2004
High Sales Price
Low Sales Price
First Quarter
$
13.40
$
10.80
Second Quarter
14.75
11.55
Third Quarter
14.73
10.18
Fourth Quarter
13.39
10.30
2005
High Sales Price
Low Sales Price
First Quarter
$
13.40
$
11.55
Second Quarter
12.67
9.95
Third Quarter
12.31
10.60
Fourth Quarter
12.09
10.11
2006
High Sales Price
Low Sales Price
First Quarter (through March 10)
$
12.00
$
8.97
Issuer Purchases of Equity Securities Information
We
did not repurchase any shares of our common stock during 2004. During the year ended December 31, 2005, we
accepted 4,656 shares in lieu of cash payments by employees and non-employee directors for payroll
tax withholdings relating to stock based compensation.
The results of our continuing operations for the years ended December 31, 2005, 2004, 2003,
2002 and 2001 include the results of certain railroads from the dates they were acquired by
purchase or lease as follows: Alcoa Railroad Group effective September 30, 2005; Fremont Line
effective September 10, 2005, Midland Subdivision effective October 15, 2004; Chicago, Fort Wayne &
Eastern Railroad effective August 1, 2004; Central Michigan Railway effective January 25, 2004;
San Luis and Rio Grande Railroad effective June 29, 2003; the Mobile Line, effective June 1, 2003;
StatesRail, effective January 4, 2002; and ParkSierra, effective January 8, 2002. The income
statement data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data at
December 31, 2005 and 2004 are derived from, and are qualified by reference to, audited financial
statements included elsewhere in this report and should be read in conjunction with those financial
statements and the notes thereto. The income statement data set forth below for the periods ended
December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 are
derived from our financial statements not included in this report on Form 10-K. Freight Australia,
Ferronor, the Arizona Eastern Railway Company and West Texas and Lubbock Railroad, all sold in
2004, and the San Luis and Rio Grande Railroad, which was sold in 2005, and the Alberta Railroad
Properties, which were sold in 2006, have been presented as discontinued operations and thus have
been excluded from the income statement data and freight carloads within the operating data.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
(in thousands, except operating and per share data)
2005
2004
2003
2002
2001
INCOME STATEMENT DATA
Operating revenue
$
423,682
$
369,432
$
329,810
$
309,499
$
227,167
Operating income
51,265
38,646
68,359
61,749
48,498
Income (loss) from continuing operations
30,845
(23,134
)
21,125
288
5,757
Basic earnings (loss) per common share from
continuing operations
$
0.82
$
(0.66
)
$
0.66
$
0.01
$
0.26
Diluted earnings (loss) per common share from
continuing operations
$
0.80
$
(0.66
)
$
0.65
$
0.01
$
0.24
Weighted
average common shares — Basic
37,817
34,982
31,806
32,047
21,510
Weighted
average common shares — Diluted
38,460
34,982
34,336
32,620
22,706
BALANCE SHEET DATA
Total assets
$
1,147,376
$
1,016,143
$
1,232,490
$
1,106,553
$
891,168
Long-term obligations, including current maturities
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We pursue growth by seeking to increase the number of our carloads and our average rate per
carload and by continuing our program of selectively acquiring railroads that we believe will
provide operating efficiencies, strategic advantages and/or profit and cash flow improvement
opportunities. Our operating costs include labor, equipment rents (locomotives and railcars),
purchased services (contract labor and professional services), diesel fuel, casualties and
insurance, materials, joint facilities and other expenses. Each of these costs is included in one
of the following functional departments: maintenance of way, maintenance of equipment,
transportation, equipment rental, and selling, general & administrative. In addition, depreciation
of our fixed assets and asset sale gains and losses are significant components of our operating
income.
Carload Growth and Acquisitions
Our total North American carloads increased by 6.4%, including 2.0% on a “same railroad”
basis, during the year ended 2005 compared to the year ended 2004, with our average rate per
carload increasing from $281 to $303. “Same railroad” amounts exclude amounts associated with
railroads, or portions of railroads, sold or acquired by us after January 1, 2005. We expect “same
railroad” carload growth to be approximately 1%-2% during 2006.
During the second quarter of 2003, we acquired two branch lines, the 154 mile San Luis & Rio
Grande Railroad in Colorado and the 288 mile Mobile Line, which is contiguous with our existing
Alabama & Gulf Coast Railway.
In January 2004, we acquired the assets of the Central Michigan Railway, which operates 100
miles of rail line in Michigan.
In July 2004, our wholly-owned subsidiary, the Central Railroad Company of Indianapolis,
executed an agreement with CSX Transportation, Inc. to lease 276 miles of railroad known as the
Chicago, Ft. Wayne & Eastern Railroad for twenty years. We assumed control of the operations on
August 1, 2004.
On June 28, 2004, our wholly-owned subsidiary, the Dallas, Garland & Northeastern Railroad,
commenced operations of Mockingbird Yard in Dallas and 11 miles of track through a 10 year
agreement with the Union Pacific Railroad. Under terms of the agreement with Union Pacific, the
Dallas, Garland & Northeastern Railroad will serve customers on the line, with the intention of
growing the business and creating a more efficient interchange with the Union Pacific Railroad.
On October 16, 2004, our wholly-owned subsidiary, the Indiana & Ohio Central Railroad Inc.,
executed an agreement with CSX Transportation, Inc. to purchase 107 miles of railroad from
Cincinnati, Ohio to Columbus, Ohio, known as the Midland Subdivision. We also entered into a
25-year lease of related real estate.
On September 10, 2005, our wholly-owned subsidiary, Mid-Michigan Railroad, entered into a
25-year lease with CSX Transportation, Inc. for the operation of the 48 mile Fremont Line. The
line runs from Fremont, Michigan south to West Olive, Michigan and interchanges with our Michigan
Shore Railroad and CSX Transportation.
On September 30, 2005, our wholly-owned subsidiary, RailAmerica Transportation Corp.,
completed the stock acquisition of four short line railroads from Alcoa, Inc. referred to as the
Alcoa Railroad Group. The railroads serve Alcoa aluminum manufacturing operations in Texas and New
York and a specialty chemicals facility in Arkansas, formerly owned by Alcoa, but now owned by
Almatis, Inc.. As part of the agreement, we have entered into three long term service agreements
with Alcoa, under which we will continue to provide service to Alcoa’s facilities. We assumed
control of the operations of the Alcoa Railroad Group on October 1, 2005. In conjunction with the
purchase of the Alcoa Railroad Group, on September 30, 2005, we entered into an amendment to our
senior credit facility, which added $75 million to the U.S. dollar tranche of the term loan
facility.
In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million in cash, a secured note for $5.7 million
due no later than June 2010 and a secured note from Ferronor for $1.7 million due no later than
February 2007, both bearing interest at 90 day LIBOR plus 3%. In January 2006, we received $7.1
million in full satisfaction of the amounts outstanding. During the year ended December 31, 2004,
we recognized a $4.0 million tax charge resulting from the sale of our interest in Ferronor and the
repatriation of the cash proceeds to the U.S. Ferronor’s results of operations have been
reclassified to discontinued operations on our consolidated financial statements.
In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result
of foreign exchange hedges that were entered into during the third quarter of 2004. In addition,
the share sale agreement provided for an additional payment to us of AUD $7 million (US $5 million)
based on the changes in the net assets of Freight Australia from September 30, 2003 through August31, 2004, which was received in December 2004, and also provides various representations and
warranties by us to the buyer. Potential claims against us for violations of most of the
representations and warranties are capped at AUD $50 million (US $39.5 million). No claims have
yet been asserted by the buyer. We believe the ultimate impact of any
claim, should one be asserted, alleging a breach of the representations and
warranties will not have a material effect on our future results of
operations. However, if we are
required to make a payment to the buyer, it could have a material effect on future cash
flows. During the year ended December 31, 2004, we recognized a gain of $20.2 million, pre-tax and
$2.0 million, net of income taxes on the sale. The $18.2 million tax provision on the sale of
Freight Australia includes a provision of $11.4 million for the previously unremitted earnings of
Freight Australia. During the fourth quarter of 2005, we recorded an additional tax benefit of
$1.6 million. This adjustment has been included in discontinued operations for the year ended
December 31, 2005. Freight Australia’s results of operations have been reclassified to
discontinued operations on our consolidated financial statements.
In conjunction with the sale of Freight Australia, on September 29, 2004, we completed the
purchase of $125.7 million of our $130 million principal amount of 12 7/8% senior subordinated
notes due 2010. At the same time, we amended and restated our credit agreement to extend the
maturity by two years, reduced the margin rate by 0.5%, borrowed $350 million in term loans and
increased the availability of the U.S. dollar denominated revolving loans by $10 million.
In December 2004, we sold the Arizona Eastern Railway Company for $2.8 million in cash,
resulting in a pretax gain of $0.3 million, or $0.2 million after tax. The results of operations
for the Arizona Eastern Railway Company have been reclassified to discontinued operations for the
periods presented.
In December 2004, we also completed the sale of our West Texas and Lubbock Railroad for $1.8
million in cash and a long term note of $3.6 million, resulting in a pretax and after tax gain of
$0.1 million. The results of operations for the West Texas and Lubbock Railroad have been
reclassified to discontinued operations for the periods presented.
In December 2005, we completed the sale of our San Luis & Rio Grande Railroad for $5.5 million
in cash and a long term note of $1.5 million, resulting in a pretax loss of $0.6 million, or $0.1
million after tax. The results of operations for the San Luis & Rio Grande Railroad have been
reclassified to discontinued operations for the periods presented.
During the fourth quarter of 2005, we committed to a plan to dispose of the Alberta Railroad
Properties, comprised of the Lakeland & Waterways Railway, Mackenzie Northern Railway and Central
Western Railway. Upon committing to the disposal plan, we determined that the sale would result in
a loss on sale of the assets. Accordingly, we recorded an estimated pretax loss on the sale of the
properties of $2.5 million, or $3.8 million after tax. We completed the sale of the Alberta
Railroad Properties in January 2006 for $22.1 million in cash. In addition, the sale agreement
includes two earn-out provisions based upon the opening of a British
Petroleum, or BP, Plant on the Mackenzie Northern
Railway. In order to receive the first payment of CAD $2.0 million, the BP Plant must be prepared
for operations or have moved a railcar on or prior to December 31, 2011. In order to receive the
second payment of CAD $2.0 million, an aggregate amount of carloads equal to or greater than 4,000
must be loaded and shipped to and from the BP Plant between the closing date of the sale and
December 31, 2011. The estimated loss on sale does not include an
effect for these earn-outs. Any proceeds received as a result of
these earn-out agreements will be recorded through income from
discontinued operations in the period received. The results of operations for the Alberta Railroad Properties have been
reclassified to discontinued operations for the periods presented.
Our railroads operate independently with their own management, employees and customer base.
They are spread out geographically and carry a diverse mix of commodities. For the year ended
December 31, 2005, bridge traffic accounted for 16%, coal accounted for 12%, and lumber and forest
products accounted for 10% of our carloads in North America. As a percentage of revenue, which is
impacted by several factors including the length of the haul, lumber and forest products generated
15%, chemicals generated 12% and metals generated 10% of our North American freight revenue for the
year ended December 31, 2005. Bridge traffic, which neither originates nor terminates on our line
and generally has a lower rate per carload, generated 7% of our freight revenue during the year
ended December 31, 2005.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods.
The critical financial statement accounts that are subject to significant estimation are
reserves for litigation, casualty and environmental matters, deferred income taxes and property,
plant and equipment depreciation methods.
In accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting
for Contingencies,” an accrual for a loss contingency is established if information available prior
to the issuance of the financial statements indicates that it is probable that a liability has been
incurred or an asset has been impaired and can be reasonably estimated. These estimates have been
developed in consultation with outside counsel handling our defense in these matters and are based
upon an analysis of potential results, assuming a combination of litigation and settlement
strategies. Subsequent changes to those estimates are reflected in our statements of income in the
period of the change.
Deferred tax assets and liabilities are recognized based on differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. We regularly review our
deferred tax assets for recoverability and establish a valuation allowance based on historical
taxable income, projected future taxable income, and the expected timing of the reversals of
existing temporary differences. If we are unable to generate sufficient future taxable income, or
if there is a material change in the statutory tax rates or time period within which the underlying
temporary differences become taxable or deductible, we could be required to establish an additional
valuation allowance against a portion of our deferred tax asset, resulting in an increase in our
effective tax rate and an adverse effect on earnings. Additionally, changes in our estimates
regarding the statutory tax rates to be applied to the reversal of deferred tax assets and
liabilities could materially affect our effective tax rate.
Property, plant and equipment comprised 79% of our total assets as of December 31, 2005. These
assets are stated at cost, less accumulated depreciation. We use the group method of depreciation
under which a single depreciation rate is applied to the gross investment in our track assets.
Upon normal sale or retirement of track assets, cost less net salvage value is charged to
accumulated depreciation and no gain or loss is recognized. Expenditures that increase asset
values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to
operating expense when the work is performed. We periodically review the carrying value of our
long-lived assets for impairment. This review is based upon our projections of anticipated future
cash flows. While we believe that our estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect our evaluations.
For a complete description of our accounting policies, see Note 1 to our consolidated
financial statements.
The following discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and Notes beginning on Page F-1.
Our historical results of operations for our North American railroads include the operations
of our acquired railroads from the dates of acquisition as follows:
NAME OF RAILROAD
DATE OF ACQUISITION
Mobile Line
May 2003
San Luis and Rio Grande Railroad
June 2003
Central Michigan Railway
January 2004
Chicago, Fort Wayne & Eastern Railroad
August 2004
Midland Subdivision
October 2004
Fremont Line
September 2005
Alcoa Railroad Group
October 2005
We disposed of certain railroads as follows:
NAME OF RAILROAD
DATE OF DISPOSITION
San Pedro & Southwestern Railway
October 2003
Arizona Eastern Railway Company
December 2004
West Texas and Lubbock Railroad
December 2004
San Luis and Rio Grande Railroad
December 2005
As a result, the results of operations for the years ended December 31, 2005, 2004 and 2003
are not comparable in various material respects and are not indicative of the results which would
have occurred had the acquisitions or dispositions been completed at the beginning of the periods
presented. In addition, the results of operations for three of our Canadian railroads, the
Lakeland & Waterways Railway, Mackenzie Northern Railway and Central Western Railway, collectively
referred to as the Alberta Railroad Properties, were reclassified to discontinued operations for the years
presented.
COMPARISON OF CONSOLIDATED OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
The following table sets forth the operating revenue and expenses by functional category for
our consolidated operations for the periods indicated (in thousands).
The following table sets forth the operating revenue and expenses by natural category for our
consolidated operations for the periods indicated (in thousands).
OPERATING REVENUE. Operating revenue increased by $54.3 million, or 15%, to $423.7 million for
the year ended 2005, from $369.4 million for the year ended 2004. Total carloads increased 6% to
1,249,035 in 2005, from 1,174,052 in 2004. Excluding revenue of $19.2 million in 2005 for the
acquired railroads, the Central Michigan Railway, the Chicago, Ft. Wayne & Eastern Railroad, the
Midland Subdivision, the Fremont Line and the Alcoa Railroad Group, operating revenue increased
$35.1 million, or 10%, while carloads increased by 23,757, or 2%. This increase in “same railroad”
revenue was primarily due to an increase in rates, higher fuel surcharges, a change in commodity
mix, the increase in carloads and a strengthening of the Canadian dollar compared to the U.S.
dollar. We expect revenue to increase by approximately 7%-10% in 2006.
The increase in the average rate per carload to $303 in the year ended December 31, 2005, from
$281 in 2004 was primarily due to an increase in rates, including the fuel surcharge, a change in
commodity mix and the improvement in the Canadian dollar.
The following table compares North American freight revenue, carloads and average freight
revenue per carload for the years ended December 31, 2005 and 2004:
the year ended December 31, 2004, an increase of $7.8 million or 16%. This increase was
primarily due to increased moves in Oregon and California as a result of a strong demand for lumber
and the re-opening of a tunnel in April 2005 on one of our West Coast railroads which had been out
of service for over one year.
Chemical revenue was $46.0 million in the year ended December 31, 2005, compared to $40.4
million in the year ended December 31, 2004, an increase of $5.6 million or 14%. This increase was
primarily due to the acquisitions of the Chicago, Ft. Wayne & Eastern Railroad and Central Michigan
Railway.
Metal revenue was $37.7 million in the year ended December 31, 2005, compared to $31.7 million
in the year ended December 31, 2004, an increase of $6.0 million or 19%. This increase was due to
the acquisition of the Chicago, Ft. Wayne & Eastern Railroad, increased business with an existing
customer in southern Ontario and increased pig iron shipments in the Midwest, partially offset by
the loss of a customer in California.
Agricultural and farm products revenue was $35.5 million in the year ended December 31, 2005,
compared to $30.2 million in the year ended December 31, 2004, an increase of $5.3 million or 17%.
This increase was primarily due to favorable growing conditions and outlook for the fall harvest in
the Midwest leading to movement of wheat and the acquisitions of the Chicago, Ft. Wayne & Eastern
Railroad and the Midland Subdivision, partially offset by a severe drought in Illinois causing
farmers to hold crops.
Paper products revenue was $32.9 million in the year ended December 31, 2005, compared to
$29.3 million in the year ended December 31, 2004, an increase of $3.6 million or 12%. This
increase was the result of increased business with existing and new customers in Alabama, the
strengthening of the Canadian dollar, as well as the acquisition of the Chicago, Ft. Wayne &
Eastern Railroad.
Coal revenue was $32.6 million in the year ended December 31, 2005, compared to $28.1 million
in the year ended December 31, 2004, an increase of $4.5 million or 16%. This increase was a
result of an increase in market share from trucks in Indiana, a strong demand for coal in Missouri
and Arkansas and increased business with existing customers in the Midwest and Oklahoma, partially
offset by a decrease in traffic out of the Powder River Basin.
Food products revenue was $29.4 million in the year ended December 31, 2005, compared to $26.5
million in the year ended December 31, 2004, an increase of $2.9 million or 11%. This increase was
due to the acquisition of the Chicago, Ft. Wayne & Eastern Railroad and increased exports of
soybean meal to Asia.
Bridge traffic revenue was $25.2 million in the year ended December 31, 2005, compared to
$24.5 million in the year ended December 31, 2004, an increase of $0.7 million or 3%. This
increase was primarily due to additional haulage by Class I carriers in Canada, partially offset by
a decrease in Class I haulage in Ohio due to new routing protocols with Class I carriers.
Minerals revenue was $23.0 million in the year ended December 31, 2005, compared to $19.2
million in the year ended December 31, 2004, an increase of $3.8 million or 19%. This increase was
primarily due to increased business in Texas, Oklahoma and Alabama with new and existing customers
as a result of increased demand for construction materials.
Metallic and non-metallic ores revenue was $19.5 million in the year ended December 31, 2005,
compared to $16.7 million in the year ended December 31, 2004, an increase of $2.8 million or 17%.
This increase was primarily due to the acquisition of the Alcoa Railroad Group.
Petroleum products revenue was $17.7 million in the year ended December 31, 2005, compared to
$15.3 million in the year ended December 31, 2004, an increase of $2.4 million or 16%. This
increase was due to increased demand for fuel oil in Canada, increased carloads at one of our West
Coast railroads as a result of increased oil and refinery production and the strengthening of the
Canadian dollar.
Other revenue was $13.0 million in the year ended December 31, 2005, compared to $10.2 million
in the year ended December 31, 2004, an increase of $2.8 million or 28%. This increase was
primarily due to an increase in construction and debris haulage in New England with a new customer
and in South Carolina with existing customers.
Autos revenue was $6.3 million in the year ended December 31, 2005, compared to $6.8 million
in the year ended December 31, 2004, a decrease of $0.5 million or 6%. This decrease was due to
reduced motor vehicle shipments in Ohio and
Michigan, partially offset by an increase in auto part shipments for new 2005 orders.
Intermodal revenue increased slightly to $3.8 million in the year ended December 31, 2005,
compared to $3.7 million in the year ended December 31, 2004.
OPERATING EXPENSES. Operating expenses increased to $372.4 million in the year ended December31, 2005, from $330.8 million in the year ended December 31, 2004. The operating ratio, defined as
total operating expenses divided by total operating revenue, was 87.9% in 2005 compared to 89.5% in
2004. The improvement in the operating ratio was primarily due to the $12.6 million charge in the
third quarter of 2004 for the impairment of the E&N Railway, partially offset by higher casualty
costs in 2005 as a result of the styrene tank car incident, as well as higher than anticipated
costs associated with the recently acquired Midland Subdivision. We expect our operating ratio for
2006 to be in the range of 86%-88%.
MAINTENANCE OF WAY. Maintenance of way expenses increased $7.5 million, or 17%, to $52.9
million in the year ended December 31, 2005, from $45.4 million in the year ended December 31,2004, primarily due to higher track and signal maintenance costs in 2005, as well as the
acquisitions in 2004 of the Midland Subdivision and the Chicago, Ft. Wayne & Eastern Railroad. As a
percentage of revenue, maintenance of way increased to 12.5% in 2005 from 12.3% in 2004, primarily
due to higher track and signal maintenance costs. Within maintenance of way expenses, casualty and
insurance costs decreased in 2005 by $0.9 million, or 0.6 percentage points as a result of costs
incurred in 2004 relating to the tunnel fire on our railroad in Oregon. We experienced 115 Federal
Railroad Administration (“FRA”) reportable incidents, consisting of both reportable train incidents
and reportable personal injuries, in both 2005 and 2004. Our FRA personal injury frequency ratio,
measured as reportable injuries per 200,000 man hours worked, was 2.24 in 2005 compared to 2.80 in
2004.
MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense increased $2.7 million, or 20%, to
$16.1 million in the year ended December 31, 2005, from $13.4 million in the year ended December31, 2004, primarily due to the acquisitions of the Midland Subdivision and the Chicago, Ft. Wayne &
Eastern Railroad in 2004 as well as increased system car repairs and locomotive repairs.
Maintenance of equipment increased as a percentage of revenue to 3.8% in 2005, from 3.6% in 2004.
TRANSPORTATION. Transportation expense increased $28.7 million, or 26%, to $140.8 million in
the year ended December 31, 2005, from $112.1 million in the year ended December 31, 2004, due to
the increase in carloads for both “same railroad” and acquisitions, higher fuel prices and higher
casualty expense as a result of the styrene tank car incident on the Indiana and Ohio Railroad. As
a percentage of revenue, transportation expense increased to 33.2% in 2005, from 30.3% in 2004.
This increase is primarily due to higher fuel costs, which accounted for a 2.0 percentage point
increase, higher casualty costs for the tank car incident, which accounted for a 0.6 percentage
point increase, along with higher labor costs and higher costs associated with the recently
acquired Midland Subdivision. Fuel costs were, on average, $1.75 per gallon in 2005 compared to
$1.36 per gallon in 2004, resulting in a $10.1 million increase in fuel expense in 2005, partially
offset by a benefit of $3.7 million from our fuel hedges in 2005.
EQUIPMENT RENTAL. Equipment rental increased $11.2 million, or 30%, to $48.4 million in the
year ended December 31, 2005, from $37.2 million in the year ended December 31, 2004. The increase
is primarily due to the acquisitions of the Midland Subdivision and the Chicago, Ft. Wayne &
Eastern Railroad in 2004, the acquisition of the Alcoa Railroad Group in 2005, increased car hire
expense, as well as additional railcar leases to support lumber traffic in California. As a
percentage of revenue, equipment rental increased to 11.4% in 2005 from 10.1% in 2004.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense decreased
$1.4 million to $84.3 million in the year ended December 31, 2005, from $85.7 million in the year
ended December 31, 2004, primarily due to the former CEO retirement costs incurred during the third
quarter of 2004, partially offset by an increase in costs associated with the acquisitions of the
Midland Subdivision and the Chicago, Ft. Wayne & Eastern Railroad and an increase in health
insurance costs in 2005. As a percentage of revenue, selling, general and administrative expense
decreased to 19.9% in 2005, from 23.2% in 2004, primarily due to the retirement costs referenced
above and an increase in revenue while the dollar amount spent on selling, general, and
administrative expenses such as labor and purchased services remained relatively consistent.
ASSET SALES. Asset sales resulted in a net gain of $1.1 million in the year ended December31, 2005 and a net gain of $4.0 million for the year ended December 31, 2004.
IMPAIRMENT OF E&N RAILWAY. During the third quarter of 2004, we committed to a plan to
dispose of the E&N
Railway. As a result of several factors, including the expectation of minimal future
operating cash flows and potential limitations on the use of certain of the real estate, we do not
expect significant proceeds from this disposal and accordingly, recorded an impairment charge of
$12.6 million during the year ended December 31, 2004.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased as a percentage
of revenue to 7.4% in the year ended December 31, 2005, from 7.7% in the year ended December 31,2004. Depreciation expense increased $2.7 million from 2004 to 2005 as a result of additional
capital expenditures incurred during 2005.
INTEREST AND OTHER EXPENSE. Interest and other expense, including amortization of deferred
financing costs, decreased $7.4 million to $20.3 million for the year ended December 31, 2005, from
$27.7 million in the year ended December 31, 2004. This decrease is primarily due to the
repurchase of our 12 7/8% senior subordinated notes and amendment and refinancing of our senior
credit facility in the third quarter of 2004 and the conversion and redemption of our junior
convertible debentures at July 31, 2004, partially offset by higher short-term interest rates in
2005. In addition, interest expense of $0.6 million and $4.3 million for the years ended December31, 2005 and 2004, respectively, were allocated to discontinued operations.
FINANCING COSTS. In September 2004, we incurred costs to amend and restate our senior credit
facility and to repurchase our 12 7/8% senior subordinated notes. The $39.5 million in costs
consist of $7.7 million for the write-off of deferred loan costs associated with the original
senior credit facility, $19.2 million in redemption premiums for the purchase of the senior
subordinated notes and $12.6 million for the write-off of deferred loan costs, original issue
discount and bank fees related to the senior subordinated notes. In August 2005, we redeemed the
remaining $4.3 million of the senior subordinated notes which resulted in a charge of $0.3 million
for the redemption premium paid and $0.3 million for the write-off of deferred loan costs, original
issue discount and bank fees related to the remaining senior subordinated notes.
INCOME TAXES. Our effective income tax rates in the years ended December 31, 2005 and 2004 for
continuing operations were -2% and 19%, respectively. The rate for 2005 includes a federal tax
benefit of approximately $13.0 million related to the track maintenance credit provisions enacted
by the American Jobs Creation Act of 2004. The rate for 2004 includes a tax charge of $2.2 million
related to the refinancing in September 2004, a reduced tax benefit of $0.9 million associated with
the E&N Railway impairment and a tax charge of $1.2 million relating to non-deductible charges from
the former CEO’s retirement costs.
DISCONTINUED OPERATIONS. During December 2005, we completed the sale of our San Luis & Rio
Grande Railroad for $5.5 million in cash and a long term note of $1.5 million, resulting in a loss
of $0.6 million and $0.5 million, before and after tax, respectively. The results of operations
for the San Luis & Rio Grande Railroad have been reclassified to discontinued operations for the
periods presented. For the years ended December 31, 2005 and 2004, the San Luis & Rio Grande
Railroad contributed income of $0.3 million and a loss of $0.5 million to the income from
discontinued operations, respectively.
During the fourth quarter of 2005, we committed to a plan to dispose of the Alberta
Properties, comprised of the Lakeland & Waterways Railway, Mackenzie Northern Railway and Central
Western Railway. Upon committing to the disposal plan, we determined that the sale would result in
a loss on sale of the assets. Accordingly, we recorded an estimated loss on the sale of the
properties of $2.5 million before tax and $3.8 million after tax. We completed the sale of the
Alberta Properties in January 2006 for $22.1 million in cash. The results of operations for the
Alberta Properties have been reclassified to discontinued operations for the periods presented.
For the years ended December 31, 2005 and 2004, the Alberta Properties contributed income of $1.5
million and $2.2 million to the income from discontinued operations, respectively.
During December 2004, we sold the Arizona Eastern Railway Company for $2.8 million in cash,
resulting in a gain on the sale of $0.3 million, or $0.2 million after tax. The results of
operations for the Arizona Eastern Railway Company have been reclassified to discontinued
operations for the periods presented. For the year ended December 31, 2004, the Arizona Eastern
Railway Company contributed a pretax loss of $3.9 million, or $2.4 million after tax, to the loss
from discontinued operations. These results from operations include a pretax impairment charge of
$4.0 million.
During the fourth quarter of 2004, we committed to a plan to dispose of the West Texas and
Lubbock Railroad. We completed the sale of the West Texas and Lubbock Railroad during December
2004, for $1.8 million in cash and a long term note for $3.8 million, resulting in a gain on the
sale of $0.1 million, before and after tax. The results of operations for the West Texas and
Lubbock Railroad have been reclassified to discontinued operations for the periods presented. For
the year ended December 31, 2004, the West Texas and Lubbock Railroad contributed income of $0.5
million to the loss from discontinued
In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result
of foreign exchange hedges that were entered into during the third quarter of 2004. In addition,
the share sale agreement provided for an additional payment to us of AUD $7 million (US $5 million)
based on the changes in the net assets of Freight Australia from September 30, 2003 through August31, 2004, which was received in December 2004, and also provides various representations and
warranties by us to the buyer. Potential claims against us for violations of most of the
representations and warranties are capped at AUD $50 million (US $39.5 million). No claims have
yet been asserted by the buyer. We believe the ultimate impact of any
claim, should one be asserted, alleging a breach of the representations and
warranties will not have a material effect on our future results of operations. However, if
we are required to make a payment to the buyer, it could have a material effect on future cash
flows. During the year ended December 31, 2004, we recognized a gain of $20.2 million, pre-tax and
$2.0 million, net of income taxes on the sale. The $18.2 million tax provision on the sale of
Freight Australia includes a provision of $11.4 million for the previously unremitted earnings of
Freight Australia. During the fourth quarter of 2005, we recorded an additional tax benefit of
$1.6 million. This adjustment has been included in discontinued operations for the year ended
December 31, 2005. The proceeds from the sale of Freight Australia were used to repay senior debt
and repurchase our 12 7/8% senior subordinated notes. Freight Australia’s results of operations
have been presented in discontinued operations on our consolidated financial statements. The
results of Freight Australia have been included in the financial statements through the date of
sale of the entity, August 31, 2004. For the year ended December 31, 2004, Freight Australia
contributed a loss of $0.9 million to the loss from discontinued operations.
In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad. Accordingly, we have presented the operating results and loss on sale of Ferronor in
discontinued operations for the periods presented. During the year ended December 31, 2004, we
recognized a $4.0 million tax charge resulting from the sale of our interest in Ferronor and the
repatriation of the cash proceeds to the U.S. No income or expense was recognized from operations
for 2004.
COMPARISON OF CONSOLIDATED OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
The following table sets forth the operating revenue and expenses by functional category for
our consolidated operations for the periods indicated (in thousands).
The following table sets forth the operating revenue and expenses by natural category for our
consolidated operations for the periods indicated (in thousands).
OPERATING REVENUE. Operating revenue increased by $39.6 million, or 12%, to $369.4 million in
the year ended 2004, from $329.8 million in the year ended 2003. Total carloads increased by
39,623, or 9%, to 1,174,052 in 2004 from 1,077,592 in 2003. Excluding revenue of $0.3 million in
2003 from the disposed San Pedro & Southwestern Railway, and $21.9 million in 2004 for the acquired
Mobile Line, Central Michigan Railway, Chicago Fort Wayne & Eastern Railroad and Midland
Subdivision, operating revenue increased $17.9 million or 5%, while carloads increased by 35,552 or
3%. The increase in “same railroad” revenue is primarily due to the increase in carloads, the
strengthening of the Canadian dollar compared to the U.S. dollar, which positively impacted
operating revenue by $4.0 million for the year ended December 31, 2004, as well as changes in
commodity mix and fuel surcharges. Non-freight revenue for the year ended December 31, 2003
included $1.0 million from the sale of easements along several of our railroad properties.
The increase in the average rate per carload to $281 in the year ended December 31, 2004, from
$268 in 2003, was primarily due to the improvement in the Canadian dollar, the acquisition of the
Mobile Line and the Central Michigan Railway, which resulted in higher rates per carload due to
increased lengths of haul, changes in commodity mix and the fuel surcharges.
The following table compares North American freight revenue, carloads and average freight
revenue per carload for the years ended December 31, 2004 and 2003:
(dollars in thousands, except average rate per carload)
Revenue
Carloads
per carload
Revenue
Carloads
per carload
Lumber & Forest Products
$
47,830
119,012
$
402
$
46,352
115,482
$
401
Chemicals
40,428
103,410
391
29,811
82,383
362
Metal
31,662
88,309
359
26,513
84,907
312
Agricultural & Farm Products
30,239
97,397
310
27,862
90,463
308
Paper Products
29,298
88,552
331
25,135
81,745
307
Coal
28,137
149,584
188
24,475
142,928
171
Food Products
26,474
79,618
333
20,351
63,192
322
Railroad Equipment/Bridge Traffic
24,494
191,237
128
23,319
178,167
131
Minerals
19,214
53,093
362
17,254
48,796
354
Metallic/Non-metallic Ores
16,691
59,835
279
13,827
51,278
270
Petroleum Products
15,267
44,730
341
12,998
39,027
333
Other
10,185
36,010
283
9,012
29,718
303
Autos
6,759
28,034
241
8,088
33,888
239
Intermodal
3,703
35,231
105
4,231
35,618
119
Total
$
330,381
1,174,052
$
281
$
289,228
1,077,592
$
268
Lumber and forest product revenue was $47.8 million in the year ended December 31, 2004,
compared to $46.4 million in the year ended December 31, 2003, an increase of $1.4 million or 3%.
This increase was primarily due to a strong demand for lumber as a result of new construction.
Chemical revenue was $40.4 million in the year ended December 31, 2004, compared to $29.8
million in the year ended December 31, 2003, an increase of $10.6 million or 36%. This increase
was primarily due to the Mobile Line, Central Michigan Railway and Chicago, Fort Wayne & Eastern
Railroad acquisitions.
Metals revenue was $31.7 million in the year ended December 31, 2004, compared to $26.5
million in the year ended December 31, 2003, an increase of $5.2 million or 19%. This increase was
primarily due to a customer’s plant expansion in North Carolina, a pipeline project in Kansas and
the Mobile Line and Chicago, Fort Wayne & Eastern Railroad acquisitions.
Agricultural and farm products revenue was $30.2 million in the year ended December 31, 2004,
compared to $27.9 million in the year ended December 31, 2003, an increase of $2.3 million or 9%.
This increase was primarily due to the improved wheat crop in Kansas compared to the prior year,
partially offset by a bumper crop of corn and soybeans in the Midwest as a result of a drought in
the region.
Paper products revenue was $29.3 million in the year ended December 31, 2004, compared to
$25.1 million in the year ended December 31, 2003, an increase of $4.2 million or 17%. This
increase was due to the Mobile Line, Central Michigan Railway and the Chicago, Fort Wayne & Eastern
Railroad acquisitions, an increase in paper production in Nova Scotia, increased business with
existing customers in Oklahoma and New England and the strengthening of the Canadian dollar,
partially offset by a decrease in carloads in Oregon as a result of a paper mill closure and in
Alabama as a result of Hurricane Ivan.
Coal revenue was $28.1 million in the year ended December 31, 2004, compared to $24.5 million
in the year ended December 31, 2003, an increase of $3.6 million or 15%. This increase was a
result of increased production at an existing customer in Arkansas, the acquisition of the Central
Michigan Railway, new business in Nova Scotia and Indiana and the strengthening of the Canadian
dollar.
Food products revenue was $26.5 million in the year ended December 31, 2004, compared to $20.4
million in the year ended December 31, 2003, an increase of $6.1 million or 30%. This increase was
due to new business moving soybeans and other products in Washington, increased business with
existing customers in California and Texas and the acquisition of the Chicago, Fort Wayne & Eastern
Railway.
Railroad equipment and bridge traffic revenue was $24.5 million in the year ended December 31,2004, compared to $23.3 million in the year ended December 31, 2003, an increase of $1.2 million or
5%. This increase was due to carload moves for a utility company in Arkansas returning to
historical levels in 2004 from an abnormally low level in 2003 and additional haulage by Class I
carriers.
Minerals revenue was $19.2 million in the year ended December 31, 2004, compared to $17.3
million in the year ended December 31, 2003, an increase of $1.9 million or 11%. This increase was
due to new fertilizer business in Indiana, new contracts in Alabama as a result of the Mobile Line
acquisition, a strong demand for asphalt in Colorado and increased business with customers in Texas
and Arizona.
Metallic and non-metallic ores revenue was $16.7 million in the year ended December 31, 2004,
compared to $13.8 million in the year ended December 31, 2003, an increase of $2.9 million or 21%.
This increase was due to the acquisitions of the Mobile Line and Chicago, Fort Wayne & Eastern
Railroad, increased carloads with existing customers in Texas, North Carolina and Alabama and new
customer business in Oklahoma.
Petroleum products revenue was $15.3 million in the year ended December 31, 2004, compared to
$13.0 million in the year ended December 31, 2003, an increase of $2.3 million or 17%. This
increase was primarily due to an increase in the demand for petroleum products in Southern Ontario
and Colorado, new business in Indiana, a strong propane market and the Chicago, Fort Wayne &
Eastern Railroad acquisition.
Other revenue was $10.2 million in the year ended December 31, 2004, compared to $9.0 million
in the year ended December 31, 2003, an increase of $1.2 million or 13%. This increase was
primarily due to the Central Michigan Railway acquisition, a strong market for steel scrap and
increased carloads with new and existing customers in Connecticut to move debris.
Autos revenue was $6.8 million in the year ended December 31, 2004, compared to $8.1 million
in the year ended December 31, 2003, a decrease of $1.3 million or 16%. This decrease was
primarily due to the loss of business to another form of transportation in Michigan and customers
losing contracts with the large automotive producers.
Intermodal revenue was $3.7 million in the year ended December 31, 2004, compared to $4.2
million in the year ended December 31, 2003, a decrease of $0.5 million or 12%. This decrease was
due to the closure of an intermodal facility in Indiana.
OPERATING EXPENSES. Operating expenses increased to $330.8 million in the year ended December31, 2004, from $261.5 million in the year ended 2003. The operating ratio was 89.5% in 2004
compared to 79.3% in 2003. The increase in the operating ratio was primarily due to an impairment
charge of $12.6 million on the E&N Railway, the charge of $6.7 million for the retirement of our
former CEO and higher fuel and casualty costs in 2004. Both periods include corporate general and
administrative expenses, which had previously been classified as corporate overhead.
MAINTENANCE OF WAY. Maintenance of way expenses increased $10.6 million, or 30%, to $45.4
million in 2004 from $34.8 million in 2003 primarily due to the acquisitions in 2004 of the Midland
Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the effect of
a full year from the 2003 acquisition of the Mobile Line as well as higher casualty costs in 2004
and the strengthening of the Canadian dollar. As a percentage of revenue, maintenance of way
increased to 12.3% in 2004, from 10.6% in 2003, primarily due to higher casualty costs in the year
ended 2004. The increase in casualty costs was due to both a greater number of FRA reportable
train incidents as well as FRA reportable personal injuries in 2004 compared to 2003. During 2004,
we experienced 66 FRA reportable train incidents compared to 52 in 2003. Our FRA personal injury
frequency ratio in 2004 was 2.80 compared to 2.05 in 2003.
MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense increased $1.1 million, or 9%, to
$13.4 million in 2004 from $12.3 million in 2003 primarily due to the acquisitions in 2004 of the
Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the
effect of a full year from the 2003 acquisition of the Mobile Line
as well as the strengthening of the Canadian dollar. Maintenance of equipment decreased as a
percentage of revenue to 3.6% in 2004, from 3.7% in 2003.
TRANSPORTATION. Transportation expense increased $24.3 million, or 28% to $112.1 million in
2004 from $87.8 million in 2003 due to the increase in carloads for both “same railroad” and
acquisitions, as well as higher fuel prices and the strengthening of the Canadian dollar. As a
percentage of revenue, transportation expense increased to 30.3% in 2004 from 26.6% in 2003. This
increase was primarily due to higher fuel costs, which accounted for a 2.3 percentage point
increase, and higher joint facility costs, which accounted for a 0.6 percentage point increase.
Joint facility costs increased as a result of trackage rights and switching fees associated with
the Mobile Line and Central Michigan Railway acquisitions. Fuel costs averaged $1.36 per gallon in
2004 compared to $0.99 per gallon in 2003, resulting in a $9.0 million increase in fuel expense in
2004.
EQUIPMENT RENTAL. Equipment rental increased $5.7 million, or 18%, to $37.2 million in 2004
from $31.5 million in 2003 primarily due to the acquisitions in 2004 of the Midland Subdivision,
the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the effect of a full year
from the 2003 acquisition of the Mobile Line as well as the strengthening of the Canadian dollar.
As a percentage of revenue, equipment rental increased to 10.1% in 2004, compared to 9.6% in 2003,
due to higher car hire expense resulting from Class I congestion and additional railcar leases to
support increased lumber traffic in California.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased
$10.5 million, or 14%, to $85.7 million in 2004 from $75.2 million in 2003 primarily due to the
$6.7 million charge related to the retirement of our former CEO. In accordance with the terms of
the severance agreement, $3.1 million was paid into a deferred compensation account and is
maintained as a long-term asset and liability on our balance sheet. In addition, 0.1 million stock
options were vested, 1.2 million stock options were extended for three years and 24,918 restricted
shares were vested, resulting in a non-cash charge of $3.6 million. Our former CEO continues to be
eligible for future payments under our Long Term Incentive Plan through the 2006 performance
period. No amount has been accrued for any future payments which he may receive. Selling, general
and administrative expense increased as a percentage of revenue to 23.2% in 2004, from 22.8% in
2003 primarily due to the charge for our former CEO’s retirement. Excluding this charge, which
accounted for a 1.3 percentage point increase, selling, general and administrative expense
decreased as a percentage of revenue to 21.9% in 2004 from 22.8% in 2003 due to the increase in
revenue while the dollar amount spent on selling, general, and administrative expenses remained
relatively flat.
ASSET SALES. Net gains on sales of assets were comparable at $4.0 million and $3.2 million
for the years ended December 31, 2004 and 2003, respectively.
IMPAIRMENT OF ASSETS. During the third quarter of 2004, we committed to a plan to dispose of
the E&N Railway. As a result of several factors, including the expectation of minimal future
operating cash flows and potential limitations on the use of certain of the real estate, we do not
expect significant proceeds from this disposal and accordingly, recorded an impairment charge of
$12.6 million during 2004.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $5.4 million,
or 23%, to $28.5 million in 2004 from $23.1 million in 2003 primarily due to the acquisitions in
2004 of the Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan
Railroad, and the effect of a full year from the 2003 acquisition of the Mobile Line. As a
percentage of revenue, depreciation and amortization increased to 7.7% in 2004, from 7.0% in 2003.
INTEREST AND OTHER EXPENSE. Interest and other expense, including amortization of deferred
financing costs, decreased $3.9 million to $27.7 million in 2004 from $31.6 million in 2003. This
decrease was primarily due to the conversion and redemption of our junior convertible debentures at
July 31, 2004, the repurchase of our 12 7/8% senior subordinated notes and the refinancing of our
senior credit facility in September 2004. Interest expense of $4.3 million and $5.7 million for
the years ended December 31, 2004 and 2003, respectively, has been allocated to discontinued
operations.
FINANCING COSTS. In September 2004, we incurred costs to refinance our senior credit facility
and to repurchase our 12 7/8% senior subordinated notes. The $39.5 million of costs consist of
$7.7 million for the write-off of deferred loan costs associated with the original senior credit
facility, $19.2 million in redemption premiums for the purchase of the senior subordinated notes
and $12.6 million for the write-off of deferred loan costs, original issue discount and bank fees
related to the senior subordinated notes.
INCOME TAXES. Our effective tax rates in 2004 and 2003 for continuing operations were 19% and
43%, respectively. The rate for 2004 includes a tax charge of $2.2 million related to the
refinancing in September 2004, a reduced tax benefit of $0.9 million associated with the E&N
Railway impairment and a tax charge of $1.2 million relating to non-deductible charges from the
former CEO’s retirement costs. The effective tax rate in 2003 was impacted by recording a
provision of $1.5 million from an increase in the Ontario, Canada provincial tax rates.
DISCONTINUED OPERATIONS. In December 2005, we completed the sale of our San Luis & Rio Grande
Railroad. The results of operations for the San Luis & Rio Grande Railroad have been reclassified
to discontinued operations for the periods presented. For the years ended December 31, 2004 and
2003, the San Luis & Rio Grande Railroad contributed a loss of $0.5 million and income of $0.1
million to the income from discontinued operations, respectively.
During the fourth quarter of 2005, we committed to a plan to dispose of the Alberta
Properties. The results of operations for the Alberta Properties have been reclassified to
discontinued operations for the periods presented. For the years ended December 31, 2004 and 2003,
the Alberta Properties contributed income of $2.2 million and $3.0 million to the income from
discontinued operations, respectively.
During December 2004, we sold the Arizona Eastern Railway Company for $2.8 million in cash,
resulting in a gain on the sale of $0.3 million, or $0.2 million after tax. The results of
operations for the Arizona Eastern Railway Company have been reclassified to discontinued
operations for the periods presented. For the year ended December 31, 2004, the Arizona Eastern
Railway Company contributed a pretax loss of $3.9 million, or $2.4 million after tax, and pretax
income of $0.5 million, or $0.5 million after tax, to the loss from discontinued operations. The
2004 results from operations include a pretax impairment charge of $4.0 million.
During the fourth quarter of 2004, we committed to a plan to dispose of the West Texas and
Lubbock Railroad. We completed the sale of the West Texas and Lubbock Railroad during December
2004, for $1.8 million in cash and a long term note for $3.8 million, resulting in a gain on the
sale of $0.1 million, before and after tax. The results of operations for the West Texas and
Lubbock Railroad have been reclassified to discontinued operations for the periods presented. For
the years ended December 31, 2004 and 2003, the West Texas and Lubbock Railroad contributed income
of $0.5 million and a loss of $0.02 million to the loss from discontinued operations, respectively.
In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result
of foreign exchange hedges that were entered into during the third quarter of 2004. In addition,
the share sale agreement provided for an additional payment to us of AUD $7 million (US $5 million)
based on the changes in the net assets of Freight Australia from September 30, 2003 through August31, 2004, which was received in December 2004, and also provided various representations and
warranties by us to the buyer. Potential claims against us for violations of most of the
representations and warranties are capped at AUD $50 million (US
$39.5 million). No claims have yet been asserted by the buyer.
We believe the ultimate impact of any claim, should one be asserted,
alleging a breach of the representations and warranties will not
have a material effect on our future results of operations. However,
if we are required to make a payment to the buyer, it could have a
material effect on future cash flows. During the year
ended December 31, 2004, we recognized a gain of $20.2 million, pre-tax and $2.0 million, net of
income taxes on the sale. The $18.2 million tax provision on the sale of Freight Australia
includes a provision of $11.4 million for the previously unremitted earnings of Freight Australia.
The proceeds from the sale of Freight Australia were used to repay senior debt and repurchase our
12 7/8% senior subordinated notes. Freight Australia’s results of operations have been presented
in discontinued operations in our consolidated financial statements. The results of Freight
Australia have been included in the financial statements through the date of sale of the entity,
August 31, 2004. For the years ended December 31, 2004 and 2003, Freight Australia contributed
losses of $0.9 million, and $10.0 million, respectively, to the loss from discontinued
operations.
In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad. Accordingly, we have presented the operating results and loss on sale of Ferronor in
discontinued operations for the periods presented. During the year ended December 31, 2004, we
recognized a $4.0 million tax charge resulting from the sale of our interest in Ferronor and the
repatriation of the cash to the U.S. For the year ended 2003, $0.02 million (net of tax) of income
is included in the loss from discontinued operations for Ferronor. No income or expense was
recognized from operations for 2004.
LIQUIDITY AND CAPITAL RESOURCES — COMBINED OPERATIONS
The discussion of liquidity and capital resources that follows reflects our consolidated
results and includes all of our
subsidiaries. Our principal source of liquidity is cash generated from operations. In
addition, we may fund any additional liquidity requirements through borrowings under our $100
million revolving credit facility. As of December 31, 2005, we had $5.0 million outstanding under
the U.S. dollar tranche of the revolving credit facility. Cash flows provided by operations of
$54.1 million less capital expenditures of $75.9 million resulted in a net cash outflow of $21.8
million for the year ended December 31, 2005 compared to a net cash outflow of $27.7 million for
the year ended December 31, 2004. The decrease in net cash outflow is primarily due to capital
expenditures incurred for Freight Australia during the first eight months of 2004. Due to the
capital intensive nature of our business, we believe this is an important cash flow measure.
Our long-term business strategy includes the selective acquisition and disposition of
transportation-related businesses. Accordingly, we may require additional equity and/or debt
capital in order to consummate acquisitions or undertake major business development activities. We
cannot predict the amount of capital that may be required for such acquisitions or business
development, and whether sufficient financing for such activities will be available on terms
acceptable to us, if at all.
As of December 31, 2005, our net debt (defined as total debt less cash and cash equivalents)
was 49.4% of total capitalization. We expect this ratio to continue to fluctuate between 45% and
55% during the next twelve months.
Operating Activities
Our cash provided by operating activities increased $6.0 million, to $54.1 million, for the
year ended December 31, 2005, from $48.1 million for the comparable period in 2004. The increase
in cash provided by operating activities is primarily due to a $10.0 million increase in working
capital accounts. Total cash provided by operating activities for the year ended December 31,2005, consists of net income of $30.8 million and $33.5 million in depreciation and amortization,
partially offset by $2.2 million in deferred income taxes and other and $10.0 million of net
increases in working capital accounts compared to total cash provided by operating activities for
the year ended December 31, 2004, which consisted of a net loss of $25.9 million, $43.1 million in
depreciation and amortization, an add-back of $39.5 million for financing costs, $16.6 million in
impairment charges, $9.5 million in deferred income taxes and other and an add-back of $3.6 million
for the non-cash portion of the charge for our former CEO’s retirement, partially offset by the
$10.0 million initial lease payment to CSX, $25.3 million of asset sale gains and $3.7 million of
net increases in working capital accounts.
Our cash provided by operating activities decreased $20.4 million, to $48.1 million, for the
year ended December 31, 2004, from $68.5 million for the comparable period in 2003. The decrease in
cash provided by operating activities is primarily due to the $10.0 million initial lease payment
on the Chicago, Fort Wayne & Eastern Railroad, a $3.7 million increase in working capital accounts
and the $3.1 million cash payment associated with our former CEO’s retirement. Total cash provided
by operating activities for the year ended December 31, 2004, consists of a net loss of $25.9
million, $43.1 million in depreciation and amortization, an add-back of $39.5 million for financing
costs, $16.6 million in impairment charges, $9.5 million in deferred income taxes and other and an
add-back of $3.6 million for the non-cash portion of the charge for our former CEO’s retirement,
partially offset by the $10.0 million initial lease payment to CSX, $25.3 million of asset sale
gains and $3.7 million of net increases in working capital accounts compared to total cash provided
by operating activities for the year ended December 31, 2003, which consisted of $14.7 million of
net income, $46.8 million of depreciation and amortization, and $13.0 million in deferred taxes and
other, partially offset by a net increase in working capital accounts of $2.8 million and $3.3
million in asset sale gains.
Investing Activities
Cash provided by (used in) investing activities was ($139.0) million in 2005 compared to
$110.7 million in 2004. The decrease is primarily due to net cash proceeds of $198.8 million
received on the sale of Freight Australia in 2004 and the payment of $77.8 million for the Alcoa
Railroad Group in 2005. Capital expenditures were $75.9 million in 2005 and $75.8 million, or
$62.3 million excluding Freight Australia, in 2004. The increase was due to a rail project on our
Ottawa Valley Railway and specially designated business development capital. Asset sale proceeds
were $14.9 million for the year ended December 31, 2005 primarily due to the receipt of $4.1
million for the STB-ordered sale of the La Harpe-Hollis Line to KJRY in February 2005 and $5.5
million for the sale of the San Luis and Rio Grande Railroad in December 2005, compared to $222.7
million in 2004, primarily due to the sale of Ferronor in February 2004 and Freight Australia in
August 2004. We expect capital expenditures in 2006 to be
approximately $60-$70 million.
Cash provided by (used in) investing activities was $110.7 million in 2004 compared to ($88.1)
million in 2003. The increase is primarily due to the net cash proceeds of $198.8 million received
on the sale of Freight Australia. Additionally,
capital expenditures in 2004 were $75.8 million, or $4.3 million higher than capital
expenditures in 2003. This increase was due to higher capitalized maintenance projects in
Australia as a result of the increased grain tonnage and the appreciation of the Australian dollar
and maintenance projects in North America related to acquisitions. Capital expenditures in North
America were $62.3 million in 2004, compared to $64.5 million in 2003. Asset sale proceeds were
$222.7 million in 2004 compared to $11.2 million in 2003, primarily due to the sale of Freight
Australia in August 2004 and Ferronor in February 2004.
Financing Activities
Cash provided by (used in) financing activities was $74.5 million for the year ended 2005
compared to ($148.4) million in the year ended 2004. The increase of $222.9 million was primarily
due to the repurchase of the 12 7/8% senior subordinated notes in 2004, the repayment of the
Australian component of our senior debt following the sale of Freight Australia and the borrowing
of $75 million on the U.S. term loan tranche of our senior credit facility in 2005 for the purchase
of the Alcoa Railroad Group. Cash proceeds from the exercise of options and warrants decreased
$19.8 million to $9.0 million in 2005 from $28.8 million in 2004.
Cash provided by (used in) financing activities was ($148.4) million for the year ended 2004
compared to $1.5 million in the year ended 2003. The decrease of $149.9 million was primarily due
to the repurchase of the 12 7/8% senior subordinated notes during 2004 and the repayment of the
Australian component of our senior debt following the sale of Freight Australia. Cash proceeds
from the exercise of options and warrants increased $27.1 million to $28.8 million in 2004 from
$1.7 million in 2003.
Working Capital
As of December 31, 2005, we had a working capital deficit of $15.1 million, including cash on
hand of $14.3 million, and $95.0 million of availability under our revolving credit facility,
compared to a working capital deficit of $6.6 million, cash on hand of $24.3 million and $100.0
million of availability under our revolving credit facility at December 31, 2004. The decrease in
working capital at December 31, 2005, compared to December 31, 2004, is primarily due to an
increase in current payables as a result of the assumption of negative working capital from the
Alcoa Railroad Group and the classification of a portion of our Australia tax provision to current
payables in 2005. Our cash flows from operations and borrowings under our credit agreements
historically have been sufficient to meet our ongoing operating requirements, to fund capital
expenditures for property, plant and equipment, and to satisfy our debt service requirements.
Long-term debt
On September 29, 2004, we entered into an amended and restated $450 million senior credit
facility. The facility consists of a $350 million term loan facility with a $313 million U.S.
tranche and a $37 million Canadian tranche and a $100 million revolving loan facility with a $90
million U.S. dollar tranche and a $10 million Canadian dollar tranche. The term loans mature on
September 30, 2011 and require 1% annual principal amortization. The revolving loans mature on
September 30, 2010. In connection with the amended and restated credit agreement, we incurred a
$7.7 million write-off of deferred loan costs related to the original senior credit facility in
2004. On September 30, 2005, we entered into Amendment No. 1 of our amended and restated credit
agreement in connection with the acquisition of the Alcoa Railroad Group. This amendment added $75
million to the existing $313 million U.S. tranche of the term loan facility. The additional $75
million matures and amortizes on the same schedule as the rest of the term loan facility. We may
incur additional indebtedness under the credit facility consisting of up to $25 million aggregate
principal amount of additional term loans to fund acquisitions, subject to the satisfaction of
conditions set forth in the amended and restated credit agreement, including the consent of the
administrative agent and lead arranger and compliance with all financial covenants set forth in the
agreement on a pro forma basis on the date of the additional borrowing. As of December 31, 2005,
we had $5.0 million in U.S. dollar loans outstanding under the revolving credit facility and no
Canadian dollar loans outstanding under the revolving loan portion of the credit facility.
At our option, loans under the amended and restated senior credit facility bear interest at
either
•
the alternative base rate, defined as the greater of:
(i)
UBS AG’s prime rate and
(ii)
the Federal Funds Effective Rate plus, if the loan is a term loan or U.S.
revolving loan, 0.50%, or, if the loan is a Canadian revolving loan, the Canadian Prime
Rate, which is defined as the greater of:
the average rate for 30 day Canadian dollar bankers’ acceptances plus 1.0% per
annum,
plus, in each case, a specified margin determined based on our leverage ratio, which
margin was 1.25% for term loans and 1.00% for revolving loans at December 31, 2005, or
•
the reserve-adjusted LIBOR plus a specified margin determined based on our leverage
ratio, which margin was 2.25% for term loans and 2.00% for revolving loans at December31, 2005.
The interest rate for both the term loans and revolvers increased at the end of the third
quarter of 2005 by 0.25% due to our leverage ratio (which is the
ratio of our total debt to our EBITDA, as these terms are defined in
our amended and restated credit agreement) exceeding 4.0 during the twelve months ended
September 30, 2005 and remains at that level as of December 31, 2005. The leverage ratio was 4.36
for the twelve months ended December 31, 2005. Our covenants require us to maintain a leverage
ratio below 4.75 until September 30, 2006, and below 4.5 thereafter. We anticipate that our
leverage ratio will remain below 4.5 for the next twelve months.
The default interest rate under the amended and restated senior credit facility is 2.0% above
the otherwise applicable rate. The U.S. term loan and the U.S. dollar denominated revolver are
collateralized by the assets of, and guaranteed by, us and most of our U.S. subsidiaries. The
Canadian term loan and the Canadian dollar denominated revolver are collateralized by the assets
of, and guaranteed by, us and most of our U.S. and Canadian subsidiaries. The loans were provided
by a syndicate of banks with UBS Securities LLC, as lead arranger, UBS AG, Stamford Branch, as
administrative agent and The Bank of Nova Scotia, as collateral agent.
Our amended and restated senior credit facility includes numerous covenants imposing
significant financial and operating restrictions on us. The covenants limit our ability to, among
other things:
•
incur more debt,
•
redeem or repurchase our common stock,
•
pay dividends or make other distributions,
•
make acquisitions or investments,
•
use assets as security in other transactions,
•
enter into transactions with affiliates,
•
merge or consolidate with others,
•
dispose of assets or use asset sale proceeds,
•
create liens on our assets,
•
make certain payments or capital expenditures, and
•
extend credit.
In addition, the amended and restated senior credit facility contains financial covenants that
require us to meet a number of financial ratios and tests. Our ability to meet these ratios and
tests and to comply with other provisions of the amended and restated senior credit facility can be
affected by events beyond our control. Failure to comply with the obligations in the amended and
restated senior credit facility could result in an event of default, which, if not cured or waived,
could permit acceleration of the term loans and revolving loans or other indebtedness which could
have a material adverse effect on us. We were in compliance with each of these covenants as of
December 31, 2005, and anticipate being in compliance with our covenants during the next twelve
months.
Our amended and restated senior credit facility allows us to invest in permitted acquisitions
of up to $80 million in any one transaction but not to exceed $300 million over the seven-year term
of the amended and restated senior credit facility and requires us to be in compliance with our
financial covenants on a pro forma basis taking into account our acquisitions and any related
financing for the prior four fiscal quarters. Although we have no current plans to make
acquisitions that do not meet these criteria, if proposed acquisitions exceed these limits we would
seek to obtain waivers from the lenders or their consent to amend the relevant provisions. To
date, we have used $8.3 million of the $300 million acquisition limit. We do not believe these
restrictions are likely to affect our acquisition program.
On September 29, 2004, we repurchased $125.7 million of our $130 million principal amount
12-7/8% senior subordinated notes due August 15, 2010, through a tender offer and consent
solicitation launched on August 31, 2004. Prior to expiration of the consent solicitation on
September 14, 2004, holders of most of the outstanding notes tendered their securities and
consented to the proposed amendments to the related indenture. The supplemental indenture
incorporating the proposed amendments, which removed most of the restrictive covenants contained in
the indenture, became effective on September 29, 2004, upon our acceptance for purchase of the
tendered notes, and is binding upon the holders of the notes that were not tendered in the tender
offer. We used proceeds from the sale of our Australian subsidiary and from the amended and
restated senior credit facility to fund the purchase of the notes. In addition to the redemption
premium charge of approximately $19.2 million for the purchase of the notes, we incurred non-cash
charges of approximately $12.4 million related to the write-off of deferred loan costs and original
issue discounts of the notes. On August 15, 2005, we redeemed the $4.3 million of notes that
remained outstanding for a call price of $1.064375 per $1.00 principal amount of the notes. In
addition to the redemption premium charge of approximately $0.3 million for the purchase of the
remaining notes, we incurred non-cash charges of approximately $0.3 million related to the
write-off of deferred loan costs and original issue discounts of the notes during the year ended
December 31, 2005.
On June 3, 2005, we entered into two interest rate swaps for a total notional amount of $100
million for the period commencing November 25, 2005, through November 24, 2008. The fair value of
these swaps was a net receivable of $2.0 million at December 31, 2005.
All of these interest rate swaps and caps qualify, are designated and are accounted for as
cash flow hedges under SFAS No. 133. More information related to these cash flow hedges can be
found under Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Contractual Obligations
Two primary uses of the cash provided by our operations are capital expenditures and debt
service. The following table represents the minimum future payments on our existing long-term debt
and lease obligations as of December 31, 2005:
2007 -
2009-
After
TOTAL
2006
2008
2010
2010
Long-term debt
$
430,993
$
5,562
$
9,282
$
117,948
$
298,201
Capital lease obligations
$
2,880
$
517
$
1,173
$
727
$
463
Operating lease obligations
$
136,995
$
32,402
$
52,277
$
21,544
$
30,772
Other long-term liabilities
$
15,337
$
1,269
$
2,047
$
2,050
$
9,971
Total contractual cash obligations (1)
$
586,205
$
39,750
$
64,779
$
142,269
$
339,407
(1)
There were no material purchase obligations outstanding as of December 31, 2005.
Common Stock Repurchase Program
We occasionally repurchase our common stock under our share repurchase program. These
repurchases are limited to $5 million per year under our senior credit facility. We did not
repurchase any shares during 2004. During the year ended December 31, 2005, we accepted 4,656
shares in lieu of cash payments by employees and non-employee directors for payroll tax
withholdings relating to stock based compensation.
As of December 31, 2005, our corporate credit ratings were BB- with a positive outlook and Ba3
with a stable outlook by Standard and Poor’s and Moody’s Investor Service, respectively. Our
long-term secured debt is rated BB and Ba3.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
47, “Accounting for Conditional Asset Retirement Obligations –an interpretation of FASB Statement
No. 143” (FIN 47). FIN 47 clarifies the term conditional asset retirement obligation as used in
SFAS No. 143, “Accounting for Asset Retirement Obligations,” and requires an entity to recognize a
liability for the fair value of a conditional asset retirement obligation if the fair value can be
reasonably estimated. Any uncertainty about the amount and/or timing of the future settlement of a
conditional asset retirement obligation should be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is
effective for fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a
material effect on our consolidated financial statements and disclosures.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No.
123-R), which amends SFAS No. 123, to require companies to recognize, in their financial
statements, the cost of employee services received in exchange for equity instruments issued, and
liabilities incurred, to employees in share-based payment transactions, such as employee stock
options and similar awards. On April 14, 2005, the Securities and Exchange Commission delayed the
effective date to annual periods, rather than interim periods, beginning after June 15, 2005. Upon
adoption of this Statement, the prospective method of accounting for stock-based compensation will
be utilized. We expect the adoption of this pronouncement will add an additional estimated $0.4
million to our labor expense in 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently use derivatives to hedge against increases in fuel prices and interest rates. We
formally document the relationship between the hedging instrument and the hedged items, as well as
the risk management objective and strategy for the use of the hedging instrument. This
documentation includes linking the derivatives that are designated as cash flow hedges to specific
assets or liabilities on our balance sheet, commitments or forecasted transactions. When we enter
into a derivative contract, and at least quarterly, we assess whether the derivative item is
effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting
from ineffectiveness, as defined by SFAS No. 133, is recognized in current period earnings. For
derivative instruments that are designated and qualify as cash flow hedges, the effective portion
of the gain or loss on the derivative instrument is recorded in Accumulated Other Comprehensive
Income, a separate component of Stockholders’ Equity, and reclassified into earnings in the period
during which the hedge transaction affects earnings.
We monitor our hedging positions and the credit ratings of our counterparties and do not
anticipate losses due to counterparty non-performance.
FOREIGN CURRENCY. Our foreign currency risk arises from owning and operating railroads in
Canada. As of December 31, 2005, we had not entered into any currency hedging transactions to
manage this risk. A decrease in the Canadian dollar could negatively impact our reported revenue
and earnings for the affected period. During 2005, the Canadian dollar increased 7% in value in
comparison to the U.S dollar. The increase in the Canadian dollar led to an increase of $4.1
million in reported revenue and $1.2 million increase in reported operating income in 2005,
compared to 2004.
INTEREST RATES. Our interest rate risk results from issuing variable rate debt obligations
under our senior credit facility, as an increase in interest rates would result in lower earnings
and increased cash outflows.
On November 30, 2004, we entered into an interest rate swap for a notional amount of $100
million for the period commencing November 25, 2005, through November 24, 2007. Under the terms of
the interest rate swap, we are required to pay a fixed interest rate of 4.05% on $100 million while
receiving a variable interest rate equal to the 90 day LIBOR. The swap qualifies, is designated
and is accounted for as a cash flow hedge under SFAS No. 133. The fair value of this swap was a
net receivable of $1.3 million at December 31, 2005.
On December 8, 2004, we entered into an interest rate cap for a notional amount of $50 million
with an effective date of November 25, 2005, expiring on November 24, 2006. Under the terms of
this cap, the 90 day LIBOR component of our interest rate can fluctuate up to 4.00%. The cap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. The fair
value of this cap was a net receivable of $0.3 million at December 31, 2005.
On June 3, 2005, we entered into two interest rate swaps for a total notional amount of $100
million for the period commencing November 25, 2005, through November 24, 2008. Under the terms of
the interest rate swaps, we are required to pay a fixed interest rate of 4.04% on $100 million
while receiving a variable interest rate equal to the 90 day LIBOR. The swaps qualify, are
designated and are accounted for as cash flow hedges under SFAS No. 133. The fair value of these
swaps was a net receivable of $2.0 million at December 31, 2005.
DIESEL FUEL. We are exposed to fluctuations in diesel fuel prices, as an increase in the price
of diesel fuel would result in lower earnings and increased cash outflows. Fuel costs represented
11% of total revenues during the year ended December 31, 2005. Due to the significance of fuel
costs to our operations and the historical volatility of fuel prices, we maintain a program to
hedge against fluctuations in the price of our diesel fuel purchases. Each one-cent change in the
price of fuel would result in approximately a $0.3 million change in fuel expense on an annual
basis.
The fuel-hedging program includes the use of derivatives that are accounted for as cash flow
hedges. For 2005, we had entered into fuel swap agreements to hedge the equivalent of 750,000
gallons per month (approximately 30% of consumption) from January 2005 through November 2005, at an
average price of $1.45 per gallon, including transportation and distribution costs. This was
increased to 1,000,000 gallons for the month of December 2005 at an average price of $1.68 per
gallon, including transportation and distribution costs. As of December 31, 2005, we have entered
into fuel hedge agreements for 250,000 gallons per month for January and February 2006 at an
average rate of $1.91 per gallon and an additional 75,000 gallons per month for all of 2006
(approximately 10% of consumption) at an average rate of $1.92 per gallon, including transportation
and distribution costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of RailAmerica, the accompanying notes thereto and the
report of independent registered certified public accounting firm 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.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of December31, 2005, our principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are effective.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). As permitted, we have excluded
from our evaluation the 2005 acquisition of the Alcoa Railroad Group, which is included in the 2005
Consolidated Financial Statements, and which represent 7.9% of consolidated total assets as of
December 31, 2005, and 1.3% of consolidated operating revenue and 2.4% of consolidated net income
for the year ended December 31, 2005. Based on our evaluation under the COSO framework, our
management concluded that our internal control over financial reporting was effective as of
December 31, 2005. Our management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered certified public accounting firm, as stated in their report which is
included herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes in our internal
control over financial reporting which occurred during the fourth quarter of fiscal year 2005 which
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Officer Certifications
We have filed the certification of our chief executive officer and chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report on Form
10-K for the year ended December 31, 2005. In June 2005, our chief executive officer, as required
by Section 303A.12(a) of the NYSE Listed Company Manual, certified to the NYSE that he was not
aware of any violation by RailAmerica, Inc. of the NYSE’s corporate governance listing standards.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, executive officers and nominees and our code of ethics is
incorporated by reference from our definitive proxy statement relating to our 2006 Annual Meeting
of Stockholders to be filed with the Commission on or before April 30, 2006.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from our definitive
proxy statement relating to our 2006 Annual Meeting of Stockholders to be filed with the Commission
on or before April 30, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership and securities issuable under equity compensation
plans is incorporated by reference from our definitive proxy statement relating to our 2006 Annual
Meeting of Stockholders to be filed with the Commission on or before April 30, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is incorporated by
reference from our definitive proxy statement relating to our 2006 Annual Meeting of Stockholders
to be filed with the Commission on or before April 30, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accounting fees and services is incorporated by reference
from our definitive proxy statement relating to our 2006 Annual Meeting of Stockholders to be filed
with the Commission on or before April 30, 2006.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The financial statements filed as part of this report are listed separately in the Index of
Financial Statements on page F-1 of this report.
(b)
Exhibits
2.1
Amended and Restated Agreement and Plan of Merger, dated as of November 26, 2001, by and among
RailAmerica, Inc., ParkSierra Acquisition Corp. and ParkSierra Corp. (9)
2.2
Merger Agreement, dated as of October 12, 2001, among RailAmerica, Inc., StatesRail Acquisition Corp.
and StatesRail, Inc. (11)
2.3
Stock Purchase Agreement, dated October 12, 2001, among RailAmerica, Inc., New StatesRail Holdings,
Inc., StatesRail L.L.C., West Texas and Lubbock Railroad Company, Inc. and the Members of StatesRail
L.L.C. (11)
2.4
Letter Agreement, dated as of October 12, 2001, between the parties to Exhibits 2.2 and 2.3 above (11)
2.5
Asset Purchase Agreement, dated November 25, 2003, among the Huron and Eastern Railway Company, Inc.
and the Straits Corporation (19)
2.6
Lease and purchase of rail improvements agreement, dated as of October 13, 2004, between the Indiana &
Ohio Central Railroad Company Inc. and CSX Transportation, Inc. (18)
2.7
Stock Purchase Agreement, dated September 13, 2005, between RailAmerica Transportation Corp. and Alcoa
Inc. (22)
Form of Common Stock Purchase Rights Agreement, dated as of January 6, 1998, between RailAmerica, Inc.
and American Stock Transfer & Trust Company (2)
4.2
Certificate of Designation of Series A Convertible Redeemable Preferred Stock of RailAmerica, Inc. (5)
4.3
Third Amendment to the Rights Agreement, dated as of January 13, 2000, between RailAmerica, Inc. and
American Stock Transfer & Trust Company (4)
4.6
Fourth Amendment to the Rights Agreement, dated as of April 13, 2000, between RailAmerica, Inc. and
American Stock Transfer and Trust Company (6)
4.7
Waiver and Supplemental Agreement, dated as of April 13, 2000, among RailAmerica, Inc. and EGS
Associates, L.P., EGS Partners, L.L.C., BEV Partners, L.P., Jonas Partners, L.P., EGS Management,
L.L.C., William Ehrman, Frederic Greenberg, Jonas Gerstl and Juli Oliver (7)
4.8
Indenture, dated as of August 14, 2000, between RailAmerica Transportation Corp., the Guarantors named
therein and Wells Fargo Bank Minnesota, N.A. (8)
RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan (1)+
10.46
RailAmerica, Inc. 1995 Employee Stock Purchase Plan (1)+
10.63
RailAmerica, Inc. 1998 Executive Incentive Compensation Plan (3)+
10.80
Form of Change in Control Agreements between RailAmerica, Inc. and certain executive officers (11) +
10.81
Service Agreement, dated April 4, 2001, between
RailAmerica, Inc. and Marinus van Onselen and first amendment thereto (11) +
10.82
Amended and Restated Executive Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Gary O. Marino (11) +
10.83
Amended and Restated Executive Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Donald D. Redfearn (11) +
10.84
Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Gary M. Spiegel (11)+
10.86
Amendment No. 1 to Credit Agreement (12)
10.87
Deferred Compensation Plan, as amended (12) +
10.88
Adoption Agreement relating to Deferred Compensation Plan, as amended (12) +
10.89
Long Term Incentive Plan, as amended (13) +
10.90
Annual Incentive Plan (13) +
10.91
Separation Agreeement, dated as of November 14, 2003, between RailAmerica, Inc. and Gary M. Spiegel (15)
10.92
Separation Agreeement, dated as of April 7, 2004, between RailAmerica, Inc. and Gary O. Marino (16)
10.93
Land and track lease agreement, dated as of July 26, 2004, between the Central Railroad Company of
Indianapolis and CSX Transportation, Inc. (17)
10.94
Amendment to the land and track lease agreement, dated as of July 30, 2004, between the Central
Railroad Company of Indianapolis and CSX Transportation, Inc. (17)
10.95
Amended and Restated Credit Agreement, dated as of September 29, 2004, among RailAmerica, Inc., Palm
Beach Rail Holdings, Inc., RailAmerica Transportation Corp., as Borrower, RailAmerica Canada Corp., as
the Canadian Term Borrower, Railink Canada Ltd., as the Canadian Revolver Borrower, as the Lenders,
UBS Securities LLC, as sole Lead Arranger and Bookrunner, UBS AG, Stamford Branch, as Administrative
Agent, and the Bank of Nova Scotia, as Collateral Agent (21)
Incorporated by reference to exhibit No. 4.1 filed as part of RailAmerica, Inc.’s
Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on
January 8, 1998.
(3)
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 10-Q for the quarter ended March 31, 1998, filed with the Securities and Exchange
Commission on May 14, 1998.
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 10-Q for the quarter ended March 31, 2003, filed with the Securities and Exchange
Commission on May 9, 2003.
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 10-Q for the quarter ended March 31, 2004, filed with the Securities and Exchange
Commission on May 10, 2004.
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 8-K, filed with the Securities and Exchange Commission on February 9, 2004.
(20)
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 8-K, filed with the Securities and Exchange Commission on October 5, 2004.
(21)
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 8-K/A, filed with the Securities and Exchange Commission on October 6, 2004.
(22)
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 8-K, filed with the Securities and Exchange Commission on September 14, 2005.
(23)
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 8-K, filed with the Securities and Exchange Commission on June 2, 2005.
(24)
Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.’s
Form 8-K, filed with the Securities and Exchange Commission on June 21, 2005.
(25)
Incorporated by reference to exhibit number 10.101 filed as part of RailAmerica, Inc.’s Form
8-K, filed with the Securities and Exchange Commission on October 4, 2005.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
In accordance with the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of RailAmerica, Inc:
We have completed integrated audits of RailAmerica, Inc.’s 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2005 and an
audit of its 2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, cash flows and shareholders’ equity, present fairly, in all material
respects, the financial position of RailAmerica, Inc. and its subsidiaries at December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2005 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2005 based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal
Control — Integrated Framework issued by the COSO. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded the Alcoa Railroad Group from its assessment of internal control over financial reporting
as of December 31, 2005 because it was acquired by the Company in a purchase business combination
during 2005. We have also excluded the Alcoa Railroad Group from our audit of internal control over
financial reporting. The Alcoa Railroad Group is comprised of four wholly-owned subsidiaries whose
assets, operating revenue and net income represent 7.9%, 1.3% and 2.4%, respectively, of the
related consolidated financial statement amounts as of and for the year ended December 31, 2005.
Accounts and notes receivable, net of allowance of
$573 and $518, respectively
82,395
63,414
Current assets of discontinued operations
3,140
—
Other current assets
14,114
14,935
Total current assets
113,959
102,680
Property, plant and equipment, net
904,588
875,883
Long-term assets of discontinued operations
25,879
—
Other assets
102,950
37,580
Total assets
$
1,147,376
$
1,016,143
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
$
6,079
$
6,097
Accounts payable
75,222
61,276
Accrued expenses
43,524
41,950
Current liabilities of discontinued operations
4,275
—
Total current liabilities
129,100
109,323
Long-term debt, less current maturities
427,794
357,253
Subordinated debt
—
4,028
Deferred income taxes
141,606
149,306
Long-term liabilities of discontinued operations
2,261
—
Other liabilities
15,337
15,307
716,098
635,217
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 60,000,000 shares authorized;
38,688,496 shares issued and outstanding at December 31, 2005
and 37,389,660 shares issued and outstanding at December 31, 2004
39
37
Additional paid in capital and other
330,919
319,417
Retained earnings
67,628
36,806
Accumulated other comprehensive income
32,692
24,666
Total stockholders’ equity
431,278
380,926
Total liabilities and stockholders’ equity
$
1,147,376
$
1,016,143
The accompanying Notes are an integral part of the Consolidated Financial Statements.
The accompanying consolidated financial statements include the accounts of RailAmerica, Inc. and
all of its subsidiaries (“RailAmerica” or, the “Company”). All of RailAmerica’s consolidated
subsidiaries are wholly-owned. All intercompany balances and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform to the 2005 presentation.
The Company’s principal operations consist of rail freight transportation in North America.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity of three months or
less at the date of purchase to be cash equivalents. The Company maintains its cash in demand
deposit accounts, which at times may exceed insurance limits. As of December 31, 2005, the Company
had approximately $13.8 million of cash in excess of insurance limits.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which are recorded at historical cost, are depreciated and amortized
on a straight-line basis over their estimated useful lives. Costs assigned to property purchased as
part of an acquisition are based on the fair value of such assets on the date of acquisition.
The Company self-constructs portions of its track structure and rebuilds certain of its rolling
stock. In addition to direct labor and material, certain indirect costs are capitalized.
Expenditures which significantly increase asset values or extend useful lives are capitalized.
Repairs and maintenance expenditures are charged to operating expense as incurred.
The Company uses the group method of depreciation under which a single depreciation rate is applied
to the gross investment in its track assets. Upon normal sale or retirement of track assets, cost
less net salvage value is charged to accumulated depreciation and no gain or loss is recognized.
The Company periodically reviews its assets for impairment by comparing the projected undiscounted
cash flows of those assets to their recorded amounts. Impairment charges are based on the excess of
the recorded amounts over their estimated fair value, as measured by discounted cash flows.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The Company incurs certain direct labor, contract service and other costs associated with the
development and installation of internal-use computer software. Costs for newly developed software
or significant enhancements to existing software are capitalized. Research, preliminary project,
operations, maintenance and training costs are charged to operating expense when the work is
performed.
Depreciation has been computed using the straight-line method based on estimated useful lives as
follows:
Buildings and improvements
20-33 years
Railroad track and ties
30-40 years
Railroad track improvements
3-10 years
Locomotives, transportation and other equipment
5-30 years
Office equipment and capitalized software
5-10 years
INCOME TAXES
The Company utilizes the liability method of accounting for deferred income taxes. This method
requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax assets are also established for the
future tax benefits of loss and credit carryovers. The liability method of accounting for deferred
income taxes requires a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized.
REVENUE RECOGNITION
The Company recognizes freight revenue after the freight has been moved from origin to destination,
which is not materially different from the recognition of revenues as shipments progress due to the
relatively short length of our railroads. Other revenue, which primarily includes demurrage,
switching, and storage fees, is recognized when the service is performed.
FOREIGN CURRENCY TRANSLATION
The financial statements and transactions of the Company’s foreign operations are maintained in
their local currency, which is their functional currency, except for Chile, where the U.S. dollar
was used as the functional currency. Where local currencies are used, assets and liabilities are
translated at current exchange rates in effect at the balance sheet date. Translation adjustments,
which result from the process of translating the financial statements into U.S. dollars, are
accumulated in the cumulative translation adjustment account, which is a component of accumulated
other comprehensive income in stockholders’ equity. Revenues and expenses are translated at the
average exchange rate for each period. Gains and losses from foreign currency transactions are
included in net income. At December 31, 2005, accumulated other comprehensive income included $30.3
million of cumulative translation adjustments.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
STOCK-BASED COMPENSATION
As of December 31, 2005, the Company has one stock option plan under which employees and
non-employee directors may be granted options to purchase shares of the Company’s common stock at
the fair market value on the date of grant. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations. No stock option-based employee compensation cost is
reflected in net income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock–Based Compensation,” to stock-based employee compensation.
Year Ended December 31,
(in thousands, except earnings per share data)
2005
2004
2003
Net income (loss), as reported
$
30,822
$
(25,939
)
$
14,690
Less: Total stock-based employee compensation determined
under fair value based method for all awards, net of related
tax effects
(596
)
(1,446
)
(2,586
)
Pro forma net income (loss)
$
30,226
$
(27,385
)
$
12,104
Earnings (loss) per share:
Basic-as reported
$
0.82
$
(0.74
)
$
0.46
Basic-pro forma
$
0.80
$
(0.78
)
$
0.38
Diluted-as reported
$
0.80
$
(0.74
)
$
0.46
Diluted-pro forma
$
0.79
$
(0.78
)
$
0.38
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations –an interpretation of FASB Statement No.
143” (FIN 47). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS
No. 143, “Accounting for Asset Retirement Obligations,” and requires an entity to recognize a
liability for the fair value of a conditional asset retirement obligation if the fair value can be
reasonably estimated. Any uncertainty about the amount and/or timing of the future settlement of a
conditional asset retirement obligation should be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is
effective for fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a
material effect on the Company’s consolidated financial statements and disclosures.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No.
123-R), which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to require companies
to recognize, in their financial statements, the cost of employee services received in exchange for
equity instruments issued, and liabilities incurred, to employees in share-based payment
transactions, such as employee stock options and similar awards. On April 14, 2005, the Securities
and Exchange Commission delayed the effective date to annual periods, rather than interim periods,
beginning after June 15, 2005. Upon adoption of this Statement, the prospective method of
accounting for stock-based compensation will be utilized. Management expects the adoption of this
pronouncement will add an additional estimated $0.4 million to our labor expense in 2006.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of common shares
outstanding during the year.
For the year ended December 31, 2005, diluted earnings per share is calculated using the sum of the
weighted average number of common shares outstanding plus potentially dilutive common shares
arising out of stock options, warrants and restricted shares. A total of 1.2 million options were
excluded from the calculation as such securities were anti-dilutive.
For the year ended December 31, 2004, diluted earnings per share is calculated using the same
number of shares as the basic earnings per share calculation because potentially dilutive common
shares arising out of stock options and warrants and convertible debt are anti-dilutive due to the
net loss. Had the Company reported net income, approximately 1.1 million additional shares would
have been included in the diluted earnings per share calculation for options and warrants for the
year ended 2004, and, depending on the amount of earnings, 0.8 million shares, would have been
included in the diluted earnings per share calculation for the convertible debt. An additional 0.5
million options and warrants still would have been excluded from the calculation for the twelve
months ended December 31, 2004, as such securities would continue to be anti-dilutive even if the
Company reported income.
For the year ended December 31, 2003, diluted earnings per share is calculated using the sum of the
weighted average number of common shares outstanding plus potentially dilutive common shares
arising out of stock options, warrants and convertible securities. Options and warrants totaling
6.4 million were excluded from the diluted earnings per share calculation.
The following is a summary of the income (loss) from continuing operations available for common
stockholders and weighted average shares outstanding (in thousands):
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DISCONTINUED OPERATIONS
During December 2005, the Company completed the sale of its San Luis & Rio Grande Railroad for $5.5
million in cash and a long-term note of $1.5 million, resulting in a loss of $0.6 million and $0.1
million, before and after tax, respectively. The results of operations for the San Luis & Rio
Grande Railroad have been reclassified to discontinued operations for the periods presented.
The results of operations for the San Luis & Rio Grande Railroad were as follows (in thousands):
Income (loss) from discontinued operations, net of tax
$
322
$
(510
)
$
55
During the fourth quarter of 2005, the Company committed to a plan to dispose of the Alberta
Railroad Properties, comprised of the Lakeland & Waterways Railway, Mackenzie Northern Railway and
Central Western Railway. Upon committing to the disposal plan, the Company determined that the
sale would result in a loss on sale of the assets. Accordingly, the Company recorded an estimated
loss on the sale of the properties of $2.5 million before tax and $3.8 million after tax. The sale
of the Alberta Railroad Properties was completed in January 2006 for $22.1 million in cash. In
addition, the sale agreement includes two earn-out provisions based upon the opening of a British Petroleum, or BP, Plant
on the Mackenzie Northern Railway. In order to receive the first payment of CAD $2.0 million, the
BP Plant must be prepared for operations or have moved a railcar on or prior to December 31, 2011.
In order to receive the second payment of CAD $2.0 million, an aggregate amount of carloads equal
to or greater than 4,000 must be loaded and shipped to and from the BP Plant between the closing
date of the sale and December 31, 2011. The estimated loss on sale does not include an effect for
these earn-outs. Any proceeds received as a result of these earn-out agreements will be recorded
through income from discontinued operations in the period received. The results of operations for
the Alberta Railroad Properties have been reclassified to discontinued operations for the periods
presented. In addition, the assets and liabilities of the Alberta Railroad Properties have been
classified as assets and liabilities of discontinued operations on the December 31, 2005 balance
sheet.
Interest expense was allocated to the Alberta Railroad Properties as permitted under the Emerging
Issues Task Force Issue No. 87-24, “Allocation of Interest to Discontinued Operations,” for all
periods presented. For the twelve months ended December 31, 2005, 2004 and 2003, $0.6 million, $1.0
million and $0.8 million, respectively, of interest expense was allocated to these discontinued
operations. The interest allocations were calculated based upon the ratio of net assets to be
discontinued less debt that is required to be paid as a result of the disposal transaction to the
sum of total net assets of the Company plus consolidated debt, less debt required to be paid as a
result of the disposal transaction and debt that can be directly attributed to other operations of
the Company.
The results of operations for the Alberta Railroad Properties were as follows (in thousands):
During December 2004, the Company sold the West Texas and Lubbock Railroad for $1.8 million in cash
and a long-term note for $3.8 million, resulting in a gain on the sale of $0.1 million, before and
after tax. The results of operations for the West Texas and Lubbock Railroad have been
reclassified to discontinued operations for the periods presented.
The results of operations for the West Texas and Lubbock Railroad were as follows (in thousands):
Income (loss) from discontinued operations, net of tax
$
—
$
447
$
(12
)
During December 2004, the Company sold the Arizona Eastern Railway Company for $2.8 million in
cash, resulting in a gain on the sale of $0.3 million, or $0.2 million after tax. The results of
operations for the year ended December 31, 2004, include a pretax impairment charge of $4.0
million. The results of operations for the Arizona Eastern Railway Company have been reclassified
to discontinued operations for the periods presented.
Income (loss) from discontinued operations, net of tax
$
—
$
(2,405
)
$
519
In August 2004, the Company completed the sale of Freight Australia to Pacific National for AUD
$285 million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a
result of foreign exchange hedges that were entered into during the third quarter of 2004. In
addition, the share sale agreement provided for an additional payment to RailAmerica of AUD $7
million (US $5 million) based on the changes in the net assets of Freight Australia from September30, 2003 through August 31, 2004, which was received in December 2004, and also provides various
representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica
for violations of most of the representations and warranties are capped at AUD $50 million (US
$39.5 million). No claims have yet been asserted by the buyer. The Company believes the
ultimate impact of any claim, should one be asserted, alleging a breach of the representations and warranties will not have a material effect on the
Company’s future results of operations. However, if the Company is required to make a payment to
the buyer, it could have a material effect on future cash flows. During the year ended December31, 2004, the Company recognized a pre-tax gain of $20.2 million, or $2.0 million, after-tax on the
sale of Freight Australia. The $18.2 million tax provision on the sale of Freight Australia
includes a provision of $11.4 million for the previously unremitted earnings of Freight Australia.
During the fourth quarter of 2005, the Company recorded an additional tax benefit of $1.6 million.
This adjustment has been included in discontinued operations for the year ended December 31, 2005.
The proceeds from the sale of Freight Australia were used to repay senior debt and repurchase the
Company’s 12 7/8% senior subordinated notes. Freight Australia’s results of operations have been
classified as discontinued operations on the Company’s consolidated financial statements.
Interest expense was allocated to the Australian discontinued operations as permitted under the
Emerging Issues Task Force Issue No. 87-24, “Allocation of Interest to Discontinued Operations,”
for all periods presented. For the twelve months ended December 31, 2004 and 2003, $3.3 million and
$4.9 million, respectively, of interest expense was allocated to the Australian discontinued
operations. The interest allocations were calculated based upon the ratio of net assets to be
discontinued less debt that is required to be paid as a result of the disposal transaction to the
sum of total net assets of the Company plus consolidated debt, less debt required to be paid as a
result of the disposal transaction and debt that can be directly attributed to other operations of
the Company.
The results of operations for Freight Australia were as follows (in thousands) (2004 results
included through the date of sale, August 31, 2004):
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DISCONTINUED OPERATIONS, continued
In February 2004, the Company completed the sale of its 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million in cash, a secured note for $5.7 million
due no later than June 2010 and a secured note from Ferronor for $1.7 million due no later than
February 2007, both bearing interest at 90 day LIBOR plus 3%. During the quarter ended March 31,2004, the Company recognized a $4.0 million tax charge resulting from the sale of its interest in
Ferronor and the repatriation of the cash proceeds to the U.S. Ferronor’s results of operations
have been classified as discontinued operations on the Company’s consolidated financial statements.
In January 2006, the Company received $7.1 million in full satisfaction of the amounts
outstanding.
The results of operations for Ferronor were as follows (in thousands):
In October 2003, the Company sold the San Pedro and Southwestern Railway for $2.6 million in cash.
The operating results of this railroad were not material. No gain or loss was recognized on this
transaction.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EXPANSION OF OPERATIONS
On September 30, 2005, the Company’s wholly-owned subsidiary, RailAmerica Transportation Corp.,
completed the stock acquisition of four short line railroads from Alcoa Inc., referred to as the
Alcoa Railroad Group, for $77.8 million in cash, plus the assumption of $6.5 million of negative
working capital. The railroads serve Alcoa aluminum manufacturing operations in Texas and New York
and a specialty chemicals facility in Arkansas, formerly owned by Alcoa, but now owned by Almatis,
Inc. The Company funded the transaction through a $75.0 million increase in the term loan portion
of the Company’s existing senior secured credit facility (see Note 7) and through cash on hand. As
part of the agreement, the Company and Alcoa have also entered into three long-term service
agreements, under which the Company will continue to provide service to Alcoa’s facilities.
The acquired Alcoa Railroad Group consists of the Point Comfort & Northern Railway Co., or the PCN,
the Rockdale, Sandow & Southern RR Co., or the RSS, the Massena Terminal RR Co., or the MSTR, and
the Bauxite & Northern Railway Co., or the BXN. Based in Port Comfort, Texas, the PCN provides
transportation services primarily for Alcoa’s bauxite, alumina and chemicals facility in Point
Comfort, Texas. The 13-mile railroad originates at Alcoa’s plant and terminates in Lolita, Texas.
The PCN interchanges with Union Pacific Railroad. Based in Sandow, Texas, the RSS provides
services primarily for Alcoa’s aluminum manufacturing facility in Rockdale, Texas. The six-mile
railroad originates at Alcoa’s plant and terminates in Marjorie, Texas. The RSS interchanges with
Union Pacific Railroad. Based in Massena, New York, the three-mile MSTR provides services for
Alcoa’s aluminum manufacturing facility in Massena, New York. The railroad originates at Alcoa’s
plant and terminates at Massena Junction. The MSTR interchanges with CSX Transportation. Based in
Bauxite, Arkansas, the BXN provides services to a former Alcoa specialty chemicals facility in
Bauxite, now owned by Almatis, Inc. The three-mile railroad originates at the Almatis Inc. plant
and terminates at Bauxite Junction. The BXN interchanges with Union Pacific Railroad.
The following table presents the major assets and liabilities of the Alcoa Railroad Group as of the
acquisition date. The purchase price allocation of the Alcoa Railroad Group, which is still being
finalized as valuations of the intangible assets are being performed, includes goodwill of $46.5
million and intangible assets of $18.1 million, primarily attributed to the Alcoa service
relationship. The intangible assets will be amortized over a period of 7 to 25 years.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EXPANSION OF OPERATIONS, continued
The following unaudited pro forma summary presents the consolidated results of operations for the
Company as if the acquisition of the Alcoa Railroad Group had occurred at January 1, 2005 and 2004,
and does not purport to be indicative of what would have occurred had the acquisition been made as
of that date or of results which may occur in the future.
For the Year Ended
(in thousands, except per share data)
December 31,
(Unaudited)
2005
2004
Operating revenue
$
438,395
$
387,536
Income (loss) from continuing operations
$
31,752
$
(21,948
)
Net income (loss)
$
31,729
$
(24,753
)
Income
(loss) from continuing operations per share — diluted
$
0.82
$
(0.63
)
Net income (loss)per share — diluted
$
0.82
$
(0.71
)
On September 10, 2005, the Company’s wholly-owned subsidiary, Mid-Michigan Railroad Inc., entered
into a 25-year lease with CSX Transportation, Inc. for the operation of the 48 mile Fremont Line
for $50,000 a year. The line runs from Fremont, Michigan south to West Olive, Michigan and
interchanges with our Michigan Shore Railroad and CSX Transportation.
In October 2004, the Company’s wholly-owned subsidiary, the Indiana & Ohio Central Railroad Inc.,
signed an agreement with CSX Transportation, Inc. to purchase 107 miles of railroad from
Cincinnati, Ohio to Columbus, Ohio, known as the Midland Subdivision, for $8.6 million. The
Company also entered into a 25 year lease of related real estate. On October 15, 2004, the Company
paid the $8.6 million by drawing on its U.S. dollar denominated
revolver. The Company assumed
control of the Midland Subdivision’s operations on October 16, 2004. The pro forma impact of this
acquisition was not material.
In July 2004, the Company’s wholly-owned subsidiary, the Central Railroad Company of Indianapolis,
executed an agreement with CSX Transportation, Inc. to lease 276 miles of railroad known as the
Chicago, Fort Wayne & Eastern Railroad (“CF&E”) for twenty years, with two five-year extensions.
This agreement required a $10 million initial payment and annual lease payments of approximately
$1.2 million for the term of the lease. The Company is amortizing the $10 million payment on a
straight-line basis over the 20 year term of the lease. The annual lease payments may vary
depending upon the extent to which the CF&E’s unit trains utilize CSX locomotive power during the
preceding lease year. The results of operations of the CF&E have been included in the Company’s
consolidated financial statements since August 1, 2004. The $10 million initial payment has been
classified as an operating activity on the 2004 consolidated statement of cash flows.
On January 25, 2004, the Company’s wholly-owned subsidiary, the Huron and Eastern Railway, acquired
the assets of the Central Michigan Railway Company, which operates 100 miles of rail line in
Michigan, for $25.3 million in cash from the Straits Corporation. In addition, if the Company
enters into a transaction for the purchase, sale or operation of certain rail segments in Michigan
and the Company realizes synergies from increased revenue or decreased operating costs from such a
transaction, a contingent payment of up to $6 million will be payable to the Straits Corporation.
If such payment is made in the future, it would increase property, plant and equipment for the
amount of the payment. The results of operations of this acquisition have been included in the
Company’s consolidated financial statements since the date of the acquisition. The pro forma
impact of this acquisition is not material.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EXPANSION OF OPERATIONS, continued
The following table presents the balances of each major asset and liability caption of Central
Michigan Railway Company as of the acquisition date (in thousands):
On June 1, 2003, the Company acquired 288 miles of track and trackage rights connecting to the
Alabama and Gulf Coast Railway for total consideration of $15.1 million in cash. On June 29, 2003,
the Company acquired a 154 mile branch line in Colorado through its newly formed subsidiary, San
Luis & Rio Grande Railroad, for consideration of $7.2 million in cash. During the first quarter of
2003, the Company acquired 2.6 miles of track connecting to the Dallas, Garland & Northeastern
Railroad and 71.5 miles of track on the west-end of the Toledo, Peoria &Western Railway for total
consideration of $3.6 million in cash. The pro forma impact of these acquisitions was not material.
5. OTHER BALANCE SHEET DATA
Other current assets consisted of the following as of December 31, 2005 and 2004 (in thousands):
2005
2004
Unbilled reimbursable projects
$
4,492
$
6,691
Track supplies
3,019
3,402
Prepaid expenses and other
6,603
4,842
$
14,114
$
14,935
Accounts payable consisted of the following as of December 31, 2005 and 2004 (in thousands):
2005
2004
Accounts payable
$
68,673
$
54,431
Current taxes payable
6,549
6,845
$
75,222
$
61,276
Accrued expenses consisted of the following as of December 31, 2005 and 2004 (in thousands):
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31, 2005 and 2004 (in
thousands):
2005
2004
Land
$
187,727
$
192,724
Buildings and improvements
20,235
20,179
Railroad track and improvements
788,579
725,364
Locomotives, transportation and
other equipment
51,556
54,625
1,048,097
992,892
Less: accumulated depreciation
(143,509
)
(117,009
)
$
904,588
$
875,883
7. LONG-TERM DEBT AND LEASES
Long-term debt consists of the following as of December 31, 2005 and 2004 (in thousands):
2005
2004
Amended and restated senior credit facilities:
U.S. Term Loan
$
380,301
$
313,000
Canadian Term Loan
36,123
37,000
U.S. Revolver
5,000
—
Other long-term debt (including capital leases)
12,449
13,350
433,873
363,350
Less: current maturities
6,079
6,097
Long-term debt, less current maturities
$
427,794
$
357,253
On September 29, 2004, the Company entered into an amended and restated $450 million senior credit
facility. The facility originally consisted of a $350 million term loan facility, with a $313
million U.S. tranche and a $37 million Canadian tranche, and a $100 million revolving loan facility
with a $90 million U.S. dollar tranche and a $10 million Canadian dollar tranche. The term loans
mature on September 30, 2011 and require 1% annual principal amortization and bear interest at
LIBOR plus 2.25%, or 6.69% as of December 31, 2005. The revolving loans mature on September 30,2010 and bear interest at LIBOR plus 2.00%. As the amended and restated credit agreement was
treated as an extinguishment of debt under EITF 96-19, “Debtor’s Accounting for Modification or
Exchange of Debt Instruments,” $7.7 million of deferred loan costs related to the original senior
credit facility were written off. These costs are reflected in Financing costs on the Consolidated
Statements of Income. On September 30, 2005, the Company entered into Amendment No. 1 of its
amended and restated credit agreement in connection with the acquisition of the Alcoa Railroad
Group. This amendment adds $75 million to the existing $313 million U.S. tranche of the term loan
facility. The additional $75 million matures and amortizes on the same schedule as the rest of the
term loan facility.
The interest rate for both the term loans and revolvers increased at the end of the third quarter
of 2005 by 0.25% due to the Company’s leverage ratio exceeding 4.0 during the twelve months ended
September 30, 2005 and remains at that level as of December 31, 2005. The leverage ratio for the
twelve months ended December 31, 2005 was 4.36.
The Company also may incur additional indebtedness under the credit facility consisting of up to
$25 million aggregate principal amount of additional term loans to fund acquisitions, subject to
the satisfaction of conditions set forth in the amended and restated credit agreement, including
the consent of the administrative agent and lead arranger and compliance with all financial
covenants set forth in the agreement on a pro forma basis on the date of
the additional borrowing.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND LEASES, continued
The U.S. term loan and the U.S. dollar denominated revolver are collateralized by the assets of and
guaranteed by the Company and most of its U.S. subsidiaries. The Canadian term loan and the
Canadian dollar denominated revolver are collateralized by the assets of and guaranteed by the
Company and most of its U.S. and Canadian subsidiaries. The loans were provided by a syndicate of
banks with UBS Securities LLC, as lead arranger, UBS AG, Stamford Branch, as administrative agent
and The Bank of Nova Scotia as collateral agent.
The amended and restated senior credit facility contains financial covenants that require the
Company to meet a number of financial ratios and tests. The Company’s ability to meet these ratios
and tests and to comply with other provisions of the amended and restated senior credit facility
can be affected by events beyond the Company’s control. Failure to comply with the obligations in
the amended and restated senior credit facility could result in an event of default, which, if not
cured or waived, could permit acceleration of the term loans and revolving loans or other
indebtedness which could have a material adverse effect on the Company. The Company was in
compliance with each of these covenants as of December 31, 2005 and anticipates being in compliance
with its covenants during the next twelve months.
The aggregate annual maturities of long-term debt are as follows (in thousands):
2006
$
6,079
2007
5,189
2008
5,266
2009
9,964
2010
108,711
Thereafter
298,664
$
433,873
During the years ended December 31, 2005, 2004 and 2003 interest of approximately $0.3 million,
$0.6 million, and $0.5 million, respectively, was capitalized for on-going capital improvement
projects.
In connection with the refinancing of the senior credit facility in May 2002, the Company entered
into two step-up collars for a total notional amount of $75 million with an effective date of
November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the 90 day
LIBOR component of the Company’s interest rates could fluctuate within specified ranges. From
November 24, 2002 through May 24, 2003, the floor and cap were 2% and 4.5%, from May 24, 2003
through November 24, 2003, the floor and cap were 2.5% and 4.75%, from November 24, 2003 through
May 24, 2004, the floor and cap were 3.5% and 5.5% and from May 24, 2004 through November 24, 2004,
the floor and cap were 4% and 5.75%. The collars qualified, were designated and accounted for as
cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” These step-up collars terminated as planned on November 24, 2004 and thus had no fair
value at December 31, 2005.
On April 10, 2003, the Company entered into two interest rate collar corridors for a total notional
amount of $100 million with an effective date of November 24, 2003 and expiring on November 24,2005. Under the terms of these interest rate collar corridors, the 90 day LIBOR component of the
Company’s interest rates could fluctuate between 1.50% and 2.81%. However, if LIBOR exceeded
5.00%, the Company was responsible for interest at that LIBOR rate. The collar corridors qualified,
were designated and accounted for as cash flow hedges under SFAS No. 133. These interest rate
collar corridors terminated as planned on November 24, 2005 and thus had no fair value at December31, 2005.
On June 25, 2003, the Company entered into two interest rate swaps for a total notional amount of
$100 million for the period commencing November 24, 2003 through November 24, 2004. The swaps
qualified, were designated and were accounted for as cash flow hedges under SFAS No. 133. Under
the terms of the interest rate swaps, the
Company was required to pay a fixed interest rate of 1.16% on $50 million and 1.19% on the
remaining $50 million while receiving a variable interest rate equal to the 90 day LIBOR rate.
These swaps terminated as planned on November 24, 2004 and thus had no fair value at December 31,2005.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND LEASES, continued
On August 13, 2004, the Company entered into an interest rate swap for a notional amount of $50
million for the period commencing November 24, 2004, through November 24, 2005. The swap
qualified, was designated and was accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, the Company was required to pay a fixed interest rate of 2.655% on
$50 million while receiving a variable interest rate equal to the 90 day LIBOR. This swap
terminated as planned on November 24, 2005 and thus had no fair value at December 31, 2005.
On August 13, 2004, the Company entered into an interest rate cap for a notional amount of $50
million with an effective date of November 24, 2004, expiring on November 24, 2005. Under the
terms of this cap, the 90 day LIBOR component of the Company’s interest rate could fluctuate up to
3.00%. The cap qualified, was designated and was accounted for as a cash flow hedge under SFAS No.
133. This cap terminated as planned on November 24, 2005 and thus had no fair value at December31, 2005.
On November 30, 2004, the Company entered into an interest rate swap for a notional amount of $100
million for the period commencing November 25, 2005, through November 24, 2007. The swap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, the Company is required to pay a fixed interest rate of 4.05% on
$100 million while receiving a variable interest rate equal to the 90 day LIBOR. The fair value of
this swap was a net receivable of $1.3 million at December 31, 2005.
On December 8, 2004, the Company entered into an interest rate cap for a notional amount of $50
million with an effective date of November 25, 2005, expiring on November 24, 2006. Under the
terms of this cap, the 90 day LIBOR component of the Company’s interest rate can fluctuate up to
4.00%. The cap qualifies, is designated and is accounted for as a cash flow hedge under SFAS No.
133. The fair value of this cap was a net receivable of $0.3 million at December 31, 2005.
On June 3, 2005, the Company entered into two interest rate swaps for a total notional amount of
$100 million for the period commencing November 25, 2005, through November 24, 2008. Under the
terms of the interest rate swaps, the Company is required to pay a fixed interest rate of 4.04% on
$100 million while receiving a variable interest rate equal to the 90 day LIBOR. These swaps
qualify, are designated and are accounted for as cash flow hedges under SFAS No. 133. The fair
value of these swaps was a net receivable of $2.0 million at December 31, 2005.
The Company monitors its hedging positions and the credit ratings of its counterparties and does
not anticipate losses due to counterparty nonperformance.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT AND LEASES, continued
Leases
The Company has several finance leases for equipment and locomotives. Certain of these leases are
accounted for as capital leases and are presented separately below. The Company also operates some
of its railroad properties under operating leases. The minimum annual lease commitments at
December 31, 2005 are as follows (in thousands):
CAPITAL
OPERATING
LEASES
LEASES
2006
$
708
$
32,402
2007
708
29,050
2008
710
23,227
2009
503
13,101
2010
303
8,443
Thereafter
464
30,772
Total minimum lease payments
$
3,396
$
136,995
Less amount representing interest
(516
)
Total obligations under capital leases
$
2,880
Less current maturities of obligations under capital leases
(517
)
Obligations under capital leases payable after one year
$
2,363
Rental expense under operating leases for continuing operations was approximately $33.2 million,
$24.1 million, and $21.3 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SUBORDINATED DEBT
In August 2000, RailAmerica Transportation Corp., a wholly-owned subsidiary of the Company, sold
units consisting of $130.0 million of
12-7/8% senior subordinated notes due 2010 (the “Notes”), and
warrants to purchase 1,411,414 shares of the Company’s common stock in a private offering, for
gross proceeds of $122.2 million after deducting the initial purchasers’ discount. On September29, 2004, the Company repurchased $125.7 million of the Notes. The proceeds from the sale of
Freight Australia and from the amended and restated senior credit facility were used to fund the
purchase of the Notes. In addition to the redemption premium charge of approximately $19.2 million
for the repurchase of the Notes, the Company incurred charges of approximately $12.4 million
related to the write-off of deferred loan costs and original issue discounts of the Notes that were
repurchased during the year ended December 31, 2004. On August 15, 2005, the Company redeemed the
remaining $4.3 million of outstanding Notes for a call price of $1.064375 per $1.00 principal
amount of the Notes. In addition to the redemption premium charge of approximately $0.3 million
for the purchase of the remaining Notes, the Company incurred non-cash charges of approximately
$0.3 million related to the write-off of deferred loan costs and original issue discounts of the
Notes during the year ended December 31, 2005. These charges are included in Financing costs on
the Consolidated Statement of Income.
In August 1999, the Company issued $22.5 million aggregate principal amount of junior convertible
subordinated debentures. Interest on the debentures accrued at the rate of 6% per annum and was
payable semi-annually. The debentures were convertible, at the option of the holder, into shares of
RailAmerica at a conversion price of $10. The debentures, which matured on July 31, 2004, were
general unsecured obligations and ranked subordinate in right of payment to all senior
indebtedness. During the twelve months ended December 31, 2004, $21.2 million of the Company’s
junior convertible subordinated debentures were converted to common stock, leaving an outstanding
balance of $0.6 million, which was repaid in August 2004.
9. COMMON STOCK TRANSACTIONS
The Company occasionally repurchases its common stock under its share repurchase program. The
terms of senior credit facility limit such repurchases to $5 million per year. The Company did not
repurchase any shares during the years ended December 31, 2004 or 2003. During the year ended
December 31, 2005, the Company accepted 4,656 shares in lieu of cash payments by employees and
non-employee directors for payroll tax withholdings relating to stock based compensation.
As of December 31, 2005, the Company had a total of 1,215,991 warrants outstanding related to the
Notes at an exercise price of $6.60 and with an expiration date of August 15, 2010.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAX PROVISION, continued
The components of deferred income tax assets and liabilities, which are all non-current, as of
December 31, 2005 and 2004 are as follows (in thousands):
2005
2004
Deferred tax assets:
Net operating loss carryforward
$
42,892
$
36,874
Alternative minimum tax credit
1,383
1,700
Track Maintenance Credit
20,400
—
Accrued expenses
13,895
15,338
Total deferred tax assets
78,570
53,912
Less: valuation allowance
(7,513
)
(8,018
)
Total deferred tax assets, net
71,057
45,894
Deferred tax liabilities:
Property, plant and equipment
(214,515
)
(194,766
)
Other
(409
)
(434
)
Total deferred tax liabilities
(214,924
)
(195,200
)
Net deferred tax liability
$
(143,867
)
$
(149,306
)
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 $7.5 million at December 31, 2005 and $8.0 million at
December 31, 2004. The table below sets forth the changes in the deferred tax asset valuation
allowance (in thousands):
The following table summarizes the of net operating loss carryforwards by jurisdiction as of
December 31, 2005 (in thousands):
Amount
Expiration Period
U.S. — Federal
$
93,603
2011 – 2025
U.S. — State
263,608
2006 – 2025
Luxembourg
94
None
Canada
5,231
2006 – 2015
$
362,536
As part of certain acquisitions, the Company acquired net operating loss carryforwards for federal
and state income tax purposes. The utilization of the acquired tax loss carryforwards may be
limited by the Internal Revenue Code Section 382. These tax loss carryforwards expire in the years
2006 through 2020.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAX PROVISION, continued
The following table summarizes general business credits available to the Company in the U.S. as of
December 31, 2005 (in thousands):
Expiration
Amount
Period
Track maintenance credit
$
20,400
2025
Total credits
$
20,400
The American Jobs Creation Act of 2004 created a temporary dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met.
The Company did not repatriate any earnings in accordance with these new rules.
11. STOCK BASED COMPENSATION
The Company has a stock option plan under which employees and non-employee directors may be granted
options to purchase shares of the Company’s common stock at the fair market value at the date of
grant. Options generally vest in two or three years and expire in ten years from the date of the
grant. The Company has adopted the disclosure-only provisions of SFAS No. 123. See Note 1 for the
total compensation costs that would have been recognized in 2005, 2004, and 2003 if the stock
options issued were valued based on the fair value at the grant date.
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 2005, 2004
and 2003: dividend yield 0.0%, 0.0% and 0.0%; expected volatility of 44%, 45% and 46%; risk-free
interest rate of 5.0%, 3.7% and 2.6%; and expected lives of 5, 5 and 5 years. The weighted average
fair value of options granted for 2005, 2004 and 2003 were $6.05, $5.59, and $3.68, respectively.
Information regarding the above options for 2005, 2004 and 2003 is as follows:
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS AND RESTRICTED STOCK, continued
The following table summarizes information about stock options outstanding at December 31, 2005:
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Weighted
Range of
Remaining
Average
Average
Exercise
Number
Contractual
Exercise
Number
Exercise
Price
of Options
Life
Price
of Options
Price
$3.50-$7.50
118,326
4.00
$
6.34
118,326
$
6.34
$7.51-$10.00
700,312
4.73
$
8.57
698,645
$
8.57
$10.01-$12.50
1,719,400
5.08
$
11.24
1,664,400
$
11.23
$12.51-$14.45
271,500
7.89
$
13.56
200,834
$
13.59
2,809,538
2,682,205
During the year ended December 31, 2005, the Board of Directors of the Company approved the grant
of restricted, performance and deferred shares of the Company’s common stock to certain employees
and non-employee directors. These grants were issued pursuant to the Company’s 1998 Executive
Incentive Compensation Plan, as amended. The restricted shares granted to employees vest ratably
at 25% per year over four years starting one year from the date of grant. The performance shares
cliff vest at the end of three years based on achievement of compounded growth in earnings per
share over a three year period. The deferred shares vest based upon years of service of the
participating employee. The Company recognized compensation expense of approximately $0.7 million
in the year ended December 31, 2005, related to these restricted, performance and deferred shares.
In August 2005 and 2004, as part of his employment agreement with the Company, the Chief Executive
Officer, Charles Swinburn, was granted 8,312 and 8,069 shares of stock, respectively, each for a
total value of $0.1 million, based upon the market value on date of grant. As these shares were
fully vested upon the date of grant, the Company recognized compensation expense of $0.1 million
during the years ended December 31, 2005 and 2004 related to these shares.
In June 2003, the Company’s Board of Directors authorized the issuance of 170,650 restricted shares
of common stock to various management level employees. Restricted stock awards are expensed
ratably over the vesting period. Restricted stock awards granted are scheduled to vest over five
years. Grants may vest earlier upon a qualifying disability, death, retirement or change in
control. This grant includes a performance element that allows vesting to accelerate when certain
performance measures are met. These measures are based upon the attainment of a specific
Consolidated Earnings Per Share (“EPS”) of the Company for the calendar year ending immediately
preceding the applicable vesting date. If the measure is met for the first calendar year, then
one-third of the restricted stock will vest on the first anniversary. This is true for the next two
years and remains applicable for the fourth year if one of the previous years’ targets is not met.
On the fifth anniversary of the grant date, any remaining balance of unvested shares will become
fully vested. For 2003, 2004 and 2005, the EPS targets were not achieved. Unearned compensation
will be recognized as compensation expense ratably over the remaining vesting periods. The
restricted stock amortization and accelerated vesting expense totaled $0.1 million, $0.5 million
and $0.2 million for the years ended December 31, 2003, 2004 and 2005, respectively.
The Company maintains an Employee Stock Purchase Plan under which all full-time employees may
purchase shares of common stock subject to an annual limit of $25,000 at a. price equal to 85% of
the fair market value of a share of the Company’s common stock on certain dates during the year.
For the years ended December 31, 2005, 2004 and 2003, the Company sold 25,157, 28,558 and 38,845
shares of common stock, respectively, to employees under this plan.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest from financing activities during 2005, 2004 and 2003 was $18.9 million,
$37.0 million and $33.7 million, respectively. Cash paid for income taxes during 2005, 2004 and
2003 was $6.4 million, $7.3 million and $3.1 million, respectively.
In January 2004, the Company entered into a seven year capital lease agreement in the amount of
$2.12 million for the lease of fourteen locomotives from Merrill Lynch.
During the year ended December 31, 2004, $21.9 million of the Company’s $22.5 million of junior
convertible subordinated debentures were converted into shares of common stock pursuant to their
terms.
The amounts included in depreciation and amortization on the Consolidated Statement of Cash Flows
are comprised of the depreciation and amortization expense for both continuing and discontinued
operations as well as the amortization of deferred financing costs for both continuing and
discontinued operations.
The following table summarizes the net cash used in acquisitions, net of cash acquired, for the
years ended December 31, 2005, 2004, and 2003 (in thousands):
2005
2004
2003
Common stock issued for businesses acquired
$
—
$
—
$
—
Details of acquisitions:
Working capital components, other than cash
6,486
—
—
Property and equipment
(19,754
)
(33,384
)
(26,941
)
Other assets
(18,100
)
(675
)
—
Goodwill
(46,482
)
850
—
Deferred income taxes payable
—
—
1,095
Net cash used in acquisitions
$
(77,850
)
$
(33,209
)
$
(25,846
)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company currently uses derivatives to hedge against increases in fuel prices and interest
rates. The Company formally documents the relationship between the hedging instrument and the
hedged item, as well as the risk management objective and strategy for the use of the hedging
instrument. This documentation includes linking the derivatives that are designated as cash flow
hedges to specific assets or liabilities on the balance sheet, commitments or forecasted
transactions. The Company assesses at the time a derivative contract is entered into, and at least
quarterly, whether the derivative item is effective in offsetting the changes in fair value or cash
flows. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133 is
recognized in current period earnings. For derivative instruments that are designated and qualify
as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is
recorded in Accumulated Other Comprehensive Income as a separate component of Stockholders’ Equity
and reclassified into earnings in the period during which the hedge transaction affects earnings.
The Company monitors its hedging positions and the credit ratings of its counterparties and does
not anticipate losses due to counterparty nonperformance.
Fuel costs represented 11% of total revenues during 2005. Due to the significance of fuel expenses
to the operations of the Company and the volatility of fuel prices, the Company periodically hedges
against fluctuations in the price of its fuel purchases. The fuel hedging program includes the use
of derivatives that are accounted for as cash flow hedges under SFAS No. 133. For 2005,
approximately 30% of the Company’s fuel costs were subject to fuel hedges. As of December 31,2005, the Company has entered into fuel hedge agreements for 250,000 gallons per month for January
and February 2006 at an average rate of $1.91 per gallon and an additional 75,000 gallons per
month for all of 2006 at an average rate of $1.92 per gallon, including transportation and
distribution costs. The fair value of these hedges was a net receivable of $0.1 million at December31, 2005.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Fluctuations in the market interest rates will affect the cost of the Company’s borrowings under
the senior credit facility. At December 31, 2005, Accumulated Other Comprehensive Income included
income of $2.3 million, net of taxes of $1.2 million, relating to the interest rate caps and swaps.
More information related to the interest rate hedges can be found under Footnote 7. Were the
Company to refinance the debt with terms different than the terms of the debt currently hedged, the
hedged transaction would no longer be effective and any deferred gains or losses would be
immediately recognized into income.
Management believes that the fair value of its senior long-term debt approximates its carrying
value based on the variable rate nature of the financing, and for all other long-term debt based on
current borrowing rates available with similar terms and maturities.
14. PENSION AND OTHER BENEFIT PROGRAMS
CANADIAN EMPLOYEES
The Company maintains a pension plan for a majority of its Canadian railroad employees, with both
defined benefit and defined contribution components.
DEFINED BENEFIT — The defined benefit component applies to approximately 60 employees who
transferred employment directly from Canadian Pacific Railway Company (“CPR”) to a subsidiary of
the Company. The defined benefit portion of the plan is a mirror plan of CPR’s defined benefit
plan. The employees that transferred and joined the mirror plan were entitled to transfer or buy
back prior years of service. As part of the arrangement, CPR transferred to the Company the
appropriate value of each employee’s pension entitlement.
The assumed discount rate included below is based on rates of return on high-quality fixed-income
investments currently available and expected to be available during the period up to maturity of
the pension benefits. The rate of 6% used as of December 31, 2005 is within the range recommended
by SEI Investments. SEI Investments distributes discount rate information to defined benefit plan
sponsors to assist in reporting for pension disclosures. The discount rate data is derived from the
2005 SEI Plan Sponsor Accounting Database, which consists of data from Standard & Poor’s
Institutional Market Services database as well as proprietary analysis created by SEI Retirement
Solutions Group. Because the plan has a younger-than-average demographic, the Company has used a
discount rate on the upper end of the recommended range which was 5.75% to 6%.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION AND OTHER BENEFIT PROGRAMS, continued
The following chart summarizes the benefit obligations, assets, funded status and rate assumptions
associated with the defined benefit plan for the years ended December 31, 2005, 2004 and 2003 (in
thousands):
The overall objective of the defined benefit portion of the Plan is to fund its
liabilities by maximizing the long term rate of return through investments in a portfolio of money
market instruments, bonds, and preferred and common equity securities while having regard to the
yield, marketability and diversification of the investments. All assets are currently invested in
readily marketable investments to provide sufficient liquidity. Investments are not permitted in
derivative securities or in any asset class not listed below without the written approval of the
Company.
The primary investment objective of the Plan is to achieve a rate of return that exceeds the
Consumer Price Index by 4.0% over rolling four-year periods. The secondary investment objectives
of the Plan are to achieve a rate of return that exceeds the benchmark portfolio (as described
below) by 0.7% before fees over rolling four-year periods and to rank above the median manager in
comparable funds over rolling four-year periods.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION AND OTHER BENEFIT PROGRAMS, continued
Benchmark Portfolio
S&P/TSX Capped Composite Index
30
%
S&P 500 (Cdn.$) Index
15
%
MSCI EAFE (Cdn.$) Index
15
%
Scotia Capital Universe Index
40
%
The initial limits of the proportion of the market value of the portfolio that may be
invested in the following classes of securities are:
Minimum
Maximum
Asset Mix Limits:
Policy Mix
Limit
Limit
Canadian Equity
30
%
20
%
40
%
US Equity
15
%
5
%
20
%
International Equity
15
%
5
%
20
%
Real Estate
0
%
0
%
10
%
Total Equity
60
%
25
%
70
%
Bonds
40
%
30
%
75
%
Mortgages
0
%
0
%
10
%
Short Term
0
%
0
%
20
%
Total Fixed Income
40
%
30
%
75
%
% of Book
Regulatory Investment Limits
Value
Maximum investment in one company’s securities
10
%
Maximum proportion of the voting shares of any company
30
%
Maximum holding in one parcel of real estate or one resource property
5
%
Maximum aggregate holding of resource properties
15
%
Maximum aggregate holding of real estate and resource properties
combined
25
%
DEFINED
CONTRIBUTION PLAN — The defined contribution component applies to a majority of the
Company’s Canadian railroad employees that are not covered by the defined benefit component. The
Company contributes 3% of a participating employee’s salary to the plan. Pension expense for the
year ended December 31, 2005, 2004 and 2003 for the defined contribution members was $1.2 million,
$0.8 million and $0.6 million, respectively.
U.S. EMPLOYEES
The Company maintains a pension plan for 43 employees who transferred employment directly from
Alcoa, Inc. to RailAmerica, Inc. The defined benefit portion of the plan is a mirror plan of
Alcoa’s Retirement Plan II, Rule IIE defined benefit plan. This plan also provides for
post-retirement health benefits. The accrued benefit earned under the Alcoa plan as of October 1,2005 is an offset to the RailAmerica plan. No assets were transferred as part of the arrangement.
There were no material assets or liabilities of the Plan as of December 31, 2005.
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.
Starting January 1, 2005, the Company has increased the contribution per employee to $2,500 for
Railroad Retirement employees and $5,000 for FICA employees. In addition, an employee becomes 100%
vested with respect to the employer contributions after completing four years of service starting
in 2004 versus five years in previous years. Employer contributions during the years ended December31, 2005, 2004 and 2003 were approximately $1.2 million, $0.9 million and $0.7 million,
respectively.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved in various legal
actions and other claims. 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.
On October 26, 2004 a train operated by the Company’s subsidiary, the Central Oregon Pacific Rail,
or CORP, derailed at Cow Creek Canyon in Oregon, resulting in the discharge of diesel fluid into
Cow Creek. The CORP immediately initiated a remediation process and followed proper clean-up
procedures. Although there was no long-term environmental impact resulting from the diesel spill,
the United States Attorney’s Office for the District of Oregon and the Environmental Protection
Agency have undertaken an investigation into the derailment to determine whether there has been a
violation of the Clean Water Act, and have issued subpoenas to the Company and the CORP. At this
time, the U.S. Attorney’s office has not informed the Company whether it will proceed with a
prosecution. Management recently learned that the EPA intends to interview some employees for
purposes of assisting the government in deciding whether to prosecute. Management cannot predict
presently whether the government will pursue criminal proceedings
seeking penalties or other remedial action.
On February 7, 2005, the Surface Transportation Board (“STB”) entered an Order setting the terms
for sale of the Company’s Toledo, Peoria & Western
Railway’s 76 mile La Harpe — Hollis Line in
western central Illinois to Keokuk Junction Railway Company, or KJRY, as a result of KJRY’s
application under the Feeder Line Statute, 49 USC sec. 10907. Management believes that the
STB-ordered sale of the line at the mandated price of $4.2 million was not in accordance with the
rules and regulations governing such STB action and did not reflect the line’s value or adequately
compensate the Company as required by these rules and regulations. As a result, the Company has
appealed the Order to the U.S. Circuit Court of Appeals. Management is unable to predict the
outcome of this appeal, but does not believe that the final outcome of this matter will materially
affect the Company’s financial position, results of operations or cash flows.
On August 28, 2005, a railcar containing styrene located on the Company’s Indiana & Ohio Railway
(I&O Railway) property in Cincinnati, Ohio, began venting, due to a chemical reaction. Styrene is
a potentially hazardous chemical used to make plastics, rubber and resin. In response to the
incident, local public officials temporarily evacuated residents and businesses from the immediate
area until public authorities confirmed that the tank car no longer posed a threat. As a result of
the incident, several civil lawsuits have been filed against the Company and others connected to
the tank car. Motions for class action certification have been filed but remain pending. In
cooperation with the Company’s insurer, the Company has paid settlements to a substantial number of
affected residents and businesses. The incident has also triggered inquiries from the Federal
Railroad Administration (FRA) and other federal, state and local authorities charged with
investigating such incidents. Management anticipates that regulatory sanctions and fines will be
assessed against the Company’s I&O Railway as a result of this incident. Because of the chemical
release, the Ohio EPA, the US EPA, the State of Ohio and the City of Cincinnati are cooperating in
a joint investigation of the incident, which management believes to be nearly complete. Should
this investigation lead to environmental crime charges against the I&O Railway, potential fines
upon conviction could range widely and could be material. While management is unable to predict
with certainty the outcome of the various matters pending, during the third quarter of 2005 the
Company estimated that its cost for this incident will be $2.3 million, inclusive of the possible
regulatory sanctions noted above.
In the fourth quarter of 2003, a tunnel at the Company’s Central Oregon & Pacific Railroad
experienced a significant fire, the cause of which has not been determined. The Company has
insurance coverage up to $10 million to cover the reconstruction of the tunnel. The Company’s
total costs to repair and reconstruct the tunnel, which was reopened in April 2005, exceeded its
insurance coverage by $2.2 million.
The Company’s operations are subject to extensive environmental regulation. The Company records
liabilities for remediation and restoration costs related to past activities when the Company’s
obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance
activities to current operations are expensed as incurred. The Company’s recorded liabilities for
these issues represent its best estimates (on an undiscounted basis) of
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remediation and restoration costs that may be required to comply with present laws and regulations.
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.
16. RETIREMENT COSTS
On April 7, 2004, the Company’s former CEO retired from the Company. In accordance with the terms
of his severance agreement, the Company paid $3.1 million into a deferred compensation account that
is maintained as a long-term asset and liability on the Company’s balance sheet. In addition, 0.1
million stock options were vested, the expiration date of 1.2 million stock options was extended
for three years and 24,918 restricted shares of common stock were vested resulting in a non-cash
charge of $3.6 million. The former CEO continues to be eligible for future payments under the
Company’s Long Term Incentive Plan through the 2006 performance period. No amount has been accrued
for any future payments which he may receive.
17. IMPAIRMENT COSTS
During the third quarter of 2004, the Company committed to a plan to dispose of the E&N Railway.
As a result of several factors, including the expectation of minimal future operating cash flows
and potential limitations on the use of certain of the real estate, the Company does not expect
significant proceeds from this disposal and accordingly, recorded an impairment charge of $12.6
million during the year ended December 31, 2004.
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SEGMENT INFORMATION
The Company’s continuing operations were previously classified into two business segments: North
American rail transportation and International rail transportation. The North American rail
transportation segment includes the operations of the Company’s railroad subsidiaries in the United
States and Canada, as well as corporate expenses and has been restated for the exclusion of the
Arizona Eastern Railway Company, the West Texas and Lubbock Railroad, the San Luis and Rio Grande
Railroad and the Alberta Railroad Properties operations, except for total assets and capital
expenditures, due to their reclassification to discontinued operations. The international segment
has been restated for the exclusion of the Chilean and Australian operations, except for total
assets and capital expenditures, due to their reclassification to discontinued operations.
Business and geographical segment information for the years ended December 31, 2005, 2004 and 2003
is as follows (in thousands):
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. UNAUDITED QUARTERLY FINANCIAL DATA
All quarterly financial data has been restated to reflect the results of Ferronor, Freight
Australia, Arizona Eastern Railway Company, West Texas and Lubbock Railroad, the San Luis and Rio
Grande Railroad and the Alberta Railroad Properties in discontinued operations. The diluted
earnings per share for each quarter will not necessarily add-up to the amount reported for the
entire fiscal year on the Consolidated Statements of Income due to variations in the calculation
for each quarter related to convertible debt.
Quarterly financial data for 2005 is as follows (in thousands, except per share amounts):
FIRST
SECOND
THIRD
FOURTH
QUARTER
QUARTER
QUARTER
QUARTER
Operating revenue
$
101,681
$
104,135
$
105,797
$
112,069
Operating income
$
9,783
$
14,938
$
12,465
$
14,079
Income from continuing operations
$
4,908
$
9,090
$
7,487
$
9,360
Net income
$
6,216
$
9,278
$
7,674
$
7,654
Basic income from continuing operations per share
$
0.13
$
0.24
$
0.20
$
0.24
Diluted income from continuing operations per share
$
0.13
$
0.24
$
0.19
$
0.24
Quarterly financial data for 2004 is as follows (in thousands, except per share amounts):
FIRST
SECOND
THIRD
FOURTH
QUARTER
QUARTER
QUARTER
QUARTER
Operating revenue
$
88,937
$
90,128
$
93,546
$
96,821
Operating income
$
14,765
$
9,553
$
2,408
$
11,920
Income (loss) from continuing operations
$
4,201
$
(587
)
$
(31,084
)
$
4,336
Net income (loss)
$
1,275
$
1,611
$
(33,139
)
$
4,314
Basic income (loss) from continuing operations per share
$
0.13
$
(0.02
)
$
(0.86
)
$
0.12
Diluted income (loss) from continuing operations per share
$
0.12
$
(0.02
)
$
(0.86
)
$
0.11
F-36
Dates Referenced Herein and Documents Incorporated by Reference