Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RAILAMERICA, INC.
(Exact name of registrant as
specified in its charter)
Delaware
4011
65-0328006
(State or Other Jurisdiction
of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
7411
Fullerton Street
Suite 300 Jacksonville, Florida32256
1-800-342-1131 (Address,
Including Zip Code, and Telephone Number, Including Area Code,
of Registrant’s Principal Executive
Offices)
Scott
Williams, Esq.
Senior Vice President and General Counsel
RailAmerica, Inc.
7411 Fullerton Street
Suite 300 Jacksonville, Florida32256
1-800-342-1131 (Name,
Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
Copies
to:
Joseph A. Coco, Esq.
Richard B. Aftanas, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square New York, New York10036-6522
(212) 735-3000
Jonathan A. Schaffzin, Esq.
Cahill Gordon & Reindel
llp
80 Pine Street New York, New York10005
(212) 701-3000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
Large
accelerated
filer o
Accelerated
filer o
Non-accelerated
filer þ
Smaller
reporting
company o
(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. Neither we nor the Initial Stockholder may sell these
securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and neither we nor the
Initial Stockholder are soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
This is an initial public offering of common shares of
RailAmerica, Inc. RailAmerica, Inc. is
selling shares
of our common stock and the Initial Stockholder identified in
this prospectus is selling an
additional shares
of our common stock. We will not receive any proceeds from the
sale of our common stock by the Initial Stockholder. After this
offering, the Initial Stockholder, an entity wholly-owned by
certain private equity funds managed by an affiliate of Fortress
Investment Group LLC, will own
approximately %
of our common stock.
The estimated initial public offering price is between
$
and
$
per share. We intend to apply to have our common stock listed on
the New York Stock Exchange under the symbol “RA.”
Investing in our common stock involves risks. See
“Risk Factors” beginning on page 11.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Per Share
Total
Public Offering Price
$
$
Underwriting Discount
$
$
Proceeds to us (before expenses)
$
$
Proceeds to the Initial Stockholder (before expenses)
$
$
The Initial Stockholder has granted the underwriters an option
to purchase up
to additional
shares of common stock at the public offering price less
underwriting discounts and commissions, for the purpose of
covering over-allotments.
The underwriters expect to deliver the shares against payment in
New York, New York on or
about ,
2009.
J.P.
Morgan
Citi
Deutsche Bank Securities
Morgan
Stanley
The date of this prospectus
is ,
2009
You should rely only on the information contained in this
prospectus or in any free writing prospectus we may authorize to
be delivered to you. We have not, and the Initial Stockholder
and underwriters have not, authorized anyone to provide you with
different information. If anyone provides you with different
information, you should not rely on it. We are not, and the
Initial Stockholder and underwriters are not, making an offer of
these securities in any jurisdiction where the offer is not
permitted. You should not assume that the information contained
in this prospectus is accurate as of any date other than the
date on the front of this prospectus.
Until ,
2009 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to each dealer’s obligation
to deliver a prospectus when acting as underwriter and with
respect to its unsold allotments or subscriptions.
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully, including the section entitled “Risk
Factors” and our financial statements and the related notes
included elsewhere in this prospectus, before making an
investment decision to purchase shares of our common stock.
Unless the context suggests otherwise, references in this
prospectus to “RailAmerica,” the “Company,”“we,”“us,” and “our” refer to
RailAmerica, Inc. and its subsidiaries. References in this
prospectus to “Fortress” refer to Fortress Investment
Group LLC. All amounts in this prospectus are expressed in
U.S. dollars and the financial statements have been
prepared in accordance with generally accepted accounting
principles in the Unites States (“GAAP”).
Our
Company
We believe that we are the largest owner and operator of short
line and regional freight railroads in North America, measured
in terms of total track-miles, operating a portfolio of 40
individual railroads with approximately 7,500 miles of
track in 27 U.S. states and three Canadian provinces. Our
railroad portfolio represents an important component of North
America’s transportation infrastructure, carrying large
quantities of freight for a highly diverse customer base. In
2008, our railroads transported over one million carloads of
freight for approximately 1,800 customers, hauling a wide range
of products such as farm and food products, lumber and forest
products, paper and paper products, metals, chemicals and coal.
For the majority of our customers, our railroads transport
freight between a customer’s facility or plant and a
connection point with a Class I railroad (a railroad with
over $359.6 million in revenues in 2007). Each of our
railroads connects with at least one Class I railroad, and
in many cases connects with multiple Class I railroads.
Frequently, our railroads are the only rail lines directly
serving our customers. Moreover, due to the nature of the
freight we carry — heavy, large quantities shipped
long distances — our service is often the most cost
competitive mode of transportation for shippers. In addition to
providing freight services, we also generate non-freight revenue
from other sources such as railcar storage, demurrage (allowing
our customers and other railroads to use our railcars for
storage or transportation in exchange for a daily fee), leases
of equipment to other users, and real estate leases and use fees.
Typically, we provide our freight services under a contract or
similar arrangement with either the customer located on our rail
line or the connecting Class I railroad. Because we
normally provide transportation for only a segment of a
shipment’s total distance, with the Class I railroad
carrying the freight the majority of the distance, customers are
usually billed once, typically by the Class I railroad, for
the total cost of rail transport. The Class I railroad is
obligated to pay us in a timely manner upon delivery of our
portion of the rail service regardless of whether or when the
Class I railroad actually receives the total payment from
the customer, which reduces our collections risk due to the high
credit quality of North American Class I railroads.
Railroads represent the largest component of North
America’s freight transportation industry, carrying more
freight than any other mode of transportation on a
ton-mile
basis. According to the Association of American Railroads, or
AAR, in 2006 (the most recent year for which data is available)
railroads carried 43% of the total
ton-miles
(one ton of freight shipped one mile) of freight transported in
the U.S. alone. Short line and regional railroads in
particular are a vital part of North America’s overall
railroad network, connecting customer facilities to Class I
railroads and providing an essential service to major shippers
and receivers of freight. As one of the largest owners and
operators of short line and regional freight railroads in North
America, we believe that we are well positioned to take
advantage of the rail industry’s favorable dynamics and to
continue to grow our business both internally, by growing
revenue and earnings from our existing portfolio of railroads,
and as an active acquiror in the industry.
We generated total operating revenue of $508.5 million, net
income of $16.5 million and Adjusted EBITDA (See
“— Summary Consolidated Financial Data”) of
$137.4 million for the year ended December 31, 2008
and total operating revenue of $206.5 million, net income
of $19.2 million and Adjusted EBITDA of $68.5 million
for the six months ended June 30, 2009.
The following charts show the relative percentages of our
freight revenue by commodity and our total revenue contribution
by region for the year ended December 31, 2008.
Freight Revenue by Commodity
Total Revenue Contribution by Region
Competitive
Strengths
We believe that the key competitive strengths that will enable
us to execute our strategy include:
•
Profitable operations with substantial earnings
growth: Our focus on continuously improving the
operating efficiency and profitability of each of our 40
railroads has allowed us to significantly increase our operating
margins and grow our cash flow. As a result of our management
team’s focus on improving operating efficiency, our
Adjusted EBITDA has grown from $91 million for the year
ended December 31, 2006 to $137 million for the year
ended December 31, 2008 and Adjusted EBITDA as a percentage
of total operating revenue has grown from 19.6% for the year
ended December 31, 2006 to 27.0% for the year ended
December 31, 2008 and to 33.2% for the six months ended
June 30, 2009. Additionally, due to the relative
operational simplicity of our railroads, we have more
predictable and lower capital expenditures when compared to the
more complex requirements of many Class I networks. As a
result of our focus on improving operating efficiency and our
predictable capital expenditures, we expect to continue to be
able to grow our earnings and cash flow over the long term.
•
Favorable tax attributes: We also benefit from
favorable tax attributes which substantially reduce our income
tax obligations. As of December 31, 2008, we had
$120 million of federal net operating loss carry-forwards
expiring between 2020 and 2027 and $95 million of short
line tax credits available through 2027. We believe short line
railroads will continue to benefit from strong legislative and
shipper support due to the pro-competitive nature of our
business.
•
Diversified portfolio of freight railroads: We
benefit from significant diversity in our customer base, product
base, geographic footprint and our relationships with
Class I railroads. For the year ended December 31,2008, no single customer accounted for more than 5% of our
freight revenue and our top ten customers accounted for
approximately 20% of our freight revenue. In addition, the types
of freight hauled over our railroads include more than a dozen
commodities, none of which accounted for more than 14% of our
freight revenue for the year ended December 31, 2008. This
diversity reduces the impact from a downturn in the volume of
any single product or a particular regional economy and lowers
our dependence on any one customer.
•
Stable and predictable revenue base: Our
railroads are often integrated into a customer’s facility
and serve as an important component of that customer’s
distribution or input network. In many circumstances, our
customers have made significant capital investments in
facilities on or near our railroads (as in the case of electric
utilities, industrial plants or major warehouses) or are
geographically unable to relocate (as in the case of coal mines
and rock quarries). This provides us with a stable and
predictable revenue base.
Focus on safety: Our focus on safety allows us
to improve the quality and reliability of our services, prevent
accidents and injuries, and lower the costs and risks associated
with operating our business. As a result of this safety focus,
from 2004 to 2008 we have reduced our Reportable Injuries Ratio,
defined by the Federal Railroad Administration, or FRA, as
reportable personal injuries per 200,000
man-hours,
from 2.84x to 1.64x. Similarly, from 2004 to 2008 we reduced our
Reportable Train Accidents Ratio, defined by the FRA as
reportable train accidents per 100,000 train miles, from 1.08x
to 0.74x.
•
Highly experienced management: Our senior
management team, which was appointed in early 2007, is comprised
of experienced rail industry executives with an average of
26 years in the industry and a track record of generating
financial improvements both at well established operations, as
well as at newly acquired and underperforming railroads. Several
members of management have held senior positions at both
Class I railroads as well as other short line and regional
railroads. We believe that the experience of our senior
management team and its focus on revenue, cash flow and earnings
growth are significant contributors to improving the operating
and financial performance of our railroads.
Growth
Strategy
We plan to grow our revenue, cash flow and earnings by employing
the following growth strategies:
Growing freight revenue: We are focused on
growing our freight revenue by seeking new business
opportunities at our individual railroads and by centralizing
key commercial and pricing decisions. We believe that shippers
often seek to locate their operations on short lines because of
possible access to multiple Class I railroads and the
resulting negotiating leverage it affords them. To this end, our
commercial and development team actively solicits customers to
locate their manufacturing and warehousing facilities on our
railroads. We also seek to generate new business by converting
customers located on or near our railroads from other modes of
transportation to rail. Members of our senior management team
have significant prior experience in the marketing departments
of both Class I and short line railroads. Additionally, by
centralizing and carefully analyzing pricing decisions based on
prevailing market conditions and competitive analysis rather
than having such decisions made at the railroad level by local
management, we believe we can leverage our management
team’s expertise and increase rates per carload.
Expanding our non-freight services and
revenue: We intend to continue to expand and grow
the non-freight services we offer to both our rail customers and
other parties. Non-freight services offered to our rail
customers include switching (or managing and positioning
railcars within a customer’s facility), storing
customers’ excess or idle railcars on inactive portions of
our rail lines, third party railcar repair, and car hire and
demurrage. Each of these services leverages our existing
customer relationships and generates additional revenue at a
high margin with minimal capital investment. We also seek to
grow our revenue from non-transportation uses of our land
holdings such as land leases, crossing or access rights,
subsurface rights, signboards and cellular communication towers,
among others. These sources of revenue and value are an
important area of focus by our management as such revenue has
minimal associated operating costs or capital expenditures and
represents a recurring, high margin cash flow stream. As a
result of this strategy, we have grown our non-freight revenue
from $56.2 million, or 12.2% of operating revenue, in 2006
to $68.4 million, or 13.5% of operating revenue, in 2008.
Pursuing opportunistic acquisitions: The North
American short line and regional railroad industry is highly
fragmented, with approximately 550 short line and regional
railroads operating approximately 45,800 miles of track. We
believe that opportunistically acquiring additional short line
and regional railroads will enable us to grow our revenue and
achieve a number of further benefits including, among others,
expanding and enhancing our services, further diversifying our
portfolio and achieving economies of scale by leveraging senior
management experience and corporate costs over a broader revenue
base. We believe that the opportunity to acquire assets at
attractive valuations is increasing due to the tighter credit
environment combined with lower volumes, which results in more
willing sellers of assets and a limited number of buyers that
possess both the financial flexibility and the expertise to
capitalize on these opportunities.
Continuing to improve operating efficiency and lowering
costs: We continue to focus on driving financial
improvement through a variety of cost savings initiatives. To
identify and implement cost savings, we have organized our 40
railroads into five regional groups which, in turn, report to
senior management where many functions such as pricing,
purchasing, capital spending, finance, insurance, real estate
and other administrative functions are centralized. We believe
that this strategy enables us to achieve cost and pricing
efficiencies and leverage the experience of senior management in
commercial, operational and strategic decisions. To date, we
have implemented a number of cost savings initiatives broadly at
all of our railroads targeting lower fuel consumption, safer
operations, more efficient locomotive utilization and lower
costs for third party services, among others, and continue to be
extremely focused on ongoing opportunities to further reduce our
costs.
Industry
Overview
The North American economy is dependent on the movement of
freight ranging from raw materials such as coal, ores,
aggregates, lumber and grain to finished goods, such as food
products, paper products, automobiles and machinery. Railroads
represent the largest component of North America’s freight
transportation industry, carrying more freight than any other
mode of transportation on a
ton-mile
basis. With a network of over 140,000 miles of track (in
the U.S.), railroads link businesses with each other
domestically and with international markets through connections
with ports and other international terminals. Unlike other modes
of transportation, such as trucking (which uses highways, toll
roads, etc.) and shipping companies (that utilize ports),
railroad operators generally own their infrastructure of track,
land and rail yards. This infrastructure, most of which was
originally established over 100 years ago, represents a
limited supply of assets and a
difficult-to-replicate
network.
The railroad industry has increased its share of freight
ton-miles
compared to other forms of freight transportation over the past
quarter-century. Since de-regulation in 1980, the railroad
industry has continually improved its cost structure compared to
other forms of freight transportation as it consumes less fuel
and has lower labor costs per ton transported than other forms
of freight transportation. According to the AAR, railroads are
estimated to be approximately four times more fuel efficient
than truck transportation and a single train can haul the
equivalent of up to approximately 280 trucks. In 1980, one
gallon of diesel fuel moved one ton of freight by rail an
average of 235 miles, versus 2007 where the equivalent
gallon of fuel moved one ton of freight an average of
436 miles by rail — representing an 85% increase
over 1980. As a result, the railroad industry’s share of
U.S. freight
ton-miles
has steadily increased from 30% in 1980 to 43% in 2006.
According to the AAR, there were 563 railroads in the United
States as of December 31, 2007. The AAR classifies
railroads operating in the United States into the following
three categories based on a railroad’s amount of revenues
and track-miles.
Aggregate
Miles
% of
Classification of Railroads
Number
Operated
Revenue
Revenues and Miles Operated in 2007
Class I(1)
7
94,313
93
%
Over $359.6 million
Regional
33
16,930
3
%
$40.0 to $359.6 million
and/or 350
or more miles operated
Local/Short line
523
28,891
4
%
Less than $40.0 million and less than 350 miles
operated
Total
563
140,134
100
%
(1)
Includes CSX Transportation, BNSF Railway Co., Norfolk Southern,
Kansas City Southern Railway Company, Union Pacific, Canadian
National Railway and Canadian Pacific Railroad Co.
Source: Association of American Railroads, Railroad Facts,
2008 Edition.
Following the completion of this offering, RR Acquisition
Holding LLC, an entity wholly-owned by certain private equity
funds managed by an affiliate of Fortress, will own
approximately % of our outstanding common stock,
or % if the underwriters’ over-allotment option
is fully exercised. RR Acquisition Holding LLC is referred to in
this prospectus as our Initial Stockholder. After this offering,
the Initial Stockholder will own shares sufficient for the
majority vote over fundamental and significant corporate matters
and transactions. See “Risk Factors — Risks
Related to Our Organization and Structure.”
Additional
Information
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 7411 Fullerton Street,
Suite 300, Jacksonville, Florida32256, and our
telephone number at that location is
1-800-342-1131.
Our Internet website address is www.railamerica.com. Information
on, or accessible through, our website is not part of this
prospectus.
Common stock to be issued and outstanding after this
offering
shares
Use of proceeds by us
We estimate that the net proceeds to us from the sale of shares
in this offering, after deducting underwriting discounts and
commissions and offering expenses payable by us, will be
approximately $ million. We
intend to use the net proceeds from this offering for working
capital and other general corporate purposes, which will include
the repayment or refinancing of a portion of outstanding
indebtedness as well as potential strategic investments and
acquisitions. See “Use of Proceeds.” We will not
receive any proceeds from the sale of our common stock by the
Initial Stockholder, including any proceeds the Initial
Stockholder may receive from the exercise by the underwriters of
their over-allotment option.
Dividend policy
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for the
operation and growth of our business.
Any future determination to pay dividends on our common stock
will be at the discretion of our board of directors and will
depend upon many factors, including our financial position,
results of operations, liquidity, legal requirements,
restrictions that may be imposed by our indenture and ABL
Facility and other factors deemed relevant by our board of
directors. See “Dividend Policy.”
Proposed New York Stock Exchange symbol
RA
Risk factors
Please read the section entitled “Risk Factors”
beginning on page 11 for a discussion of some of the
factors you should carefully consider before deciding to invest
in our common stock.
The number of shares of common stock to be issued and
outstanding after the completion of this offering is based
on shares
of common stock issued and outstanding as
of ,
2009, and excludes an
additional shares
reserved for issuance under our equity incentive plan, all of
which remain available for grant.
Except as otherwise indicated, all information in this
prospectus:
•
assumes an initial public offering price of
$ per share, the midpoint of
the price range set forth on the cover page of this prospectus;
•
assumes no exercise by the underwriters of their option to
purchase an
additional shares
of common stock from the Initial Stockholder to cover
over-allotments; and
•
assumes shares
will be issued to certain of our directors
after ,
2009 but prior to completion of this offering.
The following tables summarize consolidated financial
information for our business. You should read these tables along
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,”“Business,” and our consolidated historical financial
statements and the related notes included elsewhere in this
prospectus.
The consolidated financial information labeled as
“predecessor” includes financial reporting periods
prior to the merger on February 14, 2007, in which we were
acquired by certain private equity funds managed by affiliates
of Fortress (the “Acquisition”) and the consolidated
financial information labeled as “successor” includes
financial reporting periods subsequent to the Acquisition.
The summary consolidated statement of operations data for the
predecessor year ended December 31, 2006, the predecessor
period January 1, 2007 through February 14, 2007, the
successor period February 15, 2007 through
December 31, 2007 and the successor year ended
December 31, 2008 and the summary successor consolidated
balance sheet data as of December 31, 2007 and 2008 have
been derived from our audited financial statements included
elsewhere in this prospectus. The summary consolidated financial
data as of and for the predecessor years ended December 31,2004 and 2005 and the summary predecessor consolidated balance
sheet data as of December 31, 2006 have been derived from
our audited financial statements that are not included in this
prospectus. The summary successor consolidated statement of
operations data for the six months ended June 30, 2008 and
2009 and the summary successor consolidated balance sheet data
as of June 30, 2009 have been derived from our unaudited
financial statements included elsewhere in this prospectus.
The unaudited financial statements have been prepared on the
same basis as the audited financial statements and, in the
opinion of our management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the information set forth herein. Operating
results for the six months ended June 30, 2009 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2009 or for any future period.
The summary consolidated financial data should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
consolidated financial statements and related notes included
elsewhere in this prospectus.
Other income (loss) for the year ended December 31, 2004
primarily relates to financing costs incurred to amend the
senior credit facility and to repurchase our senior subordinated
notes. Other income (loss) for the remaining periods primarily
relates to non-cash foreign exchange gains or losses associated
with U.S. dollar term borrowings by one of our Canadian
subsidiaries. Other income (loss) for the six months ended
June 30, 2009 primarily relates to write-off of deferred
financing costs in conjunction with the repayment of our term
borrowings.
(2)
EBITDA is defined as net income (loss) before interest expense,
provision for (benefit from) income taxes and depreciation and
amortization. Adjusted EBITDA represents EBITDA before
impairment of assets, equity compensation costs, gain (loss) on
foreign currency exchange and non-recurring headquarter
relocation costs. Economic earnings (losses) is defined as net
income (loss) before provision for (benefit from) income taxes,
income taxes paid in cash, amortization costs included in
interest expense, impairment of assets, gain (loss) on foreign
currency exchange and non-recurring headquarter relocation
costs. We believe EBITDA, Adjusted EBITDA and Economic earnings
(losses) are important measures of operating performance and
provide useful information to investors because they highlight
trends in our business that may not otherwise be apparent when
relying solely on U.S. generally accepted accounting
principle (“GAAP”) measures and eliminate items that
have less bearing on our operating performance.
EBITDA provides us with a key measure of operating performance
as it assists us in comparing our performance on a consistent
basis by removing the impact of changes in (i) our asset
base (depreciation and amortization) from the Acquisition due to
a step-up in
value and from capital expenditures and (ii) our capital
structure (interest expense, including amortization costs).
Adjusted EBITDA assists us in monitoring our ability to
undertake key investing and financing functions such as making
investments, transferring property, paying dividends, and
incurring additional indebtedness, which are generally
prohibited by the covenants under our senior secured notes
unless we met certain performance ratios, as well as measuring
our performance on a consistent basis by removing significant
non-recurring items such as headquarter relocation costs, gain
(loss) on foreign currency exchange from U.S. dollar
borrowings by one of our Canadian subsidiaries and impairment of
assets. Management also uses Adjusted EBITDA (i) for
planning purposes, including the preparation of its annual
operating budget in conjunction with the restrictions from the
senior secured notes, (ii) to evaluate the Company’s
operating performance including implementation of our cost
saving initiatives and (iii) in communicating with the
holders of the senior secured notes and with the board of
directors concerning financial performance.
Both EBITDA and Adjusted EBITDA provide an assessment of
controllable expenses and afford management the ability to make
decisions which are expected to facilitate meeting current
financial goals as well as achieve optimal financial
performance. Among other things, they provide an indicator for
management to determine if adjustments to current spending
decisions are needed.
An investor or potential investor should find these metrics
important in evaluating our performance, results of operations
or financial position.
The following table shows the reconciliation of our EBITDA and
Adjusted EBITDA from net income (loss):
Certain fees related to (i) acquisition and refinancing
transactions that were not completed and (ii) consulting
fees from the Process Improvement Project undertaken by former
management during 2006 were not considered in the calculation of
Adjusted EBITDA.
Economic earnings (losses) is one of the primary metrics that is
used to determine management compensation and it assists us in
comparing our management’s performance on a consistent
basis as it removes the impact of (i) significant
non-performance related items such as amortization of deferred
financing costs and amortization from the termination of
interest rate swap agreements and income taxes paid in cash and
(ii) significant non-recurring items such as headquarter
relocation costs, gain (loss) on foreign currency exchange from
U.S. dollar term borrowings by one of our Canadian
subsidiaries and impairment of assets. Senior management
considers Economic earnings (losses) separately from Adjusted
EBITDA, primarily to include interest expense impact from our
leveraged capital structure. In addition, Economic earnings
(losses) is one of the key metrics used by senior management to
review the consolidated financial performance of the business.
An investor or potential investor should find this item
important in evaluating our performance, results of operations
and financial position.
The following table shows the reconciliation of our Economic
earnings (losses) from net income (loss):
Net Income (Loss) to Economic Earnings (Losses)
Reconciliation:
Net income (loss)
$
(25,939
)
$
30,822
$
36,643
$
(5,317
)
$
33,502
$
16,527
$
4,774
$
19,227
Add: Discontinued operations (gain) loss
11,445
362
(9,223
)
—
756
(2,764
)
297
(12,951
)
Income (loss) from continuing operations
(14,494
)
31,184
27,420
(5,317
)
34,258
13,763
5,071
6,276
Add:
Provision for (benefit from) income taxes
(1,680
)
(1,112
)
(4,809
)
935
(1,747
)
1,599
10,525
2,350
Income taxes paid in cash
(7,343
)
(6,425
)
(3,694
)
(143
)
(2,779
)
(6,655
)
(3,996
)
(1,713
)
Amortization costs included in interest expense
3,742
935
560
68
2,880
10,083
2,754
8,592
Impairment of assets
—
—
—
—
—
3,420
—
—
(Gain) loss on foreign currency exchange
—
—
—
—
(7,048
)
8,260
1,340
(1,160
)
Write-off of deferred financing costs
19,914
351
—
—
—
—
—
2,593
Non-recurring headquarter relocation costs
—
—
—
—
—
6,089
1,374
636
Economic earnings (losses)
$
139
$
24,933
$
19,477
$
(4,457
)
$
25,564
$
36,559
$
17,068
$
17,574
EBITDA, Adjusted EBITDA and Economic earnings (losses), as
presented herein, are supplemental measures of our performance
that are not required by, or presented in accordance with GAAP.
We use non-GAAP financial measures as a supplement to our GAAP
results in order to provide a more complete understanding of the
factors and trends affecting our business. However, EBITDA,
Adjusted EBITDA and Economic earnings (losses) have limitations
as analytical tools. They are not measurements of our financial
performance under GAAP and should not be considered as
alternatives to revenue, net income (loss) or any other
performance measure derived in accordance with GAAP or as
alternatives to cash flow from operating activities as measures
of liquidity.
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as other information contained in this prospectus, before
deciding to invest in our common stock. The occurrence of any of
the following risks could materially and adversely affect our
business, prospects, financial condition, results of operations
and cash flow, in which case, the trading price of our common
stock could decline and you could lose all or part of your
investment.
Risks
Related to Our Business
Adverse
macroeconomic and business conditions have and could continue to
impact our business negatively.
Economic activity in the United States and throughout the world
has undergone a sudden, sharp downturn, which has impacted our
business negatively. Global financial markets have and could
continue to experience unprecedented volatility and disruption.
Certain of our customers and suppliers are directly affected by
the economic downturn, are facing credit issues and could
experience cash flow problems that have and could continue to
give rise to payment delays, increased credit risk, bankruptcies
and other financial hardships that could decrease the demand for
our rail services. In addition, adverse economic conditions
could also affect our costs for insurance and our ability to
acquire and maintain adequate insurance coverage for risks
associated with the railroad business if insurance companies
experience credit downgrades or bankruptcies. Changes in
governmental banking, monetary and fiscal policies to stimulate
the economy, restore liquidity and increase credit availability
may not be effective. It is difficult to determine the depth and
duration of the economic and financial market problems and the
many ways in which they may impact our customers, suppliers and
our business in general. Moreover, given the asset intensive
nature of our business, the economic downturn increases the risk
of significant asset impairment charges since we are required to
assess for potential impairment of non-current assets whenever
events or changes in circumstances, including economic
circumstances, indicate that the respective asset’s
carrying amount may not be recoverable. This may also limit our
ability to sell our assets to the extent we need, or find it
desirable, to do so. Continuation or further worsening of
current macroeconomic and financial conditions could have a
material adverse effect on our operating results, financial
condition and liquidity. In addition, our railroads compete
directly with other modes of transportation, including motor
carriers, and ship, barge and pipeline operators. If these
alternative methods of transportation become more cost-effective
to our customers due to macroeconomic changes, or if legislation
is passed providing materially greater opportunity for motor
carriers with respect to size or weight restrictions, our
operating results, financial condition and liquidity could be
materially adversely affected.
Rising
fuel costs could materially adversely affect our
business.
Fuel costs were approximately 7% of our total operating revenue
for the six months ended June 30, 2009, and were
approximately 12%, 12% and 14% of our total operating revenue
for the years ended December 31, 2006, 2007 and 2008,
respectively. 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.
As
part of our railroad operations, we frequently transport
hazardous materials, the accidental release of which could have
an adverse effect on our operating results.
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.
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 and higher ongoing labor costs.
Because
we depend on Class I railroads and certain important
customers for our operations, our business and financial results
may be adversely affected if our relationships with Class I
carriers and certain important customers
deteriorate.
The railroad industry in the United States and Canada is
dominated by a small number of Class I carriers that have
substantial market control and negotiating leverage.
Approximately 87% of our total freight revenue in 2008 was
derived from interchange traffic. Of our total freight revenue
in 2008, Union Pacific, CSX Transportation, Canadian National
Railway and BNSF Railway represented 24%, 22%, 16% and 12%,
respectively and the remaining Class I carriers each
represented less than 10% of our total freight revenue. Our
ability to provide rail service to our customers 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, switching,
interchange, fuel surcharges and trackage rights (an arrangement
where the company that owns the line retains all rights, but
allows another company to operate over certain sections of its
track). 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.
Although our operations served approximately
1,800 customers in 2008, freight revenue from our 10
largest freight revenue customers accounted for
approximately 19.6% of our total revenues in 2008.
Substantial reduction in business with or loss of important
customers could have a material adverse effect on our business
and financial results.
If the
track maintenance tax credit is not renewed by Congress, we
would no longer be able to earn or assign credits for track
maintenance.
We are eligible to receive tax credits for certain track
maintenance expenditures under Section 45G of the Internal
Revenue Code, as amended, or the Code. Pursuant to
Section 45G, these credits are assignable under limited
circumstances. In 2009, we expect to receive approximately
$22.5 million from the assignment of these credits.
Section 45G is scheduled to expire on December 31,2009, and after such time, unless Section 45G is renewed,
we would no longer be able to earn or assign credits for track
maintenance expenditures. Legislation is pending before the
United States Senate (S. 461) and the House of
Representatives (H.R. 1132) that would extend the
availability of the Section 45G tax credit for three years.
There can be no assurance, however, that this legislation will
be enacted.
We are
subject to the risks of doing business in Canada.
We currently have railroad operations in Canada. The risks of
doing business in Canada include:
•
adverse changes in the economy of Canada;
•
exchange rate fluctuations; 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 environmental and other governmental regulation of
our railroad operations which could impose significant
costs.
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 foreign,
federal, state and local environmental laws and regulations. We
could incur significant costs, fines and penalties 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, maintenance
and other matters. Our failure to comply with applicable laws
and regulations could have a material adverse effect on us.
Additionally, future changes in federal
and/or state
laws and regulations governing railroad rates, operations and
practices could likewise have a material adverse effect on us.
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
face possible catastrophic loss and liability and our insurance
may not be sufficient to cover our damages or damages to
others.
The operation of any railroad carries with it an inherent risk
of catastrophe, mechanical failure, collision, and property
loss. In the course of our operations, spills or other
environmental mishaps, cargo loss or damage, business
interruption due to political developments, as well as labor
disputes, strikes and adverse weather conditions, could result
in a loss of revenues or increased liabilities and costs.
Collisions, cargo leaks or explosions, environmental mishaps, or
other accidents can cause serious bodily injury, death, and
extensive property damage, particularly when such accidents
occur in heavily populated areas. Additionally, our operations
may be affected from time to time by natural disasters such as
earthquakes, volcanoes, floods, hurricanes or other storms. The
occurrence of a major natural disaster could have a material
adverse effect on our operations and financial condition. We
maintain insurance that is consistent with industry practice
against the accident-related risks involved in the conduct of
our business and business interruption due to natural disaster.
However, this insurance is subject to a number of limitations on
coverage, depending on the nature of the risk insured against.
This insurance may not be sufficient to cover our damages or
damages to others and this insurance may not continue to be
available at commercially reasonable rates. In addition, we are
subject to the risk that one or more of our insurers may become
insolvent and would be unable to pay a claim that may be made in
the future. Even with insurance, if any catastrophic
interruption of service occurs, we may not be able to restore
service without a significant interruption to operations which
could have an adverse effect on our financial condition.
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, or FELA, rather than state
workers’ compensation laws. Currently, we are responsible
for the first $4 million of expenditures per each incident
under our general liability insurance policy and $1 million
of expenditures per each incident under our property insurance
policy. 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 $200 million and
$15 million on liability and property, respectively. In
addition, adverse events directly and indirectly attributable to
us, including such things as derailments, accidents, discharge
of toxic or hazardous materials, 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
depend on our management and key personnel, and we may not be
able to operate and grow our business effectively if we lose the
services of our management or key personnel or are unable to
attract qualified personnel in the future.
The success of our business is heavily dependent on the
continued services and performance of our current management and
other key personnel and our ability to attract and retain
qualified personnel in the future. The loss of key personnel
could affect our ability to run our business effectively.
Competition for qualified personnel is intense, and we cannot
assure you that we will be successful in attracting and
retaining such personnel. Although we have entered into
employment agreements with certain of our key personnel, these
agreements do not ensure that our key personnel will continue in
their present capacity with us for any particular period of
time. The loss of any key personnel requires the remaining key
personnel to divert immediate and substantial attention to
seeking a replacement. An inability to find a suitable
replacement for any departing executive officer on a timely
basis could adversely affect our ability to operate and grow our
business.
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. Although the substantial majority of our rail
lines and track-miles are in rural, low density areas, not
typically cited as high priority security risks, our rail lines
and facilities could be direct targets or indirect casualties of
an act or acts of terror. Such acts 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.
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.
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.
We
have a substantial amount of indebtedness, which may adversely
affect our cash flow and our ability to operate our business,
including our ability to incur additional
indebtedness.
As of June 30, 2009, our total indebtedness was
approximately $713.9 million, which represented
approximately 59.6% of our total capitalization. Our substantial
amount of indebtedness increases the possibility that we may be
unable to generate sufficient cash to pay, when due, the
principal of, interest on or other amounts due with respect to
our indebtedness.
Our substantial indebtedness could have important consequences
for you, including:
•
increasing our vulnerability to adverse economic, industry or
competitive developments;
•
requiring a substantial portion of cash flow from operations to
be dedicated to the payment of principal and interest on our
indebtedness, therefore reducing our ability to use our cash
flow to fund our operations, capital expenditures and future
business opportunities;
•
restricting us from making strategic acquisitions or causing us
to make non-strategic divestitures;
limiting our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, acquisitions and general corporate or other
purposes; and
•
limiting our flexibility in planning for, or reacting to,
changes in our business or the industry in which we operate,
placing us at a competitive disadvantage compared to our
competitors who are less highly leveraged and who, therefore,
may be able to take advantage of opportunities that our leverage
prevents us from exploiting.
The indenture governing the senior secured notes contains a
number of restrictions and covenants that, among other things,
limit our ability to incur additional indebtedness, make
investments, pay dividends or make distributions to our
stockholders, grant liens on our assets, sell assets, enter into
a new or different line of business, enter into transactions
with our affiliates, merge or consolidate with other entities or
transfer all or substantially all of our assets, and enter into
sale and leaseback transactions. The credit market turmoil could
negatively impact our ability to obtain future financing or to
refinance our outstanding indebtedness.
Our ability to comply with these restrictions and covenants in
the future is uncertain and will be affected by the levels of
cash flow from our operations and events or circumstances beyond
our control. Our failure to comply with any of the restrictions
and covenants under the indenture governing our senior secured
notes could result in a default under the indenture, which could
cause all of our existing indebtedness to be immediately due and
payable. If our indebtedness is accelerated, we may not be able
to repay our indebtedness or borrow sufficient funds to
refinance it. In addition, in the event of an acceleration
holders of our senior secured notes could proceed against the
collateral securing the notes which includes nearly all of our
assets. Even if we are able to obtain new financing, it may not
be on commercially reasonable terms or on terms that are
acceptable to us. If our indebtedness is in default for any
reason, our business, financial condition and results of
operations could be materially and adversely affected. In
addition, complying with these restrictions and covenants may
also cause us to take actions that are not favorable to our
stockholders and may make it more difficult for us to
successfully execute our business plan and compete against
companies that are not subject to such restrictions and
covenants.
Our
inability to acquire or integrate acquired businesses
successfully or to realize the anticipated cost savings and
other benefits of acquisitions could have adverse consequences
to our business.
We expect to grow through acquisitions. Evaluating acquisition
targets gives rise to additional costs related to legal,
financial, operating and industry due diligence. Acquisitions
generally result in increased operating and administrative costs
and, to the extent financed with debt, additional interest
costs. We may not be able to manage or integrate the acquired
companies or businesses successfully. The process of acquiring
businesses may be disruptive to our business and may cause an
interruption or reduction of our business as a result of the
following factors, among others:
•
loss of key employees or customers;
•
possible inconsistencies in or conflicts between standards,
controls, procedures and policies among the combined companies
and the need to implement company-wide financial, accounting,
information technology and other systems;
•
failure to maintain the quality of services that have
historically been provided;
•
integrating employees of rail lines acquired from other entities
into our regional railroad culture;
•
failure to coordinate geographically diverse
organizations; and
•
the diversion of management’s attention from our day-to-day
business as a result of the need to manage any disruptions and
difficulties and the need to add management resources to do so.
These disruptions and difficulties, if they occur, may cause us
to fail to realize the cost savings, revenue enhancements and
other benefits that we expect to result from integrating
acquired companies and may cause material adverse short- and
long-term effects on our operating results, financial condition
and liquidity.
Even if we are able to integrate the operations of acquired
businesses into our operations, we may not realize the full
benefits of the cost savings, revenue enhancements or other
benefits that we may have expected at the time of acquisition.
The expected revenue enhancements and cost savings are based on
analyses completed by members of our management. These analyses
necessarily involve assumptions as to future events, including
general business and industry conditions, the longevity of
specific customer plants and factories served, operating costs
and competitive factors, most of which are beyond our control
and may not materialize. While we believe these analyses and
their underlying assumptions to be reasonable, they are
estimates that are necessarily speculative in nature. In
addition, even if we achieve the expected benefits, we may not
be able to achieve them within the anticipated time frame. Also,
the cost savings and other synergies from these acquisitions may
be offset by costs incurred in integrating the companies,
increases in other expenses or problems in the business
unrelated to these acquisitions.
Risks
Related to Our Organization and Structure
If the
ownership of our common stock continues to be highly
concentrated, it may prevent you and other minority stockholders
from influencing significant corporate decisions and may result
in conflicts of interest.
Following the completion of this offering, an entity
wholly-owned by certain private equity funds managed by an
affiliate of Fortress, referred to in this prospectus as the
Initial Stockholder, will own approximately % of our
outstanding common stock or % if the
underwriters’ over-allotment option is fully exercised. As
a result, the Initial Stockholder will own shares sufficient for
the majority vote over all matters requiring a stockholder vote,
including: the election of directors; mergers, consolidations or
acquisitions; the sale of all or substantially all of our assets
and other decisions affecting our capital structure; the
amendment of our amended and restated certificate of
incorporation and our amended and restated bylaws; and our
winding up and dissolution. This concentration of ownership may
delay, deter or prevent acts that would be favored by our other
stockholders. The interests of the Initial Stockholder may not
always coincide with our interests or the interests of our other
stockholders. This concentration of ownership may also have the
effect of delaying, preventing or deterring a change in control
of our Company. Also, the Initial Stockholder may seek to cause
us to take courses of action that, in its judgment, could
enhance its investment in us, but which might involve risks to
our other stockholders or adversely affect us or our other
stockholders, including investors in this offering. As a result,
the market price of our common stock could decline or
stockholders might not receive a premium over the then-current
market price of our common stock upon a change in control. In
addition, this concentration of share ownership may adversely
affect the trading price of our common stock because investors
may perceive disadvantages in owning shares in a company with
significant stockholders. See “Principal and Selling
Stockholders” and “Description of Capital
Stock — Anti-Takeover Effects of Delaware Law, Our
Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws.”
We are
a holding company with no operations and rely on our operating
subsidiaries to provide us with funds necessary to meet our
financial obligations and to pay dividends.
We are a holding company with no material direct operations. Our
principal assets are the equity interests we directly or
indirectly hold in our operating subsidiaries, which own our
operating assets. As a result, we are dependent on loans,
dividends and other payments from our subsidiaries to generate
the funds necessary to meet our financial obligations and to pay
dividends on our common stock. Our subsidiaries are legally
distinct from us and may be prohibited or restricted from paying
dividends or otherwise making funds available to us under
certain conditions. If we are unable to obtain funds from our
subsidiaries, we may be unable to, or our board may exercise its
discretion not to, pay dividends.
We do
not anticipate paying any dividends on our common stock in the
foreseeable future.
We do not expect to declare or pay any cash or other dividends
in the foreseeable future on our common stock, as we intend to
use cash flow generated by operations to grow our business. Our
revolving credit facility and our senior secured notes indenture
will restrict our ability to pay cash dividends on our common
stock, and we may also enter into credit agreements or other
borrowing arrangements in the future that restrict or limit our
ability to pay cash dividends on our common stock. See
“Dividend Policy.”
Certain
provisions of the Stockholders Agreement, our amended and
restated certificate of incorporation and our amended and
restated bylaws could hinder, delay or prevent a change in
control of our company, which could adversely affect the price
of our common stock.
Certain provisions of the Stockholders Agreement, our amended
and restated certificate of incorporation and our amended and
restated bylaws contain provisions that could make it more
difficult for a third party to acquire us without the consent of
our board of directors or the Initial Stockholder. These
provisions provide for:
•
a classified board of directors with staggered three-year terms;
•
removal of directors only for cause and only with the
affirmative vote of at least 80% of the voting interest of
stockholders entitled to vote (provided, however, that for so
long as the Fortress Stockholders (as defined below) own a
majority of our issued and outstanding common stock, directors
may be removed with or without cause with the affirmative vote
of a majority of the voting interest of stockholders entitled to
vote);
•
provisions in our amended and restated certificate of
incorporation and amended and restated bylaws preventing
stockholders from calling special meetings of our stockholders
(provided, however, that for so long as the Fortress
Stockholders beneficially own at least 25% of our issued and
outstanding common stock, any stockholders that collectively
beneficially own at least 25% of our issued and outstanding
common stock may call special meetings of our stockholders);
•
advance notice requirements by stockholders with respect to
director nominations and actions to be taken at annual meetings;
•
the Stockholders Agreement will provide certain rights to the
Fortress Stockholders with respect to the designation of
directors for nomination and election to our board of directors,
including the ability to appoint a majority of the members of
our board of directors for so long as the Fortress Stockholders
continue to hold at least 40% of the outstanding shares of our
common stock. See “Certain Relationships and Related Party
Transactions — Stockholders Agreement”;
•
no provision in our amended and restated certificate of
incorporation for cumulative voting in the election of
directors, which means that the holders of a majority of the
outstanding shares of our common stock can elect all the
directors standing for election;
•
our amended and restated certificate of incorporation and
amended and restated bylaws only permit action by our
stockholders outside a meeting by unanimous written consent,
provided, however, that for so long as the Fortress Stockholders
beneficially own at least 25% of our issued and outstanding
common stock, our stockholders may act without a meeting by
written consent of a majority of our stockholders; and
•
under our restated certificate of incorporation, our board of
directors has authority to cause the issuance of preferred stock
from time to time in one or more series and to establish the
terms, preferences and rights of any such series of preferred
stock, all without approval of our stockholders. Nothing in our
restated certificate of incorporation precludes future issuances
without stockholder approval of the authorized but unissued
shares of our common stock.
In addition, these provisions may make it difficult and
expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our Initial
Stockholder, our management
and/or our
board of directors. Public stockholders who might desire to
participate in these types of transactions may not have an
opportunity to do so, even if the transaction is favorable to
stockholders. These anti-takeover provisions could substantially
impede the ability of public stockholders to benefit from a
change in control or change our management and board of
directors and, as a result, may adversely affect the market
price of our common stock and your ability to realize any
potential change of control premium. See “Description of
Capital Stock — Anti-Takeover Effects of Delaware Law,
Our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws.”
Certain
of our stockholders have the right to engage or invest in the
same or similar businesses as us.
The Initial Stockholder and certain other affiliates of Fortress
and permitted transferees (referred to in this prospectus,
collectively, as the “Fortress Stockholders”) have
other investments and business activities in addition to their
ownership of us. Under our amended and restated certificate of
incorporation, the Fortress Stockholders have the right, and
have no duty to abstain from exercising such right, to engage or
invest in the same or similar businesses as us, do business with
any of our clients, customers or vendors or employ or otherwise
engage any of our officers, directors or employees. If the
Fortress Stockholders or any of their officers, directors or
employees acquire knowledge of a potential transaction that
could be a corporate opportunity, they have no duty, to the
fullest extent permitted by law, to offer such corporate
opportunity to us, our stockholders or our affiliates.
In the event that any of our directors and officers who is also
a director, officer or employee of any of the Fortress
Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge
was not acquired solely in such person’s capacity as a
director or officer of RailAmerica and such person acts in good
faith, then to the fullest extent permitted by law such person
is deemed to have fully satisfied such person’s fiduciary
duties owed to us and is not liable to us, if the Fortress
Stockholder pursues or acquires the corporate opportunity or if
the Fortress Stockholder does not present the corporate
opportunity to us. See “Certain Relationships and Related
Party Transactions — Stockholders Agreement.”
Risks
Related to this Offering
An
active trading market for our common stock may never develop or
be sustained.
We intend to submit an application to have our common stock
listed on the New York Stock Exchange, or the NYSE, under the
symbol “RA.” However, we cannot assure you that our
common stock will be approved for listing on the NYSE or, if
approved, that an active trading market of our common stock will
develop on that exchange or elsewhere or, if developed, that any
market will be sustained. Accordingly, we cannot assure you of
the likelihood that an active trading market for our common
stock will develop or be maintained, the liquidity of any
trading market, your ability to sell your shares of common stock
when desired, or the prices that you may obtain for your shares.
The
market price and trading volume of our common stock may be
volatile, which could result in rapid and substantial losses for
our stockholders.
Even if an active trading market develops, the market price of
our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to
occur. The initial public offering price of our common stock
will be determined by negotiation between us, the Initial
Stockholder and the representatives of the underwriters based on
a number of factors and may not be indicative of prices that
will prevail in the open market following completion of this
offering. If the market price of our common stock declines
significantly, you may be unable to resell your shares at or
above your purchase price, if at all. We cannot assure you that
the market price of our common stock will not fluctuate or
decline significantly in the future. Some of the factors that
could negatively affect our share price or result in
fluctuations in the price or trading volume of our common stock
include:
•
variations in our quarterly or annual operating results;
•
changes in our earnings estimates (if provided) or differences
between our actual financial and operating results and those
expected by investors and analysts;
•
the contents of published research reports about us or our
industry or the failure of securities analysts to cover our
common stock after this offering;
additions or departures of key management personnel;
•
any increased indebtedness we may incur in the future;
•
announcements by us or others and developments affecting us;
•
actions by institutional stockholders;
•
litigation and governmental investigations;
•
changes in market valuations of similar companies;
•
speculation or reports by the press or investment community with
respect to us or our industry in general;
•
increases in market interest rates that may lead purchasers of
our shares to demand a higher yield;
•
announcements by us or our competitors of significant contracts,
acquisitions, dispositions, strategic partnerships, joint
ventures or capital commitments;
•
changes or proposed changes in laws or regulations affecting the
railroad industry or enforcement of these laws and regulations,
or announcements relating to these matters; and
•
general market, political and economic conditions, including any
such conditions and local conditions in the markets in which our
customers are located.
These broad market and industry factors may decrease the market
price of our common stock, regardless of our actual operating
performance. The stock market in general has from time to time
experienced extreme price and volume fluctuations, including in
recent months. In addition, in the past, following periods of
volatility in the overall market and the market price of a
company’s securities, securities class action litigation
has often been instituted against these companies. This
litigation, if instituted against us, could result in
substantial costs and a diversion of our management’s
attention and resources.
Future
offerings of debt or equity securities by us may adversely
affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further
increase our capital resources by issuing additional shares of
our common stock or offering debt or additional equity
securities, including commercial paper, medium-term notes,
senior or subordinated notes or shares of preferred stock.
Issuing additional shares of our common stock or other
additional equity offerings may dilute the economic and voting
rights of our existing stockholders or reduce the market price
of our common stock, or both. Upon liquidation, holders of such
debt securities and preferred shares, if issued, and lenders
with respect to other borrowings, would receive a distribution
of our available assets prior to the holders of our common
stock. Preferred shares, if issued, could have a preference with
respect to liquidating distributions or a preference with
respect to dividend payments that could limit our ability to pay
dividends to the holders of our common stock. Because our
decision to issue securities in any future offering will depend
on market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of our
future offerings. Thus, holders of our common stock bear the
risk of our future offerings reducing the market price of our
common stock and diluting their share holdings in us. See
“Description of Capital Stock.”
The
market price of our common stock could be negatively affected by
sales of substantial amounts of our common stock in the public
markets.
After this offering, there will
be shares
of common stock outstanding. There will
be shares
issued and outstanding if the underwriters exercise their
over-allotment option in full. Of our issued and outstanding
shares, all the common stock sold in this offering will be
freely transferable, except for any shares held by our
“affiliates,” as that term is defined in Rule 144
under the Securities Act of 1933, as amended, or the Securities
Act. Following completion of the offering,
approximately % of our outstanding common stock
(or % if the underwriters’ over-allotment option
is exercised in full) will be held by the
Initial Stockholder and members of our management and employees,
and can be resold into the public markets in the future in
accordance with the requirements of Rule 144. See
“Shares Eligible For Future Sale.”
We and our executive officers, directors and stockholders
(including the Initial Stockholder) holding in the aggregate
approximately % of our issued and
outstanding common stock have agreed with the underwriters that,
subject to limited exceptions, for a period
of days after the date of this
prospectus, we and they will not directly or indirectly offer,
pledge, sell, contract to sell, sell any option or contract to
purchase or otherwise dispose of any common stock or any
securities convertible into or exercisable or exchangeable for
common stock, or in any manner transfer all or a portion of the
economic consequences associated with the ownership of common
stock, or cause a registration statement covering any common
stock to be filed, without the prior written consent of the
representatives. The representatives may waive these
restrictions at their discretion. Shares of common stock held by
our employees, other than our officers who are subject to the
lockup provisions referred to above, are not subject to these
restrictions and may be sold without restriction at any time.
Pursuant to our Stockholders Agreement that we will enter into
prior to completion of this offering, the Initial Stockholder
and certain of its affiliates and permitted third-party
transferees will have the right, in certain circumstances, to
require us to register their
approximately million shares
of our common stock under the Securities Act for sale into the
public markets. Upon the effectiveness of such a registration
statement, all shares covered by the registration statement will
be freely transferable. See “Certain Relationships and
Related Party Transactions — Stockholders
Agreement.”
In addition, following the completion of this offering, we
intend to file a registration statement on
Form S-8
under the Securities Act to register an aggregate
of shares
of our common stock reserved for issuance under our incentive
plans. We may increase the number of shares registered for this
purpose at any time. Subject to any restrictions imposed on the
shares and options granted under our incentive plans, shares
registered under the registration statement on
Form S-8
will be available for sale into the public markets subject to
the -day
lock-up
agreements referred to above.
The market price of our common stock may decline significantly
when the restrictions on resale by our existing stockholders
lapse. A decline in the price of our common stock might impede
our ability to raise capital through the issuance of additional
common stock or other equity securities.
The
future issuance of additional common stock in connection with
our incentive plans, acquisitions or otherwise will dilute all
other shareholdings.
After this offering, assuming the exercise in full by the
underwriters of their over-allotment option, we will have an
aggregate
of shares
of common stock authorized but unissued and not reserved for
issuance under our incentive plans. We may issue all of these
shares of common stock without any action or approval by our
stockholders, subject to certain exceptions. We also intend to
continue to evaluate acquisition opportunities and may issue
common stock in connection with these acquisitions. Any common
stock issued in connection with our incentive plans,
acquisitions, the exercise of outstanding stock options or
otherwise would dilute the percentage ownership held by the
investors who purchase common stock in this offering.
Investors
in this offering will suffer immediate and substantial
dilution.
The initial public offering price of our common stock will be
substantially higher than the as adjusted net tangible book
value per share issued and outstanding immediately after this
offering. Our net tangible book value per share as of
June 30, 2009 was approximately
$ and represents the amount of
book value of our total tangible assets minus the book value of
our total liabilities, excluding deferred gains, divided by the
number of our shares of common stock then issued and
outstanding. Investors who purchase common stock in this
offering will pay a price per share that substantially exceeds
the net tangible book value per share of common stock. If you
purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution of
$ in the net tangible book value
per share, based upon the initial public offering price of
$ per share (the midpoint of
the price range set forth on the cover of this prospectus).
Investors who purchase common stock in this offering will have
purchased % of the shares issued and outstanding
immediately after the offering, but will have paid %
of the total consideration for those shares.
We
will have broad discretion in the use of a significant part of
the net proceeds from this offering and may not use them
effectively.
Our management currently intends to use the net proceeds from
this offering in the manner described in “Use of
Proceeds” and will have broad discretion in the application
of a significant part of the net proceeds from this offering.
The failure by our management to apply these funds effectively
could affect our ability to operate and grow our business.
As a
public company, we will incur additional costs and face
increased demands on our management.
As a public company with shares listed on a U.S. exchange,
we will need to comply with an extensive body of regulations
that did not apply to us previously, including provisions of the
Sarbanes Oxley Act, regulations of the SEC and requirements of
the NYSE. We expect these rules and regulations to increase our
legal and financial compliance costs and to make some activities
more time-consuming and costly. For example, as a result of
becoming a public company, we intend to add independent
directors, create additional board committees and adopt certain
policies regarding internal controls and disclosure controls and
procedures. In addition, we will incur additional costs
associated with our public company reporting requirements and
maintaining directors’ and officers’ liability
insurance. We are currently evaluating and monitoring
developments with respect to these rules, and we cannot predict
or estimate the amount of additional costs we may incur or the
timing of such costs. Furthermore, our management will have
increased demands on its time in order to ensure we comply with
public company reporting requirements and the compliance
requirements of the Sarbanes-Oxley Act of 2002, as well as the
rules subsequently implemented by the SEC and the applicable
stock exchange requirements of the NYSE.
We
will be required by Section 404 of the Sarbanes-Oxley Act
to evaluate the effectiveness of our internal controls by the
end of fiscal 2010, and we cannot predict the outcome of that
effort.
As a
U.S.-listed
public company, we will be required to comply with
Section 404 of the Sarbanes-Oxley Act by December 31,2010. Section 404 will require that we evaluate our
internal control over financial reporting to enable management
to report on, and our independent auditors to audit as of the
end of the next fiscal year, the effectiveness of those
controls. While we have begun the lengthy process of evaluating
our internal controls, we are in the early phases of our review
and will not complete our review until well after this offering
is completed. We cannot predict the outcome of our review at
this time. During the course of our review, we may identify
control deficiencies of varying degrees of severity, and we may
incur significant costs to remediate those deficiencies or
otherwise improve our internal controls. As a public company, we
will be required to report control deficiencies that constitute
a “material weakness” in our internal control over
financial reporting. We would also be required to obtain an
audit report from our independent auditors regarding the
effectiveness of our internal controls over financial reporting.
If we fail to implement the requirements of Section 404 in
a timely manner, we may be subject to sanctions or investigation
by regulatory authorities, including the SEC or the NYSE.
Furthermore, if we discover a material weakness or our auditor
does not provide an unqualified audit report, our share price
could decline and our ability to raise capital could be impaired.
Risks
Related to Taxation
Our
ability to use net operating loss and tax credit carryovers and
certain built-in losses to reduce future tax payments is limited
by provisions of the Internal Revenue Code, and may be subject
to further limitation as a result of the transactions
contemplated by this offering.
Section 382 and 383 of the Code contain rules that limit
the ability of a company that undergoes an ownership change,
which is generally any change in ownership of more than 50% of
its stock over a three-year period, to utilize its net operating
loss and tax credit carryforwards and certain built-in losses
recognized in years after the ownership change. These rules
generally operate by focusing on ownership changes involving
stockholders owning directly or indirectly 5% or more of the
stock of a company and any change in ownership arising from a
new issuance of stock by the company. Generally, if an ownership
change occurs, the yearly taxable income limitation on the use
of net operating loss and tax credit carryforwards and certain
built-in losses is equal to the product of the applicable long
term tax exempt rate and the value of the company’s stock
immediately before the ownership change. As a result of
transactions that have taken place in the past with respect to
our common stock, our use of our $120 million of federal
net operating losses, our $95 million of tax credits and
certain built-in losses is subject to annual taxable income
limitations. As a result, we may be unable to offset our taxable
income with losses, or our tax liability with credits, before
such losses and credits expire and therefore would incur larger
federal income tax liability.
In addition, it is possible that the transactions described in
this offering, either on a standalone basis or when combined
with future transactions (including issuances of new shares of
our common stock and sales of shares of our common stock), will
cause us to undergo one or more additional ownership changes. In
that event, we generally would not be able to use our pre-change
loss or credit carryovers or certain built-in losses prior to
such ownership change to offset future taxable income in excess
of the annual limitations imposed by Sections 382 and 383
and those attributes already subject to limitations (as a result
of our prior ownership changes) may be subject to more stringent
limitations.
Gain
recognized by
Non-U.S. Holders
on the sale or other disposition of our common stock may be
subject to U.S. federal income tax.
We expect to be treated as a “United States real property
holding corporation” under section 897(c) of the Code,
or USRPHC. Generally, stock issued by a corporation that has
been a USRPHC at any time during the preceding five years (or a
Non-U.S. Holder’s
holding period for such securities, if shorter) is treated as a
United States real property interest, or USRPI, and gain
recognized by a
Non-U.S. Holder
on the sale or other disposition of stock is subject to regular
U.S. federal income tax, as if such gain were effectively
connected with the conduct by such holder of a U.S. trade
or business. Shares of our common stock will not be treated as
USRPIs in the hands of a
Non-U.S. Holder
provided that: (i) our common stock is regularly traded on
an established securities market, and (ii) such
Non-U.S. Holder
has not owned or been deemed to own (directly or under certain
constructive ownership rules) more than 5% of our common stock
at any time during the
5-year
period ending on the date of the sale or other taxable
disposition. No assurance can be given that our common stock
will continue to be regularly traded on an established
securities market in the future. If gain recognized by a
Non-U.S. Holder
from the sale or other disposition of our common stock is
subject to regular federal income tax under these rules and our
common stock is not regularly traded on an established
securities market at such time, the transferee of such common
stock may be required to deduct and withhold a tax equal to
10 percent of the amount realized on the sale or other
disposition, unless certain exceptions apply. Any tax withheld
may be credited against the U.S. federal income tax owed by
the
Non-U.S. Holder
for the year in which the sale or other disposition occurs.
Some of the statements under “Prospectus Summary,”“Risk Factors,”“Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”“Industry,”“Business” and elsewhere in this
prospectus may contain forward-looking statements that reflect
our current views with respect to, among other things, future
events and financial performance. You can identify these
forward-looking statements by the use of forward-looking words
such as “outlook,”“believes,”“expects,”“potential,”“continues,”“may,”“will,”“should,”“could,”“seeks,”“approximately,”“predicts,”“intends,”“plans,”“estimates,”“anticipates,”“target,”“projects,”“contemplates” or the negative
version of those words or other comparable words. Any
forward-looking statements contained in this prospectus are
based upon our historical performance and on our current plans,
estimates and expectations in light of information currently
available to us. The inclusion of this forward-looking
information should not be regarded as a representation by us,
Fortress, the Initial Stockholder, the underwriters or any other
person that the future plans, estimates or expectations
contemplated by us will be achieved. Such forward-looking
statements are subject to various risks and uncertainties and
assumptions relating to our operations, financial results,
financial condition, business, prospects, growth strategy and
liquidity. Accordingly, there are or will be important factors
that could cause our actual results to differ materially from
those indicated in these statements. We believe that these
factors include, but are not limited to, our relationships with
Class I railroads and other connecting carriers, our
ability to obtain railcars and locomotives from other providers
on which we are currently dependent, legislative and regulatory
developments including rulings by the Surface Transportation
Board or the Railroad Retirement Board, strikes or work
stoppages by our employees, our transportation of hazardous
materials by rail, rising fuel costs, acquisition risks,
competitive pressures within the industry, risks related to the
geographic markets in which we operate and other factors
described in the section entitled “Risk Factors”
beginning on page 11 of this prospectus. These factors
should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are
included in this prospectus. The forward-looking statements made
in this prospectus relate only to events as of the date on which
the statements are made. We do not undertake any obligation to
publicly update or review any forward-looking statement except
as required by law, whether as a result of new information,
future developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, our actual results may vary materially from what we
may have expressed or implied by these forward-looking
statements. We caution that you should not place undue reliance
on any of our forward-looking statements. You should
specifically consider the factors identified in this prospectus
that could cause actual results to differ before making an
investment decision to purchase our common stock. Furthermore,
new risks and uncertainties arise from time to time, and it is
impossible for us to predict those events or how they may affect
us.
The net proceeds to us from the sale of
the shares
of common stock offered hereby are estimated to be approximately
$ , assuming an initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) and after deducting the estimated underwriting
discounts and commissions and offering expenses payable by us.
We will not receive any proceeds from the sale of our common
stock by the Initial Stockholder, including any shares sold by
the Initial Stockholder pursuant to the underwriters’
over-allotment option. We intend to use the net proceeds from
this offering for working capital and other general corporate
purposes, which will include the repayment or refinancing of a
portion of outstanding indebtedness as well as potential
strategic investments and acquisitions.
We intend to use a portion of the net proceeds from this
offering to redeem up to $
aggregate principal amount of our senior secured notes described
below in “Description of Certain Indebtedness” at a
price equal to 103% of the principal amount, plus accrued and
unpaid interest to, but not including, the redemption date. The
amounts borrowed under the senior secured notes on June 23,2009 were used to repay in full our bridge loan facilities and
accrued interest thereon, pay costs of terminating interest rate
swap agreements entered into in connection with the loan
facilities, and for general corporate purposes. The senior
secured notes are scheduled to mature on July 1, 2017 and
bear an interest rate of 9.25%. See “Description of Certain
Indebtedness — 9.25% Senior Secured Notes.”
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) would increase (decrease) the net proceeds to us
from this offering by
$ million, assuming the
number of shares of common stock offered by us, as set forth on
the cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for the
operation and growth of our business. Our ability to pay
dividends to holders of our common stock is limited as a
practical matter by the terms of the indenture governing our
senior secured notes and the ABL Facility. See “Description
of Certain Indebtedness.”
Any future determination to pay dividends on our common stock
will be at the discretion of our board of directors and will
depend upon many factors, including our financial position,
results of operations, liquidity, legal requirements,
restrictions that may be imposed by our indenture and ABL
Facility and other factors deemed relevant by our board of
directors.
The following table sets forth our capitalization as of
June 30, 2009:
•
on an actual basis, and;
•
on an as adjusted basis to give effect to the sale
of shares
of common stock by us in this offering, at an assumed offering
price of per share (the midpoint
of the price range set forth on the cover page of this
prospectus) and after deducting the underwriters’ discounts
and commissions and estimated offering and other expenses
payable by us, and the repayment of certain borrowings using a
portion of the net proceeds from this offering. In “Use of
Proceeds,” we describe how a change in the assumed offering
price could affect the net proceeds available for debt payment.
This table contains unaudited information and should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
consolidated historical financial statements and the related
notes included elsewhere in this prospectus.
Other long-term debt, including current maturities
3,995
Total debt
713,884
Stockholders’ equity:
Common stock, $0.01 par value, 520,000 shares
authorized and 472,983 shares issued and outstanding,
actual; shares
authorized
and shares
issued and outstanding, as adjusted
5
Additional paid in capital and other
470,941
Retained earnings
49,771
Accumulated other comprehensive income (loss)
(37,683
)
Total stockholders’ equity
483,034
Total capitalization
$
1,196,918
(1)
In connection with the borrowing of the senior secured notes, we
had $25 million of undrawn availability under the ABL
Facility as of June 30, 2009, after taking into account
borrowing base limitations.
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price in this offering per share of our common
stock and the pro forma as adjusted net tangible book value per
share of our common stock upon consummation of this offering.
Net tangible book value per share represents the book value of
our total tangible assets less the book value of our total
liabilities divided by the number of shares of common stock then
issued and outstanding.
Our net tangible book value as of June 30, 2009, was
approximately $ million, or
approximately $ per share
based on
the shares
of common stock issued and outstanding as of such date. After
giving effect to our sale of common stock in this offering at
the initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover page of this prospectus), and
after deducting estimated underwriting discounts and estimated
expenses related to this offering, our pro forma as adjusted net
tangible book value as of June 30, 2009 would have been
$ , or
$ per share (assuming no exercise
of the underwriters’ over-allotment option). This
represents an immediate and substantial dilution of
$ per share to new investors
purchasing common stock in this offering. Sales of shares by the
Initial Stockholder in this offering do not affect our net
tangible book value. The following table illustrates this
dilution per share:
Assumed initial public offering price per share
$
Net tangible book value per share as of June 30, 2009
Decrease in net tangible book value per share attributable to
this offering
Pro forma as adjusted net tangible book value per share after
giving effect to this offering
Dilution per share to new investors in this offering
$
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) would increase (decrease) our net tangible book
value by $ million, the pro
forma net tangible book value (deficit) per share after this
offering by $ per share and the
decrease in net tangible book value (deficit) to new investors
in this offering by $ per share,
assuming the number of shares of common stock offered by us, as
set forth on the cover page of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
The following table summarizes, on a pro forma basis as of
June 30, 2009, the differences between the number of shares
of common stock purchased from us, the total price and the
average price per share paid by existing stockholders and by the
new investors in this offering, before deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us, at an assumed initial public offering
price of $ per share (the midpoint
of the price range set forth on the cover page of this
prospectus).
Shares Purchased
Total Contribution
Average
Price per
Number
Percent
Amount
Percent
Share
(In thousands)
(In thousands)
Existing Stockholders
New investors
Total
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) would increase (decrease) total consideration paid
by new investors in this offering, total consideration paid by
all stockholders and the average price per share paid by all
stockholders by $ million,
$ million and
$ , respectively, assuming the
number of shares of common stock offered by us, as set forth on
the cover page of this prospectus, remains the same, and after
deducting underwriting discounts and commissions and other
estimated offering and other expenses.
The consolidated financial information labeled as
“predecessor” includes financial reporting periods
prior to the merger on February 14, 2007, in which we were
acquired by certain private equity funds managed by affiliates
of Fortress (the “Acquisition”) and the consolidated
financial information labeled as “successor” includes
financial reporting periods subsequent to the Acquisition.
The selected consolidated statement of operations data for the
predecessor year ended December 31, 2006, the predecessor
period January 1, 2007 through February 14, 2007, the
successor period February 15, 2007 through
December 31, 2007 and the successor year ended
December 31, 2008 and the selected successor consolidated
balance sheet data as of December 31, 2007 and 2008 have
been derived from our audited financial statements included
elsewhere in this prospectus. The selected consolidated
financial data as of and for the predecessor years ended
December 31, 2004 and 2005 and the selected predecessor
consolidated balance sheet data as of December 31, 2006
have been derived from our audited financial statements that are
not included in this prospectus. The selected successor
consolidated statement of operations data for the six months
ended June 30, 2008 and 2009 and the selected successor
consolidated balance sheet data as of June 30, 2009 have
been derived from our unaudited financial statements included
elsewhere in this prospectus.
The unaudited financial statements have been prepared on the
same basis as the audited financial statements and, in the
opinion of our management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the information set forth herein. Operating
results for the six months ended June 30, 2009 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2009 or for any future period.
The selected consolidated financial data should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
consolidated financial statements and related notes included
elsewhere in this prospectus.
This management’s discussion and analysis of financial
condition and results of operations contains forward-looking
statements that involve risks and uncertainties. Please see
“Special Note Regarding Forward-Looking Statements”
for a discussion of the uncertainties, risks and assumptions
associated with these statements. You should read the following
discussion in conjunction with our historical consolidated
financial statements and the notes thereto appearing elsewhere
in this prospectus, including “Capitalization,”“Summary Consolidated Financial Data” and
“Selected Historical Consolidated Financial Data.” The
results of operations for the periods reflected herein are not
necessarily indicative of results that may be expected for
future periods, and our actual results may differ materially
from those discussed in the forward-looking statements as a
result of various factors, including but not limited to those
listed under “Risk Factors” and included elsewhere in
this prospectus. Except where the context otherwise requires,
the terms “we,”“us,” or “our”
refer to the business of RailAmerica, Inc. and its consolidated
subsidiaries.
Historical information has been reclassified to conform to
the presentation of discontinued operations. The results of
operations and cash flows of the Predecessor and Successor
entities, as defined in the consolidated financial statements
included herein and notes thereto, for the periods ending
February 14, 2007 and December 31, 2007, respectively,
have been combined for comparison purposes to reflect twelve
months of data for 2007.
General
Our
Business
We believe that we are the largest owner and operator of short
line and regional freight railroads in North America, measured
in terms of total track-miles, operating a portfolio of 40
individual railroads with approximately 7,500 miles of
track in 27 states and three Canadian provinces. In
addition, we provide non-freight services such as railcar
storage, demurrage, leases of equipment and real estate leases
and use fees.
Managing
Business Performance
We manage our business performance by (i) growing our
freight and non-freight revenue, (ii) driving financial
improvements through a variety of cost savings initiatives, and
(iii) continuing to focus on safety to lower the costs and
risks associated with operating our business.
Growth in carloads and increases in revenue per carload have a
positive effect on freight revenue. Carloads have decreased in
2008 and 2009 due to the global economic slowdown, however, the
diversity in our customer base helps mitigate our exposure to
severe downturns in local economies. We do not expect carload
volumes to recover for the remainder of 2009. We continue to
implement more effective pricing by centralizing and carefully
analyzing pricing decisions and expect revenue per carload to
remain stable for 2009.
Non-freight services offered to our rail customers include
switching (or managing and positioning railcars within a
customer’s facility), storing customers’ excess or
idle railcars on inactive portions of our rail lines, third
party railcar repair, and car hire and demurrage (allowing our
customers and other railroads to use our railcars for storage or
transportation in exchange for a daily fee). Each of these
services leverages our existing customer relationships and
generates additional revenue with minimal capital investment.
Management also intends to grow non-freight revenue from users
of our land holdings for non-transportation purposes.
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.
Management is focused on improving operating efficiency and
lowering costs. Many functions such as pricing, purchasing,
capital spending, finance, insurance, real estate and other
administrative functions are
centralized, which enables us to achieve cost efficiencies and
leverage the experience of senior management in commercial,
operational and strategic decisions. A number of cost savings
initiatives have been broadly implemented at all of our
railroads targeting lower fuel consumption, safer operations,
more efficient locomotive utilization and lower costs for third
party services, among others.
Commodity
Mix
Each of our 40 railroads operates independently with its own
customer base. Our railroads are spread out geographically and
carry diverse commodities. For the six months ended
June 30, 2009, coal, agricultural products and chemicals
accounted for 22%, 14% and 10%, respectively, of our carloads.
As a percentage of our freight revenue, which is impacted by
several factors including the length of the haul, agricultural
products, chemicals and coal generated 14%, 14% and 11%,
respectively, for the six months ended June 30, 2009.
Overview
Operating revenue in the six months ended June 30, 2009,
was $206.5 million, compared with $255.2 million in
the six months ended June 30, 2008. The net decrease in our
operating revenue was primarily due to decreased carloads and
lower fuel surcharges, partially offset by negotiated rate
increases and an increase in our non-freight revenue.
Freight revenue decreased $55.5 million, or 24.7%, in the
six months ended June 30, 2009, compared with the six
months ended June 30, 2008, primarily due to a decrease in
carloads of 25.6%. Non-freight revenue increased
$6.8 million, or 22.5%, in the six months ended
June 30, 2009, compared with the six months ended
June 30, 2008, primarily due to increases in car storage
fees, real estate rental revenue and demurrage charges.
Our operating ratio, defined as total operating expenses divided
by total operating revenue, was 78.1% in the six months ended
June 30, 2009, compared with an operating ratio of 83.8% in
the six months ended June 30, 2008, primarily due to a
decrease in diesel fuel prices, reductions in labor expenses,
maintenance expenditures for right of way improvements as a
result of our cost savings initiatives as discussed under
“— Results of Operations” and a reduction in
car hire expense. Operating expenses were $161.2 million in
the six months ended June 30, 2009, compared with
$214.0 million in the six months ended June 30, 2008,
a decrease of $52.8 million, or 24.7%.
Net income in the six months ended June 30, 2009, was
$19.2 million, compared with $4.8 million in the six
months ended June 30, 2008. Income from continuing
operations in the six months ended June 30, 2009, was
$6.3 million, compared with $5.1 million in the six
months ended June 30, 2008.
During the six months ended June 30, 2009, we used
$43.4 million in cash from operating activities, of which
$55.8 million related to the termination of our interest
rate swap. We purchased $25.8 million of property and
equipment. We received $19.6 million in cash from the sale
of assets.
Results
of Operations
Comparison
of Operating Results for the Six Months Ended June 30, 2009
and 2008
Operating
Revenue
Operating revenue decreased by $48.7 million, or 19.1%, to
$206.5 million in the six months ended June 30, 2009,
from $255.2 million in the six months ended June 30,2008. Total carloads during the six month period ending
June 30, 2009 decreased 25.6% to 414,303 in 2009, from
556,689 in the six months ended June 30, 2008. The decrease
in operating revenue was primarily due to the decrease in
carloads, the weakening of the Canadian dollar, and lower fuel
surcharges, which declined $4.6 million from the prior
period, partially offset by negotiated rate increases.
The increase in the average revenue per carload to $409 in the
six months ended June 30, 2009, from $404 in the comparable
period in 2008 was primarily due to rate growth and commodity
mix.
Non-freight revenue increased by $6.8 million, or 22.6%, to
$36.9 million in the six months ended June 30, 2009
from $30.1 million in the six months ended June 30,2008, primarily due to increases in car storage fees, real
estate rental revenue and demurrage charges. In addition, during
the six months ended June 30, 2009, we restructured a
Class I contract on one of our Canadian railroads which
resulted in the revenue shifting from freight revenue to
non-freight revenue.
The following table compares our freight revenue, carloads and
average freight revenue per carload for the six months ended
June 30, 2009 and 2008:
(Dollars in thousands, except carloads and average freight
revenue per carload)
Agricultural Products
$
24,546
57,079
$
430
$
28,960
71,988
$
402
Chemicals
23,023
40,031
575
31,539
56,909
554
Coal
18,958
89,535
212
19,713
92,420
213
Non-Metallic Minerals and Products
16,058
38,789
414
19,966
49,812
401
Pulp, Paper and Allied Products
15,943
30,910
516
20,197
40,158
503
Forest Products
13,811
23,926
577
19,988
38,037
525
Food or Kindred Products
13,158
26,154
503
12,441
26,751
465
Other
11,570
34,221
338
14,816
51,024
290
Metallic Ores and Metals
10,805
19,537
553
29,113
52,907
550
Petroleum
9,740
21,351
456
10,126
22,831
444
Waste and Scrap Materials
9,323
25,412
367
15,054
41,672
361
Motor Vehicles
2,671
7,358
363
3,223
12,180
265
Total
$
169,606
414,303
$
409
$
225,136
556,689
$
404
Freight revenue was $169.6 million in the six months ended
June 30, 2009, compared to $225.1 million in the six
months ended June 30, 2008, a decrease of
$55.5 million or 24.7%. This decrease was primarily due to
the net effect of the following:
•
Agricultural products revenue decreased $4.4 million or 15%
primarily due to customers in Kansas holding grain shipments in
anticipation of more favorable grain prices;
•
Chemicals revenue decreased $8.5 million or 27% primarily
due to a customer in South Carolina who filed for bankruptcy in
2008 and a decline in chemical shipments in Michigan as a result
of the economic downturn;
•
Coal revenue decreased $0.8 million or 4% primarily due to
reduced shipments in Canada and the weakening of the Canadian
dollar;
•
Non-metallic minerals and products revenue decreased
$3.9 million or 20% primarily due to a decrease in
limestone moves in Alabama and Texas as a result of the downturn
in the construction industry;
•
Pulp, paper and allied products revenue decreased
$4.3 million or 21% due to decreased carloads in Alabama
and Canada due to a weak demand for paper products and the
weakening of the Canadian dollar;
•
Forest products revenue decreased $6.2 million or 31%
primarily due to volume declines in the Pacific Northwest
stemming from the continued downturn in the housing and
construction markets;
•
Food or kindred products revenue increased $0.7 million or
6% primarily due to negotiated rate increases and increased
shipments of tomato products and beer in California, partially
offset by a delayed tomato harvest in California;
Other revenue decreased $3.2 million or 22% due to wind
turbine component moves in Illinois in 2008 that did not recur
until the second quarter of 2009, a decrease in bridge traffic
(where we provide a pass through connection between one
Class I railroad and another railroad without freight
originating or terminating on the line) in Canada from the
restructuring of a Class I contract during the
six months ended June 30, 2009, which resulted in the
freight revenue shifting to non-freight revenue and the
weakening of the Canadian dollar;
•
Metallic ores and metals revenue decreased $18.3 million or
63% primarily due to the temporary closure of a customer
facility and a production curtailment at a customer plant, both
located in Texas and a decline in carloads resulting from weak
steel and pig iron markets which affected customers in all
geographic regions of the country;
•
Petroleum revenue decreased $0.4 million or 4% primarily
due to a decrease in liquefied petroleum gas, or LPG, cars in
California as a result of a decline in demand from business and
residential customers, partially offset by an increase in moves
of LPG cars to storage for a customer in Arizona;
•
Waste and scrap materials revenue decreased $5.7 million or
38% primarily due to a decline in construction debris moves in
the Pacific Northwest and a loss of traffic to a competitor in
mid 2008; and
•
Motor vehicles revenue decreased $0.6 million or 17%
primarily due to reduced auto shipments in the Midwest,
partially offset by an increase in the negotiated rate per
carload.
Operating
Expenses
The following table sets forth the operating revenue and
expenses, by natural category, for our consolidated operations
for the periods indicated (dollars in thousands).
The following table sets forth the reconciliation of the
functional categories presented in our consolidated statement of
operations to the natural categories discussed below. Management
utilizes the natural category format of expenses when reviewing
and evaluating our performance and believes that it provides a
more relevant basis for discussion of the changes in operations
(in thousands).
Operating expenses decreased to $161.2 million in the six
months ended June 30, 2009, from $214.0 million in the
six months ended June 30, 2008. The operating ratio was
78.1% in 2009 compared to 83.8% in 2008. The improvement in the
operating ratio was primarily due to our continuing cost saving
initiatives, which include reductions in labor expenses,
maintenance expenditures for right of way improvements in
addition to a reduction in car hire expense and a decrease in
fuel prices in the six months ended June 30, 2009 as
compared to the same period in 2008. During the six months ended
June 30, 2009 and 2008, operating expenses also include
$0.6 million and $1.4 million, respectively, of costs
related to the restructuring and relocation of our corporate
headquarters to Jacksonville, Florida. The costs incurred during
the six months ended June 30, 2009 and 2008 are included
within labor and benefits ($0.4 million and
$0.8 million, respectively) and purchased services
($0.2 million and $0.6 million, respectively).
The net decrease in operating expenses was due to the following:
•
Labor and benefits expense decreased $8.1 million, or 11%
primarily due to a reduction in labor force as a result of the
decline in carload volumes and additional cost savings
initiatives implemented by management. Other benefits expense
decreased as the six months ended June 30, 2008, included
accrued termination benefits related to the restructuring and
relocation of corporate headquarters. Health insurance costs
continued to decrease in 2009 as a result of a change to our
health insurance provider in early 2008 and an increase in
employee contributions;
•
Equipment rents expense decreased $5.2 million, or 22%
primarily due to a reduction in car hire expense as a result of
the decline in carload volume;
•
Purchased services expense decreased $2.3 million, or 13%
primarily due to cost reduction initiatives implemented by
management during 2009;
•
Diesel fuel expense decreased $24.7 million, or 62%
primarily due to lower average fuel costs of $1.72 per gallon in
2009 compared to $3.40 per gallon in 2008, resulting in a
$13.8 million decrease in fuel expense and a favorable
consumption variance of $10.7 million;
Casualties and insurance expense decreased $0.5 million, or
5% primarily due to a decrease in FRA reportable train accidents
to 13 in the six months ended June 30, 2009 from 26 in the
six months ended June 30, 2008;
•
Materials expense increased $0.2 million, or 4% primarily
due to an increase in car repair material purchases, partially
offset by a decrease in locomotive materials as a result of
fewer repairs;
•
Joint facilities expense decreased $4.3 million, or 65%
primarily due to the decline in carload volume;
•
Other expenses decreased $10.0 million, or 55% primarily
due to a reduction in expense as a result of the execution of
the Track Maintenance Agreement in 2009 as mentioned previously.
For the six months ended June 30, 2009, the Shipper paid
for $8.4 million of maintenance expenditures;
•
Asset sales resulted in net losses (gains) of $1.0 million
and $(0.1) million in the six months ended June 30,2009 and 2008, respectively. The gain on sale of
$0.1 million in the six months of 2008 is primarily due to
easement sales along our corridor of track. During the six
months ended June 30, 2009, we sold a portion of track
owned by the Central Railroad of Indianapolis at a price set by
the STB of $0.4 million, which resulted in a loss on
disposition of $1.5 million. We also sold a portion of
track owned by the Central Oregon and Pacific Railroad, known as
the Coos Bay Line, to the Port of Coos Bay for
$16.6 million. The carrying value of this line approximated
the sale price; and
•
Depreciation and amortization expense increased as a percentage
of operating revenue to 10.0% in the six months ended
June 30, 2009, from 7.7% in the six months ended
June 30, 2008 due to the capitalization and depreciation of
2008 and 2009 capital projects and the overall decrease in
operating revenue.
Other
Income (Expense) Items
Interest Expense. Interest expense, including
amortization of deferred financing costs, increased
$11.0 million to $35.3 million for the six months
ended June 30, 2009, from $24.3 million in the six
months ended June 30, 2008. This increase is primarily due
to an increase in the effective interest rate on our debt
beginning in the third quarter of 2008, which includes interest
expense on our interest rate swaps and the amortization of
deferred financing costs. The interest rate on the bridge credit
facility increased to LIBOR plus 4.00% from LIBOR plus 2.25%,
effective July 1, 2008 as part of the amendment to extend
the maturity of the loan. The amortization of deferred financing
costs increased from the prior year as a result of incurring
deferred financing costs associated with the 2008 amendment and
extension of the bridge credit facility. Interest expense
includes $8.6 million and $2.8 million of amortization
costs for the six months ended June 30, 2009 and 2008,
respectively. The six months ended June 30, 2009
amortization costs includes $1.0 million of swap
termination cost amortization. In connection with the repayment
of the bridge credit facility, we terminated our existing
interest rate swap. Per SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities,” since the
hedged cash flow transactions, future interest payments, did not
terminate, but continued with the senior secured notes, the fair
value of the hedge on the termination date in accumulated
comprehensive loss is amortized into interest expense over the
shorter of the remaining life of the swap or the maturity of the
notes.
Other Income (Loss). Other income (loss)
primarily relates to foreign exchange gains or losses associated
with the U.S. dollar term borrowing held by one of our
Canadian subsidiaries and the write-off of unamortized deferred
loan costs associated with our former bridge credit facility.
For the six months ended June 30, 2009, the exchange rates
increased, resulting in a foreign exchange gain of
$1.2 million, and for the six months ended June 30,2008, the exchange rates decreased, resulting in a foreign
exchange loss of $1.3 million, respectively. The six months
ended June 30, 2009 includes a $2.6 million loss
associated with the write-off of unamortized deferred loan costs.
Income Taxes. The effective income tax rates
for the six months ended June 30, 2009 and 2008 for
continuing operations were 27.2% and 67.5%, respectively. Our
overall effective tax rate for the six months ended
June 30, 2009, benefited from the resolution of the
Australian tax audit matter during the period which resulted in
a net tax benefit of approximately $2.5 million. Other
factors impacting the effective tax rate for
the six months ended June 30, 2009 included the adverse
impact of significant non-operational losses with minimal state
tax benefit, off-set by the favorable Canadian tax rate
differential for foreign exchange gains and the tax benefit
claimed for the loss on sale of a portion of track. Our overall
effective tax rate for the six months ended June 30, 2008
was adversely impacted by the significant non-operational losses
with minimal state tax benefit, the tax effects for repatriated
Canadian earnings, an accrual for uncertain tax positions, and
the revaluation of deferred taxes for changes in estimated state
apportionment factors. The rate for the six months ended
June 30, 2009, did not include a federal tax benefit
related to the track maintenance credit provisions enacted by
the American Jobs Creation Act of 2004 and extended by the Tax
Extenders and AMT Relief Act of 2008 due to the execution of the
Track Maintenance Agreement in 2009 as discussed above. The rate
for the six months ended June 30, 2008, did not include a
federal tax benefit related to the track maintenance credit
provisions as the Tax Extenders and AMT Relief Act of 2008 was
not enacted until the fourth quarter of 2008. For the six months
ended June 30, 2009 and 2008 we paid cash taxes of
$1.7 million and $4.0 million, respectively.
Discontinued Operations. In January 2006, we
completed the sale of our Alberta Railroad Properties for
$22.1 million in cash. In the first quarter of 2009, we
recorded an adjustment of $0.3 million, or
$0.2 million, after tax, through the gain on sale of
discontinued operations related to outstanding liabilities
associated with the disposed entities.
In August 2004, we completed the sale of our Australian
railroad, Freight Australia, to Pacific National for AUD
$285 million (US $204 million). During the six months
ended June 30, 2008, we incurred additional consulting
costs associated with sale of Freight Australia of
$0.5 million or $0.3 million, after tax, related to
the Australian Taxation Office, or ATO, audit of the
reorganization transactions undertaken by our Australian
subsidiaries prior to the sale. On May 14, 2009, we
received a notice from the ATO indicating that they would not be
taking any further action in relation to its audit of the
reorganization transactions. As a result, during the second
quarter of 2009, we removed the previously recorded tax reserves
resulting in a benefit to the continuing operations tax
provision of $2.5 million, an adjustment to the gain on
sale of discontinued operations of $12.3 million and
reduced our accrual for consulting fees resulting in a gain on
sale of discontinued operations of $0.7 million, or
$0.5 million, after tax.
The following table presents combined revenue and expense
information for the twelve months ended December 31, 2007.
The information was derived from the audited consolidated
financial statements of RailAmerica as the Predecessor for the
period January 1, 2007 through February 14, 2007 and
as Successor for the period from February 15, 2007 through
December 31, 2007.
The combined Statements of Operations are being presented solely
to assist comparisons across the years. The Successor period for
2007 in the combined Statements of Operations includes the
effect of fair value purchase accounting adjustments resulting
from the acquisition of RailAmerica on February 14, 2007.
Due to the change in the basis of accounting resulting from the
application of purchase accounting, the Predecessor’s
consolidated financial statements and the Successor’s
consolidated financial statements are not necessarily comparable.
The combined information is a non-US GAAP financial measure and
should not be used in isolation or substitution of the
Predecessor or Successor results. Such data is being presented
for informational purposes only and does not purport to
represent or be indicative of the results that actually would
have been obtained had the RailAmerica acquisition occurred on
January 1, 2007 or that may be obtained for any future
period.
Income (loss) from continuing operations before income taxes
15,362
32,511
(4,382
)
28,129
Provision for (benefit from) income taxes
1,599
(1,747
)
935
(812
)
Income (loss) from continuing operations
13,763
34,258
(5,317
)
28,941
Discontinued operations:
Gain (loss) on disposal of discontinued business
2,764
(756
)
—
(756
)
Net income (loss)
$
16,527
$
33,502
$
(5,317
)
$
28,185
Operating
Revenue
Operating revenue increased by $28.6 million, or 6%, to
$508.5 million in the year ended December 31, 2008,
from $479.9 million in the year ended December 31,2007. Total carloads decreased 9% to 1,056,710 in 2008, from
1,162,663 in 2007. The net increase in operating revenue is
primarily due to negotiated rate increases, higher fuel
surcharges, which increased $12.9 million from prior year,
partially offset by the decrease in carloads. The decrease in
carloads is primarily due to a decrease in bridge traffic at one
of our Canadian railroads and a decline in lumber and forest
product movements in the Pacific Northwest.
The increase in the average revenue per carload to $416 in the
year ended December 31, 2008, from $361 in the comparable
period in 2007 was primarily due to rate growth and higher fuel
surcharges.
Non-freight revenue increased by $7.9 million, or 13%, to
$68.4 million in the year ended December 31, 2008 from
$60.5 million in the year ended December 31, 2007.
This increase is primarily due to increases in storage fees,
real estate rental revenue and demurrage charges.
(Dollars in thousands, except carloads and average freight
revenue per carload)
Agricultural Products
$
61,193
143,730
$
426
$
54,633
147,363
$
371
Chemicals
60,082
104,791
573
56,692
113,234
501
Metallic Ores and Metals
52,378
93,419
561
43,419
87,658
495
Pulp, Paper and Allied Products
41,861
78,279
535
37,371
78,531
476
Forest Products
40,269
71,419
564
50,361
95,784
526
Non-Metallic Minerals and Products
38,553
93,690
411
39,095
109,465
357
Coal
37,364
177,847
210
36,653
189,471
193
Other
28,492
97,088
293
27,590
139,469
198
Waste and Scrap Materials
28,392
77,495
366
28,637
84,766
338
Food or Kindred Products
26,287
54,676
481
20,326
47,562
427
Petroleum
19,733
44,946
439
17,912
44,033
407
Motor Vehicles
5,437
19,330
281
6,689
25,327
264
Total
$
440,041
1,056,710
$
416
$
419,378
1,162,663
$
361
Freight revenue was $440.0 million in the year ended
December 31, 2008, compared to $419.4 million in the
year ended December 31, 2007, an increase of
$20.6 million or 5%. This increase was primarily due to the
net effect of the following:
•
Agricultural products revenue increased $6.6 million or 12%
primarily due to negotiated rate increases, higher fuel
surcharges, new business to move soybeans in North Carolina, and
an increase in carrot shipments in California, partially offset
by customers in Kansas, Illinois and Michigan holding grain
shipments in anticipation of more favorable grain prices;
•
Chemicals revenue increased $3.4 million or 6% primarily
due to negotiated rate increases, higher fuel surcharges and
additional haulage for existing customers in Ohio and Illinois.
Carloads were down 7% primarily due to reduced shipments with a
customer in South Carolina who filed for bankruptcy in early
2008 and special hauls in Alabama in 2007;
•
Metallic ores and metals revenue increased $9.0 million or
21% primarily due to negotiated rate increases, higher fuel
surcharges, plate, and rebar shipments in Alabama and North
Carolina, special pipe moves in Texas and Oklahoma and
additional copper anode moves for an existing customer in New
England, partially offset by a temporary closure of a customer
facility in Texas;
•
Pulp, paper and allied products revenue increased
$4.5 million or 12% primarily due to increased carloads in
Alabama to support a production change at a customer plant,
negotiated rate increases and higher fuel surcharges, partially
offset by a decline in carloads in New England due to weak
market conditions;
•
Forest products revenue decreased $10.1 million or 20%
primarily due to volume declines in the Pacific Northwest
stemming from the continued downturn in the housing and
construction markets;
•
Non-metallic minerals and products revenue decreased
$0.5 million or 1% primarily due to a decrease in cement
and limestone moves in the Southwest and Alabama as a result of
a downturn in the construction industry;
Coal revenue increased $0.7 million or 2% primarily due to
negotiated rate increases and increased business with existing
power customers in the Midwest and Canada, partially offset by a
6% decrease in carloads from reduced shipments in Indiana as a
result of coal shortages, power customers changing suppliers and
weather related track wash-outs;
•
Other revenue increased $0.9 million or 3% primarily due to
new business in Illinois to move wind turbine components,
partially offset by a decrease in bridge traffic in Canada and a
loss of intermodal traffic to a competitor in 2008. Carloads
decreased 30% as a result of lower bridge traffic in Canada on
one of our railroads where payment is primarily based on the
number of trains rather than individual carloads. The total
number of trains decreased 12% for the year ended
December 31, 2008 compared to the year ended
December 31, 2007;
•
Waste and scrap materials revenue decreased $0.2 million or
1% primarily due to a weakening demand for scrap iron in Ohio
and a decrease in waste moves in South Carolina;
•
Food or kindred products revenue increased $6.0 million or
29% primarily due to negotiated rate increases, higher fuel
surcharges and increased shipments of tomato products and beer
in California, and soybean meal in Washington;
•
Petroleum revenue increased $1.8 million or 10% primarily
due increased demand for LPG in Arizona and California and
negotiated rate increases; and
•
Motor vehicles revenue decreased $1.3 million or 19%
primarily due to a customer plant closing in Canada and reduced
auto shipments in the Midwest.
Operating
Expenses
The following table sets forth the operating revenue and
expenses, for our consolidated operations for the periods
indicated (dollars in thousands):
The following table sets forth the reconciliation of the
functional categories presented in our consolidated statement of
operations to the natural categories discussed below. Management
utilizes the natural category
format of expenses when reviewing and evaluating our
performance and believes that it provides a more relevant basis
for discussion of the changes in operations (in thousands).
Operating expenses increased to $422.4 million in the year
ended December 31, 2008, from $412.9 million in the
year ended December 31, 2007. The operating ratio was 83.1%
in 2008 compared to 86.0% in 2007. The net decrease in the
operating ratio was primarily due to our continuing cost saving
initiatives, which include a reduction of locomotive lease
expense and decreased casualties and insurance expense, in
addition to a decrease in stock compensation expense, partially
offset by higher diesel fuel prices in the year ended
December 31, 2008 as compared to the same period in 2007.
The 2008 operating expenses also include $6.1 million of
costs related to the restructuring and relocation of our
corporate headquarters to Jacksonville, Florida. These costs are
included within labor and benefits ($4.2 million),
purchased services ($1.4 million) and other expenses
($0.5 million).
The net increase in operating expenses is due to the following:
•
Labor and benefits expense increased $4.3 million, or 3%
primarily due to increased other benefits expense in 2008 from
accrued and paid termination benefits related to the
restructuring and relocation of corporate headquarters from Boca
Raton, Florida to Jacksonville, Florida, partially offset by
lower health insurance costs in 2008 as a result of a change to
our health insurance provider and increases in employee
contributions and higher restricted stock amortization in 2007
from the accelerated vesting of restricted shares triggered by a
change in control clause as a result of the Fortress acquisition;
•
Equipment rents expense decreased $9.6 million, or 18%
primarily as a result of purchasing locomotives that were
previously leased under operating agreements. Locomotive lease
expense declined $5.1 million in the year ended
December 31, 2008 compared to the year ended
December 31, 2007;
•
Purchased services expense increased $5.0 million, or 15%
primarily due to consulting fees incurred in connection with the
restructuring and relocation mentioned above;
•
Diesel fuel expense increased $12.6 million, or 22%
primarily due to higher average fuel costs of $3.23 per gallon
in 2008 compared to $2.33 per gallon in 2007, resulting in a
$19.0 million increase in fuel expense in the year ended
December 31, 2008, partially offset by a favorable
consumption variance of $6.4 million;
Casualties and insurance expense decreased $7.4 million, or
25% primarily due to an accrual of $3.0 million recorded in
2007 related to the Indiana & Ohio Railway, or IORY,
Styrene incident and a decrease in FRA personal injuries to 26
in the year ended December 31, 2008 from 40 in the year
ended December 31, 2007. Our FRA personal injury frequency
ratio, which is measured as the number of reportable injuries
per 200,000 person hours worked, was 1.64 at
December 31, 2008, compared to 2.37 at December 31,2007;
•
Materials expense remained relatively flat with a slight
increase of $0.3 million, or 3%;
•
Joint facilities expense increased $0.5 million, or 4%
primarily due to an increase in reciprocal switch and usage
charges;
•
Other expenses remained relatively flat at $33.3 million in
the year ended December 31, 2008 and $33.9 million in
the year ended December 31, 2007;
•
Asset sales and impairment resulted in a net loss of
$1.7 million compared to a net gain of $0.03 million
in the year ended December 31, 2008 and 2007, respectively.
The year ended December 31, 2008 includes impairment
charges of $3.4 million related to the former corporate
headquarters building located in Boca Raton, Florida and to
disposed surplus locomotives; and
•
Depreciation and amortization expense increased as a percentage
of operating revenue to 7.8% in the year ended December 31,2008, from 7.7% in the year ended December 31, 2007 due to
the capitalization and depreciation of 2008 capital projects.
Other
Income (Expense) Items
Interest Expense. Interest expense, including
amortization of deferred financing costs, increased
$15.4 million to $61.7 million for the year ended
December 31, 2008, from $46.3 million in the year
ended December 31, 2007. This increase is primarily due to
an increase in the effective interest rate on our debt in the
third quarter of 2008, which includes interest expense on our
interest rate swaps and the amortization of deferred financing
costs and the increase in our long term debt balance as a result
of the merger transaction in 2007. The interest rate on the
bridge credit facility increased to LIBOR plus 4% from LIBOR
plus 2.25%, effective July 1, 2008 as part of the amendment
to extend the maturity of the loan. The amortization of deferred
financing costs increased from the prior year as a result of
incurring deferred financing costs associated with the bridge
credit facility and for the 2008 amendment and extension, which
are amortized over a shorter period of time than the previous
deferred financing costs as a result of the shorter maturity of
the credit agreement. The year ended December 31, 2007,
includes a month and a half of interest on a term loan balance
of approximately $388 million, which increased to
$625 million on February 14, 2007 under the bridge
credit facility agreement. Interest expense includes
$10.1 million and $2.9 million of amortization costs
for the periods ended December 31, 2008 and 2007,
respectively.
Other Income (Loss). Other income (loss)
primarily relates to foreign exchange gains or losses associated
with the U.S. dollar term borrowings held by one of our
Canadian subsidiaries. For the year ended December 31, 2008
the exchange rates decreased, resulting in a foreign exchange
loss of $8.3 million, while the increase in the foreign
exchange rates in the prior year resulted in a foreign exchange
gain of $7.0 million.
Income Taxes. Our effective income tax rates
for the years ended December 31, 2008 and 2007 for
continuing operations were a provision of 10.4% and a benefit of
2.9%, respectively. The rates for the years ended
December 31, 2008 and 2007 both included a federal tax
benefit of approximately $16 million related to the track
maintenance credit provisions enacted by the American Jobs
Creation Act of 2004 and extended by the Tax Extenders and AMT
Relief Act of 2008. The rate for the year ended
December 31, 2008 includes an interest adjustment related
to our FIN 48 reserve and an increase of the valuation
allowance against certain deferred tax assets. Cash taxes paid
were $6.7 million and $2.9 million in the years ended
December 31, 2008 and 2007, respectively.
Discontinued Operations. In January 2006, we
completed the sale of our Alberta Railroad Properties for
$22.1 million in cash. In 2008, we settled working capital
claims with the buyer and as a result recorded an adjustment of
$1.3 million, or $1.2 million, after tax, through the
gain on sale of discontinued operations.
In August 2004, we completed the sale of our Australian
railroad, Freight Australia, to Pacific National for AUD
$285 million (US $204 million). During the years ended
December 31, 2008 and 2007, we incurred additional
consulting costs associated with sale of Freight Australia of
$1.9 million or $1.3 million, after tax, and
$1.1 million or $0.8 million, after tax, related to
the ATO audit of the reorganization transactions undertaken by
our Australian subsidiaries prior to the sale. In addition, we
recognized foreign exchange gains of $4.0 million or
$2.8 million, after tax, on tax reserves established in
conjunction with the ATO audit during the period ended
December 31, 2008.
The following table presents combined revenue and expense
information for the twelve months ended December 31, 2007.
The information was derived from the audited consolidated
financial statements of RailAmerica as the Predecessor for the
period January 1, 2007 through February 14, 2007 and
as Successor for the period from February 15, 2007 through
December 31, 2007.
The combined Statements of Operations are being presented solely
to assist comparisons across the years. The Successor period for
2007 in the combined Statements of Operations includes the
effect of fair value purchase accounting adjustments resulting
from the acquisition of RailAmerica on February 14, 2007.
Due to the change in the basis of accounting resulting from the
application of purchase accounting, the Predecessor’s
consolidated financial statements and the Successor’s
consolidated financial statements are not necessarily comparable.
The combined information is a non-US GAAP financial measure and
should not be used in isolation or substitution of the
Predecessor or Successor results. Such data is being presented
for informational purposes only and does not purport to
represent or be indicative of the results that actually would
have been obtained had the RailAmerica acquisition occurred on
January 1, 2007 or that may be obtained for any future
period.
Income (loss) from continuing operations before income taxes
32,511
(4,382
)
28,129
22,611
Provision for (benefit from) income taxes
(1,747
)
935
(812
)
(4,809
)
Income (loss) from continuing operations
34,258
(5,317
)
28,941
27,420
Discontinued operations:
Gain (loss) on disposal of discontinued business
(756
)
—
(756
)
9,060
Income from operations of discontinued business
—
—
—
163
Net income (loss)
$
33,502
$
(5,317
)
$
28,185
$
36,643
Operating
Revenue
Operating revenue increased by $17.3 million, or 4%, to
$479.9 million in the year ended December 31, 2007,
from $462.6 million in the year ended December 31,2006. Total carloads decreased 6% to 1,162,663 in 2007, from
1,238,182 in 2006. The net increase in operating revenue is
primarily due to negotiated rate increases and the strengthening
of the Canadian dollar, partially offset by the decrease in
carloads and lower fuel surcharges, which decreased
$1.1 million from the prior year. The decrease in carloads
is primarily due to a decrease in overhead bridge moves at one
of our Canadian railroads and a decline in lumber and forest
product movements in the Pacific Northwest.
The increase in the average revenue per carload to $361 in the
year ended December 31, 2007, from $328 in the comparable
period in 2006 was primarily due to negotiated rate increases.
Non-freight revenue increased by $4.3 million, or 8%, to
$60.5 million in the year ended December 31, 2007 from
$56.2 million in the year ended December 31, 2006.
This net increase is primarily due to an increase in storage
fees and demurrage charges, partially offset by a decrease in
car hire income.
(Dollars in thousands, except carload and average revenue per
carload)
Chemicals
$
56,692
113,234
$
501
$
49,894
109,004
$
458
Agricultural Products
54,633
147,363
371
51,751
153,169
338
Forest Products
50,361
95,784
526
58,380
117,963
495
Metallic Ores and Metals
43,419
87,658
495
35,261
73,936
477
Non-Metallic Minerals and Products
39,095
109,465
357
41,015
119,691
343
Pulp, Paper and Allied Products
37,371
78,531
476
31,405
77,645
404
Coal
36,653
189,471
193
39,818
209,126
190
Waste and Scrap Materials
28,637
84,766
338
25,626
80,420
319
Other
27,590
139,469
198
30,442
184,920
165
Food or Kindred Products
20,326
47,562
427
19,315
47,146
410
Petroleum
17,912
44,033
407
16,974
41,855
406
Motor Vehicles
6,689
25,327
264
6,485
23,307
278
Total
$
419,378
1,162,663
$
361
$
406,366
1,238,182
$
328
Freight revenue was $419.4 million in the year ended
December 31, 2007, compared to $406.4 million in the
year ended December 31, 2006, an increase of
$13.0 million or 3%. This increase was primarily due to the
net effect of the following:
•
Chemicals revenue increased $6.8 million or 14% primarily
due to negotiated rate increases and volume growth with existing
customers;
•
Agricultural products revenue increased $2.9 million or 6%
primarily due to negotiated rate increases, offset by a decline
in carloads due to strong local crops eliminating the need for
haulage via rail;
•
Forest products revenue decreased $8.0 million or 14%
primarily due to volume declines in the Pacific Northwest
stemming from the continued downturn in the housing and
construction markets;
•
Metallic ores and metals revenue increased $8.2 million or
23% primarily due to negotiated rate increases, favorable market
conditions which resulted in increased shipments with existing
customers and a new customer in the Southeast;
•
Non-metallic minerals and products revenue decreased
$1.9 million or 5% primarily due to reduced volumes as core
consumers changed sourcing options and made raw material
substitutions and decreases in housing construction in the
Midwest;
•
Pulp, paper and allied products revenue increased
$6.0 million or 19% primarily due to negotiated price
increases as a result of working closely with our Class I
partners to take significant and targeted price actions;
•
Coal revenue decreased $3.2 million or 8% primarily due to
the loss of some short-haul business to aggressive truck pricing;
•
Waste and scrap materials revenue increased $3.0 million or
12% primarily due to a demand for scrap iron and steel as a
result of declining imports at competitive pricing;
•
Other revenue decreased $2.9 million or 9% primarily due to
a decrease in bridge traffic in Canada. Carloads decreased 25%
as a result of lower bridge traffic in Canada on one of our
railroads where payment is primarily based on the number of
trains rather than individual carloads;
The following table sets forth the reconciliation of the
functional categories presented in our consolidated statement of
operations to the natural categories discussed below. Management
utilizes the natural category format of expenses when reviewing
and evaluating our performance and believes that it provides a
more relevant basis for discussion of the changes in operations.
Operating expenses increased to $412.9 million in the year
ended December 31, 2007, from $412.6 million in the
year ended December 31, 2006. The operating ratio was 86.0%
in 2007 compared to 89.2% in 2006. The net decrease in the
operating ratio was primarily due to a decrease in purchased
services and other expenses, partially offset by an increase in
casualties and insurance expense in the year ended
December 31, 2007 as compared to the same period in 2006.
The net increase in operating expenses is due to the following:
•
Labor and benefits expense increased $0.2 million, or less
than 1% primarily due to higher restricted stock amortization in
2007 as compared to 2006 from the accelerated vesting of
restricted shares triggered by a change in control clause as a
result of the Fortress acquisition, partially offset by
decreased salaries and wages in 2007 compared to 2006 from the
severance of former senior executives upon the change in control;
•
Equipment rents expense decreased $0.8 million, or 1%
primarily as a result of purchasing locomotives that were
previously leased under operating agreements. Locomotive lease
expense declined $1.0 million in the year ended
December 31, 2007 compared to the year ended
December 31, 2006;
•
Purchased services expense decreased $3.9 million, or 10%
primarily due to consulting fees incurred in connection with our
Process Improvement Project and reorganization in 2006;
•
Diesel fuel expense remained relatively flat at
$57.4 million in the year ended December 31, 2007 and
$57.5 million in the year ended December 31, 2006
primarily due to higher average fuel costs of $2.33 per gallon
in 2007 compared to $2.20 per gallon in 2006, resulting in a
$2.9 million increase in fuel expense in the year ended
December 31, 2007, partially offset by a favorable
consumption variance of $3.1 million;
•
Casualties and insurance expense increased $7.9 million, or
37% primarily due to an accrual of $3.0 million recorded in
2007 related to the IORY Styrene incident, an increase in our
personal injury accruals of $2.3 million during 2007, and
an increase in FRA personal injury frequency ratio to 2.37 at
December 31, 2007, compared to 2.21 at December 31,2006;
•
Materials expense decreased $0.4 million, or 3% primarily
due to cost saving initiatives implemented by management which
resulted in lower track material and tools and supplies costs;
•
Joint facilities expense decreased $1.0 million, or 8%
primarily due to a decrease in usage fees and switch charges as
a result of the decrease in carloads;
Other expenses decreased $3.8 million, or 10% primarily due
to a reduction in rent, bad debt and travel and entertainment
expenses in 2007;
•
Asset sales resulted in gains of $0.03 million compared to
a net gain of $3.4 million in the year ended
December 31, 2007 and 2006, respectively. The year ended
December 31, 2006 included several land and easement sales
along our railroad properties in the Pacific Northwest which
resulted in asset sale gains; and
•
Depreciation and amortization expense decreased as a percentage
of operating revenue to 7.7% in the year ended December 31,2007, from 8.2% in the year ended December 31, 2006 as a
result of a change in estimated asset lives in connection with
the Fortress acquisition.
Other
Income (Expense) Items
Interest Expense. Interest expense, including
amortization of deferred financing costs, increased
$18.9 million to $46.3 million for the year ended
December 31, 2007, from $27.4 million in the year
ended December 31, 2006. This increase is primarily due to
an increase in our long term debt balance from approximately
$388 million to $625 million on February 14, 2007
as a result of the merger transaction. In addition, the
effective interest rate on our debt, which includes interest
expense on our interest rate swaps and the amortization of
deferred financing costs increased as a result of the merger
transaction in 2007. The amortization of deferred financing
costs increased from the prior year as a result of incurring
deferred financing costs associated with the bridge credit
facility, which are amortized over a shorter period of time than
the previous deferred financing costs as a result of the shorter
maturity of the credit agreement. Interest expense includes
$2.9 million and $0.6 million of amortization costs
for the periods ended December 31, 2007 and 2006,
respectively.
Other Income (Loss). Other income (loss)
primarily relates to foreign exchange gains or losses associated
with the U.S. dollar term borrowings held by one of our
Canadian subsidiaries as a result of the refinancing in 2007.
For the year ended December 31, 2007 the Canadian dollar
strengthened, resulting in a foreign exchange gain of
$7.0 million.
Income Taxes. Our effective income tax rates
for the years ended December 31, 2007 and 2006 for
continuing operations were a benefit of 2.8% and 21.3%,
respectively. The rates for the years ended December 31,2007 and 2006 included a federal tax benefit of approximately
$16 million and $13 million, respectively, related to
the track maintenance credit provisions enacted by the American
Jobs Creation Act of 2004. The rate for the year ended
December 31, 2006 includes a $1.7 million tax benefit
as a result of changes in Canadian tax law. For the years ended
December 31, 2007 and 2006, we paid cash taxes of
$2.9 million and $3.7 million, respectively.
Discontinued Operations. On June 30,2006, we finalized the donation of our E&N Railway
operations to the Island Corridor Foundation in exchange for
$0.9 million in cash and a promissory note of
$0.3 million. This transaction resulted in the recognition
of a pre-tax gain of $2.5 million, or $2.4 million net
of tax, in the gain from sale of discontinued operations during
the year ended December 31, 2006. The results of operations
for the E&N Railway have been presented as discontinued
operations. For the year ended December 31, 2006, the
E&N Railway contributed income of approximately
$0.1 million to income from discontinued operations.
In January 2006, we completed the sale of our Alberta Railroad
Properties for $22.1 million in cash. The results of
operations for the Alberta Railroad Properties have been
presented as discontinued operations. For the year ended
December 31, 2006, the Alberta Railroad Properties
contributed income of $0.06 million to income from
discontinued operations. In conjunction with the completion of
the sale in 2006, we recorded an additional tax provision on the
sale of the discontinued operations of $1.1 million.
In August 2004, we completed the sale of our Australian
railroad, Freight Australia, to Pacific National for AUD
$285 million (US $204 million). 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 September 30, 2003
through August 31, 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 were capped at AUD
$50 million (US $39.5 million). No claims were
asserted by the buyer. Accordingly, we reduced our reserve for
warranty claims by $13.4 million, $8.0 million net of
tax, through discontinued operations in the year ended
December 31, 2006. During the years ended December 31,2007 and 2006, we incurred additional consulting costs
associated with sale of Freight Australia of $1.1 million
or $0.8 million, after tax, and $0.3 million or
$0.2 million, after tax, respectively, related to the ATO
audit of the reorganization transactions undertaken by our
Australian subsidiaries prior to the sale. These amounts are
reflected in the gain (loss) on sale of discontinued operations.
Liquidity
and Capital Resources
The discussion of liquidity and capital resources that follows
reflects our consolidated results and includes all subsidiaries.
We have historically met our liquidity requirements primarily
from cash generated from operations and borrowings under our
credit agreements which is used to fund capital expenditures and
debt service requirements. For the six months ended
June 30, 2009, there was a net cash outflow from operations
primarily due to the termination of the interest rate swap and
the payment of accrued interest of $55.8 million and
$8.7 million, respectively, in conjunction with the
repayment of the bridge credit facility in June 2009. We believe
that we will be able to generate sufficient cash flow from
operations to meet our capital expenditure and debt service
requirements through our continued focus on revenue growth and
operating efficiency as discussed under “— Managing
Business Performance.”
Operating
Activities
Cash used in operating activities was $43.4 million for the
six months ended June 30, 2009, compared to cash provided
by operating activities of $38.8 million for the six months
ended June 30, 2008. The decrease in cash flows from
operating activities was primarily due to the termination of the
existing interest rate swap in connection with the repayment of
the bridge credit facility in June 2009.
Cash provided by operating activities was $83.6 million,
$66.2 million and $60.6 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The
increase in cash flows from operating activities from 2007 to
2008 was primarily due to an increase in operating income and a
more timely collection of accounts receivable in 2008. The
increase in cash flows from operating activities from 2006 to
2007 was primarily due to an increase in operating income in
2007.
Investing
Activities
Cash used in investing activities was $6.5 million for the
six months ended June 30, 2009, compared to
$28.9 million for the six months ended June 30, 2008.
The decrease was primarily due to the sale of the Coos Bay Line
to the Port of Coos Bay for $16.6 million. Capital
expenditures were $25.8 million in the six months ended
June 30, 2009, compared to $29.6 million in the six
months ended June 30, 2008. Asset sale proceeds were
$19.6 million for the six months ended June 30, 2009
compared to $0.7 million for the six months ended
June 30, 2008, primarily due to the sale of the Coos Bay
Line.
Cash used in investing activities was $45.7 million,
$1,155.5 million and $35.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The
decrease in cash used in investing activities from 2007 to 2008
and increase from 2006 to 2007 was primarily due to the
acquisition of RailAmerica by private equity funds managed by an
affiliate of Fortress in February 2007, which resulted in
$1,087.5 million of payments to common shareholders and
repayment of the old senior credit facility. Capital
expenditures were $61.3 million, $70.9 million and
$70.4 million in the years ended December 31, 2008,
2007 and 2006, respectively. Asset sale proceeds were
$17.4 million, $2.9 million and $35.4 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. Asset sale proceeds in 2008 were primarily due to
the sale of the former corporate headquarters in Boca Raton,
Florida. Asset sale proceeds in 2007 were primarily from land
and easements sales that occurred throughout the year. Asset
sales proceeds in 2006 consisted of cash received from the sale
of Alberta Railroad Properties, cash receipts on a note
receivable related to the sale of our former Chilean railroad
operations and proceeds from the disposition of the E&N
Railway.
Cash provided by financing activities was $46.9 million for
the six months ended June 30, 2009, compared to cash used
in financing activities of $0.7 million in the six months
ended June 30, 2008. The cash provided by financing
activities in the six months ended June 30, 2009 was due to
the issuance of the 9.25% senior secured notes, partially
offset by the cash used to repay the existing bridge credit
facility and financing costs associated with the issuance of the
notes. The cash used in financing activities during the first
six months of 2008 was primarily due to scheduled payments of
other long term debt.
Cash (used in) provided by financing activities was
$(24.8) million, $1,091.4 million and
$(27.1) million during the years ended December 31,2008, 2007 and 2006, respectively. The cash used in financing
activities during 2008 was primarily for the amendment fee paid
in the third quarter of 2008 and the repayment of the mortgage
on the corporate headquarters building sold during the third
quarter of 2008. The cash provided by financing activities in
2007 was primarily due to the acquisition of RailAmerica by
investment funds managed by an affiliate of Fortress in February
2007. At this time, we entered into a new bridge credit facility
agreement, as described below, and received a capital
contribution. Cash used in financing activities during 2006 was
primarily for the paydown of our former senior term debt upon
the receipt of the cash proceeds from the sale of the Alberta
Railroad Properties.
Working
Capital
As of June 30, 2009, we had working capital of
$45.4 million, including cash on hand of
$23.9 million, and approximately $25.0 million of
availability under the ABL Facility, compared to a working
capital of $19.4 million, including cash on hand of
$27.0 million, and $25.0 million of availability under
our prior revolving credit facility at December 31, 2008.
The working capital increase at June 30, 2009, compared to
December 31, 2008, is primarily due to the decrease in
accrued liabilities as a result of interest and incentive
compensation payments. 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.
In June 2009, we declared and paid a cash dividend in the amount
of $20.0 million to our common stockholders.
We expect to use a portion of the net proceeds from this
offering to redeem up to
$
aggregate principal amount of our senior secured notes described
in “Description of Certain Indebtedness” at a price
equal to % of the principal amount,
plus accrued and unpaid interest to, but not including, the
redemption date. The redemption of
$ of senior secured notes
represents % of the aggregate
principal amount of the notes. This redemption of notes will
reduce our annual interest expense and, we believe, improve our
capital structure and financial flexibility. By
redeeming % of the aggregate
principal amount of the notes, we will
pay % of principal amount plus
accrued and unpaid interest.
Upon consummation of this offering, we expect to continue to
sufficiently meet our ongoing operating requirements, to fund
capital expenditures for property, plant and equipment, and to
satisfy our debt service requirements with our cash flows from
operations and borrowings under the ABL Facility.
Long-term
Debt
$740 million
9.25% Senior Secured Notes
On June 23, 2009, we sold $740.0 million of
9.25% senior secured notes due July 1, 2017 in a
private offering, for gross proceeds of $709.8 million
after deducting the initial purchaser’s fees and the
original issue discount. The notes are secured by first-priority
liens on substantially all of our and the guarantors’
assets. The guarantors are defined essentially as our existing
and future wholly-owned domestic restricted subsidiaries. The
net proceeds received from the issuance of the notes were used
to repay the outstanding balance of the $650 million bridge
credit facility, as described below, and $7.4 million of
accrued interest thereon, pay costs of $57.1 million to
terminate interest rate swap arrangements, including
$1.3 million of accrued interest,
entered into in connection with the bridge credit facility and
pay fees and expenses related to the offering and for general
corporate purposes.
We may redeem up to 10% of the aggregate principal amount of the
notes issued during any
12-month
period commencing on the issue date at a price equal to 103% of
the principal amount thereof plus accrued and unpaid interest,
if any. We may also redeem some or all of the notes at any time
before July 1, 2013, at a price equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date and a make-whole
premium. In addition, prior to July 1, 2012, we may redeem
up to 35% of the notes at a redemption price of 109.25% of their
principal amount thereof plus accrued and unpaid interest, if
any, with the proceeds from an equity offering. Subsequent to
July 1, 2013, we may redeem the notes at 104.625% of their
principal amount. The premium then reduces to 102.313%
commencing on July 1, 2014 and then 100% on July 1,2015 and thereafter.
$40 million
ABL Facility
In connection with the issuance of the senior secured notes on
June 23, 2009, we also entered into a $40 million
Asset Backed Loan Facility (“ABL Facility” or
“Facility”). The Facility matures on July 23,2013 and bears interest at LIBOR plus 4.00%. Obligations under
the ABL Facility are secured by a first-priority lien in the ABL
Collateral. ABL Collateral includes accounts receivable, deposit
accounts, securities accounts and cash. As of June 30,2009, there was approximately $25 million of undrawn
availability, taking into account borrowing base limitations.
The Facility and indenture contain various covenants and
restrictions that will limit us and our restricted
subsidiaries’ ability to incur additional indebtedness, pay
dividends, make certain investments, sell or transfer certain
assets, create liens, designate subsidiaries as unrestricted
subsidiaries, consolidate, merge or sell substantially all the
assets, enter into certain transactions with affiliates. It is
anticipated that proceeds from any future borrowings would be
used for general corporate purposes. As of June 30, 2009,
we had no outstanding balance under the Facility.
$650 million
Bridge Credit Facility
As part of the merger transaction in which we were acquired by
certain private equity funds managed by affiliates of Fortress
we terminated the commitments under our former Amended and
Restated Credit Agreement and repaid all outstanding loans and
other obligations in full under this Agreement. In order to fund
this repayment of debt and complete the merger transaction, on
February 14, 2007, we entered into a $650 million
bridge credit facility agreement. The facility consists of a
$587 million U.S. dollar term loan commitment and a
$38 million Canadian dollar term loan commitment, as well
as a $25 million revolving loan facility with a
$20 million U.S. dollar tranche and a $5 million
Canadian dollar tranche. We entered into an amendment on
July 1, 2008 to extend the maturity of the bridge credit
facility for one year with an additional one year extension at
our option. Under the amended bridge credit facility agreement,
the term loans and revolving loans bear interest at LIBOR plus
4.0%. The bridge credit facility agreement originally matured on
August 14, 2008, and as such, the outstanding loan balance
under this agreement was reflected as a current liability at
December 31, 2007. Prior to amendment, the bridge credit
facility agreement, including the revolving loans, paid interest
at LIBOR plus 2.25%.
In November 2008, we entered into Amendment No. 1 to the
amended bridge credit facility agreement which permitted us to
enter into employee and office space sharing agreements with
affiliates and included a technical amendment to the definitions
of interest coverage ratio and interest expense.
The U.S. and Canadian dollar term loans and the
U.S. and Canadian dollar revolvers 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 Citigroup Global Markets, Inc. and Morgan Stanley
Senior Funding, Inc., as co-lead arrangers, Citicorp North
America, Inc., as administrative agent and collateral agent and
Morgan Stanley Senior Funding, Inc. as syndication agent.
On February 14, 2007, we entered into an interest rate swap
with a termination date of February 15, 2014. The total
notional amount of swap started at $425 million for the
period commencing February 14, 2007 through
November 14, 2007, increasing to a total notional amount of
$525 million for the period commencing November 15,2007 through November 14, 2008, and ultimately increased to
$625 million for the period commencing November 15,2008 through February 15, 2014. Under the terms of the
interest rate swap, we are required to pay a fixed interest rate
of 4.9485% on the notional amount while receiving a variable
interest rate equal to the 90 day LIBOR. This swap
qualifies, is designated and is accounted for as a cash flow
hedge under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”
(SFAS 133). This interest rate swap agreement was
terminated in June 2009, in connection with the repayment of the
bridge credit facility, and thus had no fair value at
June 30, 2009. Interest expense of $0.3 million was
recognized during the six months ended June 30, 2009 for
the portion of the hedge deemed ineffective. Interest expense of
$0.5 million was recognized during the six months ended
June 30, 2008 for the portion of the hedge deemed
ineffective. Pursuant to SFAS 133, the fair value balance
of the swap at the termination date remains in accumulated other
comprehensive loss, net of tax, and is amortized into interest
expense over the remaining life of the original swap (through
February 14, 2014). As of June 30, 2009, accumulated
other comprehensive loss included $36.8 million, net of
tax, of unamortized loss relating to the terminated swap.
Reclassifications from accumulated other comprehensive loss to
interest expense in the next twelve months will be approximately
$27.4 million, or $17.0 million, net of tax.
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 were
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 qualified, were designated
and were accounted for as cash flow hedges under SFAS 133.
One of the interest rate swaps with a total notional amount of
$50 million was terminated on February 12, 2007 and
thus had no fair value at December 31, 2007. The remaining
interest rate swap’s fair value was a net receivable of
$0.03 million at December 31, 2007. This interest rate
swap terminated as planned on November 24, 2008, and thus
had no fair value at December 31, 2008. Interest expense of
$0.5 million and $0.4 million was recognized during
the years ended December 31, 2008 and December 31,2007, respectively, for the portion of the hedge deemed
ineffective.
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. The swap qualified, was designated and was accounted for
as a cash flow hedge under SFAS 133. Under the terms of the
interest rate swap, we were 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. This interest rate
swap terminated as planned on November 24, 2007, and thus
had no fair value at December 31, 2007. Interest expense of
$0.8 million was recognized during the period ended
December 31, 2007 for the portion of the hedge deemed
ineffective.
For derivative instruments in an asset position, we analyze the
credit standing of the counterparty and factor it into the fair
value measurement. SFAS No. 157, “Fair Value
Measurements” (SFAS 157) states that the fair
value of a liability must reflect the nonperformance risk of the
reporting entity. Therefore, the impact of our credit worthiness
has also been factored into the fair value measurement of the
derivative instruments in a liability position.
Off
Balance Sheet Arrangements
We currently have no off balance sheet arrangements.
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 long-term debt,
and our existing lease obligations as of June 30, 2009 (in
thousands):
In June 2009, we repaid in full our $650 million bridge
loan facilities with the amounts borrowed under the senior
secured notes.
(2)
There were no material purchase obligations outstanding as of
December 31, 2008. Table excludes any reserves for income
taxes under FIN 48, “Accounting for Uncertainty in
Income Taxes — an interpretation of FASB 109,”
because we are unable to reasonably predict the ultimate amount
or timing of settlement of our unrecognized tax benefits beyond
2009. As of June 30, 2009, our reserves for income taxes
totaled approximately $9.2 million.
Critical
Accounting Policies and 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 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 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 operations 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 65% of our total assets
as of December 31, 2008. 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.
Recently
Issued Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board, or the
FASB, issued FSP
SFAS 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in
a Business Combination That Arise from Contingencies” (FSP
SFAS 141R-1),
which addresses application issues on initial recognition and
measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies
in a business combination as set forth in SFAS 141R. This
FSP requires that such assets acquired or liabilities assumed be
initially recognized at fair value at the acquisition date if
fair value can be determined during the measurement period. If
the acquisition-date fair value cannot be determined, the asset
acquired or liability assumed arising from a contingency is
recognized only if certain criteria are met. This FSP also
requires that a systematic and rational basis for subsequently
measuring and accounting for the assets or liabilities be
developed depending on their nature. FSP
SFAS 141R-1
is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We will
apply the provisions of FSP
SFAS 141R-1
as appropriate to its future business combinations with an
acquisition date on or after January 1, 2009.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (SFAS 157), which is
effective for fiscal years beginning after November 15,2007, and for interim periods within those years. On
February 12, 2008, the FASB issued FASB Staff Position
FAS 157-2
(FSP 157-2),
which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).
FSP 157-2
partially defers the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years. SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands the related disclosure requirements. We adopted
SFAS 157 for its financial assets and liabilities on
January 1, 2008, and it did not have a material impact on
its consolidated financial statements. On January 1, 2009,
we adopted SFAS 157 for all of its nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis, and it did not have a material impact on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations” (SFAS 141R).
SFAS 141R retains the fundamental requirements of the
original pronouncement requiring that the purchase method be
used for all business combinations. SFAS 141R defines the
acquirer as the entity that obtains control of one or more
businesses in the business combination, establishes the
acquisition date as the date the acquirer achieves control and
requires the acquirer to recognize the assets acquired,
liabilities assumed and any noncontrolling interest at their
fair values as of the acquisition date. SFAS 141R also
requires that acquisition-related costs are expensed as
incurred. SFAS 141R is effective for fiscal years beginning
after December 15, 2008 and interim periods within those
years. Early adoption of SFAS 141R is prohibited. We will
apply the provisions of SFAS 141R as appropriate to its
future business combinations and adjustments to pre-acquisition
tax contingencies related to acquisitions prior to
January 1, 2009.
In December 2007, the FASB issued SFAS No. 160
“Noncontrolling Interests in Consolidated Financial
Statements (an amendment of ARB No. 51)”
(SFAS 160). SFAS 160 requires that noncontrolling
(minority) interests are reported as a component of equity, that
net income attributable to the parent and to the non-controlling
interest is separately identified in the income statement, that
changes in a parent’s ownership interest while the parent
retains its controlling interest are accounted for as equity
transactions, and that any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary is initially
measured at fair value. SFAS 160 is effective for fiscal
years beginning after December 15, 2008 and shall be
applied prospectively. However, the presentation and disclosure
requirements of SFAS 160 shall be applied retrospectively
for all periods presented. Adoption of this pronouncement on
January 1, 2009 did not have a material impact on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities” (SFAS 161). SFAS 161 requires
companies with derivative instruments to disclose information
that should enable financial-statement users to understand how
and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”
(SFAS 133) and how these items affect a company’s
financial position, results of operations and cash flows.
SFAS 161 affects only these disclosures and does not change
the accounting for derivatives. SFAS 161 has been applied
prospectively beginning with the first quarter of the 2009
fiscal year.
In April 2009, the FASB issued FASB Staff Position
No. FAS 107-1,
“Interim Disclosures about Fair Value of Financial
Instruments” (FSP
FAS 107-1).
FSP
FAS 107-1
requires expanded fair value disclosures for all financial
instruments within the scope of FASB Statement No. 107,
“Disclosures about Fair Value of Financial
Instruments.” These disclosures are required for interim
periods for publicly traded entities. In addition, entities are
required to disclose the methods and significant assumptions
used to estimate the fair value of financial instruments in
financial statements on an interim basis. We have applied this
Staff Position effective with our 2009 second quarter.
In May 2009, the FASB issued SFAS No. 165,
“Subsequent Events” (SFAS 165). SFAS 165
defines the period after the balance sheet date during which a
reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions
occurring after the balance sheet date in its financial
statements, and the disclosures an entity should make about
events or transactions that occurred after the balance sheet
date. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009, and we have applied
SFAS 165 effective with our 2009 second quarter.
In June 2009, the FASB issued SFAS No. 167,
“Consolidation of Variable Interest Entities”
(SFAS 167). SFAS 167 alters how a company determines
when an entity that is insufficiently capitalized or not
controlled through voting should be consolidated. A company has
to determine whether it should provide consolidated reporting of
an entity based upon the entity’s purpose and design and
the parent company’s ability to direct the entity’s
actions. SFAS 167 is effective commencing with the 2010
fiscal year. We are currently evaluating the effects, if any,
that adoption of this standard will have on its consolidated
financial statements.
In June 2009, the FASB issued SFAS No. 168, “The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles” (SFAS 168).
SFAS 168 authorized the Codification as the sole source for
authoritative U.S. GAAP and any accounting literature that
is not in the Codification will be considered nonauthoritative.
SFAS 168 will be effective commencing with our 2009 third
quarter and is not anticipated to have a material effect on our
consolidated financial statements.
Quantitative
And Qualitative Disclosures About Market Risk
We are exposed to market risks from changing foreign currency
exchange rates, interest rates and diesel fuel prices. Changes
in these factors could cause fluctuations in earnings and cash
flows.
Foreign Currency. Our foreign currency risk
arises from owning and operating railroads in Canada. As of
December 31, 2008, 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
2008, the Canadian dollar decreased 20% in value in comparison
to the U.S dollar. The average rate for the year ended 2008,
however, was 1% higher than it was for 2007. The increase in the
average Canadian dollar exchange rate led to an increase of
$0.8 million in reported revenue and a $0.4 million
increase in reported operating income in 2008, compared to 2007.
A 10% unfavorable change in the 2008 average exchange rate would
have negatively impacted 2008 revenue by $6.8 million and
operating income by $2.3 million.
Interest Rates. Our senior secured notes
issued in June 2009 are fixed rate instruments, and therefore,
would not be impacted by changes in interest rates. Our
potential interest rate risk results from our ABL Facility as an
increase in interest rates would result in lower earnings and
increased cash outflows. We do not currently have any
outstanding balances under this facility, but if we were to draw
upon it, we would be subject to changes in interest rates.
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 13.8% of total operating revenues during the
year ended December 31, 2008. Due to the significance of
fuel costs to our operations and the historical volatility of
fuel prices, we participate in fuel surcharge programs which
provide additional revenue to help offset the increase in fuel
expense. These fuel surcharge programs fluctuate with the price
of diesel fuel with a lag of three to nine months. Each one-cent
change in the price of fuel would result in approximately a
$0.2 million change in fuel expense on an annual basis.
Counterparty Risk. We monitor our hedging
positions and the credit ratings of our counterparties and do
not anticipate losses due to counterparty non-performance.
The North American economy is dependent on the movement of
freight ranging from raw materials such as coal, ores,
aggregates, lumber and grain to finished goods, such as food
products, paper products, automobiles and machinery. Railroads
represent the largest component of North America’s freight
transportation industry, carrying more freight than any other
mode of transportation. According to AAR, railroads account for
approximately 43% of total freight ton-miles while trucks and
ships account for approximately 30% and 13%, respectively. With
a network of over 140,000 miles of track (in the U.S.),
railroads link businesses with each other domestically and with
international markets through connections with ports and other
international terminals. Unlike other modes of transportation,
such as trucking (which uses highways, toll roads, etc.) and
shipping companies (that utilize ports), railroad operators
generally own their infrastructure of track, land and rail
yards. This infrastructure, most of which was originally
established over 100 years ago, represents a limited supply
of assets and a
difficult-to-replicate
network.
The railroad industry has increased its share of freight
ton-miles
compared to other forms of freight transportation over the past
quarter century. Since 1980, the railroad industry has
continually improved its cost structure compared to other forms
of freight transportation as it consumes less fuel and has lower
labor costs per ton transported than other forms of freight
transportation. According to AAR, railroads’ operating
ratios have decreased from 82.6% in 1998 to 78.3% in 2007 as a
result of significant reductions to labor and rolling stock
(locomotives and railcars) requirements and the spinning off of
less dense network segments. According to the AAR, railroads are
estimated to be approximately four times more fuel efficient
than truck transportation and a single train can haul the
equivalent of up to 280 trucks. Additionally, as the price of
fuel has increased over the past several years, the fuel
efficiency advantage of railroads as compared to other forms of
freight transportation has grown. In 1980, one gallon of diesel
fuel moved one ton of freight by rail an average of
235 miles, versus 2007 where the equivalent gallon of fuel
moved one ton of freight an average of 436 miles by rail
— representing an 85% increase over 1980. As a result,
the railroad industry’s share of U.S. freight
ton-miles
has steadily increased from 30% in 1980 to 43% in 2006.
The table below details the growth in railroad market share
based on freight
ton-miles
since 1980.
According to the AAR, there are 563 railroads in the United
States operating over 140,000 miles of track. The AAR
classifies railroads operating in the United States into one of
three categories based on the amount of revenues and
track-miles. Class I railroads, those with over
$359.6 million in revenues in 2007, represent approximately
93% of total rail revenues. Regional and local/short line
railroads operate approximately 45,800 miles of track in
the United States. The primary function of these smaller
railroads is to provide feeder traffic to the Class I
carriers. Regional and local/short line railroads combined
account for approximately 7% of total industry rail revenues.
Aggregate
Miles
% of
Classification of Railroads
Number
Operated
Revenue
Revenues and Miles Operated in 2007
Class I(1)
7
94,313
93
%
Over $359.6 million
Regional
33
16,930
3
%
$40.0 to $359.6 million and/or 350 or more miles operated
Local/Short line
523
28,891
4
%
Less than $40.0 million and less than 350 miles operated
Total
563
140,134
100
%
(1)
Includes CSX Transportation, BNSF Railway Co., Norfolk Southern,
Kansas City Southern Railway Company, Union Pacific, Canadian
National Railway and Canadian Pacific Railroad Co.
Source: Association of American Railroads, Railroad Facts,
2008 Edition.
Class I railroads operate across many different states and
concentrate largely, though not exclusively, on long-haul, high
density intercity traffic lanes. The six largest railroads in
North America are BNSF Railway, Union Pacific, Norfolk Southern,
CSX Transportation, Canadian National Railway, or CN, and
Canadian Pacific Railroad Company. Regional railroads typically
operate
400-650 miles
of track and provide service to selected areas of the country,
mainly connecting neighboring states
and/or
economic centers. Typically short line railroads serve as branch
lines connecting customers with Class I railroads. Short
line railroads have more predictable and straightforward
operations as they generally perform
point-to-point
service over short distances, without the complex networks
associated with the large Class I railroads.
Use of regional and short line railroads is largely driven by
interchange traffic between carriers. Typically, a Class I
railroad will transport the freight the majority of the
distance, usually hundreds or thousands of miles and drop it off
with the short line, which provides the final step of service
directly to the customer. Most short line railroads depend on
Class I traffic for a substantial portion of their revenue.
Our portfolio of 40 railroads is a mix of regional and short
line railroads.
Regional
and Short line Railroads
Short lines and regional railways have always been a part of the
rail industry in North America. In the 1800’s, most North
American railroads were constructed to serve a local or regional
interest. Today’s Class I railroads are descended from
hundreds of short lines and regionals that came together in
successive waves of consolidation.
During the 1980’s the number of regional and short line
railroads increased dramatically. Deregulation of
U.S. railroads simplified abandonment and sales
regulations, allowing the major carriers to gain many of the
savings of abandonment while preserving the traffic on the rail
lines. Carriers created through this divestiture process now
account for the majority of regional and short line railroads.
Short line and regional railroads today serve important roles in
moving freight within their service areas and function as a
critical traffic “feeder” network for the Class I
railroads.
Over the past decade, the number of regional and short line
railroads has remained relatively constant. While some new
entrants were formed through spin-offs or divestitures of
Class I railroads, they have generally been offset by other
existing regional and short lines either exiting the business or
being merged with or acquired by other railroads. With the
growth of multi-carrier holding companies, such as ourselves and
Genesee & Wyoming, the number of operators of regional
and short line railroads has decreased. The
consolidation brought on by multi-carrier holding companies has
induced a number of shippers with private railroads to sell
those railroads to the major short line operators. Similarly,
Class I railroads sell and lease rail lines to smaller rail
entities in order to address a range of issues impacting costs
and productivity.
Short lines and regional railroads have a variety of ownership
structures and are owned by shippers, governments, and
multi-carrier holding companies. RailAmerica operates 40 North
American carriers; Genesee & Wyoming operates 63
carriers in North America, Australia and the Netherlands, and
owns a minority interest in a railroad in Bolivia; and Pioneer
Railcorp operates 16 U.S. carriers. Many of the other short
lines and regionals are owned by smaller privately held
multi-carrier holding companies. Some of the larger other short
lines and regional railroads include OmniTrax, which operates 14
carriers in the U.S. and 3 in Canada; Watco, which operates
20 carriers in the U.S.; and Anacostia and Pacific (A&P),
which has 7 affiliated carriers.
Competition
Short line and regional railroads compete against each other and
other forms of freight transportation based on cost, location
and service. The cost of transporting goods and services via
different forms of freight transportation is a major factor in
determining which means of transportation a shipper will
utilize. With respect to location, potential customers often
experience geographic constraints that significantly impact the
relative freight transportation costs of different alternatives.
For example, a shipper can be constrained by railroad’s
trackage, accessible waterways, access to pipelines and
proximity to airports. As a result, short line and regional
railroad operators often evaluate the feasibility of other forms
of freight transportation available to a customer when
developing their rate and service offerings.
Some short line and regional railroad customers have multiple
forms of freight transportation available. Depending on
circumstances, truck, water, or other railroads may be
competitive alternatives for a shipment. In such instances,
customers will compare both the relative costs, reliability of
on-time delivery and quality of service when determining what
mode(s) of transport to use.
Trucking is often considered as a viable alternative to rail
transport. While trucking provides additional delivery location
flexibility due to the geographic diversity of North
America’s highway network relative to railway network,
railroads are substantially more cost competitive along travel
routes they serve. Recently, rail transport has become a more
cost efficient alternative for shippers moving bulk goods over
long distances, because of volatile fuel costs.
Other factors that enhance rail’s competitive advantage
over trucking include:
•
Capability to transport larger shipment sizes
•
Higher density; ratio of product handled in a railcar to a truck
is higher
•
Longer distances
•
Reduced sensitivity to fast or reliable service
•
Less dependent on return haul requirements compared to trucking
For many shipments, transport options that include alternative
railroads are competitive, even where direct service by a second
rail carrier is not available. When such intermodal service is
used, the cost to transfer products from one mode to another
becomes a factor. Factors that enhance a short line’s
competitive advantage over other rail routes or intermodal
options include:
•
Lower marginal operating costs
•
Direct service to the customer, so that no transfer cost is
incurred
•
Where transfer costs are incurred by both the short line and the
competitive rail mode, greater efficiency at terminals.
(Hazardous materials, for example, incur higher transfer costs
because of the risks involved.)
Options to ship by water are limited geographically, but when
available can be very competitive with rail. Factors that
enhance rail’s competitiveness over water options include:
•
Capability for rail to transport larger shipments, with higher
density as water vessels are limited by water depth and size of
shipment
•
Railroads have a more direct route between origination and
destination compared to vessels
•
Rail benefits from lower loading and unloading costs
We believe that we are the largest owner and operator of short
line and regional freight railroads in North America, measured
in terms of total track-miles, operating a portfolio of 40
individual railroads with approximately 7,500 miles of
track in 27 U.S. states and three Canadian provinces. Our
railroad portfolio represents an important component of North
America’s transportation infrastructure, carrying large
quantities of freight for a highly diverse customer base. In
2008, our railroads transported over one million carloads of
freight for approximately 1,800 customers, hauling a wide range
of products such as farm and food products, lumber and forest
products, paper and paper products, metals, chemicals and coal.
Of our approximately 7,500 total track-miles, we own
approximately 4,500 track-miles and lease approximately 3,000
track-miles. In most cases, leases involve little to no annual
lease payment, but may have involved a one-time, up front
payment, and have long-term, or perpetual durations. We also own
240 locomotives and 524 railcars and lease an additional
206 locomotives and 7,195 railcars.
Our 40 railroads are operated as independent businesses with
local management responsible for overseeing daily operations and
safety. These railroads are organized into five regional groups
that, in turn, report to senior management where many functions
such as pricing, purchasing, capital spending, finance,
insurance, real estate and other administrative functions are
centralized to achieve cost efficiencies and leverage the
experience of senior management in commercial and strategic
decisions.
We were incorporated in Delaware on March 31, 1992 as a
holding company for two pre-existing railroad companies. On
February 14, 2007, we were acquired by RR Acquisition
Holding LLC, an entity wholly-owned by certain private equity
funds managed by an affiliate of Fortress. During the period
from our formation until today, we have grown both through the
expansion of the traffic base on our existing railroads and
through acquisitions of additional North American railroads.
We generate freight revenue under three different types of
service, which are summarized below.
% of Freight
Service Type
Description
Revenue
Interchange
Freight transport between a customer’s facility and a
connection point (“interchange”) with a Class I
railroad
88%
Local
Freight that both originates and terminates on the same line
4%
Bridge
Freight transport from one connecting Class I railroad to another
8%
For the majority of our customers, our railroads transport
freight between a customer’s facility or plant and a
connection point, or “interchange,” with a national
Class I railroad. Each of our 40 railroads connects with at
least one Class I railroad, and in many cases connects with
multiple Class I railroads. Interchange circumstances vary
by customer shipping needs with freight either
(i) originating at the customer’s facility (such as a
coal mine, an ethanol production plant or a lumber yard) for
transport by the Class I railroad via the interchange to
other North American destinations or ports or (ii) received
from the Class I interchange and hauled to a
customer’s plant where the freight is subsequently consumed
(such as a coal-burning power generation plant). In other cases,
a RailAmerica rail line transports freight that both originates
and terminates on the same line, which is referred to as
“local” traffic, or provides a pass-through connection
between one Class I railroad and another railroad without
the freight originating or terminating on the line, which is
known as “bridge” traffic.
Typically, we provide our freight services under a contract or
similar arrangement with either the customer located on our rail
line or the connecting Class I railroad. Contracts and
arrangements vary in terms of duration, pricing and volume
requirements. Because we normally provide transportation for
only a segment of a shipment’s total distance, with the
Class I railroad carrying the freight the majority of the
distance, customers are billed once, typically by the
Class I, for the total cost of rail transport. The
Class I railroad is obligated to pay us in a timely manner
upon delivery of service regardless of whether or when the
Class I railroad actually receives the total payment from
the customer.
We collect the majority of our revenue from Class I
railroads and investment grade customers. Moreover, our
railroads are often integrated into a customer’s facility
and serve as an important component of that customer’s
distribution or input. In many circumstances, our customers have
made significant capital investments in facilities on or near
our railroads (as in the case of electric utilities, industrial
plants or major warehouses) or are geographically unable to
relocate (as in the case of coal mines and rock quarries). The
quality of our customers and our level of integration with their
facilities provide a stable and predictable revenue base.
Products hauled over our network include a dozen major commodity
groups, such as coal, forest products, chemicals, agricultural
products, food products, metallic ores and metals, and petroleum
products. Agricultural products traffic represented the largest
contributor to freight revenue at 13.9% in 2008. The top ten
commodities represented approximately 94% of total freight
revenue earned in 2008.
Customers
We serve approximately 1,800 customers in North America.
Although most of our North American railroads have a
well-diversified customer base, several smaller rail lines have
one or two dominant customers. In 2008, our 10 largest customers
accounted for approximately 20% of our freight revenue, with no
individual customer accounting for more than approximately 5% of
freight revenue. The table below provides a summary of our top
10 customers.
2008
Number of
Freight Revenue
% of Total
Top 10 Customers
Railroads Served
U.S. Dollars
Freight Revenue
(In millions)
Customer #1 (Steel Producer)
3
$
20.8
4.7
%
Customer #2 (Lumber & Wood Products)
6
11.2
2.5
%
Customer #3 (Metals Fabricator)
5
10.8
2.5
%
Customer #4 (Class I Railroad)
6
8.3
1.9
%
Customer #5 (Coal Producer)
1
6.3
1.4
%
Customer #6 (Lumber & Wood Products)
1
6.1
1.4
%
Customer #7 (Grain Processor)
3
5.9
1.3
%
Customer #8 (Electric Generating Plant)
1
5.8
1.3
%
Customer #9 (Electric Generating Plant)
1
5.4
1.2
%
Customer #10 (Paper Mill)
1
5.4
1.2
%
Total Top 10 Customers
86.1
19.6
%
Other
353.9
80.4
%
Total
$
440.0
100.0
%
Pricing
Our contracts typically stipulate either inflation-based or
market-based pricing. Market-based pricing, which accounts for
approximately 55% of freight revenue, is based on negotiated
rates. Pricing and escalation terms for these contracts are
negotiated prior to the signing or renewal of a contract. This
type of pricing provides us the ability to price contracts at
prevailing market rates. Inflation-based pricing, which
encompasses the remaining 45% of freight revenue, is based on a
fixed revenue per carload with inflation-based escalators.
This type of pricing is common for “handling line”
railroads (regional or short line railroads that only transport
or interchange freight on their lines for Class I carriers)
where the contract is with an interchanging Class I
railroad. These contracts are typically long-term and were often
entered into at the time the short line was purchased from the
Class I.
We operate fuel surcharge programs that vary by railroad and by
customer. The goal of these programs is to offset the majority
of fuel price increases by charging customers a fuel surcharge
on top of their regular contracted rates. Fuel surcharge
programs are typically either revenue-based or mileage-based.
Revenue-based programs charge a surcharge based on an additional
revenue per carload while mileage-based programs charge a
surcharge based on miles hauled. Both programs charge their
surcharge based on fuel price per gallon above a threshold
price. Approximately 75% of fuel price increases are offset
directly by fuel surcharges, while additional cost recovery is
obtained through increases in revenue per carload upon contract
renewal or regular rate updates.
A substantial portion of our freight revenue is generated under
contracts and similar arrangements with either the customers we
serve or the Class I railroads with which we connect.
Approximately 60% of our total freight revenue is generated
under contracts. Individual contracts vary in terms of duration,
pricing and volume requirements, but can generally be
categorized as follows:
Contracts directly with customers/shippers (approximately 18%
of freight revenue): In many cases, our
individual railroads maintain a contract with the customer that
they directly serve. Typically the customer has significant rail
infrastructure within its facility and is a major shipper or
receiver of industrial freight. Contracts stipulate the term and
pricing mechanics and often include minimum customer volume
requirements with liquidated damages paid to us to the extent
volumes fall below certain levels. In general, these contracts
are one to three years in length, although in certain instances
the term can be longer.
Contracts directly with Class I railroads (approximately
42% of freight revenue): In these cases, our
individual railroads act as an agent for the connecting
Class I railroad, with the Class I railroad typically
maintaining a contract directly with the customer/shipper for
the entire length of haul. The Class I railroad pays us
upon providing the service for its portion of the total haul,
and the Class I railroad pays us regardless of whether the
customer pays the Class I which results in low credit
exposure and timely payment. These contracts are typically
long-term in nature with an average duration of approximately
25 years.
Published rate, no contract (approximately 40% of freight
revenue): In the remaining cases, our individual
railroads generate freight revenue using a quoted revenue per
carload based on the type of freight service and market
environment. In all instances this revenue is generated directly
from customers and shippers. Rates can typically be adjusted
upon 20-days
notice although some of our larger customers often request a
private rate that provides more price certainty over a longer
period of time. While we do not serve customers under signed
contracts in these cases, we have longstanding relationships
with our customers and in many instances we are the only rail
service provider available to customers. Moreover, the heavy
nature of the freight shipped by the customer
and/or the
long distances carried competitively positions us favorably
versus other modes of transportation.
We currently do not foresee any significant changes to the mix
of contracts described above.
Non-Freight
Revenue
In addition to providing freight services, we also generate
non-freight revenue from other sources such as railcar storage,
demurrage, leases of equipment to other users (including
Class I railroads), and real estate leases and use fees.
Right-of-way
income is generated through crossing licenses and leases with
fiber optic, telecommunications, advertising, parking and
municipal users. These sources of revenue and value are an
important area of focus by our management as revenue from real
estate and
right-of-way
has minimal
associated operating costs or capital expenditures and
represents a recurring, stable cash flow stream. As a result of
this strategy, we have grown our non-freight revenue from
$60.5 million in 2007 to $68.4 million in 2008.
A summary of our non-freight revenue is presented in the table
below:
Of our 7,494 total track-miles, we own 4,546 track-miles and
lease 2,948 track-miles. In most cases, leases involve little to
no annual lease payment (but may have involved a one-time,
upfront payment) and have long-term or perpetual durations. In
addition, we operate approximately 1,038 track-miles under
trackage rights and operating agreements. Generally, trackage
rights are rights granted by other railroads to transport
freight over their tracks (but not directly serve customers on
their rail lines) while operating agreements grant us the right
to operate (and typically serve customers) on track owned by
third parties. Generally, trackage rights and operating
agreements do not convey any other rights (such as real estate
rights) to us.
Locomotives
and Railcars
Our locomotive fleet at the beginning of 2009 totaled
446 units comprised of 240 owned units and 206 leased units
and 7,719 railcars comprised of 524 owned railcars and 7,195
leased railcars. During 2008, we invested $2.5 million to
exercise early purchase options on 24 locomotives that had been
on high cost lease. We expect to continue to exercise similar
purchase options on certain leased locomotives as they become
exercisable. The average age of our locomotives and railcars is
39 and 40 years, respectively, across our entire portfolio
of railroads.
A summary of the rolling stock owned and leased by us is
presented in the table below:
We have a total of 1,582 employees of which 877 are
non-unionized and 705 are unionized. Unions representing our
employees are highly-fragmented, with representation at the
railroad-level rather than system-wide. In total, our railroads
are party to 29 labor agreements, which are separately
negotiated by the individual railroads, each of which have good
relations with employees. We have developed a standard template
in which to negotiate with the unions and are confident of its
ability to satisfy them. In our entire history there has been
just one strike in 2002, at our Cape Breton and Nova Scotia
Railroad. This strike resulted in no service interruptions due
to employee and supervisor cooperation.
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 federal regulations. Each
U.S. employee involved in train operations is subject to
pre-employment and random drug testing as 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 numerous American Short
Line and Regional Railroad Association Committees. Our FRA
reportable injury frequency ratio, measured as reportable
injuries per 200,000 man hours worked, was 1.64 in 2008 as
compared to 2.37 in 2007. For 2008, the industry average for all
railroads was 2.03.
Environmental
Our rail operations are subject to various federal, state,
provincial and local laws and regulations relating to pollution
and the protection of the environment. In the United States,
these environmental laws and regulations, which are implemented
principally by the federal Environmental Protection Agency, or
US EPA, and comparable state agencies, govern such matters as
the management of wastes, the discharge of pollutants into the
air and into surface and underground waters, the manufacture and
disposal of regulated substances and remediation of contaminated
soil and groundwater. Similarly, in Canada, these functions are
administered at the federal level by Environment Canada and the
Ministry of Transport and comparable agencies at the provincial
level.
We believe that our railroads operate in material compliance
with current environmental laws and regulations. We estimate
that any expenses incurred in maintaining compliance with
current environmental laws and regulations will not have a
material effect on our earnings or capital expenditures.
However, there can be no assurance that new, or more stringent
enforcement of existing, requirements or discovery of currently
unknown conditions will not result in significant expenditures
in the future.
There are no material environmental claims currently pending or,
to our knowledge, threatened against us or any of our railroads,
except for an August 2005 incident on the IORY in which Styrene
contained in a parked railcar was vented to the atmosphere, 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 were
filed, and claims submitted, by various individuals, businesses
and the City of Cincinnati against the Company and others
connected to the tank car. Motions for class action
certification were filed. Settlements were achieved in all these
matters including all claims of business interruption.
The IORY/Styrene incident also triggered inquiries from the FRA
and certain other federal, state and local authorities. A
settlement was reached with the FRA, requiring payment of a
$50,000 fine but no admission of liability by IORY. The
principal pending matter is a criminal investigation by US EPA
under the
federal Clean Air Act, or the CAA. Because of the chemical
release, the US EPA is investigating whether criminal negligence
on the part of IORY contributed to the incident, and whether
charges should be pressed under the CAA. To this end, the US EPA
has pursued extensive discovery and engaged the Company’s
counsel on several occasions. Should this investigation lead to
environmental crime charges, potential fines upon conviction
could range widely and there is a possibility that the US EPA
would seek to bar IORY and the Company from doing business with
the Federal Government for some period of time. US EPA’s
most recent communications indicate that any criminal charges
will likely be limited to misdemeanors. While we believe we have
substantial defenses to any such charges, we are not in a
position at this time to estimate whether any fine and any
debarment order would result in a material adverse effect on the
Company’s operations, business or financial condition.
Insurance
We maintain liability and property insurance coverage. Our
primary liability policies have self-insured retentions of up to
$4.0 million per occurrence applicable as to all of our
railroads, except for Kiamichi Railroad Company L.L.C. and Otter
Tail Valley Railroad Company. Inc. where the self-insured
retention is $50 thousand per occurrence. In addition, we
maintain excess liability policies that provide supplemental
coverage for losses in excess of our primary policy limits of up
to $200 million per occurrence.
With respect to the transportation of hazardous commodities, our
liability policies cover sudden releases of hazardous materials,
including expenses related to evacuation, up to the same excess
coverage limits and subject to the same self-insured retentions.
Personal injuries associated with grade crossing accidents are
also covered under liability policies.
Employees of our United States railroads are covered by FELA, a
fault-based system under which claims resulting from injuries
and deaths of railroad employees are settled by negotiation or
litigation. FELA-related claims are covered under our liability
insurance policies. Employees of our industrial switching
business are covered under workers’ compensation policies.
Employees of our Canadian railroads are covered by the
applicable provincial workers’ compensation policy, which
is a no-fault compensation system outside of our liability
insurance coverage.
Our property damage policies provide coverage for all
locomotives and rail cars in our care custody and control,
track, infrastructure and business interruption. This policy
provides coverage up to $15.0 million per occurrence,
subject to self-insurance retention of $1.0 million per
occurrence.
Regulation
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 Surface Transportation
Board of the USDOT, or the STB, successor to the Interstate
Commerce Commission, and the U.S. Department of Transportation,
or USDOT, through 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 regulated transportation services,
and the service provided by rail carriers.
As a result of the 1980 Staggers Rail Act, the rail industry is
trusted with 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, although certain proposed shipper-backed
legislative initiatives threaten to limit some of that pricing
freedom. 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
the 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 the 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 the 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
2008, the Railroad Retirement System required up to a 19.75%
contribution by railroad employers on eligible
wages, while the Social Security and Medicare Acts only required
a 7.65% contribution on similar wage bases.
Legal
Proceedings
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
our current litigation outstanding will not have a material
adverse effect on the Company’s financial position, results
of operations or cash flows.
The Company’s operations are subject to extensive
environmental regulation. There are no material environmental
claims currently pending or, to our knowledge, threatened
against us or any of our railroads, except for an August 2005
incident on the IORY in which Styrene contained in a parked
railcar was vented to the atmosphere, due to a chemical
reaction. See “— Environmental.”
The Company is subject to claims for employee work-related and
third-party injuries. Work-related injuries for employees are
primarily subject to the FELA. The Company retains an
independent actuarial firm to assist management in assessing the
value of personal injury claims and cases. An analysis has been
performed by an independent actuarial firm and is reviewed by
management. The methodology used by the actuary includes a
development factor to reflect growth or reduction in the value
of these personal injury claims. It is based largely on the
Company’s historical claims and settlement experience. At
December 31, 2008 and 2007, the Company had
$15.8 million and $14.4 million, respectively, accrued
for personal injury claims and cases. Actual results may vary
from estimates due to the type and severity of the injury, costs
of medical treatments and uncertainties in litigation.
On November 14, 2006, RR Acquisition Holding LLC and RR
Acquisition Sub Inc., its
wholly-owned
subsidiary, both formed by investment funds managed by
affiliates of Fortress, entered into an Agreement and Plan of
Merger with us. On February 14, 2007, shortly after the
approval of the proposed merger by the Company’s
shareholders, RR Acquisition Sub Inc. merged with and into the
Company, with the Company continuing as the entity surviving the
merger as a wholly-owned subsidiary of RR Acquisition Holding
LLC. Under the terms of the Agreement and Plan of Merger, our
shareholders received $16.35 in cash for each share of common
stock. The total value of the transaction, including the
refinancing of the Company’s existing debt, was
approximately $1.1 billion. As part of the acquisition
transaction, we became a private company and delisted our common
stock from the NYSE.
Fortress is a leading global alternative asset manager with
approximately $31.0 billion in assets under management (fee
paying) as of June 30, 2009. Fortress is headquartered in
New York and has affiliates with offices in Charlotte, Dallas,
Frankfurt, London, Los Angeles, Munich, New Canaan, Rome,
San Francisco, Shanghai, Sydney, Tokyo and Toronto.
The following table sets forth the name, age and position of our
directors and executive officers as of September 1, 2009.
Each of our executive officers holds office until his or her
successor is elected or appointed and qualified or until his or
her death, resignation, retirement or removal, if earlier. Each
director holds office until his or her successor is duly elected
or appointed and qualified or until his or her earlier death,
retirement, disqualification, resignation or removal. Upon
completion of this offering, our board will consist of seven
members, a majority of which will be “independent” as
defined under the rules of the NYSE.
Name
Age
Position
Wesley R. Edens
47
Chairman of the Board of Directors
Joseph P. Adams, Jr.
52
Director
John Giles
60
President and Chief Executive Officer
Clyde Preslar
55
Senior Vice President and Chief Financial Officer
David Rohal
47
Senior Vice President Strategic Relations
Paul Lundberg
58
Senior Vice President and Chief Operations Officer
Charles M. Patterson
54
Senior Vice President and Chief Commercial Officer
Scott Williams
55
Senior Vice President and General Counsel
David Novak
55
Senior Vice President and Chief Administrative Officer
Harold Tynes
52
Vice President and Controller
Wesley R. Edens was appointed to our board in 2007. He is
the Co-Chairman of the board of Fortress, was the Chief
Executive Officer of Fortress until August 2009 and has been a
member of the Management Committee of Fortress since co-founding
Fortress in 1998. Mr. Edens is responsible for
Fortress’s private equity and publicly traded alternative
investment businesses. He is Chairman of the board of directors
of each of Aircastle Limited, Brookdale Senior Living Inc.,
Eurocastle Investment Limited, GateHouse Media, Inc., Newcastle
Investment Corp. and Seacastle Inc. and a director of GAGFAH
S.A. and Penn National Gaming Inc. Mr. Edens was Chief
Executive Officer of Global Signal Inc. from February 2004 to
April 2006 and Chairman of the board of directors from October
2002 to January 2007. Mr. Edens serves in various
capacities in the following three registered investment
companies: Chairman, Chief Executive Officer and Trustee of
Fortress Registered Investment Trust and Fortress Investment
Trust II and Chief Executive Officer of RIC Coinvestment
Fund LP. Prior to forming Fortress, Mr. Edens was a
partner and managing director of BlackRock Financial Management
Inc., where he headed BlackRock Asset Investors, a private
equity fund. In addition, Mr. Edens was formerly a partner
and managing director of Lehman Brothers. Mr. Edens
received a B.S. in Finance from Oregon State University.
Joseph P. Adams, Jr. was appointed to our board in
2007. He is a Managing Director at Fortress within the Private
Equity Group and Deputy Chairman of Aircastle Limited and
Seacastle Inc. Previously, Mr. Adams was a partner at Brera
Capital Partners and at Donaldson, Lufkin & Jenrette
where he was in the transportation industry group. In 2002,
Mr. Adams served as the first Executive Director of the Air
Transportation Stabilization Board. Mr. Adams received a BS
in Engineering from the University of Cincinnati and an MBA from
Harvard Business School.
John Giles previously served as President and Chief
Executive Officer of Great Lakes Transportation, LLC between
2001 and 2004, at which time the company was acquired by
Canadian National Railway Co. He began in the industry in 1969
with a CSX predecessor. In 1975 he joined the Elgin,
Joliet & Eastern Railway Company, a subsidiary of US
Steel, where he held positions of progressively greater
responsibility in the Transportation department. In 1981,
Mr. Giles returned to CSX, where he served in a variety of
roles in the operations, marketing and strategic planning
departments. He has also served as a Director for various
non-profits, and as a Director and advisor on various industry
groups, including the Indiana Railroad Co., The Lake Carriers
Association, National Freight Transportation Association, and
INROADS. Mr. Giles was born in
England and raised in Indianapolis. He holds a B.A. in Business
from Marian College and a MBA from Indiana University.
Clyde Preslar was named Senior Vice President and Chief
Financial Officer of RailAmerica on May 5, 2008, and joined
the Company with over 28 years of experience in corporate
finance, including 11 years experience as a Chief Financial
Officer of publicly traded companies. Prior to joining
RailAmerica, Preslar was the Executive Vice President and Chief
Financial Officer for Cott Corporation in Tampa, Florida. He
also served as Vice President and Chief Financial Officer for
Lance, Inc. in Charlotte, North Carolina. Preslar is an Elon
College graduate and holds an MBA from Wake Forest University.
David Rohal joined RailAmerica in March 2007, with over
22 years of railroad management experience and served for
two years as RailAmerica’s Chief Operating Officer before
assuming leadership of strategic and governmental relations. He
started in the railroad industry as a management trainee with
the Chessie System Railroads, a predecessor of CSX, and held
corporate and operating positions with both CSX and short line
operator Genesee & Wyoming before joining RailAmerica.
In his career Rohal has led and managed many aspects of railroad
operations, including field operations, planning, customer
service, and equipment, and has led the execution of major
transformational projects including reengineering, acquisitions,
integrations, and consolidations. Rohal graduated from Yale
University in 1984 with a B.A. in American Studies and received
his MBA in Transportation, Marketing and Finance from
Northwestern University’s J.L. Kellogg Graduate School of
Management in 1990.
Paul Lundberg joined RailAmerica in February 2007 and
served for two years with corporate responsibilities for
operations, relationships with RailAmerica’s Class I
railroad partners, and labor relations, before becoming
RailAmerica’s Chief Operations Officer. Mr. Lundberg
is part of the management team that joined RailAmerica upon its
acquisition by Fortress. Mr. Lundberg began his railroad
career on the Chicago & North Western Railway in 1973.
He held a variety of management positions in labor relations and
operations, including Vice President — Labor Relations
and Senior Vice President — Transportation, where he
was responsible for all transportation, coal and commuter
operations, equipment management, service design and customer
service. Subsequent to his career at the C&NW,
Mr. Lundberg has held senior management positions at
SeaLand and Maersk Sealand (container shipping) and Great Lakes
Transportation (railroads and shipping). Prior to joining
RailAmerica, Mr. Lundberg was General Manager of the
Massachusetts Bay Commuter Railroad, the contract operator of
commuter operations in the Boston area. Mr. Lundberg holds
a Bachelor of Science in Communications degree from Northwestern
University, and a Master of Management degree from
Northwestern’s Kellogg Graduate School of Management.
Charles M. Patterson appointed to his post in March 2007,
joined RailAmerica after a successful run as Director of Sales
with CN Railway. Prior to that, he was Vice President and
General Manager of Great Lakes Fleet, LLC.
Mr. Patterson’s longest tenure was his 16 years
with CSX, where he started as an Operations Planning analyst and
ended as Director of Sales, Marketing and Customer Service for
Minerals. He also served proudly in the US Army from 1977 to
1981, serving as a Commanding Officer and a Logistics Officer
among other assignments. Mr. Patterson holds a B.S. from
Davidson College and an MBA from the University of Virginia.
Scott Williams has served as RailAmerica’s Senior
Vice President and General Counsel since 2002.
Mr. Williams’ responsibilities included corporate
governance and SEC, NYSE and Sarbanes Oxley compliance while
RailAmerica was a public company through 2007. Mr. Williams
continues as part of the management team that joined RailAmerica
upon its acquisition by private equity funds managed by
affiliates of Fortress Investment Group. Prior to joining
RailAmerica, Mr. Williams practiced law as an equity
partner with the 150+ attorney firm of Shutts & Bowen,
LLP, developing an extensive background in commercial office,
shopping center and industrial park development, land
development, construction and permanent loan financing, and
zoning and utilities practice. While at Shutts &
Bowen, Mr. Williams represented the predecessors to
RailAmerica in their early short line acquisitions, including
the 1986 acquisition of Huron & Eastern Railway, and
continued to represent RailAmerica in a series of asset and
stock acquisitions and financings in the decade that followed.
Mr. Williams has a combined 23 years of experience in
working in, or representing clients in, the railroad industry.
Mr. Williams received his B.A. from Yale University in 1976
and
his J.D. from Vanderbilt University in 1980. He served for four
years as a member of the State of Florida Commission on Ethics,
and was elected and served as its Chairman in 1990 and 1991.
David Novak joined RailAmerica in February 2008, with
operations and administrative responsibilities. Mr. Novak
began his business career in the operations department of the
Elgin, Joliet & Eastern Railway Company, or EJ&E,
a railroad subsidiary of United States Steel Corporation, or
USS. Subsequently, Mr. Novak moved to CSX Transportation
where he became general superintendent and a managing director
in the
sales-and-marketing
department and a managing director in the finance department. In
2001, Mr. Novak joined the Great Lakes Transportation LLC,
or GLT, management team, as a vice president with both
operations and administrative responsibilities. After Canadian
National Railway Co.’s, or CN’s, 2004 acquisition of
GLT’s carrier subsidiaries, Mr. Novak remained with CN
to integrate GLT’s operations into CN and to shutdown
GLT’s Monroeville headquarters. In December 2004,
Mr. Novak authored Project Solomon, an ambitious strategy
that envisioned dividing EJ&E between CN and USS, thereby
solving structural problems relating to CN’s Chicago-area
operations. Mr. Novak led the EJ&E project from
CN’s U.S. headquarters near Chicago and came to
RailAmerica shortly after the EJ&E acquisition was
announced. Mr. Novak holds Bachelor’s and
Master’s degrees in business from Indiana University and
has attended the University of Chicago, Syracuse University, and
the Wharton School of the University of Pennsylvania.
Harold Tynes joined RailAmerica in July 2007 as the Vice
President and Controller. Mr. Tynes joined the Company with
more than 25 years of experience in finance. He has
primarily focused on heavy operational issues and
mergers & acquisitions, both in domestic and
international settings. Prior to joining RailAmerica,
Mr. Tynes was the Chief Financial Officer for QualServ
Corporation in Kansas City, Missouri. He also served as the
Corporate Controller at Great Lakes Transportation and worked in
a variety of finance positions at GE. He holds a BS in Finance
from Troy State University and received his MBA in Finance from
Mercer University.
Board of
Directors
Our amended and restated bylaws provide that our board shall
consist of not less than three and not more than nine directors
as the board of directors may from time to time determine. Our
board of directors will initially consist of seven directors.
Our board of directors is divided into three classes that are,
as nearly as possible, of equal size. Each class of directors is
elected for a three-year term of office, but the terms are
staggered so that the term of only one class of directors
expires at each annual general meeting. The initial terms of the
Class I, Class II and Class III directors will
expire in 2010, 2011 and 2012, respectively.
Messrs. , and
will each serve as a Class I director,
Messrs. and
will each serve as a Class II director and
Messrs.
and
will each serve as a Class III director. All officers serve
at the discretion of the board of directors. Under our
Stockholders Agreement, which we and the Initial Stockholder
will execute prior to the completion of this offering, we are
required to take all reasonable actions within our control
(including nominating as directors the individuals designated by
FIG LLC that otherwise meet our reasonable standards for board
nominations) so that up to a majority (depending upon the level
of ownership of the Fortress Stockholders) of the members of our
board of directors are individuals designated by FIG LLC. Upon
completion of this offering, we will have seven directors, four
of whom we believe will be determined to be independent as
defined under the rules of the NYSE. Our board of directors has
determined that
Messrs. , , and
will be our independent directors.
Our amended and restated certificate of incorporation does not
provide for cumulative voting in the election of directors,
which means that the holders of a majority of the outstanding
shares of common stock can elect all of the directors standing
for election, and the holders of the remaining shares will not
be able to elect any directors; provided, however, that pursuant
to the Stockholders Agreement that we will enter into with the
Initial Stockholder prior to the completion of this offering, we
will be required to take all reasonable actions within our
control (including nominating as directors the individuals
designated by FIG LLC that otherwise meet our reasonable
standards for board nominations) so that up to a majority
(depending upon the level of ownership of the Fortress
Stockholders) of the members of our board of directors are
individuals designated by FIG LLC.
Upon completion of this offering, we will establish the
following committees of our board of directors:
Audit
Committee
The audit committee:
•
reviews the audit plans and findings of our independent
registered public accounting firm and our internal audit and
risk review staff, as well as the results of regulatory
examinations, and tracks management’s corrective action
plans where necessary;
•
reviews our financial statements, including any significant
financial items
and/or
changes in accounting policies, with our senior management and
independent registered public accounting firm;
•
reviews our financial risk and control procedures, compliance
programs and significant tax, legal and regulatory
matters; and
•
has the sole discretion to appoint annually our independent
registered public accounting firm, evaluate its independence and
performance and set clear hiring policies for employees or
former employees of the independent registered public accounting
firm.
The members of the committee have not yet been appointed. We
intend to appoint at least three members to this committee who
are “independent” directors as defined under NYSE
rules and
Rule 10A-3
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Each of these directors will be determined to be
financially literate by our board, and one will be our audit
committee financial expert.
Nominating,
Corporate Governance and Conflicts Committee
The nominating, corporate governance and conflicts committee:
•
reviews the performance of our board of directors and makes
recommendations to the board regarding the selection of
candidates, qualification and competency requirements for
service on the board and the suitability of proposed nominees as
directors;
•
advises the board with respect to the corporate governance
principles applicable to us;
•
oversees the evaluation of the board and management;
•
reviews and approves in advance any related party transaction,
other than those that are pre-approved pursuant to pre-approval
guidelines or rules established by the committee; and
•
established guidelines or rules to cover specific categories of
transactions.
The members of the committee have not yet been appointed. We
intend to appoint at least three members to this committee who
are “independent” directors as defined under NYSE
rules.
Compensation
Committee
The compensation committee:
•
reviews and recommends to the board the salaries, benefits and
equity incentive grants for all employees, consultants,
officers, directors and other individuals we compensate;
•
reviews and approves corporate goals and objectives relevant to
Chief Executive Officer compensation, evaluates the Chief
Executive Officer’s performance in light of those goals and
objectives, and determines the Chief Executive Officer’s
compensation based on that evaluation; and
•
oversees our compensation and employee benefit plans.
The members of the committee have not yet been appointed. We
intend to appoint at least three members to this committee who
are “independent” directors as defined under the NYSE
rules, “non-employee” directors as defined in
Rule 16b-3(b)(3)
under the Exchange Act and “outside” directors within
the meaning of Section 162(m)(4)(c)(i) of the Code.
We have not yet paid any compensation to our directors.
Following completion of this offering, we will pay an annual fee
to each independent director equal to
$ , payable semi-annually. In
addition, an annual fee of $
will be paid to the chairs of each of the audit and compensation
committees of the board of directors. Fees to independent
directors may be made by issuance of common stock, based on the
value of such common stock at the date of issuance, rather than
in cash, provided that any such issuance does not prevent such
director from being determined to be independent and such shares
are granted pursuant to a stockholder-approved plan or the
issuance is otherwise exempt from NYSE listing requirements.
Affiliated directors, however, will not be separately
compensated by us. All members of the board of directors will be
reimbursed for reasonable costs and expenses incurred in
attending meetings of our board of directors. Following the
completion of this offering, each independent director will be
eligible to receive awards of our common stock as described in
“— IPO Equity Incentive Plan.”
Messrs. , , and
will each be granted a number of restricted shares of common
stock immediately prior to the completion of this offering,
equal in value to $ , based
on the fair market value of our shares on the date of grant.
These restricted shares will become vested in three equal
portions on the last day of each of our fiscal years 2010, 2011
and 2012, provided the director is still serving as of the
applicable vesting date. The directors holding these restricted
shares will be entitled to any dividends that become payable on
such shares during the restricted period.
Except as otherwise provided by the plan administrator, on the
first business day after our annual general meeting of
stockholders in 2010 and each such annual general meeting
thereafter during the term of the RailAmerica, Inc. Equity
Incentive Plan, each of our independent directors who is serving
following such annual general meeting will automatically be
granted under the RailAmerica, Inc. Equity Incentive Plan a
number of unrestricted shares of common stock having a fair
market value of $ as of the
date of grant; however, those of our directors who are granted
the restricted shares of common stock described above
immediately prior to the completion of this offering will not be
eligible to receive these automatic annual grants. See
“— IPO Equity Incentive Plan.”
Executive
Officer Compensation
The discussion and analysis of our compensation program for our
Chief Executive Officer (the “CEO”), Chief Financial
Officer and the other executive officers named in our Summary
Compensation Table (the “named executive officers” or
“NEOs”) which follows should be read in conjunction
with the tables and text contained elsewhere in this filing.
Note that the compensation paid to our named executive officers
for 2006, 2007 and 2008, which is discussed below in the section
entitled “Historical Compensation of our Named Executive
Officers,” is not necessarily indicative of how we will
compensate our named executive officers after this offering. Set
forth immediately below in the section entitled
“Compensation Discussion and Analysis” is a
description of how we expect to compensate our named executive
officers after this offering.
Compensation
Discussion and Analysis
Our primary executive compensation goals are to attract,
motivate and retain the most talented and dedicated executives
and to align annual and long-term incentives with enhancing
shareholder value. To achieve these goals we intend to implement
and maintain compensation plans that:
•
Balance short-term and long-term goals by delivering a
substantial portion of total executive officer compensation
through restricted share grants;
•
Deliver a mix of fixed and at-risk compensation, including
through the use of restricted share grants, the value of which
is directly related to the performance of RailAmerica; and
•
Through dividend equivalents on restricted share grants, tie a
substantial portion of the overall compensation of executive
officers to the dividends we pay to our shareholders.
The compensation committee of our board of directors will
evaluate our performance, including the achievement of key
investment and capital raising goals, and the individual
performance of each named executive officer, with a goal of
setting overall compensation at levels that the compensation
committee believes are appropriate. Our named executive officers
are not in any way directly responsible for determining our
CEO’s compensation, although they will regularly provide
information to the compensation committee that will be relevant
to its evaluation of the CEO’s compensation (for instance,
in terms of our performance against established compensation
goals and otherwise). By contrast, the CEO will play a more
active role in determining the compensation of the other named
executive officers, who are his subordinates. He will regularly
advise the compensation committee of his own evaluation of their
job performance and, from time to time, offer for consideration
by the compensation committee his own recommendations for their
compensation levels. The compensation committee remains free to
disregard those recommendations.
We have not retained a compensation consultant to review our
policies and procedures with respect to executive compensation,
although the compensation committee may elect in the future to
retain a compensation consultant if it determines that doing so
would assist it in implementing and maintaining compensation
plans.
Elements
Of Compensation
Our executive compensation will consist of the elements set
forth below. Determinations regarding any one element of
compensation will affect determinations regarding each other
element of compensation, because the goal of the compensation
committee is to set overall compensation at an appropriate
level. The compensation committee will take into account in this
regard the extent to which different compensation elements are
at-risk. Accordingly, for example, the amount of salary paid to
a named executive officer will be considered by the compensation
committee in determining the amount of any cash bonus or
restricted stock award, but we do not expect the relationship
among the elements to be formulaic because of the need to
balance the likelihood that the at-risk components of the
compensation will actually be paid at any particular level.
Base Salary. Base salaries for our named
executive officers will be established based upon the scope of
their responsibilities, taking into account the compensation
levels from their recent prior employment. Base salaries will be
reviewed annually and adjusted from time to time in view of each
named executive officer’s individual responsibilities,
individual and company performance, and experience. The
compensation committee intends to conduct annual salary reviews
in December of each year. The current base salaries for our
named executive officers are as follows:
•
John Giles, $300,000
•
Clyde Preslar, $250,000
•
Paul Lundberg, $236,000
•
Charles Patterson, $236,000
•
David Rohal, $200,000
•
Scott Williams, $243,763
These base salaries are intended to complement the at-risk
components of the Company’s compensation program by
assuring that our named executive officers will receive an
appropriate minimum level of compensation.
Discretionary Cash Bonuses. The compensation
committee has the authority to award discretionary annual
bonuses to our named executive officers. The annual incentive
bonuses are intended to compensate our named executive officers
for individual performance achievements, for our overall
financial performance and for achieving important milestones.
Bonus levels will vary depending on the individual executive and
will not be formulaic, but generally will include such factors
as our overall financial performance, quality and amount of new
investments, enhancing our dividend paying capability and
improving our operations. Discretionary
cash incentives are designed to advance the interests of the
Company by providing incentives in the form of periodic bonus
awards to certain key employees who contribute significantly to
the strategic and long-term performance objectives and growth of
the Company. The bonuses ordinarily will be determined in
December and paid in a single installment in the first quarter
of the year following determination.
Equity Incentives. In addition to short-term
bonus awards, the compensation committee has the authority to
award restricted share and other equity grants to our executive
officers. These awards will be made only to certain executives,
taking into account exceptional individual and corporate
performance, to provide additional retention benefits and
performance incentives through additional share ownership.
Additional information regarding potential future equity grants
is set forth below in the section entitled “IPO Equity
Incentive Plan.”
Severance Benefits. We have entered into
employment agreements and restricted share grant agreements with
our named executive officers that provide severance benefits to
such officers in the circumstances described in greater detail
below in the section entitled “Management Shareholder,
Employment and Other Agreements.” We believe that these
severance and change in control benefits are essential elements
of our executive compensation and assist us in recruiting and
retaining talented executives.
Other Compensation. All of our executive
officers are eligible to participate in our employee benefit
plans, including medical, dental, life insurance and 401(k)
plans. These plans are available to all employees and do not
discriminate in favor of our executive officers. Certain of our
named executive officers are also eligible for reimbursements
for relocation expenses, legal costs associated with negotiating
employment agreements, tax advisory services
and/or
commuting expenses. We do not view perquisites as a significant
element of our comprehensive compensation structure.
Management
Shareholder, Employment and Other Agreements
We have entered into management shareholder agreements with our
named executive officers governing the terms and conditions of
their employment. The named executive officers are employed as
employees “at will” under these agreements.
Existing
Equity Arrangements
Each of our named executive officers has been granted restricted
shares of Company common stock under the terms of the Management
Shareholder Agreements previously entered into between the
Company and the named executive officer. The restricted shares
granted pursuant to the Management Shareholder Agreements vest
on the first five anniversaries of the date of grant in
accordance with the following schedule (provided that the
officer is employed by the Company on the vesting date): 10%,
15%, 25%, 25%, 25%.
In addition, historically, 50% of the Company’s annual
discretionary bonuses (including the bonuses payable to our
named executive officers) have been paid in restricted shares of
Company common stock. These shares vest in equal installments on
the first three anniversaries of the date of grant, provided
that the officer is employed by the Company on the vesting date.
Except as described below with respect to terminations of
employment following a change in control of the Company, if the
employment of any of our named executive officers is terminated
without cause or for good reason (as described above in the
section entitled “Management Shareholder, Employment and
Other Agreements”), subject to the named executive officer
executing a general release of claims in favor of the Company,
the tranche of restricted shares next scheduled to vest (but in
no event less than 25% of the total share grant) will vest and
the remaining unvested restricted shares will be forfeited. If
the employment of any of our named executive officers is
terminated without cause or for good reason within one year
following a change in control, subject to the named executive
officer executing a general release of claims in favor of the
Company, all unvested restricted shares will vest. On any other
termination of employment, all unvested restricted shares will
be forfeited.
The aggregate number of restricted shares held by each of our
named executive officers as of December 31, 2008 is set
forth in the table entitled “Outstanding Equity Awards At
2008 Year End.”
Prior to the completion of this offering, we will adopt an
equity incentive plan for our employees, the RailAmerica, Inc.
Equity Incentive Plan, or the “Plan.” The purposes of
the Plan are to provide additional incentives to selected
employees and directors of, and consultants to, the Company or
its subsidiaries, to strengthen their commitment, motivate them
to faithfully and diligently perform their responsibilities and
to attract and retain competent and dedicated persons who are
essential to the success of our business and whose efforts will
impact our long-term growth and profitability. To accomplish
these purposes, the Plan will provide for the issuance of share
options, share appreciation rights, restricted shares, deferred
shares, performance shares, unrestricted shares and other
share-based awards.
While we intend to issue restricted shares and other share-based
awards in the future to employees as a recruiting and retention
tool, we have not established specific parameters regarding
future grants. Our board of directors (or the compensation
committee of the board of directors, after it has been
appointed) will determine the specific criteria surrounding
other equity issuances under the Plan. The following description
summarizes the expected features of the Plan.
Summary
of Plan Terms
A total
of shares
of common stock will be reserved and available for issuance
under the Plan, subject to annual increases
of shares
of common stock per year, beginning in 2010 through and
including 2019. When Section 162(m) of the Internal Revenue
Code becomes applicable to us, the maximum aggregate awards that
may be granted during any fiscal year to any individual who is
likely to be a covered employee, as defined under
Section 162(m) of the Internal Revenue Code, will
be shares.
The Plan will initially be administered by our board of
directors, although it may be administered by either our board
of directors or any committee of our board of directors,
including a committee that complies with the applicable
requirements of Section 162(m) of the Internal Revenue
Code, Section 16 of the Exchange Act and any other
applicable legal or stock exchange listing requirements (the
board or committee being sometimes referred to as the “plan
administrator”). The plan administrator may interpret the
Plan and may prescribe, amend and rescind rules and make all
other determinations necessary or desirable for the
administration of the Plan.
The Plan will permit the plan administrator to select the
directors, employees and consultants who will receive awards, to
determine the terms and conditions of those awards, including
but not limited to the exercise price, the number of shares of
common stock subject to awards, the term of the awards and the
vesting schedule applicable to awards, and to amend the terms
and conditions of outstanding awards.
We may issue share options under the Plan. All share options
granted under the Plan are intended to be non-qualified share
options and are not intended to qualify as “incentive stock
options” within the meaning of Section 422 of the
Internal Revenue Code. The option exercise price of all share
options granted under the Plan will be determined by the plan
administrator, but in no event shall the exercise price be less
than 100% of the fair market value of the common stock on the
date of grant. The term of all share options granted under the
Plan will be determined by the plan administrator, but may not
exceed ten years. Each share option will be exercisable at such
time and pursuant to such terms and conditions as determined by
the plan administrator in the applicable share option agreement.
Unless the applicable share option agreement provides otherwise,
in the event of an optionee’s termination of employment or
service for any reason other than for cause, retirement,
disability or death, such optionee’s share options (to the
extent exercisable at the time of such termination) generally
will remain exercisable until 90 days after such
termination and will then expire. Unless the applicable share
option agreement provides otherwise, in the event of an
optionee’s termination of employment or service due to
retirement, disability or death, such optionee’s share
options (to the extent exercisable at the time of such
termination) generally will remain exercisable until one year
after such termination and will then expire. Share options that
were not exercisable on the date of termination of employment
for any reason other than for cause will expire at the close of
business on the date of such termination. In the event of an
optionee’s termination of employment or
service for cause, such optionee’s outstanding share
options (whether or not vested) will expire at the commencement
of business on the date of such termination of employment.
Share appreciation rights, or “SARs,” may be granted
under the Plan, either alone or in conjunction with all or part
of any option granted under the Plan. A free-standing SAR
granted under the Plan will entitle its holder to receive, at
the time of exercise, an amount per share equal to the excess of
the fair market value (at the date of exercise) of a share of
common stock over a specified price fixed by the plan
administrator on the date of grant (which shall be no less than
fair market value at the date of grant). A SAR granted in
conjunction with all or part of an option under the Plan will
entitle its holder to receive, at the time of exercise of the
SAR and surrender of the applicable portion of the related
option, an amount per share equal to the excess of the fair
market value (at the date of exercise) of a share of common
stock over the exercise price of the related share option. In
the event of a participant’s termination of employment or
service, free-standing SARs will be exercisable at such times
and subject to such terms and conditions determined by the plan
administrator on or after the date of grant, while SARs granted
in conjunction with all or part of an option will be exercisable
at such times and subject to the terms and conditions applicable
to the related option.
Restricted shares, deferred shares and performance shares may be
granted under the Plan. The plan administrator will determine
the purchase price, the vesting schedule and performance
objectives, if any, with respect to the grant of restricted
shares, deferred shares and performance shares. Participants
with restricted shares and performance shares will generally
have all of the rights of a shareholder, including dividend
equivalent rights. Participants with deferred shares will have
the rights of a shareholder upon the future settlement of the
shares; provided, that, during the restricted period, deferred
shares may be credited with dividend equivalent rights, if the
award agreement so provides. If the performance goals, service
requirements, and other restrictions are not satisfied, the
restricted shares, deferred shares
and/or
performance shares will be subject to forfeiture or the
Company’s right of repurchase of such shares. Subject to
the provisions of the Plan and the applicable award agreement,
the plan administrator has the sole discretion to provide for
the lapse of restrictions in installments or the acceleration or
waiver of restrictions (in whole or part) under certain
circumstances, including, without limitation, the attainment of
certain performance goals, a participant’s termination of
employment or service or a participant’s death or
disability.
In the event of a merger, consolidation, reorganization,
recapitalization, share dividend or other change in corporate
structure affecting the shares of common stock, an equitable
substitution or proportionate adjustment shall be made, as may
be determined by the plan administrator, in (i) the
aggregate number of shares of common stock reserved for issuance
under the Plan, (ii) the maximum number of shares of common
stock that may be subject to awards granted to any participant
in any calendar year, (iii) the kind, number and exercise
price subject to outstanding share options and SARs granted
under the Plan, and (iv) the kind, number and purchase
price of shares of common stock subject to outstanding awards of
restricted shares, deferred shares, performance shares or other
share-based awards granted under the Plan. In addition, the plan
administrator, in its discretion, may terminate all awards in
exchange for the payment of cash or in-kind consideration.
However, no adjustment or payment may cause any award under the
Plan that is or becomes subject to Section 409A of the
Internal Revenue Code to fail to comply with the requirements of
that section.
Unless otherwise determined by the plan administrator and
evidenced in an award agreement, if a change in control occurs
and a participant’s employment is terminated without cause
on or after the effective date of the change in control, but
prior to 12 months following the effective date of the
change in control, then any unvested or unexercisable portion of
any award carrying a right to exercise shall become fully vested
and exercisable, and the restrictions, deferral limitations,
payment conditions and forfeiture conditions applicable to any
other award granted under the Plan will lapse and such unvested
awards will be deemed fully vested and any performance
conditions imposed with respect to such awards will be deemed to
be fully achieved. Under the Plan, the term “change in
control” generally means: (i) any person or entity
(other than (a) an affiliate of Fortress or any managing
director, general partner, director, limited partner, officer or
employee of any such affiliate of Fortress or (b) any
investment fund or other entity managed directly or indirectly
by Fortress or any general partner, limited partner, managing
member or person occupying a similar role of or with respect to
any such fund or entity) becomes the beneficial owner of
securities of the Company representing 50% or more of the
Company’s then outstanding voting power; (ii) the
consummation of a merger
of the Company or any subsidiary of the Company with any other
corporation, other than a merger immediately following which the
board of directors of the Company immediately prior to the
merger constitute at least a majority of the directors of the
company surviving or continuing after the merger or, if the
surviving company is a subsidiary, the ultimate parent;
(iii) a change in the majority of the membership of the
board of directors without approval of two-thirds of the
directors who constituted the board of directors at the time
this offering is consummated, or whose election was previously
so approved; or (iv) the Company’s shareholders
approve a plan of complete liquidation or dissolution of the
Company or there is consummated an agreement for the sale or
disposition of all or substantially all of the Company’s
assets, other than (a) a sale of such assets to an entity,
at least 50% of the voting power of which is held by the
Company’s shareholders following the transaction in
substantially the same proportions as their ownership of the
Company immediately prior to the transaction or (b) a sale
or disposition of such assets immediately following which the
board of directors of the Company immediately prior to such sale
constitute at least a majority of the board of directors of the
entity to which the assets are sold or disposed, or, if that
entity is a subsidiary, the ultimate parent thereof. The
completion of this offering will not be a change of control
under the Plan.
The Plan provides that our board of directors may amend, alter
or terminate the Plan, but no such action may impair the rights
of any participant with respect to outstanding awards without
the participant’s consent. The plan administrator may amend
an award, prospectively or retroactively, but no such amendment
may impair the rights of any participant without the
participant’s consent. Unless the board of directors
determines otherwise, shareholder approval of any such action
will be obtained if required to comply with applicable law. The
Plan will terminate on the tenth anniversary of the effective
date of the Plan (although awards granted before that time will
remain outstanding in accordance with their terms).
We intend to file with the SEC a registration statement on
Form S-8
covering the shares issuable under the Plan.
Federal
Income Tax Consequences of Plan Awards
The following is a summary of certain federal income tax
consequences of awards under the Plan. It does not purport to be
a complete description of all applicable rules, and those rules
(including those summarized here) are subject to change. It is
suggested that a participant consult his or her tax
and/or
financial advisor for tax advice before exercising an option or
stock appreciation right and before disposing of any shares
acquired upon that exercise or pursuant to any other award under
the Plan.
Share Options. Participants generally will not
be taxed upon the grant of a share option. Rather, at the time
the share option is exercised, the participant will generally
recognize ordinary income for federal income tax purposes in an
amount equal to the excess of the then fair market value of the
shares of common stock purchased over the option exercise price.
The Company will generally be entitled to a tax deduction at the
time and in the amount that the participant recognizes ordinary
income.
Share Appreciation Rights. In the case of
share appreciation rights, a participant generally will not be
taxed upon the grant of such rights or vesting of such rights.
Rather, at the time of exercise of the share appreciation right,
a participant will generally recognize ordinary income for
federal income tax purposes in an amount equal to the value of
the shares of common stock and cash received at the time of such
receipt. The Company will generally be entitled to a tax
deduction at the time and in the amount that the participant
recognizes ordinary income.
Restricted Shares and Performance Awards. A
participant generally will not be subject to tax upon the grant
of a restricted share or performance award, but rather will
recognize ordinary income in an amount equal to the fair market
value of the common stock at the time the shares are no longer
subject to a substantial risk of forfeiture (as defined in the
Internal Revenue Code). A holder may, however, elect to be taxed
at the time of the grant. The Company generally will be entitled
to a deduction at the time and in the amount that the holder
recognizes ordinary income. A participant’s tax basis in
the shares of common stock will be equal to the fair market
value of the shares at the time the restrictions lapse, and the
participant’s holding period for capital gains purposes
will begin at that time. Any cash dividends paid on the common
stock before the restrictions lapse will be taxable to the
participant as additional compensation (and not as dividend
income).
Deferred Shares. In general, the grant of
deferred shares will not result in income for the participant or
in a tax deduction for us. Upon the settlement of such an award,
the participant will recognize ordinary income equal to the
aggregate value of the payment received, and we generally will
be entitled to a tax deduction in the same amount.
Historical
Compensation of our Named Executive Officers
Set forth below is information concerning the cash and non-cash
compensation earned by, awarded to or paid by us during 2008,
2007, and 2006 respectively, to our named executive officers.
Our named executive officers are our Chief Executive Officer,
Chief Financial Officer and the other four most highly
compensated executive officers of the Company who were serving
as executive officers as of the end of 2008.
During 2006, 2007 and 2008, our named executive officers
received cash salary and bonus and restricted stock grants, all
as set forth below. They did not participate in or have account
balances under any pension or nonqualified deferred compensation
plans. The potential payments to be made to a named executive
officer upon a termination of employment or change in control of
the Company are described in the section of this prospectus
entitled “Management Shareholder, Employment and Other
Agreements.”
The amount and form of compensation reported below does not
necessarily reflect the compensation that our named executive
officers will receive following the completion of this offering
because compensation levels after the offering will be
determined based on compensation policies, programs and
procedures not yet established by the compensation committee of
our board of directors. Accordingly, the compensation of our
named executive officers following the completion of this
offering could be more or less than that reported below.
SUMMARY
COMPENSATION TABLE FOR 2008
Stock
All Other
Name and Principal Position
Year
Salary ($)
Bonus ($)(6)
Awards ($)(7)
Compensation ($)
Total ($)
John Giles
2008
300,000
483,533
890,717
—
1,674,250
(President and Chief Executive Officer)(1)
2007
258,333
450,000
500,000
—
1,208,333
Clyde Preslar
2008
164,773
156,532
39,835
120,370
(8)
481,510
(Senior Vice President and Chief Financial Officer)(2)
2007
—
—
—
—
—
Paul Lundberg
2008
200,000
250,000
71,984
—
521,984
(Senior Vice President and Chief Operations Officer)(3)
2007
168,518
187,500
30,000
—
386,018
Charles Patterson,
2008
200,000
250,000
71,984
—
521,984
(Senior Vice President and Chief Commercial Officer)(4)
Represents annual cash bonuses paid to the executives in respect
of services performed for the applicable year.
(7)
Represents the total cost recognized for financial accounting
purposes in the Company’s financial statements pursuant to
SFAS 123R.
(8)
All Other Compensation for Mr. Preslar consists of
reimbursement of $115,094 for costs associated with
Mr. Preslar’s relocation from Tampa, Florida to
Jacksonville, Florida, Company contributions to our 401(k) plan
of $5,000, and life insurance premiums paid on behalf of the
executive in the amount of $276.
(9)
All Other Compensation for Mr. Williams consists of a
retention bonus paid to Mr. Williams in 2008 (payable in
cash and our common stock), in connection with the
Company’s acquisition by Fortress and
Mr. Williams’ waiver of rights under a change in
control agreement triggered in 2007.
2008
GRANTS OF PLAN-BASED AWARDS TABLE
The following table summarizes grants of plan-based awards made
in 2008 to each of our named executive officers.
All Other
Stock Awards:
Grant Date Fair
Number of Shares
Market Value of Stock
of Stock or Units
Awards
Name
Grant Date
(#)
($)
John Giles
7/15/08
(1)
174,503
Clyde Preslar
5/05/08
(2)
597,520
Paul Lundberg
7/15/08
(1)
72,789
Charles Patterson
7/15/08
(1)
72,789
David Rohal
7/15/08
(1)
72,789
Scott Williams
7/15/08
(1)
72,789
Scott Williams
1/2/08
(3)
300,000
Scott Williams
1/2/08
(2)
400,000
(1)
Represents Bonus Restricted Shares which were granted under the
Omnibus Stock Incentive Plan, vesting in equal installments on
each of the first three anniversaries of the date of grant.
(2)
Represents restricted shares which were granted pursuant to
Management Shareholder Agreements dated May 1, 2008 and
January 2, 2008, respectively. These restricted shares vest
on each of the first five anniversaries of the applicable grant
date, as follows: 10%, 15%, 25%, 25% and 25%.
(3)
Represents common shares which were granted pursuant to a
Management Shareholder Agreement dated January 2, 2008. As
described in footnote 9 to the Summary Compensation Table, these
shares constitute a portion of the retention bonus paid to
Mr. Williams in 2008 in connection with the Company’s
acquisition by Fortress.
The following table summarizes the number of securities
underlying outstanding equity awards at the end of 2008 for each
of our named executive officers.
Stock Awards
Number of Shares or
Units of Stock That
Market Value of Shares or Units of
Have Not Vested
Stock That Have Not Vested
Name
(#)
($)(1)
John Giles
(2)
7,516,800
(3)
178,872
Clyde Preslar
(4)
612,480
Paul Lundberg
(5)
501,120
(3)
74,611
Charles Patterson
(6)
501,120
(3)
74,611
David Rohal
(6)
501,120
(3)
74,611
Scott Williams
(7)
501,120
(3)
74,611
(1)
The amounts in this column reflect the market value based on the
valuation of the Company’s common stock effective as of
December 31, 2008.
The following table summarizes the shares vested during 2008 for
each of our named executive officers.
Stock Vested
Number of Shares
Acquired
Value Realized on
on Vesting
Vesting(1)
(#)
($)
John Giles
656,400
Clyde Preslar
—
Paul Lundberg
46,680
Charles Patterson
46,680
David Rohal
46,680
Scott Williams
54,320
(1)
The amounts in this column reflect the market value of the
Company’s common stock as of the latest quarterly valuation
effective during the time period of the vesting.
The following is a summary of material provisions of various
transactions we have entered into with our executive officers,
directors (including nominees), 5% or greater stockholders and
any of their immediate family members since January 1,2006. We believe the terms and conditions set forth in such
agreements are reasonable and customary for transactions of this
type.
Our
Formation/Original Capital Investment
We were incorporated in Delaware on March 31, 1992 as a
holding company for two pre-existing railroad companies. Wesley
R. Edens, Chairman of our board of directors, is the Co-Chairman
of the board of directors of Fortress Investment Group LLC, and
Joseph P. Adams, Jr., also a member of our board of
directors, is a Managing Director of Fortress Investment Group
LLC.
Stockholders
Agreement
General
Prior to the completion of this offering, we will enter into a
stockholders agreement, or the Stockholders Agreement, with RR
Acquisition Holding LLC, which we refer to as the Initial
Stockholder.
As discussed further below, the Stockholders Agreement that we
will enter into prior to completion of this offering provides
certain rights to the Initial Stockholder with respect to the
designation of directors for nomination and election to our
board of directors, as well as registration rights for certain
of our securities owned by the Initial Stockholder, certain
other affiliates of Fortress and permitted transferees
(“Fortress Stockholders”).
Our Stockholders Agreement will provide that the parties thereto
will use their respective reasonable efforts (including voting
or causing to be voted all of our voting shares beneficially
owned by each) so that no amendment is made to our amended and
restated certificate of incorporation or amended and restated
bylaws in effect as of the date of the Stockholders Agreement
that would add restrictions to the transferability of our shares
by the Initial Stockholder or its permitted transferees which
are beyond those provided for in our amended and restated
certificate of incorporation, amended and restated bylaws, the
Stockholders Agreement or applicable securities laws, or that
nullify the rights set out in the Stockholders Agreement of the
Initial Stockholder or its permitted transferees unless such
amendment is approved by such the Initial Stockholder.
Designation
and Election of Directors
Our Stockholders Agreement will provide that, for so long as the
Stockholders Agreement is in effect, we and the Fortress
Stockholders shall take all reasonable actions within our
respective control (including voting or causing to be voted all
of the securities entitled to vote generally in the election of
our directors of the Company held of record or beneficially
owned by the Fortress Stockholders, and, with respect to the
Company, including in the slate of nominees recommended by the
board those individuals designated by FIG LLC) so as to elect to
the board, and to cause to continue in office, not more than
seven (7) directors (or such other number as FIG LLC may
agree in writing), of whom, at any given time:
•
at least a majority of such directors shall be individuals
designated by FIG LLC, for so long as the Fortress Stockholders
beneficially own at least 40% of the voting power of the Company;
•
at least three directors (four if the board consists of more
than seven directors) shall be individuals designated by FIG
LLC, for so long as the Fortress Stockholders beneficially own
less than 40% but at least 20% of the voting power of the
Company;
•
at least two directors shall be individuals designated by FIG
LLC, for so long as the Fortress Stockholders beneficially own
less than 20% but at least 10% of the voting power of the
Company; and
•
at least one director shall be an individual designated by FIG
LLC, for so long as the Fortress Stockholders has beneficially
own less than 10% but at least 5% of the voting power of the
Company.
In accordance with the Stockholders Agreement, FIG LLC will
designate , ,
and
for election to our board of directors prior to the completion
of this offering.
Registration
Rights
Demand Rights. Under our Stockholders
Agreement, the Fortress Stockholders will have, for so long as
the Fortress Stockholders beneficially own an amount of our
common stock (whether owned at the time of this offering or
subsequently acquired) equal to or greater than 1% of our shares
of common stock issued and outstanding immediately after the
consummation of this offering (a “Registrable
Amount”), “demand” registration rights that allow
the Fortress Stockholders, at any time
after days following the
consummation of this offering, to request that we register under
the Securities Act an amount equal to or greater than a
Registrable Amount. The Fortress Stockholders will be entitled
to unlimited demand registrations so long as such persons,
together, beneficially own a Registrable Amount. We are also not
required to effect any demand registration within four months of
a “firm commitment” underwritten offering to which the
requestor held “piggyback” rights, described below,
and which included at least 50% of the shares of common stock
requested by the requestor to be included. We are not obligated
to grant a request for a demand registration within three months
of any other demand registration.
Piggyback Rights. For so long as the Fortress
Stockholders beneficially own an amount of our common stock
equal to or greater than 1% of our common stock issued and
outstanding immediately after the consummation of this offering,
such Fortress Stockholders will also have “piggyback”
registration rights that allow them to include the common stock
that they own in any public offering of equity securities
initiated by us (other than those public offerings pursuant to
registration statements on
Forms S-4
or S-8) or
by any of our other stockholders that have registration rights.
The “piggyback” registration rights of the Fortress
Stockholders are subject to proportional cutbacks based on the
manner of the offering and the identity of the party initiating
such offering.
Shelf Registration. Under our Stockholders
Agreement, we will grant to the Initial Stockholder or any of
its respective permitted transferees, for so long as it
beneficially owns a Registrable Amount, the right to request a
shelf registration on
Form S-3
providing for offerings of our common stock to be made on a
continuous basis until all shares covered by such registration
have been sold, subject to our right to suspend the use of the
shelf registration prospectuses for a reasonable period of time
(not exceeding 60 days in succession or 90 days in the
aggregate in any 12 month period) if we determine that
certain disclosures required by the shelf registration
statements would be detrimental to us or our stockholders. In
addition, the Initial Stockholder may elect to participate in
such shelf registrations within ten days after notice of the
registration is given.
Indemnification; Expenses. Under our
Stockholders Agreement, we will agree to indemnify the
applicable selling stockholder and its officers, directors,
employees, managers, members partners, agents and controlling
persons against any losses or damages resulting from any untrue
statement or omission of material fact in any registration
statement or prospectus pursuant to which it sells shares of our
common stock, unless such liability arose from the applicable
selling stockholder’s misstatement or omission, and the
applicable selling stockholder has agreed to indemnify us
against all losses caused by its misstatements or omissions. We
will pay all registration expenses incidental to our performance
under the Stockholders Agreement, and the applicable selling
stockholder will pay its portion of all underwriting discounts,
commissions and transfer taxes, if any, relating to the sale of
its shares of common stock under the Stockholders Agreement.
Lease
Agreements
During 2008, the Company entered into four operating lease
agreements with Florida East Coast Railway LLC, or FECR, an
entity also owned by investment funds managed by affiliates of
Fortress Investment Group LLC. Three of these agreements relate
to the leasing of locomotives between the companies for ordinary
business operations. With respect to such agreements, during the
year ended December 31, 2008, on a net basis the Company
paid FECR an aggregate amount of $0.1 million, and at
December 31, 2008, FECR had a net payable to the Company of
$0.1 million. The fourth agreement relates to the
sub-leasing of office space by FECR to the Company. During 2008,
FECR billed the Company $0.2 million under the sub-
lease agreement, of which $0.1 million was payable to FECR
at December 31, 2008. During 2009, the Company entered into
an additional operating lease agreement with FECR relating to
the leasing of locomotives between the companies for ordinary
business operations.
Management
and Reciprocal Administrative Services Agreements
We expect to enter into agreements with FECR and its affiliates
which will provide for services to be provided from time to time
by certain of our senior executives and other employees and for
certain reciprocal administrative services, including finance,
accounting, human resources, purchasing and legal. The
agreements are expected to be generally consistent with
arms-length arrangements with third parties providing similar
services. The net amount of payments to be received by us under
these agreements is expected to be less than $1 million in
the aggregate on an annual basis.
Related
Party Transaction Review Process
Pursuant to our written policies and procedures with respect to
transactions with persons related to us (referred to as
“Related Party Transactions”), a Related Party
Transaction may only be taken by us if the following steps are
taken:
•
Prior to entering into a Related Party Transaction, the party
wishing to enter into the proposed transaction must provide
notice to our legal department of the facts and circumstances of
the proposed transaction.
•
Our legal department will assess whether the proposed
transaction is a Related Party Transaction.
•
If our legal department determines that the proposed transaction
is a Related Party Transaction and unless such Related Party
Transaction is required to be approved by our board of directors
under our indenture or any other agreement we may enter into
from time to time, the proposed transaction will be submitted to
our Nominating, Corporate Governance and Conflicts Committee for
consideration at its next meeting or, in those instances in
which our legal department, in consultation with our Chief
Financial Officer, determines that it is not practicable or
desirable to wait until the next meeting, to the Chair of the
Nominating, Corporate Governance and Conflicts Committee.
•
The Nominating, Corporate Governance and Conflicts Committee, or
where submitted to the chairperson of that committee, the
chairperson, shall consider all of the relevant facts and
circumstances available, including (if applicable): the benefits
to us; the impact on a director’s independence in the event
the related party is a director, an immediate family member of a
director or an entity in which a director is a partner,
shareholder or executive officer; the availability of other
sources for comparable products or services; the terms of the
transaction; and the terms available to unrelated third parties
or to employees generally. Only those Related Party Transactions
that are in, or are not inconsistent with, our best interests
and those of our stockholders, may be approved.
Prior to this offering, substantially all of the ownership
interests in RailAmerica were owned by the Initial Stockholder
and our employees.
The following table sets forth the total number of shares of
common stock beneficially owned, and the percent so owned, prior
to this offering and as adjusted to reflect the sale of the
shares offered hereby, by (i) each person known by us to be
the beneficial owner of five percent or more of our outstanding
common stock, (ii) each of our directors and named
executive officers, (iii) all directors and executive
officers as a group, and (iv) the selling stockholders
participating in this offering.
The percentage of beneficial ownership of our common stock
before this offering is based
on shares
of common stock issued and outstanding as
of ,
2009. The percentage of beneficial ownership of our common stock
after this offering is based
on shares
of common stock issued and outstanding. The table assumes that
the underwriters will not exercise their over-allotment option.
Number of Shares
Number of Shares
Beneficially Owned
Number of
Beneficially Owned
Prior to the Offering(1)
Shares
After the Offering(1)
Number of
Being
Number of
Name of Beneficial Owner(1)
Shares(3)
Percent(4)
Offered
Shares
Percent
Executive Officers and Directors(2)
Wesley R. Edens(5)
(6
)
(7
)
(8
)
Joseph P. Adams, Jr.
John Giles
Clyde Preslar
David Rohal
Paul Lundberg
Charles Patterson
Scott Williams
All directors and executive officers as a group
(10 persons)
5% and selling stockholder
RR Acquisition Holding LLC(5)
*
Less than 1%
(1)
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. Shares of common stock subject to
options or warrants currently exercisable, or exercisable within
60 days of the date hereof, are deemed outstanding for
computing the percentage ownership of the person holding such
options or warrants but are not deemed outstanding for computing
the percentage of any other person. Except in cases where
community property laws apply we believe that each stockholder
possesses sole voting and investment power over all shares of
common stock shown as beneficially owned by the stockholder. The
beneficial owners listed in this table do not, individually or
as a group, have the right to acquire beneficial ownership over
any other shares of our common stock.
(2)
The address of each officer or director listed in this table is:
c/o RailAmerica,
Inc., 7411 Fullerton Street, Suite 300, Jacksonville,
Florida32256.
(3)
Consists of common stock held, including restricted shares,
shares underlying stock options exercisable within 60 days
and shares underlying warrants exercisable within 60 days.
(4)
Percentage amount assumes the exercise by such persons of all
options and warrants exercisable within 60 days to acquire
common stock and no exercise of options or warrants by any other
person.
(5)
RR Acquisition Holding LLC is wholly-owned by Fortress
Investment Fund IV (Fund A) L.P., Fortress
Investment Fund IV (Fund B) L.P., Fortress
Investment Fund IV (Fund C) L.P., Fortress
Investment
Fund IV (Fund D) L.P., Fortress Investment
Fund IV (Fund E) L.P., Fortress Investment
Fund IV (Fund F) L.P., Fortress Investment
Fund IV (Fund G) L.P., Fortress Investment
Fund IV (Coinvestment Fund A) L.P., Fortress
Investment Fund IV (Coinvestment Fund B) L.P.,
Fortress Investment Fund IV (Coinvestment Fund
C) L.P., Fortress Investment Fund IV (Coinvestment
Fund D) L.P., Fortress Investment Fund IV
(Coinvestment Fund F) L.P. and Fortress Investment
Fund IV (Coinvestment Fund G) L.P. (collectively,
the “Fund IV Funds”). FIG LLC is the investment
manager of each of the Fund IV Funds. Fortress Operating
Entity I LP (“FOE I”) is the 100% owner of FIG LLC.
FIG Corp. is the general partner of FOE I. FIG Corp. is a
wholly-owned subsidiary of Fortress Investment Group LLC. As of
June 30, 2009, Wesley R. Edens, the Chairman of our board
of directors, owns approximately 16% of Fortress Investment
Group LLC. By virtue of his ownership interest in Fortress
Investment Group LLC and certain of its affiliates,
Mr. Edens, may be deemed to beneficially own the shares
listed as beneficially owned by RR Acquisition Holding LLC.
Mr. Edens disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. The
address of all entities listed above is
c/o Fortress
Investment Group LLC, 1345 Avenue of the Americas, 46th Floor,
New York, New York10105. RR Acquisition Holding LLC
is not a broker-dealer or an affiliate of a broker-dealer.
(6)
Includes all shares presented in this table that are held by the
Initial Stockholder.
(7)
Represents all shares being sold by the Initial Stockholder in
this offering.
(8)
Includes all shares presented in this table that will be held by
the Initial Stockholder following the completion of this
offering.
On June 23, 2009, we and RailAmerica Transportation Corp.,
our wholly-owned subsidiary, entered into a new senior secured
asset-based revolving credit facility, or ABL Facility, with
Citicorp North America, Inc., as administrative agent, and
Citigroup Global Markets Inc., as sole lead arranger and sole
bookrunner, and a syndicate of financial institutions and
institutional lenders. Set forth below is a summary of the terms
of the ABL Facility.
The ABL Facility provides for revolving credit financing of up
to $40.0 million, subject to borrowing base availability,
with a maturity of four years. The borrowing base at any time
equals the product of 85% multiplied by the net amount of
eligible accounts receivable, minus reserves deemed necessary by
the administrative agent. The ABL Facility also provides that we
may request increases to the $40.0 million commitments by
up to a maximum aggregate amount of $20.0 million, provided
that, among other conditions, no default or event of default
exists
The ABL Facility includes borrowing capacity of up to
$10.0 million for letters of credit and of up to
$10.0 million for swingline loans. All borrowings under the
ABL Facility (including the issuance of letters of credit and
swingline borrowings) are subject to the satisfaction of
customary conditions, including absence of a default under the
ABL Facility and accuracy of representations and warranties.
Interest
rate and fees
Borrowings under the ABL Facility bear interest at a rate per
annum equal to, at our option, either (a) a base rate
determined by reference to the greater of (1) the prime
rate of the administrative agent, (2) the federal funds
effective rate plus 1/2 of 1% and (3) 3.50% or (b) a
LIBOR rate determined by reference to the greater of
(1) the costs of funds for U.S. dollar deposits in the
London interbank market for the interest period relevant to such
borrowing and (2) 2.50%, in each case plus an applicable
margin. The applicable margin with respect to (a) base rate
borrowings will be 3.00% and (b) LIBOR borrowings will be
4.00%. In addition to paying interest on outstanding principal
under the ABL Facility, we are required to pay a commitment fee,
in respect of the unutilized commitments thereunder, which fee
will be determined based on utilization of the ABL Facility
(increasing when utilization is low and decreasing when
utilization is high). We must also pay customary letter of
credit fees equal to 4.00% of the maximum face amount of such
letter of credit, a fronting fee for each letter of credit equal
to 0.25% of the maximum face amount of such letter of credit and
customary agency fees.
Guarantees
and security
All obligations under the ABL Facility are unconditionally
guaranteed jointly and severally on a senior basis by all of our
existing and subsequently acquired or organized direct or
indirect U.S. restricted subsidiaries, subject to certain
exceptions. All obligations under the ABL Facility, and the
guarantees of those obligations, are secured, subject to certain
exceptions, by a first-priority security interest in all
accounts receivable, deposit accounts, securities accounts, cash
(other than certain cash proceeds of the senior secured notes
collateral), related general intangibles and instruments
relating to the foregoing and the proceeds of the foregoing, or
the ABL Collateral. Obligations under the ABL Facility are not
secured by the collateral securing the senior secured notes.
Covenants,
Representations and Warranties and Events of
Default
The ABL Facility includes customary affirmative and negative
covenants, including, among other things, restrictions on
(i) the incurrence of indebtedness and liens,
(ii) investments and loans, (iii) dividends and other
payments with respect to capital stock, (iv) redemption and
repurchase of capital stock, (v) mergers, acquisitions and
asset sales, (vi) payments and modifications of other debt
(including the notes), (vii) affiliate transactions,
(viii) altering our business, (ix) engaging in
sale-leaseback transactions and (x) entering into
agreements that restrict our ability to create liens or repay
loans or issue capital stock. In addition, if
availability under the ABL Facility is below
$15.0 million, we will be subject to a minimum fixed charge
coverage ratio of 1.1 to 1.0.
The ABL Facility contains certain customary representations and
warranties and events of default, including, among other things,
(i) payment defaults, (ii) breach of representations
and warranties, (iii) covenant defaults,
(iv) cross-defaults to certain indebtedness,
(v) certain events of bankruptcy, (vi) certain events
under ERISA, (vii) material judgments, (viii) actual
or asserted failure of any guaranty or security document
supporting the ABL Facility to be in full force and effect, and
(ix) change of control.
9.25% Senior
Secured Notes
On June 23, 2009, we completed a private offering of
$740.0 million aggregate principal amount of
9.25% senior secured notes due 2017, or the existing senior
secured notes. By means of a separate prospectus, we intend to
offer to exchange up to $740.0 million aggregate principal
amount of 9.25% senior secured notes due 2017, or the new
senior secured notes, for an equal principal amount of the
existing senior secured notes in an offering that will have been
registered under the Securities Act. This prospectus shall not
be deemed to be an offer to exchange such notes. The existing
senior secured notes and the new senior secured notes are
referred to herein as the senior secured notes.
Interest is payable on the senior secured notes semiannually in
arrears on January 1 and July 1, starting on
January 1, 2010, with interest accruing from June 23,2009.
Optional
Redemption
During any
12-month
period commencing on the issue date, we may redeem up to 10% of
the aggregate principal amount of the senior secured notes
issued under the indenture at a redemption price equal to 103%
of the principal amount thereof plus accrued and unpaid
interest, if any.
We may also redeem some or all of the senior secured notes at
any time before July 1, 2013 at a price equal to 100% of
the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date and a make-whole
premium. The make-whole premium is the greater of (1) 1.0%
of the principal amount of the note or (2) the excess, if
any, of (a) the present value at such redemption date of
(i) the redemption price of the note at July 1, 2013
(such redemption price being set forth in the table below) plus
(ii) all required interest payments due on the note through
July 1, 2013 (excluding accrued but unpaid interest to such
redemption date), computed using a discount rate equal to the
applicable treasury rate plus 50 basis points over
(b) the principal amount of the note. On or after
July 13, 2013, we may also redeem the senior secured notes,
in whole or in part, at the following redemption prices set
forth below (expressed as percentages of principal amount), plus
accrued and unpaid interest, if any, if redeemed during the
12-month
period commencing on July 1 of the years set forth below:
Year
Percentage
2013
104.625
%
2014
102.313
%
2015
100.000
%
In addition, prior to July 1, 2012, we may redeem up to 35%
of the aggregate principal amount of the senior secured notes
using the net proceeds of certain equity offerings at a price
equal to 109.25% of the aggregate principal amount of the senior
secured notes to be redeemed, plus accrued and unpaid interest,
if any; provided that after giving effect to any such
redemption, at least 65% of the senior secured notes issued on
the issue date would remain outstanding immediately after such
redemption.
Change
of Control
Upon a Change of Control (as defined in the indenture), we (or a
third party) must offer to redeem all of the senior secured
notes for a payment equal to 101% of the senior secured
notes’ principal amount plus accrued and unpaid interest
thereon. This offering will not result in a Change of Control.
The senior secured notes are guaranteed, jointly and severally,
on a senior secured basis by all of our current and future
wholly-owned domestic restricted subsidiaries other than
domestic subsidiaries all of the material assets of which
consist of stock in foreign subsidiaries and certain domestic
subsidiaries that do not have material assets or earnings.
The senior secured notes and guarantees are senior secured
obligations of us and our subsidiary guarantors and are secured
by a first-priority lien (subject to certain exceptions and
permitted liens) on substantially all the tangible and
intangible assets of us and the guarantors, other than the ABL
Collateral securing the ABL Facility (as described in
“— ABL Revolver”), in each case held by us
and the guarantors including the capital stock of any subsidiary
held by us, any guarantor and any first tier subsidiary that is
a domestic subsidiary substantially all of the assets of which
consist of stock in foreign subsidiaries (but limited to 65% of
the voting stock of any such first-tier subsidiary). The
collateral described above was pledged to the notes collateral
agent for the benefit of the trustee, the notes collateral agent
and the holders of the notes.
Covenants
The indenture governing the senior secured notes contains
certain limitations and restrictions on the Company and its
restricted subsidiaries’ (as of the date of this
prospectus, all of the Company’s subsidiaries were
restricted subsidiaries) ability to, among other things:
•
incur additional indebtedness;
•
issue preferred and disqualified stock;
•
purchase or redeem capital stock;
•
make certain investments;
•
pay dividends or make other payments or loans or transfer
property;
•
sell assets;
•
enter into certain types of transactions with affiliates
involving consideration in excess of $5.0 million;
•
create liens on certain assets; and
•
sell all or substantially all of the Company’s or a
guarantor’s assets or merge with or into another company.
The covenants are subject to important exceptions and
qualifications described below.
The Company and its restricted subsidiaries are prohibited from
incurring or issuing additional indebtedness and disqualified
stock and its restricted subsidiaries are prohibited from
issuing preferred stock unless the Company’s fixed charge
coverage ratio for the most recently ended four full fiscal
quarters would have been at least 2.00 to 1.00 on a pro forma
basis. In addition, the Company may, among other things, incur
certain credit facilities debt not to exceed the greater of
(i) $60 million and (ii) the borrowing base; purchase
money indebtedness or capital lease obligations not to exceed
the greater of (i) $80 million and (ii) 5.0% of
total assets; indebtedness of foreign subsidiaries not to exceed
the greater of (i) $25 million and (ii) 15% of total
assets of foreign subsidiaries; acquired debt so long as the
Company would be permitted to incur at least an additional $1 of
indebtedness under its fixed charge ratio or such ratio is
greater following the transaction; and up to $100 million
(limited to $50 million for restricted subsidiaries)
indebtedness, disqualified stock or preferred stock, subject to
increase from the proceeds of certain equity sales and capital
contributions.
Furthermore, the Company and its restricted subsidiaries are
prohibited from purchasing or redeeming capital stock; making
certain investments, paying dividends or making other payments
or loans or transfers property, unless the Company could incur
an additional dollar of indebtedness under its fixed charge
ratio and such payment is less than 50% of the Company’s
consolidated net income plus certain other items that increase
the size of the payment basket. In addition, the Company may,
among other things, make any payment from the proceeds of a
capital contribution or concurrent offering of equity interests
of the Company; make stock
buy-backs
from current and former
employees/directors
in an amount to not exceed $5 million per year, subject to
carryover of unused amounts into subsequent years (capped at
$10 million in any year) and
subject to increase for cash proceeds from certain equity
issuances to employees/directors and cash proceeds from key man
life insurance; make investments in unrestricted subsidiaries in
an amount not to exceed (i) $10 million and
(ii) 0.75% of total assets; pay dividends following a
public offering up to 6% per annum of the net proceeds received
by the Company; make any payments up to $25 million. Moreover,
the Company may make investments in an amount not to exceed the
greater of (i) $25 million and (ii) 2.0% of total
assets, investments in a similar business not to exceed the
greater of (i) 50 million and (ii) 3% of total
assets and advances to employees not in excess of
$5 million.
Events
of Default
The indenture contains certain events of default, including
(subject, in some cases, to customary cure periods and
materiality thresholds) defaults based on (1) the failure
to make payments under the indenture when due, (2) breach
of covenants, (3) cross-defaults to certain other
indebtedness, (4) certain bankruptcy or insolvency events,
(5) material judgments and (6) invalidity of material
guarantees and liens.
The following descriptions are summaries of the material
terms of our amended and restated certificate of incorporation
and amended and restated bylaws as will be in effect upon the
consummation of this offering. These descriptions may not
contain all of the information that is important to you. To
understand them fully, you should read our amended and restated
certificate of incorporation and amended and restated bylaws,
copies of which are filed with the SEC as exhibits to the
registration statement of which this prospectus is a part.
Please note that, with respect to any of our shares held in
book-entry form through The Depository Trust Company or any
other share depository, the depository or its nominee will be
the sole registered and legal owner of those shares, and
references in this prospectus to any “stockholder” or
“holder” of those shares means only the depository or
its nominee. Persons who hold beneficial interests in our shares
through a depository will not be registered or legal owners of
those shares and will not be recognized as such for any purpose.
For example, only the depository or its nominee will be entitled
to vote the shares held through it, and any dividends or other
distributions to be paid, and any notices to be given, in
respect of those shares will be paid or given only to the
depository or its nominee. Owners of beneficial interests in
those shares will have to look solely to the depository with
respect to any benefits of share ownership, and any rights they
may have with respect to those shares will be governed by the
rules of the depository, which are subject to change from time
to time. We have no responsibility for those rules or their
application to any interests held through the depository.
Prior to completion of this offering, our amended and restated
certificate of incorporation will be amended so that our
authorized capital stock will consist of:
•
400,000,000 shares of common stock, par value $0.01 per
share; and
•
100,000,000 preferred shares, par value $0.01 per share.
Upon completion of this offering, there will be
outstanding shares
of common stock (assuming no exercise of the underwriters’
over-allotment option and an initial public offering price of
$ , the midpoint of the price range
set forth on the cover of this prospectus) and no outstanding
shares of preferred stock.
The following is a description of the material terms of our
amended and restated certificate of incorporation and amended
and restated bylaws. We refer you to our amended and restated
certificate of incorporation and amended and restated bylaws,
copies of which have been filed with the SEC as exhibits to our
registration statement of which this prospectus forms a part.
Common
Stock
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. Except as provided with respect to any other class
or series of stock, the holders of our common stock will possess
the exclusive right to vote for the election of directors and
for all other purposes. Our amended and restated certificate of
incorporation does not provide for cumulative voting in the
election of directors, which means that the holders of a
majority of the outstanding shares of common stock can elect all
of the directors standing for election, and the holders of the
remaining shares will not be able to elect any directors;
provided, however, that pursuant to the Stockholders Agreement
that we will enter into with the Initial Stockholder prior to
the completion of this offering, we will be required to take all
reasonable actions within our control (including nominating as
directors the individuals designated by FIG LLC) so that up to a
majority (or other number, depending upon the level of ownership
of the Initial Stockholder) of the members of our board of
directors are individuals designated by FIG LLC.
Subject to any preference rights of holders of any preferred
stock that we may issue in the future, holders of our common
stock are entitled to receive dividends, if any, declared from
time to time by our board of directors out of legally available
funds. In the event of our liquidation, dissolution or winding
up, the holders of our common stock are entitled to share
ratably in all assets remaining after the payment of
liabilities, subject to any rights of holders of our preferred
stock to prior distribution.
Holders of our common stock have no preemptive, subscription,
redemption or conversion rights. Any shares of common stock sold
under this prospectus will be validly issued, fully paid and
nonassessable upon issuance against full payment of the purchase
price for such shares.
Preferred
Stock
Our board of directors has the authority, without action by our
stockholders, to issue preferred stock and to fix voting powers
for each class or series of preferred stock, and to provide that
any class or series may be subject to redemption, entitled to
receive dividends, entitled to rights upon dissolution, or
convertible or exchangeable for shares of any other class or
classes of capital stock. The rights with respect to a series or
class of preferred stock may be greater than the rights attached
to our common stock. It is not possible to state the actual
effect of the issuance of any shares of our preferred stock on
the rights of holders of our common stock until our board of
directors determines the specific rights attached to that
preferred stock. The effect of issuing preferred stock could
include, among other things, one or more of the following:
•
restricting dividends in respect of our common stock;
•
diluting the voting power of our common stock or providing that
holders of preferred stock have the right to vote on matters as
a class;
•
impairing the liquidation rights of our common stock; or
•
delaying or preventing a change of control of us.
Stockholders
Agreement
For a description of the Stockholders Agreement that we will
enter into with the Initial Stockholder prior to the completion
of this offering, see “Certain Relationships and Related
Party Transactions — Stockholders Agreement.”
Anti-Takeover
Effects of Delaware Law, Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws
The following is a summary of certain provisions of our amended
and restated certificate of incorporation and amended and
restated bylaws that may be deemed to have an anti-takeover
effect and may delay, deter or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its
best interest, including those attempts that might result in a
premium over the market price for the shares held by
stockholders.
Authorized
but Unissued Shares
The authorized but unissued shares of our common stock and our
preferred stock will be available for future issuance without
obtaining stockholder approval. These additional shares may be
utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of
authorized but unissued shares of our common stock and preferred
stock could render more difficult or discourage an attempt to
obtain control over us by means of a proxy contest, tender
offer, merger or otherwise.
Delaware
Business Combination Statute
We are organized under Delaware law. Some provisions of Delaware
law may delay or prevent a transaction that would cause a change
in our control.
Our amended and restated certificate of incorporation provides
that Section 203 of the Delaware General Corporation Law,
as amended, an anti-takeover law, will not apply to us. In
general, this statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years after the
date of the transaction by which that person became an
interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of
Section 203, a business combination includes a merger,
asset sale or other transaction resulting in a financial benefit
to the
interested stockholder, and an interested stockholder is a
person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of voting stock.
Other
Provisions of Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws
Our amended and restated certificate of incorporation provides
for a staggered board of directors consisting of three classes
of directors. Directors of each class are chosen for three-year
terms upon the expiration of their current terms and each year
one class of our directors will be elected by our stockholders.
The terms of the first, second and third classes will expire in
2010, 2011 and 2012, respectively. We believe that
classification of our board of directors will help to assure the
continuity and stability of our business strategies and policies
as determined by our board of directors. Additionally, there is
no cumulative voting in the election of directors. This
classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and
difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a
majority of our board of directors. Thus, the classified board
provision could increase the likelihood that incumbent directors
will retain their positions. The staggered terms of directors
may delay, defer or prevent a tender offer or an attempt to
change control of us, even though a tender offer or change in
control might be believed by our stockholders to be in their
best interest. In addition, our amended and restated certificate
of incorporation and our amended and restated bylaws provide
that directors may be removed only for cause and only with the
affirmative vote of at least 80% of the voting interest of
stockholders entitled to vote; provided, however, that for so
long as the Fortress Stockholders beneficially own a majority of
our issued and outstanding common stock, directors may be
removed with or without cause with the affirmative vote of a
majority of the voting interest of stockholders entitled to vote.
Pursuant to our amended and restated certificate of
incorporation, shares of our preferred stock may be issued from
time to time, and the board of directors is authorized to
determine and alter all rights, preferences, privileges,
qualifications, limitations and restrictions without limitation.
See “— Preferred Stock.” Our amended and
restated bylaws also provide that our stockholders are
specifically denied the ability to call a special meeting of the
stockholders, provided, however, that for so long as the
Fortress Stockholders beneficially own at least 25% of our
issued and outstanding common stock, any stockholders that
collectively beneficially own at least 25% of our issued and
outstanding common stock may call special meetings of our
stockholders.
Ability
of our Stockholders to Act
Our amended and restated certificate of incorporation and
amended and restated bylaws do not permit our stockholders to
call special stockholders meetings; provided, however, that for
so long as the Fortress Stockholders beneficially own at least
25% of our issued and outstanding common stock, any stockholders
that collectively beneficially own at least 25% of our issued
and outstanding common stock may call special meetings of our
stockholders. Written notice of any special meeting so called
shall be given to each stockholder of record entitled to vote at
such meeting not less than 15 or more than 60 days before
the date of such meeting, unless otherwise required by law.
Under our amended and restated certificate of incorporation and
amended and restated bylaws, any action required or permitted to
be taken at a meeting of our stockholders may be taken without a
meeting by written consent of a majority of our stockholders for
so long as the Fortress Stockholders beneficially own at least
25% of our issued and outstanding common stock. After the
Fortress Stockholders beneficially own less than 25% of our
issued and outstanding stock, only action by unanimous written
consent of our stockholders can be taken without a meeting.
Our amended and restated bylaws provide that nominations of
persons for election to our board of directors may be made at
any annual meeting of our stockholders, or at any special
meeting of our stockholders called for the purpose of electing
directors, (a) by or at the direction of our board of
directors or (b) by any of our stockholders. In addition to
any other applicable requirements, for a nomination to be
properly brought by a stockholder, such stockholder must have
given timely notice thereof in proper written form to our
Secretary of the Company. To be timely, a stockholder’s
notice must be delivered to or mailed and received at our
principal executive offices (a) in the case of an annual
meeting of stockholders, not less than 90 days nor more
than 120 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided,
however, that in the event that the annual meeting is called for
a date that is not within 25 days before or after such
anniversary date, notice by a stockholder in order to be timely
must be so received not later than the close of business on the
fifteenth day following the day on which such notice of the date
of the annual meeting was mailed or such public disclosure of
the date of the annual meeting was made, whichever first occurs;
and (b) in the case of a special meeting of our
stockholders called for the purpose of electing directors, not
later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting
was made, whichever first occurs.
Our amended and restated bylaws provide that no business may be
transacted at any annual meeting of our stockholders, other than
business that is either (a) specified in the notice of
meeting given by or at the direction of our board of directors,
(b) otherwise properly brought before the annual meeting by
or at the direction of our board of directors, or (c) by
any of our stockholders. In addition to any other applicable
requirements, for business to be properly brought before an
annual meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to our
Secretary of the Company. To be timely, a stockholder’s
notice must be delivered to or mailed and received at our
principal executive offices not less than 90 days nor more
than 120 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided,
however, that in the event that the annual meeting is called for
a date that is not within 25 days before or after such
anniversary date, notice by a stockholder in order to be timely
must be so received not later than the close of business on the
fifteenth day following the day on which such notice of the date
of the annual meeting was mailed or such public disclosure of
the date of the annual meeting was made, whichever first occurs.
Limitations
on Liability and Indemnification of Directors and
Officers
Our amended and restated certificate of incorporation and
amended and restated bylaws provide that our directors will not
be personally liable to us or our stockholders for monetary
damages for breach of a fiduciary duty as a director, except for
the following (to the extent such exemption is not permitted
under the Delaware General Corporation Law, as amended from time
to time):
•
any breach of the director’s duty of loyalty to us or our
stockholders;
•
intentional misconduct or a knowing violation of law;
•
liability under Delaware corporate law for an unlawful payment
of dividends or an unlawful stock purchase or redemption of
stock; or
•
any transaction from which the director derives an improper
personal benefit.
Our amended and restated certificate of incorporation provides
that we must indemnify our directors and officers to the fullest
extent permitted by law. We are also expressly authorized to
advance certain expenses (including attorneys’ fees and
disbursements and court costs) to our directors and officers and
carry directors’ and officers’ insurance providing
indemnification for our directors and officers for some
liabilities. We believe that these indemnification provisions
and insurance are useful to attract and retain qualified
directors and executive officers.
Prior to the completion of this offering, we intend to enter
into separate indemnification agreements with each of our
directors and executive officers. Each indemnification agreement
will provide, among other things, for indemnification to the
fullest extent permitted by law and our amended and restated
certificate of incorporation against (i) any and all
expenses and liabilities, including judgments, fines, penalties
and amounts paid in settlement of any claim with our approval
and counsel fees and disbursements, (ii) any liability
pursuant to a loan guarantee, or otherwise, for any of our
indebtedness, and (iii) any liabilities incurred as a
result of acting on our behalf (as a fiduciary or otherwise) in
connection with an employee benefit plan. The
indemnification agreements will provide for the advancement or
payment of all expenses to the indemnitee and for reimbursement
to us if it is found that such indemnitee is not entitled to
such indemnification under applicable law and our amended and
restated certificate of incorporation. These provisions and
agreements may have the practical effect in some cases of
eliminating our stockholders’ ability to collect monetary
damages from our directors and executive officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, we have been informed that, in the opinion of the
SEC such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
the Fortress Stockholders have the right to, and have no duty to
abstain from, exercising such right to, engage or invest in the
same or similar business as us, do business with any of our
clients, customers or vendors or employ or otherwise engage any
of our officers, directors or employees;
•
if the Fortress Stockholders or any of their officers, directors
or employees acquire knowledge of a potential transaction that
could be a corporate opportunity, they have no duty to offer
such corporate opportunity to us, our stockholders or affiliates;
•
we have renounced any interest or expectancy in, or in being
offered an opportunity to participate in, such corporate
opportunities; and
•
in the event that any of our directors and officers who is also
a director, officer or employee of any of the Fortress
Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge
was not acquired solely in such person’s capacity as our
director or officer and such person acted in good faith, then
such person is deemed to have fully satisfied such person’s
fiduciary duty and is not liable to us if any of the Fortress
Stockholders pursues or acquires such corporate opportunity or
if such person did not present the corporate opportunity to us.
Transfer
Agent
The registrar and transfer agent for our common stock
is .
Listing
We intend to list our common stock on the NYSE under the symbol
“RA.”
Prior to this offering, there has been no public market for our
common stock, and we cannot predict the effect, if any, that
sales of shares or availability of any shares for sale will have
on the market price of our common stock prevailing from time to
time. Sales of substantial amounts of common stock (including
shares issued on the exercise of options, warrants or
convertible securities, if any) or the perception that such
sales could occur, could adversely affect the market price of
our common stock and our ability to raise additional capital
through a future sale of securities.
Upon completion of this offering, we will
have shares
of common stock issued and outstanding (or a maximum
of shares
if the underwriters exercise their over-allotment option in
full). All of
the shares
of our common stock sold in this offering
(or shares
if the underwriters exercise their over-allotment option in
full) will be freely tradable without restriction or further
registration under the Securities Act unless such shares are
purchased by “affiliates” as that term is defined in
Rule 144 under the Securities Act. Upon completion of this
offering, approximately % of our
outstanding common stock (or % if
the underwriters’ over-allotment option is exercised in
full) will be held by the Initial Stockholder and members of our
management and employees. These shares will be “restricted
securities” as that phrase is defined in Rule 144.
Subject to certain contractual restrictions, including the
lock-up
agreements described below, holders of restricted shares will be
entitled to sell those shares in the public market if they
qualify for an exemption from registration under Rule 144
or any other applicable exemption under the Securities Act.
Subject to the
lock-up
agreements described below and the provisions of Rules 144
and 701, additional shares will be available for sale as set
forth below.
In addition to the issued and outstanding shares of our common
stock, we intend to file a registration statement on
Form S-8
to register an aggregate
of shares
of common stock reserved for issuance under our incentive
programs. That registration statement will become effective upon
filing, and shares of common stock covered by such registration
statement are eligible for sale in the public market immediately
after the effective date of such registration statement, subject
to the
lock-up
agreements described below.
Lock-Up
Agreements
We, our officers and directors, the Initial Stockholder and the
remaining holders of substantially all of our common stock have
agreed with the underwriters, subject to certain exceptions, not
to dispose of or hedge any of their shares of common stock or
securities convertible into or exchangeable for shares during
the period from the date of this prospectus continuing through
the date days after the date
of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to any existing
incentive programs.
The -day restricted period
described in the preceding paragraph will be automatically
extended if (1) during the last 17 days of
the -day restricted period we issue
an earnings release or announce material news or a material
event relating to us occurs or (2) prior to the expiration
of the -day restricted period, we
announce that we will release earnings results during the
16-day
period following the last day of
the -day restricted period, in
which case the restrictions described in the preceding paragraph
will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless the
representatives provide a written waiver of such extension. The
representatives have no present intent or arrangement to release
any of the securities subject to these
lock-up
agreements. The release of any
lock-up is
considered on a case by case basis. Factors in deciding whether
to release shares may include the length of time before the
lock-up
expires, the number of shares involved, the reason for the
requested release, market conditions, the trading price of our
common stock, historical trading volumes of our common stock and
whether the person seeking the release is an officer, director
or affiliate of the Company.
Rule 144
In general, under Rule 144 under the Securities Act, a
person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the
three months preceding a sale, and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months
(including any period of consecutive ownership of preceding
non-affiliated holders) would be entitled to sell those shares,
subject only to the availability of current public information
about us. A non-affiliated person who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least one year would be entitled to sell those shares without
regard to the provisions of Rule 144.
A person (or persons whose shares are aggregated) who is deemed
to be an affiliate of ours and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our
common stock or the average weekly trading volume of our common
stock reported through the NYSE during the four calendar weeks
preceding such sale. Such sales are also subject to certain
manner of sale provisions, notice requirements and the
availability of current public information about us.
Rule 701
In general, under Rule 701 of the Securities Act, most of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement are eligible to resell those shares
90 days after the date of this prospectus in reliance on
Rule 144, but without compliance with the holding period or
certain other restrictions contained in Rule 144.
Registration
Rights
Pursuant to the Stockholders Agreement that we will enter into
prior to completion of this offering, the Initial Stockholder
and certain of its affiliates and permitted third-party
transferees will have the right, in certain circumstances, to
require us to register their shares of our common stock under
the Securities Act for sale into the public markets at any time
following the expiration of
the -day
lock-up
period described above. The Initial Stockholder and certain of
its affiliates and permitted third-party transferees will also
be entitled to piggyback registration rights with respect to any
future registration statement that we file for an underwritten
public offering of our securities. Upon the effectiveness of
such a registration statement, all shares covered by the
registration statement will be freely transferable. If these
rights are exercised and the Initial Stockholder sells a large
number of shares of common stock, the market price of our common
stock could decline. See “Certain Relationships and Related
Party Transactions — Stockholders Agreement” for
a more detailed description of these registration rights.
The following discussion is a summary of the anticipated
material U.S. federal income and estate tax considerations
generally applicable to the purchase, ownership and disposition
of our common stock by
Non-U.S. Holders
(as defined below). This summary deals only with our common
stock held as capital assets by holders who purchase common
stock in this offering. This discussion does not cover all
aspects of U.S. federal income taxation that may be
relevant to the purchase, ownership or disposition of our common
stock by prospective investors in light of their particular
circumstances. In particular, this discussion does not address
all of the tax considerations that may be relevant to certain
types of investors subject to special treatment under
U.S. federal income tax or estate tax laws, such as:
•
dealers in securities or currencies;
•
financial institutions;
•
regulated investment companies;
•
real estate investment trusts;
•
tax-exempt entities;
•
insurance companies;
•
persons holding common stock as part of a hedging, integrated,
conversion or constructive sale transaction or a straddle;
•
traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings;
•
persons liable for alternative minimum tax;
•
U.S. expatriates;
•
partnerships or entities or arrangements treated as a
partnership or other pass-through entity for U.S. federal
tax purposes (or investors therein); or
•
U.S. Holders (as defined below).
Furthermore, this summary is based upon the provisions of the
Code, the Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as of
the date hereof. Such authorities may be repealed, revoked,
modified or subject to differing interpretations, possibly on a
retroactive basis, so as to result in U.S. federal income
tax or estate tax consequences different from those discussed
below. This discussion does not address any other
U.S. federal tax considerations (such as gift tax) or any
state, local or
non-U.S. tax
considerations.
For purposes of this summary, a “U.S. Holder”
means a beneficial owner of our common stock that is for
U.S. federal income tax purposes one of the following:
•
a citizen or an individual resident of the United States;
•
a corporation (or other entity taxable as a corporation) created
or organized in or under the laws of the United States, any
state thereof, or the District of Columbia;
•
an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
•
a trust if it (i) is subject to the primary supervision of
a court within the United States and one or more
U.S. persons have the authority to control all substantial
decisions of the trust, or (ii) has a valid election in
effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds our common stock,
the U.S. federal income tax treatment of a partner in such
partnership will generally depend
upon the status of the partner and the activities of the
partnership. If you are a partnership or a partner of a
partnership holding our common stock, we particularly urge you
to consult your own tax advisors.
If you are considering the purchase of our common stock, we
urge you to consult your own tax advisors concerning the
particular U.S. federal income tax and estate tax
consequences to you of the purchase, ownership and disposition
of our common stock, as well as any consequences to you arising
under other federal tax laws and state, local and
non-U.S. tax
laws.
The following discussion applies only to
Non-U.S. Holders.
A
“Non-U.S. Holder”
is a beneficial owner of our common stock (other than an entity
or arrangement treated as a partnership for U.S. federal
income tax purposes) that is not a U.S. Holder. Special
rules may apply to you if you are a “controlled foreign
corporation” or a “passive foreign investment
company”, or are otherwise subject to special treatment
under the Code. Any such holders should consult their own tax
advisors to determine the U.S. federal, state, local and
non-U.S. income
and other tax consequences that may be relevant to them.
Dividends
Dividends paid to you (to the extent paid out of our current or
accumulated earnings and profits, as determined for
U.S. federal income tax purposes) generally will be subject
to U.S. federal withholding tax at a 30% rate, or such
lower rate as may be specified by an applicable tax treaty.
However, dividends that are effectively connected with a trade
or business you conduct within the United States are not subject
to the U.S. federal withholding tax, but instead are
subject to U.S. federal income tax on a net income basis at
the applicable graduated individual or corporate rates unless an
applicable income tax treaty provides otherwise. Special
certification and disclosure requirements must be satisfied for
effectively connected income to be exempt from withholding. If
you are a corporation, any effectively connected earnings and
profits attributable to such dividends may be subject to an
additional branch profits tax at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
Dividends paid to you in excess of our current accumulated
earnings and profits (as determined under U.S. federal
income tax principles) will first constitute a return of capital
that is applied against and reduces the Non-U.S. Holder’s
adjusted tax basis in our common stock (determined on a
share-by-share basis), and thereafter will be treated as gain
realized on the sale or other disposition of our common stock as
described under “— Sale, Exchange, or Other Taxable
Disposition of Common Stock” below.
If you wish to claim the benefit of an applicable treaty rate
for dividends paid on our common stock, you must provide the
withholding agent with a properly executed IRS
Form W-8BEN,
claiming an exemption from or reduction in withholding under the
applicable income tax treaty.
If you are eligible for a reduced rate of U.S. federal
withholding tax pursuant to an applicable income tax treaty, you
may obtain a refund of any excess amounts withheld by timely
filing an appropriate claim for refund with the IRS.
Sale,
Exchange or Other Taxable Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax with respect to gain recognized on a sale, exchange or other
taxable disposition of shares of our common stock unless:
•
the gain is effectively connected with your conduct of a trade
or business in the United States;
•
you are an individual present in the United States for 183 or
more days in the taxable year of the sale, exchange or other
taxable disposition, and certain other requirements are
met; or
•
we are or have been a “United States real property holding
corporation” for U.S. federal income tax purposes at
some time during the shorter of the five-year period preceding
such disposition and your holding period in the common stock,
and (i) you beneficially own, or have owned (actually or
constructively), more than 5% of our common stock at any time
during the five-year period preceding such disposition, or
(ii) our common stock has ceased to be traded on an
established securities market prior to the beginning of the
calendar year in which the sale or disposition occurs.
If you are described in the first bullet above, you will be
subject to tax on any gain derived from the sale, exchange or
other taxable disposition at applicable graduated
U.S. federal income tax rates (unless an applicable income
tax treaty provides otherwise). If you are a corporation
described in the first bullet above, you will also be subject to
the branch profits tax on your effectively connected earnings
and profits for the taxable year, which would include such gain,
at a rate of 30% or at such lower rate as may be specified by an
applicable income tax treaty, subject to adjustments. If you are
an individual described in the second bullet above, you will
generally be subject to a flat 30% tax on any gain derived from
the sale, exchange or other taxable disposition that may be
offset by U.S. source capital losses (even though you are
not considered a resident of the United States).
We expect to be treated as a “United States real property
holding corporation” for U.S. federal income tax
purposes. Generally, a corporation is a U.S. real property
holding corporation if the fair market value of its
U.S. real property interests, as defined in the Code and
applicable Treasury regulations, equals or exceeds 50% of the
aggregate fair market value of its worldwide real property
interests and its other assets used or held for use in a trade
or business. Because we expect to be treated as a United States
real property holding corporation, any
Non-U.S. Holder
of more than 5% of our common stock, actually or constructively,
at any time during the requisite period will be subject to U.S.
federal income tax on any gain as if such were effectively
connected income (except that the branch profits tax will not
apply).
Information
Reporting and Backup Withholding
You may be subject to information reporting and backup
withholding with respect to any dividends on our common stock
paid to you, unless you comply with certain reporting procedures
(usually satisfied by providing an IRS
Form W-8BEN)
or otherwise establish an exemption. Information reporting
requirements and backup withholding with respect to the payment
of proceeds from the disposition of shares of our common stock
will apply as follows:
•
If the proceeds are paid to or through the U.S. office of a
broker (U.S. or foreign), they generally will be subject to
backup withholding and information reporting, unless you certify
that you are not a U.S. person under penalties of perjury
(usually on an IRS Form
W-8BEN) or
otherwise establish an exemption;
•
If the proceeds are paid to or through a
non-U.S. office
of a broker that is not a U.S. person and is not a foreign
person with certain specified U.S. connections, they will
not be subject to backup withholding or information
reporting; and
•
If the proceeds are paid to or through a
non-U.S. office
of a broker that is a U.S. person or a foreign person with
certain specified U.S. connections, they generally will be
subject to information reporting (but not backup withholding),
unless you certify that you are not a U.S. person under
penalties of perjury (usually on an IRS
Form W-8BEN)
or otherwise establish an exemption.
In addition, the amount of any dividends paid to you and the
amount of tax, if any, withheld from such payment generally must
be reported annually to you and the IRS. The IRS may make such
information available under the provisions of an applicable
income tax treaty to the tax authorities in the country in which
you reside.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against your U.S. federal
income tax liability provided the required information is timely
furnished by you to the IRS.
Non-U.S. Holders
should consult their own tax advisors regarding the filing of a
U.S. tax return for claiming a refund of such backup
withholding.
U.S.
Federal Estate Tax
Shares of our common stock held (or deemed held) by an
individual Non-U.S. Holder at the time of his or her death will
be included in such Non-U.S. Holder’s gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.
J.P. Morgan Securities Inc., Citigroup Global Markets Inc.,
Deutsche Bank Securities Inc. and Morgan Stanley & Co.
Incorporated are acting as joint book-running managers of the
offering and as representatives of the underwriters named below.
Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus, each underwriter
named below has severally agreed to purchase, and we and the
Initial Stockholder have agreed to sell to that underwriter, the
number of shares set forth opposite the underwriter’s name.
Number
Underwriter
of Shares
J.P. Morgan Securities Inc.
Citigroup Global Markets Inc.
Deutsche Bank Securities Inc.
Morgan Stanley & Co. Incorporated
Total
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering
are subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all the
shares (other than those covered by the over-allotment option
described below) if they purchase any of the shares.
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount from the initial
public offering price not to exceed
$ per share. If all the shares are
not sold at the initial offering price, the underwriters may
change the offering price and the other selling terms. The
representatives have advised us and the Initial Stockholder that
the underwriters do not intend to make sales to discretionary
accounts.
If the underwriters sell more shares than the total number set
forth in the table above, the Initial Stockholder has granted to
the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up
to
additional shares at the public offering price less the
underwriting discount. The underwriters may exercise the option
solely for the purpose of covering over-allotments, if any, in
connection with this offering. To the extent the option is
exercised, each underwriter must purchase a number of additional
shares approximately proportionate to that underwriter’s
initial purchase commitment. Any shares issued or sold under the
option will be issued and sold on the same terms and conditions
as the other shares that are the subject of this offering.
We, our officers and directors, and holders of
approximately % of our common stock
outstanding immediately prior to this offering, including the
Initial Stockholder, have agreed that, for a period
of days from the date of this
prospectus, we and they will not, without the prior written
consent of the representatives, dispose of or hedge any shares
or any securities convertible into or exchangeable for our
common stock. The representatives in their sole discretion may
release any of the securities subject to these
lock-up
agreements at any time without notice. Notwithstanding the
foregoing, if (i) during the last 17 days of
the -day restricted period, we
issue an earnings release or material news or a material event
relating to our company occurs; or (ii) prior to the
expiration of the -day restricted
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of
the -day restricted period, the
restrictions described above shall continue to apply until the
expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
At our request, the underwriters have reserved up
to % of the shares for sale at the
initial public offering price to persons who are directors,
officers or employees, or who are otherwise associated with us
through a directed share program. The number of shares available
for sale to the general public will be reduced by the number of
directed shares purchased by participants in the program. Except
for certain of our officers, directors and employees who have
entered into
lock-up
agreements as contemplated in the immediately preceding
paragraph, each person buying shares through the directed share
program has agreed that, for a
period of days from the date
of this prospectus, he or she will not, without the prior
written consent of the representatives, dispose of or hedge any
shares or any securities convertible into or exchangeable for
our common stock with respect to shares purchased in the
program. For certain officers, directors and employees
purchasing shares through the directed share program, the
lock-up
agreements contemplated in the immediately preceding paragraph
shall govern with respect to their purchases. The
representatives in their sole discretion may release any of the
securities subject to these
lock-up
agreements at any time without notice. Any directed shares not
purchased will be offered by the underwriters to the general
public on the same basis as all other shares offered. We have
agreed to indemnify the underwriters against certain liabilities
and expenses, including liabilities under the Securities Act, in
connection with the sales of the directed shares.
Prior to this offering, there has been no public market for our
shares. Consequently, the initial public offering price for the
shares was determined by negotiations among us, the Initial
Stockholder and the representatives. Among the factors
considered in determining the initial public offering price were
our results of operations, our current financial condition, our
future prospects, our markets, the economic conditions in and
future prospects for the industry in which we compete, our
management, and currently prevailing general conditions in the
equity securities markets, including current market valuations
of publicly traded companies considered comparable to our
company. We cannot assure you, however, that the price at which
the shares will sell in the public market after this offering
will not be lower than the initial public offering price or that
an active trading market in our shares will develop and continue
after this offering.
We intend to apply to have our common stock listed on the NYSE
under the symbol “RA.”
The following table shows the underwriting discounts and
commissions that we and the Initial Stockholder are to pay to
the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the
underwriters’ over-allotment option.
Paid by Us
Paid by Initial Stockholder
No Exercise
Full Exercise
No Exercise
Full Exercise
Per share
$
$
$
$
Total
$
$
$
$
We estimate that the total expenses of this offering to be paid
by us will be
$ .
In connection with the offering, the underwriters may purchase
and sell shares in the open market. Purchases and sales in the
open market may include short sales, purchases to cover short
positions, which may include purchases pursuant to the
over-allotment option, and stabilizing purchases.
•
Short sales involve secondary market sales by the underwriters
of a greater number of shares than they are required to purchase
in the offering.
•
“Covered” short sales are sales of shares in an amount
up to the number of shares represented by the underwriters’
over-allotment option.
•
“Naked” short sales are sales of shares in an amount
in excess of the number of shares represented by the
underwriters’ over-allotment option.
•
Covering transactions involve purchases of shares either
pursuant to the over-allotment option or in the open market
after the distribution has been completed in order to cover
short positions.
•
To close a naked short position, the underwriters must purchase
shares in the open market after the distribution has been
completed. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after
pricing that could adversely affect investors who purchase in
the offering.
•
To close a covered short position, the underwriters must
purchase shares in the open market after the distribution has
been completed or must exercise the over-allotment option. In
determining the source of shares to close the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option.
Stabilizing transactions involve bids to purchase shares so long
as the stabilizing bids do not exceed a specified maximum.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when the underwriters, in covering short
positions or making stabilizing purchases, repurchase shares
originally sold by that syndicate member.
Purchases to cover short positions and stabilizing purchases, as
well as other purchases by the underwriters for their own
accounts, may have the effect of preventing or retarding a
decline in the market price of the shares. They may also cause
the price of the shares to be higher than the price that would
otherwise exist in the open market in the absence of these
transactions. The underwriters may conduct these transactions on
the NYSE, in the over-the-counter market or otherwise. If the
underwriters commence any of these transactions, they may
discontinue them at any time.
The underwriters and their respective affiliates have, from time
to time, performed, and may in the future perform, investment
banking, commercial banking and financial advisory services for
us and our affiliates, for which they received or will receive
customary fees and expenses. Citigroup Global Markets Inc. was
the sole lead arranger and sole book-running manager for the ABL
Facility. Citicorp North America, Inc., an affiliate of
Citigroup Global Markets Inc., is an agent and a lender under
the ABL Facility. JPMorgan Chase Bank, N.A., an affiliate of
J.P. Morgan Securities Inc. and Morgan Stanley Bank, N.A.,
an affiliate of Morgan Stanley & Co. Incorporated, are
also lenders under the ABL Facility. Citigroup Global Markets
Inc., J.P. Morgan Securities Inc., Morgan
Stanley & Co. Incorporated and Deutsche Bank
Securities Inc. acted as initial purchasers of the senior
secured notes.
We and the Initial Stockholder have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the
underwriters may be required to make because of any of those
liabilities.
Notice to
Prospective Investors in the European Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of shares
described in this prospectus may not be made to the public in
that relevant member state prior to the publication of a
prospectus in relation to the shares that has been approved by
the competent authority in that relevant member state or, where
appropriate, approved in another relevant member state and
notified to the competent authority in that relevant member
state, all in accordance with the Prospectus Directive, except
that, with effect from and including the relevant implementation
date, an offer of securities may be offered to the public in
that relevant member state at any time:
•
to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
•
to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than €43,000,000 and
(3) an annual net turnover of more than €50,000,000,
as shown in its last annual or consolidated accounts;
•
to fewer than 100 natural or legal persons (other than qualified
investors as defined below) subject to obtaining the prior
consent of the representatives for any such offer; or
•
in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive.
Each purchaser of shares described in this prospectus located
within a relevant member state will be deemed to have
represented, acknowledged and agreed that it is a
“qualified investor” within the meaning of
Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an “offer to
the public” in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or
subscribe the securities, as the expression may be varied in
that member state by any measure implementing the Prospectus
Directive in that member state, and the expression
“Prospectus Directive” means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
The sellers of the shares have not authorized and do not
authorize the making of any offer of shares through any
financial intermediary on their behalf, other than offers made
by the underwriters with a view to the final placement of the
shares as contemplated in this prospectus. Accordingly, no
purchaser of the shares, other than the underwriters, is
authorized to make any further offer of the shares on behalf of
the sellers or the underwriters.
Notice to
Prospective Investors in the United Kingdom
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive that are also (i) investment
professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005
(the “Order”) or (ii) high net worth entities,
and other persons to whom it may lawfully be communicated,
falling within Article 49(2)(a) to (d) of the Order
(each such person being referred to as a “relevant
person”). This prospectus and its contents are confidential
and should not be distributed, published or reproduced (in whole
or in part) or disclosed by recipients to any other persons in
the United Kingdom. Any person in the United Kingdom that is not
a relevant person should not act or rely on this document or any
of its contents.
Notice to
Prospective Investors in France
Neither this prospectus nor any other offering material relating
to the shares described in this prospectus has been submitted to
the clearance procedures of the Autorité des
Marchés Financiers or of the competent authority of
another member state of the European Economic Area and notified
to the Autorité des Marchés Financiers. The
shares have not been offered or sold and will not be offered or
sold, directly or indirectly, to the public in France. Neither
this prospectus nor any other offering material relating to the
shares has been or will be:
•
released, issued, distributed or caused to be released, issued
or distributed to the public in France; or
•
used in connection with any offer for subscription or sale of
the shares to the public in France.
Such offers, sales and distributions will be made in France only:
•
to qualified investors (investisseurs qualifiés)
and/or to a
restricted circle of investors (cercle restreint
d’investisseurs), in each case investing for their own
account, all as defined in, and in accordance with
articles L.411-2,
D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the
French Code monétaire et financier;
•
to investment services providers authorized to engage in
portfolio management on behalf of third parties; or
•
in a transaction that, in accordance with article
L.411-2-II-1°-or-2°-or 3° of the French Code
monétaire et financier and
article 211-2
of the General Regulations (Règlement
Général) of the Autorité des Marchés
Financiers, does not constitute a public offer (appel
public à l’épargne).
The shares may be resold directly or indirectly, only in
compliance with
articles L.411-1,
L.411-2,
L.412-1 and
L.621-8 through L.621-8-3 of the French Code monétaire
et financier.
The shares may not be offered or sold in Hong Kong by means of
any document other than (i) in circumstances which do not
constitute an offer to the public within the meaning of the
Companies Ordinance (Cap. 32, Laws of Hong Kong), or
(ii) to “professional investors” within the
meaning of the Securities and Futures Ordinance (Cap. 571, Laws
of Hong Kong) and any rules made thereunder, or (iii) in
other circumstances which do not result in the document being a
“prospectus” within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Notice to
Prospective Investors in Japan
The shares offered in this prospectus have not been registered
under the Securities and Exchange Law of Japan. The shares have
not been offered or sold and will not be offered or sold,
directly or indirectly, in Japan or to or for the account of any
resident of Japan, except (i) pursuant to an exemption from
the registration requirements of the Securities and Exchange Law
and (ii) in compliance with any other applicable
requirements of Japanese law.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the “SFA”),
(ii) to a relevant person pursuant to Section 275(1),
or any person pursuant to Section 275(1A), and in
accordance with the conditions specified in Section 275 of
the SFA or (iii) otherwise pursuant to, and in accordance
with the conditions of, any other applicable provision of the
SFA, in each case subject to compliance with conditions set
forth in the SFA.
Where the shares are subscribed or purchased under
Section 275 of the SFA by a relevant person which is:
•
a corporation (which is not an accredited investor (as defined
in Section 4A of the SFA)) the sole business of which is to
hold investments and the entire share capital of which is owned
by one or more individuals, each of whom is an accredited
investor; or
•
a trust (where the trustee is not an accredited investor) whose
sole purpose is to hold investments and each beneficiary of the
trust is an individual who is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest
(howsoever described) in that trust shall not be transferred
within six months after that corporation or that trust has
acquired the shares pursuant to an offer made under
Section 275 of the SFA except:
•
to an institutional investor (for corporations, under
Section 274 of the SFA) or to a relevant person defined in
Section 275(2) of the SFA, or to any person pursuant to an
offer that is made on terms that such shares, debentures and
units of shares and debentures of that corporation or such
rights and interest in that trust are acquired at a
consideration of not less than S$200,000 (or its equivalent in a
foreign currency) for each transaction, whether such amount is
to be paid for in cash or by exchange of securities or other
assets, and further for corporations, in accordance with the
conditions specified in Section 275 of the SFA;
•
where no consideration is or will be given for the
transfer; or
Certain legal matters relating to this offering will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York. Cahill Gordon &
Reindel llp, New
York, New York is representing the underwriters in this
offering. Skadden, Arps, Slate, Meagher & Flom LLP
also represents Fortress on a variety of past and current
matters.
The consolidated financial statements of RailAmerica as of
December 31, 2008 and 2007 (successor), the successor
periods January 1, 2008 through December 31, 2008 and
February 15, 2007 through December 31, 2007, and
predecessor period January 1, 2007 through
February 14, 2007 appearing in this prospectus and
registration statement, have been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of RailAmerica for the
year ended December 31, 2006 (predecessor) included in this
prospectus and registration statement, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, an
independent registered certified public accounting firm, given
on the authority of said firm as experts in accounting and
auditing.
This prospectus includes market share and industry data and
forecasts that we have obtained or developed from independent
consultant reports, publicly available information, various
industry publications, other published industry sources and our
internal data and estimates. This includes information relating
to the railroad and freight transportation industries from
several independent outside sources including the AAR, the
American Short Line and Regional Railroad Association, the USDOT
and the Canadian Ministry of Transport. See “Industry.”
Our internal data, estimates and forecasts are based upon
information obtained from our customers, partners, trade and
business organizations and other contacts in the markets in
which we operate and our management’s understanding of
industry conditions.
We have filed a registration statement, of which this prospectus
is a part, on
Form S-1
with the SEC relating to this offering. This prospectus does not
contain all of the information in the registration statement and
the exhibits included with the registration statement.
References in this prospectus to any of our contracts,
agreements or other documents are not necessarily complete, and
you should refer to the exhibits attached to the registration
statement for copies of the actual contracts, agreements or
documents. You may read and copy the registration statement, the
related exhibits and other material we file with the SEC at the
SEC’s public reference room in Washington, D.C. at
100 F Street, Room 1580, N.E.,
Washington, D.C. 20549. You can also request copies of
those documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the Commission at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. The SEC also maintains an internet site that contains
reports, proxy and information statements and other information
regarding issuers that file with the SEC. The website address is
http://www.sec.gov.
Upon the effectiveness of the registration statement, we will be
subject to the informational requirements of the Exchange Act,
and, in accordance with the Exchange Act, will file reports,
proxy and information statements and other information with the
SEC. Such annual, quarterly and special reports, proxy and
information statements and other information can be inspected
and copied at the locations set forth above. We intend to make
this information available on our website, www.railamerica.com.
We have audited the accompanying consolidated balance sheets of
RailAmerica, Inc. and subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year ended
December 31, 2008, the consolidated statements of
operations, stockholders’ equity, and cash flows for the
period February 15, 2007 to December 31, 2007
(Successor), and the consolidated statements of operations,
stockholders’ equity, and cash flows for the period
January 1, 2007 to February 14, 2007 (Predecessor).
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of RailAmerica, Inc. at December 31,2008 and 2007, and the consolidated results of their operations
and their cash flows for the year ended December 31, 2008,
the consolidated results of their operations and their cash
flows for the period February 15, 2007 to December 31,2007 (Successor), and the consolidated results of their
operations, and their cash flows for the period January 1,2007 to February 14, 2007 (Predecessor) in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the
Company changed its method for accounting for uncertainty for
income taxes in 2007.
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Shareholders of
RailAmerica, Inc.
In our opinion, the accompanying consolidated statements of
operations, stockholders’ equity and cash flows present
fairly, in all material respects, the results of operations and
cash flows of RailAmerica, Inc. and its subsidiaries (“the
Company”) for the year ended December 31, 2006 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 audit. We conducted our audit 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 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.
Accounts and notes receivable, net of allowance of $3,338 and
$2,384, respectively
76,384
89,965
Other current assets
18,480
11,968
Current deferred tax assets
5,854
9,537
Total current assets
127,669
126,857
Property, plant and equipment, net
953,604
970,505
Intangible assets
172,859
190,149
Goodwill
204,701
189,502
Other assets
16,561
6,226
Total assets
$
1,475,394
$
1,483,239
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
$
899
$
627,434
Accounts payable
56,058
60,312
Accrued expenses
51,349
43,555
Total current liabilities
108,306
731,301
Long-term debt, less current maturities
628,681
9,507
Deferred income taxes
149,695
167,676
Other liabilities
117,192
62,006
Total liabilities
1,003,874
970,490
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 520,000 shares
authorized; 471,448 shares issued and outstanding at
December 31, 2008; and 468,735 shares issued and
outstanding at December 31, 2007
5
5
Additional paid in capital and other
471,008
469,189
Retained earnings
50,029
33,502
Accumulated other comprehensive income (loss)
(49,522
)
10,053
Total stockholders’ equity
471,520
512,749
Total liabilities and stockholders’ equity
$
1,475,394
$
1,483,239
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
RailAmerica, Inc. (“RailAmerica” or the
“Company”) is one of the largest short line and
regional rail service provider in North America, with 40 short
line and regional railroads operating over approximately
7,500 miles of track in 27 states and three Canadian
provinces. The Company’s principal operations consist of
rail freight transportation and ancillary rail services.
On November 14, 2006, RR Acquisition Holding LLC, a
Delaware limited liability company (“Holdings”) and RR
Acquisition Sub Inc., a Delaware corporation and wholly owned
subsidiary of Holdings (“Subsidiary”), both formed by
investment funds managed by affiliates of Fortress Investment
Group LLC (“Fortress”) entered into an Agreement and
Plan of Merger (“Agreement”) with RailAmerica, a
Delaware corporation. On February 14, 2007 shortly after
the approval of the proposed merger by the shareholders of
RailAmerica, Subsidiary merged with and into RailAmerica, with
RailAmerica continuing as the entity surviving the merger as a
wholly owned subsidiary of Holdings (the
“Acquisition”).
Under the terms of the Agreement, purchase consideration
consisted of the shareholders of RailAmerica receiving $16.35 in
cash for each share of RailAmerica common stock plus the
assumption of the outstanding debt. The total value of the
transaction, including the refinancing of the existing debt, was
approximately $1.1 billion. See Note 2 for further
discussion of the acquisition transaction.
PRINCIPLES
OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of RailAmerica and all of its subsidiaries. All of
RailAmerica’s consolidated subsidiaries are wholly-owned.
All intercompany balances and transactions have been eliminated.
BASIS
OF PRESENTATION
The balance sheet as of December 31, 2007, which includes
the Acquisition transaction, and the statements of operations,
stockholders’ equity and cash flows for the post
acquisition activity subsequent to February 14, 2007 are
defined as those of the Successor Company and are referred to as
“the period ended December 31, 2007.” The
financial statements as of and for the year ended
December 31, 2008 are also of the Successor Company. The
statement of operations, stockholders’ equity and cash
flows for the period of January 1, 2007 through
February 14, 2007, are those of the Predecessor Company and
are referred to as “the period ended February 14,2007.” The financial statements as of and for the year
ended December 31, 2006 are also of the Predecessor Company.
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 revenue 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.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts are recorded by management based
upon the Company’s historical experience of bad debts to
sales, analysis of accounts receivable aging, and specific
identification of customers in financial distress, i.e.,
bankruptcy or poor payment record. Management reviews material
past due balances on a monthly basis. Account balances are
charged off against the allowance when management determines it
is probable that the receivable will not be recovered.
Activity in the Company’s allowance for doubtful accounts
was as follows (in thousands):
2008
2007
2006
Balance, beginning of year
$
2,384
$
1,174
$
573
Provisions
1,297
2,008
1,827
Charges
(343
)
(798
)
(1,226
)
Balance, end of year
$
3,338
$
2,384
$
1,174
MATERIALS
AND SUPPLIES
Materials and supplies, which are included in other current
assets in the consolidated balance sheet, are stated principally
at average cost, which is not in excess of replacement cost.
Materials are stated at an amount which does not exceed
estimated realizable value.
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, when impairment indicators are present,
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.
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:
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
GOODWILL
AND INDEFINITE-LIVED INTANGIBLE ASSETS
Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible and
identifiable intangible assets of RailAmerica.
The Company reviews the carrying values of goodwill and
identifiable intangible assets with indefinite lives at least
annually to assess impairment since these assets are not
amortized. Additionally, the Company reviews the carrying value
of goodwill or any intangible asset whenever such events or
changes in circumstances indicate that its carrying amount may
not be recoverable. The Company assesses impairment by comparing
the fair value of an intangible asset or goodwill with its
carrying value. Specifically, the Company tests for impairment
in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, “Goodwill and Other Intangible
Assets” (SFAS 142). For goodwill, a two-step
impairment model is used. The first step compares the fair value
of the reporting unit with its carrying amount, including
goodwill. The determination of fair value involves significant
management judgment. If the fair value of the reporting unit is
less than the carrying amount, goodwill would be considered
impaired. The second step measures the goodwill impairment as
the excess of recorded goodwill over the asset’s implied
fair value. Impairments are recognized when incurred. No
circumstances have occurred to indicate the possibility of
impairment and management believes that goodwill is not impaired
based on the results of the annual impairment test.
For the indefinite-lived intangible assets the impairment test
compares the fair value of an intangible asset with its carrying
amount. If the carrying amount of an intangible asset exceeds
its fair value, an impairment loss is recognized in an amount
equal to that excess. The Company has certain railroad leases
that are recorded as indefinite-lived intangible assets.
AMORTIZABLE
INTANGIBLE ASSETS
For amortizable intangible assets, SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (SFAS 144), requires a company to perform an
impairment test on amortizable intangible assets when specific
impairment indicators are present. The Company has amortizable
intangible assets recorded at the fair value of locomotive,
railcar and railroad leases as well as customer relationships or
contracts. These intangible assets are generally amortized on a
straight-line basis over the contractual length of the lease or
expected economic longevity of the customer relationship, the
facility served, or the length of the customer contract.
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.
In June 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. 48, or
FIN 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement
No. 109, Accounting for Income Taxes,” which clarifies
the accounting for uncertainty in income taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 requires that the Company recognize in the financial
statements the impact of a tax position, if that position more
likely than not would not be sustained on audit, based on the
technical merits of the position. FIN 48 also provides
guidance on
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The provisions of
FIN 48 were effective beginning January 1, 2007 with
the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings prior to
the Acquisition (See Note 11, Income Tax Provision).
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 revenue as shipments progress
due to the relatively short length of the Company’s
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. 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. Revenue 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, 2008 and 2007, accumulated other comprehensive
income (loss) included $8.0 million of cumulative
translation losses and $26.7 million of cumulative
translation gains, respectively. For the period ended
December 31, 2008, other income (loss) includes
$8.3 million related to exchange rate losses on
U.S. dollar denominated debt held by a Canadian entity that
has the Canadian dollar as its functional currency. The period
ended December 31, 2007 includes $7.0 million related
to exchange rate gains on U.S. dollar denominated debt held
by a Canadian entity that has the Canadian dollar as its
functional currency.
DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument held by the
Company:
•
Current assets and current liabilities: The
carrying value approximates fair value due to the short maturity
of these items.
•
Long-term debt: The fair value of the
Company’s long-term debt is based on secondary market
indicators. Since the Company’s debt is not quoted,
estimates are based on each obligation’s characteristics,
including remaining maturities, interest rate, amortization
schedule and liquidity. The carrying amount of the
Company’s fixed rate and variable rate debt approximates
its fair value.
•
Derivatives: The carrying value is based on
fair value as of the balance sheet date. SFAS No. 157,
“Fair Value Measurements” (SFAS 157) requires
companies to maximize the use of observable inputs (Level 1
and Level 2), when available, and to minimize the use of
unobservable inputs (Level 3) when determining fair
value. The Company’s measurement of the fair value of
interest rate derivatives is based on estimates of the
mid-market values for the transactions provided by the
counterparties to these agreements. For derivative instruments
in an asset position, the Company also analyzes the credit
standing of the counterparty and factors it into the fair value
measurement. SFAS 157 states that the fair value of a
liability also must reflect the nonperformance risk of the
reporting entity. Therefore, the impact of the Company’s
credit worthiness has also been factored into the fair value
measurement of the derivative instruments in a liability
position. This methodology is a market approach, which under
SFAS 157 utilizes Level 2 inputs as it uses market
data for similar instruments in active markets.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
NEW
ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (SFAS 157), which is
effective for fiscal years beginning after November 15,2007, and for interim periods within those years. On
February 12, 2008, the FASB issued FASB Staff Position
(“FSP”)
FAS 157-2
which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). This FSP
partially defers the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years. SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands the related disclosure requirements. The Company adopted
SFAS 157, except as it applies to those nonfinancial assets
and nonfinancial liabilities, as noted in
FSP 157-2,
on January 1, 2008. Such adoption did not have a material
impact on the Company’s consolidated financial statements.
The Company is currently evaluating the provisions of
FSP 157-2.
In October 2008, the FASB also issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, which clarifies the
application of SFAS No. 157 in a market that is not
active. The Company is currently evaluating the provisions of
FSP 157-3.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of
SFAS No. 115” (SFAS 159). SFAS 159
permits, but does not require, entities to choose to measure
many financial instruments and certain other items at fair
value. The standard provides entities the opportunity to
mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is
effective for fiscal years beginning after November 15,2007, and interim periods within those years. The Company
adopted the provisions of SFAS 159 on January 1, 2008.
Such adoption did not have a material impact on the
Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations” (SFAS 141R).
SFAS 141R retains the fundamental requirements of the
original pronouncement requiring that the purchase method be
used for all business combinations. SFAS 141R defines the
acquirer as the entity that obtains control of one or more
businesses in the business combination, establishes the
acquisition date as the date the acquirer achieves control and
requires the acquirer to recognize the assets acquired,
liabilities assumed and any noncontrolling interest at their
fair values as of the acquisition date. SFAS 141R also
requires that acquisition-related costs are expensed as
incurred. SFAS 141R is effective for fiscal years beginning
after December 15, 2008, and interim periods within those
years. Early adoption of SFAS 141R is prohibited. The
Company does not anticipate that the adoption of SFAS 141R
will have a material impact on its consolidated financial
statements, absent any material business combinations or
adjustments to pre-acquisition income tax contingencies.
In December 2007, the FASB issued SFAS No. 160
“Noncontrolling Interests in Consolidated Financial
Statements (an amendment of ARB No. 51)”
(SFAS 160). SFAS 160 requires that noncontrolling
(minority) interests are reported as a component of equity, that
net income attributable to the parent and to the non-controlling
interest is separately identified in the income statement, that
changes in a parent’s ownership interest while the parent
retains its controlling interest are accounted for as equity
transactions, and that any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary is initially
measured at fair value. SFAS 160 is effective for fiscal
years beginning after December 15, 2008, and shall be
applied prospectively. However, the presentation and disclosure
requirements of SFAS 160 shall be applied retrospectively
for all periods presented. The Company does not believe that
this pronouncement will have a material impact on the
Company’s consolidated financial statements.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2.
MERGER
AND ACQUISITION TRANSACTION
As described in Note 1, Summary of Significant Accounting
Policies, on February 14, 2007, RailAmerica and Fortress
completed a merger in which RailAmerica was acquired by certain
private equity funds managed by affiliates of Fortress.
Pursuant to the terms of the agreement, purchase consideration
consisted of the shareholders of RailAmerica receiving $16.35 in
cash for each share of RailAmerica common stock plus the
assumption of the outstanding debt of the Predecessor Company.
The Acquisition was financed through a $465 million capital
infusion from Holdings consisting of 465,000 common shares at
$1,000 per share and refinancing the Predecessor Company’s
amended and restated term facility with a $650 million
bridge credit facility (See Note 9). The total value of the
transaction, including the cash payments to stockholders and
option holders, refinancing of the existing debt, and
acquisition related costs, was approximately $1.1 billion.
The following table details the payments made for the
Acquisition (in thousands):
Common stockholders
$
639,115
Payoff of existing debt and accrued interest
397,541
Payments to option and warrant holders
28,838
Transaction costs
10,721
Severance of executives
11,236
Cash paid for acquisition
$
1,087,451
In accordance with SFAS No. 141, “Business
Combinations,” the Acquisition was accounted for under the
purchase method of accounting. Under this method of accounting,
assets acquired and liabilities assumed were recorded on the
Successor Company’s balance sheet at their estimated fair
value. In 2008, the Company finalized the purchase price
allocation which resulted in an adjustment to the fair value of
acquired property, plant and equipment, related income tax
liabilities and goodwill. The table below reflects the change in
the carrying amount of goodwill for the year ended
December 31, 2008 (in thousands).
As a result of the Acquisition and the consideration paid, an
estimated $174.3 million of goodwill was initially recorded
on the Consolidated Balance Sheet of the Successor Company.
During the period ended December 31, 2007, the goodwill
balance increased by $15.2 million, to $189.5 million
for foreign exchange translation adjustments. During 2008 the
initial goodwill balance increased $30.6 million, as a
result of the purchase price adjustments noted above and
decreased by $15.4 million for foreign exchange translation
adjustments. The main drivers of the goodwill were the
Company’s historical revenue growth rate, as well as
expectations for future revenue and Earnings Before Interest,
Taxes, Depreciation and Amortization (“EBITDA”) growth
from organic and strategic initiatives including synergies from
further integration of processes across the RailAmerica network.
These expectations of future business performance were key
factors influencing the premium paid for the RailAmerica
business. The goodwill associated with this Acquisition is not
deductible for tax purposes.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The allocation of the purchase price is as follows (in
thousands):
Current assets
$
91,556
Intangible assets
188,757
Goodwill
204,979
Property, plant and equipment
907,815
Other assets
10,511
Total assets acquired
1,403,618
Current liabilities
(86,117
)
Other long term liabilities
(45,475
)
Deferred tax liabilities
(184,575
)
Total liabilities assumed
(316,167
)
Purchase price
$
1,087,451
Perpetual railroad leases for trackage rights were considered
indefinite-lived intangible assets and were assigned a value of
$146.4 million. Definite-lived intangible asset classes
were assigned the following amounts and weighted-average
amortization periods (dollars in thousands):
For the year ended December 31, 2008 and the period ended
December 31, 2007, basic and diluted earnings per share is
calculated using the weighted average number of common shares
outstanding during the year. The basic earnings per share
calculation includes all vested and unvested restricted shares
as a result of their dividend participation rights.
For the Predecessor period ended February 14, 2007, basic
earnings per share is calculated using the weighted average
number of common shares outstanding during the period.
For the Predecessor year ended December 31, 2006, 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 0.6 million options were
excluded from the calculation as such securities were
anti-dilutive.
For the Predecessor period January 1, 2007 through
February 14, 2007, 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 2.8 million stock options and warrants and
0.4 million unvested restricted shares are anti-dilutive
due to the net loss.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of the income (loss) from continuing
operations available for common stockholders and weighted
average shares outstanding (in thousands):
Income (loss) from continuing operations available to common
stockholders (basic and diluted)
$
13,763
$
34,258
$
(5,317
)
$
27,420
Weighted average shares outstanding (basic)
484
477
39,104
38,650
Assumed conversion:
Options, warrants and unvested restricted stock
—
—
—
615
Weighted average shares outstanding (diluted)
484
477
39,104
39,265
4.
STOCK-BASED
COMPENSATION
Predecessor
Company
The Predecessor Company had an incentive compensation plan under
which employees and non-employee directors were granted options
to purchase shares of the Company’s common stock at the
fair market value at the date of grant. Options generally vested
in two or three years and expired ten years from the date of the
grant. The Company had previously adopted the disclosure-only
provisions of SFAS No. 123, “Accounting for
Stock-Based Compensations” but as of January 1, 2006,
the Company adopted the prospective method of accounting for
stock-based compensation under
SFAS No. 123-R,
“Share-Based Payment”
(SFAS 123-R).
As a result, the Company recognized additional compensation
expense in the first nine months of 2006 related to unvested
outstanding stock options and the Company’s Employee Stock
Purchase Plan. The effect of the adoption of
SFAS 123-R
on the Company’s financial results for the year ended
December 31, 2006 added $0.4 million of compensation
expense to income from continuing operations, before income
taxes, and $0.3 million, after income taxes.
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2005:
dividend yield of 0.0%; expected volatility of 44%; risk free
interest rate of 5.0%; and expected lives of five years. The
weighted average fair value of options granted during 2005 was
$6.05 per share. There were no stock options granted during 2006
or 2007. Expected volatilities were based on historical
volatility of the Predecessor Company’s common stock and
other factors. The Predecessor used historical experience with
exercise and post-vesting employment termination behavior to
determine the options’ expected lives, which represent the
period of time that options granted are expected to be
outstanding. The risk free interest rate is based on the
U.S. Treasury rate with a maturity date corresponding to
the options’ expected lives. All stock options that were
outstanding as of February 14, 2007, were fully vested and
redeemed at the $16.35 per share purchase price.
The Predecessor Company maintained an Employee Stock Purchase
Plan under which all full-time employees could 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 stub period ended February 14, 2007 and the year
ended December 31, 2006, the Predecessor Company sold
12,576 and 26,147 shares of common stock, respectively, to
employees under this plan. The impact of adopting
SFAS 123-R
on this plan was not material.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the status of stock options as of February 14,2007, and changes during the year ended December 31, 2006
and period ended February 14, 2007, is presented below
(aggregate intrinsic value in thousands):
As part of the acquisition, all outstanding stock options were
cancelled and paid out upon the acquisition date and have been
included as part of the purchase price.
The total intrinsic value of options exercised during the period
ended February 14, 2007 and the year ended
December 31, 2006 was $0.05 million and
$1.0 million, respectively.
The Predecessor Company also had the ability to issue restricted
shares under its incentive compensation plan. A summary of the
status of restricted shares as of February 14, 2007 and
December 31, 2006, changes during the periods then ended
and the weighted average grant date fair values are presented
below:
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Time based restricted stock awards were generally scheduled to
vest over four to five years, although in some cases individual
grants could have vested over one year, and were contingent on
continued employment. The performance shares were to 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 vested based upon years of service of the
participating employee.
During the year ended December 31, 2006, the Board of
Directors of the Predecessor Company approved the grant of
restricted, performance and deferred shares of the Predecessor
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 vested
ratably at 25% per year over four years starting one year from
the date of grant. The performance shares were to 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 vested based upon years of service of the participating
employee. The Predecessor Company recognized compensation
expense of approximately $2.6 million during the twelve
months ended December 31, 2006, related to the time based,
performance and deferred shares. These amounts include
$0.8 million of expense related to the early vesting of
time based, performance and deferred shares as a result of
employee terminations in June 2006. During the period ended
February 14, 2007, the Predecessor Company recognized
compensation expense of approximately $3.5 million related
to the triggered vesting of the time based, performance and
deferred shares in connection with the Acquisition and
subsequent change in control.
During the year ended December 31, 2006, the Predecessor
Company accepted 36,915 shares, respectively, in lieu of
cash payments by employees for payroll tax withholdings relating
to stock based compensation. During the period ended
February 14, 2007, the Predecessor Company accepted
2,874 shares, in lieu of cash payments by employees for
payroll tax withholdings relating to stock based compensation.
Successor
Company
After the date of Acquisition and throughout 2007 and 2008, the
Company entered into individual equity award agreements with
employees, including executive officers, and consultants. During
the period ended December 31, 2007, the Successor Company issued
9,250 time-based restricted shares to employees and 2,000
time-based restricted shares to consultants. During the year
ended December 31, 2008, the Company issued 3,982.2
time-based restricted shares to employees. The restricted shares
granted to employees are scheduled to vest over three to five
year periods, while the shares issued to outside consultants
were scheduled to vest over a period of three years. The grant
date fair values of the restricted shares are based upon the
fair market value of the Company at the time of grant. The
Company engages an unrelated valuation specialist to perform a
fair value analysis of the Company at the end of each quarter.
In addition, as part of these equity award agreements, certain
members of management purchased shares of common stock of the
Company at fair market value on the date of purchase, while one
was granted common shares with a value of $0.3 million
during the year ended December 31, 2008.
Stock-based compensation expense related to restricted stock
grants for the year ended December 31, 2008 and the period
ended December 31, 2007 was $2.7 million and
$1.2 million, respectively. Due to certain repurchase
provisions that are at the grant date fair value in the equity
award agreements entered into with employees, the granted
restricted shares are accounted for as liabilities, rather than
equity. As a result, $2.0 million and $0.6 million of
the share based compensation expense has been presented in other
liabilities as of December 31, 2008 and 2007, respectively.
The remaining $0.7 million and $0.6 million of
compensation expense is related to the equity award agreements
with consultants and is reflected in additional paid in capital
as of December 31, 2008 and 2007, respectively.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At December 31, 2008, there was $11.7 million of
unrecognized compensation expense related to unvested restricted
share compensation arrangements, which is expected to be
recognized over a weighted average period of 3.18 years.
A summary of the status of restricted shares as of
December 31, 2007 and 2008, and the changes during the
periods then ended and the weighted average grant date fair
values is presented below:
In the third quarter of 2007, the Successor Company entered into
an agreement to sell all of the shares of its passenger train
operations in Hawaii, the Lahaina Kaanapali & Pacific
Railroad (“LKPR”), for $0.2 million in cash. An
additional $0.2 million was received after closing to
settle working capital adjustments. No gain or loss was
recognized on the sale of the entity. The LKPR’s results of
operations for the twelve months ended December 31, 2006,
the periods ended February 14, 2007 and December 31,2007 were not material.
In the third quarter of 2004, the Predecessor Company committed
to a plan to dispose of the E&N Railway. As a result
of several factors, including the expectation of minimal future
cash flows and potential limitations on the use of certain real
estate, the Predecessor Company did not expect significant
proceeds from the disposal and accordingly recorded an
impairment charge of $12.6 million in the third quarter of
2004. On March 24, 2006, the Predecessor transferred
ownership of the E&N Railway’s operating assets to the
Island Corridor Foundation in exchange for $0.9 million in
cash and a promissory note of $0.3 million. Upon final
transition of the operations on June 30, 2006, the
Predecessor Company recorded a pre-tax gain of
$2.5 million, or $2.4 million net of tax, in the gain
from sale of discontinued operations. There were no results of
operations in 2007.
The results of operations for the E&N Railway for the year
ended December 31, 2006 were as follows (in thousands):
2006
Operating revenue
$
1,405
Operating income
158
Income from discontinued operations
158
Income tax provision
53
Income from discontinued operations, net of income taxes
$
105
During the fourth quarter of 2005, the Predecessor 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.
The sale of the Alberta Railroad Properties was completed in
January 2006 for
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$22.1 million in cash. In conjunction with the completion
of the sale in 2006, the Company recorded an additional tax
provision on the sale of the discontinued operations of
$1.1 million. In 2008, the Company settled working capital
claims with the buyer and as a result recorded an adjustment of
$1.3 million, or $1.2 million, after income taxes,
through the gain on sale of discontinued operations.
The results of operations for the twelve months ended
December 31, 2006 for the Alberta Railroad Properties were
as follows (in thousands):
2006
Operating revenue
$
1,337
Operating income
101
Income from discontinued operations
101
Income tax provision
43
Income from discontinued operations, net of tax
$
58
In August 2004, the Company completed the sale of its Australian
railroad, Freight Australia, to Pacific National for AUD
$285 million (U.S. $204 million). The share sale
agreement provided for an additional payment to the Company of
AUD $7 million (U.S. $5 million), based on the
changes in the net assets of Freight Australia from
September 30, 2003 through August 31, 2004, which was
received in December 2004, and also provided various
representations and warranties by RailAmerica to the buyer.
Potential claims against the Company for violations of most of
the representations and warranties were capped at AUD
$50 million (U.S. $39.5 million). No claims were
asserted by the buyer. Accordingly, the Company reduced its
reserve for warranty claims by $13.4 million,
$8.0 million net of income taxes, through discontinued
operations in the year ended December 31, 2006. During the
years ended December 31, 2008, 2007, and 2006, the Company
incurred additional consulting costs associated with sale of
Freight Australia of $1.9 million or $1.3 million,
after income taxes, $1.1 million or $0.8 million,
after income taxes, and $0.3 million or $0.2 million,
after income taxes, respectively, related to the Australian
Taxation Office (“ATO”) audit of the reorganization
transactions undertaken by the Company’s Australian
subsidiaries prior to the sale. In addition, the Company
recognized foreign exchange gains of $4.0 million or
$2.8 million, after income taxes, on tax reserves
established in conjunction with the ATO audit during the year
ended December 31, 2008. These amounts are reflected in the
gain (loss) on sale of discontinued operations (See
Note 15).
6.
OTHER
BALANCE SHEET DATA
Other current assets consisted of the following as of
December 31, 2008 and 2007 (in thousands):
2008
2007
Unbilled Reimbursable Projects
$
12,171
$
5,161
Other current assets
6,309
6,807
$
18,480
$
11,968
Accrued expenses consisted of the following as of
December 31, 2008 and 2007 (in thousands):
Goodwill, which totaled $204.7 million and
$189.5 million as of December 31, 2008 and 2007,
respectively, includes the excess of the purchase price over the
fair value of the net tangible and intangible assets associated
with the Acquisition. See Note 2 for further information on
the change in goodwill value during the year.
The following table provides the gross and net carrying amounts
for each major class of intangible assets (in thousands):
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth the amortization expense over the
next five years (in thousands):
2009
$
7,463
2010
7,033
2011
5,483
2012
2,389
2013
680
Thereafter
4,890
$
27,938
The gross carrying value of
non-amortizing
railroad lease intangibles increased by $6.7 million for
foreign exchange translation adjustments during the period of
February 15, 2007 through December 31, 2007. The value
subsequently decreased by $9.6 million during the year
ended December 31, 2008 due to foreign exchange translation
adjustments.
9.
LONG-TERM
DEBT AND LEASES
Long-term debt consists of the following as of December 31,2008 and 2007 (in thousands):
2008
2007
Bridge Credit Facility:
U.S. Dollar Term Loan
$
587,000
$
587,000
Canadian Dollar Term Loan
38,000
38,000
U.S. Dollar Revolver
—
—
Canadian Dollar Revolver
—
—
Other long-term debt (including capital leases)
4,580
11,941
629,580
636,941
Less: current maturities
899
627,434
Long-term debt, less current maturities
$
628,681
$
9,507
$650
Million Bridge Credit Facility
As part of the merger transaction in which the Company was
acquired by certain private equity funds managed by affiliates
of Fortress, the Company terminated the commitments under its
Amended and Restated Credit Agreement, as described below, and
repaid all outstanding loans and other obligations in full under
this agreement. In order to fund this repayment of debt and
complete the merger transaction, on February 14, 2007, the
Company entered into a $650 million bridge credit
agreement. The facility consists of a $587 million
U.S. dollar term loan commitment and a $38 million
Canadian dollar term loan commitment, as well as a
$25 million revolving loan facility with a $20 million
U.S. dollar tranche and a $5 million Canadian dollar
tranche. The Company entered into an amendment on July 1,2008 to extend the maturity of the bridge credit facility for
one year with an additional one year extension at its option.
Under the amended bridge credit facility agreement, the term
loans and revolving loans bear interest at LIBOR plus 4.0% or
7.89% as of December 31, 2008. The bridge credit facility
agreement originally matured on August 14, 2008, and as
such, the outstanding loan balance under this agreement was
reflected as a current liability on the consolidated balance
sheet at December 31, 2007. Prior to amendment, the bridge
credit facility agreement, including the revolving loans, paid
interest at LIBOR plus 2.25%. The outstanding borrowings under
this facility are classified as non-current as the Company
currently expects to exercise its option to extend the maturity
to August 15, 2010. The $25 million revolving loan
facility is available for immediate borrowing if necessary.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In November 2008, the Company entered into Amendment No. 1
to the amended bridge credit facility agreement which permitted
the Company to enter into employee and office space sharing
agreements with affiliates and included a technical amendment to
the definitions of interest coverage ratio and interest expense.
The U.S and Canadian dollar term loans and the U.S. and
Canadian dollar revolvers 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 Citigroup Global Markets, Inc. and Morgan Stanley
Senior Funding, Inc., as co-lead arrangers, Citicorp North
America, Inc., as administrative agent and collateral agent and
Morgan Stanley Senior Funding, Inc. as syndication agent.
The bridge credit facility agreement 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
bridge credit agreement can be affected by events beyond the
Company’s control. Failure to comply with the obligations
in the bridge credit facility agreement 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. (See Note 19 for update on status of bridge credit
facility.)
The aggregate annual maturities of long-term debt are as follows
(in thousands):
2009
$
899
2010
625,679
2011
826
2012
263
2013
268
Thereafter
1,645
$
629,580
Amended
and Restated $450 Million Senior Credit Facility
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. dollar tranche and
a $37 million Canadian dollar 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 had a maturity date of
September 30, 2011 and required 1% annual principal
amortization and carried interest rates of LIBOR plus 2.00%, or
7.375% as of February 14, 2007. The revolving loans had a
maturity date of September 30, 2010 and carried an interest
rate of LIBOR plus 2.00%. 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 added $75 million
to the existing $313 million U.S. dollar tranche of
the term loan facility. The additional $75 million matured
and amortized on the same schedule as the rest of the term loan
facility. This senior credit facility was repaid as part of the
Acquisition transaction on February 14, 2007. (See
Note 2)
The U.S. dollar term loan and the U.S. dollar
denominated revolver of the amended and restated credit facility
were collateralized by the assets of and guaranteed by the
predecessor Company and most of its U.S. subsidiaries. The
Canadian dollar term loan and the Canadian dollar denominated
revolver of the amended and restated credit facility were
collateralized by the assets of and guaranteed by the
predecessor 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.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Interest
Rate Swaps
On February 14, 2007, the Company entered into an interest
rate swap with a termination date of February 15, 2014. The
total notional amount of swap started at $425 million for
the period commencing February 14, 2007 through
November 14, 2007, increasing to a total notional amount of
$525 million for the period commencing November 15,2007 through November 14, 2008, and ultimately increased to
$625 million for the period commencing November 15,2008 through February 15, 2014. Under the terms of the
interest rate swap, the Company is required to pay a fixed
interest rate of 4.9485% on the notional amount while receiving
a variable interest rate equal to the 90 day LIBOR. This
swap qualifies, is designated and is accounted for as a cash
flow hedge under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”
(SFAS 133). The fair value of this swap was a net payable
of $65.5 million and $23.3 million at
December 31, 2008 and 2007, respectively. Interest expense
of $0.1 million and $0.2 million was recognized during
the successor periods ended December 31, 2008 and 2007,
respectively, for the portion of the hedge deemed ineffective.
On June 3, 2005, the Predecessor Company entered into two
interest rate swaps for a total notional amount of
$100 million for the period from November 25, 2005
through November 24, 2008. Under the terms of the interest
rate swaps, the Company was 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
qualified, were designated and were accounted for as cash flow
hedges under SFAS 133. One of the interest rate swaps with
a total notional amount of $50 million was terminated on
February 12, 2007 and thus had no fair value at
December 31, 2007. The remaining interest rate swap’s
fair value was a net receivable of $0.03 million at
December 31, 2007. This interest rate swap terminated as
planned on November 24, 2008, and thus had no fair value at
December 31, 2008. Interest expense of $0.5 million
and $0.4 million was recognized during the successor
periods ended December 31, 2008 and 2007, respectively, for
the portion of the hedge deemed ineffective.
On November 30, 2004, the Company entered into an interest
rate swap for a notional amount of $100 million for the
period from November 25, 2005 through November 24,2007. The swap qualified, was designated and was accounted for
as a cash flow hedge under SFAS 133. Under the terms of the
interest rate swap, the Company was 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. This
interest rate swap terminated as planned on November 24,2007 and thus had no fair value at December 31, 2007.
Interest expense of $0.8 million was recognized during the
period ended December 31, 2007 for the portion of the hedge
deemed ineffective.
For derivative instruments in an asset position, the Company
analyzes the credit standing of the counterparty and factors it
into the fair value measurement. SFAS 157 states that
the fair value of a liability must reflect the nonperformance
risk of the reporting entity. Therefore, the impact of the
Company’s credit worthiness has also been factored into the
fair value measurement of the derivative instruments in a
liability position.
The Company monitors its hedging positions and the credit
ratings of its counterparties and does not anticipate losses due
to counterparty nonperformance.
See Notes 1 and 13 for additional information regarding the
fair value of derivative instruments.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (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, 2008 are as follows (in thousands):
Capital
Operating
Leases
Leases
2009
$
502
$
23,616
2010
291
16,891
2011
467
10,451
2012
—
7,770
2013
—
3,876
Thereafter
—
27,749
Total minimum lease payments
$
1,260
$
90,353
Less amount representing interest
(81
)
Total obligations under capital leases
$
1,179
Less current maturities of obligations under capital leases
(502
)
Obligations under capital leases payable after one year
$
677
Rental expense under operating leases for continuing operations
was approximately $31.5 million, $31.1 million, and
$38.1 million, for the periods ended December 31,2008, 2007 and 2006, respectively. Rental expense for the period
ended February 14, 2007 was $4.8 million.
10.
COMMON
STOCK TRANSACTIONS
Predecessor
All outstanding shares of common stock for the Predecessor
Company were purchased and retired on the date of the
Acquisition. This included all vested restricted stock and
outstanding stock options. During the period ended
February 14, 2007, the Predecessor Company accepted
2,874 shares in lieu of cash payments by employees for
payroll tax withholdings relating to stock based compensation.
As of January 1, 2007, the Predecessor Company had a total
of 101,500 warrants convertible into 1,101,995 shares of
common stock outstanding related to its previously repaid senior
subordinated notes at an exercise price of $6.60 and with an
expiration date of August 15, 2010. All outstanding
warrants were paid out at $16.35 per common share on the date of
Acquisition.
Successor
As part of the equity award plans adopted after the acquisition,
the Company allows certain members of management to purchase
shares of common stock of the Company. During the periods ended
December 31, 2008 and 2007, certain members of management
and consultants purchased an aggregate of 794 and
3,735 shares of common stock, respectively. Due to certain
repurchase provisions in the purchase agreements, cash of
$0.64 million and $3.74 million received for the
purchase of shares has been classified as a liability as of
December 31, 2008 and 2007, respectively. During the year
ended December 31, 2008, the Company accepted
53.1 shares in lieu of cash payments by employees for
payroll tax withholdings relating to stock based compensation.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The differences between the U.S. federal statutory tax rate
and the Company’s effective rate from continuing operations
for the year ended December 31, 2008, the period ended
December 31, 2007, the Predecessor period ended
February 14, 2007 and the Predecessor year ended
December 31, 2006, are as follows (in thousands):
Net expense due to difference between U.S. & Foreign tax
rates
892
297
154
114
Net expense (benefit) due to change in tax law, apportionment
factors and other adjustments
1,436
(1,538
)
—
(1,700
)
Permanent differences
393
(986
)
2,786
(61
)
Track maintenance credit
(16,278
)
(13,858
)
(1,725
)
(12,990
)
Net operating loss adjustment
—
—
796
—
FIN 48 contingencies and settlements
1,645
785
—
—
State income taxes, net
1,777
1,163
54
1,643
Other, net
(19
)
294
(67
)
397
Valuation allowance
3,093
717
471
100
Tax provision
$
1,599
$
(1,747
)
$
935
$
(4,809
)
The components of deferred income tax assets and liabilities as
of December 31, 2008 and 2007 are as follows (in thousands):
2008
2007
Deferred tax assets:
Net operating loss carryforward
$
52,264
$
55,991
Alternative minimum tax credit
1,365
1,473
Track maintenance credit/GO zone credits
94,819
65,748
Tax effect of unrecognized tax positions
7,300
4,072
Hedge transactions
25,823
10,002
Accrued expenses
13,592
12,888
Total deferred tax assets
195,163
150,174
Less: valuation allowance
(7,473
)
(5,817
)
Total deferred tax assets, net
187,690
144,357
Deferred tax liabilities:
Property, plant and equipment
(322,922
)
(298,654
)
Intangibles
(6,299
)
(3,350
)
Other
(2,310
)
(492
)
Total deferred tax liabilities
(331,531
)
(302,496
)
Net deferred tax liability
$
(143,841
)
$
(158,139
)
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
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 and $5.8 million at December 31,2008 and 2007, respectively.
The following table summarizes the net operating loss
carryforwards by jurisdiction as of December 31, 2008 (in
thousands):
Expiration
Amount
Period
U.S. — Federal
$
119,796
2020 - 2027
U.S. — State
224,384
2009 - 2028
Canada
622
2009 - 2027
$
344,802
The following table summarizes general business credits
available to the Company in the U.S. as of
December 31, 2008 (in thousands):
Expiration
Amount
Period
Track maintenance credit
$
94,742
2025 - 2028
GO Zone tax credit
77
2026
Total credits
$
94,819
The Company’s net operating loss carryforwards and general
business credits for federal and state income tax purposes are
limited by Internal Revenue Code Section 382 and Internal
Revenue Code Section 383, respectively.
The Company has taken an Accounting Principles Board (APB)
No. 23, “Accounting for Income Taxes —
Special Areas” position with respect to certain of its
foreign earnings. As such, the Company has not accrued for the
U.S. tax effects on the amount of its foreign earnings
deemed to be permanently reinvested outside of the U.S. The
amount of such earnings at December 31, 2008 was
approximately $32 million. The U.S. tax effects of the
permanently reinvested foreign earnings that have not been
accrued were approximately $11 million. The Company has
accrued for the U.S. tax effects on the amount of those
foreign earnings that have been remitted during the year or are
expected to be remitted in the future. On January 16, 2009,
the Company received distributions of $5.5 million for
which the U.S. tax effects were accrued as of
December 31, 2008.
The Company adopted FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109” (FIN 48) on January 1, 2007.
As a result of the implementation of FIN 48, the Company
recognized a $4.9 million increase to reserves for
uncertain tax positions. This increase, less offsetting
long-term tax assets of $1.1 million, was recorded as a
cumulative effect adjustment to the beginning balance of
retained earnings on January 1, 2007.
During 2008, approximately $10.8 million of the additions
for tax provisions of prior years was recorded as an adjustment
to goodwill and relates to tax positions that existed prior to
the change in ownership that occurred on February 14, 2007.
The $3.5 million of reductions for tax positions of prior
years is attributable to foreign exchange translation gains,
substantially all of which was attributable to the
Company’s former Australian businesses, and is included in
the results from discontinued operations. The entire balance of
unrecognized benefits at December 31, 2008, if recognized,
could affect the effective tax rate. The Company recognizes
interest and penalties related to unrecognized tax benefits in
income tax expense. During the years ended December 31,2008 and 2007, the Company recognized approximately
$0.6 million and $0.8 million, respectively, of
interest and penalties. The Company had approximately
$9.1 million and $2.9 million for the payment of
interest and penalties accrued at December 31, 2008 and
2007, respectively.
For a discussion of uncertainties related to the Australian tax
matter see Note 15. The Company cannot predict the timing
or ultimate outcome of this matter. However, it is reasonably
possible that this matter could be resolved during the next
12 months that could result in a material change in the
total amount of unrecognized tax benefits. (See Note 19 for
additional information on the Australian tax matter.)
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, various U.S. state
jurisdictions and foreign jurisdictions. With few exceptions,
the Company or one of its subsidiaries is no longer subject to
U.S. federal, state and local, or
non-U.S. income
tax examinations by authorities for years before 2002.
12.
SUPPLEMENTAL
CASH FLOW INFORMATION
In December 2007, the Successor Company entered into a one year
capital lease agreement in the amount of $1.2 million for
the lease of twenty-one locomotives from GE.
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 and ineffective portion of interest rate swaps.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
13.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The Company uses derivatives to hedge against increases in
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 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. During the successor periods ended
December 31, 2008 and 2007 and predecessor periods ended
February 14, 2007 and December 31, 2006, the Company
reclassified $11.1 million, $1.6 million,
$0.3 million and $2.5 million, respectively from other
comprehensive loss to interest expense.
For derivative instruments in an asset position, the Company
analyzes the credit standing of the counterparty and factors it
into the fair value measurement. SFAS 157 states that
the fair value of a liability must reflect the nonperformance
risk of the reporting entity. Therefore, the impact of the
Company’s credit worthiness has also been factored into the
fair value measurement of the derivative instruments in a
liability position.
The Company monitors its hedging positions and the credit
ratings of its counterparties and does not anticipate losses due
to counterparty nonperformance.
Due to the significance of fuel expenses to the operations of
the Company and the volatility of fuel prices, the Predecessor
Company periodically hedged against fluctuations in the price of
its fuel purchases. The fuel hedging program included the use of
derivatives that are accounted for as cash flow hedges under
SFAS 133. For 2006, approximately 22% of the Company’s
fuel costs were subject to fuel hedges. As of December 31,2006, the Predecessor Company had entered into fuel hedge
agreements for an average of 437,500 gallons per month for 2007
at an average rate of $2.32 per gallon, including transportation
and distribution costs. The fair value of these hedges was a net
payable of $0.9 million at December 31, 2006. Upon
review of the fuel hedge program, management of the Successor
Company determined that the fuel surcharge program effectively
hedged the Company’s exposure to increases in fuel prices.
As such, management discontinued the use of fuel hedges as a
cash flow hedge and did not enter into any new hedging
agreements in 2007. Transportation expense included income of
$0.8 million and expense of $0.6 million during the
periods ended December 31, 2007 and 2006, respectively,
related to fuel hedges.
Fluctuations in the market interest rates affect the cost of the
Successor Company’s borrowings under the bridge credit
facility. At December 31, 2008, accumulated other
comprehensive income included a loss of $42.7 million, net
of income taxes of $26.2 million, relating to the interest
rate swaps. At December 31, 2007, accumulated other
comprehensive income included a loss of $16.9 million, net
of income taxes of $10.4 million, relating to the interest
rate swaps. More information related to the interest rate hedges
can be found under Note 8. Were the Company to refinance
the bridge credit facility 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 bridge credit
facility 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.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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 periods ended December 31, 2008,
December 31, 2007, February 14, 2007, and
December 31, 2006, for the defined contribution members was
$0.7 million, $0.6 million, $0.1 million and
$0.8 million, respectively.
DEFINED BENEFIT PLAN — 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 7.5% used as of
December 31, 2008 is within the range recommended by PC
Bond Analytics. PC Bond Analytics distributes discount rate
information to defined benefit plan sponsors to assist in
reporting for pension disclosures. The discount rate data is
derived from the 2008 PC Bond Analytics Database, which consists
of data from Standard & Poor’s Institutional
Market Services database as well as proprietary analysis created
by PC Bond Analytics.
U.S.
Employees
The Company maintains a contributory profit sharing plan as
defined under Section 401(k) of the U.S. Internal
Revenue Code. The Company makes contributions to this plan at a
rate of 50% of the employees’ contribution up to $2,500 for
Railroad Retirement employees and $5,000 for FICA employees. An
employee becomes 100% vested with respect to the employer
contributions after completing four years of service. Employer
contributions during the periods ended December 31, 2008,
December 31, 2007, February 14, 2007 and
December 31, 2006 were approximately $1.3 million,
$1.1 million, $0.4 million and $1.3 million,
respectively.
The Company maintains a pension and post retirement benefit 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. The accrued benefits earned
under the Alcoa Pension Plan as of October 1, 2005 are an
offset to the RailAmerica plan. No assets were transferred as
part of the arrangement. However, the Company assumed accrued
post retirement benefits of $2.6 million as part of the
Alcoa Railroad acquisition in 2005.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following chart summarizes the benefit obligations, assets,
funded status and rate assumptions associated with the defined
benefit plans for the years ended December 31, 2008, 2007
and 2006 (in thousands):
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Canadian
U.S.
Total
Expected Employer Contribution in 2009
$
286
$
208
$
494
Expected Employee Contribution in 2009
100
0
100
Amortization of Loss in 2009
16
22
38
Amortization of Prior Service Cost in 2009
20
0
20
Expected Benefit Payments in
2009
$
154
$
20
$
174
2010
180
29
209
2011
194
35
229
2012
220
44
264
2013
264
55
319
2014 - 2019
898
327
1,225
Prior to December 31, 2006, actuarial gains and losses and
transition obligations were not recognized in the Company’s
Consolidated Balance Sheets, but were only included in the
footnote disclosures. Beginning on December 31, 2006, upon
adoption of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans- an amendment of AFSB Statements No. 87, 88, 106 and
132(R),”the Company began recognizing these costs through
an adjustment to accumulated other comprehensive income
(“AOCI”). Beginning in 2007, the Company recognized
actuarial gains and losses in AOCI as they arise. The following
table shows the pre-tax and after tax change in AOCI
attributable to the components of the net cost and the change in
benefit obligation.
December 31,
December 31,
Adjustments to Accumulated Other Comprehensive Income
2008
2007
(In thousands)
Unrecognized net actuarial loss
$
1,332
$
(82
)
Unrecognized transition obligation
19
24
Total adjustment to AOCI, before tax
$
1,351
$
(58
)
Total adjustment to AOCI, after tax
$
904
$
(38
)
Plan Assets (Market Value) for the years ended:
December 31,
December 31,
Target Allocation
2008
2007
2009
Integra Strategic Allocated Pool Fund
100
%
100
%
100
%
Fund holdings by class:
a) Equity securities
59.5
%
60.0
%
60.0
%
b) Debt securities
39.7
%
40.0
%
40.0
%
c) Real estate
0.0
%
0.0
%
0.0
%
d) Other (including cash)
0.8
%
0.0
%
0.0
%
Total
100.0
%
100.0
%
100.0
%
Expected long-term rate of return on assets
6.50
%
6.50
%
Expected rate of return on equity securities
7.50
%
7.50
%
Expected rate of return on debt securities
5.50
%
5.50
%
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
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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.
The initial limits of the proportion of the market value of the
portfolio that may be invested in the following classes of
securities are:
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following chart summarizes the benefit obligations, assets,
funded status and rate assumptions associated with the Alcoa
Post-Retirement Benefit Plan for the years ended
December 31, 2008, 2007 and 2006 (in thousands):
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. Settlement costs associated with litigation are included
in Transportation expense on the Consolidated Statement of
Operations.
The Company’s operations are subject to extensive
environmental regulation. The Company records liabilities for
remediation and restoration costs related to past activities
when the Company’s obligation is probable and the costs can
be reasonably estimated. Costs of ongoing compliance activities
to current operations are expensed as incurred. The
Company’s recorded liabilities for these issues represent
its best estimates (on an undiscounted basis) of remediation and
restoration costs that may be required to comply with present
laws and regulations. It is the opinion of management that the
ultimate liability, if any, with respect to these matters will
not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
The Company is subject to claims for employee work-related and
third-party injuries. Work-related injuries for employees are
primarily subject to the Federal Employers’ Liability Act
(“FELA”). The Company retains an independent actuarial
firm to assist management in assessing the value of personal
injury claims and cases. An analysis has been performed by an
independent actuarial firm and is reviewed by management. The
methodology used by the actuary includes a development factor to
reflect growth or reduction in the value of these personal
injury claims. It is based largely on the Company’s
historical claims and settlement experience. At
December 31, 2008 and 2007, the Company had
$15.8 million and $14.4 million, respectively, accrued
for personal injury claims and cases. Actual results may vary
from estimates due to the type and severity of the injury, costs
of medical treatments and uncertainties in litigation.
The Company is subject to ongoing tax examinations and
governmental assessments in various U.S. and foreign
jurisdictions. Specifically, the Australian Taxation Office
(“ATO”) initiated an audit, in November 2005, of the
reorganization transactions undertaken by the Company’s
Australian subsidiaries prior to the sale of Freight Australia
to Pacific National in August 2004. The ATO is currently in the
process of gathering information to better understand such
transactions. When the ATO inquiry is completed, the Company
expects to receive the ATO’s preliminary findings. In
addition to potential liability to the ATO, certain tax
indemnities in the share sale agreement could require
indemnification payments to Pacific National. Should this audit
determine that payments to ATO
and/or
Pacific National are warranted, such payments could be material.
There have been recent discussions between the Company and the
ATO. It is possible that this matter will be resolved within the
next year. As of December 31, 2008, the estimated range of
loss for this potential liability is zero to $24.7 million.
(See Note 19 for update on the ATO matter.)
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 were filed, and claims submitted, against
the Company and others connected to the tank car. Motions for
class action certification were filed. Settlements were achieved
with what the Company believes to be all potential individual
claimants. In cooperation with the Company’s insurer, the
Company has paid settlements to a substantial number of affected
businesses, as well. All business interruption claims have been
resolved. Total payments to-date exceed the self insured
retention, so the I&O Railway’s liability for civil
matters has likely been exhausted. The incident also triggered
inquiries from the Federal Railroad Administration (FRA) and
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
other federal, state and local authorities charged with
investigating such incidents. A settlement was reached with the
FRA, requiring payment of a $50,000 fine but no admission of
liability by the I&O Railway. Because of the chemical
release, the US Environmental Protection Agency (“US
EPA”) is investigating whether criminal negligence
contributed to the incident, and whether charges should be
pressed. A conference with the Company’s attorneys and the
US EPA attorneys took place on January 14, 2009, at which
time legal theories and evidence were discussed in an effort to
influence the EPA’s charging decision. The meeting
concluded before the matters were fully discussed and a
continuance was scheduled for March 13, 2009. This
continuance meeting was delayed by the US EPA attorneys and has
not yet been rescheduled. Should this investigation lead to
environmental crime charges against the I&O Railway,
potential fines upon conviction could range widely and could be
material. As of December 31, 2008, the Company has accrued
$1.9 million for this incident, which is expected to be
paid out within the next year.
16.
RELATED
PARTY TRANSACTIONS
During 2008, the Company entered into four operating lease
agreements with Florida East Coast Railway LLC,
(“FECR”) an entity also owned by investment funds
managed by affiliates of Fortress Investment Group LLC. Three of
these agreements relate to the leasing of locomotives between
the companies for ordinary business operations. With respect to
such agreements, during the year ended December 31, 2008,
on a net basis the Company paid FECR an aggregate amount of
$0.1 million, and at December 31, 2008, FECR had a net
payable to the Company of $0.1 million. The fourth lease
relates to the
sub-leasing
of office space by FECR to the Company. During 2008, FECR billed
the Company $0.2 million under the
sub-lease
agreement, of which $0.1 million was payable to FECR at
December 31, 2008. Separately from these agreements, the
entities had shared management level employees who performed
similar functions for both entities. The net impact of these
shared services to each entity’s financial results is
immaterial for the year ended December 31, 2008.
17.
RESTRUCTURING
COSTS
RailAmerica relocated its corporate headquarters to
Jacksonville, Florida during the first quarter of 2008 and as a
result, the Company incurred facility closing costs and
relocation expenses for this move during 2008 of approximately
$6.1 million, including approximately $3.2 million of
termination benefits, all classified within selling, general and
administrative expenses. All cash termination benefits were paid
in 2008. As of December 31, 2008, the Company had an
accrual of $0.2 million relating to health benefits that
extend into 2009 and 2010 for certain terminated employees.
18.
IMPAIRMENT
OF ASSETS
During the first quarter of 2008 and in conjunction with the
relocation of corporate headquarters to Jacksonville, Florida,
the Company committed to a plan to dispose of the office
building located in Boca Raton, Florida. As a result of the
decline in the real estate market in South Florida, and after
having received initial offers, the Company did not expect
proceeds from this disposal to cover the carrying value of the
assets and accordingly, recorded an impairment charge of
$1.7 million during the year ended December 31, 2008.
The building was sold in the third quarter of 2008 for
$12.1 million, which approximated the carrying value
subsequent to the impairment adjustment.
During the third quarter of 2008, the Company entered into a
plan to dispose of surplus locomotives. Due to a deterioration
in the value of the assets as a result of the weak economic
conditions an impairment charge of $1.7 million was
recorded during the year ended December 31, 2008. All of
the equipment was sold as of December 31, 2008, with the
sales proceeds approximating the remaining book value.
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
19.
SUBSEQUENT
EVENTS
On July 13, 2008, the Company filed a petition with the
Surface Transportation Board (“STB”) to abandon a
portion of track (the “Coos Bay Line” or the
“Line”) owned by its Central Oregon and Pacific
Railroad (“CORP”). On July 11, 2008, the Oregon
International Port of Coos Bay (“the Port”) filed an
application to acquire, for continued rail service, the portion
of the Coos Bay Line at issue in this abandonment, as well as an
additional segment of 17 miles. On October 31, 2008,
the STB issued two decisions, the first of which ordered the
CORP to sell the Coos Bay Line to the Port and the second
granting the CORP the right to abandon the line if the sale to
the Port did not close. Closing terms set by the STB included a
sale price of $16.6 million and a closing date of
February 18, 2009. The Port and the Company agreed to
extend the closing date to March 13, 2009, at which time
the Port completed the purchase of the Line from the CORP. The
carrying value of this line approximates the agreed upon
purchase price.
On May 14, 2009, the Company received a notice from the ATO
indicating that they would not be taking any further action in
relation to its audit of the reorganization transactions
undertaken by the Company’s Australian subsidiaries prior
to the sale of Freight Australia to Pacific National in August
2004. As a result, the Company will reverse the recorded tax
reserves in the second quarter of 2009 and record a benefit to
the continuing operations tax provision of $2.4 million and
an adjustment to the gain on sale of discontinued operations of
$12.3 million.
On June 23, 2009, RailAmerica, Inc. sold
$740.0 million of 9.25% senior secured notes due
July 1, 2017 in a private offering, for gross proceeds of
$709.8 million after deducting the initial purchaser’s
discount. The notes are secured by first-priority liens on
substantially all of RailAmerica, Inc.’s and the
guarantors’ assets. The guarantors are defined primarily as
existing and future wholly-owned domestic restricted
subsidiaries. The net proceeds received from the issuance of the
units were used to repay the $625 million bridge credit
facility and accrued interest thereon, pay costs of
$57.1 million to terminate interest rate swap arrangements,
including $1.3 million of accrued interest, entered into in
connection with the bridge credit facility and pay fees and
expenses related to the offering and for general corporate
purposes.
RailAmerica, Inc. may redeem up to 10% of the aggregate
principal amount of the notes issued during any
12-month
period commencing on the issue date at a price equal to 103% of
the principal amount thereof plus accrued and unpaid interest,
if any. RailAmerica, Inc. may also redeem some or all of the
notes at any time before July 1, 2013, at a price equal to
100% of the aggregate principal amount thereof plus a make-whole
premium. In addition, prior to July 1, 2012, RailAmerica,
Inc. may redeem up to 35% of the senior secured notes at a
redemption price of 109.25% of their principal amount with the
proceeds from an equity offering. Subsequent to July 1,2013, RailAmerica, Inc. may redeem the notes at 104.625% of
their principal amount. The premium then reduces to 102.313%
commencing on July 1, 2014 and then 100% on July 1,2015 and thereafter.
In connection with the issuance of the senior secured notes on
June 23, 2009, RailAmerica, Inc. and certain subsidiaries
also entered into a $40 million Asset Backed Loan Facility
(“ABL Facility” or “Facility”). The Facility
matures on July 23, 2013 and bears interest at LIBOR plus
4.00%. Obligations under the ABL Facility are secured by a
first-priority lien in the ABL Collateral. ABL Collateral
includes accounts receivable, deposit accounts, securities
accounts and cash. At the time RailAmerica, Inc. entered into
the Facility, it was estimated that there would be approximately
$25 million of undrawn availability, taking into account
borrowing base limitations.
The Facility and indenture contain various covenants and
restrictions that will limit RailAmerica, Inc. and its
restricted subsidiaries ability to incur additional
indebtedness, pay dividends, make certain investments, sell or
transfer certain assets, create liens, designate subsidiaries as
unrestricted subsidiaries, consolidate, merge or sell
substantially all the assets, enter into certain transactions
with affiliates. It is anticipated that proceeds
NOTES TO
ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
from any future borrowings would be used for general corporate
purposes. As of July 27, 2009, RailAmerica, Inc. had no
outstanding balance under the Facility.
20.
SEGMENT
INFORMATION
The Company’s continuing operations consists of one
business segment, North American 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 Alberta Railroad Properties and
E&N Railway operations, except for total assets and capital
expenditures, due to their reclassification to discontinued
operations.
Accounts and notes receivable, net of allowance of $3,983 and
$3,338, respectively
76,146
76,384
Other current assets
16,403
18,480
Current deferred tax assets
5,854
5,854
Total current assets
122,333
127,669
Property, plant and equipment, net
948,883
953,604
Intangible assets
172,445
172,859
Goodwill
205,048
204,701
Other assets
20,374
16,561
Total assets
$
1,469,083
$
1,475,394
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
$
709
$
899
Accounts payable
47,985
56,058
Accrued expenses
28,266
51,349
Total current liabilities
76,960
108,306
Long-term debt, less current maturities
3,286
628,681
Senior secured notes
709,889
—
Deferred income taxes
163,455
149,695
Other liabilities
32,459
117,192
Total liabilities
986,049
1,003,874
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 520,000 shares
authorized; 472,983 shares issued and outstanding at
June 30, 2009; and 471,448 shares issued and
outstanding at December 31, 2008
5
5
Additional paid in capital and other
470,941
471,008
Retained earnings
49,771
50,029
Accumulated other comprehensive loss
(37,683
)
(49,522
)
Total stockholders’ equity
483,034
471,520
Total liabilities and stockholders’ equity
$
1,469,083
$
1,475,394
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim consolidated financial statements presented herein
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 significant intercompany
transactions and accounts have been eliminated in consolidation.
These interim consolidated financial statements have been
prepared by the Company, without audit, and accordingly do not
contain all disclosures which would be required in a full set of
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(U.S. GAAP). In the opinion of management, the unaudited
financial statements for the six months ended June 30, 2009
and 2008, are presented on a basis consistent with the audited
financial statements and contain all adjustments, consisting
only of normal recurring adjustments, necessary to provide a
fair statement of the results for interim periods. The results
of operations for interim periods are not necessarily indicative
of results of operations for the full year. The consolidated
balance sheet data for 2008 was derived from the Company’s
audited financial statements for the year ended
December 31, 2008, but does not include all disclosures
required by U.S. GAAP. In addition, in preparing the
consolidated financial statements, management has reviewed and
considered all significant events occurring subsequent to
June 30, 2009 and up until September 1, 2009, the date
of the issuance of the consolidated financial statements.
Organization
RailAmerica is one of the largest owners and operators of short
line and regional freight railroads in North America, measured
in terms of total track miles, operating a portfolio of 40
individual railroads with approximately 7,500 miles of
track in 27 states and three Canadian provinces. The
Company’s principal operations consist of rail freight
transportation and ancillary rail services.
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.
2.
RECENT
ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FSP
SFAS 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in
a Business Combination That Arise from Contingencies” (FSP
SFAS 141R-1),
which addresses application issues on initial recognition and
measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies
in a business combination as set forth in SFAS 141R. This
FSP requires that such assets acquired or liabilities assumed be
initially recognized at fair value at the acquisition date if
fair value can be determined during the measurement period. If
the acquisition date fair value cannot be determined, the asset
acquired or liability assumed arising from a contingency is
recognized only if certain criteria are met. This FSP also
requires that a systematic and rational basis for subsequently
measuring and accounting for the assets or liabilities be
developed depending on their nature. FSP
SFAS 141R-1
is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company
will apply the provisions of FSP
SFAS 141R-1
as appropriate to its future business combinations with an
acquisition date on or after January 1, 2009.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (SFAS 157), which is
effective for fiscal years beginning after November 15,2007, and for interim periods within those years. On
February 12, 2008, the FASB issued FASB Staff Position
FAS 157-2
(FSP 157-2)
which delayed the effective
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually).
FSP 157-2
partially defers the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years. SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands the related disclosure requirements. The Company adopted
SFAS 157 for its financial assets and liabilities on
January 1, 2008, and it did not have a material impact on
its consolidated financial statements. On January 1, 2009,
the Company adopted SFAS 157 for all of its nonfinancial
assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial
statements on a recurring basis, and it did not have a material
impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations” (SFAS 141R).
SFAS 141R retains the fundamental requirements of the
original pronouncement requiring that the purchase method be
used for all business combinations. SFAS 141R defines the
acquirer as the entity that obtains control of one or more
businesses in the business combination, establishes the
acquisition date as the date the acquirer achieves control and
requires the acquirer to recognize the assets acquired,
liabilities assumed and any noncontrolling interest at their
fair values as of the acquisition date. SFAS 141R also
requires that acquisition related costs are expensed as
incurred. SFAS 141R is effective for fiscal years beginning
after December 15, 2008 and interim periods within those
years. Early adoption of SFAS 141R is prohibited. The
Company will apply the provisions of SFAS 141R as
appropriate to its future business combinations and adjustments
to pre-acquisition tax contingencies related to acquisitions
prior to January 1, 2009.
In December 2007, the FASB issued SFAS No. 160
“Noncontrolling Interests in Consolidated Financial
Statements (an amendment of ARB No. 51)”
(SFAS 160). SFAS 160 requires that noncontrolling
(minority) interests are reported as a component of equity, that
net income attributable to the parent and to the noncontrolling
interest is separately identified in the income statement, that
changes in a parent’s ownership interest while the parent
retains its controlling interest are accounted for as equity
transactions, and that any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary is initially
measured at fair value. SFAS 160 is effective for fiscal
years beginning after December 15, 2008 and shall be
applied prospectively. However, the presentation and disclosure
requirements of SFAS 160 shall be applied retrospectively
for all periods presented. Adoption of this pronouncement on
January 1, 2009 did not have a material impact on the
Company’s consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities” (SFAS 161). SFAS 161 requires
companies with derivative instruments to disclose information
that should enable financial-statement users to understand how
and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”
(SFAS 133) and how these items affect a company’s
financial position, results of operations and cash flows.
SFAS 161 affects only these disclosures and does not change
the accounting for derivatives. SFAS 161 has been applied
prospectively beginning with the first quarter of the 2009
fiscal year.
In April 2009, the FASB issued FASB Staff Position
No. FAS 107-1,
“Interim Disclosures about Fair Value of Financial
Instruments” (FSP
FAS 107-1).
FSP
FAS 107-1
requires expanded fair value disclosures for all financial
instruments within the scope of FASB Statement No. 107,
“Disclosures about Fair Value of Financial
Instruments.” These disclosures are required for interim
periods for publicly traded entities. In addition, entities are
required to disclose the methods and significant assumptions
used to estimate the fair value of financial instruments in
financial statements on an interim basis. The Company has
applied this Staff Position effective with its 2009 second
quarter.
In May 2009, the FASB issued SFAS No. 165,
“Subsequent Events” (SFAS 165). SFAS 165
defines the period after the balance sheet date during which a
reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or
disclosure in the financial statements, the
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its
financial statements, and the disclosures an entity should make
about events or transactions that occurred after the balance
sheet date. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009, and the Company has
applied SFAS 165 effective with its 2009 second quarter.
In June 2009, the FASB issued SFAS No. 167,
“Consolidation of Variable Interest Entities”
(SFAS 167). SFAS 167 alters how a company determines
when an entity that is insufficiently capitalized or not
controlled through voting should be consolidated. A company has
to determine whether it should provide consolidated reporting of
an entity based upon the entity’s purpose and design and
the parent company’s ability to direct the entity’s
actions. SFAS 167 is effective commencing with the 2010
fiscal year. The Company is currently evaluating the effects, if
any, that adoption of this standard will have on its
consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The
FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles” (SFAS 168).
SFAS 168 authorized the Codification as the sole source for
authoritative U.S. GAAP and any accounting literature that
is not in the Codification will be considered nonauthoritative.
SFAS 168 will be effective commencing with the
Company’s 2009 third quarter and is not anticipated to have
a material effect on its consolidated financial statements.
3.
EARNINGS
PER SHARE
For the six months ended June 30, 2009 and 2008, basic and
diluted earnings per share is calculated using the weighted
average number of common shares outstanding during the year. The
basic earnings per share calculation includes all vested and
unvested restricted shares as a result of their dividend
participation rights.
The following is a summary of the income from continuing
operations available for common stockholders and weighted
average shares outstanding (in thousands):
Income from continuing operations (basic and diluted)
$
6,276
$
5,071
Compensation expense recorded for dividends paid to unvested
restricted shares, net of tax
307
—
Income from continuing operations available to common
stockholders (basic and diluted)
$
6,583
$
5,071
Weighted average shares outstanding (basic and diluted)
485
482
4.
STOCK-BASED
COMPENSATION
The Company has the ability to issue restricted shares under its
incentive compensation plan. Restricted shares granted to
employees are scheduled to vest over three to five year periods.
The grant date fair values of the restricted shares are based
upon the fair market value of the Company at the time of grant.
The Company engages an unrelated valuation specialist to perform
a fair value analysis of the Company at the end of each quarter.
Stock-based compensation expense related to restricted stock
grants for the six months ended June 30, 2009 was
$1.9 million. Stock-based compensation expense related to
restricted stock grants for the six months ended June 30,2008 was $1.7 million. Due to certain repurchase provisions
which are at the grant date fair value in the equity award
agreements entered into with employees, the granted restricted
shares are accounted for as liabilities, rather than equity. As
a result, the share based compensation expense incurred has been
presented in other liabilities. As of June 30, 2009 and
December 31, 2008, other liabilities includes
$3.9 million and $2.6 million, respectively, of shared
based compensation.
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the status of restricted shares as of
December 31, 2008 and June 30, 2009, and the changes
during the periods then ended and the weighted average grant
date fair values is presented below:
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. The sale of the Alberta
Railroad Properties was completed in January 2006 for
$22.1 million in cash. In the six months ended
June 30, 2009, the Company recorded an adjustment of
$0.3 million, or $0.2 million, after tax, as a gain on
sale of discontinued operations related to outstanding
liabilities associated with the disposed entities.
In August 2004, the Company completed the sale of its Australian
railroad, Freight Australia, to Pacific National for AUD
$285 million (US $204 million). During the six months
ended June 30, 2008, the Company incurred additional
consulting costs associated with the sale of Freight Australia
of $0.5 million and $0.3 million, after tax, related
to the Australian Taxation Office (“ATO”) audit of the
reorganization transactions undertaken by the Company’s
Australian subsidiaries prior to the sale. On May 14, 2009,
the Company received a notice from the ATO indicating that they
would not be taking any further action in relation to its audit
of the reorganization transactions. As a result, the Company has
removed the previously recorded tax reserves as of June 30,2009, resulting in a benefit to the continuing operations tax
provision of $2.5 million related to the accrual of
interest subsequent to the Company’s acquisition, an
adjustment to the gain on sale of discontinued operations of
$12.3 million and reduced its accrual for consulting fees
resulting in a gain on sale of discontinued operations of
$0.7 million, or $0.5 million, after tax.
6.
LONG-TERM
DEBT
$740
Million 9.25% Senior Secured Notes
On June 23, 2009, the Company, (“Issuer”) sold
$740.0 million of 9.25% senior secured notes due
July 1, 2017 in a private offering, for gross proceeds of
$709.8 million after deducting the initial purchaser’s
fees. The notes are secured by first-priority liens on
substantially all of Issuer’s and the guarantors’
assets. The guarantors are defined essentially as our existing
and future wholly-owned domestic restricted subsidiaries. The
net proceeds received from the issuance of the notes were used
to repay the outstanding balance of the $650 million bridge
credit facility, as described below, and $7.4 million of
accrued interest thereon, pay costs of $57.1 million to
terminate interest rate swap arrangements, including
$1.3 million of accrued interest, entered into in
connection with the bridge credit facility and pay fees and
expenses related to the offering and for general corporate
purposes.
The Issuer may redeem up to 10% of the aggregate principal
amount of the notes issued during any
12-month
period commencing on the issue date at a price equal to 103% of
the principal amount thereof plus accrued and unpaid interest,
if any. The Issuer may also redeem some or all of the notes at
any time before July 1, 2013, at a price equal to 100% of
the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date and a make-whole
premium. In addition, prior to July 1, 2012, the Issuer may
redeem up to 35% of the notes at a redemption price of 109.25%
of their principal amount thereof
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
plus accrued and unpaid interest, if any, with the proceeds from
an equity offering. Subsequent to July 1, 2013, the Issuer
may redeem the notes at 104.625% of their principal amount. The
premium then reduces to 102.313% commencing on July 1, 2014
and then 100% on July 1, 2015 and thereafter.
$40
Million ABL Facility
In connection with the issuance of the senior secured notes on
June 23, 2009, the Company also entered into a
$40 million Asset Backed Loan Facility (“ABL
Facility” or “Facility”). The Facility matures on
July 23, 2013 and bears interest at LIBOR plus 4.00%.
Obligations under the ABL Facility are secured by a
first-priority lien in the ABL Collateral. ABL Collateral
includes accounts receivable, deposit accounts, securities
accounts and cash. As of June 30, 2009, there was
approximately $25 million of undrawn availability, taking
into account borrowing base limitations.
The Facility and indenture contain various covenants and
restrictions that will limit the Company and its restricted
subsidiaries ability to incur additional indebtedness, pay
dividends, make certain investments, sell or transfer certain
assets, create liens, designate subsidiaries as unrestricted
subsidiaries, consolidate, merge or sell substantially all the
assets, and enter into certain transactions with affiliates. It
is anticipated that proceeds from any future borrowings would be
used for general corporate purposes. As of June 30, 2009,
the Company had no outstanding balance under the Facility.
$650
Million Bridge Credit Facility
As part of the merger transaction in which the Company was
acquired by certain private equity funds managed by affiliates
of Fortress Investment Group LLC (Fortress), the Company
terminated the commitments under its former Amended and Restated
Credit Agreement and repaid all outstanding loans and other
obligations in full under this agreement. In order to fund this
repayment of debt and complete the merger transaction, on
February 14, 2007, the Company entered into a
$650 million bridge credit facility agreement. The facility
consisted of a $587 million U.S. dollar term loan
commitment and a $38 million Canadian dollar term loan
commitment, as well as a $25 million revolving loan
facility with a $20 million U.S. dollar tranche and a
$5 million Canadian dollar tranche. The Company entered
into an amendment on July 1, 2008 to extend the maturity of
the bridge credit facility for one year with an additional one
year extension at its option. Under the amended bridge credit
facility agreement, the term loans and revolving loans carried
an interest rate of LIBOR plus 4.0%. Prior to amendment, the
bridge credit facility agreement, including the revolving loans,
paid interest at LIBOR plus 2.25%. The outstanding borrowings
under this facility were classified as non-current as of
December 31, 2008, as the Company had the intent and
ability to exercise its option to extend the maturity to
August 15, 2010. The $25 million revolving loan
facility was available for immediate borrowing if necessary.
In November 2008, the Company entered into Amendment No. 1
to the amended bridge credit facility agreement which permitted
the Company to enter into employee and office space sharing
agreements with affiliates and included a technical amendment to
the definitions of interest coverage ratio and interest expense.
The U.S. and Canadian dollar term loans and the
U.S. and Canadian dollar revolvers were 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 Citigroup Global Markets, Inc. and
Morgan Stanley Senior Funding, Inc., as co-lead arrangers,
Citicorp North America, Inc., as administrative agent and
collateral agent and Morgan Stanley Senior Funding, Inc. as
syndication agent.
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (SFAS 157), which is
effective for fiscal years beginning after November 15,2007, and for interim periods within those years. On
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
February 12, 2008, the FASB issued FASB Staff Position
FAS 157-2
(FSP 157-2)
which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).
FSP 157-2
partially defered the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years. SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands the related disclosure requirements. The Company adopted
SFAS 157, except as it applies to those nonfinancial assets
and nonfinancial liabilities, as noted in
FSP 157-2,
on January 1, 2008. Such adoption did not have a material
impact on the Company’s consolidated financial statements.
FSP 157-2
was adopted by the Company on January 1, 2009 and did not
have a material impact on the Company’s consolidated
financial statements. In October 2008, the FASB also issued FSP
FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active”
(FSP 157-3),
which clarifies the application of SFAS 157 in a market
that is not active. The Company is currently evaluating the
provisions of
FSP 157-3.
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument held by the
Company:
•
Current assets and current liabilities: The
carrying value approximates fair value due to the short maturity
of these items.
•
Long-term debt: The fair value of the
Company’s Senior Secured Notes is based on secondary market
indicators. The carrying amount of the Company’s other long
term debt approximates its fair value.
•
Derivatives: The carrying value is based on
fair value as of the balance sheet date. SFAS 157 requires
companies to maximize the use of observable inputs (Level 1
and Level 2), when available, and to minimize the use of
unobservable inputs (Level 3) when determining fair
value. The Company’s measurement of the fair value of
interest rate derivatives is based on estimates of the
mid-market values for the transactions provided by the
counterparties to these agreements. For derivative instruments
in an asset position, the Company also analyzes the credit
standing of the counterparty and factors it into the fair value
measurement. SFAS 157 states that the fair value of a
liability also must reflect the nonperformance risk of the
reporting entity. Therefore, the impact of the Company’s
credit worthiness has also been factored into the fair value
measurement of the derivative instruments in a liability
position. This methodology is a market approach, which under
SFAS 157 utilizes Level 2 inputs as it uses market
data for similar instruments in active markets. See Note 8
for further fair value disclosure of the Company’s interest
rate swap. As the Company terminated its interest rate swap
agreement in conjunction with the refinancing of its bridge
credit facility on June 23, 2009, the swap had no fair
value as of June 30, 2009.
The carrying amounts and estimated fair values of the
Company’s financial instruments were as follows:
The Company adopted SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities —
an amendment of FASB Statement No. 133”
(SFAS 161), on January 1, 2009, which enhances the
disclosure requirements about an entity’s derivative
instruments and hedging activities. The expanded disclosure
required by SFAS 161 is presented below.
The Company uses derivatives to hedge against increases in
interest rates. The Company formally documents the relationship
between the hedging instrument and the hedged item, as well as
the risk
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 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.
For derivative instruments in an asset position, the Company
analyzes the credit standing of the counterparty and factors it
into the fair value measurement. SFAS 157 states that
the fair value of a liability must reflect the nonperformance
risk of the reporting entity. Therefore, the impact of the
Company’s credit worthiness has also been factored into the
fair value measurement of the derivative instruments in a
liability position. The Company monitors its hedging positions
and the credit ratings of its counterparties and does not
anticipate losses due to counterparty nonperformance.
On February 14, 2007, the Company entered into an interest
rate swap with a termination date of February 15, 2014. The
total notional amount of the swap started at $425 million
for the period from February 14, 2007 through
November 14, 2007, increasing to a total notional amount of
$525 million for the period from November 15, 2007
through November 14, 2008, and ultimately increased to
$625 million for the period from November 15, 2008
through February 15, 2014. Under the terms of the interest
rate swap, the Company was required to pay a fixed interest rate
of 4.9485% on the notional amount while receiving a variable
interest rate equal to the 90 day LIBOR. This swap
qualified, was designated and was accounted for as a cash flow
hedge under SFAS 133. This interest rate swap agreement was
terminated in June 2009, in connection with the repayment of the
bridge credit facility, and thus had no fair value at
June 30, 2009. Interest expense of $0.3 million was
recognized during the six months ended June 30, 2009 for
the portion of the hedge deemed ineffective. Interest expense of
$0.5 million was recognized during the six months ended
June 30, 2008 for the portion of the hedge deemed
ineffective. Pursuant to SFAS 133, the fair value balance
of the swap at termination remains in accumulated other
comprehensive loss, net of tax, and is amortized to interest
expense over the remaining life of the original swap (through
February 14, 2014). As of June 30, 2009, accumulated
other comprehensive loss included $36.8 million, net of
tax, of unamortized loss relating to the terminated swap.
Reclassifications from accumulated other comprehensive loss to
interest expense in the next twelve months will be approximately
$27.4 million, or $17.0 million, net of tax.
On June 3, 2005, the Company entered into two interest rate
swaps for a total notional amount of $100 million for the
period from November 25, 2005 through November 24,2008. Under the terms of the interest rate swaps, the Company
was 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 qualified, were designated
and were accounted for as cash flow hedges under SFAS 133.
One of the interest rate swaps with a total notional amount of
$50 million was terminated on February 12, 2007 while
the remaining amount terminated as planned on November 24,2008, and thus had no fair value at December 31, 2008 or
June 30, 2009. Interest expense of $0.3 million was
recognized during the six months ended June 30, 2008 for
the portion of the hedge deemed ineffective.
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
For the six months ended June 30, 2009, the amount of loss
recognized in the consolidated statement of operations is as
follows (in thousands):
The Effect of Derivative Instruments on Statement of
Operations
Amount of Gain
or (Loss)
Recognized in
Accumulated
Location of Gain
Amount of Gain
Amount of Gain
Other
(Loss)
(Loss)
Location of Gain
(Loss)
Comprehensive
Reclassified from
Reclassified from
(Loss) Recognized
Recognized in
Income (AOCI)
AOCI into
AOCI into
in Income on
Income on
Derivatives in SFAS 133
on Derivative
Income
Income
Derivative
Derivative
Cash Flow Hedging
(Effective
(Effective
(Effective
(Ineffective
(Ineffective
Relationships
Portion)
Portion)
Portion)
Portion)
Portion)
Interest Rate Swap
$
5,322
Interest Expense
$
(7,270
)
Interest Expense
$
(278
)
9.
COMMON
STOCK TRANSACTIONS
As part of the equity award plans adopted after the acquisition,
the Company allows certain members of management to purchase
shares of common stock of the Company. During the six months
ended June 30, 2008, certain members of management
purchased an aggregate of 494 shares of common stock. Due
to certain repurchase provisions in the purchase agreements,
cash of $0.6 million that was received for the purchase of
shares during the six months ended June 30, 2008, has been
classified as a liability. During the six months ended
June 30, 2009, the Company accepted 520.6 shares in
lieu of cash payments by employees for payroll tax withholdings
relating to stock based compensation. During the six months
ended June 30, 2008, the Company accepted 36.1 shares
in lieu of cash payments by employees for payroll tax
withholdings relating to stock based compensation.
In June 2009, the Company declared and paid a cash dividend in
the amount of $20.0 million to its common shareholders.
Approximately $0.5 million of the cash dividend was paid to
holders of unvested restricted shares. This amount was accounted
for as compensation expense and presented as a reduction of cash
flow from operations.
10.
TRACK
MAINTENANCE AGREEMENT
In the first quarter of 2009, the Company entered into a Track
Maintenance Agreement with an unrelated third-party customer
(“Shipper”). Under the agreement, the Shipper pays for
qualified railroad track maintenance expenditures during 2009 in
exchange for the assignment of railroad track miles which
permits the Shipper to claim certain tax credits pursuant to
Section 45G of the Internal Revenue Code. The reduction in
maintenance expenditures is reflected in the Maintenance of Way
functional category in the consolidated results of operations.
For the six months ended June 30, 2009, the Shipper paid
for $8.4 million of maintenance expenditures, but no
capital expenditures.
11.
INCOME
TAX PROVISION
The effective income tax rates for the six months ended
June 30, 2009 and 2008 for continuing operations were 27.2%
and 67.5%, respectively. The Company’s overall effective
tax rate for the six months ended June 30, 2009 benefited
from the resolution of the Australian tax audit matter during
the reported period which resulted in a net tax benefit of
approximately $2.5 million. Other factors impacting the
effective tax rate for the six months ended June 30, 2009
included the adverse impact of significant non-operational
losses with minimal state tax benefit, off-set by the favorable
Canadian tax rate differential for foreign exchange gains
($0.4 million) and the tax benefit claimed for the loss on
sale of a portion of track ($0.5 million). The
Company’s overall effective tax rate for the six months
ended June 30, 2008 was adversely impacted by the
significant non-operational losses with minimal state tax
benefit, the tax effects for repatriated Canadian earnings
($1.4 million), an accrual for uncertain tax positions
($0.7 million), and the revaluation of deferred
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
taxes for changes in estimated state apportionment factors
($1.5 million). The rate for the six months ended
June 30, 2009, did not include a federal tax benefit
related to the track maintenance credit provisions enacted by
the American Jobs Creation Act of 2004 and extended by the Tax
Extenders and AMT Relief Act of 2008 due to the execution of the
Track Maintenance Agreement in 2009 as discussed above. The rate
for the six months ended June 30, 2008, did not include a
federal tax benefit related to the track maintenance credit
provisions as the Tax Extenders and AMT Relief Act of 2008 was
not enacted until the fourth quarter of 2008.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
Other comprehensive income consists of foreign currency
translation adjustments, unrealized gains and losses on
derivative instruments designated as hedges and unrealized
actuarial gains and losses related to pension benefits. As of
June 30, 2009, accumulated other comprehensive loss
consisted of $36.8 million of unrealized losses, net of
tax, related to hedging transactions, $1.2 million of
unrealized actuarial gains, net of tax, associated with pension
benefits and $2.1 million of cumulative translation
adjustment losses. The following table reconciles net income to
comprehensive income for the six months ended June 30, 2009
and 2008 (in thousands):
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. Settlement costs associated with litigation are included
in Transportation expense on the Consolidated Statement of
Operations.
The Company’s operations are subject to extensive
environmental regulation. The Company records liabilities for
remediation and restoration costs related to past activities
when the Company’s obligation is probable and the costs can
be reasonably estimated. Costs of ongoing compliance activities
to current operations are expensed as incurred. The
Company’s recorded liabilities for these issues represent
its best estimates (on an undiscounted basis) of remediation and
restoration costs that may be required to comply with present
laws and regulations. It is the opinion of management that the
ultimate liability, if any, with respect to these matters will
not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.
The Company is subject to claims for employee work-related and
third-party injuries. Work-related injuries for employees are
primarily subject to the Federal Employers’ Liability Act
(“FELA”). The Company retains an independent actuarial
firm to assist management in assessing the value of personal
injury claims and cases. An analysis has been performed by an
independent actuarial firm and is reviewed by management. The
methodology used by the actuary includes a development factor to
reflect growth or reduction in the value of
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
these personal injury claims. It is based largely on the
Company’s historical claims and settlement experience.
Actual results may vary from estimates due to the type and
severity of the injury, costs of medical treatments and
uncertainties in litigation.
The Company is subject to ongoing tax examinations and
governmental assessments in various U.S. and foreign
jurisdictions. Specifically, the Australian Taxation Office
(“ATO”) initiated an audit, in November 2005, of the
reorganization transactions undertaken by the Company’s
Australian subsidiaries prior to the sale of Freight Australia
to Pacific National in August 2004. On May 14, 2009, the
Company received a notice from the ATO indicating that they
would not be taking any further action in relation to its audit
of the reorganization transactions. As a result, the Company
reversed the recorded tax reserves in the second quarter of 2009
and recorded a benefit to the continuing operations tax
provision of $2.5 million and an adjustment to the gain on
sale of discontinued operations of $12.3 million.
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 were filed, and claims submitted, against
the Company and others connected to the tank car. Motions for
class action certification were filed. Settlements were achieved
with what the Company believes to be all potential individual
claimants. In cooperation with the Company’s insurer, the
Company has paid settlements to a substantial number of affected
businesses, as well. All business interruption claims have been
resolved. Total payments to-date exceed the self insured
retention, so the I&O Railway’s liability for civil
matters has likely been exhausted. The incident also triggered
inquiries from the Federal Railroad Administration (FRA) and
other federal, state and local authorities charged with
investigating such incidents. A settlement was reached with the
FRA, requiring payment of a $50,000 fine but no admission of
liability by the I&O Railway. Because of the chemical
release, the US Environmental Protection Agency (“US
EPA”) is investigating whether criminal negligence
contributed to the incident, and whether charges should be
pressed. A conference with the Company’s attorneys and the
US EPA attorneys took place on January 14, 2009, at which
time legal theories and evidence were discussed in an effort to
influence the EPA’s charging decision. The meeting
concluded before the matters were fully discussed and a
continuance was scheduled for March 13, 2009. This
continuance meeting was delayed by the US EPA attorneys and has
not yet been rescheduled. Should this investigation lead to
environmental crime charges against the I&O Railway,
potential fines upon conviction could range widely and could be
material. As of June 30, 2009, the Company has accrued
$1.7 million for this incident, which is expected to be
paid out within the next year.
15.
RELATED
PARTY TRANSACTIONS
The Company entered into four operating lease agreements with
Florida East Coast Railway LLC, (“FECR”) an entity
also owned by investment funds managed by affiliates of Fortress
Investment Group LLC during 2008 and one additional operating
lease agreement in 2009. Four of these agreements are one year
agreements which relate to the leasing of locomotives between
the companies for ordinary business operations. With respect to
such agreements, during the six months ended June 30, 2009,
on a net basis, the Company paid FECR an aggregate amount of
$0.2 million, and at June 30, 2009, the Company had a
net payable to FECR of $0.05 million. Additionally with
respect to such agreements, the Company paid FECR an aggregate
amount of $0.04 million during the six months ended
June 30, 2008.
The fifth lease relates to the sub-leasing of office space by
FECR to the Company. During the six months ended June 30,2009, FECR billed the Company $0.5 million under the
sub-lease agreement, of which $0.2 million was payable to
FECR at June 30, 2009. Separately from these agreements,
the entities had shared management level employees who performed
similar functions for both entities. The net impact of these
NOTES TO
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
shared services to each entity’s financial results is
immaterial for the six months ended June 30, 2009 and 2008.
16.
RESTRUCTURING
COSTS
RailAmerica relocated its corporate headquarters to
Jacksonville, Florida during 2008 and as a result, the Company
incurred facility closing costs and relocation expenses for this
move during the six months ended June 30, 2009 of
approximately $0.6 million, all classified within selling,
general and administrative expenses. During the six months ended
June 30, 2008, the Company incurred approximately
$1.4 million of facility closing costs and relocation
expenses also classified within selling, general and
administrative expenses. All cash termination benefits were paid
in 2008. As of June 30, 2009, the Company had an accrual of
$0.1 million relating to health benefits that extend
through 2009 and into 2010 for certain terminated employees.
Also, pursuant to SFAS 146, “Accounting for Costs
Associated with Exit or Disposal Activities,” certain
relocation costs, which are being paid out over two years or
less to relocated employees, cannot be accrued for until
incurred and thus will continue to be reflected as relocation
expense until those costs have been fully settled in cash.
Through and
including ,
2009 (25 days after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to each dealer’s obligation
to deliver a prospectus when acting as underwriter and with
respect to its unsold allotments or subscriptions.
The following table sets forth the estimated fees and expenses
(except for the SEC registration fee, the Financial Industry
Regulatory Authority, Inc., or FINRA, filing fee and the NYSE
listing fee) payable by the registrant in connection with the
distribution of our common stock:
SEC registration fee
$
16,740
FINRA filing fee
$
30,500
NYSE listing fee
*
Printing and engraving costs
*
Legal fees and expenses
*
Accountants’ fees and expenses
*
Transfer agent fees
*
Miscellaneous
*
Total
$
*
*
To be furnished by amendment.
Item 14.
Indemnification
of Directors and Officers
Section 102 of the Delaware General Corporation Law, as
amended, or the DGCL, allows a corporation to eliminate the
personal liability of directors to a corporation or its
stockholders for monetary damages for a breach of a fiduciary
duty as a director, except where the director breached his duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase or redemption in
violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that
a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the corporation’s
request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with the action,
suit or proceeding. The power to indemnify applies if
(i) such person is successful on the merits or otherwise in
defense of any action, suit or proceeding or (ii) such
person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The power to indemnify applies to actions brought by
or in the right of the corporation as well, but only to the
extent of defense expenses (including attorneys’ fees but
excluding amounts paid in settlement) actually and reasonably
incurred and not to any satisfaction of judgment or settlement
of the claim itself, and with the further limitation that in
such actions no indemnification shall be made in the event of
any adjudication of negligence or misconduct in the performance
of his duties to the corporation, unless a court believes that
in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that
a director who willfully and negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or redemption
may be held liable for such actions. A director who was either
absent when the unlawful actions were approved or dissented at
the time, may avoid liability by causing his or her dissent to
such actions to be entered in the books containing
the minutes of the meetings of the board of directors at the
time the action occurred or immediately after the absent
director receives notice of the unlawful acts.
The Company’s amended and restated certificate of
incorporation states that no director shall be personally liable
to us or any of our stockholders for monetary damages for breach
of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is not permitted
under the DGCL as it exists or may be amended. A director is
also not exempt from liability for any transaction from which he
or she derived an improper personal benefit, or for violations
of Section 174 of the DGCL. To the maximum extent permitted
under Section 145 of the DGCL, our amended and restated
certificate of incorporation authorizes us to indemnify any and
all persons whom we have the power to indemnify under the law.
Our amended and restated bylaws provide that the Company will
indemnify, to the fullest extent permitted by the DGCL, each
person who was or is made a party or is threatened to be made a
party in any legal proceeding by reason of the fact that he or
she is or was a director or officer of the Company or a
subsidiary. However, such indemnification is permitted only if
such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such
person’s conduct was unlawful. Indemnification is
authorized on a
case-by-case
basis by (1) our board of directors by a majority vote of
disinterested directors, (2) a committee of the
disinterested directors, (3) independent legal counsel in a
written opinion if (1) and (2) are not available, or
if disinterested directors so direct, or (4) the
stockholders. Indemnification of former directors or officers
shall be determined by any person authorized to act on the
matter on our behalf. Expenses incurred by a director or officer
in defending against such legal proceedings are payable before
the final disposition of the action, provided that the director
or officer undertakes to repay us if it is later determined that
he or she is not entitled to indemnification.
Prior to completion of this offering, the Company intends to
enter into separate indemnification agreements with its
directors and officers. Each indemnification agreement will
provide, among other things, for indemnification to the fullest
extent permitted by law and our amended and restated certificate
of incorporation and amended and restated bylaws against any and
all expenses, judgments, fines, penalties and amounts paid in
settlement of any claim. The indemnification agreements will
provide for the advancement or payment of all expenses to the
indemnitee and for reimbursement to us if it is found that such
indemnitee is not entitled to such indemnification under
applicable law and our amended and restated certificate of
incorporation and amended and restated bylaws.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that, in the opinion
of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
We maintain directors’ and officers’ liability
insurance for our officers and directors.
The Registrant maintains standard policies of insurance under
which coverage is provided (a) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act, and (b) to the
Registrant with respect to payments which may be made by the
Registrant to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
Item 15.
Recent
Sales of Unregistered Securities
During the past three years, we have issued unregistered
securities to a limited number of persons, as described below.
None of these transactions involved any underwriters or any
public offerings and we believe that each of these transactions
was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act or Rule 701 of the
Securities Act pursuant to compensatory benefit plans and
contracts related to compensation as provided under
Rule 701. The recipients of the securities in these
transactions have represented that these securities were
acquired for investment purposes only and not with a view to or
for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and
instruments issued in these transactions.
Between September 2006 and January 2007, prior to our
acquisition in February 2007, we granted and issued
12,576 shares of common stock under compensatory plans or
agreements to employees.
In February of 2007, in connection with our acquisition by
certain private equity funds managed by an affiliate of
Fortress, all of the existing shares of common stock were
cancelled and we issued 465,000 new shares of common stock to RR
Acquisition Holding LLC.
From February 2007 to June 2009, we issued and granted
18,078.6 shares of common stock under compensatory plans or
agreements to officers and employees, subject to vesting over
three to five years from the grant date, depending on the terms
of the applicable agreement with each such officer or employee.
From February 2007 to June 2009, certain of our officers and
employees purchased an aggregate of 3,529 shares of common
stock for an aggregate purchase price of $3.67 million, and
an outside consultant purchased 1,000 shares for an
aggregate purchase price of $1.0 million.
On June 23, 2009, the Registrant issued $740.0 million
principal amount at maturity of senior secured notes to
qualified institutional buyers under Rule 144A and outside
the United States in compliance with Regulation S.
Grants of
Restricted Share Units
Prior to the consummation of the offering, we expect to grant
pursuant to our equity incentive plan, effective upon
consummation of this
offering, restricted
shares of our common stock to certain employees. These grants of
restricted shares of our common stock will be exempt from
registration under Section 701 of the Securities Act
because they will be made under written compensatory plans or
agreements.
Form of Stockholders Agreement by and among RailAmerica, Inc.
and RR Acquisition Holding, LLC*
4
.3
Indenture, dated as of June 23, 2009, by and between
RailAmerica, Inc., the guarantors named therein, as Guarantors,
and U.S. Bank National Association, as Trustee and Notes
Collateral Agent†
5
.1
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
10
.1
Credit Agreement, dated as of June 23, 2009, among
RailAmerica, Inc., RailAmerica Transportation Corp., the several
lenders from time to time parties thereto, Citicorp North
America, Inc. and Citigroup Global Markets Inc.
10
.2
Form of RailAmerica, Inc. Equity Incentive Plan*
10
.3
Form of Indemnification Agreement with directors and officers*
Schedules not listed above have been omitted because the
information to be set forth therein is not material, not
applicable or is shown in the financial statements or notes
thereto.
Item 17.
Undertakings
(1) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(2) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide
to the underwriter at the closing specified in the underwriting
agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 1 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Jacksonville, State of Florida, on September 1, 2009.
RAILAMERICA, INC.
By:
/s/ John
Giles
Name: John Giles
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Joseph P. Adams, Jr., by signing his name below, signs this
document on behalf of each of the above named persons specified
by an asterisk (*), pursuant to a power of attorney duly
executed by such persons and filed with the Securities and
Exchange Commission in the registrant’s Registration
Statement on July 28, 2009.
Form of Stockholders Agreement by and among RailAmerica, Inc.
and RR Acquisition Holding, LLC*
4
.3
Indenture, dated as of June 23, 2009, by and between
RailAmerica, Inc., the guarantors named therein, as Guarantors,
and U.S. Bank National Association, as Trustee and Notes
Collateral Agent†
5
.1
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP*
10
.1
Credit Agreement, dated as of June 23, 2009, among
RailAmerica, Inc., RailAmerica Transportation Corp., the several
lenders from time to time parties thereto, Citicorp North
America, Inc. and Citigroup Global Markets Inc.
10
.2
Form of RailAmerica, Inc. Equity Incentive Plan*
10
.3
Form of Indemnification Agreement with directors and officers*
