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Railamerica Inc/DE – ‘S-1/A’ on 9/22/09

On:  Tuesday, 9/22/09, at 4:47pm ET   ·   Accession #:  950123-9-44884   ·   File #:  333-160835

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

 9/22/09  Railamerica Inc/DE                S-1/A                  9:3.0M                                   RR Donnelley/FA

Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment No. 2 to Form S-1                         HTML   1.91M 
 2: EX-3.1      Articles of Incorporation/Organization or By-Laws   HTML     61K 
 3: EX-3.2      Articles of Incorporation/Organization or By-Laws   HTML    130K 
 4: EX-4.1      Instrument Defining the Rights of Security Holders  HTML    125K 
 5: EX-10.2     Material Contract                                   HTML     91K 
 6: EX-10.4     Material Contract                                   HTML     61K 
 7: EX-21.1     Subsidiaries of the Registrant                      HTML     17K 
 8: EX-23.2     Consent of Experts or Counsel                       HTML      6K 
 9: EX-23.3     Consent of Experts or Counsel                       HTML      6K 


S-1/A   —   Amendment No. 2 to Form S-1
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Prospectus Summary
"Risk Factors
"Special Note Regarding Forward-Looking Statements
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Selected Historical Consolidated Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Industry
"Business
"Management
"Certain Relationships and Related Party Transactions
"Principal and Selling Stockholders
"Description of Certain Indebtedness
"Description of Capital Stock
"Shares Eligible for Future Sale
"U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders
"Underwriting
"Legal Matters
"Experts
"Market and Industry Data and Forecasts
"Where You Can Find More Information
"Index of Consolidated Financial Statements
"Reports of Independent Registered Public Accounting Firms
"Consolidated Balance Sheets -- For the Successor periods as of December 31, 2008 and December 31, 2007
"Consolidated Statements of Stockholders' Equity -- For the Predecessor periods ended December 31, 2006 and February 14, 2007 and the Successor periods ended December 31, 2007 and December 31, 2008
"Notes to Annual Consolidated Financial Statements
"Consolidated Balance Sheets -- For the Successor periods as of December 31, 2008 and June 30, 2009 (unaudited)
"Consolidated Statements of Operations -- For the Successor Periods January 1, 2009 through June 30, 2009 and January 1, 2008 through June 30, 2008 (unaudited)
"Consolidated Statements of Cash Flows -- For the Successor Periods January 1, 2009 through June 30, 2009 and January 1, 2008 through June 30, 2008 (unaudited)
"Notes to Interim Consolidated Financial Statements

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Table of Contents

As filed with the Securities and Exchange Commission on September 22, 2009
Registration No. 333-160835
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 2
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, Florida 32256
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, Florida 32256
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 York 10036-6522
(212) 735-3000
  Jonathan A. Schaffzin, Esq.
Cahill Gordon & Reindel llp
80 Pine Street
New York, New York 10005
(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)
 
Calculation of Registration Fee
 
                     
      PROPOSED MAXIMUM
      AMOUNT OF
 
TITLE OF EACH CLASS OF
    AGGREGATE
      REGISTRATION
 
SECURITIES TO BE REGISTERED     OFFERING PRICE(1)(2)       FEE(1)(3)  
Common stock, par value $0.01 per share
    $ 450,000,000       $ 25,110  
Total
    $ 450,000,000       $ 25,110  
                     
 
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
 
(2) Includes offering price of shares that the underwriters have the option to purchase pursuant to their over-allotment option.
 
(3) $16,740 previously paid, $8,370 paid herewith.
 
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.
 



Table of Contents

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.
 
Subject to completion, dated September 22, 2009
 
PROSPECTUS
 
           Shares
 
(RAILAMERICA LOGO)
 
Common Stock
 
This is an initial public offering of common stock of RailAmerica, Inc. We are 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 have applied 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 10.
 
 
 
 
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)
  $       $  
 
We have granted the underwriters an option to purchase up to     additional shares of common stock, and the Initial Stockholder has granted the underwriters an option to purchase up to          additional shares of common stock, in each case 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.
 
 
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 EX-3.1
 EX-3.2
 EX-4.1
 EX-10.2
 EX-10.4
 EX-21.1
 EX-23.2
 EX-23.3
 
 
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.



Table of Contents

 
PROSPECTUS SUMMARY
 
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”). Unless the context suggests otherwise, all share and per share information in this prospectus gives effect to the 90-for-1 stock split of our common stock, which occurred on September 22, 2009.
 
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 and net income of $16.5 million for the year ended December 31, 2008 and total operating revenue of $206.5 million and net income of $19.2 million for the six months ended June 30, 2009.


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Table of Contents

 
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
(B-W PIE CHART NAMED Y0198101A)   (PIE CHART)
 
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 operating ratio, defined as total operating expenses divided by total operating revenue, improved from 89% for the year ended December 31, 2006 to 86% for the year ended December 31, 2007 to 83% for the year ended December 31, 2008. Our operating ratio improved from 84% for the six months ended June 30, 2008 to 78% 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 2028. 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.


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Table of Contents

 
  •  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.


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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.


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Our Principal Stockholder
 
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, Florida 32256, 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.


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THE OFFERING
 
Common stock offered by us           shares
 
Common stock offered by the Initial Stockholder           shares
 
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. Our net proceeds will increase by approximately $      if the underwriters’ over-allotment option is exercised in full. 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 shares sold by the Initial Stockholder pursuant to the underwriters’ 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 10 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, after giving effect to the 90-for-1 stock split of our common stock that occurred on September 22, 2009, and excluding an additional 4,500,000 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 us and the Initial Stockholder to cover over-allotments;
 
  •  gives effect to the 90-for-1 stock split of our common stock that occurred on September 22, 2009; and
 
  •  assumes           shares will be issued to certain of our directors after          , 2009 but prior to completion of this offering.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
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 information in the following tables gives effect to the 90-for-1 stock split of our common stock, which occurred on September 22, 2009.
 
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.
 
                                                                   
    Predecessor       Successor  
                      Period from
      Period from
                   
                      January 1,
      February 15,
                   
                      2007 to
      2007
    Year Ended
    Six Months Ended
 
    Year Ended December 31,     February 14,
      to December 31,
    December 31,
    June 30,  
    2004     2005     2006     2007       2007     2008     2008     2009  
    (In thousands, except per share data)  
STATEMENT OF OPERATIONS DATA:
                                                                 
Operating revenue
  $ 366,896     $ 420,987     $ 462,580     $ 55,766       $ 424,154     $ 508,466     $ 255,240     $ 206,483  
Operating expenses
    315,825       369,965       412,577       57,157         355,776       422,418       213,970       161,174  
                                                                   
Operating income (loss)
    51,071       51,022       50,003       (1,391 )       68,378       86,048       41,270       45,309  
Interest expense, including amortization costs
    (27,696 )     (20,329 )     (27,392 )     (3,275 )       (42,996 )     (61,678 )     (24,334 )     (35,263 )
Other income (loss)(1)
    (39,549 )     (621 )           284         7,129       (9,008 )     (1,340 )     (1,420 )
                                                                   
Income (loss) from continuing operations before income taxes
    (16,174 )     30,072       22,611       (4,382 )       32,511       15,362       15,596       8,626  
Provision for (benefit from) income taxes
    (1,680 )     (1,112 )     (4,809 )     935         (1,747 )     1,599       10,525       2,350  
                                                                   
Income (loss) from continuing operations
    (14,494 )     31,184       27,420       (5,317 )       34,258       13,763       5,071       6,276  
Discontinued operations
    (11,445 )     (362 )     9,223               (756 )     2,764       (297 )     12,951  
                                                                   
Net income (loss)
  $ (25,939 )   $ 30,822     $ 36,643     $ (5,317 )     $ 33,502     $ 16,527     $ 4,774     $ 19,227  
                                                                   
Income (loss) from continuing operations per share of common stock:
                                                                 
Basic
  $ (0.41 )   $ 0.83     $ 0.71     $ (0.14 )     $ 0.80     $ 0.32     $ 0.12     $ 0.15  
Diluted
  $ (0.41 )   $ 0.81     $ 0.70     $ (0.14 )     $ 0.80     $ 0.32     $ 0.12     $ 0.15  


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    Predecessor       Successor  
                                    As of
 
    As of December 31,       As of December 31,     June 30,
 
    2004     2005     2006       2007     2008     2009  
    (In thousands)  
BALANCE SHEET DATA:
                                                 
Cash and cash equivalents
  $ 24,331     $ 14,310     $ 12,771       $ 15,387     $ 26,951     $ 23,930  
Total assets
    1,016,143       1,147,376       1,125,732         1,483,239       1,475,394       1,469,083  
Long-term obligations, including current maturities
    363,350       433,873       400,638         636,941       629,580       713,884  
Stockholders’ equity
    380,926       431,278       472,249         512,749       471,520       483,034  
 
                                                                   
    Predecessor       Successor  
                      Period from
      Period from
                   
                      January 1,
      February 15,
                   
                      2007 to
      2007 to
    Year Ended
    Six Months Ended
 
    Year Ended December 31,     February 14,
      December 31,
    December 31,
    June 30,  
    2004     2005     2006     2007       2007     2008     2008     2009  
    (In thousands, except for freight carloads)  
OTHER DATA:
                                                                 
Freight carloads (continuing operations)
    1,173,243       1,248,102       1,238,182       141,006         1,021,657       1,056,710       556,689       414,303  
Freight revenue
  $ 330,381     $ 378,100     $ 406,366     $ 48,289       $ 371,089     $ 440,041     $ 225,136     $ 169,606  
Non-freight revenue
    36,515       42,887       56,214       7,477         53,065       68,425       30,104       36,877  
EBITDA(2)
    39,818       81,515       88,135       3,741         107,653       116,618       59,529       64,455  
Depreciation and amortization
    28,296       31,114       38,132       4,848         32,146       39,578       19,599       20,566  
Interest expense, including amortization costs
    27,696       20,329       27,392       3,275         42,996       61,678       24,334       35,263  
Capital expenditures
    75,800       75,907       70,425       5,545         65,400       61,282       29,625       25,766  
Net cash provided by (used in)
                                                                 
Operating activities
    48,077       54,137       60,603       (1,763 )       67,931       83,572       38,754       (43,358 )
Investing activities
    110,669       (138,980 )     (34,996 )     (5,448 )       (1,150,087 )     (45,651 )     (28,935 )     (6,501 )
Financing activities
    (148,375 )     74,502       (27,081 )     2,458         1,088,941       (24,799 )     (655 )     46,897  
 
 
(1) 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. We believe EBITDA is an important measure of operating performance and provides useful information to investors because it highlights trends in our business that may not otherwise be apparent when relying solely on U.S. generally accepted accounting principle (“GAAP”) measures and eliminates 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 (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”) represents EBITDA before impairment of assets, equity compensation costs, gain (loss) on foreign currency exchange and non-recurring headquarter relocation costs. Adjusted EBITDA assists us in monitoring our ability to undertake key investing and financing


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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.
 
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 from net income (loss):
 
                                                                   
    Predecessor     Successor
                Period from
    Period from
           
                January 1,
    February 15,
           
                2007 to
    2007 to
  Year Ended
  Six Months
    Year Ended December 31,   February 14,
    December 31,
  December 31,
  Ended June 30,
    2004   2005   2006   2007     2007   2008   2008   2009
    (In thousands)    
Net Income (Loss) to EBITDA 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  
Interest expense, including amortization costs
    27,696       20,329       27,392       3,275         42,996       61,678       24,334       35,263  
Depreciation and amortization
    28,296       31,114       38,132       4,848         32,146       39,578       19,599       20,566  
                                                                   
EBITDA
  $ 39,818     $ 81,515     $ 88,135     $ 3,741       $ 107,653     $ 116,618     $ 59,529     $ 64,455  
                                                                   
                                                                   
 
EBITDA, as presented herein, is a supplemental measure of our performance that is 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 has limitations as an analytical tool. It is not a measurement of our financial performance under GAAP and should not be considered as an alternative to revenue, net income (loss) or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as measures of liquidity.


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RISK FACTORS
 
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


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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


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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.


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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;


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  •  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.


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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.
 
Future compensation expense may adversely affect our net income.
 
The compensation that we pay to our employees to attract and retain key personnel will reduce our net income. The compensation paid to our employees for 2008 is not necessarily indicative of how we will compensate our employees after this offering. Any increase in compensation following this offering will further reduce our net income. For example, prior to the completion of this offering, we will adopt an equity incentive plan (described in the section entitled “Management — IPO Equity Incentive Plan”) that will permit the issuance of share options, share appreciation rights, restricted shares, deferred shares, performance shares, unrestricted shares and other share-based awards to our employees. While we do not intend to grant equity awards to our executive officers at the time of this offering and we have not established specific parameters regarding future grants, we may grant restricted shares and other share-based awards to our employees in the future as a recruiting and retention tool based on specific criteria determined by our board of directors (or the compensation committee of the board of directors, after it has been appointed).
 
The table below compares our net income to our total executive compensation costs (each in thousands).
 
                 
    Year Ended
    Period From January 1,
 
    December 31, 2008     2009 to June 30, 2009  
 
Net Income
  $ 16,527     $ 19,227  
Executive Compensation Cost(1)
  $ 5,127     $ 2,332 (2)
 
 
(1) Executive Compensation Cost is computed in the manner computed for purposes of the Summary Compensation Table set forth in the section entitled “Management — Summary Compensation Table for 2008.”
 
(2) Executive Compensation Cost for the period from January 1, 2009 to June 30, 2009 does not include costs associated with 2009 annual bonuses because such costs are not determinable at this time.
 
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


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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 at least 40% 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


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  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 have applied 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


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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.


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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 180 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 4,500,000 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 180-day lock-up agreements referred to above.


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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 after giving effect to the 90-for-1 stock split of our common stock that occurred on September 22, 2009. 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.


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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


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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.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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 10 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.


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USE OF PROCEEDS
 
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. Our net proceeds will increase by approximately $      if the underwriters’ over-allotment option is exercised in full. 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.
 
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. 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.


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CAPITALIZATION
 
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.
 
                 
    As of June 30, 2009  
    Actual     As Adjusted  
    (In thousands)  
 
Cash and cash equivalents
  $ 23,930                   
                 
Debt:
               
ABL Facility(1)
  $          
Senior Secured Notes
    709,889          
Other long-term debt, including current maturities
    3,995          
                 
Total debt
    713,884          
Stockholders’ equity:
               
Common stock, $0.01 par value, 46,800,000 shares authorized and 42,568,470 shares issued and outstanding, actual; 400,000,000 shares authorized and           shares issued and outstanding, as adjusted(2)
    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.
 
(2) Giving effect to the 90-for-1 stock split of our common stock that occurred on September 22, 2009.


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DILUTION
 
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 the 90-for-1 stock split of our common stock that occurred on September 22, 2009. 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), as well as after giving effect to the 90-for-1 stock split, 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 after giving effect to the 90-for-1 stock split:
 
                 
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.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
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 information in the following tables gives effect to the 90-for-1 stock split of our common stock, which occurred on September 22, 2009.
 
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.
 


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    Predecessor       Successor  
                      Period from
      Period from
                   
                      January 1,
      February 15,
                   
                      2007 to
      2007 to
    Year Ended
    Six Months
 
    Year Ended December 31,     February 14,
      December 31,
    December 31,
    Ended June 30,  
    2004     2005     2006     2007       2007     2008     2008     2009  
    (In thousands, except per share data)  
STATEMENT OF OPERATIONS DATA:
                                                                 
Operating revenue
  $ 366,896     $ 420,987     $ 462,580     $ 55,766       $ 424,154     $ 508,466     $ 255,240     $ 206,483  
Operating expenses
    315,825       369,965       412,577       57,157         355,776       422,418       213,970       161,174  
                                                                   
Operating income (loss)
    51,071       51,022       50,003       (1,391 )       68,378       86,048       41,270       45,309  
Interest expense, including amortization costs
    (27,696 )     (20,329 )     (27,392 )     (3,275 )       (42,996 )     (61,678 )     (24,334 )     (35,263 )
Other income (loss)
    (39,549 )     (621 )           284         7,129       (9,008 )     (1,340 )     (1,420 )
                                                                   
Income (loss) from continuing operations before income taxes
    (16,174 )     30,072       22,611       (4,382 )       32,511       15,362       15,596       8,626  
Provision for (benefit from) income taxes
    (1,680 )     (1,112 )     (4,809 )     935         (1,747 )     1,599       10,525       2,350  
                                                                   
Income (loss) from continuing operations
    (14,494 )     31,184       27,420       (5,317 )       34,258       13,763       5,071       6,276  
Discontinued operations
    (11,445 )     (362 )     9,223                 (756 )     2,764       (297 )     12,951  
                                                                   
Net income (loss)
  $ (25,939 )   $ 30,822     $ 36,643     $ (5,317 )     $ 33,502     $ 16,527     $ 4,774     $ 19,227  
                                                                   
Income (loss) from continuing operations per share of common stock:
                                                                 
Basic
  $ (0.41 )   $ 0.83     $ 0.71     $ (0.14 )     $ 0.80     $ 0.32     $ 0.12     $ 0.15  
Diluted
  $ (0.41 )   $ 0.81     $ 0.70     $ (0.14 )     $ 0.80     $ 0.32     $ 0.12     $ 0.15  
                                                                   
 
                                                   
    Predecessor       Successor  
                                    As of
 
    As of December 31,       As of December 31,     June 30,
 
    2004     2005     2006       2007     2008     2009  
    (In thousands)  
BALANCE SHEET DATA:
                                                 
Total assets
  $ 1,016,143     $ 1,147,376     $ 1,125,732       $ 1,483,239     $ 1,475,394     $ 1,469,083  
Long-term debt, including current maturities
    363,350       433,873       400,638         636,941       629,580       713,884  
Stockholders’ equity
    380,926       431,278       472,249         512,749       471,520       483,034  

 
                                                 
 
                                                                   
    Predecessor     Successor
                Period from
    Period from
           
                January 1,
    February 15,
           
                2007 to
    2007 to
  Year Ended
  Six Months Ended
    Year Ended December 31,   February 14,
    December 31,
  December 31,
  June 30,
    2004   2005   2006   2007     2007   2008   2008   2009
OPERATING DATA:
                                                                 
Freight carloads (continuing operations)
    1,173,243       1,248,102       1,238,182       141,006         1,021,657       1,056,710       556,689       414,303  

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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


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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.


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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:
 
                                                 
    Six Months Ended
    Six Months Ended
 
    June 30, 2009     June 30, 2008  
                Average Freight
                Average Freight
 
    Freight
          Revenue per
    Freight
          Revenue per
 
    Revenue     Carloads     Carload     Revenue     Carloads     Carload  
    (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;


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  •  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).
 
                                 
    Six Months Ended June 30,  
    2009     2008  
 
Operating revenue
  $ 206,483       100.0 %   $ 255,240       100.0 %
Operating expenses:
                               
Labor and benefits
    65,461       31.7 %     73,606       28.8 %
Equipment rents
    18,427       8.9 %     23,588       9.2 %
Purchased services
    15,883       7.7 %     18,163       7.1 %
Diesel fuel
    14,912       7.2 %     39,582       15.5 %
Casualties and insurance
    9,372       4.6 %     9,837       3.9 %
Materials
    5,161       2.5 %     4,956       1.9 %
Joint facilities
    2,325       1.1 %     6,672       2.6 %
Other expenses
    8,053       3.9 %     18,065       7.1 %
Net loss (gain) on sale of assets
    1,014       0.5 %     (98 )     0.0 %
Depreciation and amortization
    20,566       10.0 %     19,599       7.7 %
                                 
Total operating expenses
    161,174       78.1 %     213,970       83.8 %
                                 
Operating income
  $ 45,309       21.9 %   $ 41,270       16.2 %
                                 


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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).
 
                                                 
    Six Months Ended June 30,  
    2009     2008  
                Total
                Total
 
          Selling, general
    Operating
          Selling, general
    Operating
 
    Transportation     and administrative     Expenses     Transportation     and administrative     Expenses  
 
Operating expenses:
                                               
Labor and benefits
  $ 37,657     $ 27,804     $ 65,461     $ 45,472     $ 28,134     $ 73,606  
Equipment rents
    18,215       212       18,427       23,354       234       23,588  
Purchased services
    10,010       5,873       15,883       11,607       6,556       18,163  
Diesel fuel
    14,907       5       14,912       39,582             39,582  
Casualties and insurance
    6,707       2,665       9,372       5,693       4,144       9,837  
Materials
    4,702       459       5,161       4,401       555       4,956  
Joint facilities
    2,325             2,325       6,672             6,672  
Other expenses
    (3,073 )     11,126       8,053       7,583       10,482       18,065  
Net loss (gain) on sale of assets
                1,014                   (98 )
Depreciation and amortization
                20,566                   19,599  
                                                 
Total operating expenses
  $ 91,450     $ 48,144     $ 161,174     $ 144,364     $ 50,105     $ 213,970  
                                                 
 
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;


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  •  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


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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.
 
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007
 
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.
 


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          2007  
    2008     Successor       Predecessor     Combined  
    Successor     February 15,
      January 1,
    (Non-GAAP)
 
    Year Ended
    2007 through
      2007 through
    Year Ended
 
    December 31,
    December 31,
      February 14,
    December 31,
 
    2008     2007       2007     2007  
    (In thousands)  
Operating revenue
  $ 508,466     $ 424,154       $ 55,766     $ 479,920  
Operating expenses:
                                 
Transportation
    278,241       236,156         43,949       280,105  
Selling, general and administrative
    102,876       87,474         8,387       95,861  
Net gain on sale of assets
    (1,697 )             (27 )     (27 )
Impairment of assets
    3,420                      
Depreciation and amortization
    39,578       32,146         4,848       36,994  
                                   
Total operating expenses
    422,418       355,776         57,157       412,933  
Operating income (loss)
    86,048       68,378         (1,391 )     66,987  
Interest expense, including amortization costs
    (61,678 )     (42,996 )       (3,275 )     (46,271 )
Other income (loss)
    (9,008 )     7,129         284       7,413  
                                   
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.

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The following table compares our freight revenue, carloads and average freight revenue per carload for the years ended December 31, 2008 and 2007:
 
                                                 
          Combined Year Ended
 
    Year Ended December 31, 2008     December 31, 2007 (Non-GAAP)  
                Average Freight
                Average Freight
 
    Freight
          Revenue per
    Freight
          Revenue per
 
    Revenue     Carloads     Carload     Revenue     Carloads     Carload  
    (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;


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  •  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):
 
                                                   
    2008     2007  
    Successor     Successor       Predecessor     Combined  
          February 15,
      January 1,
    (Non-GAAP)
 
          2007 through
      2007 through
    Year Ended
 
    Year Ended December 31,
    December 31,
      February 14,
    December 31,
 
    2008     2007       2007     2007  
Operating revenue
  $ 508,466       100.0 %   $ 424,154       $ 55,766     $ 479,920       100.0 %
Operating expenses:
                                                 
Labor and benefits
    148,789       29.3 %     121,879         22,605       144,484       30.1 %
Equipment rents
    45,020       8.9 %     48,057         6,538       54,595       11.4 %
Purchased services
    38,792       7.6 %     30,050         3,743       33,793       7.0 %
Diesel fuel
    69,974       13.8 %     50,487         6,900       57,387       12.0 %
Casualties and insurance
    22,041       4.3 %     24,057         5,347       29,404       6.1 %
Materials
    10,663       2.1 %     9,068         1,286       10,354       2.1 %
Joint facilities
    12,573       2.5 %     10,804         1,267       12,071       2.5 %
Other expenses
    33,265       6.6 %     29,228         4,650       33,878       7.1 %
Net loss (gain) on sale and impairment of assets
    1,723       0.3 %             (27 )     (27 )     0.0 %
Depreciation and amortization
    39,578       7.8 %     32,146         4,848       36,994       7.7 %
                                                   
Total operating expenses
    422,418       83.1 %     355,776         57,157       412,933       86.0 %
                                                   
Operating income (loss)
  $ 86,048       16.9 %   $ 68,378       $ (1,391 )   $ 66,987       14.0 %
                                                   
                                                   
 
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


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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).
 
                                                 
          Combined Period Ended December 31, 2007
 
    Year Ended December 31, 2008     (Non-GAAP)  
          Selling, General
    Total
          Selling, General
    Total
 
          and
    Operating
          and
    Operating
 
    Transportation     Administrative     Expenses     Transportation     Administrative     Expenses  
 
Operating expenses:
                                               
Labor and benefits
  $ 89,430     $ 59,359     $ 148,789     $ 91,169     $ 53,315     $ 144,484  
Equipment rents
    44,562       458       45,020       54,144       451       54,595  
Purchased services
    22,913       15,879       38,792       22,187       11,606       33,793  
Diesel fuel
    69,935       39       69,974       57,383       4       57,387  
Casualties and insurance
    14,312       7,729       22,041       21,575       7,829       29,404  
Materials
    9,494       1,169       10,663       9,299       1,055       10,354  
Joint facilities
    12,573             12,573       12,071             12,071  
Other expenses
    15,022       18,243       33,265       12,277       21,601       33,878  
Net gain on sale of assets
                1,723                   (27 )
Depreciation and amortization
                39,578                   36,994  
                                                 
Total operating expenses
  $ 278,241     $ 102,876     $ 422,418     $ 280,105     $ 95,861     $ 412,933  
                                                 
 
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


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  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.


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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.
 
Comparison of Operating Results for the Years Ended December 31, 2007 and 2006
 
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.
 
                                   
    2007        
    Successor       Predecessor     Combined     2006  
    February 15,
      January 1,
    (Non-GAAP)
    Predecessor  
    2007 through
      2007 through
    Year Ended
    Year Ended
 
    December 31,
      February 14,
    December 31,
    December 31,
 
    2007       2007     2007     2006  
    (in thousands)  
Operating revenue
  $ 424,154       $ 55,766     $ 479,920     $ 462,580  
Operating expenses:
                                 
Transportation
    236,156         43,949       280,105       278,314  
Selling, general and administrative
    87,474         8,387       95,861       99,515  
Net gain on sale of assets
            (27 )     (27 )     (3,384 )
Depreciation and amortization
    32,146         4,848       36,994       38,132  
                                   
Total operating expenses
    355,776         57,157       412,933       412,577  
Operating income (loss)
    68,378         (1,391 )     66,987       50,003  
Interest expense, including amortization costs
    (42,996 )       (3,275 )     (46,271 )     (27,392 )
Other income
    7,129         284       7,413        
                                   
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:
                                 


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    2007        
    Successor       Predecessor     Combined     2006  
    February 15,
      January 1,
    (Non-GAAP)
    Predecessor  
    2007 through
      2007 through
    Year Ended
    Year Ended
 
    December 31,
      February 14,
    December 31,
    December 31,
 
    2007       2007     2007     2006  
    (in thousands)  
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.

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The following table compares our freight revenue, carloads and average freight revenue per carload for the years ended December 31, 2007 and 2006:
 
                                                 
    Combined
       
    Year Ended December 31, 2007
       
    (Non-GAAP)     Year Ended December 31, 2006  
                Average
                Average
 
    Freight
          Revenue
    Freight
          Revenue
 
    Revenue     Carloads     per carload     Revenue     Carloads     per Carload  
    (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;


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  •  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;
 
  •  Food or kindred products revenue increased $1.0 million or 5% primarily due to a change in traffic mix;
 
  •  Petroleum revenue increased $0.9 million or 6% primarily due to negotiated rate increases; and
 
  •  Motor vehicles revenue increased $0.2 million or 3% primarily due to new business with an existing customer.
 
Operating Expenses
 
The following table sets forth the operating revenue and expenses for our consolidated operations for the periods indicated (dollars in thousands).
 
                                                   
    2007        
    Predecessor       Successor     Combined        
    January 1,
      February 15,
    (Non-GAAP)
    2006  
    2007 through
      2007 through
    Year Ended
    Predecessor  
    February 14,
      December 31,
    December 31,
    Year Ended
 
    2007       2007     2007     December 31, 2006  
Operating revenue
  $ 55,766       $ 424,154     $ 479,920       100.0 %   $ 462,580       100.0 %
Operating expenses:
                                                 
Labor and benefits
    22,605         121,879       144,484       30.1 %     144,256       31.2 %
Equipment rents
    6,538         48,057       54,595       11.4 %     55,356       12.0 %
Purchased services
    3,743         30,050       33,793       7.0 %     37,701       8.2 %
Diesel fuel
    6,900         50,487       57,387       12.0 %     57,456       12.4 %
Casualties and insurance
    5,347         24,057       29,404       6.1 %     21,475       4.7 %
Materials
    1,286         9,068       10,354       2.1 %     10,824       2.3 %
Joint facilities
    1,267         10,804       12,071       2.5 %     13,068       2.8 %
Other expenses
    4,650         29,228       33,878       7.1 %     37,693       8.1 %
Net gain on sale of assets
    (27 )             (27 )     0.0 %     (3,384 )     (0.7 )%
Depreciation and amortization
    4,848         32,146       36,994       7.7 %     38,132       8.2 %
                                                   
Total operating expenses
    57,157         355,776       412,933       86.0 %     412,577       89.2 %
                                                   
Operating income (loss)
  $ (1,391 )     $ 68,378     $ 66,987       14.0 %   $ 50,003       10.8 %
                                                   
 
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.
 


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    Combined Period Ended December 31, 2007
       
    (Non-GAAP)     Year Ended December 31, 2006  
                Total
                Total
 
          Selling, general
    Operating
          Selling, general
    Operating
 
    Transportation     and administrative     Expenses     Transportation     and administrative     Expenses  
    (in thousands)  
 
Operating expenses:
                                               
Labor and benefits
  $ 91,169     $ 53,315     $ 144,484     $ 93,025     $ 51,231     $ 144,256  
Equipment rents
    54,144       451       54,595       54,936       420       55,356  
Purchased services
    22,187       11,606       33,793       22,366       15,335       37,701  
Diesel fuel
    57,383       4       57,387       57,429       27       57,456  
Casualties and insurance
    21,575       7,829       29,404       13,792       7,683       21,475  
Materials
    9,299       1,055       10,354       9,660       1,164       10,824  
Joint facilities
    12,071             12,071       13,068             13,068  
Other expenses
    12,277       21,601       33,878       14,038       23,655       37,693  
Net gain on sale of assets
                (27 )                 (3,384 )
Depreciation and amortization
                36,994                   38,132  
                                                 
Total operating expenses
  $ 280,105     $ 95,861     $ 412,933     $ 278,314     $ 99,515     $ 412,577  
                                                 
 
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;

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  •  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


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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 are 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.


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Financing Activities
 
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 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 103% of the principal amount, plus accrued and unpaid interest to, but not including, the redemption date. The redemption of $      of senior secured notes represents 10% of the aggregate principal amount of the notes. This redemption of notes enables us to pay the least amount of additional premium as compared to an option that we may redeem up to 35% of the aggregate principal amount at a price of 109.25% (see “Description of Certain Indebtedness — 9.25% Senior Secured Notes”), and will reduce our annual interest expense. In addition, a 10% redemption of the aggregate principal amount of the notes will improve our capital structure and liquidity to give us the opportunity to pursue our growth strategies.
 
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


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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.
 
Covenants to Senior Secured Notes and ABL Facility
 
Adjusted EBITDA, as defined in the indenture governing the senior secured notes, is the key financial covenant measure that monitors our ability to undertake key investing and financing functions, such as making investments, transferring property, paying dividends, and incurring additional indebtedness.
 
The following table sets forth the reconciliation of Adjusted EBITDA from our cash flow from operating activities (in thousands):
 
                                                   
    Successor       Predecessor  
                      February 15th,
      January 1,
       
    Six Months Ended
    Year Ended
    2007 through
      2007 through
    Year Ended
 
    June 30,     December 31,
    December 31,
      February 14th,
    December 31,
 
    2009     2008     2008     2007       2007     2006  
Cash flows from operating activities to Adjusted EBITDA Reconciliation:
                                                 
Net cash (used in) provided by operating activities
  $ (43,358 )   $ 38,754     $ 83,572     $ 67,931       $ (1,763 )   $ 60,603  
Changes in working capital accounts
    27,738       1,468       (11,524 )     (10,779 )       5,965       (3,717 )
Depreciation and amortization, including amortization of debt issuance costs classified in interest expense
    (28,150 )     (21,688 )     (49,118 )     (36,447 )       (4,917 )     (38,772 )
Amortization of swap termination costs
    (972 )                                
Net gain (loss) on sale or disposal of properties
    12,258       (353 )     1,738       (1,141 )       27       19,058  


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    Successor       Predecessor  
                      February 15th,
      January 1,
       
    Six Months Ended
    Year Ended
    2007 through
      2007 through
    Year Ended
 
    June 30,     December 31,
    December 31,
      February 14th,
    December 31,
 
    2009     2008     2008     2007       2007     2006  
Foreign exchange gain (loss) on debt
    1,160       (1,340 )     (8,260 )     7,048                
Swap termination costs
    55,750                                  
Write-off of deferred financing costs
    (2,593 )                                
Equity compensation costs
    (1,942 )     (1,695 )     (3,042 )     (1,178 )       (3,524 )     (2,604 )
Deferred income taxes
    (664 )     (10,372 )     3,161       8,068         (1,105 )     2,075  
                                                   
Net income
  $ 19,227     $ 4,774     $ 16,527     $ 33,502       $ (5,317 )   $ 36,643  
                                                   
Add: Discontinued operations (gain) loss
    (12,951 )     297       (2,764 )     756               (9,223 )
                                                   
Income from continuing operations
    6,276       5,071       13,763       34,258         (5,317 )     27,420  
Add:
                                                 
Provision for (benefit from) income taxes
    2,350       10,525       1,599       (1,747 )       935       (4,809 )
Interest expense, including amortization costs
    35,263       24,334       61,678       42,996         3,275       27,392  
Depreciation and amortization
    20,566       19,599       39,578       32,146         4,848       38,132  
                                                   
EBITDA
    64,455       59,529       116,618       107,653         3,741       88,135  
Add:
                                                 
Impairment of assets
                3,420                      
Equity compensation costs
    1,942       1,695       3,042       1,178         3,524       2,604  
Foreign exchange (gain) loss on debt
    (1,160 )     1,340       8,260       (7,048 )              
Write-off of deferred financing costs
    2,593                                  
Non-recurring headquarter relocation costs
    636       1,374       6,089                      
                                                   
Adjusted EBITDA
  $ 68,466     $ 63,938     $ 137,429     $ 101,783       $ 7,265     $ 90,739  
                                                   
 
Based on current levels of Adjusted EBITDA, we are not restricted in undertaking key investing and financing functions as discussed above.
 
Adjusted EBITDA, as presented herein, does not represent cash flows from operating activities as defined by generally accepted accounting principles (“GAAP”), is not a GAAP measure, is used in addition to and in conjunction with GAAP measures and should not be considered by the reader as an alternative to net income (loss) (the most comparable GAAP financial measure to Adjusted EBITDA or any other GAAP operating performance measure).
 
$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

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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.
 
Interest Rate Swaps
 
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.


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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.
 
Contractual Obligations
 
Two primary uses of the cash provided by our operations are capital expenditures and debt service. The following table represents the minimum future payments on our long-term debt, and our existing lease obligations as of June 30, 2009 (in thousands):
 
                                         
          July 1, 2009 to
                   
          December 31,
    2010-
    2012-
    After
 
    TOTAL     2009     2011     2013     2013  
 
Senior secured notes(1)
  $ 740,000     $     $     $     $ 740,000  
Other long term debt
    3,080       161       761       550       1,608  
Interest payments on long term debt
    549,998       35,781       137,229       137,154       239,834  
Capital lease obligations
    915       156       759              
Operating lease obligations
    78,545       11,808       27,342       11,646       27,749  
                                         
Total contractual cash obligations(2)
  $ 1,372,538     $ 47,906     $ 166,091     $ 149,350     $ 1,009,191  
                                         
 
 
(1) 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.


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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.


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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


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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.


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INDUSTRY
 
Introduction
 
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.
 
(BAR CHART)
 
Source: Association of American Railroads.


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Industry Structure
 
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


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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.)


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  •  Shorter distances to a transfer point
 
  •  Better railcar supply
 
  •  Less circuitry between origin and destination
 
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


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BUSINESS
 
General
 
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.


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The following table provides a brief description of each of our railroads ranked by revenue:
 
                                     
    No. of
  Track-
  2008
  2008
   
Name
  Railroads   Miles   Carloads   Revenue  
Major Commodities Hauled
                ($ in millions)    
 
Central Region:
                                   
Missouri & Northern Railroad
    1       594       110,914     $ 30.0     Farm Products, Coal
Dallas Garland & Northeastern Railroad
    2       337       59,649       24.2     Metallic & Non-Metallic Ores
Kyle Railroad Company
    1       625       20,001       22.4     Farm Products
Kiamichi Railroad
    1       261       52,927       19.4     Coal
Point Comfort & Northern Railway
    1       19       12,402       12.3     Metallic & Non-Metallic Ores
Otter Tail Valley Railroad
    1       81       10,996       4.7     Farm Products, Coal
Rockdale, Sandow & Southern Railroad
    1       8       6,103       4.0     Metallic & Non-Metallic Ores
Bauxite & Northern Railway
    1       6       4,059       3.4     Metallic & Non-Metallic Ores
                                     
Total — Central Region
    9       1,930       277,051     $ 120.4      
Northeast Region:
                                   
New England Central Railroad
    1       394       37,018     $ 27.3     Lumber & Forest Products
Ottawa Valley Railway
    1       342       69,758       20.0     Overhead Traffic
Cape Breton Central Nova Scotia Railway
    1       245       22,739       17.9     Paper & Paper Products
Goderich-Exeter Railway
    1       181       24,724       16.1     Chemicals
Southern Ontario Railway
    1       69       44,368       14.5     Metal & Metal Products
Connecticut Southern Railroad
    1       42       23,663       10.4     Waste
Massena Terminal Railroad
    1       4       4,295       2.5     Metallic & Non-Metallic Ores
                                     
Total — Northeast Region
    7       1,278       226,565     $ 108.7      
 


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    No. of
    Track-
    2008
    2008
     
Name
  Railroads     Miles     Carloads     Revenue    
Major Commodities Hauled
                      ($ millions)      
 
Midwest Region:
                                   
Indiana & Ohio Railway
    1       570       62,353     $ 31.1     Auto & Auto Parts, Chemicals
Chicago, Ft. Wayne & Eastern Railroad
    1       315       39,352       24.1     Farm Products
Huron Eastern Railway Saginaw Valley
    1       384       34,646       17.4     Chemicals
Toledo, Peoria & Western Railway
    1       247       26,546       15.7     Intermodal, Farm Products
Mid-Michigan Railroad
    3       196       12,729       6.6     Farm Products
Central Railroad of Indiana
    1       96       8,579       4.6     Metal & Metal Products
Central Railroad of Indianapolis
    1       39       8,250       2.8     Farm Products
                                     
Total — Midwest Region
    9       1,848       192,455     $ 102.3      
Southeast Region:
                                   
Alabama & Gulf Coast Railway
    1       348       61,234     $ 30.9     Paper & Paper Products
Consolidated Virginia Railroads
    2       135       32,154       23.0     Metal & Metal Products
South Carolina Central Railroad
    2       129       35,529       18.8     Chemicals, Waste
Indiana Southern Railroad
    1       196       70,021       16.5     Coal
Eastern Alabama Railway
    1       31       15,351       9.8     Minerals & Stone
                                     
Total — Southeast Region
    7       839       214,289     $ 99.0      
Western Region:
                                   
Central Oregon & Pacific Railroad
    1       389       27,719     $ 21.8     Lumber & Forest Products
San Joaquin Valley Railroad
    1       417       39,064       18.3     Food Products
California Northern Railroad
    1       261       26,137       14.0     Food Products
Arizona & California Railroad
    1       259       12,799       8.3     Petroleum Products, Lumber & Forest Products, Metal & Metal Products
Puget Sound & Pacific Railroad
    1       108       26,498       8.2     Intermodal
San Diego Valley Railroad
    1             6,804       4.6     Petroleum Products
Cascade & Columbia River Railroad
    1       148       5,252       2.7     Metallic & Non-Metallic Ores, Lumber & Forest Products
Ventura County Railroad
    1       17       2,077       1.0     Auto & Auto Parts
                                     
Total — Western Region
    8       1,600       146,350     $ 78.9      
Total Company
    40       7,494       1,056,710     $ 509.3 (1)    
 
 
(1) Includes approximately $0.8 million of intercompany revenue eliminated in consolidation.

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Revenue Model
 
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.


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Freight Revenue
 
Commodities
 
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.
 
(B-W PIE CHART NAMED Y0198103A)
 
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.


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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.
 
Contracts
 
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


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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:
 
                 
    December 31,
    December 31,
 
    2007     2008  
    (In millions)  
 
Demurrage
  $ 12.6     $ 13.2  
Storage
    7.0       9.9  
Car hire income
    9.7       9.8  
Lease income
    7.4       9.4  
Railcar switching
    4.8       5.4  
Car repair services
    2.2       2.8  
Other non-freight revenue
    16.8       17.9  
                 
Total
  $ 60.5     $ 68.4  
                 
 
Track and Equipment
 
Track
 
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:
 
                                                     
    Railcars       Locomotives
    Owned   Leased   Total       Owned   Leased   Total
 
Covered hopper cars
    35       2,479       2,514     Horsepower/unit:                        
Open top hopper cars
    238       33       271     Over 2,000     109       94       203  
Box cars
    35       2,522       2,557     1,500 to 2,000     116       101       217  
Flat cars
    194       1,584       1,778     Under 1,500     15       11       26  
Tank cars
    6       4       10                              
Gondolas
    5       573       578                              
Other/passenger cars
    11       0       11                              
                                                     
Total railcars
    524       7,195       7,719     Total locomotives     240       206       446  
                                                     


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Employees
 
As of June 30, 2009, we have a total of 1,588 employees of which 889 are non-unionized and 699 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


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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


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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


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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.
 
Acquisition of the Company by Fortress
 
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.


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MANAGEMENT
 
Directors and Executive Officers
 
The following table sets forth the name, age and position of our directors and executive officers as of September 22, 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
 
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


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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. Mr. Preslar is currently, and has been since May 2005, a director of Alliance One International, Inc., and chairs its audit committee. 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 a Master of Management degree with concentrations 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


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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.
 
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.


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Committees of the Board of Directors
 
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.


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Compensation of Directors
 
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 $50,000, payable in semi-annual installments. In addition, an annual fee of $10,000 will be paid to each member of the audit committee ($15,000 to the chair) of the board of directors, and an annual fee of $5,000 will be paid to each member of the nominating, corporate governance and conflicts committee and the compensation committee ($10,000 to each chair) 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 $300,000, 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. 2009 Omnibus Stock Incentive Plan, each of our independent directors who is serving following such annual general meeting will automatically be granted under the RailAmerica, Inc. 2009 Omnibus Stock Incentive Plan a number of unrestricted shares of common stock having a fair market value of $15,000 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


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  •  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 are 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 our compensation program by assuring that our named executive officers will receive an appropriate level of compensation.
 
Discretionary Cash Bonuses.  The compensation committee will have the authority to award annual bonuses to our named executive officers. The annual incentive bonuses are intended to compensate our named executive officers for our overall financial performance and for achieving important milestones as well as for individual performance. Bonus levels will vary depending on the individual executive and generally will include such factors as our overall financial performance, quality and amount of new investments, enhancing


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our dividend paying capability and improving our operations. Short-term 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 will have 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 will continue to be 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 will also continue to be 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 Award Agreements previously entered into between the Company and the named executive officer as amended in connection with this offering. The restricted shares granted pursuant to the Management Shareholder Award 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 (the “bonus shares”). 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, 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”) or as a result of the officer’s death or disability, 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; provided, however, that if the employment of any of our named executive officers is terminated without cause or for good reason or the officer retires after having achieved at least sixty years of age and more than sixty months of employment with us or certain specified employers, all bonus shares will vest. 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, all unvested restricted shares will vest. On any other termination of employment, all unvested restricted shares will be forfeited.


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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.”
 
IPO Equity Incentive Plan
 
Prior to the completion of this offering, we will adopt an equity incentive plan for our employees, the RailAmerica, Inc. 2009 Omnibus Stock Incentive Plan, or the “Plan.” The purposes of the Plan are to provide additional incentives to selected employees, directors and independent contractors of, and consultants to, the Company or its affiliates, 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 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 for future equity grants under the Plan. The following description summarizes the expected features of the Plan.
 
Summary of Plan Terms
 
A total of 4,500,000 shares of common stock will be reserved and available for issuance under the Plan, subject to annual increases of 125,000 shares of common stock per year, beginning in 2010 through and including 2019.
 
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 will 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


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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 and other stock-based awards 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 and other stock-based awards. 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, performance shares and/or other stock-based awards 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” will generally mean: (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


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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 will provide our board of directors with authority to 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


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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, where applicable, 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 “Potential Payments on Termination of Employment or Change of Control.”
 
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       131,107 (8)     492,247  
(Senior Vice President and Chief Financial Officer)(2)
    2007                                
Paul Lundberg
    2008       200,000       250,000       71,984       34,551 (9)     556,535  
(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       39,519 (10)     561,503  
(Senior Vice President and Chief Commercial Officer)(4)
    2007       166,666       187,500       30,000             384,166  
David Rohal,
    2008       200,000       250,000       71,984       11,626 (11)     553,610  
(Senior Vice President, Strategic Relations)(5)
    2007       166,666       187,500       30,000             384,166  
Scott Williams,
    2008       243,762       237,152       91,984       716,281 (12)     1,289,179  
(Senior Vice President, General
    2007       243,762       187,500       102,068             535,330  
Counsel & Secretary)
    2006       236,663       94,097       31,458             362,218  
 
 
(1) Mr. Giles commenced employment with the Company on February 21, 2007.
 
(2) Mr. Preslar commenced employment with the Company on May 5, 2008.
 
(3) Mr. Lundberg commenced employment with the Company on February 27, 2007.
 
(4) Mr. Patterson commenced employment with the Company on March 1, 2007.
 
(5) Mr. Rohal commenced employment with the Company on March 1, 2007.


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(6) 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, (including $39,755 associated with a tax “gross up”) travel related expenses incurred traveling from executive’s personal residence and Company’s headquarters, Company contributions to our 401(k) plan, and life insurance premiums paid on behalf of the executive.
 
(9) All Other Compensation for Mr. Lundberg consists of travel related expenses incurred traveling from executive’s personal residence and Company’s headquarters, Company contributions to our 401(k) plan, and life insurance premiums paid on behalf of the executive.
 
(10) All Other Compensation for Mr. Patterson consists of travel related expenses incurred traveling from executive’s personal residence and Company’s headquarters, Company contributions to our 401(k) plan, and life insurance premiums paid on behalf of the executive.
 
(11) All Other Compensation for Mr. Rohal consists of travel related expenses incurred traveling from executive’s personal residence and Company’s headquarters, Company contributions to our 401(k) plan, and life insurance premiums paid on behalf of the executive.
 
(12) All Other Compensation for Mr. Williams consists of a retention bonus of $700,000 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, travel related expenses incurred traveling from executive’s personal residence and Company’s headquarters, Company contributions to our 401(k) plan, and life insurance premiums paid on behalf of the executive.
 
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     (#)(1)     ($)  
 
John Giles
    7/15/08       11,565 (2)     174,503  
Clyde Preslar
    5/05/08       39,600 (3)     597,520  
Paul Lundberg
    7/15/08       4,824 (2)     72,789  
Charles Patterson
    7/15/08       4,824 (2)     72,789  
David Rohal
    7/15/08       4,824 (2)     72,789  
Scott Williams
    7/15/08       4,824 (2)     72,789  
Scott Williams
    1/2/08       27,000 (4)     300,000  
Scott Williams
    1/2/08       36,000 (3)     400,000  
 
 
(1) The numbers in this column give effect to the 90-for-1 stock split of our common stock, which occurred on September 22, 2009.
 
(2) 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.
 
(3) 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%.
 
(4) 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.


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OUTSTANDING EQUITY AWARDS AT 2008 YEAR END
 
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)   ($)(2)
 
John Giles
    486,000 (3)     7,516,800  
      11,565 (4)     178,872  
Clyde Preslar
    39,600 (5)     612,480  
Paul Lundberg
    32,400 (6)     501,120  
      4,824 (4)     74,611  
Charles Patterson
    32,400 (7)     501,120  
      4,824 (4)     74,611  
David Rohal
    32,400 (7)     501,120  
      4,824 (4)     74,611  
Scott Williams
    32,400 (8)     501,120  
      4,824 (4)     74,611  
 
(1) The numbers in this column give effect to the 90-for-1 stock split of our common stock, which occurred on September 22, 2009.
 
(2) 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.
 
(3) Represents restricted shares which vest in annual installments as follows: 15% on February 20, 2009, 25% on February 20, 2010, 25% on February 20, 2011 and 25% on February 20, 2012.
 
(4) Represents restricted shares which vest in equal annual installments on April 1, 2009, April 1, 2010 and April 1, 2011.
 
(5) Represents restricted shares which vest in annual installments as follows: 10% on May 1, 2009, 15% on May 1, 2010, 25% on May 1, 2011, 25% on May 1, 2012 and 25% on May 1, 2013.
 
(6) Represents restricted shares which vest in annual installments as follows: 15% on April 1, 2009, 25% on April 1, 2010, 25% on April 1, 2011 and 25% on April 1, 2012.
 
(7) Represents restricted shares which vest in annual installments as follows: 15% on March 21, 2009, 25% on March 21, 2010, 25% on March 21, 2011 and 25% on March 21, 2012.
 
(8) Represents restricted shares which vest in annual installments as follows: 15% on June 1, 2009, 25% on June 1, 2010, 25% on June 1, 2011 and 25% on June 1, 2011.
 
2008 OPTION EXERCISES AND STOCK VESTED
 
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(2)
 
    (#)(1)     ($)  
 
John Giles
    54,000       656,400  
Clyde Preslar
           
Paul Lundberg
    3,600       46,680  
Charles Patterson
    3,600       46,680  
David Rohal
    3,600       46,680  
Scott Williams
    3,600       54,320  
 
 
(1) The numbers in this column give effect to the 90-for-1 stock split of our common stock, which occurred on September 22, 2009.
 
(2) 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.


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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
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.


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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 180 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 three 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-


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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.


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PRINCIPAL AND SELLING STOCKHOLDERS
 
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 90-for-1 stock split of our common stock that occurred on September 22, 2009 and 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 (as adjusted to reflect the 90-for-1 stock split). The percentage of beneficial ownership of our common stock after this offering is based on           shares of common stock issued and outstanding (as adjusted to reflect the 90-for-1 stock split). 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, Florida 32256.
 
(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.


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(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 York 10105. 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.


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DESCRIPTION OF CERTAIN INDEBTEDNESS
 
ABL Revolver
 
Overview
 
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


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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