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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d)of the
Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from_______to______
Commission File No. 0-20847
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--------------------
GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0984624
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
71 Lewis Street, Greenwich, Connecticut 06830
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(203) 629-3722
- --------------
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- ------------------- -------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
-------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. []
Aggregate market value of Class A Common Stock and Class B Common Stock held by
non-affiliates based on closing price on March 25, 1997: $112,271,808.
Shares of common stock outstanding as of the close of business on
March 25, 1997:
Class Number of Shares Outstanding
- ----- ----------------------------
Class A Common Stock 4,399,832
Class B Common Stock 846,556
Documents incorporated by reference and the Part of the Form 10-K into which
they are incorporated are listed hereunder.
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
- ----------------- ----------------------------------
Part III, Items 10, 11, 12 and 13 Registrant's proxy statement to be
issued in connection with the Annual
Meeting of the Stockholders of the
Registrant to be held on May 20, 1997.
The remainder of this page is intentionally left blank.
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PART I
ITEM 1. BUSINESS
Genesee & Wyoming Inc. (the "Registrant" or the "Company") is a holding
company whose subsidiaries own and operate short line and regional freight
railroads and provide related rail services. The Company, through its
industrial switching subsidiary, also provides railroad switching and related
services to North American industries with extensive railroad facilities within
their complexes. The Company's predecessor, Genesee and Wyoming Railroad
Company, was founded in 1899 by E.L. Fuller and his partners. From its founding
through 1977, the Company was dependent on a single commodity, salt, produced by
a single customer. In 1977, when Mortimer B. Fuller, III purchased a
controlling interest in the Company and became its Chief Executive Officer, the
Company generated $3.9 million in operating revenues over its 14 miles of track.
In 1978, under the leadership of Mr. Fuller, the Company began a strategy of
diversifying its sources of revenues, initially in the railcar leasing business
and then through rail line acquisitions and most recently, through the
acquisition of Rail Link, Inc., which provides railroad switching and related
services. As a result of the Company's acquisition and marketing strategies,
the Company has become a diversified rail operation extending over approximately
1,500 miles of track in nine states. With the addition of the recently acquired
industrial switching subsidiary, the Company now serves over 300 customers in 15
states.
INDUSTRY OVERVIEW
The railroad industry in the United States has undergone significant
change since the passage of the Staggers Rail Act of 1980 (the "Staggers Rail
Act"), which deregulated the pricing and types of services provided by
railroads. Since 1980, Class I railroads in the United States and Canada have
taken aggressive steps to improve profitability and recapture market share. In
furtherance of that goal, these Class I railroads have focused their management
and capital resources on their long-haul core systems, and certain of them have
sold branch lines to smaller and more cost-efficient rail operators that are
willing to commit the resources necessary to meet the needs of the shippers
located on these lines. Divestment of branch lines enables Class I carriers to
minimize incremental capital expenditures, concentrate traffic density, improve
operating efficiency and avoid traffic losses associated with rail line
abandonment.
The commitment of Class I carriers to increase efficiency and
profitability has also led to an increase in merger activity among long haul
railroads, such as the mergers between Union Pacific Corporation and Chicago and
North Western Holdings Corp., Burlington Northern Inc. and Santa Fe Pacific
Corporation, Union Pacific Corporation and Southern Pacific Rail Corporation
and, most recently, the pending merger or split up of Consolidated Rail
Corporation with or between Norfolk Southern Corp. and CSX Transportation, Inc.
These consolidations present both risk and opportunity for the Company. The
acquisition of Conrail may impact the Company's Northeast region. Until the
details of these consolidations reach greater clarity, the Company is unable to
determine the impact on its operations, particularly in the Northeast.
The Company believes that there will continue to be opportunities to
acquire lines from Class I railroads in the United States and that there may
3
be opportunities to make acquisitions among the over 500 existing short line and
regional railroads. The Company believes there may be acquisition opportunities
in Canada and Mexico as well, although governmental regulations may limit
acquisition opportunities in these countries. Both Canadian National Railway
Company and Canadian Pacific Limited have divestment programs, and Mexico has
announced a privatization program of the National Railroad of Mexico which could
include the disposition of rail lines.
STRATEGY
The Company's strategy is to become the dominant provider of rail freight
transportation in the markets it serves by (i) growing its business through
acquisitions to establish new regions or increase its presence in existing
regions, (ii) expanding its revenue base within each region through marketing
efforts, and (iii) improving its operating efficiency through rationalization
and consolidation of overhead expenses. The Company's growth to date has been
the result of the acquisition of rail properties, which has expanded the
Company's customer base and diversified its commodity mix, and its marketing
efforts.
Acquisition of Rail Properties
The Company seeks to expand its business through the selective acquisition
of rail properties, both in new regions and in regions in which it currently
operates. The Company's fundamental acquisition strategy is to identify
properties that have large industrial customers which will provide the Company
with a stable revenue base and the potential to generate incremental revenues
and additional customers upon implementation of a focused marketing plan. In
new regions, the Company targets rail properties that have adequate size to
establish a presence in the region, provide a basis for growth in the region and
attract qualified management. When acquiring rail properties in its existing
regions, in addition to seeking properties with large industrial customers, the
Company targets rail properties where it believes the successful implementation
of its operating strategy is likely to generate significant operating
efficiencies.
In evaluating acquisition opportunities, the Company considers, among
other matters, the size of the rail operations, opportunities for expansion,
commodity and customer diversification, revenue stability, connecting carriers,
track condition and maintenance requirements, and expected financial returns.
The Company also considers acquisition opportunities that have the potential to
enable its railroads to provide better or more cost-effective service to major
shippers or to increase and diversify the overall customer base of its
railroads. The Company develops acquisition prospects through its relationships
with Class I carriers and its reputation in the industry. In addition, the
Company currently has four consultants on retainer to assist in the
identification and development of acquisition opportunities. The Company has
successfully integrated twelve acquisitions of varying sizes and operating
characteristics, of which four were existing short lines, seven were Class I
divestitures and one was an industrial switching company with three wholly-owned
subsidiary companies.
The Company acquires rail properties by purchase of assets, or is able to
serve a market through lease or operating contract. Typically, the Company bids
against other short line and regional operators for available properties. The
structure of each transaction is determined based upon economic and strategic
considerations. In addition to the financial terms of the transaction, sellers
consider more subjective criteria such as a prospective acquiror's operating
experience, its reputation among shippers, and its
4
ability to close a transaction and commence operations smoothly. The Company
believes it has established an excellent record in each of these areas. In
addition, by growing revenues on its acquired lines and providing improved
service to shippers, the Company is able to provide increased revenue to the
Class I carriers that connect with its lines. The Company sees this ability to
provide increased revenue to Class I carriers as an advantage in bidding for
properties.
Marketing
The Company's marketing strategy is to build each region on a base of
major industrial customers, to grow that base business through marketing efforts
directed at its major customers and to generate incremental revenues outside the
base of major customers by attracting smaller customers and providing ancillary
services which generate non-freight revenues. The Company believes that over
the long term, its strategy of building its regions around a core of major
industrial customers provides a stable revenue base and allows the Company to
focus its efforts on additional growth opportunities within a region. Of the 13
customers that generated freight revenues in excess of $1 million in 1996, all
but four depend exclusively on the Company for rail service to support their
facilities, and the Company believes that each of these facilities is
strategically important to the respective customers. While the other four
customers are not dependent on the Company, the Company's railroads provide the
best route for them to move their products by rail. Through implementation of
its marketing strategy, the Company intends to increase further the number of
major customers so that, over time, the Company's reliance on any one customer
will be reduced.
Consistent with its decentralized management structure, the Company's
sales and marketing activity is coordinated in each region by a marketing
manager. The marketing manager works closely with personnel of each of the
Company's railroads and with other department heads to develop marketing plans
to increase shipments from existing customers and develop new business. The
Company focuses on providing rail service to its customers that is easily
accessible, reliable and cost-effective. The Company considers all of its
employees to be customer service representatives and encourages them to initiate
and maintain regular contact with shippers.
Because most of the traffic transported by the Company's railroads is
interchanged with Class I carriers, the Company's marketing efforts are often
aimed at enhancing its railroads' relationships with Class I carriers as well as
shippers. The Company provides related rail services such as railcar leasing,
railcar repair, switching, storage, weighing and blocking and bulk transfer,
which enable Class I carriers and customers to move freight more easily and
cost-effectively. For example, the Company supplies cars to its customers or
its railroads when, among other things, a customer has a need which cannot be
filled by cars supplied by Class I railroads or the Company has an opportunity
to provide cars on a cost basis that both meets customer needs and improves the
economics of a freight move to the Company. The Company actively manages its
railcar portfolio, buying and selling equipment to take advantage of changes in
market value in conjunction with changes in its customers needs.
Operations
The Company's operating strategy is to increase efficiency and
profitability in each region in which it operates. When acquiring new rail
properties within an existing region, the Company capitalizes on operating
efficiencies created by the presence of its other railroads within that
5
region. For example, in connection with its Pittsburg & Shawmut acquisition, the
Company will be able to liquidate 42 miles of track and sell a number of
locomotives and railcars. In addition, consolidation of revenue and accounting
functions often allows the Company to operate new railroads with fewer
employees, as was the case with both its Illinois & Midland and Pittsburg &
Shawmut acquisitions. The Company rationalizes its track, where appropriate, to
make its operations more efficient. Abandonments are planned on Buffalo &
Pittsburgh, Louisiana & Delta and Pittsburg & Shawmut in 1997. The Company also
seeks and grants trackage rights to improve regional rail infrastructure
efficiency.
The Company intends to continue to improve the operating efficiency of its
railroads by track rehabilitation, especially where maintenance has been
deferred by the prior owner. Because of the importance of certain of the
Company's shippers to the economic stability and/or development of the regions
where they are located, and because of the importance of certain of the
Company's railroads to the economic infrastructure of those regions,
approximately $18.2 million in state and federal grants for track rehabilitation
and service improvements has been invested in the Company's rail properties
since 1987.
RAILROAD OPERATIONS
Management
The Company's decentralized management structure is an important element
of its railroad operations. The Company's Chief Executive Officer and Chief
Financial Officer have responsibility for overall strategic and financial
planning. Significant operational discretion is given to local management of
the Company's railroads, with each regional Senior Vice President responsible
for implementing a strategic plan for the region reflected in annual budgets,
monitored through quarterly reviews and reinforced by incentive compensation
tied to results. Regional Senior Vice Presidents and local managers also have
specific operational objectives for continuous improvement such as reducing car
hire expense or on-the-job lost time injuries. The plan for each region is
updated annually. Each railroad is given significant freedom in pricing,
staffing, purchasing, marketing and operations, enabling the railroad's
management to be more responsive to customer needs and emerging business
opportunities. Managers from all regions meet periodically to discuss
operational matters such as marketing, safety and locomotive acquisition and
maintenance. Senior management of the Company also meets monthly to review each
railroad's operations.
The Company believes that through its decentralized management structure
it has developed a culture that encourages employees to take initiative and
responsibility which is rewarded through performance-based profit sharing and
bonus programs.
Customers
The Company's railroads and switching operations currently serve over 300
customers. A large portion of the Company's operating revenues is attributable
to customers operating in the electric utility, forest products, petroleum and
salt industries. As the Company acquires new railroad operations, the base of
customers and industries served continues to grow and diversify. The largest
ten customers, which is a group that changes annually, accounted for
6
approximately 53%, 50% and 49% of the Company's revenues in 1994, 1995 and 1996,
respectively. In 1996, the Company's largest customer was Commonwealth Edison,
an electric utility, which accounted for approximately 18% of operating
revenues. Through 1995, the Company's largest customer was Akzo Nobel Salt,
Inc. ("Akzo"), which accounted for approximately 12% of operating revenue in
1994, 9% in 1995 and 4% in 1996. Since 1994, revenues from Akzo have been
negatively affected by the flooding of the Akzo mine. See Item 7. of this
Report under the heading "Akzo Mine". The Company typically ships freight
pursuant to transportation contracts among the Company, its connecting carriers
and the shipper. These contracts are in accordance with industry norms and vary
in duration from one to seven years.
Commodities
The Company's railroads transport a wide variety of commodities for their
customers. Some of the Company's railroads have a well-diversified commodity
mix while others transport one or two principal commodities. In 1996, coal,
coke and ores and petroleum products were the two largest commodity groups
transported by the Company's railroads, constituting 32.7% and 13.9%,
respectively, of total freight revenues (see Item 7. of this Report under the
heading "Results of Operations - Year Ended December 31, 1996 Compared to Year
Ended December 31, 1995"), and 40.5% and 8.8%, respectively, of total carloads.
The following table summarizes the aggregate traffic volume of the Company's
railroads by commodity group:
CARLOADS CARRIED BY COMMODITY GROUP
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- --------------------------
Carloads % of total Carloads % of total
Commodity Group ---------- ---------- ----------------- ----------
- --------------------------
Coal, Coke & Ores 81,606 40.5% 12,398 10.5%
Petroleum Products 17,549 8.8% 17,559 14.8%
Pulp & Paper 19,480 9.7% 18,667 15.7%
Lumber & Forest Products 17,135 8.5% 14,022 11.8%
Metals 20,218 10.0% 17,014 14.3%
Chemicals 8,289 4.1% 6,641 5.6%
Farm & Food Products 11,402 5.7% 5,778 4.9%
Autos & Auto Parts 6,301 3.1% 6,381 5.4%
Minerals & Stone 6,766 3.4% 4,189 3.5%
Salt 2,300 1.1% 7,865 6.6%
Other 10,261 5.1% 8,159 6.9%
------- ----- ------- -----
Total 201,307 100.0% 118,673 100.0%
======= ===== ======= =====
Coal, coke and ores consist primarily of shipments of coal to utilities
and industrial customers.
Petroleum products consist primarily of fuel oil and crude oil.
Pulp and paper consist primarily of inbound shipments of pulp and outbound
shipments of kraft and fine papers.
Lumber and forest products consist primarily of finished lumber used in
construction, particleboard used in furniture manufacturing, and wood chips and
pulpwood used in paper manufacturing.
Metals consist primarily of scrap metal and finished steel products
shipped to and from two steel mills, and coated pipe.
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Chemicals consist primarily of various chemicals used in manufacturing.
Farm and food products consist primarily of sugar, molasses, rice and
other grains and fertilizer.
Autos and auto parts consist primarily of finished automobiles.
Minerals and stone consist primarily of gravel and stone used in
construction.
Salt consists of mined rock salt used for roadway ice control.
Rail Traffic
Rail traffic is classified as on-line or overhead traffic. On-line
traffic is traffic that either originates or terminates with shippers located on
a railroad and is interchanged with another rail carrier. On-line traffic that
both originates and terminates on a railroad is referred to as local traffic.
Overhead traffic neither originates nor terminates on a railroad, but rather
passes over a railroad from one connecting carrier to another.
The Company believes that on-line shipments provide it with a stability of
revenues because such traffic represents shipments to or from shippers located
along its lines which cannot easily be diverted to other rail carriers. While
overhead traffic is more easily diverted, it is less costly to handle. To
offset the potential for diversion of overhead traffic, the Company has sought
long-term contracts on its significant overhead traffic. In 1996, approximately
two-thirds of GWI's overhead traffic was transported under such multi-year
contracts. In 1996, 8.9% of freight revenues was generated by overhead traffic
compared to 12.8% in 1995.
The following table summarizes freight revenues by type of traffic carried
by the Company's railroads.
FREIGHT REVENUES BY TRAFFIC TYPE
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ------------------
TRAFFIC TYPE AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ------------ ------ --------- --------- ----------
On-line
Originated $19,796 31.8% $16,770 39.6%
Terminated 31,492 50.5% 17,104 40.4%
Local 5,507 8.8% 3,068 7.2%
------- ----- ------- -----
Total On-line 56,795 91.1% 36,942 87.2%
Overhead 5,521 8.9% 5,410 12.8%
------- ----- ------- -----
Total Traffic $62,316 100.0% $42,352 100.0%
======= ===== ======= =====
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Safety
GWI's safety program involves all employees and focuses on the prevention
of accidents and injuries. The Senior Vice President of each region is
accountable for the results of the program, and each has an officer responsible
for day-to-day program administration. Line supervisors have direct
responsibility for the safety and training of their personnel.
The Company maintains a corporate-wide safety policy facilitated by a
full-time Safety Director. The Company's safety program also gives each
railroad the flexibility to develop its own safety rules based on local
requirements or practices. Each railroad complies fully with all federal, state
and local government regulations. Operating personnel are trained and certified
in train operations, hazardous materials handling, proper radio procedures and
all other areas subject to governmental rules and regulations.
The Company also participates in governmental and industry sponsored
safety programs. Members of the Company's management serve on the Board of
Directors of Operation Lifesaver (the national grade crossing awareness
program), the New Program Committee of Operation Lifesaver and the American
Short Line Railroad Association Safety Committee. In addition, the Company has
a working team consisting of the safety officers from each railroad. This team
is charged with ongoing development and refinement of the Company's safety
program and coordination with each railroad to insure compliance with and
implementation of all safety rules and regulations.
Employees
As of December 31, 1996, the Company had 690 full-time employees. Of this
total, 139 are members of national labor organizations. The Company has eight
contracts with these national labor organizations which have expiration dates
ranging from August 1997 to June 1999. The Company has also entered into
collective bargaining agreements with an additional 68 employees who represent
themselves, all of which expire in 1999.
In March 1994, approximately 40 employees of one of the Company's
railroads began an illegal work stoppage to protest the use of management on
train crews. A temporary restraining order was issued and the underlying
dispute was subsequently resolved in arbitration. The work stoppage did not
have a material effect on the Company's operations and the Company believes the
work stoppage has not had an adverse effect on its overall employee relations.
The Company has not experienced any other strikes or work stoppages for over 20
years. The Company believes that its railroads' relations with their employees
are good.
INSURANCE
The Company has obtained for each of its railroads insurance coverage for
losses arising from personal injury and for property damage in the event of
derailments or other accidents or occurrences. The liability policies have
self-insured retentions ranging from $25,000 to $250,000 per occurrence. In
addition, the Company maintains an excess liability policy which provides
supplemental coverage for losses in excess of primary policy limits. With
respect to the transportation of hazardous commodities, the Company's liability
policy covers sudden releases of hazardous materials, including expenses related
to evacuation. Personal injuries associated with grade crossing accidents are
also covered under the Company's liability policy. The Company also maintains
all-risk property damage coverage, subject to a
9
standard pollution exception and self-insured retentions ranging from $10,000 to
$250,000.
Employees of the Company's railroads are covered by the Federal Employers'
Liability Act ("FELA"), a fault-based system under which injuries and deaths of
railroad employees are settled by negotiation or litigation based on the
comparative negligence of the employee and the employer. FELA-related claims are
covered under the Company's liability insurance policies.
The Company believes its insurance coverage is adequate in light of its
experience and the experience of the rail industry. However, there can be no
assurance as to the adequacy, availability or cost of insurance in the future.
COMPETITION
In acquiring rail properties, the Company competes with other short line
and regional railroad operators, some of which are larger and have greater
financial resources than the Company. Competition for rail properties is based
primarily upon price, operating history and financing capability. The Company
believes its established reputation as a successful acquiror and operator of
short line rail properties, in combination with its managerial and financial
resources, effectively positions it to take advantage of acquisition
opportunities.
Each of the Company's railroads is typically the only rail carrier
directly serving its customers; however, the Company's railroads compete
directly with other modes of transportation, principally motor carriers and, to
a lesser extent, ship and barge operators. The extent of this competition
varies significantly among the Company's railroads. Competition is based
primarily upon the rate charged and the transit time required, as well as the
quality and reliability of the service provided, for an origin-to-destination
transportation package. To the extent other carriers are involved in
transporting a shipment, the Company cannot control the cost and quality of such
service. Cost reductions achieved by major rail carriers over the past several
years have generally improved their ability to compete with alternate modes of
transportation.
REGULATION
The Company's railroads are subject to regulation by the Surface
Transportation Board ("STB"), the Federal Railroad Administration ("FRA"), state
departments of transportation and some state and local regulatory agencies. The
STB is the successor to certain regulatory functions previously administered by
the Interstate Commerce Commission. Established by the ICC Termination Act of
1995 ("ICCTA"), the STB has jurisdiction over, among other things, service
levels and compensation of carriers for use of their railcars by other carriers.
It also must authorize extension or abandonment of rail lines, the acquisition
of rail lines, and consolidation, merger or acquisition of control of rail
common carriers; in limited circumstances, it may condition such authorization
upon the payment of severance benefits to affected employees. The STB may
review rail carrier pricing only in response to a complaint concerning rates
charged for transportation where there is an absence of effective competition.
The FRA has jurisdiction over safety and railroad equipment standards and also
assists in coordinating projects for railroad route simplification.
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In 1980, the Staggers Rail Act fundamentally changed federal regulatory
policy by emphasizing the promotion of revenue adequacy (the opportunity to earn
revenues sufficient to cover costs and attract capital) for the railroads and
allowing competition to determine to a greater extent rail prices and route and
service options. The ICCTA continues the trend towards limiting regulation of
rail prices. As a result of these changes in legislative policy, the railroad
industry's rate structure has evolved from a system of interrelated prices that
applied over different routes between the same points to a combination of market
based prices that are now subject to limited regulatory constraints. While
federal regulation of rail prices has been significantly curtailed, federal
regulation of services continues to affect profitability and competitiveness in
the railroad industry.
The ICCTA has not been in effect long enough to determine its impact on
the short line and regional railroad industry. In reducing regulation an effect
of the ICCTA may be diminished regulatory recourse for small railroads which
negatively affects their competitive position with their Class I connections.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment, which have
become increasingly stringent. These environmental laws and regulations, which
are implemented principally by the Environmental Protection Agency and
comparable state agencies, govern the management of hazardous wastes, the
discharge of pollutants into the air and into surface and underground waters,
and the manufacture and disposal of certain substances. There are no material
environmental claims currently pending or, to the Company's knowledge,
threatened against the Company or any of its railroads. In addition, the Company
believes that the operations of its railroads are in material compliance with
current laws and regulations. The Company estimates that any expenses incurred
in maintaining compliance with current laws and regulations will not have a
material effect on the Company's earnings or capital expenditures. However,
there can be no assurance that the current regulatory requirements will not
change, or that currently unforeseen environmental incidents will not occur, or
that past non-compliance with environmental laws will not be discovered on the
Company's properties.
ITEM 2. PROPERTIES
The Company currently operates 15 railroads in nine states, of which ten
are owned, four are leased and one is operated under an operating agreement.
The Company's railroads own or lease 1,279 miles of track and operate over an
additional 270 miles pursuant to trackage rights and haulage contracts. These
rail properties typically consist of the track and the underlying land. Real
estate adjacent to the railroad rights-of-way is generally retained by the
seller, and the Company's holdings of such property are not material.
Similarly, the seller typically retains mineral rights and rights to grant fiber
optic and other easements in the properties acquired by the Company's railroads.
The following table sets forth certain information as of December 31, 1996
with respect to the Company's railroads:
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CONNECTING
RAILROAD AND LOCATION TRACK MILES STRUCTURE CARRIERS (1)
- --------------------- ----------- --------- ------------
Allegheny & Eastern
Railroad, Inc. ("ALY") 153 (2) Owned BPRR, CR
Pennsylvania
Bradford Industrial
Railroad, Inc. ("BR") New 4 (3) Owned BPRR, CR
York, Pennsylvania
Buffalo & Pittsburgh
Railroad, Inc. ("BPRR") 279 (4) Owned/Leased ALY, BLE, BR,
New York, Pennsylvania CN, CPRS, CR,
CSX, NS, PS,
RSR, SB
The Dansville & Mount
Morris Railroad Company 8 Owned GNWR
("DMM") New York
Genesee and Wyoming
Railroad Company ("GNWR") 26 (5) Owned (5) CPRS, CR, DMM,
New York RSR
Pittsburg & Shawmut
Railroad, Inc. ("PS") 224 (6) Owned BPRR, CR
Pennsylvania
Rochester & Southern
Railroad, Inc. ("RSR") 66 (7) Owned BPRR, CPRS, CR,
New York GNWR, NS
Illinois & Midland
Railroad, Inc. ("IMR") 97 (8) Owned BNSF, CR, GWWR,
Illinois IAIS, IC, NS,
PPU, TPW, UP
Portland & Western
Railroad, Inc. ("PNWR") 107 (9) Leased BNSF, SP, WPRR,
Oregon POTB
Willamette & Pacific
Railroad, Inc. ("WPRR") 185 (10) Leased UP, PNWR
Oregon
Louisiana & Delta
Railroad, Inc. ("LDRR") 87 (11) Owned/Leased UP
Louisiana
GWI Switching Services,
L.P. ("GWSW") Texas 0 (12) Operating UP
Agreement
Carolina Coastal Railway,
Inc. ("CLNA") North 17 (13) Leased NS
Carolina
Commonwealth Railway, Inc.
("CWRY") Virginia 17 (14) Owned/Leased NS
Talleyrand Terminal
Railroad ("TTR") Florida 10 (15) Leased NS, CSX
(1) See Legend of Connecting Carriers following this table.
(2) In addition, ALY operates by trackage rights over 3 miles of CR.
(3) In addition, BR operates by trackage rights over 14 miles of BPRR.
(4) Includes 92 miles under perpetual leases and 9 miles under a lease expiring
in 2090. In addition, BPRR operates by trackage rights over 27 miles of CSX
under an agreement expiring in 2018.
(5) Track has been conveyed to a county industrial development agency and
leased back to GNWR. The operations of the GNWR have been realigned with
those of RSR. See Item 7. of this report.
(6) In addition, PS operates over 13 miles pursuant to an operating contract.
The assets of PS were acquired on April 29, 1996.
(7) In addition, RSR has a haulage contract over 52 miles of CP.
(8) In addition, IMR operates by trackage rights over 15 miles of IC, 9 miles of
PPU and 5 miles of UP. The assets of IMR were acquired on February 8, 1996.
(9) Includes 53 miles under lease expiring in 2015 with a 10-year renewal unless
terminated by either party, and 54 miles under lease expiring in 1998 with
3-year renewals subject termination by either party. In addition, PNWR
operates by trackage rights to over 2 miles of UP and 4 miles of POTB.
(10) All under lease expiring in 2013, with renewal options subject to both
parties' consent. In addition, WPRR operates over 41 miles of UP under a
concurrent trackage rights agreement.
(11) Includes 14 miles under a lease expiring in 2011. In addition, LDRR
operates by trackage rights over 91 miles of UP under an agreement
terminable by either party after 1997 and has a haulage contract with M.A.
Patout & Sons over 4 miles of track.
(12) GWSW operates a Dayton, Texas plastic pellet car storage yard under a
contract expiring in 2009, subject to a 5-year extension at UP's option.
The yard is located on over 100 acres
12
along UP's Baytown branch and contains over 50 miles of track. GWSW
operates over 5 miles of UP under trackage rights to move the cars to and
from the storage yard and UP's Dayton rail yard. The yard currently has
capacity to hold 3,000 cars and can be expanded, at UP's option, to hold
approximately 4,500 cars.
(13) All leased on a month-to-month basis under a Lease and Option to Purchase
Agreement which commenced in 1989. The Company acquired CLNA on November
9, 1996.
(14) Includes 12.5 miles under lease expiring in 2009. The Company acquired CWRY
on November 9, 1996.
(15) All under lease expiring in 1999. The Company acquired TTR on November 9,
1996.
LEGEND OF CONNECTING CARRIERS
BLE Bessemer and Lake Erie Railroad Company
BNSF Burlington Northern Santa Fe Corp.
CN Canadian National
CPRS CP Rail Systems
CR Consolidated Rail Corporation
CSX CSX Transportation, Inc.
GWWR Gateway Western Railway
IAIS Iowa Interstate Railroad, Ltd.
IC Illinois Central Railroad Company
KJRY Keokuk Junction Railway
NS Norfolk Southern Corp.
POTB Port of Tillamook Bay Railroad
PPU Peoria & Pekin Union Railway
SB South Buffalo Railway Company
TPW Toledo, Peoria & Western Railway Corp.
UP Union Pacific Railroad Company
EQUIPMENT
As of December 31, 1996, rolling stock of the Company's railroads
consisted of 174 locomotives and 1,388 freight cars, some of which were owned
and some of which were leased from others.
ITEM 3. LEGAL PROCEEDINGS
The Company currently has no claims or legal actions pending other than
claims arising in the ordinary course of its business. The Company believes
these claims, taking into account reserves and applicable insurance, will not
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On June 24, 1996, the Company's Class A Common Stock began trading and is
quoted on the Nasdaq National Market. Its trading symbol is GNWR. The table
below shows the range of high and low actual trade prices for the Company's
Class A Common Stock during each quarterly period of 1996 since its initial
public offering.
13
Year Ended
December 31, 1996 High Low
- ----------------------- ------ ------
1st Quarter N/A N/A
2nd Quarter $21.00 $18.25
3rd Quarter $30.50 $18.50
4th Quarter $35.75 $25.25
The Company's Class B Common Stock is not publicly traded.
Prior to the initial public offering on June 24, 1996, the Company paid
dividends in the first quarter of 1996 aggregating $32,000. The Company did not
pay cash dividends in the remaining three quarters of 1996. The Company does
not intend to pay cash dividends for the foreseeable future and intends to
retain earnings, if any, for future operation and expansion of the Company's
business. Any determination to pay dividends in the future will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board of Directors. Agreements with
lenders prohibit the Company from paying cash dividends on its common stock in
excess of $32,000 in the aggregate in any one quarter.
On March 25, 1997 there were 86 holders of record of the Company's Class A
Common Stock and 13 holders of record of the Company's Class B Common Stock.
During 1996 the Company issued the following securities which were not
registered under the Securities Act of 1933, as amended (the "Act"). Each of
such issuances was made by private offering in reliance on the exemption from
the registration provisions of the Act provided by Section 4(2) of the Act:
(1) On February 8, 1996 (prior to its initial public offering), the
Company issued to The First National Bank of Boston, for a debt discount value
of $471,000, a warrant to purchase 41,847 shares of Class A Common Stock at an
exercise price of $.0005 per share. See Item 7. of this Report under the
heading "Liquidity and Capital Resources."
(2) On June 24, 1996, the Company issued to an aggregate of 82 of its
employees, for no additional consideration, options under the Genesee & Wyoming
Inc. 1996 Stock Option Plan (the "Option Plan") to purchase an aggregate of
350,500 shares of Class A Common Stock at exercise prices ranging from $17.00
per share to $18.70 per share. The shares issuable upon exercise of such
options are the subject of a Registration Statement on Form S-8 under the Act.
(3) On June 27, 1996 the Company issued to its four non-employee
directors, for no additional consideration, options under the Genesee & Wyoming
Inc. Stock Option Plan for Outside Directors to purchase an aggregate of 32,000
shares of Class A Common Stock at an exercise price of $17.00 per share. The
shares issuable upon exercise of such options are the subject of a Registration
Statement on Form S-8 under the Act.
(4) On December 19, 1996, the Company issued to an aggregate of 24 of its
employees, for no additional consideration, options under the Option Plan to
purchase an aggregate of 39,000 shares of Class A Common Stock at an exercise
price of $33.25 per share. The shares issuable upon exercise of such options
are the subject of a Registration Statement on Form S-8 under the Act.
14
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated income statement data and selected
consolidated balance sheet data of the Company for the years ended December 31,
1992, 1993, 1994, 1995 and 1996, have been derived from the Company's
consolidated financial statements. All of the information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. See also Item 7. of this
Report.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
INCOME STATEMENT DATA:
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
Operating revenues $32,940 $49,645 $55,419 $53,387 $ 77,795
Operating expenses 30,192 43,501 47,381 46,815 63,801
------- ------- ------- ------- --------
Operating income 2,748 6,144 8,038 6,572 13,994
Interest expense (2,319) (2,864) (3,212) (3,405) (4,720)
Other income 643 165 192 456 651
------- ------- ------- ------- --------
Income before income taxes,
extraordinary item and cumulative
effect of accounting change 1,072 3,445 5,018 3,623 9,925
Income taxes (435) (1,428) (2,007) (1,472) (4,020)
------- ------- ------- ------- --------
Income before extraordinary item and
cumulative effect of accounting change
637 2,017 3,011 2,151 5,905
Extraordinary item -- -- -- (494) --
Cumulative effect of accounting change
(1) -- (393) -- -- --
------- ------- ------- ------- --------
Net income $ 637 $ 1,624 $ 3,011 $ 1,657 $ 5,905
======= ======= ======= ======= ========
Earnings per common share:
Income before extraordinary item and
cumulative effect of accounting change
$ 0.28 $ 0.88 $ 1.31 $ 0.92 $ 1.49
Extraordinary item -- -- -- (0.21) --
Cumulative effect of accounting change
(1) -- (0.18) -- -- --
Net income $ 0.28 $ 0.70 $ 1.31 $ 0.71 $ 1.49
======= ======= ======= ======= ========
Dividends per common share (2) $ 0.05 $ 0.05 $ 0.03 $ 0.08 $ 0.01
======= ======= ======= ======= ========
Weighted average number of common
shares outstanding 2,258 2,304 2,304 2,348 3,966
======= ======= ======= ======= ========
BALANCE SHEET DATA AS OF PERIOD END:
Total assets $56,965 $63,653 $69,888 $78,429 $145,339
Total debt 32,109 35,095 32,640 39,941 18,731
Stockholders' equity 4,575 6,074 9,082 10,548 61,683
(1) Represents the adoption, as of January 1, 1993, of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions."
(2) Prior to the initial public offering on June 24, 1996, the Company paid
dividends at the discretion of the Company's Board of Directors. The
Company did not pay cash dividends after the initial public offering. The
Company does not intend to pay cash dividends for the foreseeable future
and intends to retain earnings, if any, for future operation and expansion
of the Company's business.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included elsewhere in this
Annual Report on Form 10-K.
GENERAL
The Company is a holding company whose subsidiaries own and operate short
line and regional freight railroads and provide related rail services. The
Company, through its industrial switching subsidiary, also provides railroad
switching and related services to North American industries with extensive
railroad facilities within their complexes. The Company generates revenues
primarily from the movement of freight over track owned or operated by its
railroads. The Company also generates non-freight revenues primarily by
providing industrial switching and related rail services such as railcar
leasing, railcar repair and storage to industries with extensive railroad
facilities within their complexes, to shippers along its lines and to the Class
I railroads that connect with its lines.
The Company's operating expenses include wages and benefits, equipment
rents (including car hire), purchased services, depreciation and amortization,
diesel fuel, casualties and insurance, materials and other expenses. Car hire
is a charge paid by a railroad to the owners of railcars used by that railroad
in moving freight. Other expenses generally include property and other non-
income taxes, professional services, communication and data processing costs and
general overhead expense.
When comparing the Company's results of operations from one reporting
period to another, the following factors should be taken into consideration.
The Company has historically experienced fluctuations in revenues and expenses
such as one-time freight moves, customer plant expansions and shut-downs,
railcar sales, accidents and derailments. In periods when these events occur,
results of operations are not easily comparable to other periods. In addition,
much of the Company's growth to date has resulted from acquisitions. The
Company completed the acquisitions of the Illinois & Midland and Pittsburg &
Shawmut Railroads during the first four months of 1996, and Rail Link, Inc. in
November 1996. Because of variations in the structure, timing and size of these
acquisitions and differences in economics among the Company's railroads
resulting from differences in the rates and other material terms established
through negotiation, the Company's results of operations in any reporting period
may not be directly comparable to its results of operations in other reporting
periods.
AKZO MINE
Prior to 1995, the Company's major customer was Akzo, which operated a
rock salt mine in Retsof, New York. In March 1994 a section of the mine's roof
collapsed, causing flooding from an underground aquifer, and the mine closed in
September 1995. Akzo actively pursued construction of a new mine throughout
1995, but in April 1996 it announced that it was abandoning the mine project and
that the Retsof location would be converted to a rock salt distribution center.
In August 1996 Akzo announced its intentions to sell all of its North American
mining operations, with the exception of the Retsof mine, to one of its
competitors, effectively ending the plan for a
16
distribution center. The subsidiary serving the Akzo mine has experienced a
significant decline in traffic and in the fourth quarter of 1996 the Company
realigned its operations and decided to close certain supporting facilities.
Thus, the Company has recorded a special charge representing the impairment of
assets of $1,140,000 and employee severance and pension termination expense of
$220,000. This special charge, which was recorded in the fourth quarter, is in
the amount of $1,360,000 before tax and $809,000 after tax, or $0.20 per share.
On February 11, 1997 an investment group announced a plan to acquire all
rights of Akzo and build a new mine in the Retsof area. According to the
investment group, development of this mine is contingent upon obtaining adequate
financing and regulatory approvals and permits. Because of the nature of the
proposed mine and the Company's realignment of operations, the supporting
facilities which are subject to this special charge will not be needed in any
future potential rail operations.
Freight revenues attributable to Akzo totaled $2.9 million in 1994, $1.9
million in 1995 and $62,000 in 1996. The Company anticipates there will be no
freight revenues attributable to Akzo in 1997 and thereafter. The flooding and
subsequent closure have not affected non-freight revenues from Akzo, which
consist primarily of income from railcar leases under long-term contracts. Non-
freight revenues from Akzo totaled $3.6 million in 1994, $2.9 million in 1995
and $3.4 million in 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenues
Operating revenues were $77.8 million in 1996 compared to $53.4 million in
1995, an increase of $24.4 million or 45.7%. This increase was attributable to
a $19.9 million increase in freight revenues coupled with a $4.5 million
increase in non-freight revenues.
Freight revenues were $62.3 million in 1996 compared to $42.4 million in
1995, an increase of $19.9 million or 46.9%. The following table compares
freight revenues, carloads and average freight revenues per carload for 1996 and
1995:
The remainder of this page is intentionally left blank.
17
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
AVERAGE
FREIGHT
REVENUES
FREIGHT REVENUES CARLOADS PER CARLOAD
---------------- -------- -----------
% of % of % of % of
Commodity Group 1996 total 1995 total 1996 total 1995 total 1996 1995
- --------------- ------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Coal, Coke & Ores $20,368 32.7% $ 2,656 6.3% 81,606 40.5% 12,398 10.5% $ 250 $ 214
Petroleum Products 8,679 13.9% 8,487 20.0% 17,549 8.8% 17,559 14.8% 495 483
Pulp & Paper 7,223 11.6% 6,797 16.1% 19,480 9.7% 18,667 15.7% 371 364
Lumber & Forest
Products 5,302 8.5% 4,496 10.6% 17,135 8.5% 14,022 11.8% 309 321
Metals 5,211 8.4% 4,459 10.5% 20,218 10.0% 17,014 14.3% 258 262
Chemicals 4,317 6.9% 3,321 7.9% 8,289 4.1% 6,641 5.6% 521 500
Farm & Food Products 3,537 5.7% 2,756 6.5% 11,402 5.7% 5,778 4.9% 310 477
Autos & Auto Parts 3,316 5.3% 3,490 8.2% 6,301 3.1% 6,381 5.4% 526 547
Minerals & Stone 2,185 3.5% 1,407 3.3% 6,766 3.4% 4,189 3.5% 323 336
Salt 387 0.6% 2,215 5.2% 2,300 1.1% 7,865 6.6% 168 282
Other 1,791 2.9% 2,268 5.4% 10,261 5.1% 8,159 6.9% 175 278
------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Total $62,316 100.0% $42,352 100.0% 201,307 100.0% 118,673 100.0% $ 310 $ 357
======= ===== ======= ===== ======= ===== ======= ===== ===== =====
The increase in freight revenues was largely attributable to the
operations on new acquisitions, which generated freight revenues of $19.0
million during 1996, $17.1 million of which were from the shipment of coal.
Freight revenue from the shipment of coal on existing operations also increased
by approximately $600,000. The Company realized $1.8 million in additional
freight revenues in 1996 attributable to the acquisition in 1995 of a rail line
in the Oregon region which generated freight revenues of $2.5 million in 1996
compared to $673,000 in 1995. The majority of this $1.8 million increase in the
Oregon region is in lumber and forest products, farm and food products, metals
and other commodities. The overall increase in freight revenues was partially
offset by a $1.8 million decrease in freight revenues from the shipment of salt
to $387,000 in 1996 from $2.2 million in 1995. This decrease was attributable
to the loss of shipments resulting from the closing of the Akzo mine at Retsof,
New York. See "Akzo Mine" in this Item 7.
Non-freight revenues were $15.5 million in 1996 compared to $11.0 million
in 1995, an increase of $4.5 million or 40.9%. Revenues from car hire and car
rentals was $4.5 million in 1996 compared to $3.2 million in 1995, an increase
of $1.3 million or 40.6%. The increase in revenues from car hire and rentals
were largely attributable to the operations on new acquisitions, which generated
car hire and rental revenues of $817,000 during the period. Car hire and rental
revenues on existing operations increased approximately $483,000, primarily from
a gain on the sale of railcars of $593,000. Revenues from switching and storage
activities were $6.2 million in 1996 compared to $3.6 million in 1995, an
increase of $2.6 million or 72.2%. The increase in switching and storage
revenues were largely attributable to the operations on
18
new acquisitions, which generated switching and storage revenues of
approximately $2.3 million during the period.
Operating Expenses
Operating expenses were $63.8 million in 1996 compared to $46.8 million in
1995, an increase of $17.0 million or 36.3%. Expenses associated with new
acquisitions represented $12.8 million of the increase, expenses attributable to
the acquisition in 1995 of a rail line in the Oregon region (which generated
operating expense of $2.6 million in 1996 compared to $711,000 in 1995)
represented $1.9 million of the increase, and expenses on existing operations
represented approximately $2.3 million of the increase.
The Company's operating ratio improved to 82.0% in 1996 from 87.7% in
1995.
The following table sets forth a comparison of the Company's operating
expenses in 1996 and 1995:
OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
1996 1995
------- -------
% OF % OF
OPERATING OPERATING
$ REVENUE $ REVENUE
------- ------- ------- -------
Labor and benefits $25,197 32.4% $18,683 35.0%
Equipment rents 8,511 10.9% 7,434 13.9%
Purchased services 3,398 4.4% 2,530 4.7%
Depreciation and amortization 6,052 7.8% 3,887 7.3%
Diesel fuel 4,433 5.7% 3,249 6.1%
Casualties and insurance 4,626 5.9% 3,673 6.9%
Materials 3,486 4.5% 2,531 4.7%
Other 6,738 8.7% 4,828 9.1%
Special charge 1,360 1.7% 0 0.0%
------- ---- ------- ----
Total $63,801 82.0% $46,815 87.7%
======= ==== ======= ====
Labor and benefits expense was $25.2 million in 1996 compared to $18.7
million in 1995, an increase of $6.5 million or 34.8% primarily due to the
commencement of operations on new acquisitions. Labor costs decreased as a
percentage of revenues, however, to 32.4% in 1996 compared to 35.0% in 1995.
This decrease reflects the efficiency of the unit coal train operations on new
acquisitions.
Equipment rents were $8.5 million in 1996 compared to $7.4 million in
1995, an increase of $1.1 million or 14.9%. However, equipment rents decreased
to 10.9% of operating revenue in 1996, from 13.9% in 1995. This is mainly
because the largest component of equipment rents, car hire expense, decreased
from 7.9% of operating revenue in 1995 to 5.8% of operating revenue in 1996 due
to the efficiency of new acquisitions. The reduction of equipment rents expense
as a percentage of operating revenues also reflects the reduction in the amount
of equipment under operating leases. In June 1995 the
19
Company purchased railcars and locomotives, which it had previously used under
operating leases, which reduced equipment rent under the terminated lease.
Depreciation expense was $6.1 million in 1996 compared to $3.9 million in
1995, an increase of $2.2 million or 56.4%. The increase primarily reflects
depreciation and amortization related to new acquisitions and purchased railcars
and locomotives previously used under operating leases.
Casualties and insurance expense, including claims brought under the
Federal Employers' Liability Act, was $4.6 million in 1996 compared to $3.7
million in 1995, an increase of $953,000 or 25.8%. The majority of the increase
in 1996 related to insurance premiums which increased $600,000 due primarily to
new acquisitions, and derailment and property damages which increased $475,000.
This increase was partially offset by a decrease in additions to reserves for
third party liability which decreased from $1.4 million in 1995 to $1.3 million
in 1996, a decrease of $123,000.
Special charge expense of $1.4 million represents the impairment of assets
of $1.2 million and employee severance and pension termination expense of
$220,000 related to the Company's realignment of operations and decision to
close certain supporting facilities of one of its subsidiaries resulting from
the closure of the Akzo mine. See Note 3 to Consolidated Financial Statements
and "Akzo Mine" in this Item 7.
Interest Expense and Income Taxes
Interest expense was $4.7 million in 1996 compared to $3.4 million in
1995, an increase of $1.3 million or 38.2%. The increase reflects the increased
debt related to the financing of new acquisitions, offset in part by the
repayment of $45.8 million of debt on June 28, 1996, from the proceeds of an
initial public offering. The Company's effective income tax rate was 40.5% in
1996 compared to 40.6% in 1995.
Net Income
The Company's net income in 1996 was $5.9 million compared to net income of
$1.7 million (or $2.2 million before an extraordinary expense of $494,000 in
connection with the early extinguishment of debt) in 1995. Excluding the effect
of this extraordinary expense, net income in 1996 increased $3.7 million or
168.2% compared to 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Operating Revenues
Operating revenues were $53.4 million in 1995 compared to $55.4 million in
1994, a decrease of $2.0 million or 3.7%. This decrease was attributable to a
$1.4 million decrease in non-freight revenues coupled with a $633,000 decrease
in freight revenues.
Freight revenues were $42.4 million in 1995 compared to $43.0 million in
1994, a decrease of $633,000 or 1.5%. The following table compares freight
revenues, carloads and average freight revenues per carload for 1995 and 1994:
The remainder of this page is intentionally left blank.
20
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
AVERAGE
FREIGHT
REVENUES
FREIGHT REVENUES CARLOADS PER CARLOAD
---------------- -------- -----------
% OF % OF % OF % OF
COMMODITY GROUP 1995 TOTAL 1994 TOTAL 1995 TOTAL 1994 TOTAL 1995 1994
- --------------- ------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Coal, Coke & Ores $ 2,656 6.3% $ 2,828 6.6% 12,398 10.5% 12,867 10.8% $ 214 $ 220
Petroleum Products 8,487 20.0% 8,341 19.4% 17,559 14.8% 17,186 14.4% 483 485
Pulp & Paper 6,797 16.1% 6,354 14.8% 18,667 15.7% 17,070 14.3% 364 372
Lumber & Forest
Products 4,496 10.6% 4,610 10.7% 14,022 11.8% 13,711 11.5% 321 336
Metals 4,459 10.5% 4,862 11.3% 17,014 14.3% 16,606 14.0% 262 293
Chemicals 3,321 7.9% 3,673 8.6% 6,641 5.6% 5,942 5.0% 500 618
Farm & Food Products 2,756 6.5% 2,112 4.9% 5,778 4.9% 6,525 5.5% 477 324
Autos & Auto Parts 3,490 8.2% 3,960 9.2% 6,381 5.4% 6,624 5.6% 547 598
Minerals & Stone 1,407 3.3% 1,860 4.3% 4,189 3.5% 5,037 4.2% 336 369
Salt 2,215 5.2% 2,835 6.6% 7,865 6.6% 10,621 8.9% 282 267
Other 2,268 5.4% 1,550 3.6% 8,159 6.9% 6,862 5.8% 278 226
------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Total $42,352 100.0% $42,985 100.0% 118,673 100.0% 119,051 100.0% $ 357 $ 361
======= ===== ======= ===== ======= ===== ======= ===== ===== =====
The decrease in freight revenues was largely attributable to the effect of
the loss of production at the Akzo mine. See "Akzo Mine" in this Item 7.
Freight revenues from Akzo totaled $1.9 million in 1995 on 6,934 carloads
compared to $2.9 million on 10,423 carloads in 1994. Excluding Akzo, total
carloads increased by 3,111 or 2.9% in 1995 compared to 1994, while total
freight revenues increased $338,000 or 0.6% in 1995 compared to 1994. In 1995,
the Company realized $673,000 in additional freight revenues attributable to the
acquisition of a new rail line in the Oregon region. This increase was
partially offset by a $470,000 decrease in freight revenues from autos and auto
parts to $3.5 million in 1995 from $4.0 million in 1994. Freight revenues from
autos and auto parts in 1994 included a large one-time move of finished vehicles
diverted to the Company by another carrier, which was not repeated in 1995.
Non-freight revenues were $11.0 million in 1995 compared to $12.4 million
in 1994, a decrease of $1.4 million or 11.2%. Revenues from car hire and car
rentals were $3.2 million in 1995 compared to $5.2 million in 1994, a decrease
of $2.0 million or 38.7%. Revenues from car hire and rentals were unusually
high in 1994 due to a gain on the sale of railcars. The Company also had a
reduced operating fleet in 1995 as a result of a sale of railcars in 1994, which
reduced rental revenue. Revenues from switching and storage activities were
$3.6 million in 1995 compared to $2.7 million in 1994, an increase of $934,000
or 34.5%. The increase reflects the operation of the Company's railcar storage
facility for a full year. Car repair revenues were $1.6 million in 1995
compared to $1.9 million in 1994, a decrease of $349,000 or 18.3%. The decrease
was attributable to a lower number of cars required to haul salt and the
improvement in the quality of cars received in interchange.
21
Operating Expenses
Operating expenses were $46.8 million in 1995 compared to $47.4 million in
1994, a decrease of $565,000 or 1.2%. The Company's operating ratio increased
to 87.7% in 1995 from 85.5% in 1994.
The following table sets forth a comparison of the Company's operating
expenses in 1995 and 1994:
OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1995 1994
------- -------
% OF % OF
OPERATING OPERATING
$ REVENUE $ REVENUE
------- ------- ------- -------
Labor and benefits $18,683 35.0% $18,092 32.6%
Equipment rents 7,434 13.9% 8,634 15.6%
Purchased services 2,530 4.7% 2,737 4.9%
Depreciation and amortization 3,887 7.3% 3,577 6.5%
Diesel fuel 3,249 6.1% 3,410 6.2%
Casualties and insurance 3,673 6.9% 2,742 5.0%
Materials 2,531 4.7% 3,401 6.1%
Other 4,828 9.1% 4,788 8.6%
------- ---- ------- ----
Total $46,815 87.7% $47,381 85.5%
======= ==== ======= ====
Labor and benefits expense was $18.7 million in 1995 compared to $18.1
million in 1994, an increase of $591,000 or 3.3%. Labor costs increased as a
percentage of revenues to 35.0% in 1995 compared to 32.6% in 1994. The increase
was attributable to the start-up costs in connection with additional lines in
Oregon and expansion of operations in Texas.
Equipment rents were $7.4 million in 1995 compared to $8.6 million in
1994, a decrease of $1.2 million or 13.9%. The decrease reflects a reduction in
the number of operating leases and lower car hire expense. In 1995, the Company
purchased railcars and locomotives subject to an operating lease, which reduced
equipment rent expense under this operating lease to $606,000 in 1995 compared
to $1.7 million in 1994. Car hire expense decreased to $4.2 million in 1995
compared to $5.4 million in 1994, reflecting a concerted management effort to
reduce this expense. Depreciation expense was $3.9 million in 1995 compared to
$3.6 million in 1994, an increase of $310,000 or 8.7%. The majority of this
increase reflects depreciation expense associated with railcars and locomotives
purchased in 1995.
Casualties and insurance expense, including claims brought under the
Federal Employers' Liability Act, was $3.7 million in 1995 compared to $2.7
million in 1994, an increase of $931,000 or 34.0%. Additions to reserves for
third party liability were $1.4 million in 1995 compared to $669,000 in 1994, an
increase of $736,000. The majority of the increase in 1995 related to incidents
occurring prior to 1995. While the Company establishes reserves for incidents
as they occur, an unexpected legal action brought in 1995, together
22
with changes in circumstances relating to prior incidents, necessitated this
increase. In August 1994, the Company reduced its self-insured retention. If
this level of coverage had been in place when these incidents occurred,
necessary additions to reserves in 1995 would have been reduced by $400,000. The
remainder of the increase in casualties and insurance expense reflects an
increase in derailment expense.
Materials expense was $2.5 million in 1995 compared to $3.4 million in
1994, a decrease of $870,000 or 25.6%. The decrease was largely attributable to
a reduction in car repairs.
Interest Expense and Income Taxes
Interest expense was $3.4 million in 1995 compared to $3.2 million in
1994, an increase of $193,000 or 6.0%. The increase reflects higher overall
debt outstanding related to the financing of rolling stock. During 1995, the
Company refinanced the majority of its outstanding debt into the Credit
Facilities, resulting in an effective rate of interest that was lower than in
1994. See "Liquidity and Capital Resources" in this Item 7. Penalties and fees
paid to lenders related to the repayment of debt resulted in an extraordinary
charge of $494,000, net of related income taxes of $357,000. The Company's
effective income tax rate was 40.6% in 1995 compared to 40.0% in 1994.
Net Income
The Company's net income in 1995 was $1.7 million (or $2.2 million before
an extraordinary expense of $494,000 in connection with the early extinguishment
of debt) compared to net income in 1994 of $3.0 million. Excluding the effect of
this extraordinary expense, net income in 1995 decreased $860,000 or 28.6%
compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company generated cash from operations of $30.4 million,
which includes the effect of $12.5 million generated by an excess of trade
payables over trade receivables from the operations of new acquisitions. The
excess of payables over receivables results from the timing difference between
collection of customer receivables and settlement of the related interline
payables. During 1996, the Company consummated three acquisitions. See Note 2
in the Consolidated Financial Statements. In addition, the Company received
$17.8 million in proceeds from the sale of equipment, of which $12.0 million was
related to the sale leaseback of locomotives and $2.4 million was from the sale
of assets acquired in the Pittsburg & Shawmut acquisition. The Company invested
$8.2 million in track and other fixed assets (apart from its investment in the
Illinois & Midland, Pittsburg & Shawmut and Rail Link acquisitions).
During 1995, the Company generated cash from operations of $2.6 million,
generated cash from asset sales of $318,000, received $3.5 million in state
grant funds for track rehabilitation, and had net new borrowings of $6.7
million. During the year the Company invested $8.6 million in equipment and
rolling stock and $8.0 million in track improvements and buildings.
During 1994, the Company generated cash from operations of $7.3 million
and cash from asset sales of $824,000, and received $1.8 million in state grants
for rehabilitation of track. The cash generated was used to fund $6.2 million
in capital expenditures and to repay a net $2.5 million in long-term debt and
capital leases. Track and track structures accounted for
23
$5.3 million of these capital expenditures, while the balance was invested in
equipment.
In June 1995, the Company borrowed under the Credit Facilities to
restructure a majority of its long-term debt and finance the purchase of rail
equipment. The Company repaid $14.3 million in debt maturing at various dates
between 1996 and 2001 and bearing interest rates ranging from 6.75% to 15.0% per
annum, including the repayment of $701,000 in debt held by directors and
officers of the Company and members of their respective families. The Company
borrowed $6.0 million under the Credit Facilities to purchase rolling stock
which had been under an operating lease.
In February 1996, the Company amended and restated its Credit Facilities
(the "Credit Facilities") with The First National Bank of Boston, as agent for a
syndicate of banks (the "Bank of Boston"), to provide funding for the Illinois &
Midland and Pittsburg & Shawmut acquisitions. The Credit Facilities include a
$40.0 million term loan and a $34.0 million revolving credit facility. The term
loan requires varying quarterly principal payments beginning September 30, 1996,
with the remaining balance payable in February 2001. The revolving credit
facility provides for a mandatory commitment reduction of $2.0 million on
December 31, 1997 with the remaining balance payable in February 2001. The
interest rate on the Credit Facilities is a varying increment over the Bank of
Boston's prime rate or LIBOR, based on the Company's ratio of debt to EBITDA.
The Credit Facilities are secured by a blanket first-priority lien on all of the
Company's railroad assets except real estate, and a pledge of all capital stock
of the Company's subsidiaries. In conjunction with the financing, the Company
paid a fee to the Bank of Boston of $1.5 million and issued the Bank of Boston a
warrant to purchase 41,847 shares of Class A Common Stock at a price of $.0005
per share.
On June 28, 1996 the Company closed an underwritten initial public
offering ("IPO") of 3,045,200 shares of Class A Common Stock, of which 2,897,200
shares were offered by the Company and 148,000 shares were offered by a selling
stockholder. The offering price was $17 per share. The proceeds of the
offering of $45.8 million, after netting 7% underwriting commission, were used
to pay down debt under the Credit Facilities. Other expenses of the offering of
$1.3 million were paid by the Company.
On December 27, 1996, the Company completed the sale of 53 of its
locomotives to a leasing company for a net sale price of approximately
$11,950,000. The proceeds were applied to repayment of debt under the Credit
Facilities. Simultaneously, a subsidiary of the Company entered into an
agreement with the leasing company to lease the locomotives back. The sale
resulted in a deferred gain of approximately $4,902,000 which will be amortized
over the term of the lease as a non-cash offset to rent expense.
At December 31, 1996 the Company had long-term debt (including current
portion) totaling $18.7 million, which comprised 23.3% of its total
capitalization. This compares to long-term debt, including current portion, of
$39.9 million at December 31, 1995, comprising 79.1% of total capitalization.
The Company's railroads have entered into a number of rehabilitation
grants with state and federal agencies. The grant funds are used as a
supplement to the Company's normal capital programs. In return for the grants,
the railroads pledge to maintain various levels of service and maintenance on
the rail lines that have been rehabilitated. The Company believes that the
levels of service and maintenance required under the grants are not materially
different from those that would be required without the grant obligation. While
the Company has benefited in recent years from these
24
grant funds, there can be no assurance that the funds will continue to be
available.
The Company has budgeted $10.0 million in capital expenditures in 1997,
primarily for track rehabilitation, of which $3.0 million is expected to be used
to fulfill an obligation to replace rail under the terms of a lease of one of
the Company's railroads.
The Company has historically relied primarily on cash generated from
operations to fund working capital and capital expenditures relating to ongoing
operations, while relying on borrowed funds to finance acquisitions and
equipment needs (primarily rolling stock) related to acquisitions. The Company
believes that its cash flow from operations together with amounts available
under the Credit Facilities will enable the Company to meet its liquidity and
capital expenditure requirements relating to ongoing operations for at least the
duration of the Credit Facilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial data required by this
item are listed at Part IV, Item 14 and are filed herewith immediately following
the signature page hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of the Stockholders of the Company to be held on May 20, 1997 under
"Election of Directors" and "Executive Officers", which proxy statement will be
filed within 120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of the Stockholders of the Company to be held on May 20, 1997 under
"Executive Compensation", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of the Stockholders of the Company to be held on May 20, 1997 under
"Security Ownership of Certain Beneficial Owners and Management", which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.
25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of the Stockholders of the Company to be held on May 20, 1997 under
"Related Transactions", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Income for the Years ended December 31,
1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statements
Schedules are omitted because they are either not required or not
applicable.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the period
covered by this Report.
(C) EXHIBITS - SEE INDEX TO EXHIBITS.
The remainder of this page is intentionally left blank.
26
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) (i) ARTICLES OF INCORPORATION
The Form of Restated Certificate of Incorporation referenced under (4)(a)
hereof is incorporated herein by reference.
(ii) BY-LAWS
The By-laws referenced under (4)(b) hereof are incorporated herein
by reference.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
(a) Form of Restated Certificate of Incorporation (Exhibit 3.2)2
(b) By-laws (Exhibit 3.3)/1/
(c) Specimen stock certificate representing shares of Class A
Common Stock (Exhibit 4.1)/3/
(d) Form of Class B Stockholders' Agreement dated as of May 20, 1996,
among the Registrant, its executive officers and its Class B
stockholders (Exhibit 4.2)2
(e) Promissory Note dated October 7, 1991 of Buffalo & Pittsburgh
Railroad, Inc. in favor of CSX Transportation, Inc. (Exhibit 4.6)/1/
(f) Amended and Restated Revolving Credit and Term Loan Agreement dated as
of February 8, 1996 among the Registrant and certain of its
Subsidiaries, The First National Bank of Boston, as agent, and the
Banks party thereto (Exhibit 4.10)/1/
(g) Revolving Credit Note dated as of February 8, 1996 of the Registrant
and certain of its subsidiaries in favor of The First National Bank of
Boston (Exhibit 4.11)/1/
(h) Term Note dated as of February 8, 1996 of the Registrant and certain
of its Subsidiaries in favor of The First National Bank of Boston
(Exhibit 4.12)/1/
(i) Amended and Restated Security Agreement dated as of February 8, 1996
among the Registrant, certain of its Subsidiaries and The First
National Bank of Boston (Exhibit 4.13)/1/
(j) Amended and Restated Stock Pledge Agreement dated as of February 8,
1996 between the Registrant and The First National Bank of Boston
(Exhibit 4.14)/1/
(k) Amended and Restated Collateral Assignment of Partnership Interests
dated as of February 8, 1996 of the Registrant and
27
GWI Dayton, Inc. in favor of The First National Bank of Boston
(Exhibit 4.15)/1/
(l) Amendment No. 1 to Amended and Restated Revolving Credit and Term Loan
Agreement dated as of April 26, 1996 among the Registrant and certain
of its Subsidiaries, The First National Bank of Boston, as agent, and
the Banks party thereto (Exhibit 4.16)/2/
(9) Voting Agreement and Stock Purchase Option dated March 21, 1980 among
Mortimer B. Fuller, III, Mortimer B. Fuller, Jr. and Frances A. Fuller,
and amendments thereto dated May 7, 1988 and March 29, 1996 (Exhibit
9.1)/1/
(10) MATERIAL CONTRACTS
The Exhibits referenced under (4)(d) and (4)(f) through (4)(l) hereof are
incorporated herein by reference.
(a) Form of Genesee & Wyoming Inc. 1996 Stock Option Plan
(Exhibit 10.1)/2/
(b) Form of Genesee & Wyoming Inc. Stock Option Plan for Outside
Directors (Exhibit 10.2)/2/
(c) Form of Employment Agreement between the Registrant and each of
its executive officers (Exhibit 10.3)/1/
(d) Form of Genesee & Wyoming Inc. Employee Stock Purchase Plan (Exhibit
10.4)/2/
(e) Asset Purchase Agreement dated February 8, 1996 between Illinois &
Midland Railroad, Inc. and Stanford PRC Acquisition Corp. (Exhibit
10.61)/1/
(f) Guaranty dated as of February 8, 1996 of the Registrant in
favor of Stanford PRC Acquisition Corp. (Exhibit 10.62)/1/
(g) Assignment and Assumption Agreements dated as of February 8, 1996
between Chicago & Illinois Midland Railway Company and Illinois &
Midland Railroad, Inc. (Exhibit 10.63)/1/
(h) Warrant Purchase Agreement dated as of February 8, 1996 between the
Registrant and First National Bank of Boston. (Exhibit 10.64)/1/
(i) Agreement dated February 6, 1996 between Illinois & Midland Railroad,
Inc. and the United Transportation Union. (Exhibit 10.65)/1/
(j) Asset Purchase Agreement dated April 19, 1996 among Pittsburg &
Shawmut Railroad, Inc., the Registrant, The Pittsburg & Shawmut
Railroad Company, Red Bank Railroad Company, Mountain Laurel Railroad
Company and Arthur T. Walker Estate Corporation, and Amendment No. 1
to Asset Purchase Agreement dated April 19, 1996. (Exhibit 10.70)/4/
28
(k) Amendment No. 1 to Warrant Purchase Agreement dated as of May
31, 1996 between the Registrant and FSC Corp. (Exhibit 10.71)/2/
*(10.1) Stock Purchase Agreement dated as of November 8, 1996 between Brenco,
Incorporated, Rail Link, Inc. and the Registrant. CONFIDENTIAL
TREATMENT HAS BEEN REQUESTED AS TO CERTAIN PORTIONS, WHICH HAVE BEEN
FILED SEPARATELY WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR
SUCH TREATMENT.
*(11.1) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(12) STATEMENT RE COMPUTATION OF RATIOS
Not applicable.
(13) ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO
SECURITY HOLDERS
Not applicable.
(16) LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
*(21.1) SUBSIDIARIES OF THE REGISTRANT
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY
HOLDERS
Not applicable.
*(23.1) CONSENT OF ARTHUR ANDERSEN LLP
(24) POWER OF ATTORNEY
Not applicable.
*(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS
- ----------------------------
*Exhibit filed with this Report.
/1/ Exhibit previously filed as part of, and incorporated herein by reference
to, the Registrant's Registration Statement on Form S-1 (Registration No. 333-
3972). The exhibit number contained in parenthesis refers to the exhibit number
in such Registration Statement.
/2/ Exhibit previously filed as part of, and incorporated herein by reference
to, Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3972). The exhibit number contained in parenthesis refers
to the exhibit number in such Amendment.
29
/3/ Exhibit previously filed as part of, and incorporated herein by reference
to, Amendment No. 2 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3972). The exhibit number contained in parenthesis refers
to the exhibit number in such Amendment.
/4/ Exhibit previously filed as part of, and incorporated herein by reference
to, Amendment No. 5 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-3972). The exhibit number contained in parenthesis refers
to the exhibit number in such Amendment.
The remainder of this page is intentionally left blank.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GENESEE & WYOMING INC.
By: /s/ Mortimer B. Fuller, III
---------------------------
Mortimer B. Fuller, III
Chairman of the Board,
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the date indicated below.
Date Title Signature
- ---- ----- ---------
March 21, 1997 President, CEO and /s/ Mortimer B. Fuller, III
Director -----------------------
Mortimer B. Fuller, III
March 21, 1997 Senior Vice President /s/ Alan R. Harris
and Chief Accounting ------------------
Officer Alan R. Harris
March 21, 1997 Senior Vice President, /s/ Mark W. Hastings
Chief Financial Officer ----------------
and Treasurer Mark W. Hastings
March 21, 1997 Director /s/ James M. Fuller
----------------
James M. Fuller
March 21, 1997 Director /s/ Louis S. Fuller
----------------
Louis S. Fuller
March 21, 1997 Director /s/ John M. Randolph
----------------
John M. Randolph
March 21, 1997 Director /s/ Philip J. Ringo
----------------
Philip J. Ringo
The remainder of this page is intentionally left blank.
31
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Genesee & Wyoming Inc. and Subsidiaries:
Report of Independent Public Accountants....................F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996......................................................F-3
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996..........................F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996..............F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1995..........................F-6
Notes to Consolidated Financial Statements..................F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and
the Shareholders of
Genesee & Wyoming Inc.:
We have audited the accompanying consolidated balance sheets of GENESEE &
WYOMING INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1995
and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genesee & Wyoming Inc. and
Subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 13, 1997
F-2
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31, December 31,
ASSETS 1995 1996
---- ----
CURRENTS ASSETS:
Cash and cash equivalents $2,115 $14,121
Accounts receivable, net 9,441 19,133
Materials and supplies 1,512 4,173
Prepaid expenses and other 1,455 1,771
Deferred income tax assets, net 1,278 1,632
------------------------------
Total current assets 15,801 40,830
------------------------------
PROPERTY AND EQUIPMENT, net 61,574 78,822
------------------------------
SERVICE ASSURANCE AGREEMENT, net ---- 14,312
------------------------------
OTHER ASSETS, net 1,054 11,375
------------------------------
Total assets $78,429 $145,339
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $1,239 $271
Accounts payable 8,408 33,583
Accrued expenses 3,404 6,122
------------------------------
Total current liabilities 13,051 39,976
------------------------------
LONG-TERM DEBT 38,702 18,460
------------------------------
OTHER LIABILITIES 2,043 2,699
------------------------------
DEFERRED INCOME TAX LIABILITIES, net 4,139 4,720
------------------------------
DEFERRED ITEMS--grants from governmental agencies 9,946 12,899
------------------------------
DEFERRED GAIN--sale leaseback ---- 4,902
------------------------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 12)
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value, one vote per share;
12,000,000 shares
authorized; 1,501,937 and 4,399,463 issued and
outstanding on December 31, 1995 and 1996, respectively 15 44
Class B common stock, $0.01 par value, 10 votes per share;
1,500,000 shares authorized; 846,556 issued and outstanding 8 8
Additional paid-in capital 1,340 46,102
Warrants outstanding ---- 471
Retained earnings 9,185 15,058
------------------------------
Total stockholders' equity 10,548 61,683
------------------------------
Total liabilities and stockholders' equity $78,429 $145,339
==============================
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
1994 1995 1996
---- ---- ----
OPERATING REVENUES $55,419 $53,387 $77,795
-----------------------------------------
OPERATING EXPENSES:
Transportation 13,357 14,262 18,952
Maintenance of ways and structures 6,632 6,127 9,431
Maintenance of equipment 14,533 12,230 14,218
General and administrative 9,282 10,309 13,788
Depreciation and amortization 3,577 3,887 6,052
Special charge -- -- 1,360
-----------------------------------------
Total operating expenses 47,381 46,815 63,801
-----------------------------------------
Income from operations 8,038 6,572 13,994
INTEREST EXPENSE (3,212) (3,405) (4,720)
OTHER INCOME 192 456 651
-----------------------------------------
Income before provision for income taxes and
extraordinary item 5,018 3,623 9,925
PROVISION FOR INCOME TAXES (2,007) (1,472) (4,020)
-----------------------------------------
Income before extraordinary item 3,011 2,151 5,905
EXTRAORDINARY ITEM FROM EARLY EXTINGUISHMENT
OF DEBT, net of related income tax benefit of $357,000 -- (494) --
-----------------------------------------
NET INCOME $3,011 $1,657 $5,905
=========================================
Earnings per common share and common equivalent share (Note 1) :
Income before extraordinary item $1.31 $0.92 $1.50
Extraordinary item -- (0.21) --
-----------------------------------------
Net Income $1.31 $0.71 $1.50
=========================================
Weighted average number of common stock and common
stock equivalents outstanding 2,304 2,348 3,941
=========================================
Earnings per common share assuming full dilution (Note 1) :
Income before extraordinary item $1.31 $0.92 $1.49
Extraordinary item -- ($0.21) --
-----------------------------------------
Net Income $1.31 $0.71 $1.49
=========================================
Weighted average number of common stock and common
stock equivalents outstanding 2,304 2,348 3,966
=========================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Class A Class B
Common Stock Common Stock
------------------------------------------------
Shares $0.01 Shares $0.01 Additional Warrants
Outstanding Value Outstanding Value Capital Outstanding
---------------------------------------------------------------------------------
BALANCE, December 31, 1993 1,480 $15 824 $8 $1,280 --
Stock options exercised 22 -- 22 -- 60 --
Net income -- -- -- -- -- --
Cash dividends -- $0.03 per share -- -- -- -- -- --
---------------------------------------------------------------------------------
BALANCE, December 31, 1994 1,502 15 847 8 1,340 --
Net income -- -- -- -- -- --
Cash dividends -- $0.08 per share -- -- -- -- -- --
---------------------------------------------------------------------------------
BALANCE, December 31, 1995 1,502 15 847 8 1,340 --
Issuance of stock warrants -- -- -- -- -- 471
Proceeds from issuance of stock--
initial public offering 2,898 29 0 44,751 --
Proceeds from issuance of stock--
employee purchase 1 -- -- -- 11 --
Net income -- -- -- -- -- --
Cash dividends -- $0.01 per share -- -- -- -- -- --
---------------------------------------------------------------------------------
BALANCE, December 31, 1996 4,401 $44 847 $8 $46,102 471
=================================================================================
Stockholders'
Retained Equity
Earnings Total
----------------------------
BALANCE, December 31, 1993 $4,771 $6,074
Stock options exercised -- 60
Net income 3,011 3,011
Cash dividends -- $0.03 per share (63) (63)
----------------------------
BALANCE, December 31, 1994 7,719 9,082
Net income 1,657 1,657
Cash dividends -- $0.08 per share (191) (191)
----------------------------
BALANCE, December 31, 1995 9,185 10,548
Issuance of stock warrants -- 471
Proceeds from issuance of stock--
initial public offering -- 44,780
Proceeds from issuance of stock--
employee purchase -- 11
Net income 5,905 5,905
Cash dividends -- $0.01 per share (32) (32)
----------------------------
BALANCE, December 31, 1996 $15,058 $61,683
============================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
-----------------------------------------
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,011 $1,657 $5,905
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 3,577 3,887 6,052
Deferred income taxes 738 811 1,332
Gain on disposition of property (169) (195) (633)
Write-off of other assets 675 -- --
Special charge -- -- 1,360
Changes in assets and liabilities, net of balances
assumed through acquisitions-
Receivables (3,226) 1,257 (7,781)
Materials and supplies (214) 38 (1,861)
Prepaid expenses and other (236) (450) (239)
Accounts payables and accrued expenses 2,855 (4,751) 25,217
Other assets and liabilities, net 279 310 1,060
---------------------------------------
Net cash provided by operating activities 7,290 2,564 30,412
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,153) (16,632) (8,174)
Purchase of assets of Chicago & Illinois Midland Railway Company -- -- (26,330)
Purchase of assets of Pittsburg & Shawmut Railroad Company,
Mountain Laurel Railroad Company and Red Bank Railroad Company -- -- (11,966)
Purchase of common stock of Rail Link, Inc. -- -- (12,122)
Proceeds from disposition of property 824 318 17,790
---------------------------------------
Net cash used in investing activities (5,329) (16,314) (40,802)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings, including capital leases (4,962) (16,999) (73,400)
Proceeds from issuance of long-term debt 2,476 24,300 51,437
Debt issuance costs -- (641) (1,642)
Net proceeds on grants 1,755 3,512 771
Dividends paid (63) (191) (32)
Proceeds from issuance of stock options 60 -- --
Proceeds from issuance of stock--employee purchase -- -- 11
Issuance of stock warrants -- -- 471
Proceeds from issuance of stock--initial public offering -- -- 44,780
---------------------------------------
Net cash (used in) provided by financing activities (734) 9,981 22,396
---------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,227 (3,769) 12,006
CASH AND CASH EQUIVALENTS, beginning of period 4,657 5,884 2,115
---------------------------------------
CASH AND CASH EQUIVALENTS, end of period $5,884 $2,115 $14,121
=======================================
CASH PAID DURING PERIOD FOR:
Interest $3,075 $3,204 $4,347
Incomes taxes 1,023 1,022 2,138
=======================================
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
GENESEE & WYOMING INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------------------
Genesee & Wyoming Inc. and Subsidiaries (the "Company") operates 15 short-line
and regional railroads in New York, Pennsylvania, Louisiana, Oregon, Texas and,
beginning in 1996, Illinois, Florida, North Carolina and Virginia (see Note 2),
through its various subsidiaries. The Company, through its leasing subsidiary,
also buys, sells, leases and manages railroad transportation equipment. The
Company, through its industrial switching subsidiary, also provides railroad
switching and related services to industries in North America with extensive
railroad facilities within their complexes.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues are estimated and recognized as shipments initially move onto the
Company's tracks, which, due to the relatively short length of haul, is not
materially different from the recognition of revenues as shipments progress.
Cash Equivalents
- ----------------
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the consolidated balance sheets and consolidated statements of
cash flows. Cash equivalents are stated at cost, which approximates fair market
value.
Materials and Supplies
- ----------------------
Materials and supplies consist of items for improvement and maintenance of road
property and equipment, and are stated at the lower of average cost or market.
Property and Equipment
- ----------------------
Property and equipment are carried at historical cost. Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments are
capitalized while routine maintenance and repairs, which do not improve or
extend asset lives, are charged to expense when incurred. Gains or losses on
sales or other dispositions are credited or charged to other income. Gains of
approximately $790,000, $0 and $572,000 realized by the leasing subsidiary on
the sale or disposition of transportation equipment during 1994, 1995 and 1996,
respectively, are classified in operating revenues. Depreciation is provided on
the straight-line method over the useful lives of the property which are as
follows:
Road Properties...............................20-50 years
Equipment......................................3-20 years
F-7
The Company continually evaluates whether later events and circumstances have
occurred that indicate the assets may not be recoverable. When factors indicate
that the assets should be evaluated for possible impairment, the Company uses an
estimate of the related undiscounted future cash flows over the remaining lives
of the assets in measuring whether the assets are recoverable.
Service Assurance Agreement
- ---------------------------
The service assurance agreement represents a commitment from the most
significant customer of the Company, to one of the subsidiary railroads (see
Note 2), which grants the Company the exclusive right to serve indefinitely
three of the customer's facilities. The service assurance agreement is
amortized on a straight-line basis over the same period as the related track
structure, which is 20 years. At December 31, 1996, the service assurance
agreement was $14,312,000, net of accumulated amortization of $669,000.
Primary and Fully Diluted Net Income per Share
- ----------------------------------------------
Primary and fully diluted net income per share are determined by dividing net
income by the weighted average number of common shares, and where applicable,
common share equivalents outstanding during the period, as adjusted for the
stock split discussed in Note 13. The common share equivalents outstanding for
primary and fully diluted net income per share are derived by calculating the
dilutive effect of unexercised stock options and stock warrants using the
average and ending market price per share, respectively.
Significant Customer Relationship
- ---------------------------------
A large portion of the Company's operating revenues is attributable to customers
operating in the electric utility, forest products, petroleum and salt
industries. As the Company acquires new railroad operations, the base of
customers and industries served continues to grow and diversify. The largest
ten customers, which is a group that changes annually, accounted for
approximately 53%, 50% and 49% of the Company's revenues in 1994, 1995 and 1996,
respectively. One customer in the electric utility industry accounted for
approximately 18% of the Company's revenues in 1996 (see Note 2) while one
customer in the salt industry accounted for approximately 12% of the Company's
revenue in 1994 (see Note 3). The Company regularly grants trade credit to all
of its customers. In addition, the Company grants trade credit to other
railroads through the routine interchange of traffic. Although the Company's
accounts receivable include a diverse number of customers and railroads, the
collection of these receivables is substantially dependent upon the economies of
the regions in which the Company operates, the electric utility, forest
products, petroleum and salt industries, and the railroad sector of the economy
in general.
Disclosures About Fair Value of Financial Instruments
- -----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.
Long-term debt: The fair value of the Company's long-term debt is based
on secondary market indicators. Since the Company's debt is not quoted,
estimates are based on each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates
fair value.
F-8
Management Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. EXPANSION OF RAILROAD OPERATIONS:
---------------------------------
Illinois & Midland Railroad, Inc. - On February 8, 1996, a newly-formed
subsidiary, Illinois & Midland Railroad, Inc. ("Illinois & Midland"), purchased
certain assets, primarily road and track structure, of Chicago & Illinois
Midland Railway Company for approximately $27.7 million, including related costs
and the assumption of certain liabilities. The purchase price was allocated to
purchased inventory ($750,000), assumed note receivable ($1,220,000), property
($10,773,000), and the service assurance agreement ($14,981,000). The purchase
also included the assumption of $1,394,000 of liabilities. This subsidiary
operates approximately 126 miles of track in the State of Illinois. A
significant portion of this subsidiary's operating revenue (83% in 1995 and 76%
in 1996) is attributable to coal shipments for one customer which is an electric
utility (see Note 1). The acquisition was accounted for as a purchase.
Pittsburg & Shawmut Railroad, Inc. - On April 29, 1996, a newly formed
subsidiary, Pittsburg & Shawmut Railroad, Inc. ("Pittsburg & Shawmut"),
purchased certain assets, primarily road and track structure, of Pittsburg &
Shawmut Railroad Company, Mountain Laurel Railroad Company, and Red Bank
Railroad Company for approximately $15.2 million, including related costs. The
purchase price was allocated to purchased inventory ($50,000), property
($14,846,000), and other assets ($264,000). The purchase also included the
assumption of $3,194,000 of deferred grants from the State of Pennsylvania. In
addition, the purchase and sale agreement provides for additional contingency
payments of up to $2.5 million. A portion of these payments are required (up to
a maximum of $500,000) if certain coal shipments during any calendar year from
1997-1999, as defined, exceed 290,000 tons. The remaining contingency payments
(up to a maximum of $2.0 million) are calculated as 25% of the gross revenues
attributable to certain coal shipments that exceed 564,793 tons during any
calendar year from 2000-2009, as defined. Upon resolution of the amount of the
contingency payments, there will be an additional element of cost related to the
transaction, which will be recorded as excess cost over the fair market value of
tangible net assets acquired and amortized over the same period as the related
track structure, which is 20 years. The acquisition was accounted for as a
purchase. On June 28, 1996, a portion of the railcars acquired in the purchase
were sold for $2.4 million, the purchase price allocation was adjusted, and no
gain or loss was recognized.
Rail Link, Inc. - On November 8, 1996, the Company completed its acquisition of
all of the common stock of Rail Link, Inc. ("Rail Link") for approximately $9.1
million in cash and $3.0 million in future amounts payable based on performance.
The purchase price was allocated to purchased net working capital ($1,218,000),
property ($5,000,000), goodwill ($5,629,000) and other assets ($275,000). The
goodwill is being amortized on a straight-line basis over 20 years. At December
31, 1996, goodwill was $5,582,000, net of accumulated amortization of $47,000.
The purchase also included the assumption of $474,000 of liabilities. Rail Link
provides railroad switching and related services to North American industries
with extensive railroad facilities within their complexes. Headquartered in
Richmond, Virginia, Rail Link manages 20 switching operations, a railcar
cleaning operation, two track maintenance operations and a locomotive leasing
operation in 11 states. Rail Link also operates three short line railroads
located in
F-9
Florida, North Carolina and Virginia. The acquisition was accounted for as a
purchase. The allocation of the purchase price is based on preliminary estimates
and may be revised at a later date.
Pro Forma for Acquisitions - Results for the operations of Illinois & Midland
Railroad, Inc., Pittsburg & Shawmut Railroad, Inc. and Rail Link, Inc. are
included within the consolidated financial statements commencing February 9,
1996, April 30, 1996, and November 9, 1996, respectively. Unaudited pro forma
results assuming these acquisitions had been made as of January 1, 1995, are as
follows (in thousands, except per share amounts):
Year Ended
-----------------
12/31/95 12/31/96
-------- --------
(Unaudited)
Revenues...........................................$82,397 $90,842
Net income......................................... 3,976 5,572
Net income per common share and common share
equivalent...................................... $1.69 $1.41
Net income per common share and common share
equivalent assuming full dilution............... $1.69 $1.40
Such pro forma information is not necessarily indicative of the results of
future operations. Income per share information has been adjusted for the stock
split (see Note 13) as though it took place on January 1, 1995.
3. SPECIAL CHARGE:
----------------
One of the Company's subsidiaries has served a salt mine in Retsof, New York
since the 1890's. This mine closed in 1995 and in 1996, the mining company
announced it would not replace the mine or maintain a distribution center. The
subsidiary has experienced a significant decline in traffic and in the fourth
quarter of 1996 the Company realigned its operations and decided to close
certain supporting facilities. Thus, the Company has recorded a special charge
representing the impairment of assets of $1,140,000 and employee severance and
pension termination expense of $220,000. This special charge, which was
recorded in the fourth quarter, is in the amount of $1,360,000 before tax and
$809,000 after tax, or $0.20 per share.
On February 11, 1997, an investment group announced a plan to acquire all rights
of the present salt mining company and build a new mine in the Retsof area.
According to the investment group, development of this new mine is contingent
upon obtaining adequate financing and regulatory approvals and permits. Because
of the nature of the proposed mine and the Company's realignment of operations,
the supporting facilities which are subject to this special charge will not be
needed in any future potential rail operations.
F-10
4. PROPERTY AND EQUIPMENT:
-----------------------
Major classifications of property and equipment are as follows (amounts in
thousands):
1995 1996
------- -------
Road properties $48,691 $62,670
Equipment and other 30,540 34,017
------ ------
79,231 96,687
Less- Accumulated depreciation and
amortization 17,657 17,865
------ ------
$61,574 $78,822
====== ======
5. OTHER ASSETS:
-------------
Major classifications of other assets are as follows (amounts in thousands):
1995 1996
------ -------
Goodwill $ -- $ 5,629
Deferred financing costs 682 2,328
Assets held for sale or future use -- 2,023
Other 609 2,160
----- ------
1,291 12,140
Less- Accumulated amortization 237 765
----- ------
$1,054 $11,375
===== ======
The Company recorded goodwill of approximately $5,629,000 related to the
acquisition of all of the common stock of a new subsidiary (see Note 2). The
goodwill is being amortized on a straight-line basis over 20 years. At December
31, 1996, goodwill was $5,582,000, net of accumulated amortization of $47,000.
Deferred financing costs are amortized over the period covered by the related
revolving credit agreement using the straight-line method, which is not
materially different from the amortization computed using the effective-interest
method (see Note 7).
In December 1996, the Company transferred approximately $2.0 million of assets
from road properties to other assets to be held for sale or future use due to
the shutdown of one of its subsidiaries (see Note 3).
In 1994, the Company wrote off certain road property which was being held for
sale or future use to state the property at net realizable value. This write-
off of approximately $675,000 was recorded as a charge to maintenance of ways
and structures expense.
F-11
6. LEASES:
-------
Lessor
- ------
A subsidiary leases rolling stock to third parties under agreements that are
accounted for as operating leases. The property held for lease on December 31,
1996, totaled $14,175,000 less accumulated depreciation of $3,701,000. The
following is a schedule by years of minimum future rentals receivable on
noncancelable operating leases (amounts in thousands):
1997.............................................$3,198
1998..............................................2,910
1999..............................................1,160
2000..............................................1,160
2001................................................680
Thereafter........................................2,722
-----
$11,830
=======
Lessee
- ------
The Company has entered into several leases for rolling stock, locomotives and
other equipment. Operating lease expense for the years ended December 31, 1994,
1995 and 1996, was approximately $2,275,000, $2,173,000 and $1,256,000,
respectively.
On December 27, 1996, the Company completed the sale of 53 of its locomotives to
a leasing company for a net sale price of approximately $11,950,000. The
proceeds were applied to debt on the Company's credit facilities (see Note 7).
Simultaneously, a subsidiary of the Company entered into an agreement with the
leasing company to lease the locomotives back. The sale resulted in a deferred
gain of approximately $4,902,000 which will be amortized over the term of the
lease as a non-cash offset to rent expense.
The following is a summary of future minimum payments under noncancelable leases
(amounts in thousands):
1997.............................................$2,868
1998............................................. 2,376
1999............................................. 2,073
2000............................................. 1,720
2001............................................. 1,666
Thereafter....................................... 6,600
-----
Total minimum payments..........................$17,303
=======
In 1992, a subsidiary of the Company entered into a lease agreement with a Class
I carrier to operate 185 miles of track in Oregon. This subsidiary began
operations in 1993. The subsidiary has assumed all operating and financial
responsibilities including maintenance and regulatory compliance. Under the
lease, no payments to the lessor are required as long as the subsidiary
interchanges its freight traffic with only the lessor. Through December 31,
1996, no payments were required under this lease arrangement as all traffic has
been interchanged with the lessor. The lease is subject to an initial 20 year
term and shall be renewed for successive ten year renewal terms, unless either
party elects not to renew the lease. If the lessor terminates the lease for any
F-12
reason, the lessor must reimburse the subsidiary for its depreciated basis in
the property.
In August, 1995, a subsidiary of the Company signed an agreement with a Class I
carrier to lease and operate 53 miles of track in Oregon. The lease is subject
to an initial 20 year term and shall be renewed for an additional ten years,
unless either party elects not to renew the lease. Under the lease, no payments
to the lessor are required as long as the subsidiary maintains minimum levels of
traffic and provided the subsidiary interchanges its freight traffic with only
the lessor and certain permitted carriers. The maximum annual lease payment
required if this subsidiary did not move any traffic would be $1.3 million. In
October, 1995, the subsidiary signed an agreement with another Class I carrier
to lease and operate an additional 53 miles of connecting track in Oregon. The
lease is subject to an initial three year term and shall be renewed for
successive three year intervals, unless either party elects not to renew the
lease. Under the lease, no payments to the lessor are required as long as the
subsidiary interchanges its freight traffic with only the lessor and certain
permitted carriers. Under both of these arrangements, the Company has assumed
all operating and financial responsibilities including maintenance and
regulatory compliance. Through December 31, 1996, no payments were required
under either lease arrangement.
A subsidiary of the Company has entered into a trackage rights agreement to
operate over 93 miles of a Class I carrier. This agreement is terminable by
either party after 1997.
7. LONG-TERM DEBT:
---------------
Long-term debt consists of the following (amounts in thousands):
1995 1996
------- -------
Credit facilities with variable
interest depending upon certain
financial ratios of the Company, as
defined (7.25% at December 31, 1996),
due partially in quarterly $24,300 $ 7,972
installments, with the balance due in
2001, net of unamortized discount of
$384,000 ($0 in 1995)
Promissory note payable with interest
at 8% and principal payments due
annually of $1,188,000 if certain
conditions, as specified in the 9,122 9,022
agreement, are met, with the balance
due in 1999
Secured promissory notes (three) with
the State of Illinois, interest at 3%,
payable in annual installments through - 1,737
2006
Term loan payable in quarterly
installments, with interest adjusted
quarterly at 90-day treasury bill rate 6,066 -
plus 3.25%
Capital lease obligations with interest
at 12.47%, payable in monthly 453 -
installments of $47,885 through 1996
------ ------
39,941 18,731
Less- Current portion 1,239 271
------ ------
Long-term debt, less current portion $38,702 $18,460
====== ======
F-13
On June 2, 1995, the Company refinanced approximately $14.3 million of
previously existing notes and purchased approximately $6 million of rolling
stock previously under an operating lease by entering into a credit facilities
agreement. In conjunction with this refinancing transaction, an extraordinary
charge for prepayment penalties and other financing costs on the early
extinguishment of debt for approximately $851,000 ($494,000 net of income taxes)
was incurred. These amounts have been recorded in the accompanying consolidated
income statement as an extraordinary item, net of income taxes.
On February 8, 1996, the Company amended and restated the credit facilities
agreement. The amended and restated credit facilities provide for (i) a $40
million term loan used to finance the acquisitions of Illinois & Midland and
Pittsburg & Shawmut and (ii) a $34 million revolving credit facility used to
finance other acquisitions, including the Rail Link acquisition, and for working
capital and other general corporate purposes. The revolving credit facility
provides for a mandatory commitment reduction of $2.0 million on December 31,
1997, with the remaining balance payable in February, 2001. The Company may
voluntarily reduce the commitment on the revolving credit facility at any time
without penalty, provided that no reinstatement of the commitment amounts may
occur. In conjunction with the amendment and restatement, the Company paid debt
financing fees of $1.6 million, primarily to a financial institution (see Note
5).
On June 28, 1996, the Company used proceeds of approximately $45,805,000 from
its initial public offering (see Note 13) to reduce its credit facilities.
Also, on December 20, 1996, the Company voluntarily paid the remaining balance
on its term loan.
The credit facilities accrue interest at prime or the Eurodollar rate, at the
option of the Company, plus the applicable margin, which varies from 0% to 3%
depending upon the Company's funded debt to EBITDA ratio, as defined in the
agreement. Interest is payable in arrears based on certain elections of the
Company, never to exceed three months outstanding. The Company pays a 1/2% per
annum commitment fee on all unused portions of the revolving credit facility.
The credit facilities agreement requires mandatory prepayments when certain
events occur. These events include, among other things, the generation of
excess cash flow, the disposition of certain levels of assets not subject to
prior liens and the sale of Company stock, all as defined in the agreement.
These credit facilities are secured by substantially all the assets of the
Company and the stock of certain subsidiaries. The credit facilities agreement
requires the maintenance of certain covenants, including, but not limited to,
funded debt to EBITDA, funded debt to net worth, cash flow coverage, EBIT to
interest and minimum net worth, all as defined in the agreement. The Company is
also limited in its ability to incur additional indebtedness, create liens on
its assets, make certain capital expenditures and pay dividends greater than
$32,000 in any one quarter. The Company and its subsidiaries were in compliance
with the provisions of these covenants as of December 31, 1996.
The promissory note payable with an outstanding balance of $9,022,000 at
December 31, 1996, provides for annual principal payments of $1,188,000 by a
subsidiary provided the subsidiary meets certain levels of revenue and cash
flow. In accordance with these provisions, the subsidiary was not required to
make any principal payments in 1995 or 1996. The subsidiary did, however, make
principal payments of $184,000 and $100,000 in 1995 and 1996, respectively, due
to additional requirements regarding the sale of assets, as defined in the
agreement. The subsidiary does not expect that it will be required to make a
principal payment in 1997. The annual debt maturity schedule has been adjusted
accordingly.
F-14
The following is a summary of the maturities of long-term debt as of December
31, 1996 (amounts in thousands):
1997.............................................$ 271
1998.............................................. 176
1999..............................................9,104
2000.............................................. 187
2001..............................................8,165
Thereafter........................................ 828
-----
$18,731
=======
8. INTEREST RATE RISK MANAGEMENT:
-----------------------------
The Company uses derivative financial instruments, specifically interest rate
caps and interest rate swaps, to manage its variable interest rate risk on long-
term debt.
Interest Rate Cap--In August, 1995, the Company entered into a three-year
- -----------------
interest rate cap agreement in order to cap the rate on three-month dollar
deposits, as defined, to a fixed rate of 8.0%. The notional amount under this
agreement reduces on a quarterly basis in varying amounts from $15,250,000 at
September 30, 1995, to $11,438,000 at September 30, 1998 ($14,500,000 at
December 31, 1996). The fees paid by the Company for the interest rate cap were
capitalized and are amortized over the period covered by the agreement.
Management estimates the carrying value of this interest rate cap to approximate
fair value.
Old Interest Rate Swap--In February, 1996, the Company entered into a three-year
- ----------------------
interest rate swap agreement with a financial institution whereby the Company
fixed its LIBOR interest rate at 5.14% by exchanging its variable interest rate
on long-term debt for a fixed interest rate. The notional amount under this
agreement was $10.0 million. In May, 1996, this agreement was terminated and
the Company received consideration of $210,000 from the financial institution,
which is being amortized as a credit to interest expense over the remaining life
of the original agreement.
New Interest Rate Swap--In October, 1996, the Company entered into a two-year
- ----------------------
interest rate swap agreement with a financial institution whereby, effective
December 31, 1996, the Company fixed its LIBOR interest rate at 6.15% by
exchanging its variable interest rate on long-term debt for a fixed interest
rate. The notional amount under this agreement is $10.0 million. Management
estimates the carrying value of this interest rate swap to approximate fair
value.
9. EMPLOYEE BENEFIT PLANS:
-----------------------
Pension
- -------
The Company administers a noncontributory defined benefit plan for the employees
of a subsidiary who are members of a union and who meet minimum service
requirements. Benefits are determined based on a fixed amount per year of
credited service. The Company's funding policy is to make contributions for
pension benefits based on actuarial computations which reflect the long-term
nature of the plan. The Company has met the minimum funding requirements
according to the Employee Retirement Income Security Act.
Pension costs for 1994, 1995 and 1996 were approximately $13,000, $14,000, and
$105,000, respectively. The 1996 pension cost includes the estimated expense of
F-15
terminating the defined benefit plan due to the shut down of a subsidiary's
operations (see Note 3). The pension liability recognized in the accompanying
consolidated balance sheet at December 31, 1995 and 1996, was approximately
$80,000 and $185,000, respectively.
The projected benefit obligation was determined using a discount rate of 7.8%.
The long-term rate of return on plan assets was 7.5%. The plan assets, which
consist of fixed income securities, were approximately $117,000 and $90,000,
respectively, at December 31, 1995 and 1996. The unrecognized net transition
obligation is being amortized over the remaining service lives of plan
participants.
Postretirement Benefits
- -----------------------
Historically, the Company has provided certain health care and life insurance
benefits for certain retired employees. Eligible employees include union
employees for one of its subsidiaries, and certain nonunion employees who have
reached the age of 55 with 30 or more years of service. The Company funds the
plan on a pay-as-you-go basis.
Total postretirement benefit costs for the years ended December 31, 1994, 1995
and 1996, were $55,000, $49,000 and $53,000, respectively. The funded status of
the plan at December 31, 1995 and 1996, was as follows (amounts in thousands):
1995 1996
----- -----
Accumulated postretirement benefit
obligation-
Fully eligible active participants $ 4 $ 58
Other active participants 145 70
Retirees 486 420
---- ----
635 548
Plan assets at fair value - -
---- ----
Accumulated postretirement benefit
obligation in excess of plan assets 635 548
Unrecognized net gain resulting from 51
change in actuarial assumptions 151
---- ----
Accrued postretirement benefit cost $ 686 $ 699
==== ====
For measurement purposes, a 9% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1998. The rate was then assumed to
gradually decrease to 5% by the year 2002, at which time the rate was assumed to
remain level. To illustrate the effect of these assumptions, increasing the
assumed health care cost trend by 1% each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996, by approximately
$44,000 and the net periodic postretirement benefit cost for 1996 by
approximately $7,000.
F-16
Relevant assumptions used in accounting for the postretirement benefit plan as
of December 31 were as follows:
1995 1996
----- -----
Weighted average discount rate 7.5% 7.75%
Long-term rate of return on plan assets N/A N/A
=== ===
Employee Bonus Programs
- -----------------------
The Company has performance-based bonus programs which include a majority of
non-union employees. Key employees are granted bonuses on a discretionary
basis. Total compensation of approximately $314,000, $308,000 and $730,000 was
awarded under the various bonus plans in 1994, 1995 and 1996, respectively.
Profit Sharing
- --------------
The Company maintains a defined contribution profit-sharing plan for two
subsidiaries. There were no contributions in 1994, 1995 or 1996.
Effective January 1, 1994, the Company established two 401(k) plans covering
union and non-union employees who have met specified length of service
requirements. The 401(k) plans qualify under Section 401(k) of the Internal
Revenue Code as salary reduction plans. Employees may elect to contribute a
certain percentage of their salary on a before-tax basis. For non-union
employees, the Company matches the participants contributions up to 1-1/2% of
the participants salary. The Company's contributions to the plans in 1994, 1995
and 1996 were approximately $70,000, $83,000 and $110,000, respectively.
Postemployment Benefits
- -----------------------
The Company does not provide postemployment benefits to its employees.
10. INCOME TAXES:
-------------
The Company files consolidated U.S. federal income tax returns which include all
of its subsidiaries. The components of the provision for income taxes on income
before extraordinary item are as follows (amounts in thousands):
1994 1995 1996
------ ------ ------
Current-
Federal $1,123 $ 550 $2,779
State 146 111 1,014
Deferred 738 811 227
----- ----- -----
$2,007 $1,472 $4,020
===== ===== =====
The provision for income taxes on income before extraordinary item in each
period differs from that which would be computed by applying the statutory U.S.
federal income tax rate to the income before taxes. The following is a summary
of the effective tax rate reconciliation:
F-17
1994 1995 1996
----- ----- -----
Tax provision at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 4.6% 4.0% 5.6%
Other, net 1.4% 2.6% 0.9%
---- ---- ----
40.0% 40.6% 40.5%
==== ==== ====
The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax liability
(amounts in thousands):
1995 1996
-------- --------
Deferred tax assets-
Accruals and reserves not deducted for
tax purposes until paid $ 1,438 $ 1,828
Alternative minimum tax credits 2,903 1,752
Net operating losses 489 -
Investment tax credits 52 -
Postretirement benefits 272 259
Other 74 154
------ ------
5,228 3,993
Deferred tax liability -- differences
in depreciation and amortization (8,089) (7,081)
------ ------
Net deferred tax liability $(2,861) $(3,088)
====== ======
The Company's alternative minimum tax credits can be carried forward
indefinitely; however, the Company must achieve future regular taxable income in
order to realize this credit. Management does not believe that a valuation
allowance is required for the deferred tax assets based on anticipated future
profit levels and the reversal of current temporary differences.
11. GRANTS FROM GOVERNMENTAL AGENCIES:
----------------------------------
In April, 1996, in connection with the purchase of assets of Pittsburg & Shawmut
Railroad Company, Mountain Laurel Railroad Company and Red Bank Railroad Company
(see Note 2), the Company assumed a deferred grant of $3,194,000 from the State
of Pennsylvania.
During 1995, a subsidiary of the Company received a grant from the State of
Pennsylvania of $3,500,000 for rehabilitation of a portion of the subsidiary's
track. The agreement requires the State of Pennsylvania to reimburse the
subsidiary for 75% of the total costs of the project. This project was
substantially complete as of December 31, 1996. Another subsidiary of the
Company received a grant from the State of Louisiana of $300,000 for
rehabilitation of a portion of the subsidiary's track. This project has been
completed.
During 1994, three subsidiaries of the Company received grants totaling
approximately $1,755,000 from the State of Pennsylvania for the rehabilitation
of a portion of each subsidiary's track. The agreements require the State to
reimburse each subsidiary for 70%-75% of the total costs for each rehabilitation
F-18
project. Each of these rehabilitation projects was completed by December 31,
1994.
During a prior year, a subsidiary of the Company received a grant from the State
of New York of $4,000,000 for the rehabilitation of a portion of the
subsidiary's track. This subsidiary also received a grant of $900,000 from the
Federal Railroad Administration for the same rehabilitation project. The State
of New York is entitled to 63.8% of the net liquidation value of the
rehabilitated track upon abandonment. The State of New York agreement also
requires the subsidiary to pay a usage fee for 10 years beginning on April 1,
1994, for all loaded cars moved over the subsidiary's track. Cumulative fees
are limited to $4,000,000. As an alternative to paying the usage fee, the
subsidiary, at its discretion, may make capital improvements, proposed by March
1 of the following year, of equal or greater value to the usage fee accrued
during the year. The Company believes that it has proposed and/or performed
capital improvements of equal or greater value which eliminates any liability
associated with the usage fee.
All of the aforementioned grants do not represent a future liability of the
Company unless the Company abandons the rehabilitated track structure within a
specified period of time, as defined in the respective agreements. As the
Company does not intend to abandon the track, the Company has recorded additions
to road property and has deferred the amount of the grants as the rehabilitation
expenditures have been incurred. The amortization of the deferred grant is a
noncash offset to depreciation expense over the useful life of the related
assets and is not included as taxable income. During the years ended December
31, 1994, 1995 and 1996, the Company recorded offsets to depreciation expense
from grant amortization of $313,000, $415,000 and $638,000, respectively.
12. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company has built its portfolio of railroad properties through the purchase
or lease of road and track structure and through operating agreements. These
transactions have related only to the physical assets of the railroad property.
Historically, the Company does not assume the operations or liabilities of the
divesting railroads.
The Company routinely interchanges traffic with certain Class I railroads that
are currently undergoing consolidations. These consolidations present both risk
and opportunity for the Company. The acquisition of Conrail may impact the
Company's Northeast region. Until the details of these consolidations reaches
greater clarity, the Company is unable to determine the impact on its
operations, particularly in the Northeast.
In connection with the Company's lease of its 185-mile line in Oregon (see Note
6), the Company has committed to the lessor to rehabilitate 25 miles of track
over five years, beginning February, 1993, at an estimated total cost of
approximately $5.0 million. As of December 31, 1996, the Company has completed
approximately $2.0 million of this rehabilitation. The Company has also
purchased and classified as material and supplies approximately $1,870,000 of
rail necessary to complete the project on schedule.
The Company is a defendant in certain lawsuits resulting from the railroad
operations. Management believes that adequate provision has been made in the
financial statements for any expected liabilities which may result from
disposition of such lawsuits. While it is possible that some of the foregoing
matters may be settled at a cost greater than that provided for, it is the
opinion of management that the ultimate liability, if any, will not be material
to the Company's results of operations or financial position.
F-19
13. STOCKHOLDERS' EQUITY:
---------------------
Warrants
- --------
In conjunction with the amendment and restatement of the Company's credit
facilities as discussed in Note 7, detachable warrants were issued to a
financial institution to purchase 41,847 shares of Class A Common Stock at an
exercise price of $0.0005 per share. These warrants are exercisable at any time
through March 1, 2006. Management has valued the warrants at approximately
$471,000, the amount of which was recorded as a debt discount and recorded in
long-term debt. The discount is being amortized over the period covered by the
related credit facilities agreement using the straight-line method, which is not
materially different from the amortization computed using the effective-interest
method.
Initial Public Offering and Related Stock Transactions
- ------------------------------------------------------
On June 28, 1996 the Company closed an underwritten initial public offering
("IPO") of 3,045,200 shares of Class A Common Stock (the "Common Stock
Offering"), of which 2,897,200 shares were offered by the Company and 148,000
shares were offered by a selling stockholder. The gross proceeds to the Company
of the Common Stock Offering of $49,252,000, net of underwriters' commission of
$3,447,000, were used to pay down borrowings on the credit facilities. Other
costs of the IPO of $1,025,000 were paid by the Company.
In connection with the Common Stock Offering, the Company, effective June 10,
1996, changed the par value of its Class A and Class B Common Stock from $10 per
share to $.01 per share and increased the shares authorized to 12 million and
1.5 million shares, respectively. The rights and privileges of Class B Common
Stock changed to substantially the same as Class A Common Stock, except it
carries 10 votes per share, is convertible into Class A Common Stock and has
transfer restrictions. The Class A Common Stock also has a 10% dividend
preference over Class B Common Stock, as and if dividends are declared by the
Board of Directors. Also, the Company executed an 18.5 to 1 stock split and
reclassified the Company's outstanding Class A Common Stock into Class A and
Class B Common Stock, depending on the election of the shareholder.
All references in the consolidated financial statements of the Company to the
number of shares authorized and outstanding of Class A and Class B Common Stock
have been retroactively adjusted to reflect the reclassification of the capital
stock and the stock split.
14. STOCK-BASED COMPENSATION PLANS:
-------------------------------
In 1996, the Company established an incentive and nonqualified stock option plan
for key employees and a nonqualified stock option plan for nonemployee directors
(collectively referred to hereafter as the "Stock Option Plans"). In addition,
the Company established an employee stock purchase plan ("Stock Purchase Plan").
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
F-20
1996
-------
Net Income: As reported $5,905
Pro Forma 5,609
Primary EPS: As reported $ 1.50
Pro Forma 1.45
Fully Diluted EPS: As reported $ 1.49
Pro Forma 1.43
The Company may sell up to 450,000 shares of stock to its full-time employees
under the Stock Purchase Plan. At December 31, 1996, 328 shares had been
purchased under this plan. The Company sells shares at 100% of the stock's
market price at date of purchase, therefore, no compensation cost exists for
this plan.
The Company may grant options to purchase up to an aggregate of 500,000 shares
of Class A Common Stock under its Stock Option Plans. Under both Plans, the
option price equals at least the stock's market price on the date of grant,
except that grants of incentive stock options to employees with significant
voting control must be at least the market price plus ten percent. The Stock
Option Committee of the Company's Board of Directors has discretion to determine
employee grantees, dates and amounts of grants, vesting and expiration dates. No
option may be exercised after ten years from date of grant (or five years in the
case of incentive stock options to employees with significant voting control),
although the stock Option Committee may establish a shorter option term.
The Company has granted 421,500 options during 1996. A total of 32,000 options
granted to directors who are not employees have an exercise price of $17, vest
over three years, and expire after ten years. Of the remaining 389,500 options
issued to employees, 350,500 have an exercise price ranging from $17 to $18.70
and 39,000 have an exercise price of $33.25. The employee options vest over
four years and expire after five years. None of the options were exercisable as
of December 31, 1996.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.5 percent; expected dividend yield of
0 percent; expected lives of 5 and 10 years; expected volatility of 54 percent.
The weighted-average fair value of options granted during 1996 was $10.29 .
F-21
15. QUARTERLY FINANCIAL DATA:
------------------------
Quarterly Results (Unaudited)
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------- -------- -------- ------- -------
1996
Operating revenues.................................. $16,608 $19,009 $19,022 $23,156
Income from operations.............................. 2,814 4,173 3,609 3,398
Net income.......................................... 965 1,559 1,763 1,619
Net income per share................................ 0.41 0.64 0.34 0.30
- -------------------------------------------------------------------------------------------
1995
Operating revenues.................................. $13,391 $13,243 $13,600 $13,154
Income from operations.............................. 1,526 1,427 1,982 1,638
Income before extraordinary item.................... 502 404 654 1,638
Net income (loss)................................... 502 (90) 654 591
Income per share before extraordinary item.......... 0.21 0.17 0.28 0.25
Extraordinary item.................................. - (0.21) - -
Net income (loss) per share......................... 0.21 (0.04) 0.28 0.25
- -------------------------------------------------------------------------------------------
The fourth quarter of 1996 includes a $1,360,000 nonrecurring charge to record
certain shutdown costs associated with the closing of a subsidiary (see Note 3).
The second quarter of 1995 includes a $494,000 extraordinary item, net of
related income tax benefit of $357,000, resulting from the early extinguishment
of debt (see Note 7).
F-22