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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 For the Fiscal Year Ended December 31, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 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, 1998: $107,012,798.
Shares of common stock outstanding as of the close of business on
March 25, 1998:
Class Number of Shares Outstanding
- ----- ----------------------------
Class A Common Stock 4,447,833
Class B Common Stock 845,539
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 12,
1998.
The remainder of this page is intentionally left blank.
2
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 United States 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. In 1977, when
Mortimer B. Fuller, III purchased a controlling interest in the Company and
became its Chief Executive Officer, the Company was dependent on a single
commodity, salt, produced by a single customer. At that time, 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 the acquisition of Rail Link, Inc.,
which provides railroad switching and related services. In 1997, the Company's
growth expanded beyond domestic operations to include the Australia Southern
Railroad ("ASR") a new railroad operation which provides freight services in
South Australia, and Genesee Rail-One Inc. ("GRO") a Canadian company in which
the Company has 47.5% ownership interest. GRO owns and operates two short line
railroads in Canada. As a result of the Company's acquisition and marketing
strategies, the Company has become a diversified rail operation extending over
approximately 2,400 miles of track, 1,500 miles of which are in the United
States and 900 miles of which are in Australia. With the addition of the
industrial switching subsidiary in 1996 and Australia Southern Railroad in 1997,
the Company now serves over 300 customers in 15 states in the United States and
10 major customers in Australia.
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 abandon
ment.
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 acquisition of Consolidated Rail Corporation by Norfolk
Southern Corp. and CSX Transportation, Inc. These consolidations present both
risk and opportunity for the Company. For example, the split up of Conrail will
impact the Company's New York and Pennsylvania railroads. Until the details of
this split up reach greater clarity, the Company is unable to determine the
impact on its operations, particularly in New York and Pennsylvania.
3
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 be
opportunities to make acquisitions among the over 500 existing short line and
regional railroads. The Company believes there may be additional acquisition
opportunities in Australia as the state and federal governments seek
privatization of the railway system. 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 begun a privatization program of the National
Railroad of Mexico which includes 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 uses consultants 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, six were Class I divestitures, one was a governmental
privatization and one was an industrial switching company which also operates
four 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
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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 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
15 domestic customers that generated freight revenues in excess of $1 million in
1997, all but 3 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 3 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 inc rease 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 in the
United States is interchanged with Class I carriers, the Company's marketing
efforts are often aimed at enhancing its railroads' relationships with these
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.
5
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 region.
For example, in connection with its Pittsburg & Shawmut acquisition, the Company
plans to liquidate 42 miles of track and was able to 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. Rationalizations are planned on Buffalo &
Pittsburgh, Louisiana & Delta and Pittsburg & Shawmut in 1998. The estimated
salvage value of property to be rationalized exceeds its book value. 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 $21.1 million in state and federal grants for track rehabilitation
and service improvements has been invested in the Company's rail properties
since 1987.
MANAGEMENT
The Company's Chief Executive Officer and Chief Financial Officer have
responsibility for overall strategic and financial planning. The Chief Executive
Officer has ultimate operating oversight over Australia and the Chief Operating
Officer, a position created and filled in November, 1997, oversees operations in
the United States. 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.
6
RAILROAD OPERATIONS - UNITED STATES
Domestic Customers
The Company's domestic railroads and switching operations currently serve
over 300 customers. A large portion of the Company's domestic operating
revenues is attributable to customers operating in the electric utility, forest
products, petroleum and chemical 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 37%, 49% and 50% of the Company's domestic
revenues in 1997, 1996 and 1995, respectively. In 1997 and 1996, the Company's
largest customer was Commonwealth Edison, an electric utility, which accounted
for approximately 15% and 18% of the Company's revenues in 1997 and 1996,
respectively. Through 1995, the Company's largest customer was Akzo Nobel Salt,
Inc. ("Akzo"), which accounted for approximately 9% of operating revenue in
1995. 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.
Domestic Commodities
The Company's domestic railroads transport a wide variety of commoditie s
for their customers. Some of the Company's railroads have a well-diversified
commodity mix while others transport one or two principal commodities. In 1997,
coal, coke and ores and petroleum products were the two largest commodity groups
transported by the Company's railroads, constituting 31.7% and 12.3%,
respectively, of total domestic freight revenues (see Item 7. of this Report
under the heading "Results of Operations - Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996"), and 37.4% and 7.9%, respectively, of total
domestic carloads. The following table summarizes the aggregate traffic volume
of the Company's domestic railroads by commodity group:
DOMESTIC CARLOADS CARRIED BY COMMODITY GROUP
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Commodity Group Carloads % of total Carloads % of total
- --------------- ------------ ------------- ------------ -------------
Coal, Coke & Ores 82,269 37.4% 81,606 40.5%
Petroleum Products 17,456 7.9% 17,549 8.8%
Pulp & Paper 20,760 9.4% 19,480 9.7%
Lumber & Forest Products 18,171 8.3% 17,135 8.5%
Metals 21,268 9.7% 20,218 10.0%
Chemicals 10,496 4.8% 8,289 4.1%
Farm & Food Products 13,390 6.1% 11,402 5.7%
Autos & Auto Parts 6,496 3.0% 6,301 3.1%
Minerals & Stone 12,657 5.8% 9,066 4.5%
Other 16,743 7.6% 10,261 5.1%
------- ----- ------- -----
Total 219,706 100.0% 201,307 100.0%
======= ===== ======= =====
Coal, coke and ores consist primarily of shipments of coal to utilities
and industrial customers.
7
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.
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.
Domestic Rail Traffic
Domestic 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 loc ated
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 1997, 7.6% of
domestic freight revenues was generated by overhead traffic compared to 8.9% in
1996.
The remainder of this page is intentionally left blank.
8
The following table summarizes domestic freight revenues by type of
traffic carried by the Company's railroads.
DOMESTIC FREIGHT REVENUES BY TRAFFIC TYPE
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
TRAFFIC TYPE AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ------------ ------ ----------- ------ ----------
On-line
Originated $22,537 33.3% $19,796 31.8%
Terminated 33,435 49.4% 31,492 50.5%
Local 5,154 9.7% 5,507 8.8%
------- ----- ------- -----
Total On-line 61,126 92.4% 56,795 91.1%
Overhead 6,587 7.6% 5,521 8.9%
------- ----- ------- -----
Total Traffic $67,713 100.0% $62,316 100.0%
======= ===== ======= =====
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 and Regional 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.
Domestic Employees
As of December 31, 1997, the Company had 771 full-time employees. Of this
total, 158 are members of national labor organizations. The Company has seven
contracts with these national labor organizations which have expiration dates
ranging from July 1998 to January 2000. The Company has also entered into
collective bargaining agreements with an additional 69 employees who represent
themselves, all of which expire in 1999.
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RAILROAD OPERATIONS - AUSTRALIA
ASR commenced operations in November 1997. ASR acquired certain freight
railroad assets of Australian National, a railroad company owned by the
Commonwealth Government of Australia. Coincident with closing the purchase, the
Company sold certain facilities and inventories to two third parties who are
under long-term contracts with ASR to perform locomotive, rolling stock and
track infrastructure maintenance and repairs. Approximately 900 miles of
branchline track structure is owned and exclusively maintained by ASR through
one of the two third parties. The land under the track structure is leased from
the State of South Australia for a 50 year term. Some of these branchlines are
isolated from other parts of the system. Also, different parts of the system
have different track gauges, that is, narrow, standard and wide gauge, and ASR
must provide discrete locomotives and rolling stock for each gauge. In some
cases dual gauge track is in place. Under contract ASR also operates unit trains
on a 153 mile branchline owned by a customer.
ASR operates unit trains for six major customers, hauling six types of
commodities including grain, coal and gypsum. It provides switching, rail yard
storage and other rail related facilities for hire to customers. ASR also
acquired contracts to operate "hook and pull" trains for three customers. Unlike
the United States, the Australian system guarantees open access to rail lines.
ASR provides locomotive, fuel, train crews, and in some cases railcars, to
freight fowarding companies. These freight fowarding companies, ASR's customers,
contract for blocks of time within which their trains can be operated at certain
designated speeds. They are responsible for track access charges and all other
costs of operating these trains. ASR operates hook and pull trains for three
customers over the 2,100 mile corridor between Melbourne and Perth. Certain of
ASR's branchline trains operate over these main lines as well. ASR is not
responsible for maintenance of these main lines.
As of December 31, 1997, ASR had about 150 employees, with about 125
operational staff being members of a union. The contract with the union expires
in November, 2000.
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 $100,000 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 standard pollution exception and
self-insured retentions ranging from $10,000 to $250,000.
Employees of the Company's United States 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.
ASR liability policies have self-insured retentions ranging from $70,000
per occurrence to a one-time deductible of $700,000 for rolling stock. Employees
are covered for injury or death by public and private sector insurance
arrangements. A levy is paid by ASR to the insurance provider based on the
amount of wages and salaries paid by ASR.
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
10
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.
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.
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
11
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.
The Commonwealth of Australia has acknowledged that certain portions of
the leasehold and freehold land acquired under the Sale and Purchase Agreement
by ASR contains contamination arising from activities associated with previous
operators. The Commonwealth has provided a release and indemnity to ASR from
obligations, duty or liability arising from pre-existing contamination. The
Commonwealth is required to remediate the relevant land to existing
environmental standards and for the purpose for which the land was used at the
date of the Sale and Purchase Agreement (or the date on which the land was last
used).
FORWARD-LOOKING STATEMENTS
This Report and the documents incorporated herein by reference may contain
forward-looking statements based on current expectations, estimates and
projections about the Company's industry, management's beliefs and assumptions
made by management. Words such as "anticipates," "intends," "plans," "believes
," "seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are no
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to forecast. Therefore, actual results may
differ materially from those expressed or forecast in any such forward-looking
statements. Such risks and uncertainties include, in addition to those set
forth in this Item 1 and in Item 7, hereof, those noted in the documents
incorporated by reference. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 2. PROPERTIES
The Company currently operates 16 railroads of which 15 are in the United
States and one is in Australia. 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 Company's railroad in Australia
operates over approximately 900 miles of track structure which is owned by the
Company. The land on which the track structure is built is leased from the State
of South Australia for a term of 50 years with a conditional right of renewal
for an additional 15 years.
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The following table sets forth certain information as of December 31, 1997
with respect to the Company's domestic railroads:
CONNECTING
RAILROAD AND LOCATION TRACK MILES STRUCTURE CARRIERS (1)
- --------------------- ----------- --------- --------
Allegheny & Eastern Railroad, Inc.
("ALY") Pennsylvania 153 (2) Owned BPRR, CR
Bradford Industrial Railroad, Inc. ("BR")
New York, Pennsylvania 4 (3) Owned BPRR, CR
ALY, BLE, BR, CN,
Buffalo & Pittsburgh Railroad, Inc. CP, CR, CSX, NS,
("BPRR") New York, Pennsylvania 279 (4) Owned/Leased PS, RSR, SB
The Dansville & Mount Morris Railroad
Company ("DMM") New York 8 Owned/Leased GNWR
Genesee and Wyoming Railroad Company
("GNWR") New York 26 (5) Owned (5) CP, CR, DMM, RSR
Pittsburg & Shawmut Railroad, Inc. ("PS")
Pennsylvania 224 (6) Owned BPRR, CR
Rochester & Southern Railroad, Inc. BPRR, CP, CR,
("RSR") New York 66 (7) Owned GNWR, NS
BNSF, CR, IAIS,
Illinois & Midland Railroad, Inc. ("IMR") IC, NS, PPU, TPW,
Illinois 97 (8) Owned UP
Portland & Western Railroad, Inc. BNSF, UP, WPRR,
("PNWR") Oregon 198 (9) Owned/Leased POTB
Willamette & Pacific Railroad, Inc.
("WPRR") Oregon 185 (10) Leased UP, PNWR
Louisiana & Delta Railroad, Inc. ("LDRR")
Louisiana 87 (11) Owned/Leased UP
Carolina Coastal Railway, Inc. ("CLNA")
North Carolina 17 (12) Leased NS
Commonwealth Railway, Inc. ("CWRY")
Virginia 17 (13) Owned/Leased NS
Talleyrand Terminal Railroad ("TTR")
Florida 10 (14) Leased NS, CSX
Corpus Christi Terminal Railroad, Inc.
("CCPN") Florida 26 (15) Leased UP, BNSF, TM
Note: GWI Switching Services, L.P. is no longer included in this table as the
operating agreement under which it provided switching services to a
Dayton, Texas plastic pellet car storage yard was terminated in December,
1997.
(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, and 83 miles of CR under an agreement
expiring in 2027. The Company is seeking abandonment and rationalization of
approximately 58 miles of owned track that parallels track the BPRR
operated over under the CR trackage right agreement.
(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, 53 miles formerly under lease which was
purchased in November, 1997, and is operated under a rail service easement
and 92 miles which was purchased in July, 1997. In addition, PNWR operates
by trackage rights 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) 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.
13
(13) Includes 12.5 miles under lease expiring in 2009. The Company acquired CWRY
on November 9, 1996.
(14) All under lease expiring in 1999. The Company acquired TTR on November 9,
1996.
(15) All under lease expiring in 2002. The Company acquired CCPN on August 3,
1997.
LEGEND OF CONNECTING CARRIERS
BLE Bessemer and Lake Erie Railroad Company
BNSF Burlington Northern Santa Fe Railway Company
CN Canadian National
CP Canadian Pacific Railway
CR Consolidated Rail Corporation
CSX CSX Transportation, Inc.
IAIS Iowa Interstate Railroad, Ltd.
IC Illinois Central Railroad Company
NS Norfolk Southern Corp.
POTB Port of Tillamook Bay Railroad
PPU Peoria & Pekin Union Railway
SB South Buffalo Railway Company
TM The Texas Mexican Railway Company
TPW Toledo, Peoria & Western Railway Corp.
UP Union Pacific Railroad Company
EQUIPMENT
As of December 31, 1997, rolling stock of the Company's domestic
railroads consisted of 175 locomotives and 1,875 freight cars, some of which
were owned and some of which were leased from others. The Company's rolling
stock for its subsidiary in Australia consisted of approximately 80 locomotives
and approximately 1,200 wagons (freight cars) owned and in service.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits resulting from railroad and
industrial switching operations, one of which includes the commencement of a
criminal investigation. Management believes that the Company has adequate
defenses to any criminal charge which may arise and 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 resolved 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
The remainder of this page is intentionally left blank.
14
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 tables
below show the range of high and low actual trade prices for the Company's Class
A Common Stock during each quarterly period of 1997 and 1996, since its initial
public offering.
YEAR ENDED
DECEMBER 31, 1997 HIGH LOW
----------------- ---- ---
1st Quarter $37.75 $29.00
2nd Quarter $31.75 $26.25
3rd Quarter $35.00 $24.00
4th Quarter $31.75 $22.50
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.
The Company did not pay cash dividends in 1997. 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 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.
On March 16, 1998 there were 109 holders of record of the Company's Class
A Common Stock and 11 holders of record of the Company's Class B Common Stock.
During 1997 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 July 25, 1997 the Company issued to one of its non-employee
directors, for no additional consideration, options under the Genesee & Wyoming
Inc. Stock Option Plan for Outside Directors to purchase an aggregate of 2,000
shares of Class A Common Stock at an exercise price of $26.00 per share. The
shares issuable upon exercise of such options were the subject of
15
a Registration Statement on Form S-8 under the Act. These options were forfeited
on October 27, 1997, when the non-employee director resigned his directorship to
accept a senior management position with the Company.
(2) On October 27, 1997 the Company issued to one of its non-employee
directors, for no additional consideration, options under the Genesee & Wyoming
Inc. Stock Option Plan for Outside Directors to purchase an aggregate of 2,000
shares of Class A Common Stock at an exercise price of $28.50 per share. The
shares issuable upon exercise of such options are the subject of a Registration
Statement on Form S-8 under the Act.
The remainder of this page is intentionally left blank.
16
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,
1997, 1996, 1995, 1994 and 1993, 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: 1997 1996 1995 1994 1993
Operating revenues $103,643 $ 77,795 $53,387 $55,419 $49,645
Operating expenses 87,200 63,801 46,815 47,381 43,501
Operating income 16,443 13,994 6,572 8,038 6,144
Interest expense (3,349) (4,720) (3,405) (3,212) (2,864)
Other income 345 651 456 192 165
Income before income taxes,
extraordinary item and cumulative
effect of accounting change 13,439 9,925 3,623 5,018 3,445
Income taxes (5,441) (4,020) (1,472) (2,007) (1,428)
Income before extraordinary item and
cumulative effect of accounting
change 7,998 5,905 2,151 3,011 2,017
Extraordinary item -- -- (494) -- --
Cumulative effect of accounting
change (1) -- -- -- -- (393)
Net income $ 7,998 $ 5,905 $ 1,657 $ 3,011 $ 1,624
Basic earnings per common share:
Income before extraordinary item and
cumulative effect of accounting
change $1.52 $ 1.54 $ 0.92 $ 1.31 $ 0.88
Extraordinary item -- -- (0.21) -- --
Cumulative effect of accounting
change (1) -- -- -- -- (0.18)
Net income $1.52 $ 1.54 $ 0.71 $ 1.31 $ 0.70
Dividends per common share (2) -- $ 0.01 $ 0.08 $ 0.03 $ 0.05
Weighted average number of shares of
common stock 5,250 3,829 2,348 2,304 2,304
BALANCE SHEET DATA AS OF PERIOD END:
Total assets $210,532 $145,339 $78,429 $69,888 $63,653
Total debt 74,144 18,731 39,941 32,640 35,095
Stockholders' equity 68,343 61,683 10,548 9,082 6,074
(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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes included elsewhere in this Annual Report.
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 freight car switching
and related services to United States 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 freight car
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. Also, much of the
Company's growth to date has resulted from acquisitions. The Company completed
two acquisitions during the first four months of 1996, one in November 1996, and
another in November 1997. 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.
GENESEE & WYOMING AUSTRALIA PTY. LTD.
On August 28, 1997 the Company announced that its wholly owned subsidiary,
Genesee & Wyoming Australia Pty. Ltd. ("GWIA"), had been awarded the contract to
purchase certain selected assets of the railroad freight operation of SA Rail, a
division of Australian National Railway which is controlled by the Commonwealth
Government of Australia (see Note 2. to Consolidated Financial Statements). SA
Rail provides intrastate freight services in South Australia, interstate haulage
of contract freight, rolling stock rental and maintenance, and interstate track
maintenance. GWIA bid as part of a consortium including EDI Clyde Engineering
and Transfield Pty. Ltd. EDI Clyde is a major Australian provider of railway
rolling stock and holds the Australian license for GM/EMD locom otives.
Transfield is a major Australian engineering, construction and infrastructure
maintenance provider. On November 8, 1997, GWIA closed on the purchase of the
assets and commenced operation of railroad freight service under the name of
Australia Southern Railroad Pty. Ltd. The assets were acquired for
approximately $33.1 million, including related costs.
18
The assets consist primarily of road and track structure, railroad rolling stock
and other equipment. The acquisition of assets was partially financed through
two new debt agreements in the aggregate amount of $22.2 million (see Note 9. to
Consolidated Financial Statements).
JOINT VENTURE - GENESEE RAIL-ONE INC.
The Company has formed a joint venture, Genesee Rail-One Inc. ("GRO") to
acquire railroads in Canada. GRO is a joint venture with Rail-One Inc. ("Rail-
One"), a subsidiary of The Cygnus Group which is an integrated transportation
facilities, services and infrastructure provider in Canada. The Company's
initial capital investment in GRO was approximately $4,913,000. On December 31,
1997, the Company's investment was $4,852,000 after adjustment for losses in
equity of unconsolidated affiliates (see Note 3. to Consolidated Financial
Statements). Based on GWI's ownership portion of 47.5%, the Company is
reporting the results of operations of GRO under the equity method of accounting
for investments. The results of operations of GRO are translated into U.S.
dollars at a weighted average exchange rate for each period. In addition, the
Company has loaned Rail-One, its joint venture partner in GRO, $4,613,000
through a promissory note denominated in Canadian currency (see Note 4. to
Consolidated Financial Statements). During 1997, GRO acquired two railroads in
Canada.
AKZO MINE
Prior to 1995, the Company's major customer was Akzo Nobel Salt, Inc.
("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 Cargill, Incorporated ("Cargill"), effectively
ending the plan for a distribution center. 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. Development of this mine is contingent upon obtaining adequate
financing and regulatory approvals and permits. As of February 1998, the
investment group continues to pursue the regulatory approvals and permits
necessary for this new mine.
There were no freight revenues attributable to Akzo in 1997. Freight revenues
attributable to Akzo totaled $62,000 in 1996 and $1.9 million in 1995. The
flooding and subsequent closure did not affect non-freight revenues, which
consist primarily of income from railcar leases under long-term contracts, from
Akzo and its successor, Cargill. Non-freight revenues from Cargill in 1997 were
$3.2 million. Non-freight revenues from Akzo totaled $3.4 million and $2.9
million in 1996 and 1995, respectively.
YEAR 2000 COMPLIANCE
The Company is executing a plan to ensure its systems are compliant with the
requirements to process transactions in the Year 2000. The Company's systems
include internal financial systems and systems provided by third parties for the
transportation operations and certain revenue and expense account processing
related specifically to the rail industry. The Company believes that the costs
necessary to make its internal financial systems Year 2000 compliant will be
immaterial. The Company is communicating with its third party vendors to
coordinate Year 2000 compliance. The Company's rail related systems require
data provided through an industry association. Year 2000
19
compliance by the industry association is planned but is not in the Company's or
its third party vendors' control. The Company believes that it will be able to
achieve Year 2000 compliance; however, no assurance can be given that these
efforts will be successful.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Operating Revenues
Operating revenues were $103.6 million in 1997 compared to $77.8 million in
1996, an increase of $25.8 million or 33.2%. This increase was attributable to
a $11.7 million increase in freight revenues coupled with a $14.1 million
increase in non-freight revenues.
Freight revenues were $74.0 million in 1997 compared to $62.3 million in 1996,
an increase of $11.7 million or 18.7%. Of this increase, $6.3 million or 10.1%
is freight revenue from a new subsidiary with operations in Australia (see Note
2. to Consolidated Financial Statements) and $5.4 million or 8.6% is from an
increase in domestic freight revenue. The following table compares domestic
freight revenues, carloads and average freight revenues per carload for 1997 and
1996:
DOMESTIC FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(EXCEPT AVERAGE PER CARLOAD)
AVERAGE
FREIGHT
REVENUES
FREIGHT REVENUES CARLOADS PER CARLOAD
---------------- -------- -----------
% OF % OF % OF % OF
COMMODITY GROUP 1997 TOTAL 1996 TOTAL 1997 TOTAL 1996 TOTAL 1997 1996
- --------------- ----- ----- ---- ----- ---- ----- ---- ----- ---- ----
COAL, COKE & ORES $21,452 31.7% $20,368 32.7% 82,269 37.4% 81,606 40.5% $ 260 $ 250
PETROLEUM PRODUCTS 8,349 12.3% 8,679 13.9% 17,456 7.9% 17,549 8.8% 478 495
PULP & PAPER 7,920 11.7% 7,223 11.6% 20,760 9.4% 19,480 9.7% 381 371
LUMBER & FOREST
PRODUCTS 6,093 9.0% 5,302 8.5% 18,171 8.3% 17,135 8.5% 335 309
CHEMICALS 5,761 8.5% 4,317 6.9% 10,496 4.8% 8,289 4.1% 548 521
METALS 5,188 7.7% 5,211 8.4% 21,268 9.7% 20,218 10.0% 243 258
FARM & FOOD PRODUCTS 3,865 5.7% 3,537 5.7% 13,390 6.1% 11,402 5.7% 288 310
AUTOS & AUTO PARTS 3,452 5.1% 3,316 5.3% 6,496 3.0% 6,301 3.1% 531 526
MINERALS & STONE 3,346 4.9% 2,572 4.1% 12,657 5.8% 9,066 4.5% 264 283
OTHER 2,287 3.4% 1,791 2.9% 16,743 7.6% 10,261 5.1% 136 175
------- ----- ------- ----- ------- ----- ------- ----- ----- -------
TOTAL $67,713 100.0% $62,316 100.0% 219,706 100.0% 201,307 100.0% $ 308 $ 310
======= ===== ======= ===== ======= ===== ======= ===== ===== =======
The increase in domestic freight revenues was largely attributable to having a
full year of operations in 1997 on acquisitions made during 1996. These
acquisitions generated freight revenues of $22.6 million during 1997 compared to
$19.0 million during 1996, an increase of $3.6 million. Approximately $2.0
million of this increase resulted from the shipment of coal which was offset by
a decrease of approximately $875,000 in the shipment of coal on existing
operations, for a net increase in freight revenue from the shipment of coal of
$1.1 million. Other significant increases in freight revenues were $1.4 million
in chemicals and plastics, $791,000 in lumber and forest products,
20
$774,000 in minerals and stone, and $697,000 in pulp and paper. All remaining
commoditie s had slight increases and decreases which when netted result in an
increase of approximately $607,000.
Non-freight revenues were $29.6 million in 1997 compared to $15.5 million in
1996, an increase of $14.1 million or 91.3%. Revenues from switching and
storage activities were $18.7 million in 1997 compared to $6.2 million in 1996,
an increase of $12.5 million or 201.1%. The increase in switching and storage
revenues was largely attributable to the full year of operations on acquisitions
made during 1996, which generated switching and storage revenues of
approximately $15.4 million during 1997 compared to $2.3 million in 1996 for an
increase of $13.1 million. Revenues from car hire and car rentals were $6.3
million in 1997 compared to $4.5 million in 1996, an increase of $1.8 million or
39.1%. Approximately $750,000 of this increase in revenue from car hire and car
rentals is from new operations in Australia (see Note 2. to Consolidated
Financial Statements). The balance consists of $700,000 of increases on
existing operations and $350,000 of increases on acquisitions made during 1996.
Operating Expenses
Operating expenses for domestic and foreign operations combined were $87.2
million in 1997 compared to $63.8 million for domestic operations only in 1996,
an increase of $23.4 million or 36.7%. Expenses attributable to operations in
Australia which began in November, 1997, represented $6.7 million or 28.7% of
the change, increases in expenses associated with acquisitions made in 1996
represented approximately $17.2 million or 73.6% of the change, and expenses on
existing operations decreased approximately $550,000 or 2.3% of the change.
The Company's operating ratio increased to 84.1% in 1997 from 82.0% in 1996.
The following table sets forth a comparison of the Company's operating
expenses in 1997 and 1996:
OPERATING EXPENSE COMPARISON
YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1997 1996
---- ----
% OF % OF
OPERATING OPERATING
$ REVENUE $ REVENUE
-- ------- -- -------
Labor and benefits $37,397 36.1% $25,197 32.4%
Equipment rents 8,938 8.6% 8,511 10.9%
Purchased services 6,411 6.2% 3,398 4.4%
Depreciation and amortization 6,999 6.8% 6,052 7.8%
Diesel fuel 6,147 5.9% 4,433 5.7%
Casualties and insurance 5,554 5.4% 4,626 5.9%
Materials 4,495 4.3% 3,486 4.5%
Other 11,260 10.8% 6,738 8.7%
Special charge 0 0.0% 1,360 1.7%
------- ---- ------- ----
Total $87,200 84.1% $63,801 82.0%
======= ==== ======= ====
21
Labor and benefits expense was $37.4 million in 1997 compared to $25.2 million
in 1996, an increase of $12.2 million or 48.4%. The increase was attributable
to increases of $9.6 million from acquisitions made in 1996, $899,000 from
operations in Australia which began in November, 1997, and $1.7 million from
increases on existing operations. Labor costs increased as a percentage of
revenues to 36.1% in 1997 compared to 32.4% in 1996. This increase is primarily
due to the labor-intensive nature of Rail Link, Inc.'s industrial switching and
other rail-related services operation.
Equipment rents were $8.9 million in 1997 compared to $8.5 million in 1996, an
increase of $427,000 or 5.0%. The increase was attributable to increases of
$333,000 from acquisitions made in 1996, $81,000 from operations in Australi a
and $13,000 from increases on existing operations. However, equipment rents
decreased to 8.6% of operating revenue in 1997, from 10.9% in 1996. This is
mainly because the largest component of equipment rents, car hire expense,
decreased to 4.7% of operating revenue in 1997 from 5.8% of operating revenue in
1996 due to a low car hire to revenue ratio for Rail Link, Inc. and no car hire
for Australia Southern Railroad.
Purchased services were $6.4 million in 1997 compared to $3.4 million in 1996,
an increase of $3.0 million or 88.6%. The increase was attributable to
increases of $417,000 from acquisitions made in 1996, $2.3 million from
operations in Australia and $298,000 from increases on existing operations.
Depreciation and amortization expense was $7.0 million in 1997 compared to
$6.1 million in 1996, an increase of $947,000 or 15.6%. The increase is a net
change and reflects increases in depreciation and amortization related to
acquisitions made in 1996 of $1.2 million, depreciation attributable to
operations in Australia of $246,000, and a decrease in depreciation on existing
operations of $479,000.
Casualties and insurance expense, including claims brought under the Federal
Employers' Liability Act, was $5.6 million in 1997 compared to $4.6 million in
1996, an increase of $928,000 or 20.0%. The increase was attributable to
increases of $267,000 from acquisitions made in 1996, $347,000 from operations
in Australia and $314,000 from increases on existing operations. The increases
of $267,000 from acquisitions made in 1996 and $314,000 from existing operations
were due to an increase in derailment expense of $628,000 less a net reduction
in third party claims and insurance premiums of $47,000.
Materials expense was $4.5 million in 1997 compared to $3.5 million in 1996,
an increase of $1.0 million or 28.9%. The increase was attributable to
increases of $723,000 from acquisitions made in 1996, $134,000 from operations
in Australia and $152,000 from increases on existing operations.
Special charge expense of $1.4 million in 1996 represents the impairment of
assets of $1.1 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 5. to Consolidated Financial Statements
and "Akzo Mine" above).
Interest Expense and Income Taxes
Interest expense was $3.3 million in 1997 compared to $4.7 million in 1996, a
decrease of $1.4 million or 29.0%. The decrease reflects the repayment of $45.8
million of debt on June 28, 1996, from the proceeds of the initial public
offering combined with other reductions to debt using cash generated from
operations, offset in part by increased debt related to the financing of a new
acquisition in Australia, an investment in a Canadian company that operates two
railroads in Canada, and a new capital lease for equipment.
22
The Company's effective income tax rate was 40.5% in 1997 and 1996,
respectively.
Net Income
The Company's net income in 1997 was $8.0 million compared to net income in
1996 of $5.9 million, an increase of $2.1 million or 35.4%.
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:
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
(EXCEPT AVERAGE PER CARLOAD)
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% 4,458 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,
23
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 Note 5. to Consolidated Financial Statements and
"Akzo Mine " above.
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
was 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 stora ge
revenues was largely attributable to the operations on 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 $1.6 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%
======= ==== ======= ====
24
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 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.
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 $954,000 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. T
his 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 in 1996 represents the impairment of
assets of $1.1 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 5. to Consolidated Financial Statements
and "Akzo Mine" above.
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 the 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.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company generated cash from operations of $1.8 million,
generated cash from asset sales of $581,000, received $2.9 million in state
grant funds for track rehabilitation, and had net new borrowings of $45.2
25
million. During the year the Company invested $16.3 million, including capital
leases of $11.8 million, in equipment and rolling stock, and $9.4 million in
track improvements and buildings. These expenditures were apart from the
Company's investment in the Australia acquisition (see Note 2. to Consolidated
Financial Statements) and its investment in GRO which operates two railroads in
Canada (see Note 3. to Consolidated Financial Statements).
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 as recorded by new acquisitions. 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 (see Note 2. to Consolidated Financial Statements).
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 sto ck and $8.0 million in track improvements and buildings.
In October, 1997, the Company amended and restated its credit facilities
agreement to provide for a $65.0 million revolving credit facility. The
facility has a maturity date of October 31, 2002. The credit facilities accrue
interest at prime or the Eurodollar rate, at the option of the Company, plus the
applicable margin, which varies from 0.75% to 1.5% 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, not to exceed three months
outstanding. The Company pays a commitment fee which varies between 0.25% and
0.375% per annum on all unused portions of the revolving credit facility
depending on the Company's funded debt to EBITDA ratio. The credit facilities
agreement requires mandatory prepayments from the issuance of new equity or debt
and annual sale of assets in excess of $6.5 million. These credit facilities
are guaranteed by all domestic subsidiaries of the Company and contain a
negative pledge of assets. The credit facilities agreement requires the
maintenance of certain covenants, including, but not limited to, funded debt to
EBITDA, cash flow coverage and EBITDA less defined capital expenditures to
interest expense, all as defined in the agreement. The Company and its
subsidiaries were in compliance with the provisions of these covenants as of
December 31, 1997.
At December 31, 1997 the Company had long-term debt (including current
portion) totaling $74.1 million, which comprised 52.0% of its total
capitalization. This compares to long-term debt, including current portion, of
$18.7 million at December 31, 1996, comprising 23.3% 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 grant funds, there can be no assurance
that the funds will continue to be available.
26
The Company has budgeted approximately $12.0 million in capital expenditures
in 1998, primarily for track rehabilitation, of which $1.5 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, and $2.5 million is expected to be used in
Australia.
In connection with the Company's acquisition of assets in Australia (see Note
2. to Consolidated Financial Statements), the Company has committed to the
Commonwealth of Australia to spend approximately $34.1 million (AU $52.3
million) to rehabilitate track structures and equipment by December 31, 2002.
The Commonwealth Government may require the payment of any shortfall between the
actual expenditure incurred from the date of acquisition to December 31, 2002,
and the contracted commitment of approximately $34.1 million (AU $52.3 million).
This commitment may be renegotiated if there is a significant change in
operating conditions outside the control of the Company.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Non-applicable.
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
The remainder of this page is intentionally left blank.
27
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 12, 1998 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 12, 1998 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 12, 1998 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.
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 12, 1998 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 STATEMENT 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, 1997 and 1996
Consolidated Statements of Income for the Years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
28
(B) REPORTS ON FORM 8-K
A report on Form 8-K dated November 7, 1997 was filed by the Registrant
reporting on Item 2. Acquisition or Disposition of Assets. No financial
statements were filed with such Form 8-K.
(C) EXHIBITS - SEE INDEX TO EXHIBITS.
The remainder of this page is intentionally left blank.
29
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 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 27, 1998 CEO and /s/ Mortimer B.
Director Fuller, III
-------------------
Mortimer B. Fuller, III
March 27, 1998 Senior Vice President /s/ Alan R. Harris
and Chief Accounting ------------------
Officer Alan R. Harris
March 27, 1998 Senior Vice /s/ Mark W. Hastings
President, --------------------
Chief Financial Mark W. Hastings
Officer
and Treasurer
March 27, 1998 Director /s/ James M. Fuller
--------------------
James M. Fuller
March 27, 1998 Director /s/ Louis S. Fuller
--------------------
Louis S. Fuller
March 27, 1998 Director /s/ Robert M. Melzer
--------------------
Robert M. Melzer
March 27, 1998 Director /s/ John M. Randolph
--------------------
John M. Randolph
March 27, 1998 Director /s/ Philip J. Ringo
--------------------
Philip J. Ringo
30
Report of Independent Public Accountants
To the Board of Directors and the Shareholders of Genesee & Wyoming Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Genesee & Wyoming Inc. and issued our
report thereon dated February 12, 1998. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule of Valuation and Qualifying Accounts is presented for purposes of
complying with the Securities and Exchange Commissions rules and are not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 12, 1998
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
Description (in thousands) December 31, 1996 December 31, 1997
- -------------------------- ----------------- -----------------
Accounts Receivable - Allowance for $76 $167
Doubtful Receivables
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/
31
*( 4.1) Second Amended and Restated Revolving Credit Agreement dated as of
October 31, 1997 among the Registrant, its subsidiaries, BankBoston,
N.A. and the Banks named therein. Upon written request, the Registrant
will provide to security holders copies of any of the referenced omitted
Exhibits and Schedules.
( 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 Severance 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) Warrant Purchase Agreement dated as of February 8, 1996 between the
Registrant and First National Bank of Boston. (Exhibit 10.64)/1/
(h) Agreement dated February 6, 1996 between Illinois & Midland
Railroad, Inc. and the United Transportation Union. (Exhibit
10.65)/1/
(i) 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
32
Railroad Company and Arthur T. Walker Estate Corporation, and
Amendment No. 1 to Asset Purchase Agreement dated April 19, 1996.
(Exhibit 10.70)/4/
(j) Amendment No. 1 to Warrant Purchase Agreement dated as of May 31,
1996 between the Registrant and FSC Corp. (Exhibit 10.71)/2/
(k) Stock Purchase Agreement dated as of November 8, 1996 between
Brenco, Incorporated, Rail Link, Inc. and the Registrant (Exhibit
10.1)/5/
(l) Amendment No. 1 to the Genesee & Wyoming Inc. Stock Option Plan
(Exhibit 10.1)/6/
(m) Share Sale Agreement dated 28 August 1997 between the Commonwealth
of Australia, Genesee & Wyoming Australia Pty. Limited (now named
Australia Southern Railroad Pty. Limited) and the Registrant, and
Amendment Agreement dated 7 November 1997 with respect thereto.
(Exhibit 2.1)/7/
*(10.1) Amendment No. 1 to Genesee & Wyoming Inc. Stock Option Plan for Outside
Directors.
*(10.2) Memorandum of Lease between Minister for Transport and Urban Planning a
Body Corporate Under the Administrative Arrangements Act 1994, the
Lessor, and Australia Southern Railroad Pty Ltd A.C.N 079 444 296, the
Lessee, dated 7 November 1997. Upon written request, the Registrant will
provide to security holders copies of any of the referenced omitted
Schedules.
*(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
33
Not applicable.
*(27.1) Financial Data Schedule for Year Ended December 31, 1997
*(27.2) Restated FDS for Quarter ended September 30, 1997
*(27.3) Restated FDS for Quarter Ended June 30, 1997
*(27.4) Restated FDS for Quarter Ended March 31, 1997
*(27.5) Restated FDS for Quarter Ended December 31, 1996
*(27.6) Restated FDS for Quarter Ended September 30, 1996
*(27.7) Restated FDS for Quarter ended June 30, 1996
(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.
/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.
/5/Exhibit previously filed as part of, and incorporated herein by
reference to, the Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1997. The exhibit number contained in parenthesis refers to the
exhibit number in such Report.
/6/Exhibit previously filed as part of, and incorporated herein by
reference to, the Registrant's Report on Form 10-Q for the quarter ended June
30, 1997. The exhibit number contained in parenthesis refers to the exhibit
number in such Report.
/7/Exhibit previously filed as part of, and incorporated herein by
reference to, the Registrant's Report on Form 8-K dated November 7, 1997. The
exhibit number contained in parenthesis refers to the exhibit number in such
Report.
The remainder of this page is intentionally left blank.
34
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Genesee & Wyoming Inc. and Subsidiaries:
Report of Independent Public Accountants.................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995..................................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995..................................................... F-6
Notes to Consolidated Financial Statements.................................................. F-7
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, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 12, 1998
2
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, December 31,
------------ -----------
ASSETS 1997 1996
------ ---- ----
CURRENTS ASSETS:
Cash and cash equivalents $11,434 $14,121
Accounts receivable, net 29,895 19,133
Note receivable - related party 4,499 ---
Materials and supplies 5,039 4,173
Prepaid expenses and other 3,145 1,771
Deferred income tax assets, net 2,523 1,632
------------------------------------
Total current assets 56,535 40,830
------------------------------------
PROPERTY AND EQUIPMENT, net 124,985 78,822
------------------------------------
SERVICE ASSURANCE AGREEMENT, net 13,563 14,312
------------------------------------
INVESTMENT IN UNCONSOLIDATED AFFILIATE 5,082 ---
------------------------------------
OTHER ASSETS, net 10,367 11,375
------------------------------------
Total assets $210,532 $145,339
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $1,157 $271
Accounts payable 30,025 33,583
Accrued expenses 6,796 6,122
-------------------------------------
Total current liabilities 37,978 39,976
-------------------------------------
LONG-TERM DEBT 72,987 18,460
-------------------------------------
OTHER LIABILITIES 3,237 2,699
-------------------------------------
DEFERRED INCOME TAX LIABILITIES, net 8,470 4,720
-------------------------------------
DEFERRED ITEMS--grants from governmental agencies 15,083 12,899
-------------------------------------
DEFERRED GAIN--sale leaseback 4,434 4,902
-------------------------------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 14)
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value, one vote per share;
12,000,000 shares authorized; 4,404,262 and 4,399,463 issued and
outstanding on December 31, 1997 and 1996, respectively 44 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 46,205 46,102
Warrants outstanding 471 471
Retained earnings 23,056 15,058
Foreign currency translation adjustment (1,441) ---
-------------------------------------
Total stockholders' equity 68,343 61,683
-------------------------------------
Total liabilities and stockholders' equity $210,532 $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
(dollars in thousands, except per share amounts)
Years Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
OPERATING REVENUES $103,643 $77,795 $53,387
---------------------------------------
OPERATING EXPENSES:
Transportation 31,690 18,952 14,262
Maintenance of ways and structures 10,483 9,431 6,127
Maintenance of equipment 17,537 14,218 12,230
General and administrative 20,491 13,788 10,309
Depreciation and amortization 6,999 6,052 3,887
Special charge ---- 1,360 ----
---------------------------------------
Total operating expenses 87,200 63,801 46,815
---------------------------------------
Income from operations 16,443 13,994 6,572
INTEREST EXPENSE (3,349) (4,720) (3,405)
OTHER INCOME, net 345 651 456
---------------------------------------
Income before provision for income taxes and
extraordinary item 13,439 9,925 3,623
PROVISION FOR INCOME TAXES (5,441) (4,020) (1,472)
---------------------------------------
Income before extraordinary item 7,998 5,905 2,151
EXTRAORDINARY ITEM FROM EARLY EXTINGUISHMENT
OF DEBT, net of related income tax benefit of $357 ---- ---- (494)
---------------------------------------
NET INCOME $7,998 $5,905 $1,657
=======================================
Basic earnings per common share :
Income before extraordinary item $1.52 $1.54 $0.92
Extraordinary item ---- ---- (0.21)
---------------------------------------
Net Income $1.52 $1.54 $0.71
=======================================
Weighted average number of shares of common stock - basic 5,250 3,829 2,348
=======================================
Diluted earnings per common share :
Income before extraordinary item $1.47 $1.49 $0.92
Extraordinary item ---- ---- ($0.21)
---------------------------------------
Net Income $1.47 $1.49 $0.71
=======================================
Weighted average number of shares of common stock - diluted 5,447 3,966 2,348
=======================================
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
Issued and Par Issued and Par Paid-in
Outstanding Value Outstanding Value Capital
------------------------------------------------------------
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 --- --- --- --- ---
Proceeds from issuance of stock--initial public offering 2,898 29 --- --- 44,751
Proceeds from issuance of stock--employee purchase --- --- --- --- 11
Net income --- --- --- --- ---
Cash dividends -- $0.01 per share --- --- --- --- ---
------------------------------------------------------------
BALANCE, December 31, 1996 4,400 44 847 8 46,102
------------------------------------------------------------
Proceeds from issuance of stock--employee purchase 4 --- --- --- 103
Translation adjustments --- --- --- --- ---
Net income --- --- --- --- ---
------------------------------------------------------------
BALANCE, December 31, 1997 4,404 $44 847 $8 $46,205
============================================================
Foreign Stockholders'
Warrants Retained Currency Equity
Outstanding Earnings Adjustment Total
--------------------------------------------------------
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 --- --- 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 471 15,058 --- 61,683
--------------------------------------------------------
Proceeds from issuance of stock--employee purchase --- --- --- 103
Translation adjustments --- --- ($1,441) (1,441)
Net income --- 7,998 --- 7,998
--------------------------------------------------------
BALANCE, December 31, 1997 $ 411 $23,056 ($1,441) $68,343
=======================================================
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,
-------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,998 $5,905 $1,657
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 6,999 6,052 3,887
Deferred income taxes 2,863 1,332 811
Gain on disposition of property (13) (633) (195)
Special charge ---- 1,360 ----
Changes in assets and liabilities, net of balances
assumed through acquisitions-
Receivables (14,347) (7,781) 1,257
Materials and supplies 477 (1,861) 38
Prepaid expenses and other (1,362) (239) (450)
Accounts payables and accrued expenses (2,015) 25,217 (4,751)
Other assets and liabilities, net 1,210 1,060 310
--------------------------------------
Net cash provided by operating activities 1,810 30,412 2,564
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,891) (8,174) (16,632)
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) ----
Purchase of assets of Australian National Railway (33,079) ---- ----
Investment in affiliate (4,913) ---- ----
Proceeds from disposition of property 581 17,790 318
--------------------------------------
Net cash used in investing activities (51,302) (40,802) (16,314)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings, including capital leases (24,982) (73,400) (16,999)
Proceeds from issuance of long-term debt 70,885 51,437 24,300
Debt issuance costs (739) (1,642) (641)
Net proceeds on grants 2,903 771 3,512
Dividends paid ---- (32) (191)
Proceeds from issuance of stock--employee purchase 103 11 ----
Issuance of stock warrants ---- 471 ----
Proceeds from issuance of stock--initial public offering ---- 44,780 ----
--------------------------------------
Net cash provided by financing activities 48,170 22,396 9,981
--------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,365) ---- ----
--------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,687) 12,006 (3,769)
CASH AND CASH EQUIVALENTS, beginning of period 14,121 2,115 5,884
--------------------------------------
CASH AND CASH EQUIVALENTS, end of period $11,434 $14,121 $2,115
======================================
CASH PAID DURING PERIOD FOR:
Interest $2,474 $4,347 $3,204
Incomes taxes 5,056 2,138 1,022
======================================
SUPPLEMENTAL NON-CASH INVESTING ACTIVITIES:
Assumption of liabilities in connection with purchase of
assets of Chicago & Illinois Midland Railway Company ---- $1,394 ----
Assumption of deferred credits from governmental agencies in connection
with purchase of assets of Pittsburg & Shawmut Railroad Company,
Mountain Laurel Railroad Company and Red Bank Railroad Company ---- 3,194 ----
Capital lease obligation $11,761 ---- ----
======================================
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 16 short line
and regional railroads in New York, Pennsylvania, Louisiana, Oregon, Texas,
Illinois, Florida, North Carolina, Virginia and, beginning in 1997, Australia
(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 freight car switching and related services to industries in the United
States with extensive railroad facilities within their complexes. The Company
has an unconsolidated 47.5 percent equity interest in a Canadian company which
owns and operates two railroads in Canada.
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
capitaliz ed 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 $78,000 and $572,000 realized by the leasing subsidiary on the
sale or disposition of transportation equipment during 1997 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
7
The Company continually evaluates whether 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 or not an impairment has occurred.
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. The service assurance agreement is stated at
$13.6 million, net of accumulated amortization of $1.4 million and $14.3
million, net of accumulated amortization of $669,000 at December 31, 1997 and
1996, respectively.
Earnings per Share
- ------------------
Earnings per share are calculated under the guidelines of FASB Statement No. 128
wherein earnings per share are presented for basic and diluted shares on net
income. Basic earnings per share are calculated on income available to common
stockholders divided by the weighted-average number of common shares during the
period. Diluted earnings per share are calculated using earnings available to
each share of common stock outstanding during the period and to each share that
would have been outstanding assuming the issuance of common shares for all
potentially dilutive common shares outstanding during the reporting period.
Unexercised stock options and warrants, calculated under the treasury stock
method, are the only reconciling items between the Company's basic and diluted
earnings per share. The number of options and warrants, included in the
denominator, used to calculate diluted earnings per share are 409,822, 424,347
and 0 for 1997, 1996 and 1995, respectively. Options to purchase 39,000 shares
of stock were outstanding during 1997 but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
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 chemical
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 37%, 49% and 50% of the Company's revenues in 1997, 1996 and 1995,
respectively. One customer in the electric utility industry accounted for
approximately 15% and 18% of the Company's revenues in 1997 and 1996,
respectively (see Note 2.). 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 chemical 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.
8
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.
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, liabilities, revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain 1996 balances have been reclassified to conform with the 1997
presentation.
Foreign Currency Translation
- ----------------------------
The financial statements of the Company's foreign subsidiary were prepared in
their respective local currency and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of income. Translation
adjustments are reflected as foreign currency translation adjustments in
Shareholders' Equity and accordingly have no effect on net income. Translation
adjustments for transactions denominated in foreign currency are included in
other expense and were $114,000 in 1997.
2. EXPANSION OF 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
purch ase price was allocated to purchased inventory ($750,000), assumed note
receivable ($1.2 million), property ($10.8 million), and the service assurance
agreement ($14.9 million). The purchase also included the assumption of $1.4
million of liabilities. This subsidiary operates approximately 126 miles of
track in the State of Illinois. A significant portion of this subsidiary's
operating revenue (74% in 1997, 76% in 1996 and 83% in 1995) 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 ($14.8 million), and other assets ($264,000). The
purchase also included the assumption of $3.2 million 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 plus interest) 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
9
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
goodwill and amortized over the same period as the related track structure,
which is 20 years. On December 31, 1997, the Company met certain contingency
payment criteria and recorded $192,000 of goodwill. 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. The
acquisition was accounted for as a purchase.
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 $12.1 million in cash
of which $3.0 million are contingent payments based on performance. In 1996,
the Company recorded the entire contingent payment as part of the purchase
price. In 1997, the Company reversed $1.5 million of purchase price based on
the probability of payment. At December 31, 1997, $1.5 million in future
amounts payable remain contingent. The purchase price was allocated to
purchased net working capital ($1.2 million), property ($5.0 million), goodwill
($4.1 million) and other assets ($275,000). The goodwill is being amortized on
a straight-line basis over 20 years. The purchase also included the assumption
of $474,000 of liabilities. Rail Link provides freight car switching and
related services to United States industries with extensive railroad facilities
within their complexes. Rail Link manages 23 switching operations, a railcar
cleaning operation, two track maintenance operations and a locomotive leasing
operation in 11 states. Rail Link operates four short line railroads located in
Florida, North Carolina, Texas and Virginia. The acquisition was accounted for
as a purchase.
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
------------------
12/31/96 12/31/95
-------- --------
(Unaudited)
Revenues....................................................$90,842 $82,397
Net income.................................................. 5,572 3,976
Net income per common share - basic......................... $1.46 $1.69
Net income per common share - diluted....................... $1.40 $1.69
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 15.) as though it took place on January 1, 1995.
Genesee & Wyoming Australia Pty. Ltd.
- -------------------------------------
On August 28, 1997, the Company announced that its wholly owned subsidiary,
Genesee & Wyoming Australia Pty. Ltd. ("GWIA"), had been awarded the contract to
purchase certain selected assets of the railroad freight operation of SA Rail, a
division of Australian National Railway which is controlled by the Commonwealth
Government of Australia. SA Rail provides intrastate freight services in South
10
Australia, interstate haulage of contract freight, rolling stock rental and
maintenance, and interstate track maintenance. GWIA bid as part of a consortium
including EDI Clyde Engineering and Transfield Pty. Ltd. EDI Clyde is a major
Australian provider of railway rolling stock and holds the Australian license
for GM/EMD locomotives. Transfield is a major Australian engineering,
construction and infrastructure maintenance provider. On November 8, 1997 GWIA
closed on the purchase of the assets and commenced operation of railroad freight
service under the name of Australia Southern Railroad Pty. Ltd. The assets were
acquired for approximately $33.1 million, including related costs. The assets
consist primarily of road and track structure, railroad rolling stock and other
equipment.
3. JOINT VENTURE:
--------------
The Company has formed a joint venture, Genesee Rail-One Inc. ("GRO") to acquire
railroads in Canada. GRO is a joint venture with Rail-One Inc., a subsidiary of
The Cygnus Group which is an integrated transportation facilities, services and
infrastructure provider in Canada. The Company's initial capital investment in
GRO was approximately $4,913,000.
On July 29, 1997, GRO commenced operations of the Huron Central Railway Inc.
("HCRY"), a 180-mile railroad located in Central Ontario. HCRY leases its rail
line from the Canadian Pacific Railway for a 20 year term and is responsible for
operation and maintenance of the leased line.
GRO commenced operations on November 11, 1997 of the Quebec Gatineau Railway
Inc. ("QGRY"), a 354-mile railroad linking Quebec City, Montreal and Hull in
Southeas tern Quebec. QGRY purchased and leased the assets for this railroad
from St. Lawrence & Hudson Railway Company Limited which is a subsidiary of
Canadian Pacific Railway Company.
Based on GWI's ownership portion of 47.5%, the Company is reporting the results
of operations of GRO under the equity method of accounting for investments. The
results of operations of GRO are translated into U.S. dollars at a weighted
average exchange rate for each period and are included in other income, net.
4. RELATED PARTY TRANSACTIONS
--------------------------
The Company has loaned Rail-One, its joint venture partner in GRO, $4,613,000
through a promissory note denominated in Canadian currency. The note bears
interest at 7.5 percent per annum, earns a Commitment Fee equal to 4 percent of
the principal amount of the note and is secured by Rail-One's 47.5 percent
ownership in GRO. The principal of the note, all accrued interest on the
principal amount and the Commitment Fee are due and payable on November 10, 1998
(the "Maturity Date"). If Rail-One pays all accrued interest and the Commitment
Fee on the Maturity Date, Rail-One shall have the option to extend the loan for
an additional three months at 12.5 percent per annum. Interest income and
Commitment Fee income reported in other income, net in the Company's financial
results for 1997 were $49,000 and $31,000, respectively. On December 31, 1997,
the Company's promissory note with Rail-One was valued at $4,499,000 after
foreign currency exchange adjustments, resulting in a translation loss of
$114,000 that is included in other income, net.
Two of the Company's subsidiaries have agreed through a Memorandum of Lease
Agreement to enter into several one year operating leases with subsidiaries of
GRO to provide rail cars and locomotives for service in Canada. On November 25,
1997, one of the Company's subsidiaries entered into a lease to provide 911
boxcars at a monthly rate of $185 per car. Equipment rental income of $197,000
resulting from this lease was included in 1997 operating revenue. The remaining
11
operating leases are dependent on asset availability and cost before lease rates
can be determined and the leases can be finalized.
The Company has entered into an agreement with GRO to provide certain
management, administrative and accounting services to GRO and its subsidiaries.
Management fees of $65,000 earned in 1997 were reported as an offset to general
and administrative expense in the Company's financial statements.
5. SPECIAL CHARGE:
---------------
Since 1899, one of the Company's subsidiaries previously served a salt mine in
Retsof, New York. 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 of that subsidiary. 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 of 1996, 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 prior 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 were the subject of this special charge will not
be needed in any future rail operations. As of February, 1998, the investment
group continues to pursue the regulatory approvals and permitting processes
necessary to development of the new mine.
6. PROPERTY AND EQUIPMENT:
-----------------------
Major classifications of property and equipment are as follows (amounts in
thousands)
1997 1996
--------- ---------
Road properties $ 83,093 $62,670
Equipment and other 66,341 34,017
-------- --------
149,434 96,687
Less- Accumulated depreciation and amortization
24,449 17,865
-------- --------
$124,985 $78,822
======== ========
12
7. OTHER ASSETS:
-------------
Major classifications of other assets are as follows (amounts in thousands):
1997 1996
--------- ---------
Goodwill $ 4,238 $ 5,629
Deferred financing costs 3,073 2,328
Assets held for sale or future use 2,023 2,023
Other 2,565 2,160
------- -------
11,899 12,140
Less- Accumulated amortization 1,532 765
------- -------
$10,367 $11,375
======= =======
Goodwill is being amortized on a straight-line basis over 20 years (see Note
2.). Deferred financing costs are amortized over the periods covered by the
related revolving credit agreement and other applicable finance agreements using
the straight-line method, which is not materially different from the
amortization computed using the effective-interest method (see Note 9.). Assets
held for sale or future use relate to the shutdown of one of the Company's
subsidiaries (see Note 5.).
8. LEASES:
-------
Lessor
- ------
Several subsidiaries of the Company lease rolling stock to third parties and
affiliated companies under agreements that are accounted for as operating
leases. The property held for lease on December 31, 1997, totaled $14.8 million
less accumulated depreciation of $4.6 million. The following is a schedule by
years of minimum future rentals receivable on noncancelable operating leases
(amounts in thousands):
1998.............................................$5,001
1999............................................. 1,397
2000............................................. 1,397
2001............................................. 918
2002............................................. 918
Thereafter....................................... 2,804
------
$12,435
=======
Lessee
- ------
The Company has entered into several leases for rolling stock, locomotives and
other equipment. Operating lease expense for the years ended December 31, 1997,
1996 and 1995, was approximately $2,015,000, $1,256,000 and $2,173,000,
respectively.
In December, 1997, a subsidiary of the Company entered into an agreement with a
bank to lease 911 boxcars at an average monthly rate of $177 per car for a lease
term of one year. The lease includes an option to automatically renew for four
subsequent one year terms at a periodic rent equal to the rent applicable during
the initial term. The lease also includes an option to purchase all of the
cars,
13
subject to certain conditions, at the end of five one-year periods. The
boxcars were simultaneously leased to an unconsolidated affiliate which is a
subsidiary of GRO at a rate of $185 per car per month.
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 9).
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 is being 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):
1998.............................................$5,162
1999............................................. 2,166
2000............................................. 1,792
2001............................................. 1,739
2002............................................. 1,511
Thereafter....................................... 5,235
-----
Total minimum payments..........................$17,605
=======
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,
1997, 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 reason, the lessor must reimburse the subsidiary for its depreciated basis
in the property.
In August, 1995, another subsidiary of the Company signed an agreement with the
same 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, this 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. On November 19, 1997, this
lease was replaced by the purchase of certain assets, rights and obligations
including a rail service easement which is a permanent and exclusive easement
over the rail corridors previously under lease. Under all of these
arrangements, the Company has assumed all operating and financial
responsibilities including maintenance and regulatory compliance. Through
December 31, 1997, no payments were required under either lease arrangement.
14
9. LONG-TERM DEBT:
---------------
Long-term debt consists of the following (amounts in thousands):
1997 1996
--------- ---------
Credit facilities with variable interest depending upon certain
financial ratios of the Company, as defined (7.0% at December
31, 1997), with the balance due in 2002, net of unamortized
discount of $290,000 ($384,000 in 1996) $27,410 $ 7,972
Promissory note payable with interest at 8% and principal
payments due annually of $1,188,000 if certain conditions, as
specified in the agreement, are met, with the balance due in
1999 8,922 9,022
Capital lease obligations with variable interest at LIBOR plus
1.5% 11,761 -
Variable rate loan with variable interest on 50% of the loan and
interest at 6.24% on the remaining 50%, payable in semi-annual
installments commencing in June, 1999 through November, 2002 14,991 -
Subordinated debt facility with interest at 6.16%, no
amortization requirements, with the balance due in 1999. 7,170 -
Other debt with interest rates up to 8% and maturing at various
dates between 1998 and 2006 3,890 1,737
---------------------------------------------------------- -------- --------
74,144 18,731
Less- Current portion 1,157 271
---------------------------------------------------------- -------- --------
Long-term debt, less current portion $72,987 $18,460
============================================================ ======= =======
Credit Facilities
- -----------------
In October, 1997, the Company amended and restated its credit facilities
agreement to provide for a $65 million revolving credit facility. The facility
has a maturity date of October 31, 2002. The credit facilities accrue interest
at prime or the Eurodollar rate, at the option of the Company, plus the
applicable margin, which varies from 0.75% to 1.5% 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, not to exceed three months
outstanding. The Company pays a commitment fee which varies between 0.25% and
0.375% per annum on all unused portions of the revolving credit facility
depending on the Company's funded debt to EBITDA ratio. The credit facilities
agreement requires mandatory prepayments from the issuance of new equity or debt
and annual sale of assets in excess of $6.5 million. These credit facilities
are guaranteed by all domestic subsidiaries of the Company and contain a
negative pledge of assets. The credit facilities agreement requires the
maintenance of certain covenants, including, but not limited to, funded debt to
EBITDA, cash flow coverage and EBITDA less defined capital expenditures to
interest expense, all as defined in the agreement. The Company and its
subsidiaries were in compliance with the provisions of these covenants as of
December 31, 1997.
15
Promissory Note
- ---------------
The promissory note payable with an outstanding balance of $8,922,000 at
December 31, 1997, 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 1997 or 1996. The subsidiary did, however, make
principal payments of $100,000 and $100,000 in 1997 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 1998. The annual debt maturity schedule has been adjusted
accordingly.
Capital Lease Obligation
- ------------------------
In March, 1997, a subsidiary of the Company entered into a master lease
agreement with a leasing company. The lease provides for the inclusion of up to
$13.0 million in railroad rolling stock. As of December 31, 1997, the Company's
subsidiary had $11.8 million of equipment under this lease. Lease payments
until September 30, 1998, are interest only at LIBOR plus 1.5%. After that
date, the equipment currently under lease will require monthly payments of
$116,461 until March, 2017. The Company's subsidiary has the right to purchase
the equipment at any time during the lease for fair market value.
Variable Rate Loan
- ------------------
In November, 1997, a subsidiary of the Company entered into a variable rate loan
which calls for semi-annual payments commencing on June 30, 1999, with the final
installment due in November, 2002. There is a fixed interest rate swap over 50%
of the loan balance, effectively fixing the interest rate at 6.24% for 50% of
the loan for the life of the loan. The loan is secured by a first ranking fixed
and floating charge over all the present and future assets of the Australia
Southern Railroad Pty. Ltd. and SA Rail Pty. Ltd. and control over all
indebtedness of the Australia Southern Railroad Pty. Ltd. to Genesee & Wyoming
Australia Pty. Ltd.
Subordinated Debt Facility
- --------------------------
In November, 1997, a subsidiary of the Company entered into a subordinated debt
facility repayable November, 1999. There is a fixed interest rate swap over
100% of the loan balance, effectively fixing the interest rate at 6.16% for the
life of the loan. The loan is secured by a second ranking fixed and floating
charge over all the present and future assets of the Australia Southern Railroad
Pty. Ltd. and SA Rail Pty. Ltd. and control over all indebtedness of the
Australia Southern Railroad Pty. Ltd. to Genesee & Wyoming Australia Pty. Ltd.
Schedule of Future Payments
- ---------------------------
The following is a summary of the maturities of long-term debt as of December
31, 1997 (amounts in thousands):
1998.............................................$1,157
1999.............................................19,035
2000..............................................2,771
2001..............................................2,822
2002.............................................36,667
Thereafter.......................................11,692
------
$74,144
=======
16
Extraordinary Item
- ------------------
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.
10. 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 Swap--In November, 1997, a subsidiary of the Company entered into
- ------------------
a five-year interest rate swap agreement with a financial institution
effectively fixing its interest rate at 6.24% by exchanging its variable
interest rate on long-term debt for a fixed interest rate. The notional amount
under this agreement is $7.5 million. Management estimates the carrying value
of this interest rate swap to approximate fair value.
Interest Rate Swap--In November, 1997, a subsidiary of the Company entered into
- ------------------
a five-year interest rate swap agreement with a financial institution
effectively fixing its interest rate at 6.16% by exchanging its variable
interest rate on long-term debt for a fixed interest rate. The notional amount
under this agreement is $7.2 million. Management estimates the carrying value
of this interest rate swap to approximate fair value.
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.
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. 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.
11. EMPLOYEE BENEFIT PLANS:
-----------------------
Pension
- -------
The Company administers two noncontributory defined benefit plans, one of which
is for the employees of a subsidiary who are members of a union and who meet
minimum service requirements, the other of which is for non-union employees of
another subsidiary. 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 plans. The Company has met the minimum funding requirements
according to the Employee Retirement Income Security Act.
17
Pension costs for the union pension plan for 1997, 1996 and 1995 were
approximately $69,000, $105,000, and $14,000, respectively. The 1997 and 1996
pension cost includes the estimated expense of terminating the defined benefit
plan due to the shut down of a subsidiary's operations (see Note 5.). The
pension liability for the union pension plan recognized in the accompanying
consolidated balance sheet at December 31, 1997 and 1996, was approximately $0
and $185,000, respectively. Subsequently, on January 31, 1998, the plan was
terminated and the vested assets were distributed to the plan members.
Pension costs for the non-union pension plan for 1997 and 1996 were
approximately $122,000 and $13,000, respectively. The pension liability for
the non-union pension plan recognized in the accompanying consolidated balance
sheet at December 31, 1997 and 1996, was approximately $385,000 and $263,000,
respectively.
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, 1997, 1996
and 1995, were $33,000, $53,000 and $49,000, respectively. The funded status of
the plan at December 31, 1997 and 1996, was as follows (amounts in thousands):
1997 1996
------- -------
Accumulated postretirement benefit obligation-
Fully eligible active participants $ 59 $ 58
Other active participants - 70
Retirees 433 420
---- ----
492 548
Plan assets at fair value - -
---- ----
Accumulated postretirement benefit obligation in excess of plan
assets 492 548
Unrecognized net gain resulting from change in actuarial 195
assumptions 151
---- ----
Accrued postretirement benefit cost $ 687 $ 699
==== ====
For measurement purposes, an 8% 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, 1998, by approximately
$32,000 and the net periodic postretirement benefit cost for 1998 by
approximately $4,000.
Relevant assumptions used in accounting for the postretirement benefit plan as
of December 31 were as follows:
18
1997 1996
---- ----
Weighted average discount rate 7.25% 7.75%
==== ====
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 $1.0 million, $730,000 and $308,000 was
awarded under the various bonus plans in 1997, 1996 and 1995, respectively.
Profit Sharing
- --------------
On December 1, 1997, the Company terminated a defined contribution profit-
sharing plan that it had maintained for two subsidiaries and distributed the
vested assets to the plan members. There were no contributions to the plan in
1997, 1996 or 1995.
Effective January 1, 1997, the Company established a 401(k) plan covering
employees of the Company's industrial switching subsidiary who have met
specified length of service requirements. The 401(k) plan qualifies under
Section 401(k) of the Internal Revenue Code as a salary reduction plan.
Employees may elect to contribute a certain percentage of their salary on a
before-tax basis. The Company matches 100% of the participants contributions up
to 5% of the participants salary. The Company's contribution to the plan in
1997 was approximately $63,000.
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 1997, 1996
and 1995 were approximately $163,000, $110,000 and $83,000, respectively.
Postemployment Benefits
- -----------------------
The Company does not provide postemployment benefits to its employees.
12. 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):
1997 1996 1995
------- ------- -------
Current-
Federal $ 2,095 $ 2,779 $ 550
State 670 1,014 111
Deferred 2,676 227 811
------ ------ ------
$ 5,441 $ 4,020 $ 1,472
====== ====== ======
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
19
income tax rate to the income before taxes. The following is a summary
of the effective tax rate reconciliation:
1997 1996 1995
-------- ------- -------
Tax provision at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit 5.7% 5.6% 4.0%
Other, net 0.8% 0.9% 2.6%
------ ------ ------
40.5% 40.5% 40.6%
====== ====== ======
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):
1997 1996
-------------- ---------
Deferred tax assets-
Accruals and reserves not deducted for tax
purposes until paid $ 2,415 $ 1,828
Alternative minimum tax credits 1,837 1,752
Net operating losses 136 -
Postretirement benefits 233 259
Other (78) 154
------- -------
4,543 3,993
Deferred tax liability -- differences in
depreciation and amortization (10,490) (7,081)
------- -------
Net deferred tax liability ($5,947) ($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.
13. GRANTS FROM GOVERNMENTAL AGENCIES:
----------------------------------
During 1997, three subsidiaries of the Company received grants from the State of
Pennsylvania of $2,500,000, $250,000 and $16,000, respectively, for
rehabilitation of portions of their track. The agreements require the State of
Pennsylvania to reimburse the subsidiaries for 75% of the total cost of specific
projects. These projects were substantially complete as of December 31, 1997.
Another subsidiary of the Company received a grant from the State of Virginia of
$135,000 for rehabilitation of a portion of the subsidiary's track. This
project was completed as of December 31, 1997.
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 $3.2 million 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
20
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 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
specifi ed 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, 1997, 1996 and 1995, the Company recorded offsets to depreciation expense
from grant amortization of $719,000, $638,000 and $415,000, respectively.
14. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company has built its portfolio of railroad properties primarily 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. Typically, the Company does not assume the operations or liabilities
of the divesting railroads.
In connection with the Company's purchase of certain selected assets in
Australia (see Note 2.), the Company has committed to the Commonwealth of
Australia to spend approximately $34.1 million (AU $52.3 million) to
rehabilitate track structures and equipment by December 31, 2002. The
Commonwealth Government may require the payment of any shortfall between the
actual expenditure incurred from the date of acquisition to December 31, 2002,
and the contracted commitment of approximately $34.1 million (AU $52.3 million).
This commitment may be renegotiated if there is a significant change in
operating conditions outside the control of the Company.
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 operations in New York and Pennsylvania. Until the details of these
consolidations reaches greater clarity, the Company is unable to determine the
impact on its operations.
In connection with the Company's lease of its 185-mile line in Oregon (see Note
8.), 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
21
approximately $5.0 million. As of December 31, 1997, the Company has completed
approximately $3.5 million of this rehabilitation.
The Company is a defendant in certain lawsuits resulting from railroad and
industrial switching operations, one of which includes the commencement of a
criminal investigation. Management believes that the Company has adequate
defenses to any criminal charge which may arise and 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 resolved 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.
15. STOCKHOLDERS' EQUITY:
---------------------
Warrants
- --------
In conjunction with the 1996 amendment and restatement of the Company's credit
facilities, 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 were exercised in January, 1998. 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 $49.2 million, net of underwriters' commission
of $3.4 million, were used to pay down borrowings on the credit facilities.
Other costs of the IPO of $1.0 million 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.
16. 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
22
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:
1997 1996
------ ------
Net Income: As reported $7,998 $5,905
Pro Forma 7,332 5,609
Basic EPS: As reported $ 1.52 $ 1.54
Pro Forma 1.40 1.49
Diluted EPS: As reported $ 1.47 $ 1.49
Pro Forma 1.34 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, 1997, 1,996 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.
In 1997, the Company increased the number of options it may grant under its
Stock Option Plan for employees by 200,000. The Company may now grant an
aggregate of 700,000 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 following is a summary of stock option activity for
1997 and 1996:
Fiscal Year Ended Fiscal Year Ended
December 31, 1997 December 31, 1996
----------------- --------------------
Wtd. Wtd.
Average Average
Shares Exercise Shares Exercise
Price Price
Outstanding at beginning of the
year 421,500 $18.61 --- ---
Granted 4,000 27.25 421,500 $18.61
Exercised 3,275 17.00 --- ---
Forfeited 15,250 25.11 --- ---
Outstanding at end of year 406,975 18.46 421,500 $18.61
Exercisable at end of year 101,354 18.41 --- ---
Weighted average fair value of
options granted --- $17.51 --- $10.29
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 was $17.51 and $10.29 in 1997 and
1996, respectively.
23
17. GEOGRAPHIC REGION AND BUSINESS SEGMENT INFORMATION
--------------------------------------------------
The Company operates in two business segments: Railroad Operations, which
includes operating short line and regional railroads, and buying, selling,
leasing and managing railroad transportation equipment; and Industrial
Switching, which includes providing freight car switching and related services
to United States industries with extensive railroad facilities within their
complexes. During 1997, the Company expanded its railroad operations
geographically to include a new subsidiary operating in Australia. During 1996,
the Company expanded its business to include industrial switching and related
services through the acquisition of all of the common stock of Rail Link, Inc.
The following tables present sales and other financial information for each
geographic region for 1997 and for each business segment for the years 1997 and
1996:
17. GEOGRAPHIC REGION (AMOUNTS IN THOUSANDS)
- ---------------------------------------- --------------- -------------- -------------
1997 U.S. Australia Total
- ---------------------------------------- --------------- -------------- -------------
Sales to unaffiliated customers $ 96,212 $ 7,431 $103,643
Operating income 15,738 705 16,443
Identifiable assets 169,969 40,563 210,532
Depreciation and amortization 6,753 246 6,999
Capital expenditures 13,871 20 13,891
Business Segment
(amounts in thousands)
Railroad Industrial
1997 Operations Switching Total
- ---------------------------------------- ---------- ---------- ----------
Sales to unaffiliated customers $ 88,791 $14,852 $103,643
Operating income (loss) 16,672 (229) 16,443
Identifiable assets 198,296 12,236 210,532
Depreciation and amortization 6,169 830 6,999
Capital expenditures 13,146 745 13,891
Business Segment
(amounts in thousands)
Railroad Industrial -------------
1996 Operations Switching Total
- ----------------------------------------- -------------- -------------- -------------
Sales to unaffiliated customers $ 75,998 $ 1,797 $ 77,795
Operating income 13,865 129 13,994
Identifiable assets 131,693 13,646 145,339
Depreciation and amortization 5,930 122 6,052
Capital expenditures 8,138 36 8,174
24
18. QUARTERLY FINANCIAL DATA:
-------------------------
Quarterly Results (Unaudited)
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
1997
Operating revenues........................ $24,092 $23,479 $23,670 $32,402
Income from operations..................... 4,035 4,171 3,901 4,336
Net income................................. 2,134 2,157 2,127 1,580
Basic earnings per share 0.41 0.40 0.41 0.30
- -----------------------------------------------------------------------------------------------------------------
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
Basic earnings 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) - -
Basic earnings (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
5.).
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 9.).
25