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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, 1998
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
--------------------
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 22, 1999: $38,062,353.
Shares of common stock outstanding as of the close of business on
March 22, 1999:
Class Number of Shares Outstanding
- -------------------- ----------------------------
Class A Common Stock 4,006,084
Class B Common Stock 845,447
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 25, 1999.
The remainder of this page is intentionally left blank.
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Part I
Item 1. BUSINESS
Genesee & Wyoming Inc. (the "Registrant" or the "Company") is a holding
company whose subsidiaries own and operate short line and regional freight
railroads and provide related rail services. The Company, through its industrial
switching subsidiary, also provides railroad switching and related services to
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 (see Note 17. to Consolidated Financial Statements). GRO
operates two short line railroads in Canada, one which is owned and one which is
leased. In July, 1998, the Company began serving as the operator of a 900-mile
mineral railroad in northern Mexico. The Company's operations are being
conducted by its new wholly-owned subsidiary, GW Mexico, S.A. de C.V. The
railroad, known as Linea Coahuila Durango, is a concession awarded by the
Mexican government in 1998 to two Mexican industrial firms, Grupo Acerero del
Norte, S.A. de C.V. and Industrias Penoles, S.A. de C.V. As a result of the
Company's acquisition and marketing strategies, the Company has become a
diversified rail operation extending over approximately 3,700 miles of track in
four countries on two continents. With the addition of the industrial switching
subsidiary in 1996 and Australia Southern Railroad in 1997, the Company now
serves over 325 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
abandonment.
The commitment of Class I carriers to increase efficiency and profitability
has also led to an increase in merger activity among long haul railroads, such
as most recently, the acquisition of Consolidated Rail Corporation by Norfolk
Southern Corp. and CSX Transportation, Inc. Such
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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 (see Note 13. To Consolidated Financial Statements).
Although the acquisition market is highly competitive, 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, Mexico
and South America as well, although governmental regulations may limit
acquisition opportunities in these countries. Both Canadian National Railway and
Canadian Pacific Railway have divestment programs, and Mexico is nearing
completion of 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 increasing 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 international and U.S. 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
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integrated 14 acquisitions of varying sizes and operating characteristics, of
which four were existing short lines, eight were Class I divestitures, one was a
governmental privatization and one was an industrial switching company which
also operates three wholly-owned subsidiary companies.
The Company acquires rail properties by purchase of assets, or is able to
serve a market through lease or operating contract. Typically, the Company bids
against other short line and regional operators for available properties. The
structure of each transaction is determined based upon economic and strategic
considerations. In addition to the financial terms of the transaction, sellers
consider more subjective criteria such as a prospective acquiror's operating
experience, its reputation among shippers, and its 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 domestic lines. The Company sees this ability to provide
increased revenue to Class I carriers as an advantage in bidding for properties
in the United States.
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.
Through implementation of its marketing strategy, the Company intends to
increase further the number of major customers so that, over time, the Company's
reliance on any one customer will be reduced.
Consistent with its decentralized management structure, the Company's sales
and marketing activity is coordinated in each region by a marketing manager.
The marketing manager works closely with personnel of each of the Company's
railroads and with other department heads to develop marketing plans to increase
shipments from existing customers and develop new business. The Company focuses
on providing rail service to its customers that is easily accessible, reliable
and cost-effective. The Company considers all of its employees to be customer
service representatives and encourages them to initiate and maintain regular
contact with shippers.
Because most of the traffic transported by the Company's railroads in the
United States is interchanged with Class I carriers, the Company's domestic
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
5
selling equipment to take advantage of changes in market value in conjunction
with changes in its customers' needs.
Operations
The Company's operating strategy is to increase efficiency and
profitability in each region in which it operates. When acquiring new rail
properties within an existing region, the Company capitalizes on operating
efficiencies created by the presence of its other railroads within that region.
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. 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 $24.3 million in state and federal grants for track rehabilitation
and service improvements has been invested in the Company's U.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.
RAILROAD OPERATIONS - UNITED STATES
Customers
The Company's U.S. railroads currently serve over 325 customers. A large
portion of the Company's U.S. railroad operating revenue is attributable to
customers operating in the electric utility, forest products, petroleum and
chemical industries. As the Company acquires new U.S. railroad operations, the
base of customers served continues to grow and diversify. The largest ten U.S.
customers, which is a group that changes annually, accounted for approximately
38%, 46% and 50% of the Company's U.S. railroad revenues in 1998, 1997 and 1996,
respectively. In 1998, 1997 and 1996, the Company's largest U.S. customer was
Commonwealth Edison, an electric utility, which accounted for approximately 14%,
18% and 18% of the Company's U.S. railroad revenues in 1998, 1997 and 1996,
respectively (see Note 13. to Consolidated Financial Statements). 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.
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United States Railroad Commodities
The Company's U.S. railroads transport a wide variety of commodities for
their customers. Some of the Company's railroads have a well-diversified
commodity mix while others transport one or two principal commodities. In 1998,
coal, coke and ores and pulp and paper products were the two largest commodity
groups transported by the Company's U.S. railroads, constituting 29.1% and
12.6%, respectively, of total U.S. revenues (see Item 7. of this Report under
the heading "Results of Operations - Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997"), and 34.8% and 9.7%, respectively, of total U.S.
carloads. The following table summarizes the aggregate traffic volume of the
Company's U.S. railroads by commodity group:
UNITED STATES CARLOADS CARRIED BY COMMODITY GROUP
Year Ended Year Ended
December 31, 1998 December 31, 1997
--------------------- ---------------------
Commodity Group
- --------------- 1998 % of Total 1997 % of Total
---- ---------- ---- ----------
Coal, Coke & Ores 75,881 34.8% 82,269 37.4%
Pulp & Paper 21,318 9.7% 20,760 9.4%
Lumber & Forest Products 20,802 9.5% 18,171 8.3%
Other 18,922 8.7% 16,743 7.6%
Metals 17,862 8.2% 21,268 9.7%
Farm & Food Products 17,451 8.0% 13,390 6.1%
Petroleum 15,992 7.3% 17,456 7.9%
Minerals & Stone 13,679 6.3% 12,657 5.8%
Chemicals 12,503 5.7% 10,496 4.8%
Autos & Auto Parts 3,895 1.8% 6,496 3.0%
--------------------------------------------------
Total 218,305 100.0% 219,706 100.0%
==================================================
Coal, coke and ores consists primarily of shipments of coal to utilities
and industrial customers.
Pulp and paper consists primarily of inbound shipments of pulp and outbound
shipments of kraft and fine papers.
Lumber and forest products consists primarily of finished lumber used in
construction, particleboard used in furniture manufacturing, and wood chips and
pulpwood used in paper manufacturing.
Metals consists primarily of scrap metal and finished steel products
shipped to and from two steel mills, and coated pipe.
Farm and food products consists primarily of sugar, molasses, rice and
other grains and fertilizer.
Petroleum products consists primarily of fuel oil and crude oil.
Minerals and stone consists primarily of gravel and stone used in
construction.
Chemicals consists primarily of various chemicals used in manufacturing.
Autos and auto parts consists primarily of finished automobiles.
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United States Rail Traffic
U.S. rail traffic is classified as on-line or overhead traffic. On-line
traffic is traffic that either originates or terminates with shippers located on
a railroad and is interchanged with another rail carrier. On-line traffic that
both originates and terminates on a railroad is referred to as local traffic.
Overhead traffic neither originates nor terminates on a railroad, but rather
passes over a railroad from one connecting carrier to another.
The Company believes that on-line shipments provide it with a stability of
revenues because such traffic represents shipments to or from shippers located
along its lines which cannot easily be diverted to other rail carriers. While
overhead traffic is more easily diverted, it is less costly to handle. To
offset the potential for diversion of overhead traffic, the Company has sought
long-term contracts on its significant overhead traffic. In 1998, 9.5% of U.S.
railroad freight revenues was generated by overhead traffic compared to 9.7% in
1997 (see Note 13. to Consolidated Financial Statements).
The following table summarizes freight revenues by type of traffic carried
by the Company's U.S. railroads:
UNITED STATES FREIGHT REVENUES BY TRAFFIC TYPE
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
TRAFFIC TYPE AMOUNT % OF TOTAL AMOUNT % OF TOTAL
On-line
Originated $22,654 34.3% $22,537 33.3%
Terminated 31,602 47.8% 33,435 49.4%
Local 5,570 8.4% 5,154 7.6%
------- ----- ------- -----
Total On-line 59,826 90.5% 61,126 92.4%
Overhead 6,255 9.5% 6,587 9.7%
------- ----- ------- -----
Total Traffic $66,081 100.0% $67,713 100.0%
======= ===== ======= =====
U.S. Railroad Employees
As of December 31, 1998, the Company had 606 full-time employees. Of this
total, 156 are members of national labor organizations. The Company has seven
contracts with these national labor organizations which have expiration dates
ranging to 2000. The Company has also entered into collective bargaining
agreements with an additional 86 employees who represent themselves, all of
which expire in 1999.
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
8
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.
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 locomotives, fuel, train crews, and in some cases railcars,
to freight forwarding companies. These freight forwarding 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, 1998, ASR had about 168 employees, with about 123
operational staff being members of a union. The contract with the union expires
in November, 2000.
U.S. INDUSTRIAL SWITCHING OPERATIONS
U.S. Industrial switching operations generate 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. The Company's U.S. industrial
switching operation serves 24 customers in 10 states. These customers are
primarily in the chemicals, paper, mining and power generation industries. The
provision of the service generally involves locating a work force and
locomotives at the customer's facility and tailoring the service level to the
switching requirements of the site. As of December 31, 1998, the Company's U.S.
industrial switching operations had approximately 242 employees.
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 region 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 Vice-President of Safety and 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. For example, members of the Company's management serve or have served
on the Board of Directors of Operation Lifesaver (the national
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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.
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 $500,000 per occurrence. In
addition, the Company maintains excess liability policies which provide
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 policies. 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. Employees of the Company's industrial switching business are covered
under workers' compensation policies.
ASR liability policies have self-insured retentions ranging from $50,000
per occurrence to a one time deductible of $650,000 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 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. However, competition for acquisitions is fierce.
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
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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 United States 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 U.S. 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 U.S. federal regulation of rail prices has been
significantly curtailed, U.S. 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. In the United States 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.
Similarly, in Australia, these functions are administered by the Environmental
Protection Agency on a state level and the Department of Transport on a federal
level. There are no material environmental claims currently pending or, to the
Company's knowledge, threatened against the Company or any of its railroads. In
addition, the Company believes that the operations of its railroads are in
material compliance with current laws and regulations. The Company estimates
that any expenses incurred in maintaining compliance with current laws and
11
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, or management's beliefs and
assumptions. 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 not
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 19 railroads of which 17 are in the United
States, one is in Australia and one is in Mexico. 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.
The remainder of this page is intentionally left blank.
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The following table sets forth certain information as of December 31, 1998 with
respect to the Company's United States railroads:
RAILROAD AND LOCATION TRACK MILES STRUCTURE CONNECTING CARRIERS (1)
Allegheny & Eastern Rail, Inc.
("ALY") Pennsylvania 153 (2) Owned BPRR, CR
Bradford Industrial Rail, Inc.
("BR") Pennsylvania 4 (3) Owned BPRR, CR
Buffalo & Pittsburgh Railroad, Inc. ALY, BLE, BR, CN, CP,
("BPRR") New York, Pennsylvania 279 (4) Owned/Leased CR, CSX, NS, PS, RSR, SB
The Dansville & Mount Morris
Railroad Company
("DMM") New York 8 Owned 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.
("RSR") New York 66 (7) Owned BPRR, CP, CR, GNWR, NS
Illinois & Midland Railroad, Inc. BNSF, CR, IAIS, IC, NS,
("IMR") Illinois 97 (8) Owned PPU, TPW, UP
Portland & Western Railroad, Inc.
("PNWR") Oregon 198 (9) Owned/Leased BNSF, UP, WPRR, 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") Texas 26 (15) Leased UP, BNSF, TM
Golden Isles Terminal Railroad, Inc. 13 (16) Leased CSXT, NS
("GITM") Georgia
Savannah Port Terminal Railroad, Inc. 1 (17) Leased CSXT, NS
("SAPT") Georgia
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 to rationalize approximately 58
miles of owned track that parallels track under the CR trackage rights
agreement.
13
(5) The operations of the GNWR have been realigned with those of RSR.
(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) Includes 12.5 miles under lease expiring in 2009. The Company acquired CWRY
on November 8, 1996.
(14) All under lease expiring in 1999.
(15) All under lease expiring in 2002.
(16) All under lease expiring in 2002. The Company acquired GITM in June, 1998.
(17) All under lease expiring in 2002. The Company acquired SAPT in June, 1998.
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, 1998, rolling stock of the Company's U.S. railroads
consisted of 228 locomotives and 2,427 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.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On June 24, 1996, the Company's Class A Common Stock began trading and is
quoted on the Nasdaq National Market. Its trading symbol is GNWR. The 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 1998, 1997 and 1996, since its
initial public offering.
YEAR ENDED
DECEMBER 31, 1998 HIGH LOW
1st Quarter $27.50 $ 20.625
2nd Quarter $27.50 $ 17.50
3rd Quarter $22.00 $ 11.75
4th Quarter $17.00 $ 11.375
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 1998 or 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
15
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 12, 1999 there were 121 holders of record of the Company's Class A
Common Stock and 10 holders of record of the Company's Class B Common Stock.
During 1998 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 January 30, 1998 the Company issued to an aggregate of 137 of its
employees, for no additional consideration, options under the Genesee & Wyoming
Inc. Stock Option Plan to purchase an aggregate of 250,600 shares of Class A
Common Stock at an exercise price of $21.25 per share. The shares issuable upon
exercise of such options were 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,
1998, 1997, 1996, 1995 and 1994, 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,
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
INCOME STATEMENT DATA:
Operating revenues $147,472 $103,643 $ 77,795 $53,387 $55,419
Operating expenses 127,904 87,200 63,801 46,815 47,381
Operating income 19,568 16,443 13,994 6,572 8,038
Interest expense (7,071) (3,349) (4,720) (3,405) (3,212)
Other income 6,645 345 651 456 192
Income before income taxes and
extraordinary item 19,142 13,439 9,925 3,623 5,018
Income taxes 7,708 5,441 4,020 1,472 2,007
Income before extraordinary item 11,434 7,998 5,905 2,151 3,011
Extraordinary item -- -- -- (494) --
Net income $ 11,434 $ 7,998 $ 5,905 $ 1,657 $ 3,011
Basic earnings per common share:
Income before extraordinary item $2.20 $1.52 $ 1.54 $ 0.92 $ 1.31
Extraordinary item -- -- -- (0.21) --
Net income $2.20 $1.52 $ 1.54 $ 0.71 $ 1.31
Dividends per common share (1) -- -- $ 0.01 $ 0.08 $ 0.03
Weighted average number of shares
of common stock 5,187 5,250 3,829 2,348 2,304
BALANCE SHEET DATA AS OF PERIOD END:
Total assets $216,760 $210,532 $145,339 $78,429 $69,888
Total debt 65,690 74,144 18,731 39,941 32,640
Stockholders' equity 74,537 68,343 61,683 10,548 9,082
(1) 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/or operate
short line and regional freight railroads and provide related rail services in
the United States, Australia and Mexico. The Company, through its U.S.
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
U.S. 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.
Joint Venture - Genesee.Rail-One Inc.
During 1997, the Company 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 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.
18
On November 11, 1997, GRO commenced operations of the Quebec Gatineau
Railway Inc. ("QGRY"), a 354-mile railroad linking Quebec City, Montreal and
Hull in Southeastern 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.
In November 1998, the Company recorded an additional investment of $875,000
for the purchase of a 10-mile segment of track that is contiguous to the QGRY.
Additionally, the Company agreed to provide a $2.2 million letter of credit to
GRO's primary lender in exchange for relief on certain financial covenants.
Based on GWI's ownership portion, the Company reported 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.
Losses from GRO of $645,000 and $60,000 in 1998 and 1997, respectively, are
recorded in other income, net.
The Company loaned Rail-One $4,613,000 under a promissory note denominated
in Canadian currency to substantially finance Rail-One's initial investment in
GRO. The note accrued interest at 7.5 percent per annum, earned 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 were due and payable on
November 10, 1998. The principal, all accrued interest and the commitment fee
were not paid on November 10, 1998, and the Company entered negotiations with
Rail-One regarding the transfer of Rail-One's ownership interest in GRO to the
Company.
As of December 31, 1998, the Company's initial investment of approximately
$4.9 million and its additional investment of $875,000 was recorded at $5.1
million, a reduction of $705,000 due to GRO operating losses. Additionally, the
Company capitalized its note receivable, accrued interest and commitment fee due
from Rail-One, totaling approximately $4.7 million, and approximately $3.1
million of trade accounts receivable due from GRO, increasing its total
investment in GRO to approximately $12.9 million.
On March 10, 1999, the Company reached an agreement in principle to acquire
Rail-One's 47.5% ownership interest in GRO thereby increasing the Company's
ownership of GRO to 95% (see Note 17. to Consolidated Financial Statements).
Under the terms of the proposed agreement, the Company would pay approximately
$844,000 in cash to the owners of Rail-One in installments over a four year
period and the Company would grant an option to the owners of Rail-One to
purchase 80,000 shares of Class A Common Stock at an exercise price equal to
market price on the date of the grant, assumed to be about March 31, 1999. The
option to purchase 80,000 shares is contingent on the Company's recovery of its
capital investment in GRO including debt assumed if the Company were to sell
GRO, and upon certain GRO income performance measures. Upon execution of a
definitive agreement, the operating results of GRO will be consolidated within
the financial statements of the Company, with a 5% minority interest due to
another GRO shareholder.
19
GW Mexico, S.A. de C.V.
On July 29, 1998 the Company began serving as the operator of a 900-mile
mineral railroad in northern Mexico. The Company's operations are being
conducted by its new wholly-owned subsidiary, GW Mexico, S.A. de C.V. The
railroad, known as Linea Coahuila Durango, is a concession awarded by the
Mexican government in 1998 to two Mexican industrial firms, Grupo Acerero del
Norte, S.A. de C.V. and Industrias Penoles, S.A. de C.V. The operating results
of GW Mexico, S.A. de C.V. are not material and are reported in U.S. railroad
operations.
Insurance Recoveries
The Company receives insurance proceeds in the normal course of business
for recoveries related to derailment damages and employee and third party
claims. These proceeds are treated as a reduction to operating expenses.
Significant insurance proceeds related to other matters are recorded in other
income. In 1998, included in other income is $6.0 million of insurance proceeds.
Genesee & Wyoming Australia Pty. Ltd.
On August 28, 1997 the Company's wholly-owned subsidiary, Genesee & Wyoming
Australia Pty. Ltd. ("GWIA"), was awarded the contract to purchase certain
selected assets of the railroad freight operation of SA Rail, a division of
Australian National Railway which was controlled by the Commonwealth Government
of Australia (see Note 2. to Consolidated Financial Statements). SA Rail
provided 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 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. The acquisition of
assets was partially financed through two new debt agreements in the aggregate
amount of $22.2 million (see Note 8. to Consolidated Financial Statements).
The remainder of this page is intentionally left blank.
20
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated Operating Revenues
Operating revenues were $147.4 million in 1998 compared to $103.6 million
in 1997, an increase of $43.8 million or 42.3%. The increase was attributable to
$39.3 million in revenues from the Australia operation, a $3.7 million increase
in United States railroad revenues, and a $823,000 increase in U.S. industrial
switching revenues.
The following three sections provide information on railroad revenues in
the United States and Australia, and industrial switching revenues in the United
States.
United States Railroad Operating Revenues
Operating revenues were $88.1 million in the year ended December 31, 1998
compared to $84.4 million in the year ended December 31, 1997, an increase of
$3.7 million or 4.4%. The increase was attributable to a $5.3 million increase
in non-freight revenues, which offset a $1.6 million decrease in freight
revenues.
The following table compares freight revenues, carloads and average freight
revenues per carload for 1998 and 1997:
United States Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 1998 and 1997
(dollars in thousands,
except average per carload)
Average
Freight
Revenue
Freight Revenues Carloads Per
------------------ -------- Carload
% of % of % of % of
Commodity Group 1998 Total 1997 Total 1998 Total 1997 Total 1998 1997
- -------------------- ------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Coal, Coke & Ores $19,245 29.1% $21,452 31.7% 75,881 34.8% 82,269 37.4% $ 254 $ 261
Pulp & Paper 8,295 12.6% 7,920 11.7% 21,318 9.7% 20,760 9.4% 389 382
Petroleum Products 7,135 10.8% 8,349 12.3% 15,992 7.3% 17,456 7.9% 446 478
Chemicals &
Plastics 6,337 9.6% 5,761 8.5% 12,503 5.7% 10,496 4.8% 507 549
Lumber & Forest
Products 6,098 9.2% 6,093 9.0% 20,802 9.5% 18,171 8.3% 293 335
Farm & Food Products 4,919 7.4% 3,865 5.7% 17,451 8.0% 13,390 6.1% 282 289
Metals 4,879 7.4% 5,188 7.7% 17,862 8.2% 21,268 9.7% 273 244
Minerals & Stone 3,790 5.8% 3,346 4.9% 13,679 6.3% 12,657 5.8% 277 264
Other 3,438 5.2% 2,287 3.4% 18,922 8.7% 16,743 7.6% 182 137
Autos & Auto Parts 1,945 2.9% 3,452 5.1% 3,895 1.8% 6,496 3.0% 499 531
---------------------------------------------------------------------------------------
Total $66,081 100.0% $67,713 100.0% 218,305 100.0% 219,706 100.0% 303 308
======================================================================================================
21
The decrease in freight revenues was attributable to the decline in freight
revenues from shipments of coal, autos and auto parts, petroleum products and
metals. Freight revenues from coal were $19.2 million in the year ended
December 31, 1998, compared to $21.4 million in the year ended December 31,
1997, a decrease of $2.2 million or 10.3% primarily due to reduced shipments of
coal resulting from scheduled maintenance and inventory adjustments at a key
customer's facilities. Freight revenues from autos and auto parts were $1.9
million in the year ended December 31, 1998, compared to $3.4 million in the
year ended December 31, 1997, a decrease of $1.5 million or 43.7% primarily due
to reduced shipments resulting from loss of overhead freight from a contract
change between CSXT and Ford, and labor issues in the auto industry. Freight
revenues from petroleum products were $7.1 million in the year ended December
31, 1998, compared to $8.3 million in the year ended December 31, 1997, a
decrease of $1.2 million or 14.5% due to reduced shipments resulting from
scheduled maintenance at a key customer's facilities. Freight revenues from
metals were $4.9 million in the year ended December 31, 1998, compared to $5.2
million in the year ended December 31, 1997, a decrease of $309,000 or 5.9%.
The decrease in freight revenues from coal, autos and auto parts, petroleum
products and metals was partially offset by increases in freight revenues from
farm and food products of $1.1 million or 27.3%, chemicals and plastics of
$576,000 or 10.0%, minerals and stone of $444,000 or 13.3% and pulp and paper of
$375,000 or 4.7%. Freight revenues from all remaining commodities reflected a
net increase of $1.2 million.
Total carloads were 218,305 in the year ended December 31, 1998 compared to
219,706 in the year ended December 31, 1997, a decrease of 1,401 or 0.6%. Also,
the overall average revenue per carload declined to $303 in the year ended
December 31, 1998, compared to $308 per carload in the year ended December 31,
1997, a decrease of 1.6% due to changes in commodity mix and traffic patterns.
United States non-freight railroad revenues were $22.0 million in the year
ended December 31, 1998 compared to $16.7 million in the year ended December 31,
1997, an increase of $5.3 million or 32.0%. The increase was primarily due to
increases in car hire and rental income of $2.0 million, other income of $1.8
million and switching revenue of $1.5 million.
Australia Railroad Operating Revenues (U.S. Dollars)
Operating revenues were $46.7 million in the year ended December 31, 1998,
compared to $7.4 million in the year ended December 31, 1997, an increase of
$39.3 million or 528.8%. The increase consisted of $35.7 million in freight
revenues and $3.6 in non-freight revenues. The increase was primarily
attributable to a full year of operations in 1998 as compared to operations
which began on November 8, 1997.
The following table outlines Australian freight revenues for the periods ended
December 31, 1998 and 1997:
The remainder of this page is intentionally left blank.
22
Australian Freight Revenue by Commodity
Years Ended December 31, 1998 and 1997
(in thousands)
Commodity Group 1998 1997
- ---------------------------------------------------------------------------------------------------
Hook and Pull (Haulage) $15,288 $1,969
Grain 13,040 2,377
Coal 7,514 817
Gypsum 2,788 463
Marble 1,949 268
Lime 1,052 203
Other 368 215
--------- ---------
Total $41,999 $6,312
========= =========
Australia non-freight revenues were $4.7 million in the year ended December
31, 1998, compared to $1.1 million in the year ended December 31, 1997, an
increase of $3.6 million or 322.6%. The increase consisted of $2.4 million in
car hire and rental income and $1.2 million in other income. The increase was
primarily attributable to a full year of operations in 1998 as compared to
operations which began on November 8, 1997.
U.S. Industrial Switching Revenues
Revenues from U.S. industrial switching activities were $12.6 million in the
year ended December 31, 1998 compared to $11.8 million in the year ended
December 31, 1997, an increase of $823,000 or 7.0%. The increase was primarily
attributable to a broadening of the customer base of Rail Link, Inc.
Consolidated Operating Expenses
Operating expenses for all operations combined were $127.9 million in 1998
compared to $87.2 million in 1997, an increase of $40.7 million or 46.7%.
Expense increases attributable to operations in Australia, which began in
November, 1997, represented $31.2 million or 76.6% of the change, expense
increases attributable to U.S. railroad operations represented $7.7 million or
19.0% of the change, and expense increases in U.S. industrial switching
represented $1.8 million or 4.4% of the change.
The following three sections provide information on railroad expenses in the
United States and Australia, and U.S. industrial switching expenses in the
United States.
United States Railroad Operating Expenses
The following table sets forth a comparison of the Company's United States
railroad operating expenses in 1998 and 1997:
23
United States Railroad
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $30,822 35.0% $28,041 33.2%
Equipment rents 11,060 12.6% 8,755 10.4%
Purchased services 4,496 5.1% 3,872 4.6%
Depreciation and amortization 7,277 8.3% 6,092 7.2%
Diesel fuel 3,187 3.6% 4,239 5.0%
Casualties and insurance 2,937 3.3% 4,280 5.1%
Materials 3,485 4.0% 3,837 4.5%
Other 12,285 13.9% 8,707 10.4%
---------------------------------------------
Total $75,549 85.8% $67,823 80.4%
=============================================
Labor and benefits expense was $30.8 million in 1998 compared to $28.0 million
in 1997, an increase of $2.8 million or 9.9%, due primarily to general increases
in wages and benefits for all railroad operations and the addition of several
new senior management positions in general and administrative.
Equipment rents were $11.1 million in 1998 compared to $8.8 million in 1997,
an increase of $2.3 million or 26.3%, due primarily to new operating leases for
railroad rolling stock utilized by the Company's leasing subsidiary.
Purchased services were $4.5 million in 1998 compared to $3.9 million in 1997,
an increase of $624,000 or 16.1%, due primarily to increases in maintenance of
way contract work of approximately $277,000 and information systems and general
and administrative contract work of approximately $413,000, offset by a net
decrease in all other departments of $66,000.
Depreciation and amortization expense was $7.3 million in 1998 compared to
$6.1 million in 1997, an increase of $1.2 million or 19.5%, due primarily to
increased capital spending in 1998 and 1997.
Diesel fuel was $3.2 million in 1998 compared to $4.2 million in 1997, a
decrease of $1.0 million or 24.8%, due primarily to a decline in diesel fuel
prices.
Casualties and insurance expense, including claims brought under the Federal
Employers' Liability Act, was $2.9 million in 1998 compared to $4.3 million in
1997, a decrease of $1.4 million or 31.4%, due primarily to a decrease in
derailment expense of approximately $739,000 and a decrease in claims expense of
approximately $584,000.
Materials expense was $3.5 million in 1998 compared to $3.8 million in 1997, a
decrease of $352,000 or 9.2%, due primarily to decreases in maintenance of way
and maintenance of equipment repairs.
Other expense was $12.3 million in 1998 compared to $8.7 million in 1997, an
increase of $3.6 million or 41.1%, due primarily to increases in acquisition
24
expense of $1.1 million, trackage rights of $1.0 million, general and
administrative of $1.0 million, legal and accounting fees of $341,000 and other
expenses, net of $137,000.
Australia Railroad Operating Expenses (U.S. Dollars)
The following table sets forth a comparison of the Company's Australia
railroad operating expenses in 1998 and 1997:
Australia Railroad
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $ 5,263 11.3% $ 899 12.1%
Equipment rents 593 1.3% 81 1.1%
Purchased services 13,538 29.0% 2,298 30.9%
Depreciation and amortization 1,842 3.9% 246 3.3%
Diesel fuel 8,895 19.0% 1,409 19.0%
Casualties and insurance 1,415 3.0% 347 4.7%
Materials 1,734 3.7% 134 1.8%
Other 4,627 9.9% 1,312 17.6%
------- ---- ------ ----
Total $37,907 81.1% $6,726 90.5%
======= ==== ====== ====
All operating expense increases are primarily attributable to a full year of
operations in 1998 as compared to operations which began on November 8, 1997.
The remainder of this page is intentionally left blank.
25
U.S. Industrial Switching Operating Expenses
The following table sets forth a comparison of the Company's U.S. industrial
switching operating expenses in 1998 and 1997:
U.S. Industrial Switching
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $ 9,019 71.3% $ 8,457 71.5%
Equipment rents 217 1.7% 102 1.0%
Purchased services 291 2.3% 241 2.0%
Depreciation and amortization 798 6.3% 661 5.6%
Diesel fuel 466 3.7% 499 4.2%
Casualties and insurance 1,363 10.8% 927 7.8%
Materials 758 6.0% 524 4.4%
Other 1,533 12.1% 1,240 10.5%
------- ----- ------- -----
Total $14,445 114.2% $12,651 107.0%
======= ===== ======= =====
Labor and benefits expense was $9.0 million in 1998 compared to $8.5 million
in 1997, an increase of $562,000 or 6.6%, which was primarily attributable to a
broadening of the customer base of Rail Link, Inc.
Casualties and insurance expense was $1.4 million in 1998 compared to $927,000
in 1997, an increase of $436,000 or 47.0%, which was primarily attributable to
an increase in derailment expense of $184,000 and an increase in claims expense
of $236,000
Other expense was $1.5 million in 1998 compared to $1.2 million in 1997, an
increase of $293,000 or 23.6%, which was primarily attributable to a broadening
of the customer base of Rail Link, Inc.
All other expense categories were $2.5 million in 1998 compared to $2.0
million in 1997, an increase of $503,000 or 24.8%, which was primarily
attributable to a broadening of the customer base of Rail Link, Inc.
Operating Ratios
The Company's combined operating ratio increased to 86.7% in 1998 from 84.1%
in 1997. The operating ratio for U.S. railroad operations increased to 85.8% in
1998 from 80.4% in 1997. The operating ratio for Australia railroad operations
decreased to 81.1% in 1998 from 90.5% in 1997. The operating ratio for U.S.
industrial switching operations increased to 114.2% in 1998 from 107.0% in 1997.
Interest Expense and Income Taxes
The Company's combined interest expense was $7.0 million in 1998 compared to
$3.3 million in 1997, an increase of $3.7 million or 111.1%. Interest expense
26
for U.S. railroad operations increased to $4.4 million in 1998 from $2.8 million
in 1997, an increase of $1.6 million or 56.9%. This increase is primarily
attributable to the partial financing of the acquisition in Australia (for which
the Company used its Credit Facility but did not allocate the interest to
Australia railroad operations), an investment in GRO which operates two
railroads in Canada, and a new capital lease for equipment. Interest expense
for Australia railroad operations increased to $2.3 million in 1998 from
$320,000 in 1997, an increase of $2.0 million or 615.3%. This increase was
primarily to attributable a full year of operations in 1998 as compared to
operations which began on November 8, 1997. Interest expense for U.S.
industrial switching operations increased to $376,000 in 1998 from $220,000 in
1997, an increase of $156,000 or 70.9%.
The Company's effective income tax rate was 40.3% and 40.5% in 1998 and 1997,
respectively.
Other Income
The Company's other income in 1998 was $6.6 million compared to other income
in 1997 of $345,000, an increase of $6.3 million or 1,826.1%. The increase was
attributable to $6.0 million of insurance proceeds recorded in the United States
railroad operations.
Net Income
The Company's net income in 1998 was $11.4 million compared to net income in
1997 of $8.0 million, an increase of $3.4 million or 42.9%. The increase was
attributable to increases in net income from the Australia operation of $3.7
million and United States railroad operations of $548,000, which offset an
increase in the net loss in U.S. industrial switching operations of $792,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Consolidated 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%. The increase was attributable to
$7.4 million in revenues from the Australia operation, a $8.4 million increase
in United States railroad revenues, and a $10.0 million increase in U.S.
industrial switching revenues.
The following three sections provide information on railroad revenues in the
United States and Australia, and industrial switching revenues in the United
States.
United States Railroad Operating Revenues
Operating revenues were $84.4 million in the year ended December 31, 1997
compared to $75.9 million in the year ended December 31, 1996, an increase of
$8.5 million or 11.0%. The increase was attributable to a $5.4 million increase
in freight revenues and a $3.1 million increase in non-freight revenues. The
increases in freight and non-freight revenues are largely attributable to having
a full year of operations in 1997 on acquisitions made in 1996.
The following table compares United States freight revenues, carloads and
average freight revenues per carload for 1997 and 1996:
27
United States Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 1997 and 1996
(dollars in thousands,
except average per carload)
Average
Freight
Revenue
Per
Freight Revenues Carloads 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% $ 261 $ 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% 382 371
Lumber & Forest
Products 6,093 9.0% 5,302 8.5% 18,171 8.3% 17,135 8.5% 335 309
Chemicals &
Plastics 5,761 8.5% 4,317 6.9% 10,496 4.8% 8,289 4.1% 549 521
Metals 5,188 7.7% 5,211 8.4% 21,268 9.7% 20,218 10.0% 244 258
Farm & Food Products 3,865 5.7% 3,537 5.7% 13,390 6.1% 11,402 5.7% 289 310
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% 137 175
---------------------------------------------------------------------------------------
Total $67,713 100.0% $62,316 100.0% 219,706 100.0% 201,307 100.0% $ 308 $ 310
======================================================================================================
The increase in U.S. 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, $774,000 in
minerals and stone, and $697,000 in pulp and paper. All remaining commodities
had slight increases and decreases which, when netted, result in an increase of
approximately $607,000.
United States non-freight railroad revenues were $16.7 million in the year
ended December 31, 1997 compared to $13.7 million in the year ended December 31,
1996, an increase of $3.0 million or 21.9%. The increase was primarily due to
increases in car hire and rental income of $1.0 million and switching revenue of
$2.1 million offset by decreases in other income of $159,000.
Australia Railroad Operating Revenues (U.S. Dollars)
Operating revenues were $7.4 million in the year ended December 31, 1997, for
operations which commenced on November 8, 1997. Revenues consisted of freight
revenues of $6.3 million and non-freight revenues of $1.1 million (as discussed
earlier in this Item 7. under the heading "Results of Operations - Year Ended
December 31, 1998 Compared to Year Ended December 31, 1997").
28
U.S. Industrial Switching Revenues
Revenues from U.S. industrial switching activities were $11.8 million in the
year ended December 31, 1997 compared to $1.8 million in the year ended December
31, 1996, an increase of $10.0 million or 558.0%. The increase was primarily
attributable a full year of operations in 1997 as compared to operations which
began in November, 1996.
Consolidated Operating Expenses
Operating expenses for all operations combined were $87.2 million in 1997
compared to $63.8 million in 1996, an increase of $23.4 million or 36.7%.
Expense increases attributable to operations in Australia, which began in
November, 1997, represented $6.7 million or 28.7% of the change, expense
increases attributable to U.S. railroad operations represented $5.8 million or
24.9% of the change, and expense increases in U.S. industrial switching
represented $10.9 million or 46.4% of the change.
The following three sections provide information on railroad expenses in the
United States and Australia, and industrial switching expenses in the United
States.
United States Railroad Operating Expenses
The following table sets forth a comparison of the Company's U.S. railroad
operating expenses in 1997 and 1996:
United States Railroad
Operating Expense Comparison
Years Ended December 31, 1997 and 1996
(dollars in thousands)
1997 1996
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $28,041 33.2% $24,144 31.8%
Equipment rents 8,755 10.4% 8,501 11.2%
Purchased services 3,872 4.6% 3,320 4.4%
Depreciation and amortization 6,092 7.2% 5,930 7.8%
Diesel fuel 4,239 5.0% 4,331 5.7%
Casualties and insurance 4,280 5.1% 4,590 6.0%
Materials 3,837 4.5% 3,397 4.5%
Other 8,707 10.4% 6,560 8.6%
Special charge --- 0.0% 1,360 1.8%
----------------------------------------------
Total $67,823 80.4% $62,133 81.8%
==============================================
Labor and benefits expense was $28.0 million in 1997 compared to $24.1 million
in 1996, an increase of $3.9 million or 16.1%, due primarily to increases of
approximately $2.2 million from acquisitions made in 1996 and $1.7 million on
existing operations.
29
Other expense was $8.7 million in 1997 compared to $6.6 million in 1996, an
increase of $2.1 million or 32.7%, due primarily to increases from acquisitions
made in 1996.
After adjusting for the special charge of $1.4 million in 1996, all other
expense categories combined aggregated $31.1 million in 1997 compared to $30.1
million in 1996, an increase of $1.0 million or 3.3%, due primarily to increases
from acquisitions made in 1996.
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 a customer's mine (see Note 4. to Consolidated Financial
Statements).
Australia Railroad Operating Expenses (U.S. Dollars)
Operating expense was $6.7 million in the year ended December 31, 1997, for
operations which commenced on November 8, 1997 (as discussed earlier in this
Item 7. under the heading "Results of Operations - Year Ended December 31, 1998
Compared to Year Ended December 31, 1997").
U.S. Industrial Switching Operating Expenses
The following table sets forth a comparison of the Company's U.S. Industrial
Switching operating expenses in 1997 and 1996:
U.S. Industrial Switching
Operating Expense Comparison
Years Ended December 31, 1997 and 1996
(dollars in thousands)
1997 1996
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $ 8,457 71.5% $1,053 58.6%
Equipment rents 102 0.9% 10 0.6%
Purchased services 241 2.0% 78 4.3%
Depreciation and amortization 661 5.6% 122 6.8%
Diesel fuel 499 4.2% 102 5.7%
Casualties and insurance 927 7.8% 36 2.0%
Materials 524 4.4% 89 5.0%
Other 1,240 10.5% 178 9.8%
-------------------------------------------------
Total $12,651 106.9% $1,668 92.8%
================================================
All expense increases were primarily attributable to a full year of operations
in 1997 as compared to operations which began in November, 1996.
30
Operating Ratios
The Company's combined operating ratio increased to 84.1% in 1997 from 82.0%
in 1996. The operating ratio for U.S. railroad operations decreased to 80.4% in
1998 from 81.8% in 1996. The operating ratio for Australia railroad operations
was 90.5% in 1997. The operating ratio for U.S. industrial switching operations
increased to 106.9% in 1997 from 92.8% in 1996.
Interest Expense and Income Taxes
The Company's combined interest expense was $3.3 million in 1997 compared to
$4.7 million in 1996, a decrease of $1.4 million or 29.0%. Interest expense for
U.S. railroad operations decreased to $2.7 million in 1997 from $4.7 million in
1996, a decrease of $2.0 million or 42.3%. The decrease reflects the repayment
of $45.8 million of debt on June 28, 1996, from the proceeds of the Company's
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 the acquisition in Australia, an investment in GRO which operates
two railroads in Canada, and a new capital lease for equipment. Interest
expense for Australia railroad operations increased to $438,000 in 1997.
Interest expense for industrial switching operations increased to $220,000 in
1997 from $56,000 in 1996, an increase of $164,000 or 292.9%.
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%. The increase was
attributable to net income from the Australia operation of $194,000 and an
increase in net income from United States railroad operations of $2.6 million
which offset an increased net loss from U.S. industrial switching operations of
$745,000.
Liquidity and Capital Resources
During 1998, the Company generated cash from operations of $23.8 million,
generated cash from asset sales of $2.6 million, received $3.2 million in state
grant funds for track rehabilitation, and had a net cash reduction to debt of
$2.1 million. During the year the Company invested $10.0 million in equipment
and rolling stock and $6.9 million in track improvements and buildings.
Additionally, the Company acquired $6.4 million in rolling stock in a non-cash
exchange for similar assets. These expenditures were apart from the Company's
additional investment of $3.1 million in cash and $4.7 million in other assets
in GRO which operates two railroads in Canada (see Notes 3. and 17. to
Consolidated Financial Statements). The Company also repurchased 345,000 shares
of its Class A Common Stock at a cost of $4.6 million which will be held in the
Company treasury (see Note 14. to Consolidated Financial Statements).
During 1997, the Company generated cash from operations of $6.3 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
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
31
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 Notes 3. and 17. 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).
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. In September, 1998, certain
covenants of the credit facilities agreement regarding consolidated cash flow,
investments and capital expenditures were amended, and a Consent to Stock
Repurchase Program (see Note 14. to Consolidated Financial Statements) was
incorporated into the credit facilities agreement. The Company and its
subsidiaries were in compliance with the provisions of these covenants as of
December 31, 1998.
At December 31, 1998 the Company had long-term debt (including current
portion) totaling $65.7 million, which comprised 46.8% of its total
capitalization. This compares to long-term debt, including current portion, of
$74.1 million at December 31, 1997, comprising 52.0% 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.
The Company has budgeted approximately $27.1 million in capital expenditures
in 1999, primarily for track rehabilitation, of which $10.1 million is expected
to be funded by rehabilitation grants from state and federal agencies to
32
several of the Company's railroads, and $6.2 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.
Year 2000 Compliance
In late 1997, the Company began a comprehensive initiative to address and
resolve potential exposure associated with the functioning of its information
systems and non-information technology systems that include embedded technology
with respect to dates in the Year 2000 and beyond.
This initiative led to the development of the GWI Year 2000 Project Handbook.
The Handbook was developed to report industry Year 2000 methods and standards,
and document "best practices" for each of the Company's subsidiaries. Its
purpose is to promote consistent implementation of the Year 2000 Project and
encourage cost-effective practices and efficient use of resources.
The Year 2000 Project Handbook contains information useful to managers, system
analysts, and other technical staff members, including consultants and business
partners. It is meant to be used as a reference throughout the Year 2000
design, modification, testing, and implementation phases. The Handbook
addresses most of the obstacles the Company may face and their potential
solutions, including project management issues, contracting and staffing,
interface and data exchange standards, and test and development methodologies.
Three major categories of systems addressed by the Company's Year 2000
Initiative are railroad operations/management systems, business systems and non-
information technology systems.
All of the Company's railroad operations and management processes are
supported through licensed third party development and contracted operations.
These systems are third party certified Year 2000 compliant. With respect to
electronic commerce transmissions, the Company is currently capable of
supporting certain Year 2000 compliant EDI (4010) transactions. Remaining Year
2000 compliant EDI transactions will be implemented according to railroad
industry-wide schedules. Full EDI compliance is expected during the second
quarter of 1999. Because the potential exists that not all of the Company's
trading partners will achieve Year 2000 compliance, the Company's operational
33
systems will accommodate non-Year 2000 electronic commerce transmissions as well
as Year 2000 ready transmissions.
All of the Company's financial, purchasing, inventory, asset management,
payroll and human resource systems supporting business operations are third
party systems. The third party vendors have certified all packages to be Year
2000 compliant.
With respect to non-information technology systems that may impact operations
and/or business processes, the Company has conducted initial assessments of its
rail yard and office facilities and found no major Year 2000 problems or
obstacles.
As part of its Year 2000 initiative, the Company is in communication with its
interline carriers, significant suppliers, large customers and financial
institutions to assess their Year 2000 readiness and expects to conduct
interface tests with its external trading partners in 1999 upon completion of
internal testing of remediated applications.
To date, the Company has expended less than $50,000 on its Year 2000
initiative and remaining costs are expected to be minimal. Overall, the
Company's Year 2000 initiative is proceeding on schedule with completion of all
areas expected by mid-1999.
Failure to achieve Year 2000 compliance by the Company, other railroads, its
suppliers, and its customers could negatively affect the Company's ability to
conduct business for an extended period. Management believes that the Company
will be successful in its Year 2000 conversion; however, there can be no
assurance that other companies on which the Company's systems and operations
rely will be converted on a timely basis, and such failure could have a material
effect on the Company's financial position, results of operations, or liquidity.
The remainder of this page is intentionally left blank.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes. The Company's
exposure to changes in interest rates applies to its borrowings under a credit
facility and a capital lease arrangement, both of which have variable interest
rates tied to the LIBOR rate. In addition, the Company's Australian subsidiary
has a variable rate loan, one-half of which fluctuates with market changes in
interest rates and one-half of which is fixed at 6.24%. The Australian loan is
denominated in Australia dollars. The Company estimates that the fair value of
these debt instruments approximated their market values and carrying values at
December 31, 1998. The Company invests excess cash in overnight money market
accounts.
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.
35
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 25, 1999 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 25, 1999 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 25, 1999 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 25, 1999 under "Related
Transactions", which proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
The remainder of this page is intentionally left blank.
36
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, 1998 and 1997
Consolidated Statements of Income for the Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
(B) REPORTS ON FORM 8-K
Not applicable.
(C) EXHIBITS - SEE INDEX TO EXHIBITS.
The remainder of this page is intentionally left blank.
37
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 30, 1999 CEO and Director /s/ Mortimer B. Fuller, III
--------------------
Mortimer B. Fuller, III
March 30, 1999 Senior Vice President /s/ Alan R. Harris
and Chief Accounting --------------------
Officer Alan R. Harris
March 30, 1999 Senior Vice President, /s/ Mark W. Hastings
Chief Financial ---------------------
Officer and Treasurer Mark W. Hastings
March 30, 1999 Director /s/ James M. Fuller
------------------
James M. Fuller
March 30, 1999 Director /s/ Louis S. Fuller
------------------
Louis S. Fuller
March 30, 1999 Director /s/ Robert M. Melzer
------------------
Robert M. Melzer
March 30, 1999 Director /s/ John M. Randolph
------------------
John M. Randolph
March 30, 1999 Director /s/ Philip J. Ringo
------------------
Philip J. Ringo
38
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 16, 1999. 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 Commission's 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 16, 1999
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Description (in thousands) December 31,
1998 1997 1996
---- ---- -----
Accounts Receivable - Allowance
for Doubtful Receivables $250 $167 $76
The remainder of this page is intentionally left blank.
39
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' dated as of May 20, 1996, among the
Registrant, its executive officers and its Class B stockholders
(Exhibit 4.2)2
(e) Promissory Note dated October 7, 1991 of Buffalo & Pittsburgh
Railroad, Inc. in favor of CSX Transportation, Inc. (Exhibit 4.6)1
(f) 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. (Exhibit 4.1)8
*(4.1) First Amendment to Promissory Note dated as of March 19, 1999 between
Buffalo & Pittsburgh Railroad, Inc. and CSX Transportation, Inc.
(9) Voting Trust Agreement
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) through (4)(f) and (4)(l)
hereof are incorporated herein by reference.
40
(a) Form of Genesee & Wyoming Inc. 1996 Stock Option Plan (Exhibit
10.1)2
(b) Form of Genesee & Wyoming Inc. Stock Option Plan for Outside
Directors (Exhibit 10.2)2
(c) Form of Employment Agreement between the Registrant and each of
its executive officers (Exhibit 10.3)1
(d) Form of Genesee & Wyoming Inc. Employee Stock Purchase Plan
(Exhibit 10.4)2
(e) Asset Purchase Agreement dated February 8, 1996 between Illinois
& Midland Railroad, Inc. and Stanford PRC Acquisition Corp.
(Exhibit 10.61)1
(f) Guaranty dated as of February 8, 1996 of the Registrant in
favor of Stanford PRC Acquisition Corp. (Exhibit 10.62)1
(g) Assignment and Assumption Agreements dated as of February 1996
between Chicago & Illinois Midland Railway Company and
Illinois & Midland Railroad, Inc. (Exhibit 10.63)18,
(h) Warrant Purchase Agreement dated as of February 8, 1996 between
the Registrant and First National Bank of Boston. (Exhibit
10.64)1
(i) Agreement dated February 6, 1996 between Illinois & Midland
Railroad, Inc. and the United Transportation Union. (Exhibit
10.65)1
(j) Asset Purchase Agreement dated April 19, 1996 among Pittsburg &
Shawmut Railroad, Inc., the Registrant, The Pittsburg & Shawmut
Railroad Company, Red Bank Railroad Company, Mountain Laurel
Railroad Company and Arthur T. Walker Estate Corporation, and
Amendment No. 1 to Asset Purchase Agreement dated April 19, 1996.
(Exhibit 10.70)4
(k) Amendment No. 1 to Warrant Purchase Agreement dated as of May 31,
1996 between the Registrant and FSC Corp. (Exhibit 10.71)2
(l) Stock Purchase Agreement dated as of November 8, 1996
between Brenco, Incorporated, Rail Link, Inc. and the
Registrant (Exhibit 10.1)5
(m) Amendment No. 1 to the Genesee & Wyoming Inc. 1996 Stock Option
Plan (Exhibit 10.1)6
(n) 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
(o) Amendment No. 1 to Genesee & Wyoming Inc. Stock Option Plan for
Outside Directors (Exhibit 10.1)8
41
(p) Memorandum of Lease between Minister for Transport and Urban
Planning a Body Corporate Under the Administrative Arrangements
Act, the Lessor, and Australia Southern Railroad Pty. Ltd., the
Lessee, dated 7 November 1997. (Exhibit 10.2)8
(q) Amendment No. 2. To the Genesee & Wyoming Inc. 1996 Stock Option
Plan (Exhibit 10.1)9
(r) Amendment No. 1. To the Genesee & Wyoming Inc. Employee Stock
Purchase Plan (Exhibit 10.2)9
*(10.1) Promissory Note dated May 20, 1998 of Mortimer B. Fuller, III in favor
of the Registrant.
*(10.2) Assignment Letter between Charles W. Charbot and the Registrant,
effective November 1, 1997
*(11.1) Statement re computation of per share earnings
(12) Statement re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
*(21.1) Subsidiaries of the Registrant
(22) Published report regarding matters submitted to vote of security
holders
Not applicable.
*(23.1) Consent of Arthur Andersen LLP
(24) Power of attorney
Not applicable.
*(27.1) Financial Data Schedule for Year Ended December 31, 1998
42
(99) Additional Exhibits
Not applicable.
____________________________
*Exhibit filed with this Report.
1Exhibit 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.
2Exhibit 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.
3Exhibit 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.
4Exhibit 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.
5Exhibit 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, 1996. The exhibit number contained in parenthesis refers to the
exhibit number in such Report.
6Exhibit 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.
7Exhibit 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.
8Exhibit 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.
9Exhibit 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, 1998. The exhibit number contained in parenthesis refers to the exhibit
number in such Report.
43
INDEX TO FINANCIAL STATEMENTS
Page
Genesee & Wyoming Inc. and Subsidiaries:
Report of Independent Public Accountants..............................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997..........F-3
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996..................................................F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996...........F-5
Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996..............................................F-6
Notes to Consolidated Financial Statements............................F-7
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, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 16, 1999
(except with respect to the matter discussed
in Note 17., as to which the date is March 10, 1999)
F-2
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
Dec. 31, Dec. 31,
ASSETS 1998 1997
CURRENT ASSETS: ------------------------
Cash and cash equivalents $ 14,396 $ 11,434
Accounts receivable, net 31,723 29,895
Materials and supplies 3,502 5,039
Prepaid expenses and other 2,914 3,145
Deferred income tax assets, net 2,315 2,523
------------------------
Total current assets 54,850 52,036
------------------------
PROPERTY AND EQUIPMENT, net 125,562 124,985
------------------------
SERVICE ASSURANCE AGREEMENT, net of accumulated
amortization of $2.1 million and $1.4 million 12,814 13,563
------------------------
INVESTMENT IN UNCONSOLIDATED AFFILIATES 13,215 9,581
------------------------
OTHER ASSETS, net 10,319 10,367
------------------------
Total assets $216,760 $210,532
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,591 $ 1,157
Accounts payable 28,814 30,025
Accrued expenses 11,338 6,796
------------------------
Total current liabilities 42,743 37,978
------------------------
LONG-TERM DEBT 63,099 72,987
------------------------
OTHER LIABILITIES 2,803 3,237
------------------------
DEFERRED INCOME TAX LIABILITIES, net 12,006 8,470
------------------------
DEFERRED ITEM--grants from governmental agencies 17,607 15,083
------------------------
DEFERRED GAIN--sale/leaseback 3,965 4,434
------------------------
STOCKHOLDERS' EQUITY:
Class A Common Stock, $0.01 par value, one vote per share;
12,000,000 shares authorized; 4,450,276 and 4,404,262 issued
and outstanding on December 31, 1998 and December 31, 1997,
respectively 45 44
Class B Common Stock, $0.01 par value, 10 votes per share;
1,500,000 shares authorized; 845,539 and 846,556 issued and
outstanding on December 31, 1998 and December 31, 1997,
respectively 8 8
Additional paid-in capital 46,730 46,205
Warrants outstanding --- 471
Retained earnings 34,490 23,056
Other comprehensive income (loss) (2,107) (1,441)
Less treasury stock, at cost, 345,000 Class A shares (4,629) ---
------------------------
Total stockholders' equity 74,537 68,343
------------------------
Total liabilities and stockholders' equity $216,760 $210,532
========================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Years Ended December 31,
1998 1997 1996
-------------------------------------------
OPERATING REVENUES $ 147,472 $ 103,643 $ 77,795
------------------------------------------
OPERATING EXPENSES
Transportation 46,784 31,690 18,952
Maintenance of ways and structures 17,306 10,483 9,431
Maintenance of equipment 27,968 17,537 14,218
General and administrative 25,929 20,491 13,788
Depreciation and amortization 9,917 6,999 6,052
Special charge -- -- 1,360
----------------------------------------
Total operating expenses 127,904 87,200 63,801
----------------------------------------
INCOME FROM OPERATIONS 19,568 16,443 13,994
Interest expense (7,071) (3,349) (4,720)
Other income 6,645 345 651
----------------------------------------
Income before provision for income taxes 19,142 13,439 9,925
Provision for income tax 7,708 5,441 4,020
----------------------------------------
NET INCOME $ 11,434 $ 7,998 $ 5,905
==========================================
Earnings per common share - basic $ 2.20 $ 1.52 $ 1.54
==========================================
Weighted average number of shares of
common stock - basic 5,187 5,250 3,829
==========================================
Earnings per common share - diluted $ 2.19 $ 1.47 $ 1.49
==========================================
Weighted average number of shares of
common stock - diluted 5,229 5,447 3,966
==========================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GENESSEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
Class A Par Class B Par Other Total
Common Value Common Value Paid-in Retained Comprehensive Treasury Stockholder
Stock $0.01 Stock $0.01 Capital Warran Earnings Income (Loss) Stock Equity
----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 1,502 $ 15 847 $ 8 $ 1,340 -- $ 9,185 --- --- $ 10,548
Comprehensive income:
Net income --- --- --- --- --- -- 5,905 --- ---
Currency translation
adjustments --- --- --- --- --- -- --- --- ---
Total comprehensive income --- --- --- --- --- -- --- --- --- 5,905
Issuance of stock warrants --- --- --- --- --- $471 --- --- --- 471
Proceeds from issuance of
stock--initial offering 2,898 29 --- --- 44,751 -- --- --- --- 44,780
Proceeds from issuance of
stock--employee purchase --- --- --- --- 11 -- --- --- --- 11
Cash dividends --- --- --- --- --- -- (32) --- --- (32)
----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 4,404 44 847 8 46,102 471 15,058 --- --- 61,683
Comprehensive income:
Net income --- --- --- --- --- -- 7,998 --- ---
Currency translation
adjustments --- --- --- --- --- -- --- $ (1,441) ---
Total comprehensive income --- --- --- --- --- -- --- --- --- 6,557
Proceeds from issuance of
stock--employee purchase 4 --- --- --- 103 -- --- --- --- 103
----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 4,400 44 847 8 46,205 471 23,056 (1,441) --- 68,343
Comprehensive income:
Net income --- --- --- --- --- -- 11,434 --- ---
Currency translation
adjustments --- --- --- --- --- -- --- (666) ---
Total comprehensive income --- --- --- --- --- -- --- --- --- 10,768
Proceeds from issuance of
stock--employee purchase 4 1 --- --- 54 -- --- --- --- 55
Warrants exercised 42 --- --- --- 471 (471) --- --- --- ---
Treasury stock acquisitions,
345,000 shares --- --- --- --- --- -- --- --- $(4,629) (4,629)
---------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 4,450 $ 45 847 $ 8 $ 46,730 -- $34,490 $(2,107) $(4,629) $ 74,537
===================================================================================================
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)
Year Ended December 31,
1998 1997 1996
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 11,434 $ 7,998 $ 5,905
Adjustment to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 9,917 6,999 6,052
Deferred income taxes 4,985 2,863 1,332
Gain on disposition of property (410) (13) (633)
Special charge ---- ---- 1,360
Changes in assets and liabilities, net of balances
assumed through acquisitions-
Receivables (3,575) (9,848) (7,781)
Materials and supplies 1,188 477 (1,861)
Prepaid expenses and other 150 (1,362) (239)
Accounts payables and accrued expenses 1,710 (2,015) 25,217
Other assets and liabilities, net (1,595) 1,210 1,060
------------------------------------------
Net cash provided by operating activities 23,804 6,309 30,412
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,901) (13,891) (8,174)
Purchase of assets of Chicago & Illinois Midland Railway Company ---- ---- (26,330)
Purchase of assets of Pittsburg & Shawmut Railroad Company,
Mountain Laurel Railroad Company and Red Bank Railroad Company ---- ---- (11,966)
Purchase of common stock of Rail Link, Inc. ---- ---- (12,122)
Purchase of assets of Australian National Railway ---- (33,079) ----
Investment in affiliate (3,084) (9,412) ----
Proceeds from disposition of property 2,597 581 17,790
------------------------------------------
Net cash used in investing activities (17,388) (55,801) (40,802)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings, including capital lease (22,852) (24,982) (73,400)
Proceeds from issuance of long-term debt 20,800 70,885 51,437
Debt issuance costs ---- (739) (1,642)
Net proceeds on grants 3,208 2,903 771
Dividends paid ---- ---- (32)
Proceeds from issuance of stock--employee purchase 55 103 11
Purchase of treasury stock (4,629) ---- ----
Issuance of stock warrants ---- ---- 471
Proceeds from issuance of stock--initial public offering ---- ---- 44,780
------------------------------------------
Net cash (used in) provided by financing activities (3,418) 48,170 22,396
------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (36) (1,365) ----
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,962 (2,687) 12,006
CASH AND CASH EQUIVALENTS, beginning of period 11,434 14,121 2,115
------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 14,396 $ 11,434 $ 14,121
==========================================
CASH PAID DURING PERIOD FOR:
Interest $ 7,092 $ 2,474 $ 4,347
Income taxes 1,042 5,056 2,138
==========================================
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 $ (5,261) $ 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 19 short line
and regional railroads in New York, Pennsylvania, Louisiana, Oregon, Texas,
Illinois, Florida, North Carolina, Virginia, Georgia and, beginning in 1998 and
1997, Mexico and Australia (see Note 2.), respectively, 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
(See Note 3. and Note 17.).
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
Revenue Recognition
- -------------------
Revenues are estimated and recognized as shipments initially move onto the
Company's tracks, which, due to the relatively short length of haul, is not
materially different from the recognition of revenues as shipments progress.
Cash Equivalents
- ----------------
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents for purposes of
classification in the consolidated balance sheets and consolidated statements of
cash flows. Cash equivalents are stated at cost, which approximates fair market
value.
Materials and Supplies
- ----------------------
Materials and supplies consist of items for improvement and maintenance of road
property and equipment, and are stated at the lower of average cost or market.
Property and Equipment
- ----------------------
Property and equipment are carried at historical cost. Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments are
capitalized while routine maintenance and repairs, which do not improve or
extend asset lives, are charged to expense when incurred. Gains or losses on
sales or other dispositions are credited or charged to other income.
Depreciation is provided on the straight-line method over the useful lives of
the property which are as follows:
Road Properties...............................20-50 years
Equipment......................................3-20 years
F-7
The Company continually evaluates whether events and circumstances have occurred
that indicate assets may not be recoverable. When factors indicate that assets
should be evaluated for possible impairment, the Company uses an estimate of the
related undiscounted future cash flows over the remaining lives of assets in
measuring whether or not an impairment has occurred.
Service Assurance Agreement
- ---------------------------
The service assurance agreement represents a commitment from one of the most
significant customers of the Company, to one of the subsidiary railroads (see
Note 2. and Note 13.), 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.
Earnings per Share
- ------------------
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 412,820, 409,822
and 424,347 for 1998, 1997 and 1996, respectively. Options to purchase 280,400
and 39,000 shares of stock were outstanding during 1998 and 1997, respectively,
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, paper, petroleum products and chemical
industries in the United States, and the farm and food products, coal and
transportation (hook and pull) industries in Australia. 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 42%, 37% and 49% of the Company's revenues
in 1998, 1997 and 1996, respectively. One customer in the electric utility
industry accounted for approximately 9%, 15% and 18% of the Company's revenues
in 1998, 1997 and 1996, respectively (see Note 2. and Note 13.). 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, paper, petroleum products, chemical, farm and food, coal and
transportation industries, and the railroad sector of the economy in general.
Insurance Recoveries
- --------------------
The Company receives insurance proceeds in the normal course of business for
recoveries related to derailment damages and employee and third party claims.
These proceeds are treated as a reduction to operating expenses. Insurance
proceeds related to other matters are recorded in other income. In 1998,
included in other income is $6.0 million of insurance proceeds.
F-8
Disclosures About Fair Value of Financial Instruments
- -----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
Current assets and current liabilities: The carrying value approximates
fair value due to the short maturity of these items.
Long-term debt: The fair value of the Company's long-term debt is based on
secondary market indicators. Since the Company's debt is not quoted,
estimates are based on each obligation's characteristics, including
remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair
value.
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 prior year balances have been reclassified to conform with the 1998
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 for 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 $331,000 and $114,000 in 1998 and 1997, respectively.
2. EXPANSION OF OPERATIONS:
------------------------
Genesee & Wyoming Australia Pty. Ltd.
- -------------------------------------
On August 28, 1997, the Company's wholly-owned subsidiary, Genesee & Wyoming
Australia Pty. Ltd. ("GWIA"), was awarded the contract to purchase certain
selected assets of the railroad freight operation of SA Rail, a division of
Australian National Railway which was controlled by the Commonwealth Government
of Australia. SA Rail provided 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
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.
F-9
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 $10.6 million in cash
of which $9.1 million was paid in 1996 and $1.5 million was paid in 1997. Rail
Link provides freight car switching and related services to United States
industries with extensive railroad facilities within their complexes. 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. 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 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, 1998 and 1997, the Company met
certain contingency payment criteria and recorded $419,000 and $192,000 of
goodwill, respectively. The acquisition was accounted for as a purchase.
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. A
significant portion of this subsidiary's operating revenue (68% in 1998, 74% in
1997 and 76% in 1996) is attributable to coal shipments for one customer which
is an electric utility (see Note 1. and Note 13.). The acquisition was
accounted for as a purchase.
3. JOINT VENTURE AND RELATED PARTY TRANSACTIONS:
---------------------------------------------
During 1997, the Company formed a joint venture, Genesee Rail-One Inc. ("GRO")
to acquire railroads in Canada (See Note 17.). 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 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.
On November 11, 1997, GRO commenced operations of the Quebec Gatineau Railway
Inc. ("QGRY"), a 354-mile railroad linking Quebec City, Montreal and Hull in
Southeastern 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.
In November, 1998, the Company recorded an additional investment of $875,000 for
the purchase of a 10-mile segment of track which is contiguous to QGRY.
Additionally, the
F-10
Company agreed to provide a $2.2 million letter of credit to GRO's primary
lender in exchange for relief on certain financial loan covenants.
Based on GWI's ownership portion, the Company reported 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. Losses
from GRO of $645,000 and $60,000 in 1998 and 1997, respectively, are recorded in
other income, net.
The Company loaned Rail-One $4,613,000 through a promissory note denominated in
Canadian currency to substantially finance Rail-One's initial investment in GRO.
The note accrued interest at 7.5 percent per annum, earned 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 were due and payable on
November 10, 1998. The principal, all accrued interest and the commitment fee
were not paid on November 10, 1998, and the Company entered negotiations with
Rail-One regarding the transfer of Rail-One's ownership interest in GRO to the
Company (See Note 17.).
As of December 31, 1998, the Company's initial investment of approximately $4.9
million and its additional investment of $875,000 were recorded at $5.1 million,
a reduction of $705,000 due to GRO operating losses. Additionally, the Company
capitalized its note receivable, accrued interest and commitment fee due from
Rail-One. totaling approximately $4.7 million, and approximately $3.1
million of trade accounts receivable due from GRO, increasing its total
investment in GRO to approximately $12.9 million.
4. 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.
The remainder of this page is intentionally left blank.
F-11
5. PROPERTY AND EQUIPMENT:
-----------------------
Major classifications of property and equipment are as follows (amounts in
thousands):
1998 1997
---- ----
Road properties $ 92,638 $ 83,093
Equipment and other 61,420 66,341
-------- --------
154,058 149,434
Less- Accumulated depreciation and amortization 28,496 24,449
-------- --------
$125,562 $124,985
======== ========
6. OTHER ASSETS:
-------------
Major classifications of other assets are as follows (amounts in thousands):
1998 1997
---- ----
Goodwill $ 4,238 $ 4,238
Deferred financing costs 2,456 3,073
Assets held for sale or future use 2,239 2,023
Other 3,615 2,565
-------- --------
12,548 11,899
Less- Accumulated amortization 2,229 1,532
-------- --------
$ 10,319 $ 10,367
======== ========
Goodwill is being amortized on a straight-line basis over 20 years. 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 8.). Assets held for sale or future use
relate to the shutdown of one of the Company's subsidiaries (see Note 4.).
7. 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, 1998, totaled $6.2 million
less accumulated depreciation of $0.4 million. The following is a schedule by
years of minimum future rentals receivable on noncancelable operating leases
(amounts in thousands):
1999.............................................$3,174
2000............................................. 287
2001............................................. 223
2002............................................. 223
2003............................................. 205
Thereafter....................................... 512
-----
$4,624
=====
F-12
Approximately $2.8 million of the $3.2 million rental receivable due in 1999 is
from leases to an unconsolidated affiliate which is a subsidiary of GRO (see
Note 17.).
During 1998, a subsidiary of the Company sold, through several transactions,
approximately 530 railroad freight cars which had previously accounted for a
significant portion of the Company's minimum future rentals receivable on non
cancelable operating leases. The proceeds of the sales were used to acquire
railroad rolling stock which had previously been utilized under terms of a
capital lease.
Lessee
- ------
The Company has entered into several leases for rolling stock, locomotives and
other equipment. Operating lease expense for the years ended December 31, 1998,
1997 and 1996, was approximately $6.3 million, $2.0 million and $1.3 million,
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, subject to certain conditions, at the end of five one-year periods. If
certain conditions related to the return of the cars are met, the Company could
be required to pay a fee equal to one year of lease payments. The boxcars were
simultaneously leased to an unconsolidated affiliate which is a subsidiary of
GRO at a rate of $185 per car per month (see Note 17.).
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 8.).
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):
1999.............................................$5,261
2000............................................. 2,264
2001............................................. 1,982
2002............................................. 1,687
2003............................................. 1,532
Thereafter....................................... 3,783
------
Total minimum payments..........................$16,509
======
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,
1998, 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
F-13
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, 1998, no payments were required
under either lease arrangement.
8. LONG-TERM DEBT:
---------------
Long-term debt consists of the following (amounts in thousands):
1998 1997
------- -------
Credit facilities with variable interest depending upon
certain financial ratios of the Company, as defined
(7.0% at December 31, 1998), with the balance due in
2002, net of unamortized discount of $195,000 ($290,000
in 1997). $33,604 $27,410
Promissory note payable with interest at 8% and principal
payments due annually of $1,187,000 if certain conditions,
as specified in the agreement, are met, with the balance
due in 2000. 8,922 8,922
Capital lease obligations with variable interest at LIBOR
plus 1.5%. Balance paid in February, 1999. 6,500 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. Change in balance due to currency
conversion of Australian to U.S. dollars at different rates. 14,088 14,991
Subordinated debt facility with interest at 6.16%, no
amortization requirements, with the balance paid in 1998. - 7,170
Other debt with interest rates up to 8% and maturing at
various dates between 1999 and 2006. 2,576 3,890
- ------------------------------------------------------------- ----------------
65,690 74,144
Less- Current portion 2,591 1,157
- ------------------------------------------------------------- ----------------
Long-term debt, less current portion $63,099 $72,987
============================================================= ================
F-14
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. In September, 1998, certain
covenants of the credit facilities agreement regarding consolidated cash flow,
investments and capital expenditures were amended, and a Consent to Stock
Repurchase Program (see Note 14.) was incorporated into the credit facilities
agreement. The Company and its subsidiaries were in compliance with the
provisions of these covenants as of December 31, 1998.
Promissory Note
- ---------------
The promissory note payable with an outstanding balance of $8,922,000 at
December 31, 1998, provides for annual principal payments of $1,187,000 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 1998 or 1997. The subsidiary did, however, make
principal payments of $100,000 in 1997 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 1999. The annual debt
maturity schedule has been adjusted accordingly. The terms of the agreement
call for payment of all outstanding principal in 2000.
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, 1998 and 1997, the
Company's subsidiary had $6.5 million and $11.8 million, respectively, of
equipment under this lease. During 1998, the Company reduced its lease
obligation through the purchase of $5.3 million of rolling stock assets held
under the master lease agreement. Lease payments in 1998 were interest only at
LIBOR plus 1.5%. The $6.5 million lease obligation at December 31, 1998, was
liquidated in February, 1999, by the purchase of the remaining assets held under
the master lease agreement.
Variable Rate Loan
- --------------------
In November, 1997, a subsidiary of the Company entered into a variable rate loan
denominated in Australian currency which calls for semi-annual payments
commencing on June 30, 1999, with the final installment due in November, 2002.
There is a fixed interest rate swap over 50% of the loan balance, effectively
fixing the interest rate at 6.24% for 50% of the loan for the life of the loan.
The loan is secured by a first ranking fixed and floating charge over all the
present and future assets of the Australia Southern Railroad Pty. Ltd. and SA
Rail Pty. Ltd. and control over all indebtedness of the Australia Southern
Railroad Pty. Ltd. to Genesee & Wyoming Australia Pty. Ltd.
F-15
Subordinated Debt Facility
- --------------------------
In November, 1997, a subsidiary of the Company entered into a subordinated debt
facility repayable November, 1999. There was a fixed interest rate swap over
100% of the loan balance, effectively fixing the interest rate at 6.16% for the
life of the loan. This subordinated debt facility was repaid in September 1998.
Schedule of Future Payments
- ---------------------------
The following is a summary of the maturities of long-term debt as of December
31, 1998 (amounts in thousands):
1999.............................................$ 2,591
2000............................................. 11,611
2001............................................. 2,683
2002............................................. 42,339
2003............................................. 596
Thereafter....................................... 5,870
------
$65,690
=======
9. 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 and December, 1998, the Company entered into
two-year interest rate swap agreements with a financial institution whereby,
effective December 31, 1998, the Company fixed its LIBOR interest rate at an
average of 4.98% by exchanging its variable interest rate on long-term debt for
a fixed interest rate. The notional amount under these agreements is $20.0
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 6.24% 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.
F-16
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:
-----------------------------------------------
The Company provides a noncontributory defined benefit plan for non-union
employees of a subsidiary, and a postretirement benefit plan to certain active
and retired employees of another subsidiary. The following provides a
reconciliation of benefit obligation, plan assets, and funded status of the
plans (dollars in thousands):
Other
Retirement
Pension Benefits
1998 1997 1998 1997
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of period $ 774 $ 635 $ 492 $ 548
Service cost 149 141 -- 3
Interest cost 58 47 34 41
Plan participants' contributions -- -- -- --
Amendments -- -- -- --
Actuarial (gain) loss 117 (49) 61 (56)
Benefits paid -- -- (43) (44)
------ ------ ------ ------
Benefit obligation at end of period $1,098 $ 774 $ 544 $ 492
------ ------ ------ ------
Change in plan assets:
Fair value of assets at beginning of period $ 362 $ 340 -- --
Actual return on plan assets 81 22 -- --
Employer contribution -- -- $ 43 $ 44
Plan participants' contributions -- -- -- --
Benefits paid -- -- (43) (44)
------ ------ ------ ------
Fair value of assets at end of period $ 443 $ 362 -- --
------ ------ ------ ------
Reconciliation of Funded Status:
Funded status ($655) ($413) ($545) ($492)
Unrecognized net actuarial (gain) or loss 24 (42) (122) (195)
Unrecognized transition (asset) or obligation -- -- -- --
Unrecognized prior service cost 250 273 -- --
------ ------ ------ ------
Prepaid (accrued) benefit cost ($381) ($182) ($667) ($687)
------ ------ ------ ------
Weighted-average assumptions as of
September 30:
Discount rate 7.0% 7.5% 7.0% 7.25%
Expected return on plan assets 8.5% 8.5% N/A N/A
Rate of compensation increase 5.0% 5.0% N/A N/A
Components of net periodic benefit cost:
Service cost $ 149 $ 141 -- $ 3
Interest cost 58 47 $ 34 41
Expected return on plan assets (31) (29) -- --
Amortization of prior service cost 23 23 -- --
Amortization of transition obligation -- -- -- --
Amortization of (gain) loss -- -- (13) (11)
------ ------ ------ ------
Net periodic benefit cost $ 199 ($182) $ 21 $ 33
------ ------ ------ ------
F-17
Pension
- -------
The Company administers one noncontributory defined benefit plan for non-union
employees of a 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 plan. The Company has met the minimum funding requirements
according to the Employee Retirement Income Security Act.
Postretirement Benefits
- -----------------------
Historically, the Company has provided certain health care and life insurance
benefits for certain retired employees. Eligible employees include union
employees of 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.
For measurement purposes, an 8.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 1998. The rate was
assumed to decrease gradually over the next three years to 5.0% and remain at
that level thereafter.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing (decreasing) the assumed health care cost
trend rates by one percentage point in each year would increase (decrease) the
aggregate of the service and interest cost components of the net periodic
postretirement benefit cost and the end of the year accumulated postretirement
benefit obligation as follows:
1 - Percentage 1 - Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components $ 3,132 $ (2,867)
Effect on postretirement benefit obligation $ 35,942 $(33,706)
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 $1.4 million, $1.0 million and
$730,000 was awarded under the various bonus plans in 1998, 1997 and 1996,
respectively.
Profit Sharing
- --------------
Effective November 8, 1996, 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 contributions to the plan
in 1998 and 1997 were approximately $88,000 and $63,000, respectively.
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 all non-union
and some 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 1998, 1997 and 1996 were approximately $156,000, $163,000 and $110,000,
respectively.
F-18
Postemployment Benefits
- -----------------------
The Company does not provide postemployment benefits to its employees.
11. INCOME TAXES:
-------------
The Company files consolidated U.S. federal income tax returns which include all
of its U.S. subsidiaries. The Company's Australian subsidiaries file Australian
income tax returns. The Company's Mexican subsidiary files a Mexican income tax
return.
No provision is made for the U.S. income taxes applicable to the undistributed
earnings of foreign subsidiaries as it is the intention of management to utilize
those earnings in the operations of the foreign subsidiaries for the foreseeable
future. In the event earnings should be distributed in the future, those
distributions may be subject to U.S. income taxes (through reduction of foreign
tax credits) and withholding taxes payable to various foreign countries. It is
not practicable to determine the amount of U.S. income taxes or foreign
withholding taxes that could be payable if a distribution of earnings were to
occur. The components of the provision for income taxes are as follows (amounts
in thousands):
United States: 1998 1997 1996
---- ---- ----
Current-
Federal $2,055 $2,095 $2,779
State 715 670 1,014
Deferred 2,642 2,561 227
------ ------ ------
5,412 5,326 4,020
------ ------ ------
Foreign (U.S.$):
Current 1,735 -- --
Deferred 561 115 --
------ ------ ------
Total $7,708 $5,441 $4,020
====== ====== ======
The provision for income taxes differs from that which would be computed by
applying the statutory U.S. federal income tax rate to the income before taxes.
The following is a summary of the effective tax rate reconciliation:
1998 1997 1996
---- ---- ----
Tax provision at statutory rate 35.0% 34.0% 34.0%
Effect of foreign operations 0.7% 0.1% --
State income taxes, net of federal
income tax benefit 4.0% 5.7% 5.6%
Other, net 0.6% 0.7% 0.9%
---- ---- ----
Effective income tax rate 40.3% 40.5% 40.5%
==== ==== ====
F-19
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):
1998 1997
---- ----
Deferred tax assets-
Accruals and reserves not deducted
for tax purposes until paid $ 2,341 $ 2,415
Alternative minimum tax credits 1,592 1,837
Net operating losses -- 136
Postretirement benefits 233 233
Other 128 (78)
-------- --------
4,294 4,543
Deferred tax liability - differences
in depreciation and amortization (13,985) (10,490)
-------- --------
Net deferred tax liability ($9,691) ($5,947)
======== ========
The Company's alternative minimum tax credit 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.
12. GRANTS FROM GOVERNMENTAL AGENCIES:
----------------------------------
During 1998 and 1997, several subsidiaries of the Company received grants from
states within which they operate for rehabilitation of portions of their track.
These agreements typically require the states to reimburse the subsidiaries for
75% of the total cost of specific projects. During 1998, grants totaling $10.5
million and $2.8 million were received from the States of New York and
Pennsylvania, respectively. The grant from the State of New York of $10.5
million is for construction of approximately 2.0 miles of new track which will
serve as a connection to a new salt mine currently under construction, and
rehabilitation of a portion of the subsidiary's existing track. Approximately
$375,000 of the New York grant proceeds and all of the Pennsylvania grant
proceeds had been used as of December 31, 1998. During 1997, grants totaling
$2.8 million and $135,000 were received from the States of Pennsylvania and
Virginia, respectively.
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.
All of the aforementioned grants do not represent a future liability of the
Company unless the Company abandons the rehabilitated track structure within a
specified period of time or fails to maintain the rehabilitated track to certain
FRA standards and make certain minimum capital improvements, as defined in the
respective agreements. As the Company intends to comply with these agreements,
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 deferred grants is a non-cash 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, 1998, 1997 and 1996, the Company
recorded offsets to depreciation expense from grant amortization of $728,000,
$719,000 and $638,000, respectively.
F-20
13. 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.
Capital Commitment - United States
- ----------------------------------
In connection with the Company's lease of its 185-mile line in Oregon (see Note
7.), the Company has committed to the lessor to rehabilitate 25 miles of track
over five years, beginning February, 1993, at an estimated total cost of
approximately $5.0 million. As of December 31, 1998, the Company had completed
this rehabilitation.
Capital Commitment - Australia
- ------------------------------
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.
Consolidated Rail Corporation Merger
- ------------------------------------
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. On July 23, 1998, the Surface Transportation
Board ("STB") issued its written order approving the petition of CSX
Transportation, Inc. ("CSX") and Norfolk Southern Corp. ("NS") to control and
divide the assets of Consolidated Rail Corporation ("Conrail"). Railroads in
the Company's New York and Pennsylvania region interchange with, or participate
in overhead traffic with, one or both of these railroads. Overhead traffic is
defined as traffic that neither originates nor terminates on the Company's
northeastern rail network. In their joint filing with the STB, CSX and NS
estimated that approximately $8.3 million in freight revenue related to overhead
traffic on one of the Company's subsidiaries may be diverted as a result of the
proposed transactions. The Company agrees with this estimate and is
implementing operational changes aimed at minimizing this impact. On October
21, 1997 the Company and several of its subsidiaries entered into a confidential
Rate and Route Agreement with CSX that the Company believes will facilitate the
operation's restructuring process. The STB's written order contains one or more
conditions which also may minimize this impact. The division of Conrail's
assets is expected to occur in 1999. While the Company believes that agreements
reached with CSX and NS in regard to the Conrail breakup will ultimately benefit
the Company, the transition will be uncertain until new operating patterns are
established. Based on its initial studies the Company believes that no
impairment of its assets will occur.
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
F-21
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.
On August 6, 1998, a lawsuit was commenced against the Company and its
subsidiary, Illinois & Midland Railroad, Inc. ("IMRR"), by Commonwealth Edison
Company ("ComEd") in the Circuit Court of Cook County, Illinois. The suit
alleges that IMRR is in breach of certain provisions of a 1987 agreement entered
into by a prior unrelated owner of the IMRR rail line. The provisions pertain
to limitations on rates received by IMRR and the unrelated predecessor for
freight hauled for ComEd's Powerton plant. The suit seeks unspecified
compensatory damages in excess of $100,000. The Company believes the suit is
without merit. IMRR intends to vigorously defend against the suit.
14. STOCKHOLDERS' EQUITY:
---------------------
Stock Repurchase
- ----------------
On August 12, 1998, the Company's board of directors authorized the Company's
repurchase of up to one million shares of the Company's Class A common stock
under SEC Rule 10b-18. At December 31, 1998, the Company had purchased 345,000
shares at a total cost of $4,629,000. The repurchase program remains open and
additional purchases are at the discretion of management.
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.
Initial Public Offering and Related Stock Transactions
- ------------------------------------------------------
On June 28, 1996 the Company made 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.
15. 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 non-employee
directors (collectively referred to hereafter as the "Stock Option Plans"). In
addition, the Company established an employee stock purchase plan ("Stock
Purchase Plan"). The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
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1998 1997 1996
---- ---- ----
Net Income: As reported $11,434 $7,998 $5,905
Pro Forma 10,451 7,332 5,609
Basic EPS: As reported $ 2.20 $ 1.52 $ 1.54
Pro Forma 2.01 1.40 1.49
Diluted EPS: As reported $ 2.19 $ 1.47 $ 1.49
Pro Forma 2.01 1.34 1.43
In May, 1998, the Company reduced the number of shares of stock it may sell to
its full-time employees under the Stock Purchase Plan from 450,000 to 250,000.
At December 31, 1998, 4,502 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 May, 1998, the Company increased the number of shares available for option
grants under its Stock Option Plan for employees from 650,000 to 850,000. The
Company may now grant options to purchase an aggregate of 900,000 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 Compensation and 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 1998, 1997 and 1996:
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
Wtd. Ave. Wtd. Ave. Wtd. Ave.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------
Outstanding at
beginning of
the year 406,975 $18.46 421,500 $18.61 --- ---
Granted 250,600 21.25 4,000 27.25 421,500 $18.61
Exercised 500 17.00 3,275 17.00 --- ---
Forfeited 4,700 21.25 15,250 25.11 --- ---
Outstanding at
end of year 652,375 18.41 406,975 18.46 421,500 18.61
Exercisable at
end of year 205,415 18.41 101,354 18.41 --- ---
Weighted average
fair value of
options granted --- 8.97 --- 17.51 --- 10.29
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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 5.48 percent; expected dividend yield of
0 percent; expected lives of 5 and 10 years; expected volatility of 37.77
percent. The weighted-average fair value of options was $8.97, $17.51 and
$10.29 in 1998, 1997 and 1996, respectively.
16. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION:
------------------------------------------------
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in 1998, which changes the way the Company reports
information about its operating segments. The information for 1997 and 1996 has
been restated from prior years' presentations in order to conform to the 1998
presentation.
The Company operates in three business segments in two geographic areas: United
States Railroad Operations, which includes operating short line and regional
railroads, and buying, selling, leasing and managing railroad transportation
equipment within the United States; Australian Railroad Operations, which
includes operating a regional railroad and providing hook and pull (haulage)
services to other railroads within Australia; and Industrial Switching, which
includes providing freight car switching and related services to industries with
extensive railroad facilities within their complexes in the United States.
Corporate overhead expenses, including acquisition expense, are reported in
United States Railroad Operations.
The accounting policies of the reportable segments are the same as those
described in Note 1. of Notes to Consolidated Financial Statements. The Company
evaluates the performance of its operating segments based on operating income.
Intersegment sales and transfers are not significant. Summarized financial
information for each business segment for the years 1998, 1997 and 1996 and for
each geographic area for the years 1998 and 1997 are shown in the following
tables:
Business Segment
(amounts in thousands)
U.S. Australia Industrial
Railroad Railroad Switching
1998 Operations Operations Operations Total
- --------------------------------------------------------------------------
Revenues $ 88,097 $46,728 $12,647 $147,472
Operating income (loss) 12,546 8,820 (1,798) 19,568
Depreciation and
amortization 7,277 1,842 798 9,917
Identifiable assets 167,095 40,077 9,588 216,760
Capital expenditures 13,789 2,662 450 16,901
- --------------------------------------------------------------------------
U.S. Australia Industrial
Railroad Railroad Switching
1997 Operations Operations Operations Total
- --------------------------------------------------------------------------
Revenues $ 84,388 $ 7,431 $11,824 $103,643
Operating income (loss) 16,565 705 (827) 16,443
Depreciation and
amortization 6,093 246 661 6,999
Identifiable assets 160,238 40,563 9,731 210,532
Capital expenditures 13,523 20 348 13,891
- --------------------------------------------------------------------------
F-24
U.S. Australia Industrial
Railroad Railroad Switching
1996 Operations Operations Operations Total
- --------------------------------------------------------------------------
Revenues $ 75,998 $--- $ 1,797 $ 77,795
Operating income (loss) 13,865 --- 129 13,994
Depreciation and
amortization 5,930 --- 122 6,052
Identifiable assets 131,693 --- 13,646 145,339
Capital expenditures 8,138 --- 36 8,174
- --------------------------------------------------------------------------
Geographic Region
(amounts in thousands)
1998 U.S. Australia Total
- -------------------------------------------------------------
Revenues $100,744 $46,728 $147,472
Capital expenditures 14,239 2,662 16,901
- -------------------------------------------------------------
1997 U.S. Australia Total
- -------------------------------------------------------------
Revenues $ 96,212 $ 7,431 $103,643
Capital expenditures 13,871 20 13,891
- -------------------------------------------------------------
17. SUBSEQUENT EVENTS:
-----------------
On March 10, 1999, the Company reached an agreement in principle to acquire
Rail-One's 47.5% ownership interest in GRO thereby increasing the Company's
ownership of GRO to 95%. Under the terms of the proposed agreement, the Company
would pay approximately $844,000 in cash to the owners of Rail-One in
installments over a four year period and the Company would grant an option to
the owners of Rail-One to purchase 80,000 shares of Class A Common Stock at an
exercise price equal to market price on the date of the grant, assumed to be
about March 31, 1999. The option to purchase 80,000 shares is contingent on the
Company's recovery of its capital investment in GRO including debt assumed if
the Company were to sell GRO, and upon certain GRO income performance measures.
Upon execution of a definitive agreement, the operating results of GRO will be
consolidated within the financial statements of the Company, with a 5% minority
interest due to another GRO shareholder.
The remainder of this page is intentional left blank.
F-25
18. QUARTERLY FINANCIAL DATA:
-------------------------
Quarterly Results (Unaudited)
First Second Third Fourth
(in thousands, except per share data) Quarter Quarter Quarter Quarter
1998
- ----
Operating revenues......................... $37,740 $37,065 $34,707 $37,960
Income from operations..................... 4,974 4,672 4,138 5,784
Net income ................................ 2,282 1,846 1,403 5,902
Diluted earnings per share................. 0.42 0.34 0.27 1.19
- ----------------------------------------------------------------------------------------
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
Diluted earnings per share................. 0.39 0.40 0.39 0.29
- ----------------------------------------------------------------------------------------
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
Diluted earnings per share................. 0.41 0.63 0.32 0.30
- ----------------------------------------------------------------------------------------
The fourth quarter of 1998 includes $6,000,000 of pre-tax nonrecurring other
income related to proceeds from an insurance settlement (see Note 1.).
The fourth quarter of 1996 includes a $1,360,000 pre-tax nonrecurring charge to
record certain shutdown costs associated with the closing of a subsidiary (see
Note 4.).
F-26