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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

Commission File No. 0-20618

RAILAMERICA, INC.

5300 Broken Sound Blvd, N.W., Boca Raton, Florida 33487

(561) 994-6015

Check whether the registrant (1) 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. Yes   x   No   o

APPLICABLE ONLY TO CORPORATE ISSUERS

Common Stock, par value $.001 — 31,969,323 shares as of November 12, 2002

RAILAMERICA, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2002

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2002 and 2001
(in thousands, except earnings per share)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2002 and 2001
(in thousands)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements included herein have been prepared by RailAmerica, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the consolidated financial statements contain all adjustments of a recurring nature and disclosures necessary to present fairly the financial position of the Company as of September 30, 2002 and December 31, 2001, the results of operations for the three and nine months ended September 30, 2002 and 2001, and the cash flows for the nine months ended September 30, 2002 and 2001. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current period presentation.

	The accounting principles which materially affect the financial position, results of operations and cash flows of the Company are set forth in Notes to the Consolidated Financial Statements which are included in the Company’s 2001 annual report on Form 10-K.

2. NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 142, goodwill and identifiable intangible assets with an indefinite life will no longer be amortized; however, both goodwill and other intangible assets will need to be tested at least annually for impairment. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets, excluding goodwill and intangible assets, to be held and used or disposed of. While the adoption of these pronouncements did not have a material impact on the Company’s consolidated financial statements, SFAS No. 144 will require the Company to report the results of operations of a railroad that has been disposed of or is being held for disposal in discontinued operations.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 is effective for the Company’s fiscal year beginning January 1, 2003, and requires the Company to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Management is evaluating the impact this standard may have on the Company’s financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, which is effective for fiscal years beginning after May 15, 2002, requires that debt extinguishments used as part of a company’s risk management strategy should not be classified as an extraordinary item. It also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Management is evaluating the impact this standard may have on the Company’s consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146, which is effective for exit or disposal activities initiated after December 31, 2002, requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when the liability is incurred rather than when management commits to an exit or disposal plan. Management is evaluating the impact this standard may have on the Company’s consolidated financial statements.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. EARNINGS PER SHARE

	For the three and nine months ended September 30, 2002 and 2001, basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Income from continuing operations for the three and nine months ended September 30, 2001 is reduced by preferred stock dividends and accretion for the basic earnings per share computation.

For the three months ended September 30, 2002, diluted earnings per share is calculated using the sum of the weighted average number of common shares outstanding plus potentially dilutive common shares arising out of stock options, warrants and convertible debt. A total of 5.0 million options and warrants were excluded from the calculation for the three months ended September 30, 2002, as their exercise prices were in excess of the average stock price during the period.

For the nine months ended September 30, 2002, diluted earnings per share is calculated using the sum of the weighted average number of common shares outstanding plus potentially dilutive common shares arising out of stock options and warrants. Assumed conversion of 2.2 million shares of convertible debt was excluded from the diluted earnings per share calculation, as their impact was anti-dilutive. A total of 3.6 million options and warrants were also excluded from the diluted earnings per share calculation for the nine months ended September 30, 2002, as their exercise prices were in excess of the average stock price during the period.

For the three and nine months ended September 30, 2001, diluted earnings per share is calculated using the sum of the weighted average number of common shares outstanding plus potentially dilutive common shares arising out of stock options, warrants and convertible securities. A total of 1.6 million options and warrants were excluded from the diluted earnings per share calculation for the nine months ended September 30, 2001, as their impact was anti-dilutive.

	The following is a summary of the income from continuing operations available to common stockholders and weighted average shares (in thousands):

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. ACQUISITIONS

On January 4, 2002, the Company acquired StatesRail, Inc. (“StatesRail”), a privately owned group of railroads headquartered in Dallas, Texas, which owned and operated eight railroads (including seven freight railroads and a tourist railroad in Hawaii) with 1,647 miles of track in 11 states. Total consideration for the acquisition was $90 million, consisting of $67 million in cash and 1.7 million shares of the Company’s common stock valued at $23 million.

On January 8, 2002, the Company acquired ParkSierra Corp. (“ParkSierra”), a privately owned group of railroads headquartered in Napa, California, which owned and operated three freight railroads with 703 miles of track in four western states. Total consideration for the acquisition was $48 million, consisting of $23 million in cash and 1.8 million shares of the Company’s common stock valued at $25 million.

	The cash components of the StatesRail and ParkSierra acquisitions were financed through available cash and an additional $50 million term loan under the Company’s prior senior credit facility (see Note 6).

	The results of operations of StatesRail and ParkSierra have been included in the Company’s consolidated financial statements since the dates of their respective acquisitions.

	The following unaudited pro forma summary presents the consolidated results of operations for the Company as if the acquisitions of StatesRail and ParkSierra had occurred at the beginning of 2001 and does not purport to be indicative of what would have occurred had the acquisition been made as of that date or results which may occur in the future (in thousands, except per share data).

In January 2002, the Company submitted a bid for the acquisition of National Rail and FreightCorp, two government-owned railroads in Australia. Subsequently, the Company was notified that another entity was awarded the bid. Accordingly, the Company recorded a charge in selling, general and administrative expense during the three months ended March 31, 2002 of $2.4 million for the direct costs incurred in preparing, submitting and financing the bid. These costs represent amounts already paid and estimates of remaining costs. Any changes in these estimates will be reflected in the period of change.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. DISPOSITIONS

In May 2002, the Company sold the Texas New Mexico Railroad and certain operating assets for total consideration of $2.25 million consisting of cash of $0.55 million, a short term note of $0.85 million and a long term note of $0.85 million. The short-term note bears interest at 10% and is due on November 15, 2002 and the long-term note bears interest at 7% and is due on May 24, 2007. The net gain on the transaction of $0.9 million is included in discontinued operations. The results of operations for the Texas New Mexico Railroad were not material.

	In March 2002, the Company sold the Georgia Southwestern Railroad and certain operating assets for total consideration of $7.1 million, including a long-term note for $0.8 million, resulting in a gain of $4.5 million. The note receivable bears interest at 5% and is due February 28, 2007. The results of operations for the Georgia Southwestern Railroad were not material.

In December 2000, the Company sold its trailer manufacturing operation which was previously classified as a discontinued operation. For the three and nine months ended September 30, 2002, a charge of $0.2 million, net of income taxes of $0.1 million and $0.4 million, net of income taxes of $0.2 million, respectively, was recorded to discontinued operations in conjunction with the settlement of certain amounts with the buyer of the business.

6. DEBT

In May 2002, the Company refinanced its senior credit facility, including $50 million borrowed in connection with the January 2002 acquisitions of ParkSierra and StatesRail. The new senior debt facility includes a $375 million Term B loan facility consisting of $265 million of U.S. Term Loans, $50 million of Canadian Term Loans and $60 million of Australia Term Loans with a 1% annual principal amortization for seven years and the balance due in 2009, and a $100 million revolver with sub-limits equal to $82.5 million in the United States, $10 million in Canada and $7.5 million in Australia. The revolver is due in 2008. The interest rate on the Term B debt and the revolver is LIBOR + 2.50% (4.63% at September 30, 2002). There were no outstanding balances under the revolver at September 30, 2002. The senior credit facility is collateralized by substantially all of the assets of the Company, excluding its investment in Ferronor.

The senior credit facility and the indenture governing our senior subordinated notes include numerous covenants imposing significant financial and operating restrictions on the Company. The covenants limit the Company’s ability to, among other things: incur more debt or prepay existing debt, redeem or repurchase the Company’s common stock, pay dividends or make other distributions, make acquisitions or investments, use assets as security in other transactions, enter into transactions with affiliates, merge or consolidate with others, dispose of assets or use asset sale proceeds, create liens on the Company’s assets, make certain payments or capital expenditures and extend credit. In addition, the senior credit facility also contains financial covenants that require the Company to meet a number of financial ratios and tests. The Company was in compliance with each of these covenants as of September 30, 2002.

In connection with the refinancing, the Company terminated its existing interest rate swaps. Because these hedging instruments were designated as hedges of the cash flows under the previous senior debt facility, SFAS No. 133 requires the entire balance in other accumulated comprehensive loss to be charged to earnings. Accordingly, a charge of $17.1 million was recorded in other income (expense) during the nine months ended September 30, 2002. In addition, the Company recorded an extraordinary charge of $4.5 million, net of income taxes of $2.2 million, to write off the unamortized deferred loan costs relating to the prior senior credit facility, as of the date of refinancing.

	During the three months ended September 30, 2001, the Company prepaid $19.1 million of long-term debt with cash received from the sale of common stock. Based on this reduction, an extraordinary charge of approximately $0.2 million, net of income tax of $0.1 million, was recorded in the third quarter of 2001 from the write-off of deferred loan costs from this early extinguishment of debt.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. HEDGING ACTIVITIES

The Company currently uses derivatives to hedge against increases in fuel prices and interest. The Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments or forecasted transactions. The Company assesses at the time a derivative contract is entered into, and at least quarterly, whether the derivative item is effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in accumulated other comprehensive loss as a separate component of Stockholders’ Equity and reclassified into earnings in the period during which the hedged transaction affects earnings.

	The Company monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance.

Fuel costs represented 8% of total revenues during the nine months ended September 30, 2002. Due to the significance of fuel costs to the operations of the Company and the historical volatility of fuel prices, the Company maintains a program to hedge against fluctuations in the price of its diesel fuel purchases. Each one-cent change in the price of fuel would result in a $0.4 million change in fuel expense on an annual basis.

The fuel-hedging program includes the use of derivatives that are accounted for as cash flow hedges. As of November 12, 2002, the Company had entered into fuel swap agreements to hedge the equivalent of 180,000 gallons per month through December 31, 2002, (8% of estimated North American monthly consumption) at an average price of 63 cents per gallon, excluding transportation and taxes. The fair value of the fuel swap was not material at September 30, 2002. On November 7, 2002, the Company entered into a fuel swap agreement to hedge 750,000 gallons per month in 2003 (30% of estimated North American consumption) at an average price of 66 cents per gallon, excluding transportation and taxes.

	As noted in Note 6, the Company terminated its interest rate swaps and reclassified $17.1 million from accumulated other comprehensive loss against earnings during the nine months ended September 30, 2002, in connection with the refinancing of the senior credit facility.

In June 2002, the Company, as required under its new senior credit facility, entered into two step-up collars for a total notional amount of $75 million with an effective date of November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the LIBOR component of the Company’s interest rates can fluctuate within specified ranges. From November 24, 2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify as cash flow hedges under SFAS No. 133. The fair value of these collars was a net liability of $1.5 million at September 30, 2002. On November 8, 2002, the Company entered into two interest rate swaps for a total amount of $300 million for the period commencing December 5, 2002 through December 4, 2003. Under the terms of the interest rate swaps, the LIBOR component of the Company’s interest rate is fixed at 1.615% on $300 million of debt.

8. COMMON STOCK REPURCHASES

The Company occasionally repurchases its common stock under its share repurchase program. Such repurchases are limited to $5 million per year pursuant to its borrowing arrangements. In July 2002, the Board of Directors authorized a 2 million share repurchase program through December 31, 2003, subject to restrictions under the Company’s borrowing arrangements. During the nine months ended September 30, 2002, the Company repurchased 384,100 shares at a total cost of $3.8 million.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. COMPREHENSIVE INCOME (LOSS)

	Other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains and losses on derivative instruments designated as hedges. The following table reconciles net income to comprehensive income (loss) for the three and nine months ended September 30, 2002 and 2001 (in thousands).

	In 2001, the Company recorded a charge of $4.4 million to comprehensive income for the cumulative effect of the adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

10. COMMITMENTS AND CONTINGENCIES

In 2000, certain parties filed property damage claims totaling approximately $32.5 million against RaiLink Ltd. and RaiLink Canada Ltd., wholly-owned subsidiaries of RailAmerica, and others in connection with fires that allegedly occurred in 1998. The Company intends to vigorously defend these claims, and has insurance coverage of approximately $13.0 million to cover these claims. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In the ordinary course of conducting its business, the Company becomes involved in various legal actions and other claims, which are pending or could be asserted against the Company. Litigation is subject to many uncertainties, the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of these matters may be decided unfavorably to the Company. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

11. SEGMENT INFORMATION

The Company’s continuing operations have been classified into two business segments: North American rail transportation and International rail transportation. The North American rail transportation segment includes the operations of the Company’s railroad subsidiaries in the United States and Canada, and the International rail transportation segment includes the operations of the Company’s railroad subsidiaries in Chile and Australia.

	Business segment information for the three and nine months ended September 30, 2002 and 2001 follows (in thousands):

     THREE MONTHS ENDED SEPTEMBER 30, 2002:

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 2001:

NINE MONTHS ENDED SEPTEMBER 30, 2002:

NINE MONTHS ENDED SEPTEMBER 30, 2001:

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

12. GUARANTOR FINANCIAL STATEMENT INFORMATION

In August 2000, RailAmerica Transportation Corp. (“Issuer”), a wholly-owned subsidiary of RailAmerica, Inc. (“Parent”), sold units including 12 7/8% senior subordinated notes, which were subsequently exchanged for notes registered with the Securities and Exchange Commission. The notes are guaranteed by the Parent, the domestic subsidiaries of the Issuer and Palm Beach Rail Holdings, Inc. All amounts in the following tables are in thousands.

RAILAMERICA, INC.
CONSOLIDATING BALANCE SHEET
September 30, 2002