GENESEE & WYOMING INC - 10-Q Quarterly Report

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 quarter ended September 30, 2003 Commission File No. 001-31456

GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)


Delaware		06-0984624

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)





66 Field Point Road, Greenwich, Connecticut		06830

(Address of principal executive offices)		(Zip Code)

(203) 629-3722

(Telephone No.)

Shares of common stock outstanding as of the close of business on October 29, 2003:


Class	Number of Shares Outstanding

Class A Common Stock		13,341,556




Class B Common Stock		1,805,290

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 whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

[X] YES [ ] NO

TABLE OF CONTENTS


	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS
SIGNATURES
EX-11.1 STATEMENT RE COMPUTATION OF PER SHARE ERNG
EX-31.1 CERTIFICATION
EX-31.2 CERTIFICATION
EX-32.1 CERTIFICATIONS

INDEX

Part I — Financial Information


		Page

Item 1. Financial Statements (Unaudited):




Consolidated Statements of Income — For the Three Month and Nine Month Periods Ended September 30, 2003 and 2002		3




Consolidated Balance Sheets – As of September 30, 2003 and December 31, 2002		4




Consolidated Statements of Cash Flows — For the Nine Month Periods Ended September 30, 2003 and 2002		5




Notes to Consolidated Financial Statements		6 - 17




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18 - 33




Item 3. Quantitative and Qualitative Disclosures About Market Risk		33




Item 4. Controls and Procedures		33




Part II — Other Information		34




Item 1. Legal Proceedings		34




Item 6. Exhibits and Reports on Form 8-K		34




Index to Exhibits		35 - 37




Signatures		38

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)


			Three Months						Nine Months
			Ended September 30,						Ended September 30,

			2003			2002			2003			2002

OPERATING REVENUES			$	61,499		$	53,001		$	183,298		$	153,372

OPERATING EXPENSES:




		Transportation		20,252			16,352			62,005			47,112




		Maintenance of ways and structures		6,449			6,079			19,550			17,298




		Maintenance of equipment		9,028			8,769			27,181			26,022




		General and administrative		12,731			11,089			34,930			31,181




		Net (gain) loss on sale and impairment of assets		(35	)		43			141			(380	)




		Depreciation and amortization		3,869			3,346			11,437			9,913

Total operating expenses				52,294			45,678			155,244			131,146

INCOME FROM OPERATIONS				9,205			7,323			28,054			22,226




Interest expense				(2,175	)		(1,861	)		(6,685	)		(5,152	)




Other income, net				54			336			767			505

Income before income taxes and equity earnings				7,084			5,798			22,136			17,579




Provision for income taxes				2,384			1,986			8,260			5,995

Income before equity earnings				4,700			3,812			13,876			11,584




Equity in net income of international affiliates:




	Australian Railroad Group			2,715			2,690			6,859			7,241




	South America			203			523			112			1,023

Net income				7,618			7,025			20,847			19,848




Impact of preferred stock outstanding				384			293			969			879

Net income available to common stockholders			$	7,234		$	6,732		$	19,878		$	18,969

Basic earnings per common share			$	0.48		$	0.46		$	1.32		$	1.29

Weighted average shares				15,163			14,729			15,093			14,655

Diluted earnings per common share			$	0.43		$	0.40		$	1.17		$	1.13

Weighted average shares and equivalents				17,890			17,584			17,808			17,554

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

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)


			As of			As of
			Sep. 30,			Dec. 31,
			2003			2002

ASSETS




CURRENTS ASSETS:




		Cash and cash equivalents	$	6,942		$	11,028




		Accounts receivable, net		53,604			54,527




		Materials and supplies		5,402			5,468




		Prepaid expenses and other		7,560			7,447




		Deferred income tax assets, net		2,630			2,484

Total current assets				76,138			80,954

PROPERTY AND EQUIPMENT, net				272,265			264,728




INVESTMENT IN UNCONSOLIDATED AFFILIATES				104,648			81,287




GOODWILL				24,445			24,174




INTANGIBLE ASSETS, net				52,769			53,504




OTHER ASSETS, net				9,527			10,212

Total assets			$	539,792		$	514,859

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES:




		Current portion of long-term debt	$	6,560		$	6,116




		Accounts payable		51,040			49,482




		Accrued expenses		15,201			11,555

Total current liabilities				72,801			67,153

LONG-TERM DEBT, less current portion				93,359			119,301




DEFERRED INCOME TAX LIABILITIES, net				36,263			31,686




DEFERRED ITEMS—grants from government agencies				42,712			42,509




DEFERRED GAIN—sale-leaseback				4,099			4,448




OTHER LONG-TERM LIABILITIES				15,174			13,039




MINORITY INTEREST				3,331			3,122




REDEEMABLE CONVERTIBLE PREFERRED STOCK				23,944			23,980




STOCKHOLDERS’ EQUITY:




	Class A common stock, $0.01 par value, one vote per share; 30,000,000 shares authorized; 15,684,251 and 15,425,624 shares issued and 13,331,310 and 13,087,108 shares outstanding (net of 2,352,941 and 2,338,516 in treasury) on September 30, 2003 and December 31, 2002, respectively			157			154




	Class B common stock, $0.01 par value, ten votes per share; 5,000,000 shares authorized; 1,805,290 issued and outstanding on September 30, 2003 and December 31, 2002			18			18




	Additional paid-in capital			130,836			127,741




	Retained earnings			123,343			103,465




	Accumulated other comprehensive income (loss)			6,335			(9,493	)




	Less treasury stock, at cost			(12,580	)		(12,264	)

Total stockholders’ equity				248,109			209,621

Total liabilities and stockholders’ equity			$	539,792		$	514,859

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

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)


				Nine Months Ended
				September 30,

				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:




	Net income			$	20,847		$	19,848




	Adjustments to reconcile net income to net cash provided by operating activities-




		Depreciation and amortization			11,437			9,913




		Deferred income taxes			4,750			3,386




		Loss (gain) on disposition of property			141			(380	)




		Equity earnings of unconsolidated international affiliates			(6,971	)		(8,264	)




		Minority interest expense			209			272




		Tax benefit realized upon exercise of stock options			846			742




		Changes in assets and liabilities -




			Accounts receivable		1,457			(3,269	)




			Materials and supplies		77			(354	)




			Prepaid expenses and other		(343	)		(1,094	)




			Accounts payable and accrued expenses		4,437			(3,181	)




			Other assets and liabilities, net		1,271			1,964

	Net cash provided by operating activities				38,158			19,583

CASH FLOWS FROM INVESTING ACTIVITIES:




	Purchase of property and equipment, net of proceeds from government grants				(12,846	)		(13,379	)




	Locomotive upgrade project				(1,425	)		—




	Purchase of Utah Railway Company				—			(55,668	)




	Purchase of Emons Transportation Group, Inc., net of cash received				—			(29,449	)




	Cash received from unconsolidated international affiliate				132			263




	Proceeds from disposition of property, including sale-leaseback				644			673

	Net cash used in investing activities				(13,495	)		(97,560	)

CASH FLOWS FROM FINANCING ACTIVITIES:




	Principal payments on long-term borrowings, including capital leases				(121,932	)		(70,958	)




	Proceeds from issuance of long-term debt				92,000			133,800




	Proceeds from employee stock purchases				1,996			1,823




	Purchase of treasury stock				(316	)		(36	)




	Dividends paid on Redeemable Convertible Preferred Stock				(750	)		(750	)

	Net cash (used in) provided by financing activities				(29,002	)		63,879

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS					253			(1,322	)

DECREASE IN CASH AND CASH EQUIVALENTS					(4,086	)		(15,420	)




CASH AND CASH EQUIVALENTS, beginning of period					11,028			28,732

CASH AND CASH EQUIVALENTS, end of period				$	6,942		$	13,312

CASH PAID DURING PERIOD FOR:




	Interest			$	6,533		$	7,687




	Income taxes				922			571

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

GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:

The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries. References to “GWI” or the “Company” mean Genesee & Wyoming Inc. and, unless the context indicates otherwise, its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of management, the unaudited financial statements for the three-month and nine-month periods ended September 30, 2003 and 2002, are presented on a basis consistent with audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2002 included in the Company’s 2002 Form 10-K. Certain prior period balances have been reclassified to conform with the 2003 presentation.

2. EXPANSION OF OPERATIONS:

United States

On December 30, 2002, the Company expanded its Oregon region by commencing railroad operations over a 76-mile rail line between Salem and Eugene, Oregon previously operated by Burlington Northern Santa Fe Railway Company (BNSF). The rail line is contiguous to the Company’s existing Oregon railroad operations and is expected to increase that region’s annual carloads and enhance operations through more efficient routing of existing traffic. The Company is operating the rail line under a 15-year lease agreement with BNSF. Under the lease, no payments to the lessor are required as long as certain operating conditions are met. Through September 30, 2003, no payments were required under this lease.

On August 28, 2002, the Company acquired all of the issued and outstanding shares of common stock of Utah Railway Company (URC) for approximately $55.7 million in cash, including transaction costs. The purchase price was allocated to current assets ($4.3 million), property and equipment ($18.1 million), and intangible assets ($35.9 million), less current liabilities assumed ($2.6 million). As contemplated with the acquisition, the Company implemented a severance program under which 15 URC employees were terminated in 2002. The aggregate $578,000 cost of these restructuring activities is considered a liability assumed in the acquisition, and as such, was allocated to the purchase price (see table below). The Company funded the acquisition through its revolving line of credit held under its primary credit agreement. URC (either directly or through its wholly-owned subsidiary, Salt Lake City Southern Railroad Company, Inc.) operates over 46 miles of owned track and 374 miles of track under track access agreements. The tracks over which URC operates run from Ogden, Utah to Grand Junction, Colorado. In addition, URC serves industrial customers in and around Salt Lake City, Utah through trackage rights from the Utah Transit Authority. The table below sets forth a roll-forward of the activity affecting the restructuring reserves established in the acquisition of URC including the number of employees, reserve adjustments and actual cash payments:

Utah Railway Company
Schedule of Restructuring Activity


	Quarter Ended

	September 30, 2002			December 31, 2002

Number of Employees:




Beginning estimate of number of terminations		7			5




Additional terminations estimated during the quarter		—			8




Actual number of employees terminated		(2	)		(13	)

Ending estimate of number of employees to be terminated		5			—

Restructuring Reserve:




Beginning balance	$	336,000		$	179,000




Adjustments		—			242,000




Cash payments		(157,000	)		(421,000	)

Ending balance	$	179,000		$	—

On February 22, 2002, the Company acquired Emons Transportation Group, Inc. (Emons) for approximately $29.4 million in cash, including transaction costs and net of cash received in the acquisition. The Company purchased all of the outstanding shares of Emons at $2.50 per share. The purchase price was allocated to current assets ($4.0 million) and property and equipment ($33.7 million) less assumed current liabilities ($4.5 million) and assumed long-term liabilities ($3.8 million). As contemplated with the acquisition, the Company implemented early retirement and severance programs under which 24 Emons employees were terminated in 2002. The aggregate $804,000 cost of these restructuring activities is considered a liability assumed in the acquisition and as such, was allocated to the purchase price (see table below). The majority of these costs were paid in the three months ended March 31, 2002. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement. Emons is a short line railroad holding company with operations over 340 miles of track in Maine, Vermont, New Hampshire, Quebec and Pennsylvania. The table below sets forth a roll-forward of the activity affecting the restructuring reserves established in the acquisition of Emons including the number of employees and actual cash payments:

Emons Transportation Group, Inc.
Schedule of Restructuring Activity


	Quarter Ended

	March 31, 2002			June 30, 2002			Sept. 30, 2002			Dec. 31, 2002

Number of Employees:




Beginning estimate of number of terminations		24			8			3			2




Actual number of employees terminated		(16	)		(5	)		(1	)		(2	)

Ending estimate of number of employees to be terminated		8			3			2			—

Restructuring Reserve:




Beginning balance	$	804,000		$	243,000		$	89,000		$	43,000




Cash payments		(561,000	)		(154,000	)		(46,000	)		(43,000	)

Ending balance	$	243,000		$	89,000		$	43,000		$	—

Pro Forma Financial Results

The following table summarizes the Company’s unaudited pro forma operating results for the three months and nine months ended September 30, 2003 and 2002, as if URC and Emons had been acquired as of the beginning of the applicable period (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended

	2003		2002		2003		2002

Operating revenues	$	61,499	$	56,298	$	183,298	$	171,972




Net income		7,618		7,316		20,847		21,121




Basic earnings per share		0.48		0.48		1.32		1.38




Diluted earnings per share		0.43		0.42		1.17		1.20

The pro forma operating results include the acquisitions of URC and Emons adjusted for depreciation expense, net of tax reduction resulting from the allocation of negative goodwill to the asset values of URC and Emons, and incremental interest expense, net of tax related to borrowings used to fund the URC and Emons acquisitions.

The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had all the transactions been completed as of the assumed dates and for the periods presented and are not intended to be a projection of future results or trends.

3. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three month and nine month periods ended September 30, 2003 and 2002 (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended

	Sep. 30, 2003			Sep. 30, 2002			Sep. 30, 2003			Sep. 30, 2002

Numerators:




Net income	$	7,618		$	7,025		$	20,847		$	19,848




Impact of Preferred Stock Outstanding		(384	)		(293	)		(969	)		(879	)

Net income available to common stockholders	$	7,234		$	6,732		$	19,878		$	18,969

Denominators:




Basic – weighted average common shares outstanding		15,163			14,729			15,093			14,655




Dilutive effect of employee stock options		281			409			269			453




Dilutive effect of Convertible Preferred Stock		2,446			2,446			2,446			2,446

		17,890			17,584			17,808			17,554

Income per common share:




Basic	$	0.48		$	0.46		$	1.32		$	1.29

Diluted	$	0.43		$	0.40		$	1.17		$	1.13

On February 14, 2002, the Company announced a three-for-two common stock split in the form of a 50% stock dividend distributed on March 14, 2002 to stockholders of record as of February 28, 2002. All share, per share and par value amounts presented herein have been restated to reflect the retroactive effect of the stock split.

4. EQUITY INVESTMENTS

Australian Railroad Group (ARG)

ARG is a company which is 50%-owned by the Company and is accounted for under the equity method of accounting. The related equity earnings in this investment are shown within the Equity in Net Income of International Affiliates section in the accompanying consolidated statements of income. The following are U.S. GAAP condensed balance sheets of ARG as of September 30, 2003 and December 31, 2002, and the related condensed consolidated statements of income and cash flows for the three months and nine months ended September 30, 2003 and 2002 (in thousands of U.S. dollars). Relevant Australian dollar to U.S. dollar exchange rates are:


As of September 30, 2003	$	0.68




As of December 31, 2002	$	0.56




Average for the three months ended September 30, 2003	$	0.67




Average for the three months ended September 30, 2002	$	0.55




Average for the nine months ended September 30, 2003	$	0.63




Average for the nine months ended September 30, 2002	$	0.54

Australian Railroad Group Pty. Ltd.
Condensed Consolidated Balance Sheets


				September 30, 2003		December 31, 2002

ASSETS




CURRENT ASSETS:




	Cash and cash equivalents			$	22,140	$	5,882




	Accounts receivable, net				38,760		30,315




	Materials and supplies				8,545		7,985




	Prepaid expenses and other				4,592		2,061

			Total current assets		74,037		46,243




PROPERTY AND EQUIPMENT, net					488,034		402,286




DEFERRED INCOME TAX ASSETS, net					1,465		8,094




RESTRICTED CASH					69,327		53,380




OTHER ASSETS, net					3,259		4,224

		Total assets		$	636,122	$	514,227

LIABILITIES AND STOCKHOLDERS’ EQUITY




CURRENT LIABILITIES:




	Current portion of long-term debt			$	161,809	$	133,285




	Accounts payable and accrued expenses				36,421		29,363




	Current income tax liabilities				—		1,672

		Total current liabilities			198,230		164,320




LONG-TERM BANK DEBT					236,752		195,017




OTHER LONG-TERM LIABILITIES					1,191		1,032




FAIR VALUE OF INTEREST RATE SWAPS					14,916		16,622




NON-INTEREST BEARING LOANS FROM SHAREHOLDERS					10,492		8,642

		Total liabilities			461,581		385,633




TOTAL STOCKHOLDERS’ EQUITY					174,541		128,594

		Total liabilities and stockholders’ equity		$	636,122	$	514,227

The non-interest bearing loans from shareholders in the amount of $10.5 million at September 30, 2003 and $8.6 million at December 31, 2002 are subordinated to senior debt and can only be re-paid from amounts available for distribution to equity. There are no current plans for payments to be made.

Australian Railroad Group Pty. Ltd.
Consolidated Statements of Income


	Three Months Ended						Nine Months Ended

	Sep. 30, 2003			Sep. 30, 2002			Sep. 30, 2003			Sep. 30, 2002

Operating revenues	$	61,716		$	54,454		$	174,988		$	159,416

Operating expenses		50,546			41,272			138,153			119,653




Restructuring costs		—			—			267			—




Bid costs		—			—			—			827

Total operating expenses		50,546			41,272			138,420			120,480




Income from operations		11,170			13,182			36,568			38,936




Interest expense		(8,060	)		(6,243	)		(22,757	)		(18,652	)




Other income, net		876			251			2,414			565

Income before income taxes		3,986			7,190			16,225			20,849




Provision (benefit) for income taxes		(1,446	)		1,810			2,505			6,368

Net income	$	5,432		$	5,380		$	13,720		$	14,481

Australian Railroad Group Pty. Ltd.
Consolidated Statements of Cash Flows


				Nine Months Ended

				Sep. 30, 2003			Sep. 30, 2002

CASH FLOWS FROM OPERATING ACTIVITIES:




	Net income			$	13,720		$	14,481




	Adjustments to reconcile net income to net cash provided by operating activities-




			Depreciation and amortization		16,940			12,260




			Deferred income taxes		8,362			6,368




			Gain on disposition of property		(816	)		(259	)




			Changes in assets and liabilities		(3,926	)		3,764

		Net cash provided by operating activities			34,280			36,614

CASH FLOWS FROM INVESTING ACTIVITIES:




	Purchase of property and equipment				(21,014	)		(22,799	)




	Proceeds from disposition of property and equipment				4,027			291




	Transfer to restricted cash				(4,523	)		(7,652	)

		Net cash used in investing activities			(21,510	)		(30,160	)

CASH FLOWS FROM FINANCING ACTIVITIES:




	Payments on short-term borrowings				—			(6,048	)




	Proceeds from borrowings				—			5,280





		Net cash used in by financing activities			—			(768	)

EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH AND CASH EQUIVALENTS					3,488			779

INCREASE IN CASH AND CASH EQUIVALENTS					16,258			6,465




CASH AND CASH EQUIVALENTS, beginning of period					5,882			9,908

CASH AND CASH EQUIVALENTS, end of period				$	22,140		$	16,373

South America

Empresa Ferroviaria Oriental, S.A. (Oriental) is a company which is 22.89%-owned by the Company and is accounted for under the equity method of accounting. The related equity earnings in this investment are shown within the Equity in Net Income of International Affiliates section in the accompanying consolidated statements of income. The following condensed results of operations for Oriental for the three months and nine months ended September 30, 2003 and 2002 have a U.S. functional currency and are based on accounting principles generally accepted in the United States of America (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2003		2002		2003		2002

Operating revenues	$	7,325	$	8,957	$	18,745	$	24,216




Net income		1,510		2,963		2,846		6,296

Condensed balance sheet information for Oriental as of September 30, 2003 and December 31, 2002:


		September 30, 2003		December 31, 2002

Current assets		$	11,388	$	15,153




Non-current assets			54,130		54,537

	Total assets	$	65,518	$	69,690

Current liabilities		$	4,772	$	5,823




Non-current liabilities			4,123		3,853




Senior debt			1,227		1,350




Shareholders’ equity			55,396		58,664

	Total liabilities and shareholders’ equity	$	65,518	$	69,690

The above data does not include non-recourse debt of $12.0 million held at an intermediate unconsolidated affiliate or any of the general and administrative, interest or income tax costs at various intermediate unconsolidated affiliates. The Company’s share of the various costs from the intermediate unconsolidated affiliates is $178,000 and $163,000 for the three months and $466,000 and $449,000 for the nine months ended September 30, 2003 and 2002, respectively, and is included in the Company’s equity income reported for South America for the three months and nine months ended September 30, 2003 and 2002, respectively.

As noted previously, the Company holds its equity interest in Empresa Ferroviaria Oriental, S.A. (Oriental) through a number of intermediate holding companies, and the Company accounts for its interest in Oriental under the equity method of accounting. The Company indirectly holds a 12.52% equity interest in Oriental through an interest in Genesee & Wyoming Chile (GWC), and the Company holds its remaining 10.37% equity interest in Oriental through other companies. GWC is an obligor of non-recourse debt of $12 million, which has an adjustable interest rate dependent on operating results of Oriental. This non-recourse debt is secured by a lien over GWC’s indirect equity interest in Oriental.

This debt became due and payable on November 2, 2003. Due to the political and economic unrest and uncertainties in Bolivia, it has become difficult for GWC to refinance this

debt and the Company has chosen not to repay the non-recourse obligation. GWC currently is in default on this debt and is in discussions with the lenders concerning the terms of the debt. As a result of those discussions, GWC expects to obtain 90 day written waivers from the lenders in the near future. If the Company were to lose its 12.52% equity stake in Oriental due to lenders exercising their lien, the Company would record a $250,000 write-off, the basis of its investment in Oriental held through GWC. A default, acceleration or effort to foreclose on the lien under the non-recourse debt will have no impact on the Company’s remaining 10.37% equity interest in Oriental, because that equity interest is held indirectly through holding companies outside of GWC’s ownership in Oriental. The Company plans to continue providing management resources to Oriental and generates substantially all of its equity income through this remaining 10.37% ownership interest.

Oriental has no obligations associated with the $12 million debt. In addition, a default, acceleration or effort to foreclose on the lien under the non-recourse debt would not result in a breach of a representation, warranty, covenant, cross-default or acceleration under the Company’s Senior Credit Facility.

5. COMPREHENSIVE INCOME:

Comprehensive income is the total of net income and all other non-owner changes in equity. The following tables set forth the Company’s comprehensive income, net of tax, for the three months and nine months ended September 30, 2003 and 2002:

Statement of Comprehensive Income
(in thousands)


		Three Months Ended
		September 30,

		2003			2002

Net income		$	7,618		$	7,025




Other comprehensive income (loss):




Foreign currency translation adjustments			(2,476	)		(4,838	)




Net unrealized losses on qualifying cash flow hedges, net of tax of $297 and benefit of $143, respectively			577			(278	)




	Net unrealized losses on qualifying cash flow hedges of Australian Railroad Group, net of tax of $1,058 and benefit of $1,065, respectively		2,468			(2,484	)

Other comprehensive income		$	8,187		$	(575	)

Statement of Comprehensive Income
(in thousands)


	Nine Months Ended September 30,

	2003			2002

Net income	$	20,847		$	19,848




Other comprehensive income (loss):




Foreign currency translation adjustments	$	15,846			700




Net unrealized losses on qualifying cash flow hedges, net of tax benefit of $106 and $167, respectively		(181	)		(324	)




Net unrealized gains (losses) on qualifying cash flow hedges of Australian Railroad Group, net of tax of $256 and benefit of $2,208, respectively		597			(5,154	)




Minimum pension liability adjustment, net of tax benefit of $186		(435	)		—

Other comprehensive income	$	36,674		$	15,070

For the nine months ended September 30, 2002, approximately $1.2 million of net unrealized losses were recorded that related to 2001.

The following table sets forth the components of accumulated other comprehensive income (loss), net of tax, included in the consolidated balance sheets as of September 30, 2003, and December 31, 2002 (in thousands):


	September 30, 2003			December 31, 2002

Net accumulated foreign currency translation adjustments	$	14,186		$	(1,660	)




Net unrealized losses on qualifying cash flow hedges		(1,644	)		(1,463	)




Net unrealized losses on qualifying cash flow hedges of Australian Railroad Group		(5,220	)		(5,818	)




Net unrealized minimum pension liability adjustment, net of tax		(987	)		(552	)

Accumulated other comprehensive income (loss) as reported	$	6,335		$	(9,493	)

6. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION:

The Company historically reported two similar business segments: North American Railroad Operations, which includes operating short line and regional railroads, and Industrial Switching, which included providing freight car switching and related services to industrial companies with railroad facilities within their complexes in the United States. The Company’s North American Railroad Operations is comprised of various operating segments which represent its various railroad lines. However, per the guidance noted in FAS 131, each line has similar characteristics so they have been aggregated into one segment. Effective January 1, 2003, the Company has changed its reporting to reflect one reportable business segment: North American Railroad Operations. This reporting change follows a change in internal structure whereby the Chief Operating Decision maker now views industrial switching as part of a larger segment comprised of multiple railroad operations which are similar to the Company’s other North American Railroad operating segments.

Geographic Area Data


	Three Months Ended				Nine Months Ended

	Sep. 30, 2003		Sep. 30, 2002		Sep. 30, 2003		Sep. 30, 2002

Operating Revenues:




United States	$	44,388	$	39,696	$	131,792	$	107,209




Canada		8,782		6,471		27,142		23,995




Mexico		8,329		6,834		24,364		22,168

Total operating revenues	$	61,499	$	53,001	$	183,298	$	153,372

	As of				As of
	September 30,				December 31,
		2003				2002

Long-lived assets located in:




United States	$	369,841			$	348,989




Canada		54,135				45,706




Mexico		39,678				39,210

Total long-lived assets	$	463,654			$	433,905

7. DERIVATIVE FINANCIAL INSTRUMENTS:

Interest Rate Risk

During 2003, 2002 and 2001, the Company entered into various interest rate swaps fixing its base interest rate by exchanging its variable LIBOR interest rates on long-term debt for a fixed interest rate. The swaps expire at various dates through September 2007 and the fixed base rates range from 3.35% to 5.46%. At September 30, 2003 and December 31, 2002, the notional amount under these agreements was $59.8 million and $50.6 million, respectively and the fair value of these interest rate swaps was a negative $2.5 million and $2.3 million, respectively.

Foreign Currency Exchange Rate Risk

During 2003, the Company entered into various exchange rate options that established exchange rates for converting Mexican Pesos to U.S. Dollars, several of which have expired. The remaining options expire in March 2004 and September 2004, and give the Company the right to sell Mexican Pesos for U.S. Dollars at an exchange rate of 12.91 Mexican Pesos to the U.S. Dollar and 12.61 Mexican Pesos to the U.S. Dollar. At September 30, 2003 and December 31, 2002, the notional amount under exchange rate options was $5.3 million and $6.4 million, respectively. The Company paid an up-front premium for one of these options of $66,000 in the quarter ended March 31, 2003. At September 30, 2003 and December 31, 2002, the fair value of exchange rate currency options was $41,000 and $127,000, respectively.

8. INTANGIBLE AND OTHER ASSETS, NET AND GOODWILL:

Acquired intangible and other assets are as follows (in thousands):


		September 30, 2003				December 31, 2002

		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization

Amortizing intangible assets:




	Chiapas-Mayab Operating License	$	7,157	$	954	$	7,629	$	826




	Amended and Restated Service Assurance Agreement		10,566		108		10,566		—




	Other amortizable assets		256		39		274		30




Unamortized intangible assets:




	Track Access Agreements		35,891		—		35,891		—




Deferred financing costs			7,685		2,665		7,515		1,750




Other assets			4,507		—		4,447		—

Total		$	66,062	$	3,766	$	66,322	$	2,606

The Chiapas-Mayab Operating License is being amortized over 30 years, through 2029, which is the life of the concession agreement with the Mexican Communications and Transportation Department. The Chiapas-Mayab Operating License is subject to exchange rate changes resulting from conversion of Mexican pesos to U.S. dollars at different periods.

Upon adoption of SFAS No. 142, the Service Assurance Agreement (SAA) was determined to have an indefinite useful life and therefore was no longer subject to amortization. However, as a result of the settlement of litigation in July 2003, the Company began amortizing the SAA in July 2003. (See Note 9).

The Track Access Agreements are perpetual trackage agreements assumed in the Company’s acquisition of Utah Railway Company. Under SFAS No. 142 these assets have been determined to have an indefinite useful life and therefore are not subject to amortization.

Deferred financing costs are amortized over terms of the related debt using the effective-interest method for the fixed term debt and using the straight-line method for the revolving loan portion of debt.

Other assets primarily consist of executive split dollar life insurance, assets held for sale, and a minority equity investment in an agricultural facility. Executive split dollar life insurance is the present value of life insurance benefits which the Company had funded through July 2002, and that are owned by executive officers. The Company retains a collateral interest in the policies’ cash values and death benefits. Assets held for sale or future use primarily represent excess track and locomotives.

Upon adoption of SFAS No. 142, amortization of goodwill was discontinued as of January 1, 2002. The changes in the carrying amount of goodwill are as follows:


		Nine Months Ended		Twelve Months Ended
		September 30, 2003		December 31, 2002

Goodwill:




	Balance at beginning of period	$	24,174	$	24,144




	Goodwill acquired during period		—		—




	Amortization		—		—




	Currency translation adjustment		271		30




	Impairment losses		—		—

	Balance at end of period	$	24,445	$	24,174

9. SETTLEMENT OF LITIGATION WITH COMMONWEALTH EDISON COMPANY AND RESUMPTION
OF AMORTIZATION OF SERVICE ASSURANCE AGREEMENT

On July 23, 2003 the parties to the lawsuit between Illinois & Midland Railroad, Inc. (IMRR), a subsidiary to the Company, and Commonwealth Edison Company (ComEd) entered into a settlement agreement. Under the terms of the settlement agreement, both parties’ appeals will be dismissed and the parties will amend and restate the SAA. Due to the specified term contained in the Amended and Restated Service Assurance Agreement (ARSAA) rather than a perpetual term which existed in the SAA, the Company began amortizing the ARSAA in July 2003. The Company has concluded that there is a high probability that the IMRR’s customer relationship with the power plant will continue beyond the current term of the ARSAA, and the Company has based its estimate of the useful life of the ARSAA asset on its estimate of the useful life of the coal-fired electricity generation plant, which the Company estimates will be in service through 2027. As a result of this settlement agreement, the Company recorded a non-cash charge to net income of $442,000 in the third quarter of 2003. Future annual amortization related to the ARSAA is $431,000 pre-tax.

10. RECENTLY ISSUED ACCOUNTING STANDARDS:

In June 2002, the Financial Accounting Standards Board issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that was previously included in equity or reported in the mezzanine section of the balance sheet as a liability, if that instrument is mandatorily redeemable and embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date or upon an event that is certain to occur. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Financial Accounting Standards Board mandates that it be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company adopted SFAS No. 150 on June 30, 2003, and has determined this statement will have no impact on the Company’s financial statements.

In June 2002, the Financial Accounting Standards Board issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. In particular, this Statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, and (4) amends certain other existing pronouncements. These changes are intended to result in more consistent reporting of contracts as either derivatives or hybrid instruments. This Statement is effective for contracts entered into or modified after June 30, 2003 and all provisions of this Statement should be applied prospectively. This statement will have no impact on the Company’s financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in the Company’s 2002 Form 10-K.

Forward-Looking Statements

This report and other documents referred to in this report may contain forward-looking statements based on current expectations, estimates and projections about the Company’s industry, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast including risks related to adverse weather conditions, changes in environmental and other laws and regulations to which the Company is subject, difficulties associated with the integration of acquired railroads, derailments, unpredictability of fuel costs and general economic and business conditions. 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 2, those noted in the documents incorporated by reference especially in the Company’s 2002 Form 10-K. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

General

The Company is a holding company whose subsidiaries and unconsolidated affiliates own and/or operate short line and regional freight railroads and provide related rail services in North America, South America and Australia. 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 industrial companies with extensive railroad facilities within their complexes, to shippers along its lines, and to the Class I railroads that connect with its North American lines.

For a complete description of the Company’s accounting policies, see Note 2 to the audited consolidated financial statements for the year ended December 31, 2002 included in the Company’s 2002 Form 10-K.

United States

On December 30, 2002, the Company expanded its Oregon region by commencing railroad operations over a 76-mile rail line between Salem and Eugene, Oregon previously operated by Burlington Northern Santa Fe Railway Company (BNSF). The rail line is contiguous to the Company’s existing Oregon railroad operations and is expected to add approximately 20,000 carloads of paper, lumber and agricultural products to that region’s annual carloads. The rail line is being operated under a 15-year lease agreement with BNSF. Under the lease, no payments to the lessor are required as long as certain operating conditions are met. Through September 30, 2003, no payments were required under this lease.

On August 28, 2002, the Company acquired all of the issued and outstanding shares of common stock of Utah Railway Company (URC) for approximately $55.7 million in

cash, including transaction costs. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement. URC (either directly or through its wholly-owned subsidiary, Salt Lake City Southern Railroad Company, Inc.) operates over 46 miles of owned track and 374 miles of track under track access agreements. The tracks over which URC operates run from Ogden, Utah to Grand Junction, Colorado. In addition, URC serves industrial customers in and around Salt Lake City, Utah through trackage rights from the Utah Transit Authority.

On February 22, 2002, the Company acquired Emons Transportation Group, Inc. (Emons) for approximately $29.4 million in cash, including transaction costs and net of cash received in the acquisition. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement. Emons is a short line railroad holding company with operations over 340 miles of track in Maine, Vermont, New Hampshire, Quebec and Pennsylvania.

Results of Operations

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

North American Railroad Operating Revenues

North American operating revenues (which exclude revenues from the Company’s equity investments) were $61.5 million in the quarter ended September 30, 2003 compared to $53.0 million in the quarter ended September 30, 2002, an increase of $8.5 million or 16.0%. The $8.5 million increase was attributable to $4.4 million in revenues from new Oregon and URC railroad operations and a $4.1 million increase in existing North American railroad revenues. The $4.4 million increase in operating revenues from new Oregon and URC consisted of $3.0 million in freight revenues and $1.4 million in non-freight revenues. The $4.1 million increase on existing North American railroad operations consisted of $2.7 million in freight revenues and $1.4 million in non-freight revenues.

The following table compares North American freight revenues, carloads and average freight revenues per carload for the quarters ended September 30, 2003 and 2002:

North American Freight Revenues and Carloads Comparison by Commodity Group
Quarters Ended September 30, 2003 and 2002
(dollars in thousands, except average per carload)


																					Average
																					Freight
																					Revenues
	Freight Revenues										Carloads										Per Carload

Commodity Group	2003		% of Total			2002		% of Total			2003		% of Total			2002		% of Total			2003		2002

Coal, Coke & Ores	$	9,271		20.6	%	$	7,674		19.5	%		43,307		32.8	%		35,589		30.4	%	$	214	$	216




Pulp & Paper		8,019		17.8	%		6,805		17.3	%		19,361		14.7	%		16,860		14.4	%		414		404




Petroleum Products		6,079		13.5	%		5,021		12.7	%		7,636		5.8	%		7,452		6.4	%		796		674




Minerals & Stone		5,791		12.9	%		5,619		14.2	%		15,296		11.6	%		14,550		12.4	%		379		386




Lumber & Forest Products		4,333		9.6	%		3,142		8.0	%		13,652		10.4	%		9,061		7.7	%		317		347




Metals		3,999		8.9	%		4,223		10.7	%		13,241		10.0	%		15,263		13.0	%		302		277




Chemicals & Plastics		2,775		6.2	%		2,284		5.8	%		5,998		4.5	%		4,595		3.9	%		463		497




Farm & Food Products		2,708		6.0	%		1,902		4.8	%		6,826		5.2	%		4,990		4.3	%		397		381




Autos & Auto Parts		1,116		2.5	%		1,488		3.8	%		2,773		2.1	%		3,691		3.1	%		402		403




Intermodal		411		0.9	%		402		1.0	%		1,347		1.0	%		1,710		1.5	%		305		235




Other		537		1.1	%		878		2.2	%		2,397		1.9	%		3,443		2.9	%		224		255

Total	$	45,039		100.0	%	$	39,438		100.0	%		131,834		100.0	%		117,204		100.0	%		342		336

Total North American carloads were 131,834 in the quarter ended September 30, 2003 compared to 117,204 in the quarter ended September 30, 2002, an increase of 14,630, or 12.5%. The increase consisted of 12,980 from new Oregon and URC railroad operations and an increase of 1,650 on existing North American railroad operations. The average revenue per carload increased to $342 in the quarter ended September 30, 2003, compared to $336 per carload in the quarter ended September 30, 2002, an increase of 1.8%. The increase in revenues per carload was due, in part, to the 13.4% strengthening of the Canadian dollar, and in part, to an overall increase in revenues per carload from the Company’s Mexico region (despite the 8.4% depreciation of the Mexican Peso). The increase in average revenues per carload in Mexico relates primarily to petroleum products for which longer hauls are yielding substantially higher average revenues per carload.

North American non-freight revenues were $16.5 million in the quarter ended September 30, 2003 compared to $13.6 million in the quarter September 30, 2002, an increase of $2.9 million or 21.4%. The $2.9 million increase was attributable to $1.4 million of non-freight revenues from new URC railroad operations and a $1.5 million increase on existing North American railroad operations. The following table compares North American non-freight revenues for the quarters ended September 30, 2003 and 2002:

North American Railroad
Non-Freight Revenues Comparison
Quarters Ended September 30, 2003 and 2002
(dollars in thousands)


	2003					2002

	$		% of			$		% of
			Total					Total

Railroad switching	$	8,387		51.0	%	$	7,454		55.0	%




Car hire and rental income		1,755		10.7	%		1,927		14.2	%




Car repair services		1,026		6.2	%		841		6.2	%




Other operating income		5,292		32.1	%		3,341		24.6	%

Total non-freight revenues	$	16,460		100.0	%	$	13,563		100.0	%

North America Railroad Operating Expenses

North American operating expenses were $52.3 million in the quarter ended September 30, 2003, compared to $45.7 million in the quarter ended September 30, 2002, an increase of $6.6 million or 14.5%. The increase was attributable to $2.4 million in operating expenses from new URC railroad operations and an increase of $4.2 million in operating expenses on existing North American railroad operations including $870,000 in materials and $803,000 in purchased services due primarily to increased maintenance of way repairs, $739,000 from locomotive diesel fuel price increases, $686,000 in labor and benefits, $408,000 from depreciation and amortization, and an increase in other expenses of $833,000 including $736,000 from settlement of a lawsuit outstanding since 1998.

The following table sets forth a comparison of the Company’s North American railroad operating expenses in the quarters ended September 30, 2003 and 2002:

North American Railroad
Operating Expense Comparison
Quarters Ended September 30, 2003 and 2002
(dollars in thousands)


	2003						2002

				% of					% of
				Operating					Operating
	$			Revenues			$		Revenues

Labor and benefits	$	21,068			34.3	%	$	19,336		36.5	%




Equipment rents		4,362			7.1	%		4,230		8.0	%




Purchased services		4,779			7.8	%		3,567		6.7	%




Depreciation and amortization		3,869			6.3	%		3,346		6.3	%




Diesel fuel		4,105			6.7	%		3,097		5.8	%




Casualties and insurance		3,377			5.5	%		3,596		6.8	%




Materials		4,157			6.8	%		3,199		6.1	%




Net loss (gain) on sale and impairment of assets		(35	)		(0.1	%)		43		0.1	%




Other expenses		6,612			10.6	%		5,264		9.9	%

Total operating expenses	$	52,294			85.0	%	$	45,678		86.2	%

Labor and benefits expense was $21.1 million in the quarter ended September 30, 2003 compared to $19.3 million in the quarter ended September 30, 2002, an increase

of $1.8 million or 9.0%. The increase was attributable to $1.1 million in labor and benefits expense from new URC railroad operations and an increase of $686,000 in labor and benefits expense on existing North American railroad operations due primarily to increased traffic levels as well as incremental costs associated with the additional rail line in Oregon.

Purchased Services expense was $4.8 million in the quarter ended September 30, 2003 compared to $3.6 million in the quarter ended September 30, 2002, an increase of $1.2 million or 34.0%. The increase was attributable to $409,000 from new URC railroad operations and $809,000 on existing North American railroad operations primarily due to increased seasonal maintenance of way repairs combined with the incremental costs associated with the additional rail line in Oregon.

Diesel fuel expense was $4.1 million in the quarter ended September 30, 2003 compared to $3.1 million in the quarter ended September 30, 2002, an increase of $1.0 million or 32.5%. The increase was attributable to $269,000 in operating expense from new URC railroad operations and $739,000 on existing North American railroad operations, primarily due to diesel fuel price increases and the incremental costs associated with the additional rail line in Oregon.

Materials expense was $4.2 million in the quarter ended September 30, 2003 compared to $3.2 million in the quarter ended September 30, 2002, an increase of $1.0 million or 29.9%. The increase was attributable to $88,000 in operating expense from new URC railroad operations and $870,000 on existing North American railroad operations, primarily due to increased maintenance of way repairs combined with the incremental costs associated with the additional rail line in Oregon.

Operating Ratio

The Company’s operating ratio (total operating expenses as a percentage of operating revenues) improved to 85.0% in the quarter ended September 30, 2003 from 86.2% in the quarter ended September 30, 2002.

Interest Expense

Interest expense was $2.2 million in the quarter ended September 30, 2003 compared to $1.9 million in the quarter ended September 30, 2002, an increase of $314,000, or 16.9% primarily due to an increase in debt used for the acquisition of URC.

Other Income, Net

Other income, net in the quarter ended September 30, 2003, was $54,000 compared to $336,000 in the quarter ended September 30, 2002, a decrease of $282,000. Other income, net consists primarily of exchange rate transaction gains on foreign dollar-denominated cash accounts, minority interest expense and interest income.

Income Taxes

The Company’s effective income tax rate in the quarter ended September 30, 2003 was 33.7% compared to 34.3% in the quarter ended September 30, 2002.

Equity in Net Income of Unconsolidated International Affiliates

Equity earnings of unconsolidated international affiliates were $2.9 million in the quarter ended September 30, 2003, compared to $3.2 million in the quarter ended September 30, 2002, a decrease of $295,000. Equity earnings in the quarter ended September 30, 2003, consisted of $2.7 million from Australian Railroad Group and

$203,000 from South America affiliates. The equity earnings from Australia included $960,000 of income related to the resolution of two issues. First, the Australian Tax Office and Australian Railroad Group reached agreement on the tax classification and depreciable lives for certain assets acquired in December 2000 from the government of Western Australia and second, the Rail Regulator of Western Australia reached a final decision regarding the formula for computing access fees charged by Australian Railroad Group’s track infrastructure company. Equity earnings in the quarter ended September 30, 2002, consisted of $2.7 million from Australian Railroad Group and $523,000 from South America affiliates. See additional information regarding ARG’s financial results in the Supplemental Information – Australian Railroad Group section.

Net Income and Earnings Per Share

The Company’s net income in the quarter ended September 30, 2003 was $7.6 million compared to net income of $7.0 million in the quarter ended September 30, 2002, an increase of $593,000. The increase in net income is the result of an increase in net income from North American railroad operations of $888,000, offset by a decrease in equity in net income of unconsolidated international affiliates of $295,000.

Basic and Diluted Earnings Per Share in the quarter ended September 30, 2003 were $0.48 and $0.43 respectively, on weighted average shares of 15.2 million and 17.9 million respectively, compared to $0.46 and $0.40 respectively, on weighted average shares of 14.7 million and 17.6 million respectively, in the quarter ended September 30, 2002. The increases in weighted average shares outstanding for Basic and Diluted Earnings Per Share are primarily attributable to the exercise of employee stock options.

Supplemental Information – Australian Railroad Group

ARG is a company owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. The Company accounts for its 50% ownership in ARG under the equity method of accounting. The 21.8% appreciation of the Australian dollar relative to the U.S. dollar between the quarter ended September 30, 2003 and the quarter ended September 30, 2002, should be considered in the following discussions of equity earnings, freight and non-freight operating revenues, and operating expenses.

In the quarters ended September 30, 2003 and 2002, the Company recorded $2.7 million and $2.7 million, respectively, of equity earnings in the Equity in Net Income of International Affiliates – Australian Railroad Group caption in the accompanying consolidated statement of income.

ARG Operating Revenues

ARG’s operating revenues increased by $7.2 million, or 13.3%, to $61.7 million in the quarter ended September 30, 2003 of which $50.6 million were freight revenues and $11.1 million were non-freight revenues. Operating revenues in the quarter ended September 30, 2002 were $54.5 million of which $45.1 million were freight revenues and $9.4 million were non-freight revenues.

The following table provides ARG’s freight revenues, carloads and average freight revenues per carload for the quarters ended September 30, 2003 and 2002:

Australian Railroad Group Freight Revenues and Carloads by Commodity Group
Quarters Ended September 30, 2003 and 2002
(U.S. dollars in thousands, except average per carload)


																					Average
																					Freight
																					Revenues
	Freight																				Per
	Revenues										Carloads										Carload

Commodity Group	2003		% of Total			2002		% of Total			2003		% of Total			2002		% of Total			2003		2002

Grain	$	13,298		26.3	%	$	14,087		31.3	%		35,552		16.6	%		46,062		21.0	%	$	374	$	306




Other Ores and Minerals		12,571		24.8	%		9,430		20.9	%		28,282		13.2	%		25,024		11.4	%		444		377




Iron Ore		9,960		19.7	%		7,349		16.3	%		47,646		22.2	%		46,367		21.1	%		209		158




Alumina		3,736		7.4	%		3,530		7.8	%		38,577		18.0	%		38,794		17.6	%		97		91




Bauxite		2,398		4.7	%		2,571		5.7	%		32,426		15.1	%		32,330		14.7	%		74		80




Hook and Pull (Haulage)		1,404		2.8	%		1,437		3.2	%		3,253		1.5	%		2,439		1.1	%		432		589




Gypsum		817		1.6	%		599		1.3	%		13,176		6.1	%		11,879		5.4	%		62		50




Other		6,414		12.7	%		6,070		13.5	%		15,694		7.3	%		16,940		7.7	%		409		358

Total	$	50,598		100.0	%	$	45,073		100.0	%		214,606		100.0	%		219,835		100.0	%		236		205

ARG’s freight revenues were $50.6 million, an increase of $5.5 million that was entirely attributable to the appreciation of the Australian dollar. ARG’s carloads declined 5,229, or 2.4%, to 214,606, primarily as a result of a 10,510 carload decrease in grain due to lower grain harvests in Western and South Australia, partially offset by a 3,258 carload increase in other ores and minerals. Average freight revenue per carload increased from $205 to $236, primarily due to the appreciation of the Australian dollar.

ARG’s non-freight railroad revenues were $11.1 million in the quarter ended September 30, 2003 compared to $9.4 million in the quarter September 30, 2002, an increase of $1.7 million, or 18.5% due to the appreciation of the Australian dollar.

ARG Operating Expenses

ARG’s operating expenses were $50.5 million in the quarter ended September 30, 2003, compared to $41.3 million in the quarter ended September 30, 2002, an increase of $9.2 million, or 22.5%, which was primarily attributable to the appreciation of the Australian dollar.

The following table sets forth a comparison of Australian Railroad Group’s railroad operating expenses in the quarters ended September 30, 2003 and 2002:

Australian Railroad Group
Operating Expense Comparison
Quarters Ended September 30, 2003 and 2002
(U.S. dollars in thousands)


	2003						2002

				% of						% of
				Operating						Operating
	$			Revenues			$			Revenues

Labor and benefits	$	12,416			20.1	%	$	9,486			17.4	%




Equipment rents		482			0.8	%		301			0.6	%




Purchased services		16,433			26.6	%		12,555			23.1	%




Depreciation and amortization		6,065			9.8	%		4,287			7.9	%




Diesel fuel		5,391			8.7	%		4,412			8.1	%




Casualties and insurance		1,563			2.5	%		2,835			5.2	%




Materials		2,970			4.8	%		1,965			3.6	%




Net gain on sale and impairment of assets		(183	)		(0.3	%)		(108	)		(0.2	%)




Other expenses		5,409			8.9	%		5,539			10.1	%

Total operating expenses	$	50,546			81.9	%	$	41,272			75.8	%

Labor and benefits increased to 20.1% of revenue in the quarter ended September 30, 2003, compared to 17.4% of revenues in the quarter ended September 30, 2002 primarily due to a $1.2 million increase in safety and performance related bonus accruals.

Purchased services expense increased to 26.6% of revenue in the quarter ended September 30, 2003, compared to 23.1% of revenues in the quarter ended September 30, 2002 primarily due to an increase in contractor track maintenance work.

Depreciation and amortization expense, as a percentage of revenues, increased to 9.8% in the quarter ended September 30, 2003, compared to 7.9% in the quarter ended September 30, 2002. The higher depreciation expense resulted from an increase in depreciable assets due to capital expenditures.

Diesel fuel expense increased to 8.7% of revenues in the quarter ended September 30, 2003, compared to 8.1% of revenues in the quarter ended September 30, 2002, primarily due to higher fuel prices.

Casualties and insurance costs decreased to 2.5% of revenues in the quarter ended September 30, 2003, compared to 5.2% of revenues in the quarter ended September 30, 2002, due to improved safety performance and reduced insurance costs.

Materials expense, as a percentage of revenues, increased to 4.8% in the quarter ended September 30, 2003 compared to 3.6% in the quarter ended September 30, 2002. The higher materials expense is primarily due to an increase in track and rolling stock maintenance work.

Other expenses, as a percentage of revenues, decreased to 8.9% in the quarter ended September 30, 2003 compared to 10.1% in the quarter ended September 30, 2002.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

North American Railroad Operating Revenues

North American operating revenues (which exclude revenues from the Company’s equity investments) were $183.3 million in the nine months ended September 30, 2003 compared to $153.4 million in the nine months ended September 30, 2002, an increase of $29.9 million or 19.5%. The increase was attributable to $20.3 million in revenues from new Oregon, Emons and URC railroad operations and a $9.6 million increase in existing North American railroad revenues. The $29.9 million increase in operating revenues consisted of $20.8 million in freight revenues of which $13.8 million was from new Oregon, URC and Emons railroad operations and $7.0 million was on existing North American railroad operations, and $9.1 million in non-freight revenues of which $6.6 million was from new Oregon, URC and Emons railroad operations and $2.5 million was on existing North American railroad operations. The $7.0 million increase in freight revenues on existing North American railroad operations consisted primarily of increases in Coal, Coke and Ores of $4.1 million, Pulp and Paper of $3.0 million and Petroleum Products of $3.1 million offset by decreases of $1.1 million in Auto and Auto Parts and $1.7 million in Other.

The following table compares North American freight revenues, carloads and average freight revenues per carload for the nine months ended September 30, 2003 and 2002:

North American Freight Revenues and Carloads Comparison by Commodity Group
Nine Months Ended September 30, 2003 and 2002
(dollars in thousands, except average per carload)


																					Average
																					Freight
																					Revenues
	Freight Revenues										Carloads										Per Carload

Commodity Group	2003		% of Total			2002		% of Total			2003		% of Total			2002		% of Total			2003		2002

Coal, Coke & Ores	$	28,919		21.2	%	$	19,383		16.7	%		125,418		31.7	%		92,048		27.6	%	$	231	$	211




Pulp & Paper		23,288		17.0	%		18,921		16.3	%		56,340		14.2	%		47,577		14.3	%		413		398




Petroleum Products		18,750		13.7	%		15,668		13.5	%		24,033		6.1	%		22,307		6.7	%		780		702




Minerals & Stone		16,888		12.4	%		16,744		14.4	%		43,961		11.1	%		38,812		11.6	%		384		431




Lumber & Forest Products		12,776		9.3	%		9,390		8.1	%		40,508		10.2	%		26,541		8.0	%		315		354




Metals		12,584		9.2	%		12,007		10.4	%		43,629		11.0	%		43,162		13.0	%		288		278




Chemicals & Plastics		8,209		6.0	%		7,058		6.1	%		17,631		4.5	%		14,374		4.3	%		466		491




Farm & Food Products		8,199		6.0	%		7,127		6.1	%		21,688		5.5	%		19,066		5.7	%		378		374




Autos & Auto Parts		4,351		3.2	%		5,400		4.7	%		10,764		2.7	%		13,112		3.9	%		404		412




Intermodal		1,199		0.9	%		963		0.8	%		4,335		1.1	%		4,087		1.2	%		277		236




Other		1,555		1.1	%		3,265		2.9	%		7,465		1.9	%		12,116		3.7	%		208		269

Total	$	136,718		100.0	%	$	115,926		100.0	%		395,772		100.0	%		333,202		100.0	%		345		348

Total North American carloads were 395,722 in the nine months ended September 30, 2003 compared to 333,202 in the nine months ended September 30, 2002, an increase of 62,520, or 18.8%. The increase consisted of 50,823 from new Oregon, URC and Emons railroad operations and an increase of 11,697 on existing North American railroad operations due largely to a 5,637 increase in carloads of coal, a 3,939 increase in carloads of minerals and stone, and a 3,574 increase in carloads of pulp and paper, offset by a 2,348 decrease in carloads of auto and auto parts. The average revenue per carload decreased to $345 in the nine months ended September 30, 2003, compared

to $348 per carload in the nine months ended September 30, 2002, a decrease of 0.9%. The decline in revenues per carload was due, in part, to a change in the traffic mix in Minerals & Stone as salt shipments in the Company’s New York-Pennsylvania region were shorter haul and therefore lower yielding, and in part, to the overall decline in revenues per carload from the Company’s Mexico region due to the 11.0% depreciation of the Mexican Peso. Also, new lower-yielding Lumber and Forest Products traffic associated with the additional rail line in Oregon contributed to the decline in revenues per carload.

North American non-freight railroad revenues were $46.6 million in the nine months ended September 30, 2003 compared to $37.4 million in the nine months September 30, 2002, an increase of $9.2 million or 24.4%. The $9.2 million increase consisted of $6.6 million of non-freight revenues from new URC and Emons railroad operations and a $2.6 million increase on existing North American railroad operations. The $2.6 million increase on existing North American railroad operations consisted primarily of an increase in other operating income resulting from increases in demurrage and storage of $862,000, trackage rights of $487,000 and other miscellaneous items of $916,000, and an increase in car repair services of $335,000. The following table compares North American non-freight revenues for the nine months ended September 30, 2003 and 2002:

North American Railroad
Non-Freight Revenues Comparison
Nine Months Ended September 30, 2003 and 2002
(dollars in thousands)


	2003					2002

	$		% of			$		% of
			Total					Total

Railroad switching	$	24,458		52.5	%	$	20,219		54.0	%




Car hire and rental income		5,257		11.3	%		5,705		15.2	%




Car repair services		3,222		6.9	%		2,606		7.0	%




Other operating income		13,643		29.3	%		8,916		23.8	%

Total non-freight revenues	$	46,580		100.0	%	$	37,446		100.0	%

North America Railroad Operating Expenses

North American operating expenses were $155.2 million in the nine months ended September 30, 2003, compared to $131.1 million in the nine months ended September 30, 2002, an increase of $24.1 million or 18.4%. The increase was attributable to $12.9 million in operating expenses from new URC and Emons railroad operations and an increase of $11.2 million in operating expenses on existing North American railroad operations of which approximately $3.0 million was from diesel fuel price increases, $1.9 million in materials and $1.1 million in purchased services due primarily to increased maintenance of way repairs, $1.8 million in labor and benefits, and approximately $1.6 million was from increased insurance premium expense. The increase also included incremental costs associated with the additional rail line in Oregon.

The following table sets forth a comparison of the Company’s North American railroad operating expenses in the nine months ended September 30, 2003 and 2002:

North American Railroad
Operating Expense Comparison
Nine Months Ended September 30, 2003 and 2002
(dollars in thousands)


	2003					2002

			% of						% of
			Operating						Operating
	$		Revenues			$			Revenues

Labor and benefits	$	64,868		35.4	%	$	57,074			37.2	%




Equipment rents		13,162		7.2	%		12,939			8.4	%




Purchased services		13,735		7.5	%		10,936			7.1	%




Depreciation and amortization		11,437		6.2	%		9,913			6.5	%




Diesel fuel		13,726		7.5	%		9,057			5.9	%




Casualties and insurance		9,675		5.3	%		8,053			5.3	%




Materials		11,822		6.4	%		9,278			6.0	%




Net loss (gain) on sale and impairment of assets		141		0.1	%		(380	)		(0.2	%)




Other expenses		16,678		9.1	%		14,276			9.3	%

Total operating expenses	$	155,244		84.7	%	$	131,146			85.5	%

Labor and benefits expense was $64.9 million in the nine months ended September 30, 2003 compared to $57.1 million in the nine months ended September 30, 2002, an increase of $7.8 million or 13.7%. The increase was attributable to $6.0 million in labor and benefits expense from new URC and Emons railroad operations and an increase of $1.8 million in labor and benefits expense on existing North American railroad operations due to increased freight operations and the incremental costs associated with the additional rail line in Oregon.

Purchased services expense was $13.7 million in the nine months ended September 30, 2003 compared to $10.9 million in the nine months ended September 30, 2002, an increase of $2.8 million or 25.6%. The increase was attributable to $1.7 million in purchased services expense from new URC and Emons railroad operations and an increase of $1.1 million in purchased services expense on existing North American railroad operations. The $1.1 million increase on existing North American railroad operations was primarily due to increased track repairs on the Company’s Canada, Oregon and New York/Pennsylvania operations, and the incremental costs associated with the additional rail line in Oregon.

Diesel fuel expense was $13.7 million in the nine months ended September 30, 2003 compared to $9.1 million in the nine months ended September 30, 2002, an increase of $4.6 million or 51.6%. The increase was attributable to $1.6 million in diesel fuel expense from new URC and Emons railroad operations and $3.0 million in existing North American railroad operations, primarily attributable to diesel fuel price increases.

Casualties and insurance expense was $9.7 million in the nine months ended September 30, 2003 compared to $8.1 million in the nine months ended September 30, 2002, an increase of $1.6 million or 20.1%. The increase was attributable to $453,000 in casualties and insurance expense from new URC and Emons railroad operations and an increase of $1.2 million in casualties and insurance expense on existing North American railroad operations due primarily to increased insurance expense.

Materials expense was $11.8 million in the nine months ended September 30, 2003 compared to $9.3 million in the nine months ended September 30, 2002, an increase of $2.5 million or 27.4%. The increase was attributable to $641,000 in materials expense from new URC and Emons railroad operations and an increase of $1.9 million in materials expense on existing North American railroad operations. The $1.9 million increase on existing North American railroad operations was primarily due to increased track repairs on the Company’s Canada, Oregon and New York/Pennsylvania operations, and the incremental costs associated with the additional rail line in Oregon.

Operating Ratio

The Company’s operating ratio (total operating expenses as a percentage of operating revenues) improved to 84.7% in the nine months ended September 30, 2003 from 85.5% in the nine months ended September 30, 2002.

Interest Expense

Interest expense was $6.7 million in the nine months ended September 30, 2003 compared to $5.2 million in the nine months ended September 30, 2002, an increase of $1.5 million or 29.8% due primarily to an increase in debt used to finance the acquisitions of URC and Emons.

Other Income, Net

Other income, net in the nine months ended September 30, 2003, was $767,000 compared to $505,000 in the nine months ended September 30, 2002, an increase of $262,000. Other income, net consists primarily of exchange rate transaction gains on foreign dollar-denominated cash accounts and interest income.

Income Taxes

The Company’s effective income tax rate in the nine months ended September 30, 2003 was 37.3% compared to 34.1% in the nine months ended September 30, 2002. The increase was primarily attributable to an increase in the effective tax rate of the Company’s Mexico railroad operations.

Equity in Net Income of Unconsolidated International Affiliates

Equity earnings of unconsolidated international affiliates, net were $7.0 million in the nine months ended September 30, 2003, compared to $8.3 million in the nine months ended September 30, 2002, a decrease of $1.3 million. Equity earnings in the nine months ended September 30, 2003, consisted of $6.9 million from Australian Railroad Group and $112,000 from South America affiliates. The equity earnings from Australia included $960,000 of income related to the resolution of two issues. First, the Australian Tax Office and Australian Railroad Group reached agreement on the tax classification and depreciable lives for certain assets acquired in December 2000 from the government of Western Australia and second, the Rail Regulator of Western Australia reached a final decision regarding the formula for computing access fees charged by Australian Railroad Group’s track infrastructure company. Equity earnings in the nine months ended September 30, 2002, consisted of $7.3 million from Australian Railroad Group and $1.0 from South America affiliates. See additional information regarding ARG’s financial results in the Supplemental Information – Australian Railroad Group section.

Net Income and Earnings Per Share

The Company’s net income in the nine months ended September 30, 2003 was $20.8 million compared to net income of $19.8 million in the nine months ended September 30, 2002, an increase of $1.0 million. The increase in net income is the result of

an increase in net income from North American railroad operations of $2.3 million, offset by a decrease in equity in net income of unconsolidated international affiliates of $1.3 million.

Basic and Diluted Earnings Per Share in the nine months ended September 30, 2003 were $1.32 and $1.17 respectively, on weighted average shares of 15.1 million and 17.8 million respectively, compared to $1.29 and $1.13 respectively, on weighted average shares of 14.7 million and 17.6 million respectively, in the nine months ended September 30, 2002. The increases in weighted average shares outstanding for Basic and Diluted Earnings Per Share are primarily attributable to the exercise of employee stock options.

Supplemental Information – Australian Railroad Group

ARG is a company owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. The Company accounts for its 50% ownership in ARG under the equity method of accounting. The 16.6% appreciation of the Australian dollar relative to the U.S. dollar between the nine months ended September 30, 2003 and the nine months ended September 30, 2002, should be considered in the following discussions of equity earnings, freight and non-freight operating revenues, and operating expenses.

In the nine months ended September 30, 2003 and 2002, the Company recorded $6.9 million and $7.2 million, respectively, of equity earnings in the Equity in Net Income of International Affiliates – Australian Railroad Group caption in the accompanying consolidated statement of income.

ARG Operating Revenues

ARG’s operating revenues increased by $15.6 million, or 9.8%, to $175.0 million in the nine months ended September 30, 2003 of which $143.2 million were freight revenues and $31.8 million were non-freight revenues. Operating revenues in the nine months ended September 30, 2002 were $159.4 million of which $133.5 million were freight revenues and $25.9 million were non-freight revenues.

The following table provides ARG’s freight revenues, carloads and average freight revenues per carload for the nine months ended September 30, 2003 and 2002:

Australian Railroad Group Freight Revenues and Carloads by Commodity Group
Nine Months Ended September 30, 2003 and 2002
(U.S. dollars in thousands, except average per carload)


																					Average
																					Freight
																					Revenues
	Freight																				Per
	Revenues										Carloads										Carload

Commodity Group	2003		% of Total			2002		% of Total			2003		% of Total			2002		% of Total			2003		2002

Grain	$	40,709		28.4	%	$	42,030		31.5	%		104,369		17.0	%		139,598		21.2	%	$	390	$	301




Other Ores and Minerals		33,969		23.7	%		28,055		21.0	%		78,577		12.8	%		74,327		11.3	%		432		377




Iron Ore		25,640		17.9	%		21,098		15.8	%		132,250		21.5	%		134,526		20.5	%		194		157




Alumina		11,680		8.2	%		10,299		7.7	%		114,659		18.7	%		114,182		17.4	%		102		90




Bauxite		8,068		5.6	%		7,529		5.6	%		96,430		15.7	%		95,389		14.5	%		84		79




Hook and Pull (Haulage)		3,086		2.2	%		5,885		4.4	%		6,146		1.0	%		19,101		2.9	%		502		308




Gypsum		2,127		1.5	%		1,822		1.4	%		34,482		5.6	%		32,334		4.9	%		62		56




Other		17,896		12.5	%		16,780		12.6	%		47,029		7.7	%		48,227		7.3	%		381		348

Total	$	143,175		100.0	%	$	133,498		100.0	%		613,942		100.0	%		657,684		100.0	%		233		203

ARG’s freight revenues were $143.2 million, an increase of $9.7 million that was entirely attributable to the appreciation of the Australian dollar. ARG’s carloads declined 43,742, or 6.7%, to 613,942, primarily as a result of a 35,229 carload decrease in grain due to drought conditions and lower harvests, and a 12,955 carload decline in hook and pull due to the loss of business previously handled for two Australian companies prior to their joint acquisition of a previously state-owned railroad. Average freight revenue per carload increased to $233 from $203, primarily due to the appreciation of the Australian dollar.

ARG’s non-freight railroad revenues were $31.8 million in the nine months ended September 30, 2003 compared to $25.9 million in the nine months September 30, 2002, an increase of $5.9 million or 22.7%. In addition to the appreciation of the Australian dollar, ARG’s non-freight revenue increase was primarily attributable to increased sales of locomotive diesel fuel to other railroads.

ARG Operating Expenses

ARG’s operating expenses were $138.4 million in the nine months ended September 30, 2003, compared to $120.5 million in the nine months ended September 30, 2002, an increase of $17.9 million or 14.9% primarily due to the appreciation of the Australian dollar. Operating expenses of $120.5 million in the nine months ended September 30, 2002 include $1.5 million of expense resulting from the mechanical failure of a locomotive and a subsequent collision at a switching yard in Kalgoorlie, Western Australia, and $827,000 of bid costs from the unsuccessful bid for the privatization of an Australian railroad.

The following table sets forth a comparison of Australian Railroad Group’s operating expenses in the nine months ended September 30, 2003 and 2002:

Australian Railroad Group
Operating Expense Comparison
Nine Months Ended September 30, 2003 and 2002
(U.S. dollars in thousands)


	2003						2002

				% of						% of
				Operating						Operating
	$			Revenues			$			Revenues

Labor and benefits	$	33,033			18.9	%	$	28,704			18.0	%




Equipment rents		1,204			0.7	%		807			0.5	%




Purchased services		43,283			24.7	%		35,805			22.5	%




Depreciation and amortization		16,940			9.7	%		12,260			7.7	%




Diesel fuel		15,365			8.8	%		12,312			7.7	%




Casualties and insurance		6,444			3.7	%		8,993			5.6	%




Materials		8,404			4.8	%		5,089			3.2	%




Net gain on sale and impairment of assets		(816	)		-0.5	%		(259	)		-0.2	%




Other expenses		14,563			8.3	%		16,769			10.6	%

Total operating expenses	$	138,420			79.1	%	$	120,480			75.6	%

Labor and benefits increased to 18.9% of revenue in the nine months ended September 30, 2003, compared to 18.0% of revenues in the nine months ended September 30, 2002 primarily due to safety and performance related bonus accruals.

Purchased services expense increased to 24.7% of revenue in the nine months ended September 30, 2003, compared to 22.5% of revenues in the nine months ended September 30, 2002 primarily due to an increase in contractor track maintenance work.

Depreciation and amortization expense, as a percentage of revenues, increased to 9.7% in the nine months ended September 30, 2003, compared to 7.7% in the nine months ended September 30, 2002. The higher depreciation expense resulted from an increase in depreciable assets due to capital expenditures.

Diesel fuel expense increased to 8.8% of revenues in the nine months ended September 30, 2003, compared to 7.7% of revenues in the nine months ended September 30, 2002, primarily due to higher fuel prices.

Casualties and insurance expense decreased to 3.7% of revenues in the nine months ended September 30, 2003, compared to 5.6% of revenues in the nine months ended September 30, 2002, due to improved safety performance and reduced insurance costs.

Materials expense, as a percentage of revenues, increased to 4.8% in the nine months ended September 30, 2003 compared to 3.2% in the nine months ended September 30, 2002. The higher materials expense is primarily due to an increase in track and rolling stock maintenance work.

Other expenses, as a percentage of revenues, decreased to 8.3% in the nine months ended September 30, 2003 compared to 10.6% in the nine months ended September 30, 2002. The decrease was primarily due to lower grain transfer costs in the nine months ended September 30, 2003 compared to costs in the nine months ended September 30, 2002, which also included $827,000 of costs related to the unsuccessful bid for the privatization of an Australian railroad.

Liquidity and Capital Resources

During the nine months ended September 30, 2003 the Company generated cash from operations of $38.2 million and invested $14.3 million in capital assets (net of $1.5 million in state grant funds received for track rehabilitation and construction). The Company also received $132,000 in cash from unconsolidated affiliates, received $644,000 in proceeds from the disposition of property, and received $2.0 million in proceeds from employee stock purchases. The Company paid $750,000 of dividends on the Company’s Redeemable Convertible Preferred Stock and $316,000 for the purchase of treasury stock, all of which resulted from employee stock option holders using shares already owned by the option holder to pay for option exercises under the Company’s 1996 Stock Option Plan. The Company had a net decrease in debt of $29.9 million during this same period primarily by using cash provided by operations to reduce debt.

During the nine months ended September 30, 2002 the Company generated cash from operations of $19.6 million, invested $55.7 million in the purchase of Utah Railway Company, invested $29.4 million (net of $2.0 million in cash received) in the purchase of Emons Transportation Group, Inc., and invested $13.4 million in capital assets (net of $2.7 million in state grant funds received for track rehabilitation and construction). The Company also received $263,000 from unconsolidated affiliates, received $673,000 in proceeds from the disposition of property, and received $1.8 million in proceeds from employee stock purchases. The Company paid $750,000 of dividends on the Company’s Redeemable Convertible Preferred Stock and acquired treasury stock for $36,000. The Company had a net increase in debt of $62.8 million during this same period primarily related to the Emons acquisition.

For 2003, the Company has budgeted approximately $23.1 million in capital expenditures, primarily for track rehabilitation and $4.1 million for a locomotive upgrade project. These capital expenditures are net of $2.3 million that is expected to be funded by rehabilitation grants from state and federal agencies. In

April 2003, the Company’s Board of Directors approved an additional $2.5 million in capital expenditures to finance a track project that enables one of the Company’s railroads to serve a major power plant customer with longer unit coal trains and which is part of a contract extension with that customer. Approximately $14.3 million of budgeted capital expenditures was completed as of September 30, 2003.

At September 30, 2003 the Company had long-term debt, including current portion, totaling $99.9 million, which comprised 26.8% of its total capitalization (Total Debt plus Convertible Preferred plus total Stockholder’s Equity). At December 31, 2002 the Company had long-term debt, including current portion, totaling $125.4 million, which comprised 34.9% of its total capitalization.

The Company has historically relied on cash generated from operations to fund working capital and capital expenditures relating to ongoing operations, while relying on borrowed funds and stock issuances to finance acquisitions and investments in unconsolidated affiliates. 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.

On October 31, 2002, the Company closed on $250.0 million of new senior secured credit facilities. The facilities are composed of a $223.0 million revolving loan and a US$27.0 million Canadian term loan, each maturing in 2007. The Canadian term loan was funded in Canadian dollars and principal and interest payments on the term loan will be made in Canadian dollars. Under the terms of the financing, the Company may expand the size of the facilities to $350.0 million if certain criteria are met in the future. The new $250.0 million facilities were used to refinance approximately $100.0 million of existing debt at the Company’s U.S. and Canadian subsidiaries. The remaining $150.0 million ($170.9 million as of September 30, 2003) of unused borrowing capacity is available for general corporate purposes including acquisitions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation Of Disclosure Controls And Procedures. The Company’s Chairman and Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) evaluated its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of

the end of the period covered by this quarterly report. Based on this evaluation, the Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date.

(b) Changes In Internal Control Over Financial Reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Report dated July 29, 2003 reporting on Item 9 Regulation FD Disclosure (Information furnished under Item 12. Results of Operations and Financial Condition). This report furnished the Company’s press release regarding 2003 second quarter financial results.

INDEX TO EXHIBITS


(2)	Plan of acquisition, reorganization, arrangement, liquidation or succession




	Not applicable.




(3)	(i)	Articles of Incorporation




	The Exhibits referenced under 4.1 through 4.4 hereof are incorporated herein by reference.




	(ii)	By-laws




	The By-laws referenced under 4.5 hereof are incorporated herein by reference.




(4)	Instruments defining the rights of security holders, including indentures




	4.1	Restated Certificate of Incorporation (Exhibit 3.1)4




	4.2	Certificate of Designation of 4.0% Senior Redeemable Convertible Preferred Stock, Series A (Exhibit 3.2)4




	4.3	Certificate of Correction to the Restated Certificate of Incorporation (Exhibit 3.1)6




	4.4	Certificate of Amendment of the Restated Certificate of Incorporation (Exhibit 3.1)6




	4.5	By-laws (Exhibit 3.1)1




	4.6	Specimen stock certificate representing shares of Class A Common Stock (Exhibit 4.1)3




	4.7	Form of Class B Stockholders’ Agreement dated as of May 20, 1996, among the Registrant, its executive officers and its Class B stockholders (Exhibit 4.2)2




	4.8	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




	4.9	Stock Purchase Agreement by and between Genesee & Wyoming Inc. and The 1818 Fund III, L.P. dated October 19, 2000 (Exhibit 10.1)4




	4.10	Registration Rights Agreement between Genesee & Wyoming Inc. and The 1818 Fund III, L.P. dated December 12, 2000 (Exhibit 10.2)4




	4.11	Letter Agreement between Genesee & Wyoming Inc., The 1818 Fund III, L.P. and Mortimer B. Fuller, III dated December 12, 2000 (Exhibit 10.3)4




	4.12	Form of Senior Debt Indenture (Exhibit j)5




	4.13	Form of Subordinated Debt Indenture (Exhibit k)5






		(10)		Material Contracts




				Not applicable.




		*(11.1)		Statement re computation of per share earnings




		(15)		Letter re unaudited interim financial information




				Not applicable.




		(18)		Letter re change in accounting principles




				Not applicable.




		(19)		Report furnished to security holders




				Not applicable.




		(22)		Published report regarding matters submitted to vote of security holders




				Not applicable.




		(23)		Consents of experts and counsel




				Not applicable.




		(24)		Power of attorney




				Not applicable.




		*(31.1)		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer




		*(31.2)		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer




		*(32.1)		Section 1350 Certification




		(99)		Additional Exhibits




				Not applicable.

Exhibit filed with this Report.

1 Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant’s Registration Statement on Form S-1 (Registration No. 333-3972). The exhibit number contained in parenthesis refers to the exhibit number in such Registration Statement.

2 Exhibit previously filed as part of, and incorporated herein by reference to, Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-3972). The exhibit number contained in parenthesis refers to the exhibit number in such Amendment.

3 Exhibit previously filed as part of, and incorporated herein by reference to, Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-3972). The exhibit number contained in parenthesis refers to the exhibit number in such Amendment.

4 Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant’s Report on Form 8-K dated December 7, 2000. The exhibit number contained in parenthesis refers to the exhibit number in such Report.

5 Exhibit previously filed as part of, and incorporated herein by reference to, Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-73026). The exhibit number contained in parenthesis refers to the exhibit number in such Amendment.

6 Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant’s Report on Form 8-K dated December 17, 2001. The exhibit number contained in parenthesis refers to the exhibit number in such Report.

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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.

Date: November 12, 2003		By: /s/ John C. Hellmann Name: John C. Hellmann Title: Chief Financial Officer

Date: November 12, 2003		By: /s/ Alan R. Harris Name: Alan R. Harris Title: Senior Vice President and Chief Accounting Officer

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		the end of the period covered by this quarterly report. Based on this evaluation, the Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of such date.

(b)		Changes In Internal Control Over Financial Reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.