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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File Number 0-20618
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RAILAMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0328006
(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification Number)
5300 BROKEN SOUND BLVD, N.W.
BOCA RATON, FLORIDA 33487
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 994-6015
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.001 Par Value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Check 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. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Check whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2002 computed by reference to the average bid and
asked prices of registrant's common stock reported on the New York Stock
Exchange on such date was $335.8 million.
The number of shares outstanding of registrant's Common Stock, $.001 par value
per share, as of March 20, 2003 was 31,797,083.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) will be
incorporated by reference from the registrant's Definitive Proxy Statement to be
filed with the Commission pursuant to Regulation 14A.
1
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis 21
Item 7a. Market Risk 34
Item 8. Financial Statements 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Item 14. Controls and Procedures 36
PART IV
Item 15. Exhibits and Reports on Form 8-K 37
Signatures 40
2
This Form 10-K contains certain "forward-looking" statements within the
meaning of The Private Securities Litigation Reform Act of 1995 and information
relating to RailAmerica, Inc. and its subsidiaries that are based on the beliefs
of our management and that involve known and unknown risks and uncertainties.
When used in this report, the terms "anticipate," "believe," "estimate,"
"expect" and "intend" and words or phrases of similar import, as they relate to
us or our subsidiaries or our management, are intended to identify
forward-looking statements. These statements reflect the current risks,
uncertainties and assumptions related to various factors including, without
limitation, currency risk, competitive factors, general economic conditions,
customer relations, fuel costs, the interest rate environment, governmental
regulation and supervision, the inability to successfully integrate acquired
operations, the ability to successfully market and sell non-core properties and
assets, the ability to service debt, one-time events and other factors described
under the heading "Factors affecting our operating results, business prospects
and market price of stock" and elsewhere in this report and in other filings
made by us with the Securities and Exchange Commission. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this report as anticipated, believed,
estimated or intended. We undertake no obligation to update, and we do not have
a policy of updating or revising, these forward-looking statements. Except where
the context otherwise requires, the terms "we," "us," or "our" refer to the
business of RailAmerica, Inc. and its consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We are the largest owner and operator of short line freight railroads in
North America and a leading owner and operator of regional freight railroads in
Australia and Chile. We own, lease or operate a diversified portfolio of 49
railroads with approximately 12,900 miles of track located in the United States,
Australia, Canada, Chile and Argentina. Through our diversified portfolio of
rail lines, we operate in numerous geographic regions with varying
concentrations of commodities hauled.
In January 2003, we announced our intention to sell our 55% equity
interest in our Chilean railroad operation, Ferronor. As a result, Ferronor has
been presented as a discontinued operation in our financial statements.
We were incorporated in Delaware on March 31, 1992 as a holding company
for two pre-existing railroad companies. Our principal executive office is
located at 5300 Broken Sound Blvd, N.W., Boca Raton, Florida 33487, and our
telephone number at that location is (561) 994-6015.
Our Internet website address is www.railamerica.com. We make available
free of charge on or through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission (SEC). We also make available on our website other reports filed with
the SEC under the Securities Exchange Act of 1934, as amended, including proxy
statements and reports filed by officers and directors under Section 16(a) of
that Act. These reports may be found by selecting the option entitled "SEC
FILINGS" in the "INVESTOR RELATIONS" section on our website. Information
contained in or connected to our website is not part of this report.
3
During the past six years, we have grown significantly through the
following acquisitions:
o In February 1997, we acquired a 55% equity interest in
Ferronor, a Chilean regional railroad, for $7.2 million.
o In April 1999, we acquired Freight Australia, an Australian
regional railroad, for $103 million.
o In July 1999, we acquired RaiLink, Inc., a holding company
that owned or had equity interests in 11 Canadian railroads,
for $49.8 million.
o In September 1999, we acquired the Toledo, Peoria, and Western
Railroad, for $17.4 million.
o In February 2000, we acquired RailTex, Inc., a holding company
that owned 25 railroads in the United States and Canada, for
$294.2 million.
o In January 2002, we acquired StatesRail, Inc. ("StatesRail"),
a holding company of 8 railroads in the United States, for $90
million.
o In January 2002, we acquired ParkSierra Corp. ("ParkSierra"),
a holding company of 3 railroads in the United States, for $48
million.
BUSINESS STRATEGY
INCREASE REVENUE THROUGH FOCUSED MARKETING EFFORTS AND RELIABLE RAIL
SERVICE. In North America and Australia, we strive to increase our revenues
through focused marketing efforts and cost effective and reliable service. In
North America, we work with customers, industrial development organizations and
our Class I interchange partners to develop transportation solutions to meet the
needs of our customers. We specialize in developing customer-driven solutions
for logistical issues, with local and regional marketing representatives working
directly with customers to ensure that rail transportation services meet their
needs. The operating focus of our North American railroads is on meeting and
exceeding the customer's expectations by providing frequent, dependable rail
service at reasonable rates. In Australia, we market our services to potential
customers across the continent, primarily in eastern Australia, as the open
access rules allow us to operate over the track owned by other transportation
companies. To supplement grain revenue, we are aggressively seeking to diversify
our commodity base and regions served. We have recently signed new long-term
contracts based in New South Wales that should add $50 million in revenue over
the next three to five years and are in the process of soliciting transportation
contracts from coal shippers in the Hunter Valley region and other potential
customers.
REDUCE DEBT TO INDUSTRY AVERAGE. At December 31, 2002, our net debt to
total capitalization, excluding accumulated other comprehensive loss, was 63%.
Our goal is to reduce this amount to 50% by the end of 2004. We intend to
accomplish this through our recently announced $100 million asset
rationalization plan, retention of earnings and generation of free cash flow.
Our asset rationalization plan includes the sale of our 55% equity interest in
Ferronor, our Chilean railroad, as well as the sale of other non-strategic and
non-core assets in North America and Australia.
CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Since 1997, we have made
seven significant acquisitions of railroad companies, which owned or had equity
interests in 50 railroads for total consideration in excess of $600 million. All
of these railroads have been successfully integrated into our operations and in
total have added in excess of 11,000 miles of track to our operations and in
excess of $400 million in revenues.
In North America, we seek acquisition candidates that enable us to form
geographic clusters of short lines, thereby affording economies of scale as well
as marketing and operating synergies. We also seek properties where operating
efficiencies can be realized from professional management techniques and asset
rationalization, thereby enabling the target railroad to reduce operating costs
and improve service. The resultant competitive pricing and better service,
coupled with a focused sales and marketing effort, typically yields customer
loyalty and increased carloads.
Acquisition opportunities in North America generally come from three
sources. First, certain Class I railroads have stated an intent to sell certain
branch lines over the next several years. We believe, based on our strong
operating performance and relationships with the Class I railroads, we are a
logical choice to acquire some of these properties. Second, as the short line
industry itself continues to consolidate, we believe we are in an excellent
position to acquire other short lines or groups of short lines because of our
industry reputation, demonstrated access to capital, breadth of geographic
coverage and ability to efficiently evaluate and negotiate prospective
transactions. Third, as industrial companies divest of their railroad operations
we believe our cost-effective and customer oriented approach makes us a strong
candidate to acquire some of these railroads.
4
We continue to monitor acquisition candidates in economically and
politically stable international markets as a result of an increasing number of
governments seeking to privatize their national rail systems.
In acquiring rail properties, we compete with other short line and
regional railroad operators, some of which have greater financial resources than
we do. Competition for rail properties is based primarily upon price, operating
history and financing capability. We believe our established reputation as a
successful acquirer and operator of short line rail properties, combined with
our managerial resources, effectively positions us to take advantage of future
acquisition opportunities.
NORTH AMERICAN RAILROADS
We currently own, lease or operate 46 rail properties in North America, of
which 45 are short line railroads that provide transportation services for both
on-line customers and Class I railroads that interchange with our rail lines.
Short line railroads are typically less than 350 miles long, serve a particular
class of customers in a small geographic area and interchange with Class I
railroads. Short line rail operators primarily serve customers on their line by
transporting products to and from the Class I interchanges. Each of our North
American rail lines is typically the only rail carrier directly serving its
customers. The ability to haul heavy and large quantities of freight as part of
a long-distance haul makes our rail services generally a more effective,
lower-cost alternative to other modes of transportation, including motor
carriers. In addition to our 45 short line railroads, we operate one tourist
railroad.
UNITED STATES. We own, lease or operate 37 short line rail properties and
one tourist railroad in the United States with approximately 6,500 miles of
track. Our properties are geographically diversified and operate in 26 states.
We have clusters of rail properties in the Southeastern, Southwestern,
Midwestern, Great Lakes, New England and Pacific Coast regions of the United
States. We believe that this cluster strategy provides economies of scale and
helps achieve operational synergies.
CANADA. We own, lease or operate 8 short line rail properties in Canada
with approximately 1,800 miles of track. Our Canadian properties are
geographically diversified and operate in five provinces and the Northwest
territories.
INDUSTRY OVERVIEW
The U.S. railroad industry is dominated by major Class I railroads, which
operated approximately 98,000 miles of track in 2001. In addition to large
railroad operators, there were more than 560 short line and regional railroads,
which operated approximately 45,000 miles of track in 2001.
The railroad industry is subject to regulations of various government
agencies, primarily the Surface Transportation Board, or STB. For regulatory
purposes, the STB classifies railroads into three groups: Class I, Class II and
Class III, based on annual operating revenue. For 2001, the Class I railroads
had operating revenues of at least $266.7 million, Class II railroads had
revenues of $21.3 million to $266.6 million, and Class III railroads had
revenues of less than $21.3 million (these thresholds are adjusted annually for
inflation).
In compiling data on the U.S. railroad industry, the Association of
American Railroads, or AAR, uses the STB's revenue threshold for Class I
railroads. Regionals are railroads operating at least 350 miles of rail line
and/or having revenues between $40 million and the Class I revenue threshold.
Locals are railroads falling below the Regional criteria, plus switching and
terminal railroads.
2001 INDUSTRY OVERVIEW
Number of 2001 Revenues
Type of Railroad Carriers Miles Operated (in billions) % of Revenues
- ---------------- --------- -------------- ------------- -------------
Class I 8 97,631 $33.5 91.5%
Regional 34 17,439 1.6 4.4
Local 529 27,563 1.5 4.1
--- ------- ----- -----
Total 571 142,633 $36.6 100.0%
=== ======= ===== =====
5
As a result of deregulation in 1980, Class I railroads have been able to
concentrate on core, long-haul routes, while divesting many of their low-density
branch lines to smaller and more cost-efficient freight railroad operators such
as our company. Divesting branch lines allows Class I railroads to increase
traffic density, improve railcar utilization and avoid rail line abandonment.
Because of the focus by short line railroads on increasing traffic volume
through increased customer service and more efficient operations, traffic volume
on short line railroads frequently increases after divestiture by Class I
operators. Consequently, these transactions often result in net increases in the
divesting carriers' freight traffic because much of the business originating or
terminating on branch lines feeds into divesting carriers' core routes.
SALES AND MARKETING
We focus on providing rail service to our customers that is easily
accessible, reliable and cost-effective. In many cases, we believe customer
service and sales and marketing at railroads that we have acquired have been
neglected by the previous owners. We purchased several of our rail lines from
Class I railroads. Due to the size of the Class I railroads and their
concentration on long-haul traffic, we believe the Class I operators typically
have not effectively marketed to customers on these branch line operations.
Following commencement of operations, our railroads generally have
attracted increased rail shipments from existing customers and obtained traffic
from new customers who had not previously shipped by rail or had ceased rail
shipments. We believe our ability to generate additional traffic is enhanced by
our marketing efforts which are aimed at identifying and responding quickly to
the individual business needs of customers along our rail lines. As part of our
marketing efforts, we often schedule more frequent rail service, help customers
negotiate price and service levels with interchange partners and assist
customers in obtaining the quantity and type of rail equipment required for
their operations. We also provide non-scheduled train service on short notice to
accommodate customers' special or emergency needs.
Our decentralized management structure is an important element of our
marketing strategy. We give significant discretion with respect to sales and
marketing activities to our North American regional marketing managers. Each
regional marketing manager works closely with personnel of our railroads and
with other members of senior management to develop marketing plans to increase
shipments from existing customers and to develop business from new customers. We
also work with the marketing staffs of the connecting Class I carriers to
develop an appropriate array of rail-oriented proposals to meet customers' needs
and with industrial development organizations to locate new rail users. We
consider all of our employees to be customer service representatives and
encourage them to initiate and maintain regular contact with shippers.
Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along a
rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other
carriers. Bridge traffic passes over the line from one connecting rail carrier
to another.
Interline and local traffic generated 87%, 84% and 86% of our total
freight revenue in 2002, 2001, and 2000, respectively. We believe that high
levels of interline and local traffic provide us with greater stability of
revenues because this traffic represents shipments to or from customers located
along our lines and cannot be easily diverted to other rail carriers, unlike
bridge traffic.
Our railroads compete directly with other modes of transportation,
principally motor carriers and, to a lesser extent, ship and barge operators.
The extent of this competition varies significantly among our railroads.
Competition is based primarily upon the rate charged and the transit time
required, as well as the quality and reliability of the service provided, for an
origin-to-destination package. To the extent other carriers are involved in
transporting a shipment, we cannot control the cost and quality of service. Cost
reductions achieved by major rail carriers over the past several years have
generally improved their ability to compete with alternate modes of
transportation.
6
The following table summarizes freight revenue by type of traffic carried
by our North American railroads in 2002, 2001 and 2000 in dollars and as a
percent of total freight revenue.
NORTH AMERICA
FREIGHT REVENUE
(DOLLARS IN THOUSANDS)
2002 2001 2000
------------------ ------------------ ------------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
Interline $235,408 81.5% $165,821 76.5% $146,184 72.0%
Local 16,924 5.9% 16,044 7.4% 27,404 13.5%
Bridge 36,430 12.6% 34,901 16.1% 29,396 14.5%
-------- ----- -------- ----- -------- -----
$288,762 100.0% $216,766 100.0% $202,984 100.0%
======== ===== ======== ===== ======== =====
All of our short line properties interchange traffic with Class I
railroads. The following table summarizes our significant connecting carriers in
2002, 2001 and 2000 by freight revenues and carloads as a percentage of total
interchanged (interline and bridge) traffic.
NORTH AMERICA
INTERCHANGED TRAFFIC
2002 2001 2000
-------------------- -------------------- --------------------
Revenues Carloads Revenues Carloads Revenues Carloads
-------- -------- -------- -------- -------- --------
Union Pacific Railroad 30.2% 28.3% 22.2% 23.2% 24.0% 21.8%
Canadian National Railway 22.2% 19.9% 30.4% 26.1% 24.7% 24.7%
CSX Transportation 15.4% 13.4% 16.0% 12.9% 18.9% 15.0%
Burlington Northern Santa Fe Railway 13.3% 14.5% 6.2% 5.9% 8.5% 7.3%
Canadian Pacific Railway 8.7% 11.3% 12.8% 16.6% 10.3% 16.6%
Norfolk Southern 4.6% 5.3% 5.6% 6.9% 7.2% 7.3%
All other railroads 5.6% 7.3% 6.8% 8.4% 6.4% 7.3%
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
Charges for interchanged traffic are generally billed to the customers by
the connecting carrier and cover the entire transportation of a shipment from
origin to destination, including the portion that travels over our lines. Our
revenues from this traffic are generally collected through fees paid directly to
us by the connecting carriers rather than by customers on our lines and are
payable regardless of whether the connecting carriers are able to collect from
the customers. The fees payable by connecting carriers are set forth in
contracts entered into by each of our railroads with their respective connecting
carriers and are generally subject to periodic adjustments.
In 2002, we served approximately 1,600 customers in North America. These
customers shipped and/or received a wide variety of products. Although most of
our North American railroads have a well-diversified customer base, several of
the smaller rail lines have one or two dominant customers. In 2002, our 10
largest North American customers accounted for approximately 27% of North
American transportation revenue, as compared to 25% of North American
transportation revenue in 2001.
7
The following table sets forth by number and percentage the carloads
hauled by our North American railroads during the years ended December 31, 2002,
2001 and 2000.
CARLOADS CARRIED BY COMMODITY GROUP
2002 2001 2000
------------------ ----------------- ------------------
COMMODITY GROUP Carloads % Carloads % Carloads %
- --------------------------------- -------- ----- ------- ----- -------- -----
Agricultural & Farm Products 95,005 8.5% 80,835 9.1% 76,593 9.0%
Autos 43,843 4.0% 45,962 5.2% 47,900 5.7%
Chemicals 84,935 7.6% 66,915 7.5% 66,827 8.0%
Coal 128,540 11.5% 95,433 10.7% 71,945 8.6%
Food Products 62,471 5.6% 40,988 4.6% 39,313 4.7%
Intermodal 39,538 3.5% 42,253 4.7% 30,134 3.6%
Lumber & Forest Products 124,025 11.1% 88,351 9.9% 90,102 10.7%
Metals 80,117 7.3% 52,184 5.8% 61,049 7.3%
Metallic/Non-metallic Ores 55,260 5.0% 45,658 5.1% 36,780 4.4%
Minerals 45,995 4.1% 19,424 2.2% 16,393 2.0%
Paper Products 94,528 8.5% 64,914 7.3% 59,124 7.0%
Petroleum Products 47,252 4.3% 28,593 3.2% 26,840 3.2%
Railroad Equipment/Bridge Traffic 186,388 16.7% 200,565 22.5% 192,323 22.9%
Other 26,028 2.3% 19,243 2.2% 24,128 2.9%
--------- ----- ------- ----- ------- -----
Total 1,113,925 100.0% 891,318 100.0% 839,451 100.0%
========= ===== ======= ===== ======= =====
EMPLOYEES
Currently, we have approximately 1,600 full-time railroad employees and
125 full-time corporate employees in North America. Approximately 760 of these
employees are subject to collective bargaining agreements.
SAFETY
We endeavor to conduct safe railroad operations for the benefit and
protection of employees, customers and the communities served by our railroads.
Our safety program, led by the Vice President of Safety and Operating Practices,
involves all of our employees and is administered by each Regional Vice
President. Operating personnel are trained and certified in train operations,
hazardous materials handling, personal safety and all other areas subject to
governmental rules and regulations. Each U.S. employee involved in train
operations is subject to pre-employment and random drug testing whether or not
required by federal regulation. We believe that each of our North American
railroads complies in all material respects with federal, state, provincial and
local regulations. Additionally, each railroad is given flexibility to develop
more stringent safety rules based on local requirements or practices. We also
participate in committees of the AAR, governmental and industry sponsored safety
programs including Operation Lifesaver (the national grade crossing awareness
program) and the American Short Line and Regional Railroad Association Safety
Committee.
REGULATION
UNITED STATES. Our subsidiaries in the United States are subject to
various safety and other laws and regulations by numerous government agencies,
including (1) regulation by the STB, and the Federal Railroad Administration, or
FRA, (2) labor related statutes including the Railway Labor Act, Railroad
Retirement Act, the Railroad Unemployment Insurance Act, and the Federal
Employer's Liability Act, and (3) some limited regulation by agencies in the
states in which we do business.
The STB, established by the ICC Termination Act of 1995, has jurisdiction
over, among other matters, the construction, acquisition, or abandonment of rail
lines, the consolidation or merger of railroads, the assumption of control of
one railroad by another railroad, the use by one railroad of another railroad's
tracks through lease, joint use or trackage rights, the rates charged for their
transportation services, and the service provided by rail carriers.
As a result of the 1980 Staggers Rail Act, railroads have received
considerable rate and market flexibility including the ability to obtain
wholesale exemptions from numerous provisions of the Interstate Commerce Act.
The Staggers Rail Act allowed the deregulation of all containerized and truck
trailer traffic handled by railroads. Requirements for the creation of new short
line railroads or the expansion of existing short line railroads were
substantially expedited and simplified under the
8
exemption process. On regulated traffic, railroads and shippers are permitted to
enter into contracts for rates and provision of transportation services without
the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act
allows railroads considerable freedom to raise or lower rates without objection
from captive shippers. While the ICC Termination Act retained maximum rate
regulation on traffic over which railroads have exclusive control, the new law
relieved railroads from the requirements of filing tariffs and rate contracts
with the STB on all traffic other than agricultural products.
The FRA regulates railroad safety and equipment standards, including track
maintenance, handling of hazardous shipments, locomotive and rail car inspection
and repair requirements, and operating practices and crew qualifications.
CANADA. Our Canadian railroad subsidiaries are subject to regulation by
various governmental departments and regulatory agencies at the federal or
provincial level depending on whether the railroad in question falls within
federal or provincial jurisdiction. A Canadian railroad generally falls within
the jurisdiction of federal regulation if the railroad crosses provincial or
international borders or if the Parliament of Canada has declared the railroad
to be a federal work or undertaking and in selected other circumstances. Any
company which proposes to construct or operate a railway in Canada which falls
within federal jurisdiction is required to obtain a certificate of fitness under
the Canada Transportation Act, or CTA. Under the CTA, the sale of a federally
regulated railroad line is not subject to federal approval, although a process
of advertising and negotiating may be required in connection with any proposed
discontinuance of a federal railway. Federal railroads are governed by federal
labor relations laws.
Short line railroads located within the boundaries of a single province
which do not otherwise fall within the federal jurisdiction are regulated by the
laws of the province in question, including laws as to licensing and labor
relations. Most of Canada's ten provinces have enacted new legislation, which is
more favorable to the operation of short line railroads than previous provincial
laws. Many of the provinces require as a condition of licensing under the short
line railroads acts that the licensees comply with federal regulations
applicable to safety and other matters and remain subject to inspection by
federal railway inspectors. Under some provincial legislation, the sale of a
provincially regulated railroad line is not subject to provincial approval,
although a process of advertising and negotiating may be required in connection
with any proposed discontinuance of a provincial railway.
Acquisition of additional railroad operations in Canada, whether federally
or provincially regulated, may be subject to review by the Investment Canada
Act, or ICA, a federal statute which applies to every acquisition of a Canadian
business or establishment of a new Canadian business by a non-Canadian. Whether
or not an acquisition is subject to review under the ICA is dependent on the
book value of the assets of the Canadian business being acquired. Acquisitions
that are subject to review must, before their completion, satisfy the Minister
responsible for administering the ICA that the acquisition is of net benefit to
Canada.
Any contemplated acquisitions may also be subject to the provisions of the
Competition Act federal antitrust legislation of general application. The
Competition Act contains merger control provisions which apply to certain
acquisitions. As a result, acquisitions exceeding specified asset and/or revenue
thresholds may be subject to pre-merger notification and subsequent substantive
review prior to their completion.
FREIGHT AUSTRALIA
We own Freight Australia, a regional freight railroad operating in and
around the State of Victoria, Australia. Freight Australia was purchased from
the Government of the State of Victoria, Australia on April 30, 1999 for total
consideration of approximately $103 million. Freight Australia operates over
3,150 miles of track under a 45 year lease from the State of Victoria.
9
INDUSTRY OVERVIEW
The demographics and geography of Australia dictate that the freight
transport business is characterized by long distances and low volumes of
freight. Industrial flows tend to relate to production cycles and agricultural
product flows are seasonal and driven by export shipping schedules. Generally,
the pattern of surface freight movement in Australia comprises:
o bulk materials and grains from inland areas, usually to the closest
port or processing plant
o inputs to the resources industries from coastal industrial centers,
ports and cities to the interior
o general freight from coastal industrial centers, ports and cities to
the interior, and
o interstate freight, comprising manufactured goods, steel, paper and
general freight between capital cities, and to and from major
industrial centers.
In recent years, the Australian rail freight sector's share of the total
freight market has been maintained despite growth in road transport, largely
because of the growth in Australia's coal and mineral exports. Over a period of
30 years, rail movements of these commodities have increased almost eightfold.
Major changes have taken place in the rail industry over the last decade,
partly as a result of the privatization of government-owned railways and the
entry of private sector participants in accordance with the competitive
neutrality provisions of the national Competition Principles Agreement. The
private sector has taken an increasingly larger role through outsourcing of
non-core activities by railway operators.
The railway network in Australia contains approximately 25,000 miles of
track, of which approximately 21,000 miles is track used for general and bulk
freight and passenger services. The remaining 4,000 miles are private sector
owned and operated, and principally serve Australia's mining and primary
production industries.
SALES AND MARKETING
Freight Australia focuses on providing door-to-door rail service to
customers that is easily accessible, reliable and cost-effective since truck and
other rail operators are the principle competition. Due to surplus assets and
the open access to trackage outside of Victoria, we have been able to market to
customers across the Australian continent effectively.
Following commencement of operations, Freight Australia has attracted
increased rail shipments from existing customers and obtained traffic from new
customers who had not previously shipped by rail or had ceased rail shipments.
We believe that our ability to generate additional traffic is enhanced by our
marketing efforts, which are aimed at identifying and responding quickly to the
individual business needs of customers along the rail lines. As part of our
marketing efforts, we often schedule more frequent rail service. Freight
Australia also provides non-scheduled train service on short notice to
accommodate customers' special or emergency needs.
Our decentralized management structure is an important element of our
marketing strategy. We give significant discretion with respect to sales and
marketing activities to our marketing managers. Each marketing manager works
closely with personnel in other departments to develop marketing plans to
increase shipments from existing customers and to develop business from new
customers. We consider all of our employees to be customer service
representatives and encourage them to initiate and maintain regular contact with
shippers.
Freight Australia's customers span a variety of industries, with
particular emphasis on companies in the Australian agricultural industry for
whom we carry bulk grain and other agricultural products. One customer, AWB
Limited, represented 25% of Freight Australia's transportation revenue for the
year ended 2002, 28% for the year ended 2001 and 25% for the year ended 2000.
Additionally, track access fees from V/Line Passenger represented 15% of Freight
Australia's operating revenue in 2002, 13% in 2001, and 15% in 2000.
10
The following table sets forth by dollar amount (in thousands) and
percentage Freight Australia's transportation and infrastructure revenue for the
years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
----------------- ----------------- -----------------
US$ US$ US$
Amount % Amount % Amount %
------- ----- ------- ----- ------- -----
Agricultural products $36,913 40% $46,265 47% $45,440 46%
Track access fees 18,074 20% 15,367 16% 16,309 16%
Intermodal containers 12,950 14% 9,742 10% 13,148 13%
Fast Track parcel service 6,924 8% 8,235 8% 8,210 8%
Bulk (i.e., cement, gypsum,
stone, logs) 9,174 10% 10,595 11% 9,932 11%
Interstate 7,626 8% 8,428 8% 5,954 6%
------- ----- ------- ----- ------- -----
Total transportation and infrastructure revenue $91,661 100.0% $98,632 100.0% $98,993 100.0%
======= ===== ======= ===== ======= =====
Freight Australia competes directly with other railroads in the open
access Australian railway network as well as with other modes of transportation,
principally motor carriers and, to a lesser extent, ship operators. Competition
is based primarily upon the rate charged and the transit time required, as well
as the quality and reliability of the service provided, for an
origin-to-destination package. To the extent other carriers are involved in
transporting a shipment, we cannot control the cost and quality of service. Cost
reductions achieved by Freight Australia over the past several years have
generally improved its ability to compete with alternate modes of
transportation.
EMPLOYEES
Freight Australia currently has approximately 705 employees. Most of these
employees are subject to collective bargaining agreements.
SAFETY
Freight Australia endeavors to conduct safe railroad operations for the
benefit and protection of employees, customers and communities we serve.
Operating personnel are trained and certified in train operations, hazardous
materials handling, personal safety and all other areas subject to governmental
rules and regulations. Each employee involved in train operations is subject to
pre-employment and random drug testing whether or not required by federal or
state regulation. We believe that Freight Australia complies in all material
respects with federal, state and local regulations. Freight Australia holds Rail
Safety Accreditation in accordance with Australian Standards Regulations 4292 in
Victoria, New South Wales, and South Australia. We also participate in several
governmental and industry sponsored safety programs.
REGULATION
Freight Australia is subject to regulation in the State of Victoria by the
Office of the Regulator-General. The Office of the Regulator-General, known as
ORG, was established by the Office of the Regulator-General Act. The purpose of
the ORG is to create a regulatory framework for regulated industries which
promotes and safeguards competition and fair and efficient market conduct or, if
there is no competitive market, promotes the simulation of competitive market
conduct and the prevention of misuse of monopoly power. These objectives were
expanded by the Victorian Government in the Rail Corporations Act 1996 to ensure
that rail users have fair and reasonable access to declared railway services.
The Rail Corporations Act 1996, known as RCA, regulates the operation of
the State of Victoria's passenger trains and trams and rail network. Part 2A of
the RCA outlines an access regime, which potentially applies to railways and
rail infrastructure and gives power to the ORG to regulate access to relevant
services. At present, however, no rail transport services have been declared to
be subject to the regime. If there were any, ORG could set the terms and
conditions of access.
The Secretary to the Department of Infrastructure may take disciplinary
action against an accredited (licensed to provide certain services) railroad if
the railroad has failed to comply with the requirements of accreditation or has
permitted an unsafe practice or acted negligently. Disciplinary action, which
the Secretary may take, includes disqualifying the railroad from
11
holding an accreditation for a period specified by the Secretary, suspension of
the accreditation, early expiry of the accreditation and immediate or future
cancellation of the accreditation.
The Transport Act contains detailed provisions authorizing the Secretary
of the Department of the Infrastructure to carry out inspections and giving
inspectors powers to enter and inspect premises (including, testing equipment
and seizing property if appropriate). All actions must be reasonably necessary
to determine compliance with the Transport Act. A search warrant or prior
written consent of the occupier is necessary for entry into premises.
The Secretary must conduct safety audits of every person accredited at
least once every twelve months, to ensure that the accredited person is
complying with the requirements of accreditation. The Secretary may charge the
accredited person a fee for the safety audit service, subject to the limits set
out in the relevant regulations. An accredited person has a duty to inquire into
accidents and incidents.
FERRONOR
Ferronor owns and operates the only north-south railroad in northern
Chile, extending from La Calera near Santiago, where it connects with Chile's
southern railway, Ferrocarril del Pacifico, S.A., to its northern terminus at
Iquique, approximately 120 miles south of the Peruvian border. It also operates
several east-west branch lines that link a number of iron, copper and mineral
salt mines and production facilities with several Chilean Pacific port cities.
Ferronor also serves Argentina and Bolivia through traffic interchanged with the
Belgrano Cargas Railroad and the Antofagasta (Chile)-Bolivia Railway. In
addition, commencing in 2002, Ferronor began operating the Potrerillos Railway,
a customer-owned 57 mile freight railroad. In January 2003, we announced our
intention to sell our 55% equity interest in Ferronor. As a result, Ferronor has
been presented as a discontinued operation in our financial statements.
12
ITEM 2. PROPERTIES
NORTH AMERICAN RAILROAD PROPERTIES
The following table sets forth information with respect to the North American
railroad properties that we owned as of March 22, 2003:
DATE OF TRACK PRINCIPAL
RAILROAD ACQUISITION MILES STRUCTURE LOCATION COMMODITIES
-------- ----------- ----- --------- -------- -----------
Alabama and Gulf Coast Railway Jan. 2002 141 Owned, Alabama, Forest and paper products,
Trackage rights Florida chemicals, food products
Arizona & California Railroad Jan. 2002 297 Owned, Arizona, Cement, asphalt, forest
Trackage rights California products, steel
Arizona Eastern Railway Jan. 2002 135 Owned Arizona Copper cathode and related
materials
California Northern Railroad Jan. 2002 255 Leased, California Oil/gas transmission pipe,
Trackage rights minerals, beer, food
products, grains
Cape Breton & Central Nova Feb. 2000 245 Owned Nova Scotia Coal, paper, chemicals
Scotia Railway
Carolina Piedmont Railroad Feb. 2000 49 Owned South Carolina Chemicals, metal
products, clay, food
products
Cascade and Columbia River Sept. 1996 130 Owned; Washington Lumber & wood products,
Railroad Trackage rights minerals, agricultural
products
Central Oregon & Pacific Feb. 2000 449 Owned; Leased; Oregon, Lumber & wood products,
Railroad Trackage rights California paper, chemicals
Central Railroad of Indiana Feb. 2000 81 Owned Indiana, Ohio Chemicals, minerals, clay,
food products
Central Railroad of Feb. 2000 73 Leased; Indiana Farm and food products,
Indianapolis Trackage rights chemicals, metals
Central Western July 1999 21 Owned Alberta Agricultural products
Connecticut Southern Feb. 2000 78 Owned; Connecticut Lumber & wood products,
Trackage rights paper products, chemicals,
bridge traffic
Dallas Consolidated Feb. 2000 294 Leased Texas Farm & food products,
(Dallas, Garland & paper products, railroad
Northeastern Railroad and equipment, chemicals,
Texas Northeastern Railroad) autos
E&N Railway Jan. 1999 61 Owned British Paper products, minerals,
120 Leased Columbia chemicals
Eastern Alabama Railway Jan. 2002 25 Owned Alabama Minerals
Goderich-Exeter Railway Feb. 2000 159 Owned; Ontario Auto parts, farm
Leased products, chemicals
Huron and Eastern Railway March 1986 171 Owned; Michigan Agricultural products
May 1988 leased;
Trackage rights
Ohio Consolidated Feb. 2000 577 Owned; Michigan, Autos, bridge traffic
(Indiana & Ohio Railway and Leased Ohio, Indiana agricultural products,
Indiana & Ohio Central Railroad) chemicals, pulpboard
13
DATE OF TRACK PRINCIPAL
RAILROAD ACQUISITION MILES STRUCTURE LOCATION COMMODITIES
-------- ----------- ----- --------- -------- -----------
Indiana Southern Railroad Feb. 2000 176 Owned; Indiana Coal, farm products,
Trackage rights chemicals
Kiamichi Railroad Jan. 2002 230 Owned, Arkansas, Steel, coal, aggregates,
Trackage rights Oklahoma, cement, food items, forest
Texas products, paper products
Kyle Railroad Jan. 2002 692 Owned Colorado, Agricultural products, coal,
Kansas, asphalt, aggregates
Nebraska
Lahaina, Kaanapali & Pacific Railroad Jan. 2002 6 Owned Hawaii Tourists
Lakeland & Waterways July 1999 120 Owned Alberta Forest products,
agricultural products,
petroleum coke, bridge
traffic
Mackenzie Northern July 1999 650 Owned Alberta, Fuel, forest products,
Northwest agricultural products,
Territory chemicals
Michigan Consolidated Feb. 2000 118 Owned Michigan Agricultural products,
(Mid-Michigan Railroad, auto parts, fertilizer
Grand Rapids Eastern
Railroad, and Michigan
Shore Railroad)
Missouri & Northern Feb. 2000 527 Owned; leased; Missouri, Coal, farm products,
Arkansas Railroad trackage rights Arkansas, food products,
Kansas minerals, roofing material
New England Central Feb. 2000 343 Owned; Vermont, New Lumber & wood products,
Railroad Leased Hampshire, paper products, plastic,
Massachusetts, coal, copper, bridge
Connecticut traffic
Ottawa Valley Railway July 1999 389 Leased Ontario Bridge traffic, acid,
copper concentrates,
chemicals
Otter Tail Valley Railroad Oct. 1996 72 Owned Minnesota Coal, agricultural
products, fertilizer
Puget Sound and Pacific Railroad Jan. 2002 150 Owned, Washington Forest products, chemicals,
Trackage rights grains, fertilizers, metal
products
Saginaw Valley Railway Jan. 1991 57 Owned Michigan Agricultural products,
Apr. 1998 fertilizer , stone
San Diego & Imperial Feb. 2000 124 Trackage rights California, Petroleum, paper
Valley Railroad Mexico products, non-metallic
ores, lumber
San Joaquin Valley Railroad Jan. 2002 341 Owned, California Consumer products, citrus
Trackage rights and food products, paper
products, metals, petro-
chemical products
San Pedro & Southwestern Railroad Jan. 2002 78 Owned Arizona Lime, nitrogen, fertilizer
South Carolina Central Feb. 2000 97 Owned South Carolina Chemicals, metals, coal,
Railroad paper products, waste
Southern Ontario Railway July 1999 54 Leased Ontario Fuel, metals,
agricultural products
14
DATE OF TRACK PRINCIPAL
RAILROAD ACQUISITION MILES STRUCTURE LOCATION COMMODITIES
-------- ----------- ----- --------- -------- -----------
Toledo, Peoria and Western Sept. 1999 369 Owned; Indiana, Intermodal, agricultural
Railroad Trackage Illinois, Iowa products, fertilizers,
rights chemicals
Ventura County Railroad Aug. 1998 13 Leased California Automobiles, chemicals,
paper products
Virginia Consolidated Feb. 2000 211 Leased; Virginia, Coal, lumber, metals
(Chesapeake & Albermarle Owned North Carolina
Railroad, North Carolina
& Virginia Railroad, and
Virginia Southern
Railroad)
West Texas & Lubbock Nov. 1995 104 Owned Texas Fertilizer, chemicals,
Railroad cotton products, scrap
iron, steel
-----
Total track miles 8,282
=====
AUSTRALIAN RAILROAD PROPERTIES
On April 30, 1999, through our wholly owned subsidiary Freight Australia,
we prepaid a 45-year lease to operate 3,150 miles of track in the State of
Victoria, Australia. Freight Australia's principal commodity is agricultural
products for use in southwestern Australia as well as export markets.
CHILEAN RAILROAD PROPERTIES
In Chile, Ferronor owns and/or operates approximately 1,500 miles of
track, extending from La Calera in the south, to its northern terminus at
Iquique. It also operates several east-west branch lines that link a number of
iron, copper and mineral salt mines and production facilities with several
Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia through
traffic interchanged with the Belgrano Cargas Railroad and the Antofagasta
(Chile)-Bolivia Railway. In 2002, Ferronor commenced operating the Potrerillos
Railway, a customer-owned 57 mile railroad.
NORTH AMERICAN ROLLING STOCK
The following tables summarize the current composition of our North
American railroad equipment fleet.
FREIGHT CARS
TYPE OWNED LEASED TOTAL
- ---- ----- ------------ -----
Covered hopper cars 147 2,425 2,572
Open top hopper cars 91 262 353
Box cars 103 2,302 2,405
Flat cars 214 1,122 1,336
Tank cars 6 0 6
Gondolas 3 383 386
Passenger car 17 0 17
----- ----- -----
581 6,494 7,075
===== ===== =====
LOCOMOTIVES
HORSEPOWER/UNIT OWNED LEASED TOTAL
- --------------- ----- ------------ -----
Over 2000 102 248 350
1500 to 2000 61 55 116
Under 1500 10 19 29
----- ----- -----
173 322 495
===== ===== =====
15
INTERNATIONAL ROLLING STOCK
The following tables summarize the current composition of our Australian
and Chilean railroad equipment fleet. We own all of our international equipment
fleet.
FREIGHT CARS
TYPE CHILE AUSTRALIA TOTAL
- ---- ----- ------------ -----
Covered hopper cars 0 1,111 1,111
Open top hopper cars 223 88 311
Box cars 145 275 420
Intermodal containers 87 685 772
Tank cars 34 79 113
Flat cars 0 217 217
Gondolas 65 73 138
----- ----- -----
554 2,528 3,082
===== ===== =====
LOCOMOTIVES
HORSEPOWER/UNIT CHILE AUSTRALIA TOTAL
- --------------- ----- ------------ -----
Over 2000 0 32 32
1500 to 2000 2 25 27
Under 1500 40 50 90
----- ----- -----
42 107 149
===== ===== =====
Based on current and forecasted traffic levels on our railroads,
management believes that our present equipment, combined with the availability
of other rail cars and/or locomotives for hire, is adequate to support our
operations. We believe that our insurance coverage with respect to our property
and equipment is adequate.
ADMINISTRATIVE OFFICES AND OTHER
We own a 59,500 square foot office building, located in Boca Raton,
Florida, where our executive offices are located. Of this space, approximately
12,600 square feet are leased to third parties. In addition, we lease
approximately 21,000 square feet of office space in San Antonio, Texas for
$500,000 annually. The lease expires December 31, 2005.
Freight Australia's administrative office is in Melbourne, Australia.
Freight Australia leases approximately 20,000 square feet of space from the
Victorian Government for $200,000 annually. The lease expires May 31, 2004.
Ferronor's administrative office is in Coquimbo, Chile, where Ferronor
owns a three-story 21,600 square foot office building.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting our business, we become involved in
various legal actions and other claims some of which are currently pending.
Litigation is subject to many uncertainties and we may be unable to accurately
predict the outcome of individual litigated matters. Some of these matters
possibly may be decided unfavorably to us. It is the opinion of management that
the ultimate liability, if any, with respect to these matters will not be
material. Other than ordinary routine litigation incidental to our business, no
other litigation exists.
In 2000, certain parties filed property damage claims totaling
approximately $32.5 million against RaiLink Ltd. And RaiLink Canada Ltd.,
wholly-owned subsidiaries of RailAmerica, Inc., and others in connection with
fires that allegedly occurred in 1998. We are vigorously defending these claims
and have insurance coverage to approximately $13.0 million to cover these
claims. It is the opinion of management that the ultimate liability, if any,
with respect to these matters will fall
16
within the insurance coverage and that these claims will not have a material
adverse effect on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the New York Stock Exchange (NYSE) on
January 2, 2002 under the symbol "RRA". Prior to January 2, 2002, our common
stock traded on the Nasdaq National Market (Nasdaq) under the symbol "RAIL". Set
forth below is high and low price information for the common stock as reported
on the Nasdaq and NYSE for each period presented.
2001 High Sales Price Low Sales Price
-------------- ---------------- ---------------
First Quarter $10.250 $ 7.500
Second Quarter 13.750 9.563
Third Quarter 14.250 10.050
Fourth Quarter 15.250 9.750
------- -------
2002 High Sales Price Low Sales Price
-------------- ---------------- ---------------
First Quarter $14.640 $ 9.230
Second Quarter 11.310 8.500
Third Quarter 10.850 6.900
Fourth Quarter 8.200 6.500
------- -------
2003 High Sales Price Low Sales Price
-------------- ---------------- ---------------
First Quarter (through March 24) $ 7.65 $ 4.44
------- -------
As of March 24, 2003, there were 553 holders of record of the common
stock. We have never declared or paid a dividend on our common stock. Our senior
credit agreement and the indenture governing our senior subordinated notes limit
our ability to pay dividends.
17
ITEM 6. SELECTED FINANCIAL DATA
The results of our continuing operations for the years ended December 31,
2002, 2001 and 2000 include the results of certain railroads from the dates they
were acquired as follows: StatesRail, effective January 4, 2002; ParkSierra,
effective January 8, 2002; RailTex, effective February 1, 2000; Freight
Australia, effective April 30, 1999; RaiLink, effective August 1, 1999; and TPW,
effective September 1, 1999. The income statement data for the years ended
December 31, 2002, 2001 and 2000 and the balance sheet data at December 31, 2002
and 2001 are derived from, and are qualified by reference to, audited financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and the notes thereto. The income statement data
set forth below for the periods ended December 31, 1999 and 1998 and the balance
sheet data as of December 31, 2000, 1999 and 1998 are derived from our financial
statements not included (in thousands, except operating and per share data).
Ferronor has been presented as a discontinued operation.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- -------- ---------
INCOME STATEMENT DATA
Operating revenue $ 428,243 $ 347,546 $ 334,615 $109,845 $ 23,212
Operating income 70,505 71,225 67,438 21,463 1,269
Income (loss) from continuing operations 5,263 15,792 8,359 4,585 (1,467)
Basic earnings (loss) per common share from
continuing operations $ 0.16 $ 0.72 $ 0.43 $ 0.32 $ (0.15)
Diluted earnings (loss) per common share from
continuing operations $ 0.16 $ 0.66 $ 0.42 $ 0.32 $ (0.15)
Weighted average common shares - Basic 32,047 21,510 18,040 11,090 9,553
Weighted average common shares - Diluted 32,620 25,350 18,267 11,665 9,553
BALANCE SHEET DATA
Total assets $1,106,553 $ 891,168 $ 839,703 $443,929 $ 130,964
Long-term obligations, including
current maturities 387,321 301,687 358,856 162,827 66,327
Subordinated debt 141,331 144,988 141,411 122,449 --
Redeemable convertible preferred stock -- -- 6,613 8,830 --
Stockholders' equity 278,903 220,959 123,434 69,467 34,760
OPERATING DATA
Freight carloads 1,314,794 1,113,028 1,042,987 300,412 49,519
Track mileage 12,800 11,000 11,000 8,400 2,400
Number of full time employees 2,676 2,180 2,230 1,707 652
FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF
STOCK
Substantial Debt and Debt Service. As of December 31, 2002, we had
substantial indebtedness, and, as a result, we incur significant interest
expense. The degree to which we are leveraged could have important consequences,
including the following:
- our ability to obtain additional financing in the future for capital
expenditures, potential acquisitions, and other purposes may be
limited or financing may not be available on terms favorable to us
or at all;
- a substantial portion of our cash flows from operations must be used
to pay our interest expense and repay our debt, which would reduce
the funds that would otherwise be available to us for our operations
and future business opportunities; and
- fluctuations in market interest rates will affect the cost of our
borrowings to the extent not covered by interest rate hedge
agreements because the interest under our credit facilities is
payable at variable rates.
A default could result in acceleration of our indebtedness. If this
occurs, our business and financial condition may be materially adversely
affected.
18
While as of December 31, 2002, we had no borrowings under our revolving
credit facility, this facility allows us to borrow a total of $100 million and
we may borrow up to an additional $100 million of term debt in connection with
acquisitions if we meet specified conditions.
Covenant Restrictions. Our credit facilities and the indenture governing
our senior subordinated notes contain numerous covenants imposing restrictions
on our ability to, among other things:
- incur more debt;
- pay dividends, redeem or repurchase our stock or make other
distributions;
- make acquisitions or investments;
- use assets as security in other transactions;
- enter into transactions with affiliates;
- merge or consolidate with others;
- dispose of assets or use asset sale proceeds;
- create liens on our assets; and
- extend credit.
In addition, our credit facilities also contain financial covenants that
require us to meet a number of financial ratios and tests. Our failure to comply
with the obligations in our credit facilities and indenture could result in an
event of default under the credit facilities or the indenture, which, if not
cured or waived, could permit acceleration of the indebtedness or our other
indebtedness, or result in the same consequences as a default in payment as
described in the previous risk factor.
Fuel Costs. Fuel costs were approximately 6.9% of our historical revenues
for the year ended December 31, 2002, 8.1% for the year ended December 31, 2001
and 8.7% for the year ended December 31, 2000. Fuel prices and supplies are
influenced significantly by international political and economic circumstances.
If a fuel supply shortage or unusual price volatility were to arise for any
reason, higher fuel prices would materially affect our operating results. While
we elected to hedge approximately 35% of our anticipated North American fuel
needs for 2003, 65% of those needs remain unhedged.
Acquisitions and Integration. We have acquired many railroads since we
commenced operations in 1992 and intend to continue to maintain an acquisition
program. Acquisitions result in greater administrative burdens and operating
costs and, to the extent financed with debt, additional interest costs. The
process of integrating our acquired businesses may be disruptive to our business
and may cause an interruption of, or a loss of momentum in, our business.
If these disruptions and difficulties occur, they may cause us to fail to
realize the cost savings, revenue enhancements and other benefits that we
currently expect to result from that integration and may cause material adverse
short- and long-term effects on our operating results and financial condition.
Financing for acquisitions may come from several sources, including cash
on hand and proceeds from the incurrence of indebtedness or the issuance of
additional common stock, preferred stock, convertible debt or other securities.
The issuance of any additional securities could result in dilution to our
stockholders.
Foreign Operations. We have railroad operations in Australia, Chile and
Canada. We may also consider acquisitions in other foreign countries. The risks
of doing business in foreign countries include:
- adverse changes in the economy of those countries;
- exchange rate fluctuations;
19
- adverse effects of currency exchange controls;
- restrictions on the withdrawal of foreign investment and earnings;
- government policies against ownership of businesses by
non-nationals;
- the potential instability of foreign governments; and
- economic uncertainties including, among others, risk of
renegotiation or modification of existing agreements or arrangements
with governmental authorities, exportation and transportation
tariffs, foreign exchange restrictions and changes in taxation
structure.
Reliance on Australian Agriculture. Factors that negatively affect the
agricultural industry in the regions in which Freight Australia operates could
have a material adverse effect on our results of operations and financial
condition. These factors include drought or other weather conditions, export and
domestic demand and total world supply, and fluctuations in agricultural prices.
For the year ended December 31, 2001 approximately 45% of Freight Australia's
revenues and for the year ended December 31, 2002 approximately 39% of Freight
Australia's revenues were derived from the agricultural industry. Our 2002
results of operations were significantly adversely impacted by a severe drought
in Australia. We expect the drought to continue to adversely affect our business
in 2003. As a result, Freight Australia will continue to be affected by
unfavorable conditions affecting the agricultural industry in areas served by
Freight Australia.
Environmental and Other Governmental Regulation. Our railroad and real
estate ownership are subject to extensive foreign, federal, state and local
environmental laws and regulations. We could incur significant costs as a result
of any allegations or findings to the effect that we have violated, or are
strictly liable under these laws or regulations. We may be required to incur
significant expenses to investigate and remediate environmental contamination.
We are also subject to governmental regulation by a significant number of
foreign, federal, state and local regulatory authorities with respect to our
railroad operations and a variety of health, safety, labor, environmental,
maintenance and other matters. Our failure to comply with applicable laws and
regulations could have a material adverse effect on us.
Continuing Relationships with Class I Carriers. The railroad industry in
the United States and Canada is dominated by a small number of Class I carriers
that have substantial market control and negotiating leverage. Almost all of the
traffic on our North American railroads is interchanged with Class I carriers.
Our ability to provide rail service to our customers in North America depends in
large part upon our ability to maintain cooperative relationships with Class I
carriers with respect to, among other matters, freight rates, car supply,
reciprocal switching, interchange and trackage rights. Class I carriers are also
sources of potential acquisition candidates as they continue to divest
themselves of branch lines to smaller rail operators. Because we depend on Class
I carriers for our North American operations, our business and financial results
may be adversely affected if our relationships with those carriers were to
deteriorate.
Risks of Our Australian Operations. In addition to the risks described
above, our Australian operations are subject to the following risks and
uncertainties:
- The applicable legislative framework enables third party rail
operators to gain access to the railway infrastructure on which we
operate for access fees. Because of this regulatory framework, we
may lose customers or be forced to reduce rates to compete with
third party rail operators.
- Our access agreement with V/Line Passenger in Australia contains
penalty provisions if trains using the railway infrastructure are
delayed, early or cancelled under a variety of circumstances
resulting from our actions.
- The director of public transport for the State of Victoria,
Australia may terminate our long-term railway infrastructure lease
in specified circumstances, including: (1) if we fail to maintain
all necessary accreditations; (2) if we fail to maintain railway
infrastructure; and (3) if we fail to maintain insurance.
20
Our Australian subsidiary generates approximately 19% of its total
revenues under a five-year arrangement with AWB, Limited, the sole exporter of
Australian wheat. AWB, Limited may terminate the agreement under specified
limited circumstances.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
We are the world's largest short line and regional freight railroad
operator. We own 49 railroads operating approximately 12,900 route miles in the
United States, Canada, Chile, Argentina and Australia. In North America, we
operate in 26 states, five Canadian provinces and the Northwest Territories.
In January 2003, we announced our intent to sell our 55% equity interest
in Ferronor, our Chilean railroad operations. Accordingly, the results of
operations for the years presented have been reclassified to discontinued
operations.
Our principal business consists of the operations of North American short
line freight railroads and international regional railroads. During 2002,
excluding Ferronor, 78% of our revenues were derived from railroad operations in
North America while 22% of revenues were derived from our international railroad
operations based in Australia.
Our North American rail group operates 46 railroads. Each of these
railroads operates independently with their own customer base. While these
railroads are spread out geographically and carry diverse commodities, bridge
traffic accounted for 17%, coal accounted for 12%, and lumber and forest
products accounted for 11% of our carloads in North America during 2002. As a
percentage of revenues, which is impacted by several factors including the
length of the haul, bridge traffic generated 8%, coal generated 8%, and lumber
and forest products generated 17% of our North American freight revenues. Bridge
traffic, which neither originates or terminates on our line, generally has a
lower rate per carload.
Freight Australia, our Australian regional railroad, has two primary
sources of revenues. The first is freight revenues, which comprises 78% of
Freight Australia's total revenues. Freight Australia hauls various commodities
over its line including agricultural products, cement, gypsum, stone and logs.
Agricultural products comprised approximately 39% of Freight Australia's total
revenues in 2002. The level of revenues from agricultural products is highly
dependent on the annual grain harvest in the State of Victoria. The grain
harvest in the fourth quarter of 2002 was very poor due to the worst drought in
many years in the grain regions served by Freight Australia. As a result,
revenues from transporting grain were 21% lower in 2002 than in 2001. To
partially offset this decrease in revenues and to reduce our dependence on grain
business, Freight Australia has pursued and been awarded several new long-term
contracts to move a variety of other commodity types. It is anticipated that
these new contracts should add approximately $50 million of new revenues over
the next three to five years. The second source of revenue is access fees paid
to us by other passenger or freight operators for the right to operate over our
railroad. These amounts accounted for 19% of Freight Australia's revenues in
2002.
In addition to our railroad operations, we have historically generated
gains through asset sales. Through our various North American railroads, we own
8,300 miles of track and 63,000 acres of land. We continually review our
portfolio of railroads and look to sell entire railroads, portions of railroads
or underutilized real estate where holding such assets does not meet our
internal criteria. During 2002, we generated net gains of $9.2 million. These
gains are included in operating income in our consolidated statements of income.
In January 2002, we acquired all of the stock of StatesRail, which owned
and operated eight railroads (including seven freight railroads and a tourist
railroad in Hawaii) with 1,647 miles of track in eleven states. Total
consideration for the acquisition was $90 million, consisting of $67 million in
cash and $23 million in our common stock (1.7 million shares).
Also, in January 2002, we acquired all of the stock of ParkSierra, which
owned and operated three freight railroads with 703 miles of track in four
western states. Total consideration for the acquisition was $48 million,
consisting of $23 million in cash and $25 million in our common stock (1.8
million shares).
In February 2000, we acquired RailTex, which owned and operated 25
railroads with over 4,100 miles of track in North America. Total consideration
for the acquisition was $294 million, consisting of $128 million in cash,
assumption of $105 million in debt and 6.6 million shares of our common stock
valued at $61 million.
21
In December 2000, we sold our specialty truck trailer manufacturing
operations for $39 million. This segment is presented as a discontinued
operation for each period presented.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
The critical financial statement accounts that are subject to significant
estimation are reserves for litigation, casualty and environmental matters,
Australian long service leave, deferred income taxes and property, plant and
equipment.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 5, "Accounting for Contingencies,"an accrual for a loss contingency is
established if information available prior to the issuance of the financial
statements indicates that it is probable that a liability has been incurred or
an asset has been impaired. These estimates have been developed in consultation
with outside counsel handling our defense in these matters and are based upon an
analysis of potential results, assuming a combination of litigation and
settlement strategies. Subsequent changes to those estimates are reflected in
our statement of operations in the period of the change.
Freight Australia maintains a long service leave program for its
employees. Under the program, an employee is entitled to paid leave of up to 13
weeks after they have performed 10 years of service. Key assumptions in
estimating this liability are the discount rate, annual rate of increase in
compensation levels, employee turnover and the number of years before employees
use the accrued leave.
Deferred taxes are recognized based on differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. We
regularly review our deferred tax assets for recoverability and establish a
valuation allowance based on historical taxable income, projected future taxable
income, and the expected timing of the reversals of existing temporary
differences. If we are unable to generate sufficient future taxable income, or
if there is a material change in the actual effective tax rates or time period
within which the underlying temporary differences become taxable or deductible,
we could be required to establish an additional valuation allowance against a
portion of our deferred tax asset, resulting in an increase in our effective tax
rate and an adverse impact on earnings.
Property, plant and equipment comprised 82% of our total assets as of
December 31, 2002. These assets are stated at cost, less accumulated
depreciation. We use the group method of depreciation under which a single
depreciation rate is applied to the gross investment in our track assets. Upon
normal sale or retirement of track assets, cost less net salvage value is
charged to accumulated depreciation and no gain or loss is recognized.
Expenditures that increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed. We periodically review the carrying value of our long-lived
assets for impairment. This review is based upon our projections of anticipated
future cash flows. While we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially
affect our evaluations.
For a complete description of our accounting policies, see Note 1 to our
consolidated financial statements.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on Page F-1.
On a consolidated basis, we recorded net income for 2002 of $2.2 million,
or $0.07 per diluted share, compared with net income for 2001 of $17.0 million,
or $0.71 per diluted share. Our operating revenues increased $80.7 million, or
23%, to $428.2 million in 2002 from $347.5 million in 2001. The acquisitions of
ParkSierra and StatesRail contributed $90.3 million to operating revenues for
the year. This increase was partially offset by a decrease of $6.5 million in
operating revenues from Freight Australia primarily due to the drought in
Australia and a $3.1 million decrease from the disposal of Georgia Southwestern
Railroad. Operating income decreased $0.7 million, or 1%, to $70.5 million from
$71.2 million in 2001 primarily
22
due to a decrease of $17.0 million in Freight Australia's operating income and
$6.4 million due to failed bid costs and restructuring charges, partially offset
by the acquisitions of ParkSierra and StatesRail, which contributed $25.2
million to operating income. Interest expense, including amortization of
deferred financing costs, decreased $7.3 million, or 14%, to $43.4 million for
the year ended December 31, 2002 from $50.7 million in 2001 primarily due to a
general decrease in interest rates and the refinancing of our senior debt in May
2002, which resulted in a lower interest rate to us. In connection with our debt
refinancing in May 2002, we recorded a charge to other income (expense) of $19.1
million for the write-off of our interest rate swaps and other refinancing
related costs and we recorded a charge of $4.5 million, after tax, as an
extraordinary item for the write-off of the unamortized deferred loan costs from
the terminated credit facility, which was originally entered into in 2000.
NORTH AMERICAN RAILROAD OPERATIONS
Our historical results of operations for our North American railroads
include the operations of our acquired railroads from the dates of acquisition
as follows:
NAME OF RAILROAD DATE OF ACQUISITION
- ---------------- -------------------
RailTex properties (25 railroads) February 2000
StatesRail (8 railroads) January 2002
ParkSierra (3 railroads) January 2002
We disposed of certain railroads as follows:
NAME OF RAILROAD DATE OF DISPOSITION
- ---------------- -------------------
Minnesota Northern Railroad August 2000
St. Croix Valley Railroad August 2000
South Central Tennessee Railroad December 2000
Pittsburgh Industrial Railroad December 2000
Ontario L'Orignal Railway December 2000
Dakota Rail, Inc. December 2001
Georgia Southwestern Railroad March 2002
Texas New Mexico Railroad May 2002
As a result, the results of operations for the years ended December 31,
2002, 2001 and 2000 are not comparable in various material respects and are not
indicative of the results which would have occurred had the acquisitions or
dispositions been completed at the beginning of the periods presented.
COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 2002 AND 2001
The following table sets forth the operating revenues and expenses (in
thousands) for our North American railroad operations for the periods indicated.
For the year ended For the year ended
December 31, 2002 December 31, 2001
------------------ ------------------
Total operating revenue $332,992 100.0% $245,426 100.0%
-------- ----- -------- -----
Operating expenses:
Maintenance of way 34,590 10.5% 23,477 9.5%
Maintenance of equipment 30,094 9.0% 20,984 8.5%
Transportation 87,817 26.4% 69,932 28.5%
Equipment rental 19,103 5.7% 15,136 6.2%
Selling, general and administrative 55,678 16.7% 39,962 16.3%
Depreciation and amortization 21,699 6.5% 15,915 6.5%
-------- ----- -------- -----
Total operating expenses 248,981 74.8% 185,406 75.5%
-------- ----- -------- -----
Operating income $ 84,011 25.2% $ 60,020 24.5%
======== ===== ======== -----
23
OPERATING REVENUES. Operating revenue increased by $87.6 million, or 36%, to
$333.0 million for the year ended December 31, 2002 from $245.4 million for the
year ended December 31, 2001 while carloads increased 25% to 1,113,925 in 2002
from 891,318 in 2001. These increases are primarily due to the acquisitions of
ParkSierra and StatesRail. Excluding revenues of $91.4 million in 2002 and $5.0
million in 2001 for the acquisitions of ParkSierra and StatesRail and the
dispositions of the Texas New Mexico Railroad and Georgia Southwestern Railroad,
operating revenues increased $1.1 million or 1% while carloads decreased by
13,696 or 2%. The increase in "same railroad" revenues, while carloads declined,
is due to a change in commodity mix. While lower rated bridge traffic declined
14,177 carloads in 2002, certain other commodities, such as metals, increased
from 2001. The average rate per carload increased in 2002 to $259 from $243 in
2001. The increase in the average rate per carload is due to the acquisitions of
ParkSierra and StatesRail which, on average, have a higher rate per carload as
well as the change in mix of commodities as previously discussed.
The following table compares North American freight revenues, carloads and
average freight revenue per carload for the years ended December 31, 2002 and
2001:
(dollars in thousands, except average For the year ended For the year ended
rate per carload) December 31, 2002 December 31, 2001
----------------- -----------------
Freight Average rate Freight Average rate
Revenues Carloads per carload Revenues Carloads per carload
-------- -------- ------------ -------- -------- ------------
Agricultural & Farm Products $ 27,877 95,005 $293 $ 20,524 80,835 $254
Autos 9,842 43,843 224 9,982 45,962 217
Chemicals 28,305 84,935 333 22,907 66,915 342
Coal 22,261 128,540 173 18,956 95,433 199
Food Products 19,817 62,471 317 11,956 40,988 292
Intermodal 4,082 39,538 103 4,859 42,253 115
Lumber & Forest Products 48,632 124,025 392 35,929 88,351 407
Metals 24,400 80,117 305 14,645 52,184 281
Metallic/Non-metallic Ores 14,196 55,260 257 11,074 45,658 243
Minerals 16,983 45,995 369 7,299 19,424 376
Paper Products 26,240 94,528 278 20,764 64,914 320
Petroleum Products 16,194 47,252 343 9,819 28,593 343
Railroad Equipment/Bridge Traffic 22,275 186,388 120 22,979 200,565 115
Other 7,658 26,028 294 5,073 19,243 264
-------- --------- ---- -------- ------- ----
Total $288,762 1,113,925 $259 $216,766 891,318 $243
======== ========= ==== ======== ======= ====
Lumber and forest products revenues were $48.6 million in the year ended
December 31, 2002 compared to $35.9 million in the year ended December 31, 2001,
an increase of $12.7 million or 35%. This increase consists of $11.2 million
from the acquisitions of ParkSierra and StatesRail and an increase of $1.5
million from the existing North American railroad operations resulting from new
business secured from forest product customers in Alberta and Oregon.
Agricultural and farm products revenues were $27.9 million in the year
ended December 31, 2002 compared to $20.5 million in the year ended December 31,
2001, an increase of $7.4 million or 36%. This increase is primarily the result
of the acquisitions of ParkSierra and StatesRail.
Paper products revenues were $26.2 million in the year ended December 31,
2002 compared to $20.8 million in the year ended December 31, 2001, an increase
of $5.4 million or 26%. This increase consists of $7.6 million from the
acquisitions of ParkSierra and StatesRail and an increase of $0.6 million from
the existing North American railroad operations, partially offset by a decrease
of $2.7 million from divested North American operations. The increase of $0.6
million from existing North American railroad operations is due to new business
obtained in Oregon and Alberta.
Metal revenues were $24.4 million in the year ended December 31, 2002
compared to $14.6 million in the year ended December 31, 2001, an increase of
$9.8 million or 67%. This increase consists of $6.7 million from the
acquisitions of ParkSierra and StatesRail and an increase of $3.1 million from
the existing North American railroad operations resulting from increased
carloads from new business secured in North Carolina and our new steel train
service in Southern Ontario.
24
Food products revenues were $19.8 million in the year ended December 31,
2002 compared to $12.0 million in the year ended December 31, 2001, an increase
of $7.8 million or 66%. This increase consists of $8.3 million from the
acquisitions of ParkSierra and StatesRail partially offset by a decrease of $0.7
million from divested North American operations.
Mineral revenues were $17.0 million in the year ended December 31, 2002
compared to $7.3 million in the year ended December 31, 2001, an increase of
$9.7 million or 133%. This increase is due to the acquisitions of ParkSierra and
StatesRail.
Petroleum products revenues were $16.2 million in the year ended December
31, 2002 compared to $9.8 million in the year ended December 31, 2001, an
increase of $6.4 million or 65%. This increase consists of $5.1 million from the
acquisitions of ParkSierra and StatesRail and an increase of $1.3 million from
the existing North American railroad operations due to new customers in New
England and new business secured to diamond mines in the Canadian Northwest
territories.
Coal revenues were $22.3 million in the year ended December 31, 2002
compared to $19.0 million in the year ended December 31, 2001, an increase of
$3.3 million or 17%. This increase is due to the acquisitions of ParkSierra and
StatesRail.
Chemicals revenues were $28.3 million in the year ended December 31, 2002
compared to $22.9 million in the year ended December 31, 2001, an increase of
$5.4 million or 24%. This increase is due to the acquisitions of ParkSierra and
StatesRail.
Bridge traffic revenues were $22.3 million in the year ended December 31,
2002 compared to $23.0 million in the year ended December 31, 2001, a decrease
of $0.7 million or 3%. This decrease is due to the reduction of volume
associated with one of our railroads in eastern Canada during the third and
fourth quarter of 2002.
The change in the remaining commodities is primarily due to the
acquisitions of ParkSierra and StatesRail.
OPERATING EXPENSES. Total operating expenses increased by $63.6 million,
or 34%, to $249.0 million for the year ended December 31, 2002 from $185.4
million for the year ended December 31, 2001. The increase in operating expenses
is primarily due to ParkSierra and StatesRail. The operating ratios, defined as
total operating expenses divided by total revenues, were 74.8% and 75.5% for the
years ended December 31, 2002 and 2001, respectively.
MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage
of revenues to 10.5% in 2002 from 9.5% in 2001, primarily due to the reduction
of an environmental liability in 2001 of $1.9 million due to changes in
environmental regulations.
MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense, which includes
locomotive lease expense, increased as a percentage of revenues to 9.0% in 2002
from 8.5% in 2001. The increase is primarily due to car repairs on equipment
used by StatesRail properties.
TRANSPORTATION. Transportation expenses decreased as a percentage of
revenues to 26.4% in 2002 from 28.5% in 2001. Of this decrease, lower fuel
prices accounted for 1.0 percentage point as fuel costs were 87 cents per gallon
in 2002 compared to $1.00 per gallon in 2001. Lower labor costs accounted for
the other 1.1 percentage points. Labor costs were lower due to strict cost
control measures implemented in 2002.
EQUIPMENT RENTAL. Equipment rental expenses decreased as a percentage of
revenues to 5.7% in 2002 from 6.2% in 2001, due to improved management of leased
cars.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased as a percentage of revenues to 16.7% in 2002 from 16.3% in
2001 due to higher labor and insurance costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
remained constant in 2002 from 2001 at 6.5% of revenues.
25
COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000
The following table sets forth the operating revenues and expenses (in
thousands) for our North American railroad operations for the years ended
December 31, 2001 and 2000.
For the year ended For the year ended
December 31, 2001 December 31, 2000
------------------ ------------------
Total operating revenue $245,426 100.0% $231,445 100.0%
-------- ----- -------- -----
Operating expenses:
Maintenance of way 23,477 9.5% 25,448 11.0%
Maintenance of equipment 20,984 8.5% 13,101 5.7%
Transportation 69,932 28.5% 70,958 30.7%
Equipment rental 15,136 6.2% 15,842 6.8%
Selling, general and administrative 39,962 16.3% 41,062 17.7%
Depreciation and amortization 15,915 6.5% 16,430 7.1%
-------- ----- -------- -----
Total operating expenses 185,406 75.5% 182,841 79.0%
-------- ----- -------- -----
Operating income $ 60,020 24.5% $ 48,604 21.0%
======== ----- ======== -----
OPERATING REVENUES. Operating revenue increased by $14.0 million, or 6%,
to $245.4 million for the year ended December 31, 2001 from $231.4 million for
the year ended December 31, 2000 while carloads increased 6% to 891,318 in 2001
from 839,451 in 2000. The increases in revenues and carloads was primarily due
to the inclusion of the RailTex properties for twelve months in 2001 compared to
eleven months in 2000, partially offset by the sale of certain railroads in 2000
and the 4% decline in the Canadian dollar in 2001 compared to 2000. On a "same
railroad" basis, including the RailTex properties on a pro forma basis from
January 2000 and excluding the sold railroads, carloads and revenues both
increased 4% in 2001. Increased coal shipments were primarily responsible for
the increase. Transportation revenue per carload increased to $243 in 2001 from
$242 in 2000.
The following table compares North American freight revenues, carloads and
average freight revenue per carload for the years ended December 31, 2001 and
2000:
(dollars in thousands, except average For the year ended For the year ended
rate per carload) December 31, 2001 December 31, 2000
------------------ ------------------
Freight Average rate Freight Average rate
Revenues Carloads per carload Revenues Carloads per carload
-------- -------- ------------ -------- -------- ------------
Agricultural & Farm Products $ 20,524 80,835 $254 $ 19,235 76,593 $251
Autos 9,982 45,962 217 9,797 47,900 205
Chemicals 22,907 66,915 342 22,135 66,827 331
Coal 18,956 95,433 199 15,612 71,945 217
Food Products 11,956 40,988 292 10,710 39,313 272
Intermodal 4,859 42,253 115 4,076 30,134 135
Lumber & Forest Products 35,929 88,351 407 34,866 90,102 387
Metals 14,645 52,184 281 13,683 61,049 224
Metallic/Non-metallic Ores 11,074 45,658 243 8,796 36,780 239
Minerals 7,299 19,424 376 6,237 16,393 380
Paper Products 20,764 64,914 320 19,229 59,124 325
Petroleum Products 9,819 28,593 343 9,686 26,840 361
Railroad Equipment/Bridge Traffic 22,979 200,565 115 23,603 192,323 123
Other 5,073 19,243 264 5,319 24,128 220
-------- ------- ---- -------- ------- ----
Total $216,766 891,318 $243 $202,984 839,451 $242
======== ======= ==== ======== ======= ====
Coal revenues were $19.0 million in the year ended December 31, 2001
compared to $15.6 million in the year ended December 31, 2000, an increase of
$3.4 million or 21%. This increase was due to new business in Indiana and
increased moves for utilities in Minnesota.
26
Agricultural and farm products revenues were $20.5 million in the year
ended December 31, 2001 compared to $19.2 million in the year ended December 31,
2000, an increase of $1.3 million or 7%. This increase was primarily due to the
inclusion of the RailTex properties for twelve months in 2001 compared to eleven
months in 2000, partially offset by a decrease of $0.9 million from divested
North American operations.
Paper products revenues were $20.8 million in the year ended December 31,
2001 compared to $19.2 million in the year ended December 31, 2000, an increase
of $1.6 million or 8%. This increase was primarily due to the inclusion of the
RailTex properties for twelve months in 2001 compared to eleven months in 2000,
partially offset by a decrease of $0.4 million from divested North American
operations.
Metallic and non-metallic ore revenues were $11.1 million in the year
ended December 31, 2001 compared to $8.8 million in the year ended December 31,
2000, an increase of $2.3 million or 26%. This increase was due to new business
in Texas and an increase in salt movements in Southern Ontario.
Food products revenues were $12.0 million in the year ended December 31,
2001 compared to $10.7 million in the year ended December 31, 2000, an increase
of $1.3 million or 12%. This increase was primarily due to the inclusion of the
RailTex properties for twelve months in 2001 compared to eleven months in 2000,
partially offset by a decrease of $0.4 million from divested North American
operations.
The change in the remaining commodities was primarily due to the inclusion
of the RailTex properties for twelve months in 2001 compared to eleven months in
2000.
OPERATING EXPENSES. Total operating expenses increased by $2.6 million, or
1%, to $185.4 million for the year ended December 31, 2001 from $182.8 million
for the year ended December 31, 2000. The operating ratios were 75.5% and 79.0%
for the years ended December 31, 2001 and 2000, respectively.
MAINTENANCE OF WAY. Maintenance of way expenses decreased $1.9 million, or
8%, to $23.5 million in 2001 from $25.4 million in 2000. This decrease is
primarily due to the reduction of an environmental liability in 2001 of $1.9
million due to changes in environmental regulations.
MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense, which includes
locomotive lease expense, increased $7.9 million, or 60%, to $21.0 million in
2001 from $13.1 million in 2000. This increase is primarily due to our
sale-leaseback transactions which we consummated in December 2000 and June 2001.
Additional rent from these two transactions was approximately $4.0 million in
2001. In addition, in connection with our locomotive fleet rationalization and
upgrade program, we leased additional locomotives in 2001 to replace existing
older, less powerful locomotives.
TRANSPORTATION. Transportation expenses decreased $1.1 million, or 1%, to
$69.9 million in 2001 from $71.0 million in 2000. The decrease in transportation
expenses is primarily due to lower fuel costs in 2001 as our average price per
gallon was $1.00 in 2001 compared to $1.07 in 2000, resulting in a $1.5 million
savings. In addition, our fleet rationalization and upgrade program resulted in
more efficient locomotives and lower operating costs.
27
INTERNATIONAL RAILROAD OPERATIONS
In January 2003, we announced our intent to sell our 55% equity interest
in Ferronor, the Chilean railroad operations. Accordingly, the results of
operations for the years presented have been reclassified to discontinued
operations.
COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
The following table sets forth the operating revenues and expenses (in
thousands) for our international railroad operations for the years ended
December 31, 2002 and 2001.
2002 2001
------- --------
Revenues: $94,915 $101,430
------- --------
Operating expenses:
Transportation 70,952 66,575
Selling, general and administrative 8,010 5,870
Depreciation and amortization 10,855 6,932
------- --------
Total operating expenses 89,817 79,377
------- --------
Operating income $ 5,098 $ 22,053
======= ========
OPERATING REVENUES. Operating revenues decreased $6.5 million, or 6%, to
$94.9 million for the year ended December 31, 2002 from $101.4 million for the
year ended December 31, 2001. Freight Australia benefited from an increase in
the Australian dollar against the U.S. dollar to 54 cents in 2002 from 52 cents
in 2001, increasing revenues by $4.5 million in 2002. This was more than offset
by lower grain traffic compared to 2001 as a result of the drought in Australia.
Freight Australia's carloads were 200,869 for the year ended December 31, 2002,
a decrease of 20,841, or 9%, compared to 221,710 for the year ended December 31,
2001. Revenue per carload was $366 for 2002 versus $376 for 2001.
The following table compares international freight revenues, carloads and
average freight revenue per carload for the years ended December 31, 2002 and
2001:
(dollars in thousands, except average For the year ended For the year ended
rate per carload) December 31, 2002 December 31, 2001
------------------ ------------------
Freight Average rate Freight Average rate
Revenues Carloads per carload Revenues Carloads per carload
-------- -------- ------------ -------- -------- ------------
Agricultural & Farm Products $36,597 75,207 $487 $46,040 97,003 $475
Chemicals 316 1,013 311 225 737 305
Coal 7 38 195 244 681 358
Intermodal 27,500 83,331 330 26,405 82,474 320
Lumber & Forest Products 1,630 5,017 325 4,725 9,475 499
Minerals 4,960 18,793 264 3,692 16,076 230
Paper Products 1,274 13,492 94 1,109 11,426 97
Petroleum Products 1,284 3,889 330 786 3,435 229
Other 19 89 217 40 403 99
------- ------- ---- ------- ------- ----
Total $73,587 200,869 $366 $83,266 221,710 $376
======= ======= ==== ======= ======= ====
Agricultural and farm products revenues were $36.6 million in the year
ended December 31, 2002 compared to $46.0 million in the year ended December 31,
2001, a decrease of $9.4 million or 21%. This decrease is primarily due to the
drought in Australia. In 2002, Freight Australia transported 3.7 million tons of
grain compared to 5.0 million tons of grain in 2001. We are estimating that
Freight Australia will transport 2.0 million tons of grain in 2003 as the impact
of the drought will be felt for the entire year. We believe, however, that
Freight Australia will transport between 4.0 million and 5.0 million tons of
grain in 2004 if normal harvest conditions return in Australia.
Lumber and forest products revenues were $1.6 million in the year ended
December 31, 2002 compared to $4.7 million in the year ended December 31, 2001,
a decrease of $3.1 million or 66%. The decrease is due to a decline in demand
for export wood chips from Australia.
28
Minerals revenues were $5.0 million in the year ended December 31, 2002
compared to $3.7 million in the year ended December 31, 2001, an increase of
$1.3 million or 34%. This increase is primarily due to a new contract to extend
a cement haul in Australia.
OPERATING EXPENSES. Operating expenses increased $10.4 million, or 13%, to
$89.8 million for the year ended December 31, 2002 from $79.4 million for the
year ended December 31, 2001. An increase in the Australian dollar against the
U.S. Dollar, as noted above, increased total operating expenses by $4.3 million.
The remaining increase was due to higher labor, insurance, maintenance and
depreciation expense. These increases were partially offset by reductions in
transportation costs directly related to the decrease in grain traffic in 2002.
The operating ratio for Freight Australia was 94.6% in 2002 compared to 78.3% in
2001 due to the decreased carloads and the increased operating expenses as
discussed above.
COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000
2001 2000
-------- --------
Revenues: $101,430 $102,204
-------- --------
Operating expenses:
Transportation 66,575 70,118
Selling, general and administrative 5,870 6,284
Depreciation and amortization 6,932 5,438
-------- --------
Total operating expenses 79,377 81,840
-------- --------
Operating income $ 22,053 $ 20,364
======== ========
OPERATING REVENUES. Operating revenues decreased $0.8 million, or 1%, to
$101.4 million for the year ended December 31, 2001 from $102.2 million for the
year ended December 31, 2000. Freight Australia's carloads were 221,710 for the
year ended December 31, 2001, an increase of 18,174, or 9%, compared to 203,536
for the year ended December 31, 2000. Freight Australia's revenue per carload
was $376 for 2001 versus $406 for 2000. The decrease in Freight Australia's
revenues and revenue per carload was primarily due to an 11% decline in the
Australian dollar in 2001 compared to 2000. The increase in the carloads in 2001
was due to the strong grain harvest in Victoria. The decline in the value of the
Australian dollar relative to the U.S. dollar in 2001 compared to 2000 impacted
Freight Australia's revenues by $12.6 million.
The following table compares international freight revenues, carloads, and
average freight revenue per carload for the years ended December 31, 2001 and
2000:
(dollars in thousands, except average For the year ended For the year ended
rate per carload) December 31, 2001 December 31, 2000
------------------ ------------------
Freight Average rate Freight Average rate
Revenues Carloads per carload Revenues Carloads per carload
-------- -------- ------------ -------- -------- ------------
Agricultural & Farm Products $46,040 97,003 $475 $45,123 80,835 $558
Chemicals 225 737 305 315 861 366
Coal 244 681 358 764 2,557 299
Intermodal 26,405 82,474 320 27,312 74,379 367
Lumber & Forest Products 4,725 9,475 499 3,111 14,386 216
Minerals 3,692 16,076 230 4,068 17,076 238
Paper Products 1,109 11,426 97 1,093 10,286 106
Petroleum Products 786 3,435 229 894 3,152 284
Other 40 403 99 1 4 177
------- ------- ---- ------- ------- ----
Total $83,266 221,710 $376 $82,681 203,536 $406
======= ======= ==== ======= ======= ====
Agricultural and farm products revenues were $46.0 million in the year
ended December 31, 2001 compared to $45.1 million in the year ended December 31,
2000, an increase of $0.9 million or 2%. This increase was primarily due to a
strong grain harvest in 2001, partially offset by the weaker Australian dollar
in 2001.
Intermodal revenues were $26.4 million in the year ended December 31, 2001
compared to $27.3 million in the year ended
29
December 31, 2000, a decrease of $0.9 million or 3%. This decrease was due to
the lower Australian Dollar in 2001.
OPERATING EXPENSES. Operating expenses decreased $2.5 million, or 3%, to
$79.4 million for the year ended December 31, 2001 from $81.8 million for the
year ended December 31, 2000. The decrease in operating expenses was primarily
due to the 11% decline in the Australian dollar, which reduced operating
expenses by $9.8 million. Partially offsetting this decrease was an increase in
2001 of depreciation and amortization due to the extensive capital work done on
the locomotive fleet and track since we purchased the railroad from the
government in 1999. The operating ratio improved to 78.3% in 2001 from 80.1% in
2000 due to the increased carloads and the relatively fixed nature of many of
the expenses.
CORPORATE OVERHEAD AND OTHER
CORPORATE OVERHEAD. Corporate overhead services performed for our
subsidiaries include executive management, overall strategic planning,
accounting, finance, legal, cash management, information technology, human
resources, payroll and tax. Corporate overhead, which is included in selling,
general and administrative expenses in the consolidated statements of income,
increased $10.0 million, or 62%, to $26.1 million for the year ended December
31, 2002 from $16.1 million for the year ended December 31, 2001. Approximately
$3.3 million of the increase is due primarily to the write-off of the failed bid
costs in connection with the proposed acquisition of National Rail and
FreightCorp, two government-owned railroads in Australia. In addition, we
recorded a $1.4 million charge in 2002 relating to the consolidation of the
accounting and human resource functions from San Antonio to Boca Raton and a
$1.0 million restructuring charge relating to the termination of certain
executives in December 2002. The remaining increase was due to increased
headcount in 2002 to support the ParkSierra and StatesRail acquisitions. For the
year ended December 31, 2001, corporate overhead increased $3.7 million, or 30%,
to $16.1 million from $12.4 million for the year ended December 31, 2000. This
increase was related to the additional costs incurred to manage the acquired
railroads and to establish a strong management team to handle our continued
growth.
ASSET RATIONALIZATION PLAN. As part of our strategic plan, we continually
review our portfolio for under performing, non-core or non-strategic assets that
can be sold. Net gains on sales of assets were $9.2 million for the year ended
December 31, 2002. This gain primarily relates to the sale of the Georgia
Southwestern Railroad in March 2002 resulting in a gain of $4.5 million and a
sale of right-of-ways resulting in a gain of $3.5 million. In December 2001, we
sold Dakota Rail, Inc. and certain other assets for $9.8 million. The proceeds
from these transactions were used to reduce our long-term debt and for general
working capital purposes. The net gains in 2001 were $6.4 million compared to
$11.2 million in 2000.
TERMINATED MOTOR CARRIER OPERATIONS. During the year ended December 31,
2002, we recorded a charge of $1.3 million for the write-off of the remaining
assets from the motor carrier division.
INTEREST EXPENSE. Interest expense, including amortization of financing
costs, decreased from $53.9 million in 2000 to $50.7 million in 2001 and
continued to decrease to $43.4 million in 2002. The decrease in interest expense
from 2000 to 2001 is primarily due to reduction of our long-term debt and a
decrease in base interest rates. The decrease in interest expense from 2001 to
2002 is primarily due to the refinancing of our senior debt in May 2002, which
resulted in a lower interest rate.
FINANCING COSTS AND OTHER INCOME (EXPENSE). In connection with the May
2002 refinancing of our senior debt, we terminated our existing interest rate
swaps. Because these hedging instruments were designated as hedges of the cash
flows under the previous senior debt facility, SFAS No. 133 requires the entire
balance in other accumulated comprehensive loss to be charged to earnings.
Accordingly, a charge of $17.1 million was recorded in other income (expense)
during the year ended December 31, 2002. We also incurred a charge of $2.0
million during 2002 to write-off other refinancing related costs incurred in
connection with our May 2002 refinancing.
INCOME TAXES. Our effective tax rates in 2002 and 2001 were 35.5% and
22.5%, respectively. In 2001, we recorded a benefit of $3.1 million from a
reduction in the Canadian federal and provincial tax rates. We believe our
effective rate in 2003 will be approximately 37%.
DISCONTINUED OPERATIONS. In January 2003, we announced our intent to sell
our 55% equity interest in Ferronor. Accordingly, we reclassified the operating
results of Ferronor for each of the years presented to discontinued operations.
As such, the income statements for the years ended 2002, 2001 and 2000, include
$1.0 million, $1.5 million, and $1.2 million, (net of tax) respectively, of
income from discontinued operations for Ferronor. We expect to sell our 55%
equity interest in Ferronor in 2003 and use the proceeds of the sale to retire
debt. In May 2002, we sold the Texas New Mexico Railroad for $2.3
30
million resulting in a net gain of $1.3 million ($0.8 million, after tax). The
gain has been included in discontinued operations. In December 2000, we sold our
specialty truck trailer manufacturing operations for $38.5 million resulting in
a gain of approximately $11.5 million, net of income taxes. In connection with
the acquisition of RailTex, we refinanced our investment in our trailer
manufacturing operations resulting in additional interest expense of $7.3
million in 2000.
EXTRAORDINARY LOSS. In connection with the refinancing of our senior debt
in May 2002, we wrote off the unamortized balance of the deferred loan costs
relating to our old senior credit facility. The total charge of $6.6 million
($4.5 million, after tax) was included as an extraordinary charge. In connection
with the reduction of our senior debt in July and August 2001, we recorded an
extraordinary charge of $0.2 million for the year ended December 31, 2001.
Pursuant to the refinancing of our debt in February 2000, we recorded an
extraordinary charge for the year ended December 31, 2000 for the loss on early
extinguishment of debt of $2.9 million. In connection with the issuance of
subordinated debt in August 2000 we recorded an extraordinary charge of $1.1
million for early extinguishment of debt.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In 2000, we recorded a $2.3
million charge associated with a change in accounting principle. This charge
resulted from a beneficial conversion feature associated with warrants in
connection with the junior convertible subordinated debentures issued in 1999.
This was a result of a change during 2000 of the applicable accounting
literature.
LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS
The discussion of liquidity and capital resources that follows reflects
our consolidated results and includes all subsidiaries. Our principal source of
liquidity is cash generated from operations. In addition, we may fund any
additional liquidity requirements through borrowings under our $100 million
revolving credit facility.
Operating Activities
Our cash provided by operating activities was $38.6 million for the year
ended December 31, 2002. This amount consists of $2.2 million in net income,
$41.3 million in depreciation and amortization and $25.4 million of refinancing
related charges, partially offset by $9.7 million of asset sale gains (including
the sale of discontinued operations) and $23.5 million of changes in working
capital accounts. Excluding the payments for the termination of the interest
rate swaps of $17.1 million, which are classified as an operating activity
pursuant to SFAS No.104, cash flows from operations would have been $55.7
million, which is comparable to $55.0 million in 2001.
Investing Activities
Cash used in investing activities was $150.1 million for the year ended
December 31, 2002 compared to $46.7 million in 2001. The increase of $103.4
million is primarily due to the use of cash for the purchase of ParkSierra and
StatesRail which totaled $89.4 million. In addition, capital expenditures for
the year were $65.7 million or $4.0 million higher than 2001. Asset sale
proceeds were $9.3 million for the year ended 2002 compared to $18.5 million in
2001. We expect capital expenditures in 2003 to be approximately $71 million,
including Ferronor, a discontinued operation. Ferronor's capital expenditures
were $2 million in 2002 and are expected to be $7.0 million in 2003.
Financing Activities
Cash provided by financing activities was $79.3 million for 2002 compared
to $39.4 million in 2001. The increase of $39.9 million is primarily due to $50
million of borrowings to finance the acquisitions of ParkSierra and StatesRail
and an additional $50 million of borrowings in connection with the refinancing
of the senior credit facility in May 2002, partially offset by the new financing
costs totaling $15.4 million and common stock repurchases of $5.0 million. Under
our existing senior debt facilities, our principal repayments will be $3.8
million in 2003.
In May 2002, we refinanced our senior credit facility. The new senior
credit facility requires 1% annual principal amortization and provides (1) a
$265 million U.S. Term Loan, (2) a $50 million Canadian Term Loan, (3) a $60
million Australian Term Loan and (4) a $100 million revolving credit facility
which includes $82.5 million of U.S. dollar denominated loans, $10 million of
Canadian dollar denominated loans and $7.5 million of Australian dollar
denominated loans. The U.S. Term Loan, the Canadian Term Loan and the Australian
Term Loan mature on May 23, 2009 and the revolver loans mature on May 23, 2008.
In addition, we may incur additional indebtedness under the credit facility
consisting of up to $100 million
31
aggregate principal amount of additional term loans subject to the satisfaction
of certain conditions set forth in the credit agreement including consent of the
Administrative Agent and the Joint Lead Arrangers under the credit facility and
the satisfaction of all financial covenants set forth in the credit facility on
a pro forma basis on the date of the additional borrowing.
At our option, the new senior credit facilities bear interest at either
(1) the alternative base rate (defined as the greater of (i) UBS AG's prime rate
and (ii) the Federal Funds Effective Rate plus 0.50%) if such loan is a Term
Loan or U.S. Revolving Loan or the Canadian Prime Rate (defined as the greater
of (i) UBS AG's Canadian prime rate and (ii) the average rate for 30 day
Canadian Dollar bankers' acceptances plus 1.0% per annum) if such loan is a
Canadian revolving loan plus 1.00% for the revolving credit facilities and 1.50%
for the Term Loan facility, or (2) the reserve-adjusted LIBO rate (or, in the
case of Australian revolving loans, the BBSY Rate) plus 2.00% for the revolving
credit facility and 2.50% for the term loan facilities; provided, that the
additional amounts added to the alternative base rate and the LIBO rate for the
revolving credit facilities and the term loan facilities discussed above will be
subject to adjustment based on changes in our leverage ratio effective two
fiscal quarters after the closing of the new senior credit facilities. At
December 31, 2002 the interest rate on the term loan facilities was LIBOR plus
2.50%, or 4.00%. The default rate under the new senior credit facility is 2.0%
above the otherwise applicable rate. The U.S. Term Loan and the U.S. dollar
denominated revolver are collateralized by the assets of and guaranteed by
RailAmerica, Inc. and its U.S. subsidiaries, the Canadian Term Loan and the
Canadian dollar denominated revolver are collateralized by the assets of and
guaranteed by RailAmerica, Inc. and its U.S. and Canadian subsidiaries, and the
Australian Term Loan and the Australian dollar denominated revolver are
collateralized by the assets of and guaranteed by RailAmerica, Inc. and its U.S.
and Australian Subsidiaries. The assets of Ferronor, as well as any other
subsidiaries designated in the future as unrestricted subsidiaries, are not
pledged under this agreement. Ferronor has not guaranteed and any other
unrestricted subsidiaries are not required to guarantee any of the obligations
under the credit facility. The loans were provided by a syndicate of banks with
Morgan Stanley Senior Funding, Inc., as syndication agent, UBS AG, Stamford
Branch, as administrative agent and The Bank of Nova Scotia, as collateral
agent.
In connection with the refinancing of the senior credit facility in May
2002, we terminated our interest rate swap agreements resulting in a cash
payment of $17.1 million. Additionally, as required under our new senior credit
facility, we entered into two step-up collars for a total notional amount of $75
million with an effective date of November 24, 2002 and expiring on November 24,
2004. Under the terms of these collars, the LIBOR component of our interest
rates can fluctuate within specified ranges. From November 24, 2002 through May
24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November
24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through
May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through
November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify and
are accounted for as cash flow hedges under SFAS No. 133. As of December 31,
2002, the fair value of these collars was a net liability of $1.9 million.
On November 8, 2002, we entered into two interest rate swaps for a total
amount of $300 million for the period commencing December 5, 2002 through
December 5, 2003. Under the terms of the interest rate swaps, the LIBOR
component of our interest rate is fixed at 1.62% on $300 million of debt. The
swaps qualify and are accounted for as cash flow hedges under SFAS No. 133. At
December 31, 2002, the fair value of these swaps was a net liability of $0.6
million.
The May 2002 senior credit facility and the indenture governing our senior
subordinated notes include numerous covenants imposing significant financial and
operating restrictions on RailAmerica, Inc. The covenants limit our ability to,
among other things: incur more debt or prepay existing debt, redeem or
repurchase our common stock, pay dividends or make other distributions, make
acquisitions or investments, use assets as security in other transactions, enter
into transactions with affiliates, merge or consolidate with others, dispose of
assets or use asset sale proceeds, create liens on our assets, make certain
payments or capital expenditures and extend credit. In addition, the senior
credit facility also contains financial covenants that require us to meet a
number of financial ratios and tests. Our ability to meet these ratios and tests
and to comply with other provisions of the new senior credit facility can be
affected by events beyond our control. Failure to comply with the obligations in
the new senior credit facility could result in an event of default under the new
senior credit facility, which, if not cured or waived, could permit acceleration
of the indebtedness or other indebtedness which could have a material adverse
effect on us. We were in compliance with each of these covenants as of December
31, 2002.
In August 2000, RailAmerica Transportation Corp., our wholly-owned
subsidiary, sold units consisting of $130.0 million of 12-7/8% senior
subordinated notes due 2010 and warrants to purchase 1,411,414 shares of our
common stock. Our U.S. subsidiaries are guarantors of the senior subordinated
notes.
32
In February 2000, we entered into a credit agreement and two bridge notes
in connection with the acquisition of RailTex and the refinancing of most of our
and RailTex's existing debt. The credit agreement provided (i) a $125 million
Term A loan, bearing interest at LIBOR plus 2.50% (4.44% at December 31, 2001),
(ii) a $205 million Term B loan, initially bearing interest at LIBOR plus 3.25%
(5.19% at December 31, 2001), and (iii) a $50 million revolving credit facility
which includes $30 million of U.S. dollar denominated loans, $10 million of
Canadian dollar denominated loans and $10 million of Australian dollar
denominated loans with an interest rate of LIBOR plus 2.50%. All of the capital
stock of RailAmerica, Inc.'s U.S. subsidiaries, 65% of the capital stock of the
Canadian and Australian subsidiaries and the majority of the assets of
RailAmerica, Inc.'s subsidiaries served as collateral for the senior credit
facilities. In January 2002, in connection with the acquisitions of ParkSierra
and StatesRail, we borrowed an additional $50 million under this senior credit
facility. The credit agreement and the two bridge notes have all been repaid.
Our long-term business strategy includes the selective acquisition or
disposition of transportation-related businesses. Accordingly, we may require
additional equity and/or debt capital in order to consummate acquisitions or
undertake major business development activities. It is impossible to predict the
amount of capital that may be required for such acquisitions or business
development, and whether sufficient financing for such activities will be
available on terms acceptable to us, if at all.
As of December 31, 2002, we had working capital of $20 million compared to
$30 million as of December 31, 2001. This decrease is primarily due to the
private placement of common stock in December 2001, in which we raised $51
million. These funds were subsequently used to fund the acquisitions of
ParkSierra and StatesRail in January 2002, thus decreasing our cash balance and
reducing our working capital balance. Our cash flows from operations and
borrowings under our credit agreements historically have been sufficient to meet
our ongoing operating requirements, capital expenditures for property, plant and
equipment, and to satisfy our debt service requirements.
Two primary uses of the cash provided by our operations are capital
expenditures and debt service. The following table represents the minimum future
payments on our existing long-term debt and lease obligations:
2004 - 2006 - After
TOTAL 2003 2005 2007 2007
-------- ------- ------- ------- --------
Long-term debt $385,701 $ 4,120 $ 8,300 $ 8,388 $364,893
Subordinated debt $141,331 $ 0 $21,107 $ 0 $120,224
Capital lease obligations $ 1,620 $ 80 $ 492 $ 648 $ 400
Operating lease obligations $ 97,970 $19,417 $33,701 $27,016 $ 17,836
Long-term debt of discontinued operations $ 20,840 $ 6,743 $ 5,248 $ 4,243 $ 4,606
Total contractual cash obligations $647,462 $30,360 $68,848 $40,295 $507,959
Common Stock Repurchases Program
We occasionally repurchase our common stock under our share repurchase
program. These repurchases are limited to $5 million per year pursuant to our
borrowing arrangements. In July 2002, our board of directors authorized a 2
million share repurchase program through December 31, 2003, subject to
restrictions under our borrowing arrangements. During the year ended December
31, 2002, we repurchased 530,500 shares at a total cost of $4.9 million.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." Under SFAS No. 142, goodwill and identifiable intangible
assets with an indefinite life will no longer be amortized; however, both
goodwill and other intangible assets will need to be tested at least annually
for impairment. SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets, excluding goodwill and intangible assets,
to be held and used or disposed of. While the adoption of these pronouncements
did
33
not have a material impact on our consolidated financial statements, SFAS No.
144 will require us to report the results of operations of a railroad that has
been disposed of or is being held for disposal in discontinued operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is
effective for the fiscal year beginning January 1, 2003, and requires us to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. We believe the adoption of this pronouncement
will not have a material impact on our financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, requires that debt extinguishments used as part of a
company's risk management strategy should not be classified as an extraordinary
item. The requirement to reclassify debt extinguishments is effective for fiscal
years beginning after May 15, 2002. We will adopt SFAS No. 145 on January 1,
2003 and reclassify $4.5 million and $0.2 million of extraordinary charges, net
of tax, to continuing operations in 2002 and 2001, respectively.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146, which is effective
for exit or disposal activities initiated after December 31, 2002, requires that
a liability for a cost associated with an exit or disposal activity is
recognized at fair value when the liability is incurred rather than when
management commits to an exit or disposal plan. We believe the adoption of this
pronouncement will not have a material impact on our financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others: an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,"
which is effective for guarantees issued or modified after December 31, 2002.
This Interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees.
This Interpretation also clarifies the requirements related to the recognition
of a liability by a guarantor at the inception of a guarantee for the
obligations the guarantor has undertaken in issuing that guarantee. We believe
the adoption of this pronouncement will not have a material impact on our
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which is
effective for fiscal years ending after December 15, 2002, provides alternative
methods of transition for voluntary changes to the fair value based method of
accounting for stock-based employee compensation and requires prominent
disclosure in both annual and interim financial statements about the method used
on reported results. The adoption of this pronouncement did not have a material
impact on our financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which is effective immediately
for variable interest entities created after January 31, 2003, and applies in
the first interim period beginning after June 15, 2003 for variable interest
entities created before February 1, 2003. FIN 46 addresses the consolidation of
variable interest entities through identification of a primary beneficiary. We
believe the adoption of this pronouncement will not have a material impact on
our financial statements.
ITEM 7a. MARKET RISK
We currently use derivatives to hedge against increases in fuel prices and
interest rates. We formally document the relationship between the hedging
instrument and the hedged items, as well as the risk management objective and
strategy for the use of the hedging instrument. This documentation includes
linking the derivatives that are designated as cash flow hedges to specific
assets or liabilities on the balance sheet, commitments or forecasted
transactions. When we enter into a derivative contract, and at least quarterly,
we assess whether the derivative item is effective in offsetting the changes in
fair value or cash flows. Any change in fair value resulting from
ineffectiveness, as defined by SFAS No. 133, is recognized in current period
earnings. For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the derivative
instrument is recorded in Accumulated Other Comprehensive Loss, a separate
component of Stockholders' Equity, and reclassified into earnings in the period
during which the hedge transaction affects earnings.
We monitor our hedging positions and credit ratings of our counterparties
and do not anticipate losses due to counterparty nonperformance.
34
FOREIGN CURRENCY. Our foreign currency risk arises from owning and
operating railroads in Canada, Chile and Australia. As of December 31, 2002, we
had not entered into any currency hedging transactions to manage this risk. A
decrease in either the Canadian dollar or the Australian dollar would negatively
impact our reported revenues and earnings for the affected period. During 2002,
the Australian dollar increased 5% while the Canadian dollar declined 1%. This
led to a net increase of $3.7 million in reported revenues and $0.1 million
increase in reported operating income, in 2002, compared to 2001. A majority of
our revenue and debt in Chile is denominated to the U.S. dollar and therefore,
we are not negatively impacted by a decline in the value of the Chilean peso.
INTEREST RATES. Our interest rate risk results from issuing variable rate
debt obligations, as an increase in interest rates would result in lower
earnings and increased cash outflows.
In June 2002, as required under our new senior credit facility, we entered
into two step-up collars for a total notional amount of $75 million with an
effective date of November 24, 2002 and expiring on November 24, 2004. Under the
terms of these collars, the LIBOR component of our interest rates can fluctuate
within specified ranges. From November 24, 2002 through May 24, 2003, the floor
and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor
and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the
floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004,
the floor and cap are 4% and 5.75%. The collars qualify and are accounted for as
cash flow hedges under SFAS No. 133. On November 8, 2002, we entered into two
interest rate swaps for a total amount of $300 million for the period commencing
December 5, 2002 through December 5, 2003. The swaps qualify and are accounted
for as cash flow hedges under SFAS No. 133. Under the terms of the interest rate
swaps, the LIBOR component of our interest rate is fixed at 1.62% on $300
million of debt.
DIESEL FUEL. We are exposed to fluctuations in diesel fuel prices, as an
increase in the price of diesel fuel would result in lower earnings and
increased cash outflows. Fuel costs represented 7% of total revenues during the
year ended December 31, 2002. Due to the significance of fuel costs to our
operations and the historical volatility of fuel prices, we maintain a program
to hedge against fluctuations in the price of our diesel fuel purchases. Each
one-cent change in the price of fuel would result in a $0.4 million change in
fuel expense on an annual basis.
The fuel-hedging program includes the use of derivatives that are
accounted for as cash flow hedges. As of December 31, 2002, we had entered into
fuel swap agreements to hedge the equivalent of 750,000 gallons per month in
2003 (35% of estimated North American consumption) at an average price of 66
cents per gallon, excluding transportation and taxes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of RailAmerica, the accompanying
notes thereto and the independent accountants' reports are included as part of
this Form 10-K and immediately follow the signature page of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, executive officers and nominees is
incorporated by reference from our definitive proxy statement relating to our
2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 30, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from our definitive proxy statement relating to our 2003 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A on or
before April 30, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership and securities issuable under
equity compensation plans is incorporated by reference from our definitive proxy
statement relating to our 2003 Annual Meeting of Stockholders to be filed with
the Commission pursuant to Regulation 14A on or before April 30, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference from our definitive proxy statement relating to our
2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
As of a date within 90 days of this report, our chief executive officer
and chief financial officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures.
Management and PricewaterhouseCoopers have advised the audit committee of
our board of directors that during the course of the audit, they noted
deficiencies in internal controls of our Australian subsidiary relating to
procedures for determining which costs spent on improvements to track structure,
locomotives and freight cars qualified for capitalization under our policies.
PricewaterhouseCoopers has advised the audit committee that these internal
control deficiencies constitute a material weakness as defined by Statement of
Auditing Standards No. 60. We have performed substantial additional procedures
designed to ensure that these internal control deficiencies do not lead to
material misstatements in our consolidated financial statements and to enable
the completion of PricewaterhouseCoopers' audit of our consolidated financial
statements, notwithstanding the presence of the internal control weaknesses
noted above.
We are in the process of implementing corrective actions as of the date of
this annual report on Form 10-K to address these issues, and are evaluating
implementation of the following corrective actions as well as additional
procedures:
o Reorganization of the financial accounting responsibilities;
o Developing a pre-approval process for capital projects in Australia
similar to our process in the United States;
o Modifying the software which tracks individual jobs on our locomotives and
railcars to provide better information to the accounting department; and
o Instituting new requirements for invoicing and documentation of outsourced
track maintenance and improvements in Australia.
Based upon this evaluation and the additional procedures performed, our
CEO and CFO concluded that the disclosure controls and procedures are effective
in ensuring that information required to be disclosed in reports we file under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by rules and forms
promulgated under that act. We will continue to evaluate the effectiveness of
our disclosure controls and internal controls and procedures on an ongoing
basis, and will take further action as appropriate.
36
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
November 26, 2001 by and among RailAmerica, Inc., ParkSierra
Acquisition Corp. and ParkSierra Corp. (30)
2.2 Merger Agreement, dated as of October 12, 2001, among RailAmerica,
Inc., StatesRail Acquisition Corp. and StatesRail, Inc. (32)
2.3 Stock Purchase Agreement, dated October 12, 2001, among RailAmerica,
Inc., New StatesRail Holdings, Inc., StatesRail L.L.C., West Texas
and Lubbock Railroad Company, Inc. and the Members of StatesRail
L.L.C. (32)
2.4 Letter Agreement, dated as of October 12, 2001 between the parties
to Exhibits 2.2 and 2.3 above. (32)
3.1 Amended and Restated Certificate of Incorporation of Registrant, as
amended (2)
3.2 By-laws of RailAmerica, Inc. (1)
3.3 Certificate Of Amendment to Amended and Restated Certificate of
Incorporation of RailAmerica, Inc. (31)
4.1 Form of Common Stock Purchase Rights Agreement, dated as of January
6, 1998, between RailAmerica, Inc. and American Stock Transfer &
Trust Company (6)
4.2 Certificate of Designation of Series A Convertible Redeemable
Preferred Stock (19)
4.3 Third Amendment to the Rights Agreement, dated as of January 13,
2000, between RailAmerica, Inc. and American Stock Transfer & Trust
Company (10)
4.6 Fourth Amendment to the Rights Agreement, dated as of April 13,
2000, between RailAmerica, Inc. and American Stock Transfer and
Trust Company (21)
4.7 Waiver and Supplemental Agreement, dated as of April 13, 2000, among
RailAmerica, Inc. and EGS Associates, L.P., EGS Partners, L.L.C.,
BEV Partners, L.P., Jonas Partners, L.P., EGS Management, L.L.C.,
William Ehrman, Frederic Greenberg, Jonas Gerstl and Juli Oliver
(22)
4.8 Indenture, dated as of August 14, 2000, between RailAmerica
Transportation Corp., the Guarantors named therein and Wells Fargo
Bank Minnesota, N.A. (24)
4.9 Warrant Agreement, dated August 14, 2000, between RailAmerica, Inc.
and Wells Fargo Bank Minnesota, N.A. (26)
4.10 Warrant Registration Rights Agreement, dated August 14, 2000,
between RailAmerica, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Barclays Bank PLC and Scotia Capital (USA) Inc. (27)
4.11 Form of Placement Agent Warrant, dated as of June 2001. (32)
4.12 Form of Placement Agent Warrant, dated as of December 2001. (32)
4.13 First Supplemental Indenture (32)
4.14 Second Supplemental Indenture (32)
37
10.43 Stock Option Agreement, dated November 11, 1994, between
RailAmerica, Inc. and Gary O. Marino (7)+
10.45 RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan (2)
10.46 RailAmerica, Inc. 1995 Employee Stock Purchase Plan (2)
10.47 RailAmerica, Inc. Corporate Senior Executive Bonus Plan (2)+
10.59 RailAmerica, Inc. Nonqualified Deferred Compensation Trust (5)+
10.60 Nonqualified Deferred Compensation Agreement between RailAmerica,
Inc. and Gary O. Marino (5)+
10.63 RailAmerica, Inc. 1998 Executive Incentive Compensation Plan (7)+
10.80 Form of Change in Control Agreements between RailAmerica, Inc. and
certain executive officers (32)
10.81 Service Agreement, dated April 4, 2001, between RailAmerica, Inc.
and Marinus van Onselen and first amendment thereto. (32)
10.82 Amended and Restated Executive Employment Agreement, dated as of
January 1, 2002, between RailAmerica, Inc. and Gary O. Marino. (32)
10.83 Amended and Restated Executive Employment Agreement, dated as of
January 1, 2002, between RailAmerica, Inc. and Donald D. Redfearn.
(32)
10.84 Employment Agreement, dated as of January 1, 2002, between
RailAmerica, Inc. and Gary M. Spiegel. (32)
10.85 Credit agreement, dated as of May 23, 2002 among RailAmerica, Inc.,
Palm Beach Rail Holdings, Inc., RailAmerica Transportation Corp., as
borrower, RailAmerica Canada Corp., as the Canadian term Borrower,
Railink Ltd., as the Canadian revolver Borrower, RailAmerica
Australia Finance Pty., Ltd., as the Australian Term Borrower,
Freight Victoria Limited and RailAmerica Australia Pty., Ltd., as
the Australian Revolver Borrowers, various financial institutions
from time to time parties hereto, as the lenders, UBS Warburg LLC
and Morgan Stanley Senior Funding, Inc., as Joint Lead Arrangers and
Bookrunners, Morgan Stanley Denior Funding, Inc., as Syndication
Agent for the lenders, UBS AG, Stamford Branch, as the
Administrative Agent for the lenders, The Bank of Nova Scotia , as
Collateral Agent for the lenders, and The Bank of Nova Scotia and
Credit Lyonnais New York Branch, as the Document Agents for the
lenders. (33)
10.86 Amendment No. 1 to Credit Agreement
10.87 Deferred Compensation Plan, as amended
10.88 Adoption Agreement relating to Deferred Compensation Plan, as
amended
21.1 Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
99.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
38
(1) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Registration Statement on Form S-1, Registration No.
33-49026.
(2) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Form 10-QSB for the quarter ended September 30, 1995,
filed with the Securities and Exchange Commission on November 12, 1995.
(5) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Form 10-KSB for year ended December 31, 1995, filed
with the Securities and Exchange Commission on March 31, 1997.
(6) Incorporated by reference to exhibit No. 4.1 filed as part of RailAmerica,
Inc.'s Registration Statement on Form 8-A, filed with the Securities and
Exchange Commission on January 8, 1998.
(7) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Form 10-Q for the quarter ended March 31, 1998, filed
with the Securities and Exchange Commission on May 14, 1998.
(10) Incorporated by reference to exhibit 4.1 filed as part of RailAmerica,
Inc.'s Form 8-K as of January 13, 2000, filed with the Securities and
Exchange Commission on January 26, 2000.
(12) Incorporated by reference to exhibit 10.2 filed as part of RailAmerica,
Inc.'s Form 8-K as of April 30, 1999, filed with the Securities and
Exchange Commission on May 18, 1999.
(19) Incorporated by reference to the exhibit of the same number filed as part
of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 1998
filed with the Securities and Exchange Commission on March 31, 1999.
(20) Incorporated by reference to the exhibit of the same number filed as part
of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 1999,
filed with the Securities and Exchange Commission on March 30, 2000.
(21) Incorporated by reference to Exhibit 4.1 filed as part of RailAmerica,
Inc.'s Form 8-K, dated April 13, 2000.
(22) Incorporated by reference to Exhibit 4.2 filed as part of RailAmerica,
Inc.'s Form 8-K, dated April 13, 2000.
(24) Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica,
Inc.'s Registration Statement on Form S-4, Registration No. 333-45196.
(26) Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica,
Inc.'s Registration Statement on Form S-3, Registration No. 333-45200.
(27) Incorporated by reference to the Exhibit 4.2 filed as part of RailAmerica,
Inc.'s Registration Statement on Form S-3, Registration No. 333-45200.
(30) Incorporated by reference to the Annex A, filed as part of RailAmerica,
Inc.'s Registration Statement on Form S-4, Registration No. 333-75290.
(31) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Form 10-K for the year ended December 31, 2000, filed
with the Securities and Exchange Commission on April 2, 2001.
(32) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Form 10-K for the year ended December 31, 2001, filed
with the Securities and Exchange Commission on April 1, 2002.
(33) Incorporated by reference to the same exhibit number filed as part of
RailAmerica, Inc.'s Form 10-Q for the quarter ended June 30, 2002, filed
with the Securities and Exchange Commission on August 14, 2002.
+ Executive Compensation Plan or Arrangement.
(b) Reports on Form 8-K.
Registrant filed no reports on Form 8-K during the fourth quarter of the
year ended December 31, 2002.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RAILAMERICA, INC.
By: /s/ GARY O. MARINO
--------------------
Gary O. Marino, Chairman, President
and Chief Executive Officer
By: /s/ MICHAEL J. HOWE
---------------------
Michael J. Howe, Senior Vice
President and Chief Financial
Officer (Principal Financial
Officer)
By: /s/ ROBERT J. RABIN
---------------------
Robert J. Rabin, Vice President and
Corporate Controller (Principal
Accounting Officer)
Dated March 27, 2003
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ GARY O. MARINO Chairman, President, Chief Executive March 27, 2003
- ------------------------ Officer and Director
Gary O. Marino
/s/ DONALD D. REDFEARN Chief Administrative Officer, Executive March 27, 2003
- ------------------------ Vice President, Secretary and Director
Donald D. Redfearn
/s/ JOHN H. MARINO Assistant Secretary and Director March 27, 2003
- ------------------------
John H. Marino
/s/ DOUGLAS R. NICHOLS Director March 27, 2003
- ------------------------
Douglas R. Nichols
/s/ RICHARD RAMPELL Director March 27, 2003
- ------------------------
Richard Rampell
/s/ CHARLES SWINBURN Director March 27, 2003
- ------------------------
Charles Swinburn
/s/ JOHN M. SULLIVAN Director March 27, 2003
- ------------------------
John M. Sullivan
/s/ FERD C. MEYER, JR. Director March 27, 2003
- ------------------------
Ferd C. Meyer, Jr.
/s/ WILLIAM G. PAGONIS Director March 27, 2003
- ------------------------
William G. Pagonis
40
CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER
I, Gary O. Marino, certify that:
1. I have reviewed this annual report on Form 10-K of RailAmerica, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
i) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
ii) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
iii) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
i) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Gary O. Marino
- ----------------------------
Gary O. Marino
Chief Executive Officer
Date: March 27, 2003
41
CERTIFICATE OF THE CHIEF FINANCIAL OFFICER
I, Michael J. Howe, certify that:
1. I have reviewed this annual report on Form 10-K of RailAmerica, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
i) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
ii) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
iii) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent functions):
ii) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Michael J. Howe
- ----------------------------
Michael J. Howe
Chief Financial Officer
Date: March 27, 2003
42
RAILAMERICA, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS
The following consolidated financial statements of RailAmerica, Inc. and
Subsidiaries are referred to in Item 8:
PAGES
-----
Report of Independent Certified Public Accountants................ F-2
Consolidated Balance Sheets - December 31, 2002 and 2001.......... F-3
Consolidated Statements of Income - For the Years Ended
December 31, 2002, 2001 and 2000........................... F-4
Consolidated Statements of Stockholders' Equity - For the Years
Ended December 31, 2002, 2001 and 2000..................... F-5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2002, 2001 and 2000........................... F-6
Notes to Consolidated Financial Statements........................ F-7-F-36
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
RailAmerica, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
RailAmerica, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 14, the Company changed its method of accounting for
derivative instruments and hedging activities in 2001.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Miami, Florida
March 3, 2003
F-2
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 28,887 $ 59,761
Restricted cash in escrow ........................................... 371 2,418
Accounts and notes receivable, net of allowance of
$406 and $571, respectively ..................................... 63,463 54,278
Current assets of discontinued operations ........................... 5,834 --
Other current assets ................................................ 22,429 14,204
----------- ---------
Total current assets ............................................ 120,984 130,661
Property, plant and equipment, net ......................................... 904,253 738,775
Long-term assets of discontinued operations ................................ 50,355 --
Other assets ............................................................... 30,961 21,732
----------- ---------
Total assets .................................................... $ 1,106,553 $ 891,168
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................................ $ 4,200 $ 24,484
Accounts payable .................................................... 46,722 36,035
Accrued expenses .................................................... 38,420 39,889
Current liabilities of discontinued operations ...................... 11,624 --
----------- ---------
Total current liabilities ....................................... 100,966 100,408
Long-term debt, less current maturities .................................... 383,121 277,203
Subordinated debt .......................................................... 141,331 144,988
Deferred income taxes ...................................................... 150,159 96,822
Long-term liabilities of discontinued operations ........................... 27,283 --
Other liabilities .......................................................... 24,790 50,788
----------- ---------
827,650 670,209
----------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 60,000,000 shares authorized;
31,879,602 shares issued and outstanding at December 31, 2002
and 28,842,090 shares issued and outstanding at December 31, 2001 ... 32 29
Additional paid in capital ................................................. 261,372 224,248
Retained earnings .......................................................... 48,055 45,902
Accumulated other comprehensive loss ....................................... (30,556) (49,220)
----------- ---------
Total stockholders' equity ...................................... 278,903 220,959
----------- ---------
Total liabilities and stockholders' equity ...................... $ 1,106,553 $ 891,168
=========== =========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-3
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Operating revenue .................................................... $ 428,243 $ 347,546 $ 334,615
--------- --------- ---------
Operating expenses:
Transportation ..................................................... 242,555 196,105 195,467
Selling, general and administrative ................................ 89,784 61,982 59,484
Net gain on sale and impairment of assets .......................... (9,155) (6,422) (11,184)
Terminated motor carrier operations, net ........................... 1,396 263 88
Depreciation and amortization ...................................... 33,158 24,393 23,322
--------- --------- ---------
Total operating expenses ......................................... 357,738 276,321 267,177
--------- --------- ---------
Operating income ................................................. 70,505 71,225 67,438
Interest expense, including amortization costs of
$4,686, $4,410, and $4,854, respectively ........................... (43,441) (50,714) (53,912)
Other income (expense) ............................................... (18,908) 178 (2,267)
--------- --------- ---------
Income from continuing operations before income taxes .............. 8,156 20,689 11,259
Provision for income taxes ........................................... 2,893 4,897 2,900
--------- --------- ---------
Income from continuing operations .................................. 5,263 15,792 8,359
Discontinued operations:
Net gain on disposal of discontinued business (net of income
taxes of $161 and $6,850, respectively) ........................ 387 -- 11,527
Income (loss) from operations of discontinued business
(net of income taxes of ($10), $108, and ($1,600),
respectively) .................................................. 984 1,482 (1,977)
--------- --------- ---------
Income before extraordinary item and cumulative effect
of accounting change ........................................... 6,634 17,274 17,909
Extraordinary loss from early extinguishment of debt (net of
income taxes of ($2,167), ($142) and ($2,200), respectively) ... (4,481) (236) (3,996)
Cumulative effect of accounting change ............................. -- -- (2,252)
--------- --------- ---------
Net income .................................................... $ 2,153 $ 17,038 $ 11,661
========= ========= =========
Net income available to common stockholders .......................... $ 2,153 $ 16,740 $ 10,991
Basic earnings per common share:
Continuing operations .............................................. $ 0.16 $ 0.72 $ 0.43
Discontinued operations ............................................ 0.04 0.07 0.52
Extraordinary item ................................................. (0.13) (0.01) (0.22)
Cumulative effect of accounting change ............................. -- -- (0.12)
--------- --------- ---------
Net income ....................................................... $ 0.07 $ 0.78 $ 0.61
========= ========= =========
Diluted earnings per common share:
Continuing operations .............................................. $ 0.16 $ 0.66 $ 0.42
Discontinued operations ............................................ 0.04 0.06 0.52
Extraordinary item ................................................. (0.13) (0.01) (0.22)
Cumulative effect of accounting change ............................. -- -- (0.12)
--------- --------- ---------
Net income ....................................................... $ 0.07 $ 0.71 $ 0.60
========= ========= =========
Weighted average common shares outstanding:
Basic .............................................................. 32,047 21,510 18,040
Diluted ............................................................ 32,620 25,350 18,267
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-4
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------
Number of Additional Other
FOR THE YEARS ENDED DECEMBER 31, Shares Par Paid-In Retained Comprehensive
2002, 2001 AND 2000 Issued Value Capital Earnings Income (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Balance, January 1, 2000 ............................ 12,611 $ 13 $ 47,797 $ 18,171 $ 3,486 $ 69,467
Net income .......................................... -- -- -- 11,661 -- 11,661
Cumulative translation adjustments .................. -- -- -- -- (27,735) (27,735)
---------
Total comprehensive loss .................. (16,074)
---------
Issuance of common stock ............................ 6,652 7 60,917 -- -- 60,924
Exercise of stock options ........................... 49 -- 269 -- -- 269
Conversion of redeemable securities ................. 339 -- 2,669 -- -- 2,669
Warrants issued ..................................... -- -- 8,841 -- -- 8,841
Purchase of treasury stock .......................... -- -- (1,992) -- -- (1,992)
Retirement of treasury stock ........................ (1,028) (1) 1 -- -- --
Preferred stock dividends and accretion ............. -- -- -- (670) -- (670)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 .......................... 18,623 19 118,502 29,162 (24,249) 123,434
Net income .......................................... -- -- -- 17,038 -- 17,038
Cumulative effect of adopting SFAS 133, net ......... -- -- -- -- (4,388) (4,388)
Change in market value of derivative
instruments, net .................................. -- -- -- -- (5,008) (5,008)
Cumulative translation adjustments .................. -- -- -- -- (15,575) (15,575)
---------
Total comprehensive loss ................ (7,933)
---------
Issuance of common stock ............................ 8,176 8 89,728 -- -- 89,736
Exercise of stock options ........................... 1,334 1 8,342 -- -- 8,343
Tax benefit on exercise of options and
Warrants .......................................... -- -- 2,633 -- -- 2,633
Conversion of redeemable securities ................. 882 1 7,030 -- -- 7,031
Purchase of treasury stock .......................... (173) -- (1,987) -- -- (1,987)
Preferred stock dividends and accretion ............. -- -- -- (298) -- (298)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 .......................... 28,842 29 224,248 45,902 (49,220) 220,959
Net income .......................................... -- -- -- 2,153 -- 2,153
Change in market value of derivative
instruments, net .................................. -- -- -- -- (2,472) (2,472)
Realized loss on derivatives designated as hedges,
net of tax ....................................... -- -- -- -- 10,737 10,737
Cumulative translation adjustments .................. -- -- -- -- 10,399 10,399
---------
Total comprehensive income .............. 18,664
---------
Issuance of common stock ............................ 3,485 3 41,144 -- -- 41,147
Exercise of stock options ........................... 83 -- 589 -- -- 589
Tax benefit on exercise of options and warrants ..... -- -- 109 -- -- 109
Warrants issued ..................................... -- -- 204 -- -- 204
Purchase of treasury stock .......................... (530) -- (4,922) -- -- (4,922)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 .......................... 31,880 $ 32 $ 261,372 $ 48,055 $(30,556) $ 278,903
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-5
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 2,153 $ 17,038 $ 11,661
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 41,251 32,011 34,566
Financing costs ....................................... 25,433 378 4,857
Interest paid in kind ................................. -- -- 5,806
Equity interest in earnings of affiliate .............. -- -- (554)
Net gain on sale or disposal of properties ............ (9,705) (6,434) (29,554)
Cumulative effect of accounting change ................ -- -- 2,252
Deferred income taxes ................................. 2,218 2,926 (2,797)
Other ................................................. 742 1,350 995
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable ................................ 2,766 5,298 3,654
Other current assets ............................... 673 8,587 2,455
Accounts payable ................................... (5,640) 1,172 2,239
Accrued expenses ................................... (9,919) (12,485) 5,759
Other assets and liabilities ....................... (11,365) 5,129 3,094
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities ....... 38,607 54,970 44,433
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ................. (65,682) (61,675) (62,499)
Proceeds from sale of properties and investments .......... 9,291 18,502 96,654
Acquisitions, net of cash acquired ........................ (89,359) -- (148,922)
Change in restricted cash in escrow ....................... 1,357 1,046 (4,539)
Deferred acquisition costs and other ...................... (5,680) (4,577) (2,711)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities ........... (150,073) (46,704) (122,017)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .................. 457,870 85,590 549,235
Principal payments on long-term debt ...................... (358,639) (142,088) (448,107)
Sale of common stock ...................................... -- 89,736 --
Proceeds from exercise of stock options ................... 386 8,343 234
Preferred stock dividends paid ............................ -- (241) (289)
Purchase of treasury stock ................................ (4,922) (1,987) (1,992)
Deferred financing costs paid ............................. (15,383) -- (18,980)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities ....... 79,312 39,353 80,101
- ----------------------------------------------------------------------------------------------------
Effect of exchange rates on cash .......................... 1,280 (948) (1,025)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash ........................... (30,874) 46,671 1,492
Cash, beginning of period ................................. 59,761 13,090 11,598
- ----------------------------------------------------------------------------------------------------
Cash, end of period ....................................... $ 28,887 $ 59,761 $ 13,090
- ----------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
F-6
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
RailAmerica, Inc. and all of its subsidiaries (the "Company"). All of
RailAmerica's consolidated subsidiaries are wholly-owned except Empresa De
Transporte Ferroviario S.A. ("Ferronor"), a Chilean railroad, in which the
Company has a 55% equity interest. All intercompany balances and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform to the 2002 presentation.
In January 2003, the Company announced its intention to sell its 55%
equity interest in Ferronor, its Chilean railroad operations. As a result,
Ferronor has been presented as a discontinued operation in the financial
statements.
The Company's principal operations consist of rail freight transportation
in North America, Chile, Argentina and Australia.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less at the date of purchase to be cash
equivalents. The Company maintains its cash in demand deposit accounts,
which at times may exceed insurance limits. As of December 31, 2002, the
Company had approximately $28 million of cash in excess of insurance
limits.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which are recorded at historical cost, are
depreciated and amortized on a straight-line basis over their estimated
useful lives. Costs assigned to property purchased as part of an
acquisition are based on the fair value of such assets on the date of
acquisition.
The Company self-constructs portions of its track structure and rebuilds
certain of its rolling stock. In addition to direct labor and material,
certain indirect costs are capitalized. Expenditures which significantly
increase asset values or extend useful lives are capitalized. Repairs and
maintenance expenditures are charged to operating expense when the work is
performed.
The Company uses the group method of depreciation under which a single
depreciation rate is applied to the gross investment in its track assets.
Upon normal sale or retirement of track assets, cost less net salvage
value is charged to accumulated depreciation and no gain or loss is
recognized. The Company periodically reviews its assets for impairment by
comparing the projected undiscounted cash flows of those assets to their
recorded amounts. Impairment charges are based on the excess of the
recorded amounts over their estimated fair value, as measured by the
discounted cash flows.
The Company incurs certain direct labor, contract service and other costs
associated with the development and installation of internal-use computer
software. Costs for newly developed software or significant enhancements
to existing software are capitalized. Research, preliminary project,
operations, maintenance and training costs are charged to operating
expense when the work is performed.
F-7
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Depreciation has been computed using the straight-line method based on
estimated useful lives as follows:
Buildings and improvements 20-33 years
Railroad track 30-40 years
Railroad track improvements 3-10 years
Locomotives, transportation and other equipment 5-30 years
Office equipment and capitalized software 5-10 years
INCOME TAXES
The Company utilizes the liability method of accounting for deferred
income taxes. This method requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse. Deferred tax assets are also established for the
future tax benefits of loss and credit carryovers. The liability method of
accounting for deferred income taxes requires a valuation allowance
against deferred tax assets if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets
will not be realized.
REVENUE RECOGNITION
The Company recognizes transportation revenue after the freight has been
moved from origin to destination. Other revenue is recognized as service
is performed.
FOREIGN CURRENCY TRANSLATION
The financial statements and transactions of the Company's foreign
operations are maintained in their local currency, which is their
functional currency, except for Chile, where the U.S. dollar is used as
the functional currency. Where local currencies are used, assets and
liabilities are translated at current exchange rates in effect at the
balance sheet date. Translation adjustments, which result from the process
of translating the financial statements into U.S. dollars, are accumulated
in the cumulative translation adjustment account, which is a component of
accumulated other comprehensive loss in stockholders' equity. Revenues and
expenses are translated at the average exchange rate for each period.
Gains and losses from foreign currency transactions are included in net
income. At December 31, 2002, accumulated other comprehensive loss
included ($29.4) million of cumulative translation adjustments.
STOCK-BASED COMPENSATION
As of December 31, 2002, the Company has three stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock -Based Compensation," to stock-based employee compensation.
F-8
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Year Ended December 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Net income, as reported ............................................ $ 2,153 $ 17,038 $ 11,661
Less: Total stock-based employee compensation determined
under fair value based method for all awards, net of related tax
effects ............................................................ (4,257) (4,349) (3,585)
---------- ---------- ----------
Pro forma net income (loss) ........................................ $ (2,104) $ 12,689 $ 8,076
========== ========== ==========
Earnings (loss) per share:
Basic-as reported .............................................. $ 0.07 $ 0.78 $ 0.61
---------- ---------- ----------
Basic-pro forma ................................................ $ (0.07) $ 0.58 $ 0.41
---------- ---------- ----------
Diluted-as reported ............................................ $ 0.07 $ 0.71 $ 0.60
---------- ---------- ----------
Diluted-pro forma .............................................. $ (0.07) $ 0.54 $ 0.41
---------- ---------- ----------
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Under SFAS No. 142, goodwill and
identifiable intangible assets with an indefinite life will no longer be
amortized; however, both goodwill and other intangible assets will need to
be tested at least annually for impairment. SFAS No. 144 addresses
financial accounting and reporting for the impairment of long-lived
assets, excluding goodwill and intangible assets, to be held and used or
disposed of. While the adoption of these pronouncements did not have a
material impact on the Company's consolidated financial statements, SFAS
No. 144 will require the Company to report the results of operations of a
railroad that has been disposed of or is being held for disposal in
discontinued operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
is effective for the Company's fiscal year beginning January 1, 2003, and
requires the Company to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The Company
believes the adoption of this pronouncement will not have a material
impact on its financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, requires that debt extinguishments
used as part of a company's risk management strategy should not be
classified as an extraordinary item. The requirement to reclassify debt
extinguishments is effective for fiscal years beginning after May 15,
2002. The Company will adopt SFAS No. 145 on January 1, 2003 and
reclassify $4.5 million and $0.2 million of extraordinary charges, net of
tax, to continuing operations in 2002 and 2001, respectively.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146, which is
effective for exit or disposal activities initiated after December 31,
2002, requires that a liability for a cost associated with an exit or
disposal activity is recognized at fair value when the liability is
incurred rather than when management commits to an exit or disposal plan.
The Company believes the adoption of this pronouncement will not have a
material impact on its financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others: an interpretation
of FASB Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34," which is effective for guarantees issued or
modified after December 31, 2002. This Interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations
F-9
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
under guarantees. This Interpretation also clarifies the requirements
related to the recognition of a liability by a guarantor at the inception
of a guarantee for the obligations the guarantor has undertaken in issuing
that guarantee. The Company believes the adoption of this pronouncement
will not have a material impact on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which
is effective for fiscal years ending after December 15, 2002, provides
alternative methods of transition for voluntary changes to the fair value
based method of accounting for stock-based employee compensation and
requires prominent disclosure in both annual and interim financial
statements about the method used on reported results. The adoption of this
pronouncement did not have a material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which is effective
immediately for variable interest entities created after January 31, 2003,
and applies in the first interim period beginning after June 15, 2003 for
variable interest entities created before February 1, 2003. FIN 46
addresses the consolidation of variable interest entities through
identification of a primary beneficiary. The Company believes the adoption
of this pronouncement will not have a material impact on its financial
statements.
2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number
of common shares outstanding during the year while income from continuing
operations is reduced by preferred stock dividends and accretion.
Diluted earnings per share is calculated using the sum of the weighted
average number of common shares outstanding plus potentially dilutive
common shares arising out of stock options, warrants and convertible
securities. Options and warrants totaling 4.4 million, 1.2 million and 4.3
million were excluded from the diluted earnings per share calculation for
the years ended December 31, 2002, 2001 and 2000, respectively, as well as
assumed conversion of $21.8 million (2.2 million shares) of convertible
debentures in 2002 and $29.2 million (3.1 million shares) of convertible
preferred stock and convertible debentures in 2000, as such securities
were anti-dilutive.
The following is a summary of the income from continuing operations
available for common stockholders and weighted average shares outstanding
(in thousands):
Year Ended December 31,
--------------------------------
2002 2001 2000
------- -------- --------
Income from continuing operations ............... $ 5,263 $ 15,792 $ 8,359
Preferred stock dividends and accretion ......... -- (298) (670)
------- -------- --------
Income from continuing operations available
to common stockholders (basic) .............. 5,263 15,494 7,689
Interest on convertible debt .................... -- 1,044 --
Preferred stock dividends and accretion ......... -- 298 --
------- -------- --------
Income from continuing operations available
to common stockholders (diluted) ............ $ 5,263 $ 16,836 $ 7,689
======= ======== ========
Weighted average shares outstanding (basic) ..... 32,047 21,510 18,040
Assumed conversion:
Options and warrants ........................ 573 1,196 227
Convertible debentures and preferred stock .. -- 2,644 --
------- -------- --------
Weighted average shares outstanding (diluted) ... 32,620 25,350 18,267
======= ======== ========
F-10
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DISCONTINUED OPERATIONS
In January 2003, the Company announced its intent to sell its 55% equity
interest in Ferronor, its Chilean railroad operations. The Company expects
to sell this ownership interest within the next twelve months, therefore,
the results of operations are reported in discontinued operations, net of
applicable income taxes, for all periods presented. In addition, the
liabilities and assets of Ferronor have been reclassified as assets and
liabilities of discontinued operations on the December 31, 2002 balance
sheet (see Note 8 for description of long-term debt). Gains realized on
the sale of this business will be reported in the period in which the
divestiture is complete.
The results of operations for Ferronor were as follows (in thousands):
For the twelve months ended December 31,
2002 2001 2000
------- -------- --------
Operating revenue $22,619 $ 22,085 $ 22,873
Income from discontinued operations $ 974 $ 1,590 $ 1,299
Income tax benefit (provision) 10 (108) (50)
------- -------- --------
Income from discontinued operations, net of tax $ 984 $ 1,482 $ 1,249
======= ======== ========
The major classes of assets and liabilities for Ferronor were as follows
(in thousands):
For the twelve months ended
December 31,
2002 2001
------- -------
Accounts receivable, net $ 3,767 $ 3,496
Inventory 939 976
Other current assets 1,128 1,215
------- -------
Total current assets 5,834 5,687
Property, plant and equipment, net 49,857 49,621
Other assets 498 250
------- -------
Total assets $56,189 $55,558
======= =======
Current maturities of long- term debt $ 6,743 $ 6,853
Accounts payable 2,003 1,962
Accrued expenses 2,878 3,413
------- -------
Total current liabilities 11,624 12,228
Long-term debt, less current maturities 12,427 17,230
Subordinated debt 1,670 2,147
Minority interest and other liabilities 13,186 11,709
------- -------
Total liabilities $38,907 $43,314
======= =======
In February 2000, the Company finalized its plan to sell its trailer
manufacturing operations which consisted of Kalyn/Siebert, L.P. ("KSLP")
and Kalyn/Siebert Canada ("KSC"). This business has been accounted for as
a discontinued operation and results of operations have been excluded from
continuing operations in the consolidated statements of operations for all
periods presented.
In December 2000, the Company sold KSLP for $32.5 million in cash,
including $3.5 million which was in escrow at December 31, 2000. A gain of
$21.0 million was recognized. In December 2000, the Company sold
substantially all of the assets and business of KSC for $6 million in
cash, including $2 million which
F-11
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DISCONTINUED OPERATIONS, continued
was in escrow at December 31, 2000. A loss of $2.6 million was recognized.
As of December 31, 2002 and 2001, $0 and $2.2 million remained in escrow
under terms of the sale agreements.
Total revenue for the trailer manufacturing business was $34.7 million for
the year ended December 31, 2000. Interest expense of $7.3 million was
charged to the manufacturing business in 2000, representing the interest
expense for the portion of the asset sale bridge note, which was repaid
with the proceeds from the sale of the trailer manufacturing business.
Loss before income taxes for the trailer manufacturing business was $4.9
million for the year ended December 31, 2000.
4. ACQUISITIONS
On January 4, 2002, the Company acquired StatesRail, Inc. ("StatesRail"),
a privately owned group of railroads headquartered in Dallas, Texas, which
owned and operated eight railroads (including seven freight railroads and
a tourist railroad in Hawaii) with 1,647 miles of track in 11 states.
Total consideration for the acquisition was $90 million, consisting of $67
million in cash and 1.7 million shares of the Company's common stock
valued at $23 million. At December 31, 2002 there was $4.0 million in
escrow outstanding relating to the purchase. The following table presents
the balances of each major asset and liability caption of StatesRail as of
the acquisition date (in thousands):
StatesRail, Inc. January 4, 2002
---------------- ---------------
Cash $ 105
Accounts receivable, net 9,062
Other current assets 2,128
--------
Total current assets 11,295
Property, plant, and equipment, net 110,883
Other assets 4,000
--------
Total assets $126,178
========
Current portion of long-term debt $ 60
Accounts payable 4,622
Accrued expenses 9,079
--------
Total current liabilities 13,761
Long-term debt 1,457
Deferred income taxes 25,907
--------
Total liabilities $ 41,125
========
F-12
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITIONS, continued
On January 8, 2002, the Company acquired ParkSierra Corp. ("ParkSierra"),
a privately owned group of railroads headquartered in Napa, California,
which owned and operated three freight railroads with 703 miles of track
in four western states. Total consideration for the acquisition was $48
million, consisting of $23 million in cash and 1.8 million shares of the
Company's common stock valued at $25 million. At December 31, 2002 there
was $2.1 million in escrow outstanding relating to the purchase. The
following table presents the balances of each major asset and liability
caption of ParkSierra as of the acquisition date (in thousands):
ParkSierra Corp. January 8, 2002
---------------- ---------------
Cash $ 899
Accounts receivable, net 3,793
Other current assets 1,664
-------
Total current assets 6,356
Property, plant, and equipment, net 62,226
-------
Total assets $68,582
=======
Accounts payable $ 1,937
Accrued expenses 1,266
-------
Total current liabilities 3,203
Deferred income taxes 19,055
Other long-term liabilities 108
-------
Total liabilities $22,366
=======
The cash components of the StatesRail and ParkSierra acquisitions were
financed through available cash and an additional $50 million term loan
under the Company's prior senior credit facility (see Note 8).
The results of operations of StatesRail and ParkSierra have been included
in the Company's consolidated financial statements since the dates of
their respective acquisitions.
The following unaudited pro forma summary presents the consolidated
results of operations for the Company as if the acquisitions of StatesRail
and ParkSierra had occurred at the beginning of 2001 and does not purport
to be indicative of what would have occurred had the acquisition been made
as of that date or results which may occur in the future (in thousands,
except per share data).
For the Twelve
Months Ended
December 31,
2001
--------------
Operating revenue ...................................... $431,735
Income from continuing operations ...................... $ 26,125
Net income ............................................. $ 27,607
Income from continuing operations per share - diluted .. $ 0.86
Net income per share - diluted ......................... $ 0.91
In January 2002, the Company submitted a bid for the acquisition of
National Rail and FreightCorp, two government-owned railroads in
Australia. Subsequently, the Company was notified that another entity was
awarded the bid. Accordingly, the Company recorded a charge in selling,
general and administrative expense during the year ended 2002 of $3.3
million for the direct costs incurred in preparing, submitting and
financing the bid.
F-13
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITIONS, continued
On February 4, 2000, the Company acquired RailTex, Inc. for $128 million
in cash, assumption of $105.3 million in debt and 6.6 million shares of
the Company's common stock valued at $60.9 million. RailTex, the operator
of 25 railroads with over 4,100 miles of rail lines in North America,
became a wholly-owned subsidiary of the Company. As part of the purchase
price and in accordance with EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination", the Company recorded
liabilities of $11.2 million which related to severance and change of
control payments to former RailTex employees. The separation cost activity
was as follows (in thousands):
Separation Costs
----------------
Balance February 2, 2000 ............ $ 11,200
Payments ............................ (8,259)
--------
Balance December 31, 2000 ........... 2,941
Payments ............................ (1,154)
Adjustment to purchase price ........ (729)
--------
Balance December 31, 2001 ........... 1,058
Payments ............................ (240)
--------
Balance December 31, 2002 ........... $ 818
========
The RailTex acquisition was accounted for as a purchase and its results
were included since the date of acquisition. On a pro forma basis
(unaudited), as if the acquisition of RailTex had occurred on January 1,
2000, the Company's operating revenue, income from continuing operations
and diluted earnings per share would have been $372.0 million, $11.7
million and $0.57, respectively. This does not purport to be indicative of
what would have occurred had the acquisition been made on January 1, 2000
or of results which may occur in the future.
5. DISPOSITIONS
In December 2002, the Company sold a right-of-way in South Carolina for
total consideration of $4.25 million consisting of cash of $1.05 million
and a short-term note of $3.2 million. The short-term note bears interest
at 7.5% and is due on October, 31, 2003. The net gain on the transaction
was $3.5 million.
In May 2002, the Company sold the Texas New Mexico Railroad and certain
operating assets for total consideration of $2.25 million consisting of
cash of $0.55 million, a short-term note of $0.85 million and a long-term
note of $0.85 million, resulting in a net gain of $0.8 million which is
included in discontinued operations. The results of operations for the
Texas New Mexico Railroad were not material. The short-term note accrued
interest at 10% and was due on November 15, 2002 and the long-term note
accrues interest at 7% and is due on May 24, 2007. In December 2002, $0.4
million was paid on the short-term note, $0.15 million was added to the
long-term note due on May 24, 2007 and the remaining balance of $0.3
million was extended until December 11, 2006 at an interest rate of 7%.
In March 2002, the Company sold the Georgia Southwestern Railroad and
certain operating assets for total consideration of $7.1 million,
including a long-term note for $0.8 million, resulting in a gain of $4.5
million. The note receivable bears interest at 5% and is due February 28,
2007. The results of operations for the Georgia Southwestern Railroad were
not material.
During 2001, the Company sold Dakota Rail, Inc. for $7.6 million,
resulting in a net gain of $3.9 million. In addition, the Company sold
other non-core assets resulting in a net gain of $2.5 million.
During 2000, the Company sold several railroads and other non-core assets
for total proceeds of $44.0 million, resulting in a net gain of $11.2
million.
F-14
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER BALANCE SHEET DATA
Other current assets consist of the following as of December 31, 2002 and
2001 (in thousands):
2002 2001
------- -------
Track supplies ................... $13,889 $ 7,702
Prepaid expenses and other ....... 8,540 6,502
------- -------
$22,429 $14,204
======= =======
Accrued expenses consist of the following as of December 31, 2002 and 2001
(in thousands):
2002 2001
------- -------
Accrued interest expense ......... $ 8,254 $ 8,382
Accrued compensation and benefits 8,625 5,893
Other accrued liabilities ........ 21,541 25,614
------- -------
$38,420 $39,889
======= =======
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31,
2002 and 2001 (in thousands):
2002 2001
-------- --------
Land ............................. $182,004 $133,643
Buildings and improvements ....... 18,747 15,963
Railroad track and improvements 638,743 504,491
Locomotives, transportation and
other equipment ................. 152,426 147,489
-------- --------
991,920 801,586
Less: accumulated depreciation ... 87,667 62,811
-------- --------
$904,253 $738,775
======== ========
The Company completed $8.4 million in locomotive sale/leaseback
transactions in 2001.
8. LONG-TERM DEBT AND LEASES
Long-term debt consists of the following as of December 31, 2002 and 2001
(in thousands):
2002 2001
-------- --------
Senior credit facilities, see below ................... $375,000 $267,752
Credit facility with Banco de Desarrollo (Ferronor) ... -- 11,678
Credit facility with Banco Security (Ferronor) ........ -- 7,325
Other long-term debt .................................. 12,321 14,932
-------- --------
387,321 301,687
Less current maturities ............................... 4,200 24,484
-------- --------
Long-term debt, less current maturities ........... $383,121 $277,203
======== ========
In May 2002, the Company refinanced its senior credit facility, including
$50 million borrowed in connection with the January 2002 acquisitions of
ParkSierra and StatesRail. The new senior debt facility includes a $375
million Term B loan facility consisting of $265 million of U.S. Term
Loans, $50 million of Canadian Term Loans and $60 million of Australia
Term Loans with a 1% annual principal amortization for seven years and the
balance due in 2009, and a $100 million revolver with sub-limits equal to
$82.5 million in the United States, $10 million in Canada and $7.5 million
in Australia. The revolver is due in
F-15
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND LEASES, continued
2008. The interest rate on the Term B debt and the revolver is LIBOR +
2.50% (4.00% at December 31, 2002). There were no outstanding balances
under the revolver at December 31, 2002. The senior credit facility is
collateralized by substantially all of the assets of the Company,
excluding its investment in Ferronor.
The senior credit facility and the indenture governing our senior
subordinated notes include numerous covenants imposing significant
financial and operating restrictions on the Company. The covenants limit
the Company's ability to, among other things: incur more debt or prepay
existing debt, redeem or repurchase the Company's common stock, pay
dividends or make other distributions, make acquisitions or investments,
use assets as security in other transactions, enter into transactions with
affiliates, merge or consolidate with others, dispose of assets or use
asset sale proceeds, create liens on the Company's assets, make certain
payments or capital expenditures and extend credit. In addition, the
senior credit facility also contains financial covenants that require the
Company to meet a number of financial ratios and tests. The Company was in
compliance with each of these covenants as of December 31, 2002.
During the year ended December 31, 2001, the Company prepaid $19.1 million
of long-term debt with cash received from the sale of common stock. Based
on this reduction, an extraordinary charge of approximately $0.2 million,
net of income tax of $0.1 million, was recorded in the third quarter of
2001 from the write-off of deferred loan costs from this early
extinguishment of debt.
In February 2000, the Company entered into a credit agreement and two
bridge notes in connection with the acquisition of RailTex and the
refinancing of most of the Company's and RailTex's existing debt. The
credit agreement provided (i) a $125 million Term A loan, bearing interest
at LIBOR plus 2.50% (4.44% at December 31, 2001), (ii) a $205 million Term
B loan, initially bearing interest at LIBOR plus 3.25% (5.19% at December
31, 2001), and (iii) a $50 million revolving credit facility which
included $30 million of U.S. dollar denominated loans, $10 million of
Canadian dollar denominated loans and $10 million of Australian dollar
denominated loans with an interest rate of LIBOR plus 2.50%. All of the
capital stock of the Company's U.S. subsidiaries, 65% of the capital stock
of the Canadian and Australian subsidiaries and the majority of the assets
of the Company's subsidiaries served as collateral for the senior credit
facilities. These term loans were repaid in connection with the May 2002
refinancing discussed above.
In connection with the February 2000 debt refinancing, the Company
recorded an extraordinary charge of $2.2 million for early extinguishments
of debt, net of income taxes.
The aggregate annual maturities of long-term debt are as follows (in
thousands):
2003 ..................................... $ 4,200
2004 ..................................... 4,344
2005 ..................................... 4,448
2006 ..................................... 4,493
2007 ..................................... 4,543
Thereafter ............................... 365,293
--------
$387,321
========
During the years ended December 31, 2002, 2001 and 2000 interest of
approximately $584, $668, and $1,257, respectively, was capitalized for
on-going capital improvement projects.
On May 4, 2000, the Company entered into two interest rate swap agreements
for a total notional amount of $212.5 million. The agreements, which had a
term of three years, required the Company to pay a fixed interest rate of
7.23% while receiving a variable interest rate equal to the 90 day LIBOR
rate. In May 2001, the interest rate swap agreements were extended for two
years and the fixed pay rate was reduced to 6.723%. In connection with the
refinancing in May 2002, the Company terminated these existing interest
F-16
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND LEASES, continued
rate swaps. Because these hedging instruments were designated as hedges of
the cash flows under the previous senior debt facility, SFAS No. 133
required the entire balance in other accumulated comprehensive loss to be
charged to earnings. Accordingly, a charge of $17.1 million was recorded
in other income (expense) during the year ended December 31, 2002. In
addition, the Company recorded an extraordinary charge of $4.5 million,
net of income taxes of $2.2 million, to write off the unamortized deferred
loan costs relating to the prior senior credit facility, as of the date of
refinancing.
In connection with the refinancing of the senior credit facility in May,
the Company, as required under its new senior credit facility, entered
into two step-up collars for a total notional amount of $75 million with
an effective date of November 24, 2002 and expiring on November 24, 2004.
Under the terms of these collars, the LIBOR component of the Company's
interest rates can fluctuate within specified ranges. From November 24,
2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24,
2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from
November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and
5.5% and from May 24, 2004 through November 24, 2004, the floor and cap
are 4% and 5.75%. The collars qualify and are accounted for as cash flow
hedges under SFAS No. 133. On November 8, 2002, the Company entered into
two interest rate swaps for a total amount of $300 million for the period
commencing December 5, 2002 through December 5, 2003. Under the terms of
the interest rate swaps, the LIBOR component of the Company's interest
rate is fixed at 1.62% on $300 million of debt. The swaps qualify and are
accounted for as cash flow hedges under SFAS No. 133.
Leases
The Company has several equipment finance leases for equipment. Certain of
these leases are accounted for as capital leases and are presented
separately below. The minimum annual lease commitments at December 31,
2002 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
2003 ............................. $ 80 $19,417
2004 ............................. 204 17,238
2005 ............................. 288 16,463
2006 ............................. 311 14,425
2007 ............................. 337 12,591
Thereafter ....................... 400 17,836
------- -------
$ 1,620 $97,970
======= =======
Rental expense under operating leases was approximately $24.4 million,
$16.0 million, and $9.0 million for the years ended December 31, 2002,
2001 and 2000, respectively.
F-17
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT AND LEASES, continued
The following table presents Ferronor's long-term debt balances, which are
included in Long-term liabilities of discontinued operations in the
balance sheet for the year ended December 31, 2002 (in thousands):
2002 2001
------- -------
Credit facility with Banco de Desarrollo, see below ... 9,491 11,678
Credit facility with Banco Security, interest rate
rate of 4.50% - 7.00% ................................. 5,813 7,325
Other long-term debt .................................. 3,866 5,080
------- -------
19,170 24,083
Less current maturities ............................... 6,743 6,853
------- -------
Long-term debt, less current maturities ........... $12,427 $17,230
======= =======
In February 1999, Ferronor refinanced certain short-term debt with Banco
de Desarrollo. The refinancing consists of two credit lines. The first
credit line is a $5.0 million facility which bears interest at the
interbank cost plus 1.75% (9.05% at December 31, 2002) with interest to be
paid over 120 equal monthly installments and principal to be paid over 96
equal installments beginning two years from the funding. The second credit
line is a $7.7 million facility which bears interest at LIBOR plus 2.75%
(4.25% at December 31, 2002) and is payable in 120 equal monthly
installments (including interest).
9. SUBORDINATED DEBT
In August 2000, RailAmerica Transportation Corp. ("RTC"), a wholly-owned
subsidiary of the Company, sold units consisting of $130.0 million of
12-7/8% senior subordinated notes due 2010 and warrants to purchase
1,411,414 shares of the Company's common stock in a private offering, for
gross proceeds of $122.2 million after deducting the initial purchasers'
discount. All of the Company's U.S. subsidiaries are guarantors of the
senior subordinated notes. The net proceeds received from the issuance of
the units were used to pay $115.0 million of then-existing debt and
approximately $1.8 million of term loans under the Company's senior credit
facilities, resulting in an extraordinary charge of $1.8 million, net of
taxes, associated with the early extinguishment of debt. The warrants,
which have an exercise price of $6.60 per share and expire on August 15,
2010, were valued at $5.1 million and are being amortized as additional
interest expense over ten years, the term of the senior subordinated
notes.
Prior to August 15, 2003, the Company may redeem up to 35% of the senior
subordinated notes at a redemption price of 112.875% of their principal
amount with the proceeds from an equity offering. From August 16, 2003
through August 14, 2005, the Company may not redeem the senior
subordinated notes and subsequent to August 14, 2005, the Company may
redeem the senior subordinated notes for 106.438% of their principal
amount. The premium reduces annually on a sliding scale until they may be
redeemed at their principal amount commencing August 15, 2008.
In June 2000, the Company engaged an investment banking firm to assist the
Company's Board of Directors in evaluating the issuance of the senior
subordinated notes, for which it issued three-year warrants to purchase
150,000 shares of the Company's common stock. Of these warrants, 75,000
are at an exercise price of $5.50 and 75,000 are at an exercise price of
$6.50. These warrants were exercised during 2001.
In August 1999, the Company issued $22.5 million aggregate principal
amount of junior convertible subordinated debentures. Interest on the
debentures accrues at the rate of 6% per annum and is payable
F-18
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SUBORDINATED DEBT, continued
semi-annually. The debentures are convertible, at the option of the
holder, into shares of RailAmerica at a conversion price of $10. The
debentures which mature on July 31, 2004, are general unsecured
obligations and rank subordinate in right of payment to all senior
indebtedness. At RailAmerica's option, the debentures may be redeemed at
par plus accrued interest, in whole or in part, if the closing price of
RailAmerica's common stock is above $20 for 10 consecutive trading days.
During 2001 and 2000, $0.39 million and $0.35 million, respectively, of
the junior convertible subordinated debentures were converted into common
stock.
The Company recognized a $2.3 million charge in the fourth quarter of 2000
for the beneficial conversion feature included in the junior convertible
subordinated debentures. This charge is shown as the cumulative effect of
an accounting change.
10. COMMON STOCK TRANSACTIONS
In December 2001, the Company closed on the private placement sale of 4.3
million shares of its common stock for $12.50 per share, resulting in net
proceeds of $51.5 million. The proceeds from this private placement were
used to finance the StatesRail and ParkSierra acquisitions, which are
described in Note 4, as well as the reduction of debt and other general
corporate purposes. In connection with this private placement, the Company
issued 18-month warrants to purchase 100,000 shares of common stock at an
exercise price of $13.75 per share to the placement agents.
In June 2001, the Company closed on the private placement sale of 3.8
million shares of its common stock for $10.75 per share, resulting in net
proceeds of $38.2 million. The proceeds from this private placement were
used to reduce debt and for general corporate purposes. In connection with
this private placement, the Company issued 18-month warrants to purchase
200,000 shares of common stock at an exercise price of $11.825 per share
to the placement agents.
The Company occasionally repurchases its common stock under its share
repurchase program. Such repurchases are limited to $5 million per year
pursuant to its borrowing arrangements. In July 2002, the Board of
Directors authorized a 2 million share repurchase program through December
31, 2003, subject to restrictions under the Company's borrowing
arrangements. During the year ended December 31, 2002, the Company
repurchased 530,500 shares at a total cost of $4.9 million.
As of December 31, 2002, the Company has a total of 3,069,564 warrants
outstanding with exercise prices ranging from $6.60 to $13.75 and with
expiration dates ranging from March 26, 2003 to August 15, 2010.
11. INCOME TAX PROVISION
Income from continuing operations before income taxes for the years ended
December 31, 2002, 2001 and 2000 consists of (in thousands):
2002 2001 2000
------- ------- --------
Domestic ................ $ 1,608 $ 5,743 $(19,539)
Foreign subsidiaries .... 6,548 14,946 30,798
------- ------- --------
$ 8,156 $20,689 $ 11,259
======= ======= ========
F-19
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAX PROVISION, continued
The provision for income taxes for the years ended December 31, 2002, 2001
and 2000 consists of (in thousands):
2002 2001 2000
------- ------- -------
Federal income taxes:
Current .................... $ -- $ -- $ 334
Deferred ................... (2,341) 801 2,494
------- ------- -------
(2,341) 801 2,828
------- ------- -------
State income taxes:
Current .................... 1,140 437 700
Deferred ................... (795) 565 (1,548)
------- ------- -------
345 1,002 (848)
------- ------- -------
Foreign income taxes
Current .................... 2,140 1,500 2,435
Deferred ................... 733 4,737 1,535
Change in tax law .......... -- (3,177) --
------- ------- -------
2,873 3,060 3,970
------- ------- -------
Total income tax provision ... $ 877 $ 4,863 $ 5,950
======= ======= =======
The following summarizes the total income tax provisions for each of the
years ended December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
------- ------- -------
Continuing operations ........ $ 2,893 $ 4,897 $ 2,900
Discontinued operations ...... 151 108 5,250
Extraordinary item ........... (2,167) (142) (2,200)
------- ------- -------
Total income tax provision ... $ 877 $ 4,863 $ 5,950
======= ======= =======
The differences between the U.S. federal statutory tax rate and the
Company's effective rate from continuing operations are as follows (in
thousands):
2002 2001 2000
------- ------- -------
Income tax provision, at 35% ................... $ 2,854 $ 7,242 $ 3,951
Net benefit due to difference between U.S. &
Foreign tax rates .......................... 155 (408) (15)
Net benefit due to tax law changes in Canada ... -- (3,177) --
Amortization of non-deductible warrants ........ -- -- (602)
Permanent differences .......................... (815) -- --
State income taxes, net ........................ (785) -- --
Other, net ..................................... (208) 610 (345)
Valuation allowance ............................ 1,692 630 (89)
------- ------- -------
Tax provision .................................. $ 2,893 $ 4,897 $ 2,900
======= ======= =======
The Company files a consolidated U.S. income tax return with its domestic
subsidiaries. For state income tax purposes, the Company and each of its
domestic subsidiaries generally file on a separate return basis in the
states in which they do business. The Company's foreign subsidiaries file
income tax returns in their respective jurisdictions.
F-20
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAX PROVISION, continued
The components of deferred income tax assets and liabilities as of
December 31, 2002 and 2001 are as follows (in thousands):
2002 2001
--------- ---------
Deferred tax assets:
Net operating loss carryforward ...... $ 44,346 $ 26,178
Alternative minimum tax credit ....... 783 783
Accrued expenses ..................... 5,889 12,973
Other ................................ -- 24
--------- ---------
Total deferred tax assets ........ 51,018 39,958
Less: valuation allowance ............ (5,563) (3,357)
--------- ---------
Total deferred tax assets, net ... 45,455 36,601
Deferred tax liabilities:
Property, plant and equipment ........ 195,543 132,806
Deferred revenue ..................... 71 617
Net deferred tax liability ....... $(150,159) $ (96,822)
========= =========
The liability method of accounting for deferred income taxes requires a
valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. It is management's belief that
it is more likely than not that a portion of the deferred tax assets will
not be realized. The Company has established a valuation allowance of $5.6
million at December 31, 2002 and $3.4 million at December 31, 2001.
The following is a summary of net operating loss carryforwards by
jurisdiction as of December 31, 2002 (in thousands):
AMOUNT EXPIRATION PERIOD
------- -----------------
U.S. - Federal $ 72,942 2011 - 2022
U.S. - State 164,037 2003 - 2022
Luxembourg 21 None
Australia 34,656 None
Canada 6,569 2003 - 2009
--------
$278,225
========
As part of certain acquisitions, the Company acquired net operating loss
carryforwards for federal and state income tax purposes. The utilization
of the acquired tax loss carryforwards may be limited by the Internal
Revenue Code Section 382. These tax loss carryforwards expire in the years
2003 through 2020.
No provision was made in 2002 for U.S. income taxes on undistributed
earnings of the Canadian or Australian subsidiaries as it is the intention
of management to utilize those earnings in their respective operations for
an indefinite period of time.
12. STOCK OPTIONS
The Company has stock option plans under which employees and non-employee
directors may be granted options to purchase shares of the Company's
common stock at the fair market value at the date of grant. Options
generally vest in two or three years and expire in ten years from the date
of the grant. The Company has adopted the disclosure-only provisions of
SFAS No. 123. See Note 1 for the total compensation costs that would have
been recognized in 2002, 2001, and 2000 if the stock options issued were
valued based on the fair value at the grant date.
F-21
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS, continued
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002, 2001 and 2000:
dividend yield 0.0%, 0.0% and 0.0%; expected volatility of 46%, 41% and
41%; risk-free interest rate of 3.0%, 4.6% and 6.5%; and expected lives of
5, 5 and 5 years. The weighted average fair value of options granted for
2002, 2001 and 2000 were $4.52, $5.03, and $4.75, respectively.
Information regarding the above options for 2002, 2001 and 2000 is as
follows:
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
OUTSTANDING EXERCISE SHARES EXERCISE
SHARES PRICE EXERCISABLE PRICE
----------- -------- ----------- --------
Outstanding at January 1, 2000 .... 1,840,000 $ 6.34
Granted ........................... 1,882,558 $ 8.08
Exercised ......................... (48,969) $ 4.78
Forfeited ......................... (222,498) $ 7.64
--------- ---------
Outstanding at December 31, 2000 .. 3,451,091 $ 7.23 1,937,858 $6.50
=========
Granted ........................... 1,494,289 $11.72
Exercised ......................... (936,223) $ 5.31
Forfeited ......................... (62,855) $ 7.74
--------- ---------
Outstanding at December 31, 2001 .. 3,946,302 $ 9.37 2,557,233 $8.70
--------- =========
Granted ........................... 1,876,000 $10.31
Exercised ......................... (82,912) $ 6.79
Forfeited ......................... (98,159) $11.02
--------- ---------
Outstanding at December 31, 2002 .. 5,641,231 $ 9.69 3,921,857 $9.25
--------- =========
Authorized at December 31, 2002 ... 6,113,893
=========
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF OPTIONS LIFE PRICE OF OPTIONS PRICE
------------- ---------- ----------- -------- ---------- --------
$3.50-$5.00 178,200 3.19 $ 4.53 178,200 $ 4.53
$5.01-$7.50 483,577 6.65 $ 6.52 483,577 $ 6.52
$7.51-$10.00 1,813,954 6.64 $ 8.77 1,777,892 $ 8.78
$10.01-$14.45 3,165,500 9.07 $11.00 1,482,188 $11.28
--------- ----------
5,641,231 3,921,857
========= ==========
The Company maintains an Employee Stock Purchase Plan for all full-time
employees. Each employee may have payroll deductions as a percentage of
their compensation, not to exceed $25,000 per year. The purchase price
equals 85% of the fair market value of a share of the Company's common
stock on certain dates during the year. For the years ended December 31,
2002, 2001 and 2000, 25,081, 21,943 and 11,749 shares of common stock,
respectively, were sold to employees under this plan.
F-22
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. NON-CASH INVESTING AND FINANCING ACTIVITIES
Cash paid for interest from continuing operations during 2002, 2001 and
2000 was $41.0 million, $54.6 million and $41.2 million, respectively.
Cash paid (received) for income taxes during 2002, 2001 and 2000 was $0.2
million, $(1.1) million and $4.0 million, respectively.
The following table summarizes the net cash used in acquisitions, net of
cash acquired, for the years ended December 31, 2002, 2001, and 2000 (in
thousands):
2002 2001 2000
--------- ----- ---------
Common stock issued for businesses acquired ...... $ 40,905 $ -- $ 60,773
Debt issued for business acquired ................ -- -- 105,376
Details of acquisitions:
Working capital components, other than cash .. 316 -- 6,109
Property and equipment ....................... (173,099) -- (390,468)
Other assets ................................. (9) -- (6,980)
Goodwill ..................................... (4,000) -- --
Notes payable and loans payable .............. 1,565 -- 3,148
Deferred income taxes payable ................ 44,963 -- 73,120
--------- ----- ---------
Net cash used in acquisitions .................... $ (89,359) $ -- $(148,922)
========= ===== =========
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and recorded a cumulative
transition charge of $4.4 million, net of tax, to Accumulated Other
Comprehensive Loss ("AOCL"). The standard requires that all derivatives be
recorded on the balance sheet at fair value and establishes criteria for
documentation and measurement of hedging activities.
The Company currently uses derivatives to hedge against increases in fuel
prices and interest rates. The Company formally documents the relationship
between the hedging instrument and the hedged item, as well as the risk
management objective and strategy for the use of the hedging instrument.
This documentation includes linking the derivatives that are designated as
cash flow hedges to specific assets or liabilities on the balance sheet,
commitments or forecasted transactions. The Company assesses at the time a
derivative contract is entered into, and at least quarterly, whether the
derivative item is effective in offsetting the changes in fair value or
cash flows. Any change in fair value resulting from ineffectiveness, as
defined by SFAS No. 133, is recognized in current period earnings. For
derivative instruments that are designated and qualify as cash flow
hedges, the effective portion of the gain or loss on the derivative
instrument is recorded in AOCL as a separate component of Stockholders'
Equity and reclassified into earnings in the period during which the hedge
transaction affects earnings.
The Company monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.
Fuel costs represented 7% of total revenues during 2002. Due to the
significance of fuel expenses to the operations of the Company and the
historical volatility of fuel prices, the Company periodically hedges
against fluctuations in the price of its fuel purchases. Each one-cent
increase in the price of fuel would result in $0.4 million of additional
fuel expense on a monthly basis.
The fuel hedging program includes the use of derivatives that are
accounted for as cash flow hedges. As of December 31, 2002, the Company
entered into a fuel swap agreement to hedge 750,000 gallons per month
F-23
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
in 2003 (35% of estimated North American consumption) at an average price
of 66 cents per gallon, excluding transportation and taxes. The fair value
of the fuel swap was a net receivable of 0.8 million at December 31, 2002.
Interest on the Company's senior credit facility is payable at variable
rates indexed to LIBOR. To partially mitigate the volatility of LIBOR, the
Company entered into two interest rate swaps in May 2000. These swaps were
accounted for as cash flow hedges under SFAS No. 133 and qualified for the
short cut method of recognition. The interest rate swaps locked in a LIBOR
rate of 7.23% on $212.5 million of debt for a three-year period. In 2001,
the Company extended the interest rate swaps for two years and reduced the
LIBOR rate to 6.723%. As noted in Note 8, the Company terminated its
interest rate swaps and reclassified $17.1 million from accumulated other
comprehensive loss against earnings during the year ended 2002, in
connection with the refinancing of the senior credit facility.
In June 2002, the Company, as required under its new senior credit
facility, entered into two step-up collars for a total notional amount of
$75 million with an effective date of November 24, 2002 and expiring on
November 24, 2004. Under the terms of these collars, the LIBOR component
of the Company's interest rates can fluctuate within specified ranges.
From November 24, 2002 through May 24, 2003, the floor and cap are 2% and
4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are
2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and
cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the
floor and cap are 4% and 5.75%. The collars qualify and are accounted for
as cash flow hedges under SFAS No. 133. The fair value of these collars
was a net liability of $1.9 million at December 31, 2002.
On November 8, 2002, the Company entered into two interest rate swaps for
a total amount of $300 million for the period commencing December 5, 2002
through December 5, 2003. Under the terms of the interest rate swaps, the
LIBOR component of the Company's interest rate is fixed at 1.62% on $300
million of debt. The swaps qualify and are accounted for as cash flow
hedges under SFAS No. 133. The fair value of these swaps was a net
liability of $0.6 million at December 31, 2002. Were the Company to
refinance the debt with terms different than the terms of the debt
currently hedged, the hedged transaction would no longer be effective and
any deferred gains or losses would be immediately recognized into income.
Fluctuations in the market interest rate will affect the cost of our
remaining borrowings. Excluding the impact of our interest rate hedges, a
1% increase in interest rates would result in a $3.8 million increase in
interest expense. At December 31, 2002, AOCL included a $1.7 million
charge, net of taxes, relating to the interest rate collars and swaps.
Management believes that the fair value of its senior long-term debt
approximates its carrying value based on the variable rate nature of the
financing, and for all other long-term debt based on current borrowing
rates available with similar terms and maturities. The fair value of the
senior subordinated notes is $136.5 million as of December 31, 2002, based
on the quoted market price.
F-24
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION AND OTHER BENEFIT PROGRAMS
The Company maintains a pension plan for a majority of its Canadian
railroad employees, with both defined benefit and defined contribution
components.
DEFINED BENEFIT - The defined benefit component applies to approximately
60 employees who transferred employment directly from Canadian Pacific
Railway Company ("CPR") to a subsidiary of RailLink, Ltd. The defined
benefit portion of the plan is a mirror plan of CPR's defined benefit
plan. The employees that transferred and joined the mirror plan were
entitled to transfer or buy back prior years of service. As part of the
arrangement, CPR transferred to the Company the appropriate value of each
employee's pension entitlement.
The following chart summarizes the benefit obligations, assets, funded
status and rate assumptions associated with the defined benefit plan for
the years ended December 31, 2002 and December 31, 2001 (in thousands):
January 1, 2002 to January 1, 2001 to January 1, 2000 to
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
EXCHANGE RATE BEGINNING OF YEAR ................... $ 0.63 $ 0.67 $ 0.69
EXCHANGE RATE END OF YEAR ......................... $ 0.63 $ 0.63 $ 0.67
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period ......... $ 3,282 $ 3,114 $ 2,853
Service cost ...................................... 64 60 62
Interest cost ..................................... 230 205 194
Plan participants' contributions .................. 96 89 91
Actuarial loss .................................... 244 0 0
Benefits paid ..................................... (6) 0 (3)
Foreign currency exchange rate changes ............ 0 (186) (83)
------- ------- -------
Benefit obligation at end of period ............... $ 3,910 $ 3,282 $ 3,114
======= ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period .. $ 3,164 $ 3,201 $ 2,655
Actual return on plan assets ...................... (291) (54) 388
Employer contribution ............................. 100 101 106
Plan participants' contributions .................. 97 106 132
Benefits paid ..................................... (6) 0 (3)
Foreign currency exchange rate changes ............ 0 (190) (77)
------- ------- -------
Fair value of plan assets at end of period ........ $ 3,064 $ 3,164 $ 3,201
======= ======= =======
Funded status - (accrued) benefit cost ............ $ (846) $ (118) $ 87
======= ======= =======
ASSUMPTIONS
Discount rate ..................................... 6.50% 7.00% 7.00%
Expected return on plan assets .................... 7.00% 8.00% 8.00%
Rate of compensation increase ..................... 4.00% 4.50% 4.50%
COMPONENTS OF NET PERIODIC BENEFIT COST IN
PERIOD
Service cost ...................................... $ 64 $ 60 $ 62
Interest cost ..................................... 230 205 194
Expected return on plan assets .................... (222) (241) (206)
Amortization of prior service cost ................ 15 15 16
------- ------- -------
Net periodic pension cost ......................... $ 87 $ 39 $ 66
======= ======= =======
F-25
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PENSION AND OTHER BENEFIT PROGRAMS, continued
Freight Australia's employees participate in the Victorian government's
superannuation funds. The contributions made by Freight Australia are as
follows for the year ended December 31, 2002, 2001 and December 31, 2000
(in thousands):
2002 2001 2000
------ ------ ------
Total contributions ...... $2,012 $1,566 $1,536
====== ====== ======
DEFINED CONTRIBUTION - The defined contribution component applies to a
majority of the Company's Canadian railroad employees that are not covered
by the defined benefit component. The Company contributes 3% of a
participating employee's salary to the plan. Pension expense for the year
ended December 31, 2002, 2001 and 2000 for the defined contribution
members was $0.5 million, $0.3 million and $0.2 million, respectively.
PROFIT SHARING PLAN - The Company maintains a contributory profit sharing
plan as defined under Section 401(k) of the U.S. Internal Revenue Code.
The Company made contributions to this plan at a rate of 50% of the
employees' contribution up to a maximum annual contribution of $1,500 per
eligible employee. An employee becomes 100% vested with respect to the
employer contributions after completing five years of service. Employer
contributions during the years ended December 31, 2002, 2001 and 2000 were
approximately $644,000, $484,000 and $286,000, respectively.
16. COMMITMENTS AND CONTINGENCIES
In 2000, certain parties filed property damage claims totaling
approximately $32.5 million against RaiLink Ltd. and RaiLink Canada Ltd.,
wholly-owned subsidiaries of RailAmerica, and others in connection with
fires that allegedly occurred in 1998. The Company is vigorously defending
these claims, and has insurance coverage to approximately $13.0 million to
cover these claims. It is the opinion of management that the ultimate
liability, if any, with respect to these matters will fall within the
insurance coverage and that these claims will not have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims, which are pending or
could be asserted against the Company. Litigation is subject to many
uncertainties, the outcome of individual litigated matters is not
predictable with assurance, and it is reasonably possible that some of
these matters may be decided unfavorably to the Company. It is the opinion
of management that the ultimate liability, if any, with respect to these
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
The Company has a $4.7 million contingent obligation, under certain events
of default or if line abandonment occurs, to the Canadian National
Railroad in connection with its properties. The contingent obligation
bears no interest and has no pre-defined terms of payment or maturity.
The Company's operations are subject to extensive environmental
regulation. The Company records liabilities for remediation and
restoration costs related to past activities when the Company's obligation
is probable and the costs can be reasonably estimated. Costs of ongoing
compliance activities to current operations are expensed as incurred. The
Company's recorded liabilities for these issues represent its best
estimates (on an undiscounted basis) of remediation and restoration costs
that may be required to comply with present laws and regulations. During
the fourth quarter of 2001, the Company reduced its environmental
liability by $1.9 million due to a change in environmental regulations.
The remaining liabilities are not material. It is the opinion of
management that the ultimate liability, if any, with respect to these
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
F-26
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SEGMENT INFORMATION
The Company's continuing operations have been classified into two business
segments: North American rail transportation and International rail
transportation. The North American rail transportation segment includes
the operations of the Company's railroad subsidiaries in the United States
and Canada, as well as corporate expenses. The international segment has
been restated for the exclusion of the Chilean operations except for total
assets and capital expenditures, due to its reclassification to
discontinued operations.
Business and geographical segment information for the years ended December
31, 2002, 2001 and 2000 is as follows (in thousands):
YEAR ENDED DECEMBER 31, 2002:
NORTH AMERICA INTERNATIONAL
------------- -------------
CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA
------------ ------------- -------- ------- ---------
Revenue ................ $ 428,243 $274,251 $ 59,077 $ -- $ 94,915
Depreciation and
amortization ......... $ 33,158 $ 18,428 $ 3,875 $ -- $ 10,855
Income before
income taxes ......... $ 8,156 $ 1,608 $ 4,404 $ -- $ 2,144
Interest expense ....... $ 43,441 $ 37,073 $ 3,414 $ -- $ 2,954
Total assets ........... $1,106,553 $715,615 $141,853 $56,189 $192,876
Capital expenditures ... $ 65,682 $ 37,980 $ 8,587 $ 2,021 $ 17,094
YEAR ENDED DECEMBER 31, 2001:
NORTH AMERICA INTERNATIONAL
------------- -------------
CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA
------------ ------------- -------- ------- ---------
Revenue ................ $ 347,546 $184,216 $ 61,900 $ -- $101,430
Depreciation and
amortization ......... $ 24,393 $ 13,938 $ 3,523 $ -- $ 6,932
Income before
income taxes ......... $ 20,689 $ 5,743 $ 2,271 $ -- $ 12,675
Interest expense ....... $ 50,714 $ 43,893 $ 6,565 $ -- $ 256
Total assets ........... $ 891,168 $630,607 $ 87,952 $59,342 $113,267
Capital expenditures ... $ 61,675 $ 29,148 $ 9,869 $ 2,444 $ 20,214
YEAR ENDED DECEMBER 31, 2000:
NORTH AMERICA INTERNATIONAL
------------- -------------
CONSOLIDATED UNITED STATES CANADA CHILE AUSTRALIA
------------ ------------- -------- ------- ---------
Revenue ................ $ 334,615 $169,354 $ 63,057 $ -- $102,204
Depreciation and
amortization ......... $ 23,322 $ 14,052 $ 3,832 $ -- $ 5,438
Income (loss) before
income taxes ......... $ 11,259 $(19,539) $ 13,752 $ -- $ 17,046
Interest expense ....... $ 53,912 $ 53,010 $ 431 $ -- $ 471
Total assets ........... $ 839,703 $635,746 $ 83,724 $57,629 $ 62,604
Capital expenditures ... $ 62,499 $ 24,566 $ 9,570 $10,018 $ 18,345
F-27
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. UNAUDITED QUARTERLY FINANCIAL DATA
All quarterly financial data has been restated for the inclusion of
Ferronor's results in discontinued operations.
Quarterly financial data for 2002 is as follows (in thousands, except per
share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- --------- -------- --------
Operating revenue ................... $105,811 $ 109,766 $108,488 $104,178
Operating income .................... $ 19,574 $ 20,538 $ 17,761 $ 12,632
Income(loss) from continuing
operations ........................ $ 4,899 $ (7,094) $ 5,582 $ 1,876
Net income (loss) ................... $ 5,143 $ (10,725) $ 5,913 $ 1,822
Basic income (loss) from
continuing operations per share ... $ 0.15 $ (0.22) $ 0.17 $ 0.06
Diluted income (loss) from
continuing operations per share ... $ 0.15 $ (0.22) $ 0.17 $ 0.06
Quarterly financial data for 2001 is as follows (in thousands, except per
share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- --------- -------- --------
Operating revenue ................... $ 85,875 $ 88,008 $ 87,842 $ 85,821
Operating income .................... $ 17,008 $ 18,888 $ 18,794 $ 16,535
Income from continuing
operations ........................ $ 2,408 $ 3,734 $ 4,626 $ 5,024
Net income .......................... $ 2,787 $ 4,153 $ 4,919 $ 5,179
Basic income from
continuing operations per share ... $ 0.13 $ 0.20 $ 0.19 $ 0.20
Diluted income from
continuing operations per share ... $ 0.12 $ 0.19 $ 0.18 $ 0.19
F-28
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION
In August 2000, RailAmerica Transportation Corp. ("Issuer"), a
wholly-owned subsidiary of RailAmerica, Inc. ("Parent"), sold units
including 12 7/8% senior subordinated notes, which are registered with the
Securities and Exchange Commission. The notes are guaranteed by the
Parent, the domestic subsidiaries of the Issuer and Palm Beach Rail
Holdings, Inc.
RAILAMERICA, INC.
Consolidating Balance Sheet
At December 31, 2002
(in thousands)
NON
COMPANY GUARANTOR GUARANTOR
ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash ................................... $ -- $ 8,895 $ 369 $ 19,623 $ -- $ 28,887
Cash held in escrow .................... -- 245 -- 126 -- 371
Accounts and notes receivable .......... -- 654 39,984 22,825 -- 63,463
Current assets of discontinued
operations ........................... -- -- -- 5,834 5,834
Other current assets ................... -- 3,243 13,660 5,526 -- 22,429
--------- --------- -------- --------- --------- -----------
Total current assets ............. -- 13,037 54,013 53,934 -- 120,984
--------- --------- -------- --------- --------- -----------
Property, plant and equipment, net ....... 42 1,374 620,534 282,303 -- 904,253
Long-term assets of discontinued
operations ............................. -- -- 50,355 50,355
Other assets ............................. 16,892 1,163 8,136 4,770 -- 30,961
Investment in and advances to affiliates . 292,664 272,696 112,671 (4,623) (673,409) --
--------- --------- -------- --------- --------- -----------
Total assets ..................... $ 309,598 $ 288,271 $795,354 $ 386,739 $(673,409) $ 1,106,553
========= ========= ======== ========= ========= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ... $ 2,650 $ -- $ 450 $ 1,100 $ -- $ 4,200
Accounts payable ....................... 149 988 30,512 15,073 -- 46,722
Accrued expenses ....................... 7,135 3,020 21,558 6,707 -- 38,420
Current liabilities of discontinued
operations ........................... -- -- -- 11,624 -- 11,624
--------- --------- -------- --------- --------- -----------
Total current liabilities ........ 9,934 4,008 52,520 34,504 -- 100,966
--------- --------- -------- --------- --------- -----------
Long-term debt, less current maturities .. 262,350 -- 11,871 108,900 -- 383,121
Subordinated debt ........................ 120,224 21,107 -- -- -- 141,331
Deferred income taxes .................... (20,251) (15,747) 154,331 31,826 -- 150,159
Long-term liabilities of discontinued
operations ............................. -- -- -- 27,283 -- 27,283
Other liabilities ........................ 2,504 -- 7,803 14,483 -- 24,790
Stockholders' equity:
Common stock ........................... -- 32 3,263 63,589 (66,852) 32
Additional paid-in capital ............. 758 261,372 433,564 66,715 (501,037) 261,372
Retained earnings ...................... (64,268) 48,055 131,527 53,003 (120,262) 48,055
Accumulated other comprehensive
Income .............................. (1,653) (30,556) 475 (13,564) 14,742 (30,556)
--------- --------- -------- --------- --------- -----------
Total stockholders' equity ....... (65,163) 278,903 568,829 169,743 (673,409) 278,903
--------- --------- -------- --------- --------- -----------
Total liabilities and
stockholders' equity ........... $ 309,598 $ 288,271 $795,354 $ 386,739 $(673,409) $ 1,106,553
========= ========= ======== ========= ========= ===========
F-29
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC.
Consolidating Statement of Income
For the year ended December 31, 2002
(in thousands)
NON
COMPANY GUARANTOR GUARANTOR
ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
Operating revenue ........................ $ -- $ -- $274,251 $ 153,992 $ -- $ 428,243
--------- --------- -------- --------- --------- -----------
Operating expenses:
Transportation ......................... -- -- 138,367 104,188 -- 242,555
Selling, general and administrative .... 187 25,230 51,100 13,267 -- 89,784
Gain on sale and impairment of
assets (net) ........................ -- 101 (9,191) (65) -- (9,155)
Terminated motor carrier operations,
net .................................. -- -- -- 1,396 1,396
Depreciation and amortization .......... 92 200 18,136 14,730 -- 33,158
--------- --------- -------- --------- --------- -----------
Total operating expenses ......... 279 25,531 198,412 133,516 -- 357,738
--------- --------- -------- --------- --------- -----------
Operating (loss) income .......... (279) (25,531) 75,839 20,476 -- 70,505
Interest expense ......................... (11,744) (1,532) (23,797) (6,368) -- (43,441)
Equity in earnings of subsidiaries ....... 24,921 (701) -- -- (24,220) --
Other income (expense) ................... (18,911) 21,001 (14,158) (6,840) -- (18,908)
--------- --------- -------- --------- --------- -----------
Income from continuing
operations before income taxes .. (6,013) (6,763) 37,884 7,268 (24,220) 8,156
Provision for income taxes ............... (10,517) (8,916) 18,924 3,402 -- 2,893
--------- --------- -------- --------- --------- -----------
Income from continuing operations .. 4,504 2,153 18,960 3,866 (24,220) 5,263
Gain from sale of discontinued
operations (net of tax) .................. -- -- 387 -- -- 387
Income from discontinued operations (net
of tax) .................................. -- -- -- 984 -- 984
Extraordinary loss from early
extinguishment of debt (net of tax) ... (4,481) -- -- -- -- (4,481)
--------- --------- -------- --------- --------- -----------
Net income ....................... $ 23 $ 2,153 $ 19,347 $ 4,850 $ (24,220) $ 2,153
========= ========= ======== ========= ========= ===========
F-30
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the year ended December 31, 2002
(in thousands)
Non
Company Guarantor Guarantor
Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income ............................. $ 23 $ 2,153 $ 19,347 $ 4,850 $ (24,220) $ 2,153
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization ...... 3,795 955 18,162 18,339 -- 41,251
Financing costs .................... 25,433 -- -- -- -- 25,433
Equity in earnings of subsidiaries . (24,921) 701 -- -- 24,220 --
Gain on sale or disposal of
properties ....................... -- 101 (10,588) 782 -- (9,705)
Deferred income taxes .............. (12,306) (8,962) 20,142 3,344 -- 2,218
Other .............................. -- 1,417 10 (685) -- 742
Changes in operating assets and
liabilities, net of acquisitions
and dispositions:
Accounts receivable ............. -- (1,151) 4,780 (863) -- 2,766
Other current assets ............ 22 2,483 (1,555) (277) -- 673
Accounts payable ................ -- (727) (4,776) (137) -- (5,640)
Accrued expenses ................ (1,777) (1,751) (2,167) (4,224) -- (9,919)
Other assets and liabilities .... (17,057) 4,210 (1,739) 3,221 -- (11,365)
--------- --------- -------- --------- --------- -----------
Net cash provided by (used
in) operating activities .... (26,788) (571) 41,616 24,350 -- 38,607
--------- --------- -------- --------- --------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment ............................ -- (646) (37,334) (27,702) -- (65,682)
Proceeds from sale of properties ....... -- 963 7,963 365 -- 9,291
Acquisitions, net of cash acquired ..... -- -- (89,359) -- -- (89,359)
Change in restricted cash in escrow .... -- -- 1,357 -- -- 1,357
Deferred acquisition costs and other ... -- (3,008) -- (2,672) -- (5,680)
--------- --------- -------- --------- --------- -----------
Net cash used in investing
activities ................... -- (2,691) (117,373) (30,009) -- (150,073)
--------- --------- -------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt ................................. 343,500 -- 556 113,814 -- 457,870
Principal payments on long-term debt ... (346,254) -- (883) (11,502) -- (358,639)
Disbursements/receipts on intercompany
debt ................................. 44,925 (21,356) 76,408 (99,977) -- --
Proceeds from exercise of stock
options and warrants ................. -- 385 -- -- -- 385
Purchase of treasury stock ............. -- (4,921) -- -- -- (4,921)
Deferred financing costs paid .......... (15,383) -- -- -- -- (15,383)
--------- --------- -------- --------- --------- -----------
Net cash provided by (used in)
financing activities ......... 26,788 (25,892) 76,081 2,335 -- 79,312
--------- --------- -------- --------- --------- -----------
Effect of exchange rates on cash ......... -- -- -- 1,280 -- 1,280
--------- --------- -------- --------- --------- -----------
Net (decrease) increase in cash .......... -- (29,154) 324 (2,044) -- (30,874)
Cash, beginning of period ................ -- 38,049 45 21,667 -- 59,761
--------- --------- -------- --------- --------- -----------
Cash, end of period ...................... $ -- $ 8,895 $ 369 $ 19,623 $ -- $ 28,887
========= ========= ======== ========= ========= ===========
F-31
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC.
Consolidating Balance Sheet
At December 31, 2001
(in thousands)
NON
COMPANY GUARANTOR GUARANTOR
ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash ................................... $ -- $ 38,049 $ 457 $ 21,254 $ -- $ 59,761
Cash held in escrow .................... -- 245 2,000 173 -- 2,418
Accounts and notes receivable .......... -- 911 29,353 24,014 -- 54,278
Other current assets ................... 11 1,344 5,801 7,048 -- 14,204
--------- --------- -------- --------- --------- -----------
Total current assets ............. 11 40,550 37,611 52,489 -- 130,661
--------- --------- -------- --------- --------- -----------
Property, plant and equipment, net ....... 48 929 434,137 303,662 -- 738,775
Other assets ............................. 12,884 3,518 (5,180) 10,510 -- 21,732
Investment in and advances to affiliates . 344,002 187,223 29,965 (113,810) (447,380) --
--------- --------- -------- --------- --------- -----------
Total assets ..................... $ 356,945 $ 232,220 $496,533 $ 252,850 $(447,380) $ 891,168
========= ========= ======== ========= ========= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ... $ 16,635 $ -- $ 2,695 $ 6,853 $ (1,699) $ 24,484
Accounts payable ....................... -- 1,831 15,667 18,536 -- 36,035
Accrued expenses ....................... 7,638 1,356 18,635 12,260 -- 39,889
--------- --------- -------- --------- --------- -----------
Total current liabilities ........ 24,273 3,187 36,997 37,649 (1,699) 100,408
--------- --------- -------- --------- --------- -----------
Long-term debt, less current maturities .. 251,117 -- 8,842 17,244 -- 277,203
Subordinated debt ........................ 118,942 20,679 -- 5,367 -- 144,988
Deferred income taxes .................... (28,978) (12,607) 108,991 29,417 -- 96,822
Minority interest and other liabilities .. 15,155 2 20,317 20,729 (5,415) 50,788
Stockholders' equity:
Common stock ........................... -- 29 5,565 62,035 (67,600) 29
Additional paid-in capital ............. -- 224,248 278,322 45,623 (323,945) 224,248
Retained earnings ...................... (14,118) 45,902 37,499 50,826 (74,207) 45,902
Accumulated other comprehensive
Income .............................. (9,446) (49,220) -- (16,040) 25,486 (49,220)
--------- --------- -------- --------- --------- -----------
Total stockholders' equity ....... (23,564) 220,959 321,386 142,444 (440,266) 220,959
--------- --------- -------- --------- --------- -----------
Total liabilities and
stockholders' equity ........... $ 356,945 $ 232,220 $496,533 $ 252,850 $(447,380) $ 891,168
========= ========= ======== ========= ========= ===========
F-32
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC
Consolidating Statement of Income
For the Year Ended December 31, 2001
(in thousands)
NON
COMPANY GUARANTOR GUARANTOR
ISSUER (PARENT) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
Operating revenue ........................ $ -- $ 1,776 $182,047 $ 163,723 $ -- $ 347,546
--------- --------- -------- --------- --------- -----------
Operating expenses:
Transportation ......................... -- -- 94,379 101,726 -- 196,105
Selling, general and administrative .... 185 15,077 32,184 14,536 -- 61,982
Gain on sale and impairment of
assets (net) ......................... 26 -- (6,440) (8) -- (6,422)
Terminated motor carrier operations,
net .................................. -- -- -- 263 -- 263
Depreciation and amortization .......... 1,031 130 12,777 10,455 -- 24,393
--------- --------- -------- --------- --------- -----------
Total operating expenses ........... 1,242 15,207 132,900 126,972 -- 276,321
--------- --------- -------- --------- --------- -----------
Operating (loss) income ............ (1,242) (13,431) 49,147 36,751 -- 71,225
Interest expense ......................... (14,522) (1,581) (23,854) (10,757) -- (50,714)
Equity in earnings of subsidiaries ....... 25,253 12,614 -- -- (37,867) --
Minority interest and other income
(expense) .............................. -- 15,064 (7,490) (7,396) -- 178
--------- --------- -------- --------- --------- -----------
Income from continuing
operations before income taxes ..... 9,489 12,666 17,803 18,598 (37,867) 20,689
Provision for income taxes ............... (3,099) (4,371) 5,114 7,253 -- 4,897
--------- --------- -------- --------- --------- -----------
Income from continuing operations .. 12,588 17,037 12,689 11,345 (37,867) 15,792
Income from discontinued operations (net
of tax) ................................ -- -- -- 1,482 -- 1,482
Extraordinary loss from early
extinguishment of debt (net of tax) .... (238) -- -- -- -- (236)
--------- --------- -------- --------- --------- -----------
Net income ....................... $ 12,352 $ 17,037 $ 12,689 $ 12,827 $ (37,867) $ 17,038
========= ========= ======== ========= ========= ===========
F-33
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2001
(in thousands)
Non
Company Guarantor Guarantor
Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income ............................. $ 12,352 $ 17,037 $ 12,689 $ 12,827 $ (37,867) $ 17,038
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization ...... 4,584 891 13,853 12,682 -- 32,011
Write-off of deferred loan costs ... 378 -- -- -- -- 378
Equity in earnings of subsidiaries . (25,253) (12,614) -- -- 37,867 --
Gain on sale or disposal of
properties ....................... -- -- (6,428) (6) -- (6,434)
Deferred income taxes .............. (3,244) (4,371) 3,904 6,637 -- 2,926
Other .............................. -- -- -- 1,350 -- 1,350
Changes in operating assets and
liabilities, net of acquisitions
and dispositions:
Accounts receivable .............. 11 1,038 3,450 799 -- 5,298
Other current assets ............. 12 (515) 5,049 4,041 -- 8,587
Accounts payable ................. (74) 1,294 4,356 (4,404) -- 1,172
Accrued expenses ................. (2,249) 218 (11,397) 942 -- (12,485)
Other assets and liabilities ..... 92 340 3,819 878 -- 5,129
--------- --------- -------- --------- --------- -----------
Net cash provided by (used in)
operating activities ......... (13,390) 3,318 29,297 35,745 -- 54,970
--------- --------- -------- --------- --------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment ............................ (7) (421) (30,674) (30,573) -- (61,675)
Proceeds from sale of properties ....... -- -- 13,592 4,910 -- 18,502
Change in restricted cash in escrow .... -- (245) 1,291 -- -- 1,046
Deferred acquisition costs and other ... -- (2,319) 42 (2,300) -- (4,577)
--------- --------- -------- --------- --------- -----------
Net cash used in investing
activities ................... (7) (2,985) (15,749) (27,962) -- (46,703)
--------- --------- -------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt ................................. 84,800 -- 649 141 -- 85,590
Principal payments on long-term debt ... (136,762) -- (5,326) -- -- (142,088)
Disbursements/receipts on intercompany
debt ................................. 65,360 (58,142) (11,357) 4,139 -- --
Sale of Common Stock ................... -- 89,736 -- -- -- 89,736
Proceeds from exercise of stock
options and warrants ................. -- 8,343 -- -- -- 8,343
Preferred stock dividends paid ......... -- (241) -- -- -- (241)
Purchase of treasury stock ............. -- (1,987) -- -- -- (1,987)
Deferred financing costs paid .......... -- -- -- -- -- --
--------- --------- -------- --------- --------- -----------
Net cash provided by (used in)
financing activities ......... 13,398 37,709 (16,034) 4,280 -- 39,353
--------- --------- -------- --------- --------- -----------
Effect of exchange rates on cash ......... -- -- -- (948) -- (948)
--------- --------- -------- --------- --------- -----------
Net (decrease) increase in cash .......... -- 38,042 (2,487) 11,115 -- 47,671
Cash, beginning of period ................ -- 7 2,944 10,139 -- 13,090
--------- --------- -------- --------- --------- -----------
Cash, end of period ...................... $ -- $ 38,049 $ 457 $ 21,254 $ -- $ 59,761
========= ========= ======== ========= ========= ===========
F-34
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC.
Consolidating Statement of Income
For the Year Ended December 31, 2000
(in thousands)
Non
Company Guarantor Guarantor
Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
Operating revenue ........................ $ -- $ 594 $169,353 $ 165,261 $ (593) $ 334,615
--------- --------- -------- --------- --------- -----------
Operating expenses:
Transportation ......................... -- -- 87,897 107,570 -- 195,467
Selling, general and administrative .... 530 11,730 34,090 13,727 (593) 59,484
Gain on sale and impairment of assets
(net) ................................ (762) -- (10,753) 331 -- (11,184)
Terminated motor carrier operations,
net .................................. -- -- -- 88 -- 88
Depreciation and amortization .......... 944 121 12,987 9,270 -- 23,322
--------- --------- -------- --------- --------- -----------
Total operating expenses ........... 712 11,851 124,221 130,986 (593) 267,177
--------- --------- -------- --------- --------- -----------
Operating income ................... (712) (11,257) 45,132 34,275 -- 67,438
Interest expense ......................... (48,428) (1,910) (2,247) (1,327) -- (53,912)
Interest in equity of subsidiaries ....... 55,891 25,301 -- -- (81,192) --
Minority interest and other income
(expense) .............................. -- 7 223 (2,497) -- (2,267)
--------- --------- -------- --------- --------- -----------
Income from continuing operations
before income taxes ................ 6,751 12,141 43,108 30,451 (81,192) 11,259
Provision for income taxes ............... (11,548) (3,093) 10,130 7,411 -- 2,900
--------- --------- -------- --------- --------- -----------
Income from continuing operations ... 18,299 15,234 32,978 23,040 (81,192) 8,359
Discontinued operations:
Gain on disposal of discontinued
segment (net of tax) ................. -- -- 13,527 (2,000) -- 11,527
Loss from operations of discontinued
segment (net of tax) ................. -- -- (5,077) 3,100 -- (1,977)
Extraordinary loss from early
extinguishment of debt (net of tax) .. (1,299) (1,321) (1,376) -- -- (3,996)
Cumulative effect of accounting change . -- (2,252) -- -- -- (2,252)
--------- --------- -------- --------- --------- -----------
Net income ....................... $ 17,000 $ 11,661 $ 40,052 $ 24,140 $ (81,192) $ 11,661
========= ========= ======== ========= ========= ===========
F-35
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued
RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2000
(In thousands)
Non
Company Guarantor Guarantor
Issuer (Parent) Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ...................... $ 17,000 $ 11,661 $ 40,052 $ 24,140 $ (81,192) $ 11,661
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization ...... 4,594 1,236 15,751 12,985 -- 34,566
Financing costs .................... 1,615 1,353 735 1,154 -- 4,857
Interest paid in kind .............. -- -- 5,806 -- -- 5,806
Equity interest in earnings of
affiliate ........................ (55,891) (25,301) -- (554) 81,192 (554)
(Gain) loss on sale or disposal of
properties ....................... (762) -- (31,857) 3,065 -- (29,554)
Cumulative effect of accounting
change ........................... -- 2,252 -- -- -- 2,252
Deferred income taxes .............. (13,984) (4,431) 20,549 (4,931) -- (2,797)
Other .............................. -- -- -- 995 -- 995
Changes in operating assets and
liabilities, net of acquisitions
and dispositions:
Accounts receivable .............. (356) 745 (2,676) 5,941 -- 3,654
Other current assets ............. (23) (388) (1,802) 4,668 -- 2,455
Accounts payable ................. 74 (240) (2,977) 5,382 -- 2,239
Accrued expenses ................. 9,889 295 (2,562) (1,863) -- 5,759
Other assets and liabilities ..... 263 (1,552) 4,279 104 -- 3,094
--------- --------- -------- --------- --------- -----------
Net cash provided by operating
activities ................... (37,581) (14,370) 45,297 51,088 -- 44,433
--------- --------- -------- --------- --------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment ............................ (52) (26) (24,034) (38,387) -- (62,499)
Proceeds from sale of properties ....... -- -- 80,976 15,678 -- 96,654
Acquisitions, net of cash acquired ..... -- -- (148,922) -- -- (148,922)
Change in cash in escrow ............... -- -- (2,507) (2,032) -- (4,539)
Deferred acquisition costs and other ... -- (2,711) -- -- -- (2,711)
--------- --------- -------- --------- --------- -----------
Net cash used in investing
activities ................... (52) (2,737) (94,486) (24,742) -- (122,017)
--------- --------- -------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt ................................. 539,150 986 6,040 3,059 -- 549,235
Principal payments on long-term debt ... (97,186) (11,699) (156,010) (183,212) -- (448,107)
Disbursements/receipts on intercompany
debt ................................. (385,991) 29,805 201,256 154,930 -- --
Proceeds from exercise of stock
options .............................. -- 234 -- -- -- 234
Preferred stock dividends paid ......... -- (289) -- -- -- (289)
Purchase of treasury stock ............. -- (1,992) -- -- -- (1,992)
Deferred financing costs paid .......... (18,340) (23) (617) -- -- (18,980)
--------- --------- -------- --------- --------- -----------
Net cash provided by financing
activities ................... 37,633 17,022 50,669 (25,223) -- 80,101
--------- --------- -------- --------- --------- -----------
Effect of exchange rates on cash ......... -- -- -- (1,025) -- (1,025)
--------- --------- -------- --------- --------- -----------
Net (decrease) increase in cash .......... -- (85) 1,480 98 -- 1,492
Cash, beginning of period ................ -- 92 1,464 10,042 -- 11,598
--------- --------- -------- --------- --------- -----------
Cash, end of period ...................... $ -- $ 7 $ 2,943 $ 10,140 $ -- $ 13,090
========= ========= ======== ========= ========= ===========
F-36