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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act
of 1934 For the Fiscal Year Ended December 31, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from____to____
Commission File No. 0-20847
--------------------
GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0984624
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
71 Lewis Street, Greenwich, Connecticut 06830
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(203) 629-3722
- --------------
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- ------------------- -------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
-------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. []
Aggregate market value of Class A Common Stock and Class B Common Stock held by
non-affiliates based on closing price on March 16, 2000: $49,833,816
Shares of common stock outstanding as of the close of business on
March 16, 2000:
Class Number of Shares Outstanding
- ----- ----------------------------
Class A Common Stock 3,455,632
Class B Common Stock 845,447
Documents incorporated by reference and the Part of the Form 10-K into which
they are incorporated are listed hereunder.
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 Registrant's proxy statement to be issued in
connection with the Annual Meeting of the
Stockholders of the Registrant to be held on
May 23, 2000.
The remainder of this page is intentionally left blank.
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Part I
Item 1. BUSINESS
Genesee & Wyoming Inc. (the "Registrant" or the "Company") is a holding
Company whose subsidiaries own and operate short line and regional freight
railroads and provide related rail services in North America and Australia. The
Company, through its industrial switching subsidiary, also provides railroad
switching and related services to United States industrial companies with
extensive railroad facilities within their complexes. The Company's predecessor,
Genesee & Wyoming Railroad Company, was founded in 1899 by E.L. Fuller and his
partners. In 1977, when Mortimer B. Fuller, III purchased a controlling interest
in the Company and became its Chief Executive Officer, the Company
was dependent on a single commodity, salt, produced by a single customer. At
that time, the Company generated $3.9 million in operating revenues over its 14
miles of track. In 1978, under the leadership of Mr. Fuller, the Company began a
strategy of growth by acquisition that broadened its sources of rail and
rail-related revenues. Initial expansion was into the railcar leasing business
which was followed by 16 rail line acquisitions in the United States.
Significant U.S. acquisitions have included the Rochester & Southern Railroad,
Inc. (1986), Louisiana & Delta Railroad, Inc. (1987), Buffalo & Pittsburgh
Railroad, Inc. (1988), Allegheny & Eastern Railroad, Inc. (1992), Willamette &
Pacific Railroad, Inc. (1993), Portland & Western Railroad, Inc. (1995),
Illinios & Midland Railroad, Inc. (1996), Pittsburg & Shawmut Railroad, Inc.
(1996), and the rail and industrial switching business of Rail Link, Inc.
(1996).
The Company's domestic growth has been complemented by expansion into
deregulating rail markets worldwide. In 1997, the Company was awarded the
contract to operate the Australia Southern Railroad ("ASR"), a railroad that
provides freight services in South Australia. Also in 1997, the Company formed a
joint-venture for Canadian rail acquisitions, Genesse Rail-One Inc. ("GRO"),
which currently operates two railroads in Canada. In April 1999, the Company
increased its ownership interest in GRO to 95% and now consolidates its
operating results (see Note 3. to Consolidated Financial Statements). In July,
1998, the Company began serving as the operator of a mineral railroad in
northern Mexico. The railroad, known as Linea Coahuila Durango ("LCD"), is a
concession awarded by the Mexican government to two Mexican industrial firms.
Late in 1999, the Company changed its relationship with LCD to that of being a
provider of technical assistance so that management could focus on the Company's
new Mexican operation, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V.
("FCCM"). In August 1999, FCCM, a wholly-owned subsidiary of the Company, was
awarded a concession to operate two railways, the Chiapas line and the Mayab
line, owned by the state-owned Mexican rail company Ferronales. FCCM began
operations on September 1, 1999 (see Note 3. to Consolidated Financial
Statements).
As a result of the Company's growth strategy, the Company has become a
diversified rail operation extending over approximately 3,750 miles of owned or
leased track and 2,700 miles of track under trackage rights or similar track
access arrangements in four countries on two continents providing services to
over 545 customers in North America and 9 major customers in Australia.
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INDUSTRY OVERVIEW
The railroad industry in the United States has undergone significant change
since the passage of the Staggers Rail Act of 1980 (the "Staggers Rail Act"),
which deregulated the pricing and types of services provided by railroads.
Since 1980, Class I railroads in the United States and Canada have taken
aggressive steps to improve profitability and recapture market share. In
furtherance of that goal, these Class I railroads have focused their management
and capital resources on their long-haul core systems, and certain of them have
sold branch lines to smaller and more cost-efficient rail operators that are
willing to commit the resources necessary to meet the needs of the shippers
located on these lines. Divestment of branch lines enables Class I carriers to
minimize incremental capital expenditures, concentrate traffic density, improve
operating efficiency and avoid traffic losses associated with rail line
abandonment.
The commitment of Class I carriers to increase efficiency and profitability
has also led to an increase in merger activity among long haul railroads, such
as, most recently, the acquisition of Consolidated Rail Corporation by Norfolk
Southern Corp. and CSX Transportation, Inc. Such consolidations present both
risk and opportunity for the Company.
Although the acquisition market is highly competitive, the Company believes
that there will continue to be opportunities to acquire railroad lines in the
United States and Canada from both Class I railroads and shortline and regional
operators. The Company believes there may be additional acquisition
opportunities in Australia as the state and federal governments continue the
privatization of the railway system. In addition, the Company believes there may
be acquisition opportunities in Mexico and South America.
STRATEGY
The Company's strategy is to become the dominant provider of rail freight
transportation in the markets it serves by (i) growing its business through
acquisitions to establish new regions or increasing its presence in existing
regions, (ii) expanding its revenue base within each region through marketing
efforts, and (iii) improving its operating efficiency through rationalization
and consolidation of overhead expenses. The Company's growth to date has been
the result of the acquisition of rail properties, which has expanded the
Company's customer base and diversified its commodity mix, and its marketing
efforts.
Acquisition of Rail Properties
The Company seeks to expand its international and U.S. business through the
selective acquisition of rail properties, both in new regions and in regions in
which it currently operates. The Company's fundamental acquisition strategy is
to identify properties that have large industrial customers which will provide
the Company with a stable revenue base and the potential to generate incremental
revenues and additional customers upon implementation of a
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focused marketing plan. In new regions, the Company targets rail properties that
have adequate size to establish a presence in the region, provide a basis for
growth in the region and attract qualified management. When acquiring rail
properties in its existing regions, in addition to seeking properties with large
industrial customers, the Company targets rail properties where it believes the
successful implementation of its operating strategy is likely to generate
significant operating efficiencies.
In evaluating acquisition opportunities, the Company considers, among other
matters, the size of the rail operations, opportunities for expansion, commodity
and customer diversification, revenue stability, connecting carriers, track
condition and maintenance requirements, and expected financial returns. The
Company also considers acquisition opportunities that have the potential to
enable its railroads to provide better or more cost-effective service to major
shippers or to increase and diversify the overall customer base of its
railroads. The Company develops acquisition prospects through its relationships
with Class I carriers and its reputation in the industry. In addition, the
Company uses consultants to assist in the identification and development of
acquisition opportunities. The Company has successfully integrated sixteen
acquisitions of varying sizes and operating characteristics, of which four were
existing short lines, six were Class I divestitures, four were governmental
privatizations, one was an industrial switching company which also operates four
wholly-owned subsidiary railroad companies and one was a Canadian company which
operates two wholly-owned subsidiary railroad companies.
The Company acquires rail properties by purchase of assets, or is able to
serve a market through lease or operating contract. Typically, the Company bids
against other short line and regional operators for available properties. The
structure of each transaction is determined based upon economic and strategic
considerations. In addition to the financial terms of the transaction, sellers
consider more subjective criteria such as a prospective acquiror's operating
experience, its reputation among shippers, and its ability to close a
transaction and commence operations smoothly. The Company believes it has
established an excellent record in each of these areas. In addition, by growing
revenues on its acquired lines and providing improved service to shippers, the
Company is able to provide increased revenue to the Class I carriers that
connect with its North American lines. The Company sees this ability to provide
increased revenue to Class I carriers as an advantage in bidding for properties
in North America.
Marketing
The Company's marketing strategy is to build each region on a base of major
industrial customers, to grow that base business through marketing efforts
directed at its major customers, and to generate incremental revenues outside
the base of major customers by attracting smaller customers and providing
ancillary services which generate non-freight revenues. The Company believes
that over the long term, its strategy of building its regions around a core of
major industrial customers provides a stable revenue base and allows the Company
to focus its efforts on additional growth opportunities within a region.
Through implementation of its marketing strategy, the Company intends to further
increase the number of major customers so that, over time, the Company's
reliance on any one customer will be reduced.
Consistent with its decentralized management structure, the Company's sales
and marketing activity is coordinated in each region by a marketing
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manager. The marketing manager works closely with personnel of each of the
Company's railroads and with other department heads to develop marketing plans
to increase shipments from existing customers and develop new business. The
Company focuses on providing rail service to its customers that is easily
accessible, reliable and cost-effective. The Company considers all of its
employees to be customer service representatives and encourages them to initiate
and maintain regular contact with shippers.
Because most of the traffic transported by the Company's railroads in the
United States and Canada is interchanged with Class I carriers, the Company's
marketing efforts in these areas are often aimed at enhancing its railroads'
relationships with these Class I carriers as well as shippers. The Company
provides related rail services such as railcar leasing, railcar repair,
switching, storage, weighing and blocking and bulk transfer, which enable Class
I carriers and customers to move freight more easily and cost-effectively. For
example, the Company supplies cars to its customers or its railroads when, among
other things, a customer has a need which cannot be filled by cars supplied by
Class I railroads or the Company has an opportunity to provide cars on a cost
basis that both meets customer needs and improves the economics of a freight
move to the Company. The Company actively manages its railcar portfolio, buying
and selling equipment to take advantage of changes in market value in
conjunction with changes in its customers' needs.
Operations
The Company's operating strategy is to increase efficiency and profitability
in each region in which it operates. When acquiring new rail properties within
an existing region, the Company capitalizes on operating efficiencies created by
the presence of its other railroads within that region. In addition,
consolidation of revenue and accounting functions often allows the Company to
operate new railroads with fewer employees. The Company rationalizes its track,
where appropriate, to make its operations more efficient. The Company also
seeks and grants trackage rights to improve regional rail infrastructure
efficiency.
The Company intends to continue to improve the operating efficiency of its
railroads by track rehabilitation, especially where maintenance has been
deferred by the prior owner. Because of the importance of certain of the
Company's shippers to the economic stability and/or development of the regions
where they are located, and because of the importance of certain of the
Company's railroads to the economic infrastructure of those regions,
approximately $35.0 million in state and federal grants for track rehabilitation
and service improvements has been invested in the Company's U.S. rail properties
since 1987.
MANAGEMENT
The Company's Chief Executive Officer, Chief Financial Officer and Executive
Vice President - Corporate Development have responsibility for overall strategic
and financial planning. The Chief Executive Officer has ultimate operating
oversight over Australia and the Chief Operating Officer oversees operations in
North America. The Company believes that through its decentralized management
structure it has developed a culture that encourages employees to take
initiative and responsibility which is rewarded through performance-based profit
sharing and bonus programs.
6
RAILROAD OPERATIONS - NORTH AMERICA
North American Customers
The Company's North American railroads currently serve over 545 customers.
A large portion of the Company's North American railroad operating revenue is
attributable to customers operating in the electric utility, paper, petroleum
products, lumber and forest products, chemicals and metals industries. As the
Company acquires new North American railroad operations, the base of customers
served continues to grow and diversify. The largest ten North American
customers, which is a group that changes annually, accounted for approximately
34%, 38%, and 46% of the Company's North American railroad revenues in 1999,
1998 and 1997, respectively. In 1999, 1998 and 1997, the Company's largest
North American customer was Commonwealth Edison, an electric utility, which
accounted for approximately 15%, 14% and 18% of the Company's North American
railroad revenues in 1999, 1998 and 1997, respectively (see Note 13. to
Consolidated Financial Statements). The Company typically ships freight
pursuant to transportation contracts among the Company, its connecting carriers
and the shipper. These contracts are in accordance with industry norms and vary
in duration from one to seven years.
North American Railroad Commodities
The Company's North American railroads transport a wide variety of
commodities for their customers. Some of the Company's railroads have a well-
diversified commodity mix while others transport one or two principal
commodities. In 1999, coal, coke and ores and pulp and paper products were the
two largest commodity groups transported by the Company's North American
railroads, constituting 25.9% and 15.6%, respectively, of total North American
revenues (see Item 7. of this Report under the heading "Results of Operations -
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998"), and
31.4% and 13.3%, respectively, of total North American carloads. The following
table summarizes the aggregate traffic volume of the Company's North American
railroads by commodity group:
NORTH AMERICAN CARLOADS CARRIED BY COMMODITY GROUP
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Commodity Group Carloads % of Total Carloads % of Total
- --------------- -------- ---------- -------- ----------
Coal, Coke & Ores 94,140 31.4% 75,881 34.8%
Pulp & Paper 39,952 13.3% 21,318 9.7%
Metals 30,614 10.2% 17,862 8.2%
Lumber & Forest Products 28,627 9.6% 20,802 9.5%
Minerals & Stone 23,667 7.9% 13,679 6.3%
Petroleum 20,206 6.7% 15,992 7.3%
Farm & Food Products 19,898 6.6% 17,451 8.0%
Chemicals 16,039 5.4% 12,503 5.7%
Autos & Auto Parts 4,790 1.6% 3,895 1.8%
Other 22,024 7.3% 18,922 8.7%
---------------------------------------------
Total 299,957 100.0% 218,305 100.0%
=============================================
Coal, coke and ores consists primarily of shipments of coal to utilities and
industrial customers.
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Pulp and paper consists primarily of inbound shipments of pulp and outbound
shipments of kraft and fine papers.
Metals consists primarily of scrap metal and finished steel products
shipped to and from steel mills, and coated pipe.
Lumber and forest products consists primarily of finished lumber used in
construction, particleboard used in furniture manufacturing, and wood chips and
pulpwood used in paper manufacturing.
Minerals and stone consists primarily of gravel and stone used in
construction.
Petroleum products consists primarily of fuel oil and crude oil.
Farm and food products consists primarily of sugar, molasses, rice and
other grains and fertilizer.
Chemicals consists primarily of various chemicals used in manufacturing.
Autos and auto parts consists primarily of finished automobiles.
North American Railroad Employees
As of December 31, 1999, the Company's North American railroads had
approximately 1,200 full-time employees. Of this total, approximately 423 are
members of national labor organizations. The Company's North American railroads
have nine contracts with these national labor organizations which have
expiration dates ranging to 2002. The Company has also entered into collective
bargaining agreements with an additional 153 employees who represent themselves,
all of which are currently being renegotiated.
RAILROAD OPERATIONS - AUSTRALIA
ASR commenced operations in November 1997. ASR acquired certain freight
railroad assets of Australian National, a railroad company owned by the
Commonwealth Government of Australia. Coincident with closing the purchase, the
Company sold certain facilities and inventories to two third parties who are
under long-term contracts with ASR to perform locomotive, rolling stock and
track infrastructure maintenance and repairs. Approximately 900 miles of
branchline track structure is owned and exclusively maintained by ASR through
one of the two third parties. The land under the track structure is leased from
the State of South Australia for a 50 year term with an option for an additional
15 years. Some of these branchlines are isolated from other parts of the
system. Also, different parts of the system have different track gauges, that
is, narrow, standard and broad gauge, and ASR must provide discrete locomotives
and rolling stock for each gauge. In some cases, dual gauge track is in place.
Australia Customers
ASR operates unit trains for four major customers, hauling four types of
commodities including grain, gypsum, limestone and marble. In December 1999, it
commenced hauling iron ore to an integrated steel mill at Whyalla in South
Australia for Broken Hill Proprietary Limited ("BHP"). ASR also conducts
shunting (switching) within BHP's facility at Whyalla.
8
ASR provides switching, rail yard storage and other rail related facilities
for hire to its customers, and operates trains for the haulage of rail, ballast
and ties primarily for the owner of the interstate mainline. ASR also acquired
contracts to operate "hook and pull" trains for three customers. Unlike the
United States, the Australian system guarantees open access to rail lines. ASR
provides locomotives, fuel, train crews, and in some cases railcars, to freight
forwarding companies. These freight forwarding companies, ASR's customers,
contract for blocks of time within which their trains can be operated at certain
designated speeds. They are responsible for track access charges and all other
costs of operating these trains. ASR operates hook and pull trains for these
three customers over the 2,100 mile corridor between Melbourne and Perth.
Certain of ASR's branchline trains operate over these main lines as well. ASR
is not responsible for maintenance of these main lines.
Australia Railroad Commodities and Hook and Pull Services (Haulage)
The Company's Australia railroad transports a variety of commodities and
provides hook and pull (haulage) services for its customers. In 1999, hook and
pull (haulage) and grain products were the two largest commodity groups
transported by the Company's Australia railroad, constituting 45.4% and 35.2%,
respectively, of total Australia revenues (see Item 7. of this Report under the
heading "Results of Operations - Year Ended December 31, 1999 compared to Year
Ended December 31, 1998"), and 31.3% and 29.1%, respectively, of total Australia
carloads. The following table summarizes the aggregate traffic volume of the
Company's Australia railroad by commodity group:
AUSTRALIA CARLOADS CARRIED BY COMMODITY GROUP
Year Ended Year Ended
December 31, 1999 December 31, 1998
Commodity Group Carloads % of Total Carloads % of Total
- --------------- -------- ---------- -------- ----------
Hook and Pull
(Haulage) 52,407 31.3% 40,817 22.3%
Grain 48,781 29.1% 45,896 25.1%
Gypsum 40,304 24.1% 36,611 20.0%
Marble 8,343 5.0% 8,294 4.5%
Iron Ore 8,069 4.8% - 0.0%
Lime 4,662 2.8% 2,500 1.4%
Coal 4,317 2.6% 47,286 25.9%
Other 603 0.3% 1,382 0.8%
---------------------------------------------
Total 167,486 100.0% 182,786 100.0%
=============================================
Australia Railroad Employees
As of December 31, 1999, ASR had approximately 190 employees, some of whom
are operational staff that are members of a union. The contract with the union
expires in November, 2000.
U.S. INDUSTRIAL SWITCHING OPERATIONS
U.S. industrial switching operations generate non-freight revenues
primarily by providing freight car switching and related rail services such as
9
railcar leasing, railcar repair and storage to industrial companies with
extensive railroad facilities within their complexes. The Company's U.S.
industrial switching operation serves 24 customers in 9 states. These customers
are primarily in the chemicals, paper, grain, mining and power generation
industries. The provision of the service generally involves locating a work
force and locomotives at the customer's facility and tailoring the service level
to the switching requirements of the site. As of December 31, 1999, the
Company's U.S. industrial switching operations had approximately 190 employees.
SAFETY
The Company's safety program involves all employees at all levels of the
company. Safety focuses on the prevention of accidents/injuries, and the
creation of a safety culture within the organization. The Senior Vice President
of each region is accountable for the results of the program, and each region
has an officer responsible for day-to-day program administration. Line
supervisors have direct responsibility for the safety and training of their
personnel.
The Company maintains a corporate-wide safety policy facilitated by a Vice
President of Safety and a Safety Director. The Company's safety program allows
each of its subsidiaries the flexibility to develop safety rules and procedures
based on local requirements or statutes. The Company works continuously to
comply fully with all federal, state and local government regulations.
Operating personnel are trained and certified in train operations, the
transportation of hazardous materials, safety and operating rules, and
governmental rules and regulations.
The Company also participates in governmental and industry sponsored safety
programs. For example, members of the Company's management serve or have served
on the Board of Directors of Operation Lifesaver (the national grade crossing
awareness program), the New Program Committee of Operation Lifesaver and the
American Short Line & Regional Railroad Association Safety Committee.
In addition, the Company has created two working safety groups. The first
group, the Focus Team, consisting of the general managers and the Vice President
of Safety, develops the corporate safety strategy and ensures consistency of
implementation for policies within the organization. The second group, the GWI
Team, includes safety representatives of each region, a general manager as team
leader, and the Vice President of Safety as the facilitator working together to
refine the Company's safety program. Each team coordinates with the Company's
subsidiaries to insure compliance with and implementation of all safety rules
and regulations. The objective of both teams is to sponsor the Company's
initiatives to make it the safest carrier with regard to its employees,
customers, assets, the public and the environment.
INSURANCE
The Company has obtained insurance coverage for losses arising from personal
injury and for property damage in the event of derailments or other accidents or
occurrences. The liability policies have self-insured retentions ranging from
$50,000 to $500,000 per occurrence. In addition, the Company maintains excess
liability policies which provide supplemental coverage for losses in excess of
primary policy limits. With respect to the transportation of hazardous
commodities, the Company's liability policy covers sudden releases
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of hazardous materials, including expenses related to evacuation. Personal
injuries associated with grade crossing accidents are also covered under the
Company's liability policies. The Company also maintains property damage
coverage, subject to a standard pollution sub-limit and self-insured retentions
ranging from $10,000 to $250,000.
Employees of the Company's United States railroads are covered by the
Federal Employers' Liability Act ("FELA"), a fault-based system under which
injuries and deaths of railroad employees are settled by negotiation or
litigation based on the comparative negligence of the employee and the employer.
FELA-related claims are covered under the Company's liability insurance
policies. Employees of the Company's industrial switching business are covered
under workers' compensation policies.
ASR liability policies have self-insured retentions for third party claims
ranging from $100,000 per occurrence for personal injury to $500,000 for
property damage. Employees are covered for injury or death by public and
private sector insurance arrangements. A levy is paid by ASR to the insurance
provider based on the amount of wages and salaries paid by ASR.
The Company believes its insurance coverage is adequate in light of its
experience and the experience of the rail industry. However, there can be no
assurance as to the adequacy, availability, or cost of insurance in the future.
COMPETITION
In acquiring rail properties, the Company competes with other short line and
regional railroad operators, some of which are larger and have greater financial
resources than the Company. Competition for rail properties is based primarily
upon price, operating history and financing capability. The Company believes
its established reputation as a successful acquiror and operator of short line
rail properties, in combination with its managerial and financial resources,
effectively positions it to take advantage of acquisition opportunities.
However, competition for acquisitions is fierce.
Each of the Company's railroads is typically the only rail carrier directly
serving its customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a lesser
extent, ship and barge operators. The extent of this competition varies
significantly among the Company's railroads. Competition is based primarily
upon the rate charged and the transit time required, as well as the quality and
reliability of the service provided, for an origin-to-destination transportation
package. To the extent other carriers are involved in transporting a shipment,
the Company cannot control the cost and quality of such service. Cost
reductions achieved by major rail carriers over the past several years have
generally improved their ability to compete with alternate modes of
transportation.
REGULATION
The Company's United States railroads are subject to regulation by the
Surface Transportation Board ("STB"), the Federal Railroad Administration
("FRA"), state departments of transportation and some state and local regulatory
agencies. The STB is the successor to certain regulatory functions previously
administered by the Interstate Commerce Commission. Established by the ICC
Termination Act of 1995 ("ICCTA"), the STB has jurisdiction over, among other
things, service levels and compensation of carriers for use of their
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railcars by other carriers. It also must authorize extension or abandonment of
rail lines, the acquisition of rail lines, and consolidation, merger or
acquisition of control of rail common carriers; in limited circumstances, it may
condition such authorization upon the payment of severance benefits to affected
employees. The STB may review rail carrier pricing only in response to a
complaint concerning rates charged for transportation where there is an absence
of effective competition. The FRA has jurisdiction over safety and railroad
equipment standards and also assists in coordinating projects for railroad route
simplification.
In 1980, the Staggers Rail Act fundamentally changed U.S. federal regulatory
policy by emphasizing the promotion of revenue adequacy (the opportunity to earn
revenues sufficient to cover costs and attract capital) for the railroads and
allowing competition to determine to a greater extent rail prices and route and
service options. The ICCTA continues the trend towards limiting regulation of
rail prices. As a result of these changes in legislative policy, the railroad
industry's rate structure has evolved from a system of interrelated prices that
applied over different routes between the same points to a combination of market
based prices that are now subject to limited regulatory constraints. While U.S.
federal regulation of rail prices has been significantly curtailed, U.S. federal
regulation of services continues to affect profitability and competitiveness in
the railroad industry.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment, which have
become increasingly stringent. In the United States these environmental laws
and regulations, which are implemented principally by the Environmental
Protection Agency and comparable state agencies, govern the management of
hazardous wastes, the discharge of pollutants into the air and into surface and
underground waters, and the manufacture and disposal of certain substances.
Similarly, in Australia, these functions are administered primarily by the
Department of Transport on a federal level and by the Environmental Protection
Agency on a state level. In Canada, these functions are administered at the
federal level by Environment Canada and the Department of Transport, and
comparable agencies on a provincial level. In Mexico, these functions are
administered at the federal level by the Ministry of Environment, Natural
Resources and Fisheries and the Attorney General for Environmental Protection,
and by comparable agencies at the state level. There are no material
environmental claims currently pending or, to the Company's knowledge,
threatened against the Company or any of its railroads. In addition, the
Company believes that the operations of its railroads are in material compliance
with current laws and regulations. The Company estimates that any expenses
incurred in maintaining compliance with current laws and regulations will not
have a material effect on the Company's earnings or capital expenditures.
However, there can be no assurance that the current regulatory requirements will
not change, or that currently unforeseen environmental incidents will not occur,
or that past non-compliance with environmental laws will not be discovered on
the Company's properties.
The Commonwealth of Australia has acknowledged that certain portions of the
leasehold and freehold land acquired under the sale and purchase agreement by
ASR contains contamination arising from activities associated with previous
operators. The Commonwealth has provided a release and indemnity to ASR from
obligations, duty or liability arising from pre-existing contamination. The
Commonwealth is required to remediate the relevant land to existing
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environmental standards and for the purpose for which the land was used at the
date of the Sale and Purchase Agreement (or the date on which the land was last
used).
In Mexico, the Company's wholly-owned subsidiary, Compania de Ferrocarriles
Chiapas-Mayab, S.A. de C.V. ("FCCM"), was awarded a 30-year concession to
operate certain railways owned by the state-owned rail company Ferronales.
Under the terms of the concession agreement, Ferronales remains responsible for
remediation of all obligations, duty or liability arising from contamination or
other environmental issues that occurred prior to the execution date of the
concession agreement.
FORWARD-LOOKING STATEMENTS
This Report and the documents incorporated herein by reference may contain
forward-looking statements based on current expectations, estimates and
projections about the Company's industry, or management's beliefs and
assumptions. Words such as "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to forecast. Therefore, actual results may
differ materially from those expressed or forecast in any such forward-looking
statements. Such risks and uncertainties include, in addition to those set
forth in this Item 1 and in Item 7 hereof, those noted in the documents
incorporated by reference. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 2. PROPERTIES
The Company currently operates twenty-one railroads of which seventeen are
in the United States, two are in Canada, one is in Mexico and one is in
Australia. These rail properties typically consist of the track and the
underlying land. Real estate adjacent to the railroad rights-of-way is
generally retained by the seller, and the Company's holdings of such property
are not material. Similarly, the seller typically retains mineral rights and
rights to grant fiber optic and other easements in the properties acquired by
the Company's railroads. Several of the Company's railroads are operated under
terms of leases or operating licenses in which the Company does not assume
ownership of the track and the underlying land.
The Company's railroads operate over approximately 3,750 miles of track that
is owned or leased by the Company. The Company's railroad also operate, under
various trackage rights agreements, over approximately 2,700 miles of track that
is owned or leased by others. Additionally, the Company's wholly-owned
subsidiary, GW Mexico, S.A. de C.V., provides management services for a 700-mile
mineral railroad in northern Mexico known as Linea Coahuila Durango which is
owned by two Mexican industrial firms, Grupo Acerero del Norte, S.A. de C.V. and
Industrias Penoles, S.A. de C.V.
13
The following table sets forth certain information as of December 31, 1999
with respect to the Company's railroads:
RAILROAD AND LOCATION TRACK MILES STRUCTURE CONNECTING CARRIERS (1)
Allegheny & Eastern Railroad, Inc.
("ALY") Pennsylvania 153 (2) Owned BPRR, NS, CSX
Bradford Industrial Rail, Inc.
("BR") Pennsylvania 4 (3) Owned BPRR
Buffalo & Pittsburgh Railroad, Inc. ALY, BLE, BR, CN, CP,
("BPRR") New York, Pennsylvania 279 (4) Owned/Leased CSX, NS, PS, RSR, SB
The Dansville & Mount Morris
Railroad Company
("DMM") New York 8 Owned GNWR
Genesee and Wyoming Railroad Company
("GNWR") New York 26 (5) Owned (5) CP, DMM, RSR, NS, CSX
Pittsburg & Shawmut Railroad, Inc.
("PS") Pennsylvania 224 (6) Owned BPRR, CSX, NS
Rochester & Southern Railroad, Inc.
("RSR") New York 66 (7) Owned BPRR, CP, GNWR, CSX
Illinois & Midland Railroad, Inc. BNSF, IAIS, IC, NS,
("IMR") Illinois 97 (8) Owned PPU, TPW, UP
Portland & Western Railroad, Inc.
("PNWR") Oregon 211 (9) Owned/Leased BNSF, UP, WPRR, POTB
Willamette & Pacific Railroad, Inc.
("WPRR") Oregon 185 (10) Leased UP, PNWR, HLSC
Louisiana & Delta Railroad, Inc.
("LDRR") Louisiana 87 (11) Owned/Leased UP
Carolina Coastal Railway, Inc.
("CLNA") North Carolina 17 (12) Leased NS
Commonwealth Railway, Inc.
("CWRY") Virginia 17 (13) Owned/Leased NS
Talleyrand Terminal Railroad
("TTR") Florida 10 (14) Leased NS, CSX
Corpus Christi Terminal Railroad, Inc.
("CCPN") Texas 26 (15) Leased UP, BNSF, TM
Golden Isles Terminal Railroad, Inc.
("GITM") Georgia 13 (16) Leased CSX, NS
Savannah Port Terminal Railroad, Inc.
("SAPT") Georgia 1 (17) Leased CSX, NS
Australia Southern Railrod Pty Ltd
("ASR") Australia 900 (18) Owned/Leased
Huron Central Railroad, Inc.
("HCR") Canada 179 (19) Leased CP, WC
Quebec Gatineau Railroad, Inc.
("QGRR") Canada 293 (20) Owned/Leased CP, CN
Compania de Ferrocarriles
Chiapas-Mayab, S.A. de C.V. 960 (21) Leased Ferrosur
("FCCM") Mexico
(1) See Legend of Connecting Carriers following this table.
(2) In addition, ALY operates by trackage rights over 3 miles of NS.
14
(3) In addition, BR operates by trackage rights over 14 miles of BPRR.
(4) Includes 92 miles under perpetual leases and 9 miles under a lease expiring
in 2090. In addition, BPRR operates by trackage rights over 27
miles of CSX under an agreement expiring in 2018, and 83 miles of NS under
an agreement expiring in 2027. The Company is seeking to rationalize
approximately 58 miles of owned track that parallels track under the NS
trackage rights agreement.
(5) The operations of the GNWR have been realigned with those of RSR.
(6) In addition, PS operates over 13 miles pursuant to an operating contract.
(7) In addition, RSR has a haulage contract over 52 miles of CP.
(8) In addition, IMR operates by trackage rights over 15 miles of IC, 9 miles
of PPU and 5 miles of UP.
(9) Includes 53 miles under lease expiring in 2015 with a 10-year renewal
unless terminated by either party, 53 miles formerly under lease which was
purchased in November, 1997, and is operated under a rail service easement,
and 92 miles which was purchased in July, 1997. In addition, PNWR operates
by trackage rights over 2 miles of UP and 4 miles of POTB
(10) All under lease expiring in 2013, with renewal options subject to both
parties' consent. In addition, WPRR operates over 41 miles of UP under a
concurrent trackage rights agreement.
(11) Includes 14 miles under a lease expiring in 2011. In addition, LDRR
operates by trackage rights over 91 miles of UP under an agreement
terminable by either party after 1997 and has a haulage contract with M.A.
Patout & Sons over 4 miles of track.
(12) All leased on a month-to-month basis under a Lease and Option to Purchase
Agreement which commenced in 1989.
(13) Includes 12.5 miles under lease expiring in 2009.
(14) All under lease expiring in 2002.
(15) All under lease expiring in 2002.
(16) All under lease expiring in 2002.
(17) All under lease expiring in 2002.
(18) The track structure is owned by the Company. The land on which the track
structure is built is leased from the State of South Australia for a term
of 50 years with a conditional right of renewal for an additional 15 years.
In addition, ASR operates over the 2,100 mile government-owned corridor
between Melbourne and Perth under a trackage rights agreement.
(19) All under lease expiring in 2017, with renewal options subject to both
parties' consent.
(20) Consists of 275 miles which are owned and 18 which are under lease expiring
in 2017, with renewal options subject to both parties' consent. In
addition, QGRR operates by trackage rights over 27 miles of CP.
(21) All under a 30-year concession agreement operating on track structure which
is owned by the state-owned rail company Ferronales. In addition, FCCM
operates by trackage rights over 210 miles on Ferrosur (a recently
privatized rail concession) and a government-owned line.
LEGEND OF CONNECTING CARRIERS
BLE Bessemer and Lake Erie Railroad Company
BNSF Burlington Northern Santa Fe Railway Company
CN Canadian National
CP Canadian Pacific Railway
CSX CSX Transportation, Inc.
HLSC Hampton Railway
IAIS Iowa Interstate Railroad, Ltd.
IC Illinois Central Railroad Company
NS Norfolk Southern Corp.
POTB Port of Tillamook Bay Railroad
PPU Peoria & Pekin Union Railway
SB South Buffalo Railway Company
TM The Texas Mexican Railway Company
TPW Toledo, Peoria & Western Railway Corp.
UP Union Pacific Railroad Company
WC Wisconsin Central
EQUIPMENT
As of December 31, 1999, rolling stock of the Company's North American
operations consisted of 297 locomotives and 3,560 freight cars, some of which
were owned and some of which were leased from others. The Company's rolling
stock for its subsidiary in Australia consisted of approximately 80 locomotives
and approximately 1,200 wagons (freight cars) owned and in service.
15
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits resulting from railroad and
industrial switching operations, one of which includes the commencement of a
criminal investigation. Management believes that the Company has adequate
defenses to any criminal charge which may arise and that adequate provision has
been made in the financial statements for any expected liabilities which may
result from disposition of such lawsuits. While it is possible that some of the
foregoing matters may be resolved at a cost greater than that provided for, it
is the opinion of management that the ultimate liability, if any, will not be
material to the Company's results of operations or financial position.
On August 6, 1998, a lawsuit was commenced against the Company and its
subsidiary, Illinois & Midland Railroad, Inc. ("IMRR"), by Commonwealth Edison
Company ("ComEd") in the Circuit Court of Cook County, Illinois. The suit
alleges that IMRR is in breach of certain provisions of a stock purchase
agreement entered into by a prior unrelated owner of the IMRR rail line. The
provisions allegedly pertain to limitations on rates received by IMRR and the
unrelated predecessor for freight hauled for ComEd's Powerton plant. The suit
seeks unspecified compensatory damages for alleged past rate overcharges. The
Company believes the suit is without merit and intends to vigorously defend
against the suit.
The parent company of ComEd has sold certain of ComEd's power facilities,
one of which is the Powerton plant served by IMRR under the provisions of a 1987
Service Assurance Agreement (the "SAA"), entered into by a prior unrelated owner
of the IMRR rail line. The SAA, which is not terminable except for failure to
perform, provides that IMRR has exclusive access to provide rail service to the
Powerton plant. On April 6, 1999, a lawsuit was commenced by the Company and
its subsidiary, IMRR, against ComEd in the Circuit Court of Sangamon County,
Illinois. The suit sought declaration of certain rights regarding the SAA
including declarations that the SAA is not terminable at will and that ComEd
must assign its contractual obligations under the SAA to the purchaser of the
Powerton plant. On June 10, 1999, the suit commenced by the Company and IMRR,
against ComEd in Sangamon County was voluntarily withdrawn without prejudice in
partial resolution of several procedural motions pending in the Cook County
action, and with the explicit recognition from ComEd that the action may be re-
filed in Cook County.
Revenue for haulage to the Powerton plant accounted for 6.6% and 6.3% of
the consolidated revenues of the Company and its subsidiaries in 1999 and 1998,
respectively. Failure to satisfactorily resolve this litigation could have a
material adverse effect on the Company.
The remainder of this page is intentionally left blank.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On June 24, 1996, the Company's Class A Common Stock began publicly trading
and is quoted on the Nasdaq National Market. Its trading symbol is GNWR. The
tables below show the range of high and low actual trade prices for the
Company's Class A Common Stock during each quarterly period of 1999, 1998 and
1997.
YEAR ENDED
DECEMBER 31, 1999 HIGH LOW
1st Quarter $ 14.75 $ 10.375
2nd Quarter $ 11.625 $ 7.75
3rd Quarter $ 15.25 $ 9.875
4th Quarter $ 13.75 $ 11.25
YEAR ENDED
DECEMBER 31, 1998 HIGH LOW
1st Quarter $ 27.50 $ 20.625
2nd Quarter $ 27.50 $ 17.50
3rd Quarter $ 22.00 $ 11.75
4th Quarter $ 17.00 $ 11.375
YEAR ENDED
DECEMBER 31, 1997 HIGH LOW
1st Quarter $ 37.75 $ 29.00
2nd Quarter $ 31.75 $ 26.25
3rd Quarter $ 35.00 $ 24.00
4th Quarter $ 31.75 $ 22.50
The Company's Class B Common Stock is not publicly traded.
The Company did not pay cash dividends in 1999, 1998 or 1997. The Company
does not intend to pay cash dividends for the foreseeable future and intends to
retain earnings, if any, for future operation and expansion of the Company's
business. Any determination to pay dividends in the future will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board of Directors.
17
On March 16, 2000 there were 131 holders of record of the Company's Class A
Common Stock and 10 holders of record of the Company's Class B Common Stock.
During 1999, the Company issued the following securities which were not
registered under the Securities Act of 1933, as amended (the "Act"). Each of
such issuances was made by private offering in reliance on the exemption from
the registration provisions of the Act provided by Section 4(2) of the Act. The
facts relied upon to establish such exemption included the recipents'
representations as to their investment intent with respect to such Securities
and restrictions on the transfer of such Securities imposed by the Company.
(1) On April 9, 1999, the Company issued to an aggregate of 144 of its
employees, for no additional consideration, options under the Genesee & Wyoming
Inc. 1996 Stock Option Plan to purchase an aggregate of 102,650 shares of Class
A Common Stock at an exercise price of $8.375 per share, and 18,750 shares of
Class A Common Stock at an exercise price of $9.2125 per share. The shares
issuable upon exercise of such options are the subject of a Registration
Statement on Form S-8 under the Act.
(2) On July 30, 1999, the Company issued to one of its directors, for no
additional consideration, options under the Genesee & Wyoming Inc. Stock Option
Plan for Outside Directors to purchase an aggregate of 2,000 shares of Class A
Common Stock at an exercise price of $11.00 per share. The shares issuable upon
exercise of such options are the subject of a Registration Statement on Form S-8
under the Act.
(3) On October 27, 1999, the Company issued to one of its directors, for
no additional consideration, options under the Genesee & Wyoming Inc. Stock
Option Plan for Outside Directors to purchase an aggregate of 1,000 shares of
Class A Common Stock at an exercise price of $11.75 per share. The shares
issuable upon exercise of such options are the subject of a Registration
Statement on Form S-8 under the Act.
(4) On April 15, 1999, as part of the consideration for the Company's
acquisition of Rail-One Inc., the Company granted options to the sellers to
purchase up to 80,000 shares of Class A Common Stock at an exercise price of
$8.625 per share. Note 3. to the Consolidated Financial Statements included in
Item 8. here of is incorporated herein by reference.
(5) On September 30, 1999, as part of the consideration for the Company's
acquisition of an ownership interest in Latin American Rail LLC, the Company
issued to the sellers 25,532 shares of Class A Common Stock. Note 3. to the
Consolidated Financial Statements included in Item 8. here of is incorporated
herein by reference.
The remainder of this page is intentionally left blank.
18
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated income statement data and selected
consolidated balance sheet data of the Company as of and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995, have been derived from the
Company's consolidated financial statements. All of the information should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. See also Item 7. of this
Report.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
INCOME STATEMENT DATA: 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
Operating revenues $175,586 $147,472 $103,643 $ 77,795 $53,387
Operating expenses 153,218 127,904 87,200 63,801 46,815
Operating income 22,368 19,568 16,443 13,994 6,572
Interest expense (8,462) (7,071) (3,349) (4,720) (3,405)
Other income, net 1,064 6,645 345 651 456
Income before income taxes and
extraordinary item 14,970 19,142 13,439 9,925 3,623
Income taxes 2,175 7,708 5,441 4,020 1,472
Income before extraordinary item 12,795 11,434 7,998 5,905 2,151
Extraordinary item (262) -- -- -- (494)
Net income $ 12,533 $ 11,434 $ 7,998 $ 5,905 $ 1,657
Basic earnings per common share:
Income before extraordinary item $ 2.85 $ 2.20 $ 1.52 $ 1.54 $ 0.92
Extraordinary item (0.06) -- -- -- (0.21)
Net income $ 2.79 $ 2.20 $ 1.52 $ 1.54 $ 0.71
Weighted average number of shares
of common stock 4,491 5,187 5,250 3,829 2,348
Diluted earnings per common share:
Income before extraordinary item $ 2.82 $ 2.19 $ 1.47 $ 1.49 $ 0.92
Extraordinary item (0.06) -- -- -- (0.21)
Net income $ 2.76 $ 2.19 $ 1.47 $ 1.49 $ 0.71
Weighted average number of shares
of common stock and equivalents 4,540 5,229 5,447 3,966 2,348
Dividends per common share (1) -- -- -- $ 0.01 $ 0.08
BALANCE SHEET DATA AS OF YEAR END:
Total assets $301,940 $216,760 $210,532 $145,339 $78,429
Total debt 108,376 65,690 74,144 18,731 39,941
Stockholders' equity 81,829 74,537 68,343 61,683 10,548
(1) Prior to its initial public offering on June 24, 1996, the Company paid
dividends at the discretion of the Company's Board of Directors. The Company
has not paid cash dividends after the initial public offering. The Company does
not intend to pay cash dividends for the foreseeable future and intends to
retain earnings, if any, for future operation and expansion of the Company's
business.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Annual Report.
General
The Company is a holding company whose subsidiaries own and/or operate
short line and regional freight railroads and provide related rail services in
North America and Australia. The Company, through its U.S. industrial switching
subsidiary, also provides freight car switching and related services to United
States industrial companies with extensive railroad facilities within their
complexes. The Company generates revenues primarily from the movement of
freight over track owned or operated by its railroads. The Company also
generates non-freight revenues primarily by providing freight car switching and
related rail services such as railcar leasing, railcar repair and storage to
industrial companies with extensive railroad facilities within their complexes,
to shippers along its lines, and to the Class I railroads that connect with its
North American lines.
The Company's operating expenses include wages and benefits, equipment
rents (including car hire), purchased services, depreciation and amortization,
diesel fuel, casualties and insurance, materials and other expenses. Car hire
is a charge paid by a railroad to the owners of railcars used by that railroad
in moving freight. Other expenses generally include property and other non-
income taxes, professional services, communication and data processing costs,
and general overhead expense.
When comparing the Company's results of operations from one reporting
period to another, the following factors should be taken into consideration.
The Company has historically experienced fluctuations in revenues and expenses
such as one-time freight moves, customer plant expansions and shut-downs,
railcar sales, accidents and derailments. In periods when these events occur,
results of operations are not easily comparable to other periods. Also, much of
the Company's growth to date has resulted from acquisitions. Most recently, the
Company completed one acquisition in November 1997 and two acquisitions in 1999.
Because of variations in the structure, timing and size of these acquisitions
and differences in economics among the Company's railroads resulting from
differences in the rates and other material terms established through
negotiation, the Company's results of operations in any reporting period may not
be directly comparable to its results of operations in other reporting periods.
Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V.
In August 1999, the Company's wholly-owned subsidiary, Compania de
Ferrocarriles Chiapas-Mayab, S.A. de C.V. ("FCCM"), was awarded a 30-year
concession to operate certain railways owned by the state-owned Mexican rail
company Ferronales. FCCM also acquired equipment and other assets. The
aggregate purchase price, including acquisition costs, was approximately 297
million pesos, or approximately $31.5 million at then-current exchange rates.
The purchase included $12.3 million of rolling stock, a $9.7 million advance
payment on track improvements to be completed on the state-owned track property
by mid-2000, a $1.0 million escrow payment which will be returned to the Company
upon successful completion of the track improvements, an expected future
20
utilization by the Company of $2.2 million of value-added taxes paid on the
transaction, and $1.0 million in goodwill. The remaining purchase price ($5.3
million) was allocated to the 30-year operating license. As the track
improvements are made, the related costs will be reclassified into the property
accounts as leasehold improvements and amortized over the improvements'
estimated useful life of 20 years. Pursuant to the acquisition, employee
termination payments of $1.0 million were made to former state employees and
approximately 55 employees whom the Company retained upon acquisition but
terminated as part of its plan to reduce operating costs after September 30,
1999. All payments were made during the fourth quarter of 1999 and are
considered a cost of the acquisition. Accordingly, the payments represent costs
in excess of fair market value and are being amortized over 20 years.
The Chiapas-Mayab concession is made up of two separate rail lines. The
Chiapas is approximately 450 kilometers (280 miles) long and runs between
Ixtepec in the Mexican state of Oaxaca, and Ciudad Hidalgo in the Mexican state
of Chiapas. Principal commodities hauled include cement, corn, petroleum
products and various agricultural products. The Mayab extends approximately
1,100 kilometers (680 miles) from Coatzacoalcos in the Mexican state of Vera
Cruz, to beyond Merida in the Mexican state of Yucatan. Principal commodities
hauled on the line include cement, silica sand and various agricultural
products. The two railroads are connected via trackage rights over Ferrosur (a
recently privatized rail concession) and a government-owned line. FCCM began
operations on September 1, 1999.
Genesee Rail-One Inc.
On April 15, 1999, the Company closed on an agreement to acquire Rail-One
Inc. ("Rail-One") which has a 47.5% ownership interest in Genesee Rail-One Inc.
("GRO"), thereby increasing the Company's ownership of GRO to 95%. GRO owns and
operates two short line railroads in Canada. Under the terms of the purchase
agreement, the Company converted outstanding notes receivable from Rail-One of
$4.6 million into capital, will pay approximately $844,000 in cash to the
sellers of Rail-One in installments over a four year period, and granted options
to the sellers of Rail-One to purchase up to 80,000 shares of the Company's
Class A Common Stock at an exercise price of $8.625 per share. Exercise of the
option is contingent on the Company's recovery of its capital investment in GRO
including debt assumed if the Company were to sell GRO, and upon certain GRO
income performance measures. The transaction is accounted for as a purchase and
resulted in $2.8 million of goodwill which is being amortized over 15 years.
The contingent purchase price will be recorded as a component of goodwill at the
value of the options issued, if and when such options are exercisable.
Effective with this agreement, the operating results of GRO have been
consolidated within the financial statements of the Company, with a 5% minority
interest due to another GRO shareholder. Prior to April 15, 1999, the Company
accounted for its investment in GRO under the equity method and recorded losses
of $618,000, $645,000 and $60,000 in 1999, 1998 and 1997, respectively, in other
income, net.
Genesee & Wyoming Australia Pty. Ltd.
On August 28, 1997, the Company's wholly-owned subsidiary, Genesee &
Wyoming Australia Pty. Ltd. ("GWIA"), was awarded the contract to purchase
certain selected assets of the railroad freight operation of SA Rail, a division
of Australian National Railway which was controlled by the Commonwealth
Government of Australia. SA Rail provided intrastate freight services in South
Australia, interstate haulage of contract freight, rolling
21
stock rental and maintenance, and interstate track maintenance. GWIA bid as part
of a consortium including EDI Clyde Engineering and Transfield Pty. Ltd. EDI
Clyde is a major Australian provider of railway rolling stock and holds the
Australian license for GM/EMD locomotives. Transfield is a major Australian
engineering, construction and infrastructure maintenance provider. On November
8, 1997 GWIA closed on the purchase of the assets and commenced operation of
railroad freight service under the name of Australia Southern Railroad Pty. Ltd.
The assets were acquired for approximately $33.1 million, including related
costs. The assets consist primarily of road and track structure, railroad
rolling stock and other equipment.
Latin American Rail LLC
On September 30, 1999, the Company closed on an agreement to acquire a
47.5% ownership interest in Latin American Rail LLC in Chile for approximately
$10.0 million in cash and 25,532 shares of the Company's stock valued at
approximately $281,000. Latin American Rail LLC owns 100% of Latin American Rail
Investors, S.A. which in turn own 4.0% of CB Transportes S.A., a company that
has investments in several railroads in South America. The Company is accouting
for this investment under the equity method of accouting for investments.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Consolidated Operating Revenues
Operating revenues were $175.6 million in the year ended December 31, 1999
compared to $147.5 million in the year ended December 31, 1998, a net increase
of $28.1 million or 19.1%. The net increase was attributable to a $33.0 million
increase in North American railroad revenues of which $19.9 million were
revenues from new railroad operations in Canada, $8.8 million were revenues from
new railroad operations in Mexico and $4.3 million were increases in revenues on
existing North America railroad operations, offset by a $3.6 million decrease in
revenues from Australian railroad operations due primarily to the non-renewal of
a coal contract and a $1.3 million decrease in industrial switching revenues due
primarily to the Company's decision to exit an unprofitable switching contract.
The following three sections provide information on railroad revenues for
North American and Australian railroad operations, and industrial switching
revenues in the United States.
North American Railroad Operating Revenues
Operating revenues were $121.1 million in the year ended December 31, 1999
of which $95.5 million were freight revenues and $25.6 million were non-freight
revenues compared to $88.1 million of which $66.1 million were freight revenues
and $22.0 million were non-freight revenues in the year ended December 31, 1998,
an increase in operating revenues of $33.0 million or 37.5%. The increase was
attributable to a $29.5 million increase in freight revenues and a $3.5 million
increase in non-freight revenues. The increase of $29.5 million in North
American freight revenues was due to $15.0 million in freight revenues
attributable to new railroad operations in Canada, $7.2 million in freight
revenues attributable to new railroad operations in Mexico, and an increase of
$7.3 million in freight revenues on existing railroad operations. The following
table compares North American freight revenues, carloads and average freight
revenues per carload for the years ended December 31, 1999 and 1998:
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22
North American Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 1999 and 1998
(dollars in thousands, except average per carload)
Average
Freight
Revenues
Per
Freight Revenues Carloads Carload
---------------- -------- -------
% of % of % of % of
Commodity Group 1999 Total 1998 Total 1999 Total 1998 Total 1999 1998
- --------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ----
Coal, Coke & Ores $24,779 25.9% $19,245 29.1% 94,140 31.4% 75,881 34.8% $263 $254
Pulp & Paper 14,867 15.6% 8,295 12.6% 39,952 13.3% 21,318 9.7% 372 389
Petroleum Products 10,210 10.7% 7,135 10.8% 20,206 6.7% 15,992 7.3% 505 446
Lumber & Forest
Products 8,304 8.7% 6,098 9.2% 28,627 9.6% 20,802 9.5% 290 293
Chemicals-Plastics 8,169 8.6% 6,337 9.6% 16,039 5.4% 12,503 5.7% 509 507
Metals 8,156 8.5% 4,879 7.4% 30,614 10.2% 17,862 8.2% 266 273
Minerals & Stone 7,905 8.3% 3,790 5.8% 23,667 7.9% 13,679 6.3% 334 277
Farm & Food Products 5,831 6.1% 4,919 7.4% 19,898 6.6% 17,451 8.0% 293 282
Autos & Auto Parts 2,491 2.6% 1,945 2.9% 4,790 1.6% 3,895 1.8% 520 499
Other 4,825 5.0% 3,438 5.2% 22,024 7.3% 18,922 8.7% 219 182
--------- --------- ----------- --------- ---------- --------- ----------- ----------
Totals $95,537 100.0% $66,081 100.0% 299,957 100.0% 218,305 100.0% 319 303
========= ========= =========== ========= ========== ========= =========== ==========
Coal increased by $5.5 million or 28.8% of which $5.4 million was on
existing railroad operations and $182,000 was new freight revenues attributable
to the acquisition of GRO. The increase on existing railroad operations in 1999
was primarily attributable to a return to normal shipments at a key customer's
facilities which compare to reduced shipments in the 1998 period due to
scheduled inventory reductions and planned maintenance projects at the key
customer's facilities.
Pulp and Paper increased by $6.6 million or 79.2% of which $553,000 was on
existing railroad operations, $5.9 million was new freight revenues attributable
to the acquisition of GRO, and $125,000 was freight revenues attributable to new
railroad operations in Mexico.
Petroleum Products increased by $3.1 million or 43.0% of which $95,000 was
on existing railroad operations, $131,000 was new freight revenues attributable
to the acquisition of GRO, and $2.8 million was freight revenues attributable to
new railroad operations in Mexico.
Lumber and Forest Products increased by $2.2 million or 36.2% of which
$956,000 was on existing railroad operations, $1.2 million was new freight
revenues attributable to the acquisition of GRO, and $35,000 was freight
revenues attributable to new railroad operations in Mexico.
Chemicals and Plastics increased by $1.8 million or 28.9% of which $258,000
was on existing railroad operations, $1.3 million was new freight revenues
attributable to the acquisition of GRO, and $233,000 was freight revenues
attributable to new railroad operations in Mexico.
23
Metals increased by $3.3 million or 67.2% of which $177,000 was an increase
on existing railroad operations, $3.0 million was new freight revenues
attributable to the acquisition of GRO, and $80,000 was freight revenues
attributable to new railroad operations in Mexico.
Minerals and Stone increased by a net $4.1 million or 108.8% of which $1.6
million was new freight revenues attributable to the acquisition of GRO, $2.9
was freight revenues attributable to new railroad operations in Mexico and
$360,000 was a decrease on existing railroad operations.
Freight revenues from all remaining commodities reflected an increase of
$2.8 million or 27.6% of which $245,000 was an increase on existing railroad
operations, $1.7 million was new freight revenues attributable to the
acquisition of GRO, and $916,000 was new freight revenues attributable to new
railroad operations in Mexico.
Total North American carloads were 299,957 in the year ended December 31,
1999 compared to 218,305 in the year ended December 31, 1998, an increase of
81,652 or 37.4%. The increase of 81,652 consisted of an increase of 25,951
carloads on existing railroad operations of which 17,557 were coal, 46,478
carloads attributable to the acquisition of GRO, and 9,223 carloads attributable
to new railroad operations in Mexico.
The overall average revenue per carload increased to $319 in the year ended
December 31, 1999, compared to $303 per carload in the year ended December 31,
1998, an increase of 5.3% due primarily to higher per carload revenues
attributable to Canada and Mexico carloads offset by a slight decrease on
existing railroad operations carloads.
North American non-freight railroad revenues were $25.6 million in the year
ended December 31, 1999 compared to $22.0 million in the year ended December 31,
1998, an increase of $3.5 million or 16.1%. The increase is the net result of
$4.8 million of new non-freight revenues attributable to the acquisition of GRO,
$1.7 million of new non-freight revenues attributable to Mexico and a decrease
of $3.0 million of non-freight revenues on existing railroad operations due
primarily to a decrease in car hire and rental income.
Australian Railroad Operating Revenues
Operating revenues were $43.2 million in the year ended December 31, 1999,
compared to $46.7 million in the year ended December 31, 1998, a decrease of
$3.6 million or 7.7%. The decrease was the result of a decrease in freight
revenues from Australian railroad operations of $3.4 million or 8.0% primarily
due to the non-renewal of a coal contract and a decrease in non-freight revenues
of $226,000 or 4.8%.
Australian freight revenues were $38.6 million in the year ended December
31, 1999, compared to $42.0 million in the year ended December 31, 1998, a
decrease of $3.4 million or 8.0%. The following table outlines Australian
freight revenues for the years ended December 31, 1999 and 1998:
The remainder of this page is intentionally left blank.
24
Australian Freight Revenues by Commodity
Years Ended December 31, 1999 and 1998
(dollars in thousands, except average per carload)
Average
Freight
Revenues
Per
Freight Revenues Carloads Carload
---------------- -------- -------
% of % of % of % of
Commodity Group 1999 Total 1998 Total 1999 Total 1998 Total 1999 1998
--------------- ---------- ---------- ---------- --------- ---------- --------- ---------- --------- ------- ------
Hook and Pull
(Haulage) $17,533 45.4% $15,288 36.4% 52,407 31.3% 40,817 22.3% $335 $375
Grain 13,588 35.2% 13,040 31.0% 48,781 29.1% 45,896 25.1% 279 284
Gypsum 2,861 7.4% 2,788 6.6% 40,304 24.1% 36,611 20.0% 71 76
Marble 2,034 5.3% 1,949 4.6% 8,343 5.0% 8,294 4.5% 244 235
Lime 1,531 4.0% 1,052 2.5% 4,662 2.8% 2,500 1.4% 328 421
Coal 664 1.7% 7,514 17.9% 4,317 2.6% 47,286 25.9% 154 159
Iron Ore 350 0.9% - 0.0% 8,069 4.8% - 0.0% 43 -
Other 88 0.1% 368 1.0% 603 0.3% 1,382 0.8% 146 266
---------- ---------- ---------- --------- ---------- --------- ---------- ---------
Total $38,649 100.0% $41,999 100.0% 167,486 100.0% 182,786 100.0% 231 230
========== ========== ========== ========= ========== ========= ========== =========
The net decrease of $3.4 million in Australian freight revenues was
primarily attributable to a decrease in freight revenues from Coal of $6.9
million offset by new freight revenues from the shipment of Iron Ores of
$350,000, increases in freight revenues from the shipment of Grain of $548,000,
Hook and Pull of $2.2 million and all other non-coal commodities of $357,000.
The decrease in freight revenues from Coal in the year ended December 31, 1999,
was due to the non-renewal of a Coal contract.
Australia carloads were 167,486 in the year ended December 31, 1999
compared to 182,786 in the year ended December 31, 1998, a decrease of 15,300 or
8.4%. The decrease was primarily the result of a decrease in Coal carloads of
42,969 offset by increases in Hook and Pull of 11,590, Iron Ores of 8,069,
Gypsum of 3,693, Grain of 2,885, and all other commodities of 1,432.
The overall average revenue per carload increased to $231 in the year ended
December 31, 1999, compared to $230 per carload in the year ended December 31,
1998.
Australian non-freight revenues were $4.5 million in the year ended
December 31, 1999, compared to $4.7 million in the year ended December 31, 1998,
a decrease of $226,000 or 4.8% due primarily to a decrease in other income.
U.S. Industrial Switching Revenues
Revenues from U.S. industrial switching activities were $11.3 million in
the year ended December 31, 1999 compared to $12.6 million in the year ended
December 31, 1998, a decrease of $1.3 million or 10.3% due primarily to the
Company's decision to exit an unprofitable switching contract.
25
Consolidated Operating Expenses
Operating expenses for all operations combined were $153.2 million in the
year ended December 31, 1999, compared to $127.9 million in the year ended
December 31, 1998, a net increase of $25.3 million or 19.8%. Expenses
attributable to North American railroad operations were $105.2 million in the
year ended December 31, 1999, compared to $75.6 million in the year ended
December 31, 1998, an increase of $29.6 million or 39.2% of which $17.8 million
were expenses attributable to new railroad operations in Canada, $8.1 million
were expenses attributable to new railroad operations in Mexico and $3.7 were
expenses attributable to existing U.S. railroad operations. Expenses
attributable to operations in Australia were $36.6 million in the year ended
December 31, 1999, compared to $37.9 million in the year ended December 31,
1998, a decrease of $1.3 million or 3.5%. Expenses attributable to U.S.
industrial switching were $11.4 million in the year ended December 31, 1999,
compared to $14.4 million in the year ended December 31, 1998, a decrease of
$3.0 million or 20.9%.
Operating Ratios
The Company's combined operating ratio increased to 87.3% in the year ended
December 31, 1999 from 86.7% in the year ended December 31, 1998. The operating
ratio for North American railroad operations increased to 86.9% in the year
ended December 31, 1999 from 85.8% in the year ended December 31, 1998. The
operating ratio for Australian railroad operations increased to 84.8% in the
year ended December 31, 1999 from 81.1% in the year ended December 31, 1998.
The operating ratio for U.S. industrial switching operations decreased to 100.8%
in the year ended December 31, 1999 from 114.2% in the year ended December 31,
1998.
The following three sections provide information on railroad expenses for
North American and Australian railroad operations, and industrial switching
expenses in the United States.
North American Railroad Operating Expenses
The following table sets forth a comparison of the Company's North American
railroad operating expenses in the years ended December 31, 1999 and 1998:
The remainder of this page is intentionally left blank.
26
North American Railroad
Operating Expense Comparison
Years Ended December 31, 1999 and 1998
(dollars in thousands)
1999 1998
---- ----
Percent of Percent of
Operating Operating
Dollars Revenue Dollars Revenue
------- ------- ------- -------
Labor and benefits $ 38,819 32.1% $ 30,822 35.0%
Equipment rents 13,768 11.4% 11,060 12.6%
Purchased services 7,996 6.6% 4,496 5.1%
Depreciation and amortization 9,649 8.0% 7,277 8.3%
Diesel fuel 6,357 5.2% 3,187 3.6%
Casualties and insurance 4,172 3.4% 2,937 3.3%
Materials 8,503 7.0% 3,485 4.0%
Other expenses 15,929 13.2% 12,285 13.9%
----------------- ---------------- ----------------- -----------------
Total operating expenses $ 105,193 86.9% $75,549 85.8%
================= ================ ================= =================
Labor and benefits expense was $38.8 million in the year ended December 31,
1999 compared to $30.8 million in the year ended December 31, 1998, an increase
of $8.0 million or 25.9% of which $5.0 million was attributable to the
acquisition of GRO, $2.7 million was attributable to new railroad operations in
Mexico and $281,000 was attributable to an increase on existing railroad
operations.
Equipment rents were $13.8 million in the year ended December 31, 1999
compared to $11.1 million in the year ended December 31, 1998, a net increase of
$2.7 million or 24.5% of which $4.0 million was attributable to the acquisition
of GRO, $53,000 was attributable to new railroad operations in Mexico and $1.4
million was a decrease on existing railroad operations due primarily to a
reduction of rolling stock and associated.
Purchased services were $8.0 million in the year ended December 31, 1999
compared to $4.5 million in the year ended December 31, 1998, a net increase of
$3.5 million or 77.8% of which $2.8 million was attributable to the acquisition
of GRO, $865,000 was attributable to new railroad operations in Mexico and
$202,000 was a decrease on existing railroad operations resulting from increased
capital spending which reduced the need for certain purchased maintenance
services.
Depreciation and amortization expense was $9.6 million in the year ended
December 31, 1999 compared to $7.2 million in the year ended December 31, 1998,
an increase of $2.4 million or 32.6% of which $1.4 million was attributable to
the acquisition of GRO, $671,000 was attributable to new railroad operations in
Mexico and $280,000 was attributable to existing railroad operations as a result
of increased capital spending in 1998 and 1999.
Diesel fuel expense was $6.4 million in the year ended December 31, 1999
compared to $3.2 million in the year ended December 31, 1998, an increase of
$3.2 million or 99.5% of which $1.5 million was attributable to the acquisition
of GRO, $836,000 was attributable to new railroad operations in Mexico and
$831,000 was attributable to existing railroad operations due primarily to
27
increased fuel oil prices in 1999 and secondarily to increased fuel consumption
resulting from an increase in carloads on existing operations.
Casualties and insurance expense was $4.2 million in the year ended
December 31, 1999 compared to $2.9 million in the year ended December 31, 1998,
an increase of $1.3 million or 42.0% of which $498,000 was attributable to the
acquisition of GRO, $223,000 was attributable to new railroad operations in
Mexico and $514,000 was attributable to existing railroad operations due
primarily to increases in derailment and insurance expense.
Materials expense was $8.5 million in the year ended December 31, 1999
compared to $3.5 million in the year ended December 31, 1998, an increase of
$5.0 million or 144.0% of which $984,000 was attributable to the acquisition of
GRO, $1.2 million was attributable to new railroad operations in Mexico and $2.8
million was attributable to existing railroad operations due primarily to
increased track and locomotive materials expense.
Other expenses were $15.9 million in the year ended December 31, 1999
compared to $12.3 million in the year ended December 31, 1998, an increase of
$3.6 million or 29.6% of which $1.5 million was attributable to the acquisition
of GRO, $1.5 million was attributable to new railroad operations in Mexico and
$629,000 was attributable to existing railroad operations primarily related to
acquisition expenses which were $1.9 million in 1999 ($1.2 million of which was
incurred in the first quarter of 1999) compared to $1.5 million in 1998, an
increase of $404,000 or 27.9%.
Australian Railroad Operating Expenses
The following table sets forth a comparison of the Company's Australian
railroad operating expenses in the years ended December 31, 1999 and 1998:
Australian Railroad
Operating Expense Comparison
Years Ended December 31, 1999 and 1998
(dollars in thousands)
1999 1998
---- ----
Percent of Percent of
Operating Operating
Dollars Revenue Dollars Revenue
------------------------------------------------------------------------------
Labor and benefits $ 5,443 12.6% $ 5,263 11.3%
Equipment rents 367 0.9% 593 1.3%
Purchased services 12,116 28.1% 13,538 29.0%
Depreciation and amortization 2,157 5.0% 1,842 3.9%
Diesel fuel 8,186 19.0% 8,895 19.0%
Casualties and insurance 1,635 3.8% 1,415 3.0%
Materials 1,861 4.3% 1,734 3.7%
Other expenses 4,833 11.1% 4,627 9.9%
------------------------------------------------------------------------------
Total operating expenses $36,598 84.8% $37,907 81.1%
==============================================================================
Purchased services were $12.1 million in the year ended December 31, 1999
compared to $13.5 million in the year ended December 31, 1998, a decrease
28
of $1.4 million or 10.5%. The decrease was primarily related to the non-renewal
of a coal haulage contract which resulted in no contracted maintenance charges
on the track used for the coal haulage, and the positive impact of capital work
on ASR-owned tracks which reduced contract labor expense for maintenance.
All other operating expenses were $24.5 million in the year ended December
31, 1999 compared to $24.4 million in the year ended December 31, 1998, a net
increase of $113,000.
U. S. Industrial Switching Operating Expenses
The following table sets forth a comparison of the Company's industrial
switching operating expenses in the years ended December 31, 1999 and 1998:
U.S. Industrial Switching
Operating Expense Comparison
Years Ended December 31, 1999 and 1998
(dollars in thousands)
1999 1998
---- ----
Percent of Percent of
Operating Operating
Dollars Revenue Dollars Revenue
------------------------------------------------------------------------------
Labor and benefits $ 7,945 70.1% $ 9,019 71.3%
Equipment rents 187 1.6% 217 1.7%
Purchased services 476 4.2% 291 2.3%
Depreciation and amortization 768 6.8% 798 6.3%
Diesel fuel 421 3.7% 466 3.7%
Casualties and insurance 971 8.6% 1,363 10.8%
Materials 743 6.6% 758 6.0%
Other expenses (84) -0.8% 1,533 12.1%
------------------------------------------------------------------------------
Total operating expenses $11,427 100.8% $14,445 114.2%
==============================================================================
Labor and benefits expense was $7.9 million in the year ended December 31,
1999 compared to $9.0 million in the year ended December 31, 1998, a decrease of
$1.1 million or 11.9%, due primarily to the decision to exit unprofitable
switching contracts.
Other expense was a credit of $84,000 in the year ended December 31, 1999
compared to $1.5 million in the year ended December 31, 1998, a decrease of $1.6
million or 105.5%. The 1998 period was unusually high due to approximately
$550,000 of legal fees for still-pending litigation.
Interest Expense
Interest expense in the year ended December 31, 1999 was $8.5 million
compared to $7.1 million in the year ended December 31, 1998, an increase of
$1.4 million or 19.7% primarily related to the increase in debt used for
acquisitions.
29
Other Income and Income Taxes
The Company's other income consists primarily of interest income, gains and
losses on assets sales, equity earnings and losses on unconsolidated affiliates,
minority interest expense, and foreign currency. Other income in the year ended
December 31, 1999 was $1.1 million compared to $6.6 million in the year ended
December 31, 1998, a decrease of $5.5 million or 84.0%. The 1998 other income
reflected $6.0 million of non-recurring insurance proceeds recorded in North
American railroad operations.
The Company's effective income tax rate in the years ended December 31,
1999 and 1998 was 14.5% and 40.3%, respectively. The 1999 rate was impacted by
a $4.2 million benefit recorded in the third quarter of 1999 as a result of a
favorable tax law change in Australia. Without this impact, 1999's effective
income tax rate was 42.5%. The Company may realize additional benefits from
this tax law change in future quarters.
Net Income and Earnings Per Share
The Company's net income in the year ended December 31, 1999 was $12.5
million (including a $4.2 million income tax benefit described above and an
extraordinary non-cash expense of $262,000 related to the early extinguishment
of debt described in Note 8. to Consolidated Financial Statements) compared to
net income of $11.4 million (including a $3.9 million after-tax effect of an
insurance settlement described in Note 2. to Consolidated Financial Statements)
in the year ended December 31, 1998, an increase of $1.1 million or 9.6%. The
increase in net income is the net result of an increase in net income from
Australian railroad operations of $3.6 million, a decrease in net income from
North American railroad operations of $3.7 million, and a decrease in the net
loss of industrial switching of $1.2 million.
Basic and Diluted Earnings Per Share in the year ended December 31, 1999
were $2.79 and $2.76 respectively, on weighted average shares of 4.5 million
compared to $2.20 and $2.19 respectively, on weighted average shares of 5.2
million in the year ended December 31, 1998. The change in weighted average
shares outstanding primarily reflects the impact of a 1.0 million share buy-back
program which started in August, 1998 and ended in April, 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated Operating Revenues
Operating revenues were $147.4 million in 1998 compared to $103.6 million
in 1997, an increase of $43.8 million or 42.3%. The increase was attributable
to $39.3 million in revenues from the Australia operation, a $3.7 million
increase in North America railroad revenues, and a $823,000 increase in U.S.
industrial switching revenues.
The following three sections provide information on railroad revenues in
North America and Australia, and industrial switching revenues in the United
States.
North America Railroad Operating Revenues
Operating revenues were $88.1 million in the year ended December 31, 1998
compared to $84.4 million in the year ended December 31, 1997, an increase of
$3.7 million or 4.4%. The increase was attributable to a $5.3 million increase
30
in non-freight revenues, which offset a $1.6 million decrease in freight
revenues.
The following table compares freight revenues, carloads and average freight
revenues per carload for 1998 and 1997:
North America Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 1998 and 1997
(dollars in thousands,
except average per carload)
Average
Freight
Revenue
Freight Revenues Carloads Per Carload
---------------- -------- -----------
% of % of % of % of
Commodity Group 1998 Total 1997 Total 1998 Total 1997 Total 1998 1997
- --------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ----
Coal, Coke & Ores $19,245 29.1% $21,452 31.7% 75,881 34.8% 82,269 37.4% $254 $261
Pulp & Paper 8,295 12.6% 7,920 11.7% 21,318 9.7% 20,760 9.4% 389 382
Petroleum Products 7,135 10.8% 8,349 12.3% 15,992 7.3% 17,456 7.9% 446 478
Chemicals &
Plastics 6,337 9.6% 5,761 8.5% 12,503 5.7% 10,496 4.8% 507 549
Lumber & Forest
Products 6,098 9.2% 6,093 9.0% 20,802 9.5% 18,171 8.3% 293 335
Farm & Food Products 4,919 7.4% 3,865 5.7% 17,451 8.0% 13,390 6.1% 282 289
Metals 4,879 7.4% 5,188 7.7% 17,862 8.2% 21,268 9.7% 273 244
Minerals & Stone 3,790 5.8% 3,346 4.9% 13,679 6.3% 12,657 5.8% 277 264
Autos & Auto Parts 1,945 2.9% 3,452 5.1% 3,895 1.8% 6,496 3.0% 499 531
Other 3,438 5.2% 2,287 3.4% 18,922 8.7% 16,743 7.6% 182 137
---------- --------- ----------- --------- ---------- --------- ----------- ----------
Total $66,081 100.0% $67,713 100.0% 218,305 100.0% 219,706 100.0% 303 308
========== ========= =========== ========= ========== ========= =========== ==========
The decrease in freight revenues was attributable to the decline in freight
revenues from shipments of coal, autos and auto parts, petroleum products and
metals. Freight revenues from coal were $19.2 million in the year ended
December 31, 1998, compared to $21.4 million in the year ended December 31,
1997, a decrease of $2.2 million or 10.3% primarily due to reduced shipments of
coal resulting from scheduled maintenance and inventory adjustments at a key
customer's facilities.
Freight revenues from autos and auto parts were $1.9 million in the year
ended December 31, 1998, compared to $3.4 million in the year ended December 31,
1997, a decrease of $1.5 million or 43.7% primarily due to reduced shipments
resulting from loss of overhead freight from a contract change between CSXT and
Ford, and labor issues in the auto industry.
Freight revenues from petroleum products were $7.1 million in the year
ended December 31, 1998, compared to $8.3 million in the year ended December 31,
1997, a decrease of $1.2 million or 14.5% due to reduced shipments resulting
from scheduled maintenance at a key customer's facilities.
Freight revenues from metals were $4.9 million in the year ended December
31, 1998, compared to $5.2 million in the year ended December 31, 1997, a
decrease of $309,000 or 5.9%. The decrease in freight revenues from coal, autos
and auto parts, petroleum products and metals was partially offset by increases
in freight revenues from farm and food products of $1.1 million or
31
27.3%, chemicals and plastics of $576,000 or 10.0%, minerals and stone of
$444,000 or 13.3% and pulp and paper of $375,000 or 4.7%. Freight revenues from
all remaining commodities reflected a net increase of $1.2 million.
Total carloads were 218,305 in the year ended December 31, 1998 compared to
219,706 in the year ended December 31, 1997, a decrease of 1,401 or 0.6%. Also,
the overall average revenue per carload declined to $303 in the year ended
December 31, 1998, compared to $308 per carload in the year ended December 31,
1997, a decrease of 1.6% due to changes in commodity mix and traffic patterns.
North America non-freight railroad revenues were $22.0 million in the year
ended December 31, 1998 compared to $16.7 million in the year ended December 31,
1997, an increase of $5.3 million or 32.0%. The increase was primarily due to
increases in car hire and rental income of $2.0 million, other income of $1.8
million and switching revenue of $1.5 million.
Australian Railroad Operating Revenues
Operating revenues were $46.7 million in the year ended December 31, 1998,
compared to $7.4 million in the year ended December 31, 1997, an increase of
$39.3 million or 528.8%. The increase consisted of $35.7 million in freight
revenues and $3.6 in non-freight revenues. The increase was primarily
attributable to a full year of operations in 1998 as compared to operations
which began on November 8, 1997.
The following table outlines Australian freight revenues for the periods
ended December 31, 1998 and 1997:
Australian Freight Revenues by Commodity
Year Ended December 31, 1998 and 1997
(in thousands)
Average
Freight
Revenue
Freight Revenues Carloads Per Carload
---------------- -------- -----------
% of % of % of % of
Commodity Group 1998 Total 1997 Total 1998 Total 1997 Total 1998 1997
- --------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ----
Hook and Pull
(Haulage) $15,288 36.4% $ 1,969 31.2% 40,817 22.3% 4,465 15.4% $375 $441
Grain 13,040 31.0% 2,377 37.7% 45,896 25.1% 10,201 35.3% 284 233
Coal 7,514 17.9% 817 12.9% 47,286 25.9% 6,719 23.2% 159 122
Gypsum 2,788 6.6% 463 7.3% 36,611 20.0% 5,494 19.0% 76 82
Marble 1,949 4.6% 268 4.2% 8,294 4.5% 1,060 3.7% 235 253
Lime 1,052 2.5% 203 3.2% 2,500 1.4% 225 0.7% 421 902
Other 368 1.0% 215 3.5% 1,382 0.8% 772 2.7% 266 278
---------- ---------- ---------- --------- ---------- --------- ---------- ---------
Total $41,999 100.0% $ 6,312 100.0% 182,786 100.0% 28,936 100.0% 230 218
========== ========== ========== ========= ========== ========= ========== =========
Australia non-freight revenues were $4.7 million in the year ended December
31, 1998, compared to $1.1 million in the year ended December 31, 1997, an
increase of $3.6 million or 322.6%. The increase consisted of $2.4 million in
car hire and rental income and $1.2 million in other income. The
32
increase was primarily attributable to a full year of operations in 1998 as
compared to operations which began on November 8, 1997.
U.S. Industrial Switching Revenues
Revenues from U.S. industrial switching activities were $12.6 million in
the year ended December 31, 1998 compared to $11.8 million in the year ended
December 31, 1997, an increase of $823,000 or 7.0%. The increase was primarily
attributable to a broadening of the customer base of Rail Link, Inc.
Consolidated Operating Expenses
Operating expenses for all operations combined were $127.9 million in 1998
compared to $87.2 million in 1997, an increase of $40.7 million or 46.7%.
Expense increases attributable to operations in Australia, which began in
November, 1997, represented $31.2 million or 76.6% of the change, expense
increases attributable to North America railroad operations represented $7.7
million or 19.0% of the change, and expense increases in U.S. industrial
switching represented $1.8 million or 4.4% of the change.
Operating Ratios
The Company's combined operating ratio increased to 86.7% in 1998 from
84.1% in 1997. The operating ratio for U.S. railroad operations increased to
85.8% in 1998 from 80.4% in 1997. The operating ratio for Australia railroad
operations decreased to 81.1% in 1998 from 90.5% in 1997. The operating ratio
for U.S. industrial switching operations increased to 114.2% in 1998 from 107.0%
in 1997.
The following three sections provide information on railroad expenses in
North America and Australia, and industrial switching expenses in the United
States.
North America Railroad Operating Expenses
The following table sets forth a comparison of the Company's North America
railroad operating expenses in 1998 and 1997:
The remainder of this page is intentionally left blank.
33
North America Railroad
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
Percent of Percent of
Operating Operating
Dollars Revenue Dollars Revenue
------- ------- ------- -------
Labor and benefits $30,822 35.0% $28,041 33.2%
Equipment rents 11,060 12.6% 8,755 10.4%
Purchased services 4,496 5.1% 3,872 4.6%
Depreciation and amortization 7,277 8.3% 6,092 7.2%
Diesel fuel 3,187 3.6% 4,239 5.0%
Casualties and insurance 2,937 3.3% 4,280 5.1%
Materials 3,485 4.0% 3,837 4.5%
Other 12,285 13.9% 8,707 10.4%
------ ---- ----- ----
Total $75,549 85.8% $67,823 80.4%
======= ==== ======= ====
Labor and benefits expense was $30.8 million in 1998 compared to $28.0
million in 1997, an increase of $2.8 million or 9.9%, due primarily to general
increases in wages and benefits for all railroad operations and the addition of
several new senior management positions in general and administrative.
Equipment rents were $11.1 million in 1998 compared to $8.8 million in
1997, an increase of $2.3 million or 26.3%, due primarily to new operating
leases for railroad rolling stock utilized by the Company's leasing subsidiary.
Purchased services were $4.5 million in 1998 compared to $3.9 million in
1997, an increase of $624,000 or 16.1%, due primarily to increases in
maintenance of way contract work of approximately $277,000 and information
systems and general and administrative contract work of approximately $413,000,
offset by a net decrease in all other departments of $66,000.
Depreciation and amortization expense was $7.3 million in 1998 compared to
$6.1 million in 1997, an increase of $1.2 million or 19.5%, due primarily to
increased capital spending in 1998 and 1997.
Diesel fuel was $3.2 million in 1998 compared to $4.2 million in 1997, a
decrease of $1.0 million or 24.8%, due primarily to a decline in diesel fuel
prices.
Casualties and insurance expense, including claims brought under the
Federal Employers' Liability Act, was $2.9 million in 1998 compared to $4.3
million in 1997, a decrease of $1.4 million or 31.4%, due primarily to a
decrease in derailment expense of approximately $739,000 and a decrease in
claims expense of approximately $584,000.
Materials expense was $3.5 million in 1998 compared to $3.8 million in
1997, a decrease of $352,000 or 9.2%, due primarily to decreases in maintenance
of way and maintenance of equipment repairs.
34
Other expense was $12.3 million in 1998 compared to $8.7 million in 1997, an
increase of $3.6 million or 41.1%, due primarily to increases in acquisition
expense of $1.1 million, trackage rights of $1.0 million, general and
administrative of $1.0 million, legal and accounting fees of $341,000 and other
expenses, net of $137,000.
Australian Railroad Operating Expenses
The following table sets forth a comparison of the Company's Australia
railroad operating expenses in 1998 and 1997:
Australian Railroad
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
Percent of Percent of
Operating Operating
Dollars Revenue Dollars Revenue
------- ------- ------- -------
Labor and benefits $ 5,263 11.3% $ 899 12.1%
Equipment rents 593 1.3% 81 1.1%
Purchased services 13,538 29.0% 2,298 30.9%
Depreciation and amortization 1,842 3.9% 246 3.3%
Diesel fuel 8,895 19.0% 1,409 19.0%
Casualties and insurance 1,415 3.0% 347 4.7%
Materials 1,734 3.7% 134 1.8%
Other 4,627 9.9% 1,312 17.6%
------- ---- ------ ----
Total $37,907 81.1% $6,726 90.5%
======= ==== ====== ====
All Australia railroad operating expense increases are primarily
attributable to a full year of operations in 1998 as compared to operations
which began on November 8, 1997.
U. S. Industrial Switching Operating Expenses
The following table sets forth a comparison of the Company's U.S. industrial
switching operating expenses in 1998 and 1997:
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35
U.S. Industrial Switching
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
Percent of Percent of
Operating Operating
Dollars Revenue Dollars Revenue
------- ------- ------- -------