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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act
of 1934 For the Fiscal Year Ended December 31, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from____to____
Commission File No. 0-20847
--------------------
GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0984624
- ------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification No.)
71 Lewis Street, Greenwich, Connecticut 06830
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(203) 629-3722
- ---------------
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- ------------------ -------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
-------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. []
Aggregate market value of Class A Common Stock and Class B Common Stock held by
non-affiliates based on closing price on March 22, 1999: $38,062,353.
Shares of common stock outstanding as of the close of business on
March 22, 1999:
Class Number of Shares Outstanding
- -------------------- ----------------------------
Class A Common Stock 4,006,084
Class B Common Stock 845,447
Documents incorporated by reference and the Part of the Form 10-K into which
they are incorporated are listed hereunder.
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 Registrant's proxy statement to be issued in
connection with the Annual Meeting of the
Stockholders of the Registrant to be held on
May 25, 1999.
The remainder of this page is intentionally left blank.
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Part I
Item 1. BUSINESS
Genesee & Wyoming Inc. (the "Registrant" or the "Company") is a holding
company whose subsidiaries own and operate short line and regional freight
railroads and provide related rail services. The Company, through its industrial
switching subsidiary, also provides railroad switching and related services to
United States industries with extensive railroad facilities within their
complexes. The Company's predecessor, Genesee and Wyoming Railroad Company, was
founded in 1899 by E.L. Fuller and his partners. In 1977, when Mortimer B.
Fuller, III purchased a controlling interest in the Company and became its Chief
Executive Officer, the Company was dependent on a single commodity, salt,
produced by a single customer. At that time, the Company generated $3.9 million
in operating revenues over its 14 miles of track. In 1978, under the leadership
of Mr. Fuller, the Company began a strategy of diversifying its sources of
revenues, initially in the railcar leasing business and then through rail line
acquisitions and the acquisition of Rail Link, Inc., which provides railroad
switching and related services. In 1997, the Company's growth expanded beyond
domestic operations to include the Australia Southern Railroad ("ASR"), a new
railroad operation which provides freight services in South Australia, and
Genesee Rail-One Inc. ("GRO"), a Canadian company in which the Company has 47.5%
ownership interest (see Note 17. to Consolidated Financial Statements). GRO
operates two short line railroads in Canada, one which is owned and one which is
leased. In July, 1998, the Company began serving as the operator of a 900-mile
mineral railroad in northern Mexico. The Company's operations are being
conducted by its new wholly-owned subsidiary, GW Mexico, S.A. de C.V. The
railroad, known as Linea Coahuila Durango, is a concession awarded by the
Mexican government in 1998 to two Mexican industrial firms, Grupo Acerero del
Norte, S.A. de C.V. and Industrias Penoles, S.A. de C.V. As a result of the
Company's acquisition and marketing strategies, the Company has become a
diversified rail operation extending over approximately 3,700 miles of track in
four countries on two continents. With the addition of the industrial switching
subsidiary in 1996 and Australia Southern Railroad in 1997, the Company now
serves over 325 customers in 15 states in the United States and 10 major
customers in Australia.
INDUSTRY OVERVIEW
The railroad industry in the United States has undergone significant change
since the passage of the Staggers Rail Act of 1980 (the "Staggers Rail Act"),
which deregulated the pricing and types of services provided by railroads.
Since 1980, Class I railroads in the United States and Canada have taken
aggressive steps to improve profitability and recapture market share. In
furtherance of that goal, these Class I railroads have focused their management
and capital resources on their long-haul core systems, and certain of them have
sold branch lines to smaller and more cost-efficient rail operators that are
willing to commit the resources necessary to meet the needs of the shippers
located on these lines. Divestment of branch lines enables Class I carriers to
minimize incremental capital expenditures, concentrate traffic density, improve
operating efficiency and avoid traffic losses associated with rail line
abandonment.
The commitment of Class I carriers to increase efficiency and profitability
has also led to an increase in merger activity among long haul railroads, such
as most recently, the acquisition of Consolidated Rail Corporation by Norfolk
Southern Corp. and CSX Transportation, Inc. Such
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consolidations present both risk and opportunity for the Company. For example,
the split up of Conrail will impact the Company's New York and Pennsylvania
railroads (see Note 13. To Consolidated Financial Statements).
Although the acquisition market is highly competitive, the Company believes
that there will continue to be opportunities to acquire lines from Class I
railroads in the United States and that there may be opportunities to make
acquisitions among the over 500 existing short line and regional railroads. The
Company believes there may be additional acquisition opportunities in Australia
as the state and federal governments seek privatization of the railway system.
The Company believes there may be acquisition opportunities in Canada, Mexico
and South America as well, although governmental regulations may limit
acquisition opportunities in these countries. Both Canadian National Railway and
Canadian Pacific Railway have divestment programs, and Mexico is nearing
completion of a privatization program of the National Railroad of Mexico which
includes the disposition of rail lines.
STRATEGY
The Company's strategy is to become the dominant provider of rail freight
transportation in the markets it serves by (i) growing its business through
acquisitions to establish new regions or increasing its presence in existing
regions, (ii) expanding its revenue base within each region through marketing
efforts, and (iii) improving its operating efficiency through rationalization
and consolidation of overhead expenses. The Company's growth to date has been
the result of the acquisition of rail properties, which has expanded the
Company's customer base and diversified its commodity mix, and its marketing
efforts.
Acquisition of Rail Properties
The Company seeks to expand its international and U.S. business through the
selective acquisition of rail properties, both in new regions and in regions in
which it currently operates. The Company's fundamental acquisition strategy is
to identify properties that have large industrial customers which will provide
the Company with a stable revenue base and the potential to generate incremental
revenues and additional customers upon implementation of a focused marketing
plan. In new regions, the Company targets rail properties that have adequate
size to establish a presence in the region, provide a basis for growth in the
region and attract qualified management. When acquiring rail properties in its
existing regions, in addition to seeking properties with large industrial
customers, the Company targets rail properties where it believes the successful
implementation of its operating strategy is likely to generate significant
operating efficiencies.
In evaluating acquisition opportunities, the Company considers, among other
matters, the size of the rail operations, opportunities for expansion, commodity
and customer diversification, revenue stability, connecting carriers, track
condition and maintenance requirements, and expected financial returns. The
Company also considers acquisition opportunities that have the potential to
enable its railroads to provide better or more cost-effective service to major
shippers or to increase and diversify the overall customer base of its
railroads. The Company develops acquisition prospects through its relationships
with Class I carriers and its reputation in the industry. In addition, the
Company uses consultants to assist in the identification and development of
acquisition opportunities. The Company has successfully
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integrated 14 acquisitions of varying sizes and operating characteristics, of
which four were existing short lines, eight were Class I divestitures, one was a
governmental privatization and one was an industrial switching company which
also operates three wholly-owned subsidiary companies.
The Company acquires rail properties by purchase of assets, or is able to
serve a market through lease or operating contract. Typically, the Company bids
against other short line and regional operators for available properties. The
structure of each transaction is determined based upon economic and strategic
considerations. In addition to the financial terms of the transaction, sellers
consider more subjective criteria such as a prospective acquiror's operating
experience, its reputation among shippers, and its ability to close a
transaction and commence operations smoothly. The Company believes it has
established an excellent record in each of these areas. In addition, by growing
revenues on its acquired lines and providing improved service to shippers, the
Company is able to provide increased revenue to the Class I carriers that
connect with its domestic lines. The Company sees this ability to provide
increased revenue to Class I carriers as an advantage in bidding for properties
in the United States.
Marketing
The Company's marketing strategy is to build each region on a base of major
industrial customers, to grow that base business through marketing efforts
directed at its major customers, and to generate incremental revenues outside
the base of major customers by attracting smaller customers and providing
ancillary services which generate non-freight revenues. The Company believes
that over the long term, its strategy of building its regions around a core of
major industrial customers provides a stable revenue base and allows the Company
to focus its efforts on additional growth opportunities within a region.
Through implementation of its marketing strategy, the Company intends to
increase further the number of major customers so that, over time, the Company's
reliance on any one customer will be reduced.
Consistent with its decentralized management structure, the Company's sales
and marketing activity is coordinated in each region by a marketing manager.
The marketing manager works closely with personnel of each of the Company's
railroads and with other department heads to develop marketing plans to increase
shipments from existing customers and develop new business. The Company focuses
on providing rail service to its customers that is easily accessible, reliable
and cost-effective. The Company considers all of its employees to be customer
service representatives and encourages them to initiate and maintain regular
contact with shippers.
Because most of the traffic transported by the Company's railroads in the
United States is interchanged with Class I carriers, the Company's domestic
marketing efforts are often aimed at enhancing its railroads' relationships with
these Class I carriers as well as shippers. The Company provides related rail
services such as railcar leasing, railcar repair, switching, storage, weighing
and blocking and bulk transfer, which enable Class I carriers and customers to
move freight more easily and cost-effectively. For example, the Company
supplies cars to its customers or its railroads when, among other things, a
customer has a need which cannot be filled by cars supplied by Class I railroads
or the Company has an opportunity to provide cars on a cost basis that both
meets customer needs and improves the economics of a freight move to the
Company. The Company actively manages its railcar portfolio, buying and
5
selling equipment to take advantage of changes in market value in conjunction
with changes in its customers' needs.
Operations
The Company's operating strategy is to increase efficiency and
profitability in each region in which it operates. When acquiring new rail
properties within an existing region, the Company capitalizes on operating
efficiencies created by the presence of its other railroads within that region.
In addition, consolidation of revenue and accounting functions often allows the
Company to operate new railroads with fewer employees, as was the case with both
its Illinois & Midland and Pittsburg & Shawmut acquisitions. The Company
rationalizes its track, where appropriate, to make its operations more
efficient. The Company also seeks and grants trackage rights to improve
regional rail infrastructure efficiency.
The Company intends to continue to improve the operating efficiency of its
railroads by track rehabilitation, especially where maintenance has been
deferred by the prior owner. Because of the importance of certain of the
Company's shippers to the economic stability and/or development of the regions
where they are located, and because of the importance of certain of the
Company's railroads to the economic infrastructure of those regions,
approximately $24.3 million in state and federal grants for track rehabilitation
and service improvements has been invested in the Company's U.S. rail properties
since 1987.
MANAGEMENT
The Company's Chief Executive Officer and Chief Financial Officer have
responsibility for overall strategic and financial planning. The Chief
Executive Officer has ultimate operating oversight over Australia and the Chief
Operating Officer, a position created and filled in November, 1997, oversees
operations in the United States. The Company believes that through its
decentralized management structure it has developed a culture that encourages
employees to take initiative and responsibility which is rewarded through
performance-based profit sharing and bonus programs.
RAILROAD OPERATIONS - UNITED STATES
Customers
The Company's U.S. railroads currently serve over 325 customers. A large
portion of the Company's U.S. railroad operating revenue is attributable to
customers operating in the electric utility, forest products, petroleum and
chemical industries. As the Company acquires new U.S. railroad operations, the
base of customers served continues to grow and diversify. The largest ten U.S.
customers, which is a group that changes annually, accounted for approximately
38%, 46% and 50% of the Company's U.S. railroad revenues in 1998, 1997 and 1996,
respectively. In 1998, 1997 and 1996, the Company's largest U.S. customer was
Commonwealth Edison, an electric utility, which accounted for approximately 14%,
18% and 18% of the Company's U.S. railroad revenues in 1998, 1997 and 1996,
respectively (see Note 13. to Consolidated Financial Statements). The Company
typically ships freight pursuant to transportation contracts among the Company,
its connecting carriers and the shipper. These contracts are in accordance with
industry norms and vary in duration from one to seven years.
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United States Railroad Commodities
The Company's U.S. railroads transport a wide variety of commodities for
their customers. Some of the Company's railroads have a well-diversified
commodity mix while others transport one or two principal commodities. In 1998,
coal, coke and ores and pulp and paper products were the two largest commodity
groups transported by the Company's U.S. railroads, constituting 29.1% and
12.6%, respectively, of total U.S. revenues (see Item 7. of this Report under
the heading "Results of Operations - Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997"), and 34.8% and 9.7%, respectively, of total U.S.
carloads. The following table summarizes the aggregate traffic volume of the
Company's U.S. railroads by commodity group:
UNITED STATES CARLOADS CARRIED BY COMMODITY GROUP
Year Ended Year Ended
December 31, 1998 December 31, 1997
--------------------- ---------------------
Commodity Group
- --------------- 1998 % of Total 1997 % of Total
---- ---------- ---- ----------
Coal, Coke & Ores 75,881 34.8% 82,269 37.4%
Pulp & Paper 21,318 9.7% 20,760 9.4%
Lumber & Forest Products 20,802 9.5% 18,171 8.3%
Other 18,922 8.7% 16,743 7.6%
Metals 17,862 8.2% 21,268 9.7%
Farm & Food Products 17,451 8.0% 13,390 6.1%
Petroleum 15,992 7.3% 17,456 7.9%
Minerals & Stone 13,679 6.3% 12,657 5.8%
Chemicals 12,503 5.7% 10,496 4.8%
Autos & Auto Parts 3,895 1.8% 6,496 3.0%
--------------------------------------------------
Total 218,305 100.0% 219,706 100.0%
==================================================
Coal, coke and ores consists primarily of shipments of coal to utilities
and industrial customers.
Pulp and paper consists primarily of inbound shipments of pulp and outbound
shipments of kraft and fine papers.
Lumber and forest products consists primarily of finished lumber used in
construction, particleboard used in furniture manufacturing, and wood chips and
pulpwood used in paper manufacturing.
Metals consists primarily of scrap metal and finished steel products
shipped to and from two steel mills, and coated pipe.
Farm and food products consists primarily of sugar, molasses, rice and
other grains and fertilizer.
Petroleum products consists primarily of fuel oil and crude oil.
Minerals and stone consists primarily of gravel and stone used in
construction.
Chemicals consists primarily of various chemicals used in manufacturing.
Autos and auto parts consists primarily of finished automobiles.
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United States Rail Traffic
U.S. rail traffic is classified as on-line or overhead traffic. On-line
traffic is traffic that either originates or terminates with shippers located on
a railroad and is interchanged with another rail carrier. On-line traffic that
both originates and terminates on a railroad is referred to as local traffic.
Overhead traffic neither originates nor terminates on a railroad, but rather
passes over a railroad from one connecting carrier to another.
The Company believes that on-line shipments provide it with a stability of
revenues because such traffic represents shipments to or from shippers located
along its lines which cannot easily be diverted to other rail carriers. While
overhead traffic is more easily diverted, it is less costly to handle. To
offset the potential for diversion of overhead traffic, the Company has sought
long-term contracts on its significant overhead traffic. In 1998, 9.5% of U.S.
railroad freight revenues was generated by overhead traffic compared to 9.7% in
1997 (see Note 13. to Consolidated Financial Statements).
The following table summarizes freight revenues by type of traffic carried
by the Company's U.S. railroads:
UNITED STATES FREIGHT REVENUES BY TRAFFIC TYPE
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
TRAFFIC TYPE AMOUNT % OF TOTAL AMOUNT % OF TOTAL
On-line
Originated $22,654 34.3% $22,537 33.3%
Terminated 31,602 47.8% 33,435 49.4%
Local 5,570 8.4% 5,154 7.6%
------- ----- ------- -----
Total On-line 59,826 90.5% 61,126 92.4%
Overhead 6,255 9.5% 6,587 9.7%
------- ----- ------- -----
Total Traffic $66,081 100.0% $67,713 100.0%
======= ===== ======= =====
U.S. Railroad Employees
As of December 31, 1998, the Company had 606 full-time employees. Of this
total, 156 are members of national labor organizations. The Company has seven
contracts with these national labor organizations which have expiration dates
ranging to 2000. The Company has also entered into collective bargaining
agreements with an additional 86 employees who represent themselves, all of
which expire in 1999.
RAILROAD OPERATIONS - AUSTRALIA
ASR commenced operations in November 1997. ASR acquired certain freight
railroad assets of Australian National, a railroad company owned by the
Commonwealth Government of Australia. Coincident with closing the purchase, the
Company sold certain facilities and inventories to two third parties who are
under long-term contracts with ASR to perform locomotive, rolling stock and
track infrastructure maintenance and repairs. Approximately 900 miles of
branchline track structure is owned and exclusively maintained by ASR through
one of the two third parties. The land under the track structure is leased
8
from the State of South Australia for a 50 year term. Some of these branchlines
are isolated from other parts of the system. Also, different parts of the system
have different track gauges, that is, narrow, standard and wide gauge, and ASR
must provide discrete locomotives and rolling stock for each gauge. In some
cases dual gauge track is in place.
ASR operates unit trains for six major customers, hauling six types of
commodities including grain, coal and gypsum. It provides switching, rail yard
storage and other rail related facilities for hire to customers. ASR also
acquired contracts to operate "hook and pull" trains for three customers.
Unlike the United States, the Australian system guarantees open access to rail
lines. ASR provides locomotives, fuel, train crews, and in some cases railcars,
to freight forwarding companies. These freight forwarding companies, ASR's
customers, contract for blocks of time within which their trains can be operated
at certain designated speeds. They are responsible for track access charges and
all other costs of operating these trains. ASR operates hook and pull trains
for three customers over the 2,100 mile corridor between Melbourne and Perth.
Certain of ASR's branchline trains operate over these main lines as well. ASR
is not responsible for maintenance of these main lines.
As of December 31, 1998, ASR had about 168 employees, with about 123
operational staff being members of a union. The contract with the union expires
in November, 2000.
U.S. INDUSTRIAL SWITCHING OPERATIONS
U.S. Industrial switching operations generate non-freight revenues
primarily by providing freight car switching and related rail services such as
railcar leasing, railcar repair and storage to industries with extensive
railroad facilities within their complexes. The Company's U.S. industrial
switching operation serves 24 customers in 10 states. These customers are
primarily in the chemicals, paper, mining and power generation industries. The
provision of the service generally involves locating a work force and
locomotives at the customer's facility and tailoring the service level to the
switching requirements of the site. As of December 31, 1998, the Company's U.S.
industrial switching operations had approximately 242 employees.
SAFETY
GWI's safety program involves all employees and focuses on the prevention
of accidents and injuries. The Senior Vice President of each region is
accountable for the results of the program, and each region has an officer
responsible for day-to-day program administration. Line supervisors have direct
responsibility for the safety and training of their personnel.
The Company maintains a corporate-wide safety policy facilitated by a full-
time Vice-President of Safety and Safety Director. The Company's safety program
also gives each railroad the flexibility to develop its own safety rules based
on local requirements or practices. Each railroad complies fully with all
federal, state and local government regulations. Operating personnel are
trained and certified in train operations, hazardous materials handling, proper
radio procedures and all other areas subject to governmental rules and
regulations.
The Company also participates in governmental and industry sponsored safety
programs. For example, members of the Company's management serve or have served
on the Board of Directors of Operation Lifesaver (the national
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grade crossing awareness program), the New Program Committee of Operation
Lifesaver and the American Short Line and Regional Railroad Association Safety
Committee. In addition, the Company has a working team consisting of the safety
officers from each railroad. This team is charged with ongoing development and
refinement of the Company's safety program and coordination with each railroad
to insure compliance with and implementation of all safety rules and
regulations.
INSURANCE
The Company has obtained for each of its railroads insurance coverage for
losses arising from personal injury and for property damage in the event of
derailments or other accidents or occurrences. The liability policies have
self-insured retentions ranging from $100,000 to $500,000 per occurrence. In
addition, the Company maintains excess liability policies which provide
supplemental coverage for losses in excess of primary policy limits. With
respect to the transportation of hazardous commodities, the Company's liability
policy covers sudden releases of hazardous materials, including expenses related
to evacuation. Personal injuries associated with grade crossing accidents are
also covered under the Company's liability policies. The Company also maintains
all-risk property damage coverage, subject to a standard pollution exception and
self-insured retentions ranging from $10,000 to $250,000.
Employees of the Company's United States railroads are covered by the
Federal Employers' Liability Act ("FELA"), a fault-based system under which
injuries and deaths of railroad employees are settled by negotiation or
litigation based on the comparative negligence of the employee and the employer.
FELA-related claims are covered under the Company's liability insurance
policies. Employees of the Company's industrial switching business are covered
under workers' compensation policies.
ASR liability policies have self-insured retentions ranging from $50,000
per occurrence to a one time deductible of $650,000 for rolling stock.
Employees are covered for injury or death by public and private sector insurance
arrangements. A levy is paid by ASR to the insurance provider based on the
amount of wages and salaries paid by ASR.
The Company believes its insurance coverage is adequate in light of its
experience and the experience of the rail industry. However, there can be no
assurance as to the adequacy, availability or cost of insurance in the future.
COMPETITION
In acquiring rail properties, the Company competes with other short line
and regional railroad operators, some of which are larger and have greater
financial resources than the Company. Competition for rail properties is based
primarily upon price, operating history and financing capability. The Company
believes its established reputation as a successful acquiror and operator of
short line rail properties, in combination with its managerial and financial
resources, effectively positions it to take advantage of acquisition
opportunities. However, competition for acquisitions is fierce.
Each of the Company's railroads is typically the only rail carrier directly
serving its customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a lesser
extent, ship and barge operators. The extent of this competition
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varies significantly among the Company's railroads. Competition is based
primarily upon the rate charged and the transit time required, as well as the
quality and reliability of the service provided, for an origin-to-destination
transportation package. To the extent other carriers are involved in
transporting a shipment, the Company cannot control the cost and quality of such
service. Cost reductions achieved by major rail carriers over the past several
years have generally improved their ability to compete with alternate modes of
transportation.
REGULATION
The Company's United States railroads are subject to regulation by the
Surface Transportation Board ("STB"), the Federal Railroad Administration
("FRA"), state departments of transportation and some state and local regulatory
agencies. The STB is the successor to certain regulatory functions previously
administered by the Interstate Commerce Commission. Established by the ICC
Termination Act of 1995 ("ICCTA"), the STB has jurisdiction over, among other
things, service levels and compensation of carriers for use of their railcars by
other carriers. It also must authorize extension or abandonment of rail lines,
the acquisition of rail lines, and consolidation, merger or acquisition of
control of rail common carriers; in limited circumstances, it may condition such
authorization upon the payment of severance benefits to affected employees. The
STB may review rail carrier pricing only in response to a complaint concerning
rates charged for transportation where there is an absence of effective
competition. The FRA has jurisdiction over safety and railroad equipment
standards and also assists in coordinating projects for railroad route
simplification.
In 1980, the Staggers Rail Act fundamentally changed U.S. federal
regulatory policy by emphasizing the promotion of revenue adequacy (the
opportunity to earn revenues sufficient to cover costs and attract capital) for
the railroads and allowing competition to determine to a greater extent rail
prices and route and service options. The ICCTA continues the trend towards
limiting regulation of rail prices. As a result of these changes in legislative
policy, the railroad industry's rate structure has evolved from a system of
interrelated prices that applied over different routes between the same points
to a combination of market based prices that are now subject to limited
regulatory constraints. While U.S. federal regulation of rail prices has been
significantly curtailed, U.S. federal regulation of services continues to affect
profitability and competitiveness in the railroad industry.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment, which have
become increasingly stringent. In the United States these environmental laws
and regulations, which are implemented principally by the Environmental
Protection Agency and comparable state agencies, govern the management of
hazardous wastes, the discharge of pollutants into the air and into surface and
underground waters, and the manufacture and disposal of certain substances.
Similarly, in Australia, these functions are administered by the Environmental
Protection Agency on a state level and the Department of Transport on a federal
level. There are no material environmental claims currently pending or, to the
Company's knowledge, threatened against the Company or any of its railroads. In
addition, the Company believes that the operations of its railroads are in
material compliance with current laws and regulations. The Company estimates
that any expenses incurred in maintaining compliance with current laws and
11
regulations will not have a material effect on the Company's earnings or capital
expenditures. However, there can be no assurance that the current regulatory
requirements will not change, or that currently unforeseen environmental
incidents will not occur, or that past non-compliance with environmental laws
will not be discovered on the Company's properties.
The Commonwealth of Australia has acknowledged that certain portions of the
leasehold and freehold land acquired under the Sale and Purchase Agreement by
ASR contains contamination arising from activities associated with previous
operators. The Commonwealth has provided a release and indemnity to ASR from
obligations, duty or liability arising from pre-existing contamination. The
Commonwealth is required to remediate the relevant land to existing
environmental standards and for the purpose for which the land was used at the
date of the Sale and Purchase Agreement (or the date on which the land was last
used).
FORWARD-LOOKING STATEMENTS
This Report and the documents incorporated herein by reference may contain
forward-looking statements based on current expectations, estimates and
projections about the Company's industry, or management's beliefs and
assumptions. Words such as "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to forecast. Therefore, actual results may
differ materially from those expressed or forecast in any such forward-looking
statements. Such risks and uncertainties include, in addition to those set
forth in this Item 1 and in Item 7, hereof, those noted in the documents
incorporated by reference. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 2. PROPERTIES
The Company currently operates 19 railroads of which 17 are in the United
States, one is in Australia and one is in Mexico. These rail properties
typically consist of the track and the underlying land. Real estate adjacent to
the railroad rights-of-way is generally retained by the seller, and the
Company's holdings of such property are not material. Similarly, the seller
typically retains mineral rights and rights to grant fiber optic and other
easements in the properties acquired by the Company's railroads. The Company's
railroad in Australia operates over approximately 900 miles of track structure
which is owned by the Company. The land on which the track structure is built is
leased from the State of South Australia for a term of 50 years with a
conditional right of renewal for an additional 15 years.
The remainder of this page is intentionally left blank.
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The following table sets forth certain information as of December 31, 1998 with
respect to the Company's United States railroads:
RAILROAD AND LOCATION TRACK MILES STRUCTURE CONNECTING CARRIERS (1)
Allegheny & Eastern Rail, Inc.
("ALY") Pennsylvania 153 (2) Owned BPRR, CR
Bradford Industrial Rail, Inc.
("BR") Pennsylvania 4 (3) Owned BPRR, CR
Buffalo & Pittsburgh Railroad, Inc. ALY, BLE, BR, CN, CP,
("BPRR") New York, Pennsylvania 279 (4) Owned/Leased CR, CSX, NS, PS, RSR, SB
The Dansville & Mount Morris
Railroad Company
("DMM") New York 8 Owned GNWR
Genesee and Wyoming Railroad Company
("GNWR") New York 26 (5) Owned (5) CP, CR, DMM, RSR
Pittsburg & Shawmut Railroad, Inc.
("PS") Pennsylvania 224 (6) Owned BPRR, CR
Rochester & Southern Railroad, Inc.
("RSR") New York 66 (7) Owned BPRR, CP, CR, GNWR, NS
Illinois & Midland Railroad, Inc. BNSF, CR, IAIS, IC, NS,
("IMR") Illinois 97 (8) Owned PPU, TPW, UP
Portland & Western Railroad, Inc.
("PNWR") Oregon 198 (9) Owned/Leased BNSF, UP, WPRR, POTB
Willamette & Pacific Railroad, Inc.
("WPRR") Oregon 185 (10) Leased UP, PNWR
Louisiana & Delta Railroad, Inc.
("LDRR") Louisiana 87 (11) Owned/Leased UP
Carolina Coastal Railway, Inc.
("CLNA") North Carolina 17 (12) Leased NS
Commonwealth Railway, Inc.
("CWRY") Virginia 17 (13) Owned/Leased NS
Talleyrand Terminal Railroad
("TTR") Florida 10 (14) Leased NS, CSX
Corpus Christi Terminal Railroad, Inc.
("CCPN") Texas 26 (15) Leased UP, BNSF, TM
Golden Isles Terminal Railroad, Inc. 13 (16) Leased CSXT, NS
("GITM") Georgia
Savannah Port Terminal Railroad, Inc. 1 (17) Leased CSXT, NS
("SAPT") Georgia
Note: GWI Switching Services, L.P. is no longer included in this table as
the operating agreement under which it provided switching services to a
Dayton, Texas plastic pellet car storage yard was terminated in December,
1997.
(1) See Legend of Connecting Carriers following this table.
(2) In addition, ALY operates by trackage rights over 3 miles of CR.
(3) In addition, BR operates by trackage rights over 14 miles of BPRR.
(4) Includes 92 miles under perpetual leases and 9 miles under a lease expiring
in 2090. In addition, BPRR operates by trackage rights over 27 miles of CSX
under an agreement expiring in 2018, and 83 miles of CR under an agreement
expiring in 2027. The Company is seeking to rationalize approximately 58
miles of owned track that parallels track under the CR trackage rights
agreement.
13
(5) The operations of the GNWR have been realigned with those of RSR.
(6) In addition, PS operates over 13 miles pursuant to an operating contract.
The assets of PS were acquired on April 29, 1996.
(7) In addition, RSR has a haulage contract over 52 miles of CP.
(8) In addition, IMR operates by trackage rights over 15 miles of IC, 9 miles
of PPU and 5 miles of UP. The assets of IMR were acquired on February 8,
1996.
(9) Includes 53 miles under lease expiring in 2015 with a 10-year renewal
unless terminated by either party, 53 miles formerly under lease which was
purchased in November, 1997, and is operated under a rail service easement
and 92 miles which was purchased in July, 1997. In addition, PNWR operates
by trackage rights over 2 miles of UP and 4 miles of POTB.
(10) All under lease expiring in 2013, with renewal options subject to both
parties' consent. In addition, WPRR operates over 41 miles of UP under a
concurrent trackage rights agreement.
(11) Includes 14 miles under a lease expiring in 2011. In addition, LDRR
operates by trackage rights over 91 miles of UP under an agreement
terminable by either party after 1997 and has a haulage contract with M.A.
Patout & Sons over 4 miles of track.
(12) All leased on a month-to-month basis under a Lease and Option to Purchase
Agreement which commenced in 1989. The Company acquired CLNA on November
9, 1996.
(13) Includes 12.5 miles under lease expiring in 2009. The Company acquired CWRY
on November 8, 1996.
(14) All under lease expiring in 1999.
(15) All under lease expiring in 2002.
(16) All under lease expiring in 2002. The Company acquired GITM in June, 1998.
(17) All under lease expiring in 2002. The Company acquired SAPT in June, 1998.
LEGEND OF CONNECTING CARRIERS
BLE Bessemer and Lake Erie Railroad Company
BNSF Burlington Northern Santa Fe Railway Company
CN Canadian National
CP Canadian Pacific Railway
CR Consolidated Rail Corporation
CSX CSX Transportation, Inc.
IAIS Iowa Interstate Railroad, Ltd.
IC Illinois Central Railroad Company
NS Norfolk Southern Corp.
POTB Port of Tillamook Bay Railroad
PPU Peoria & Pekin Union Railway
SB South Buffalo Railway Company
TM The Texas Mexican Railway Company
TPW Toledo, Peoria & Western Railway Corp.
UP Union Pacific Railroad Company
EQUIPMENT
As of December 31, 1998, rolling stock of the Company's U.S. railroads
consisted of 228 locomotives and 2,427 freight cars, some of which were owned
and some of which were leased from others. The Company's rolling stock for its
subsidiary in Australia consisted of approximately 80 locomotives and
approximately 1,200 wagons (freight cars) owned and in service.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits resulting from railroad and
industrial switching operations, one of which includes the commencement of a
criminal investigation. Management believes that the Company has adequate
defenses to any criminal charge which may arise and that adequate provision has
been made in the financial statements for any expected liabilities which may
result from disposition of such lawsuits. While it is possible that some of the
foregoing matters may be resolved at a cost greater than that provided for, it
is the opinion of management that the ultimate liability, if any, will not be
material to the Company's results of operations or financial position.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On June 24, 1996, the Company's Class A Common Stock began trading and is
quoted on the Nasdaq National Market. Its trading symbol is GNWR. The tables
below show the range of high and low actual trade prices for the Company's Class
A Common Stock during each quarterly period of 1998, 1997 and 1996, since its
initial public offering.
YEAR ENDED
DECEMBER 31, 1998 HIGH LOW
1st Quarter $27.50 $ 20.625
2nd Quarter $27.50 $ 17.50
3rd Quarter $22.00 $ 11.75
4th Quarter $17.00 $ 11.375
YEAR ENDED
DECEMBER 31, 1997 HIGH LOW
1st Quarter $37.75 $ 29.00
2nd Quarter $31.75 $ 26.25
3rd Quarter $35.00 $ 24.00
4th Quarter $31.75 $ 22.50
YEAR ENDED
DECEMBER 31, 1996 HIGH LOW
1st Quarter N/A N/A
2nd Quarter $21.00 $ 18.25
3rd Quarter $30.50 $ 18.50
4th Quarter $35.75 $ 25.25
The Company's Class B Common Stock is not publicly traded.
The Company did not pay cash dividends in 1998 or 1997. Prior to the
initial public offering on June 24, 1996, the Company paid dividends in the
first quarter of 1996 aggregating $32,000. The Company does not intend to pay
cash dividends for the foreseeable future and intends to retain earnings, if
any, for future operation and expansion of the Company's business. Any
determination to pay dividends in the future will be at the discretion of the
15
Company's Board of Directors and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board of Directors.
On March 12, 1999 there were 121 holders of record of the Company's Class A
Common Stock and 10 holders of record of the Company's Class B Common Stock.
During 1998 the Company issued the following securities which were not
registered under the Securities Act of 1933, as amended (the "Act"). Each of
such issuances was made by private offering in reliance on the exemption from
the registration provisions of the Act provided by Section 4(2) of the Act:
(1) On January 30, 1998 the Company issued to an aggregate of 137 of its
employees, for no additional consideration, options under the Genesee & Wyoming
Inc. Stock Option Plan to purchase an aggregate of 250,600 shares of Class A
Common Stock at an exercise price of $21.25 per share. The shares issuable upon
exercise of such options were the subject of a Registration Statement on Form S-
8 under the Act.
The remainder of this page is intentionally left blank.
16
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated income statement data and selected
consolidated balance sheet data of the Company for the years ended December 31,
1998, 1997, 1996, 1995 and 1994, have been derived from the Company's
consolidated financial statements. All of the information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report on Form 10-K. See also Item 7. of this
Report.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
INCOME STATEMENT DATA:
Operating revenues $147,472 $103,643 $ 77,795 $53,387 $55,419
Operating expenses 127,904 87,200 63,801 46,815 47,381
Operating income 19,568 16,443 13,994 6,572 8,038
Interest expense (7,071) (3,349) (4,720) (3,405) (3,212)
Other income 6,645 345 651 456 192
Income before income taxes and
extraordinary item 19,142 13,439 9,925 3,623 5,018
Income taxes 7,708 5,441 4,020 1,472 2,007
Income before extraordinary item 11,434 7,998 5,905 2,151 3,011
Extraordinary item -- -- -- (494) --
Net income $ 11,434 $ 7,998 $ 5,905 $ 1,657 $ 3,011
Basic earnings per common share:
Income before extraordinary item $2.20 $1.52 $ 1.54 $ 0.92 $ 1.31
Extraordinary item -- -- -- (0.21) --
Net income $2.20 $1.52 $ 1.54 $ 0.71 $ 1.31
Dividends per common share (1) -- -- $ 0.01 $ 0.08 $ 0.03
Weighted average number of shares
of common stock 5,187 5,250 3,829 2,348 2,304
BALANCE SHEET DATA AS OF PERIOD END:
Total assets $216,760 $210,532 $145,339 $78,429 $69,888
Total debt 65,690 74,144 18,731 39,941 32,640
Stockholders' equity 74,537 68,343 61,683 10,548 9,082
(1) Prior to the initial public offering on June 24, 1996, the Company paid
dividends at the discretion of the Company's Board of Directors. The Company
did not pay cash dividends after the initial public offering. The Company does
not intend to pay cash dividends for the foreseeable future and intends to
retain earnings, if any, for future operation and expansion of the Company's
business.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Annual Report.
General
The Company is a holding company whose subsidiaries own and/or operate
short line and regional freight railroads and provide related rail services in
the United States, Australia and Mexico. The Company, through its U.S.
industrial switching subsidiary, also provides freight car switching and related
services to United States industries with extensive railroad facilities within
their complexes. The Company generates revenues primarily from the movement of
freight over track owned or operated by its railroads. The Company also
generates non-freight revenues primarily by providing freight car switching and
related rail services such as railcar leasing, railcar repair and storage to
industries with extensive railroad facilities within their complexes, to
shippers along its lines, and to the Class I railroads that connect with its
U.S. lines.
The Company's operating expenses include wages and benefits, equipment
rents (including car hire), purchased services, depreciation and amortization,
diesel fuel, casualties and insurance, materials and other expenses. Car hire is
a charge paid by a railroad to the owners of railcars used by that railroad in
moving freight. Other expenses generally include property and other non-income
taxes, professional services, communication and data processing costs and
general overhead expense.
When comparing the Company's results of operations from one reporting
period to another, the following factors should be taken into consideration. The
Company has historically experienced fluctuations in revenues and expenses such
as one-time freight moves, customer plant expansions and shut-downs, railcar
sales, accidents and derailments. In periods when these events occur, results of
operations are not easily comparable to other periods. Also, much of the
Company's growth to date has resulted from acquisitions. The Company completed
two acquisitions during the first four months of 1996, one in November 1996, and
another in November 1997. Because of variations in the structure, timing and
size of these acquisitions and differences in economics among the Company's
railroads resulting from differences in the rates and other material terms
established through negotiation, the Company's results of operations in any
reporting period may not be directly comparable to its results of operations in
other reporting periods.
Joint Venture - Genesee.Rail-One Inc.
During 1997, the Company formed a joint venture, Genesee Rail-One Inc.
("GRO") to acquire railroads in Canada. GRO is a joint venture with Rail-One
Inc. ("Rail-One"), a subsidiary of The Cygnus Group which is an integrated
transportation facilities, services and infrastructure provider in Canada. The
Company's initial capital investment in GRO was approximately $4,913,000.
On July 29, 1997, GRO commenced operations of the Huron Central Railway
Inc. ("HCRY"), a 180-mile railroad located in Central Ontario. HCRY leases its
rail line from the Canadian Pacific Railway for a 20 year term and is
responsible for operation and maintenance of the leased line.
18
On November 11, 1997, GRO commenced operations of the Quebec Gatineau
Railway Inc. ("QGRY"), a 354-mile railroad linking Quebec City, Montreal and
Hull in Southeastern Quebec. QGRY purchased and leased the assets for this
railroad from St. Lawrence & Hudson Railway Company Limited which is a
subsidiary of Canadian Pacific Railway Company.
In November 1998, the Company recorded an additional investment of $875,000
for the purchase of a 10-mile segment of track that is contiguous to the QGRY.
Additionally, the Company agreed to provide a $2.2 million letter of credit to
GRO's primary lender in exchange for relief on certain financial covenants.
Based on GWI's ownership portion, the Company reported the results of
operations of GRO under the equity method of accounting for investments. The
results of operations of GRO are translated into U.S. dollars at a weighted
average exchange rate for each period and are included in other income, net.
Losses from GRO of $645,000 and $60,000 in 1998 and 1997, respectively, are
recorded in other income, net.
The Company loaned Rail-One $4,613,000 under a promissory note denominated
in Canadian currency to substantially finance Rail-One's initial investment in
GRO. The note accrued interest at 7.5 percent per annum, earned a commitment fee
equal to 4 percent of the principal amount of the note and is secured by Rail-
One's 47.5 percent ownership in GRO. The principal of the note, all accrued
interest on the principal amount and the commitment fee were due and payable on
November 10, 1998. The principal, all accrued interest and the commitment fee
were not paid on November 10, 1998, and the Company entered negotiations with
Rail-One regarding the transfer of Rail-One's ownership interest in GRO to the
Company.
As of December 31, 1998, the Company's initial investment of approximately
$4.9 million and its additional investment of $875,000 was recorded at $5.1
million, a reduction of $705,000 due to GRO operating losses. Additionally, the
Company capitalized its note receivable, accrued interest and commitment fee due
from Rail-One, totaling approximately $4.7 million, and approximately $3.1
million of trade accounts receivable due from GRO, increasing its total
investment in GRO to approximately $12.9 million.
On March 10, 1999, the Company reached an agreement in principle to acquire
Rail-One's 47.5% ownership interest in GRO thereby increasing the Company's
ownership of GRO to 95% (see Note 17. to Consolidated Financial Statements).
Under the terms of the proposed agreement, the Company would pay approximately
$844,000 in cash to the owners of Rail-One in installments over a four year
period and the Company would grant an option to the owners of Rail-One to
purchase 80,000 shares of Class A Common Stock at an exercise price equal to
market price on the date of the grant, assumed to be about March 31, 1999. The
option to purchase 80,000 shares is contingent on the Company's recovery of its
capital investment in GRO including debt assumed if the Company were to sell
GRO, and upon certain GRO income performance measures. Upon execution of a
definitive agreement, the operating results of GRO will be consolidated within
the financial statements of the Company, with a 5% minority interest due to
another GRO shareholder.
19
GW Mexico, S.A. de C.V.
On July 29, 1998 the Company began serving as the operator of a 900-mile
mineral railroad in northern Mexico. The Company's operations are being
conducted by its new wholly-owned subsidiary, GW Mexico, S.A. de C.V. The
railroad, known as Linea Coahuila Durango, is a concession awarded by the
Mexican government in 1998 to two Mexican industrial firms, Grupo Acerero del
Norte, S.A. de C.V. and Industrias Penoles, S.A. de C.V. The operating results
of GW Mexico, S.A. de C.V. are not material and are reported in U.S. railroad
operations.
Insurance Recoveries
The Company receives insurance proceeds in the normal course of business
for recoveries related to derailment damages and employee and third party
claims. These proceeds are treated as a reduction to operating expenses.
Significant insurance proceeds related to other matters are recorded in other
income. In 1998, included in other income is $6.0 million of insurance proceeds.
Genesee & Wyoming Australia Pty. Ltd.
On August 28, 1997 the Company's wholly-owned subsidiary, Genesee & Wyoming
Australia Pty. Ltd. ("GWIA"), was awarded the contract to purchase certain
selected assets of the railroad freight operation of SA Rail, a division of
Australian National Railway which was controlled by the Commonwealth Government
of Australia (see Note 2. to Consolidated Financial Statements). SA Rail
provided intrastate freight services in South Australia, interstate haulage of
contract freight, rolling stock rental and maintenance, and interstate track
maintenance. GWIA bid as part of a consortium including EDI Clyde Engineering
and Transfield Pty. Ltd. EDI Clyde is a major Australian provider of railway
rolling stock and holds the Australian license for GM/EMD locomotives.
Transfield is a major Australian engineering, construction and infrastructure
maintenance provider. On November 8, 1997, GWIA closed on the purchase of the
assets and commenced operation of railroad freight service under the name of
Australia Southern Railroad Pty. Ltd. The assets were acquired for approximately
$33.1 million, including related costs. The assets consist primarily of road and
track structure, railroad rolling stock and other equipment. The acquisition of
assets was partially financed through two new debt agreements in the aggregate
amount of $22.2 million (see Note 8. to Consolidated Financial Statements).
The remainder of this page is intentionally left blank.
20
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated Operating Revenues
Operating revenues were $147.4 million in 1998 compared to $103.6 million
in 1997, an increase of $43.8 million or 42.3%. The increase was attributable to
$39.3 million in revenues from the Australia operation, a $3.7 million increase
in United States railroad revenues, and a $823,000 increase in U.S. industrial
switching revenues.
The following three sections provide information on railroad revenues in
the United States and Australia, and industrial switching revenues in the United
States.
United States Railroad Operating Revenues
Operating revenues were $88.1 million in the year ended December 31, 1998
compared to $84.4 million in the year ended December 31, 1997, an increase of
$3.7 million or 4.4%. The increase was attributable to a $5.3 million increase
in non-freight revenues, which offset a $1.6 million decrease in freight
revenues.
The following table compares freight revenues, carloads and average freight
revenues per carload for 1998 and 1997:
United States Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 1998 and 1997
(dollars in thousands,
except average per carload)
Average
Freight
Revenue
Freight Revenues Carloads Per
------------------ -------- Carload
% of % of % of % of
Commodity Group 1998 Total 1997 Total 1998 Total 1997 Total 1998 1997
- -------------------- ------- ----- ------- ----- ------- ----- ------- ----- ----- -----
Coal, Coke & Ores $19,245 29.1% $21,452 31.7% 75,881 34.8% 82,269 37.4% $ 254 $ 261
Pulp & Paper 8,295 12.6% 7,920 11.7% 21,318 9.7% 20,760 9.4% 389 382
Petroleum Products 7,135 10.8% 8,349 12.3% 15,992 7.3% 17,456 7.9% 446 478
Chemicals &
Plastics 6,337 9.6% 5,761 8.5% 12,503 5.7% 10,496 4.8% 507 549
Lumber & Forest
Products 6,098 9.2% 6,093 9.0% 20,802 9.5% 18,171 8.3% 293 335
Farm & Food Products 4,919 7.4% 3,865 5.7% 17,451 8.0% 13,390 6.1% 282 289
Metals 4,879 7.4% 5,188 7.7% 17,862 8.2% 21,268 9.7% 273 244
Minerals & Stone 3,790 5.8% 3,346 4.9% 13,679 6.3% 12,657 5.8% 277 264
Other 3,438 5.2% 2,287 3.4% 18,922 8.7% 16,743 7.6% 182 137
Autos & Auto Parts 1,945 2.9% 3,452 5.1% 3,895 1.8% 6,496 3.0% 499 531
---------------------------------------------------------------------------------------
Total $66,081 100.0% $67,713 100.0% 218,305 100.0% 219,706 100.0% 303 308
======================================================================================================
21
The decrease in freight revenues was attributable to the decline in freight
revenues from shipments of coal, autos and auto parts, petroleum products and
metals. Freight revenues from coal were $19.2 million in the year ended
December 31, 1998, compared to $21.4 million in the year ended December 31,
1997, a decrease of $2.2 million or 10.3% primarily due to reduced shipments of
coal resulting from scheduled maintenance and inventory adjustments at a key
customer's facilities. Freight revenues from autos and auto parts were $1.9
million in the year ended December 31, 1998, compared to $3.4 million in the
year ended December 31, 1997, a decrease of $1.5 million or 43.7% primarily due
to reduced shipments resulting from loss of overhead freight from a contract
change between CSXT and Ford, and labor issues in the auto industry. Freight
revenues from petroleum products were $7.1 million in the year ended December
31, 1998, compared to $8.3 million in the year ended December 31, 1997, a
decrease of $1.2 million or 14.5% due to reduced shipments resulting from
scheduled maintenance at a key customer's facilities. Freight revenues from
metals were $4.9 million in the year ended December 31, 1998, compared to $5.2
million in the year ended December 31, 1997, a decrease of $309,000 or 5.9%.
The decrease in freight revenues from coal, autos and auto parts, petroleum
products and metals was partially offset by increases in freight revenues from
farm and food products of $1.1 million or 27.3%, chemicals and plastics of
$576,000 or 10.0%, minerals and stone of $444,000 or 13.3% and pulp and paper of
$375,000 or 4.7%. Freight revenues from all remaining commodities reflected a
net increase of $1.2 million.
Total carloads were 218,305 in the year ended December 31, 1998 compared to
219,706 in the year ended December 31, 1997, a decrease of 1,401 or 0.6%. Also,
the overall average revenue per carload declined to $303 in the year ended
December 31, 1998, compared to $308 per carload in the year ended December 31,
1997, a decrease of 1.6% due to changes in commodity mix and traffic patterns.
United States non-freight railroad revenues were $22.0 million in the year
ended December 31, 1998 compared to $16.7 million in the year ended December 31,
1997, an increase of $5.3 million or 32.0%. The increase was primarily due to
increases in car hire and rental income of $2.0 million, other income of $1.8
million and switching revenue of $1.5 million.
Australia Railroad Operating Revenues (U.S. Dollars)
Operating revenues were $46.7 million in the year ended December 31, 1998,
compared to $7.4 million in the year ended December 31, 1997, an increase of
$39.3 million or 528.8%. The increase consisted of $35.7 million in freight
revenues and $3.6 in non-freight revenues. The increase was primarily
attributable to a full year of operations in 1998 as compared to operations
which began on November 8, 1997.
The following table outlines Australian freight revenues for the periods ended
December 31, 1998 and 1997:
The remainder of this page is intentionally left blank.
22
Australian Freight Revenue by Commodity
Years Ended December 31, 1998 and 1997
(in thousands)
Commodity Group 1998 1997
- ---------------------------------------------------------------------------------------------------
Hook and Pull (Haulage) $15,288 $1,969
Grain 13,040 2,377
Coal 7,514 817
Gypsum 2,788 463
Marble 1,949 268
Lime 1,052 203
Other 368 215
--------- ---------
Total $41,999 $6,312
========= =========
Australia non-freight revenues were $4.7 million in the year ended December
31, 1998, compared to $1.1 million in the year ended December 31, 1997, an
increase of $3.6 million or 322.6%. The increase consisted of $2.4 million in
car hire and rental income and $1.2 million in other income. The increase was
primarily attributable to a full year of operations in 1998 as compared to
operations which began on November 8, 1997.
U.S. Industrial Switching Revenues
Revenues from U.S. industrial switching activities were $12.6 million in the
year ended December 31, 1998 compared to $11.8 million in the year ended
December 31, 1997, an increase of $823,000 or 7.0%. The increase was primarily
attributable to a broadening of the customer base of Rail Link, Inc.
Consolidated Operating Expenses
Operating expenses for all operations combined were $127.9 million in 1998
compared to $87.2 million in 1997, an increase of $40.7 million or 46.7%.
Expense increases attributable to operations in Australia, which began in
November, 1997, represented $31.2 million or 76.6% of the change, expense
increases attributable to U.S. railroad operations represented $7.7 million or
19.0% of the change, and expense increases in U.S. industrial switching
represented $1.8 million or 4.4% of the change.
The following three sections provide information on railroad expenses in the
United States and Australia, and U.S. industrial switching expenses in the
United States.
United States Railroad Operating Expenses
The following table sets forth a comparison of the Company's United States
railroad operating expenses in 1998 and 1997:
23
United States Railroad
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $30,822 35.0% $28,041 33.2%
Equipment rents 11,060 12.6% 8,755 10.4%
Purchased services 4,496 5.1% 3,872 4.6%
Depreciation and amortization 7,277 8.3% 6,092 7.2%
Diesel fuel 3,187 3.6% 4,239 5.0%
Casualties and insurance 2,937 3.3% 4,280 5.1%
Materials 3,485 4.0% 3,837 4.5%
Other 12,285 13.9% 8,707 10.4%
---------------------------------------------
Total $75,549 85.8% $67,823 80.4%
=============================================
Labor and benefits expense was $30.8 million in 1998 compared to $28.0 million
in 1997, an increase of $2.8 million or 9.9%, due primarily to general increases
in wages and benefits for all railroad operations and the addition of several
new senior management positions in general and administrative.
Equipment rents were $11.1 million in 1998 compared to $8.8 million in 1997,
an increase of $2.3 million or 26.3%, due primarily to new operating leases for
railroad rolling stock utilized by the Company's leasing subsidiary.
Purchased services were $4.5 million in 1998 compared to $3.9 million in 1997,
an increase of $624,000 or 16.1%, due primarily to increases in maintenance of
way contract work of approximately $277,000 and information systems and general
and administrative contract work of approximately $413,000, offset by a net
decrease in all other departments of $66,000.
Depreciation and amortization expense was $7.3 million in 1998 compared to
$6.1 million in 1997, an increase of $1.2 million or 19.5%, due primarily to
increased capital spending in 1998 and 1997.
Diesel fuel was $3.2 million in 1998 compared to $4.2 million in 1997, a
decrease of $1.0 million or 24.8%, due primarily to a decline in diesel fuel
prices.
Casualties and insurance expense, including claims brought under the Federal
Employers' Liability Act, was $2.9 million in 1998 compared to $4.3 million in
1997, a decrease of $1.4 million or 31.4%, due primarily to a decrease in
derailment expense of approximately $739,000 and a decrease in claims expense of
approximately $584,000.
Materials expense was $3.5 million in 1998 compared to $3.8 million in 1997, a
decrease of $352,000 or 9.2%, due primarily to decreases in maintenance of way
and maintenance of equipment repairs.
Other expense was $12.3 million in 1998 compared to $8.7 million in 1997, an
increase of $3.6 million or 41.1%, due primarily to increases in acquisition
24
expense of $1.1 million, trackage rights of $1.0 million, general and
administrative of $1.0 million, legal and accounting fees of $341,000 and other
expenses, net of $137,000.
Australia Railroad Operating Expenses (U.S. Dollars)
The following table sets forth a comparison of the Company's Australia
railroad operating expenses in 1998 and 1997:
Australia Railroad
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $ 5,263 11.3% $ 899 12.1%
Equipment rents 593 1.3% 81 1.1%
Purchased services 13,538 29.0% 2,298 30.9%
Depreciation and amortization 1,842 3.9% 246 3.3%
Diesel fuel 8,895 19.0% 1,409 19.0%
Casualties and insurance 1,415 3.0% 347 4.7%
Materials 1,734 3.7% 134 1.8%
Other 4,627 9.9% 1,312 17.6%
------- ---- ------ ----
Total $37,907 81.1% $6,726 90.5%
======= ==== ====== ====
All operating expense increases are primarily attributable to a full year of
operations in 1998 as compared to operations which began on November 8, 1997.
The remainder of this page is intentionally left blank.
25
U.S. Industrial Switching Operating Expenses
The following table sets forth a comparison of the Company's U.S. industrial
switching operating expenses in 1998 and 1997:
U.S. Industrial Switching
Operating Expense Comparison
Years Ended December 31, 1998 and 1997
(dollars in thousands)
1998 1997
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $ 9,019 71.3% $ 8,457 71.5%
Equipment rents 217 1.7% 102 1.0%
Purchased services 291 2.3% 241 2.0%
Depreciation and amortization 798 6.3% 661 5.6%
Diesel fuel 466 3.7% 499 4.2%
Casualties and insurance 1,363 10.8% 927 7.8%
Materials 758 6.0% 524 4.4%
Other 1,533 12.1% 1,240 10.5%
------- ----- ------- -----
Total $14,445 114.2% $12,651 107.0%
======= ===== ======= =====
Labor and benefits expense was $9.0 million in 1998 compared to $8.5 million
in 1997, an increase of $562,000 or 6.6%, which was primarily attributable to a
broadening of the customer base of Rail Link, Inc.
Casualties and insurance expense was $1.4 million in 1998 compared to $927,000
in 1997, an increase of $436,000 or 47.0%, which was primarily attributable to
an increase in derailment expense of $184,000 and an increase in claims expense
of $236,000
Other expense was $1.5 million in 1998 compared to $1.2 million in 1997, an
increase of $293,000 or 23.6%, which was primarily attributable to a broadening
of the customer base of Rail Link, Inc.
All other expense categories were $2.5 million in 1998 compared to $2.0
million in 1997, an increase of $503,000 or 24.8%, which was primarily
attributable to a broadening of the customer base of Rail Link, Inc.
Operating Ratios
The Company's combined operating ratio increased to 86.7% in 1998 from 84.1%
in 1997. The operating ratio for U.S. railroad operations increased to 85.8% in
1998 from 80.4% in 1997. The operating ratio for Australia railroad operations
decreased to 81.1% in 1998 from 90.5% in 1997. The operating ratio for U.S.
industrial switching operations increased to 114.2% in 1998 from 107.0% in 1997.
Interest Expense and Income Taxes
The Company's combined interest expense was $7.0 million in 1998 compared to
$3.3 million in 1997, an increase of $3.7 million or 111.1%. Interest expense
26
for U.S. railroad operations increased to $4.4 million in 1998 from $2.8 million
in 1997, an increase of $1.6 million or 56.9%. This increase is primarily
attributable to the partial financing of the acquisition in Australia (for which
the Company used its Credit Facility but did not allocate the interest to
Australia railroad operations), an investment in GRO which operates two
railroads in Canada, and a new capital lease for equipment. Interest expense
for Australia railroad operations increased to $2.3 million in 1998 from
$320,000 in 1997, an increase of $2.0 million or 615.3%. This increase was
primarily to attributable a full year of operations in 1998 as compared to
operations which began on November 8, 1997. Interest expense for U.S.
industrial switching operations increased to $376,000 in 1998 from $220,000 in
1997, an increase of $156,000 or 70.9%.
The Company's effective income tax rate was 40.3% and 40.5% in 1998 and 1997,
respectively.
Other Income
The Company's other income in 1998 was $6.6 million compared to other income
in 1997 of $345,000, an increase of $6.3 million or 1,826.1%. The increase was
attributable to $6.0 million of insurance proceeds recorded in the United States
railroad operations.
Net Income
The Company's net income in 1998 was $11.4 million compared to net income in
1997 of $8.0 million, an increase of $3.4 million or 42.9%. The increase was
attributable to increases in net income from the Australia operation of $3.7
million and United States railroad operations of $548,000, which offset an
increase in the net loss in U.S. industrial switching operations of $792,000.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Consolidated Operating Revenues
Operating revenues were $103.6 million in 1997 compared to $77.8 million in
1996, an increase of $25.8 million or 33.2%. The increase was attributable to
$7.4 million in revenues from the Australia operation, a $8.4 million increase
in United States railroad revenues, and a $10.0 million increase in U.S.
industrial switching revenues.
The following three sections provide information on railroad revenues in the
United States and Australia, and industrial switching revenues in the United
States.
United States Railroad Operating Revenues
Operating revenues were $84.4 million in the year ended December 31, 1997
compared to $75.9 million in the year ended December 31, 1996, an increase of
$8.5 million or 11.0%. The increase was attributable to a $5.4 million increase
in freight revenues and a $3.1 million increase in non-freight revenues. The
increases in freight and non-freight revenues are largely attributable to having
a full year of operations in 1997 on acquisitions made in 1996.
The following table compares United States freight revenues, carloads and
average freight revenues per carload for 1997 and 1996:
27
United States Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 1997 and 1996
(dollars in thousands,
except average per carload)
Average
Freight
Revenue
Per
Freight Revenues Carloads Carload
------------------ -------- -------
% of % of % of % of
Commodity Group 1997 Total 1996 Total 1997 Total 1996 Total 1997 1996
- -------------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ----
Coal, Coke & Ores $21,452 31.7% $20,368 32.7% 82,269 37.4% 81,606 40.5% $ 261 $ 250
Petroleum Products 8,349 12.3% 8,679 13.9% 17,456 7.9% 17,549 8.8% 478 495
Pulp & Paper 7,920 11.7% 7,223 11.6% 20,760 9.4% 19,480 9.7% 382 371
Lumber & Forest
Products 6,093 9.0% 5,302 8.5% 18,171 8.3% 17,135 8.5% 335 309
Chemicals &
Plastics 5,761 8.5% 4,317 6.9% 10,496 4.8% 8,289 4.1% 549 521
Metals 5,188 7.7% 5,211 8.4% 21,268 9.7% 20,218 10.0% 244 258
Farm & Food Products 3,865 5.7% 3,537 5.7% 13,390 6.1% 11,402 5.7% 289 310
Autos & Auto Parts 3,452 5.1% 3,316 5.3% 6,496 3.0% 6,301 3.1% 531 526
Minerals & Stone 3,346 4.9% 2,572 4.1% 12,657 5.8% 9,066 4.5% 264 283
Other 2,287 3.4% 1,791 2.9% 16,743 7.6% 10,261 5.1% 137 175
---------------------------------------------------------------------------------------
Total $67,713 100.0% $62,316 100.0% 219,706 100.0% 201,307 100.0% $ 308 $ 310
======================================================================================================
The increase in U.S. freight revenues was largely attributable to having a
full year of operations in 1997 on acquisitions made during 1996. These
acquisitions generated freight revenues of $22.6 million during 1997 compared to
$19.0 million during 1996, an increase of $3.6 million. Approximately $2.0
million of this increase resulted from the shipment of coal, which was offset by
a decrease of approximately $875,000 in the shipment of coal on existing
operations, for a net increase in freight revenue from the shipment of coal of
$1.1 million. Other significant increases in freight revenues were $1.4 million
in chemicals and plastics, $791,000 in lumber and forest products, $774,000 in
minerals and stone, and $697,000 in pulp and paper. All remaining commodities
had slight increases and decreases which, when netted, result in an increase of
approximately $607,000.
United States non-freight railroad revenues were $16.7 million in the year
ended December 31, 1997 compared to $13.7 million in the year ended December 31,
1996, an increase of $3.0 million or 21.9%. The increase was primarily due to
increases in car hire and rental income of $1.0 million and switching revenue of
$2.1 million offset by decreases in other income of $159,000.
Australia Railroad Operating Revenues (U.S. Dollars)
Operating revenues were $7.4 million in the year ended December 31, 1997, for
operations which commenced on November 8, 1997. Revenues consisted of freight
revenues of $6.3 million and non-freight revenues of $1.1 million (as discussed
earlier in this Item 7. under the heading "Results of Operations - Year Ended
December 31, 1998 Compared to Year Ended December 31, 1997").
28
U.S. Industrial Switching Revenues
Revenues from U.S. industrial switching activities were $11.8 million in the
year ended December 31, 1997 compared to $1.8 million in the year ended December
31, 1996, an increase of $10.0 million or 558.0%. The increase was primarily
attributable a full year of operations in 1997 as compared to operations which
began in November, 1996.
Consolidated Operating Expenses
Operating expenses for all operations combined were $87.2 million in 1997
compared to $63.8 million in 1996, an increase of $23.4 million or 36.7%.
Expense increases attributable to operations in Australia, which began in
November, 1997, represented $6.7 million or 28.7% of the change, expense
increases attributable to U.S. railroad operations represented $5.8 million or
24.9% of the change, and expense increases in U.S. industrial switching
represented $10.9 million or 46.4% of the change.
The following three sections provide information on railroad expenses in the
United States and Australia, and industrial switching expenses in the United
States.
United States Railroad Operating Expenses
The following table sets forth a comparison of the Company's U.S. railroad
operating expenses in 1997 and 1996:
United States Railroad
Operating Expense Comparison
Years Ended December 31, 1997 and 1996
(dollars in thousands)
1997 1996
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $28,041 33.2% $24,144 31.8%
Equipment rents 8,755 10.4% 8,501 11.2%
Purchased services 3,872 4.6% 3,320 4.4%
Depreciation and amortization 6,092 7.2% 5,930 7.8%
Diesel fuel 4,239 5.0% 4,331 5.7%
Casualties and insurance 4,280 5.1% 4,590 6.0%
Materials 3,837 4.5% 3,397 4.5%
Other 8,707 10.4% 6,560 8.6%
Special charge --- 0.0% 1,360 1.8%
----------------------------------------------
Total $67,823 80.4% $62,133 81.8%
==============================================
Labor and benefits expense was $28.0 million in 1997 compared to $24.1 million
in 1996, an increase of $3.9 million or 16.1%, due primarily to increases of
approximately $2.2 million from acquisitions made in 1996 and $1.7 million on
existing operations.
29
Other expense was $8.7 million in 1997 compared to $6.6 million in 1996, an
increase of $2.1 million or 32.7%, due primarily to increases from acquisitions
made in 1996.
After adjusting for the special charge of $1.4 million in 1996, all other
expense categories combined aggregated $31.1 million in 1997 compared to $30.1
million in 1996, an increase of $1.0 million or 3.3%, due primarily to increases
from acquisitions made in 1996.
Special charge expense of $1.4 million in 1996 represents the impairment of
assets of $1.1 million and employee severance and pension termination expense of
$220,000 related to the Company's realignment of operations and decision to
close certain supporting facilities of one of its subsidiaries resulting from
the closure of a customer's mine (see Note 4. to Consolidated Financial
Statements).
Australia Railroad Operating Expenses (U.S. Dollars)
Operating expense was $6.7 million in the year ended December 31, 1997, for
operations which commenced on November 8, 1997 (as discussed earlier in this
Item 7. under the heading "Results of Operations - Year Ended December 31, 1998
Compared to Year Ended December 31, 1997").
U.S. Industrial Switching Operating Expenses
The following table sets forth a comparison of the Company's U.S. Industrial
Switching operating expenses in 1997 and 1996:
U.S. Industrial Switching
Operating Expense Comparison
Years Ended December 31, 1997 and 1996
(dollars in thousands)
1997 1996
---- ----
$ % of Operating $ % of Operating
Revenue Revenue
Labor and benefits $ 8,457 71.5% $1,053 58.6%
Equipment rents 102 0.9% 10 0.6%
Purchased services 241 2.0% 78 4.3%
Depreciation and amortization 661 5.6% 122 6.8%
Diesel fuel 499 4.2% 102 5.7%
Casualties and insurance 927 7.8% 36 2.0%
Materials 524 4.4% 89 5.0%
Other 1,240 10.5% 178 9.8%
-------------------------------------------------
Total $12,651 106.9% $1,668 92.8%
================================================
All expense increases were primarily attributable to a full year of operations
in 1997 as compared to operations which began in November, 1996.
30
Operating Ratios
The Company's combined operating ratio increased to 84.1% in 1997 from 82.0%
in 1996. The operating ratio for U.S. railroad operations decreased to 80.4% in
1998 from 81.8% in 1996. The operating ratio for Australia railroad operations
was 90.5% in 1997. The operating ratio for U.S. industrial switching operations
increased to 106.9% in 1997 from 92.8% in 1996.
Interest Expense and Income Taxes
The Company's combined interest expense was $3.3 million in 1997 compared to
$4.7 million in 1996, a decrease of $1.4 million or 29.0%. Interest expense for
U.S. railroad operations decreased to $2.7 million in 1997 from $4.7 million in
1996, a decrease of $2.0 million or 42.3%. The decrease reflects the repayment
of $45.8 million of debt on June 28, 1996, from the proceeds of the Company's
initial public offering, combined with other reductions to debt using cash
generated from operations, offset in part by increased debt related to the
financing of the acquisition in Australia, an investment in GRO which operates
two railroads in Canada, and a new capital lease for equipment. Interest
expense for Australia railroad operations increased to $438,000 in 1997.
Interest expense for industrial switching operations increased to $220,000 in
1997 from $56,000 in 1996, an increase of $164,000 or 292.9%.
The Company's effective income tax rate was 40.5% in 1997 and 1996,
respectively.
Net Income
The Company's net income in 1997 was $8.0 million compared to net income in
1996 of $5.9 million, an increase of $2.1 million or 35.4%. The increase was
attributable to net income from the Australia operation of $194,000 and an
increase in net income from United States railroad operations of $2.6 million
which offset an increased net loss from U.S. industrial switching operations of
$745,000.
Liquidity and Capital Resources
During 1998, the Company generated cash from operations of $23.8 million,
generated cash from asset sales of $2.6 million, received $3.2 million in state
grant funds for track rehabilitation, and had a net cash reduction to debt of
$2.1 million. During the year the Company invested $10.0 million in equipment
and rolling stock and $6.9 million in track improvements and buildings.
Additionally, the Company acquired $6.4 million in rolling stock in a non-cash
exchange for similar assets. These expenditures were apart from the Company's
additional investment of $3.1 million in cash and $4.7 million in other assets
in GRO which operates two railroads in Canada (see Notes 3. and 17. to
Consolidated Financial Statements). The Company also repurchased 345,000 shares
of its Class A Common Stock at a cost of $4.6 million which will be held in the
Company treasury (see Note 14. to Consolidated Financial Statements).
During 1997, the Company generated cash from operations of $6.3 million,
generated cash from asset sales of $581,000, received $2.9 million in state
grant funds for track rehabilitation, and had net new borrowings of $45.2
million. During the year the Company invested $16.3 million, including capital
leases of $11.8 million, in equipment and rolling stock, and $9.4 million in
track improvements and buildings. These expenditures were apart from the
31
Company's investment in the Australia acquisition (see Note 2. to Consolidated
Financial Statements) and its investment in GRO which operates two railroads in
Canada (see Notes 3. and 17. to Consolidated Financial Statements).
During 1996, the Company generated cash from operations of $30.4 million,
which includes the effect of $12.5 million generated by an excess of trade
payables over trade receivables as recorded by new acquisitions. In addition,
the Company received $17.8 million in proceeds from the sale of equipment, of
which $12.0 million was related to the sale leaseback of locomotives and $2.4
million was from the sale of assets acquired in the Pittsburg & Shawmut
acquisition. The Company invested $8.2 million in track and other fixed assets
apart from its investment in the Illinois & Midland, Pittsburg & Shawmut and
Rail Link acquisitions (see Note 2. to Consolidated Financial Statements).
In October, 1997, the Company amended and restated its credit facilities
agreement to provide for a $65.0 million revolving credit facility. The
facility has a maturity date of October 31, 2002. The credit facilities accrue
interest at prime or the Eurodollar rate, at the option of the Company, plus the
applicable margin, which varies from 0.75% to 1.5% depending upon the Company's
funded debt to EBITDA ratio, as defined in the agreement. Interest is payable
in arrears based on certain elections of the Company, not to exceed three months
outstanding. The Company pays a commitment fee which varies between 0.25% and
0.375% per annum on all unused portions of the revolving credit facility
depending on the Company's funded debt to EBITDA ratio. The credit facilities
agreement requires mandatory prepayments from the issuance of new equity or debt
and annual sale of assets in excess of $6.5 million. These credit facilities
are guaranteed by all domestic subsidiaries of the Company and contain a
negative pledge of assets. The credit facilities agreement requires the
maintenance of certain covenants, including, but not limited to, funded debt to
EBITDA, cash flow coverage and EBITDA less defined capital expenditures to
interest expense, all as defined in the agreement. In September, 1998, certain
covenants of the credit facilities agreement regarding consolidated cash flow,
investments and capital expenditures were amended, and a Consent to Stock
Repurchase Program (see Note 14. to Consolidated Financial Statements) was
incorporated into the credit facilities agreement. The Company and its
subsidiaries were in compliance with the provisions of these covenants as of
December 31, 1998.
At December 31, 1998 the Company had long-term debt (including current
portion) totaling $65.7 million, which comprised 46.8% of its total
capitalization. This compares to long-term debt, including current portion, of
$74.1 million at December 31, 1997, comprising 52.0% of total capitalization.
The Company's railroads have entered into a number of rehabilitation grants
with state and federal agencies. The grant funds are used as a supplement to the
Company's normal capital programs. In return for the grants, the railroads
pledge to maintain various levels of service and maintenance on the rail lines
that have been rehabilitated. The Company believes that the levels of service
and maintenance required under the grants are not materially different from
those that would be required without the grant obligation. While the Company has
benefited in recent years from these grant funds, there can be no assurance that
the funds will continue to be available.
The Company has budgeted approximately $27.1 million in capital expenditures
in 1999, primarily for track rehabilitation, of which $10.1 million is expected
to be funded by rehabilitation grants from state and federal agencies to
32
several of the Company's railroads, and $6.2 million is expected to be used in
Australia.
In connection with the Company's acquisition of assets in Australia (see Note
2. to Consolidated Financial Statements), the Company has committed to the
Commonwealth of Australia to spend approximately $34.1 million (AU $52.3
million) to rehabilitate track structures and equipment by December 31, 2002.
The Commonwealth Government may require the payment of any shortfall between the
actual expenditure incurred from the date of acquisition to December 31, 2002,
and the contracted commitment of approximately $34.1 million (AU $52.3 million).
This commitment may be renegotiated if there is a significant change in
operating conditions outside the control of the Company.
The Company has historically relied primarily on cash generated from
operations to fund working capital and capital expenditures relating to ongoing
operations, while relying on borrowed funds to finance acquisitions and
equipment needs (primarily rolling stock) related to acquisitions. The Company
believes that its cash flow from operations together with amounts available
under the credit facilities will enable the Company to meet its liquidity and
capital expenditure requirements relating to ongoing operations for at least the
duration of the credit facilities.
Year 2000 Compliance
In late 1997, the Company began a comprehensive initiative to address and
resolve potential exposure associated with the functioning of its information
systems and non-information technology systems that include embedded technology
with respect to dates in the Year 2000 and beyond.
This initiative led to the development of the GWI Year 2000 Project Handbook.
The Handbook was developed to report industry Year 2000 methods and standards,
and document "best practices" for each of the Company's subsidiaries. Its
purpose is to promote consistent implementation of the Year 2000 Project and
encourage cost-effective practices and efficient use of resources.
The Year 2000 Project Handbook contains information useful to managers, system
analysts, and other technical staff members, including consultants and business
partners. It is meant to be used as a reference throughout the Year 2000
design, modification, testing, and implementation phases. The Handbook
addresses most of the obstacles the Company may face and their potential
solutions, including project management issues, contracting and staffing,
interface and data exchange standards, and test and development methodologies.
Three major categories of systems addressed by the Company's Year 2000
Initiative are railroad operations/management systems, business systems and non-
information technology systems.
All of the Company's railroad operations and management processes are
supported through licensed third party development and contracted operations.
These systems are third party certified Year 2000 compliant. With respect to
electronic commerce transmissions, the Company is currently capable of
supporting certain Year 2000 compliant EDI (4010) transactions. Remaining Year
2000 compliant EDI transactions will be implemented according to railroad
industry-wide schedules. Full EDI compliance is expected during the second
quarter of 1999. Because the potential exists that not all of the Company's
trading partners will achieve Year 2000 compliance, the Company's operational
33
systems will accommodate non-Year 2000 electronic commerce transmissions as well
as Year 2000 ready transmissions.
All of the Company's financial, purchasing, inventory, asset management,
payroll and human resource systems supporting business operations are third
party systems. The third party vendors have certified all packages to be Year
2000 compliant.
With respect to non-information technology systems that may impact operations
and/or business processes, the Company has conducted initial assessments of its
rail yard and office facilities and found no major Year 2000 problems or
obstacles.
As part of its Year 2000 initiative, the Company is in communication with its
interline carriers, significant suppliers, large customers and financial
institutions to assess their Year 2000 readiness and expects to conduct
interface tests with its external trading partners in 1999 upon completion of
internal testing of remediated applications.
To date, the Company has expended less than $50,000 on its Year 2000
initiative and remaining costs are expected to be minimal. Overall, the
Company's Year 2000 initiative is proceeding on schedule with completion of all
areas expected by mid-1999.
Failure to achieve Year 2000 compliance by the Company, other railroads, its
suppliers, and its customers could negatively affect the Company's ability to
conduct business for an extended period. Management believes that the Company
will be successful in its Year 2000 conversion; however, there can be no
assurance that other companies on which the Company's systems and operations
rely will be converted on a timely basis, and such failure could have a material
effect on the Company's financial position, results of operations, or liquidity.
The remainder of this page is intentionally left blank.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes. The Company's
exposure to changes in interest rates applies to its borrowings under a credit
facility and a capital lease arrangement, both of which have variable interest
rates tied to the LIBOR rate. In addition, the Company's Australian subsidiary
has a variable rate loan, one-half of which fluctuates with market changes in
interest rates and one-half of which is fixed at 6.24%. The Australian loan is
denominated in Australia dollars. The Company estimates that the fair value of
these debt instruments approximated their market values and carrying values at
December 31, 1998. The Company invests excess cash in overnight money market
accounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial data required by this
item are listed at Part IV, Item 14 and are filed herewith immediately following
the signature page hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
The remainder of this page is intentionally left blank.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of the Stockholders of the Company to be held on May 25, 1999 under "Election of
Directors" and "Executive Officers", which proxy statement will be filed within
120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of the Stockholders of the Company to be held on May 25, 1999 under "Executive
Compensation", which proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of the Stockholders of the Company to be held on May 25, 1999 under "Security
Ownership of Certain Beneficial Owners and Management", which proxy statement
will be filed within 120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to
the Company's proxy statement to be issued in connection with the Annual Meeting
of the Stockholders of the Company to be held on May 25, 1999 under "Related
Transactions", which proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
The remainder of this page is intentionally left blank.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
(B) REPORTS ON FORM 8-K
Not applicable.
(C) EXHIBITS - SEE INDEX TO EXHIBITS.
The remainder of this page is intentionally left blank.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GENESEE & WYOMING INC.
By: /s/ Mortimer B. Fuller, III
---------------------------
Mortimer B. Fuller, III
Chairman of the Board
and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the date indicated below.
Date Title Signature
March 30, 1999 CEO and Director /s/ Mortimer B. Fuller, III
--------------------
Mortimer B. Fuller, III
March 30, 1999 Senior Vice President /s/ Alan R. Harris
and Chief Accounting --------------------
Officer Alan R. Harris
March 30, 1999 Senior Vice President, /s/ Mark W. Hastings
Chief Financial ---------------------
Officer and Treasurer Mark W. Hastings
March 30, 1999 Director /s/ James M. Fuller
------------------
James M. Fuller
March 30, 1999 Director /s/ Louis S. Fuller
------------------
Louis S. Fuller
March 30, 1999 Director /s/ Robert M. Melzer
------------------
Robert M. Melzer
March 30, 1999 Director /s/ John M. Randolph
------------------
John M. Randolph
March 30, 1999 Director /s/ Philip J. Ringo
------------------
Philip J. Ringo
38
Report of Independent Public Accountants
To the Board of Directors and the Shareholders of Genesee & Wyoming Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Genesee & Wyoming Inc. and issued our
report thereon dated February 16, 1999. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule of Valuation and Qualifying Accounts is presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 16, 1999
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Description (in thousands) December 31,
1998 1997 1996
---- ---- -----
Accounts Receivable - Allowance
for Doubtful Receivables $250 $167 $76
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39
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (i) Articles of Incorporation
The Form of Restated Certificate of Incorporation referenced under
(4)(a) hereof is incorporated herein by reference.
(ii) By-laws
The By-laws referenced under (4)(b) hereof are incorporated herein by
reference.
(4) Instruments defining the rights of security holders, including
indentures
(a) Form of Restated Certificate of Incorporation (Exhibit 3.2)2
(b) By-laws (Exhibit 3.3)1
(c) Specimen stock certificate representing shares of Class A Common
Stock (Exhibit 4.1)3
(d) Form of Class B Stockholders' dated as of May 20, 1996, among the
Registrant, its executive officers and its Class B stockholders
(Exhibit 4.2)2
(e) Promissory Note dated October 7, 1991 of Buffalo & Pittsburgh
Railroad, Inc. in favor of CSX Transportation, Inc. (Exhibit 4.6)1
(f) Second Amended and Restated Revolving Credit Agreement dated as of
October 31, 1997 among the Registrant, its subsidiaries, BankBoston,
N.A. and the Banks named therein. (Exhibit 4.1)8
*(4.1) First Amendment to Promissory Note dated as of March 19, 1999 between
Buffalo & Pittsburgh Railroad, Inc. and CSX Transportation, Inc.
(9) Voting Trust Agreement
Voting Agreement and Stock Purchase Option dated March 21, 1980 among
Mortimer B. Fuller, III, Mortimer B. Fuller, Jr. and Frances A. Fuller,
and amendments thereto dated Ma