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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number 0-20618
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RAILAMERICA, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0328006
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(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification Number)
5300 Broken Sound Blvd, N.W.
BOCA RATON, FLORIDA 33487
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 994-6015
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Common Stock Purchase Rights
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 23, 2000 computed by reference to the average bid
and asked prices of registrant's common stock reported on NASDAQ on such date
was $96.5 million.
The number of shares outstanding of registrant's Common Stock, $.001
par value per share, as of March 23, 2000 was 18,676,021.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for the Annual Meeting of Stockholders
(the "Definitive Proxy Statement") to be filed with the Commission pursuant to
Regulation 14A is incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis 31
Item 7a. Market Risk 46
Item 8. Financial Statements 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits and Reports on Form 8-K 49
Signatures
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This Form 10-K contains certain "forward-looking" statements within the
meaning of The Private Securities Act of 1995 and information relating to
RailAmerica, Inc. and it subsidiaries that are based on the beliefs of the
Company's management and that involve known and unknown risks and uncertainties.
When used in this report "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitation, currency risk, competitive factors, general economic conditions,
customer relations, relationships with vendors, fuel costs, the interest rate
environment, governmental regulation and supervision, seasonality, technological
change, changes in industry practices, the inability to integrate successfully
the acquired operations, the ability to service debt, one-time events and other
factors described herein and in other filings made by the Company with the
Securities and Exchange Commission. Based upon changing conditions, should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or intended. The
Company undertakes no obligation to update, and the Company does not have a
policy of updating or revising, these forward looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
RailAmerica, Inc. (together with its consolidated subsidiaries, the
"Company" or "RailAmerica") is the largest owner and operator of short line
freight railroads in North America and a leading owner and operator of regional
freight railroads in Australia and Chile. RailAmerica owns/leases, operates or
has equity interests in, a diversified portfolio of 50 railroads with
approximately 12,500 miles of track located in the United States, Australia,
Canada and Chile. Through its diversified portfolio of rail lines, the Company
operates in numerous geographic regions with varying concentrations of
commodities hauled. The Company believes that individual economic and seasonal
cycles in each region may partially offset each other.
The Company was incorporated in Delaware on March 31, 1992 as a holding
company for two pre-existing railroad companies. The Company's principal
executive office is located at 5300 Broken Sound Blvd, N.W., Boca Raton, Florida
33487, and its telephone number at that location is (561) 994-6015.
The Company's strategy is to grow through (i) the integration of the
newly acquired properties, including RailTex, Inc. ("RailTex"), (ii) the
creation of new business and improvement in operating performance of newly added
and currently operated properties and (iii) the continuance of selective
acquisitions in North America and Internationally and divestiture of non-core
lines.
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RECENT DEVELOPMENTS
Since January 1, 1999, the Company has completed the following acquisitions:
o in February 2000, the Company acquired RailTex, a leading owner and
operator of short line freight railroads concentrated in the
southeastern, midwestern, Great Lakes and New England regions of the
United States and in eastern Canada, with approximately 4,100 miles of
freight rail lines in North America, for total consideration of
approximately $128 million in cash, approximately 6.6 million shares of
RailAmerica common stock, valued at $60.8 million, and assumption of
approximately $111 million in debt. As a result of the acquisition,
former RailTex shareholders owned approximately 35 % of the Company's
common stock at the time of the merger;
o in September 1999, the Company acquired The Toledo, Peoria and Western
Railroad Corporation ("TPW"), a regional freight railroad with 369
miles of rail lines in the central United States, for an aggregate
purchase price of $18 million, including the assumption of debt and
subject to closing working capital adjustments;
o in July 1999, the Company acquired RaiLink Ltd. ("RaiLink"), the third
largest freight rail system in Canada, which owns or operates
approximately 1,620 miles of rail lines and has an approximately 26%
interest in a railroad company operating another 740 miles, for an
aggregate purchase price of $71 million, including the assumption of
debt;
o in April 1999, the Company acquired the business of V/Line Freight
Corporation, the freight railroad of Australia's Victorian Government,
with approximately 3,150 miles of rail lines in Australia, for total
consideration of $103 million. The Company operates this business
through its wholly owned subsidiary Freight Victoria Limited, which
does business as Freight Victoria;
o in January 1999, the Company acquired the assets of the Esquimalt and
Nanaimo Railway Company, a 181 mile rail line in British Columbia,
Canada, which operates as E&N Railway Corporation, for an aggregate
purchase price of $11 million.
In November 1999, the Company announced a plan to sell its trailer
manufacturing operations, Kalyn/Siebert. This business has been classified as a
discontinued operation and the results of operations have been excluded from
continuing operations in the consolidated statements of operations for all
periods presented.
In February 2000, the Company's wholly owned subsidiary Freight
Victoria announced that it will begin doing business as Freight Australia.
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BUSINESS STRATEGY
The Company's strategy is to expand its position as a leading owner and
operator of short line and regional railroads in selected markets worldwide. Key
elements of this strategy include:
INTEGRATE RECENT ACQUISITIONS INTO THE COMPANY'S OPERATIONS. A key
element to the Company's strategy will be to implement a comprehensive
integration plan focusing on areas such as rationalizing staffing, regionalizing
operations, centralizing corporate functions and management information systems
and the elimination of other duplicative costs including public company costs
and board of director fees. Should the Company be unable to integrate
successfully the acquired operations, the Company's operating results and
financial condition may be materially adversely affected.
GROW INTERNALLY THROUGH FOCUSED SALES, MARKETING EFFORTS AND CUSTOMER
SERVICE. The Company will continue to focus on increasing traffic in each of the
Company's markets by aggressively marketing the Company's customer service to
its customers and bolstering sales efforts. In many cases, customer service and
sales and marketing at railroads that the Company has acquired have been
neglected by the previous owners. The Company has purchased a number of rail
lines from Class I railroads. Due to the size of the Class I railroads and their
concentration on long-haul traffic, the Class I operators typically have not
effectively marketed these branch line operations.
Once the Company acquires a rail property the Company undertakes steps
to improve the local sales and marketing efforts and to increase the railroad's
focus on customer service. Due to the Company's decentralized management
structure and a flexible, cross-trained employee base, the Company is able to
provide flexible and customized solutions that were not previously available to
the customers under the ownership of a Class I operator. This increased focus on
service enables the Company to reestablish relationships with customers who had
previously dropped service.
In addition, the Company's management has been successful at increasing
traffic by further penetrating the acquired railroad's existing customer base.
As a result, typically revenues increase and profitability improves once the
Company acquires and integrates a railroad. The Company's management intends to
continue this successful strategy by deepening its relationships with customers
and further improving upon its local sales and marketing efforts.
MAINTAIN CLOSE RELATIONSHIPS WITH CLASS I RAILROADS. Since all of the
Company's North American short line properties interchange with at least one
Class I railroad, the Company maintains close relationships with all of the
North American Class I railroads. The Company believes that these relationships
will enable the Company to pursue new business opportunities on existing rail
properties and acquire additional short line freight lines from the Class I
railroads.
CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. The Company expects
that opportunities to acquire select North American short line rail properties
will continue to become available over the next several years. The Company
intends to selectively make acquisitions of properties at an attractive purchase
price and with the potential for substantial improvement in revenue and
profitability, in similar geographic regions or clusters so that synergies and
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economies of scale may be achieved. The Company expects that those acquisitions
will increase product diversification in order to further mitigate the effects
of seasonal or cyclical fluctuations.
The Company also expects to make acquisitions in economically and
politically stable international markets as a result of an increasing number of
governments seeking to privatize their national rail systems. In particular, the
Company believes that further acquisition opportunities exist within Australia,
and that the Company has a significant advantage over its competitors in
completing acquisitions of Australian rail properties given its current
operating status in the region. The Company has been successful at improving
operating efficiencies and reducing costs at the recently acquired Freight
Victoria and Ferronor railroads and the Company believes it will be able to
achieve success at other international acquisitions.
DIVERSIFICATION. RailAmerica believes that its revenue diversification
limits its exposure to geographic, economic and customer related risks, while
positioning the Company to take advantage of a broad range of business
opportunities. This diversification, and the stability it provides to the
Company's operations, differentiates it from other regional and short line
carriers. Diversification also enables the Company to develop and maintain close
relationships with essentially all major rail carriers in North America.
DIVESTITURES. In order to capitalize on opportunities more profitable
to its overall portfolio and to minimize the amount of management time and
effort on the smaller properties in its portfolio and to reduce debt, it may
from time to time divest certain of its non-core railroad properties. The
Company believes there is a market for such divestitures among other smaller
short line operating companies and selected strategic buyers.
NORTH AMERICAN RAILROAD OPERATIONS
The Company currently owns, leases and/or operates 43 rail properties
in North America and has equity interests in an additional five rail properties.
All of the Company's North American rail properties are short line railroads
that provide transportation services for both on-line customers and Class I
railroads which interchange with the Company's rail lines. Short line railroads
are typically less than 350 miles long, serve a particular class of customers in
a small geographic area and interchange with Class I railroads. Short line rail
operators primarily serve customers on their line by transporting products to
and from the Class I interchanges. Each of the Company's North American rail
lines is typically the only rail carrier directly serving its customers. The
ability to haul heavy and large quantities of freight as part of a long-distance
haul make the Company's rail services generally a more effective, lower-cost
alternative to other modes of transportation, including motor carriers.
UNITED STATES. The Company owns/leases and operates 33 short line rail
properties in the United States with approximately 5,000 miles of track. The
Company's United States properties are geographically diversified and operate in
24 states. The Company has clusters of rail properties in the southeastern,
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midwestern, Great Lakes and New England regions of the United States. The
Company believes that this cluster strategy provides economies of scale and
helps achieve operational synergies.
CANADA. The Company owns/leases and operates 10 short line rail
properties in Canada with approximately 2,200 miles of track. The Company's
Canadian properties are geographically diversified and operate in six provinces.
The Company has clusters of rail properties in Alberta, southern Ontario and
eastern Quebec. The Company also owns a 26% equity interest in Quebec Railway
Corporation, a railroad company operating five railroads in southeastern Canada.
SALES AND MARKETING. The Company focuses on providing rail service to
its customers that is easily accessible, reliable and cost-effective. Following
commencement of operations, the Company's railroads generally have attracted
increased rail shipments from existing customers and obtained traffic from new
customers who had not previously shipped by rail or had ceased rail shipments.
The Company believes its ability to generate additional traffic is enhanced by
its marketing efforts which are aimed at identifying and responding quickly to
the individual business needs of customers along its rail lines. As part of its
marketing efforts, the Company often schedules more frequent rail service, helps
customers negotiate price and service levels with interchange partners and
assists customers in obtaining the quantity and type of rail equipment required
for their operations. The Company also provides non-scheduled train service on
short notice to accommodate customers' special or emergency needs.
The Company's decentralized management structure is an important
element of its marketing strategy. Significant discretion with respect to sales
and marketing activities is given to the Company's North American regional
marketing managers and international marketing managers. Each regional marketing
manager works closely with personnel of the Company's railroads and with other
members of senior management to develop marketing plans to increase shipments
from existing customers and to develop business from new customers. The Company
also works with the marketing staffs of the connecting Class I carriers to
develop an appropriate array of rail-oriented proposals to meet customers' needs
and with industrial development organizations to locate new rail users. The
Company considers all of its employees to be customer service representatives
and encourages them to initiate and maintain regular contact with shippers.
TRAFFIC. Rail traffic may be categorized as interline, local or bridge
traffic. Interline traffic either originates or terminates with customers
located along a rail line and is interchanged with other rail carriers. Local
traffic both originates and terminates on the same rail line and does not
involve other carriers. Bridge traffic neither originates nor terminates on a
rail carrier's line, but rather passes over the line from one connecting rail
carrier to another.
Traffic which originated or terminated on RailAmerica's lines generated
89% and 100% of the Company's total freight revenue in 1999 and 1998,
respectively. The Company believes that higher levels of interline and local
traffic provide it with greater stability of revenues because such traffic
represents shipments to or from customers located along its lines, unlike bridge
traffic, which cannot be easily diverted to other rail carriers.
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The following table summarizes freight revenue by type of traffic
carried by the Company's railroads in 1999 and 1998, in dollars and as a percent
of total freight revenue.
FREIGHT REVENUE
(DOLLARS IN THOUSANDS)
1999 1998
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Interline $31,905 86.5% $14,979 99.1%
Local 945 2.6% 142 0.9%
Bridge 4,019 10.9% -- --
------- ----- ------- -----
$36,869 100.0% $15,121 100.0%
======= ===== ======= =====
CONNECTING CARRIERS. All of RailAmerica's short line properties
interchange traffic with Class I railroads. The following table summarizes the
Company's significant connecting carriers in 1999 and 1998 by freight revenues
and carloads as a percentage of total interchanged (interline and bridge)
traffic.
INTERCHANGED TRAFFIC
1999 1998
------------------- -----------------------
FREIGHT FREIGHT
REVENUES CARLOADS REVENUES CARLOADS
Canadian Pacific 28.5% 24.4% -- --
Burlington Northern Sante Fe Railway 26.6% 34.2% 63.0% 66.2%
Canadian National Railways 20.4% 21.6% -- --
CSXT Transportation, Inc. 14.6% 10.0% 31.5% 28.2%
Union Pacific Corporation 3.5% 3.3% 1.9% 1.8%
All other railroads 6.4% 6.5% 3.6% 3.8%
------ ------ ------ ------
Total interchanged traffic 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Charges for interchanged traffic are generally billed to the customers
by the connecting carrier and cover the entire transportation of a shipment from
origin to destination, including the portion that travels over the Company's
lines. The Company's revenues from such traffic are generally collected through
fees paid directly to the Company by the connecting carriers rather than by
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customers on its lines and are payable regardless of whether the connecting
carriers are able to collect from the customers. The fees payable by connecting
carriers are set forth in contracts entered into by each of the Company's
railroads with their respective connecting carriers and are subject to periodic
adjustments.
CUSTOMERS. In 1999, the Company served more than 500 customers in North
America who shipped and/or received a wide variety of products. The Company's
railroads are typically the only rail carriers directly serving their customers.
Although most of the Company's North American railroads have a well-diversified
customer base, several of the smaller rail lines have one or two dominant
customers. In 1999, the Company's 10 largest North American customers accounted
for approximately 39% of North American transportation revenue. One of these
customers accounted for approximately 12% of the Company's North American
transportation revenue.
COMMODITIES. The following table sets forth by number and percentage
the carloads hauled by our North American railroads during the years ended
December 31, 1999, 1998 and 1997.
CARLOADS CARRIED BY COMMODITY GROUP
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
COMMODITY CARLOADS % OF TOTAL CARLOADS % OF TOTAL CARLOADS % OF TOTAL
----------------- -------- ---------- -------- ---------- -------- ----------
Railroad equipment 37,023 24% -- 0% -- 0%
Paper and forest products 29,991 19% 9,152 19% 9,797 21%
Agriculture 28,140 18% 15,349 31% 13,185 29%
Steel & scrap steel 10,956 7% 1,695 3% 1,562 3%
Food products 9,736 6% 5,272 11% 4,928 11%
Chemicals/fertilizer 8,522 6% 4,936 10% 4,418 10%
Petroleum products 5,678 4% 135 0% -- 0%
Coal 5,504 4% 4,898 10% 3,877 8%
Containers 5,033 3% -- 0% -- 0%
Minerals & stones 4,066 3% 4,879 10% 5,247 11%
Auto parts 3,415 2% 683 1% 755 2%
Other 6,927 4% 2,520 5% 2,438 5%
----- ----- -----
Total 154,991 100% 49,519 100% 46,207 100%
======= ====== ======
* - Railroad equipment includes bridge traffic on the Company's Ottawa Valley
Railway
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EMPLOYEES. Currently, the Company has approximately 1,300 full-time
railroad employees in North America. A majority of the approximately 400
Canadian employees are subject to collective bargaining agreements as well as
approximately 200 of the 900 United States employees.
SAFETY. The Company endeavors to conduct safe railroad operations for
the benefit and protection of employees, customers and the communities served by
the Company's railroads. The Company's safety program, led by the Assistant Vice
President of Safety, involves all of the Company's employees and is administered
on a daily basis by each Regional Vice President. 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. Each employee involved in train operations is subject to
pre-employment and random drug testing whether or not required by federal
regulation. The Company believes that each of its North American railroads
complies in all material respects with federal, state and local regulations.
Additionally, each railroad is given flexibility to develop more stringent
safety rules based on local requirements or practices. The Company also
participates in governmental and industry sponsored safety programs including
Operation Lifesaver (the national grade crossing awareness program) and the
American Short Line Railroad Association Safety Committee.
COMPETITION. In acquiring rail properties, the Company competes with
other short line and regional railroad operators, some of which 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 acquirer of short line rail
properties, combined with its managerial resources, effectively positions it to
take advantage of future acquisition opportunities.
The Company's railroads are typically the only rail carriers directly
serving their customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a lesser
extent, ship and barge operators. The extent of this competition varies
significantly among the Company's railroads. Competition is based primarily upon
the rate charged and the transit time required, as well as the quality and
reliability of the service provided, for an origin-to-destination package. To
the extent other carriers are involved in transporting a shipment, the Company
cannot control the cost and quality of service.
INTERNATIONAL RAILROAD OPERATIONS
AUSTRALIAN RAILROAD OPERATIONS
In Australia, the Company owns Freight Victoria, a regional freight
railroad operating in the State of Victoria. Freight Victoria is the Company's
wholly owned Australian subsidiary that purchased the assets and business of
V/Line Freight Corporation from the Government of the State of Victoria,
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Australia on April 30, 1999 for total consideration of approximately $103
million. The assets purchased from V/Line Freight Corporation included 106
locomotives and over 2,600 rail cars. In addition, Freight Victoria prepaid to
the State of Victoria the rental payments of a 45-year lease to operate 3,150
miles of track. The present value of the lease payments totaled approximately
$60 million.
In February 2000, Freight Victoria announced that it will begin doing
business as Freight Australia.
CUSTOMERS. Freight Victoria's customers span a variety of industries,
with particular emphasis on companies in the Australian agricultural industry
for whom we carry bulk grain and other agricultural products.
MAJOR CONTRACTS. Freight Victoria generates a substantial percentage of
its revenue from contracts with the Australian Wheat Board and the Government of
Victoria's Passenger Rail Authority. In addition, Freight Victoria has recently
entered into a contract with GrainCo, a private Australian agricultural
commodities company.
o AUSTRALIAN WHEAT BOARD - Through a recently renewed five-year contract
with the Australian Wheat Board, Australia's only government-owned
grain export agency, Freight Victoria hauls grain from points on its
rail system to various export terminals throughout the State of
Victoria, including the port of Melbourne and other industrial
locations. Pursuant to this contract, Freight Victoria is guaranteed to
haul 90% of all wheat harvested in Victoria and specified surrounding
areas, and destined for export abroad, and receives fixed-rate fees for
the transportation services. The contract expires in September 2005.
Freight Victoria, under this new contract is provided a 90% guarantee
for additional grain-growing regions of southeastern Australia
(including specified areas of New South Wales) and, correspondingly, a
greater amount of tonnage to be hauled. Australian Wheat Board
represented 19% of Freight Victoria's transportation revenue for the
period May 1, 1999 to December 31, 1999.
o V/LINE PASSENGER - In connection with the acquisition of Freight
Victoria, the Company entered into a long-term agreement granting the
Victoria Passenger Rail Authority track access for its V/Line passenger
train business. Under the contract, Freight Victoria provides track
entitlements and maintenance for the passenger train business and
receives minimum fees of $16 million per year (subject to escalation
each year) in return for providing such access and maintenance. The
contract is non-cancelable and expires in 2006. V/Line Passenger access
revenue represented 23% of Freight Victoria's transportation revenue
for the period May 1, 1999 to December 31, 1999.
o GRAINCO - In September 1999, Freight Victoria entered into a two-year
contract with GrainCo, an Australian agricultural commodities company.
Under the terms of this agreement, Freight Victoria will generate total
revenue of approximately $4 million per year. GrainCo, a private
Australian company, operates an agricultural products brokerage,
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trading and distribution business through facilities located throughout
the state of Victoria, including a large new facility in the Port of
Melbourne. GrainCo handles Australian agricultural product shipments,
including grain, barley and other cereals, destined for both the
domestic Australian market as well as export.
COMMODITIES. The following table sets forth by dollar amount (in
thousands) and percentage Freight Victoria's transportation revenue for the
period from May 1, 1999 to December 31, 1999.
COMMODITY US$ AMOUNT % OF TOTAL
--------- ---------- ----------
Agricultural products 24,613 40%
Track access fees 12,430 21%
Intermodal containers 7,470 12%
Fast track* 6,744 11%
Bulk (i.e. cement, gypsum, stone, logs) 6,213 10%
Interstate 3,484 6%
------- --
Total transportation revenue 60,954 100%
======= ====
* Fast Track - Freight Victoria's Fast Track business transports products
which typically are less than a container load of freight (the majority
of traffic are either parcels or pallets). Services offered to
customers include depot-to-depot, depot-to-door, and door-to-door. The
Fast Track business has six metropolitan sites and services 24 regional
freight centers. Road contractors perform local pick-up and delivery to
and from the freight centers.
EMPLOYEES. Freight Victoria currently has approximately 650 employees.
A majority of these employees are subject to collective bargaining agreements.
CHILEAN RAILROAD OPERATIONS
In February 1997, the Company, through a newly formed, wholly owned
subsidiary, RailAmerica de Chile S.A., acquired 55% of the outstanding voting
stock of Ferronor for approximately $7.2 million. Ferronor owns and operates
approximately 1,400 miles of rail line serving northern Chile. RailAmerica was
joined in the purchase of Ferronor by Andres Pirazzoli y Cia, Ltda. ("APCO"), a
Chilean contractor providing equipment and mechanized services to the forest
industry.
Ferronor operates the only north-south railroad in northern Chile,
extending from La Calera near Santiago, where it connects with Chile's southern
railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique,
approximately 120 miles south of the Peruvian border. It also operates several
east-west branch lines that link a number of iron, copper and limestone mines
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and production facilities with several Chilean Pacific port cities. Ferronor
also serves Argentina and Bolivia through traffic interchanged with the General
Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia.
CUSTOMERS. Ferronor's customers are principally in the mining industry.
Ferronor had two customers who each represented more than 10% of the
transportation revenue in Chile. The customers represented 43% and 40% of the
Chilean transportation revenue for 1999.
MAJOR CONTRACTS. Ferronor, in 1996, entered into a new 20-year
take-or-pay agreement with CMH, a large Chilean mining company. The contract
outlines the terms for the transport of approximately 5.2 million tons of iron
pellets annually, commencing July 1998. The contract guarantees a minimum of 4.0
million tons per year at a rate of US$1.45/ton. The contract has escalators
based on general inflation rates and the cost of fuel. Ferronor expects the
contract to yield a minimum of US$8.6 million per year in additional revenue.
During 1998, Ferronor entered into a new 10-year transportation
contract with SQM Nitratos S.A. that the Company estimates will yield aggregate
revenues of approximately US$68 million. The contract calls for the movement of
approximately 500,000 tons annually of potassium chloride and potassium sulfite
from the Minsal Salt Flats mine in northern Chile to Coya Sur, a distance of 128
miles, with further service 54 miles to Tocopilla, in conjunction with the
Tocopilla railroad. Movements commenced in mid 1998.
COMMODITIES. Iron ore and nitrates accounted for approximately 43% and
40%, respectively, of Ferronor's revenue for 1999.
EMPLOYEES. Ferronor currently has approximately 255 full-time
employees. A majority of Ferronor's employees are subject to collective
bargaining agreements.
TRAILER MANUFACTURING OPERATIONS
Kalyn/Siebert, Inc ("KSI"), located in Gatesville, Texas, was
established in 1968 and manufactures a broad range of specialty truck trailers.
KSI products are marketed to customers in the construction, trucking,
agricultural, railroad, utility, and oil industries. In addition, a substantial
portion of KSI's sales are to the military and several other local and federal
government agencies. During the second quarter of 1999, KSI's assets and
operations were transferred to a Texas limited partnership, Kalyn/Siebert L.P.
KSI is the 1% general partner and a newly formed, wholly owned subsidiary of the
Company, KS Boca, Inc., is the 99% limited partner.
In January 1998, the Company, through its wholly-owned subsidiary, KSI,
acquired all of the outstanding stock of Fabrex, Inc. and its affiliate,
Services Remorques Plus, Inc. Fabrex's operations have been combined into
Kalyn/Siebert Canada ("KSC"), a wholly-owned subsidiary of KSI. KSC is a
manufacturer of specialty bulk-hauling truck trailers located in Trois-Rivieres,
Quebec, Canada. KSC's products are marketed to the solid waste, agricultural and
construction industries.
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In November 1999, the Company adopted a plan to sell its trailer
manufacturing operations. This business has been classified as a discontinued
operation and the results of operations have been excluded from continuing
operations in the consolidated statements of operations for all periods
presented.
PRODUCTS. KSI manufactures an extensive variety of light, medium and
heavy duty truck trailers. The Company's products include the following:
o FLATBED TRAILERS. Flatbed trailers, also known as platform trailers,
are generally used to carry loads such as steel and building materials.
The Company produces a wide variety of flatbed trailers, including
straight frames, drop frames and multi-axle units for specialized
loads. KSI's leading product in this category is the KDP-80, a 48 foot
drop deck flatbed trailer which is purchased primarily by commercial
customers. This trailer has a 10 foot spread on the tandem axle which
allows more weight per axle than narrower tandems.
o LOWBED TRAILERS. Lowbed trailers, also known as lowboy trailers or
California legals, generally haul heavy equipment such as electrical
transformers or grain silos. Lowbed trailers are equipped with up to 18
axles and have the capacity to haul up to 300 ton loads. Heavy
equipment lowbeds are used by heavy haulers, specialized carriers and
riggers, larger construction and engineering firms and
highly-specialized members of the aerospace and automotive industries.
The products constituting this category include the following trailers:
fixed neck lowbed, folding neck lowbed, detachable lowbed, and the
mechanical removable gooseneck, which is KSI's leading trailer by sales
in this product line.
o OTHER PRODUCTS. KSI manufactures a sliding-axle trailer which can be
used to transport heavy equipment such as forklifts and similar
equipment. KSI also manufactures a specialty van trailer for the United
States Tank Automotive Command ("TACOM"), a Department of Defense unit
established to consolidate purchases for various branches of the
military, which has special dolly-style suspensions and removable
landing gear so that it can be shipped on military transport cargo
planes. These specialty van trailers can be used for tactical combat
purposes or as storage containers. Another specialty trailer is a
double drop totally enclosed trailer for hauling rocket engines.
o PARTS AND ACCESSORIES. Replacement parts and accessories are primarily
sold to dealers.
KSC produces specialty bulk-hauling truck trailers used in the
solid-waste, agricultural, and construction industries. Historically,
approximately 85% of KSC's sales have been transfer trailers and 80% of these
have been made in aluminum. KSC began producing dump trailers in 1995. In 1998,
these trailers represented approximately 15% of KSC's sales. The dump trailers
consist of approximately 70% aluminum and 30% steel. During the second half of
1998, KSC began producing KSI flatbed trailers in its newly acquired facility.
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MANUFACTURING AND ENGINEERING. KSI considers its engineering expertise,
combined with the manufacturing experience of its work force, to be key
competitive advantages. KSI utilizes this experience in its marketing by
including manufacturing personnel in initial meetings with potential KSI
customers to assist in defining and meeting the customer's objectives. This team
approach often results in new and unique ways to satisfy customer needs and
facilitates effective communication throughout the organization.
Each of KSI's trailers is manufactured from highly customized designs
based on detailed customer specifications of each aspect of the trailer,
including dimensions, structural requirements, fabrication materials, component
parts and accessories. KSI's computer assisted design allows its engineers to
readily modify trailer component designs and generate new designs based on
customer needs.
KSI builds all the structural parts of its trailers using steel bars
and plates. The major manufacturing steps include cutting, bending and welding
of steel and, once assembled, cleaning and painting. The axles and running gears
are purchased as sub-assemblies which are integrated into the KSI trailer
design. KSI contracts out any necessary machining. KSI exercises strict quality
control by screening suppliers and conducting inspections throughout the
production process.
KSI's ability to manufacture trailers is dependent upon receiving
supplies or components and raw materials from a limited number of sources. To
date, KSI has experienced no material difficulties in procuring supplies,
components or materials. However, if deliveries of such items are delayed, KSI's
production ability may be decreased which could have a negative effect on KSI's
and the Company's results of operations.
KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on an 25.5 acre site,
which were constructed between 1969 and 1998. The Company expects that this site
will be able to meet its manufacturing goals for the foreseeable future.
At acquisition date, Fabrex, was producing its trailers at a 45,000
square foot manufacturing facility located in Trios Rivieres, Quebec, Canada,
midway between Montreal and Quebec City. In April 1998, KSC purchased an
additional 105,000 square-foot manufacturing facility on a 36.7 acre site
located adjacent to KSC's existing plant in Trois-Rivieres, Quebec, Canada.
MARKETING AND DISTRIBUTION. KSI's marketing strategy is focused on
offering a broad range of high-quality, customized trailers manufactured to the
design specifications of its customers. These products are marketed and
distributed through a network of approximately 140 independent dealers
throughout North America and through a direct sales force. During 1998
approximately 50% of independent dealers maintained inventories of KSI trailers.
Presently, up to 75% of all of KSI's commercial sales are made to
dealers, with the balance representing direct retail sales by its sales force.
KSI's sales staff consists of a vice president, seven sales managers, and an
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advertising manager. The sales staff is supported by registered mechanical
design engineers and draftsmen. KSC's sales staff consists of a V.P. sales and
five sales managers.
In the United States the majority of sales are done through a network
of dealers. KSC also has access to KSI's extensive dealer base in the United
States.
CUSTOMERS. The majority of sales in the government segment are to the
General Services Administration ("GSA"), the purchasing arm of most non-military
agencies, and to TACOM. KSI has been awarded "Blue Ribbon Contractor" status
with TACOM. As a result of this status, KSI receives a 10% preference on bids
for certain contracts. Sales to governmental agencies represented 35%, 36% and
37% of KSI's manufacturing revenue for the years ended December 31, 1999, 1998
and 1997. A substantial decrease in orders by the GSA and/or TACOM could have a
material adverse effect on KSI's business and results of operations.
KSC's trailers are used in the solid-waste, agricultural and
construction industries. Waste disposal companies are KSC's largest market
segment. In addition, during the second half of 1998 KSC began producing and
marketing KSI type flatbed trailers.
Unit sales of new truck trailers have historically been subject to
substantial variation. Sales of new truck trailers have historically been
subject to a five- to seven-year replacement cycle. Additionally, periods of
economic recession in the United States have previously resulted in declines in
the profitability of the trucking industry. Future decreases in the demand for
truck trailers due to economic downturns or cyclical decreases would likely have
a material adverse effect on RailAmerica's business and results of operations.
BACKLOG. As of December 31, 1999, KSI's backlog of orders was
approximately $14.0 million, compared to $18.3 million as of December 31, 1998.
As of December 31, 1999, KSC's backlog of orders was approximately $2.3 million,
compared to $3.7 million as of December 31, 1998. KSI and KSC include in its
backlog only those orders for trailers for which a confirmed customer order has
been received. KSI manufactures trailers mostly to customer or dealer orders and
does not typically maintain an inventory of "stock" trailers in anticipation of
future orders.
COMPETITION. The Company faces significant competition in the truck
trailer manufacturing industry which is highly competitive and has relatively
low barriers to entry. The Company competes with a number of other trailer
manufacturers, some of which have greater financial resources and higher sales
than KSI. Furthermore, the Company's products compete with alternative forms of
shipping, such as intermodal containers. There can be no assurance that the
Company will be able to continue to compete effectively with existing or
potential competitors or alternative forms of shipping containers.
EMPLOYEES. Currently, KSI has 172 full-time employees in the trailer
manufacturing operation. None of the KSI employees are subject to a collective
bargaining agreement. Currently, KSC has 140 full-time employees in the trailer
manufacturing operation of which approximately 90 are subject to a collective
bargaining agreement.
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REGULATION
UNITED STATES. The Company's subsidiaries in the United States are
subject to various safety and other laws and regulations by numerous government
agencies, including (1) regulation by the Surface Transportation Board ("STB")
and the Federal Railroad Administration ("FRA"), (2) labor related statutes
including the Railway Labor Act, Railroad Retirement Act, the Railroad
Unemployment Insurance Act, and the Federal Employer's Liability Act, and (3)
regulation by agencies in the states in which the Company does business.
Additionally, the Company is subject to STB regulation in connection with its
acquisition of new railroad properties. As a result of the enactment in 1980 of
the Staggers Rail Act, which amended the Interstate Commerce Act, and the
enactment of the ICC Termination Act of 1995, there has been a significant
relaxation in regulation governing rail carriers, which management believes has
greatly simplified the purchase and sale of short line railroad properties and
expedited the closing of such transactions.
The STB has jurisdiction over, among other matters, the construction,
acquisition, or abandonment of rail lines, the consolidation or merger of
railroads, the assumption of control of one railroad by another railroad, the
use by one railroad of another railroad's tracks through lease, joint use or
trackage rights, the rates charged for their transportation services, and the
service provided by rail carriers. The ICC Termination Act replaced the
Interstate Commerce Commission ("ICC") with the STB. The ICC Termination Act
also abolished labor protective conditions applicable to numerous types of rail
transactions. Labor protective conditions cannot be imposed on the sale of a
railroad line to a new carrier. In the sale of a railroad line to a regional
railroad, which is a railroad with annual revenues between $20 million and $250
million, as adjusted by the railroad revenue deflator, labor protection consists
of the payment of up to one year of severance pay for employees affected by the
transaction. In some instances of the sale of a railroad line to a small
railroad, which is a railroad with annual revenues that are less than $20
million, as adjusted by the railroad revenue deflator, labor protection also
consists of the payment of up to one year of severance pay for employees
affected by the transaction. While imposition of labor protective conditions on
line sales and transfers does not subject a rail line buyer to the seller's
collective bargaining agreements, rates of pay, and other labor practices and
does not unionize the buyer's operating and maintenance employees, it does
entitle employees of the buyer or seller who are "adversely affected" by the
transaction in terms of job loss, pay cuts, loss of overtime, loss of hours,
loss of benefits, and moving expenses, to receive over a period of up to six
years payments representing compensation for those losses. Generally, in a line
sale or transfer, only the seller's or transferor's employees are affected.
As a result of the Staggers Rail Act, railroads have received
considerable rate and market flexibility including the ability to obtain
wholesale exemptions from numerous provisions of the Interstate Commerce Act.
The Staggers Rail Act allowed the deregulation of all containerized and truck
trailer traffic handled by railroads. On regulated traffic, railroads and
shippers are permitted to enter into contracts for rates and provision of
transportation services without the need to file tariffs. Moreover, on regulated
traffic, the Staggers Rail Act allows railroads considerable freedom to raise or
lower rates without objection from captive shippers. While the ICC Termination
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Act retained maximum rate regulation on traffic over which railroads have
exclusive control, the new law relieved railroads from the requirements of
filing tariffs and rate contracts with the STB on all traffic other than
agricultural products.
Under the ICC Termination Act, the STB is funded through September 30,
2000. It is unclear whether the STB will be reauthorized in its present form.
Under the ICC Termination Act, states lost their jurisdiction over economic
regulation of interstate railroad transportation. All states retain some
jurisdiction over safety related matters.
The FRA regulates railroad safety and equipment standards, including
track maintenance, handling of hazardous shipments, locomotive and rail car
inspection and repair requirements, and operating practices and crew
qualifications.
AUSTRALIA. Our Australian subsidiary, Freight Victoria, is subject to
regulation in the State of Victoria by the Office of the Regulator-General. The
Office of the Regulator-General (the "ORG") was established by the Office of the
Regulator-General Act. The purpose of the ORG is to create a regulatory
framework for regulated industries which promotes and safeguards competition and
fair and efficient market conduct or, if there is no competitive market, which
promotes the simulation of competitive market conduct and the prevention of
misuse of monopoly power. These objectives were expanded by the Victorian
Government in the RAIL CORPORATIONS ACT 1996 to ensure that rail users have fair
and reasonable access to declared railway services.
The RAIL CORPORATIONS ACT 1996 (the "RCA") regulates the operation of
the State of Victoria's passenger trains and trams and rail network. Part 2A of
the RCA outlines an access regime which potentially applies to railways and rail
infrastructure and gives power to the ORG to regulate access to relevant
services. At present, however, no rail transport services have been declared to
be subject to the regime. ORG and the Department of Infrastructure, however,
advise that a Discussion Paper in relation to the regulation of the rail
transport authority is currently being prepared and is expected to be issued
before the end of April 2000. This paper is likely to contain draft declarations
(in relation to specific rail services which may be made subject to the access
regime in Part 2A) and draft pricing orders.
In the event that any services are declared to be "declared rail
transport services" and thus become subject to the Part 2A access regime, Part
2A provides that:
(1) manager of rail infrastructure and a provider and operator of
rolling stock must: (1) use all reasonable endeavours to meet
the requirements of persons seeking access to the declared
rail transport services;
(2) make a formal proposal of terms and conditions for access
within 14 days after receiving a request for it to do so; and
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(3) at the request of a person seeking, or considering seeking,
access provide to that person information as prescribed by
ORG.
In the following circumstances an application may be made in writing to
ORG, by the operator or a person seeking access, for a determination:
(1) if the operator has not made a formal proposal within 14 days
after receiving a request for it to do so;
(2) if the operator and a person seeking access cannot agree on
the terms and conditions on which access is to be provided;
and
(3) a person considers that their right of access to a declared
rail transport service has been hindered.
A determination of ORG may, among other things:
(1) require the operator to provide access to the service to the
person seeking access;
(2) deal with the terms and conditions of access; and
(3) specify the extent to which the determination overrides an
earlier determination.
In addition, the Governor in the Council may specify policies or
principles which ORG must apply in:
(1) determining any amount to be paid for access to a specified
declared rail transport services; or
(2) determining the terms and conditions of access.
In addition to complying with the above-described regulations, a
manager of rail infrastructure and a provider and operator of rolling stock,
must be accredited under the TRANSPORT ACT 1993. A corporation which manages
rail infrastructure or operates rolling stock without accreditation is liable
for a fine of $250,000.
The Secretary to the Department of Infrastructure may take disciplinary
action against an accredited person if the person has failed to comply with the
requirements of accreditation or has permitted an unsafe practice or acted
negligently. Disciplinary action which the Secretary may take includes
disqualifying the person from holding an accreditation (for a period specified
by the Secretary), suspension of the accreditation, early expiry of the
accreditation and immediate or future cancellation of the accreditation.
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The person has a right of review concerning accreditation decisions and
may apply to the Victorian Civil and Administrative Tribunal for a review of a
decision made by the Secretary. An accreditation is personal to a person who
holds it, it is not capable of being transferred of assigned or otherwise dealt
with by the person who holds it and does not vest by operation of law in any
other person.
The TRANSPORT ACT contains detailed provisions authorizing the
Secretary of the Department of the Infrastructure to carry out inspections and
giving inspectors powers to enter and inspect premises (including, to test
equipment and to seize property if appropriate). All actions must be reasonably
necessary to determine compliance with the Transport Act. A search warrant or
prior written consent of the occupier is necessary for entry into premises.
The Secretary must conduct safety audits of every person accredited at
least once every 12 months, to ensure that the accredited person is complying
with the requirements of accreditation. The Secretary may charge the accredited
person a fee for the safety audit service subject to the limits set out in the
relevant regulations. An accredited person has a duty to inquire into accidents
and incidents.
CANADA. The Company's Canadian railroad subsidiaries are subject to
regulation by various governmental departments and regulatory agencies at the
federal or provincial level depending on whether the railroad operated by the
subsidiary in question falls within federal or provincial jurisdiction. A
Canadian railroad generally falls within the jurisdiction of federal regulation
if the railroad crosses provincial or international borders or if the Parliament
of Canada has declared the railroad to be a federal work or undertaking and in
selected other circumstances. Any company which proposes to construct or operate
a railway in Canada which falls within federal jurisdiction is required to
obtain a certificate of fitness under the Canada Transportation Act ("CTA")
which is issued on proof of insurance. Under the CTA, the sale of a federally
regulated railroad line is not subject to federal approval, although a process
of advertising and negotiations may be required in connection with any proposed
discontinuance of a federal railway. Federal railroads are governed by federal
labor relations laws.
Short lines located within the boundaries of a single province which do
not otherwise fall within the federal jurisdiction are regulated by the laws of
the province in question, including laws as to licensing and labor relations.
Most of Canada's ten provinces have enacted new legislation which is more
favorable to the operation of short line railroads than previous provincial
laws. Many of the provinces require as a condition of licensing under the short
line railroads acts that the licensees comply with federal regulations
applicable to safety and other matters and remain subject to inspection by
federal railway inspectors. Under some provincial legislation, the sale of a
provincially regulated railroad line is not subject to provincial approval,
although a process of advertising and negotiations may be required in connection
with any proposed discontinuance of a provincial railway.
Acquisition of additional railroad operations in Canada, whether
federally or provincially regulated, may be subject to review by the Investment
Canada Act (the "ICA"), a federal statute which applies to every acquisition of
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a Canadian business or establishment of a new Canadian business by a
non-Canadian. Whether or not an acquisition is subject to review under the ICA
is dependent on the book value of the assets of the Canadian business being
acquired. Acquisitions that are subject to review must, before their completion,
satisfy the Minister responsible tor administering the ICA that the acquisition
is of net benefit to Canada.
Any contemplated acquisitions may also be subject to the provisions of
the Competition Act (the "CA"), federal antitrust legislation of general
application. The CA contains merger control provisions which apply to certain
acquisitions. As a result, acquisitions exceeding specified asset and/or revenue
thresholds may be subject to pre-merger notification and subsequent substantive
review prior to their completion.
NORTH AMERICAN RAILROAD INDUSTRY
The U.S. railroad industry is dominated by major Class I railroads,
which operated approximately 120,000 miles of track and represented 91.2% of
total rail industry operating revenues of approximately $35.3 billion in 1998.
In addition to large railroad operators, there were more than 500 short line and
regional railroads, which generated approximately $3.1 billion of operating
revenues and operated approximately 50,000 miles of track at year end 1998.
The railroad industry is subject to regulations of various government
agencies, primarily the STB. For regulatory purposes, the STB classifies
railroads into three groups: Class I, Class II and Class III, based on annual
operating revenue. For 1998, the Class I railroads had operating revenues of at
least $259.4 million, Class II railroads had revenues of $20.8 million to $259.4
million, and Class III railroads had revenues of less than $20.8 million.
In compiling data on the U.S. railroad industry, the Association of
American Railroads ("AAR") uses the STB's revenue threshold for Class I
railroads. Regionals are railroads operating at least 350 miles of rail line
and/or earnings between $40 million and the Class I revenue threshold. Locals
are railroads falling below the Regional thresholds.
1998 INDUSTRY OVERVIEW
NUMBER OF
TYPE OF RAILROAD CARRIERS 1998 REVENUES % OF REVENUES
---------------- --------- ------------- -------------
Class I 9 $32.2 91.2%
Regional 35 1.6 4.5
Local 515 1.5 4.3
--- ----- -----
Total 559 $35.3 100.0%
=== ===== =====
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As a result of deregulation, Class I railroads have been able to
concentrate on core, long-haul routes, while divesting many of their low-density
branch lines to smaller and more cost-efficient freight railroad operators such
as the Company. Divesting branch lines allows Class I railroads to increase
traffic density, improve railcar utilization and avoid rail line abandonment.
The proportion of total track miles operated by short line and regional
railroads in the U.S. has increased dramatically as a result of these
divestitures.
Because of the focus by short line railroads on increasing traffic
volume through increased customer service and more efficient operations, traffic
volume on short line railroads frequently increases after divestiture by Class I
operators. Consequently, these transactions often result in net increases in
divesting carriers' freight traffic because much of the business originating or
terminating on branch lines feeds into divesting carriers' core routes.
Rail traffic may be categorized into three categories: interline, local
and bridge. Interline traffic either originates or terminates with customers
located along a rail line and is interchanged with other rail carriers. Local
traffic both originates and terminates on the same rail line and does not
involve other rail carriers. Bridge traffic neither originates nor terminates on
a rail carrier's line, but rather passes over the line from one connecting
carrier to another.
INTERNATIONAL RAILROAD INDUSTRY
Freight railroad services in countries other than the United States and
Canada are typically conducted at a loss. This is primarily the result of
state-run railroads that are unresponsive to market needs and inefficiently
operated. Due to economic necessity and a lack of cost-effective solutions, many
countries are privatizing their rail operations. Recent examples include Mexico,
Japan (for rail passenger service) and Australia.
In the last several years several states in Australia have privatized
their rail systems. The largest to-date being the V/Line Freight Corporation in
the state of Victoria. It is anticipated that several other state rail systems
as well as the national rail system will be privatized over the next several
years.
ITEM 2. DESCRIPTION OF PROPERTY
NORTH AMERICAN RAILROAD PROPERTIES
The following table sets forth certain information with respect to the
North American railroad properties that the Company owned as of December 31,
1999:
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Date of Track Principal
Railroad Acquisition Miles Structure Location Commodities
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Huron and Eastern Railway March 1986 83 Owned Michigan Agricultural products, sugar
May 1988 55 Owned products, fertilizer
45 Leased
2 Trackage
rights
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Saginaw Valley Railway Jan. 1991 10 Owned Michigan Agricultural products,
Apr. 1998 51 Owned fertilizer
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
South Central Tennessee Feb. 1994 49 Leased Tennessee Wood products, frozen
Railroad 3 Trackage potatoes, paper products
rights
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Dakota Rail Sept. 1995 44 Contract Minnesota Plastics, lumber, scrap steel
for Deed
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
West Texas & Lubbock Railroad Nov. 1995 104 Owned Texas Fertilizer, sodium sulfate,
4 Trackage cotton and cotton products
rights
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Cascade and Columbia River Sept. 1996 131 Owned Washington Wood products, limestone,
Railroad 6 Trackage agricultural products
rights
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Otter Tail Valley Railroad Oct. 1996 72 Owned Minnesota Coal, agricultural products,
fertilizer
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Minnesota Northern Railroad Dec. 1996 167 Owned Minnesota Agricultural products, sugar
47 Trackage products, fertilizer, coal,
rights aggregates
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
St. Croix Valley Railroad Aug. 1997 44 Easement Minnesota Agricultural products,
8 Trackage fertilizer, plastics
rights
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Ventura County Railroad Aug. 1998 13 Leased California Automobiles, paper products
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
E&N Railway Jan. 1999 61 Owned British Lumber, paper products,
120 Leased Columbia propane
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Ottawa Valley (RaiLink) July 1999 342 Leased Ontario Bridge traffic, forest
products, mining
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Southern Ontario (RaiLink) July 1999 53 Leased Ontario Fuel, metals, agricultural
products
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Mackenzie Northern (RaiLink) July 1999 650 Owned Alberta, Fuel, forest products,
Northwest agricultural products
Territory
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Coronado Bonnyville (RaiLink) July 1999 271 Owned Alberta Forest products, agricultural
products
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Central Western (RaiLink) July 1999 103 Owned Alberta Agricultural products
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Lakeland & Waterways (RaiLink) July 1999 202 Owned Alberta Petroleum coke
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
Toledo, Peoria and Western Sept 1999 273 Owned Indiana, Intermodal, agricultural
Railroad 96 Trackage Illinois, Iowa products, fertilizers,
rights chemicals
- ------------------------------- -------------- -------- ------------ --------------- -------------------------------
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In February 2000, the Company acquired RailTex which operates the
following 25 North American railroad properties:
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Date of Track Principal
Railroad Acquisition* Miles Structure Location Commodities
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Indiana & Ohio Railway June 1996 576 Owned Michigan, Ohio, Autos, railroad equipment,
Leased Indiana agricultural products
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Missouri & Northern Arkansas Dec 1992 497 Owned Missouri, Railroad equipment, coal,
Railroad Sept 1998 10 Leased Arkansas, Kansas agricultural products
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Central Oregon & Pacific Dec 1994 336 Owned Oregon Lumber, paper products
Railroad 105 Leased
8 Trackage
rights
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
New England Central Railroad Feb 1995 330 Owned Vermont, Lumber, paper products
Massachusetts
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Indiana Southern Railroad Apr 1992 170 Owned Indiana Coal
6 Trackage
rights
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Cape Breton & Central Nova Oct 1993 245 Owned Nova Scotia Coal, paper, metals,
Scotia Railway railroad equipment
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Dallas Consolidated (2 rail Feb 1992 92 Leased Texas Food products, Non-metallic
lines) Jan 1999 89 Leased ores, paper products
Oct 1990 107 Leased
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
South Carolina Central Dec 1987 58 Owned South Carolina Chemicals, metals, coal,
Railroad paper products
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Goderich-Exeter Railway Apr 1992 70 Owned Ontario Auto parts, chemicals,
Nov 1998 99 Leased non-metallic ores
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Michigan Consolidated Dec 1987 67 Owned Michigan, Ohio, Agricultural products,
(3 rail lines) Dec 1990 7 Owned Indiana non-metallic ores, chemicals
July 1993 45 Owned
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Georgia Southwestern Railroad June 1989 357 Leased Georgia, Alabama Non-metallic ores, lumber,
June 1995 chemicals
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
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- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Connecticut Southern Sept 1996 23 Owned Connecticut Lumber, paper products,
55 Trackage chemicals
rights
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Virginia Consolidated Nov 1988 75 Leased Virginia, North Coal, lumber
(3 rail lines) Nov 1987 53 Owned Carolina
Apr 1990 82 Leased
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Central Railroad of Indiana June 1998 81 Owned Indiana, Ohio Chemicals, minerals &
stones, metals
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
San Diego & Imperial Valley Oct 1984 153 Trackage California, Petroleum, paper products,
Railroad rights Mexico non-metallic ores
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Carolina Piedmont Railroad Nov 1990 37 Owned South Carolina Chemicals, minerals &
Apr 1997 12 Owned stones, food products
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Pittsburgh Industrial Dec 1996 42 Owned Pennsylvania Chemicals, metals, petroleum
Railroad
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Central Railroad of June 1998 92 Leased Indiana Agricultural products,
Indianapolis Trackage railroad equipment,
rights
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Ontario L'Original Railroad Nov 1996 26 Owned Ontario Metals
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
Texas-New Mexico Railroad Sept 1989 107 Owned Texas, New Non-metallic ores, petroleum
Mexico
- ------------------------------ --------------- -------- ----------- ----------------- ------------------------------
* - Date acquired by RailTex.
CHILEAN RAILROAD PROPERTIES
In February 1997, the Company, through a newly formed, wholly-owned
subsidiary, RailAmerica de Chile S.A., acquired 55% of the outstanding voting
stock of Ferronor. Ferronor owns and operates approximately 1,400 miles of rail
line serving northern Chile. RailAmerica was joined in the purchase of Ferronor
by APCO, a family-owned Chilean transportation and distribution company.
Ferronor operates the only north-south railroad in northern Chile,
extending from La Calera near Santiago, where it connects with Chile's southern
railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique,
approximately 120 miles south of the Peruvian border. It also operates several
east-west branch lines that link a number of iron, copper and limestone mines
and production facilities with several Chilean Pacific port cities. Ferronor
also serves Argentina and Bolivia through traffic interchanged with the General
Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia.
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AUSTRALIAN RAILROAD PROPERTIES
On April 30, 1999, the Company through its wholly owned subsidiary
Freight Victoria, prepaid a 45-year lease to operate 3,150 miles of track in the
State of Victoria, Australia.
TEXAS MANUFACTURING PROPERTIES
KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on an 25.5-acre site,
which were constructed over the period from 1969 to 1998. QUEBEC, CANADA
MANUFACTURING PROPERTIES
KSC's manufacturing operations are conducted in two Company owned
buildings, totaling approximately 150,000 square feet on a 36.7-acre site.
ONTARIO, CANADA MOTOR CARRIER PROPERTIES
Steel City Carriers leases a terminal it owns in Sault Ste. Marie,
Ontario, Canada, which includes an office building housing administrative and
dispatch offices, fabricating and service and a shop building. A 5-1/2 acre lot
provides adequate space for the normal loading, unloading, movement and parking
of tractors and trailers as well as for temporarily storing and transferring
some shipments. The Company has entered into an agreement to sell the real
estate and anticipates the sale closing in 12 to 24 months.
NORTH AMERICAN ROLLING STOCK
The following tables summarize the composition of the Company's North
American railroad equipment fleet as of December 31, 1999:
FREIGHT CARS
TYPE OWNED LEASED TOTAL
---- ----- ------------- -----
Covered hopper cars -- 583 583
Open top hopper cars 48 204 252
Tank cars 143 -- 143
Box cars -- 167 167
Wood chip cars -- 78 78
Center-beam flat cars -- 120 120
Flat cars 12 10 22
---- ------- -------
203 1,162 1,365
==== ======= =======
LOCOMOTIVES
HORSEPOWER/UNIT OWNED LEASED TOTAL
--------------- ------ ----------- -----
Over 2000 5 -- 5
1500 to 2000 92 28 120
Under 1500 11 -- 11
---- ------ ----
108 28 136
==== ====== ====
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INTERNATIONAL ROLLING STOCK
The following tables summarize the composition of the Company's
Australian and Chilean railroad equipment fleet as of December 31, 1999:
FREIGHT CARS
------------
TYPE CHILE AUSTRALIA TOTAL
- ---- ----- --------- -----
Covered hopper cars -- 1,157 1,157
Open top hopper cars 198 173 371
Box cars 230 249 479
Intermodal containers -- 646 646
Tank cars -- 335 335
Flat cars 115 84 199
Gondola cars 87 -- 87
----- ----- -----
630 2,644 3,274
===== ===== =====
LOCOMOTIVES
HORSEPOWER/UNIT CHILE AUSTRALIA TOTAL
- --------------- ----- ------------ -----
Over 2000 -- 40 40
1500 to 2000 -- 23 23
Under 1500 32 43 75
---- ---- ----
32 106 138
==== ==== ====
All of the international equipment fleet is owned by the Company.
Based on current and forecasted traffic levels on the Company's
railroads, management believes that its present equipment, combined with the
availability of other rail cars and/or locomotives for hire, is adequate to
support its operations. Management believes that the Company's insurance
coverage with respect to its property and equipment is adequate.
ADMINISTRATIVE OFFICES
The Company maintains its principal executive office in Boca Raton,
Florida. In July 1998, the Company purchased a 59,500 square foot office
building, located in Boca Raton, Florida, for approximately $4.6 million and has
renovated it for an additional $3.2 million. Approximately 17,500 square feet of
this building is being used as the Company's new corporate headquarters. The
remaining 42,000 square feet of space is currently leased to a single tenant.
Freight Victoria's administrative office is in Melbourne, Australia.
Freight Victoria leases approximately 20,000 square feet of space from the
Victorian Government for AUS$310,000 annually. The lease term is May 1, 1999 to
May 31, 2004.
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Ferronor's administrative office is in Coquimbo, Chile. Ferronor owns a
three story 21,600 square foot office building in Coquimbo. This building was
included as part of the February 1997 acquisition of Ferronor by the Company.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims some of which are currently
pending. Litigation is subject to many uncertainties and the Company may be
unable to accurately predict the outcome of individual litigated matters. Some
of these matters possibly may be decided unfavorably to the Company. It is the
opinion of management that the ultimate liability, if any, with respect to these
matters will not be material. Other than ordinary routine litigation incidental
to the Company's business, no other litigation exists.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective March 6, 1997, the Company's common stock began trading on
the Nasdaq National Market under the symbol "Rail". Prior to March 6, 1997, the
Company's common stock traded on the Nasdaq SmallCap Market tier of The Nasdaq
Stock Market. Set forth below is high and low bid information for the common
stock as reported on the NASDAQ system for each quarter of 1998 and 1999. All
such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not reflect actual transactions.
1998 HIGH SALES PRICE LOW SALES PRICE
- ----------------------------------------------------------- ----- ---------------------- ----- ----------------------
First Quarter $ 7 23/32 $ 6
Second Quarter 7 3/16 5 15/16
Third Quarter 6 3/8 5
Fourth Quarter 8 3/4 5 5/16
- ----------------------------------------------------------- ----- ---------------------- ----- ----------------------
1999 HIGH SALES PRICE LOW SALES PRICE
- ---------------------------------------------------------- ----- ---------------------- ------ ----------------------
First Quarter $ 10 1/4 $ 7 11/16
Second Quarter 10 5/16 8 3/4
Third Quarter 10 3/4 9 1/8
Fourth Quarter 9 15/16 7 1/16
- ---------------------------------------------------------- ----- ---------------------- ------ ----------------------
2000 HIGH SALES PRICE LOW SALES PRICE
- ---------------------------------------------------------- ----- ---------------------- ----- ----------------------
First Quarter (through March 21) $ 9 1/16 $ 5 3/4
- ---------------------------------------------------------- ----- ---------------------- ----- ----------------------
As of March 21, 2000, there were 522 holders of record of the common
stock. The Company has never declared or paid a dividend on its common stock.
The ability of the Company to pay dividends in the future will depend on, among
other things, restrictive covenants contained in loan or other agreements to
which the Company may be subject.
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30
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the financial statements and the notes thereto included elsewhere in this
Annual Report on Form 10-K. The results of operations for the year ended
December 31, 1999 include the results of the railroads acquired in 1999 as
follows: Freight Victoria, effective April 30, 1999, RaiLink, effective August
1, 1999 and TPW, effective September 1, 1999. The statement of operations data
for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data
at December 31, 1998 and 1999 are derived from, and are qualified by reference
to, audited financial statements included elsewhere herein and should be read in
conjunction with those financial statements and the notes thereto. The statement
of operations data set forth below for the periods ended December 31, 1995 and
1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from the audited financial statements of the Company not included herein
(thousands, except operating data).
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
----- ------ ----- ----- ----
INCOME STATEMENT DATA
Operating revenue $ 7,205 $ 12,020 $ 24,496 $ 37,256 $125,372
Operating income 541 2,529 3,365 5,497 21,268
Income (loss) from
continuing operations (40) 478 288 113 6,026
Basic earnings per
common share from
continuing operations $ (0.15) $ 0.10 $ 0.02 $ 0.01 $ 0.45
Diluted earnings per
common share from
continuing operations $ (0.15) $ 0.09 $ 0.02 $ 0.01 $ 0.43
Weighted average
common shares - Basic 4,554 4,966 8,304 9,553 11,090
BALANCE SHEET DATA
Total assets $ 34,469 $ 65,215 $ 95,141 $130,964 $443,928
Long-term debt, including
current maturities 16,274 37,788 47,603 66,327 162,827
Subordinated debt,
including current maturities 3,879 2,212 2,212 -- 122,449
Redeemable convertible
preferred stock -- -- -- -- 8,830
Stockholders' equity 9,149 15,992 26,814 34,760 69,314
OPERATING DATA
Freight Carloads 18,505 25,871 69,140 117,535 394,177
Track Mileage 450 930 2,330 2,400 8,400
Number of full time
employees 265 275 542 652 1,707
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Company's principal operations include the operation of North
American short line freight railroads and international regional railroads. The
Company hauls various products, which historically have consisted primarily of
agricultural commodities, for its customers corresponding to their local
operating areas. The Company recognizes railroad transportation revenue after
services are provided.
On February 4, 2000, the Company acquired RailTex through a merger of
one of its wholly owned subsidiaries with and into RailTex for approximately
$128 million in cash, assumption of $111 million in debt and approximately 6.6
million shares of the Company's common stock valued at $60.8 million. RailTex
owned and operated 25 short line freight railroads with approximately 4,100
miles of track concentrated in the southeastern, midwestern, Great Lakes and New
England regions of the United States and eastern Canada. In connection with the
acquisition, we entered into a credit agreement providing $330 million of senior
term loans and $50 million of senior revolving loans. In addition, a wholly
owned subsidiary of the Company issued $95 million of subordinated bridge notes
and another wholly owned subsidiary issued $50 million of asset sale bridge
notes, in connection with the acquisition.
Set forth below is a discussion of the historical results of operations
for the Company's North American, international railroad operations and
discontinued trailer manufacturing operations and motor carrier operations as
well as a discussion of corporate overhead.
NORTH AMERICAN RAILROAD OPERATIONS
The Company's historical results of operations include the operations
of its acquired railroads from the dates of acquisition as follows:
NAME OF RAILROAD DATE OF ACQUISITION
- ---------------- -------------------
Evansville Terminal Company ("ETC") July 1, 1996
(disposed of September 30, 1997)
Cascade and Columbia River Railroad September 6, 1996
Otter Tail Valley Railroad October 1, 1996
Gettysburg Railway and Gettysburg Scenic Rail Tours November 18, 1996
(disposed of October 31, 1997)
Minnesota Northern Railroad December 28, 1996
St. Croix Valley Railroad September 8, 1997
Ventura County Railroad September 1, 1998
E&N Railway January 6, 1999
RaiLink properties (6 railroads) August 1, 1999
Toledo, Peoria and Western Railroad September 1, 1999
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As a result, the results of operations for the years ended December 31,
1999, 1998 and 1997 are not comparable in various material respects and are not
indicative of the results which would have occurred had the acquisitions been
completed at the beginning of the periods presented.
The acquisition of RailTex occurred after the periods presented and
RailTex's results of operations are not included in the discussion.
The following table sets forth the operating revenues and expenses (in
thousands) for the Company's North American railroad operations for the periods
indicated. All results of operations discussed in this section are for the
Company's North American railroads only, unless otherwise indicated.
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
Operating Revenue:
Transportation revenue $38,842 $15,388 $14,737
Other revenue 2,095 802 1,277
------- ------- -------
Total operating revenue 40,937 16,190 16,014
------- ------- -------
Operating Expenses:
Maintenance of way 5,486 1,974 2,231
Maintenance of equipment 1,912 675 678
Transportation 12,232 3,605 3,799
Equipment rental 1,039 347 599
General and administrative 6,927 3,095 2,457
Depreciation and amortization 3,594 1,570 1,337
------- ------- -------
Total operating expenses 31,190 11,266 11,101
------- ------- -------
Operating income 9,747 4,924 4,913
Interest and other expense 5,472 2,852 2,842
------- ------- -------
Income before income taxes $ 4,275 $ 2,072 $ 2,071
======= ======= =======
COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1999 AND 1998
OPERATING REVENUES. Transportation revenue increased $23.4 million, or
152%, to $38.8 million for the year ended December 31, 1999 from $15.4 million
for the year ended December 31, 1998. The increase was primarily due to
increased carloads resulting from 1999 acquisitions. The transportation revenue
per carload decreased to $238 from $303 per car primarily due to the acquisition
of a rail line in Canada that hauls a significant amount of bridge traffic at a
lower rate per car than the Company's other rail lines and intermodal traffic on
the newly acquired TPW which also moves at a lower rate per car than the
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33
Company's other rail lines. Carloads handled totaled 154,991 for the year ended
December 31, 1999, an increase of 105,472, or 213%, compared to 49,519 for the
year ended December 31, 1998. The increase was primarily due to the acquisitions
of E&N Railroad, the RaiLink properties and TPW, which moved 7,839, 77,328 and
16,981 carloads, respectively, for the year ended December 31, 1999. The
Company's "same railroad" car loadings and revenue increased 2% and 5%,
respectively, for the year ended December 31, 1999 compared to the year ended
December 31, 1998.
Other revenue increased $1.3 million, or 161%, to $2.1 million for the
year ended December 31, 1999 from $0.8 million for the year ended December 31,
1998. Other revenues for 1999 and 1998 consist of gain on sales of railroad
assets, easement sales, railroad lease and rental income and other miscellaneous
income. The increase was primarily due to acquisitions of the RaiLink properties
and TPW, which had $0.7 million and $0.4 million, respectively, in other revenue
for the year ended December 31, 1999.
OPERATING EXPENSES. Operating expenses increased $19.9 million, or
177%, to $31.1 million for the year ended December 31, 1999 from $11.3 million
for the year ended December 31, 1998. The increase was primarily due to the
acquisitions of E&N Railroad, the RaiLink properties and TPW, which had $4.4
million, $11.1 million and $3.4 million, respectively, in operating expenses for
the year ended December 31, 1999 and the write-off of $0.6 million in costs
related to the discontinuance of the Delaware Valley Railway. Operating
expenses, as a percentage of transportation revenue, were 80.3% and 73.2% for
1999 and 1998, respectively. Exclusive of the write-off of costs at the Delaware
Valley Railway, the operating ratio was 78.7% for 1999. The increase was due
primarily to higher operating ratios at the railroads acquired in 1999 compared
to the Company's previously existing railroads. Management anticipates an
improvement in the operating ratio over the next twelve months, exclusive of
seasonality, as the new operations are assimilated into the Company's North
American operations.
Maintenance of way expenses increased approximately $3.5 million, or
178%, to $5.5 million for the year ended December 31, 1999 from $2.0 million for
the year ended December 31, 1998. The increase was primarily due to the
maintenance of way expenses at E&N Railroad, the RaiLink properties and TPW of
$0.4 million, $2.3 million and $0.4 million, respectively, for the year ended
December 31, 1999.
Maintenance of equipment increased $1.2 million, or 183%, to $1.9
million for the year ended December 31, 1999 from $0.7 million for the year
ended December 31,1998. The increase was primarily due to the maintenance of
equipment expenses at E&N Railroad, the RaiLink properties and TPW of $0.2
million, $0.8 million and $0.2 million, respectively, for the year ended
December 31, 1999.
Transportation expense increased $8.6 million, or 239%, to $12.2
million for the year ended December 31, 1999 from $3.6 million for the year
ended December 31, 1998. The increase was primarily due to the transportation
expenses at E&N Railroad, the RaiLink properties and TPW of $1.5 million, $5.1
million and $1.6 million, respectively, for the year ended December 31, 1999. In
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34
addition, the Company's transportation expenses for 1999 were negatively
impacted by the increasing fuel prices throughout the year. Fuel prices have
continued to increase this year, which may continue to have a negative impact on
operating results.
Equipment rental increased $0.7 million, or 199%, to $1.0 million for
the year ended December 31, 1999 from $0.3 million for the year ended December
31, 1998. The increase was primarily due to the equipment rental expenses at E&N
Railroad and TPW of $1.0 million and $0.4 million, respectively, for the year
ended December 31, 1999 partially offset by increased earnings on certain of the
Company's leased rail car fleets.
General and administrative expenses increased $3.8 million, or 124%, to
$6.9 million for the year ended December 31, 1999 from $3.1 million for the year
ended December 31, 1998. The increase was primarily due to general and
administrative expenses at E&N Railroad, the RaiLink properties and TPW of $1.1
million, $1.6 million and $0.4 million, respectively, for the year ended
December 31, 1999 and the write-off of costs at DVRC of $0.6 million.
Depreciation and amortization increased $2.0 million, or 129%, to $3.6
million for the year ended December 31, 1999 from $1.6 million for the year
ended December 31, 1998. The increase was primarily due to the acquisitions in
1999.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased $2.6
million, or 92%, to $5.5 million for the year ended December 31, 1999 from $2.9
million for the year ended December 31, 1998. The increase in interest expense
was primarily due to increased borrowings in connection with the acquisitions of
E&N Railroad, RaiLink and TPW.
COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
OPERATING REVENUES. Transportation revenues increased $0.7 million, or
4.4%, to $15.4 million for the year ended December 31, 1998 from $14.7 million
for the year ended December 31, 1997. The transportation revenue per carload
decreased to $303 from $308 per car primarily due to the difference in product
mix hauled between 1998 and 1997. Carloads handled totaled 49,519 for the year
ended December 31, 1998, an increase of 3,312, or 7.2%, compared to 46,207 for
the year ended December 31, 1997.
Other revenues decreased $0.5 million, or 37.2%, to $0.8 million for
the year ended December 31, 1998 from $1.3 million for the year ended December
31, 1997. Other revenues for 1998 and 1997 consist of gain on sales of railroad
assets, easement sales, railroad lease and rental income and other miscellaneous
income. The decrease was primarily due to certain gains on sale of assets during
1997 with no corresponding sales of assets in 1998.
OPERATING EXPENSES. Operating expenses increased $0.2 million, or 1.8%,
to $11.3 million for the year ended December 31, 1998 from $11.1 million for the
34
35
year ended December 31, 1997. Operating expenses, as a percentage of
transportation revenue, were 73.2% and 75.3% for 1998 and 1997, respectively.
Maintenance of way expenses decreased $0.2 million, or 11.5%, to $2.0
million for the year ended December 31, 1998 from $2.2 million for the year
ended December 31, 1997 primarily due to increased track work being performed as
part of scheduled maintenance programs at the West Texas and Lubbock Railroad
("WTLR") and the Huron and Eastern Railway ("HESR") during 1997.
Maintenance of equipment expenses remained fairly constant at $0.7
million for the years ended December 31, 1998 and 1997.
Transportation expense decreased $0.2 million, or 5.1%, to $3.6 million
for the year ended December 31, 1998 from $3.8 million for the year ended
December 31, 1997 primarily due to the dispositions of ETC, Gettysburg Railway
and Gettysburg Scenic Rail Tours in 1997.
Equipment rental decreased $0.3 million, or 42.0%, to $0.3 million for
the year ended December 31, 1998 from $0.6 million for the year ended December
31, 1997. The decrease is primarily due to increased utilization of the
Company's leased railcar fleet. Cascade and Columbia River Railroad ("CCRR") and
Minnesota Northern Railroad ("MNR") equipment rental expenses decreased by 78.8%
and 137.4% respectively due to increased earnings offsetting equipment rental
expense on their railcar fleets.
General and administrative expenses increased $0.6 million, or 26.0%,
to $3.1 million for the year ended December 31, 1998 from $2.5 million for the
year ended December 31, 1997. MNR had selling, general and administrative
expenses of $0.5 million in 1998 compared to $0.3 million for the year ended
December 31, 1997, an increase of $0.2 million. Otter Tail Valley Railroad had
selling, general and administrative expenses of $0.3 million in 1998 compared to
$0.2 million for the year ended December 31, 1997, an increase of approximately
$0.1 million. St. Croix Valley Railroad had selling, general and administrative
expenses of $0.1 million for the year ended December 31, 1998, an increase of
$0.1 million from $15,000 in 1997.
Depreciation and amortization increased $0.3 million, or 17.4%, to $1.6
million for the year ended December 31, 1998 from $1.3 million for the year
ended December 31, 1997.
INTEREST AND OTHER EXPENSES. Interest and other expenses remained
fairly constant at $2.9 million for the years ended December 31, 1998 and 1997.
INTERNATIONAL RAILROAD OPERATIONS
All results of operations discussed in this section are for the
Company's international railroads only, unless otherwise indicated. The results
of international railroad operations for the years ended December 31, 1998 and
1997 include only Ferronor. The results of operations for the year ended
December 31, 1999 also include the operations of Freight Victoria from May 1,
35
36
1999 to December 31, 1999. As a result, the results of operations for the year
ended December 31, 1999 are not comparable to the prior years in certain
material respects and are not indicative of the results which would have
occurred had the acquisition been consummated at the beginning of the respective
periods.
The following table sets forth the operating revenues and expenses (in
thousands) for the Company's international railroad operations for the periods
indicated.
FOR THE YEAR ENDED
ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
Revenue:
Transportation revenue $ 80,069 $ 14,915 $ 7,287
Other revenue 2,404 1,009 775
----------- ---------- ----------
Total revenue 82,473 15,924 8,062
----------- --------- ---------
Operating expenses:
Transportation 54,706 8,982 5,113
General and administrative 7,391 1,724 1,137
Depreciation and amortization 4,660 706 267
----------- --------- ---------
Total operating expenses 66,757 11,412 6,517
----------- --------- ---------
Operating income 15,716 4,512 1,545
Other income (expense) (6,867) (1,257) 319
Minority interest in earnings (1,551) (1,672) (851)
----------- --------- ---------
Income before income taxes $ 7,298 $ 1,583 $ 1,013
=========== ========= =========
COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
FERRONOR.
OPERATING REVENUES. Transportation revenue increased $4.2 million, or
28%, to $19.1 million for the year ended December 31, 1999 from $14.9 million
for the year ended December 31, 1998. Ferronor's carloads handled totaled 93,835
for the year ended December 31, 1999, an increase of 25,819, or 38%, compared to
68,016 for the year ended December 31, 1998. The increase in both carloads and
revenue is due to Ferronor commencing movement of iron ore out of the El
Algarrabo mine in late March 1998 and, the Los Colorados mine in July 1998 and
nitrates out of the Minsal mine during 1999. These increases were offset
slightly by a decrease in the international traffic out of Argentina and Bolivia
due to the slow down in the world economy in the second quarter of 1998.
OPERATING EXPENSES. Operating expenses increased $4.0 million, or 35%, to
$15.4 million for the year ended December 31, 1999 from $11.4 million for the
year ended December 31, 1998. The increase was due to Ferronor commencing
movement of iron ore out of the El Algarrabo mine in late March 1998 and, the
Los Colorados mine in July 1998 and nitrates out of the Minsal mine during 1999.
Operating expenses, as a percentage of transportation revenue, were 80.7% and
76.5% for the years ended December 31, 1999 and 1998, respectively. The
operating ratio increase was due primarily to the loss in 1999 of international
traffic which is typically higher margin business.
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37
OTHER INCOME (EXPENSE). Other income (expense) decreased $0.6 million, or
46%, to $0.7 million for the year ended December 31, 1999 from $1.3 million for
the year ended December 31, 1998. The decrease in net expense was due primarily
to an exchange rate gain of $0.5 million recorded in 1999.
FREIGHT VICTORIA
OPERATING REVENUES. Operating revenues were $63.4 million for the period
May 1, 1999 through December 31, 1999. These revenues consisted of $48.5 million
of freight revenue, $12.4 million of track access fees and $2.4 million of other
operating revenue.
OPERATING EXPENSES. Operating expenses were $51.3 million for the period
May 1, 1999 through December 31, 1999. These expenses consisted of $10.0 million
of maintenance of way costs, $5.8 million of maintenance of equipment costs,
$26.9 million of transportation costs, $5.2 million