RAILAMERICA INC /DE - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission File No. 0-20618

RAILAMERICA, INC.

(Exact name of registrant as specified in its charter)


Delaware		65-0328006

(State or Other Jurisdiction of Incorporation)		(IRS Employer Identification Number)

5300 Broken Sound Blvd, N.W., Boca Raton, Florida 33487
(Address of principal executive offices) (Zip code)

(561) 994-6015
(Issuer’s telephone number)

Check whether the registrant (1) 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, par value $.001 — 31,905,569 shares as of August 7, 2003

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EX-3.2 BY-LAWS, AS AMENDED & RESTATED
EX- 31.1 PRINCIPAL EXECUTIVE OFFICE CERTIFICATION
EX-31.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION
EX-32.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
EX-32.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION

RAILAMERICA, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

QUARTER ENDED JUNE 30, 2003


		Page

Part I	Financial Information		3
	Item 1. Financial Statements		3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		34
	Item 4. Controls and Procedures		35

Part II	Other Information		36
	Item 4. Submission of Matters to a Vote of Security Holders		36
	Item 6. Exhibits and Reports on Form 8-K		36

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(in thousands, except share data)


					(unaudited)
					June 30,		December 31,
					2003		2002

				ASSETS
Current assets:
	Cash and cash equivalents				$	21,684	$	28,887
	Accounts and notes receivable, net					64,334		63,463
	Current assets of discontinued operations					6,864		5,834
	Other current assets					18,946		22,800

		Total current assets				111,828		120,984
Property, plant and equipment, net						989,694		904,253
Long-term assets of discontinued operations						49,271		50,355
Other assets						30,021		30,961

		Total assets			$	1,180,814	$	1,106,553

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current maturities of long-term debt				$	4,159	$	4,200
	Accounts payable					47,517		46,722
	Accrued expenses					30,725		38,420
	Current liabilities of discontinued operations					11,870		11,624

		Total current liabilities				94,271		100,966
Long-term debt, less current maturities						395,094		383,121
Subordinated debt						142,186		141,331
Deferred income taxes						159,311		150,159
Long-term liabilities of discontinued operations						26,582		27,283
Other liabilities						26,403		24,790

		Total liabilities				843,847		827,650

Commitments and contingencies
Stockholders’ equity:
	Common stock, $0.001 par value, 60,000,000 shares authorized; 31,905,569 shares and 31,879,602 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively					32		32
	Additional paid-in capital and other					260,475		261,372
	Retained earnings					57,082		48,055
	Accumulated other comprehensive income (loss)					19,378		(30,556	)

		Total stockholders’ equity				336,967		278,903

		Total liabilities and stockholders’ equity			$	1,180,814	$	1,106,553

The accompanying Notes are an integral part of the consolidated financial statements.

RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2003 and 2002
(in thousands, except earnings per share)
(unaudited)


				Three months ended						Six months ended
				June 30,						June 30,

				2003			2002			2003			2002

Operating revenue				$	110,232		$	109,766		$	217,461		$	215,577

Operating expenses:
	Transportation				63,191			60,401			123,721			120,657
	Selling, general and administrative				22,371			21,900			44,664			44,632
	Net gain on sale of assets				(1,638	)		(702	)		(2,005	)		(5,349	)
	Depreciation and amortization				9,325			7,704			18,046			15,645

			Total operating expenses		93,249			89,303			184,426			175,585

			Operating income		16,983			20,463			33,035			39,992
Interest expense					(9,658	)		(11,623	)		(19,396	)		(23,932	)
Financing costs and other income (expense)					13			(25,736	)		13			(25,736	)

			Income (loss) from continuing operations before income taxes		7,338			(16,896	)		13,652			(9,676	)
Provision for (benefit of) income taxes					2,885			(5,321	)		5,190			(3,000	)

		Income (loss) from continuing operations			4,453			(11,575	)		8,462			(6,676	)
Gain from sale of discontinued operations, net of income taxes					—			853			—			657
Income (loss) from discontinued operations, net of income taxes					240			(3	)		565			437

			Net income (loss)	$	4,693		$	(10,725	)	$	9,027		$	(5,582	)
Basic earnings (loss) per common share:
	Continuing operations			$	0.14		$	(0.36	)	$	0.26		$	(0.21	)
	Discontinued operations				0.01			0.03			0.02			0.04

			Net income (loss)	$	0.15		$	(0.33	)	$	0.28		$	(0.17	)
Diluted earnings (loss) per common share:
	Continuing operations			$	0.14		$	(0.36	)	$	0.26		$	(0.21	)
	Discontinued operations				0.01			0.03			0.02			0.04

			Net income (loss)	$	0.15		$	(0.33	)	$	0.28		$	(0.17	)
Weighted average common shares outstanding:
	Basic				31,781			32,158			31,826			32,081

	Diluted				31,953			32,158			31,927			32,081

The accompanying Notes are an integral part of the consolidated financial statements.

RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2003 and 2002
(in thousands)
(unaudited)


				2003			2002

Cash flows from operating activities:
	Net income (loss)			$	9,027		$	(5,582	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization, including amortization of deferred loan costs			22,684			19,503
		Write-off of deferred acquisition costs			—			2,386
		Financing costs			—			25,611
		Gain on sale of assets			(2,005	)		(6,573	)
		Deferred income taxes and other			5,494			(2,639	)
	Changes in operating assets and liabilities, net of acquisitions and dispositions:
		Accounts receivable			5,240			1,068
		Other current assets			510			3,362
		Accounts payable			4,343			(9,346	)
		Accrued expenses			(7,093	)		(6,331	)
		Other assets and liabilities			(1,906	)		(19,970	)

			Net cash provided by operating activities		36,294			1,489

Cash flows from investing activities:
	Purchase of property, plant and equipment				(30,403	)		(30,423	)
	Proceeds from sale of assets				2,900			6,775
	Acquisitions, net of cash acquired				(25,846	)		(88,724	)
	Deferred acquisition costs and other				(106	)		(5,220	)

			Net cash used in investing activities		(53,455	)		(117,592	)

Cash flows from financing activities:
	Proceeds from issuance of long-term debt				19,000			457,870
	Principal payments on long-term debt				(8,668	)		(350,233	)
	Proceeds from exercise of stock options and warrants				443			370
	Purchase of treasury stock				(1,226	)		(1,997	)
	Financing costs and other				(660	)		(15,383	)

			Net cash provided by financing activities		8,889			90,627

Effect of exchange rates on cash					1,069			1,444

Net decrease in cash					(7,203	)		(24,032	)
Cash, beginning of period					28,887			59,761

Cash, end of period				$	21,684		$	35,729

The accompanying Notes are an integral part of the consolidated financial statements.

RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements included herein have been prepared by RailAmerica, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the consolidated financial statements contain all adjustments of a recurring nature and disclosures necessary to present fairly the financial position of the Company as of June 30, 2003 and December 31, 2002, the results of operations for the three and six months ended June 30, 2003 and 2002, and the cash flows for the six months ended June 30, 2003 and 2002. The December 31, 2002 balance sheet is derived from the Company’s audited financial statements for the year ended December 31, 2002. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current period presentation.

In January 2003, the Company announced its intention to sell its 55% equity interest in Ferronor, its Chilean railroad operations. As a result, Ferronor has been presented as a discontinued operation in the financial statements.

The accounting principles which materially affect the financial position, results of operations and cash flows of the Company are set forth in Notes to the Consolidated Financial Statements, which are included in the Company’s 2002 annual report on Form 10-K.

2. NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, requires that debt extinguishments used as part of a company’s risk management strategy should not be classified as an extraordinary item. The requirement to reclassify debt extinguishments is effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 on January 1, 2003 and has reclassified $4.5 million of extraordinary charges, net of tax, to continuing operations in 2002.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149, which is effective for contracts entered into or modified after June 30, 2003, as well as for hedging relationships designated after June 30, 2003, amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company believes the adoption of this pronouncement will not have a material impact on its financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150, which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, specifies that instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. The Company believes the adoption of this pronouncement will not have a material impact on its financial statements.

RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. STOCK-BASED COMPENSATION

The Company has stock option plans under which employees and non-employee directors may be granted options to purchase shares of the Company’s common stock at the fair market value at the date of grant. Options generally vest in two or three years and expire ten years from the date of the grant. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock –Based Compensation,” to stock-based employee compensation.


		For the three months						For the six months
		ended June 30,						ended June 30,

		2003			2002			2003			2002

Net income (loss), as reported		$	4,693		$	(10,725	)	$	9,027		$	(5,582	)
Less: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects			(862	)		(2,100	)		(1,668	)		(2,801	)

Pro forma net income (loss)		$	3,831		$	(12,825	)	$	7,359		$	(8,383	)
Earnings (loss) per share:
	Basic-as reported	$	0.15		$	(0.33	)	$	0.28		$	(0.17	)

	Basic-pro forma	$	0.12		$	(0.40	)	$	0.23		$	(0.26	)

	Diluted-as reported	$	0.15		$	(0.33	)	$	0.28		$	(0.17	)

	Diluted-pro forma	$	0.12		$	(0.40	)	$	0.23		$	(0.26	)

4. EARNINGS PER SHARE

For the three and six months ended June 30, 2003 and 2002, basic earnings per share is calculated using the weighted average number of common shares outstanding during the period.

For the three and six months ended June 30, 2003, diluted earnings per share is calculated using the sum of the weighted average number of common shares outstanding plus potentially dilutive common shares arising out of stock options and warrants. A total of 8.2 million options, warrants and restricted shares were excluded from the calculation for the three months ended June 30, 2003, as well as assumed conversion of $21.8 million (2.2 million shares) of convertible debentures, as such securities were anti-dilutive. A total of 8.4 million options, warrants and restricted shares were excluded from the calculation for the six months ended June 30, 2003, as well as assumed conversion of $21.8 million (2.2 million shares) of convertible debentures, as such securities were anti-dilutive.

For the three and six months ended June 30, 2002, diluted earnings per share is calculated using the same number of shares as the basic earnings per share calculation because potentially dilutive common shares arising out of stock options, warrants and convertible debt are anti-dilutive due to the loss from continuing operations. Had the Company reported income from continuing operations, approximately 0.6 million and 0.8 million additional shares would have been included in the diluted earnings per share calculation for options and warrants for the three and six months ended June 30, 2002, respectively, and, depending on the amount of earnings, 2.2 million shares would have been included in the diluted earnings per share calculation for the convertible debt. An additional 4.1 million and 1.7 million options and warrants would have been excluded from the calculation because their strike prices were in excess of the average stock price during the three and six months ended June 30, 2002, respectively.

RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. EARNINGS PER SHARE, continued

The following is a summary of the income (loss) from continuing operations available to common stockholders and weighted average shares (in thousands):

Three Months Ended

Six Months Ended

June 30,

2003

2002

2003

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents