-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2I0vQLRLT/X8UrZXwKplepHL4dZFZjuC4lPKZtSvAc7v2oQ6lkVWxHnkr3qLfOm HpPOdmmzhcL6wDhHHRtZIw== 0000950130-00-001795.txt : 20000331 0000950130-00-001795.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950130-00-001795 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENESEE & WYOMING INC CENTRAL INDEX KEY: 0001012620 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 060984624 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20847 FILM NUMBER: 587690 BUSINESS ADDRESS: STREET 1: 71 LEWIS ST CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036293722 MAIL ADDRESS: STREET 1: 71 LEWIS STREET STREET 2: 71 LEWIS STREET CITY: GREENWICH STATE: CT ZIP: 06830 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1999 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from____to____ Commission File No. 0-20847 -------------------- GENESEE & WYOMING INC. (Exact name of registrant as specified in its charter) Delaware 06-0984624 - ------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 71 Lewis Street, Greenwich, Connecticut 06830 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (203) 629-3722 - -------------- (Telephone No.) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered - ------------------- ------------------- None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $0.01 par value ------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of the Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [] Aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates based on closing price on March 16, 2000: $49,833,816 Shares of common stock outstanding as of the close of business on March 16, 2000: Class Number of Shares Outstanding - ----- ---------------------------- Class A Common Stock 3,455,632 Class B Common Stock 845,447 Documents incorporated by reference and the Part of the Form 10-K into which they are incorporated are listed hereunder. PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE Part III, Items 10, 11, 12 and 13 Registrant's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Registrant to be held on May 23, 2000. The remainder of this page is intentionally left blank. 2 Part I Item 1. BUSINESS Genesee & Wyoming Inc. (the "Registrant" or the "Company") is a holding Company whose subsidiaries own and operate short line and regional freight railroads and provide related rail services in North America and Australia. The Company, through its industrial switching subsidiary, also provides railroad switching and related services to United States industrial companies with extensive railroad facilities within their complexes. The Company's predecessor, Genesee & Wyoming Railroad Company, was founded in 1899 by E.L. Fuller and his partners. In 1977, when Mortimer B. Fuller, III purchased a controlling interest in the Company and became its Chief Executive Officer, the Company was dependent on a single commodity, salt, produced by a single customer. At that time, the Company generated $3.9 million in operating revenues over its 14 miles of track. In 1978, under the leadership of Mr. Fuller, the Company began a strategy of growth by acquisition that broadened its sources of rail and rail-related revenues. Initial expansion was into the railcar leasing business which was followed by 16 rail line acquisitions in the United States. Significant U.S. acquisitions have included the Rochester & Southern Railroad, Inc. (1986), Louisiana & Delta Railroad, Inc. (1987), Buffalo & Pittsburgh Railroad, Inc. (1988), Allegheny & Eastern Railroad, Inc. (1992), Willamette & Pacific Railroad, Inc. (1993), Portland & Western Railroad, Inc. (1995), Illinios & Midland Railroad, Inc. (1996), Pittsburg & Shawmut Railroad, Inc. (1996), and the rail and industrial switching business of Rail Link, Inc. (1996). The Company's domestic growth has been complemented by expansion into deregulating rail markets worldwide. In 1997, the Company was awarded the contract to operate the Australia Southern Railroad ("ASR"), a railroad that provides freight services in South Australia. Also in 1997, the Company formed a joint-venture for Canadian rail acquisitions, Genesse Rail-One Inc. ("GRO"), which currently operates two railroads in Canada. In April 1999, the Company increased its ownership interest in GRO to 95% and now consolidates its operating results (see Note 3. to Consolidated Financial Statements). In July, 1998, the Company began serving as the operator of a mineral railroad in northern Mexico. The railroad, known as Linea Coahuila Durango ("LCD"), is a concession awarded by the Mexican government to two Mexican industrial firms. Late in 1999, the Company changed its relationship with LCD to that of being a provider of technical assistance so that management could focus on the Company's new Mexican operation, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. ("FCCM"). In August 1999, FCCM, a wholly-owned subsidiary of the Company, was awarded a concession to operate two railways, the Chiapas line and the Mayab line, owned by the state-owned Mexican rail company Ferronales. FCCM began operations on September 1, 1999 (see Note 3. to Consolidated Financial Statements). As a result of the Company's growth strategy, the Company has become a diversified rail operation extending over approximately 3,750 miles of owned or leased track and 2,700 miles of track under trackage rights or similar track access arrangements in four countries on two continents providing services to over 545 customers in North America and 9 major customers in Australia. 3 INDUSTRY OVERVIEW The railroad industry in the United States has undergone significant change since the passage of the Staggers Rail Act of 1980 (the "Staggers Rail Act"), which deregulated the pricing and types of services provided by railroads. Since 1980, Class I railroads in the United States and Canada have taken aggressive steps to improve profitability and recapture market share. In furtherance of that goal, these Class I railroads have focused their management and capital resources on their long-haul core systems, and certain of them have sold branch lines to smaller and more cost-efficient rail operators that are willing to commit the resources necessary to meet the needs of the shippers located on these lines. Divestment of branch lines enables Class I carriers to minimize incremental capital expenditures, concentrate traffic density, improve operating efficiency and avoid traffic losses associated with rail line abandonment. The commitment of Class I carriers to increase efficiency and profitability has also led to an increase in merger activity among long haul railroads, such as, most recently, the acquisition of Consolidated Rail Corporation by Norfolk Southern Corp. and CSX Transportation, Inc. Such consolidations present both risk and opportunity for the Company. Although the acquisition market is highly competitive, the Company believes that there will continue to be opportunities to acquire railroad lines in the United States and Canada from both Class I railroads and shortline and regional operators. The Company believes there may be additional acquisition opportunities in Australia as the state and federal governments continue the privatization of the railway system. In addition, the Company believes there may be acquisition opportunities in Mexico and South America. STRATEGY The Company's strategy is to become the dominant provider of rail freight transportation in the markets it serves by (i) growing its business through acquisitions to establish new regions or increasing its presence in existing regions, (ii) expanding its revenue base within each region through marketing efforts, and (iii) improving its operating efficiency through rationalization and consolidation of overhead expenses. The Company's growth to date has been the result of the acquisition of rail properties, which has expanded the Company's customer base and diversified its commodity mix, and its marketing efforts. Acquisition of Rail Properties The Company seeks to expand its international and U.S. business through the selective acquisition of rail properties, both in new regions and in regions in which it currently operates. The Company's fundamental acquisition strategy is to identify properties that have large industrial customers which will provide the Company with a stable revenue base and the potential to generate incremental revenues and additional customers upon implementation of a 4 focused marketing plan. In new regions, the Company targets rail properties that have adequate size to establish a presence in the region, provide a basis for growth in the region and attract qualified management. When acquiring rail properties in its existing regions, in addition to seeking properties with large industrial customers, the Company targets rail properties where it believes the successful implementation of its operating strategy is likely to generate significant operating efficiencies. In evaluating acquisition opportunities, the Company considers, among other matters, the size of the rail operations, opportunities for expansion, commodity and customer diversification, revenue stability, connecting carriers, track condition and maintenance requirements, and expected financial returns. The Company also considers acquisition opportunities that have the potential to enable its railroads to provide better or more cost-effective service to major shippers or to increase and diversify the overall customer base of its railroads. The Company develops acquisition prospects through its relationships with Class I carriers and its reputation in the industry. In addition, the Company uses consultants to assist in the identification and development of acquisition opportunities. The Company has successfully integrated sixteen acquisitions of varying sizes and operating characteristics, of which four were existing short lines, six were Class I divestitures, four were governmental privatizations, one was an industrial switching company which also operates four wholly-owned subsidiary railroad companies and one was a Canadian company which operates two wholly-owned subsidiary railroad companies. The Company acquires rail properties by purchase of assets, or is able to serve a market through lease or operating contract. Typically, the Company bids against other short line and regional operators for available properties. The structure of each transaction is determined based upon economic and strategic considerations. In addition to the financial terms of the transaction, sellers consider more subjective criteria such as a prospective acquiror's operating experience, its reputation among shippers, and its ability to close a transaction and commence operations smoothly. The Company believes it has established an excellent record in each of these areas. In addition, by growing revenues on its acquired lines and providing improved service to shippers, the Company is able to provide increased revenue to the Class I carriers that connect with its North American lines. The Company sees this ability to provide increased revenue to Class I carriers as an advantage in bidding for properties in North America. Marketing The Company's marketing strategy is to build each region on a base of major industrial customers, to grow that base business through marketing efforts directed at its major customers, and to generate incremental revenues outside the base of major customers by attracting smaller customers and providing ancillary services which generate non-freight revenues. The Company believes that over the long term, its strategy of building its regions around a core of major industrial customers provides a stable revenue base and allows the Company to focus its efforts on additional growth opportunities within a region. Through implementation of its marketing strategy, the Company intends to further increase the number of major customers so that, over time, the Company's reliance on any one customer will be reduced. Consistent with its decentralized management structure, the Company's sales and marketing activity is coordinated in each region by a marketing 5 manager. The marketing manager works closely with personnel of each of the Company's railroads and with other department heads to develop marketing plans to increase shipments from existing customers and develop new business. The Company focuses on providing rail service to its customers that is easily accessible, reliable and cost-effective. The Company considers all of its employees to be customer service representatives and encourages them to initiate and maintain regular contact with shippers. Because most of the traffic transported by the Company's railroads in the United States and Canada is interchanged with Class I carriers, the Company's marketing efforts in these areas are often aimed at enhancing its railroads' relationships with these Class I carriers as well as shippers. The Company provides related rail services such as railcar leasing, railcar repair, switching, storage, weighing and blocking and bulk transfer, which enable Class I carriers and customers to move freight more easily and cost-effectively. For example, the Company supplies cars to its customers or its railroads when, among other things, a customer has a need which cannot be filled by cars supplied by Class I railroads or the Company has an opportunity to provide cars on a cost basis that both meets customer needs and improves the economics of a freight move to the Company. The Company actively manages its railcar portfolio, buying and selling equipment to take advantage of changes in market value in conjunction with changes in its customers' needs. Operations The Company's operating strategy is to increase efficiency and profitability in each region in which it operates. When acquiring new rail properties within an existing region, the Company capitalizes on operating efficiencies created by the presence of its other railroads within that region. In addition, consolidation of revenue and accounting functions often allows the Company to operate new railroads with fewer employees. The Company rationalizes its track, where appropriate, to make its operations more efficient. The Company also seeks and grants trackage rights to improve regional rail infrastructure efficiency. The Company intends to continue to improve the operating efficiency of its railroads by track rehabilitation, especially where maintenance has been deferred by the prior owner. Because of the importance of certain of the Company's shippers to the economic stability and/or development of the regions where they are located, and because of the importance of certain of the Company's railroads to the economic infrastructure of those regions, approximately $35.0 million in state and federal grants for track rehabilitation and service improvements has been invested in the Company's U.S. rail properties since 1987. MANAGEMENT The Company's Chief Executive Officer, Chief Financial Officer and Executive Vice President - Corporate Development have responsibility for overall strategic and financial planning. The Chief Executive Officer has ultimate operating oversight over Australia and the Chief Operating Officer oversees operations in North America. The Company believes that through its decentralized management structure it has developed a culture that encourages employees to take initiative and responsibility which is rewarded through performance-based profit sharing and bonus programs. 6 RAILROAD OPERATIONS - NORTH AMERICA North American Customers The Company's North American railroads currently serve over 545 customers. A large portion of the Company's North American railroad operating revenue is attributable to customers operating in the electric utility, paper, petroleum products, lumber and forest products, chemicals and metals industries. As the Company acquires new North American railroad operations, the base of customers served continues to grow and diversify. The largest ten North American customers, which is a group that changes annually, accounted for approximately 34%, 38%, and 46% of the Company's North American railroad revenues in 1999, 1998 and 1997, respectively. In 1999, 1998 and 1997, the Company's largest North American customer was Commonwealth Edison, an electric utility, which accounted for approximately 15%, 14% and 18% of the Company's North American railroad revenues in 1999, 1998 and 1997, respectively (see Note 13. to Consolidated Financial Statements). The Company typically ships freight pursuant to transportation contracts among the Company, its connecting carriers and the shipper. These contracts are in accordance with industry norms and vary in duration from one to seven years. North American Railroad Commodities The Company's North American railroads transport a wide variety of commodities for their customers. Some of the Company's railroads have a well- diversified commodity mix while others transport one or two principal commodities. In 1999, coal, coke and ores and pulp and paper products were the two largest commodity groups transported by the Company's North American railroads, constituting 25.9% and 15.6%, respectively, of total North American revenues (see Item 7. of this Report under the heading "Results of Operations - Year Ended December 31, 1999 Compared to Year Ended December 31, 1998"), and 31.4% and 13.3%, respectively, of total North American carloads. The following table summarizes the aggregate traffic volume of the Company's North American railroads by commodity group: NORTH AMERICAN CARLOADS CARRIED BY COMMODITY GROUP
Year Ended Year Ended December 31, 1999 December 31, 1998 ----------------- ----------------- Commodity Group Carloads % of Total Carloads % of Total - --------------- -------- ---------- -------- ---------- Coal, Coke & Ores 94,140 31.4% 75,881 34.8% Pulp & Paper 39,952 13.3% 21,318 9.7% Metals 30,614 10.2% 17,862 8.2% Lumber & Forest Products 28,627 9.6% 20,802 9.5% Minerals & Stone 23,667 7.9% 13,679 6.3% Petroleum 20,206 6.7% 15,992 7.3% Farm & Food Products 19,898 6.6% 17,451 8.0% Chemicals 16,039 5.4% 12,503 5.7% Autos & Auto Parts 4,790 1.6% 3,895 1.8% Other 22,024 7.3% 18,922 8.7% --------------------------------------------- Total 299,957 100.0% 218,305 100.0% =============================================
Coal, coke and ores consists primarily of shipments of coal to utilities and industrial customers. 7 Pulp and paper consists primarily of inbound shipments of pulp and outbound shipments of kraft and fine papers. Metals consists primarily of scrap metal and finished steel products shipped to and from steel mills, and coated pipe. Lumber and forest products consists primarily of finished lumber used in construction, particleboard used in furniture manufacturing, and wood chips and pulpwood used in paper manufacturing. Minerals and stone consists primarily of gravel and stone used in construction. Petroleum products consists primarily of fuel oil and crude oil. Farm and food products consists primarily of sugar, molasses, rice and other grains and fertilizer. Chemicals consists primarily of various chemicals used in manufacturing. Autos and auto parts consists primarily of finished automobiles. North American Railroad Employees As of December 31, 1999, the Company's North American railroads had approximately 1,200 full-time employees. Of this total, approximately 423 are members of national labor organizations. The Company's North American railroads have nine contracts with these national labor organizations which have expiration dates ranging to 2002. The Company has also entered into collective bargaining agreements with an additional 153 employees who represent themselves, all of which are currently being renegotiated. RAILROAD OPERATIONS - AUSTRALIA ASR commenced operations in November 1997. ASR acquired certain freight railroad assets of Australian National, a railroad company owned by the Commonwealth Government of Australia. Coincident with closing the purchase, the Company sold certain facilities and inventories to two third parties who are under long-term contracts with ASR to perform locomotive, rolling stock and track infrastructure maintenance and repairs. Approximately 900 miles of branchline track structure is owned and exclusively maintained by ASR through one of the two third parties. The land under the track structure is leased from the State of South Australia for a 50 year term with an option for an additional 15 years. Some of these branchlines are isolated from other parts of the system. Also, different parts of the system have different track gauges, that is, narrow, standard and broad gauge, and ASR must provide discrete locomotives and rolling stock for each gauge. In some cases, dual gauge track is in place. Australia Customers ASR operates unit trains for four major customers, hauling four types of commodities including grain, gypsum, limestone and marble. In December 1999, it commenced hauling iron ore to an integrated steel mill at Whyalla in South Australia for Broken Hill Proprietary Limited ("BHP"). ASR also conducts shunting (switching) within BHP's facility at Whyalla. 8 ASR provides switching, rail yard storage and other rail related facilities for hire to its customers, and operates trains for the haulage of rail, ballast and ties primarily for the owner of the interstate mainline. ASR also acquired contracts to operate "hook and pull" trains for three customers. Unlike the United States, the Australian system guarantees open access to rail lines. ASR provides locomotives, fuel, train crews, and in some cases railcars, to freight forwarding companies. These freight forwarding companies, ASR's customers, contract for blocks of time within which their trains can be operated at certain designated speeds. They are responsible for track access charges and all other costs of operating these trains. ASR operates hook and pull trains for these three customers over the 2,100 mile corridor between Melbourne and Perth. Certain of ASR's branchline trains operate over these main lines as well. ASR is not responsible for maintenance of these main lines. Australia Railroad Commodities and Hook and Pull Services (Haulage) The Company's Australia railroad transports a variety of commodities and provides hook and pull (haulage) services for its customers. In 1999, hook and pull (haulage) and grain products were the two largest commodity groups transported by the Company's Australia railroad, constituting 45.4% and 35.2%, respectively, of total Australia revenues (see Item 7. of this Report under the heading "Results of Operations - Year Ended December 31, 1999 compared to Year Ended December 31, 1998"), and 31.3% and 29.1%, respectively, of total Australia carloads. The following table summarizes the aggregate traffic volume of the Company's Australia railroad by commodity group: AUSTRALIA CARLOADS CARRIED BY COMMODITY GROUP
Year Ended Year Ended December 31, 1999 December 31, 1998 Commodity Group Carloads % of Total Carloads % of Total - --------------- -------- ---------- -------- ---------- Hook and Pull (Haulage) 52,407 31.3% 40,817 22.3% Grain 48,781 29.1% 45,896 25.1% Gypsum 40,304 24.1% 36,611 20.0% Marble 8,343 5.0% 8,294 4.5% Iron Ore 8,069 4.8% - 0.0% Lime 4,662 2.8% 2,500 1.4% Coal 4,317 2.6% 47,286 25.9% Other 603 0.3% 1,382 0.8% --------------------------------------------- Total 167,486 100.0% 182,786 100.0% =============================================
Australia Railroad Employees As of December 31, 1999, ASR had approximately 190 employees, some of whom are operational staff that are members of a union. The contract with the union expires in November, 2000. U.S. INDUSTRIAL SWITCHING OPERATIONS U.S. industrial switching operations generate non-freight revenues primarily by providing freight car switching and related rail services such as 9 railcar leasing, railcar repair and storage to industrial companies with extensive railroad facilities within their complexes. The Company's U.S. industrial switching operation serves 24 customers in 9 states. These customers are primarily in the chemicals, paper, grain, mining and power generation industries. The provision of the service generally involves locating a work force and locomotives at the customer's facility and tailoring the service level to the switching requirements of the site. As of December 31, 1999, the Company's U.S. industrial switching operations had approximately 190 employees. SAFETY The Company's safety program involves all employees at all levels of the company. Safety focuses on the prevention of accidents/injuries, and the creation of a safety culture within the organization. The Senior Vice President of each region is accountable for the results of the program, and each region has an officer responsible for day-to-day program administration. Line supervisors have direct responsibility for the safety and training of their personnel. The Company maintains a corporate-wide safety policy facilitated by a Vice President of Safety and a Safety Director. The Company's safety program allows each of its subsidiaries the flexibility to develop safety rules and procedures based on local requirements or statutes. The Company works continuously to comply fully with all federal, state and local government regulations. Operating personnel are trained and certified in train operations, the transportation of hazardous materials, safety and operating rules, and governmental rules and regulations. The Company also participates in governmental and industry sponsored safety programs. For example, members of the Company's management serve or have served on the Board of Directors of Operation Lifesaver (the national grade crossing awareness program), the New Program Committee of Operation Lifesaver and the American Short Line & Regional Railroad Association Safety Committee. In addition, the Company has created two working safety groups. The first group, the Focus Team, consisting of the general managers and the Vice President of Safety, develops the corporate safety strategy and ensures consistency of implementation for policies within the organization. The second group, the GWI Team, includes safety representatives of each region, a general manager as team leader, and the Vice President of Safety as the facilitator working together to refine the Company's safety program. Each team coordinates with the Company's subsidiaries to insure compliance with and implementation of all safety rules and regulations. The objective of both teams is to sponsor the Company's initiatives to make it the safest carrier with regard to its employees, customers, assets, the public and the environment. INSURANCE The Company has obtained insurance coverage for losses arising from personal injury and for property damage in the event of derailments or other accidents or occurrences. The liability policies have self-insured retentions ranging from $50,000 to $500,000 per occurrence. In addition, the Company maintains excess liability policies which provide supplemental coverage for losses in excess of primary policy limits. With respect to the transportation of hazardous commodities, the Company's liability policy covers sudden releases 10 of hazardous materials, including expenses related to evacuation. Personal injuries associated with grade crossing accidents are also covered under the Company's liability policies. The Company also maintains property damage coverage, subject to a standard pollution sub-limit and self-insured retentions ranging from $10,000 to $250,000. Employees of the Company's United States railroads are covered by the Federal Employers' Liability Act ("FELA"), a fault-based system under which injuries and deaths of railroad employees are settled by negotiation or litigation based on the comparative negligence of the employee and the employer. FELA-related claims are covered under the Company's liability insurance policies. Employees of the Company's industrial switching business are covered under workers' compensation policies. ASR liability policies have self-insured retentions for third party claims ranging from $100,000 per occurrence for personal injury to $500,000 for property damage. Employees are covered for injury or death by public and private sector insurance arrangements. A levy is paid by ASR to the insurance provider based on the amount of wages and salaries paid by ASR. The Company believes its insurance coverage is adequate in light of its experience and the experience of the rail industry. However, there can be no assurance as to the adequacy, availability, or cost of insurance in the future. COMPETITION In acquiring rail properties, the Company competes with other short line and regional railroad operators, some of which are larger and have greater financial resources than the Company. Competition for rail properties is based primarily upon price, operating history and financing capability. The Company believes its established reputation as a successful acquiror and operator of short line rail properties, in combination with its managerial and financial resources, effectively positions it to take advantage of acquisition opportunities. However, competition for acquisitions is fierce. Each of the Company's railroads is typically the only rail carrier directly serving its customers; however, the Company's railroads compete directly with other modes of transportation, principally motor carriers and, to a lesser extent, ship and barge operators. The extent of this competition varies significantly among the Company's railroads. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided, for an origin-to-destination transportation package. To the extent other carriers are involved in transporting a shipment, the Company cannot control the cost and quality of such service. Cost reductions achieved by major rail carriers over the past several years have generally improved their ability to compete with alternate modes of transportation. REGULATION The Company's United States railroads are subject to regulation by the Surface Transportation Board ("STB"), the Federal Railroad Administration ("FRA"), state departments of transportation and some state and local regulatory agencies. The STB is the successor to certain regulatory functions previously administered by the Interstate Commerce Commission. Established by the ICC Termination Act of 1995 ("ICCTA"), the STB has jurisdiction over, among other things, service levels and compensation of carriers for use of their 11 railcars by other carriers. It also must authorize extension or abandonment of rail lines, the acquisition of rail lines, and consolidation, merger or acquisition of control of rail common carriers; in limited circumstances, it may condition such authorization upon the payment of severance benefits to affected employees. The STB may review rail carrier pricing only in response to a complaint concerning rates charged for transportation where there is an absence of effective competition. The FRA has jurisdiction over safety and railroad equipment standards and also assists in coordinating projects for railroad route simplification. In 1980, the Staggers Rail Act fundamentally changed U.S. federal regulatory policy by emphasizing the promotion of revenue adequacy (the opportunity to earn revenues sufficient to cover costs and attract capital) for the railroads and allowing competition to determine to a greater extent rail prices and route and service options. The ICCTA continues the trend towards limiting regulation of rail prices. As a result of these changes in legislative policy, the railroad industry's rate structure has evolved from a system of interrelated prices that applied over different routes between the same points to a combination of market based prices that are now subject to limited regulatory constraints. While U.S. federal regulation of rail prices has been significantly curtailed, U.S. federal regulation of services continues to affect profitability and competitiveness in the railroad industry. ENVIRONMENTAL MATTERS The Company's operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, which have become increasingly stringent. In the United States these environmental laws and regulations, which are implemented principally by the Environmental Protection Agency and comparable state agencies, govern the management of hazardous wastes, the discharge of pollutants into the air and into surface and underground waters, and the manufacture and disposal of certain substances. Similarly, in Australia, these functions are administered primarily by the Department of Transport on a federal level and by the Environmental Protection Agency on a state level. In Canada, these functions are administered at the federal level by Environment Canada and the Department of Transport, and comparable agencies on a provincial level. In Mexico, these functions are administered at the federal level by the Ministry of Environment, Natural Resources and Fisheries and the Attorney General for Environmental Protection, and by comparable agencies at the state level. There are no material environmental claims currently pending or, to the Company's knowledge, threatened against the Company or any of its railroads. In addition, the Company believes that the operations of its railroads are in material compliance with current laws and regulations. The Company estimates that any expenses incurred in maintaining compliance with current laws and regulations will not have a material effect on the Company's earnings or capital expenditures. However, there can be no assurance that the current regulatory requirements will not change, or that currently unforeseen environmental incidents will not occur, or that past non-compliance with environmental laws will not be discovered on the Company's properties. The Commonwealth of Australia has acknowledged that certain portions of the leasehold and freehold land acquired under the sale and purchase agreement by ASR contains contamination arising from activities associated with previous operators. The Commonwealth has provided a release and indemnity to ASR from obligations, duty or liability arising from pre-existing contamination. The Commonwealth is required to remediate the relevant land to existing 12 environmental standards and for the purpose for which the land was used at the date of the Sale and Purchase Agreement (or the date on which the land was last used). In Mexico, the Company's wholly-owned subsidiary, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. ("FCCM"), was awarded a 30-year concession to operate certain railways owned by the state-owned rail company Ferronales. Under the terms of the concession agreement, Ferronales remains responsible for remediation of all obligations, duty or liability arising from contamination or other environmental issues that occurred prior to the execution date of the concession agreement. FORWARD-LOOKING STATEMENTS This Report and the documents incorporated herein by reference may contain forward-looking statements based on current expectations, estimates and projections about the Company's industry, or management's beliefs and assumptions. Words such as "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, actual results may differ materially from those expressed or forecast in any such forward-looking statements. Such risks and uncertainties include, in addition to those set forth in this Item 1 and in Item 7 hereof, those noted in the documents incorporated by reference. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 2. PROPERTIES The Company currently operates twenty-one railroads of which seventeen are in the United States, two are in Canada, one is in Mexico and one is in Australia. These rail properties typically consist of the track and the underlying land. Real estate adjacent to the railroad rights-of-way is generally retained by the seller, and the Company's holdings of such property are not material. Similarly, the seller typically retains mineral rights and rights to grant fiber optic and other easements in the properties acquired by the Company's railroads. Several of the Company's railroads are operated under terms of leases or operating licenses in which the Company does not assume ownership of the track and the underlying land. The Company's railroads operate over approximately 3,750 miles of track that is owned or leased by the Company. The Company's railroad also operate, under various trackage rights agreements, over approximately 2,700 miles of track that is owned or leased by others. Additionally, the Company's wholly-owned subsidiary, GW Mexico, S.A. de C.V., provides management services for a 700-mile mineral railroad in northern Mexico known as Linea Coahuila Durango which is owned by two Mexican industrial firms, Grupo Acerero del Norte, S.A. de C.V. and Industrias Penoles, S.A. de C.V. 13 The following table sets forth certain information as of December 31, 1999 with respect to the Company's railroads:
RAILROAD AND LOCATION TRACK MILES STRUCTURE CONNECTING CARRIERS (1) Allegheny & Eastern Railroad, Inc. ("ALY") Pennsylvania 153 (2) Owned BPRR, NS, CSX Bradford Industrial Rail, Inc. ("BR") Pennsylvania 4 (3) Owned BPRR Buffalo & Pittsburgh Railroad, Inc. ALY, BLE, BR, CN, CP, ("BPRR") New York, Pennsylvania 279 (4) Owned/Leased CSX, NS, PS, RSR, SB The Dansville & Mount Morris Railroad Company ("DMM") New York 8 Owned GNWR Genesee and Wyoming Railroad Company ("GNWR") New York 26 (5) Owned (5) CP, DMM, RSR, NS, CSX Pittsburg & Shawmut Railroad, Inc. ("PS") Pennsylvania 224 (6) Owned BPRR, CSX, NS Rochester & Southern Railroad, Inc. ("RSR") New York 66 (7) Owned BPRR, CP, GNWR, CSX Illinois & Midland Railroad, Inc. BNSF, IAIS, IC, NS, ("IMR") Illinois 97 (8) Owned PPU, TPW, UP Portland & Western Railroad, Inc. ("PNWR") Oregon 211 (9) Owned/Leased BNSF, UP, WPRR, POTB Willamette & Pacific Railroad, Inc. ("WPRR") Oregon 185 (10) Leased UP, PNWR, HLSC Louisiana & Delta Railroad, Inc. ("LDRR") Louisiana 87 (11) Owned/Leased UP Carolina Coastal Railway, Inc. ("CLNA") North Carolina 17 (12) Leased NS Commonwealth Railway, Inc. ("CWRY") Virginia 17 (13) Owned/Leased NS Talleyrand Terminal Railroad ("TTR") Florida 10 (14) Leased NS, CSX Corpus Christi Terminal Railroad, Inc. ("CCPN") Texas 26 (15) Leased UP, BNSF, TM Golden Isles Terminal Railroad, Inc. ("GITM") Georgia 13 (16) Leased CSX, NS Savannah Port Terminal Railroad, Inc. ("SAPT") Georgia 1 (17) Leased CSX, NS Australia Southern Railrod Pty Ltd ("ASR") Australia 900 (18) Owned/Leased Huron Central Railroad, Inc. ("HCR") Canada 179 (19) Leased CP, WC Quebec Gatineau Railroad, Inc. ("QGRR") Canada 293 (20) Owned/Leased CP, CN Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. 960 (21) Leased Ferrosur ("FCCM") Mexico
(1) See Legend of Connecting Carriers following this table. (2) In addition, ALY operates by trackage rights over 3 miles of NS. 14 (3) In addition, BR operates by trackage rights over 14 miles of BPRR. (4) Includes 92 miles under perpetual leases and 9 miles under a lease expiring in 2090. In addition, BPRR operates by trackage rights over 27 miles of CSX under an agreement expiring in 2018, and 83 miles of NS under an agreement expiring in 2027. The Company is seeking to rationalize approximately 58 miles of owned track that parallels track under the NS trackage rights agreement. (5) The operations of the GNWR have been realigned with those of RSR. (6) In addition, PS operates over 13 miles pursuant to an operating contract. (7) In addition, RSR has a haulage contract over 52 miles of CP. (8) In addition, IMR operates by trackage rights over 15 miles of IC, 9 miles of PPU and 5 miles of UP. (9) Includes 53 miles under lease expiring in 2015 with a 10-year renewal unless terminated by either party, 53 miles formerly under lease which was purchased in November, 1997, and is operated under a rail service easement, and 92 miles which was purchased in July, 1997. In addition, PNWR operates by trackage rights over 2 miles of UP and 4 miles of POTB (10) All under lease expiring in 2013, with renewal options subject to both parties' consent. In addition, WPRR operates over 41 miles of UP under a concurrent trackage rights agreement. (11) Includes 14 miles under a lease expiring in 2011. In addition, LDRR operates by trackage rights over 91 miles of UP under an agreement terminable by either party after 1997 and has a haulage contract with M.A. Patout & Sons over 4 miles of track. (12) All leased on a month-to-month basis under a Lease and Option to Purchase Agreement which commenced in 1989. (13) Includes 12.5 miles under lease expiring in 2009. (14) All under lease expiring in 2002. (15) All under lease expiring in 2002. (16) All under lease expiring in 2002. (17) All under lease expiring in 2002. (18) The track structure is owned by the Company. The land on which the track structure is built is leased from the State of South Australia for a term of 50 years with a conditional right of renewal for an additional 15 years. In addition, ASR operates over the 2,100 mile government-owned corridor between Melbourne and Perth under a trackage rights agreement. (19) All under lease expiring in 2017, with renewal options subject to both parties' consent. (20) Consists of 275 miles which are owned and 18 which are under lease expiring in 2017, with renewal options subject to both parties' consent. In addition, QGRR operates by trackage rights over 27 miles of CP. (21) All under a 30-year concession agreement operating on track structure which is owned by the state-owned rail company Ferronales. In addition, FCCM operates by trackage rights over 210 miles on Ferrosur (a recently privatized rail concession) and a government-owned line. LEGEND OF CONNECTING CARRIERS BLE Bessemer and Lake Erie Railroad Company BNSF Burlington Northern Santa Fe Railway Company CN Canadian National CP Canadian Pacific Railway CSX CSX Transportation, Inc. HLSC Hampton Railway IAIS Iowa Interstate Railroad, Ltd. IC Illinois Central Railroad Company NS Norfolk Southern Corp. POTB Port of Tillamook Bay Railroad PPU Peoria & Pekin Union Railway SB South Buffalo Railway Company TM The Texas Mexican Railway Company TPW Toledo, Peoria & Western Railway Corp. UP Union Pacific Railroad Company WC Wisconsin Central EQUIPMENT As of December 31, 1999, rolling stock of the Company's North American operations consisted of 297 locomotives and 3,560 freight cars, some of which were owned and some of which were leased from others. The Company's rolling stock for its subsidiary in Australia consisted of approximately 80 locomotives and approximately 1,200 wagons (freight cars) owned and in service. 15 ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in certain lawsuits resulting from railroad and industrial switching operations, one of which includes the commencement of a criminal investigation. Management believes that the Company has adequate defenses to any criminal charge which may arise and that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits. While it is possible that some of the foregoing matters may be resolved at a cost greater than that provided for, it is the opinion of management that the ultimate liability, if any, will not be material to the Company's results of operations or financial position. On August 6, 1998, a lawsuit was commenced against the Company and its subsidiary, Illinois & Midland Railroad, Inc. ("IMRR"), by Commonwealth Edison Company ("ComEd") in the Circuit Court of Cook County, Illinois. The suit alleges that IMRR is in breach of certain provisions of a stock purchase agreement entered into by a prior unrelated owner of the IMRR rail line. The provisions allegedly pertain to limitations on rates received by IMRR and the unrelated predecessor for freight hauled for ComEd's Powerton plant. The suit seeks unspecified compensatory damages for alleged past rate overcharges. The Company believes the suit is without merit and intends to vigorously defend against the suit. The parent company of ComEd has sold certain of ComEd's power facilities, one of which is the Powerton plant served by IMRR under the provisions of a 1987 Service Assurance Agreement (the "SAA"), entered into by a prior unrelated owner of the IMRR rail line. The SAA, which is not terminable except for failure to perform, provides that IMRR has exclusive access to provide rail service to the Powerton plant. On April 6, 1999, a lawsuit was commenced by the Company and its subsidiary, IMRR, against ComEd in the Circuit Court of Sangamon County, Illinois. The suit sought declaration of certain rights regarding the SAA including declarations that the SAA is not terminable at will and that ComEd must assign its contractual obligations under the SAA to the purchaser of the Powerton plant. On June 10, 1999, the suit commenced by the Company and IMRR, against ComEd in Sangamon County was voluntarily withdrawn without prejudice in partial resolution of several procedural motions pending in the Cook County action, and with the explicit recognition from ComEd that the action may be re- filed in Cook County. Revenue for haulage to the Powerton plant accounted for 6.6% and 6.3% of the consolidated revenues of the Company and its subsidiaries in 1999 and 1998, respectively. Failure to satisfactorily resolve this litigation could have a material adverse effect on the Company. The remainder of this page is intentionally left blank. 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. On June 24, 1996, the Company's Class A Common Stock began publicly trading and is quoted on the Nasdaq National Market. Its trading symbol is GNWR. The tables below show the range of high and low actual trade prices for the Company's Class A Common Stock during each quarterly period of 1999, 1998 and 1997. YEAR ENDED DECEMBER 31, 1999 HIGH LOW 1st Quarter $ 14.75 $ 10.375 2nd Quarter $ 11.625 $ 7.75 3rd Quarter $ 15.25 $ 9.875 4th Quarter $ 13.75 $ 11.25 YEAR ENDED DECEMBER 31, 1998 HIGH LOW 1st Quarter $ 27.50 $ 20.625 2nd Quarter $ 27.50 $ 17.50 3rd Quarter $ 22.00 $ 11.75 4th Quarter $ 17.00 $ 11.375 YEAR ENDED DECEMBER 31, 1997 HIGH LOW 1st Quarter $ 37.75 $ 29.00 2nd Quarter $ 31.75 $ 26.25 3rd Quarter $ 35.00 $ 24.00 4th Quarter $ 31.75 $ 22.50 The Company's Class B Common Stock is not publicly traded. The Company did not pay cash dividends in 1999, 1998 or 1997. The Company does not intend to pay cash dividends for the foreseeable future and intends to retain earnings, if any, for future operation and expansion of the Company's business. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. 17 On March 16, 2000 there were 131 holders of record of the Company's Class A Common Stock and 10 holders of record of the Company's Class B Common Stock. During 1999, the Company issued the following securities which were not registered under the Securities Act of 1933, as amended (the "Act"). Each of such issuances was made by private offering in reliance on the exemption from the registration provisions of the Act provided by Section 4(2) of the Act. The facts relied upon to establish such exemption included the recipents' representations as to their investment intent with respect to such Securities and restrictions on the transfer of such Securities imposed by the Company. (1) On April 9, 1999, the Company issued to an aggregate of 144 of its employees, for no additional consideration, options under the Genesee & Wyoming Inc. 1996 Stock Option Plan to purchase an aggregate of 102,650 shares of Class A Common Stock at an exercise price of $8.375 per share, and 18,750 shares of Class A Common Stock at an exercise price of $9.2125 per share. The shares issuable upon exercise of such options are the subject of a Registration Statement on Form S-8 under the Act. (2) On July 30, 1999, the Company issued to one of its directors, for no additional consideration, options under the Genesee & Wyoming Inc. Stock Option Plan for Outside Directors to purchase an aggregate of 2,000 shares of Class A Common Stock at an exercise price of $11.00 per share. The shares issuable upon exercise of such options are the subject of a Registration Statement on Form S-8 under the Act. (3) On October 27, 1999, the Company issued to one of its directors, for no additional consideration, options under the Genesee & Wyoming Inc. Stock Option Plan for Outside Directors to purchase an aggregate of 1,000 shares of Class A Common Stock at an exercise price of $11.75 per share. The shares issuable upon exercise of such options are the subject of a Registration Statement on Form S-8 under the Act. (4) On April 15, 1999, as part of the consideration for the Company's acquisition of Rail-One Inc., the Company granted options to the sellers to purchase up to 80,000 shares of Class A Common Stock at an exercise price of $8.625 per share. Note 3. to the Consolidated Financial Statements included in Item 8. here of is incorporated herein by reference. (5) On September 30, 1999, as part of the consideration for the Company's acquisition of an ownership interest in Latin American Rail LLC, the Company issued to the sellers 25,532 shares of Class A Common Stock. Note 3. to the Consolidated Financial Statements included in Item 8. here of is incorporated herein by reference. The remainder of this page is intentionally left blank. 18 Item 6. SELECTED FINANCIAL DATA. The following selected consolidated income statement data and selected consolidated balance sheet data of the Company as of and for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, have been derived from the Company's consolidated financial statements. All of the information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. See also Item 7. of this Report.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, INCOME STATEMENT DATA: 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- Operating revenues $175,586 $147,472 $103,643 $ 77,795 $53,387 Operating expenses 153,218 127,904 87,200 63,801 46,815 Operating income 22,368 19,568 16,443 13,994 6,572 Interest expense (8,462) (7,071) (3,349) (4,720) (3,405) Other income, net 1,064 6,645 345 651 456 Income before income taxes and extraordinary item 14,970 19,142 13,439 9,925 3,623 Income taxes 2,175 7,708 5,441 4,020 1,472 Income before extraordinary item 12,795 11,434 7,998 5,905 2,151 Extraordinary item (262) -- -- -- (494) Net income $ 12,533 $ 11,434 $ 7,998 $ 5,905 $ 1,657 Basic earnings per common share: Income before extraordinary item $ 2.85 $ 2.20 $ 1.52 $ 1.54 $ 0.92 Extraordinary item (0.06) -- -- -- (0.21) Net income $ 2.79 $ 2.20 $ 1.52 $ 1.54 $ 0.71 Weighted average number of shares of common stock 4,491 5,187 5,250 3,829 2,348 Diluted earnings per common share: Income before extraordinary item $ 2.82 $ 2.19 $ 1.47 $ 1.49 $ 0.92 Extraordinary item (0.06) -- -- -- (0.21) Net income $ 2.76 $ 2.19 $ 1.47 $ 1.49 $ 0.71 Weighted average number of shares of common stock and equivalents 4,540 5,229 5,447 3,966 2,348 Dividends per common share (1) -- -- -- $ 0.01 $ 0.08 BALANCE SHEET DATA AS OF YEAR END: Total assets $301,940 $216,760 $210,532 $145,339 $78,429 Total debt 108,376 65,690 74,144 18,731 39,941 Stockholders' equity 81,829 74,537 68,343 61,683 10,548
(1) Prior to its initial public offering on June 24, 1996, the Company paid dividends at the discretion of the Company's Board of Directors. The Company has not paid cash dividends after the initial public offering. The Company does not intend to pay cash dividends for the foreseeable future and intends to retain earnings, if any, for future operation and expansion of the Company's business. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Annual Report. General The Company is a holding company whose subsidiaries own and/or operate short line and regional freight railroads and provide related rail services in North America and Australia. The Company, through its U.S. industrial switching subsidiary, also provides freight car switching and related services to United States industrial companies with extensive railroad facilities within their complexes. The Company generates revenues primarily from the movement of freight over track owned or operated by its railroads. The Company also generates non-freight revenues primarily by providing freight car switching and related rail services such as railcar leasing, railcar repair and storage to industrial companies with extensive railroad facilities within their complexes, to shippers along its lines, and to the Class I railroads that connect with its North American lines. The Company's operating expenses include wages and benefits, equipment rents (including car hire), purchased services, depreciation and amortization, diesel fuel, casualties and insurance, materials and other expenses. Car hire is a charge paid by a railroad to the owners of railcars used by that railroad in moving freight. Other expenses generally include property and other non- income taxes, professional services, communication and data processing costs, and general overhead expense. When comparing the Company's results of operations from one reporting period to another, the following factors should be taken into consideration. The Company has historically experienced fluctuations in revenues and expenses such as one-time freight moves, customer plant expansions and shut-downs, railcar sales, accidents and derailments. In periods when these events occur, results of operations are not easily comparable to other periods. Also, much of the Company's growth to date has resulted from acquisitions. Most recently, the Company completed one acquisition in November 1997 and two acquisitions in 1999. Because of variations in the structure, timing and size of these acquisitions and differences in economics among the Company's railroads resulting from differences in the rates and other material terms established through negotiation, the Company's results of operations in any reporting period may not be directly comparable to its results of operations in other reporting periods. Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. In August 1999, the Company's wholly-owned subsidiary, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. ("FCCM"), was awarded a 30-year concession to operate certain railways owned by the state-owned Mexican rail company Ferronales. FCCM also acquired equipment and other assets. The aggregate purchase price, including acquisition costs, was approximately 297 million pesos, or approximately $31.5 million at then-current exchange rates. The purchase included $12.3 million of rolling stock, a $9.7 million advance payment on track improvements to be completed on the state-owned track property by mid-2000, a $1.0 million escrow payment which will be returned to the Company upon successful completion of the track improvements, an expected future 20 utilization by the Company of $2.2 million of value-added taxes paid on the transaction, and $1.0 million in goodwill. The remaining purchase price ($5.3 million) was allocated to the 30-year operating license. As the track improvements are made, the related costs will be reclassified into the property accounts as leasehold improvements and amortized over the improvements' estimated useful life of 20 years. Pursuant to the acquisition, employee termination payments of $1.0 million were made to former state employees and approximately 55 employees whom the Company retained upon acquisition but terminated as part of its plan to reduce operating costs after September 30, 1999. All payments were made during the fourth quarter of 1999 and are considered a cost of the acquisition. Accordingly, the payments represent costs in excess of fair market value and are being amortized over 20 years. The Chiapas-Mayab concession is made up of two separate rail lines. The Chiapas is approximately 450 kilometers (280 miles) long and runs between Ixtepec in the Mexican state of Oaxaca, and Ciudad Hidalgo in the Mexican state of Chiapas. Principal commodities hauled include cement, corn, petroleum products and various agricultural products. The Mayab extends approximately 1,100 kilometers (680 miles) from Coatzacoalcos in the Mexican state of Vera Cruz, to beyond Merida in the Mexican state of Yucatan. Principal commodities hauled on the line include cement, silica sand and various agricultural products. The two railroads are connected via trackage rights over Ferrosur (a recently privatized rail concession) and a government-owned line. FCCM began operations on September 1, 1999. Genesee Rail-One Inc. On April 15, 1999, the Company closed on an agreement to acquire Rail-One Inc. ("Rail-One") which has a 47.5% ownership interest in Genesee Rail-One Inc. ("GRO"), thereby increasing the Company's ownership of GRO to 95%. GRO owns and operates two short line railroads in Canada. Under the terms of the purchase agreement, the Company converted outstanding notes receivable from Rail-One of $4.6 million into capital, will pay approximately $844,000 in cash to the sellers of Rail-One in installments over a four year period, and granted options to the sellers of Rail-One to purchase up to 80,000 shares of the Company's Class A Common Stock at an exercise price of $8.625 per share. Exercise of the option is contingent on the Company's recovery of its capital investment in GRO including debt assumed if the Company were to sell GRO, and upon certain GRO income performance measures. The transaction is accounted for as a purchase and resulted in $2.8 million of goodwill which is being amortized over 15 years. The contingent purchase price will be recorded as a component of goodwill at the value of the options issued, if and when such options are exercisable. Effective with this agreement, the operating results of GRO have been consolidated within the financial statements of the Company, with a 5% minority interest due to another GRO shareholder. Prior to April 15, 1999, the Company accounted for its investment in GRO under the equity method and recorded losses of $618,000, $645,000 and $60,000 in 1999, 1998 and 1997, respectively, in other income, net. Genesee & Wyoming Australia Pty. Ltd. On August 28, 1997, the Company's wholly-owned subsidiary, Genesee & Wyoming Australia Pty. Ltd. ("GWIA"), was awarded the contract to purchase certain selected assets of the railroad freight operation of SA Rail, a division of Australian National Railway which was controlled by the Commonwealth Government of Australia. SA Rail provided intrastate freight services in South Australia, interstate haulage of contract freight, rolling 21 stock rental and maintenance, and interstate track maintenance. GWIA bid as part of a consortium including EDI Clyde Engineering and Transfield Pty. Ltd. EDI Clyde is a major Australian provider of railway rolling stock and holds the Australian license for GM/EMD locomotives. Transfield is a major Australian engineering, construction and infrastructure maintenance provider. On November 8, 1997 GWIA closed on the purchase of the assets and commenced operation of railroad freight service under the name of Australia Southern Railroad Pty. Ltd. The assets were acquired for approximately $33.1 million, including related costs. The assets consist primarily of road and track structure, railroad rolling stock and other equipment. Latin American Rail LLC On September 30, 1999, the Company closed on an agreement to acquire a 47.5% ownership interest in Latin American Rail LLC in Chile for approximately $10.0 million in cash and 25,532 shares of the Company's stock valued at approximately $281,000. Latin American Rail LLC owns 100% of Latin American Rail Investors, S.A. which in turn own 4.0% of CB Transportes S.A., a company that has investments in several railroads in South America. The Company is accouting for this investment under the equity method of accouting for investments. Results of Operations Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Consolidated Operating Revenues Operating revenues were $175.6 million in the year ended December 31, 1999 compared to $147.5 million in the year ended December 31, 1998, a net increase of $28.1 million or 19.1%. The net increase was attributable to a $33.0 million increase in North American railroad revenues of which $19.9 million were revenues from new railroad operations in Canada, $8.8 million were revenues from new railroad operations in Mexico and $4.3 million were increases in revenues on existing North America railroad operations, offset by a $3.6 million decrease in revenues from Australian railroad operations due primarily to the non-renewal of a coal contract and a $1.3 million decrease in industrial switching revenues due primarily to the Company's decision to exit an unprofitable switching contract. The following three sections provide information on railroad revenues for North American and Australian railroad operations, and industrial switching revenues in the United States. North American Railroad Operating Revenues Operating revenues were $121.1 million in the year ended December 31, 1999 of which $95.5 million were freight revenues and $25.6 million were non-freight revenues compared to $88.1 million of which $66.1 million were freight revenues and $22.0 million were non-freight revenues in the year ended December 31, 1998, an increase in operating revenues of $33.0 million or 37.5%. The increase was attributable to a $29.5 million increase in freight revenues and a $3.5 million increase in non-freight revenues. The increase of $29.5 million in North American freight revenues was due to $15.0 million in freight revenues attributable to new railroad operations in Canada, $7.2 million in freight revenues attributable to new railroad operations in Mexico, and an increase of $7.3 million in freight revenues on existing railroad operations. The following table compares North American freight revenues, carloads and average freight revenues per carload for the years ended December 31, 1999 and 1998: The remainder of this page is intentionally left blank. 22 North American Freight Revenues and Carloads Comparison by Commodity Group Years Ended December 31, 1999 and 1998 (dollars in thousands, except average per carload)
Average Freight Revenues Per Freight Revenues Carloads Carload ---------------- -------- ------- % of % of % of % of Commodity Group 1999 Total 1998 Total 1999 Total 1998 Total 1999 1998 - --------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ---- Coal, Coke & Ores $24,779 25.9% $19,245 29.1% 94,140 31.4% 75,881 34.8% $263 $254 Pulp & Paper 14,867 15.6% 8,295 12.6% 39,952 13.3% 21,318 9.7% 372 389 Petroleum Products 10,210 10.7% 7,135 10.8% 20,206 6.7% 15,992 7.3% 505 446 Lumber & Forest Products 8,304 8.7% 6,098 9.2% 28,627 9.6% 20,802 9.5% 290 293 Chemicals-Plastics 8,169 8.6% 6,337 9.6% 16,039 5.4% 12,503 5.7% 509 507 Metals 8,156 8.5% 4,879 7.4% 30,614 10.2% 17,862 8.2% 266 273 Minerals & Stone 7,905 8.3% 3,790 5.8% 23,667 7.9% 13,679 6.3% 334 277 Farm & Food Products 5,831 6.1% 4,919 7.4% 19,898 6.6% 17,451 8.0% 293 282 Autos & Auto Parts 2,491 2.6% 1,945 2.9% 4,790 1.6% 3,895 1.8% 520 499 Other 4,825 5.0% 3,438 5.2% 22,024 7.3% 18,922 8.7% 219 182 --------- --------- ----------- --------- ---------- --------- ----------- ---------- Totals $95,537 100.0% $66,081 100.0% 299,957 100.0% 218,305 100.0% 319 303 ========= ========= =========== ========= ========== ========= =========== ==========
Coal increased by $5.5 million or 28.8% of which $5.4 million was on existing railroad operations and $182,000 was new freight revenues attributable to the acquisition of GRO. The increase on existing railroad operations in 1999 was primarily attributable to a return to normal shipments at a key customer's facilities which compare to reduced shipments in the 1998 period due to scheduled inventory reductions and planned maintenance projects at the key customer's facilities. Pulp and Paper increased by $6.6 million or 79.2% of which $553,000 was on existing railroad operations, $5.9 million was new freight revenues attributable to the acquisition of GRO, and $125,000 was freight revenues attributable to new railroad operations in Mexico. Petroleum Products increased by $3.1 million or 43.0% of which $95,000 was on existing railroad operations, $131,000 was new freight revenues attributable to the acquisition of GRO, and $2.8 million was freight revenues attributable to new railroad operations in Mexico. Lumber and Forest Products increased by $2.2 million or 36.2% of which $956,000 was on existing railroad operations, $1.2 million was new freight revenues attributable to the acquisition of GRO, and $35,000 was freight revenues attributable to new railroad operations in Mexico. Chemicals and Plastics increased by $1.8 million or 28.9% of which $258,000 was on existing railroad operations, $1.3 million was new freight revenues attributable to the acquisition of GRO, and $233,000 was freight revenues attributable to new railroad operations in Mexico. 23 Metals increased by $3.3 million or 67.2% of which $177,000 was an increase on existing railroad operations, $3.0 million was new freight revenues attributable to the acquisition of GRO, and $80,000 was freight revenues attributable to new railroad operations in Mexico. Minerals and Stone increased by a net $4.1 million or 108.8% of which $1.6 million was new freight revenues attributable to the acquisition of GRO, $2.9 was freight revenues attributable to new railroad operations in Mexico and $360,000 was a decrease on existing railroad operations. Freight revenues from all remaining commodities reflected an increase of $2.8 million or 27.6% of which $245,000 was an increase on existing railroad operations, $1.7 million was new freight revenues attributable to the acquisition of GRO, and $916,000 was new freight revenues attributable to new railroad operations in Mexico. Total North American carloads were 299,957 in the year ended December 31, 1999 compared to 218,305 in the year ended December 31, 1998, an increase of 81,652 or 37.4%. The increase of 81,652 consisted of an increase of 25,951 carloads on existing railroad operations of which 17,557 were coal, 46,478 carloads attributable to the acquisition of GRO, and 9,223 carloads attributable to new railroad operations in Mexico. The overall average revenue per carload increased to $319 in the year ended December 31, 1999, compared to $303 per carload in the year ended December 31, 1998, an increase of 5.3% due primarily to higher per carload revenues attributable to Canada and Mexico carloads offset by a slight decrease on existing railroad operations carloads. North American non-freight railroad revenues were $25.6 million in the year ended December 31, 1999 compared to $22.0 million in the year ended December 31, 1998, an increase of $3.5 million or 16.1%. The increase is the net result of $4.8 million of new non-freight revenues attributable to the acquisition of GRO, $1.7 million of new non-freight revenues attributable to Mexico and a decrease of $3.0 million of non-freight revenues on existing railroad operations due primarily to a decrease in car hire and rental income. Australian Railroad Operating Revenues Operating revenues were $43.2 million in the year ended December 31, 1999, compared to $46.7 million in the year ended December 31, 1998, a decrease of $3.6 million or 7.7%. The decrease was the result of a decrease in freight revenues from Australian railroad operations of $3.4 million or 8.0% primarily due to the non-renewal of a coal contract and a decrease in non-freight revenues of $226,000 or 4.8%. Australian freight revenues were $38.6 million in the year ended December 31, 1999, compared to $42.0 million in the year ended December 31, 1998, a decrease of $3.4 million or 8.0%. The following table outlines Australian freight revenues for the years ended December 31, 1999 and 1998: The remainder of this page is intentionally left blank. 24 Australian Freight Revenues by Commodity Years Ended December 31, 1999 and 1998 (dollars in thousands, except average per carload)
Average Freight Revenues Per Freight Revenues Carloads Carload ---------------- -------- ------- % of % of % of % of Commodity Group 1999 Total 1998 Total 1999 Total 1998 Total 1999 1998 --------------- ---------- ---------- ---------- --------- ---------- --------- ---------- --------- ------- ------ Hook and Pull (Haulage) $17,533 45.4% $15,288 36.4% 52,407 31.3% 40,817 22.3% $335 $375 Grain 13,588 35.2% 13,040 31.0% 48,781 29.1% 45,896 25.1% 279 284 Gypsum 2,861 7.4% 2,788 6.6% 40,304 24.1% 36,611 20.0% 71 76 Marble 2,034 5.3% 1,949 4.6% 8,343 5.0% 8,294 4.5% 244 235 Lime 1,531 4.0% 1,052 2.5% 4,662 2.8% 2,500 1.4% 328 421 Coal 664 1.7% 7,514 17.9% 4,317 2.6% 47,286 25.9% 154 159 Iron Ore 350 0.9% - 0.0% 8,069 4.8% - 0.0% 43 - Other 88 0.1% 368 1.0% 603 0.3% 1,382 0.8% 146 266 ---------- ---------- ---------- --------- ---------- --------- ---------- --------- Total $38,649 100.0% $41,999 100.0% 167,486 100.0% 182,786 100.0% 231 230 ========== ========== ========== ========= ========== ========= ========== =========
The net decrease of $3.4 million in Australian freight revenues was primarily attributable to a decrease in freight revenues from Coal of $6.9 million offset by new freight revenues from the shipment of Iron Ores of $350,000, increases in freight revenues from the shipment of Grain of $548,000, Hook and Pull of $2.2 million and all other non-coal commodities of $357,000. The decrease in freight revenues from Coal in the year ended December 31, 1999, was due to the non-renewal of a Coal contract. Australia carloads were 167,486 in the year ended December 31, 1999 compared to 182,786 in the year ended December 31, 1998, a decrease of 15,300 or 8.4%. The decrease was primarily the result of a decrease in Coal carloads of 42,969 offset by increases in Hook and Pull of 11,590, Iron Ores of 8,069, Gypsum of 3,693, Grain of 2,885, and all other commodities of 1,432. The overall average revenue per carload increased to $231 in the year ended December 31, 1999, compared to $230 per carload in the year ended December 31, 1998. Australian non-freight revenues were $4.5 million in the year ended December 31, 1999, compared to $4.7 million in the year ended December 31, 1998, a decrease of $226,000 or 4.8% due primarily to a decrease in other income. U.S. Industrial Switching Revenues Revenues from U.S. industrial switching activities were $11.3 million in the year ended December 31, 1999 compared to $12.6 million in the year ended December 31, 1998, a decrease of $1.3 million or 10.3% due primarily to the Company's decision to exit an unprofitable switching contract. 25 Consolidated Operating Expenses Operating expenses for all operations combined were $153.2 million in the year ended December 31, 1999, compared to $127.9 million in the year ended December 31, 1998, a net increase of $25.3 million or 19.8%. Expenses attributable to North American railroad operations were $105.2 million in the year ended December 31, 1999, compared to $75.6 million in the year ended December 31, 1998, an increase of $29.6 million or 39.2% of which $17.8 million were expenses attributable to new railroad operations in Canada, $8.1 million were expenses attributable to new railroad operations in Mexico and $3.7 were expenses attributable to existing U.S. railroad operations. Expenses attributable to operations in Australia were $36.6 million in the year ended December 31, 1999, compared to $37.9 million in the year ended December 31, 1998, a decrease of $1.3 million or 3.5%. Expenses attributable to U.S. industrial switching were $11.4 million in the year ended December 31, 1999, compared to $14.4 million in the year ended December 31, 1998, a decrease of $3.0 million or 20.9%. Operating Ratios The Company's combined operating ratio increased to 87.3% in the year ended December 31, 1999 from 86.7% in the year ended December 31, 1998. The operating ratio for North American railroad operations increased to 86.9% in the year ended December 31, 1999 from 85.8% in the year ended December 31, 1998. The operating ratio for Australian railroad operations increased to 84.8% in the year ended December 31, 1999 from 81.1% in the year ended December 31, 1998. The operating ratio for U.S. industrial switching operations decreased to 100.8% in the year ended December 31, 1999 from 114.2% in the year ended December 31, 1998. The following three sections provide information on railroad expenses for North American and Australian railroad operations, and industrial switching expenses in the United States. North American Railroad Operating Expenses The following table sets forth a comparison of the Company's North American railroad operating expenses in the years ended December 31, 1999 and 1998: The remainder of this page is intentionally left blank. 26 North American Railroad Operating Expense Comparison Years Ended December 31, 1999 and 1998 (dollars in thousands)
1999 1998 ---- ---- Percent of Percent of Operating Operating Dollars Revenue Dollars Revenue ------- ------- ------- ------- Labor and benefits $ 38,819 32.1% $ 30,822 35.0% Equipment rents 13,768 11.4% 11,060 12.6% Purchased services 7,996 6.6% 4,496 5.1% Depreciation and amortization 9,649 8.0% 7,277 8.3% Diesel fuel 6,357 5.2% 3,187 3.6% Casualties and insurance 4,172 3.4% 2,937 3.3% Materials 8,503 7.0% 3,485 4.0% Other expenses 15,929 13.2% 12,285 13.9% ----------------- ---------------- ----------------- ----------------- Total operating expenses $ 105,193 86.9% $75,549 85.8% ================= ================ ================= =================
Labor and benefits expense was $38.8 million in the year ended December 31, 1999 compared to $30.8 million in the year ended December 31, 1998, an increase of $8.0 million or 25.9% of which $5.0 million was attributable to the acquisition of GRO, $2.7 million was attributable to new railroad operations in Mexico and $281,000 was attributable to an increase on existing railroad operations. Equipment rents were $13.8 million in the year ended December 31, 1999 compared to $11.1 million in the year ended December 31, 1998, a net increase of $2.7 million or 24.5% of which $4.0 million was attributable to the acquisition of GRO, $53,000 was attributable to new railroad operations in Mexico and $1.4 million was a decrease on existing railroad operations due primarily to a reduction of rolling stock and associated. Purchased services were $8.0 million in the year ended December 31, 1999 compared to $4.5 million in the year ended December 31, 1998, a net increase of $3.5 million or 77.8% of which $2.8 million was attributable to the acquisition of GRO, $865,000 was attributable to new railroad operations in Mexico and $202,000 was a decrease on existing railroad operations resulting from increased capital spending which reduced the need for certain purchased maintenance services. Depreciation and amortization expense was $9.6 million in the year ended December 31, 1999 compared to $7.2 million in the year ended December 31, 1998, an increase of $2.4 million or 32.6% of which $1.4 million was attributable to the acquisition of GRO, $671,000 was attributable to new railroad operations in Mexico and $280,000 was attributable to existing railroad operations as a result of increased capital spending in 1998 and 1999. Diesel fuel expense was $6.4 million in the year ended December 31, 1999 compared to $3.2 million in the year ended December 31, 1998, an increase of $3.2 million or 99.5% of which $1.5 million was attributable to the acquisition of GRO, $836,000 was attributable to new railroad operations in Mexico and $831,000 was attributable to existing railroad operations due primarily to 27 increased fuel oil prices in 1999 and secondarily to increased fuel consumption resulting from an increase in carloads on existing operations. Casualties and insurance expense was $4.2 million in the year ended December 31, 1999 compared to $2.9 million in the year ended December 31, 1998, an increase of $1.3 million or 42.0% of which $498,000 was attributable to the acquisition of GRO, $223,000 was attributable to new railroad operations in Mexico and $514,000 was attributable to existing railroad operations due primarily to increases in derailment and insurance expense. Materials expense was $8.5 million in the year ended December 31, 1999 compared to $3.5 million in the year ended December 31, 1998, an increase of $5.0 million or 144.0% of which $984,000 was attributable to the acquisition of GRO, $1.2 million was attributable to new railroad operations in Mexico and $2.8 million was attributable to existing railroad operations due primarily to increased track and locomotive materials expense. Other expenses were $15.9 million in the year ended December 31, 1999 compared to $12.3 million in the year ended December 31, 1998, an increase of $3.6 million or 29.6% of which $1.5 million was attributable to the acquisition of GRO, $1.5 million was attributable to new railroad operations in Mexico and $629,000 was attributable to existing railroad operations primarily related to acquisition expenses which were $1.9 million in 1999 ($1.2 million of which was incurred in the first quarter of 1999) compared to $1.5 million in 1998, an increase of $404,000 or 27.9%. Australian Railroad Operating Expenses The following table sets forth a comparison of the Company's Australian railroad operating expenses in the years ended December 31, 1999 and 1998: Australian Railroad Operating Expense Comparison Years Ended December 31, 1999 and 1998 (dollars in thousands)
1999 1998 ---- ---- Percent of Percent of Operating Operating Dollars Revenue Dollars Revenue ------------------------------------------------------------------------------ Labor and benefits $ 5,443 12.6% $ 5,263 11.3% Equipment rents 367 0.9% 593 1.3% Purchased services 12,116 28.1% 13,538 29.0% Depreciation and amortization 2,157 5.0% 1,842 3.9% Diesel fuel 8,186 19.0% 8,895 19.0% Casualties and insurance 1,635 3.8% 1,415 3.0% Materials 1,861 4.3% 1,734 3.7% Other expenses 4,833 11.1% 4,627 9.9% ------------------------------------------------------------------------------ Total operating expenses $36,598 84.8% $37,907 81.1% ==============================================================================
Purchased services were $12.1 million in the year ended December 31, 1999 compared to $13.5 million in the year ended December 31, 1998, a decrease 28 of $1.4 million or 10.5%. The decrease was primarily related to the non-renewal of a coal haulage contract which resulted in no contracted maintenance charges on the track used for the coal haulage, and the positive impact of capital work on ASR-owned tracks which reduced contract labor expense for maintenance. All other operating expenses were $24.5 million in the year ended December 31, 1999 compared to $24.4 million in the year ended December 31, 1998, a net increase of $113,000. U. S. Industrial Switching Operating Expenses The following table sets forth a comparison of the Company's industrial switching operating expenses in the years ended December 31, 1999 and 1998: U.S. Industrial Switching Operating Expense Comparison Years Ended December 31, 1999 and 1998 (dollars in thousands)
1999 1998 ---- ---- Percent of Percent of Operating Operating Dollars Revenue Dollars Revenue ------------------------------------------------------------------------------ Labor and benefits $ 7,945 70.1% $ 9,019 71.3% Equipment rents 187 1.6% 217 1.7% Purchased services 476 4.2% 291 2.3% Depreciation and amortization 768 6.8% 798 6.3% Diesel fuel 421 3.7% 466 3.7% Casualties and insurance 971 8.6% 1,363 10.8% Materials 743 6.6% 758 6.0% Other expenses (84) -0.8% 1,533 12.1% ------------------------------------------------------------------------------ Total operating expenses $11,427 100.8% $14,445 114.2% ==============================================================================
Labor and benefits expense was $7.9 million in the year ended December 31, 1999 compared to $9.0 million in the year ended December 31, 1998, a decrease of $1.1 million or 11.9%, due primarily to the decision to exit unprofitable switching contracts. Other expense was a credit of $84,000 in the year ended December 31, 1999 compared to $1.5 million in the year ended December 31, 1998, a decrease of $1.6 million or 105.5%. The 1998 period was unusually high due to approximately $550,000 of legal fees for still-pending litigation. Interest Expense Interest expense in the year ended December 31, 1999 was $8.5 million compared to $7.1 million in the year ended December 31, 1998, an increase of $1.4 million or 19.7% primarily related to the increase in debt used for acquisitions. 29 Other Income and Income Taxes The Company's other income consists primarily of interest income, gains and losses on assets sales, equity earnings and losses on unconsolidated affiliates, minority interest expense, and foreign currency. Other income in the year ended December 31, 1999 was $1.1 million compared to $6.6 million in the year ended December 31, 1998, a decrease of $5.5 million or 84.0%. The 1998 other income reflected $6.0 million of non-recurring insurance proceeds recorded in North American railroad operations. The Company's effective income tax rate in the years ended December 31, 1999 and 1998 was 14.5% and 40.3%, respectively. The 1999 rate was impacted by a $4.2 million benefit recorded in the third quarter of 1999 as a result of a favorable tax law change in Australia. Without this impact, 1999's effective income tax rate was 42.5%. The Company may realize additional benefits from this tax law change in future quarters. Net Income and Earnings Per Share The Company's net income in the year ended December 31, 1999 was $12.5 million (including a $4.2 million income tax benefit described above and an extraordinary non-cash expense of $262,000 related to the early extinguishment of debt described in Note 8. to Consolidated Financial Statements) compared to net income of $11.4 million (including a $3.9 million after-tax effect of an insurance settlement described in Note 2. to Consolidated Financial Statements) in the year ended December 31, 1998, an increase of $1.1 million or 9.6%. The increase in net income is the net result of an increase in net income from Australian railroad operations of $3.6 million, a decrease in net income from North American railroad operations of $3.7 million, and a decrease in the net loss of industrial switching of $1.2 million. Basic and Diluted Earnings Per Share in the year ended December 31, 1999 were $2.79 and $2.76 respectively, on weighted average shares of 4.5 million compared to $2.20 and $2.19 respectively, on weighted average shares of 5.2 million in the year ended December 31, 1998. The change in weighted average shares outstanding primarily reflects the impact of a 1.0 million share buy-back program which started in August, 1998 and ended in April, 1999. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Consolidated Operating Revenues Operating revenues were $147.4 million in 1998 compared to $103.6 million in 1997, an increase of $43.8 million or 42.3%. The increase was attributable to $39.3 million in revenues from the Australia operation, a $3.7 million increase in North America railroad revenues, and a $823,000 increase in U.S. industrial switching revenues. The following three sections provide information on railroad revenues in North America and Australia, and industrial switching revenues in the United States. North America Railroad Operating Revenues Operating revenues were $88.1 million in the year ended December 31, 1998 compared to $84.4 million in the year ended December 31, 1997, an increase of $3.7 million or 4.4%. The increase was attributable to a $5.3 million increase 30 in non-freight revenues, which offset a $1.6 million decrease in freight revenues. The following table compares freight revenues, carloads and average freight revenues per carload for 1998 and 1997: North America Freight Revenues and Carloads Comparison by Commodity Group Years Ended December 31, 1998 and 1997 (dollars in thousands, except average per carload)
Average Freight Revenue Freight Revenues Carloads Per Carload ---------------- -------- ----------- % of % of % of % of Commodity Group 1998 Total 1997 Total 1998 Total 1997 Total 1998 1997 - --------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ---- Coal, Coke & Ores $19,245 29.1% $21,452 31.7% 75,881 34.8% 82,269 37.4% $254 $261 Pulp & Paper 8,295 12.6% 7,920 11.7% 21,318 9.7% 20,760 9.4% 389 382 Petroleum Products 7,135 10.8% 8,349 12.3% 15,992 7.3% 17,456 7.9% 446 478 Chemicals & Plastics 6,337 9.6% 5,761 8.5% 12,503 5.7% 10,496 4.8% 507 549 Lumber & Forest Products 6,098 9.2% 6,093 9.0% 20,802 9.5% 18,171 8.3% 293 335 Farm & Food Products 4,919 7.4% 3,865 5.7% 17,451 8.0% 13,390 6.1% 282 289 Metals 4,879 7.4% 5,188 7.7% 17,862 8.2% 21,268 9.7% 273 244 Minerals & Stone 3,790 5.8% 3,346 4.9% 13,679 6.3% 12,657 5.8% 277 264 Autos & Auto Parts 1,945 2.9% 3,452 5.1% 3,895 1.8% 6,496 3.0% 499 531 Other 3,438 5.2% 2,287 3.4% 18,922 8.7% 16,743 7.6% 182 137 ---------- --------- ----------- --------- ---------- --------- ----------- ---------- Total $66,081 100.0% $67,713 100.0% 218,305 100.0% 219,706 100.0% 303 308 ========== ========= =========== ========= ========== ========= =========== ==========
The decrease in freight revenues was attributable to the decline in freight revenues from shipments of coal, autos and auto parts, petroleum products and metals. Freight revenues from coal were $19.2 million in the year ended December 31, 1998, compared to $21.4 million in the year ended December 31, 1997, a decrease of $2.2 million or 10.3% primarily due to reduced shipments of coal resulting from scheduled maintenance and inventory adjustments at a key customer's facilities. Freight revenues from autos and auto parts were $1.9 million in the year ended December 31, 1998, compared to $3.4 million in the year ended December 31, 1997, a decrease of $1.5 million or 43.7% primarily due to reduced shipments resulting from loss of overhead freight from a contract change between CSXT and Ford, and labor issues in the auto industry. Freight revenues from petroleum products were $7.1 million in the year ended December 31, 1998, compared to $8.3 million in the year ended December 31, 1997, a decrease of $1.2 million or 14.5% due to reduced shipments resulting from scheduled maintenance at a key customer's facilities. Freight revenues from metals were $4.9 million in the year ended December 31, 1998, compared to $5.2 million in the year ended December 31, 1997, a decrease of $309,000 or 5.9%. The decrease in freight revenues from coal, autos and auto parts, petroleum products and metals was partially offset by increases in freight revenues from farm and food products of $1.1 million or 31 27.3%, chemicals and plastics of $576,000 or 10.0%, minerals and stone of $444,000 or 13.3% and pulp and paper of $375,000 or 4.7%. Freight revenues from all remaining commodities reflected a net increase of $1.2 million. Total carloads were 218,305 in the year ended December 31, 1998 compared to 219,706 in the year ended December 31, 1997, a decrease of 1,401 or 0.6%. Also, the overall average revenue per carload declined to $303 in the year ended December 31, 1998, compared to $308 per carload in the year ended December 31, 1997, a decrease of 1.6% due to changes in commodity mix and traffic patterns. North America non-freight railroad revenues were $22.0 million in the year ended December 31, 1998 compared to $16.7 million in the year ended December 31, 1997, an increase of $5.3 million or 32.0%. The increase was primarily due to increases in car hire and rental income of $2.0 million, other income of $1.8 million and switching revenue of $1.5 million. Australian Railroad Operating Revenues Operating revenues were $46.7 million in the year ended December 31, 1998, compared to $7.4 million in the year ended December 31, 1997, an increase of $39.3 million or 528.8%. The increase consisted of $35.7 million in freight revenues and $3.6 in non-freight revenues. The increase was primarily attributable to a full year of operations in 1998 as compared to operations which began on November 8, 1997. The following table outlines Australian freight revenues for the periods ended December 31, 1998 and 1997: Australian Freight Revenues by Commodity Year Ended December 31, 1998 and 1997 (in thousands)
Average Freight Revenue Freight Revenues Carloads Per Carload ---------------- -------- ----------- % of % of % of % of Commodity Group 1998 Total 1997 Total 1998 Total 1997 Total 1998 1997 - --------------- ---- ----- ---- ----- ---- ----- ---- ----- ---- ---- Hook and Pull (Haulage) $15,288 36.4% $ 1,969 31.2% 40,817 22.3% 4,465 15.4% $375 $441 Grain 13,040 31.0% 2,377 37.7% 45,896 25.1% 10,201 35.3% 284 233 Coal 7,514 17.9% 817 12.9% 47,286 25.9% 6,719 23.2% 159 122 Gypsum 2,788 6.6% 463 7.3% 36,611 20.0% 5,494 19.0% 76 82 Marble 1,949 4.6% 268 4.2% 8,294 4.5% 1,060 3.7% 235 253 Lime 1,052 2.5% 203 3.2% 2,500 1.4% 225 0.7% 421 902 Other 368 1.0% 215 3.5% 1,382 0.8% 772 2.7% 266 278 ---------- ---------- ---------- --------- ---------- --------- ---------- --------- Total $41,999 100.0% $ 6,312 100.0% 182,786 100.0% 28,936 100.0% 230 218 ========== ========== ========== ========= ========== ========= ========== =========
Australia non-freight revenues were $4.7 million in the year ended December 31, 1998, compared to $1.1 million in the year ended December 31, 1997, an increase of $3.6 million or 322.6%. The increase consisted of $2.4 million in car hire and rental income and $1.2 million in other income. The 32 increase was primarily attributable to a full year of operations in 1998 as compared to operations which began on November 8, 1997. U.S. Industrial Switching Revenues Revenues from U.S. industrial switching activities were $12.6 million in the year ended December 31, 1998 compared to $11.8 million in the year ended December 31, 1997, an increase of $823,000 or 7.0%. The increase was primarily attributable to a broadening of the customer base of Rail Link, Inc. Consolidated Operating Expenses Operating expenses for all operations combined were $127.9 million in 1998 compared to $87.2 million in 1997, an increase of $40.7 million or 46.7%. Expense increases attributable to operations in Australia, which began in November, 1997, represented $31.2 million or 76.6% of the change, expense increases attributable to North America railroad operations represented $7.7 million or 19.0% of the change, and expense increases in U.S. industrial switching represented $1.8 million or 4.4% of the change. Operating Ratios The Company's combined operating ratio increased to 86.7% in 1998 from 84.1% in 1997. The operating ratio for U.S. railroad operations increased to 85.8% in 1998 from 80.4% in 1997. The operating ratio for Australia railroad operations decreased to 81.1% in 1998 from 90.5% in 1997. The operating ratio for U.S. industrial switching operations increased to 114.2% in 1998 from 107.0% in 1997. The following three sections provide information on railroad expenses in North America and Australia, and industrial switching expenses in the United States. North America Railroad Operating Expenses The following table sets forth a comparison of the Company's North America railroad operating expenses in 1998 and 1997: The remainder of this page is intentionally left blank. 33 North America Railroad Operating Expense Comparison Years Ended December 31, 1998 and 1997 (dollars in thousands)
1998 1997 ---- ---- Percent of Percent of Operating Operating Dollars Revenue Dollars Revenue ------- ------- ------- ------- Labor and benefits $30,822 35.0% $28,041 33.2% Equipment rents 11,060 12.6% 8,755 10.4% Purchased services 4,496 5.1% 3,872 4.6% Depreciation and amortization 7,277 8.3% 6,092 7.2% Diesel fuel 3,187 3.6% 4,239 5.0% Casualties and insurance 2,937 3.3% 4,280 5.1% Materials 3,485 4.0% 3,837 4.5% Other 12,285 13.9% 8,707 10.4% ------ ---- ----- ---- Total $75,549 85.8% $67,823 80.4% ======= ==== ======= ====
Labor and benefits expense was $30.8 million in 1998 compared to $28.0 million in 1997, an increase of $2.8 million or 9.9%, due primarily to general increases in wages and benefits for all railroad operations and the addition of several new senior management positions in general and administrative. Equipment rents were $11.1 million in 1998 compared to $8.8 million in 1997, an increase of $2.3 million or 26.3%, due primarily to new operating leases for railroad rolling stock utilized by the Company's leasing subsidiary. Purchased services were $4.5 million in 1998 compared to $3.9 million in 1997, an increase of $624,000 or 16.1%, due primarily to increases in maintenance of way contract work of approximately $277,000 and information systems and general and administrative contract work of approximately $413,000, offset by a net decrease in all other departments of $66,000. Depreciation and amortization expense was $7.3 million in 1998 compared to $6.1 million in 1997, an increase of $1.2 million or 19.5%, due primarily to increased capital spending in 1998 and 1997. Diesel fuel was $3.2 million in 1998 compared to $4.2 million in 1997, a decrease of $1.0 million or 24.8%, due primarily to a decline in diesel fuel prices. Casualties and insurance expense, including claims brought under the Federal Employers' Liability Act, was $2.9 million in 1998 compared to $4.3 million in 1997, a decrease of $1.4 million or 31.4%, due primarily to a decrease in derailment expense of approximately $739,000 and a decrease in claims expense of approximately $584,000. Materials expense was $3.5 million in 1998 compared to $3.8 million in 1997, a decrease of $352,000 or 9.2%, due primarily to decreases in maintenance of way and maintenance of equipment repairs. 34 Other expense was $12.3 million in 1998 compared to $8.7 million in 1997, an increase of $3.6 million or 41.1%, due primarily to increases in acquisition expense of $1.1 million, trackage rights of $1.0 million, general and administrative of $1.0 million, legal and accounting fees of $341,000 and other expenses, net of $137,000. Australian Railroad Operating Expenses The following table sets forth a comparison of the Company's Australia railroad operating expenses in 1998 and 1997: Australian Railroad Operating Expense Comparison Years Ended December 31, 1998 and 1997 (dollars in thousands)
1998 1997 ---- ---- Percent of Percent of Operating Operating Dollars Revenue Dollars Revenue ------- ------- ------- ------- Labor and benefits $ 5,263 11.3% $ 899 12.1% Equipment rents 593 1.3% 81 1.1% Purchased services 13,538 29.0% 2,298 30.9% Depreciation and amortization 1,842 3.9% 246 3.3% Diesel fuel 8,895 19.0% 1,409 19.0% Casualties and insurance 1,415 3.0% 347 4.7% Materials 1,734 3.7% 134 1.8% Other 4,627 9.9% 1,312 17.6% ------- ---- ------ ---- Total $37,907 81.1% $6,726 90.5% ======= ==== ====== ====
All Australia railroad operating expense increases are primarily attributable to a full year of operations in 1998 as compared to operations which began on November 8, 1997. U. S. Industrial Switching Operating Expenses The following table sets forth a comparison of the Company's U.S. industrial switching operating expenses in 1998 and 1997: The remainder of this page is intentionally left blank. 35 U.S. Industrial Switching Operating Expense Comparison Years Ended December 31, 1998 and 1997 (dollars in thousands)
1998 1997 ---- ---- Percent of Percent of Operating Operating Dollars Revenue Dollars Revenue ------- ------- ------- ------- Labor and benefits $ 9,019 71.3% $ 8,457 71.5% Equipment rents 217 1.7% 102 1.0% Purchased services 291 2.3% 241 2.0% Depreciation and amortization 798 6.3% 661 5.6% Diesel fuel 466 3.7% 499 4.2% Casualties and insurance 1,363 10.8% 927 7.8% Materials 758 6.0% 524 4.4% Other 1,533 12.1% 1,240 10.5% ------- ----- ------- ----- Total $14,445 114.2% $12,651 107.0% ======= ===== ======= =====
Labor and benefits expense was $9.0 million in 1998 compared to $8.5 million in 1997, an increase of $562,000 or 6.6%, which was primarily attributable to a broadening of the customer base of Rail Link, Inc. Casualties and insurance expense was $1.4 million in 1998 compared to $927,000 in 1997, an increase of $436,000 or 47.0%, which was primarily attributable to an increase in derailment expense of $184,000 and an increase in claims expense of $236,000 Other expense was $1.5 million in 1998 compared to $1.2 million in 1997, an increase of $293,000 or 23.6%, which was primarily attributable to a broadening of the customer base of Rail Link, Inc. All other expense categories were $2.5 million in 1998 compared to $2.0 million in 1997, an increase of $503,000 or 24.8%, which was primarily attributable to a broadening of the customer base of Rail Link, Inc. Interest Expense The Company's combined interest expense was $7.1 million in 1998 compared to $3.4 million in 1997, an increase of $3.7 million or 111.1%. Interest expense for North America railroad operations increased to $4.4 million in 1998 from $2.8 million in 1997, an increase of $1.6 million or 56.9%. This increase is primarily attributable to the partial financing of the acquisition in Australia (for which the Company used its Credit Facility but did not allocate the interest to Australia railroad operations), an investment in GRO which operates two railroads in Canada, and a new capital lease for equipment. Interest expense for Australia railroad operations increased to $2.3 million in 1998 from $320,000 in 1997, an increase of $2.0 million or 615.3%. This increase was primarily attributable to a full year of operations in 1998 as compared to operations which began on November 8, 1997. Interest expense for U.S. industrial switching operations increased to $376,000 in 1998 from $220,000 in 1997, an increase of $156,000 or 70.9%. 36 Other Income and Income Taxes The Company's other income in 1998 was $6.6 million compared to other income in 1997 of $345,000, an increase of $6.3 million or 1,826.1%. The increase was attributable to $6.0 million of insurance proceeds recorded in North America railroad operations. The Company's effective income tax rate was 40.3% and 40.5% in 1998 and 1997, respectively. Net Income and Earnings Per Share The Company's net income in 1998 was $11.4 million compared to net income in 1997 of $8.0 million, an increase of $3.4 million or 42.9%. The increase was attributable to increases in net income from the Australia operation of $3.7 million and North America railroad operations of $548,000, which offset an increase in the net loss in U.S. industrial switching operations of $792,000. Basic and Diluted Earnings Per Share in the year ended December 31, 1998 were $2.20 and $2.19 respectively, on weighted average shares of 5.2 million compared to $1.52 and $1.47 respectively, on weighted average shares of 5.4 million in the year ended December 31, 1997. Liquidity and Capital Resources During 1999, the Company generated cash from operations of $29.3 million, generated cash from asset sales of $10.3 million, received $10.9 million in state grant funds for track rehabilitation and construction, and had a net cash increase in debt of $17.5 million. During the year, the Company invested $14.8 million in equipment and rolling stock and $21.0 million in track improvements (including the $10.9 million in state grant funds described above) and buildings. These expenditures were apart from the Company's investments in Ferrocarriles Chiapas-Mayab in Mexico of $31.5 million and Latin American Rail, LLC in Chile of $1.3 million. The Company also received $57,000 of cash in the purchase of Rail-One Inc. in Canada less cash paid for its common stock. See Note 3. to Consolidated Financial Statements. The Company repurchased 655,000 shares of its Class A Common Stock which are now held in the Company treasury at a cost of $6.4 million. During 1998, the Company generated cash from operations of $23.8 million, generated cash from asset sales of $2.6 million, received $3.2 million in state grant funds for track rehabilitation, and had a net cash reduction to debt of $2.1 million. During the year the Company invested $10.0 million in equipment and rolling stock and $6.9 million in track improvements (including the $3.2 million in state grant funds described above) and buildings. Additionally, the Company acquired $6.4 million in rolling stock in a non-cash exchange for similar assets. These expenditures were apart from the Company's additional investment of $3.1 million in cash and $4.7 million in other assets in GRO which operates two railroads in Canada. See Note 3. to Consolidated Financial Statements. The Company also repurchased 345,000 shares of its Class A Common Stock which are now held in the Company treasury at a cost of $4.6 million. During 1997, the Company generated cash from operations of $6.3 million, generated cash from asset sales of $581,000, received $2.9 million in state grant funds for track rehabilitation, and had net new borrowings of $45.2 million. During the year the Company invested $16.3 million, including capital 37 leases of $11.8 million, in equipment and rolling stock, and $9.4 million in track improvements (including the $2.9 million in state grant funds described above) and buildings. These expenditures were apart from the Company's investment in the Australia acquisition and its investment in GRO which operates two railroads in Canada (see Note 3. to Consolidated Financial Statements). On August 17, 1999, the Company amended and restated its primary credit facilities agreement to provide for an increase from $65.0 million to $150.0 million. The agreement provides for $88 million in revolving credit facilities (with a sub limit of $15 million in Australian dollar equivalents to be allocated to the Australian subsidiaries) and $62.0 million in term loan facilities consisting of a U.S. Term Loan facility in the amount of $10.0 million, a Canadian Term Loan facility in the Canadian Dollar Equivalent of $22.0 million, and a Mexican Term Loan facility of $30.0 million. The term loans are due in quarterly installments and mature, along with the revolving credit facilities, on August 17, 2004. The credit facilities accrue interest at various rates depending on the country in which the funds are drawn, plus the applicable margin, which varies from 1.75% to 2.5% depending upon the country in which the funds are drawn and the Company's funded debt to EBITDA ratio, as defined in the agreement. Interest is payable in arrears based on certain elections of the Company, not to exceed three months outstanding. The Company pays a commitment fee which varies between 0.375% and 0.500% per annum on all unused portions of the revolving credit facility depending on the Company's funded debt to EBITDA ratio. The credit facilities agreement requires mandatory prepayments from the issuance of new equity or debt and annual sale of assets in excess of varying minimum amounts depending on the country in which the sales occur. The credit facilities are secured by essentially all the assets of the Company and its subsidiaries. The credit facilities agreement requires the maintenance of certain covenant ratios or amounts, including, but not limited to, funded debt to EBITDA, minimum EBITDA for a period, cash flow coverage, and Net Worth, all as defined in the agreement. The Company and its subsidiaries were in compliance with the provisions of these covenants as of December 31, 1999. Borrowings under the Canadian portion of the amended agreement were used to refinance certain GRO debt. In conjunction with that refinancing, the Company recorded a non-cash after tax extraordinary charge of $262,000 related to the unamortized deferred financing costs of the retired debt. On December 7, 1999, the Company completed the sale of 483 freight cars to a financial institution for a net sale price of $8,630,000. The proceeds were used to reduce borrowings under the Company's revolving credit facilities. Simultaneously, the Company entered into agreements with the financial institution to lease these 483 freight cars and an additional 100 centerbeam flat cars for a period of at least eight years including automatic renewals. The sale/leaseback transaction resulted in a deferred gain of $612,000, which will be amortized over the term of the lease as a non-cash offset to rent expense. These leases also include an option to purchase all of the cars, subject to certain conditions. If certain conditions related to the return of the cars are met, the Company could be required to pay a fee. At December 31, 1999 the Company had long-term debt, including current portion, totaling $108.4 million, which comprised 57.0% of its total capitalization. This compares to long-term debt, including current portion, of $65.7 million at December 31, 1998, comprising 46.8% of total capitalization. The increase primarily relates to borrowings to fund acquisitions in 1999. 38 At December 31, 1999 approximately $36.9 million of the Company's debt was U.S. denominated foreign debt related to the Company's Mexican acquisition (see Note 3. to Consolidated Financial Statements) which is subject to debt valuation adjustments resulting from currency exchange rate changes. The Company recorded approximately $191,000 of non-cash expense related to valuation adjustments on this debt in the Other Income, net section of its 1999 income statement. The Company's railroads have entered into a number of rehabilitation or construction grants with state and federal agencies. The grant funds are used as a supplement to the Company's normal capital programs. In return for the grants, the railroads pledge to maintain various levels of service and maintenance on the rail lines that have been rehabilitated or constructed. The Company believes that the levels of service and maintenance required under the grants are not materially different from those that would be required without the grant obligation. While the Company has benefited from these grant funds in recent years including 1999 and 1998, there can be no assurance that the funds will continue to be available. The Company has budgeted approximately $38.7 million in capital expenditures in 2000, primarily for track rehabilitation, of which $7.7 million is expected to be used in Australia. Of the $38.7 million in capital expenditures, $12.8 million is expected to be funded by rehabilitation grants from state and federal agencies to several of the Company's railroads. In connection with the Company's purchase of selected assets in Australia (see Note 3. to Consolidated Financial Statements), the Company has committed to the Commonwealth of Australia to spend approximately $34.1 million (AU $52.3 million) to rehabilitate track structures and equipment by December 31, 2002. The Commonwealth Government may require the payment of any shortfall between the actual expenditures incurred and the contracted commitment from the date of acquisition to December 31, 2002. This commitment may be renegotiated if there is a significant change in operating conditions outside the control of the Company. As of December 31, 1999, $18.1 million (AU $27.6 million) of this commitment had been met. The Company has historically relied primarily on cash generated from operations to fund working capital and capital expenditures relating to ongoing operations, while relying on borrowed funds to finance acquisitions and equipment needs (primarily rolling stock) related to acquisitions. The Company believes that its cash flow from operations together with amounts available under the credit facilities will enable the Company to meet its liquidity and capital expenditure requirements relating to ongoing operations for at least the duration of the credit facilities. Year 2000 Compliance The Company encountered no significant problems in the transition to the year 2000. The remainder of this page is intentionally left blank. 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to the impact of interest rate changes. The Company's exposure to changes in interest rates applies to its borrowings under its credit facilities which have variable interest rates depending on the country in which the funds are drawn, plus the applicable margin, which varies from 1.75% to 2.5% depending upon the country in which the funds are drawn and the Company's funded debt to EBITDA ratio, as defined in the credit facilities agreement. The Company is also exposed to the impact of foreign currency exchange rate risk as it relates to debt valuation adjustments resulting from currency exchange rate changes on certain U.S. denominated foreign debt. At December 31, 1999, approximately $36.9 million of the Company's debt was U.S. denominated foreign debt related to the Company's Mexican acquisition (see Note 3. to Consolidated Financial Statements) which is subject to debt valuation adjustments resulting from currency exchange rate changes. The Company estimates that the fair value of these debt instruments approximated their market values and carrying values at December 31, 1999. The Company invests excess cash in overnight money market accounts. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary financial data required by this item are listed at Part IV, Item 14 and are filed herewith immediately following the signature page hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None The remainder of this page is intentionally left blank. 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Company to be held on May 23, 2000 under "Election of Directors" and "Executive Officers", which proxy statement will be filed within 120 days after the end of the Company's fiscal year. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Company to be held on May 23, 2000 under "Executive Compensation", which proxy statement will be filed within 120 days after the end of the Company's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Company to be held on May 23, 2000 under "Security Ownership of Certain Beneficial Owners and Management", which proxy statement will be filed within 120 days after the end of the Company's fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of the Stockholders of the Company to be held on May 23, 2000 under "Related Transactions", which proxy statement will be filed within 120 days after the end of the Company's fiscal year. The remainder of this page is intentionally left blank. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) DOCUMENTS FILED AS PART OF THIS FORM 10-K. Financial Statements: Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (B) REPORTS ON FORM 8-K Not applicable. (C) EXHIBITS - SEE INDEX TO EXHIBITS. The remainder of this page is intentionally left blank. 42 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENESEE & WYOMING INC. By: /s/ Mortimer B. Fuller, III --------------------------- Mortimer B. Fuller, III Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the date indicated below. Date Title Signature March 29, 2000 Chief Executive Officer /s/ Mortimer B. Fuller, III and Director ----------------------- Mortimer B. Fuller, III March 29, 2000 Chief Financial Officer /s/ John C. Hellmann ---------------------- John C. Hellmann March 29, 2000 Senior Vice President /s/ Alan R. Harris and Chief Accounting ------------------ Officer Alan R. Harris March 29, 2000 Director /s/ James M. Fuller ----------------------- James M. Fuller March 29, 2000 Director /s/ Louis S. Fuller ----------------------- Louis S. Fuller March 29, 2000 Director /s/ Robert M. Melzer ----------------------- Robert M. Melzer March 29, 2000 Director /s/ John M. Randolph ----------------------- John M. Randolph March 29, 2000 Director /s/ Philip J. Ringo ----------------------- Philip J. Ringo March 29, 2000 Director /s/ M. Douglas Young ----------------------- M. Douglas Young 43 INDEX TO EXHIBITS (2) Plan of acquisition, reorganization, arrangement, liquidation or succession Not applicable. (3) (i) Articles of Incorporation The Form of Restated Certificate of Incorporation referenced under (4)(a) hereof is incorporated herein by reference. (ii) By-laws The By-laws referenced under (4)(b) hereof are incorporated herein by reference. (4) Instruments defining the rights of security holders, including indentures (a) Form of Restated Certificate of Incorporation (Exhibit 3.2)2 (b) By-laws (Exhibit 3.3)1 (c) Specimen stock certificate representing shares of Class A Common Stock (Exhibit 4.1)3 (d) Form of Class B Stockholders' Agreement dated as of May 20, 1996, among the Registrant, its executive officers and its Class B stockholders (Exhibit 4.2)2 (e) Promissory Note dated October 7, 1991 of Buffalo & Pittsburgh Railroad, Inc. in favor of CSX Transportation, Inc. (Exhibit 4.6)1 (f) First Amendment to Promissory Note dated as of March 19, 1999 between Buffalo & Pittsburgh Railroad, Inc. and CSX Transportation, Inc. (Exhibit 4.1)7 (g) Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of August 17, 1999 among the Registrant, certain subsidiaries, BankBoston, N.A. and the banks named therein (Exhibit 4.1)9 (9) Voting Trust Agreement Voting Agreement and Stock Purchase Option dated March 21, 1980 among Mortimer B. Fuller, III, Mortimer B. Fuller, Jr. and Frances A. Fuller, and amendments thereto dated May 7, 1988 and March 29, 1996 (Exhibit 9.1)1 (10) Material Contracts The Exhibits referenced under (4)(d) through (4)(g) hereof are incorporated herein by reference. 44 (a) Form of Genesee & Wyoming Inc. 1996 Stock Option Plan (Exhibit 10.1)2 (b) Form of Genesee & Wyoming Inc. Stock Option Plan for Outside Directors (Exhibit 10.2)2 (c) Form of Compensation agreement between the Registrant and each of its executive officers (Exhibit 10.3)1 (d) Form of Genesee & Wyoming Inc. Employee Stock Purchase Plan (Exhibit 10.4)2 (e) Agreement dated February 6, 1996 between Illinois & Midland Railroad, Inc. and the United Transportation Union (Exhibit 10.65)1 (f) Amendment No. 1 to the Genesee & Wyoming Inc. 1996 Stock Option Plan (Exhibit 10.1)4 (g) Amendment No. 1 to Genesee & Wyoming Inc. Stock Option Plan for Outside Directors (Exhibit 10.1)5 (h) Memorandum of Lease between Minister for Transport and Urban Planning a Body Corporate Under the Administrative Arrangements Act, the Lessor, and Australia Southern Railroad Pty. Ltd., the Lessee, dated 7 November 1997 (Exhibit 10.2)5 (i) Amendment No. 2. To the Genesee & Wyoming Inc. 1996 Stock Option Plan (Exhibit 10.1)6 (j) Amendment No. 1. To the Genesee & Wyoming Inc. Employee Stock Purchase Plan (Exhibit 10.2)6 (k) Promissory Note dated May 20, 1998 of Mortimer B. Fuller, III in favor of the Registrant (Exhibit 10.1)7 (l) Assignment Letter between Charles W. Chabot and the Registrant, effective November 1, 1998 (Exhibit 10.2)7 (m) Amendment No. 1 to Promissory Note dated May 28, 1999 of Mortimer B. Fuller, III in favor of the Registrant (Exhibit 10.1)8 (n) Genesee & Wyoming Deferred Stock Plan for Non-Employee Directors is incorporated herein by reference to the Registrant's 1999 Definitive Proxy Statement, which was filed in electronic format on April 19, 1999 as Annex A to the Proxy Statement. (o) Purchase and Sale Agreement dated August 17, 1999 between the Federal Government of United Mexican States, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V., and Ferrocarriles Nacionales de Mexico (Exhibit 10.1)9 45 *(11.1) Statement re computation of per share earnings (12) Statements re computation of ratios Not applicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders Not applicable. (16) Letter re change in certifying accountant Not applicable. (18) Letter re change in accounting principles Not applicable. *(21.1) Subsidiaries of the Registrant (22) Published report regarding matters submitted to vote of security holders Not applicable. *(23.1) Consent of Arthur Andersen LLP (24) Power of attorney Not applicable. *(27.1) Financial Data Schedule for Year Ended December 31, 1999 (99) Additional Exhibits Not applicable. - ---------------------------- 46 *Exhibit filed with this Report. 1Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Registration Statement on Form S-1 (Registration No. 333-3972). The exhibit number contained in parenthesis refers to the exhibit number in such Registration Statement. 2Exhibit previously filed as part of, and incorporated herein by reference to, Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-3972). The exhibit number contained in parenthesis refers to the exhibit number in such Amendment. 3Exhibit previously filed as part of, and incorporated herein by reference to, Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-3972). The exhibit number contained in parenthesis refers to the exhibit number in such Amendment. 4Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Report on Form 10-Q for the quarter ended June 30, 1997. The exhibit number contained in parenthesis refers to the exhibit number in such Report. 5Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1997. The exhibit number contained in parenthesis refers to the exhibit number in such Report. 6Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Report on Form 10-Q for the quarter ended June 30, 1998. The exhibit number contained in parenthesis refers to the exhibit number in such Report. 7Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1998. The exhibit number contained in parenthesis refers to the exhibit number in such Report. 8Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Report on Form 10-Q for the quarter ended June 30, 1999. The exhibit number contained in parenthesis refers to the exhibit number in such Report. 9Exhibit previously filed as part of, and incorporated herein by reference to, the Registrant's Report on Form 10-Q for the quarter ended September 30, 1999. The exhibit number contained in parenthesis refers to the exhibit number in such Report. 47 INDEX TO FINANCIAL STATEMENTS Page Genesee & Wyoming Inc. and Subsidiaries: Report of Independent Public Accountants.............................F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998.........F-3 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997....................................F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997.........F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997....................................F-6 Notes to Consolidated Financial Statements...........................F-7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and the Shareholders of Genesee & Wyoming Inc.: We have audited the accompanying consolidated balance sheets of GENESEE & WYOMING INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Genesee & Wyoming Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Chicago, Illinois February 10, 2000 2
GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, ASSETS 1999 1998 -------------------------------- CURRENTS ASSETS: Cash and cash equivalents $ 7,791 $ 14,396 Accounts receivable, net 47,870 31,723 Materials and supplies 6,141 3,502 Prepaid expenses and other 7,689 2,914 Deferred income tax assets, net 3,087 2,315 -------------------------------- Total current assets 72,578 54,850 -------------------------------- PROPERTY AND EQUIPMENT, net 185,970 125,562 -------------------------------- SERVICE ASSURANCE AGREEMENT, net 12,065 12,814 -------------------------------- INVESTMENT IN UNCONSOLIDATED AFFILIATES 1,576 13,215 -------------------------------- OTHER ASSETS, net 29,751 10,319 -------------------------------- Total assets $ 301,940 $ 216,760 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 15,146 $ 2,591 Accounts payable 52,501 28,814 Accrued expenses 9,738 11,338 -------------------------------- Total current liabilities 77,385 42,743 -------------------------------- LONG-TERM DEBT, less current portion 93,230 63,099 -------------------------------- OTHER LIABILITIES 4,231 2,803 -------------------------------- DEFERRED INCOME TAX LIABILITIES, net 13,145 12,006 -------------------------------- DEFERRED ITEMS--grants from governmental agencies 27,427 17,607 -------------------------------- DEFERRED GAIN--sale/leaseback 4,109 3,965 -------------------------------- MINORITY INTEREST 584 - -------------------------------- STOCKHOLDERS' EQUITY: Class A Common Stock, $0.01 par value, one vote per share; 12,000,000 shares authorized; 4,453,368 and 4,450,276 issued and outstanding on December 31, 1999 and December 31, 1998, respectively 45 45 Class B Common Stock, $0.01 par value, 10 votes per share; 1,500,000 shares authorized; 845,447 and 845,539 issued and outstanding on December 31, 1999 and December 31, 1998, respectively 8 8 Additional paid-in capital 47,072 46,730 Retained earnings 47,023 34,490 Currenct translation adjustment (1,316) (2,107) Less treasury stock, at cost, 1,000,000 and 345,000 Class A shares on December 31, 1999 and December 31, 1998, respectively (11,003) (4,629) -------------------------------- Total stockholders' equity 81,829 74,537 -------------------------------- Total liabilities and stockholders' equity $ 301,940 $ 216,760 ================================ The accompanying notes are an integral part of these consolidated financial statements.
3
GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) Years Ended December 31, 1999 1998 1997 --------------------------------------------------- OPERATING REVENUES $ 175,586 $ 147,472 $ 103,643 --------------------------------------------------- OPERATING EXPENSES: Transportation 55,811 46,784 31,690 Maintenance of ways and structures 21,096 17,306 10,483 Maintenance of equipment 34,597 27,968 17,537 General and administrative 29,140 25,929 20,491 Depreciation and amortization 12,574 9,917 6,999 --------------------------------------------------- Total operating expenses 153,218 127,904 87,200 --------------------------------------------------- INCOME FROM OPERATIONS 22,368 19,568 16,443 Interest expense (8,462) (7,071) (3,349) Other income, net 1,064 6,645 345 --------------------------------------------------- --------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM 14,970 19,142 13,439 Provision for income tax 2,175 7,708 5,441 --------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 12,795 11,434 7,998 Extraordinary item from early extinguishment of debt, net of related income tax benefit of $162 (262) - - --------------------------------------------------- NET INCOME $ 12,533 $ 11,434 $ 7,998 =================================================== BASIC EARNINGS PER SHARE: Income before extraordinary item $ 2.85 $ 2.20 $ 1.52 Extraordinary item (0.06) - - --------------------------------------------------- Earnings per common share $ 2.79 $ 2.20 $ 1.52 =================================================== Weighted average shares 4,491 5,187 5,250 =================================================== DILUTED EARNINGS PER SHARE: Income before extraordinary item $ 2.82 $ 2.19 $ 1.47 Extraordinary item (0.06) - - --------------------------------------------------- Earnings per common share $ 2.76 $ 2.19 $ 1.47 =================================================== Weighted average shares and equivalents 4,540 5,229 5,447 =================================================== The accompanying notes are an integral part of these consolidated financial statements.
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GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (dollars in thousands) Class A Class B Additional Currency Total Common Common Paid-in Retained Translation Treasury Stockholders' Stock Stock Capital Warrants Earnings Adjustment Stock Equity ----------------------------------------------------------------------------------- BALANCE, December 31, 1996 $ 44 $ 8 $ 46,102 $ 471 $ 15,058 - - $ 61,683 Comprehensive income - - - - 7,998 $ (1,441) - 6,557 Proceeds from employee stock purchases - - 103 - - - - 103 ----------------------------------------------------------------------------------- BALANCE, December 31, 1997 44 8 46,205 471 23,056 (1,441) - 68,343 - Comprehensive income - - - - 11,434 (666) - 10,768 Proceeds from employee - stock purchases 1 - 54 - - - - 55 Warrants exercised, 42,000 shares - - 471 (471) - - - - Treasury stock acquisitions, 345,000 shares - - - - - - $ (4,629) (4,629) ----------------------------------------------------------------------------------- BALANCE, December 31, 1998 45 8 46,730 - 34,490 (2,107) (4,629) 74,537 - Comprehensive income - - - - 12,533 791 - 13,324 Proceeds from employee - - - stock purchases - - 61 - - - - 61 Shares issued for investment in unconsolidated affiliate - - 281 - - - - 281 Treasury stock acquisitions, 655,000 shares - - - - - - (6,374) (6,374) ----------------------------------------------------------------------------------- BALANCE, December 31, 1999 $ 45 $ 8 $ 47,072 $ - $ 47,023 $ (1,316)$ (11,003) $ 81,829 =================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
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GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,533 $ 11,434 $ 7,998 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 12,574 9,917 6,999 Deferred income taxes (974) 4,985 2,863 Gain on disposition of property and equipment (652) (410) (13) Extraordinary item, net of tax 262 - - Equity losses of unconsolidated affiliates 657 457 - Minority interest expense 50 - - Valuation adjustment of U. S. dollar denominated foreign debt 191 - - Changes in assets and liabilities, net of balances assumed through acquisitions- Accounts receivable (10,250) (3,575) (9,848) Materials and supplies (872) 1,188 477 Prepaid expenses and other (985) 150 (1,362) Accounts payable and accrued expenses 15,641 1,710 (2,015) Other assets and liabilities, net 1,120 (2,052) 1,210 ----------------------------------------- Net cash provided by operating activities 29,295 23,804 6,309 ----------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (35,767) (16,901) (13,891) Cash investments in affiliates (1,018) (3,084) (9,412) Cash received in purchase of Rail-One Inc. less cash paid for common stock 57 - - Purchase of business assets by Ferrocarriles de Chiapas-Mayab (31,527) - - Purchase of business assets of Australian National Railway - - (33,079) Proceeds from disposition of property and equipment 10,327 2,597 581 ----------------------------------------- Net cash used in investing activities (57,928) (17,388) (55,801) ----------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term borrowings, including capital leases (89,954) (22,852) (24,982) Proceeds from issuance of long-term debt 107,477 20,800 70,885 Payment of debt issuance costs (1,475) - (739) Proceeds from governement grants 10,869 3,208 2,903 Proceeds from issuance of employee stock purchase 61 55 103 Purchase of treasury stock (6,374) (4,629) - ----------------------------------------- Net cash provided by (used in) by financing activities 20,604 (3,418) 48,170 ----------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,424 (36) (1,365) ----------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,605) 2,962 (2,687) CASH AND CASH EQUIVALENTS, beginning of year 14,396 11,434 14,121 ----------------------------------------- CASH AND CASH EQUIVALENTS, end of year $ 7,791 $ 14,396 $ 11,434 ========================================= CASH PAID DURING YEAR FOR: Interest $ 8,090 $ 7,092 $ 2,474 Incomes taxes 3,774 1,042 5,056 ========================================= SUPPLEMENTAL NON-CASH INVESTING ACTIVITIES: Acquisition of controlling interest of GRO: Receivables forgiven $ 11,742 $ - $ - Liabilities assumed 29,176 - - Assets acquired (40,861) - - Shares issued for investment in unconsolidated affiliate 281 - - Capital lease obligation - (5,261) 11,761 ========================================= The accompanying notes are an integral part of these consolidated financial statements.
6 GENESEE & WYOMING INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. BUSINESS AND CUSTOMERS: ----------------------- Genesee & Wyoming Inc. and Subsidiaries (the "Company") operates twenty-one short line and regional railroads through its various subsidiaries of which seventeen are located in the United States, one is located in Australia, one is located in Mexico, and two are located in Canada. Railroad operations in Australia commenced in November, 1997 while separate operations in Mexico commenced in July, 1998 and September, 1999. The Company began consolidating the results of the two railroads in Canada in April, 1999, after increasing its ownership in the Canadian company which owns and operates the two railroads to 95%. The Company previously had an unconsolidated 47.5 percent equity interest in this Canadian company. The Company, through its leasing subsidiary, also buys, sells, leases and manages railroad transportation equipment in the United States and Canada. The Company, through its industrial switching subsidiary, also provides freight car switching and related services to industrial companies in the United States with extensive railroad facilities within their complexes. A large portion of the Company's operating revenue is attributable to customers operating in the electric utility, paper, petroleum products, metals and chemical industries in North America, and the farm and food products and transportation (hook and pull) industries in Australia. As the Company acquires new railroad operations, the base of customers and industries served continues to grow and diversify. The largest ten customers, which is a group that changes annually, accounted for approximately 36%, 42% and 37% of the Company's revenues in 1999, 1998 and 1997, respectively. One customer in the electric utility industry accounted for approximately 10%, 9% and 15% of the Company's revenue in 1999, 1998 and 1997, respectively (see Note 13.). The Company regularly grants trade credit to all of its customers. In addition, the Company grants trade credit to other railroads through the routine interchange of traffic. Although the Company's accounts receivable include a diverse number of customers and railroads, the collection of these receivables is substantially dependent upon the electric utility, paper, petroleum products, metals, chemical, farm and food and transportation industries, and the railroad sector of the economy in general. 2. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The Company's investments in unconsolidated affiliates are accounted for under the equity method. All significant intercompany transactions and accounts have been eliminated in consolidation. Revenue Recognition - ------------------- Railroad revenues are estimated and recognized as shipments initially move onto the Company's tracks, which, due to the relatively short length of haul, is not materially different from the recognition of revenues as shipments progress. Industrial switching and other service revenues are recognized as such services are provided. 7 Cash Equivalents - ---------------- The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. Materials and Supplies - ---------------------- Materials and supplies consist of purchased items for improvement and maintenance of road property and equipment, and are stated at the lower of average cost or market. Property and Equipment - ---------------------- Property and equipment are carried at historical cost. Acquired railroad property is recorded at the purchased cost. Major renewals or betterments are capitalized while routine maintenance and repairs are charged to expense when incurred. Gains or losses on sales or other dispositions are credited or charged to other income upon disposition. Depreciation is provided on the straight-line method over the useful lives of the road property (20-50 years) and equipment (3-20 years). The Company continually evaluates whether events and circumstances have occurred that indicate that its long-lived assets may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining lives of assets in measuring whether or not an impairment has occurred. If an impairment is identified, a loss would be reported to the extent that the carrying value of the related assets exceed the fair value of those assets as determined by valuation techniques available in the circumstances. Service Assurance Agreement - --------------------------- The service assurance agreement represents a commitment from one of the most significant customers of the Company, to one of the subsidiary railroads (see Note 13.), which grants the Company the exclusive right to serve indefinitely three of the customer's then-current facilities. The service assurance agreement is amortized on a straight-line basis over the same period as the related track structure, which is 20 years, and accumulated amortization was $2.8 million and $2.1 million as of December 31, 1999 and 1998, respectively. Earnings per Share - ------------------ Unexercised stock options and warrants, calculated under the treasury stock method, are the only reconciling items between the Company's basic and diluted weighted average shares outstanding. The number of options and warrants used to calculate diluted earnings per share are 204,750, 412,820 and 409,822 for 1999, 1998 and 1997, respectively. Options to purchase 637,500, 280,400 and 39,000 shares of stock were outstanding as of December 31, 1999, 1998 and 1997, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. Insurance Recoveries - -------------------- The Company receives insurance proceeds in the normal course of business for recoveries related to derailment damages and employee and third party claims. These proceeds are accounted for as a reduction of operating expenses. Insurance proceeds related to other matters are recorded in other income including proceeds of $6.0 million in 1998. 8 Disclosures About Fair Value of Financial Instruments - ----------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company: Current assets and current liabilities: The carrying value approximates fair value due to the short maturity of these items. Long-term debt: The fair value of the Company's long-term debt is based on secondary market indicators. Since the Company's debt is not quoted, estimates are based on each obligation's characteristics, including remaining maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying amount approximates fair value. Foreign Currency Translation - ---------------------------- The financial statements of the Company's foreign subsidiaries were prepared in their respective local currencies and translated into U.S. dollars based on the current exchange rate at the end of the period for balance sheet items and a weighted-average rate for the year for the statement of income items. Translation adjustments are reflected as currency translation adjustments in Stockholders' Equity and accordingly only affect comprehensive income. Translation adjustments for transactions denominated in foreign currencies and for U. S. dollar denominated foreign debt are netted with other income and were losses of $191,000, $331,000 and $114,000 in 1999, 1998 and 1997, respectively. Management Estimates - -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - ----------------- Certain prior year balances have been reclassified to conform with the 1999 presentation. 3. EXPANSION OF OPERATIONS: ------------------------ Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. - ----------------------------------------------------- In August 1999, the Company's wholly-owned subsidiary, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. ("FCCM"), was awarded a 30-year concession to operate certain railways owned by the state-owned Mexican rail company Ferronales. FCCM also acquired equipment and other assets. The aggregate purchase price, including acquisition costs, was approximately 297 million pesos, or approximately $31.5 million at then-current exchange rates. The purchase included $12.3 million of rolling stock, a $9.7 million advance payment on track improvements to be completed on the state-owned track property by mid- 2000, a $1.0 million escrow payment which will be returned to the Company upon successful completion of the track improvements, an expected future utilization by the Company of $2.2 million of value-added taxes paid on the transaction, and $1.0 million in goodwill. The remaining purchase price ($5.3 million) was allocated to the 30-year operating license. As the track improvements are made, the related costs will be reclassified into the property accounts as leasehold improvements and amortized over the improvements' estimated useful life of 20 years. Pursuant to the acquisition, employee termination payments of $1.0 million were made to former state employees and approximately 55 employees whom the Company retained upon acquisition but terminated as part of its plan 9 to reduce operating costs after September 30, 1999. All payments were made during the fourth quarter of 1999 and are considered a cost of the acquisition. Accordingly, the payments represent costs in excess of fair market value and are being amortized over 20 years. The Chiapas-Mayab concession is made up of two separate rail lines. The Chiapas is approximately 450 kilometers (280 miles) long and runs between Ixtepec in the Mexican state of Oaxaca, and Ciudad Hidalgo in the Mexican state of Chiapas. Principal commodities hauled include cement, corn, petroleum products and various agricultural products. The Mayab extends approximately 1,100 kilometers (680 miles) from Coatzacoalcos in the Mexican state of Vera Cruz, to beyond Merida in the Mexican state of Yucatan. Principal commodities hauled on the line include cement, silica sand and various agricultural products. The two railroads are connected via trackage rights over Ferrosur (a recently privatized rail concession) and a government-owned line. FCCM began operations on September 1, 1999. Genesee Rail-One Inc. - --------------------- On April 15, 1999, the Company closed on an agreement to acquire Rail-One Inc. ("Rail-One") which has a 47.5% ownership interest in Genesee Rail-One Inc. ("GRO"), thereby increasing the Company's ownership of GRO to 95%. GRO owns and operates two short line railroads in Canada. Under the terms of the purchase agreement, the Company converted outstanding notes receivable from Rail-One of $4.6 million into capital, will pay approximately $844,000 in cash to the sellers of Rail-One in installments over a four year period, and granted options to the sellers of Rail-One to purchase up to 80,000 shares of the Company's Class A Common Stock at an exercise price of $8.625 per share. Exercise of the option is contingent on the Company's recovery of its capital investment in GRO including debt assumed if the Company were to sell GRO, and upon certain GRO income performance measures. The transaction is accounted for as a purchase and resulted in $2.8 million of goodwill which is being amortized over 15 years. The contingent purchase price will be recorded as a component of goodwill at the value of the options issued, if and when such options are exercisable. Effective with this agreement, the operating results of GRO have been consolidated within the financial statements of the Company, with a 5% minority interest due to another GRO shareholder. Prior to April 15, 1999, the Company accounted for its investment in GRO under the equity method and recorded losses of $618,000, $645,000 and $60,000 in 1999, 1998 and 1997, respectively, in other income, net. Genesee & Wyoming Australia Pty. Ltd. - ------------------------------------- On August 28, 1997, the Company's wholly-owned subsidiary, Genesee & Wyoming Australia Pty. Ltd. ("GWIA"), was awarded the contract to purchase certain selected assets of the railroad freight operation of SA Rail, a division of Australian National Railway which was controlled by the Commonwealth Government of Australia. SA Rail provided intrastate freight services in South Australia, interstate haulage of contract freight, rolling stock rental and maintenance, and interstate track maintenance. GWIA bid as part of a consortium including EDI Clyde Engineering and Transfield Pty. Ltd. EDI Clyde is a major Australian provider of railway rolling stock and holds the Australian license for GM/EMD locomotives. Transfield is a major Australian engineering, construction and infrastructure maintenance provider. On November 8, 1997 GWIA closed on the purchase of the assets and commenced operation of railroad freight service under the name of Australia Southern Railroad Pty. Ltd. The assets were acquired for approximately $33.1 million, including related costs. The assets consist primarily of road and track structure, railroad rolling stock and other equipment. 10 Latin American Rail LLC - ----------------------- On September 30, 1999, the Company closed on an agreement to acquire a 47.5% ownership interest in Latin American Rail LLC in Chile for approximately $1.0 million in cash and 25,532 shares of the Company's stock valued at approximately $281,000. Latin American Rail LLC owns 100% of Latin American Rail Investors, S.A. which in turn owns 4.0% of CB Transportes S.A., a company that has investments in several railroads in South America. The Company is accounting for this investment under the equity method of accounting for investments. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: -------------------------------- Activity in the Company's allowance for doubtful accounts was as follows (amounts in thousands): 1999 1998 1997 ---- ---- ---- Allowance for doubtful receivables: Balance beginning of year $ 250 $ 167 $ 171 Provisions 628 136 110 Charges (836) (53) (114) Established in acquisitions 1,222 -0- -0- -------- ------- ----- Balance end of year $ 1,264 $ 250 $ 167 ======== ======= ===== 5. PROPERTY AND EQUIPMENT: ----------------------- Major classifications of property and equipment are as follows (amounts in thousands): 1999 1998 Road properties $117,786 $ 92,638 Equipment and other 108,016 61,420 -------- ------- 225,802 154,058 Less- Accumulated depreciation and amortization 39,832 28,496 -------- ------- $185,970 $125,562 ======== ======== 6. OTHER ASSETS: ------------- Major classifications of other assets are as follows (amounts in thousands): 1999 1998 ---- ---- Goodwill $ 7,763 $ 4,238 Chiapas-Mayab Operating License 5,213 --- Chiapas-Mayab Special Escrow Deposit - Track Project 9,668 --- Deferred financing costs 3,932 2,456 Assets held for sale or future use 1,867 2,239 Other 4,364 3,615 -------- ------- 32,807 12,548 Less- Accumulated amortization 3,056 2,229 -------- ------- $ 29,751 $ 10,319 ======= ======== 11 Goodwill is being amortized on a straight-line basis over lives of 15-20 years. The Chiapas-Mayab Operating License (see Note 3.) is being amortized over 30 years. The Chiapas-Mayab Special Escrow Deposit - Track Project (see Note 3.) is not currently being amortized. Deferred financing costs are amortized over terms of the related debt using the straight-line method, which is not materially different from the amortization computed using the effective-interest method. Assets held for sale or future use primarily represent railroad track and related structures of a segment of track that has been inactive since 1996 as a result of the closure of that segment's primary customer's facility. A similar facility is currently under construction by another customer on that same segment of track and it is expected that these assets will be put back into service when the customer's new facility is put in service. 7. LEASES: ------- Lessor - ------ As of December 31, 1999, the Company had no significant operating leases as lessor. During 1999, the Company sold 166 railroad freight cars, which were previously leased to third-parties. The proceeds of the sale were used to acquire railroad rolling stock which had previously been utilized under terms of a capital lease. During 1998, the Company sold, through several transactions, approximately 530 railroad freight cars which had previously accounted for a significant portion of the Company's minimum future rentals receivable on noncancelable operating leases. The proceeds of the sales were used to acquire railroad rolling stock which had previously been utilized under terms of a capital lease. Lessee - ------ The Company has entered into several leases for rolling stock, locomotives and other equipment. Operating lease expense for the years ended December 31, 1999, 1998 and 1997 was approximately $9.1 million, $6.3 million and $2.0 million, respectively. On December 7, 1999, the Company completed the sale of 483 of its freight cars to a financial institution for a net sale price of $8,630,000. The proceeds were used to reduce borrowings under the Company's revolving credit facilities. Simultaneously, the Company entered into agreements with the financial institution to lease these 483 freight cars and an additional 100 centerbeam flat cars for a period of at least 8 years including automatic renewals. The sale/leaseback transaction resulted in a deferred gain of $612,000, which will be amortized over the term of the lease as a non-cash offset to rent expense. These leases also include an option to purchase all of the cars, subject to certain conditions. If certain conditions related to the return of the cars are met, the Company could be required to pay a fee. In December 1997, the Company entered into an agreement with a bank to lease 911 boxcars for a period of at least five years including automatic renewals. The lease also includes an option to purchase all of the cars, subject to certain conditions, at the end of the lease term. If certain conditions related to the return of the cars are met, the Company could be required to pay a fee equal to one year of lease payments. The remainder of this page is intentionally left blank. 12 The following is a summary of future minimum payments under noncancelable leases (amounts in thousands): 2000--------------------------------$ 6,664 2001-------------------------------- 2,856 2002-------------------------------- 2,133 2003-------------------------------- 1,532 2004-------------------------------- 1,374 Thereafter-------------------------- 2,409 ------ Total minimum payments--------------$16,968 ======= The Company is party to two lease agreements with Class I carriers to operate 238 miles of track in Oregon. Under the leases, no payments to the lessor are required as long as certain operating conditions are met. The leases are subject to an initial 20 year term and shall be renewed for successive ten year renewal terms, unless either party elects not to renew the leases. If the lessor terminates the leases for any reason, the lessor must reimburse the Company for its depreciated basis in the property. The Company has assumed all operating and financial responsibilities including maintenance and regulatory compliance under these lease arrangements. Through December 31, 1999, no payments were required under either lease arrangement. 8. LONG-TERM DEBT: --------------- Long-term debt consists of the following (amounts in thousands):
1999 1998 -------- ------- Credit facilities with variable interest rates (weighted average of 8.4% and 7.0% at December 31, 1999 and 1998, respectively), net of unamortized discount of $101 and $195 at December 31, 1999 and 1998, respectively. $ 97,395 $ 33,604 Promissory note payable with interest at 8%. 8,922 8,922 Capital lease obligations with variable interest at LIBOR plus 1.5%. Balance paid in February, 1999. --- 6,500 Variable rate loan with balance paid in August, 1999. --- 14,088 Other debt with interest rates up to 8% and maturing at various dates between 2000 and 2006. 2,059 2,576 -------- -------- 108,376 65,690 Less- Current portion 15,146 2,591 -------- -------- Long-term debt, less current portion $ 93,230 $ 63,099 ======== ========
Credit Facilities - ----------------- On August 17, 1999, the Company amended and restated its primary credit facilities agreement to provide for an increase from $65.0 million to $150.0 million. The agreement provides for $88 million in revolving credit facilities (with a sub limit of $15 million in Australian dollar equivalents to be allocated to the Australian subsidiaries) and $62.0 million in term loan facilities consisting of a U.S. Term Loan facility in the amount of $10.0 million, a Canadian Term Loan facility in the Canadian Dollar Equivalent of $22.0 million, and a Mexican Term Loan facility of $30.0 million. The term loans are due in quarterly installments and mature, along with the revolving credit facilities, on 13 August 17, 2004. The credit facilities accrue interest at various rates depending on the country in which the funds are drawn, plus the applicable margin, which varies from 1.75% to 2.5% depending upon the country in which the funds are drawn and the Company's funded debt to EBITDA ratio, as defined in the agreement. Interest is payable in arrears based on certain elections of the Company, not to exceed three months outstanding. The Company pays a commitment fee which varies between 0.375% and 0.500% per annum on all unused portions of the revolving credit facility depending on the Company's funded debt to EBITDA ratio. The credit facilities agreement requires mandatory prepayments from the issuance of new equity or debt and annual sale of assets in excess of varying minimum amounts depending on the country in which the sales occur. The credit facilities are secured by essentially all the assets of the Company and its subsidiaries. The credit facilities agreement requires the maintenance of certain covenant ratios or amounts, including, but not limited to, funded debt to EBITDA, minimum EBITDA for a period, cash flow coverage, and Net Worth, all as defined in the agreement. The Company and its subsidiaries were in compliance with the provisions of these covenants as of December 31, 1999. Borrowings under the Canadian portion of the amended agreement were used to refinance certain GRO debt. In conjunction with that refinancing, the Company recorded a non-cash after tax extraordinary charge of $262,000 related to the unamortized deferred financing costs of the retired debt. Promissory Note - --------------- The promissory note payable provides for annual principal payments of $1,187,000 provided a certain subsidiary of the Company meets certain levels of revenue and cash flow. In accordance with these provisions, the Company was not required to make any principal payments in 1999 or 1998. The terms of the agreement call for payment of all outstanding principal in 2000. Capital Lease Obligation - ------------------------ In March, 1997, the Company entered into a master lease agreement with a leasing company. The lease provided for the inclusion of up to $13.0 million in railroad rolling stock. During 1998, the Company reduced its lease obligation through the purchase of $5.3 million of rolling stock assets held under the master lease agreement. The remaining assets held under the master lease agreement were purchased in February, 1999. Variable Rate Loan - -------------------- In November, 1997, the Company entered into a variable rate loan denominated in Australian currency which called for semi-annual payments commencing on June 30, 1999, with the final installment due in November, 2002. There was a fixed interest rate swap over 50% of the loan balance, effectively fixing the interest rate at 6.24% for 50% of the loan for the life of the loan. The loan was secured by a first ranking fixed and floating charge over all the present and future assets of the Australia Southern Railroad Pty. Ltd. and SA Rail Pty. Ltd. and control over all indebtedness of the Australia Southern Railroad Pty. Ltd. to Genesee & Wyoming Australia Pty. Ltd. This loan was repaid in August 1999 with proceeds from the amended credit facilities. The remainder of this page is intentionally left blank. 14 Schedule of Future Payments - --------------------------- The following is a summary of the maturities of long-term debt as of December 31, 1999 (amounts in thousands): 2000.............................................$15,146 2001............................................. 7,921 2002............................................. 9,920 2003............................................. 11,928 2004............................................. 22,200 Thereafter....................................... 41,261 ------ $108,376 ======= 9. INTEREST RATE RISK MANAGEMENT: ------------------------------ The Company uses derivative financial instruments, specifically interest rate caps and interest rate swaps, to manage its variable interest rate risk on long- term debt. Interest Rate Swap - In December 1999, the Company entered into a two-year interest rate swap agreement with a financial institution effectively fixing its interest rate by exchanging its variable interest rate on long-term debt for a fixed interest rate. The fixed rate is reset quarterly through December 31, 2001, beginning at 6.120% through March 31, 2000 and escalating to 6.875% by December 31, 2001. The notional amount under this agreement is $18.0 million. Management estimates the carrying value of this interest rate swap to approximate fair value. Interest Rate Swap--In November and December, 1998, the Company entered into two-year interest rate swap agreements with a financial institution whereby, effective December 31, 1998, the Company fixed its LIBOR interest rate at an average of 4.98% by exchanging its variable interest rate on long-term debt for a fixed interest rate. The notional amount under these agreements is $20.0 million. Management estimates the carrying value of this interest rate swap to approximate fair value. Interest Rate Swap--In November, 1997, a subsidiary of the Company entered into a five-year interest rate swap agreement with a financial institution effectively fixing its interest rate at 6.24% by exchanging its variable interest rate on long-term debt for a fixed interest rate. The notional amount under this agreement is $7.5 million. Management estimates the carrying value of this interest rate swap to approximate fair value. Interest Rate Swap--In November, 1997, a subsidiary of the Company entered into a five-year interest rate swap agreement with a financial institution effectively fixing its interest rate at 6.16% by exchanging its variable interest rate on long-term debt for a fixed interest rate. The notional amount under this agreement is $7.2 million. Management estimates the carrying value of this interest rate swap to approximate fair value. The remainder of this page is intentionally left blank. 15 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS: ----------------------------------------------- The Company administers one noncontributory defined benefit plan for non-union employees of a subsidiary. Benefits are determined based on a fixed amount per year of credited service. The Company's funding policy is to make contributions for pension benefits based on actuarial computations which reflect the long-term nature of the plan. The Company has met the minimum funding requirements according to the Employee Retirement Income Security Act. Historically, the Company has provided certain health care and life insurance benefits for certain retired employees. Eligible employees include union employees of one of its subsidiaries, and certain nonunion employees who have reached the age of 55 with 30 or more years of service. The Company funds the plan on a pay-as-you-go basis. The following provides a reconciliation of benefit obligation, plan assets, and funded status of the plans (dollars in thousands):
Other Retirement Pension Benefits 1999 1998 1999 1998 ---- ---- ---- ---- Change in benefit obligation: Benefit obligation at beginning of year $1,098 $ 774 $ 544 $ 492 Service cost 179 149 2 -- Interest cost 76 58 36 34 Actuarial (gain) loss (85) 117 169 61 Benefits paid (1) -- (45) (43) ------ ------ ------ ------ Benefit obligation at end of year $1,267 $1,098 $ 706 $ 544 ------ ------ ------ ------ Change in plan assets: Fair value of assets at beginning of year $ 443 $ 362 -- -- Actual return on plan assets 21 81 -- -- Employer contribution 557 -- $ 45 $ 43 Benefits paid (1) -- (45) (43) ------ ------ ------ ------ Fair value of assets at end of year $1,020 $ 443 -- -- ------ ------ ------ ------ Reconciliation of Funded Status: Funded status ($247) ($655) ($706) ($544) Unrecognized net actuarial (gain) loss (45) 24 54 (123) Unrecognized prior service cost 227 250 -- -- ------ ------ ------ ------ Accrued benefit obligation ($65) ($381) ($652) ($667) ------ ------ ------ ------ Weighted-average assumptions as of December 31, 1999 and September 30, 1998, respectively: Discount rate 7.5% 7.0% 7.75% 7.0% Expected return on plan assets 8.5% 8.5% N/A N/A Rate of compensation increase 4.5% 5.0% N/A N/A
16
Other Retirement Pension Benefits 1999 1998 1999 1998 ---- ---- ---- ---- Components of net periodic benefit cost: Service cost $ 179 $ 149 $ 2 -- Interest cost 76 58 36 $ 34 Expected return on plan assets (38) (31) -- -- Amortization of prior service cost 24 23 -- -- Amortization of (gain) loss -- -- (6) (13) ----- ----- ----- -------- Net periodic benefit cost $ 241 $ 199 $ 32 $ 21 ===== ===== ===== ========
For measurement purposes, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 1999. The rate was assumed to decrease gradually over the next three years to 5.0% and remain at that level thereafter. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing (decreasing) the assumed health care cost trend rates by one percentage point in each year would increase (decrease) the aggregate of the service and interest cost components of the net periodic postretirement benefit cost and the end of the year accumulated postretirement benefit obligation as follows: 1 - Percentage 1 - Percentage Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 2,860 $ (2,507) Effect on postretirement benefit obligation $ 53,527 $(46,957) Employee Bonus Programs - ----------------------- The Company has performance-based bonus programs which include a majority of non-union employees. Key employees are granted bonuses on a discretionary basis. Total compensation of approximately $1.7 million, $1.4 million and $1.0 million was awarded under the various bonus plans in 1999, 1998 and 1997, respectively. Profit Sharing - -------------- The Company has three 401(k) plans covering certain union and non-union employees who have met specified length of service requirements. The 401(k) plans qualify under Section 401(k) of the Internal Revenue Code as salary reduction plans. Employees may elect to contribute a certain percentage of their salary on a before-tax basis. Under two of these plans, the Company matches participants' contributions up to 1.5% of the participants' salary. Under the third plan, the Company matches participants' contributions up to 5.0% of the participants' salary. The Company's contributions to the plans in 1999, 1998 and 1997 were approximately $264,000, $244,000 and $226,000, respectively. Postemployment Benefits - ----------------------- The Company does not provide any significant postemployment benefits to its employees. 17 11. INCOME TAXES: ------------- The Company files consolidated U.S. federal income tax returns which include all of its U.S. subsidiaries. Each of the Company's foreign subsidiaries files appropriate income tax returns in their respective countries. The components of income before provision for income taxes for the presented periods are as follows (amounts in thousands): 1999 1998 1997 ------- ------- ------- United States $ 9,016 $12,942 $13,130 Foreign (U.S.$) 5,954 6,200 309 ------- ------- ------- $14,970 $19,142 $13,439 ======= ======= ======= No provision is made for the U.S. income taxes applicable to the undistributed earnings of foreign subsidiaries as it is the intention of management to utilize those earnings in the operations of the foreign subsidiaries for the foreseeable future. In the event earnings should be distributed in the future, those distributions may be subject to U.S. income taxes (appropriately reduced by available foreign tax credits, some of which would become available upon the distribution) and withholding taxes payable to various foreign countries. The amount of undistributed earnings of the Company's foreign subsidiaries as of December 31, 1999 is $12.0 million. It is not practicable to determine the amount of U.S. income taxes or foreign withholding taxes that could be payable if a distribution of earnings were to occur. The components of the provision for income taxes are as follows (amounts in thousands): United States: 1999 1998 1997 -------- ------ ------ Current- Federal $ 1,265 $ 2,055 $ 2,095 State 952 715 670 Deferred 2,381 2,642 2,561 ------- ------- ------- 4,598 5,412 5,326 ------- ------- ------- Foreign (U.S.$): Current (1,212) 1,735 -- Deferred (1,211) 561 115 ------- ------- ------- (2,423) 2,296 115 ------- ------- ------- Total $ 2,175 $ 7,708 $ 5,441 ======= ======= ======= The provision for income taxes differs from that which would be computed by applying the statutory U.S. federal income tax rate to income before taxes. The following is a summary of the effective tax rate reconciliation: 1999 1998 1997 -------- ----- ----- Tax provision at statutory rate 35.0% 35.0% 34.0% Effect of foreign operations (104.9%) 0.7% 0.1% State income taxes, net of federal income tax benefit 6.0% 4.0% 5.7% Change in valuation allowance 74.8% -- -- Other, net 3.6% 0.6% 0.7% ------ ---- ---- Effective income tax rate 14.5% 40.3% 40.5% ====== ==== ==== 18 Deferred income taxes reflect the net income effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as available income tax credits. The components of net deferred income taxes as of the presented year ends are as follows (amounts in thousands): 1999 1998 ---------- --------- Deferred tax benefits- Accruals and reserves not deducted for tax purposes until paid $ 2,511 $ 2,341 Alternative minimum tax credits 1,230 1,592 Net operating losses 5,013 -- Postretirement benefits 233 233 Other 121 128 --------- -------- 9,108 4,294 Deferred tax obligations - Property basis differences (7,969) (13,985) Valuation allowance (11,197) -- --------- -------- Net deferred tax obligations ($10,058) ($9,691) ========= ======== In the accompanying consolidated balance sheet, these deferred benefits and deferred obligations are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred tax obligation or benefit that is not related to an asset or liability for financial reporting, including deferred tax assets related to carry- forwards, are classified according to the expected reversal date of the temporary difference as of the end of the year. The Company's alternative minimum tax credit can be carried forward indefinitely; however, the Company must achieve future regular U.S. taxable income in order to realize this credit. The net operating loss carry-forwards consist of $10.3 million from the Company's Mexican operations (which expire, if unused, in 2009) and $2.2 million from the Company's Canadian operations (which expire, if unused, between 2004 and 2006). The Mexican losses, for income tax purposes, primarily relate to the immediate deduction of the purchase price paid for the FCCM operations and the Canadian losses primarily represent losses generated prior to the Company's gaining control of those operations in April 1999. In the third quarter of 1999, the Australian government enacted an income tax law that, for assets acquired from a tax-exempt entity, impacts the depreciable basis of those assets. The impact of the new law on the Company's Australian operation is that it will be able to deduct, for income tax purposes, depreciation in excess of the financial reporting basis of certain fixed assets acquired from the government in November 1997. However, management estimates that it is more likely than not that the Company will be unable to fully realize all of the potential income tax benefits and accordingly, has established a partial valuation allowance against the deferred tax assets recorded pursuant to the tax law change. Accordingly, the net income tax benefit recorded in the 1999 third quarter as a result of this tax law change was $4.2 million. Management's assessment of the likelihood of realizing the full benefit of this incremental tax depreciation included a review of the Australian operation's forecasted results for the next several years which indicated that, with the additional tax depreciation deductions and other accelerated deductions for income tax purposes, this operation would not likely realize this tax benefit. 19 In addition to the valuation allowance described above, the income tax benefit of the Mexican and Canadian net operating losses have been offset by a partial valuation allowance based on management's assessment regarding their ultimate realization. A certain portion of this incremental valuation allowance was established in the acquisition of GRO, and accordingly, if reversed in the future, will result in a decrease to goodwill. Management does not believe that a valuation allowance is required for any other deferred tax assets based on anticipated future profit levels and the reversal of current deferred tax obligations. The Australian government also enacted legislation effective in the fourth quarter of 1999 that will decrease the corporate income tax rate from its current level of 36% to 34% for the year beginning January 1, 2000 and 30% for the years beginning January 1, 2001 and thereafter. The effect of this change was not material. 12. GRANTS FROM GOVERNMENTAL AGENCIES: ---------------------------------- The Company periodically receives grants from states within which it operates for rehabilitation or construction of track. The states are typically required to reimburse the Company for 75% to 100% of the total cost of specific projects. Under two such grant programs, the Company received $6.1 million and $375,000 in 1999 and 1998, respectively, from the State of New York and $4.5 million and $2.8 million in 1999 and 1998, respectively, from the State of Pennsylvania. The grant from the State of New York is for construction of approximately 2.0 miles of new track which will serve as a connection to a new salt mine currently under construction, and rehabilitation of a portion of existing track. The grants from the State of Pennsylvania are for rehabilitation of portions of existing track. In addition, the Company received $200,000 and $23,000 of grants in 1999 and 1998, respectively, from other states. As of December 31, 1999, the Company is under agreement to receive an additional $3.6 million of grants for projects in progress at that date. None of the Company's grants represent a future liability of the Company unless the Company abandons the rehabilitated or new track structure within a specified period of time or fails to maintain the rehabilitated or new track to certain FRA standards and make certain minimum capital improvements, as defined in the respective agreements. As the Company intends to comply with these agreements, the Company has recorded additions to road property and has deferred the amount of the grants as the rehabilitation expenditures have been incurred. The amortization of deferred grants is a non-cash offset to depreciation expense over the useful life of the related assets and is not included as taxable income. During the years ended December 31, 1999, 1998 and 1997, the Company recorded offsets to depreciation expense from grant amortization of $1.0 million, $728,000 and $719,000, respectively. 13. COMMITMENTS AND CONTINGENCIES: ------------------------------ The Company has built its portfolio of railroad properties primarily through the purchase or lease of road and track structure and through operating agreements. These transactions have related only to the physical assets of the railroad property. Typically, the Company does not assume the operations or liabilities of the divesting railroads. Capital Commitment - Australia - ------------------------------ In connection with the Company's purchase of certain selected assets in Australia (see Note 3.), the Company has committed to the Commonwealth of Australia to spend approximately $34.1 million (AU $52.3 million) to rehabilitate track structures and equipment by December 31, 2002. The Commonwealth Government may require the payment of any shortfall between the actual expenditures incurred and the contracted commitment from 20 the date of acquisition to December 31, 2002. This commitment may be renegotiated if there is a significant change in operating conditions outside the control of the Company. As of December 31, 1999, $18.1 million (AU $27.6 million) of this commitment had been met. Consolidated Rail Corporation Merger - ------------------------------------ On July 23, 1998, the Surface Transportation Board ("STB") issued its written order approving the petition of CSX Transportation, Inc. ("CSX") and Norfolk Southern Corp. ("NS") to control and divide the assets of Consolidated Rail Corporation ("Conrail"). Railroads in the Company's New York and Pennsylvania region interchange with, or participate in overhead traffic with, one or both of these railroads. Overhead traffic is defined as traffic that neither originates nor terminates on the Company's northeastern rail network. In their joint filing with the STB, CSX and NS estimated that approximately $8.3 million in freight revenue related to overhead traffic on one of the Company's subsidiaries may be diverted as a result of the transactions. The Company substantially agrees with this estimate and is implementing operational changes aimed at minimizing this impact. On October 21, 1997, the Company and several of its railroads entered into a confidential Rate and Route Agreement with CSX that the Company believes will facilitate the operations' restructuring process. The STB's written order contains one or more conditions which also may minimize this impact. The division of Conrail's assets occurred on June 1, 1999. While the Company believes that agreements reached with CSX and NS in regard to the Conrail breakup will ultimately benefit the Company, the operational startups by CSX and NS of the former Conrail lines have created some operational challenges which have had a commensurate negative impact on financial performance. Although the effects of these challenges were expected, the Company continues to monitor the situation very carefully. Based on its initial studies, the Company believes that no impairment of its assets has occurred or will occur. Legal Proceedings - ----------------- The Company is a defendant in certain lawsuits resulting from railroad and industrial switching operations, one of which includes the commencement of a criminal investigation. Management believes that the Company has adequate defenses to any criminal charge which may arise and that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits. While it is possible that some of the foregoing matters may be resolved at a cost greater than that provided for, it is the opinion of management that the ultimate liability, if any, will not be material to the Company's results of operations or financial position. On August 6, 1998, a lawsuit was commenced against the Company and its subsidiary, Illinois & Midland Railroad, Inc. ("IMRR"), by Commonwealth Edison Company ("ComEd") in the Circuit Court of Cook County, Illinois. The suit alleges that IMRR is in breach of certain provisions of a stock purchase agreement entered into by a prior unrelated owner of the IMRR rail line. The provisions allegedly pertain to limitations on rates received by IMRR and the unrelated predecessor for freight hauled for ComEd's Powerton plant. The suit seeks unspecified compensatory damages for alleged past rate overcharges. The Company believes the suit is without merit and intends to vigorously defend against the suit. The parent company of ComEd has sold certain of ComEd's power facilities, one of which is the Powerton plant served by IMRR under the provisions of a 1987 Service Assurance Agreement (the "SAA"), entered into by a prior unrelated owner of the IMRR rail line. The SAA, which is not terminable except for failure to perform, provides that IMRR has exclusive access to provide rail service to the Powerton plant. On April 6, 1999, a lawsuit was commenced by the Company and its subsidiary, IMRR, against ComEd in the Circuit Court of Sangamon County, Illinois. The suit sought declaration of certain 21 rights regarding the SAA including declarations that the SAA is not terminable at will and that ComEd must assign its contractual obligations under the SAA to the purchaser of the Powerton plant. On June 10, 1999, the suit commenced by the Company and IMRR, against ComEd in Sangamon County was voluntarily withdrawn without prejudice in partial resolution of several procedural motions pending in the Cook County action, and with the explicit recognition from ComEd that the action may be re- filed in Cook County. Revenue for haulage to the Powerton plant accounted for 6.6% and 6.3% of the consolidated revenues of the Company and its subsidiaries in 1999 and 1998, respectively. Failure to satisfactorily resolve this litigation could have a material adverse effect on the Company. 14. STOCK-BASED COMPENSATION PLANS: ------------------------------- The Company established an incentive and nonqualified stock option plan for key employees and a nonqualified stock option plan for non-employee directors (the "Stock Option Plans"). The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1999 1998 1997 ---- ---- ---- Net Income: As reported $12,533 $11,434 $7,998 Pro Forma 11,468 10,451 7,332 Basic EPS: As reported $ 2.79 $ 2.20 $ 1.52 Pro Forma 2.55 2.01 1.40 Diluted EPS: As reported $ 2.76 $ 2.19 $ 1.47 Pro Forma 2.53 2.01 1.34 In May, 1998, the Company reduced the number of shares of stock it may sell to its full-time employees under its Stock Purchase Plan from 450,000 to 250,000. At December 31, 1999 and 1998, 7,961 and 4,502 shares had been purchased under this plan. The Company sells shares at 100% of the stock's market price at date of purchase, therefore, no compensation cost exists for this plan. The Company has reserved 900,000 shares of Class A Common Stock for issuance under the Stock Option Plans. The Compensation and Stock Option Committee of the Company's Board of Directors has discretion to determine employee grantees, dates and amounts of grants, vesting and expiration dates. However, under both Plans, the exercise price must equal at least 100% of the stock's market price on the date of grant and must be exercised within five years, or ten years for directors, from the date of grant. The remainder of this page is intentionally left blank. 22 The following is a summary of stock option activity for 1999, 1998 and 1997: Year Ended Year Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1997 Wtd. Ave. Wtd. Ave. Wtd. Ave. Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of the year 652,375 $19.51 406,975 $18.46 421,500 $18.61 Granted 124,400 8.57 251,600 21.25 4,000 27.25 Exercised --- --- 500 17.00 3,275 17.00 Forfeited 14,525 21.16 5,700 20.81 15,250 25.11 ------- ------- ------- Outstanding at end of year 762,250 17.72 652,375 19.51 406,975 18.46 ======= ======= ======= Exercisable at end of year 367,886 18.86 205,415 18.41 101,354 18.41 ======= ======= ======= Weighted average fair value of options granted --- 4.16 --- 8.97 --- 17.51 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.40% 5.48% 5.91% Expected dividend yield 0.00% 0.00% 0.00% Expected lives in years 5.90 5.00 10.00 Expected volatility 39.50% 37.77% 38.64% 15. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION: ------------------------------------------------- The Company operates in three business segments in two geographic areas: North America Railroad Operations, which includes operating short line and regional railroads, and buying, selling, leasing and managing railroad transportation equipment within the United States, Canada and Mexico; Australia Railroad Operations, which includes operating a regional railroad and providing hook and pull (haulage) services to other railroads within Australia; and Industrial Switching, which includes providing freight car switching and related services to industrial companies with extensive railroad facilities within their complexes in the United States. Corporate overhead expenses, including acquisition expenses, are reported in North America Railroad Operations. The accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its operating segments based on operating income. Intersegment sales and transfers are not significant. Summarized financial information for each business segment and for each geographic area for the years 1999, 1998 and 1997 are shown in the following tables (amounts in thousands): 23
North America Australia ------------- --------- Industrial Railroad Switching Railroad 1999 Operations Operations Total Operations Total - ---------------------------------------------------------------------------------- Revenues $121,093 $11,341 $132,434 $43,152 $175,586 Operating income (loss) 15,900 (86) 15,814 6,554 22,368 Depreciation and amortization 9,649 768 10,417 2,157 12,574 Identifiable assets 251,624 8,319 259,943 41,997 301,940 Capital expenditures 29,129 130 29,259 6,508 35,767 - ---------------------------------------------------------------------------------- 1998 - ---------------------------------------------------------------------------------- Revenues $88,097 $12,647 $100,744 $46,728 $147,472 Operating income (loss) 12,546 (1,798) 10,748 8,820 19,568 Depreciation and amortization 7,277 798 8,075 1,842 9,917 Identifiable assets 167,095 9,588 176,683 40,077 216,760 Capital expenditures 13,789 450 14,239 2,662 16,901 - ---------------------------------------------------------------------------------- 1997 - ---------------------------------------------------------------------------------- Revenues $84,388 $11,824 $96,212 $7,431 $103,643 Operating income (loss) 16,565 (827) 15,738 705 16,443 Depreciation and amortization 6,093 661 6,754 246 6,999 Identifiable assets 160,238 9,731 169,969 40,563 210,532 Capital expenditures 13,523 348 13,871 20 13,891 - ----------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL DATA: -------------------------
Quarterly Results (Unaudited) First Second Third Fourth (in thousands, except per share data) Quarter Quarter Quarter Quarter 1999 - ---- Operating revenues ................................ $ 34,172 $ 42,669 $ 45,063 $ 53,682 Income from operations ............................ 2,038 5,723 6,351 8,257 Net income ........................................ (331) 2,746 6,691 3,429 Diluted earnings per share ........................ (0.07) 0.62 1.53 0.78 - ------------------------------------------------------------------------------------------------------- 1998 - ---- Operating revenues ................................ $ 37,740 $ 37,065 $ 34,707 $ 37,960 Income from operations ............................ 4,974 4,672 4,138 5,784 Net income ........................................ 2,282 1,846 1,403 5,902 Diluted earnings per share ........................ 0.42 0.34 0.27 1.19 - ------------------------------------------------------------------------------------------------------- 1997 - ---- Operating revenues ................................ $ 24,092 $ 23,479 $ 23,670 $ 32,402 Income from operations ............................ 4,035 4,171 3,901 4,336 Net income ........................................ 2,134 2,157 2,127 1,580 Diluted earnings per share ........................ 0.39 0.40 0.39 0.29 - -------------------------------------------------------------------------------------------------------
24 The third quarter of 1999 includes $4.2 million of nonrecurring income tax benefit related to a favorable income tax legislation change in Australia (see Note 11.). The fourth quarter of 1998 includes $6.0 million of pre-tax nonrecurring other income related to proceeds from an insurance settlement (see Note 2.). 17. RECENTLY ISSUED ACCOUNTING STANDARDS: ------------------------------------- The Financial Accounting Standards Board recently issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and hedging activities. The new standard requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value with changes in fair value reported in income. This statement will require the Company to provide separate disclosure of derivative instruments either on the face of the balance sheet or within the footnotes to the financial statements. Adoption of this statement is required no later than the third quarter of 2000, which is when the Company expects to adopt it. The Company is in the process of assessing the impact of this statement. 25 EX-11.1 2 COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 GENESEE & WYOMING INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (in thousands, except per share amounts)
For the years ended December 31, 1999 1998 1997 ---- ---- ---- BASIC EARNINGS PER SHARE CALCULATION: Net Income $12,533 $11,434 $ 7,998 Weighted average number of shares of common stock 4,491 5,187 5,250 Earnings per share - basic $ 2.79 $ 2.20 $ 1.52 DILUTED EARNINGS PER SHARE CALCULATION: Net Income $12,533 $11,434 $ 7,998 Weighted average number of shares of common stock and common stock equivalents outstanding: Weighted average number of shares of common stock 4,491 5,187 5,250 Common stock equivalents applicable to warrants -- -- 42 Common stock equivalents issuable under stock option plans 49 42 155 Weighted average number of shares of common stock and common stock equivalents - diluted 4,540 5,229 5,447 Earnings per share - diluted $ 2.76 $ 2.19 $ 1.47
EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Direct or Indirect Subsidiary Corporations State of Formation Allegheny & Eastern Railroad, Inc. Delaware Australia Southern Railroad Pty Ltd. South Australia Bradford Industrial Rail, Inc. Delaware Buffalo & Pittsburgh Railroad, Inc. Delaware Carolina Coastal Railway, Inc. Virginia Commonwealth Railway, Inc. Virginia Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. Mexico Corpus Christi Terminal Railroad, Inc. Delaware Dansville and Mount Morris Railroad Company (The) New York Genesee & Wyoming Australia Pty Limited South Australia Genesee & Wyoming Investors, Inc. Delaware Genesee & Wyoming Railroad Company New York Genesee & Wyoming Railroad Services, Inc. Delaware Genesee Rail-One, Inc. Canada Golden Isles Terminal Railroad, Inc. Delaware Grande Prairie-Grande Cache Railway Inc. Canada GWI Canada, Inc. Delaware GWI Dayton, Inc. Delaware GWI Leasing Corporation Delaware GWI Rail Management Corporation Delaware G.W. Mexico SA de C.V. Mexico Huron Central Railway Inc. Canada Illinois & Midland Railroad, Inc. Delaware Kittanning Equipment Leasing Co. Pennsylvania Louisiana & Delta Railroad, Inc. Delaware Mirabel Railway, Inc. Canada Pittsburg & Shawmut Railroad, Inc. Delaware Portland & Western Railroad, Inc. New York Quebec-Gatineau Railway Inc. Canada Rail One, Inc. Canada Rail Link, Inc. Virginia Rochester & Southern Railroad, Inc. New York S A Rail Pty Limited South Australia Savannah Port Terminal Railroad, Inc. Delaware Talleyrand Terminal Railroad Company, Inc. Virginia Willamette & Pacific Railroad, Inc. New York EX-23.1 4 CONSENT OF ARTHUR ANDERSEN Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 10, 2000 included in this Form 10-K, into the Company's previously filed registration statements on Form S-8 (File nos. 333-09165, 333-49231 and 333-90845). /s/ Arthur Andersen LLP Chicago, Illinois March 27, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET, INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 7,791 0 47,870 0 6,140 72,578 225,802 39,832 301,940 77,385 93,230 0 0 53 81,776 301,940 175,586 175,586 153,218 153,218 (1,064) 0 8,462 14,970 2,175 12,795 0 (262) 0 12,533 2.79 2.76
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