-----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, Mlq4QBVagguNyN7xT+XnHYmiEe92azFWUJusPTbbq8HHOm7wKpbG1+vFsY93KplK dC9Mmp9rGgjy/QWdtWEcgw== 0000950130-99-004795.txt : 19990816 0000950130-99-004795.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950130-99-004795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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-Q SEC ACT: SEC FILE NUMBER: 000-20847 FILM NUMBER: 99686749 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-Q 1 FORM 10-Q FOR THE QUARTER ENDED 6/30/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended June 30, 1999 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.) Shares of common stock outstanding as of the close of business on August 6, 1999: Class Number of Shares Outstanding - ----- ---------------------------- Class A Common Stock 3,452,605 Class B Common Stock 845,539 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 INDEX Part I - Financial Information Item 1. Financial Statements: Page ------ Consolidated Statements of Income - For the Three Month and Six Month Periods Ended June 30, 1999 and 1998................................ 3 Consolidated Balance Sheets - June 30, 1999 and December 31, 1998............................ 4 Consolidated Statements of Cash Flows - For the Six Month Periods Ended June 30, 1999 and 1998......................................... 5 Notes to Consolidated Financial Statements......... 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 10 - 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 26 Part II - Other Information.................................. 27 - 28 Index to Exhibits............................................ 29 - 30 Signatures................................................... 31 2 GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 ----------------------------------------------------------------- OPERATING REVENUES $ 42,669 $ 37,065 $ 76,841 $ 74,806 ----------------------------------------------------------------- OPERATING EXPENSES: Transportation 13,465 11,958 24,778 23,772 Maintenance of ways and structures 4,782 4,478 8,942 8,683 Maintenance of equipment 8,524 7,113 15,466 14,872 General and administrative 7,023 6,351 14,048 13,036 Depreciation and amortization 3,152 2,493 5,846 4,797 ----------------------------------------------------------------- Total operating expenses 36,946 32,393 69,080 65,160 ----------------------------------------------------------------- INCOME FROM OPERATIONS 5,723 4,672 7,761 9,646 Interest expense (1,930) (1,642) (3,324) (3,204) Other income (expense) 381 175 (216) 569 ----------------------------------------------------------------- Income before provision for income taxes 4,174 3,205 4,221 7,011 Provision for income taxes 1,428 1,359 1,807 2,883 ----------------------------------------------------------------- NET INCOME $ 2,746 $ 1,846 $ 2,414 $ 4,128 ================================================================= Earnings per common share - basic $ 0.62 $ 0.35 $ 0.52 $ 0.78 ================================================================= Weighted average number of shares of common stock - basic 4,416 5,294 4,673 5,294 ================================================================= Earnings per common share - diluted $ 0.62 $ 0.34 $ 0.51 $ 0.76 ================================================================= Weighted average number of shares of common stock - diluted 4,439 5,400 4,704 5,398 =================================================================
3 GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
June 30, Dec. 31, 1999 1998 ASSETS (Unaudited) ----------------------------- CURRENT ASSETS: Cash and cash equivalents $ 11,847 $ 14,396 Accounts receivable, net 33,844 31,723 Materials and supplies 5,666 3,502 Prepaid expenses and other 3,051 2,914 Deferred income tax assets, net 2,936 2,315 ----------------------------- Total current assets 57,344 54,850 ----------------------------- PROPERTY AND EQUIPMENT, net 160,457 125,562 ----------------------------- SERVICE ASSURANCE AGREEMENT, net 12,439 12,814 ----------------------------- INVESTMENT IN UNCONSOLIDATED AFFILIATES 327 13,215 ----------------------------- OTHER ASSETS, net 13,901 10,319 ----------------------------- Total assets $ 244,468 $ 216,760 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 5,595 $ 2,591 Accounts payable 33,784 28,814 Accrued expenses 9,203 11,338 ----------------------------- Total current liabilities 48,582 42,743 ----------------------------- LONG-TERM DEBT, less current portion 84,500 63,099 ----------------------------- OTHER LIABILITIES 4,367 2,803 ----------------------------- DEFERRED INCOME TAX LIABILITIES, net 13,666 12,006 ----------------------------- DEFERRED ITEMS--grants from governmental agencies 17,303 17,607 ----------------------------- DEFERRED GAIN--sale/leaseback 3,731 3,965 ----------------------------- MINORITY INTEREST 521 - ----------------------------- STOCKHOLDERS' EQUITY: Class A common stock, $0.01 par value, one vote per share; 12,000,000 shares authorized; 4,452,289 and 4,450,276 issued and outstanding on June 30, 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; 845,539 issued and outstanding on June 30, 1999 and December 31, 1998. 8 8 Additional paid-in capital 46,752 46,730 Retained earnings 37,359 34,490 Foreign currency translation adjustment (1,363) (2,107) Less treasury stock, at cost, 1,000,000 and 345,000 Class A shares held on June 30, 1999 and December 31, 1998, respectively. (11,003) (4,629) ----------------------------- Total stockholders' equity 71,798 74,537 ----------------------------- Total liabilities and stockholders' equity $ 244,468 $ 216,760 =============================
4 GENESEE & WYOMING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended June 30, 1999 1998 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,414 $ 4,128 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 5,846 4,797 Deferred income taxes (328) 1,919 Gain on disposition of property and equipment (139) --- Changes in assets and liabilities, net of effect of acquired business - Accounts receivable 3,513 3,581 Materials and supplies (430) 1,199 Prepaid expenses and other 401 (148) Accounts payable and accrued expenses (1,183) 1,017 Other assets and liabilities, net 126 322 --------------------------- Net cash provided by operating activities 10,220 16,815 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (6,871) (9,513) Cash received in purchase of Rail-One Inc. less cash paid for common stock 57 --- Proceeds from disposition of property 183 1,445 --------------------------- Net cash used in investing activities (6,631) (8,068) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term borrowings, including capital leases (29,761) (905) Proceeds from issuance of long-term debt 30,000 5,800 Net proceeds on grants 221 167 Proceeds from issuance of common stock 22 36 Purchase of treasury stock (6,374) --- --------------------------- Net cash provided by (used in) financing activities (5,892) 5,098 --------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (246) (175) --------------------------- INCREASE IN CASH AND CASH EQUIVALENTS (2,549) 13,670 CASH AND CASH EQUIVALENTS, beginning of period 14,396 11,434 --------------------------- CASH AND CASH EQUIVALENTS, end of period $ 11,847 $ 25,104 =========================== CASH PAID DURING PERIOD FOR: Interest $ 3,154 $ 3,329 Incomes taxes 4,076 1,301 SUPPLEMENTAL NON-CASH INVESTING ACTIVITIES: Acquisition of contolling interest of GRO: Receivables forgiven $ 11,742 --- Liabilities assumed 29,176 --- Assets acquired 40,861 --- Cash received, net of cash paid 57 ---
5 GENESEE & WYOMING INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries. References to "GWI" or the "Company" mean Genesee & Wyoming Inc. and, unless the context indicates otherwise, its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of management, the unaudited financial statements for the three-month and six-month periods ended June 30, 1999 and 1998 are presented on a basis consistent with audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 1998 included in the Company's Form 10-K. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. 2. CORPORATE DEVELOPMENTS: Compania de Ferrocarriles de Chiapas-Mayab, S.A. de C.V. On July 7, 1999, the Company announced that its newly-formed subsidiary, Compania de Ferrocarriles de Chiapas-Mayab, SA de CV ("FCCM") had been awarded the Chiapas-Mayab railway concession by the state-owned rail company Ferronales. FCCM's bid was 141 million pesos for the concession, or approximately $15 million at current exchange rates. In addition FCCM has committed to purchase locomotives, freight cars, and other assets used on the lines, and to complete significant track rehabilitation on one of the lines. 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 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. The transaction is expected to close approximately August 17, 1999 with FCCM starting operations on September 1, 1999. 3. GENESEE RAIL-ONE INC.: On April 15, 1999, the Company closed on an agreement to acquire Rail-One Inc. ("Rail-One") which has 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 6 million, will pay approximately $844,000 in cash to the owners of Rail-One in installments over a four year period, and granted options to the owners of Rail- One to purchase up to 80,000 shares of the Company's Class A Common Stock at an exercise price of $8.62 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 $2.2 million of goodwill which is 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. 4. LEASES: In March 1997, a subsidiary of the Company entered into a master capital lease agreement with a leasing company. The capital lease provided for the inclusion of up to $13.0 million in railroad rolling stock, of which $11.6 million was under commitment as of August, 1998. In September 1998, the Company completed an exchange of like-kind assets with the leasing company reducing its commitment under the master lease agreement by approximately $5.1 million. The remaining $6.5 million lease obligation was liquidated in February, 1999, through the purchase of the remaining assets held under the master lease agreement. 5. CONTINGENCIES: IMRR - 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 and ongoing rate overcharges. The Company believes the suit is without merit and intends to vigorously defend against the suit. The parent company of ComEd has contracted to sell 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, IMRR's suit against Com Ed 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. ComEd is currently IMRR's largest customer and in 1998 the Powerton plant accounted for 6.3% of the consolidated revenues of the Company and its subsidiaries. Failure to satisfactorily resolve this litigation could have a material adverse effect on the Company. 7 Conrail 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. Stock Repurchase - On August 12, 1998, the Company's board of directors authorized the Company's repurchase of up to one million shares of the Company's Class A common stock under Rule 10b-18. On May 10, 1999, the Company completed its purchase of the one million shares authorized by the board of directors at a total cost of $11.0 million. 6. COMPREHENSIVE INCOME: Comprehensive income is the total of net income and all other non-owner changes in equity. The following table sets forth the Company's comprehensive income for the periods ended June 30, 1999 and 1998: Statement of Comprehensive Income (in thousands)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net income $2,746 $1,846 $2,414 $4,128 Other comprehensive income - Foreign currency translation adjustments 337 (824) 744 (540) ------------------------------------------------------------- Comprehensive income $3,083 $1,022 $3,158 $3,588 =============================================================
7. BUSINESS SEGMENT INFORMATION: The Company operates in three business segments in four geographic areas: North American 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; Australian Railroad Operations, which includes operating a regional railroad and providing hook and pull 8 (haulage) services to other railroads within Australia; and Industrial Switching, which includes providing freight car switching and related services to industries with extensive railroad facilities within their complexes in the United States. Intersegment sales and transfers are not significant. Summarized financial information for each business segment for the three month and six month periods ended June, 1999 and 1998 are shown in the following tables:
Business Segment (amounts in thousands) Three Months Ended June 30, North American Australian Industrial Railroad Railroad Switching 1999 Operations Operations Operations Total - --------------------------------------------------------------------------------------- Revenues $ 29,054 $ 10,559 $ 3,056 $ 42,669 Operating income 4,338 1,162 223 5,723 Other expense, net (1,549) Income before taxes 4,174 Identifiable assets 190,913 43,515 10,040 244,468 - --------------------------------------------------------------------------------------- North American Australian Industrial Railroad Railroad Switching 1998 Operations Operations Operations Total - --------------------------------------------------------------------------------------- Revenues $ 21,526 $12,146 $ 3,393 $ 37,065 Operating income (loss) 3,122 2,122 (572) 4,672 Other expense, net (1,467) Income before taxes 3,205 Identifiable assets 168,810 41,705 9,923 220,438 - --------------------------------------------------------------------------------------- Six Months Ended June 30, North American Australian Industrial Railroad Railroad Switching 1999 Operations Operations Operations Total - --------------------------------------------------------------------------------------- Revenues $ 48,993 $21,580 $ 6,268 $ 76,841 Operating income (loss) 4,755 3,083 (77) 7,761 Other expense, net (3,540) Income before taxes 4,221 Identifiable assets 190,913 43,515 10,040 244,468 - --------------------------------------------------------------------------------------- North American Australian Industrial Railroad Railroad Switching 1998 Operations Operations Operations Total - --------------------------------------------------------------------------------------- Revenues $ 43,916 $24,412 $ 6,478 $ 74,806 Operating income (loss) 6,932 3,800 (1,086) 9,646 Other expense, net (2,635) Income before taxes 7,011 Identifiable assets 168,810 41,705 9,923 220,438 - ---------------------------------------------------------------------------------------
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in the Company's 1998 Form 10-K. General The Company is a holding company whose subsidiaries own and/or operate short line and regional freight railroads and provide related rail services in the United States, Australia, Canada and Mexico. The Company, through its U.S. industrial switching subsidiary, also provides freight car switching and related services to United States industries with extensive railroad facilities within their complexes. The Company generates revenues primarily from the movement of freight over track owned or operated by its railroads. The Company also generates non-freight revenues primarily by providing freight car switching and related rail services such as railcar leasing, railcar repair and storage to industries with extensive railroad facilities within their complexes, to shippers along its lines, and to the Class I railroads that connect with its U.S. and Canadian lines. The Company's operating expenses include wages and benefits, equipment rents (including car hire), purchased services, depreciation and amortization, diesel fuel, casualties and insurance, materials and other expenses. Car hire is a charge paid by a railroad to the owners of railcars used by that railroad in moving freight. Other expenses generally include property and other non-income taxes, professional services, communication and data processing costs and general overhead expense. When comparing the Company's results of operations from one reporting period to another, the following factors should be taken into consideration. The Company has historically experienced fluctuations in revenues and expenses such as one-time freight moves, customer plant expansions and shut-downs, railcar sales, accidents and derailments. In periods when these events occur, results of operations are not easily comparable to other periods. Also, much of the Company's growth to date has resulted from acquisitions. The Company completed two acquisitions during the first four months of 1996, one in November 1996, and another in November 1997, and effective April 15, 1999, the Company began consolidating the results of Genesee Rail-One Inc. (see "Genesee Rail-One Inc." immediately below and Note 3. to the consolidated financial statements). 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. 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-OneInc. ("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, will pay approximately $844,000 in cash to the owners of Rail-One in installments over a four year period, and granted options to the owners of Rail-One 10 to purchase up to 80,000 shares of the Company's Class A Common Stock at an exercise price of $8.62 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 $2.2 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. Year 2000 Compliance In late 1997, the Company began a comprehensive initiative to address and resolve potential exposure associated with the functioning of its information systems and non-information technology systems that include embedded technology with respect to dates in the Year 2000 and beyond. This initiative led to the development of the GWI Year 2000 Project Handbook. The Handbook was developed to report industry Year 2000 methods and standards, and document "best practices" for each of the Company's subsidiaries. Its purpose is to promote consistent implementation of the Year 2000 Project and encourage cost-effective practices and efficient use of resources. The Year 2000 Project Handbook contains information useful to managers, system analysts, and other technical staff members, including consultants and business partners. It is meant to be used as a reference throughout the Year 2000 design, modification, testing, and implementation phases. The Handbook addresses most of the obstacles the Company may face and their potential solutions, including project management issues, contracting and staffing, interface and data exchange standards, and test and development methodologies. Three major categories of systems addressed by the Company's Year 2000 Initiative are railroad operations/management systems, business systems and non- information technology systems. All of the Company's railroad operations and management processes are supported through licensed third party development and contracted operations. These systems are third party certified Year 2000 compliant. With respect to electronic commerce transmissions, the Company is currently capable of supporting certain Year 2000 compliant EDI (4010) transactions. Remaining Year 2000 compliant EDI transactions will be implemented according to industry-wide schedules. Full EDI compliance is expected during the third quarter of 1999. Because the potential exists that not all of the Company's trading partners will achieve Year 2000 compliance, the Company's operational systems will accommodate non-Year 2000 electronic commerce transmissions as well as Year 2000 ready transmissions. All of the Company's financial, purchasing, inventory, asset management, payroll and human resource systems supporting business operations are third party systems. The third party vendors have certified all packages to be Year 2000 compliant. With respect to non-information technology systems (e.g. fire and security, HVAC, etc.) that may impact operations and/or business processes, the Company has conducted initial assessments of its rail yard and office facilities and found no major Year 2000 problems or obstacles. 11 As part of its Year 2000 initiative, the Company is in communication with its interline carriers, significant suppliers, large customers and financial institutions to assess their Year 2000 readiness and expects to conduct interface tests with its external trading partners in 1999 upon completion of internal testing of remediated applications. To date, the Company has expended less than $50,000 on its Year 2000 initiative and remaining costs are expected to be minimal. Overall, the Company's Year 2000 initiative is proceeding on schedule with completion of all areas expected by late-1999. Failure to achieve Year-2000 compliance by the Company, other railroads, its suppliers, and its customers could negatively affect the Company's ability to conduct business for an extended period. Management believes that the Company will be successful in its Year 2000 conversion; however, there can be no assurance that other companies on which the Company's systems and operations rely will be converted on a timely basis, and such failure could have a material adverse effect on the Company's financial position, results of operations, or liquidity. The remainder of this page is intentionally left blank. 12 Results of Operations Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Consolidated Operating Revenues Operating revenues were $42.7 million in the quarter ended June 30, 1999 compared to $37.1 million in the quarter ended June 30, 1998, a net increase of $5.6 million or 15.1%. The net increase was attributable to a $7.5 million increase in North American railroad revenues of which $5.9 million were revenues from new railroad operations in Canada, offset by a $1.6 million decrease in revenues from Australian railroad operations and a $337,000 decrease in industrial switching revenues. 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 $29.0 million in the quarter ended June 30, 1999 compared to $21.5 million in the quarter ended June 30, 1998, an increase of $7.5 million or 35.0%. The increase was attributable to a $6.4 million increase in freight revenues and $1.1 million increase in non-freight revenues. The increase of $6.4 million in North American freight revenues was due to $4.5 million in new freight revenues attributable to the acquisition of GRO's Canadian railroads in April, 1999 (see Note 3. to Consolidated Financials Statements), and an increase of $1.9 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 quarters ended June 30, 1999 and 1998: North American Freight Revenues and Carloads Comparison by Commodity Group Quarters Ended June 30, 1999 and 1998 (dollars in thousands, except average per carload)
Average Freight Revenues Per Freight Revenues Carloads Carload ---------------- -------- --------- Commodity Group - -------------------- 1999 % of Total 1998 % of Total 1999 % of Total 1998 % of Total 1999 1998 ------ ---------- ------ ---------- ------ ---------- ----- ---------- ---- ---- Coal, Coke & Ores $ 5,915 25.9% $ 4,894 29.8% 21,448 29.4% 18,412 34.1% $ 276 $ 266 Pulp & Paper 3,982 17.5% 2,072 12.6% 10,395 14.2% 5,258 9.7% 383 394 Metals 2,343 10.3% 1,398 8.5% 8,578 11.7% 4,804 8.9% 273 291 Chemicals & Plastics 2,243 9.8% 1,761 10.7% 4,508 6.2% 3,454 6.4% 498 510 Lumber & Forest Products 2,231 9.8% 1,657 10.1% 7,119 9.7% 5,675 10.5% 313 292 Petroleum Products 1,995 8.7% 1,550 9.4% 4,501 6.2% 3,446 6.4% 443 450 Minerals & Stone 1,267 5.5% 847 5.2% 5,836 8.0% 2,904 5.4% 217 292 Farm & Food Products 1,141 5.0% 1,056 6.4% 4,131 5.6% 3,475 6.4% 276 304 Autos & Auto Parts 650 2.9% 616 3.8% 1,279 1.8% 1,215 2.3% 508 507 Other 1,039 4.6% 564 3.5% 5,221 7.2% 5,324 9.9% 199 106 ----------------------------------------------------------------------------------------- Total $22,806 100.0% $16,415 100.0% 73,016 100.0% 53,967 100.0% 312 304 =============================================================================================================
13 Coal increased by $1.0 million or 20.9% of which $966,000 was on existing railroad operations and $55,000 was new freight revenues attributable to the acquisition of GRO. The increase on existing railroad operations was primarily attributable to increased shipments at a key customer's facilities which offset reduced shipments in the first quarter of 1999 due to planned maintenance projects. Pulp and Paper increased by $1.9 million or 92.2% of which $195,000 was on existing railroad operations and $1.7 million was new freight revenues attributable to the acquisition of GRO. Metals increased by $945,000 or 67.6% of which $25,000 was a decrease on existing railroad operations and $970,000 was new freight revenues attributable to the acquisition of GRO. Freight revenues from all remaining commodities reflected an increase of $2.5 million or 31.2% of which $714,000 was on existing railroad operations and $1.8 million was new freight revenues attributable to the acquisition of GRO. Total North American carloads were 73,016 in the quarter ended June 30, 1999 compared to 53,967 in the quarter ended June 30, 1998, an increase of 19,049 or 35.3%. The increase of 19,049 consisted of an increase of 5,317 carloads on existing railroad operations of which 2,823 were coal, and 13,732 carloads attributable to the acquisition of GRO. The overall average revenue per carload increased to $312 in the quarter ended June 30, 1999, compared to $304 per carload in the quarter ended June 30, 1998, an increase of 2.6% due primarily to higher per carload revenues attributable to GRO carloads combined with a slight increase on existing railroad operations carloads. North American non-freight railroad revenues were $6.2 million in the quarter ended June 30, 1999 compared to $5.1 million in the quarter ended June 30, 1998, an increase of $1.1 million or 22.2%. The increase is the net result of a decrease of $265,000 on non-freight revenues on existing railroad operations and $1.4 million of new non-freight revenues attributable to the acquisition of GRO. The GRO non-freight revenues are primarily car hire and car rental revenues. Australian Operating Revenues (U.S. Dollars) Operating revenues were $10.6 million in the quarter ended June 30, 1999, compared to $12.1 million in the quarter ended June 30, 1998, a decrease of $1.5 million or 13.1%. The decrease was the result of a decrease in freight revenues from Australian railroad operations of $1.4 million or 13.3% and a decrease in non-freight revenues of $146,000 or 11.1%. Australian freight revenues were $9.4 million in the quarter ended June 30, 1999, compared to $10.8 million in the quarter ended June 30, 1998, a decrease of $1.4 million or 13.3%. The following table outlines Australian freight revenues for the quarters ended June 30, 1999 and 1998: 14 Australian Freight Revenues by Commodity Quarters Ended June 30, 1999 and 1998 (in thousands)
1999 1998 ----- ---- Commodity Group Dollars % of Total Dollars % of Total - --------------- ----------------------------------------------------------------- Hook and Pull (Haulage) $5,049 53.7% $ 3,937 36.3% Grain 2,830 30.1% 3,598 33.2% Coal -0- 0.0% 1,792 16.5% Gypsum 656 7.0% 784 7.2% Marble 487 5.2% 502 4.6% Lime 370 3.9% 168 1.6% Other 3 0.1% 55 0.6% ----------------------------------------------------------------- Total $9,395 100.0% $10,836 100.0% =================================================================
The net decrease of $1.4 million in Australian freight revenues was primarily attributable to the decline in freight revenues from the shipment of Coal of $1.8 million and Grain of $768,000 which was offset by an increase in freight revenues from Hook and Pull of $1.1 million. There were no freight revenues from coal in the quarter ended June 30, 1999, due to the non-renewal of a coal contract. Net freight revenues from all remaining commodities were comparable for the quarters. Australian non-freight revenues were $1.2 million in the quarter ended June 30, 1999, compared to $1.3 million in the quarter ended June 30, 1998, a decrease of $146,000 or 11.1%. The decrease in non-freight revenues from Australian railroad operations was due primarily to a reduction in car hire and rental income. Industrial Switching Revenues Revenues from U.S. industrial switching activities were $3.1 million in the quarter ended June 30, 1999 compared to $3.4 million in the quarter ended June 30, 1998, a decrease of $337,000 or 9.9% due primarily to the decision to exit unprofitable switching contracts. Consolidated Operating Expense Operating expenses for all operations combined were $37.0 million in the quarter ended June 30, 1999, compared to $32.4 million in the quarter ended June 30, 1998, an increase of $4.6 million or 14.1%. Expenses attributable to North American railroad operations were $24.7 million in the quarter ended June 30, 1999, compared to $18.4 million in the quarter ended June 30, 1998, an increase of $6.3 million or 34.3% of which $5.0 million were expenses attributable to new railroad operations in Canada. Expenses attributable to operations in Australia were $9.4 million in the quarter ended June 30, 1999, compared to $10.0 million in the quarter ended June 30, 1998, a decrease of $626,000 or 6.2%. Expenses attributable to U.S. industrial switching were $2.8 million in the quarter ended June 30, 1999, compared to $3.9 million in the quarter ended June 30, 1998, a decrease of $1.1 million or 28.5%. The following three sections provide information on railroad expenses for North American and Australian railroad operations, and industrial switching expenses in the United States. 15 North American Railroad Operating Expenses The following table sets forth a comparison of the Company's North American railroad operating expenses in the quarters ended June 30, 1999 and 1998: North American Railroad Operating Expense Comparison Quarters Ended June 30, 1999 and 1998 (dollars in thousands)
1999 1998 ------ ------ $ % of Operating $ % of Operating Revenue Revenue Labor and benefits $ 9,351 32.2% $ 7,578 35.2% Equipment rents 3,630 12.5% 2,513 11.7% Purchased services 1,677 5.8% 1,070 5.0% Depreciation and amortization 2,397 8.3% 1,872 8.7% Diesel fuel 1,321 4.5% 763 3.5% Casualties and insurance 1,197 4.1% 923 4.3% Materials 1,766 6.1% 886 4.1% Other 3,376 11.6% 2,799 13.0% ------------------------------------------------------- Total $24,715 85.1% $18,404 85.5% =======================================================
Labor and benefits expense was $9.4 million in the quarter ended June 30, 1999 compared to $7.6 million in the quarter ended June 30, 1998, an increase of $1.8 million or 23.4% of which $315,000 was attributable to increases on existing railroad operations and $1.5 million was attributable to the acquisition of GRO. Equipment rents were $3.6 million in the quarter ended June 30, 1999 compared to $2.5 million in the quarter ended June 30, 1998, an increase of $1.1 million or 44.4%. The increase is the net result of a $184,000 decrease on existing railroad operations and $1.3 million increase attributable to the acquisition of GRO. Materials expense was $1.8 million in the quarter ended June 30, 1999 compared to $886,000 in the quarter ended June 30, 1998, an increase of $880,000 or 99.3% of which $621,000 was attributable to increases on existing railroad operations and $259,000 was attributable to the acquisition of GRO. The increase on existing railroad operations was due primarily to increases in maintenance of locomotives and freight cars. All other expenses combined were $9.9 million in the quarter ended June 30, 1999 compared to $7.4 million in the quarter ended June 30, 1998, an increase of $2.5 million or 34.2% of which $600,000 was attributable to increases on existing railroad operations and $1.9 million was attributable to the acquisition of GRO. Australian Railroad Operating Expenses (U.S. Dollars) The following table sets forth a comparison of the Company's Australian railroad operating expenses in the quarters ended June 30, 1999 and 1998: 16 Australian Railroad Operations Operating Expense Comparison Quarters Ended June 30, 1999 and 1998 (dollars in thousands)
1999 1998 ----- ----- $ % of Operating $ of Operating Revenue Revenue Labor and benefits $1,436 13.6% $ 1,221 10.1% Equipment rents 69 0.7% 99 0.8% Purchased services 2,969 28.1% 3,856 31.7% Depreciation and amortization 534 5.1% 419 3.4% Diesel fuel 1,980 18.8% 2,305 19.0% Casualties and insurance 627 5.9% 378 3.1% Materials 376 3.6% 561 4.6% Other 1,406 13.2% 1,184 9.8% --------------------------------------------------------------- Total $9,397 89.0% $10,023 82.5% ===============================================================
Purchased services were $3.0 million in the quarter ended June 30, 1999 compared to $3.9 million in the quarter ended June 30, 1998, a net decrease of $887,000 or 23.0%. The decrease was primarily related to the non-renewal of the coal haulage contract discussed above under "Australian Operating Revenues" which resulted in no contracted maintenance charges on the track used for the coal haulage, and capital work on ASR-owned tracks which reduced contract labor expense for maintenance. Diesel fuel was $2.0 million in the quarter ended June 30, 1999 compared to $2.3 million in the quarter ended June 30, 1998, a decrease of $325,000 or 14.1%, due primarily to a combination of price reductions and reduced fuel consumption resulting from lower freight volumes. Casualties and insurance was $627,000 in the quarter ended June 30, 1999 compared to $378,000 in the quarter ended June 30, 1998, an increase of $249,000 or 65.9%, due primarily to an increase in derailment expense. U. S. Industrial Switching Operating Expenses The following table sets forth a comparison of the Company's U.S. industrial switching operating expenses in the quarters ended June 30, 1999 and 1998: The remainder of this page is intentionally left blank. 17 U.S. Industrial Switching Operating Expense Comparison Quarters Ended June 30, 1999 and 1998 (dollars in thousands)
1999 1998 ----- ----- $ % of Operating $ % Operating of Revenue Revenue Labor and benefits $2,099 68.7% $2,537 74.8% Equipment rents 47 1.5% 47 1.4% Purchased services 111 3.6% 85 2.5% Depreciation and amortization 221 7.2% 202 6.0% Diesel fuel 101 3.3% 116 3.4% Casualties and insurance 266 8.7% 94 2.8% Materials 233 7.7% 196 5.8% Other (244) (8.0%) 689 20.2% ------------------------------------------------------ Total $2,834 92.7% $3,966 1 16.9% =========================================================
Labor and benefits expense was $2.1 million in the quarter ended June 30, 1999 compared to $2.5 million in the quarter ended June 30, 1998, a decrease of $438,000 or 17.3%, due primarily to the decision to exit unprofitable switching contracts. Casualties and insurance expense was $266,000 in the quarter ended June 30, 1999 compared to $94,000 in the quarter ended June 30, 1998, an increase of $172,000 or 183.0%, due primarily to an increase in claims expense. Other expense was a credit of $244,000 in the quarter ended June 30, 1999 compared to $689,000 in the quarter ended June 30, 1998, a decrease of $933,000 or 135.4%. The credit balance reflects the reclassification of $305,000 of administrative expense that had originally been classified as railroad operations expense. The 1998 period was unusually high due to approximately $400,000 of legal fees for still-pending litigation. Operating Ratios The Company's combined operating ratio decreased to 86.6% in the quarter ended June 30, 1999 from 87.4% in the quarter ended June 30, 1998. The operating ratio for North American railroad operations decreased to 85.1% in the quarter ended June 30, 1999 from 85.5% in the quarter ended June 30, 1998. The operating ratio for Australian railroad operations increased to 89.0% in the quarter ended June 30, 1999 from 82.5% in the quarter ended June 30, 1998. The operating ratio for U.S. industrial switching operations decreased to 92.7% in the quarter ended June 30, 1999 from 116.9% in the quarter ended June 30, 1998. Interest Expense and Income Taxes Interest expense in the quarter ended June 30, 1999 was $1.9 million compared to $1.6 million in the quarter ended June 30, 1998, an increase of $288,000 or 17.5%. The Company's effective income tax rate in the quarter ended June 30, 1999, was 34.2% which compared to 42.4% in the quarter ended June 30, 1998. The decrease is primarily attributable to income tax treatment of GRO's operating results. GRO is 18 now able to utilize net operating loss carryovers from its earlier operations when tax benefits could not be recognized. Net Income The Company's net income in the quarter ended June 30, 1999 was $2.7 million compared to net income of $1.8 million in the quarter ended June 30, 1998, an increase of $900,000 or 48.8%. The increase in net income is the net result of an increase in net income from North American railroad operations of $842,000, a decrease in net income from Australian railroad operations of $365,000, and a decrease in the net loss of industrial switching of $423,000. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Consolidated Operating Revenues Operating revenues were $76.8 million in the six months ended June 30, 1999 compared to $74.8 million in the six months ended June 30, 1998, a net increase of $2.0 million or 2.7%. The net increase was attributable to a $5.1 million increase in North American railroad revenues offset by a $2.8 million decrease in revenues from Australian railroad operations and a $210,000 decrease in industrial switching revenues. 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 $49.0 million in the six months ended June 30, 1999 compared to $43.9 million in the six months ended June 30, 1998, an increase of $5.1 million or 11.6%. The increase was attributable to a $4.3 million increase in freight revenues and $793,000 increase in non-freight revenues. The net increase of $4.3 million in North American freight revenues was due to $4.5 million in new freight revenues attributable to the acquisition of GRO's Canadian railroads in April, 1999 (see Note 3. to Consolidated Financials Statements) offset by a decrease of $257,000 in freight revenues on existing railroad operations. The following table compares North American freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 1999 and 1998: The remainder of this page is intentionally left blank. 19 North American Freight Revenues and Carloads Comparison by Commodity Group Six Months Ended June 30, 1999 and 1998 (dollars in thousands, except average per carload)
Average Freight Revenues Per Freight Revenues Carloads Carload ---------------- -------- ------- Commodity Group % of % of % of % of - --------------- 1999 Total 1998 Total 1999 Total 1998 Total 1999 1998 ---- ----- ---- ----- ---- ----- ---- ----- ---- ---- Coal, Coke & Ores $9,589 25.4% $10,045 30.0% 36,420 29.8% 39,289 34.8% $263 $256 Pulp & Paper 5,993 15.9% 4,418 13.2% 16,101 13.2% 11,367 10.1% 372 389 Chemicals & Plastics 4,052 10.7% 3,077 9.2% 7,979 6.5% 5,902 5.2% 508 521 Petroleum Products 3,892 10.3% 3,756 11.2% 8,676 7.1% 8,719 7.7% 449 431 Lumber & Forest Products 3,890 10.3% 2,972 8.9% 12,920 10.6% 10,017 8.9% 301 297 Metals 3,389 9.0% 2,908 8.7% 12,837 10.5% 10,751 9.5% 264 270 Farm & Food Products 2,159 5.7% 1,999 6.0% 7,722 6.3% 7,231 6.4% 280 276 Minerals & Stone 1,761 4.7% 1,725 5.2% 7,558 6.2% 6,089 5.4% 233 283 Autos & Auto Parts 1,250 3.3% 1,067 3.2% 2,461 2.0% 2,109 1.9% 508 506 Other 1,739 4.7% 1,463 4.4% 9,390 7.8% 11,429 10.1% 185 128 --------------------------------------------------------------------------------------------------------- Total $37,714 100.0% $33,430 100.0% 122,064 100.0% 112,903 100.0% 309 296 =========================================================================================================
Coal decreased by $456,000 or 4.5% due to a $511,000 decrease on existing railroad operations offset by $55,000 of new freight revenues attributable to the acquisition of GRO. Pulp and Paper increased by a net $1.6 million or 35.6% which consisted of a $140,000 decrease on existing railroad operations offset by $1.7 million of new freight revenues attributable to the acquisition of GRO. Chemicals & Plastics increased by $975,000 or 31.7% of which $538,000 was on existing railroad operations and $437,000 was new freight revenues attributable to the acquisition of GRO. Lumber & Forest Products increased by $918,000 or 30.9% of which $594,000 was on existing railroad operations and $324,000 was new freight revenues attributable to the acquisition of GRO. Freight revenues from all remaining commodities reflected a net increase of $1.3 million or 9.8% which consisted of a $738,000 decrease on existing railroad operations offset by $2.0 million of new freight revenues attributable to the acquisition of GRO. Total North American carloads were 122,064 in the six months ended June 30, 1999 compared to 112,903 in the six months ended June 30, 1998, an increase of 9,161 or 8.1%. The increase of 9,161 consisted of a decrease of 4,571 carloads on existing railroad operations of which 3,082 were Coal, offset by 13,732 carloads attributable to the acquisition of GRO. The overall average revenue per carload increased to $309 in the six months ended June 30, 1999, compared to $296 in the six months ended June 30, 1998, an increase of 4.4% due primarily to higher per carload revenues 20 attributable to GRO combined with an increase on existing railroad operations carloads. North American non-freight railroad revenues were $11.3 million in the six months ended June 30, 1999 compared to $10.5 million in the six months ended June 30, 1998, an increase of $793,000 or 7.6%. The increase is the net result of a decrease of $609,000 on non-freight revenues on existing railroad operations and $1.4 million of new non-freight revenues attributable to the acquisition of GRO. The GRO non-freight revenues are primarily car hire and car rental revenues. Australian Operating Revenues (U.S. Dollars) Operating revenues were $21.6 million in the six months ended June 30, 1999, compared to $24.4 million in the six months ended June 30, 1998, a decrease of $2.8 million or 11.6%. The decrease was the result of a decrease in freight revenues of $2.3 million and a decrease in non-freight revenues of $516,000. Australian freight revenues were $19.3 million in the six months ended June 30, 1999, compared to $21.6 million in the six months ended June 30, 1998, a decrease of $2.3 million or 10.7%. The following table outlines Australian freight revenues for the six months ended June 30, 1999 and 1998: Australian Freight Revenues by Commodity Six Months Ended June 30, 1999 and 1998 (in thousands)
1999 1998 ---- ---- Commodity Group Dollars %of Dollars % of - --------------- Total Total ------------------------------------------------------------------ Hook and Pull (Haulage) $ 9,256 47.9% $ 7,877 36.4% Grain 6,504 33.7% 6,472 29.9% Coal 664 3.4% 3,856 17.8% Gypsum 1,309 6.8% 1,541 7.1% Marble 959 5.0% 1,010 4.7% Lime 623 3.2% 524 2.4% Other 7 0.0% 358 1.7% ----------------------------------------------------------------- Total $19,322 100.0% $21,638 100.0% =================================================================
The net decrease of $2.3 million in Australian freight revenues was primarily attributable to the decline in freight revenues from the shipment of Coal of $3.2 million which was offset by an increase in freight revenues from Hook and Pull of $1.4 million. Freight revenues from coal were significantly lower in the six months ended June 30, 1999, due to the non-renewal of a coal contract. Net freight revenues from all remaining commodities increased by $503,000. Australian non-freight revenues were $2.3 million in the six months ended June 30, 1999, compared to $2.8 million in the six ended June 30, 1998, a decrease of $516,000 or 18.6%. The decrease in non-freight revenues from Australian railroad operations was due primarily to a reduction in car hire and rental income. 21 Industrial Switching Revenues Revenues from U.S. industrial switching activities were $6.3 million in the six months ended June 30, 1999 compared to $6.5 million in the six months ended June 30, 1998, a decrease of $210,000 or 3.2% due primarily to the decision to exit unprofitable switching contracts. Consolidated Operating Expenses Operating expenses for all operations combined were $69.1 million in the six months ended June 30, 1999, compared to $65.2 million in the six months ended June 30, 1998, an increase of $3.9 million or 6.0%. Expenses attributable to North American railroad operations were $44.2 million in the six months ended June 30, 1999, compared to $37.0 million in the six months ended June 30, 1998, an increase of $7.2 million or 19.6%. Expenses attributable to operations in Australia were $18.5 million in the six months ended June 30, 1999, compared to $20.6 million in the six months ended June 30, 1998, a decrease of $2.1 million or 10.3%. Expenses attributable to U.S. industrial switching were $6.3 million in the six months ended June 30, 1999, compared to $7.6 million in the six months ended June 30, 1998, a decrease of $1.3 million or 16.1%. 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 six months ended June 30, 1999 and 1998: North American Railroad Operating Expense Comparison Six Months Ended June 30, 1999 and 1998 (dollars in thousands)
1999 1998 ---- ---- $ % of Operating $ % of Operating Revenue Revenue Labor and benefits $17,141 35.0% $14,987 34.1% Equipment rents 6,361 13.0% 5,404 12.3% Purchased services 2,702 5.5% 2,164 4.9% Depreciation and amortization 4,390 9.0% 3,521 8.0% Diesel fuel 2,050 4.2% 1,701 3.9% Casualties and insurance 1,785 3.6% 1,824 4.2% Materials 3,081 6.3% 1,822 4.1% Other 6,731 13.7% 5,562 12.7% ------------------------------------------------------ Total $44,241 90.3% $36,985 84.2% ==================================================
Labor and benefits expense was $17.1 million in the six months ended June 30, 1999 compared to $15.0 million in the six months ended June 30, 1998, an increase of $2.1 million or 14.4% of which $696,000 was attributable to increases on existing railroad operations and $1.4 million was attributable to the acquisition of GRO. 22 Equipment rents were $6.4 million in the six months ended June 30, 1999 compared to $5.4 million in the six months ended June 30, 1998, an increase of $957,000 or 17.7%. The increase is the net result of a $344,000 decrease on existing railroad operations and $1.3 million attributable to the acquisition of GRO. Materials expense was $3.0 million in the six months ended June 30, 1999 compared to $1.8 in the six months ended June 30, 1998, an increase of $1.2 million or 69.1% of which $1.0 million was attributable to increases on existing railroad operations and $259,000 was attributable to the acquisition of GRO. The increase on existing railroad operations was due primarily to increases in maintenance for locomotives and freight cars. All other expenses combined were $17.7 million in the six months ended June 30, 1999 compared to $14.8 million in the six months ended June 30, 1998, an increase of $2.9 million or 19.5% of which $1.0 million was attributable to increases on existing railroad operations and $1.9 million was attributable to the acquisition of GRO. Australian Railroad Operating Expenses (U.S. Dollars) The following table sets forth a comparison of the Company's Australian railroad operating expenses in the six months ended June 30, 1999 and 1998: Australian Railroad Operations Operating Expense Comparison Six Months Ended June 30, 1999 and 1998 (dollars in thousands)
1999 1998 ----- ----- $ % of Operating $ % of Operating Revenue Revenue Labor and benefits $ 2,809 13.0% $ 2,615 10.7% Equipment rents 97 0.4% 452 1.9% Purchased services 5,924 27.5% 7,857 32.2% Depreciation and amortization 1,029 4.8% 880 3.6% Diesel fuel 3,959 18.3% 4,769 19.5% Casualties and insurance 1,249 5.8% 686 2.8% Materials 859 4.0% 902 3.7% Other 2,570 11.9% 2,450 10.0% ---------------------------------------------------- Total $18,496 85.7% $20,611 84.4% =====================================================
Equipment rent was $97,000 in the six months ended June 30, 1999 compared to $452,000 in the six months ended June 30, 1998, a decrease of $355,000 or 78.5%, due primarily to the loss of the coal haulage contract discussed above under "Australian Operating Revenues". Purchased services were $5.9 million in the six months ended June 30, 1999 compared to $7.9 million in the six months ended June 30, 1998, a decrease of $1.9 million or 24.6%. The decrease was due primarily to the loss of the coal haulage contract discussed above under "Australian Operating Revenues" which resulted in reduced contracted maintenance charges on the track used for the coal haulage, and capital work on ASR-owned tracks which reduced contract labor expense for maintenance. 23 Diesel fuel was $4.0 million in the six months ended June 30, 1999 compared to $4.8 million in the six months ended June 30, 1998, a decrease of $810,000 or 17.0%, due primarily to a combination of price reductions and reduced fuel consumption resulting from lower freight volumes. Casualties and insurance was $1.2 million in the six months ended June 30, 1999 compared to $686,000 in the six months ended June 30, 1998, an increase of $563,000 or 82.1%, due primarily to an increase in derailment expense. U. S. Industrial Switching Operating Expenses The following table sets forth a comparison of the Company's U.S. industrial switching operating expenses in the six months ended June 30, 1999 and 1998: U.S. Industrial Switching Operating Expense Comparison Six Months Ended June 30, 1999 and 1998 (dollars in thousands)
1999 1998 ---- ---- $ % of Operating $ % of Operating Revenue Revenue Labor and benefits $4,443 70.9% $4,919 75.9% Equipment rents 93 1.5% 83 1.3% Purchased services 218 3.5% 164 2.5% Depreciation and amortization 428 6.8% 397 6.1% Diesel fuel 220 3.5% 248 3.8% Casualties and insurance 659 10.5% 188 2.9% Materials 434 6.9% 366 5.6% Other (151) (2.4%) 1,198 18.6% ---------------------------------------------------- Total $6,344 101.2% $7,563 116.7% ====================================================
Labor and benefits expense was $4.4 million in the six months ended June 30, 1999 compared to $4.9 million in the six months ended June 30, 1998, a decrease of $476,000 or 9.7%, due primarily to the decision to exit unprofitable switching contracts. Casualties and insurance expense was $659,000 in the six months ended June 30, 1999 compared to $188,000 in the six months ended June 30, 1998, an increase of $471,000 or 250.5%, due primarily to an increase in claims expense. Other expense was a credit of $151,000 in the six months ended June 30, 1999 compared to $1.2 million in the six months ended June 30, 1998, a decrease of $1.3 million or 112.6%. The credit balance reflects the reclassification of $305,000 of administrative expense that had originally been classified as railroad operations expense. The 1998 period was unusually high due to approximately $550,000 of legal fees for still-pending litigation. Operating Ratios The Company's combined operating ratio increased to 89.9% in the six months ended June 30, 1999 from 87.1% in the six months ended June 30, 1998. The operating ratio 24 for North American railroad operations increased to 90.3% in the six months ended June 30, 1999 from 84.2% in the six months ended June 30, 1998. The operating ratio for Australian railroad operations increased to 85.7% in the six months ended June 30, 1999 from 84.4% in the six months ended June 30, 1998. The operating ratio for U.S. industrial switching operations decreased to 101.2% in the six months ended June 30, 1999 from 116.7% in the six months ended June 30, 1998. Interest Expense and Income Taxes Interest expense in the six months ended June 30, 1999 was $3.3 million compared to $3.2 million in the six months ended June 30, 1998, an increase of $120,000 or 3.7%. The Company's effective income tax rate in the six months ended June 30, 1999, was 42.8% which compared to 41.1% in the six months ended June 30, 1998. Net Income The Company's net income in the six months ended June 30, 1999 was $2.4 million compared to net income of $4.1 million in the six months ended June 30, 1998, a decrease of $1.7 million or 41.5%. The decrease in net income is the net result of a decrease in net income from North American railroad operations of $2.2 million and a decrease in net income from Australian railroad operations of $71,000 offset by a decrease in the net loss of industrial switching of $536,000. Liquidity and Capital Resources Stock Repurchase - On August 12, 1998, the Company's board of directors authorized management to repurchase up to one million shares of the Company's Class A common stock under SEC Rule 10b-18. On May 10, 1999, the Company completed its purchase of the one million shares authorized by the board of directors at a total cost of $11.0 million. During the six months ended June 30, 1999 the Company generated cash from operations of $10.2 million, invested $6.9 million in capital assets, received cash of $57,000 in the purchase of Rail-One Inc. less cash paid for common stock, had a net increase in debt of $239,000 and received $221,000 in proceeds from the disposition of property. During the six months ended June 30, 1998 the company generated cash from operations of $16.8 million, invested $9.5 million in capital assets and received $1.4 million in proceeds from disposition of property. The Company has budgeted approximately $16.5 million in capital expenditures in 1999, of which $11.5 million is planned for track rehabilitation and $5.0 is planned for equipment. Of these amounts, $3.7 million is planned for track rehabilitation in Australia and $2.5 million is planned for equipment in Australia. Approximately $6.9 million of the budgeted capital expenditures of $16.5 million were completed as of June 30, 1999. At June 30, 1999 the Company had long-term debt (including current portion) totaling $90.1 million, which comprised 55.7% 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 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 25 from operations together with amounts available under its credit facilities will enable the Company to meet its liquidity and capital expenditure requirements relating to ongoing operations for at least the duration of its credit facilities. Forward-Looking Statements This Report may contain forward-looking statements based on current expectations, estimates and projections about the Company's industry, management's beliefs and assumptions made by management. 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 no 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 2, those noted in the Part II, Item 1 of this Report. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to the impact of interest rate changes. The Company's exposure to changes in interest rates applies to its borrowings under a credit facility and a capital lease arrangement, both of which have variable interest rates tied to the LIBOR rate. In addition, the Company's Australian subsidiary has a variable rate loan, one-half of which fluctuates with market changes in interest rates and one-half of which is fixed at 6.24%. The Australian loan is denominated in Australian dollars. The Company estimates that the fair value of these debt instruments approximated their market values and carrying values at June 30, 1999. The Company invests excess cash in overnight money market accounts. The remainder of this page is intentionally left blank. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS IMRR - 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 and ongoing rate overcharges. The Company believes the suit is without merit and intends to vigorously defend against the suit. The parent company of ComEd has contracted to sell 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, IMRR's suit against Com Ed 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. ComEd is currently IMRR's largest customer and in 1998 the Powerton plant accounted for 6.3% of the consolidated revenues of the Company and its subsidiaries. Failure to satisfactorily resolve this litigation could have a material adverse effect on the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 25, 1999, the Stockholders of the Company approved the following proposals at the Annual Meeting: Proposal 1: To elect two directors to serve for a three-year term expiring in - ---------- 2002 Authority For Withheld ---- --------- Mortimer B. Fuller, III 11,677,106 182,506 Robert M. Melzer 11,677,106 182,506 Proposal 2: To approve and ratify the Genesee & Wyoming Inc. Deferred Stock - ----------- Plan for Non-Employee Directors: For 11,691,238 Against 160,628 Abstain 7,746 27 Proposal 3. Proposal to approve and ratify the selection of Arthur Andersen LLP - ----------- as the Company's independent auditors for the year ending December 31, 1999. For 11,738,361 Against 117,150 Abstain 4,101 ITEM 5. OTHER INFORMATION - NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A). EXHIBITS - SEE INDEX TO EXHIBITS (B) REPORTS ON FORM 8-K: No Reports on Form 8-K were filed by the Registrant during the period covered by this Report. The reminder of this page is intentionally left blank. 28 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) Second Amended and Restated Revolving Credit Agreement dated as of October 31, 1997 among the Registrant, its subsidiaries, BankBoston, N.A. and the banks named therein (Exhibit 4.1)/4/ (g) First Amendment to Promissory Note dated as of March 19, 1999 between Buffalo & Pittsburgh Railroad, Inc. and CSX Transportation, Inc. (Exhibit 4.1)/5/ (10) Material Contracts *(10.1) Amendment No. 1 to Promissory Note dated May 28, 1999 of Mortimer B. Fuller, III in favor of the Registrant Genesee & Wyoming Inc. Deferred Stock Plan for Non-Employee Directors is incorporated herein by reference to the Registrant's 1999 Definitive Proxy Statement, which Plan was filed in electronic format on April 19, 1999 as Annex A to the Proxy Statement. *(11.1) Statement re computation of per share earnings (15) Letter re unaudited interim financial information 29 Not applicable. (18) Letter re change in accounting principles Not applicable. (19) Report furnished to security holders Not applicable. (22) Published report regarding matters submitted to vote of security holders Not applicable. (23) Consents of experts and counsel Not applicable. (24) Power of attorney Not applicable. *(27) Financial Data Schedule (99) Additional Exhibits Not applicable. ____________________________ *Exhibit filed with this Report. /1/Exhibit 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. /2/Exhibit 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. /3/Exhibit 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. /4/Exhibit 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. /5/Exhibit 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. 30 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. Date: August 13, 1999 By: /s/ Mortimer B. Fuller, III --------------------------- Name: Mortimer B. Fuller, III Title: Chairman of the Board and CEO Date: August 13, 1999 By: /s/ Alan R. Harris --------------------------- Name: Alan R. Harris Title: Senior Vice President and Chief Accounting Officer The remainder of this page is intentionally left blank. 31 EX-10.1 2 AMEND NO. 1 TO PROMISSORY NOTE DATED MAY 28,1999 Exhibit 10.1 AMENDMENT NO. 1 TO PROMISSORY NOTE This Amendment No. 1 dated May 28, 1999, amends the Promissory Note dated May 20, 1998, in the original principal amount of $500,000 (the "Note") made by Mortimer B. Fuller, III ("Maker") in favor of Genesee & Wyoming Inc. ("Payee"). The Note is hereby amended by deleting Paragraph 1 in its entirety and substituting the following in lieu thereof: 1. The principal and interest of this Note shall be paid as follows: (a) Maker shall pay all accrued interest on the unpaid principal of the Note through December 31, 1998. (b) Beginning in the year 2000, on the date Maker receives from Payee his annual incentive bonus award, if any, Maker shall pay to Payee an amount equal to twenty-five percent (25%) of the net amount of any such bonus (after deduction of the maximum applicable withholding required for federal, state and local tax purposes) (the "Annual Payment Amount") and such Annual Payment Amount shall be applied first to accrued interest as of December 31 of the previous calendar year and second to outstanding principal. (c) If in any year Maker is not paid an annual incentive bonus, or the Annual Payment Amount is not sufficient to pay all accrued interest, Maker shall pay to Payee on the date the annual incentive bonus is paid or would have been paid a sufficient amount to cause all accrued interest as of December 31 of the previous calendar year to be paid in full. (d) On May 19, 2003, the unpaid principal balance of this Note, together with all accrued and unpaid interest thereon, shall be paid in full. IN WITNESS WHEREOF, Maker and Payee have caused this Amendment No. 1 to be executed and delivered as of the date set forth above. /s/ Mortimer B. Fuller, III ---------------------------------- Mortimer B. Fuller, III GENESEE & WYOMING INC. By: /s/ Mark W. Hastings ---------------------------------- Mark W. Hastings, Treasurer EX-11.1 3 STATEMENT RE 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)
Three Months Ended Six Months Ended June 30, 1999 June 30, 1999 ------------- ------------- BASIC EARNINGS PER SHARE CALCULATION: Net Income $2,746 $2,414 Weighted average number of shares of common stock 4,416 4,673 Earnings per share - basic $ 0.62 $ 0.52 DILUTED EARNINGS PER SHARE CALCULATION: Net Income $2,746 $ 2,414 Weighted average number of shares of common stock and common stock equivalents outstanding: Weighted average number of shares of common stock 4,416 4,673 Common stock equivalents issuable under stock option plans 23 31 Weighted average number of shares of common stock and common stock equivalents - diluted 4,439 4,704 Earnings per share - diluted $ 0.62 $0.51
EX-27 4 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 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 11847 0 33844 0 5666 57344 197213 36756 244468 48582 84500 0 0 53 71745 244468 76841 76841 69080 69080 216 0 3324 4221 1807 2414 0 0 0 2414 0.52 0.51
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