Genesee & Wyoming Inc.
Annual Report 2001

Plain-text annual report

Genesee & Wyoming Inc. 2001 Annual Report Financial Highlights 2001 Net Income by Geography 44.3% Australia North America 53.6% South America 2.1% (in thousands, except per share data) Years Ended December 31 Income Statement Data Operating revenues Operating income Net income Diluted earnings per common share Weighted average number 2001 2000 $173,576 $22,140 $19,084 $1.48 $206,530 $23,753 $13,932 $1.38 of shares of common stock–diluted 12,917 10,094 Balance Sheet Data as of Period End Total assets Total debt Redeemable Convertible Preferred Stock Stockholders’ equity $402,519 $60,591 $23,808 $185,663 $338,383 $104,801 $18,849 $94,732 Diluted Earnings (per share) $1.50 $1.48 $1.38 $1.23 $1.00 $0.97 $.50 $0 Net Income (in thousands) $19,084 $13,932 $12,533 $11,434 $20 $15 $10 $5 $0 1998 1999 2000 2001 1998 1999 2000 2001 Cover: A mixed consist on the Mosgrove Bridge heads over the Allegheny River in GWI’s New York/Pennsylvania region. This line interchanges with all major eastern Class I railroads in the United States and Canada. 2 ❘ G e n e s e e & W y o m i n g I n c . To Our Shareholders By nearly every measure, 2001 was an exceptional year for Genesee & Wyoming Inc. (GWI). We once again achieved record earnings, supported by the successful inte- gration of our Australian joint venture and by steady performance in North America in a difficult economic environment. We made two acquisitions in North America as we continued to build our regional rail systems. Then, in December we completed a well-received secondary stock offering, the proceeds of which paid down debt and expanded our acquisition capacity. These accomplishments were the result of our continued execution of a focused strategy to be the best in our industry as measured Mortimer B. Fuller III by our customers and shareholders. Chairman of the Board of Directors and Chief Executive Officer Delivering Record Results in a Difficult Economy Our 2001 strategic efforts, combined with strong shipments from our Australian customer base, drove dramatic improvement in GWI’s financial results — a notable achievement given the general economic softness that characterized the American, Canadian and Mexican markets in 2001. Our net income rose 37 percent to a record $19.1 million from $13.9 million at year-end 2000. Diluted earnings per share increased to a record $1.48 on 12.9 million shares, a 7.2 percent increase from $1.38 on 10.1 million shares at the close of the prior year. We continue to have a solid performance record, with a five-year compounded annual growth rate in earn- ings per share of 22.8 percent. Backing up our 2001 earnings, free cash flow was an impressive $16.3 million. Reflecting the deconsolidation of the Australia Southern Railroad (ASR), revenues declined to $173.6 million, compared with $206.5 million in 2000. We also worked hard during 2001 to expand our ownership base, increase the liquidity of our stock, and provide capital to support our future growth. We executed a three-for-two stock split, completed the funding of convertible preferred stock with Brown Brothers Harriman & Co., and completed the secondary public offering of common stock, using the $67.5 million in proceeds to reduce bank debt. The price of our common stock increased 79 percent to a split-adjusted $21.77 at year-end 2001 from $12.16 at the end of the prior year, while our market capitalization grew 308 percent to $378 million at year-end 2001 from $123 million at the close of 2000. After several years of having been overlooked in the “dot-com” era, the mar- ket’s recognition of GWI, as reflected in this increase in value, is gratifying. We have GWI’s first Australian acquisition took place in 1997. Three subsequent acquisitions in 1999, 2000 and 2001 extended the business across the continent. 1997 1999 2000 2001 ASR operations over Interstate Lines Interstate Lines AUSTRALIAN RAILROAD GROUP operations over Interstate Lines Interstate Lines worked hard to generate tangible results for our shareholders. While there is much more to do, we are pleased with the market’s increasing recognition of our per- formance. In February 2002, our Board approved an additional three-for-two com- mon stock split, effective March 14, 2002, as a reflection of our confidence in the future. Our results in the accompanying financial statements reflect both of the stock splits in the past 12 months. Building Strong Regional Rail Systems At the heart of GWI’s success is our continued focus on the creation and integration of strong regional rail systems. We seek to build these systems by making acquisi- tions in markets where we have existing operations in order to: (1) further increase Above: Newly painted locomotives in the Australia Northern Railroad (ANR) livery are ready to begin hauling loads of construction materials on the Asia Pacific Transport Consortium’s Alice Springs-to-Darwin project. efficiencies by consolidating staff, equipment and facilities; (2) expand our market ARG is the contract rail operator supplying all crewing and rollingstock required in the initial construction phase and will manage the freight business reach; and (3) enhance our return on capital. Australia exemplifies this strategy exe- cuted on a continental scale. In 1997 we made our first acquisition: the freight rail lines in South Australia. In 1999, we added the in-plant rail lines of OneSteel’s (for- merly BHP) Whyalla steel mill, as well as the rail lines supplying iron ore to the mill following the project’s completion. from their two mines. The acquisition of Westrail and the formation of the This approximately 885-mile construction project, expected to continue into 2004, is the last link in the Australian North-South transcontinental rail system. Australian Railroad Group (ARG), our joint venture with Wesfarmers, followed in 2000 and our position in the Alice Springs-to-Darwin consortium was added in 2001 to create what is now the second largest private freight rail operation on the conti- nent, with operations stretching from Sydney and Melbourne to Perth, from Adelaide to Alice Springs and, in 2004, to Darwin. ARG contributed 44.3 percent of GWI’s earnings in 2001. Looking ahead to 2002, we believe ARG’s outlook is bright. The export-driven Australian economy is strong, and several of our customers have expansion plans. The construction trains to support the building of the Alice Springs-to-Darwin line should reach full volume in 2002 and continue into 2004. In February 2002, Freightcorp (FC), the freight railway of New South Wales, and National Rail, prima- rily an intermodal operator on the interstate line owned by the Commonwealth, were both privatized in a single transaction. The new organization displaces ARG as the largest private freight railway in Australia. We were substantially outbid, and although we were disappointed in the result, we believe the privatization creates additional opportunities. As a condition of the sale, the buyer must sell 120 loco- motives and 600 wagons. This creates an opportunity for us to acquire equipment to grow our core business. The transaction also puts FC, whom we considered an irrational business competitor, in the private sector. 2 ❘ G e n e s e e & W y o m i n g I n c . The development of the NY/PA region exemplifies GWI’s strategy of building a regional rail system through disciplined, contiguous acquisitions. Beginning with the 14-mile Genesee and Wyoming Railroad Company that in 1976 had $3.5 million in annual freight revenues, this region now operates more than 750 miles of track and is expected to generate $50 million in revenues in 2002. 1899-1976 Genesee & Wyoming Railroad 1985 Rochester & Southern Railroad 1988 Buffalo & Pittsburgh Railroad 1992 Allegheny & Eastern Railroad 1996 Pittsburg & Shawmut Railroad 2001 South Buffalo Railway CANADA Lake Ontario Buffalo Lake Erie USA Rochester Caledonia CANADA Lake Ontario Buffalo Rochester Caledonia Le Roy Silver Springs Mt. Morris Retsof Lake Ontario Lake Ontario Lake Ontario CANADA Buffalo Rochester Caledonia CANADA Buffalo Rochester Caledonia CANADA Buffalo Retsof Silver Springs Dansville Machias Lake Erie Dansville Lake Erie Retsof Silver Springs CANADA Lake Ontario Buffalo Rochester Caledonia Le Roy Orchard Park Retsof Silver Springs Dansville Rochester Caledonia Le Roy Orchard Park Retsof Silver Springs Dansville Lake Erie Dansville Lake Erie USA Machias USA New York Pennsylvania E. Salamanca Owen New York Bradford Pennsylvania Mt. Jewett Johnsonburg Ridgway Brockway Bruin New Castle Petrolia Karns City Dubois Punxsutawney USA E. Salamanca Machias Ashford Jct. Erie Corry Warren New York Bradford Pennsylvania West Valley USA E. Salamanca Machias Ashford Jct. Erie Corry Warren New York Bradford Pennsylvania Lake Erie Erie West Valley USA E. Salamanca Machias Ashford Jct. Corry Warren New York Bradford Pennsylvania New Castle Bruin Petrolia Karns City Mt. Jewett Kane Johnsonburg Ridgway Brockway St. Marys Emporium Dubois Punxsutawney Mt. Jewett Kane Johnsonburg Ridgway Brockway Emporium St. Marys Driftwood Sligo Brookville Penfield Dubois Dora Reesedale Punxsutawney Mt. Jewett Kane Johnsonburg Ridgway Brockway Emporium St. Marys Driftwood Sligo Brookville Penfield Dubois Dora Reesedale Punxsutawney New Castle Bruin Petrolia Karns City New Castle Bruin Petrolia Karns City Retsof New York Pennsylvania Eidenau Butler Eidenau Butler Eidenau Kittanning Butler Freeport Marion Center Eidenau Butler Kittanning Marion Center Freeport Clarksburg Homer City Clarksburg Homer City During 2001, we announced two important additional acquisitions in North America that exemplify our strategy of building regional rail systems: In September, we acquired the South Buffalo Railway (SBR), a switching railroad near Buffalo, New York, that, in addition to connecting to our New York/Penn- sylvania region, provides new access to bulk transload opportunities on Lake Erie. The seamless integration of SBR into GWI’s existing operations contributed substantially to our strong fourth quarter results in 2001. Above: The NY/PA state-of-the-art dispatch system is a “point and In December, we announced the acquisition of Emons Transportation, a short- click” system with the railroad line railroad holding company. The transaction was completed on February 22, 2002. The St. Lawrence & Atlantic Railroad, which accounts for 75 percent of Emons’ revenue, complements our existing operations in Canada, and will be operating rules written into the computer program. This allows dispatchers to save time, eliminate errors and control movement on integrated into GWI’s Canadian region in 2002. The balance of Emon’s business the track more safely. fits well with our railroad switching operations. In addition, Emons brings expertise in intermodal and rail warehousing operations. We also build our regional rail systems by improving operating efficiencies and adding new customers. In a weak North American economy, cost controls were par- ticularly important in 2001. In addition, three new customers helped to stabilize our revenues and to provide a foundation for future growth. The first new coal mine in decades opened in the NY/PA region late in the first quarter. The same region also began shipping rock salt in the second half of 2001 from American Rock Salt’s new mine, which should become a major customer once initial production settles down. And in Mexico, as a result of our service reliability and improved track, Ford Motor Company began moving vehicles by rail, taking the business off the highway. 2001 Australian Freight Mix by carloads 2001 North American Freight Mix by carloads Other Ores 12% Hook & Pull 5% Gypsum 5% Other 7% 15% Bauxite 20% Grain 19% Iron Ore Coal 33% Minerals/Stone 11% 1% Auto 6% Other 4% Chemicals 7% Farm/Food 7% Petroleum 17% Alumina Paper 13% 7% Lumber Metals 11% G e n e s e e & W y o m i n g I n c . ❘ 3 Above: Alcoa’s Deschambault Aligning the Organization with Shareholder Value Mill, located about 30 miles west of Québec City, is a major cus- In 2001, we began to roll out a new financial management plan to integrate our budg- tomer of the Québec Gatineau eting, financial analysis and compensation systems effectively. This plan establishes Railway. With the addition to this performance benchmarks for each of our regions that are tied to targeted returns on region of the St. Lawrence & Atlantic Railroad, one of the Emons Transportation properties acquired in February 2002, expected revenues should invested capital. It also links employee compensation to achievement of those targets, ensuring greater accountability and alignment with enhancing shareholder value. We also further strengthened our management in 2001. We appointed Marty Lacombe, formerly President of Genesee • Rail-One in Canada, to the position of approach $50 million. Chief Executive of ARG. Marty replaced Chuck Chabot, whose expiring visa trig- gered his return to the United States after five years of outstanding management performance in Australia. Upon his return, Chuck will move to a new top manage- ment position, and he will continue to work on strategic issues in Australia. We named Mario Brault, a longtime railroad executive, as Marty’s replacement in Canada. We were pleased with the results achieved by Jaime Valencia Valencia our new general manager in Bolivia, whose operational improvements partially miti- gated poor revenues due to drought’s impact on soybean production. In Oregon, we appointed Larry Phipps, another seasoned railroad executive, to the post of President and General Manager of Portland & Western Railroad. Finally, to reflect emphasis on improved asset utilization and return on capital, Carl Belke was appointed General Manager, Fleet Management. We are confident about GWI’s future because of our numerous strengths: We are an industry leader; Our acquisition growth has brought increasing customer, commodity and geo- graphic diversification producing steadier and more predictable earnings and healthy cash flow; As a result of our secondary stock offering, our capital structure is flexible and our balance sheet strong; Because of our reputation and integrity, we have forged strong partnerships with Brown Brothers Harriman & Co., Wesfarmers and the International Finance Corporation (IFC); We have demonstrated the ability to acquire and grow rail freight businesses, and we expect to be exposed to many new acquisition opportunities. (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) We are also guided by exceptional people, including a board of directors that appro- Above: The Cooperative Bulk priately reflects our international outlook and a management team that provides us with a distinct competitive advantage. Although all our lives have been changed by September 11th, fortunately GWI Handling Limited (CBH) grain terminal at Kwinana is one of four export grain terminals in Western Australia served by AWR. was not materially affected. However, we have all been inspired by the heroic efforts CBH, founded, financed and made by so many extraordinary people doing their “jobs” as the circumstances controlled by Western Australia’s required. In that spirit, I feel GWI is blessed with truly outstanding employees who work every day to make our Company a success. At a moment in our nation’s his- tory when courage has never been more treasured, we count among our heroes grain growers, annually stores and handles up to 40 percent of the national average of grain produc- tion. Grain is approximately 20 some of our very own people: Ed Somerville, a Buffalo & Pittsburgh yardmaster, on percent of ARG’s commodity mix. his way home, spotted an ambulance parked across our tracks at the scene of an auto accident and made an emergency call to stop an oncoming train from a certain collision. Québec Gatineau engineer Claude Lemieux, conductor Ronnie Samson and car man Jean Bergeron, came upon a fire near a 400-liter propane tank and warned local residents to evacuate, protecting them from a possible explosion. And Aric Jeffs, a Portland & Western conductor, plucked seven-year-old Dylan Arledge from the trestle tracks in front of a moving 4,000-pound locomotive, saving the youngster from certain death. These are men who acted swiftly to save lives, putting them- selves at grave personal risk in the process. I am deeply grateful to them for their courage and for the example they set for us all. I am honored to call them my col- leagues. Mortimer B. Fuller III Chairman and Chief Executive Officer March 25, 2002 Index to Financial Statements Genesee & Wyoming Inc. and Subsidiaries: Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 14 Selected Financial Data . . . . . . . . . . . . . . . . . .37 Report of Independent Public Accountants . . . .38 Report of Independent Public Auditors . . . . . . . 39 Consolidated Balance Sheets as of December 31, 2001 and 2000 . . . . . . . . . 40 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999. . . . . . . . . 41 Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999 . . . . . . . . 42 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 . . . . . . . . 43 Notes to Consolidated Financial Statements. . . 44 Left: These Portland & Western locomotives near Beaverton, Oregon are among GWI’s more than 300 loco- motives serving customers in North America. Improved management of our locomotive fleet provides oppor- tunities to increase asset utilization and improve our return on capital. G e n e s e e & W y o m i n g I n c . ❘ 13 Management’s Discussion and Analysis Of Financial Condition and Results of Operations and derailments. In periods when these events occur, results of operations are not easily comparable to other periods. Also, the Company has completed a number of recent acquisitions. The Company completed the The following discussion should be read in conjunction acquisition of South Buffalo Railway in the United States with the Consolidated Financial Statements and related in October, 2001. The Company, through a 50% owned notes included elsewhere in this Annual Report. joint venture, completed an acquisition in Western General The Company is a holding company whose subsidiaries and unconsolidated affiliates own and/or operate short line and regional freight railroads and provide related rail services in North America, South America and Australia. The Company, through its U.S. industrial switching subsidiary, also provides freight car switching and related services to United States industrial compa- nies with extensive railroad facilities within their com- plexes. 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 ancillary rail services. 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 fac- tors 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 Australia in December 2000, and through an investment in an unconsolidated affiliate, acquired an interest in a railroad in Bolivia in November 2000. Additionally, the Company completed two acquisitions, one in Canada and one in Mexico, 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. The general downturn in economies in North America in 2001, has adversely affected the Company’s cyclical shipments of commodities such as paper products in Canada, chemicals in the United States, and cement in Mexico. However, shipments of other important commodities such as coal and salt are less affected by economic downturns and are more closely affected by the weather. The economic downturn has also impacted the Company’s customers and while a limited number of them have declared bankruptcy, their traffic volumes have remained largely unaffected and the impact on the collection of their receivables has not been significant to date. On February 14, 2002 and May 1, 2001, the Company announced three-for-two common stock splits in the form of 50% stock dividends distributed on March 14, 2002 to shareholders of record as of February 28, 2002, and on June 15, 2001 to shareholders of record as of May 31, 2001, respectively. All share, per share and par value amounts presented herein have been restated to reflect the retroactive effect of both of the stock splits. 14 ❘ G e n e s e e & W y o m i n g I n c . Expansion of Operations United States On February 22, 2002, the Company acquired Emons Transportation Group, Inc. (Emons) for approximately $20.0 million in cash, including transaction costs and net of cash received in the acquisition, and $11.0 million of debt assumed. The Company purchased all of the outstanding shares of Emons at $2.50 per share. The Company funded the acquisition through its $103.0 million revolving line of credit held under its primary credit agreement, all of which was available at the time of the purchase. Emons is a short line railroad holding company with operations over 340 miles of track in Maine, Vermont, Québec and Pennsylvania. On October 1, 2001, the Company acquired all of the issued and outstanding shares of common stock of South Buffalo Railway (South Buffalo) from Bethlehem As contemplated with the acquisition, the Company will close the former South Buffalo headquarters office in March 2002 and has implemented an early retirement program under which 28 South Buffalo employees terminated in December 2001. The aggregate $876,000 cost of these restructuring activities is considered a liability assumed in the acquisition, and therefore is included in goodwill. The majority of these costs were paid in 2001. The acquisition of South Buffalo triggered the right of The 1818 Fund III, L.P. (the Fund), a private equity fund managed by Brown Brothers Harriman & Co., to acquire an additional $5.0 million of the Company’s Series A Redeemable Convertible Preferred Stock (the Convertible Preferred), and the Fund exercised that right on December 11, 2001 (see Note 12 to Consolidated Financial Statements). Steel Corp. (Bethlehem) for $33.1 million in cash, Australia including transaction costs, and the assumption of certain liabilities of $5.6 million. At the closing, the Company acquired beneficial ownership of the shares and, having received the necessary approvals from The Surface Transportation Board on November 21, 2001, assumed actual ownership on December 6, 2001. The purchase price was allocated to current assets ($2.3 mil- lion), property and equipment ($17.6 million) and good- will ($18.8 million) less assumed current liabilities ($2.4 million) and assumed long-term liabilities ($3.2 million). South Buffalo operates over 52 miles of owned track in Buffalo, New York. The purchase price has been reduced by a $407,000 estimated adjustment pursuant to the final determination of the net assets of South Buffalo on the sale date. This amount, together with another $300,000 related to pre-acquisition liabilities paid by the Company on Bethlehem’s behalf, are reflected in the December 31, 2001 balance sheet as receivables. Although Bethlehem filed for voluntary protection under U.S. bankruptcy laws on October 5, 2001, payment of this receivable could be funded from a $3.0 million escrow account held by an independent trustee to settle amounts due to the Company pursuant to the South Buffalo acquisition. On December 16, 2000, the Company, through its newly-formed joint venture, Australian Railroad Group Pty. Ltd. (ARG), completed the acquisition of Westrail Freight from the government of Western Australia for approximately $334.4 million U.S. dollars including working capital. ARG is a joint venture owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. Westrail Freight was composed of the freight operations of the formerly state-owned railroad of Western Australia. To complete the acquisition, the Company contributed its formerly wholly-owned subsidiary, Australia Southern Railroad (ASR), to ARG along with the Company’s 2.6% interest in the Asia Pacific Transport Consortium (APTC) – a consortium selected to construct and operate the Alice Springs to Darwin railway line in the Northern Territory of Australia. Additionally, the Company contributed $21.4 million of cash to ARG (partially funded by a $20.0 million private placement of the Convertible Preferred with the Fund) while Wesfarmers contributed $64.2 million in cash, including $8.2 mil- lion which represents a long-term Australian dollar denominated non-interest bearing note to match a simi- lar note due to the Company from ASR at the date of the G e n e s e e & W y o m i n g I n c . ❘ 15 Management’s Discussion and Analysis transaction. ARG funded the remaining purchase price agreement as to the level of acquisition-related costs with proceeds from its Australian bank credit facility. to be reimbursed to both venture partners. Accordingly, As a direct result of the ARG transaction, ASR stock in the fourth quarter of 2001, the Company recorded a options became immediately exercisable by key manage- $728,000 decrease to its previously recorded gains to ment of ASR and, as allowed under the provisions of reflect the lower than estimated reimbursed amount the stock option plan, the option holders, in lieu of ASR for acquisition-related costs. stock, were paid an equivalent value in cash, resulting The Company accounts for its 50% ownership in a $4.0 million compensation charge to ASR earnings. in ARG under the equity method of accounting and The Company recognized a $10.1 million gain upon therefore deconsolidated ASR from its consolidated the issuance of ASR stock to Wesfarmers upon the for- financial statements as of December 16, 2000. Prior mation of ARG as a result of such issuance being at to its deconsolidation, ASR accounted for $37.6 million a per share price in excess of the Company’s book value and $4.0 million of operating revenue and income from per share investment in ASR. Additionally, due to the operations (excluding the $4.0 option buyout charge), deconsolidation of ASR, the Company recognized a respectively, for 2000 and $43.2 million and $6.6 $6.5 million deferred tax expense resulting from the million, respectively, for 1999. financial reporting versus tax basis difference in the Company’s equity investment in ARG. Mexico On April 20, 2001, APTC completed the arrangement of debt and equity capital to finance a project to build, own and operate the Alice Springs to Darwin railway line in the Northern Territory of Australia. As previ- ously arranged, upon APTC reaching financial closure, Wesfarmers contributed an additional $7.4 million into ARG and accordingly, the Company recorded an addi- tional first quarter gain of $3.7 million related to the December, 2000 issuance of ARG stock to Wesfarmers. A related deferred income tax expense of $1.1 million was also recorded. In the second quarter of 2001, ARG paid the $7.4 million to its two shareholders, in equal amounts of $3.7 million each, as partial payment of each shareholder’s Australian dollar denominated non-interest bearing note which resulted in a $508,000 currency transaction loss. The combined gains totaling $13.8 million relating to the formation of ARG represented the difference between the recorded balance of the Company’s previ- ously wholly owned investment in Australia, less invest- ment amounts that the Company estimated would be reimbursed by ARG, and the value of those Australian operations when ARG was formed. In the fourth quarter of 2001, the Company, ARG and Wesfarmers reached In August 1999, the Company’s then wholly-owned subsidiary, Compañía 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 price included rolling stock, an advance payment on track improve- ments to be completed on the state-owned track property, an escrow payment, which was returned to the Company upon successful completion of the track improvements, and prepaid value-added taxes. A portion of the purchase price ($8.4 million) was also allocated to the 30-year operating license. As the track improvements were made, the related costs were reclassified into the property accounts as leasehold improvements and are now being amortized over the improvements’ estimated useful lives. Pursuant to the acquisition, employee termination pay- ments of $1.0 million were made to former state employ- ees and approximately 55 employees who 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. 16 ❘ G e n e s e e & W y o m i n g I n c . On December 7, 2000, in conjunction with and upon certain GRO income performance measures the refinancing of FCCM and its parent company, which have not yet been met. The transaction was GW Servicios, S.A. de C.V. (Servicios) (see Note 9 to accounted for as a purchase and resulted in $2.8 million Consolidated Financial Statements), the International of initial goodwill which was being amortized over 15 Finance Corporation (IFC) invested $1.9 million of equity years. The contingent purchase price will be recorded as for a 12.7% indirect interest in FCCM, through Servicios. a component of goodwill at the value of the options The Company contributed an additional $13.1 million issued, if and when such options are exercisable. and maintains an 87.3% indirect ownership in FCCM. Effective with this agreement, the operating results of The Company funded $10.7 million of its new invest- GRO were initially consolidated within the financial ment with borrowings under its amended credit facility, statements of the Company, with a 5% minority interest with the remaining investment funded by the conversion due to another GRO shareholder. During the second of intercompany advances into permanent capital. quarter of 2000, the Company purchased the remaining Along with its equity investment, IFC received a put 5% minority interest in GRO with an initial cash pay- option exercisable in 2005 to sell its equity stake back ment of $240,000 and subsequent annual cash install- to the Company. The put price will be based on a multi- ments of $180,000 paid in 2001 and due in 2002. ple of earnings before interest, taxes, depreciation and Prior to April 15, 1999, the Company accounted for amortization. The Company increases its minority inter- its investment in GRO under the equity method and est expense in the event that the value of the put option recorded an equity loss of $618,000 in 1999. exceeds the otherwise minority interest liability. Because the IFC equity stake can be put to the Company, the impact of selling the equity stake at a per share price below the Company’s book value per share investment was recorded directly to paid-in capital in 2000. Canada South America On November 5, 2000, the Company acquired an indirect 21.87% equity interest in Empresa Ferroviaria Oriental, S.A. (Oriental) increasing its stake in Oriental to 22.55% from its original indirect 0.68% interest acquired in September 1999. On July 24, 2001, the On April 15, 1999, the Company acquired Rail-One Company increased its indirect equity interest in Inc. (Rail-One) which has a 47.5% ownership interest in Oriental to 22.89% with an additional investment of Genesee • Rail-One Inc. (GRO), thereby increasing the $246,000. Oriental is a railroad serving eastern Bolivia Company’s ownership of GRO to 95% from the 47.5% and connecting to railroads in Argentina and Brazil. it acquired in 1997. GRO owns and operates two short The Company’s ownership interest is largely through line railroads in Canada. Under the terms of the purchase a 90% owned holding company in Bolivia which also agreement, the Company converted outstanding notes received $740,000 from the minority partner for invest- receivable from Rail-One of $4.6 million into capital, ment into Oriental. The Company’s portion of the committed to pay approximately $844,000 in cash to the Oriental investment is composed of $6.9 million in sellers of Rail-One in installments over a four year period, cash, the assumption (via an unconsolidated subsidiary) and granted options to the sellers of Rail-One to pur- of non-recourse debt of $10.8 million (90% of $12.0 chase up to 180,000 shares of the Company’s Class A million) at an adjustable interest rate dependent on Common Stock at an exercise price of $3.83 per share. operating results of Oriental, and a non-interest bearing Exercise of the option is contingent on the Company’s contingent payment of $450,000 due in 2003 if certain recovery of its capital investment in GRO (after payoff financial results are achieved. The cash used by the of existing GRO debt) if the Company were to sell GRO, G e n e s e e & W y o m i n g I n c . ❘ 17 Management’s Discussion and Analysis Company to fund such investment was obtained from Results of Operations its existing revolving credit facility. Additionally, the Company received the right to collect dividends from Oriental related to its full year 2000 earnings. Such dividends of $617,000 were received in March 2001. The full value of the non-recourse debt of the Company’s unconsolidated subsidiary ($12.0 million as of December 31, 2001) bears interest, based on the availability of divi- dends received from Oriental, between a floor of 4% and a ceiling of 7.67%. The debt effectively bore interest of 6.12% throughout 2001 and is due, in annual install- ments through 2003. Such installments and interest are primarily funded by dividends received from Oriental, with any shortages (which are expected for 2002 pay- ments) to be funded by the Company and its partner. The Company accounts for its indirect interest in Oriental under the equity method of accounting. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Consolidated Operating Revenues Consolidated operating revenues (which exclude revenues from the Company’s equity investees) were $173.6 mil- lion in the year ended December 31, 2001 compared to $206.5 million in the year ended December 31, 2000, a net decrease of $33.0 million or 16.0%. The net decrease was attributable to a $37.6 million decrease due to the deconsolidation of Australian railroad operations as of December 16, 2000 and a $275,000 net decrease on existing North American railroad operations, offset by a $3.4 million increase in North American railroad revenues from the October 1, 2001 acquisition of South Buffalo, and a $1.5 million increase in industrial switch- ing revenues. The following two sections provide information on railroad revenues for North America and industrial switching revenues in the United States. North American Railroad Operating Revenues Operating revenues had a net increase of $3.1 million, or 2.0%, to $161.4 million in the year ended December 31, 2001 of which $129.9 million were freight revenues and $31.6 million were non-freight revenues. Operating rev- enues in the year ended December 31, 2000 were $158.3 million of which $126.4 million were freight revenues and $31.9 million were non-freight revenues. The net increase in operating revenues was attributable to a $3.5 million increase in freight revenues which consisted of $2.8 million in freight revenue from South Buffalo and a $643,000 increase on existing North American railroad operations, offset by a $362,000 decrease in non-freight revenues which consisted of $556,000 in non-freight revenue from South Buffalo offset by a $918,000 decrease on existing North American railroad operations. The following table compares North American freight revenues, carloads and average freight revenues per carload for the years ended December 31, 2001 and 2000: 18 ❘ G e n e s e e & W y o m i n g I n c . North American Freight Revenues and Carloads Comparison by Commodity Group (dollars in thousands, except average per carload) Years Ended December 31, 2001 and 2000 Freight Revenues Carloads Average Freight Revenue Per Carload 2001 % of total 2000 % of total 2001 % of total 2000 % of total 2001 2000 Commodity Group Coal, Coke & Ores Minerals & Stone Pulp & Paper Petroleum Products Metals Farm & Food Products Lumber & Forest Products Chemicals-Plastics Autos & Auto Parts Other $28,081 19,439 18,663 16,971 11,239 10,008 8,846 8,359 2,499 5,756 33.1% 117,189 20.6% 128,286 21.6% $25,987 42,146 43,615 17,901 15.0% 11.2% 14.2% 51,753 49,033 12.6% 19,653 15.6% 14.4% 30,075 7.1% 27,541 18,221 14.4% 13.1% 36,554 10.5% 40,679 8.0% 10,069 8.7% 27,710 7.3% 28,205 7.6% 9,653 7.7% 25,426 6.9% 26,727 6.2% 7,827 6.8% 16,985 4.3% 16,574 7.0% 8,800 6.4% 5,849 1.4% 5,283 2.5% 3,148 1.9% 21,438 5.6% 22,040 3.9% 5,113 4.4% 31.2% 11.2% 13.8% 8.0% 9.7% 7.4% 6.8% 4.5% 1.6% 5.8% $219 446 381 616 276 355 331 504 473 261 $222 425 380 606 275 348 308 518 538 239 Totals $129,861 100.0% $126,372 100.0% 387,983 100.0% 375,125 100.0% 335 337 Coal, Coke and Ores revenue increased by $2.1 Lumber and Forest Products revenue increased by million, or 8.1%, primarily due to hauling additional $1.0 million, or 13.0%, primarily due to an increase of carloads of Coal on existing railroad operations for 1,301 carloads hauled in 2001 for lumber and forest customers operating in the electric utility industry. products industries located on the Company’s Oregon Minerals and Stone revenue increased by $1.5 and New York-Pennsylvania railroad operations. million, or 8.6%, primarily due to hauling additional Freight revenues from all remaining commodities carloads of Salt on existing railroad operations as the reflected a net decrease of $92,000, after consideration result of a new salt mine customer which began of $1.4 million of mostly Auto and Auto Parts revenue shipping in May 2001. from South Buffalo during its 13 weeks as part of the Pulp and Paper revenue decreased by $1.0 million, Company. or 5.0%, primarily due to a decrease of 2,720 carloads Total North American carloads were 387,983 hauled in 2001 resulting from a business decline in the in the year ended December 31, 2001 compared to Pulp and Paper industries located on the Company’s 375,125 in the year ended December 31, 2000, an Oregon, New York-Pennsylvania and Canada railroad increase of 12,858, or 3.4%. The increase of 12,858 operations. consisted of 9,652 carloads from South Buffalo and Petroleum Products revenue decreased by $1.3 10,584 carloads of coal on existing railroad operations, million, or 6.9%, primarily due to a decrease of 2,534 offset by a net decrease of 7,378 carloads in all other carloads hauled in 2001 for Petroleum Products indus- commodities combined on existing railroad operations. tries located on the Company’s Mexico railroad opera- The overall average revenue per carload decreased tions due to a weakening Mexican economy and to $335 in the year ended December 31, 2001, compared shifting traffic patterns. to $337 per carload in the year ended December 31, Metals revenue increased by a net $1.2 million, or 2000, a decrease of 0.6%, due primarily to a 1.4% 11.6%, primarily due to $1.4 million in freight revenue decrease in per carload revenues attributable to coal from South Buffalo, offset by a $222,000 decrease on resulting from volume discounts. existing railroad operations. G e n e s e e & W y o m i n g I n c . ❘ 19 Management’s Discussion and Analysis North American non-freight railroad revenues were U.S. Industrial Switching Revenues $31.6 million in the year ended December 31, 2001, Revenues from U.S. industrial switching activities were compared to $31.9 million in the year ended December $12.1 million in the year ended December 31, 2001 31, 2000, a decrease of $362,000, or 1.1%, which consisted compared to $10.6 million in the year ended December of $556,000 in non-freight revenue from South Buffalo 31, 2000, an increase of $1.5 million, or 14.7%, due offset by a $918,000 decrease on existing North American primarily to the addition of several new switching railroad operations. The following table compares North contracts in 2001. American non-freight revenues for the years ended December 31, 2001 and 2000: North American Railroad Non-Freight Operating Revenues Comparison (dollars in thousands) Year Ended December 31, 2001 2000 $ % of Non-Freight Operating Revenue $ % of Non-Freight Operating Revenue $8,785 27.8% $11,340 35.5% Railroad switching Car hire and 7,484 rental income Car repair services 3,135 Other operating income 12,180 23.7% 9.9% 38.6% 7,969 3,019 9,618 24.9% 9.5% 30.1% Total non-freight revenues Consolidated Operating Expenses Consolidated operating expenses for all operations were $151.4 million in the year ended December 31, 2001, compared to $182.8 million in the year ended December 31, 2000, a net decrease of $31.4 million, or 17.1%. The net decrease was attributable to a $37.7 million decrease due to the deconsolidation of Australian railroad opera- tions on December 16, 2000, offset by a $5.0 million increase in North American railroad operating expenses of which $2.4 million was attributable to the Company’s start-up logistics operation, Speedlink, for which opera- tions were discontinued in September 2001, $1.9 million resulted from the October 1, 2001 acquisition of South $31,584 100.0% $31,946 100.0% Buffalo, $747,000 was from an increase on North Ameri- can railroad operations, and $1.3 million was from an The net decrease of $2.6 million in railroad increase in industrial switching operating expenses. switching revenues is primarily attributable to a decrease of $3.1 million from passenger train operations in Mexico, offset by an increase of $531,000 in switching revenues from operations in the United States of which $413,000 is revenue from South Buffalo. The increase of $2.6 million in other operating income is primarily attributable to a $1.1 million increase in storage and demurrage of which $93,000 is revenue from South Buffalo and $1.0 million is from existing railroad operations, and a $1.1 million increase in other income. The increase in other income consists primarily of a $420,000 increase in management fee revenue on existing railroad operations related to coal unloading facilities, and $398,000 of revenue from the Company’s start-up logistics operation, Speedlink, for which operations were discontinued in September 2001. Operating Ratios The Company’s consolidated operating ratio improved to 87.2% in the year ended December 31, 2001 from 88.5% in the year ended December 31, 2000. The operating ratio for North American railroad operations declined to 86.6% in the year ended December 31, 2001 from 85.1% in the year ended December 31, 2000. The operating ratio for U.S. industrial switching operations improved to 96.0% in the year ended December 31, 2001 from 97.7% in the year ended December 31, 2000. The operating ratio for Australian railroad operations was 89.4% in 2000 (excluding the $4.0 million stock option charge). The following two sections provide information on railroad expenses in North America and industrial switching expenses in the United States. 20 ❘ G e n e s e e & W y o m i n g I n c . North American Railroad Operating Expenses Diesel fuel expense decreased a net $1.3 million, The following table sets forth a comparison of the or 10.0%, of which $1.4 million was a decrease on exist- Company’s North American railroad operating expenses ing North American operations resulting primarily from in the years ended December 31, 2001 and 2000: decreased fuel prices in 2001, offset by $52,000 of North American Railroad Operating Expense Comparison (dollars in thousands) Year Ended December 31, 2001 2000 % of Operating Revenue % of Operating Revenue $ $ $55,902 19,675 11,942 34.7% $54,212 19,787 12.2% 10,805 7.4% 34.2% 12.5% 6.8% 12,139 11,596 6,779 10,560 11,200 7.5% 7.2% 4.3% 6.5% 6.6% 11,068 12,888 6,111 10,226 9,677 7.0% 8.1% 3.9% 6.5% 6.1% $139,793 86.4% $134,774 85.1% Labor and benefits Equipment rents Purchased services Depreciation and amortization Diesel fuel Casualties and insurance Materials Other expenses Total operating expenses Labor and benefits expense increased $1.7 million, or 3.1%, of which $945,000 was attributable to South Buffalo, $252,000 was attributable to the Company’s start-up logistics operation, Speedlink, for which operations were discontinued in September 2001, and $493,000 was on existing North American operations. Purchased services increased a net $1.1 million, or 10.5%, of which $139,000 was attributable to South Buffalo and $1.3 million was attributable to Speedlink, offset by a $334,000 decrease on existing North American operations. Depreciation and amortization expense increased $1.1 million, or 9.7%, of which $150,000 was attributa- ble to South Buffalo and $921,000 was on existing North American operations. Pursuant to adopting SFAS No. 142 on January 1, 2002, goodwill will no longer be amortized (see Note 21 to Consolidated Financial Statements). expense attributable to South Buffalo. All remaining operating expenses combined increased $2.4 million, or 5.3%, of which $625,000 was attributable to South Buffalo, $839,000 was attributable to Speedlink, and $1.0 million was on existing North American operations. 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, 2001 and 2000: U.S. Industrial Switching Operating Expense Comparison (dollars in thousands) Year Ended December 31, 2001 2000 % of Operating Revenue 66.4% 2.4% 3.2% $ $8,061 289 392 % of Operating Revenue 60.7% 2.3% 3.2% $ $6,419 239 335 617 464 294 702 824 5.1% 3.8% 2.4% 5.8% 6.9% 658 542 529 643 970 6.2% 5.1% 5.0% 6.1% 9.1% $11,643 96.0% $10,335 97.7% Labor and benefits Equipment rents Purchased services Depreciation and amortization Diesel fuel Casualties and insurance Materials Other expenses Total operating expenses Labor and benefits expense increased $1.6 million, or 25.6%, due primarily to the addition of several new switching contracts in 2001. G e n e s e e & W y o m i n g I n c . ❘ 21 Management’s Discussion and Analysis All other expenses were $3.6 million in the year Other Income, Net ended December 31, 2001, compared to $3.9 million Other income, net, in the year ended December 31, 2001, in the year ended December 31, 2000, a decrease of $334,000, or 8.5%, due primarily to a $235,000 net decrease in casualties and insurance which resulted from the settlement of a long-standing claim for $350,000 less than the Company’s recorded accrual, offset by a $115,000 increase in actual 2001 casualties and insurance expense. Interest Expense Interest expense in the year ended December 31, 2001, was $10.0 million compared to $11.2 million in the year ended December 31, 2000, a decrease of $1.2 million, or 10.5%, primarily due to a decrease in debt and lower interest rates in 2001, offset by new borrowings to was $1.4 million compared to $3.0 million in the year ended December 31, 2000, a decrease of $1.6 million, or 53.3%. Other income, net, in the year ended December 31, 2001 consists primarily of interest income of $1.1 million and gain on asset sales of $814,000, offset by currency losses of $508,000 on Australian dollar denom- inated receivables. Other income, net, in the year ended December 31, 2000, consisted primarily of interest income of $2.3 million. The decrease in interest income in the year ended December 31, 2001, is primarily due to a partial year of earnings compared to a full year of earnings in the year ended December 31, 2000 on a special deposit at the Company’s Mexican subsidiary. acquire South Buffalo. Income Taxes Gain on 50% Sale of Australia Southern Railroad The Company recorded a non-cash gain of $10.1 million upon the issuance of shares of ASR at a price per share in excess of its book value per share investment in ASR in December 2000 and a related net $3.0 million increase of that gain in 2001 (see Note 3 to Consolidated Finan- cial Statements). Valuation Adjustment of U.S. Dollar Denominated Foreign Debt Amounts outstanding under the Company’s credit facilities which were borrowed by FCCM represented U.S. dollar denominated foreign debt of the Company’s Mexican subsidiary. As the Mexican peso moved against the U.S. dollar, the revaluation of this outstanding debt to its Mexican peso equivalent resulted in non-cash gains and losses. On June 16, 2000, pursuant to a corporate and financial restructuring of the Company’s Mexican subsidiaries, the income statement impact of the U.S. dollar denominated foreign debt revaluation was significantly reduced. The Company’s effective income tax rate in the years ended December 31, 2001 and 2000 was 37.6% and 43.9%, respectively. The decrease in 2001 is partially attributable to a lower Australian income tax rate (30%) recorded on the $3.0 million one-time gain on the sale of 50% of its interest in APTC. The 2000 rate was impacted by a $6.6 million non-cash deferred tax expense related to the financial reporting versus tax basis difference in the Company’s investment in Australia which resulted from the deconsolidation of those operations, and a $1.0 million reduction in the valuation allowance established in 1999 against the positive impact of a favorable tax law change in Australia. Without the impact of these items, the Company’s effective income tax rate in the year ended December 31, 2000, was 35.8%. Equity in Net Income of Unconsolidated International Affiliates Equity earnings of unconsolidated international affiliates in the year ended December 31, 2001, were $8.9 million compared to $411,000 in the year ended December 31, 2000, an increase of $8.5 million. Equity earnings in the year ended December 31, 2001, consist of $8.5 million from Australian Railroad Group and $412,000 from South America affiliates. Equity earnings in the year ended December 31, 2000, consist of $261,000 from 22 ❘ G e n e s e e & W y o m i n g I n c . Australian Railroad Group for the period of December 17 through December 31, 2000, and $150,000 from South America affiliates for the period of November 6 through December 31, 2000. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Consolidated Operating Revenues Net Income and Earnings Per Share The Company’s net income for the year ended December 31, 2001, was $19.1 million compared to net income in the year ended December 31, 2000, of $13.9 million, an increase of $5.2 million, or 37.0%. The increase in net income is the net result of an increase in equity earnings of unconsolidated affiliates of $8.5 million and a decrease in the net loss of industrial switching of $83,000, offset by a decrease in net income from exist- ing North American railroad operations of $3.2 million and a decrease in net income from Australian railroad operations of $204,000 due to its deconsolidation. Basic and Diluted Earnings Per Share in the year ended December 31, 2001, were $1.72 and $1.48, respectively, on weighted average shares of 10.5 million and 12.9 million, respectively, compared to $1.42 and $1.38, respectively, on weighted average shares of 9.8 million and 10.1 million in the year ended December 31, 2000. The earnings per share and weighted average shares outstanding for the years ended December 31, 2001 and 2000 are adjusted for the impact of the March Consolidated operating revenues (which exclude revenues from the Company’s equity investees) were $206.5 million in the year ended December 31, 2000, compared to $175.6 million in the year ended December 31, 1999, a net increase of $30.9 million, or 17.6%. The net increase was attributable to a $37.2 million increase in North American railroad revenues of which $23.8 million was attributable to a full year of railroad operations in Mexico compared to four months of rail- road operations in Mexico in the 1999 period, $10.2 million was attributable to a full year of railroad opera- tions in Canada compared to eight and one-half months of railroad operations in Canada in the 1999 period, and $3.2 million was on existing North American opera- tions, offset by a $5.5 million decrease in revenues from Australian railroad operations and a $768,000 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. Australian railroad operations were deconsolidated starting December 17, 2000. 14, 2002 and June 15, 2001 stock splits (see Note 2. to North American Railroad Operating Revenues Consolidated Financial Statements). The increase in weighted average shares outstanding for Basic Earnings Per Share of 731,000 is primarily attributable to the exercise of employee stock options in 2001, and the impact of the December 21, 2001, offering of common stock (see Note 11 to Consolidated Financial Statements). The increase in weighted average shares outstanding for Diluted Earnings Per Share of 2.8 million is primarily attributable to the above impact and the dilutive impact of the common stock equivalents associated with the Redeemable Convertible Preferred Stock issued in December 2001 and December 2000, (26,802 and 1,956,522 weighted average shares, respectively), and the dilutive impact of unexercised employee and director stock options as a result of an increase in the market price of the Company’s stock in 2001. Operating revenues increased $37.2 million, or 30.7%, to $158.3 million in the year ended December 31, 2000, of which $126.4 million were freight revenues and $31.9 million were non-freight revenues. Operating revenues in the year ended December 31, 1999, were $121.1 million, of which $95.5 million were freight revenues and $25.6 million were non-freight revenues. The increase was attributable to a $30.7 million increase in freight revenues and a $6.5 million increase in non-freight revenues. The increase of $30.7 million in North American freight revenues consisted of $20.7 million in freight revenues attributable to a full year of railroad operations in Mexico, $8.6 million in freight revenues attributable to a full year of railroad operations G e n e s e e & W y o m i n g I n c . ❘ 23 Management’s Discussion and Analysis in Canada, and $1.4 million on existing North American operations. The following table compares North American freight revenues, carloads and average freight revenues per carload for the years ended December 31, 2000 and 1999: North American Freight Revenues and Carloads Comparison by Commodity Group (dollars in thousands, except average per carload) Years Ended December 31, 2000 and 1999 Freight Revenues Carloads Average Freight Revenues Per Carload 2000 % of total 1999 % of total 2000 % of total 1999 % of total 2000 1999 Coal, Coke & Ores Pulp & Paper Petroleum Products Minerals & Stone Metals Farm & Food Products Chemicals-Plastics Lumber & Forest Products Autos & Auto Parts Other $25,987 19,653 18,221 17,901 10,069 9,653 8,800 7,827 3,148 5,113 20.6% $24,779 15.6% 14.4% 14.2% 8.0% 7.6% 7.0% 6.2% 2.5% 3.9% 14,867 15.6% 10,210 10.7% 8.3% 7,905 8.5% 8,156 6.1% 5,831 8.6% 8,169 8.7% 8,304 2.6% 2,491 5.0% 4,825 25.9% 117,189 51,753 30,075 42,146 36,554 27,710 16,985 25,426 5,849 21,438 31.2% 13.8% 8.0% 11.2% 9.7% 7.4% 4.5% 6.8% 1.6% 5.8% 94,140 39,952 20,206 23,667 30,614 19,898 16,039 28,627 4,790 22,024 31.4% 13.3% 6.7% 7.9% 10.2% 6.6% 5.4% 9.6% 1.6% 7.3% $222 380 606 425 275 348 518 308 538 239 $263 372 505 334 266 293 509 290 520 219 Totals $126,372 100.0% $95,537 100.0% 375,125 100.0% 299,957 100.0% 337 319 Revenues from hauling Coal increased by $1.2 million, or 4.9%, of which $77,000 was attributable to a full year of railroad operations in Canada, and $1.1 million was on existing North American operations. The increase on existing railroad operations was primarily attributable to freight revenues for two new customers in the 2000 period. The average revenue per carload for coal decreased by 15.6% due to lower revenue per car- load for the new customers, and freight rate reductions on certain existing traffic. Pulp and Paper revenues increased by $4.8 million, or 32.2%, of which $306,000 was attributable to a full year of railroad operations in Mexico, $2.9 million was attributable to a full year of railroad operations in Canada, and $1.6 million was on existing North American operations. Petroleum Products revenues increased by $8.0 mil- lion, or 78.5%, of which $7.1 million was attributable to a full year of railroad operations in Mexico, $33,000 was attributable to a full year of railroad operations in Canada, and $868,000 was on existing North American operations. Minerals and Stone revenues increased by $10.0 mil- lion, or 126.5%, of which $8.9 million was attributable to a full year of railroad operations in Mexico, $237,000 was attributable to a full year of railroad operations in Canada, and $887,000 was on existing North American operations. Farm and Food Products increased by a net $3.8 mil- lion, or 65.5%, of which $2.2 million was attributable to a full year of railroad operations in Mexico and $1.7 mil- lion was attributable to a full year of railroad operations in Canada, offset by a decrease of $103,000 on existing North American operations. 24 ❘ G e n e s e e & W y o m i n g I n c . North American Railroad Non-Freight Operating Revenues Comparison (dollars in thousands) Year Ended December 31, 2000 1999 $ % of Non-Freight Operating Revenue $ % of Non-Freight Operating Revenue $ 11,340 35.5% $ 6,818 26.7% Railroad switching Car hire and rental income 7,969 3,019 Car repair services Other operating income 9,618 24.9% 9.5% 30.1% 7,981 2,346 8,411 31.2% 9.2% 32.9% Total non-freight revenues $ 31,946 100.0% $ 25,556 100.0% The increase of $4.5 million in railroad switching revenues is primarily attributable to a full year of railroad operations in Mexico. Freight revenues from all remaining commodities reflected a net increase of $3.0 million, or 9.4%, of which $2.3 million was attributable to a full year of railroad operations in Mexico, $3.7 million was attributable to a full year of railroad operations in Canada, offset by a net decrease of $3.0 million on existing North American operations. The net decrease on existing North American operations was primarily due to decreases in revenues from Lumber and Forest Products of $1.5 million, Chemicals and Plastics of $698,000, and Other of $1.5 million, offset by increases in Metals of $293,000 and Autos and Auto Parts of $436,000. Total North American carloads were 375,125 in the year ended December 31, 2000, compared to 299,957 in the year ended December 31, 1999, an increase of 75,168, or 25.1%. The increase of 75,168 consisted of 29,914 carloads attributable to a full year of railroad operations in Mexico, 24,962 carloads attributable to a full year of railroad operations in Canada, and a net increase of 20,292 carloads on existing North American railroad operations of which 23,049 were coal offset by a net decrease of 2,757 in all other commodities. The overall average revenue per carload increased to $337 in the year ended December 31, 2000, compared to $319 per carload in the year ended December 31, 1999, an increase of 5.6% due primarily to higher per carload revenues attributable to Canada and Mexico carloads offset by a decrease on existing North American railroad operations carloads. North American non-freight railroad revenues were $31.9 million in the year ended December 31, 2000, compared to $25.6 million in the year ended December 31, 1999, an increase of $6.3 million, or 25.0%. The increase of $6.3 million in North American non-freight revenues consisted of $3.1 million attributable to a full year of operations in Mexico, $1.5 million attributable to a full year of operations in Canada, and $1.7 million in non-freight revenues on existing North American operations. The following table compares North American non-freight revenues for the years ended December 31, 2000 and 1999: G e n e s e e & W y o m i n g I n c . ❘ 25 Management’s Discussion and Analysis Australian Railroad Operating Revenues in Australian operating revenues is due to the December Operating revenues were $37.6 million in the period 17 deconsolidation and the depreciation of the Australian ended December 16, 2000, compared to $43.2 million dollar against the U.S. dollar in the 2000 period com- in the year ended December 31, 1999, a decrease of pared to the 1999 period. The weighted average currency $5.6 million, or 12.8%. The Company deconsolidated its exchange rate in the year ended December 31, 2000 Australian subsidiary as part of the ARG transaction on December 17, 2000. The decrease was the result of a decrease in freight revenues from Australian railroad was $0.5828 compared to $0.6449 in the year ended December 31, 1999, a decrease of $0.0621, or 9.6%. The following table outlines Australian freight revenues operations of $5.2 million, or 13.5%, and a decrease in for the two periods: non-freight revenues of $284,000, or 6.3%. The decrease Australian Freight Revenues by Commodity (dollars in thousands, except average per carload) Years Ended December 31, 2000 and 1999 Freight Revenues Carloads Average Freight Revenues Per Carload 2000 % of total 1999 % of total 2000 % of total 1999 % of total 2000 1999 Hook and Pull (Haulage) Grain Iron Ore Gypsum Marble Lime Coal Other Total $14,905 44.6% $17,533 45.4% 13,588 35.2% 0.9% 7.4% 5.3% 4.0% 1.7% 0.1% 9,009 27.0% 3,754 11.2% 7.2% 2,417 5.4% 1,788 4.3% 1,451 0.0% - 0.3% 96 350 2,861 2,034 1,531 664 88 51,165 21.3% 34,875 14.5% 99,544 41.4% 40,841 17.0% 3.4% 1.7% 0.0% 0.7% 8,171 4,182 - 1,596 52,407 48,781 8,069 40,304 8,343 4,662 4,317 603 31.3% 29.1% 4.8% 24.1% 5.0% 2.8% 2.6% 0.3% $291 258 38 59 219 347 - 60 $335 279 43 71 244 328 154 146 $33,420 100.0% $38,649 100.0% 240,374 100.0% 167,486 100.0% 139 231 The net decrease of $5.2 million in Australian freight the result of increases of 91,475 carloads from the ship- revenues was primarily attributable to the December 17 ment of Iron Ores and 537 carloads from the shipment deconsolidation and the 9.6% depreciation of the of Gypsum, offset by decreases in carloads from Grain, Australian dollar. Decreases in revenues from Grain of Coal, and all other commodities of 13,906, 4,317, and $4.6 million, Hook and Pull of $2.6 million, Coal of 901, respectively. $664,000, and all remaining commodities except Iron The overall average revenue per carload decreased to Ores of $762,000, were primarily due to the deconsoli- $139 in the period ended December 16, 2000, compared dation and depreciation. Grain revenues for 1999 also to $231 per carload in the year ended December 31, reflect the strong harvest experienced during the 1999. The decrease is primarily due to the significantly 1998/99 season. There were no freight revenues from higher number of carloads of lower revenue per carload coal in the 2000 period due to the non-renewal of a coal Iron Ore, and the depreciation of the Australian dollar contract. The increase of $3.4 million from the shipment against the U.S. dollar in the 2000 period compared of Iron Ores was from a new customer that began to the 1999 period. shipments in the forth quarter of 1999. Australian non-freight revenues were $4.2 million Australian carloads were 240,374 in the period in the period ended December 16, 2000, compared to ended December 16, 2000, compared to 167,486 in the $4.5 million in the year ended December 31, 1999, year ended December 31, 1999, an increase of 72,888, a decrease of $284,000, or 6.3%. or 43.5%. The net increase of 72,888 was primarily 26 ❘ G e n e s e e & W y o m i n g I n c . U.S. Industrial Switching Revenues The following three sections provide information Revenues from U.S. industrial switching activities were on railroad expenses for North American and Australian $10.6 million in the year ended December 31, 2000, railroad operations, and industrial switching expenses compared to $11.3 million in the year ended December in the United States. Australian railroad operations were 31, 1999, a decrease of $768,000, or 6.8%, due primarily deconsolidated starting December 17, 2000. to the Company’s decision to exit an unprofitable switch- ing contract in May, 1999. North American Railroad Operating Expenses The following table sets forth a comparison of the Consolidated Operating Expenses Company’s North American railroad operating expenses Consolidated operating expenses for all operations were in the years ended December 31, 2000 and 1999: $182.8 million in the year ended December 31, 2000, compared to $153.2 million in the year ended December North American Railroad Operating Expense Comparison 31, 1999, a net increase of $29.6 million, or 19.3%. (dollars in thousands) Year Ended December 31, Expenses attributable to North American railroad opera- tions were $134.8 million in the year ended December 31, 2000, compared to $105.2 million in the year ended December 31, 1999, an increase of $29.6 million, or 28.1%, of which $17.5 million are operating expenses attributable to a full year of railroad operations in Mexico compared to four months of railroad operations in Mexico in the 1999 period, $8.1 million are operating expenses attributable to a full year of railroad operations in Canada compared to eight and one-half months of railroad operations in Canada in the 1999 period, and $4.0 million are operating expenses on existing North American operations. Expenses attributable to operations in Australia were $37.7 million in 2000, compared to $36.6 million in 1999, an increase of $1.1 million, or 2.9%. Expenses attributable to U.S. industrial switching were $10.3 million in the year ended December 31, 2000, compared to $11.4 million in the year ended December 31, 1999, a decrease of $1.1 million, or 9.6%. 2000 1999 % of Operating Revenue $ % of Operating Revenue $ $54,212 19,787 10,805 34.2% $38,819 13,768 12.5% 7,996 6.8% 32.1% 11.4% 6.6% 11,068 12,888 6,111 10,226 9,677 7.0% 8.1% 3.9% 6.5% 6.1% 9,649 6,357 8.0% 5.2% 4,172 8,503 15,929 3.4% 7.0% 13.2% $134,774 85.1% $105,193 86.9% Labor and benefits Equipment rents Purchased services Depreciation and amortization Diesel fuel Casualties and insurance Materials Other expenses Total operating expenses Labor and benefits expense increased $15.4 million, or 39.7%, of which $7.5 million was attributable to a full year of railroad operations in Mexico, $2.2 million was attributable to a full year of railroad operations in Canada, and $5.7 million was on existing North Operating Ratios American operations. The Company’s consolidated operating ratio increased to 88.5% in the year ended December 31, 2000 from 87.3% in the year ended December 31, 1999. The operating ratio for North American railroad operations decreased to 85.1% in the year ended December 31, 2000 from 86.9% in the year ended December 31, 1999. The operating ratio for Australian railroad operations increased to 100.1% in 2000 from 84.8% in 1999. The operating ratio for U.S. industrial switching operations decreased to 97.7% in the year ended December 31, 2000 from 100.8% in the year ended December 31, 1999. Equipment rents increased $6.0 million, or 43.7%, of which $994,000 was attributable to a full year of rail- road operations in Mexico, $1.8 million was attributable to a full year of railroad operations in Canada, and $3.2 million was on existing North American operations. Purchased services increased $2.8 million, or 35.1%, of which $1.8 million was attributable to a full year of railroad operations in Mexico, $955,000 was attributable G e n e s e e & W y o m i n g I n c . ❘ 27 Management’s Discussion and Analysis to a full year of railroad operations in Canada, and Australian Railroad Operating Expenses $81,000 was on existing North American operations. Depreciation and amortization expense increased The following table sets forth a comparison of the Company’s Australian railroad operating expenses $1.4 million, or 14.7%, of which $1.3 million was attrib- in the periods ended December 16, 2000 and utable to a full year of railroad operations in Mexico December 31, 1999: and $512,000 was attributable to a full year of railroad operations in Canada, offset by a decrease of $434,000 on existing North American operations. Diesel fuel expense increased $6.5 million, or 102.7%, of which $2.4 million was attributable to a full year of railroad operations in Mexico, $1.8 million was attribut- able to a full year of railroad operations in Canada, and $2.3 million was on existing North American operations. The increase on existing railroad operations was due primarily to increased fuel oil prices in 2000 and sec- ondarily to increased fuel consumption resulting from an increase in carloads on existing operations. Casualties and insurance expense increased $1.9 million, or 46.5%, of which $1.4 million was attributable to a full year of railroad operations in Mexico, $19,000 was attributable to a full year of railroad operations in Canada, and $565,000 was on existing North American operations. Materials expense increased $1.7 million, or 20.3%, of which $1.5 million was attributable to a full year of railroad operations in Mexico and $231,000 was on existing North American operations, offset by a $48,000 decrease attributable to Canada. The decrease attributa- ble to Canada is due primarily to increased capital work in the 2000 period compared to a higher level of maintenance work in the 1999 period. Other expenses were $9.7 million in the year ended December 31, 2000, compared to $15.9 million in the year ended December 31, 1999, a net decrease of $6.2 million, or 39.2%. The net decrease of $6.2 million consists of an increase of $531,000 attributable to a full year of railroad operations in Mexico, $800,000 attribut- able to a full year of railroad operations in Canada, offset by a $7.6 million decrease on existing North American operations. Australian Railroad Operating Expense Comparison (dollars in thousands) Year Ended December 31, 2000 1999 $ $5,266 210 11,947 % of Operating Revenue 14.0% 0.6% 31.7% % of Operating Revenue $ $5,443 367 12,116 12.6% 0.9% 28.1% 2,254 6,672 6.0% 17.7% 2,157 8,186 5.0% 19.0% 1,415 1,492 4,397 4,015 3.8% 4.0% 11.7% 10.6% 1,635 1,861 4,833 - 3.8% 4.3% 11.1% 0.0% $37,668 100.1% $36,598 84.8% Labor and benefits Equipment rents Purchased services Depreciation and amortization Diesel fuel Casualties and insurance Materials Other expenses Stock option charge Total operating expenses Operating expenses (exclusive of a $4.0 million stock option charge) decreased by $2.9 million in 2000 primarily due to the December 17 deconsolidation and the 9.6% depreciation of the Australian dollar against the U.S. dollar in the 2000 period compared to the 1999 period. As a direct result of the Company’s contribution of ASR to ARG, ASR stock options became immediately exercisable by the option holders and, as allowed under the provisions of the stock option plan, the option hold- ers, in lieu of ASR stock, were paid an equivalent value in cash, resulting in a $4.0 million pre-tax compensation charge to ASR earnings. 28 ❘ G e n e s e e & W y o m i n g I n c . U. S. Industrial Switching Operating Expenses The following table sets forth a comparison of the Valuation Adjustment of U.S. Dollar Denominated Foreign Debt Company’s industrial switching operating expenses Amounts outstanding under the Company’s credit in the years ended December 31, 2000 and 1999: facilities which were borrowed by FCCM represented U.S. Industrial Switching Operating Expense Comparison (dollars in thousands) Year Ended December 31, 2000 1999 $ $6,419 239 335 % of Operating Revenue $ 60.7% $7,945 187 476 2.3% 3.2% % of Operating Revenue 70.1% 1.6% 4.2% Labor and benefits Equipment rents Purchased services Depreciation and amortization 658 Diesel fuel 542 Casualties and insurance 529 643 Materials 970 Other expenses 6.2% 5.1% 5.0% 6.1% 9.1% 768 421 971 743 (84) 6.8% 3.7% 8.6% 6.6% (0.8%) U.S. dollar denominated foreign debt of the Company’s Mexican subsidiary. As the Mexican peso moved against the U.S. dollar, the revaluation of this outstanding debt to its Mexican peso equivalent resulted in non-cash gains and losses which totaled a loss of $1.5 million in the year ended December 31, 2000, compared to a loss of $191,000 in the year ended December 31, 1999. On June 16, 2000, pursuant to a corporate and financial restructuring of the Company’s Mexican subsidiaries, the income statement impact of the U.S. dollar denominated foreign debt revaluation was significantly reduced. Other Income, Net Other income, net in the year ended December 31, 2000, was $3.0 million compared to $1.9 million in Total operating expenses $10,335 97.7% $11,427 100.8% the year ended December 31, 1999, an increase of Labor and benefits expense decreased $1.5 million, or 19.2%, due primarily to the Company’s decision to exit an unprofitable switching contract in May, 1999. All other expenses were $3.9 million in the year ended December 31, 2000, compared to $3.5 in the year ended December 31, 1999, an increase of $434,000, or 12.5%. Interest Expense Interest expense in the year ended December 31, 2000, was $11.2 million compared to $8.5 million in the year ended December 31, 1999, an increase of $2.7 million or 32.7% primarily due to the increase in debt used to fund acquisitions in 1999 and investments in uncon- solidated affiliates in 2000. Gain on 50% Sale of Australia Southern Railroad $1.1 million or 59.1%. Other income, net in the years ended December 31, 2000 and 1999, consists primarily of interest income of $2.3 million and $1.3 million, respectively. The increase in interest income in the year ended December 31, 2000, is primarily due to a full year of earnings on a special deposit at the Company’s Mexican subsidiary. Income Taxes The Company’s effective income tax rate in the years ended December 31, 2000 and 1999 was 43.9% and 14.0%, respectively. The 2000 rate was impacted by a $6.6 million non-cash deferred tax expense related to the financial reporting versus tax basis difference in the Company’s investment in Australia which resulted from the deconsolidation of those operations, and a $1.0 mil- lion reduction in the valuation allowance established in 1999 against the positive impact of a favorable tax law change in Australia. Without the impact of these items, The Company recorded a non-cash gain of $10.1 million the Company’s effective income tax rate in the year upon the issuance of shares of ASR at a price per share ended December 31, 2000, was 35.8%. The 1999 rate in excess of its book value per share investment in ASR was impacted by a $4.2 million benefit recorded in in December 2000 (see Note 3 to Consolidated Financial the third quarter of 1999 as a result of the favorable tax Statements). law change in Australia. Without this impact, 1999’s effective income tax rate was 40.9%. G e n e s e e & W y o m i n g I n c . ❘ 29 Management’s Discussion and Analysis Equity in Net Income of Unconsolidated International Affiliates Liquidity and Capital Resources During 2001, 2000 and 1999, the Company generated Equity earnings of unconsolidated international affiliates $28.6 million, $23.5 million and $29.3 million, respec- in the year ended December 31, 2000, were $411,000 tively, of cash from operations. The 2001 increase over compared to a loss of $618,000 in the year ended 2000 was primarily due to the net decrease in non-cash December 31, 1999, an increase of $1.0 million. Equity working capital during 2001 compared to the increase in earnings in the year ended December 31, 2000, consist non-cash working capital in 2000, offset by lower cash of $261,000 from Australian Railroad Group for the earnings in 2001. The 2000 decrease is primarily due period of December 17 through December 31, 2000, to higher cash earnings in 2000 being more than offset and $150,000 from South America affiliates for the by the net increase in non-cash working capital during period of November 6 through December 31, 2000. 2000 compared to the net decrease in such non-cash Equity losses of $618,000 in the year ended December working capital in 1999. 31, 1999, were from Genesee • Rail-One for the period Cash flows from investing activities included of January 1 through April 15, 1999, at which date capital expenditures of $16.6 million, $29.3 million the Company acquired majority ownership of Genesee • and $24.9 million in 2001, 2000 and 1999, respectively. Rail-One. Net Income and Earnings Per Share The Company’s net income for the year ended December 31, 2000, was $13.9 million compared to net income in the year ended December 31, 1999, of $12.5 million, an increase of $1.4 million, or 11.2%. The increase in net income is the net result of an increase in net income from North American railroad operations of $7.6 million, an increase in equity earn- ings of unconsolidated affiliates of $1.0 million, and a decrease in the net loss of industrial switching of $86,000, offset by a decrease in net income from Australian railroad operations of $7.3 million. Basic and Diluted Earnings Per Share in the year ended December 31, 2000, were $1.42 and $1.38, respectively, on weighted average shares of 9.8 million and 10.1 million, respectively, compared to $1.24 and $1.23, respectively, on weighted average shares of 10.1 million and 10.2 million, respectively, in the year ended December 31, 1999. The earnings per share and weighted average shares outstanding for years ended December 31, 2000 and 1999 are adjusted for the impact of the March 14, 2002 and June 15, 2001 stock splits (see Note 2 to Consolidated Financial Statements). Of these expenditures, $4.5 million, $14.4 million and $14.8 million were for equipment and rolling stock in 2001, 2000 and 1999, respectively. The remaining capital expenditure amounts each year were for track improvements and are net of funds received under governmental grants of $3.9 million, $8.9 million and $8.6 million in 2001, 2000 and 1999, respectively. Year 2001 cash flows from investing activities included $33.1 million for the acquisition of South Buffalo Railway, $246,000 of investments in unconsolidated affiliates, and $4.3 million in cash received from uncon- solidated affiliates. Year 2000 cash flows from investing activities included $29.4 million of investments in unconsolidated affiliates and $2.6 million of proceeds from the issuance of minority shares in consolidated affiliates. Year 1999 cash flows from investing activities included $1.0 million of investments in unconsolidated affiliates and $31.5 million for the acquisition by FCCM. Proceeds from assets sales were $8.1 million in 2001, $679,000 in 2000 and $10.3 million in 1999. Cash flows from financing activities included a net decrease in outstanding debt of $43.0 million in 2001 and net increases in outstanding debt of $6.4 million in 2000 and $17.5 million in 1999. Common stock activity resulted in net cash inflows of $71.6 million and $2.2 million, respectively, in 2001 and 2000 and outflows of $6.3 million in 1999, such outflows primarily represent- ing the 1999 portion of the Company’s program from 30 ❘ G e n e s e e & W y o m i n g I n c . August, 1998 to April, 1999 to repurchase 2.3 million at various rates plus the applicable margin, which varies shares of its Class A common stock. Year 2001 and 2000 from 1.75% to 2.5% depending upon the country in cash flows from financing activities also included $4.8 which the funds are drawn and the Company’s funded million and $18.8 million, respectively, of net proceeds debt to Earnings Before Interest, Taxes, Depreciation, from the Company’s respective December 2001 and Amortization and Operating Leases (EBITDAR) ratio, as December 2000 issuances of Redeemable Convertible defined in the agreement. Interest is payable in arrears Preferred Stock and 2001 included $855,000 of divi- based on certain elections of the Company, not to exceed dends paid on the Preferred. three months outstanding. The Company pays a commit- During 2001, the Company completed two amend- ment fee which varies between 0.375% and 0.500% per ments to its primary credit agreement (neither of which annum on all unused portions of the revolving credit affected the terms of the debt) to facilitate the Company’s facility depending on the Company’s funded debt to acquisition of South Buffalo, the issuance of Class A EBITDAR ratio. The credit facilities agreement requires Common Stock, and the acquisition of Emons (see Note mandatory prepayments from the issuance of new equity 3 to Consolidated Financial Statements). During 2000, or debt and annual sale of assets in excess of varying the Company completed four amendments to its primary minimum amounts depending on the country in which credit agreement to facilitate the Company’s corporate the sales occur. The credit facilities are secured by essen- restructuring and refinancing of its Mexico operations, tially all the Company’s assets in the United States and the issuance of Convertible Preferred stock, and the sale Canada. The credit agreement requires the maintenance of a 50% interest in ASR. As amended, the Company’s of certain covenant ratios or amounts, including, but not primary credit agreement consists of a $135.0 million limited to, funded debt to EBITDAR, cash flow coverage, credit facility with $103.0 million in revolving credit and net worth, all as defined in the credit agreement. facilities and $32.0 million in term loan facilities. The The Company and its subsidiaries were in compliance term loan facilities consist of a U.S. Term Loan facility with the provisions of these covenants as of December in the amount of $10.0 million and a Canadian Term 31, 2001. Loan facility in the Canadian Dollar Equivalent of On August 17, 1999, the Company amended and $22.0 million in U.S. dollars. Prior to the 2000 amend- restated its primary credit agreement to provide for an ments, this agreement allowed for maximum borrowings increase in total borrowings. Borrowings under the of $150.0 million including $45.0 million in Mexico and Canadian portion of the amended agreement were used $15.0 million in Australia. Amounts previously outstand- to refinance certain GRO debt. In conjunction with that ing under the credit agreement which were borrowed by refinancing, the Company recorded a non-cash after FCCM represented U.S. dollar denominated foreign debt tax extraordinary charge of $262,000 related to the of the Company’s Mexican subsidiary. As the Mexican write off of unamortized deferred financing costs peso moved against the U.S. dollar, the revaluation of of the retired debt. this outstanding debt to its Mexican peso equivalent On December 7, 2000, one of the Company’s sub- resulted in non-cash gains and losses as reflected in the sidiaries in Mexico, Servicios, entered into three promis- accompanying statements of income. On June 16, 2000, sory notes payable totaling $27.5 million with variable pursuant to a corporate and financial restructuring of interest rates based on LIBOR plus 3.5%. Two of the the Company’s Mexican subsidiaries, the income state- notes have an eight year term with principal payments ment impact of the U.S. dollar denominated foreign of $1.4 million due semi-annually beginning March 15, debt revaluation was significantly reduced. 2003, through the maturity date of September 15, 2008. 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 G e n e s e e & W y o m i n g I n c . ❘ 31 Management’s Discussion and Analysis The third note has a nine year term with principal pay- additional $5.0 million in the Company through the ments of $750,000 due semi-annually beginning March private placement of Redeemable Convertible Preferred 15, 2003, with a maturity date of September 15, 2009. Stock (See Note 12 to Consolidated Financial Statements). The promissory notes are secured by essentially all of On March 30, 2001 and December 7, 1999, the the assets of Servicios and FCCM, and a pledge of the Company completed the sale of certain rolling stock to Company’s shares of Servicios and FCCM. The promis- financial institutions for a net sale price of $6.5 million sory notes contain certain financial covenants which Servicios is in compliance with as of December 31, 2001. In October 2000, the Company amended and restated its promissory note payable to a Class I railroad, after making a $1.0 million principal payment, by refinancing $7.9 million at 8% with interest due quarterly and prin- cipal payments due in annual installments of $1.0 mil- lion beginning October 31, 2001 through the maturity date of October 31, 2008. Prior to this amendment and restatement, the promissory note payable provided for annual principal payments of $1.2 million provided a certain subsidiary of the Company met certain levels and $8.6 million, respectively. The proceeds were used to reduce borrowings under the Company’s revolving credit facilities. Simultaneously, the Company entered into agreements with the financial institutions to lease this and other rolling stock for a period of eight years including automatic renewals. The sale/leaseback transactions resulted in aggregate deferred gains of $2.4 million, which are being amortized over the term of the lease as a non-cash offset to rent expense. The Company fully anticipates renewing these leases at all available lease renewal dates. Alternatively, if the Company chooses not to renew of revenue and cash flow. In accordance with these prior these and certain other leases at their next available provisions, the Company was not required to make any renewal dates, it would have (depending upon the lease) principal payments through 1999. In November 2001, the Company completed a universal shelf registration of up to $200.0 million of various debt and equity securities. The form and terms of such securities shall be determined when and if these securities are issued. On December 21, 2001, as an initial draw on the shelf registration, the Company sold 3.9 million shares of Class A Common Stock in a public offering at a price of $18.50 per share for net proceeds of $66.5 million. The proceeds were used to pay off all revolving debt under the Company’s primary credit agreement and for general corporate purposes. In December 2000, to fund its cash investment in ARG, the Company completed a private placement of Redeemable Convertible Preferred Stock. The Company exercised its option to fund $20.0 million of a possible $25.0 million in gross proceeds from the Convertible Preferred. In December 2001, upon final approval by the Surface Transportation Board of the Company’s acquisition of South Buffalo Railway, the Fund exercised the option it had received in December 2000 to invest an up to two additional options. One option would be to return the rolling stock and pay aggregate fees of approximately $9.0 million. The other option would be to purchase the rolling stock. The leases that allow this second option would require payments of approximately $17.8 million. Management anticipates the future mar- ket value of the leased rolling stock will equal or exceed the payments necessary to purchase the rolling stock. At December 31, 2001 the Company had long-term debt, including current portion, totaling $60.6 million, which comprised 22.4% of its total capitalization includ- ing the Convertible Preferred. At December 31, 2000 the Company had long-term debt, including current portion, totaling $104.8 million, which comprised 48.0% of its total capitalization including the Convertible Preferred. On February 22, 2002, the Company acquired Emons Transportation Group, Inc. (Emons) for approxi- mately $20.0 million in cash, including transaction costs and net of cash received in the acquisition, and $11.0 million of debt assumed. The Company purchased all of the outstanding shares of Emons at $2.50 per share. The Company funded the acquisition through its $103.0 million revolving line of credit held under its primary 32 ❘ G e n e s e e & W y o m i n g I n c . credit agreement, all of which was available at the time In connection with the Company’s purchase of of the purchase. Emons is a short line railroad holding selected assets in Australia in 1997, the Company had company with operations over 340 miles of track in committed to the Commonwealth of Australia to spend Maine, Vermont, Quebec and Pennsylvania. approximately $26.7 million (AU $52.3 million) to reha- The Company’s railroads have entered into a bilitate track structures and equipment by December 31, number of rehabilitation or construction grants with 2002. This commitment was transferred to ARG in state and federal agencies. The grant funds are used December, 2000. as a supplement to the Company’s normal capital pro- The Company has historically relied primarily on grams. In return for the grants, the railroads pledge to cash generated from operations to fund working capital maintain various levels of service and maintenance on and capital expenditures relating to ongoing operations, the rail lines that have been rehabilitated or constructed. while relying on borrowed funds and stock issuances to The Company believes that the levels of service and finance acquisitions and investments in unconsolidated maintenance required under the grants are not materially affiliates. The Company believes that its cash flow from different from those that would be required without the operations together with amounts available under the grant obligation. In addition to government grants, credit facilities will enable the Company to meet its customers occasionally provide fixed funding of certain liquidity and capital expenditure requirements relating track rehabilitation or construction projects to facilitate to ongoing operations for at least the duration of the the Company’s service over that track. The Company credit facilities. records any excesses in the fixed funding compared to The Company has the potential to draw on its the actual cost of rehabilitation and construction as remaining universal shelf registration up to $128.5 gains in the current period. While the Company has million of various debt and equity securities. The form benefited from these grant funds in recent years, includ- and terms of such securities shall be determined when ing 2001 and 2000, there can be no assurance that the and if these securities are issued. funds will continue to be available. On December 7, 2000, in conjunction with the refinancing of FCCM and Servicios, the International Finance Corporation invested $1.9 million of equity for a 12.7% indirect interest in FCCM, through its parent company Servicios (See Notes 3 and 9 to Consolidated Financial Statements). Along with its equity investment, IFC received a put option exercisable in 2005 to sell its equity stake back to the Company. The put price will be based on a multiple of earnings before interest, taxes, depreciation and amortization. The Company increases its minority interest expense in the event that the value of the put option exceeds the otherwise minority interest liability. This put option may result in a future cash outflow of the Company. The Company has budgeted approximately $18.0 million in capital expenditures in 2002, primarily for track rehabilitation. The $18.0 million in capital expen- ditures is net of $1.8 million that is expected to be funded by rehabilitation grants from state and federal agencies to several of the Company’s railroads. Disclosures About Market Risk The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the exchange rate or interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. The Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. Complex instru- ments involving leverage or multipliers are not used. Management believes that its use of derivative instru- ments to manage risk is in the Company’s best interest. G e n e s e e & W y o m i n g I n c . ❘ 33 Management’s Discussion and Analysis Interest Rate Sensitivity The table below provides information about the Company’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The variable interest rates presented below include margins of approximately 2.95% in 2002 and 2003 and 3.5% thereafter. The margins represent the weighted average of 2.25% for borrowings under the Company’s primary credit facility and 3.5% for borrowings under promissory notes provided by the IFC and other banks. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractu- al) maturity dates. Notional amounts are used to calcu- late the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at March 14, 2002. There are no margin requirements for the interest rate swaps. The information is presented in U.S. dollar equivalents, which is the Company’s report- ing currency. Expected Maturity Date Liabilities (dollars in thousands) Long-term Debt: Fixed Rate Average interest rate Variable Rate Average interest rate Interest Rate Derivatives Value (dollars in thousands) Interest Rate Swaps: Variable to Fixed Average pay rate Average receive rate 2002 2003 2004 2005 2006 There after Total Fair Value $1,241 7.3% $3,200 5.5% $1,246 7.3% $7,937 7.6% $1,255 7.4% $22,530 9.2% $1,263 7.5% $4,333 9.7% $1,243 7.7% $4,333 10.0% $1,846 — $10,164 — $8,094 — $52,497 — $8,094 — $52,497 — 2002 2003 2004 2005 2006 There after Fair Value $30,625 5.8% 2.6% $18,458 5.5% 4.6% $14,125 5.5% 5.7% $9,792 5.5% 6.2% $6,216 5.5% 6.5% $0 — — ($1,100) — — Exchange Rate Sensitivity The table below summarizes information on instruments that are sensitive to foreign currency exchange rates, including the Company’s debt facilities for its Mexican operations and the Company’s foreign currency financial instruments. For these debt obligations, the table presents, in U.S. dollar equivalents, principal and interest expense cash flows and related weighted average interest rates by expected maturity dates. For foreign currency options, the table presents the notional amounts and weighted average exchange rates by expected maturity dates. Expected Maturity Date Value (dollars in thousands) Liabilities Long-Term Debt: Variable rate debt principal Variable rate debt interest Total variable rate payments 2002 2003 2004 2005 2006 There after Total Fair Value $0 1,680 $1,680 $4,332 2,060 $6,392 $4,332 1,935 $6,267 $4,332 1,620 $5,952 $4,332 1,235 $5,567 $10,172 — — $27,500 — — $27,500 — — Average interest rate 6.1% 8.1% 9.2% 9.7% 10.0% — — — Expected Maturity or Transaction Date Related Derivatives (dollars in thousands) Foreign Currency Options: (Receive US$/Pay pesos): Notional amount Average exchange rate 34 ❘ G e n e s e e & W y o m i n g I n c . March 15, 2002 September 16, 2002 Total Fair Value $1,400 10.61 $800 10.10 $2,200 — $17 — Risk Factors of Foreign Operations ARG derives a significant portion of its rail freight The Company’s operations and financial condition revenues from shipments of grain. For example, for the are subject to certain risks that could cause actual oper- year ended December 31, 2001, grain shipments in ating and financial results to differ materially from those expressed or forecast in the Company’s forward- looking statements. These risks include the fact that the Company’s 50/50 joint venture in Australia, ARG, and some of the Company’s significant subsidiaries South Australia and Western Australia generated approxi- mately 27.4% of ARG’s operating revenues. A decrease in grain shipments as a result of adverse weather or other negative agricultural conditions could have a material effect on the Company’s income from ARG and financial transact business in foreign countries, namely in condition. Australia, Canada, Mexico and Bolivia. In addition, Australia’s open access regime could lead to additional the Company may consider acquisitions in other foreign competition for ARG’s business, which could result in countries in the future. The risks of doing business in foreign countries may include: changes or greater volatility in the economies of those countries, effects of currency exchange controls, changes to the regulatory environment of those countries, changes to the tax laws and regulations of those countries, restrictions on the withdrawal of foreign investment and earnings, the nationalization of the businesses that the Company operates, the actual or perceived failure by the Company decreased revenues and profit margins. The legislative and regulatory framework in Australia allows third party rail operators to gain access to ARG’s railway infrastruc- ture, and in turn governs ARG’s access to track owned by others. ARG currently operates on the Commonwealth- owned interstate network from Sydney, New South Wales and Melbourne, Victoria to Kalgoorlie, Western Australia and on State-owned track in New South Wales. Access charges are paid for access onto the track of other companies, and access charges under state and federal regimes continue to evolve because privatization of railways in Australia is recent. Where ARG pays access fees to others, if those fees are increased, ARG’s operat- ing margins could be negatively affected. Conversely, to fulfill commitments under concession agreements, if the federal government or respective state regulators the potential instability of foreign governments, determine that access fees charged to current or prospec- including from domestic insurgency movements, and tive third party rail freight operators by ARG in Western the challenge of managing a culturally and geographically diverse operation. The Company’s operations in foreign countries are also subject to economic uncertainties, including among others, risk of renegotiation or modification of existing agreements or arrangements with governmental authori- ties, exportation and transportation tariffs, foreign exchange restrictions and changes in taxation structure. Australia or South Australia do not meet competitive standards, then ARG’s income from those fees could be negatively affected. When ARG operates over track networks owned by others, including Commonwealth- owned and State-owned networks, the owners of the network rather than the operators are responsible for scheduling the use of the tracks as well as for determin- ing the amount and timing of the expenditures neces- sary to maintain the network in satisfactory condition. Therefore, in areas where ARG operates over tracks owned by others, it is subject to train scheduling set G e n e s e e & W y o m i n g I n c . ❘ 35 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Management’s Discussion and Analysis by the owners as well as the risk that the network is not adequately maintained. Either risk could affect ARG’s results of operations and financial condition. The results of operations of the Company’s foreign operations are reported in the local currency - the Australian dollar, the Canadian dollar and the Mexican peso - and then translated into U.S. dollars at the appli- cable exchange rates for inclusion in the Company’s financial statements. The functional currency of the Company’s Bolivian operations is the U.S. dollar. The exchange rates between some of these currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to do so in the future. In addi- tion, because the Company’s financial statements are stated in U.S. dollars, the translation effect of such fluctuations may affect the Company’s results of opera- tions and financial position and may affect the compara- bility of the Company’s results between financial periods. Forward-Looking Statements This discussion and analysis contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events and future performance of Genesee & Wyoming Inc. Words such as “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future perform- ance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Actual results may differ materially from those expressed or forecast in these forward-looking statements. These risks and uncertainties include those noted above under the caption “Risk Factors of Foreign Operations” as well as those noted in documents that the Company files from time to time with the Securities and Exchange Commission, such as Forms 10-K and 10-Q which con- tain additional important factors that could cause actual results to differ from current expectations and from the forward-looking statements contained in this discussion and analysis. 36 ❘ G e n e s e e & W y o m i n g I n c . Selected Financial Data (In thousands, except per share amounts) Year Ended December 31, 2001 2000 1999 1998 1997 Income Statement Data: Operating revenues Operating expenses Income from operations Interest expense Gain on sale of 50% equity in Australian operations Other income, net Income before income taxes, equity earnings and extraordinary item Income taxes Equity earnings (losses) Income before extraordinary item Extraordinary item Net income Preferred stock dividends and cost accretion $173,576 151,436 $206,530 182,777 $175,586 153,218 $147,472 127,904 $103,643 87,200 22,140 (10,049) 2,985 1,311 16,387 6,166 8,863 19,084 — 19,084 957 23,753 (11,233) 10,062 1,508 24,090 10,569 411 13,932 — 13,932 52 22,368 (8,462) — 1,682 15,588 2,175 (618) 12,795 (262) 12,533 — 19,568 (7,071) — 7,290 19,787 7,708 (645) 11,434 — 11,434 — 16,443 (3,349) — 345 13,439 5,441 — 7,998 — 7,998 — Net income available to common stockholders $18,127 $13,880 $12,533 $11,434 $7,998 Basic Earnings Per Common Share: Net income available to common stockholders before extraordinary item Extraordinary item Net income Weighted average number of shares of common stock Diluted Earnings Per Common Share: Net income before extraordinary item Extraordinary item Net income Weighted average number of shares $1.72 — $1.72 $1.42 — $1.42 $1.27 (0.03) $0.98 — $1.24 $0.98 $0.68 — $0.68 10,509 9,779 10,104 11,671 11,813 $1.48 — $1.48 $1.38 — $1.38 $1.26 (0.03) $1.23 $0.97 — $0.97 $0.65 — $0.65 of common stock and equivalents 12,917 10,094 10,215 11,765 12,256 Balance Sheet Data at Year End: Total assets Total debt Redeemable Convertible Preferred Stock Stockholders’ equity $402,519 $338,383 $216,760 $210,532 $145,339 60,591 23,808 185,663 104,801 108,376 65,690 74,144 18,849 94,732 — — — 81,829 74,537 68,343 G e n e s e e & W y o m i n g I n c . ❘ 37 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, 2001 and 2000, 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, 2001. 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 did not audit the financial statements of Australian Railroad Group Pty. Ltd. (ARG), the investment in which is reflected in the accompanying financial statements using the equity method of accounting. The investment in ARG represents 14.8 percent and 16.1 percent of the Company’s total assets as of December 31, 2001 and 2000, respectively, and the equity in its net income represents 44.3 percent of the Company’s net income for the year ended December 31, 2001. Additionally, the summarized financial data for ARG contained in Note 7 is based on the financial statements of ARG, which were audited by other auditors. Their report has been furnished to us, and our opinion, insofar as it relates to amounts included in the Company’s financial state- ments for ARG, including the data in Note 7, is based on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those stan- dards require that we plan and perform the audits to obtain reasonable assurance about whether the financial state- ments 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 signifi- cant 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, based on our audits and the report of other auditors, the financial statements referred to above pres- ent fairly, in all material respects, the financial position of Genesee & Wyoming Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Chicago, Illinois February 11, 2002 38 ❘ G e n e s e e & W y o m i n g I n c . Report of Independent Auditors To the Board of Directors and Stockholders of Australian Railroad Group Pty Ltd We have audited the consolidated balance sheet of Australian Railroad Group Pty Ltd and subsidiaries as of December 31, 2001 and the related consolidated statements of income, stockholders’ equity and comprehensive income and cash flows for the year ended December 31, 2001. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those stan- dards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Australian Railroad Group Pty Ltd and subsidiaries at December 31, 2001 and the consolidated results of their operations and their cash flows for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. The balance sheet at December 31, 2000 was not audited by us and, accordingly, we do not express an opinion on it. Ernst & Young Perth, Western Australia February 11, 2002 G e n e s e e & W y o m i n g I n c . ❘ 39 Consolidated Balance Sheets (in thousands, except share amounts) Assets Current Assets: Cash and cash equivalents Accounts receivable, net Materials and supplies Prepaid expenses and other Deferred income tax assets, net Total current assets Property and Equipment, net Investment in Unconsolidated Affiliates Service Assurance Agreement, net Other Assets, net Total assets Liabilities and Stockholders’ Equity Current Liabilities: Current portion of long-term debt Accounts payable Accrued expenses Total current liabilities Long-Term Debt, less current portion Deferred Income Tax Liabilities, net Deferred Items—grants from governmental agencies Deferred Gain—sale/leaseback Other Long-Term Liabilities Minority Interest December 31, 2001 2000 $28,732 41,025 4,931 6,514 2,150 83,352 $3,373 45,209 5,023 7,249 2,202 63,056 199,102 177,317 69,402 10,566 40,097 64,091 11,315 22,604 $402,519 $338,383 $4,441 45,206 12,077 $3,996 43,045 10,860 61,724 57,901 56,150 24,620 35,362 4,607 7,731 2,854 100,805 22,179 32,897 3,558 4,737 2,725 Redeemable Convertible Preferred Stock 23,808 18,849 Stockholders’ Equity: Class A Common Stock, $0.01 par value, one vote per share; 30,000,000 shares authorized; 15,074,462 and 10,370,627 shares issued and 12,737,601 and 8,116,833 shares outstanding (net of 2,336,861 and 2,253,794 shares in treasury) on December 31, 2001 and 2000, respectively Class B Common Stock, $0.01 par value, ten votes per share; 5,000,000 shares authorized; 1,805,292 and 1,902,257 shares issued and outstanding on December 31, 2001 and 2000, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Less treasury stock, at cost Total stockholders’ equity Total liabilities and stockholders’ equity 151 104 18 123,597 79,030 (4,905) (12,228) 19 49,642 60,903 (4,883) (11,053) 185,663 94,732 $402,519 $338,383 The accompanying notes are an integral part of these consolidated financial statements. 40 ❘ G e n e s e e & W y o m i n g I n c . Consolidated Statements of Income (in thousands, except per share amounts) Operating Revenues Operating Expenses: Transportation Maintenance of ways and structures Maintenance of equipment General and administrative Depreciation and amortization Charge for buyout of Australian stock options Total operating expenses Income from Operations Interest expense Gain on sale of 50% equity in Australian operations Valuation adjustment of U.S. dollar denominated foreign loans Other income, net Income Before Income Taxes, Equity Earnings and Extraordinary Item Provision for income taxes Equity in Net Income (Loss) of International Affiliates: Australia South America Canada Income Before Extraordinary Item Extraordinary item from early extinguishment of debt, net of related income tax benefit of $162 Net Income Preferred stock dividends and cost accretion Year Ended December 31, 2001 2000 1999 $173,576 $206,530 $175,586 56,573 19,271 31,231 31,605 12,756 — 69,132 22,225 40,378 33,047 13,980 4,015 55,811 21,096 34,597 29,140 12,574 — 151,436 182,777 153,218 22,140 23,753 22,368 (10,049) 2,985 (81) 1,392 (11,233) 10,062 (1,472) 2,980 (8,462) — (191) 1,873 16,387 6,166 24,090 10,569 15,588 2,175 8,451 412 — 261 150 — — — (618) 19,084 13,932 12,795 — — (262) 19,084 13,932 957 52 12,533 — Net Income Available to Common Stockholders $18,127 $13,880 $12,533 Basic Earnings Per Share: Net income available to common stockholders before extraordinary item Extraordinary item Earnings per common share Weighted average shares Diluted Earnings Per Share: Net income before extraordinary item Extraordinary item Earnings per common share $1.72 — $1.72 $1.42 — $1.42 $1.27 (0.03) $1.24 10,509 9,779 10,105 $1.48 — $1.48 $1.38 — $1.38 $1.26 (0.03) $1.23 Weighted average shares and equivalents 12,917 10,094 10,215 The accompanying notes are an integral part of these consolidated financial statements. G e n e s e e & W y o m i n g I n c . ❘ 41 Consolidated Statements of Stockholders’ Equity and Comprehensive Income (dollars in thousands) Class A Common Stock Class B Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders’ Equity Balance, December 31, 1998 $102 $19 $46,662 $34,490 $(2,107) $(4,629) $74,537 Comprehensive income, net of tax: Net income Currency translation adjustments Proceeds from employee stock purchases Shares issued for investment in unconsolidated affiliate Treasury stock acquisitions, 1,473,750 shares — — — — — — — — — — — — 61 12,533 — — — 791 — — 12,533 791 — 61 — 281 — — — — — — (6,374) 281 (6,374) Balance, December 31, 1999 102 19 47,004 47,023 (1,316) (11,003) 81,829 Comprehensive income, net of tax: Net income Currency translation adjustments Proceeds from employee stock purchases Impact of sale of puttable equity in Mexican operations Tax benefit from exercise of stock options Accretion of fees on Redeemable Convertible Preferred Stock 4% dividend earned on Redeemable Convertible Preferred Stock Treasury stock acquisitions, 3,794 shares — — 2 — — — — — — — — — — — — — — — 2,217 13,932 — — — (3,567) — — 13,932 — (3,567) 2,219 — (75) 496 — — — — — (8) (44) — — — — — — — — — — (50) (75) 496 (8) (44) (50) Balance, December 31, 2000 104 19 49,642 60,903 (4,883) (11,053) 94,732 Comprehensive income, net of tax: Net income Currency translation adjustments Fair market value adjustments of cash flow hedges Proceeds from Class A Common Stock Offering, net of fees Proceeds from employee stock purchases Conversion of Class B Common Stock to Class A Common Stock Tax benefit from exercise of stock options Accretion of fees on Redeemable Convertible Preferred Stock 4% dividend earned on Redeemable Convertible Preferred Stock Treasury stock acquisitions, 83,067 shares — — — 38 8 1 — — — — — — — — — — — 66,495 — 6,254 (1) — — 1,206 19,084 — — — — — — — (146) — 708 — 19,084 708 — (730) — (730) — — — — — — 66,533 6,262 — — — — 1,206 — (146) — — (811) — — — — (1,175) (811) (1,175) — — — Balance, December 31, 2001 $151 $18 $123,597 $79,030 $(4,905) $(12,228) $185,663 The accompanying notes are an integral part of these consolidated financial statements. 42 ❘ G e n e s e e & W y o m i n g I n c . Consolidated Statements of Cash Flows (in thousands) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization Deferred income taxes (Gain) loss on disposition of property and equipment Extraordinary item, net of income tax Gain on sale of 50% equity in Australian operations Equity (earnings) losses of unconsolidated affiliates Minority interest expense Tax benefit realized upon exercise of stock options Valuation adjustment of U.S. dollar denominated foreign loans Changes in assets and liabilities, net of effect of acquisitions and deconsolidation of Australia Southern Railroad- Accounts receivable Materials and supplies Prepaid expenses and other Accounts payable and accrued expenses Other assets and liabilities, net Net cash provided by operating activities Cash Flows from Investing Activities Purchase of property and equipment, net of proceeds from government grants Purchase of assets of South Buffalo Railway, net of cash received Cash investments in unconsolidated affiliate- Australian Railroad Group, net Cash investments in unconsolidated affiliate- South America Cash received from unconsolidated international affiliates Proceeds from sale of equity in subsidiaries Cash received in purchase of Rail-One Inc., net Purchase of business assets by Ferrocarriles de Chiapas-Mayab Proceeds from disposition of property and equipment Year Ended December 31, 2001 2000 1999 $19,084 $13,932 $12,533 12,756 4,164 (814) — (2,985) (8,863) 129 1,206 81 3,376 369 2,348 (77) (2,214) 28,560 (16,551) (33,117) — (246) 4,329 — — — 8,147 13,980 9,571 41 — (10,062) (411) 40 496 1,472 (3,744) (517) 180 (327) (1,160) 23,491 (29,273) — (21,738) (7,635) — 2,640 — — 679 12,574 1,170 (652) 262 — 618 50 — 191 (10,250) (872) (985) 13,497 1,159 29,295 (24,898) — — (1,018) — — 57 (31,527) 10,327 Net cash used in investing activities (37,438) (55,327) (47,059) Cash Flows from Financing Activities Principal payments on long-term borrowings Proceeds from issuance of long-term debt Payment of debt issuance costs Proceeds from issuance of Class A Common Stock, net Proceeds from issuance of Redeemable Convertible Preferred Stock, net Proceeds from employee stock purchases Purchase of treasury stock Dividends paid on Redeemable Convertible Preferred Stock (200,033) 157,000 (287) 66,533 4,812 6,262 (1,175) (855) (109,869) 116,267 (1,388) — 18,841 2,219 (50) — Net cash provided by financing activities 32,257 26,020 Effect of Exchange Rate Changes on Cash and Cash Equivalents 1,980 1,398 Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, beginning of year Cash and Cash Equivalents, end of year 25,359 3,373 $28,732 (4,418) 7,791 $3,373 (89,954) 107,477 (1,475) — — 61 (6,374) — 9,735 1,424 (6,605) 14,396 $7,791 Cash Paid During Year For: Interest Income taxes The accompanying notes are an integral part of these consolidated financial statements. $9,875 835 $10,395 1,291 $8,090 3,774 G e n e s e e & W y o m i n g I n c . ❘ 43 Notes to Consolidated Financial Statements 1. Business and Customers: Genesee & Wyoming Inc. and Subsidiaries (the Company) has interests in twenty-four short line and regional railroads through its various operating subsidiaries and unconsolidated affiliates of which eighteen are located in the United States, two are located in Australia, one is located in Bolivia, one is located in Mexico, and two are located in Canada. The eighteen U. S. railroads are wholly owned by the Company through various acquisi- tions from 1985 to, most recently, the acquisition of South Buffalo Railway (South Buffalo) in October 2001. The two Canadian railroads have been wholly owned by the Company since its June 2000 acquisition of the remaining 5% minority holding. In April 1999, the Company increased its ownership in these Canadian roads from 47.5% to 95% and began consolidating their results. The Mexican railroad, acquired in September 1999, was wholly owned by the Company until December 2000, when the Company sold a minority 12.7% interest in the operations. The Company wholly owned one of the Australian railroads from November 1997 to December 2000, at which point the Company contributed the operations into a venture that then acquired the second Australian railroad. The Company now owns 50% of the venture and accounts for its invest- ment under the equity method of accounting. In July 2001, the Company increased its indirect equity interest in the Bolivian railroad by 0.34% to 22.89% with an additional investment of cash. Previously, through a majority owned subsidiary, the Company acquired an indirect 21.87% interest in the Bolivian railroad in November 2000, and an indirect 0.68% interest in September 1999. This investment is also accounted for under the equity method of accounting. See Note 3 for descriptions of the Company’s expansions in recent years. The Company, through its leasing subsidiary, also leases and manages railroad transportation equip- ment in the United States and Canada. The Company, through its industrial switching subsidiary, provides freight car switching and ancillary rail services. A large portion of the Company’s operating revenue is attributable to customers operating in the electric utility, cement and forest products industries in North America, and prior to the December 16, 2000 deconsoli- dation of Australian railroad operations, the farm and food products, iron ores 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 accounted for approximately 28%, 29% and 36% of the Company’s operating revenues in 2001, 2000 and 1999, respectively. In 2001, the Company’s largest customer was a coal-fired electricity generating plant which accounted for approximately 7% of the Company’s operating revenues. In 2000, no single customer accounted for more than 5% of the Company’s operating revenue. In 1999, one customer in the electric utility industry accounted for approximately 10% of the Company’s operating revenues (see Note 16). The Company regularly grants trade credit to most 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 economies of the regions in which the Company operates, the electric utility, cement and forest products industries, and the railroad sector of the economy in general. The general downturn in economies in North America in 2001 has adversely affected the Company’s cyclical shipments of commodities such as paper prod- ucts in Canada, chemicals in the United States, and cement in Mexico. However, shipments of other impor- tant commodities such as coal and salt are less affected by economic downturns and are more closely affected by the weather. The economic downturn has also impacted the Company’s customers and while a limited number of them have declared bankruptcy, their traffic volumes have remained largely unaffected and the impact on the collection of their receivables has not been significant to date. 44 ❘ G e n e s e e & W y o m i n g I n c . 2. Significant Accounting Policies: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its controlled subsidiaries. The Company’s investments in unconsolidated affiliates are accounted for under the equity method. All signifi- cant intercompany transactions and accounts have been eliminated in consolidation. related undiscounted future cash flows over the remain- ing 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 exceeds the fair value of those assets as determined by valuation techniques available in the circumstances. (See Note 21 regarding adoption of SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002.) Revenue Recognition Grants 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 serv- ice revenues are recognized as such services are provided. Cash Equivalents The Company considers all highly liquid instruments with a maturity of three months or less when purchased Grants received from governmental agencies are recorded as long-term liabilities as received and amortized over the same period which the underlying purchased assets are depreciated. In addition to government grants, customers occasionally provide fixed funding of certain track rehabilitation or construction projects to facilitate the Company’s service over that track. The Company records any excesses in the fixed funding compared to the actual cost of rehabilitation and construction as to be cash equivalents. Materials and Supplies gains in the current period. Insurance 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 The Company maintains insurance, with varying deductibles up to $400,000 per incident for liability and up to $250,000 per incident for property damage, for claims resulting from train derailments and other accidents related to its railroad and industrial switching operations. Additionally, the Company is self-insured Property and equipment are carried at historical cost. for general employee health and medical claims. Acquired railroad property is recorded at the purchased Accruals for claims, limited when appropriate to the cost. Major renewals or betterments are capitalized while applicable deductible, are estimated and recorded routine maintenance and repairs are charged to expense when such claims are incurred. when incurred. Gains or losses on sales or other disposi- tions 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 (20-30 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 Gains/Losses on Sales of Stock in Subsidiaries The Company records gains and losses on the sale of the stock of its subsidiaries in current earnings unless the sales transaction is part of a broader corporate reorganization which involves the potential for a repur- chase of the shares at a future date. If the sale is part of a broader corporate reorganization, gains and losses are recorded in additional paid in capital. G e n e s e e & W y o m i n g I n c . ❘ 45 Notes to Consolidated Financial Statements Service Assurance Agreement The service assurance agreement represents a commit- Disclosures About Fair Value of Financial Instruments ment from a significant customer of a U.S. railroad that The following methods and assumptions were used the Company acquired in 1996 (see Note 16), which to estimate the fair value of each class of financial grants the Company the exclusive right to serve indefi- instrument held by the Company: nitely three specific facilities. The service assurance agree- Current assets and current liabilities: The carrying ment is amortized on a straight-line basis over the same value approximates fair value due to the short period as the related track structure, which is 20 years, maturity of these items. and accumulated amortization was $4.4 million and $3.6 million as of December 31, 2001 and 2000, respectively. Common Stock Splits On February 14, 2002 and May 1, 2001 the Company announced three-for-two common stock splits in the form of 50% stock dividends distributed on March 14, 2002 to shareholders of record as of February 28, 2002, Long-term debt: The fair value of the Company’s long-term debt is based on secondary market indica- tors. Since the Company’s debt is not quoted, esti- mates 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. and on June 15, 2001 to shareholders of record as of Foreign Currency May 31, 2001, respectively. All share, per share and par value amounts presented herein have been restated to reflect the retroactive effect of both of the stock splits. Earnings Per Share Common shares issuable under unexercised stock options, calculated under the treasury stock method, and redeemable convertible preferred stock (see Note 12) are the only reconciling items between the Company’s basic and diluted weighted average shares outstanding. The number of shares from options used to calculate diluted earnings per share is 1,289,826, 1,649,177 and 460,688 for 2001, 2000 and 1999, respectively. Options to purchase 70,875 and 1,434,376 additional shares of stock were outstanding as of December 31, 2000 and 1999, respectively, but were not included in the compu- tation of diluted earnings per share because the options’ 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 monthly weighted-average rate for the statement of income items. Translation adjust- ments are reflected as currency translation adjustments in Stockholders’ Equity and accordingly only affect comprehensive income. Revaluation of U.S. dollar denominated foreign loans into the appropriate local currency resulted in losses of $81,000, $1.5 million and $191,000 in 2001, 2000 and 1999, respectively. Additionally, foreign currency exchange transaction losses, most notably, $508,000 from the par- tial settlement of an Australian dollar denominated receivable in 2001, are reported in Other Income, net. exercise prices were greater than the average market Management Estimates price of the common shares. Also included in the diluted earnings per share calculation in 2001 and 2000 are 1,983,324 shares and 107,207 shares, respectively, of common stock equivalents which represent the weighted average share impact of the assumed conversion of the redeemable convertible preferred stock. 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 2001 presentation. 46 ❘ G e n e s e e & W y o m i n g I n c . 3. Expansion of Operations: United States On February 22, 2002, the Company acquired Emons Transportation Group, Inc. (Emons) for approximately $20.0 million (Unaudited) in cash, including transaction costs and net of cash received in the acquisition, and $11.0 million (Unaudited) of debt assumed. The Company purchased all of the outstanding shares of Emons at $2.50 per share. The Company funded the acquisition through its $103.0 million revolving line of credit held under its primary credit agreement, all of which was available at the time of the purchase. Emons is a short line railroad holding company with operations over 340 miles of track in Maine, Vermont, Québec and Pennsylvania. On October 1, 2001, the Company acquired all of As contemplated with the acquisition, the Company will close the former South Buffalo headquarters office in March 2002 and has implemented an early retirement program under which 28 South Buffalo employees were terminated in December 2001. The aggregate $876,000 cost of these restructuring activities is considered a liability assumed in the acquisition, and therefore is included in goodwill. The majority of these costs were paid in 2001. The acquisition of South Buffalo triggered the right of The 1818 Fund III, L.P. (the Fund), a private equity fund managed by Brown Brothers Harriman & Co., to acquire an additional $5.0 million of the Company’s Series A Redeemable Convertible Preferred Stock (the Convertible Preferred), and the Fund exercised that right on December 11, 2001 (see Note 12). the issued and outstanding shares of common stock of Australia South Buffalo Railway (South Buffalo) from Bethlehem Steel Corp. (Bethlehem) for $33.1 million in cash, including transaction costs and the assumption of cer- tain liabilities. At the closing, the Company acquired beneficial ownership of the shares and, having received the necessary approvals from The Surface Transportation Board on November 21, 2001, assumed actual ownership on December 6, 2001. The purchase price was allocated to current assets ($2.3 million), property and equipment ($17.6 million) and goodwill ($18.8 million) less assumed current liabilities ($2.4 million) and assumed long-term liabilities ($3.2 million). South Buffalo oper- ates over 52 miles of owned track in Buffalo, New York. The purchase price was reduced by a $407,000 estimated adjustment pursuant to the final determination of the net assets of South Buffalo on the sale date. This amount, along with another $300,000 related to pre-acquisition liabilities paid by the Company on Bethlehem’s behalf, are reflected in the December 31, 2001 balance sheet as receivables. Although Bethlehem filed for voluntary protection under U.S. bankruptcy laws on October 5, 2001, payment of this receivable could be funded from a $3.0 million escrow account held by an independent trustee to settle amounts due to the Company pursuant to the South Buffalo acquisition. On December 16, 2000, the Company, through its newly-formed joint venture, Australian Railroad Group Pty. Ltd. (ARG), completed the acquisition of Westrail Freight from the government of Western Australia for approximately $334.4 million U.S. dollars including working capital. ARG is a joint venture owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. Westrail Freight is composed of the freight operations of the formerly state-owned railroad of Western Australia. To complete the acquisition, the Company con- tributed its formerly wholly-owned subsidiary, Australia Southern Railroad (ASR), to ARG along with the Company’s 2.6% interest in the Asia Pacific Transport Consortium (APTC) – a consortium selected to construct and operate the Alice Springs to Darwin railway line in the Northern Territory of Australia. Additionally, the Company contributed $21.4 million of cash to ARG (partially funded by a $20.0 million private placement of the Convertible Preferred with the Fund) while Wesfarmers contributed $64.2 million in cash, including $8.2 million which represents a long-term Australian dollar denominated non-interest bearing note to match a similar note due to the Company from ASR at the date of the transaction. ARG funded the remaining purchase price with proceeds from its Australian bank credit facility. G e n e s e e & W y o m i n g I n c . ❘ 47 Notes to Consolidated Financial Statements As a direct result of the ARG transaction, ASR stock The Company accounts for its 50% ownership in options became immediately exercisable by key manage- ARG under the equity method of accounting and there- ment of ASR and, as allowed under the provisions of the fore deconsolidated ASR from its consolidated financial stock option plan, the option holders, in lieu of ASR statements as of December 16, 2000. Prior to its decon- stock, were paid an equivalent value in cash, resulting solidation, ASR accounted for $37.6 million and $4.0 in a $4.0 million compensation charge to ASR earnings. million of operating revenue and income from opera- The Company recognized a $10.1 million gain upon tions (excluding the $4.0 option buyout charge), the issuance of ASR stock to Wesfarmers upon the for- respectively, for 2000 and $43.2 million and mation of ARG as a result of such issuance being at a $6.6 million, respectively, for 1999. per share price in excess of the Company’s book value per share investment in ASR. Additionally, due to the deconsolidation of ASR, the Company recognized a $6.5 million deferred tax expense resulting from the financial reporting versus tax basis difference in the Company’s equity investment in ARG. On April 20, 2001, APTC completed the arrangement of debt and equity capital to finance a project to build, own and operate the Alice Springs to Darwin railway line in the Northern Territory of Australia. As previously arranged, upon APTC reaching financial closure, Wesfarmers contributed an additional $7.4 million into ARG and accordingly, the Company recorded an addi- tional first quarter gain of $3.7 million related to the December, 2000 issuance of ARG stock to Wesfarmers. A related deferred income tax expense of $1.1 million was also recorded. In the second quarter of 2001, ARG paid the $7.4 million to its two shareholders, in equal amounts of $3.7 million each, as partial payment of each shareholder’s Australian dollar denominated non-interest bearing note which resulted in a $508,000 currency transaction loss. The combined gains totaling $13.8 million relating to the formation of ARG represented the difference between the recorded balance of the Company’s previ- ously wholly owned investment in Australia, less invest- ment amounts that the Company estimated would be reimbursed by ARG, and the value of those Australian operations when ARG was formed. In the fourth quarter of 2001, the Company, ARG and Wesfarmers reached agreement as to the level of acquisition-related costs to be reimbursed to both venture partners. Accordingly, in the fourth quarter of 2001, the Company recorded a $728,000 decrease to its previously recorded gains to reflect the lower than estimated reimbursed amount for acquisition-related costs. Pro Forma Financial Results The following table summarizes the Company’s unaudited pro forma operating results for the years ended December 31, 2001 and 2000, as if South Buffalo had been acquired and ARG had been formed and acquired Westrail Freight as of the beginning of the appli- cable period (in thousands, except per share amounts): Operating revenues Net income Basic earnings per share Diluted earnings per share 2001 2000 $186,688 18,956 1.70 1.43 $187,122 20,540 1.98 1.66 The pro forma operating results include the acquisi- tion of South Buffalo, the deconsolidation of ASR, depreciation expense resulting from the step-up of South Buffalo property based on appraised values, amortization of goodwill generated in the South Buffalo acquisition, incremental interest expense (with related tax benefit) related to borrowings used to fund the ASR stock option buyout and related to borrowings used to fund the South Buffalo acquisition and incremental preferred stock impacts on income available to common stock- holders related to the initial issuance of $20 million in Convertible Preferred for the ARG transactions and the subsequent issuance of $5 million triggered by the South Buffalo acquisition. These results exclude the gain on sale of 50% equity in Australian operations but include the pro forma equity earnings attributable to the investment in ARG based on ARG’s pro forma net income of $17.9 million for 2000. These pro forma net income results give effect to ARG’s acquisition of Westrail Freight and the related 48 ❘ G e n e s e e & W y o m i n g I n c . purchase accounting adjustments primarily for incre- approximately 55 employees whom the Company mental depreciation and amortization expense, elimina- retained upon acquisition but terminated as part of its tion of access fees charged by the government, impacts plan to reduce operating costs after September 30, 1999. of the new financing structure and related income taxes. All payments were made during the fourth quarter of The Company has adopted Statement of Financial 1999 and are considered a cost of the acquisition. Accounting Standards No. 142, “Goodwill and Other On December 7, 2000, in conjunction with the refi- Intangible Assets” effective June 30, 2001. That state- nancing of FCCM and its parent company, GW Servicios, ment requires that goodwill related to acquisitions S.A. de C.V. (Servicios) (see Note 9.), the International after June 30, 2001 not be amortized, while goodwill Finance Corporation (IFC) invested $1.9 million of equity for acquisitions prior to June 30, 2001 continue to be for a 12.7% indirect interest in FCCM, through Servicios. amortized through December 31, 2001. As the pro forma The Company contributed an additional $13.1 million statements give effect to the South Buffalo acquisition and maintains an 87.3% indirect ownership in FCCM. as if it occurred prior to June 30, 2001, annual amortiza- The Company funded $10.7 million of its new invest- tion of $1.0 million has been reflected. However, actual ment with borrowings under its amended credit facility, goodwill generated by this acquisition will not be with the remaining investment funded by the conversion amortized. of intercompany advances into permanent capital. Along The pro forma financial information does not with its equity investment, IFC received a put option purport to be indicative of the results that actually exercisable in 2005 to sell its equity stake back to the would have been obtained had all the transactions been Company. The put price will be based on a multiple of completed as of the assumed dates and for the periods earnings before interest, taxes, depreciation and amorti- presented and are not intended to be a projection of zation. The Company increases its minority interest future results or trends. Mexico In August 1999, the Company’s then wholly-owned sub- sidiary, Compañía 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 expense in the event that the value of the put option exceeds the otherwise minority interest liability. Because the IFC equity stake can be put to the Company, the impact of selling the equity stake at a per share price below the Company’s book value per share investment was recorded directly to paid-in capital in 2000. Mexican rail company Ferronales. FCCM also acquired Canada equipment and other assets. The aggregate purchase On April 15, 1999, the Company acquired Rail-One Inc. price, including acquisition costs, was approximately (Rail-One) which has a 47.5% ownership interest in 297 million pesos, or approximately $31.5 million at Genesee • Rail-One Inc. (GRO), thereby increasing the then-current exchange rates. The purchase price included Company’s ownership of GRO to 95% from the 47.5% it rolling stock, an advance payment on track improve- acquired in 1997. GRO owns and operates two short line ments to be completed on the state-owned track property, railroads in Canada. Under the terms of the purchase an escrow payment, which was returned to the Company agreement, the Company converted outstanding notes upon successful completion of the track improvements, receivable from Rail-One of $4.6 million into capital, and prepaid value-added taxes. A portion of the purchase committed to pay approximately $844,000 in cash to price ($8.4 million) was also allocated to the 30-year the sellers of Rail-One in installments over a four year operating license. As the track improvements were made, period, and granted options to the sellers of Rail-One to the related costs were reclassified into the property purchase up to 180,000 shares of the Company’s Class A accounts as leasehold improvements and amortized over Common Stock at an exercise price of $3.83 per share. the improvements’ estimated useful life. Pursuant to Exercise of the option is contingent on the Company’s the acquisition, employee termination payments of $1.0 million were made to former state employees and G e n e s e e & W y o m i n g I n c . ❘ 49 Notes to Consolidated Financial Statements recovery of its capital investment in GRO (after payoff financial results are achieved. The cash used by the of existing GRO debt) if the Company were to sell GRO, Company to fund such investment was obtained from and upon certain GRO income performance measures its existing revolving credit facility. Additionally, the which have not yet been met. The transaction was Company received the right to collect dividends from accounted for as a purchase and resulted in $2.8 million Oriental related to its full year 2000 earnings. Such divi- of initial goodwill, which was being amortized over 15 dends of $617,000 were received in March 2001. The full years. The contingent purchase price will be recorded as value of the non-recourse debt of the Company’s uncon- a component of goodwill at the value of the options solidated subsidiary ($12.0 million as of December 31, issued, if and when such options are exercisable. 2001) bears interest, based on the availability of divi- Effective with this agreement, the operating results of dends received from Oriental, between a floor of 4% and GRO were initially consolidated within the financial a ceiling of 7.67%. The debt effectively bore interest statements of the Company, with a 5% minority interest of 6.12% throughout 2001 and is due, in annual install- due to another GRO shareholder. During the second ments through 2003. Such installments and interest are quarter of 2000, the Company purchased the remaining primarily funded by dividends received from Oriental, 5% minority interest in GRO with an initial cash payment with any shortages (which are expected for 2002 pay- of $240,000 and subsequent annual cash installments of ments) to be funded by the Company and its partner. $180,000 paid in 2001 and due in 2002. Prior to April The Company accounts for its indirect interest in 15, 1999, the Company accounted for its investment in Oriental under the equity method of accounting. GRO under the equity method and recorded an equity loss of $618,000 in 1999. South America On November 5, 2000, the Company acquired an indirect 21.87% equity interest in Empresa Ferroviaria Oriental, S.A. (Oriental) increasing its stake in Oriental to 22.55% from its original indirect 0.68% interest acquired in September 1999. On July 24, 2001, the Company increased its indirect equity interest in Oriental to 22.89% with an additional investment of 4. Allowance for Doubtful Accounts: Activity in the Company’s allowance for doubtful accounts was as follows (in thousands): 2001 2000 1999 Balance, beginning of year Provisions Charges Established in acquisitions $1,308 468 (775) - $1,264 389 (345) - $250 628 (836) 1,222 $246,000. Oriental is a railroad serving eastern Bolivia Balance, end of year $1,001 $1,308 $1,264 and connecting to railroads in Argentina and Brazil. The Company’s ownership interest is largely through a 90% owned holding company in Bolivia which also received $740,000 from the minority partner for invest- ment into Oriental. The Company’s portion of the Oriental investment is composed of $6.9 million in cash, the assumption (via an unconsolidated subsidiary) of non-recourse debt of $10.8 million (90% of $12.0 million ) at an adjustable interest rate dependent on Road properties Equipment and other 5. Property and Equipment: Major classifications of property and equipment are as follows (in thousands): 2001 2000 $198,117 60,074 $164,497 61,438 258,191 225,935 Less- Accumulated depreciation and amortization 59,089 48,618 $199,102 $177,317 operating results of Oriental, and a non-interest bearing contingent payment of $450,000 due in 2003 if certain 50 ❘ G e n e s e e & W y o m i n g I n c . 6. Other Assets: Major classifications of other assets are as follows (in thousands): receivable due from Company executives which bear interest at 5.69% and are due in annual installments through 2003. 2001 2000 $25,808 8,651 $6,507 8,200 7. Equity Investments: Australian Railroad Group Goodwill Chiapas-Mayab Operating License Chiapas-Mayab Special Escrow Deposit - Track Project Deferred financing costs Executive split-dollar life insurance Assets held for sale or future use Other Less- Accumulated amortization - 3,642 2,507 557 2,522 1,638 3,356 2,728 1,045 1,298 43,687 3,590 24,772 2,168 $40,097 $22,604 The Company adopted Statement of Financial Accounting Standards No. 142 as of January 1, 2002 for existing goodwill and intangible assets and immedi- ately for any new business combinations subsequent to The following condensed financial data of ARG is based on accounting principles generally accepted in the United States and converted into thousands of U.S. dollars based on the following Australian dollar to U.S. dollar exchange rates: As of December 31, 2000 As of December 31, 2001 Average for the 15 day period ended December 31, 2000 Average for the year ended December 31, 2001 Australian Railroad Group Statement of Income $.559 $.510 $.553 $.518 June 30, 2001. Goodwill for all acquisitions prior to June (U.S. dollars in thousands) Year Ended December 31, 2001 has been amortized on a straight-line basis over lives of 15-20 years through December 31, 2001. The Chiapas-Mayab Operating License (see Note 3) is being Operating revenues Operating expenses amortized over 30 years. The change in the asset value Income from operations of the Operating License from 2000 to 2001 results from currency exchange rates changes. The Chiapas-Mayab special escrow deposit (see Note 3) was reclassified into road property upon completion of the project and is being depreciated. Deferred financing costs are amor- Interest expense Other income, net Income before income taxes Provision for income taxes tized over terms of the related debt using the straight- Net income 2001 $181,714 134,471 47,243 (22,505) 748 25,486 8,584 $16,902 line method, which is not materially different from amortization computed using the effective-interest Net income for the year ended December 31, 2001 method. Executive split dollar life insurance is the pres- includes a $1.2 million after-tax charge related to costs ent value of life insurance benefits which the Company incurred in the fourth quarter of 2001 from ARG’s funds but that are owned by executive officers. The unsuccessful bid for the privatization of an Australian Company retains a collateral interest in the policies’ railroad. Condensed results of operations for the 15 cash values and death benefits. Assets held for sale or days ending December 31, 2000 consisted of operating future use at December 31, 2001, primarily represent revenues of $4.8 million, income before income taxes excess locomotives. Assets held for sale or future use of $834,000, and net income of $522,000. at December 31, 2000, primarily represent excess loco- motives and a segment of railroad track that was sold in 2001. Reflected within Other are $536,000 of notes G e n e s e e & W y o m i n g I n c . ❘ 51 Notes to Consolidated Financial Statements Australian Railroad Group Balance Sheets (U.S. dollars, in thousands) Assets Current Assets: Cash and cash equivalents Accounts receivable, net Materials and supplies Prepaid expenses and other Deferred income tax assets, net Total current assets Property and Equipment, net Deferred Income Tax Assets Other Assets, net Total assets Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable Accrued expenses Short-term debt Current income tax liabilities Total current liabilities Long-Term Debt, net of current portion Other Long-term Liabilities Total Stockholders’ Equity and Advances Total liabilities and stockholders’ equity December 31, 2001 2000 (unaudited) $ 9,071 15,919 11,306 17,482 272 $ 9,908 25,983 8,390 3,109 — 47,390 54,050 355,818 9,469 12,122 338,342 14,406 8,424 $ 424,799 $ 415,222 $ 7,949 30,273 — 309 $ 3,398 14,979 16,342 — 38,531 34,719 262,876 10,660 265,408 2,524 112,732 112,571 $ 424,799 $ 415,222 Property and equipment, net as of December 31, 2001 2000. This fourth quarter 2001 charge resulted in a excludes $2.3 million of costs originally capitalized dur- $0.8 million after-tax decrease in the Company’s equity ing 2001 that were written off in December when ARG’s earnings from ARG. board approved a change in the capital expenditure poli- On October 11, 2001, ARG announced that it was cies of its Western Australia railroad system, which was restructuring the operations of the formerly state- acquired from the Western Australian government in owned assets of Westrail Freight and expected a work December 2000, to conform to the capital expenditure force reduction of 80 employees by the end of March policies used at its South Australian railroad. Most of 2002. The estimated restructuring costs of $2.3 million these costs were approved as capital projects prior to the have been accounted for as an adjustment to the pur- acquisition of Westrail Freight by ARG on December 16, chase price of Westrail Freight. Restructuring costs to be paid during 2002 are reflected as accrued expenses. 52 ❘ G e n e s e e & W y o m i n g I n c . Australian Railroad Group Statement of Cash Flows (U.S. dollars, in thousands) Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization Deferred income taxes Gain on disposition of property Changes in assets and liabilities Net cash provided by operating activities Cash Flows from Investing Activities: Purchase of property and equipment Proceeds from disposition of property and equipment Net cash used in investing activities Cash Flows from Financing Activities: Payments on short-term borrowings Borrowings on debt Proceeds from issuance of shares Repayment of subordinated loans Refund of goods and services tax received from acquisition of Westrail Freight Transfer to restricted funds on deposit Net cash provided by financing activities Effect of Exchange Rate Differences on Cash and Cash Equivalents Increase in Cash and Cash Equivalents Cash and Cash Equivalents, beginning of year Cash and Cash Equivalents, end of year Year ended December 31, 2001 $16,902 13,392 7,252 (152) 4,004 41,398 (54,358) 152 (54,206) (16,360) 20,452 7,685 (7,685) 16,457 (6,351) 14,198 (553) 837 9,071 $9,908 G e n e s e e & W y o m i n g I n c . ❘ 53 Notes to Consolidated Financial Statements South America into agreements with the financial institutions to lease The following condensed unaudited results of operations for Oriental for the year ended December 31, 2001 have this and other rolling stock for a period of 8 years including automatic renewals. The sale/leaseback a U.S. functional currency and are based on accounting transactions resulted in aggregate deferred gains of principles generally accepted in the United States (in thousands): Operating revenues Net income $ 27,440 5,979 Condensed balance sheet information for Oriental as of December 31, 2001: Current assets Non-current assets Current liabilities Non-current liabilities Senior debt Shareholders’ equity $ 10,201 54,533 5,483 2,446 1,526 55,279 The above data does not include the non-recourse debt of $12.0 million held at an intermediate unconsoli- dated subsidiary or any of the general and administra- tive, interest or income tax costs at various intermediate unconsolidated subsidiaries. 8. Leases: The Company has entered into several leases for freight cars, locomotives and other equipment. Related operat- ing lease expense for the years ended December 31, 2001, 2000 and 1999 was approximately $8.1 million, $7.6 million and $6.6 million, respectively. Additionally, the Company leases certain real property which resulted in lease expense for the years ended December 31, 2001, 2000 and 1999 of approximately $1.2 million, $1.1 $2.4 million, which are being amortized over the term of the leases as a non-cash offset to rent expense. The Company fully anticipates renewing these leases at all available lease renewal dates. Alternatively, if the Company chooses not to renew these and certain other leases at their next available renewal dates, they would have (depending upon the lease) up to two additional options. One option would be to return the rolling stock and pay aggregate fees of approximately $9.0 million. The other option would be to purchase the rolling stock. The leases that allow this second option would require payments of approximately $17.8 million. Management anticipates the future mar- ket value of the leased rolling stock will equal or exceed the payments necessary to purchase the rolling stock. The following is a summary of future minimum lease payments (without consideration of $4.6 million of amortizing deferred gains from sale/leasebacks) under noncancelable leases and expected automatic renewals (in thousands): 2002 2003 2004 2005 2006 Thereafter Noncancelable Automatic Renewals Totals $2,501 2,106 1,761 929 818 1,364 $4,440 4,440 4,440 4,440 4,440 5,912 $6,941 6,546 6,201 5,369 5,258 7,276 Total minimum payments $9,479 $28,112 $37,591 million and $1.0 million, respectively. The Company is party to two lease agreements with On March 30, 2001 and December 7, 1999, the Class I carriers to operate 238 miles of track in Oregon. Company completed the sale of certain rolling stock to Under the leases, no payments to the lessor are required financial institutions for a net sale price of $6.5 million as long as certain operating conditions are met. The and $8.6 million, respectively. The proceeds were used leases expire in 2013 and 2015 unless renewed for suc- to reduce borrowings under the Company’s revolving cessive ten year renewal terms. If the lessor terminates credit facilities. Simultaneously, the Company entered the leases for any reason, the lessor must reimburse the Company for its depreciated basis of certain improvements on the track. The Company has assumed all operating and financial responsibilities including 54 ❘ G e n e s e e & W y o m i n g I n c . maintenance and regulatory compliance under these term loan facilities consist of a U.S. Term Loan facility lease arrangements. Through December 31, 2001, no in the amount of $10.0 million and a Canadian Term payments were required under either lease arrangement. Loan facility in the Canadian Dollar Equivalent of $22.0 9. Long-term Debt: Long-term debt consists of the following (in thousands): million in U.S. dollars. Prior to the 2000 amendments, this agreement allowed for maximum borrowings of $150.0 million including $45.0 million in Mexico and $15.0 million in Australia. Amounts previously outstand- 2001 2000 ing under the credit agreement which were borrowed by Credit facilities with variable interest rates (weighted average of 4.47% and 8.41% at December 31, 2001 and 2000, respectively) $24,997 $67,871 Non-recourse U.S. dollar denominated promissory notes of Mexican subsidiary with variable interest rates (6.59% and 10.18% on December 31, 2001 and 2000, respectively) Promissory note payable to CSX 27,500 27,500 FCCM represented U.S. dollar denominated foreign debt of the Company’s Mexican subsidiary. As the Mexican peso moved against the U.S. dollar, the revaluation of this outstanding debt to its Mexican peso equivalent resulted in non-cash gains and losses as reflected in the accompanying statements of income. On June 16, 2000, pursuant to a corporate and financial restructuring of the Company’s Mexican subsidiaries, the income statement impact of the U.S. dollar denominated foreign debt revaluation was significantly reduced. The term loans are due in quarterly installments Transportation, Inc. (8% interest) 6,814 7,922 and mature, along with the revolving credit facilities, Other debt with interest rates up to 8% and maturing at various dates between 2002 and 2006 Less- Current portion 1,280 1,508 60,591 4,441 104,801 3,996 Long-term debt, less current portion $56,150 $100,805 Credit Facilities During 2001, the Company completed two amendments to its primary credit agreement (neither of which affected the terms of the debt) to facilitate the Company’s acqui- sition of South Buffalo, the issuance of Class A Common Stock, and the acquisition of Emons. During 2000, the Company completed four amendments to its primary credit agreement to facilitate the Company’s corporate restructuring and refinancing of its Mexico operations, the issuance of Convertible Preferred stock, and the sale of a 50% interest in ASR. As amended, the Company’s primary credit agreement consists of a $135.0 million credit facility with $103.0 million in revolving credit facilities and $32.0 million in term loan facilities. The on August 17, 2004. The credit facilities accrue interest at various rates 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 Earnings Before Interest, Taxes, Depreciation, Amortization and Operating Leases (EBITDAR) ratio, as defined in the credit 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 on all unused portions of the revolv- ing credit facility which varies between 0.375% and 0.500% per annum depending on the Company’s funded debt to EBITDAR ratio. The credit 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 essen- tially all the Company’s assets in the United States and Canada. The credit agreement requires the maintenance of certain covenant ratios or amounts, including, but not limited to, funded debt to EBITDAR, 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, 2001. G e n e s e e & W y o m i n g I n c . ❘ 55 Notes to Consolidated Financial Statements On August 17, 1999, the Company amended and Schedule of Future Payments restated its primary credit agreement to provide for The following is a summary of the maturities of long- an increase in total borrowings. Borrowings under the term debt as of December 31, 2001 (in thousands): 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 write off of unamortized deferred financing costs of the retired debt. Non-Recourse Promissory Notes On December 7, 2000, one of the Company’s sub- 2002 2003 2004 2005 2006 Thereafter $4,441 9,183 23,785 5,596 5,576 12,010 $60,591 sidiaries in Mexico, Servicios, entered into three promis- 10. Financial Risk Management sory notes payable totaling $27.5 million with variable interest rates based on LIBOR plus 3.5%. Two of the notes have an eight year term with principal payments of $1.4 million due semi-annually beginning March 15, 2003, through the maturity date of September 15, 2008. The third note has a nine year term with principal pay- ments of $750,000 due semi-annually beginning March 15, 2003, with a maturity date of September 15, 2009. The promissory notes are secured by essentially all the assets of Servicios and FCCM, and a pledge of the Company’s shares of Servicios and FCCM. The promis- sory notes contain certain financial covenants which Servicios is in compliance with as of December 31, 2001. Promissory Note In October 2000, the Company amended and restated its promissory note payable to CSX Transportation, Inc., after making a $1.0 million discretionary principal pay- ment, by refinancing $7.9 million at 8% with interest due quarterly and principal payments due in annual installments of $1.0 million which began October 31, 2001 through the maturity date of October 31, 2008. Prior to this amendment and restatement, the promis- sory note payable provided for annual principal pay- ments of $1.2 million provided a certain subsidiary of the Company met certain levels of revenue and cash flow. In accordance with these prior provisions, the Company was not required to make any principal payments through 1999. The Company actively monitors its exposure to foreign currency exchange rate and interest rate risks and uses derivative financial instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the exchange rate or interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. The Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. Complex instru- ments involving leverage or multipliers are not used. Management believes that its use of derivative instru- ments to manage risk is in the Company’s best interest. On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138. In accordance with the provisions of SFAS No. 133, the Company recorded a transition adjustment upon adoption of the standard to recognize its derivative instruments at the then fair value of a liability of $388,000. The effect of this transition adjust- ment did not impact earnings and was not material to accumulated other comprehensive income. Initially, upon adoption of the new derivative accounting standard, and prospectively as of the date new derivatives are entered into, the Company desig- nates the derivatives as a hedge of a forecasted transac- tion or the variability of the cash flows to be received or paid in the future related to a recognized asset or liability 56 ❘ G e n e s e e & W y o m i n g I n c . (cash flow hedge). The effective portion of the changes rates for converting Mexican Pesos to U.S. Dollars, in the fair value of the derivative that is designated as a one of which expired in March 2001 and one of which cash flow hedge is recorded in accumulated other com- expired in September 2001. The remaining options prehensive income. When the hedged item is realized, expire in March 2002 and September 2002, and give the the gain or loss included in accumulated other compre- Company the right to sell Mexican Pesos for U.S. Dollars hensive income is reported on the same line in the at exchange rates of 10.10 Mexican Pesos to the U.S. consolidated statements of income, as the hedged item. Dollar and 10.61 Mexican Pesos to the U.S. Dollar. In addition, the ineffective portion of the changes in At December 31, 2001, the notional amount under fair value of derivatives used as cash flow hedges are these options is $2.2 million. The Company paid up- immediately recognized. front premiums for these options totaling $120,000. The Company formally documents its hedge relation- At December 31, 2001, the fair value of these currency ships, including identifying the hedge instruments and options was $17,000. hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction. Derivatives are recorded in the consolidated balance sheets at fair value in prepayments or other assets and accrued expenses or other liabilities. This process includes matching the hedge instrument to the underly- ing hedged item (assets, liabilities, firm commitments or forecasted transactions). At hedge inception and at least quarterly thereafter, the Company assesses whether the derivatives used to hedge transactions are highly effec- tive in offsetting changes in either the fair value or cash flows of the hedged item. When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any gains or losses on the derivative instrument are recognized in earnings during the period it no longer qualifies as a hedge. Summarized below are the specific accounting policies by market risk category. Foreign Currency Exchange Rate Risk Interest Rate Risk The Company uses interest rate swap agreements to manage its exposure to changes in interest rates for its floating rate debt. Interest rate swap agreements are accounted for as cash flow hedges. Gains or losses on the swaps, representing interest rate differentials to be received or paid on the swaps, are recognized in the con- solidated statements of income as a reduction or increase in interest expense, respectively. In accordance with the new derivative requirements, the effective portion of the change in the fair value of the derivative instrument is recorded in the consolidated balance sheets as a compo- nent of current assets or liabilities and other comprehen- sive income. The ineffective portion of the change in the fair value of the derivative instrument, along with the gain or loss on the hedged item, is recorded in earnings and reported in the consolidated statements of income, on the same line as the hedged item. During 2001 and 2000, the Company entered into The Company uses purchased options to manage foreign various interest rate swaps fixing its base interest rate currency exchange rate risk related to certain projected by exchanging its variable LIBOR interest rates on cash flows related to foreign operations. Under SFAS No. long-term debt for a fixed interest rate. The swaps expire 133, the instruments are carried at fair value in the con- at various dates through September 2006 and the fixed solidated balance sheets as a component of prepayments base rates range from 5.46% to 6.47%. At December 31, or other assets or accrued expense or other liabilities. 2001, the notional amount under these agreements is Changes in the fair value of derivative instruments that $30.6 million and the fair value of these interest rate swaps are used to manage exchange rate risk in foreign currency is a negative $1.1 million. During 2002, the Company denominated cash flows are recognized in the consolidated anticipates it will record a charge to earnings of $412,000, balance sheets as a component of accumulated other com- as certain swaps expire, representing the anticipated prehensive income in common shareholders’ equity. value of the interest rate differentials to be paid. During 2001 and 2000, the Company entered into various exchange rate options that established exchange G e n e s e e & W y o m i n g I n c . ❘ 57 Notes to Consolidated Financial Statements 11. Class A Common Stock: In November 2001, the Company completed a universal shelf registration of up to $200 million of various debt and equity securities. The form and terms of such secu- rities shall be determined when and if these securities are issued. On December 21, 2001, as an initial draw on the shelf registration, the Company sold 3.9 million shares of Class A Common Stock in a public offering at a price of $18.50 per share for net proceeds of $66.5 million. The proceeds were used to pay off all revolving debt under the Company’s primary credit agreement and for general corporate purposes. Additionally, certain shareholders (after exercising options and converting shares of Class B Common Stock into 64,641 shares of Class A Common Stock) sold shares in this offering. While the Company paid all issuance costs (except for the related underwriter’s fee), the Company did not receive any proceeds from the sale of shareholder shares. Had this issuance, and the the Fund exercised its option and invested an additional $5.0 million. Dividends on the Convertible Preferred are cumulative and payable quarterly in arrears in an amount equal to 4% of the issue price. Each share of the Convertible Preferred is convertible by the Fund at any time into shares of Class A Common Stock of the Company at a conversion price of $10.22 per share of Class A Common Stock (if converted, 2,445,654 shares of Common Stock). The Convertible Preferred is callable by the Company after four years, and is mandatorily redeemable in eight years. At December 31, 2001, no shares of Convertible Preferred have been converted into shares of Class A Common Stock. Issuance fees are being amortized as additional dividends over the Convertible Preferred’s eight year life. 13. Pension and Other Postretirement Benefit Plans: The Company administers two noncontributory December 2001 Convertible Preferred issuance, occurred defined benefit plans for union and non-union employ- on January 1, 2001, basic and diluted earnings per share ees of two U.S. subsidiaries. Benefits are determined for 2001 would have been $1.26 and $1.11, respectively, based on a fixed amount per year of credited service. on 14.3 million and 17.1 million weighted average The Company’s funding policy is to make contributions shares outstanding. 12. Redeemable Convertible Preferred Stock: In December 2000, to fund its cash investment in ARG, the Company completed a private placement of the Convertible Preferred with the Fund managed by Brown Brothers Harriman & Co. The Company exercised its option to fund $20.0 million of a possible $25.0 million in gross proceeds from the Convertible Preferred. The Fund also received an option to invest an additional $5.0 million in the Company provided that the Company complete future acquisitions with an aggregate purchase price greater than $25.0 million. In December 2001, upon final approval by the Surface Transportation Board of the Company’s acquisition of South Buffalo Railway, for pension benefits based on actuarial computations which reflect the long-term nature of the plans. The Company has met the minimum funding requirements according to the Employee Retirement Income Security Act. The plan assets are managed by Registered Invest- ment Companies that invest in Balanced Asset Funds, none of which are invested in the Company’s stock. On January 31, 2002, the Company froze one of its defined benefit plans. Effective that date, new employees will not be eligible to participate in this plan, and future earning for current participants will not be eligible in the compu- tation of benefits for those participants. 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 U.S. subsidiaries, and certain nonunion employees who have reached the age of 55 with 30 or 58 ❘ G e n e s e e & W y o m i n g I n c . more years of service. In October 2001, upon the South retirement if certain combinations of age and years of Buffalo acquisition, the Company assumed a liability to service are met. The Company funds the plans on a provide certain health care and life insurance benefits pay-as-you-go basis. for union and non-union personnel employed by that The following provides a reconciliation of benefit subsidiary as of its acquisition date. The union and non- obligation, plan assets, and funded status of the plans union employees of the subsidiary will become eligible (in thousands): for these health care and life insurance benefits upon Change in benefit obligations: Benefit obligation at beginning of year Adjustment for plan assumed in acquisition Service cost Interest cost Actuarial (gain) loss Benefits paid Benefit obligation at end of year Change in plan assets: Fair value of assets at beginning of year Actual return (loss) on plan assets Employer contributions Benefits paid Fair value of assets at end of year Reconciliation of Funded Status: Funded status Unrecognized net actuarial (gain) loss Unrecognized prior service cost Total accrued benefit obligation Weighted-average assumptions: Discount rate Expected return on plan assets Rate of compensation increase Pension Other Retirement Benefits 2001 2000 2001 2000 $1,323 — 155 91 (6) (50) $1,267 — 210 95 (91) (158) $624 2,085 104 210 11 (50) $706 — 3 48 (63) (70) $1,513 $1,323 $2,984 $624 $1,105 (119) 206 (50) $1,020 163 80 (158) $1,142 $1,105 — — $50 ($50) — — — $70 ($70) — ($371) 8 182 ($217) (213) 204 ($2,984) (17) — ($624) (28) — ($181) ($226) ($3,001) ($652) 7.75% 8.5% 3.5% 7.75% 8.5% 4.5% 7.5% N/A N/A 7.5% N/A N/A Pension Other Retirement Benefits 2001 2000 1999 2001 2000 1999 Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of (gain) loss $155 91 (96) 23 (12) $210 95 (88) 23 — Net periodic benefit cost $161 $240 $179 76 (38) 24 — $241 $104 210 — — — $314 $3 48 — — — $2 36 — — (6) $51 $32 G e n e s e e & W y o m i n g I n c . ❘ 59 Notes to Consolidated Financial Statements For measurement purposes, a weighted average As required by provisions within the Mexican 5.8% annual rate of increase in the per capita cost of Constitution and Mexican Labor Laws, the Company’s covered health care benefits was assumed for 2001 subsidiary, FCCM provides a statutory profit sharing and thereafter. benefit to its employees. In accordance with these laws, The health care cost trend rate assumption has an FCCM is required to pay to its employees a 10% share effect on the amounts reported. To illustrate, increasing of its profits within 60 days of filing corporate income (decreasing) the assumed health care cost trend rates tax returns. The profit sharing basis is computed under by one percentage point in each year would increase a section of the Mexican Income Tax Law which, in (decrease) the aggregate of the service and interest cost general terms, differs from the taxable income by components of the net periodic postretirement benefit excluding the inflation adjustment on depreciation, cost and the end of the year accumulated postretirement amortization, receivables and payables. Provisions for benefit obligation as follows: statutory profit sharing expense were $298,000 and 1–Percentage Point Increase 1–Percentage Point Decrease $766,000 for 2001 and 2000, respectively. Postemployment Benefits $14,574 ($13,051) The Company does not provide any other significant $282,277 ($251,731) postemployment benefits to its employees. Effect on total of service and interest cost components Effect on postretirement benefit obligation 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 $2.3 million, $2.1 million and $1.7 million was awarded under the various bonus plans in 2001, 2000 and 1999, respectively. Profit Sharing In February 2001, the Company merged two of its three 401(k) plans covering certain U.S. union and non-union employees. The two 401(k) plans qualify under Section 401(k) of the Internal Revenue Code as salary reduction plans. Employees may elect to con- tribute a certain percentage of their salary on a before- tax basis. Under one of these plans, the Company matches participants’ contributions up to 1.5% of the participants’ salary. Under the second plan, the Company matches participants’ contributions up to 5.0% of the participants’ salary. The Company’s contri- butions to all plans in 2001, 2000 and 1999 were approximately $307,000, $299,000 and $264,000, respectively. 60 ❘ G e n e s e e & W y o m i n g I n c . 14. Income Taxes: The Company files consolidated U.S. federal income tax returns which include all of its U.S. subsidiaries. Each of the Company’s foreign subsidiaries files appro- priate income tax returns in their respective countries. The components of income before provision for income taxes, equity earnings and extraordinary item for the presented periods are as follows (in thousands): United States Foreign (U.S.$) 2001 2000 1999 $7,615 8,772 $9,199 14,891 $ 9,634 5,954 $16,387 $24,090 $15,588 No provision is made for the U.S. income taxes applicable to the undistributed earnings of controlled 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 earn- ings should be distributed in the future, those distribu- tions 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 controlled foreign subsidiaries as of December 31, 2001 deferred income taxes as of the presented year ends is $16.0 million. It is not practicable to determine the are as follows (in thousands): amount of U.S. income and foreign withholding taxes that could be payable if a distribution of earnings Deferred tax benefits- 2001 2000 were to occur. The components of the provision for income taxes are as follows (in thousands): 2001 2000 1999 Accruals and reserves not deducted for tax purposes until paid Alternative minimum tax credits Net operating losses Postretirement benefits Other 841 $2,150 $2,202 935 7,586 233 131 176 707 6,776 United States: Current- Federal State Deferred Foreign (U.S.$): Current Deferred $681 85 2,228 $ 495 339 2,594 $1,265 952 2,381 2,994 3,428 4,598 Deferred tax obligations – Property and investments basis differences Valuation allowance 10,650 11,087 (32,670) (450) (30,267) (797) Net deferred tax obligations ($22,470) ($19,977) 1,236 1,936 164 6,977 (1,212) (1,211) In the accompanying consolidated balance sheets, these deferred benefits and deferred obligations are 3,172 7,141 (2,423) classified as current or non-current based on the Total $6,166 $10,569 $2,175 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 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 2001 2000 1999 must achieve future regular U.S. taxable income in order 34.0% 34.0% 35.0% 3.2% 12.2% (100.7%) to realize this credit. The Company had net operating loss carry-forwards from its Mexican operations in 2001, 2000 and 1999 of $18.1 million, $20.0 million and $10.3 million, respectively. The Mexican losses, for income tax purposes, primarily relate to the immediate 1.9% 1.8% 5.7% deduction of the purchase price paid for the FCCM oper- reconciliation: Tax provision at statutory rate Effect of foreign operations State income taxes, net of federal income tax benefit Change in valuation allowance Other, net (2.0%) 0.5% (3.6%) (0.5%) 71.9% 2.1% Effective income tax rate 37.6% 43.9% 14.0% 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 ations. These loss carry-forwards will expire, if unused, between 2009 and 2010. The Company had net operating loss carry-forwards from its Canadian operations as of December 31, 2001, 2000 and 1999 of $1.1 million, $1.5 million and $2.2 million, respectively. The Canadian losses primarily represent losses generated prior to the Company gaining control of those operations in April 1999. These loss carry-forwards will expire, if unused, between 2004 and 2006. G e n e s e e & W y o m i n g I n c . ❘ 61 Notes to Consolidated Financial Statements In the third quarter of 1999, the Australian govern- ment 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 estimated that it was more likely than not that the Company would be unable to fully realize all of the potential income tax benefits and accordingly, 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 the entire tax benefit. During 2000, based on the actual operating results achieved by the Australian subsidiary, management revised its assessment of the likelihood that this tax benefit would be realized. The 2000 reassessment resulted in a decrease in the related valuation allowance of $1.0 million. Pursuant to the deconsolidation of ASR, the remaining valuation allowance and related deferred tax assets are no longer included in the consolidated results of the Company. As of December 31, 2001, 2000 and 1999, in addition to the valuation allowance described above, the income tax benefit of the Mexican and Canadian net operating losses had been offset by a partial valuation allowance 15. Grants From Governmental Agencies: The Company periodically receives grants from states and provinces in which it operates for rehabilitation or construction of track. The states and provinces typically reimburse the Company for 75% to 100% of the total cost of specific projects. Under two such grant programs, the Company received $278,000, $6.0 million and $6.1 mil- lion in 2001, 2000 and 1999, respectively, from the State of New York and $3.2 million, $2.2 million and $3.2 million in 2001, 2000 and 1999, respectively, from the State of Pennsylvania. In addition, the Company received $86,000, $341,000 and $200,000 of grants in 2001, 2000 and 1999, respectively, from other states, and $388,000 and $315,000 in 2001 and 2000, respec- tively, from a province in Canada. 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 speci- fied period of time or fails to maintain the rehabilitated or new track to certain standards and make certain min- imum 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 construction and rehabilitation expendi- tures have been incurred. The amortization of deferred grants is a non-cash offset to depreciation expense over the useful lives of the related assets and is not included as taxable income. During the years ended December 31, 2001, 2000 and 1999, the Company recorded offsets to depreciation expense from grant amortization of $1.4 million, $1.1 million and $1.0 million, respectively. 16.Commitments and Contingencies: based on management’s assessment regarding their ulti- The Company has built its portfolio of railroad proper- mate realization. A certain portion of this incremental ties primarily through the purchase or lease of road valuation allowance was established in the acquisition and track structure and through operating agreements. of GRO, and accordingly, if reversed will result in a These transactions have historically related only to the decrease to goodwill. Management does not believe that physical assets of the railroad property. Typically, the a valuation allowance is required for any other deferred Company does not assume the operations or liabilities tax assets based on anticipated future profit levels and of the divesting railroads. However, in October 2001, the reversal of current deferred tax obligations. 62 ❘ G e n e s e e & W y o m i n g I n c . the Company assumed certain current liabilities of declaration of certain rights regarding the SAA and $2.4 million and certain long-term liabilities of $3.2 damages for ComEd’s failure to assign the SAA to the million through the acquisition of South Buffalo Railway purchaser of the Powerton plant. The Company believes (see Note 3). Legal Proceedings The Company is a defendant in certain lawsuits resulting from railroad and industrial switching operations, one of which had included the commencement of a criminal investigation that was resolved in 2001 with no charges arising. Management believes that the Company has adequate provisions 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 breached 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 previously owned 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. However, an adverse outcome of this lawsuit could have a material adverse effect on the Company’s financial condition. 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 July 7, 2000, the Company filed an amended counterclaim against ComEd in the Cook County action. The counterclaim seeks a that its counterclaim against ComEd is well-founded and is pursuing it vigorously. 17. Stock-Based Compensation Plans: In 1996, the Company established an incentive and nonqualified stock option plan for key employees and a nonqualified stock option plan for non-employee direc- tors (the Stock Option Plans). The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized, except for $200,000 of compensation expense related to the imme- diate repurchase of shares issued upon exercise of certain stock options in 2001. Had compensation cost for all options issued under these plans been determined con- sistent with FASB Statement No. 123, the Company’s net income and earnings per share would have been reduced as follows (in thousands, except EPS): 2001 2000 1999 Net Income: As reported $19,084 18,307 Pro Forma $13,932 12,925 $12,533 11,468 Basic EPS: As reported $1.72 1.65 Pro Forma Diluted EPS: As reported $1.48 Pro Forma 1.42 $1.42 1.32 $1.38 1.28 $1.24 1.13 $1.23 1.12 The Company has reserved 2,565,000 Class A shares for option grants under the Stock Option Plans. The Compensation and Stock Option Committee of the Company’s Board of Directors has discretion to deter- mine employee grantees, dates and amounts of grants, vesting and expiration dates. Some awards under the director’s plan are automatic during the first two years after joining the Board of Directors, and the Board of Directors may make other awards under this plan. 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. G e n e s e e & W y o m i n g I n c . ❘ 63 Notes to Consolidated Financial Statements The following is a summary of stock option activity for 2001, 2000 and 1999: Year Ended December 31, 2001 2000 1999 Shares Wtd. Average Exercise Price Shares Wtd. Average Exercise Price Shares Wtd. Average Exercise Price Outstanding at beginning of year 1,720,052 $7.72 1,715,064 $7.88 1,467,845 $8.67 Granted Exercised Forfeited 339,977 (741,428) (28,775) 11.45 8.39 7.28 336,488 (287,625) (43,875) 6.70 7.59 6.42 279,900 — (32,681) Outstanding at end of year 1,289,826 8.32 1,720,052 7.72 1,715,064 Exercisable at end of year 466,977 7.77 950,220 8.38 827,744 Weighted average fair value of options granted 6.28 3.47 3.81 — 9.40 7.88 8.38 1.85 The following table summarizes information about stock options outstanding at December 31, 2001: Exercise Price $3.72 - 5.99 6.00 - 7.99 8.00 - 9.99 10.00 - 11.99 12.00 - 17.35 3.72 - 17.35 Options Outstanding Options Exercisable Number of Options Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number of Options Weighted Average Exercise Price 258,159 293,821 396,520 268,575 72,751 1,289,826 2.6 Years 3.8 Years 1.4 Years 4.2 Years 5.3 Years 3.0 Years $ 4.12 6.93 9.38 10.64 14.57 8.32 98,686 114,990 248,801 — 4,500 466,977 $4.02 7.22 9.42 — 12.67 7.77 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: 2001 2000 1999 Risk-free interest rate Expected dividend yield Expected lives in years Expected volatility 4.50% 0.00% 4.91 58.11% 6.20% 0.00% 5.45 47.80% 5.40% 0.00% 5.90 39.50% In addition to the Stock Option Plans, the Company has reserved 562,500 shares of Class A common stock it may sell to its full-time employees under its Stock Purchase Plan. At December 31, 2001, 2000 and 1999, 25,202 shares, 22,388 shares and 17,912 shares, respectively, 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. 64 ❘ G e n e s e e & W y o m i n g I n c . 18. Business Segment and Geographic Area Information The Company currently operates in two business seg- ments: 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; 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. Through December 16, 2000, the Company also operated in the Australian Railroad Operations segment, which included operating a regional railroad and providing hook and pull (haulage) services to other railroads within Australia. Corporate overhead expenses, including acquisition expenses, are reported in North American Railroad Operations. The Company’s December 31, 2001 and 2000, equity investments in Australia and South America are also included in the Asset section of North American 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 infor- mation for each business segment and for each geo- graphic area for 2001, 2000 and 1999 are shown in the following tables (in thousands): 2001 Operating revenues Income from operations Depreciation and amortization Assets Capital expenditures, net of government grants 2000 Operating revenues Income (loss) from operations Depreciation and amortization Assets Capital expenditures, net of government grants 1999 Operating revenues Income (loss) from operations Depreciation and amortization Assets Capital expenditures, net of government grants North American Australian Consolidated Railroad Operations Industrial Switching Operations Total Railroad Operations Total $161,445 21,653 12,139 394,746 16,307 $158,318 23,545 11,068 330,358 22,581 $121,093 15,900 9,649 253,624 18,260 $12,131 487 617 7,773 244 $10,573 238 658 8,025 404 $11,341 (86) 768 8,319 130 $173,576 22,140 12,756 402,519 16,551 $168,891 23,783 11,726 338,383 22,985 $132,434 15,814 10,417 261,943 18,390 — — — — — $173,576 22,140 12,756 402,519 16,551 $37,639 (30) 2,254 — 6,288 $206,530 23,753 13,980 338,383 29,273 $43,152 6,554 2,157 41,997 6,508 $175,586 22,368 12,574 303,940 24,898 Refer to the accompanying consolidated statements of income for items to reconcile from consolidated income from operations to consolidated net income. G e n e s e e & W y o m i n g I n c . ❘ 65 Notes to Consolidated Financial Statements 19. Quarterly Financial Data: (in thousands, except per share data) Quarterly Results (Unaudited) First Quarter Second Quarter Third Quarter Fourth Quarter $42,871 5,181 6,578 0.53 $55,411 8,297 4,412 0.44 $34,172 2,038 (331) (0.03) $44,243 5,960 5,087 0.40 $52,354 7,807 2,278 0.23 $42,669 5,723 2,746 0.27 $42,050 5,108 4,531 0.35 $50,095 6,681 3,192 0.32 $45,063 6,351 6,691 0.67 $44,412 5,891 2,888 0.21 $48,670 967 4,050 0.38 $53,682 8,257 3,429 0.35 The fourth quarter of 2001 includes a $728,000 pre-tax decrease to the previously recorded gain of $3.7 million to reflect the lower than estimated reimbursed amount for acquisition-related costs (see Note 3). The first quarter of 2001 includes an additional pre-tax gain of $3.7 million related to the December, 2000 issuance of ARG stock to Wesfarmers (see Note 3). The fourth quarter of 2000 includes a $10.1 million pre-tax gain upon the issuance of ASR stock to Wesfarmers, a $4.0 million pre-tax compensation charge related to accelerating ASR stock options and a $6.6 million deferred tax expense resulting from the deconsolidation of ASR (see Note 3). 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 14). 2001 Operating revenues Income from operations Net income Diluted earnings per share 2000 Operating revenues Income from operations Net income Diluted earnings per share 1999 Operating revenues Income from operations Net income (loss) Diluted earnings (loss) per share 66 ❘ G e n e s e e & W y o m i n g I n c . 20. Comprehensive Income: Comprehensive income is the total of net income and all 21. Recently Issued Accounting Standards: other non-owner changes in equity. The following table On October 3, 2001, the Financial Accounting Standards sets forth the Company’s comprehensive income for the Board issued Statement of Financial Accounting years ended December 31, 2001, 2000 and 1999 (in Standards No. 144 (SFAS No. 144), “Accounting for the thousands): Net income Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 2001 2000 1999 $19,084 $13,932 $12,533 Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long- lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be 708 (3,567) 791 Disposed Of.” SFAS No. 144, however, retains the funda- Transition adjustment related to change in accounting for derivative instruments and hedging activities (255) Net change in unrealized losses on qualifying cash flow hedges mental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived — — assets to be disposed of by sale. SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion No. 30 (“Opinion 30”), “Reporting the Results of (475) — — Operations - Reporting the Effects of Disposal of a Comprehensive income $19,062 $10,365 $13,324 Segment of a Business, and Extraordinary, Unusual and The following table sets forth the components of accumulated other comprehensive loss, net of tax, included in the consolidated balance sheets as of December 31, 2001 and 2000 (in thousands): Net foreign currency 2001 2000 Infrequently Occurring Events and Transactions,” for segments of a business to be disposed of. SFAS No. 144, however, retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, translation adjustments $(4,175) $(4,883) by abandonment, or in a distribution to owners) or is Net unrealized losses on qualifying cash flow hedges (730) — classified as held for sale. The Company adopted SFAS No. 144 on January 1, 2002 and does not expect to Accumulated other comprehensive loss $(4,905) $(4,883) record any impairment charges upon adoption. On June 30, 2001, the Financial Accounting Standards Board issued Statement No. 141, “Business Combinations”(SFAS No. 141). Under SFAS No. 141, all business combinations initiated after June 30, 2001 must be accounted for using the purchase method of accounting. Use of the pooling-of-interests method is prohibited. Additionally, Statement No. 141 requires that certain intangible assets that can be identified and named be recognized as assets apart from goodwill. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. G e n e s e e & W y o m i n g I n c . ❘ 67 Notes to Consolidated Financial Statements On June 30, 2001, the Financial Accounting Standards Board issued Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will contin- ue to be amortized over their useful lives. In accordance with this statement, the Company adopted SFAS 142 as of January 1, 2002 for existing goodwill and intangi- ble assets and on June 30, 2001 for South Buffalo. As of December 31, 2001, goodwill, net of accumulated amortization, is $24.1 million and amortization expense for the year ended December 31, 2001 is $358,000. The Company does not expect to record any impairment charges upon adoption in 2002. 68 ❘ G e n e s e e & W y o m i n g I n c . Corporate Headquarters Stock Registrar and Transfer Agent Genesee & Wyoming Inc. 66 Field Point Road Greenwich, Connecticut 06830 203-629-3722 Fax 203-661-4106 NASDAQ GNWR www.gwrr.com Common Stock The Class A Common Stock of the Company has been traded since June 24, 1996, on the Nasdaq National Market under the symbol GNWR. The Class B Common Stock is not publicly traded. LaSalle Bank, N.A. Trust and Asset Management 135 South LaSalle Street Chicago, IL 60603 312-904-2450 www.lasallebank.com Legal Counsel Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 212-455-2000 www.stblaw.com The actual trade prices of Class A Common Stock reflected below have been adjusted for a three-for-two stock split paid on March 14, 2002 to shareholders of record on February 28, 2002; and for a three-for-two stock split paid on June 15, 2001 to shareholders of record on May 31, 2001: Harter, Secrest & Emery LLP 1600 Bausch & Lomb Place Rochester, New York 14604-2711 716-232-6500 www.hselaw.com Year Ended December 31, 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Ended December 31, 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low $13.055 $ 9.000 $14.600 $ 9.028 $17.966 $12.340 $22.066 $15.000 High Low $ 6.888 $ 5.278 $ 8.555 $ 6.333 $11.222 $ 7.111 $14.222 $ 7.666 As of March 22, 2002, there were 133 record holders of Class A Common Stock and 9 holders of Class B Common Stock. Class B Common Stock is not publicly traded. The Company believes that there are approxi- mately 3,650 beneficial owners of Class A Common Stock. Prior to its initial public offering, the Company historically paid dividends on its common stock. See “Selected Financial Data.” However, the Company does not intend to pay cash dividends for the foreseeable future. G e n e s e e & W y o m i n g I n c . ❘ 69 Back (l-r): John M. Randolph , Philip J. Ringo, Mortimer B. Fuller III, T. Michael Long, James M. Fuller, Louis S. Fuller, and C. Sean Day, Seated (l-r): Robert M. Melzer and Hon. M. Douglas Young, P.C. Board of Directors Corporate Officers C. Sean Day (2) Chairman, Teekay Shipping Corporation James M. Fuller (2) Retired, Harvey Salt Co. Louis S. Fuller (3) Retired, Courtright and Associates Mortimer B. Fuller III (3) Chairman and Chief Executive Officer T. Michael Long (1) Partner, Brown Brothers Harriman & Co. Robert M. Melzer (1) Retired, former Chief Executive Officer, Property Capital Trust John M. Randolph (2) (3) Financial Consultant and Private Investor Philip J. Ringo (1) Chairman and CEO, RubberNetwork.com Hon. M. Douglas Young, P.C. (3) Chairman, SUMMA Strategies Canada, Inc. (1) Member of Audit Committee (2) Member of Compensation and Stock Option Committees (3) Member of Executive Committee Mortimer B. Fuller III Chairman of the Board of Directors and Chief Executive Officer Charles N. Marshall President and Chief Operating Officer Mark W. Hastings Executive Vice President Corporate Development and Secretary John C. Hellmann Chief Financial Officer James W. Benz Senior Vice President GWI Rail Switching Services Charles W. Chabot Senior Vice President Australia David J. Collins Senior Vice President New York/Pennsylvania Alan R. Harris Senior Vice President and Chief Accounting Officer Martin D. Lacombe Senior Vice President Thomas P. Loftus Senior Vice President Finance and Treasurer Shayne M. Magdoff Senior Vice President Administration and Human Resources Paul M. Victor Senior Vice President Mexico Spencer D. White Senior Vice President Illinois 70 ❘ G e n e s e e & W y o m i n g I n c . 

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