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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**** ****FORM 10-K**   þ **Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the fiscal year ended December 31, 2009, or**   o **Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the transition period from                      to                     ****Commission file number 001-32579**** ****RAILAMERICA, INC.**(Exact name of registrant as specified in its charter)   Delaware 65-0328006   (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)   7411 Fullerton Street, Suite 300, Jacksonville, Florida 32256   (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (800) 342-1131Securities Registered Pursuant to Section 12(b) of the Act:   TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED   Common Stock, $.01 Par Value New York Stock ExchangeSecurities Registered Pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o    No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes o    No þIndicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes þ    No oIndicate by check mark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files). Yes o     No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):       Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o    (Do not check if a smaller reporting company)  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o     No þThe aggregate market value of voting and non-voting common equity held by non-affiliates of theregistrant as of June 30, 2009 is not applicable because the registrant was not publicly traded asof June 30, 2009.The number of shares outstanding of the registrant’s Common Stock, $.01 par value per share, as ofMarch 25, 2010 was 54,884,640.DOCUMENTS INCORPORATED BY REFERENCEThe information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated byreference from the registrant’s Definitive Proxy Statement for its 2010 Annual Meeting ofStockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.  
 

 
TABLE OF CONTENTS       PAGE PART I     Item 1. Business  3 Item 1A. Risk Factors  11 Item 1B. Unresolved Staff Comments  20 Item 2. Properties  20 Item 3. Legal Proceedings  22 Item 4. Removed and Reserved  22  PART II     Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  23 Item 6. Selected Financial Data  24 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk  43 Item 8. Financial Statements and Supplementary Data  43 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  44 Item 9A. Controls and Procedures  44 Item 9B. Other Information  44  PART III     Item 10. Directors, Executive Officers and Corporate Governance  45 Item 11. Executive Compensation  45 Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters  45 Item 13. Certain Relationships and Related Transactions, and Director Independence  45 Item 14. Principal Accountant Fees and Services  45  PART IV     Item 15. Exhibits and Financial Statement Schedules  46 Signatures  48  EX-23.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2
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     Certain statements in this Annual Report on Form 10-K and other information we provide fromtime to time may constitute forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 including, but not necessarily limited to, statements relating tofuture events and financial performance. Words such as “anticipates,” “expects,” “intends,”“plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates”and variations on these words and similar expressions are intended to identify such forward-lookingstatements. These statements are based on management’s current expectations and beliefs and aresubject to a number of factors that could lead to actual results materially different from thosedescribed in the forward-looking statements. We can give no assurance that its expectations will beattained. Accordingly, you should not place undue reliance on any forward-looking statementscontained in this report. Factors that could have a material adverse effect on our operations andfuture prospects or that could cause actual results to differ materially from our expectationsinclude, but are not limited to, prolonged capital markets disruption and volatility, generaleconomic conditions and business conditions, our relationships with Class I railroads and otherconnecting carriers, our ability to obtain railcars and locomotives from other providers on whichwe are currently dependent, legislative and regulatory developments including rulings by theSurface Transportation Board or the Railroad Retirement Board, strikes or work stoppages by ouremployees, our transportation of hazardous materials by rail, rising fuel costs, acquisition risks,competitive pressures within the industry, risks related to the geographic markets in which weoperate; and other risks detailed in our filings with the Securities and Exchange Commission(“SEC”), including our prospectus filed with the SEC on October 13, 2009. In addition, new risksand uncertainties emerge from time to time, and it is not possible for us to predict or assess theimpact of every factor that may cause our actual results to differ from those contained in anyforward-looking statements. Such forward-looking statements speak only as of the date of thisreport. We expressly disclaim any obligation to release publicly any updates or revisions to anyforward-looking statements contained herein to reflect any change in our expectations with regardthereto or change in events, conditions or circumstances on which any statement is based. Exceptwhere the context otherwise requires, the terms “RailAmerica,” “we,” “us,” or “our” refer to thebusiness of RailAmerica, Inc. and its consolidated subsidiaries.**PART I****ITEM 1. BUSINESS****OVERVIEW**     We are a leading owner and operator of short line and regional freight railroads in NorthAmerica, operating a portfolio of 40 individual railroads with approximately 7,400 miles of trackin 27 U.S. states and three Canadian provinces. Our railroad portfolio represents an importantcomponent of North America’s transportation infrastructure, carrying large quantities of freightfor a highly diverse customer base. In 2009, our railroads transported over 800,000 carloads offreight for approximately 1,500 customers, hauling a wide range of products such as farm and foodproducts, lumber and forest products, paper and paper products, metals, chemicals and coal.     We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existingrailroad companies. On February 14, 2007, we were acquired by RR Acquisition Holding LLC, an entitywholly-owned by certain private equity funds managed by an affiliate of Fortress Investment GroupLLC (“Fortress”). On October 16, 2009, we completed an initial public offering. During the periodfrom our formation until today, we have grown both through the expansion of the traffic base on ourexisting railroads and through acquisitions of additional North American railroads.     Our Internet website address is www.railamerica.com. We make available free of charge, on orthrough our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, and amendments to these reports. The SEC maintains an Internet site thatcontains reports, proxy and information statements and other information regarding issuers thatfile electronically with the SEC at http://www.sec.gov. We also make available on ourwebsite other registration statements, prospectuses, and reports filed with the SEC under theSecurities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934,as amended (the “Exchange Act”), including proxy statements and reports filed by officers anddirectors under Section 16(a) of the Exchange Act. These filings may be found by selecting theoption entitled “SEC FILINGS” in the “INVESTOR RELATIONS” section on our website. Additionally, ourcorporate governance guidelines, board committee charters, code of business conduct and ethics andcode of ethics for principal executive and senior financial officers are available on our websiteand in print to any stockholder who requests them. Information contained in or connected to ourwebsite is not part of this report.
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**BUSINESS STRATEGY**     We plan to grow our revenue, cash flow and earnings by employing the following growthstrategies:     *Growing freight revenue:*We are focused on growing our freight revenue by seeking newbusiness opportunities at our individual railroads and by centralizing key commercial and pricingdecisions. We believe that shippers often seek to locate their operations on short lines because ofpossible access to multiple Class I railroads and the resulting negotiating leverage it affordsthem. To this end, our commercial and development team actively solicits customers to locate theirmanufacturing and warehousing facilities on our railroads. We also seek to generate new business byconverting customers located on or near our railroads from other modes of transportation to rail.Members of our senior management team have significant prior experience in the marketingdepartments of both Class I and short line railroads. Additionally, by centralizing and carefullyanalyzing pricing decisions based on prevailing market conditions and competitive analysis ratherthan having such decisions made at the railroad level by local management, we believe we canleverage our management team’s expertise and increase rates per carload.     *Expanding our non-freight services and revenue:*We intend to continue to expand and grow thenon-freight services we offer to both our rail customers and other parties. Non-freight servicesoffered to our rail customers include switching (or managing and positioning railcars within acustomer’s facility), storing customers’ excess or idle railcars on inactive portions of our raillines, third party railcar repair, and car hire and demurrage. Each of these services leverages ourexisting customer relationships and generates additional revenue at attractive margins with minimalcapital investment. We also seek to grow our revenue from non-transportation uses of our landholdings such as land leases, crossing or access rights, subsurface rights, signboards and cellularcommunication towers, among others. These sources of revenue and value are an important area offocus by our management as such revenue has minimal associated operating costs or capitalexpenditures and represents a recurring, high margin cash flow stream.     *Pursuing opportunistic acquisitions:*The North American short line and regional railroadindustry is highly fragmented, with approximately 558 short line and regional railroads operatingapproximately 45,200 miles of track. We believe that opportunistically acquiring additional shortline and regional railroads, or other railroad-related or transportation-related businesses, willenable us to grow our revenue and achieve a number of additional benefits including, among others,expanding and enhancing our services, further diversifying our portfolio and achieving economies ofscale by leveraging senior management experience and corporate costs over a broader revenue base.     *Continuing to improve operating efficiency and lowering costs:*We continue to focus ondriving financial improvement through a variety of cost savings initiatives. To identify andimplement cost savings, we have organized our 40 railroads into five regional groups which, inturn, report to senior management where many functions such as pricing, purchasing, capitalspending, finance, insurance, real estate and other administrative functions are centralized. Webelieve that this strategy enables us to achieve cost and pricing efficiencies and leverage theexperience of senior management in commercial, operational and strategic decisions. To date, wehave implemented a number of cost savings initiatives broadly at all of our railroads targetinglower fuel consumption, safer operations, more efficient locomotive utilization and lower costs forthird party services, among others, and continue to be extremely focused on ongoing opportunitiesto further reduce our costs.**INDUSTRY OVERVIEW**     The North American economy is dependent on the movement of freight ranging from raw materialssuch as coal, ores, aggregates, lumber and grain to finished goods, such as food products, paperproducts, automobiles and machinery. Railroads represent the largest component of North America’sfreight transportation industry, carrying more freight than any other mode of transportation on aton-mile basis. With a network of over 139,000 miles of track in the U.S., railroads linkbusinesses with each other domestically and with international markets through connections withports and other international terminals.**Industry Structure**     According to the Association of American Railroads (“AAR”), there are 565 railroads in theUnited States operating over 139,000 miles of track. The AAR classifies railroads operating in theUnited States into one of three categories based on the amount of revenues and track-miles. Class Irailroads, those individual railroads with over $401.4 million in revenues in 2008, representapproximately 94% of total rail revenues. Regional and local/short line railroads operateapproximately 45,200 miles of track in the United States. The primary function of these smallerrailroads is to provide feeder traffic to the Class I carriers. Regional and local/short linerailroads combined account for approximately 6% of total industry rail revenues.
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                       **Aggregate**             **Miles**  **% of**    **Classification of Railroads** **Number**  **Operated**  **Revenue**  **Revenues and Miles Operated in 2008** Class I (1)  7   94,082   94% Over $401.4 millionRegional  33   16,690   3% $40.0 to $401.4  million and/or 350 or more miles operated Local/Short line  525   28,554   3% Less than $40.0 million and less than 350 miles operated              Total  565   139,326   100%                   (1) Includes CSX Transportation, BNSF Railway Co., Norfolk Southern,Kansas City Southern Railway Company, Union Pacific, Canadian NationalRailway and Canadian Pacific Railroad Co.   Source: Association of American Railroads, *Railroad Facts, 2009 Edition.*     Class I railroads operate across many different states and concentrate largely, though notexclusively, on long-haul, high density intercity traffic lanes. The six largest railroads in NorthAmerica are BNSF Railway, Union Pacific, Norfolk Southern, CSX Transportation, Canadian NationalRailway, and Canadian Pacific Railroad Company. Regional railroads typically operate 400-650 milesof track and provide service to selected areas of the country, mainly connecting neighboring statesand/or economic centers. Typically short line railroads serve as branch lines connecting customerswith Class I railroads. Short line railroads have more predictable and straightforward operationsas they generally perform point-to-point service over short distances, without the complex networksassociated with the large Class I railroads.     Use of regional and short line railroads is largely driven by interchange traffic betweencarriers. Typically, a Class I railroad will transport the freight the majority of the distance,usually hundreds or thousands of miles and drop it off with the short line, which provides thefinal step of service directly to the customer. Most short line railroads depend on Class I trafficfor a substantial portion of their revenue. Our portfolio of 40 railroads is a mix of regional andshort line railroads.**     Regional and Short line Railroads**     Short lines and regional railways have always been a part of the rail industry in NorthAmerica. In the 1800’s, most North American railroads were constructed to serve a local or regionalinterest. Today’s Class I railroads are descended from hundreds of short lines and regionals thatcame together in successive waves of consolidation.     During the 1980’s the number of regional and short line railroads increased dramatically.Deregulation of U.S. railroads simplified abandonment and sales regulations, allowing the majorcarriers to gain many of the savings of abandonment while preserving the traffic on the rail lines.Carriers created through this divestiture process now account for the majority of regional andshort line railroads. Short line and regional railroads today serve important roles in movingfreight within their service areas and function as a critical traffic “feeder” network for theClass I railroads.     Over the past decade, the number of regional and short line railroads has remained relativelyconstant. While some new entrants were formed through spin-offs or divestitures of Class Irailroads, they have generally been offset by other existing regional and short lines eitherexiting the business or being merged with or acquired by other railroads. With the growth ofmulti-carrier holding companies, the number of operators of regional and short line railroads hasdecreased. The consolidation brought on by multi-carrier holding companies has induced a number ofshippers with private railroads to sell those railroads to the major short line operators.Similarly, Class I railroads sell and lease rail lines to smaller rail entities in order to addressa range of issues impacting costs and productivity.**RAIL TRAFFIC**   ***Revenue Model***     We generate freight revenue under three different types of service, which are summarizedbelow.               **% of Freight** **Service Type** **Description** **Revenue** Interchange Freight transport between a customer’s facility and a connection point with a Class I railroad  86%Local Freight that both originates and terminates on the same line  3%Bridge Freight transport from one connecting Class I railroad to another  11%
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     For the majority of our customers, our railroads transport freight between a customer’sfacility or plant and a connection point (“interchange”) with a national Class I railroad. Each ofour 40 railroads connects with at least one Class I railroad, and in many cases connects withmultiple Class I railroads. Interchange circumstances vary by customer shipping needs with freighteither (i) originating at the customer’s facility (such as a coal mine, an ethanol production plantor a lumber yard) for transport by the Class I railroad via the interchange to other North Americandestinations or ports or (ii) received from the Class I interchange and hauled to a customer’splant where the freight is subsequently consumed or stored (such as a coal-burning power generationplant). In other cases, a RailAmerica rail line transports freight that both originates andterminates on the same line, which is referred to as “local” traffic, or provides a pass-throughconnection between one Class I railroad and another railroad without the freight originating orterminating on the line, which is known as “bridge” traffic.     Typically, we provide our freight services under a contract or similar arrangement with eitherthe customer located on our rail line or the connecting Class I railroad. Contracts andarrangements vary in terms of duration, pricing and volume requirements. Because we normallyprovide transportation for only a segment of a shipment’s total distance, with the Class I railroadcarrying the freight the majority of the distance, as a convenience, customers aregenerally billed once for the movement of their freight, typically bythe Class I carrier, for the total cost of rail transport. The Class I railroad is obligated to pay us in atimely manner upon delivery of service regardless of whether or when the Class I railroad actuallyreceives the total payment from the customer.     Our railroads are often integrated into a customer’s facility and serve as an importantcomponent of that customer’s distribution or input. In many circumstances, our customers have madesignificant capital investments in facilities on or near our railroads (as in the case of electricutilities, industrial plants or major warehouses) or are geographically unable to relocate (as inthe case of coal mines and rock quarries). The quality of our customers and our level ofintegration with their facilities provide a stable and predictable revenue base.**Freight Revenue**     ***Commodities***     Products hauled over our network include a dozen major commodity groups, such as coal, forestproducts, chemicals, agricultural products, food products, metallic ores and metals, and petroleumproducts. Agricultural products traffic represented the largest contributor to freight revenue at17% in 2009. The top ten commodities represented approximately 94% of total freight revenue earnedin 2009.                           **Year ended December 31, 2009**  **Year ended December 31, 2008**           **Average Freight**          **Average Freight**   **Freight**      **Revenue per**  **Freight**      **Revenue per**   **Revenue**  **Carloads**  **Carload**  **Revenue**  **Carloads**  **Carload**       **(Dollars in thousands, except carloads and average freight revenue per carload)**     Agricultural Products $56,458   126,683  $446  $61,193   143,730  $426 Chemicals  47,022   80,748   582   59,543   103,290   576 Coal  36,914   178,028   207   37,362   177,842   210 Non-Metallic Minerals and Products  31,603   75,701   417   38,467   93,413   412 Pulp, Paper and Allied Products  30,453   57,865   526   39,456   72,167   547 Forest Products  26,642   46,755   570   40,023   70,737   566 Food or Kindred Products  25,386   52,298   485   26,279   54,659   481 Metallic Ores and Metals  23,802   41,542   573   52,361   93,351   561 Waste and Scrap Materials  20,227   53,685   377   28,379   77,434   366 Petroleum  19,429   41,943   463   19,725   44,912   439 Other  13,504   32,709   413   13,697   36,087   380 Motor Vehicles  6,454   17,458   370   5,437   19,330   281                    Total $337,894   805,415  $420  $421,922   986,952  $428                         ***Customers***     In 2009, we served approximately 1,500 customers in North America. Although most of our NorthAmerican railroads have a well-diversified customer base, several smaller rail lines have one ortwo dominant customers. In 2009 and 2008, our 10 largest customers accounted for approximately 20%of our freight revenue with no individual customer accounting for more than approximately 5% offreight revenue.
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   ***Pricing***     Our contracts typically stipulate either inflation-based or market-based pricing. Market-basedpricing is based on negotiated rates. Pricing and escalation terms for these contracts arenegotiated prior to the signing or renewal of a contract. This type of pricing provides us theability to price contracts at prevailing market rates. Inflation-based pricing is based on a fixedrevenue per carload with inflation-based escalators. This type of pricing is common for “handlingline” railroads where the contract is with an interchanging Class I railroad.These contracts are typically long-term and were often entered into at the time the short line waspurchased from the Class I.     We operate fuel surcharge programs that vary by railroad and by customer. The goal of theseprograms is to offset the majority of fuel price increases by charging customers a fuel surchargeon top of their regular contracted rates. Fuel surcharge programs are typically eitherrevenue-based or mileage-based. Revenue-based programs charge a surcharge based on an additionalrevenue per carload while mileage-based programs charge a surcharge based on miles hauled. Bothprograms charge their surcharge based on fuel price per gallon above a threshold price.Approximately 75% of fuel price increases are offset directly by fuel surcharges, while additionalcost recovery is obtained through increases in revenue per carload upon contract renewal or regularrate updates.     ***Contracts***     A substantial portion of our freight revenue is generated under contracts and similararrangements with either the customers we serve or the Class I railroads with which we connect.Approximately 56% of our total freight revenue is generated under contracts. Individual contractsvary in terms of duration, pricing and volume requirements, but can generally be categorized asfollows:     *Contracts directly with customers/shippers:*In many cases, our individual railroadsmaintain a contract with the customer that they directly serve. Typically the customer hassignificant rail infrastructure within its facility and is a major shipper or receiver ofindustrial freight. Contracts stipulate the term and pricing mechanics and often include minimumcustomer volume requirements with liquidated damages paid to us to the extent volumes fall belowcertain levels. In general, these contracts are one to three years in length, although in certaininstances the term can be longer.     *Contracts directly with Class I railroads:*In these cases, our individual railroads act asan agent for the connecting Class I railroad, with the Class I railroad typically maintaining acontract directly with the customer/shipper for the entire length of haul. The Class I railroadpays us upon providing the service for its portion of the total haul, and the Class I railroadpays us regardless of whether the customer pays the Class I which results in low credit exposureand timely payment. These contracts are typically long-term in nature with an average duration ofapproximately 25 years.     *Published rate, no contract:*In the remaining cases, our individual railroads generatefreight revenue using a quoted revenue per carload based on the type of freight service andmarket environment. In all instances this revenue is generated directly from customers andshippers. Rates can typically be adjusted as market conditions merit although some of our largercustomers often request a private rate that provides more price certainty over a longer period oftime. While we do not serve customers under signed contracts in these cases, we have longstandingrelationships with our customers and in many instances we are theonly rail carrier at that customer’s facility. Moreover, the heavy nature of the freight shipped by the customer and/orthe long distances carried competitively positions us favorably versus other modes oftransportation.     ***Non-Freight Revenue***     In addition to providing freight services, we also generate non-freight revenue from othersources such as railcar storage, demurrage, leases of equipment to other users (including Class Irailroads), and real estate leases and use fees. Right-of-way income is generated through crossinglicenses and leases with fiber optic, telecommunications, advertising, parking and municipal users.These sources of revenue and value are an important area of focus by our management as revenue fromreal estate and right-of-way has minimal associated operating costs or capital expenditures andrepresents a recurring, stable cash flow stream.     ***Competition***Railroads compete against each other and other forms of freighttransportation based on cost, location and service. The cost of transporting goods and services viadifferent forms of freight transportation is a major factor in determining which means oftransportation a shipper will utilize. With respect to location, potential customers oftenexperience geographic constraints that significantly impact the relative freight transportationcosts of different alternatives. For example, a shipper can be constrained by railroad’s trackage,accessible waterways, access to pipelines and proximity to majorhighways. As a result, short line andregional railroad
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operators often evaluate the feasibility of other forms of freight transportation available toa customer when developing their rate and service offerings.     Some short line and regional railroad customers have multiple forms of freight transportationavailable. Depending on circumstances, truck, water, or other railroads may be competitivealternatives for a shipment. In such instances, customers will compare both the relative costs,reliability of on-time delivery and quality of service when determining what mode(s) of transportto use.     The railroad industry has increased its share of freight ton-miles compared to other forms offreight transportation over the past quarter-century. Since deregulation in 1980, the railroadindustry has continually improved its cost structure compared to other forms of freighttransportation as it consumes less fuel and has lower labor costs per ton transported than otherforms of freight transportation. According to the AAR, railroads are estimated to be approximatelyfour times more fuel efficient than truck transportation and a single train can haul the equivalentof up to approximately 280 trucks. In 1980, one gallon of diesel fuel moved one ton of freight byrail an average of 235 miles, versus 2007 where the equivalent gallon of fuel moved one ton offreight an average of 436 miles by rail — representing an 85% increase over 1980. As a result, therailroad industry’s share of U.S. freight ton-miles has steadily increased from 30% in 1980 to 43%in 2006.**EMPLOYEES**     Currently, we have approximately 1,553 employees of which 870 are non-unionized and 683 areunionized. Unions representing our employees are highly-fragmented, with representation at therailroad-level rather than system-wide. In total, our railroads are party to 29 labor agreements,which are separately negotiated by the individual railroads.**SAFETY**     We endeavor to conduct safe railroad operations for the benefit and protection of employees,customers and the communities served by our railroads. Our safety program, led by our VicePresident of Safety and Operating Practices, involves all of our employees and is administered byeach Regional Vice President. Operating personnel are trained and certified in train operations,hazardous materials handling, personal safety and all other areas subject to federal regulations.Each U.S. employee involved in train operations is subject to pre-employment and random drugtesting as required by federal regulation. We believe that each of our North American railroadscomplies in all material respects with federal, state, provincial and local regulations.Additionally, each railroad is given flexibility to develop more stringent safety rules based onlocal requirements or practices. We also participate in committees of the AAR, governmental andindustry sponsored safety programs including Operation Lifesaver (the national grade crossingawareness program) and numerous American Short Line and Regional Railroad Association Committees.Our Federal Railroad Administration (“FRA”) reportable injury frequency ratio, measured asreportable injuries per 200,000 man hours worked, was 1.64 in 2009 as compared to 1.70 in 2008.For 2009, the industry average for all railroads was 1.98.**ENVIRONMENTAL**     Our rail operations are subject to various federal, state, provincial and local laws andregulations relating to pollution and the protection of the environment. In the United States,these environmental laws and regulations, which are implemented principally by the federalEnvironmental Protection Agency (the “U.S. EPA”) and comparable state agencies, govern such mattersas the management of wastes, the discharge of pollutants into the air and into surface andunderground waters, the manufacture and disposal of regulated substances and remediation ofcontaminated soil and groundwater. Similarly, in Canada, these functions are administered at thefederal level by Environment Canada and the Ministry of Transport and comparable agencies at theprovincial level.     We believe that our railroads operate in material compliance with current environmental lawsand regulations. We estimate that any expenses incurred in maintaining compliance with currentenvironmental laws and regulations will not have a material effect on our earnings or capitalexpenditures. However, there can be no assurance that new, or more stringent enforcement ofexisting, requirements or discovery of currently unknown conditions will not result in significantexpenditures in the future.     There are no material environmental claims currently pending or, to our knowledge, threatenedagainst us or any of our railroads, except for an August 2005 incident on the Indiana & OhioRailway (“IORY”) in which Styrene contained in a parked railcar was vented to the atmosphere, dueto a chemical reaction. Styrene is a potentially hazardous chemical used to make plastics, rubberand resin. In response to the incident, local public officials temporarily evacuated residents andbusinesses from the immediate area until public authorities confirmed that the tank car no longerposed a threat. As a result of the incident, several civil lawsuits were filed, and
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claims submitted, by various individuals, businesses and the City of Cincinnati against us andothers connected to the tank car. Motions for class action certification were filed. Settlementswere achieved in all these matters including all claims of business interruption.     The IORY/Styrene incident also triggered inquiries from the FRA and certain other federal,state and local authorities. A settlement was reached with the FRA, requiring payment of a $50,000fine but no admission of liability by IORY. The principal pending matter is a criminalinvestigation by the U.S. EPA under the federal Clean Air Act (“CAA”). Because of the chemicalrelease, the U.S. EPA is investigating whether criminal negligence on the part of IORY contributedto the incident, and whether charges should be pressed under the CAA. To this end, the U.S. EPA haspursued extensive discovery and engaged our counsel on several occasions. Should this investigationlead to environmental crime charges, potential fines upon conviction could range widely and thereis a possibility that the U.S. EPA would seek to bar IORY and RailAmerica from doing business withthe Federal Government for some period of time. The U.S. EPA’s most recent communications indicatethat any criminal charges will likely be limited to misdemeanors. While we believe we havesubstantial defenses to any such charges, we are not in a position at this time to estimate whetherany fine and any debarment order would result in a material adverse effect on our operations,business or financial condition.**INSURANCE**     We maintain liability and property insurance coverage. Our primary liability policies haveself-insured retentions of up to $2.0 million per occurrence applicable as to all of our railroads,except for Kiamichi Railroad Company L.L.C. and Otter Tail Valley Railroad Company. Inc. where theself-insured retention is $50,000 per occurrence. In addition, we maintain excess liabilitypolicies that provide supplemental coverage for losses in excess of our primary policy limits of upto $200 million per occurrence.     With respect to the transportation of hazardous commodities, our liability policies coversudden releases of hazardous materials, including expenses related to evacuation, up to the sameexcess coverage limits and subject to the same self-insured retentions. Personal injuriesassociated with grade crossing accidents are also covered under liability policies.     Employees of our United States railroads are covered by the Federal Employers’ Liability Act(the “FELA”), a fault-based system under which claims resulting from injuries and deaths ofrailroad employees are settled by negotiation or litigation. FELA-related claims are covered underour liability insurance policies. Employees of our industrial switching business are covered underworkers’ compensation policies.     Employees of our Canadian railroads are covered by the applicable provincial workers’compensation policy, which is a no-fault compensation system outside of our liability insurancecoverage.     Our property damage policies provide coverage for track, infrastructure, businessinterruption, and all locomotives and rail cars in our care custody and control. This policyprovides coverage up to $15.0 million per occurrence, subject to self-insurance retention of$1.0 million per occurrence.**REGULATION**     *United States.*Our subsidiaries in the United States are subject to various safety and otherlaws and regulations administered by numerous government agencies, including (1) regulation by theU.S. Department of Transportation (the “USDOT”) and the Surface Transportation Board of the USDOT(the “STB”), successor to the Interstate Commerce Commission, through the FRA, (2) labor relatedstatutes including the Railway Labor Act, the Railroad Retirement Act, the Railroad UnemploymentInsurance Act, and the FELA, and (3) some limited regulation by agencies in the states in which wedo business.     The STB, established by the ICC Termination Act of 1995 (the “ICC Termination Act”), hasjurisdiction over, among other matters, the construction, acquisition, or abandonment of raillines, the consolidation or merger of railroads, the assumption of control of one railroad byanother railroad, the use by one railroad of another railroad’s tracks through lease, joint use ortrackage rights, the rates charged for regulated transportation services, and the service providedby rail carriers.     As a result of the 1980 Staggers Rail Act (the “Staggers Rail Act”), the rail industry istrusted with considerable rate and market flexibility including the ability to obtain wholesaleexemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowedthe deregulation of all containerized and truck trailer traffic handled by railroads. Requirementsfor the creation of new short line railroads or the expansion of existing short line railroads weresubstantially expedited and simplified under the exemption process. On regulated traffic, railroadsand shippers are permitted to enter into contracts for rates and provision of
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transportation services without the need to file tariffs. Moreover, on regulated traffic, theStaggers Rail Act allows railroads considerable freedom to raise or lower rates without objectionfrom captive shippers, although certain proposed shipper-backed legislative initiatives threaten tolimit some of that pricing freedom. While the ICC Termination Act retained maximum rate regulationon traffic over which railroads have exclusive control, the new law relieved railroads from therequirements of filing tariffs and rate contracts with the STB on all traffic other thanagricultural products.     The FRA regulates railroad safety and equipment standards, including track maintenance,handling of hazardous shipments, locomotive and rail car inspection and repair requirements, andoperating practices and crew qualifications.     *Canada.*Our Canadian railroad subsidiaries are subject to regulation by various governmentaldepartments and regulatory agencies at the federal or provincial level depending on whether therailroad in question falls within federal or provincial jurisdiction. A Canadian railroad generallyfalls within the jurisdiction of federal regulation if the railroad crosses provincial orinternational borders or if the Parliament of Canada has declared the railroad to be a federal workor undertaking and in selected other circumstances. Any company which proposes to construct oroperate a railway in Canada which falls within federal jurisdiction is required to obtain acertificate of fitness under the Canada Transportation Act (the “ CTA”). Under the CTA, the sale ofa federally regulated railroad line is not subject to federal approval, although a process ofadvertising and negotiating may be required in connection with any proposed discontinuance of afederal railway. Federal railroads are governed by federal labor relations laws.     Short line railroads located within the boundaries of a single province which do not otherwisefall within the federal jurisdiction are regulated by the laws of the province in question,including laws as to licensing and labor relations. Most of Canada’s ten provinces have enacted newlegislation, which is more favorable to the operation of short line railroads than previousprovincial laws. Many of the provinces require as a condition of licensing under the short linerailroads acts that the licensees comply with federal regulations applicable to safety and othermatters and remain subject to inspection by federal railway inspectors. Under some provinciallegislation, the sale of a provincially regulated railroad line is not subject to provincialapproval, although a process of advertising and negotiating may be required in connection with anyproposed discontinuance of a provincial railway.     Acquisition of additional railroad operations in Canada, whether federally or provinciallyregulated, may be subject to review under the Investment Canada Act (the “ICA”), a federal statutewhich applies to the acquisition of a Canadian business or establishment of a new Canadian businessby a non-Canadian. In the case of an acquisition that is subject to review, the non-Canadianinvestor must observe a statutory waiting period prior to completion and satisfy the Ministerresponsible for the administration of the ICA that the investment will be of net benefit to Canada,giving regard to certain evaluative factors set out in the legislation.     Any contemplated acquisitions may also be subject to the provisions of the Competition Act(Canada) (the “CA”). The CA contains provisions relating to premerger notification as well assubstantive merger provisions. An acquisition that exceeds certain financial thresholds set out inthe CA may be subject to notification and observance of a statutory waiting period prior tocompletion, during which time the Commissioner of Competition (the “Commissioner”) will evaluatethe impact of the acquisition upon competition. In addition, the Commissioner has the jurisdictionunder the CA to review an acquisition that is a “merger” within the meaning of the CA in certaincircumstances, even where notification is not filed.**RAILROAD RETIREMENT**     Railroad industry personnel are covered by the Railroad Retirement System instead of SocialSecurity. Our contributions under the Railroad Retirement System have been approximately triplethose of employees in industries covered by Social Security. The Railroad Retirement System, fundedprimarily by payroll taxes on covered employers and employees, includes a benefit roughlyequivalent to Social Security (Tier I), an additional benefit similar to that allowed in someprivate defined-benefit plans (Tier II), and other benefits. For 2009, the Railroad RetirementSystem required up to a 19.75% contribution by railroad employers on eligible wages, while theSocial Security and Medicare Acts only required a 7.65% contribution on similar wage bases.**DISCONTINUED OPERATIONS**In December 2009, we entered into a transaction with the Canadian Pacific Railroad (“CP”) toterminate the lease of the Ottawa Valley Railroad (“OVRR”) line. Under the terms of the agreement,we received CAD $73 million (U.S.$68.6 million) in gross proceeds. We will continue to maintainand operate certain sections of the CP-owned rail lines until dates in 2010 to be determined by CPas part of the wind down of operations. As a result of this transaction, the results of operationsfor the OVRR line have been reclassified to discontinued operations on our consolidated financialstatements and removed from our reported operating statistics.
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**ITEM 1A.** **RISK FACTORS****Risks Related to Our Business**     ***Adverse macroeconomic and business conditions have and could continue to impact our businessnegatively.***     The decline in economic activity in the United States and throughout the world over the pasttwo and a half years has impacted our business negatively. Certain of our customers and suppliersare directly affected by the economic downturn, are facing credit issues and could experience cashflow problems that have and could continue to give rise to payment delays, increased credit risk,bankruptcies and other financial hardships that could decrease the demand for our rail services.Adverse economic conditions could also affect our costs for insurance and our ability to acquireand maintain adequate insurance coverage for risks associated with the railroad business ifinsurance companies experience credit downgrades or bankruptcies. In addition, changes ingovernmental banking, monetary and fiscal policies to stimulate the economy, restore liquidity andincrease credit availability may not be effective. It is difficult to determine the depth andduration of the economic and financial market problems and the many ways in which they may impactour customers, suppliers and our business in general. Moreover, given the asset intensive nature ofour business, the economic downturn increases the risk of significant asset impairment chargessince we are required to assess for potential impairment of non-current assets whenever events orchanges in circumstances, including economic circumstances, indicate that the respective asset’scarrying amount may not be recoverable. This may limit our ability to sell our assets to the extentwe need, or find it desirable, to do so. Continuation or further worsening of currentmacroeconomic, business and financial conditions could have a material adverse effect on ouroperating results, financial condition and liquidity. In addition, our railroads compete directlywith other modes of transportation, including motor carriers, and ship, barge and pipelineoperators. If these alternative methods of transportation become more cost-effective to ourcustomers due to macroeconomic changes, or if legislation is passed providing materially greateropportunity for motor carriers with respect to size or weight restrictions, our operating results,financial condition and liquidity could be materially adversely affected.     ***Rising fuel costs could materially adversely affect our business.***     Fuel costs were approximately 8%, 14% and 12% of our total operating revenue for the yearsended December 31, 2009, 2008 and 2007, respectively. Fuel prices and supplies are influencedsignificantly by international, political and economic circumstances. If fuel supply shortages orunusual price volatility were to arise for any reason, the resulting higher fuel prices wouldsignificantly increase our operating costs.     ***As part of our railroad operations, we frequently transport hazardous materials, theaccidental release of which could have an adverse effect on our operating results.***     We are required to transport hazardous materials to the extent of our common carrierobligation. An accidental release of hazardous materials could result in significant loss of lifeand extensive property damage. The associated costs could have an adverse effect on our operatingresults, financial condition or liquidity.     ***Some of our employees belong to labor unions and strikes or work stoppages could adversely affectour operations.***     Many of our employees are union-represented. Our union employees work under collectivebargaining agreements with various labor organizations. Our inability to negotiate acceptablecontracts with these unions could result in, among other things, strikes, work stoppages or otherslowdowns by the affected workers. If our union-represented employees were to engage in a strike,work stoppage or other slowdown, or other employees were to become unionized or their terms andconditions in future labor agreements were renegotiated, we could experience significant disruptionof our operations and higher ongoing labor costs.     ***Because we depend on Class I railroads and certain important customers for our operations, ourbusiness and financial results may be adversely affected if our relationships with Class I carriersand certain important customers deteriorate.***     The railroad industry in the United States and Canada is dominated by a small number ofClass I carriers that have substantial market control and negotiating leverage. Approximately 97%of our total freight revenue in 2009 was derived from Class I traffic. Of our total freight revenuein 2009, Union Pacific, CSX Transportation, Canadian National Railway and BNSF Railway represented32%, 20%, 19% and 17%, respectively, and the remaining Class I carriers each represented less than10% of our total freight revenue. Our ability to provide rail service to our customers depends inlarge part upon our ability to maintain cooperative relationships with
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Class I carriers with respect to, among other matters, freight rates, car supply, switching,interchange, fuel surcharges and trackage rights (an arrangement where the company that owns theline retains all rights, but allows another company to operate over certain sections of its track).In addition, loss of customers or service interruptions or delays by our Class I interchangepartners relating to customers who ship over our track may decrease our revenue. Class I carriersare also sources of potential acquisition candidates as they continue to divest branch lines.Failure to maintain good relationships may adversely affect our ability to negotiate acquisitionsof branch lines.     Although our operations served approximately 1,500 customers in 2009, freight revenue from our10 largest freight revenue customers accounted for approximately 20% of our total revenues in 2009.Substantial reduction in business with or loss of important customers could have a material adverseeffect on our business and financial results.     ***If the track maintenance tax credit is not renewed by Congress, we will no longer be able toearn or assign credits for track maintenance.***     Until December 31, 2009, we were eligible to receive tax credits for certain track maintenanceexpenditures under Section 45G of the Internal Revenue Code (the “Code”), as amended, or the Code.Pursuant to Section 45G, these credits were assignable under limited circumstances. In 2009, wereceived approximately $22.4 million from the assignment of these credits. Section 45G expired onDecember 31, 2009, and unless Section 45G is renewed, we will no longer be able to earn or assigncredits for track maintenance expenditures. Recently the U.S. House of Representatives and theSenate passed substantially similar bills that, if enacted, would extend the availability of theSection 45G tax credit for one year. There can be no assurance, however, that legislationextending the availability of the Section 45G tax credit will be enacted.     ***We are subject to the risks of doing business in Canada.***     We currently have railroad operations in Canada. The risks of doing business in Canadainclude:**•**    adverse changes in the economy of Canada;**•**    exchange rate fluctuations; and**•**    economic uncertainties including, among others, risk of renegotiation or modification of existingagreements or arrangements with governmental authorities, exportation and transportation tariffs,foreign exchange restrictions and changes in taxation structure.     ***We are subject to environmental and other governmental regulation of our railroad operationswhich could impose significant costs.***     The failure to comply with environmental and other governmental regulations could have amaterial adverse effect on us. Our railroad and real estate ownership is subject to foreign,federal, state and local environmental laws and regulations. We could incur significant costs,fines and penalties as a result of any allegations or findings to the effect that we have violatedor are strictly liable under these laws or regulations. We may be required to incur significantexpenses to investigate and remediate environmental contamination. We are also subject togovernmental regulation by a significant number of foreign, federal, state and local regulatoryauthorities with respect to our railroad operations and a variety of health, safety, labor,maintenance and other matters. Our failure to comply with applicable laws and regulations couldhave a material adverse effect on us.     Additionally, future changes in federal and/or state laws and regulations governing railroadrates, operations and practices could likewise have a material adverse effect on us.     ***Severe weather and natural disasters could disrupt normal business operations, which couldresult in increased costs and liabilities and decreases in revenues.***     Severe weather conditions and other natural phenomena, including earthquakes, hurricanes,fires and floods, may cause significant business interruptions and result in increased costs,increased liabilities and decreased revenue.     ***We face possible catastrophic loss and liability and our insurance may not be sufficient tocover our damages or damages to others.***
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     The operation of any railroad carries with it an inherent risk of catastrophe, mechanicalfailure, collision, and property loss. In the course of our operations, spills or otherenvironmental mishaps, cargo loss or damage, business interruption due to political developments,as well as labor disputes, strikes and adverse weather conditions, could result in a loss ofrevenues or increased liabilities and costs. Collisions, cargo leaks or explosions, environmentalmishaps, or other accidents can cause serious bodily injury, death, and extensive property damage,particularly when such accidents occur in heavily populated areas. Additionally, our operations maybe affected from time to time by natural disasters such as earthquakes, volcanoes, floods,hurricanes or other storms. The occurrence of a major natural disaster could have a materialadverse effect on our operations and financial condition. We maintain insurance that is consistentwith industry practice against the accident-related risks involved in the conduct of our businessand business interruption due to natural disaster. However, this insurance is subject to a numberof limitations on coverage, depending on the nature of the risk insured against. This insurance maynot be sufficient to cover our damages or damages to others and this insurance may not continue tobe available at commercially reasonable rates. In addition, we are subject to the risk that one ormore of our insurers may become insolvent and would be unable to pay a claim that may be made inthe future. Even with insurance, if any catastrophic interruption of service occurs, we may not beable to restore service without a significant interruption to operations which could have anadverse effect on our financial condition.     ***We may face liability for casualty losses which are not covered by insurance.***     We have obtained insurance coverage for losses sustained by our railroads arising frompersonal injury and for property damage in the event of derailments or other incidents. Personalinjury claims made by our railroad employees are subject to the FELA rather than state workers’compensation laws. Currently, we are responsible for the first $2 million of expenditures per eachincident under our general liability insurance policy and $1 million of expenditures per eachincident under our property insurance policy. Severe accidents or personal injuries could cause ourliability to exceed our insurance limits which might have a material adverse effect on our businessand financial condition. Our annual insurance limits are $200 million and $15 million on liabilityand property, respectively. In addition, adverse events directly and indirectly attributable to us,including such things as derailments, accidents, discharge of toxic or hazardous materials, orother like occurrences in the industry, can be expected to result in increases in our insurancepremiums and/or our self insured retentions and could result in limitations to the coverage underour existing policies.     ***We depend on our management and key personnel, and we may not be able to operate and grow ourbusiness effectively if we lose the services of our management or key personnel or are unable toattract qualified personnel in the future.***     The success of our business is heavily dependent on the continued services and performance ofour current management and other key personnel and our ability to attract and retain qualifiedpersonnel in the future. The loss of key personnel could affect our ability to run our businesseffectively. Competition for qualified personnel is intense, and we cannot assure you that we willbe successful in attracting and retaining such personnel. Although we have entered into employmentagreements with certain of our key personnel, these agreements do not ensure that our key personnelwill continue in their present capacity with us for any particular period of time. The loss of anykey personnel requires the remaining key personnel to divert immediate and substantial attention toseeking a replacement. An inability to find a suitable replacement for any departing executiveofficer on a timely basis could adversely affect our ability to operate and grow our business.     ***Future acts of terrorism or war, as well as the threat of war, may cause significant disruptionsin our business operations.***     Terrorist attacks, such as those that occurred on September 11, 2001, as well as the morerecent attacks on the transportation systems in Madrid and London, any government response to thosetypes of attacks and war or risk of war may adversely affect our results of operations, financialcondition or liquidity. Although the substantial majority of our rail lines and track-miles are inrural, low density areas, not typically cited as high priority security risks, our rail lines andfacilities could be direct targets or indirect casualties of an act or acts of terror. Such actscould cause significant business interruption and result in increased costs and liabilities anddecreased revenues, which could have an adverse effect on our operating results and financialcondition. Such effects could be magnified where releases of hazardous materials are involved. Anyact of terror, retaliatory strike, sustained military campaign or war or risk of war may have anadverse effect on our operating results and financial condition by causing or resulting inunpredictable operating or financial conditions, including disruptions of rail lines, volatility orsustained increase of fuel prices, fuel shortages, general economic decline and instability orweakness of financial markets which could restrict our ability to raise capital. In addition,insurance premiums charged for some or all of our coverage could increase dramatically or certaincoverage may not be available to us in the future.
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     ***The availability of qualified personnel and an aging workforce may adversely affect ouroperations.***     Changes in demographics, training requirements and the availability of qualified personnel,particularly train crew members, could negatively affect our service levels. Unpredictableincreases in demand for rail services may exacerbate these risks and may have an adverse effect onour operating results, financial condition or liquidity.     ***We have a substantial amount of indebtedness, which may adversely affect our cash flow and ourability to operate our business, including our ability to incur additional indebtedness.***     As of December 31, 2009, our total indebtedness was approximately $643.8 million, whichrepresented approximately 49.4% of our total capitalization. Our substantial amount of indebtednessincreases the possibility that we may be unable to generate sufficient cash to pay, when due, theprincipal of, interest on or other amounts due with respect to our indebtedness.     Our substantial indebtedness could have important consequences for you, including:**•**    increasing our vulnerability to adverse economic, industry or competitive developments;**•**    requiring a substantial portion of cash flow from operations to be dedicated to the payment ofprincipal and interest on our indebtedness, therefore reducing our ability to use our cash flow tofund our operations, capital expenditures and future business opportunities;**•**    restricting us from making strategic acquisitions or causing us to make non-strategicdivestitures;**•**    limiting our ability to obtain additional financing for working capital, capital expenditures,product development, debt service requirements, acquisitions and general corporate or otherpurposes; and**•**    limiting our flexibility in planning for, or reacting to, changes in our business or the industryin which we operate, placing us at a competitive disadvantage compared to our competitors who areless highly leveraged and who, therefore, may be able to take advantage of opportunities that ourleverage prevents us from exploiting.     The indenture governing the senior secured notes contains a number of restrictions andcovenants that, among other things, limit our ability to incur additional indebtedness, makeinvestments, pay dividends or make distributions to our stockholders, grant liens on our assets,sell assets, enter into a new or different line of business, enter into transactions with ouraffiliates, merge or consolidate with other entities or transfer all or substantially all of ourassets, and enter into sale and leaseback transactions. Credit market conditions could negativelyimpact our ability to obtain future financing or to refinance our outstanding indebtedness.     Our ability to comply with these restrictions and covenants in the future is uncertain andwill be affected by the levels of cash flow from our operations and events or circumstances beyondour control. Our failure to comply with any of the restrictions and covenants under the indenturegoverning our senior secured notes could result in a default under the indenture, which could causeall of our existing indebtedness to be immediately due and payable. If our indebtedness isaccelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinanceit. In addition, in the event of an acceleration, holders of our senior secured notes could proceedagainst the collateral securing the notes which includes nearly all of our assets. Even if we areable to obtain new financing, it may not be on commercially reasonable terms or on terms that areacceptable to us. If our indebtedness is in default for any reason, our business, financialcondition and results of operations could be materially and adversely affected. In addition,complying with these restrictions and covenants may also cause us to take actions that are notfavorable to our stockholders and may make it more difficult for us to successfully execute ourbusiness plan and compete against companies that are not subject to such restrictions andcovenants.     ***Our inability to acquire or integrate acquired businesses successfully or to realize theanticipated cost savings and other benefits of acquisitions could have adverse consequences to ourbusiness.***     We expect to grow through acquisitions. Evaluating acquisition targets gives rise toadditional costs related to legal, financial, operating and industry due diligence. Acquisitionsgenerally result in increased operating and administrative costs and, to the extent financed withdebt, additional interest costs. We may not be able to manage or integrate the acquired companiesor businesses successfully. The process of acquiring businesses may be disruptive to our businessand may cause an interruption or reduction of our business as a result of the following factors,among others:**•**    loss of key employees or customers;
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**•**    possible inconsistencies in or conflicts between standards, controls, procedures and policiesamong the combined companies and the need to implement company-wide financial, accounting,information technology and other systems;**•**    failure to maintain the quality of services that have historically been provided;**•**    integrating employees of rail lines acquired from other entities into our regional railroadculture;**•**    failure to coordinate geographically diverse organizations; and**•**    the diversion of management’s attention from our day-to-day business as a result of the need tomanage any disruptions and difficulties and the need to add management resources to do so.     These disruptions and difficulties, if they occur, may cause us to fail to realize the costsavings, revenue enhancements and other benefits that we expect to result from integrating acquiredcompanies and may cause material adverse short- and long-term effects on our operating results,financial condition and liquidity.     Even if we are able to integrate the operations of acquired businesses into our operations, wemay not realize the full benefits of the cost savings, revenue enhancements or other benefits thatwe may have expected at the time of acquisition. The expected revenue enhancements and cost savingsare based on analyses completed by members of our management. These analyses necessarily involveassumptions as to future events, including general business and industry conditions, the longevityof specific customer plants and factories served, operating costs and competitive factors, most ofwhich are beyond our control and may not materialize. While we believe these analyses and theirunderlying assumptions to be reasonable, they are estimates that are necessarily speculative innature. In addition, even if we achieve the expected benefits, we may not be able to achieve themwithin the anticipated time frame. Also, the cost savings and other synergies from theseacquisitions may be offset by costs incurred in integrating the companies, increases in otherexpenses or problems in the business unrelated to these acquisitions.     ***We are required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of ourinternal controls by the end of fiscal 2010, and we cannot predict the outcome of that effort.***As a U.S.-listed public company, we are required to comply with Section 404 of the Sarbanes-OxleyAct by December 31, 2010. Section 404 requires that we evaluate our internal control over financialreporting to enable management to report on, and our independent auditors to audit as of the end ofthe next fiscal year, the effectiveness of those controls. We are currently evaluating our internalcontrols and cannot predict the outcome of our review at this time. During the course of ourreview, we may identify control deficiencies of varying degrees of severity, and we may incursignificant costs to remediate those deficiencies or otherwise improve our internal controls. As apublic company, we are required to report control deficiencies that constitute a “materialweakness” in our internal control over financial reporting. We are also required to obtain an auditreport from our independent auditors regarding the effectiveness of our internal controls overfinancial reporting. If we fail to implement the requirements of Section 404 in a timely manner, wemay be subject to sanctions or investigation by regulatory authorities, including the SEC or theNew York Stock Exchange. Furthermore, if we discover a material weakness or our auditor does notprovide an unqualified audit report, our share price could decline and our ability to raise capitalcould be impaired.     ***Future compensation expense may adversely affect our net income.***     The compensation that we pay to our employees to attract and retain key personnel will reduceour net income. The compensation paid to our employees for 2009 is not necessarily indicative ofhow we will compensate our employees in the future. Any increase in compensation will furtherreduce our net income. For example, we have adopted an equity incentive plan that permits theissuance of share options, share appreciation rights, restricted shares, deferred shares,performance shares, unrestricted shares and other share-based awards to our employees. We may grantrestricted shares and other share-based awards to our employees in the future as a recruiting andretention tool based on specific criteria determined by our board of directors (or the compensationcommittee of the board of directors).
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     The table below compares our net income to our total executive compensation costs (each inthousands).           **Year Ended** **Year Ended**  **December 31, 2009** **December 31, 2008****Net Income** $15,842  $16,527 **Executive Compensation Cost(1)** $5,441  $4,798  (1) Executive Compensation Cost is computed in the manner computed forpurposes of the Summary Compensation Table for 2009 to be included inour 2010 proxy statement.**Risks Related to Our Organization and Structure**     ***If the ownership of our common stock continues to be highly concentrated, it may prevent minority stockholders from influencing significant corporate decisions and may result inconflicts of interest.***     As of December 31, 2009, an entity wholly-owned by certain private equity funds managed by anaffiliate of Fortress, the Initial Fortress Stockholder, owns approximately 55.8% of ouroutstanding common stock. The Initial Fortress Stockholder owns shares sufficient for the majorityvote over all matters requiring a stockholder vote, including: the election of directors; mergers,consolidations or acquisitions; the sale of all or substantially all of our assets and otherdecisions affecting our capital structure; the amendment of our amended and restated certificate ofincorporation and our amended and restated bylaws; and our winding up and dissolution. Thisconcentration of ownership may delay, deter or prevent acts that would be favored by our otherstockholders. The interests of the Initial Fortress Stockholder may not always coincide with ourinterests or the interests of our other stockholders. This concentration of ownership may also havethe effect of delaying, preventing or deterring a change in control of RailAmerica. Also, theInitial Fortress Stockholder may seek to cause us to take courses of action that, in its judgment,could enhance its investment in us, but which might involve risks to our other stockholders oradversely affect us or our other stockholders. As a result, the market price of our common stockcould decline or stockholders might not receive a premium over the then-current market price of ourcommon stock upon a change in control. In addition, this concentration of share ownership mayadversely affect the trading price of our common stock because investors may perceive disadvantagesin owning shares in a company with significant stockholders.     ***We are a holding company with no operations and rely on our operating subsidiaries to provideus with funds necessary to meet our financial obligations and to pay dividends.***     We are a holding company with no material direct operations. Our principal assets are theequity interests we directly or indirectly hold in our operating subsidiaries, which own ouroperating assets. As a result, we are dependent on loans, dividends and other payments from oursubsidiaries to generate the funds necessary to meet our financial obligations and to pay dividendson our common stock. Our subsidiaries are legally distinct from us and may be prohibited orrestricted from paying dividends or otherwise making funds available to us under certainconditions. If we are unable to obtain funds from our subsidiaries, we may be unable to, or ourboard may exercise its discretion not to, pay dividends.     ***We do not anticipate paying any dividends on our common stock in the foreseeable future.***     We do not expect to declare or pay any cash or other dividends in the foreseeable future onour common stock, as we intend to use cash flow generated by operations to grow our business. Ourrevolving credit facility and our senior secured notes indenture will restrict our ability to paycash dividends on our common stock, and we may also enter into credit agreements or other borrowingarrangements in the future that restrict or limit our ability to pay cash dividends on our commonstock.     ***Certain provisions of our stockholders agreement, our amended and restated certificate ofincorporation and our amended and restated bylaws could hinder, delay or prevent a change incontrol of RailAmerica, which could adversely affect the price of our common stock.***     Certain provisions of our stockholders agreement, our amended and restated certificate ofincorporation and our amended and restated bylaws contain provisions that could make it moredifficult for a third party to acquire us without the consent of our board of directors or theInitial Fortress Stockholder. These provisions provide for:
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     **•**    a classified board of directors with staggered three-year terms;     **•**    removal of directors only for cause and only with the affirmative vote of at least 80% ofthe voting interest of stockholders entitled to vote (provided, however, that for so long as theFortress Stockholders (as defined below) own at least 40% of our issued and outstanding commonstock, directors may be removed with or without cause with the affirmative vote of a majority ofthe voting interest of stockholders entitled to vote);     **•**    provisions in our amended and restated certificate of incorporation and amended and restatedbylaws preventing stockholders from calling special meetings of our stockholders (provided,however, that for so long as the Fortress Stockholders beneficially own at least 25% of our issuedand outstanding common stock, any stockholders that collectively beneficially own at least 25% ofour issued and outstanding common stock may call special meetings of our stockholders);     **•**    advance notice requirements by stockholders with respect to director nominations and actionsto be taken at annual meetings;     **•**    our stockholders agreement provides certain rights to the Fortress Stockholders with respectto the designation of directors for nomination and election to our board of directors, includingthe ability to appoint a majority of the members of our board of directors for so long as theFortress Stockholders continue to hold at least 40% of the outstanding shares of our common stock;     **•**    no provision in our amended and restated certificate of incorporation for cumulative votingin the election of directors, which means that the holders of a majority of the outstanding sharesof our common stock can elect all the directors standing for election;     **•**    our amended and restated certificate of incorporation and amended and restated bylaws onlypermit action by our stockholders outside a meeting by unanimous written consent, provided,however, that for so long as the Fortress Stockholders beneficially own at least 25% of our issuedand outstanding common stock, our stockholders may act without a meeting by written consent of amajority of our stockholders; and     **•**    under our amended and restated certificate of incorporation, our board of directors hasauthority to cause the issuance of preferred stock from time to time in one or more series and toestablish the terms, preferences and rights of any such series of preferred stock, all withoutapproval of our stockholders. Nothing in our amended and restated certificate of incorporationprecludes future issuances without stockholder approval of the authorized but unissued shares ofour common stock.     In addition, these provisions may make it difficult and expensive for a third party to pursuea tender offer, change in control or takeover attempt that is opposed by the Initial FortressStockholder, our management and/or our board of directors. Public stockholders who might desire toparticipate in these types of transactions may not have an opportunity to do so, even if thetransaction is favorable to stockholders. These anti-takeover provisions could substantially impedethe ability of public stockholders to benefit from a change in control or change our management andboard of directors and, as a result, may adversely affect the market price of our common stock andyour ability to realize any potential change of control premium.     ***Certain of our stockholders have the right to engage or invest in the same or similarbusinesses as us.***     The Initial Fortress Stockholder and certain other affiliates of Fortress and permittedtransferees, (collectively, the “Fortress Stockholders”) have other investments and businessactivities in addition to their ownership of us. Under our amended and restated certificate ofincorporation, the Fortress Stockholders have the right, and have no duty to abstain fromexercising such right, to engage or invest in the same or similar businesses as us, do businesswith any of our clients, customers or vendors or employ or otherwise engage any of our officers,directors or employees. If the Fortress Stockholders or any of their officers, directors oremployees acquire knowledge of a potential transaction that could be a corporate opportunity, theyhave no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us,our stockholders or our affiliates.     In the event that any of our directors and officers who is also a director, officer oremployee of any of the Fortress Stockholders acquires knowledge of a corporate opportunity or isoffered a corporate opportunity, provided that this knowledge was not acquired solely in suchperson’s capacity as a director or officer of RailAmerica and such person acts in good faith, thento the fullest extent permitted by law such person is deemed to have fully satisfied such person’sfiduciary duties owed to us and is not liable to us, if the Fortress Stockholder pursues oracquires the corporate opportunity or if the Fortress Stockholder does not present the corporateopportunity to us.
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**Risks Related to our Common Stock**     ***The market price and trading volume of our common stock may be volatile, which could result inrapid and substantial losses for our stockholders.***     The market price of our common stock may be highly volatile and could be subject to widefluctuations. In addition, the trading volume in our common stock may fluctuate and causesignificant price variations to occur. If the market price of our common stock declinessignificantly, you may be unable to resell your shares at or above your purchase price, if at all.We cannot assure you that the market price of our common stock will not fluctuate or declinesignificantly in the future. Some of the factors that could negatively affect our share price orresult in fluctuations in the price or trading volume of our common stock include: **•** variations in our quarterly or annual operating results;  **•** changes in our earnings estimates (if provided) or differences between our actualfinancial and operating results and those expected by investors and analysts;  **•** the contents of published research reports about us or our industry or the failure ofsecurities analysts to cover our common stock after this offering;  **•** litigation and governmental investigations;  **•** changes in market valuations of similar companies;  **•** speculation or reports by the press or investment community with respect to us or ourindustry in general;  **•** increases in market interest rates that may lead purchasers of our shares to demand ahigher yield;  **•** announcements by us or our competitors of significant contracts, acquisitions,dispositions, strategic partnerships, joint ventures or capital commitments;  **•** changes or proposed changes in laws or regulations affecting the railroad industry orenforcement of these laws and regulations, or announcements relating to these matters; and  **•** general market, political and economic conditions, including any such conditions and localconditions in the markets in which our customers are located.     These broad market and industry factors may decrease the market price of our common stock,regardless of our actual operating performance. The stock market in general has from time to timeexperienced extreme price and volume fluctuations. In addition, in the past, following periods ofvolatility in the overall market and the market price of a company’s securities, securities classaction litigation has often been instituted against these companies. This litigation, if institutedagainst us, could result in substantial costs and a diversion of our management’s attention andresources.     ***Future offerings of debt or equity securities by us may adversely affect the market price ofour common stock.***     In the future, we may attempt to obtain financing or to further increase our capital resourcesby issuing additional shares of our common stock or offering debt or additional equity securities,including commercial paper, medium-term notes, senior or subordinated notes or shares of preferredstock. Issuing additional shares of our common stock or other additional equity offerings maydilute the economic and voting rights of our existing stockholders or reduce the market price ofour common stock, or both. Upon liquidation, holders of such debt securities and preferred shares,if issued, and lenders with respect to other borrowings, would receive a distribution of ouravailable assets prior to the holders of our common stock. Preferred shares, if issued, could havea preference with respect to liquidating distributions or a preference with respect to dividendpayments that could limit our ability to pay dividends to the holders of our common stock. Becauseour decision to issue securities in any future offering will depend on market conditions and otherfactors beyond our control, we cannot predict or estimate the amount, timing or nature of ourfuture offerings. Thus, holders of our common stock bear the risk of our future offerings reducingthe market price of our common stock and diluting their share holdings in us.
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     ***The market price of our common stock could be negatively affected by sales of substantialamounts of our common stock in the public markets***.     As of December 31, 2009, there are 54,364,306 shares of common stock outstanding. All issuedand outstanding shares of our common stock are freely transferable, except for any shares held byour “affiliates,” as that term is defined in Rule 144 under the Securities Act. Approximately 59.5%of our outstanding common stock is held by the Initial Fortress Stockholder and members of ourmanagement and employees, and can be resold into the public markets in the future in accordancewith the requirements of Rule 144.     We and our executive officers, directors and the Initial Fortress Stockholder (who hold in theaggregate approximately 58.0% of our issued and outstanding common stock) have agreed with theunderwriters of our initial public offering that, subject to limited exceptions, until April 10,2010, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell anyoption or contract to purchase or otherwise dispose of any common stock or any securitiesconvertible into or exercisable or exchangeable for common stock, or in any manner transfer all ora portion of the economic consequences associated with the ownership of common stock, or cause aregistration statement covering any common stock to be filed, without the prior written consent ofthe designated representatives. The designated representatives may waive these restrictions attheir discretion. Shares of common stock held by our employees, other than our officers who aresubject to the lockup provisions referred to above, are not subject to these restrictions and maybe sold without restriction at any time.     Pursuant to our stockholders agreement, the Initial Fortress Stockholder and certain of itsaffiliates and permitted third-party transferees have the right, in certain circumstances, torequire us to register their approximately 30,350,000 shares of our common stock under theSecurities Act for sale into the public markets. Upon the effectiveness of such a registrationstatement, all shares covered by the registration statement will be freely transferable.     On October 13, 2009, we filed a registration statement on Form S-8 under the Securities Act toregister an aggregate of 4,500,000 shares of our common stock reserved for issuance under ourincentive plans. We may increase the number of shares registered for this purpose at any time.Subject to any restrictions imposed on the shares and options granted under our incentive plans,shares registered under the registration statement on Form S-8 will be available for sale into thepublic markets subject to the lock-up agreements referred to above.     The market price of our common stock may decline significantly when the restrictions on resaleby our existing stockholders lapse. A decline in the price of our common stock might impede ourability to raise capital through the issuance of additional common stock or other equitysecurities.     ***The future issuance of additional common stock in connection with our incentive plans,acquisitions or otherwise will dilute all other shareholdings.***     As of December 31, 2009, we have an aggregate of 345,635,694 shares of common stock authorizedbut unissued with approximately 4.4 million shares reserved for issuance under our incentive plans.We may issue all of these shares of common stock without any action or approval by ourstockholders, subject to certain exceptions. We also intend to continue to evaluate acquisitionopportunities and may issue common stock in connection with these acquisitions. Any common stockissued in connection with our incentive plans, acquisitions, the exercise of outstanding stockoptions or otherwise would dilute the percentage ownership held by holders of our common stock.**Risks Related to Taxation**     ***Our ability to use net operating loss and tax credit carryovers and certain built-in losses toreduce future tax payments is limited by provisions of the Internal Revenue Code.***     Section 382 and 383 of the Code contain rules that limit the ability of a company thatundergoes an ownership change, which is generally any change in ownership of more than 50% of itsstock over a three-year period, to utilize its net operating loss and tax credit carryforwards andcertain built-in losses recognized in years after the ownership change. These rules generallyoperate by focusing on ownership changes involving stockholders owning directly or indirectly 5% ormore of the stock of a company and any change in ownership arising from a new issuance of stock bythe company. Generally, if an ownership change occurs, the yearly taxable income limitation on theuse of net operating loss and tax credit carryforwards and certain built-in losses is equal to theproduct of the applicable long term tax exempt rate and the value of the company’s stockimmediately before the ownership change. As a result of transactions that have taken place in thepast with respect to our common stock, our use of our $127 million of federal
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net operating losses, our $95 million of tax credits and certain built-in losses is subject toannual taxable income limitations. As a result, we may be unable to offset our taxable income withlosses, or our tax liability with credits, before such losses and credits expire and thereforewould incur larger federal income tax liability.     In addition, it is possible that future transactions (including issuances of new shares of ourcommon stock and sales of shares of our common stock) will cause us to undergo one or moreadditional ownership changes. In that event, we generally would not be able to use our pre-changeloss or credit carryovers or certain built-in losses prior to such ownership change to offsetfuture taxable income in excess of the annual limitations imposed by Sections 382 and 383 and thoseattributes already subject to limitations (as a result of our prior ownership changes) may besubject to more stringent limitations.     ***Gain recognized by Non-U.S. Holders on the sale or other disposition of our common stock maybe subject to U.S. federal income tax.***     We expect to be treated as a “United States real property holding corporation” undersection 897(c) of the Code (“USRPHC”). Generally, stock issued by a corporation that has been aUSRPHC at any time during the preceding five years (or a Non-U.S. Holder’s holding period for suchsecurities, if shorter) is treated as a United States real property interest (“USRPI”), and gainrecognized by a Non-U.S. Holder on the sale or other disposition of stock is subject to regularU.S. federal income tax, as if such gain were effectively connected with the conduct by such holderof a U.S. trade or business. Shares of our common stock will not be treated as USRPIs in the handsof a Non-U.S. Holder provided that: (i) our common stock is regularly traded on an establishedsecurities market, and (ii) such Non-U.S. Holder has not owned or been deemed to own (directly orunder certain constructive ownership rules) more than 5% of our common stock at any time during the5-year period ending on the date of the sale or other taxable disposition. No assurance can begiven that our common stock will continue to be regularly traded on an established securitiesmarket in the future. If gain recognized by a Non-U.S. Holder from the sale or other disposition ofour common stock is subject to regular federal income tax under these rules and our common stock isnot regularly traded on an established securities market at such time, the transferee of suchcommon stock may be required to deduct and withhold a tax equal to 10 percent of the amountrealized on the sale or other disposition, unless certain exceptions apply. Any tax withheld may becredited against the U.S. federal income tax owed by the Non-U.S. Holder for the year in which thesale or other disposition occurs.**ITEM 1B.** **UNRESOLVED STAFF COMMENTS**     None.**ITEM 2.** **PROPERTIES**     We operate a portfolio of 40 individual railroads with approximately 7,400 miles of track in27 U.S. states and three Canadian provinces. Of our approximately 7,400 total track-miles, we ownapproximately 4,500 track-miles and lease approximately 2,900 track-miles.
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     The following table provides a brief description of each of the railroads that we ownedor leased as of March 25, 2010. Track miles under operating agreements are excluded:             **No. of** **Track-**  **Name** **Railroads** **Miles** **Major Commodities Hauled*****Central Region:***          Missouri & Northern Railroad  1   594  Coal, Agricultural ProductsDallas Garland & Northeastern Railroad  2   337  Non Metallic Minerals and ProductsKyle Railroad Company  1   625  Agricultural ProductsKiamichi Railroad  1   261  Coal, Non Metallic Minerals and ProductsPoint Comfort & Northern Railway  1   19  Metallic Ores and MetalsOtter Tail Valley Railroad  1   81  Agricultural Products, CoalRockdale, Sandow & Southern Railroad  1   8  Waste and Scrap Materials, Metallic Ores andMetalsBauxite & Northern Railway  1   6  Metallic & Non-Metallic Ores           **Total — Central Region**  **9**   **1,931**              ***Northeast Region:***          New England Central Railroad  1   394  Forest Products, Non Metallic Minerals andProductsOttawa Valley Railway(1)  1   242  Overhead TrafficCape Breton Central Nova Scotia Railway  1   245  Pulp, Paper and Allied Products, CoalGoderich-Exeter Railway  1   181  Chemicals, Agricultural ProductsSouthern Ontario Railway  1   69  Petroleum, ChemicalsConnecticut Southern Railroad  1   42  Waste and Scrap Materials, OtherMassena Terminal Railroad  1   4  Metallic Ores and Metals           **Total — Northeast Region**  **7**   **1,177**              ***Midwest Region:***          Indiana & Ohio Railway  1   570  Agricultural Products, Motor VehiclesChicago, Ft. Wayne & Eastern Railroad  1   315  Agricultural Products, ChemicalsHuron Eastern Saginaw Valley Railway  1   384  Agricultural Products, ChemicalsToledo, Peoria & Western Railway  1   247  Agricultural Products, ChemicalsMid-Michigan Railroad  3   196  Agricultural Products, Non-Metallic Mineralsand ProductsCentral Railroad of Indiana  1   96  Motor Vehicles, Non-Metallic Minerals andProductsCentral Railroad of Indianapolis  1   39  Agricultural Products           **Total — Midwest Region**  **9**   **1,847**              ***Southeast Region:***          Alabama & Gulf Coast Railway  1   348  Pulp, Paper and Allied ProductsConsolidated Virginia Railroads  2   135  Metallic Ores and Metals, Waste and ScrapMaterialsSouth Carolina Central Railroad  2   129  Waste and Scrap Materials, Metallic Ores andMetalsIndiana Southern Railroad  1   196  CoalEastern Alabama Railway  1   31  Non-Metallic Minerals and Products           **Total — Southeast Region**  **7**   **839**              ***Western Region:***          Central Oregon & Pacific Railroad  1   389  Forest ProductsSan Joaquin Valley Railroad  1   417  Food or Kindred Products, PetroleumCalifornia Northern Railroad  1   261  Food or Kindred ProductsArizona & California Railroad  1   259  Petroleum, Non-Metallic Minerals and ProductsPuget Sound & Pacific Railroad  1   108  Waste and Scrap Materials, Agricultural ProductsSan Diego Valley Railroad (2)  1   —  PetroleumCascade & Columbia River Railroad  1   148  Non-Metallic Minerals and Products, ForestProductsVentura County Railroad  1   17  Motor Vehicles           **Total — Western Region**  **8**   **1,599**              **Total Company**  **40**   **7,393**               (1) The Ottawa Valley Railway is a discontinued operation, but we are operating a portion of it until datesin 2010 to be determined by CP. (2) No track miles shown as this railroad is exclusively under an operating agreement.
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**Track and Equipment**  ***Track***     Of our 7,393 total track-miles, we own 4,545 track-miles and lease 2,848 track-miles. In mostcases, leases involve little to no annual lease payment (but may have involved a one-time, upfrontpayment) and have long-term or perpetual durations. In addition, we operate approximately 1,038track-miles under trackage rights and operating agreements. Generally, trackage rights are rightsgranted by other railroads to transport freight over their tracks (but not directly serve customerson their rail lines) while operating agreements grant us the right to operate (and typically servecustomers) on track owned by third parties. Generally, trackage rights and operating agreements donot convey any other rights (such as real estate rights) to us.  ***Locomotives and Railcars***     Our locomotive fleet at December 31, 2009 totaled 444 units comprised of 254 owned units and190 leased units and 6,903 railcars comprised of 524 owned railcars and 6,379 leased railcars. Theaverage age of our locomotives and railcars is 50 and 41 years, respectively, across our entireportfolio of railroads.     A summary of the rolling stock owned and leased by us is presented in the table below:               **Railcars**   **Owned**  **Leased**  **Total** Covered hopper cars  35   2,685   2,720 Open top hopper cars  238   30   268 Box cars  35   2,603   2,638 Flat cars  194   624   818 Tank cars  6   4   10 Gondolas  5   433   438 Other/passenger cars  11   0   11           **Total railcars**  **524**   **6,379**   **6,903**                          **Locomotives**   **Owned**  **Leased**  **Total** Horsepower/unit:            Over 2,000  121   90   211 1,500 to 2,000  120   94   214 Under 1,500  13   6   19                        **Total locomotives**  **254**   **190**   **444**           **ITEM 3. LEGAL PROCEEDINGS**     In the ordinary course of conducting our business, we have become involved in various legalactions and other claims. Litigation is subject to many uncertainties, the outcome of individuallitigated matters is not predictable with assurance, and it is reasonably possible that some ofthese matters may be decided unfavorably to RailAmerica. It is the opinion of management that theultimate liability, if any, with respect to our current litigation outstanding will not have amaterial adverse effect on our financial position, results of operations or cash flows.     Our operations are subject to extensive environmental regulation. There are no materialenvironmental claims currently pending or, to our knowledge, threatened against us or any of ourrailroads, except for an August 2005 incident on the IORY in which Styrene contained in a parkedrailcar was vented to the atmosphere due to a chemical reaction. See “Item 1. Business—Environmental.”     We are subject to claims for employee work-related and third-party injuries. Work-relatedinjuries for employees are primarily subject to the FELA. We retain an independent actuarial firmto assist management in assessing the value of personal injury claims and cases. An analysis hasbeen performed by an independent actuarial firm and is reviewed by management. The methodology usedby the actuary includes a development factor to reflect growth or reduction in the value of thesepersonal injury claims. It is based largely on our historical claims and settlement experience. AtDecember 31, 2009 and 2008, we had $14.2 million and $15.8 million, respectively, accrued forpersonal injury claims and cases. Actual results may vary from estimates due to the type andseverity of the injury, costs of medical treatments and uncertainties in litigation.**ITEM 4. (REMOVED AND RESERVED)**
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**PART II****ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES****Market Information**     Our common stock began trading on the New York Stock Exchange (NYSE) on October 13, 2009 underthe symbol “RA”.**Our Principal Stockholder**     RR Acquisition Holding LLC, an entity wholly-owned by certain private equity funds managed byan affiliate of Fortress, owns approximately 55.8% of our outstanding common stock. RR AcquisitionHolding LLC is referred to in this Form 10-K as our Initial Stockholder. The Initial Stockholderowns shares sufficient for the majority vote over fundamental and significant corporate matters andtransactions. See “Risk Factors — Risks Related to Our Organization and Structure.”**Description of Common Stock**     A total of 400 million shares of common stock is authorized, of which 54,364,306 shares wereoutstanding as of December 31, 2009. Each share is entitled to one vote in all matters requiring avote of shareholders. As of March 22, 2010, there wereapproximately 116 holders of record and webelieve at least 5,027 beneficial owners of our common stock. Weighted average common sharesoutstanding used in the calculation of diluted earnings per share was approximately 45,979,000 asof December 31, 2009, and is expected to increase in 2010 due to incentive programs.     In June 2009, we declared and paid a cash dividend in the amount of $20.0 million to ourcommon stockholders. We do not expect to declare or pay any cash or other dividends in theforeseeable future on our common stock, as we intend to use cash flow generated by operations togrow our business. Our revolving credit facility and our senior secured notes indenture willrestrict our ability to pay cash dividends on our common stock, and we may also enter into creditagreements or other borrowing arrangements in the future that restrict or limit our ability to paycash dividends on our common stock.**Stock Market Results**Set forth below is the high and low price information for our common stock as reported on the NYSEfor each period presented.         2009 High Sales Price  Low Sales Price FourthQuarter (October 13 through December 31) $14.78  $10.91          2010 High Sales Price  Low Sales Price First Quarter (through March 22) $14.47  $10.94 **Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities**     On October 16, 2009, we completed our initial public offering of 22,000,000 shares of commonstock at $15.00 per share. We sold 10,500,000 shares of common stock and RR Acquisition Holding LLC(“Holdings”), an investment fund managed by Fortress, sold 11,500,000 shares of common stock.Proceeds to us were $143.1 million net of the underwriters’ discount and expenses. We did notreceive any proceeds from the sale of our common stock by Holdings. On November 16, 2009, weredeemed $74 million aggregate principal amount of the notes at a cash redemption price of 103%,plus accrued interest thereon to, but not including, the redemption date. We intend to use theremainder of the net proceeds from the initial public offering for working capital and othergeneral corporate purposes, including potential strategic investments and acquisitions.
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**ITEM 6. SELECTED FINANCIAL DATA**     The consolidated financial information labeled as “Predecessor” includes financial reportingperiods prior to the merger on February 14, 2007, in which we were acquired by certain privateequity funds managed by affiliates of Fortress (the “Acquisition”) and the consolidated financialinformation labeled as “Successor” includes financial reporting periods subsequent to theAcquisition. On October 16, 2009, we completed an initial public offering of 22,000,000 shares ofcommon stock.     The information in the following tables gives effect to the 90-for-1 stock split of our commonstock, which occurred on September 22, 2009.     The selected consolidated statement of operations data for the Predecessor period January 1,2007 through February 14, 2007, the successor period February 15, 2007 through December 31, 2007and the Successor years ended December 31, 2008 and 2009 and the selected successor consolidatedbalance sheet data as of December 31, 2008 and 2009 have been derived from our audited financialstatements included elsewhere in this report on Form 10-K. The selected consolidated financial dataas of and for the Predecessor years ended December 31, 2005 and 2006 and the selected Predecessorconsolidated balance sheet data as of December 31, 2005 and 2006 have been derived from our auditedfinancial statements that are not included in this report on Form 10-K.                           **Predecessor**  **Successor**           **Period from**  **Period from**              **January 1, 2007**  **February 15, 2007**      **Year ended December 31,**  **to February 14,**  **to December 31,**  **Year ended December 31,**   **2005**  **2006**  **2007**  **2007**  **2008**  **2009** STATEMENT OF OPERATIONS DATA:                        Operating revenue $400,361  $440,930  $53,544  $406,590  $488,457  $410,603 Operating expenses  353,229   393,339   54,944   344,679   408,580   329,682                    Operating income (loss)  47,132   47,591   (1,400)  61,911   79,877   80,921 Interest expense, including amortization costs  (20,372)  (27,438)  (3,280)  (43,009)  (61,718)  (86,878)Other income (loss)  (621)  —   284   7,129   (9,008)  (8,117)                   Income (loss) from continuing operationsbefore income taxes  26,139   20,153   (4,396)  26,031   9,151   (14,074)Provision for (benefit from) income taxes  (2,493)  (5,696)  930   (4,086)  (481)  (8,539)                   Income (loss) from continuing operations  28,632   25,849   (5,326)  30,117   9,632   (5,535)Discontinued operations  2,190   10,794   9   3,385   6,895   21,377                    Net income (loss) $30,822  $36,643  $(5,317) $33,502  $16,527  $15,842                                             Dividends declared and paid per common share $—  $—  $—  $—  $—  $0.46                          Income (loss) from continuing operations pershare of common stock:                        Basic $0.76  $0.67  $(0.14) $0.70  $0.22  $(0.11)Diluted $0.74  $0.66  $(0.14) $0.70  $0.22  $(0.11)                         OPERATING DATA:                        Freight carloads (continuing operations)  1,104,641   1,104,688   126,150   936,383   986,952   805,415                        **Predecessor**  **Successor**   **As of December 31,**  **As of December 31,**   **2005**  **2006**  **2007**  **2008**  **2009** BALANCE SHEET DATA:                    Total assets $1,147,376  $1,125,732  $1,483,239  $1,470,447  $1,598,629 Long-term debt, including current maturities  433,873   400,638   636,941   629,580   643,778 Stockholders’ equity  431,278   472,249   512,749   471,520   659,331 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     *This management’s discussion and analysis of financial condition and results of operationscontains forward-looking statements that involve risks, uncertainties and assumptions. You shouldread the following discussion in conjunction with our historical consolidated financial statementsand the notes thereto. The results of operations for the periods reflected herein are notnecessarily indicative of results that may be expected for future periods.*     *Historical information has been reclassified to conform to the presentation of discontinuedoperations. The results of operations and cash flows of the Predecessor and Successor entities, asdefined in the consolidated financial statements included herein and notes thereto, for the periodsending February 14, 2007 and December 31, 2007, respectively, have been combined for comparisonpurposes to reflect twelve months of data for 2007.***General**   ***Our Business***     We are a leading owner and operator of short line and regional freight railroads in NorthAmerica, operating a portfolio of 40 individual railroads with approximately 7,400 miles of trackin 27 states and three Canadian provinces. In addition, we provide non-freight services such asrailcar storage, demurrage, leases of equipment and real estate leases and use fees.   ***Managing Business Performance***     We manage our business performance by (i) growing our freight and non-freight revenue, (ii)driving financial improvements through a variety of cost savings initiatives, and (iii) continuingto focus on safety to lower the costs and risks associated with operating our business.     Changes in carloads and revenue per carload have a direct impact on freight revenue. Carloadshave decreased in 2008 and 2009 due to the global economic slowdown, however, the diversity in ourcustomer base helps mitigate our exposure to severe downturns in local economies. We continue toimplement more effective pricing by centralizing and carefully analyzing pricing decisions toimprove our freight revenue per carload.     Non-freight services offered to our customers include switching (or managing and positioningrailcars within a customer’s facility), storing customers’ excess or idle railcars on inactiveportions of our rail lines, third party railcar repair, and car hire and demurrage (allowing ourcustomers and other railroads to use our railcars for storage or transportation in exchange for adaily fee). Each of these services leverages our existing business relationships and generatesadditional revenue with minimal capital investment. Management also intends to grow non-freightrevenue from users of our land holdings for non-transportation purposes.     Our operating costs include labor, equipment rents (locomotives and railcars), purchasedservices (contract labor and professional services), diesel fuel, casualties and insurance,materials, joint facilities and other expenses. Each of these costs is included in one of thefollowing functional departments: maintenance of way, maintenance of equipment, transportation,equipment rental and selling, general & administrative.     Management is focused on improving operating efficiency and lowering costs. Many functionssuch as pricing, purchasing, capital spending, finance, insurance, real estate and otheradministrative functions are centralized, which enables us to achieve cost efficiencies andleverage the experience of senior management in commercial, operational and strategic decisions. Anumber of cost savings initiatives have been broadly implemented at all of our railroads targetinglower fuel consumption, safer operations, more efficient locomotive utilization and lower costs forthird party services, among others.     **Commodity Mix**     Each of our 40 railroads operates independently with its own customer base. Our railroads arespread out geographically and carry diverse commodities. For the year ended December 31, 2009,coal, agricultural products and chemicals accounted for 22%, 16% and 10%, respectively, of ourcarloads. As a percentage of our freight revenue, which is impacted by several factors includingthe length of the haul, agricultural products, chemicals and coal generated 17%, 14% and 11%,respectively, for the year ended December 31, 2009.
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     **Overview**     Operating revenue in the year ended December 31, 2009, was $410.6 million, compared with$488.5 million in the year ended December 31, 2008. The net decrease in our operating revenue wasprimarily due to decreased carloads and lower fuel surcharges, partially offset by negotiated rateincreases and an increase in our non-freight revenue.     Freight revenue decreased $84.0 million, or 20%, in the year ended December 31, 2009, comparedwith the year ended December 31, 2008, primarily due to a decrease in carloads of 18%. Non-freightrevenue increased $6.2 million, or 9%, in the year ended December 31, 2009, compared with the yearended December 31, 2008, primarily due to increases in car storage fees, car repair income,switching revenue and real estate rental revenue, partially offset by a decrease in car hireincome.     Our operating ratio, defined as total operating expenses divided by total operating revenue,was 80.3% in the year ended December 31, 2009, compared with an operating ratio of 83.6% in theyear ended December 31, 2008, primarily due to a decrease in diesel fuel expense, maintenanceexpenditures for right of way improvements, labor expenses and purchased services as a result ofour cost savings initiatives and a reduction in car hire expense. Operating expenses were $329.7million in the year ended December 31, 2009, compared with $408.6 million in the year endedDecember 31, 2008, a decrease of $78.9 million, or 19%.     In 2009, we entered into a track maintenance agreement with an unrelated third-party customer(“Shipper”). Under the agreement, the Shipper pays for qualified railroad track maintenanceexpenditures during 2009 in exchange for the assignment of railroad track miles which permits theShipper to claim certain tax credits pursuant to Section 45G of the Code. The reduction inmaintenance expenditures is reflected in the transportation functional category and other expensesnatural category in the results of operations set forth below. For the year ended December 31,2009, the Shipper paid for $17.1 million of maintenance expenditures and $5.3 million of capitalexpenditures.     Net income in the year ended December 31, 2009, was $15.8 million, compared with $16.5 millionin the year ended December 31, 2008. Income (loss) from continuing operations in the year endedDecember 31, 2009, was $(5.5) million, compared with $9.6 million in the year ended December 31,2008. Net income for the year ended December 31, 2009 includes an adjustment to the gain ondisposal of discontinued operations of $17.0 million primarily related to the resolution of theAustralian tax matter and the disposal of the OVRR.     During the year ended December 31, 2009, we generated $9.5 million in cash from operatingactivities, which included a payment of $55.8 million to terminate our interest rate swap. Wepurchased $47.8 million of property and equipment and received $90.3 million in cash from thedisposition of assets.     **Results of Operations*****Comparisonof Operating Results for the Years ended December 31, 2009 and2008***     The following table sets forth the results of operations for the years ended December 31, 2009and 2008:           **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2009**  **2008** Operating revenue $410,603  $488,457 Operating expenses:        Transportation  179,338   267,541 Selling, general and administrative  107,641   99,956 Net loss (gain) on sale of assets  899   (1,696)Impairment of assets  —   3,420 Depreciation and amortization  41,804   39,359        Total operating expenses  329,682   408,580 Operating income  80,921   79,877 Interest expense, including amortization costs  (86,878)  (61,718)Other loss  (8,117)  (9,008)       Income (loss) from continuing operations before income taxes  (14,074)  9,151 Benefit from income taxes  (8,539)  (481)       Income (loss) from continuing operations  (5,535)  9,632 Discontinued operations:        Gain on disposal of discontinued business  17,040   2,764 Income from operations of discontinued business  4,337   4,131        Net income $15,842  $16,527        
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     *Operating Revenue*     Operating revenue decreased by $77.9 million, or 16%, to $410.6 million in the year endedDecember 31, 2009, from $488.5 million in the year ended December 31, 2008. Total carloads duringthe year ending December 31, 2009 decreased 18% to 805,415 in 2009, from 986,952 in the year endedDecember 31, 2008. The decrease in operating revenue was primarily due to the decrease in carloads,lower fuel surcharges, which declined $17.2 million from the prior period, and the weakening of theCanadian dollar, partially offset by negotiated rate increases.     The decrease in the average revenue per carload to $420 in the year ended December 31, 2009,from $428 in the comparable period in 2008 was primarily due to lower fuel surcharges and commoditymix changes, partially offset by rate growth.     Non-freight revenue increased by $6.2 million, or 9%, to $72.7 million in the year endedDecember 31, 2009 from $66.5 million in the year ended December 31, 2008, primarily due toincreases in car storage fees, car repair income, switching income and real estate rental revenue,partially offset by a decrease in car hire income.     The following table compares our freight revenue, carloads and average freight revenue percarload for the years ended December 31, 2009 and 2008:                           **Year ended December 31, 2009**  **Year ended December 31, 2008**           **Average Freight**          **Average Freight**   **Freight**      **Revenue per**  **Freight**      **Revenue per**   **Revenue**  **Carloads**  **Carload**  **Revenue**  **Carloads**  **Carload**       **(Dollars in thousands, except carloads and average freight revenue per carload)**     Agricultural Products $56,458   126,683  $446  $61,193   143,730  $426 Chemicals  47,022   80,748   582   59,543   103,290   576 Coal  36,914   178,028   207   37,362   177,842   210 Non-Metallic Minerals and Products  31,603   75,701   417   38,467   93,413   412 Pulp, Paper and Allied Products  30,453   57,865   526   39,456   72,167   547 Forest Products  26,642   46,755   570   40,023   70,737   566 Food or Kindred Products  25,386   52,298   485   26,279   54,659   481 Metallic Ores and Metals  23,802   41,542   573   52,361   93,351   561 Waste and Scrap Materials  20,227   53,685   377   28,379   77,434   366 Petroleum  19,429   41,943   463   19,725   44,912   439 Other  13,504   32,709   413   13,697   36,087   380 Motor Vehicles  6,454   17,458   370   5,437   19,330   281                    Total $337,894   805,415  $420  $421,922   986,952  $428                         Freight revenue was $337.9 million in the year ended December 31, 2009, compared to $421.9million in the year ended December 31, 2008, a decrease of$84.0 million or 20%. This decreasewas primarily due to the net effect of the following: **•** Agricultural products revenue decreased $4.7 million or 8% primarily due to reducedshipments of corn and soybeans in the Midwest as a result of a later than normal harvest;  **•** Chemicals revenue decreased $12.5 million or 21% primarily due to a decline in chemicalshipments due to widespread weakness in U.S. manufacturing as a result of the economic downturn andthe loss of a customer in South Carolina who filed for bankruptcy in 2008;  **•** Coal revenue decreased $0.4 million or 1% primarily due to reduced shipments of Powder RiverBasin coal to Midwest power plants, a decrease in fuel surcharges, and the weakening of theCanadian dollar, partially offset by growth in Illinois Basin coal;  **•** Non-metallic minerals and products revenue decreased $6.9 million or 18% primarily due to adecrease in construction activity in Texas and reduced demand for minerals used in the paperindustry;  **•** Pulp, paper and allied products revenue decreased $9.0 million or 23% due to widespreaddeclines in paper production in the Southeast and Canada and the weakening of the Canadian dollar;  **•** Forest products revenue decreased $13.4 million or 33% primarily due to volume declines inthe Pacific Northwest stemming from the continued downturn in the housing and construction markets;
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 **•** Food or kindred products revenue decreased $0.9 million or 3% primarily due to reducedmovements of spent grain mash from ethanol plants to animal feed facilities and a decrease inproduction of beet sugar in the Midwest, partially offset by increased shipments of tomato productsand beer in California;  **•** Metallic ores and metals revenue decreased $28.6 million or 55% primarily due to thetemporary closure of a customer facility and a production curtailment at a customer plant, bothlocated in Texas and a decline in carloads resulting from weak demand for plate, slab and sheetproducts as well as reduced demand for feed stocks;  **•** Waste and scrap materials revenue decreased $8.2 million or 29% primarily due to a declinein municipal solid waste moves for landfills in the Southeast, reduced demand for scrap metal andreduced movements of construction debris in the Northeast;  **•** Petroleum revenue decreased $0.3 million or 2% primarily due to reduced demand for ethanoland a decrease in liquefied petroleum gas (“LPG”), production in Canada and California as a resultof a decline in demand in Mexico and the U.S;  **•** Other revenue decreased $0.2 million or 1% due to wind turbine component moves in Illinoisin 2008 that did not recur until the second quarter of 2009 and a decrease in movements for Class Irailroads in the Southeast and Northeast; and  **•** Motor vehicles revenue increased $1.0 million or 19% primarily due to movements for a newMidwest production facility that came online in late 2008, partially offset by reduced autoshipments as a result of the general weakness in the automobile industry.*Operating Expenses*     The following table sets forth the operating revenue and expenses, by natural category, forour consolidated operations for the periods indicated (dollars in thousands).                   **Year Ended December 31,**   **2009**  **2008** Operating revenue $410,603   100.0% $488,457   100.0%Operating expenses:                Labor and benefits  139,132   33.9%  140,760   28.8%Equipment rents  35,838   8.7%  44,790   9.2%Purchased services  31,055   7.6%  38,425   7.8%Diesel fuel  32,243   7.8%  68,657   14.0%Casualties and insurance  15,520   3.8%  20,929   4.3%Materials  11,175   2.7%  10,286   2.1%Joint facilities  6,941   1.7%  12,573   2.6%Other expenses  15,075   3.7%  31,077   6.3%Net loss (gain) on sale of assets  899   0.2%  (1,696)  -0.3%Impairment of assets  —   0.0%  3,420   0.7%Depreciation and amortization  41,804   10.2%  39,359   8.1%             Total operating expenses  329,682   80.3%  408,580   83.6%             Operating income $80,921   19.7% $79,877   16.4%             
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     The following table sets forth the reconciliation of the functional categories presented inour consolidated statement of operations to the natural categories discussed below. Managementutilizes the natural category format of expenses when reviewing and evaluating our performance andbelieves that it provides a more relevant basis for discussion of the changes in operations (inthousands).                           **Year Ended December 31,**   **2009**  **2008**       **Selling,**  **Total**      **Selling,**  **Total**       **General and**  **Operating**      **General and**  **Operating**   **Transportation**  **Administrative**  **Expenses**  **Transportation**  **Administrative**  **Expenses** Operating expenses:                        Labor and benefits $72,550  $66,582  $139,132  $82,614  $58,146  $140,760 Equipment rents  35,407   431   35,838   44,337   453   44,790 Purchased services  18,384   12,671   31,055   22,606   15,819   38,425 Diesel fuel  32,227   16   32,243   68,619   38   68,657 Casualties and insurance  9,727   5,793   15,520   13,499   7,430   20,929 Materials  10,291   884   11,175   9,129   1,157   10,286 Joint facilities  6,941   —   6,941   12,573   —   12,573 Other expenses  (6,189)  21,264   15,075   14,164   16,913   31,077 Net loss (gain) on sale of assets  —   —   899   —   —   (1,696)Impairment of assets  —   —   —   —   —   3,420 Depreciation and amortization  —   —   41,804   —   —   39,359                    Total operating expenses $179,338  $107,641  $329,682  $267,541  $99,956  $408,580                         Operating expenses decreased to $329.7 million in the year ended December 31, 2009, from$408.6 million in the year ended December 31, 2008. The operating ratio was 80.3% in 2009 comparedto 83.6% in 2008. The improvement in the operating ratio was primarily due to our continuing costsaving initiatives, which include reductions in labor and purchased services expenses, a decreasein maintenance expenditures for right of way improvements as a result of the track maintenanceagreement, a reduction in car hire expense and a decrease in fuel prices in the year ended December31, 2009 as compared to the same period in 2008. The year ended December 31, 2009 includes anon-cash charge of $6.3 million in labor and benefits expense related to the initial publicoffering for the expiration of a repurchase feature under the former stock compensation agreements.During the year ended December 31, 2009 and 2008, operating expenses also include $1.4 million and$6.1 million, respectively, of costs related to the restructuring and relocation of our corporateheadquarters to Jacksonville, Florida. The costs incurred during the year ended December 31, 2009and 2008 are included within labor and benefits ($1.2 million and $4.2 million, respectively),purchased services ($0.2 million and $1.4 million, respectively) and other expenses ($0 and $0.5million, respectively).     The net decrease in operating expenses was due to the following:  **•** Labor and benefits expense decreased $1.6 million, or 1% primarily due to a reduction in laborforce as a result of the decline in carload volumes and additional cost savings initiativesimplemented by management. This decrease was partially offset by the non-cash initial publicoffering charge mentioned above which was incurred in 2009. Other benefits expense also includedrestructuring costs during the years ended 2009 and 2008 as mentioned above;  **•** Equipment rents expense decreased $9.0 million, or 20% primarily due to a reduction in car hireexpense as a result of the decline in carload volume;  **•** Purchased services expense decreased $7.4 million, or 19% primarily due to cost reductioninitiatives implemented by management during 2009 and costs incurred in connection with therestructuring and relocation of corporate headquarters in 2008;  **•** Diesel fuel expense decreased $36.4 million, or 53% primarily due to lower average fuel costs of$1.93 per gallon in 2009 compared to $3.22 per gallon in 2008, resulting in a $20.7 milliondecrease in fuel expense and a favorable consumption variance of $15.3 million;  **•** Casualties and insurance expense decreased $5.4 million, or 26% primarily due to managementinitiatives to decrease safety related incidents. FRA reportable train accidents decreased to 30 inthe year ended December 31, 2009 from 42 in the year ended December 31, 2008 while FRA personalinjuries decreased to 20 in the year ended December 31, 2009 from 25 in the year ended December 31,2008. Our FRA personal injury frequency ratio, which is measured as the number of reportableinjuries per 200,000 person hours worked, was 1.64 at December 31, 2009, compared to 1.70 atDecember 31, 2008;
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 **•** Materials expense increased $0.9 million, or 9% primarily due to an increase in car repairmaterial purchases, partially offset by a decrease in locomotive materials as a result of fewerrepairs;  **•** Joint facilities expense decreased $5.6 million, or 45% primarily due to the decline in carloadvolume;  **•** Other expenses decreased $16.0 million, or 51% primarily due to a reduction in expense as aresult of the execution of the Track Maintenance Agreement in 2009 as mentioned previously. For theyear ended December 31, 2009, the Shipper paid for $17.1 million of maintenance expenditures;  **•** Asset sales resulted in net losses (gains) of $0.9 million and $(1.7) million in the years endedDecember 31, 2009 and 2008, respectively. The gain on sale of $1.7 million in 2008 was primarilydue to easement sales along our corridor of track. During the year ended December 31, 2009, we solda portion of track owned by the Central Railroad of Indianapolis at a price set by the STB of $0.4million, which resulted in a loss on disposition of $1.5 million. We also sold a portion of trackowned by the Central Oregon and Pacific Railroad, known as the Coos Bay Line, to the Port of CoosBay for $16.6 million. The carrying value of this line approximated the sale price;  **•** Impairment of assets of $3.4 million for the year ended December 31, 2008 related to the formercorporate headquarters building located in Boca Raton, Florida and to disposed surplus locomotives;and  **•** Depreciation and amortization expense increased as a percentage of operating revenue to 10.2% inthe year ended December 31, 2009, from 8.1% in the year ended December 31, 2008 due to thecapitalization and depreciation of 2008 and 2009 capital projects and the overall decrease inoperating revenue.*Other Income (Expense) Items*     *Interest Expense.*Interest expense, including amortization of deferred financing costs,increased $25.2 million to $86.9 million for the year ended December 31, 2009, from $61.7 millionin the year ended December 31, 2008. This increase is primarily due to an increase in the effectiveinterest rate on our debt beginning in the third quarter of 2008, which includes interest expenseon our interest rate swaps and the amortization of deferred financing costs. The interest rate onthe bridge credit facility increased to LIBOR plus 4.00% from LIBOR plus 2.25%, effective July 1,2008 as part of the amendment to extend the maturity of the loan. The amortization of deferredfinancing costs increased from the prior year as a result of incurring deferred financing costsassociated with the 2008 amendment and extension of the bridge credit facility. Interest expenseincludes $26.9 million and $10.1 million of amortization costs for the years ended December 31,2009 and 2008, respectively. The year ended December 31, 2009 amortization costs include $16.6million of swap termination cost amortization. In connection with the repayment of the bridgecredit facility, we terminated our existing interest rate swap. Per *Derivatives and Hedging Topic*,ASC 815, since the hedged cash flow transactions, future interest payments, did not terminate, butcontinued with the senior secured notes, the fair value of the hedge on the termination date inaccumulated comprehensive loss is amortized into interest expense over the shorter of the remaininglife of the swap or the maturity of the notes.     *Other Income (Loss).*Other loss of $8.1 million during the year ended December 31, 2009primarily relates to costs incurred in connection with the repurchase of senior secured notesduring the fourth quarter of 2009 and the write-off of unamortized deferred loan costs associatedwith our former bridge credit facility. Other loss of $9.0 million during the year ended December31, 2008 primarily relates to foreign exchange losses associated with the U.S. dollar termborrowing held by one of our Canadian subsidiaries. For the year ended December 31, 2008 theexchange rates decreased, resulting in a foreign exchange loss of $8.3 million.     *Income Taxes.*The effective income tax rate for the years ended December 31, 2009 and 2008for continuing operations were a benefit of 60.7% and 5.3%, respectively. The overall effective taxrate for continuing operations for the year ended December 31, 2009 was favorably impacted by theresolution of the Australian tax audit ($2.4 million), the conversion of certain operatingsubsidiaries to single member limited liability companies ($1.0 million) and the adjustment ofdeferred tax balances resulting from change in tax laws and change in estimates of the apportionedstate rates ($2.3 million). These favorable tax adjustments were partially offset by an increase inthe valuation allowance of $4.0 million to reduce deferred tax assets to their realizable value.The effective tax rate for continuing operations for the year ended December 31, 2008 was adverselyimpacted by the tax effects for repatriation of Canadian earnings ($3.3 million), an increase inthe valuation allowance against certain deferred assets ($3.1 million), an accrual for uncertaintax positions ($1.7 million) and the revaluation of deferred taxes for change in tax laws andchange in estimated state apportionment factors ($1.4 million). The rate for the year endedDecember 31, 2008 included a federal tax benefit of approximately $16 million related to the trackmaintenance credit provisions enacted by the American Jobs Creation Act of 2004 and extended by the
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Tax Extenders and AMT Relief Act of 2008. The rate for the year ended December 31, 2009, didnot include a similar federal tax benefit due to the execution of the Track Maintenance Agreementin 2009 as discussed above. For the year ended December 31, 2009 and 2008 we paid cash taxes of$3.4 million and $6.7 million, respectively.     *Discontinued Operations.*In January 2006, we completed the sale of our Alberta RailroadProperties for $22.1 million in cash. During the year ended December 31, 2008, we settled workingcapital claims with the buyer and as a result recorded an adjustment of $1.3 million, or $1.2million after income taxes, through the gain on disposal of discontinued operations. In the yearended December 31, 2009, we recorded an adjustment of $0.2 million, or $0.2 million, after tax, asa gain on disposal of discontinued operations related to outstanding liabilities associated withthe disposed entities.     In August 2004, we completed the sale of our Australian railroad, Freight Australia, toPacific National for AUD $285 million (U.S. $204 million). During the year ended December 31, 2008,we incurred additional consulting costs associated with the sale of Freight Australia of $1.9million or $1.3 million, after tax, related to the Australian Taxation Office (“ATO”), audit of thereorganization transactions undertaken by our Australian subsidiaries prior to the sale. Inaddition, we recognized foreign exchange gains of $4.0 million, or $2.8 million after tax, on taxreserves established in conjunction with the ATO audit during the period ended December 31, 2008.On May 14, 2009, we received a notice from the ATO indicating that they would not be taking anyfurther action in relation to its audit of the reorganization transactions. As a result, during thesecond quarter of 2009, we removed the previously recorded tax reserves resulting in a benefit tothe continuing operations tax provision of $2.5 million, an adjustment to the gain on disposal ofdiscontinued operations of $12.3 million and reduced our accrual for consulting fees resulting in again on disposal of discontinued operations of $0.7 million, or $0.5 million after tax.     In December 2009, we completed a transaction to terminate the lease of the OVRR line for CAD$73 million (U.S.$68.6 million). As a result of this transaction, we recorded a gain on disposal ofdiscontinued operations in the fourth quarter of 2009 of $26.8 million, or $4.1 million after tax.The tax rate on the gain on disposal reflects the U.S. taxes on the distribution of OVRR’s Canadianearnings, which were previously considered to be reinvested in Canada. Income from operations ofthe discontinued business was $4.3 million and $4.1 million, after tax, during the years endedDecember 31, 2009 and 2008, respectively.***Comparison of Operating Results for the Years Ended December 31, 2008 and 2007***     The following table presents combined revenue and expense information for the twelve monthsended December 31, 2007. The information was derived from the audited consolidated financialstatements of RailAmerica as the Predecessor for the period January 1, 2007 through February 14,2007 and as the Successor for the period from February 15, 2007 through December 31, 2007.     The combined Statements of Operations are being presented solely to assist comparisons acrossthe years. The Successor period for 2007 in the combined Statements of Operations includes theeffect of fair value purchase accounting adjustments resulting from the acquisition of RailAmericaon February 14, 2007. Due to the change in the basis of accounting resulting from the applicationof purchase accounting, the Predecessor’s consolidated financial statements and the Successor’sconsolidated financial statements are not necessarily comparable.
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     The combined information is a non- GAAP (as defined below) financial measure and shouldnot be used in isolation or substitution of the Predecessor or Successor results. Such data isbeing presented for informational purposes only and does not purport to represent or be indicativeof the results that actually would have been obtained had the RailAmerica acquisition occurred onJanuary 1, 2007 or that may be obtained for any future period.                   **2008**  **2007**   **Successor**  **Successor**  **Predecessor**  **Combined**       **February 15,**  **January 1,**  **(Non-GAAP)**   **Year Ended**  **2007 through**  **2007 through**  **Year Ended**   **December 31,**  **December 31,**  **February 14,**  **December 31,**   **2008**  **2007**  **2007**  **2007**   **(In thousands)** Operating revenue $488,457  $406,590  $53,544  $460,134 Operating expenses:                Transportation  267,541   227,337   42,314   269,651 Selling, general and administrative  99,956   85,260   8,378   93,638 Net gain on sale of assets  (1,696)  —   (20)  (20)Impairment of assets  3,420   —   —   — Depreciation and amortization  39,359   32,082   4,272   36,354              Total operating expenses  408,580   344,679   54,944   399,623 Operating income (loss)  79,877   61,911   (1,400)  60,511 Interest expense, including amortization costs  (61,718)  (43,009)  (3,280)  (46,289)Other income (loss)  (9,008)  7,129   284   7,413              Income (loss) from continuing operations before income taxes  9,151   26,031   (4,396)  21,635 Provision for (benefit from) income taxes  (481)  (4,086)  930   (3,156)             Income (loss) from continuing operations  9,632   30,117   (5,326)  24,791 Discontinued operations:                Gain (loss) on disposal of discontinued business  2,764   (756)  —   (756)Income from operations of discontinued business  4,131   4,141   9   4,150              Net income (loss) $16,527  $33,502  $(5,317) $28,185              *Operating Revenue*     Operating revenue increased by $28.3 million, or 6%, to $488.5 million in the year endedDecember 31, 2008, from $460.1 million in the year ended December 31, 2007. Total carloadsdecreased 7% to 986,952 in 2008, from 1,062,533 in 2007. The net increase in operating revenue isprimarily due to negotiated rate increases and higher fuel surcharges, which increased$12.7 million from prior year, partially offset by the decrease in carloads.     The increase in the average revenue per carload to $428 in the year ended December 31, 2008,from $377 in the comparable period in 2007 was primarily due to rate growth and higher fuelsurcharges.     Non-freight revenue increased by $7.1 million, or 12%, to $66.5 million in the year endedDecember 31, 2008 from $59.4 million in the year ended December 31, 2007. This increase isprimarily due to increases in storage fees, real estate rental revenue and demurrage charges.
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     The following table compares our freight revenue, carloads and average freight revenue percarload for the years ended December 31, 2008 and 2007:                                       **Combined Year Ended**   **Year Ended December 31, 2008**  **December 31, 2007 (Non-GAAP)**           **Average Freight**          **Average Freight**   **Freight**      **Revenue per**  **Freight**      **Revenue per**   **Revenue**  **Carloads**  **Carload**  **Revenue**  **Carloads**  **Carload**   **(Dollars in thousands, except carloads and average freight revenue per carload)** Agricultural Products $61,193   143,730  $426  $54,633   147,363  $371 Chemicals  59,543   103,290   576   56,131   111,568   503 Metallic Ores and Metals  52,361   93,351   561   43,409   87,628   495 Forest Products  40,023   70,737   566   49,933   94,639   528 Pulp, Paper and Allied Products  39,456   72,167   547   35,261   72,663   485 Non-Metallic Minerals and Products  38,467   93,413   412   38,969   109,020   357 Coal  37,362   177,842   210   36,653   189,471   193 Waste and Scrap Materials  28,379   77,434   366   28,637   84,766   338 Food or Kindred Products  26,279   54,659   481   20,320   47,545   427 Petroleum  19,725   44,912   439   17,888   43,943   407 Other  13,697   36,087   380   12,246   48,600   252 Motor Vehicles  5,437   19,330   281   6,689   25,327   264                    Total $421,922   986,952  $428  $400,769   1,062,533  $377                         Freight revenue was $421.9 million in the year ended December 31, 2008, compared to$400.8 million in the year ended December 31, 2007, an increase of $21.1 million or 5%. Thisincrease was primarily due to the net effect of the following: **•** Agricultural products revenue increased $6.6 million, or 12%, primarily due to negotiated rateincreases, higher fuel surcharges, new business to move soybeans in North Carolina, and an increasein carrot shipments in California, partially offset by customers in Kansas, Illinois and Michiganholding grain shipments in anticipation of more favorable grain prices;  **•** Chemicals revenue increased $3.4 million, or 6%, primarily due to negotiated rate increases,higher fuel surcharges and additional haulage for existing customers in Ohio and Illinois. Carloadswere down 7% primarily due to reduced shipments with a customer in South Carolina who filed forbankruptcy in early 2008 and special hauls in Alabama in 2007;  **•** Metallic ores and metals revenue increased $9.0 million, or 21%, primarily due to negotiated rateincreases, higher fuel surcharges, plate, and rebar shipments in Alabama and North Carolina,special pipe moves in Texas and Oklahoma and additional copper anode moves for an existing customerin New England, partially offset by a temporary closure of a customer facility in Texas;  **•** Forest products revenue decreased $9.9 million, or 20%, primarily due to volume declines in thePacific Northwest stemming from the continued downturn in the housing and construction markets;  **•** Pulp, paper and allied products revenue increased $4.2 million, or 12%, primarily due toincreased carloads in Alabama to support a production change at a customer plant, negotiated rateincreases and higher fuel surcharges, partially offset by a decline in carloads in New England dueto weak market conditions;  **•** Non-metallic minerals and products revenue decreased $0.5 million, or 1%, primarily due to adecrease in cement and limestone moves in the Southwest and Alabama as a result of a downturn inthe construction industry;  **•** Coal revenue increased $0.7 million, or 2%, primarily due to negotiated rate increases andincreased business with existing power customers in the Midwest and Canada, partially offset by a6% decrease in carloads from reduced shipments in Indiana as a result of coal shortages, powercustomers changing suppliers and weather related track wash-outs;  **•** Waste and scrap materials revenue decreased $0.3 million, or 1%, primarily due to a weakeningdemand for scrap iron in Ohio and a decrease in waste moves in South Carolina;  **•** Food or kindred products revenue increased $6.0 million, or 29%, primarily due to negotiated rateincreases, higher fuel surcharges and increased shipments of tomato products and beer inCalifornia, and soybean meal in Washington;
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 **•** Petroleum revenue increased $1.8 million, or 10%, primarily due to increased demand for LPG inArizona and California and negotiated rate increases;  **•** Other revenue increased $1.5 million, or 12%, primarily due to new business in Illinois to movewind turbine components, partially offset by a loss of intermodal traffic to a competitor in 2008;and  **•** Motor vehicles revenue decreased $1.3 million, or 19%, primarily due to a customer plant closingin Canada and reduced auto shipments in the Midwest.*Operating Expenses*     The following table sets forth the operating revenue and expenses, for our consolidatedoperations for the periods indicated (dollars in thousands):                           **2008**  **2007**   **Successor**  **Successor**  **Predecessor**  **Combined**           **February 15,**  **January 1,**  **(Non-GAAP)**           **2007 through**  **2007 through**  **Year Ended**   **Year Ended December 31,**  **December 31,**  **February 14,**  **December 31,**   **2008**  **2007**  **2007**  **2007** Operating revenue $488,457   100.0% $406,590  $53,544  $460,134   100.0%Operating expenses:                        Labor and benefits  140,760   28.8%  115,096   21,502   136,598   29.7%Equipment rents  44,790   9.2%  47,824   6,496   54,320   11.8%Purchased services  38,425   7.8%  29,813   3,716   33,529   7.3%Diesel fuel  68,657   14.0%  49,568   6,758   56,326   12.2%Casualties and insurance  20,929   4.3%  23,308   5,294   28,602   6.2%Materials  10,286   2.1%  8,488   1,250   9,738   2.1%Joint facilities  12,573   2.6%  10,803   1,268   12,071   2.6%Other expenses  31,077   6.3%  27,697   4,408   32,105   7.0%Net gain on sale of assets  (1,696)  -0.3%  —   (20)  (20)  0.0%Impairment of assets  3,420   0.7%  —   —   —   0.0%Depreciation and amortization  39,359   8.1%  32,082   4,272   36,354   7.9%                   Total operating expenses  408,580   83.6%  344,679   54,944   399,623   86.8%                   Operating income (loss) $79,877   16.4% $61,911  $(1,400) $60,511   13.2%                        The following table sets forth the reconciliation of the functional categories presented inour consolidated statement of operations to the natural categories discussed below. Managementutilizes the natural category format of expenses when reviewing and evaluating our performance andbelieves that it provides a more relevant basis for discussion of the changes in operations (inthousands).                                       **Combined Period Ended December 31, 2007**   **Year Ended December 31, 2008**  **(Non-GAAP)**       **Selling,**  **Total**      **Selling,**  **Total**       **General and**  **Operating**      **General and**  **Operating**   **Transportation**  **Administrative**  **Expenses**  **Transportation**  **Administrative**  **Expenses** Operating expenses:                        Labor and benefits $82,614  $58,146  $140,760  $84,241  $52,357  $136,598 Equipment rents  44,337   453   44,790   53,874   446   54,320 Purchased services  22,606   15,819   38,425   21,932   11,597   33,529 Diesel fuel  68,619   38   68,657   56,322   4   56,326 Casualties and insurance  13,499   7,430   20,929   21,177   7,425   28,602 Materials  9,129   1,157   10,286   8,702   1,036   9,738 Joint facilities  12,573   —   12,573   12,071   —   12,071 Other expenses  14,164   16,913   31,077   11,332   20,773   32,105 Net gain on sale of assets  —   —   (1,696)  —   —   (20)Impairment of assets  —   —   3,420   —   —   — Depreciation and amortization  —   —   39,359   —   —   36,354                    Total operating expenses $267,541  $99,956  $408,580  $269,651  $93,638  $399,623                         Operating expenses increased to $408.6 million in the year ended December 31, 2008, from$399.6 million in the year ended December 31, 2007. The operating ratio was 83.6% in 2008 comparedto 86.8% in 2007. The net decrease in the operating ratio was
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primarily due to cost saving initiatives, which included a reduction of locomotive leaseexpense and decreased casualties and insurance expense, in addition to a decrease in stockcompensation expense, partially offset by higher diesel fuel prices in the year ended December 31,2008 as compared to the same period in 2007. The 2008 operating expenses also include $6.1 millionof costs related to the restructuring and relocation of our corporate headquarters to Jacksonville,Florida. These costs are included within labor and benefits ($4.2 million), purchased services($1.4 million) and other expenses ($0.5 million).     The net increase in operating expenses is due to the following:**•**    Labor and benefits expense increased $4.2 million, or 3% primarily due to termination benefitsrelated to the restructuring and relocation of corporate headquarters from Boca Raton, Florida toJacksonville, Florida in 2008, partially offset by lower health insurance costs in 2008 and higherrestricted stock amortization in 2007 from the accelerated vesting of restricted shares triggeredby a change in control clause as a result of the Fortress acquisition;**•**    Equipment rents expense decreased $9.5 million, or 18% primarily as a result of purchasinglocomotives that were previously leased under operating agreements;**•**    Purchased services expense increased $4.9 million, or 15% primarily due to consulting feesincurred in connection with the restructuring and relocation mentioned above;**•**    Diesel fuel expense increased $12.3 million, or 22% primarily due to higher average fuel costs of$3.22 per gallon in 2008 compared to $2.32 per gallon in 2007, resulting in a $18.6 millionincrease in fuel expense in the year ended December 31, 2008, partially offset by a favorableconsumption variance of $6.4 million;**•**    Casualties and insurance expense decreased $7.7 million, or 27% primarily due to an accrual of$3.0 million recorded in 2007 related to the IORY Styrene incident and a decrease in FRA personalinjuries to 25 in the year ended December 31, 2008 from 32 in the year ended December 31, 2007. OurFRA personal injury frequency ratio was 1.70 at December 31, 2008, compared to 2.06 at December 31,2007;**•**    Materials, Joint facilities and Other expenses were relatively flat;**•**    Asset sales resulted in a net gain of $1.7 million compared to a net gain of $0.02 million in theyear ended December 31, 2008 and 2007, respectively.**•**    The year ended December 31, 2008 includes impairment charges of $3.4 million related to theformer corporate headquarters building located in Boca Raton, Florida and to disposed surpluslocomotives; and**•**    Depreciation and amortization expense increased as a percentage of operating revenue to 8.1% inthe year ended December 31, 2008, from 7.9% in the year ended December 31, 2007 due to thecapitalization and depreciation of 2008 capital projects.*Other Income (Expense) Items*     *Interest Expense.*Interest expense, including amortization of deferred financing costs,increased $15.4 million to $61.7 million for the year ended December 31, 2008, from $46.3 millionin the year ended December 31, 2007. This increase is primarily due to an increase in the effectiveinterest rate on our debt in the third quarter of 2008, which includes interest expense on ourinterest rate swaps and the amortization of deferred financing costs and the increase in our longterm debt balance as a result of the merger transaction in 2007. The interest rate on the bridgecredit facility increased to LIBOR plus 4% from LIBOR plus 2.25%, effective July 1, 2008 as part ofthe amendment to extend the maturity of the loan. The amortization of deferred financing costsincreased from the prior year as a result of incurring deferred financing costs associated with thebridge credit facility and for the 2008 amendment and extension, which are amortized over a shorterperiod of time than the previous deferred financing costs as a result of the shorter maturity ofthe credit agreement. The year ended December 31, 2007, includes a month and a half of interest ona term loan balance of approximately $388 million, which increased to $625 million on February 14,2007 under the bridge credit facility agreement. Interest expense includes $10.1 million and$2.9 million of amortization costs for the periods ended December 31, 2008 and 2007, respectively.     *Other Income (Loss).*Other income (loss) primarily relates to foreign exchange gains orlosses associated with the U.S. dollar term borrowings held by one of our Canadian subsidiaries.For the year ended December 31, 2008 the exchange rates decreased, resulting
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in a foreign exchange loss of $8.3 million, while the increase in the foreign exchange ratesin the prior year resulted in a foreign exchange gain of $7.0 million.     *Income Taxes.*Our effective income tax rates for the years ended December 31, 2008 and 2007for continuing operations were a benefit of 5.3% and 14.6%, respectively. The rates for the yearsended December 31, 2008 and 2007 both included a federal tax benefit of approximately $16 millionrelated to the track maintenance credit provisions enacted by the American Jobs Creation Act of2004 and extended by the Tax Extenders and AMT Relief Act of 2008. The rate for the year endedDecember 31, 2008 included the tax effects for repatriation of Canadian earnings, an interestadjustment related to our Australian tax reserve, an increase of the valuation allowance againstcertain deferred tax assets and the revaluation of deferred taxes for change in tax laws and changein estimated state apportionment factors. Cash taxes paid were $6.7 million and $2.9 million in theyears ended December 31, 2008 and 2007, respectively.     *Discontinued Operations.*In January 2006, we completed the sale of our Alberta RailroadProperties for $22.1 million in cash. In 2008, we settled working capital claims with the buyer andas a result recorded an adjustment of $1.3 million, or $1.2 million, after tax, through the gain ondisposal of discontinued operations.     In August 2004, we completed the sale of our Australian railroad, Freight Australia, toPacific National for AUD $285 million (U.S. $204 million). During the years ended December 31, 2008and 2007, we incurred additional consulting costs associated with the sale of Freight Australia of$1.9 million or $1.3 million, after tax, and $1.1 million or $0.8 million, after tax, related tothe ATO audit of the reorganization transactions undertaken by our Australian subsidiaries prior tothe sale. In addition, we recognized foreign exchange gains of $4.0 million or $2.8 million, aftertax, on tax reserves established in conjunction with the ATO audit during the period endedDecember 31, 2008.     In December 2009, we completed a transaction to terminate the lease of the OVRR line for CAD$73 million ($68.6 million). Income from operations of the discontinued business was $4.1 millionand $4.2 million, after tax, during the years ended December 31, 2008 and 2007, respectively.**Liquidity and Capital Resources**     The discussion of liquidity and capital resources that follows reflects our consolidatedresults and includes all subsidiaries. We have historically met our liquidity requirementsprimarily from cash generated from operations and borrowings under our credit agreements which areused to fund capital expenditures and debt service requirements. For the year ended December 31,2009, there was a net cash inflow from operations of $9.5 million primarily due to cash flowgenerated by operations being offset by cash payments made for the termination of the interest rateswap and the payment of accrued interest of $55.8 million and $8.7 million, respectively, inconjunction with the repayment of the bridge credit facility in June 2009. We believe that we willbe able to generate sufficient cash flow from operations to meet our capital expenditure and debtservice requirements through our continued focus on revenue growth and operating efficiency.***Operating Activities***     Cash provided by operating activities was $9.5 million for the year ended December 31, 2009,compared to $83.6 million for the year ended December 31, 2008. The decrease in cash flows fromoperating activities was primarily due to the termination of the existing interest rate swap inconnection with the repayment of the bridge credit facility in June 2009 and timing of interestpayments.     Cash provided by operating activities was $83.6 million and $66.2 million for the years endedDecember 31, 2008 and 2007, respectively. The increase in cash flows from operating activities from2007 to 2008 was primarily due to an increase in operating income and a more timely collection ofaccounts receivable in 2008.***Investing Activities***     Cash provided by (used in) investing activities was $42.2 million for the year ended December31, 2009, compared to $(45.7) million for the year ended December 31, 2008. The increase in cashprovided was primarily due to the termination of the OVRR lease agreement for $68.6 million and thesale of the Coos Bay Line to the Port of Coos Bay for $16.6 million. Capital expenditures were$47.8 million in the year ended December 31, 2009, compared to $61.3 million in the year endedDecember 31, 2008. Asset sale/disposition proceeds were $90.3 million for the year ended December31, 2009 compared to $17.4 million for the year ended December 31, 2008, primarily due to thetermination of the OVRR lease agreement and the sale of the Coos Bay Line.
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     Cash used in investing activities was $45.7 million and $1,155.5 million for the years endedDecember 31, 2008 and 2007, respectively. The decrease in cash used in investing activities from2007 to 2008 was primarily due to the acquisition of RailAmerica by private equity funds managed byan affiliate of Fortress in February 2007, which resulted in $1,087.5 million of payments to commonshareholders and repayment of the old senior credit facility. Capital expenditures were$61.3 million and $70.9 million in the years ended December 31, 2008 and 2007, respectively. Assetsale proceeds were $17.4 million and $2.9 million for the years ended December 31, 2008 and 2007,respectively. Asset sale proceeds in 2008 were primarily due to the sale of the former corporateheadquarters in Boca Raton, Florida. Asset sale proceeds in 2007 were primarily from land andeasements sales that occurred throughout the year.***Financing Activities***     Cash provided by (used in) financing activities was $111.2 million for the year ended December31, 2009, compared to $(24.8) million in the year ended December 31, 2008. The cash provided byfinancing activities in the year ended December 31, 2009 was due to the common stock proceedsgenerated from the initial public offering in October 2009 and the issuance of the 9.25% seniorsecured notes, partially offset by the cash used to repay the existing bridge credit facility andfinancing costs associated with the issuance of the notes. The cash used in financing activitiesduring the year ended December 31, 2008 was primarily due to the amendment fee paid in conjunctionwith the extension of the bridge credit facility and the repayment of the mortgage on the corporateheadquarters building sold during the third quarter of 2008.     Cash (used in) provided by financing activities was $(24.8) million and $1,091.4 millionduring the years ended December 31, 2008 and 2007, respectively. The cash used in financingactivities during 2008 was primarily for the amendment fee paid in the third quarter of 2008related to the bridge credit facility and the repayment of the mortgage on the corporateheadquarters building sold during the third quarter of 2008. The cash provided by financingactivities in 2007 was primarily due to the acquisition of RailAmerica by investment funds managedby an affiliate of Fortress in February 2007. At that time, we entered into a new bridge creditfacility agreement, as described below, and received a capital contribution.***Working Capital***     As of December 31, 2009, we had working capital of $202.2 million, including cash on hand of$190.2 million, and approximately $17.1 million of availability under the ABL Facility (as definedbelow), compared to working capital of $19.4 million, including cash on hand of $27.0 million, and$25.0 million of availability under our prior revolving credit facility at December 31, 2008. Theworking capital increase at December 31, 2009, compared to December 31, 2008, is primarily due tothe increase in cash from the initial public offering and the cash proceeds from the termination ofthe OVRR lease. In June 2009, we declared and paid a cash dividend in the amount of $20.0 millionto our common stockholders.     Our cash flows from operations and borrowings under our credit agreements historically havebeen sufficient to meet our ongoing operating requirements, to fund capital expenditures forproperty, plant and equipment, and to satisfy our debt service requirements. We expect to continueto sufficiently meet our ongoing operating requirements with our cash flows from operations andborrowings under the ABL Facility.***Long-term Debt****$740 million 9.25% Senior Secured Notes*     On June 23, 2009, we sold $740.0 million of 9.25% senior secured notes due July 1, 2017 in aprivate offering, for gross proceeds of $709.8 million after deducting the initial purchaser’s feesand the original issue discount. The notes are secured by first-priority liens on substantially allof our and the guarantors’ assets. The guarantors are defined essentially as our existing andfuture wholly-owned domestic restricted subsidiaries. The net proceeds received from the issuanceof the notes were used to repay the outstanding balance of the $650 million bridge credit facility,as described below, and $7.4 million of accrued interest thereon, pay costs of $57.1 million toterminate interest rate swap arrangements, including $1.3 million of accrued interest, entered intoin connection with the bridge credit facility and pay fees and expenses related to the offering andfor general corporate purposes.     We may redeem up to 10% of the aggregate principal amount of the notes issued during any12-month period commencing on the issue date at a price equal to 103% of the principal amountthereof plus accrued and unpaid interest, if any. We may also redeem some or all of the notes atany time before July 1, 2013, at a price equal to 100% of the aggregate principal amount thereofplus accrued and unpaid interest, if any, to the redemption date and a make-whole premium. Inaddition, prior to July 1, 2012, we may redeem up to
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35% of the notes at a redemption price of 109.25% of their principal amount thereof plusaccrued and unpaid interest, if any, with the proceeds from an equity offering. Subsequent toJuly 1, 2013, we may redeem the notes at 104.625% of their principal amount. The premium thenreduces to 102.313% commencing on July 1, 2014 and then 100% on July 1, 2015 and thereafter.     On November 16, 2009, we redeemed $74 million aggregate principal amount of the notes at acash redemption price of 103%, plus accrued interest thereon to, but not including, the redemptiondate.     On November 2, 2009, we commenced an exchange offer of the privately placed senior securednotes for senior secured notes which have been registered under the Securities Act. The registerednotes have terms that are substantially identical to the privately placed notes. The exchange offerexpired on December 2, 2009.*$40 million ABL Facility*     In connection with the issuance of the senior secured notes on June 23, 2009, we also enteredinto a $40 million Asset Backed Loan Facility (“ABL Facility”). The ABL Facility matures onJune 23, 2013 and bears interest at LIBOR plus 4.00%. Obligations under the ABL Facility aresecured by a first-priority lien in the ABL collateral. ABL collateral includes accountsreceivable, deposit accounts, securities accounts and cash. As of December 31, 2009, we had nooutstanding balance under the ABL Facility and approximately $17.1 million of undrawn availability,taking into account borrowing base limitations.*Covenants to Senior Secured Notes and ABL Facility*     The indenture governing the senior secured notes contains certain limitations and restrictionson us and our restricted subsidiaries’ (as of the date of thisreport, all of our subsidiaries wererestricted subsidiaries) ability to, among other things, incur additional indebtedness; issuepreferred and disqualified stock; purchase or redeem capital stock; make certain investments; paydividends or make other payments or loans or transfer property; sell assets; enter into certaintypes of transactions with affiliates involving consideration in excess of $5.0 million; createliens on certain assets; and sell all or substantially all of our assets or our guarantor’s assets ormerge with or into another company.     The covenants are subject to important exceptions and qualifications described below.     We and our restricted subsidiaries are prohibited from incurring or issuing additionalindebtedness and disqualified stock and its restricted subsidiaries are prohibited from issuingpreferred stock unless our fixed charge coverage ratio, defined as Adjusted EBITDA less capitalexpenditures divided by fixed charges, for the most recently ended four full fiscal quarters wouldhave been at least 2.00 to 1.00 on a pro forma basis. In addition, we may, among other things,incur certain credit facilities debt not to exceed the greater of (i) $60 million and (ii) theborrowing base; purchase money indebtedness or capital lease obligations not to exceed the greaterof (i) $80 million and (ii) 5.0% of total assets; indebtedness of foreign subsidiaries not toexceed the greater of (i) $25 million and (ii) 15% of total assets of foreign subsidiaries;acquired debt so long as we would be permitted to incur at least an additional $1 of indebtednessunder its fixed charge ratio or such ratio is greater following the transaction; and up to$100 million (limited to $50 million for restricted subsidiaries) indebtedness, disqualified stockor preferred stock, subject to increase from the proceeds of certain equity sales and capitalcontributions.     Furthermore, we and our restricted subsidiaries are prohibited from purchasing or redeemingcapital stock; making certain investments, paying dividends or making other payments or loans ortransfers property, unless we could incur an additional dollar of indebtedness under our fixedcharge ratio and such payment is less than 50% of our consolidated net income plus certain otheritems that increase the size of the payment basket. In addition, we may, among other things, makeany payment from the proceeds of a capital contribution or concurrent offering of equity interestsof us; make stock buy-backs from current and former employees/directors in an amount to not exceed$5 million per year, subject to carryover of unused amounts into subsequent years (capped at$10 million in any year) and subject to increase for cash proceeds from certain equity issuances toemployees/directors and cash proceeds from key man life insurance; make investments in unrestrictedsubsidiaries in an amount not to exceed (i) $10 million and (ii) 0.75% of total assets; paydividends following a public offering up to 6% per annum of the net proceeds received by the us;make any payments up to $25 million. Moreover, we may make investments in an amount not to exceedthe greater of (i) $25 million and (ii) 2.0% of total assets, investments in a similar business notto exceed the greater of (i) 50 million and (ii) 3% of total assets and advances to employees notin excess of $5 million.
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     Adjusted EBITDA, as defined in the indenture governing the senior secured notes, is the keyfinancial covenant measure that monitors our ability to undertake key investing and financingfunctions, such as making investments, transferring property, paying dividends, and incurringadditional indebtedness.     The following table sets forth the reconciliation of Adjusted EBITDA from our cash flow fromoperating activities (in thousands):                   **Successor**  **Predecessor**           **February 15th,**  **January 1,**   **Year Ended**  **Year Ended**  **2007 through**  **2007 through**   **December 31,**  **December 31,**  **December 31,**  **February 14th,**   **2009**  **2008**  **2007**  **2007** **Cash flows from operating activities toAdjusted EBITDA Reconciliation:**                Net cash (used in) provided by operating activities $9,540  $83,572  $67,931  $(1,763)Changes in working capital accounts  32,790   (11,524)  (10,779)  5,965 Depreciation and amortization, includingamortization of debt issuance costs classified ininterest expense  (52,340)  (49,118)  (36,447)  (4,917)Amortization of swap termination costs  (16,616)  —   —   — Net gain (loss) on sale or disposal of properties  26,826   1,738   (1,141)  27 Foreign exchange gain (loss) on debt  1,160   (8,260)  7,048   — Swap termination costs  55,750   —   —   — Loss on extinguishment of debt  (9,499)  —   —   — Equity compensation costs  (10,712)  (3,042)  (1,178)  (3,524)Deferred income taxes  (21,057)  3,161   8,068   (1,105)             Net income (loss)  15,842   16,527   33,502   (5,317)             Add: Discontinued operations income/gain  (21,377)  (6,895)  (3,385)  (9)             Income (loss) from continuing operations  (5,535)  9,632   30,117   (5,326)Add:                Provision for (benefit from) income taxes  (8,539)  (481)  (4,086)  930 Interest expense, including amortization costs  86,878   61,718   43,009   3,280 Depreciation and amortization  41,804   39,359   32,082   4,272              EBITDA  114,608   110,228   101,122   3,156 Add:                Impairment of assets  —   3,420   —   — Equity compensation costs  10,712   3,042   1,178   3,524 Foreign exchange (gain) loss on debt  (1,160)  8,260   (7,048)  — Loss on extinguishment of debt  9,499   —   —   — Non-recurring headquarter relocation costs  1,403   6,089   —   —              Adjusted EBITDA $135,062  $131,039  $95,252  $6,680                   Based on current levels of Adjusted EBITDA, we are not restricted in undertaking key investingand financing functions as discussed above.     Adjusted EBITDA, as presented herein, is a supplemental measure of liquidity that is notrequired by, or presented in accordance with, GAAP. We use non-GAAP financial measures as asupplement to our GAAP results in order to provide a more complete understanding of the factors andtrends affecting our business. However, Adjusted EBITDA has limitations as an analytical tool. Itis not a measurement of our cash flows from operating activities under GAAP and should not beconsidered as an alternative to cash flow from operating activities as a measure of liquidity.     The ABL Facility includes customary affirmative and negative covenants, including, among otherthings, restrictions on (i) the incurrence of indebtedness and liens, (ii) investments and loans,(iii) dividends and other payments with respect to capital stock, (iv) redemption and repurchase ofcapital stock, (v) mergers, acquisitions and asset sales, (vi) payments and modifications of otherdebt (including the notes), (vii) affiliate transactions, (viii) altering our business,(ix) engaging in sale-leaseback transactions and (x) entering into agreements that restrict ourability to create liens or repay loans or issue capital stock. In addition, if availability underthe ABL Facility is below $15.0 million, we will be subject to a minimum fixed charge coverageratio of 1.1 to 1.0.
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*$650 million Bridge Credit Facility*     As part of the merger transaction in which we were acquired by certain private equity fundsmanaged by affiliates of Fortress we terminated the commitments under our former amended andrestated credit agreement and repaid all outstanding loans and other obligations in full under thisagreement. In order to fund this repayment of debt and complete the merger transaction, onFebruary 14, 2007, we entered into a $650 million bridge credit facility agreement. The facilityconsists of a $587 million U.S. dollar term loan commitment and a $38 million Canadian dollar termloan commitment, as well as a $25 million revolving loan facility with a $20 million U.S. dollartranche and a $5 million Canadian dollar tranche. We entered into an amendment on July 1, 2008 toextend the maturity of the bridge credit facility for one year with an additional one yearextension at our option. Under the amended bridge credit facility agreement, the term loans andrevolving loans paid interest at LIBOR plus 4.0%. The bridge credit facility agreement originallymatured on August 14, 2008, and as such, the outstanding loan balance under this agreement wasreflected as a current liability at December 31, 2007. Prior to amendment, the bridge creditfacility agreement, including the revolving loans, paid interest at LIBOR plus 2.25%.     In November 2008, we entered into Amendment No. 1 to the amended bridge credit facilityagreement which permitted us to enter into employee and office space sharing agreements withaffiliates and included a technical amendment to the definitions of interest coverage ratio andinterest expense.     The U.S. and Canadian dollar term loans and the U.S. and Canadian dollar revolvers werecollateralized by the assets of and guaranteed by us and most of our U.S. and Canadiansubsidiaries. The loans were provided by a syndicate of banks with Citigroup Global Markets, Inc.and Morgan Stanley Senior Funding, Inc., as co-lead arrangers, Citicorp North America, Inc., asadministrative agent and collateral agent and Morgan Stanley Senior Funding, Inc. as syndicationagent.***Interest Rate Swaps***     On February 14, 2007, we entered into an interest rate swap with a termination date ofFebruary 15, 2014. The total notional amount of the swap started at $425 million for the periodcommencing February 14, 2007 through November 14, 2007, increasing to a total notional amount of$525 million for the period commencing November 15, 2007 through November 14, 2008, and ultimatelyincreased to $625 million for the period commencing November 15, 2008 through February 15, 2014.Under the terms of the interest rate swap, we were required to pay a fixed interest rate of 4.9485%on the notional amount while receiving a variable interest rate equal to the 90 day LIBOR. Thisswap qualified, was designated and was accounted for as a cash flow hedge under ASC 815. Thisinterest rate swap agreement was terminated in June 2009, in connection with the repayment of thebridge credit facility, and thus had no fair value at December 31, 2009. Interest expense of$0.3 million was recognized during the year ended December 31, 2009 for the portion of the hedgedeemed ineffective. Interest expense of $0.5 million was recognized during the year ended December31, 2008 for the portion of the hedge deemed ineffective. Pursuant to ASC 815, the fair valuebalance of the swap at the termination date remains in accumulated other comprehensive loss, net oftax, and is amortized into interest expense over the remaining life of the original swap (throughFebruary 14, 2014). As of December 31, 2009, accumulated other comprehensive loss included$27.1 million, net of tax, of unamortized loss relating to the terminated swap. Reclassificationsfrom accumulated other comprehensive loss to interest expense in the next twelve months will beapproximately $21.4 million, or $13.3 million, net of tax.     On June 3, 2005, we entered into two interest rate swaps for a total notional amount of$100 million for the period commencing November 25, 2005 through November 24, 2008. Under the termsof the interest rate swaps, we were required to pay a fixed interest rate of 4.04% on $100 millionwhile receiving a variable interest rate equal to the 90 day LIBOR. These swaps qualified, weredesignated and were accounted for as cash flow hedges under ASC 815. One of the interest rate swapswith a total notional amount of $50 million was terminated on February 12, 2007 while the remainingamount terminated as planned on November 24, 2008, and thus had no fair value at December 31, 2008or December 31, 2009. Interest expense of $0.5 million and $0.4 million was recognized during theyears ended December 31, 2008 and December 31, 2007, respectively, for the portion of the hedgedeemed ineffective.     On November 30, 2004, we entered into an interest rate swap for a notional amount of$100 million for the period commencing November 25, 2005 through November 24, 2007. The swapqualified, was designated and was accounted for as a cash flow hedge under ASC 815. Under the termsof the interest rate swap, we were required to pay a fixed interest rate of 4.05% on $100 millionwhile receiving a variable interest rate equal to the 90 day LIBOR. This interest rate swapterminated as planned on November 24, 2007, and thus had no fair value at December 31, 2008 orDecember 31, 2009. Interest expense of $0.8 million was recognized during the period endedDecember 31, 2007 for the portion of the hedge deemed ineffective.
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     For derivative instruments in an asset position, we analyze the credit standing of thecounterparty and factor it into the fair value measurement. *Fair Value Measurements and DisclosuresTopic*, ASC 820, states that the fair value of a liability must reflect the nonperformance risk ofthe reporting entity. Therefore, the impact of our credit worthiness has also been factored intothe fair value measurement of the derivative instruments in a liability position.***Off-Balance Sheet Arrangements***     We currently have no off-balance sheet arrangements.***Contractual Obligations***     Two primary uses of the cash provided by our operations are capital expenditures and debtservice. The following table represents the minimum future payments on our long-term debt, and ourexisting lease obligations as of December 31, 2009 (in thousands):                                       **After**   **Total**  **2010**  **2011-2012**  **2013-2014**  **2014** Senior secured notes $666,000  $—  $—  $—  $666,000 Other long term debt  2,923   390   673   640   1,220 Interest payments on senior secured notes  462,038   61,605   123,210   123,210   154,013 Interest payments on long term debt  842   174   291   216   161 Capital lease obligations  758   278   480   —   — Operating lease obligations  64,841   19,173   18,799   6,330   20,539                 Total contractual cash obligations(1) $1,197,402  $81,620  $143,453  $130,396  $841,933                  (1) There were no material purchase obligations outstanding as of December31, 2009. Table excludes any reserves for income taxes under IncomeTaxes Topic, ASC 740-10-25, because we are unable to reasonablypredict the ultimate amount or timing of settlement of ourunrecognized tax benefits beyond 2009. As of December 31, 2009, ourreserves for income taxes totaled approximately $6.8 million.***Critical Accounting Policies and Use of Estimates***     The preparation of financial statements in conformity with generally accepted accountingprinciples in the United States (“GAAP”) requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets andliabilities at the dates of the financial statements and the reported amounts of revenue andexpenses during the reporting periods. These estimates are based on management’s currentexpectations and beliefs and are subject to a number of factors that could lead to actual resultsmaterially differing from the estimates. The factors impacting management’s estimates are set forthbelow.     The critical financial statement accounts that are subject to significant estimation arereserves for litigation, casualty and environmental matters, deferredincome taxes, property,plant and equipment depreciation methods and goodwill and intangibleassets.     In accordance with *Contingencies Topic*, ASC 450, an accrual for a loss contingency isestablished if information available prior to the issuance of the financial statements indicatesthat it is probable that a liability has been incurred or an asset has been impaired and can bereasonably estimated. These estimates have been developed in consultation with outside counselhandling our defense in these matters and are based upon an analysis of potential results, assuminga combination of litigation and settlement strategies. Subsequent changes to those estimates arereflected in our statements of operations in the period of the change.     Deferred tax assets and liabilities are recognized based on differences between the financialstatement carrying amounts and the tax bases of assets and liabilities. We regularly review ourdeferred tax assets for recoverability and establish a valuation allowance based on historicaltaxable income, projected future taxable income, and the expected timing of the reversals ofexisting temporary differences. If we are unable to generate sufficient future taxable income, orif there is a material change in the statutory tax rates or time period within which the underlyingtemporary differences become taxable or deductible, we could be required to establish an additionalvaluation allowance against a portion of our deferred tax asset, resulting in an increase in oureffective tax rate and an adverse effect on earnings. Additionally, changes in our estimatesregarding the statutory tax rates to be applied to the reversal of deferred tax assets andliabilities could materially affect our effective tax rate.
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     Property, plant and equipment comprised 60% of our total assets as of December 31, 2009. Theseassets are stated at cost, less accumulated depreciation. We use the group method of depreciationunder which a single depreciation rate is applied to the gross investment in our track assets. Uponnormal sale or retirement of track assets, cost less net salvage value is charged to accumulateddepreciation and no gain or loss is recognized. Expenditures that increase asset values or extenduseful lives are capitalized. Repair and maintenance expenditures are charged to operating expensewhen the work is performed. We periodically review the carrying value of our long-lived assets forimpairment. This review is based upon our projections of anticipated future cash flows. While webelieve that our estimates of future cash flows are reasonable, different assumptions regardingsuch cash flows could materially affect our evaluations.     We review the carrying values of goodwill and identifiable intangible assets with indefinitelives at least annually to assess impairment since these assets are not amortized. Additionally, wereview the carrying value of goodwill or any intangible asset whenever such events or changes incircumstances indicate that its carrying amount may not be recoverable. Management assessesimpairment by comparing the fair value of an intangible asset or goodwill with its carrying value.Specifically, we test for impairment in accordance with *Intangibles- Goodwill and Other Topic,*ASC350. For goodwill, a two-step impairment model is used. The first step compares the fair value ofthe reporting unit with its carrying amount, including goodwill. The determination of fair valueinvolves significant management judgment. If the fair value of the reporting unit is less than thecarrying amount, goodwill would be considered impaired. The second step measures the goodwillimpairment as the excess of recorded goodwill over the asset’s implied fair value. Impairments arerecognized when incurred.     For the indefinite-lived intangible assets the impairment test compares the fair value of anintangible asset with its carrying amount. If the carrying amount of an intangible asset exceedsits fair value, an impairment loss is recognized in an amount equal to that excess. The Company hascertain railroad leases that are recorded as indefinite-lived intangible assets.     No circumstances have occurred to indicate an impairment and management believes that goodwilland the indefinite-lived intangible assets are not impaired based on the results of the annualimpairment test. However, a change in circumstances in the future that may negatively impact cashflows including, but not limited to, a loss of a key customer, a significant reduction in theforecast of a reporting unit’s carloadings, regulatory or legislative changes or a decrease in ourmarket capitalization could result in an interim impairment test. The result of such an impairmenttest could result in the write-off of goodwill or indefinite lived intangible assets in a futureaccounting period.     For a complete description of our accounting policies, see Note 1 to our consolidatedfinancial statements.***Recently Issued Accounting Pronouncements***     In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 168, *The FASB Accounting Standards Codification and the Hierarchyof Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162*. Thisstatement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative andnonauthoritative accounting literature. Effective July 2009, the FASB Accounting StandardsCodification (“ASC” and also known collectively as the “Codification”) is considered the singlesource of authoritative U.S. accounting and reporting standards, except for additionalauthoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance andliterature would include, among other things, FASB Concepts Statements, American Institute ofCertified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. TheCodification was developed to organize GAAP pronouncements by topic so that users can more easilyaccess authoritative accounting guidance. It is organized by topic, subtopic, section, andparagraph, each of which is identified by a numerical designation. This statement appliesbeginning in third quarter 2009. All accounting references have been updated, and therefore SFASreferences have been replaced with ASC references.     Effective beginning second quarter 2009, the *Financial Instruments Topic*, ASC 825-10-65-1(a),requires disclosures about fair value of financial instruments in quarterly reports as well as inannual reports. For RailAmerica, this statement applies to certain investments, including cashequivalents, and long-term debt.
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**ITEM 7A.** **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**     We are exposed to market risks from changing foreign currency exchange rates, interest ratesand diesel fuel prices. Changes in these factors could cause fluctuations in earnings and cashflows.     *Foreign Currency.*Our foreign currency risk arises from owning and operating railroads inCanada. As of December 31, 2009, we had not entered into any currency hedging transactions tomanage this risk. A decrease in the Canadian dollar could negatively impact our reported revenueand earnings for the affected period. During 2009, the Canadian dollar increased 16% in value incomparison to the U.S. dollar. The average rate for the year ended 2009, however, was 9% lower thanit was for 2008. The decrease in the average Canadian dollar exchange rate led to a decrease of$2.6 million in reported revenue and a $1.8 million decrease in reported operating income in 2009,compared to 2008. A 10% unfavorable change in the 2009 average exchange rate would have negativelyimpacted 2009 revenue by $4.0 million and operating income by $1.2 million.     *Interest Rates.*Our senior secured notes issued in June 2009 are fixed rate instruments, andtherefore, would not be impacted by changes in interest rates. Our potential interest rate riskresults from our ABL Facility as an increase in interest rates would result in lower earnings andincreased cash outflows. We do not currently have any outstanding balances under this facility, butif we were to draw upon it, we would be subject to changes in interest rates.     *Diesel Fuel.*We are exposed to fluctuations in diesel fuel prices, as an increase in theprice of diesel fuel would result in lower earnings and increased cash outflows. Fuel costsrepresented 7.8% of total operating revenues during the year ended December 31, 2009. Due to thesignificance of fuel costs to our operations and the historical volatility of fuel prices, weparticipate in fuel surcharge programs which provide additional revenue to help offset the increasein fuel expense. These fuel surcharge programs fluctuate with the price of diesel fuel with a lagof three to nine months. Each one-cent change in the price of fuel would result in approximately a$0.2 million change in fuel expense on an annual basis.     *Counterparty Risk.*We monitor our hedging positions and the credit ratings of ourcounterparties and do not anticipate losses due to counterparty non-performance.**ITEM 8.** **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**     The Consolidated Financial Statements of RailAmerica, the accompanying notes thereto and thereport of the independent registered certified public accounting firm are included as part of thisForm 10-K and immediately follow the signature page of this Form 10-K.
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**ITEM 9.** **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**     None.**ITEM 9A.** **CONTROLS AND PROCEDURES**     DISCLOSURE CONTROLS AND PROCEDURES. Based on an evaluation by our management, with theparticipation of our chief executive officer and chief financial officer, as of the end of theperiod covered by this report, our chief executive officer and chief financial officer haveconcluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)of the Exchange Act) are effective to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in SEC’s rules and forms and that such information isaccumulated and communicated to our management, including our chief executive and chief financialofficers, as appropriate to allow timely decisions regarding required disclosure.     MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. This annual report does notinclude a report of management’s assessment regarding internal control over financial reporting oran attestation report of the company’s registered public accounting firm due to a transition periodestablished by rules of the Securities and Exchange Commission for newly public companies.     CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in ourinternal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) during the last fiscal quarter covered by this report that have materiallyaffected, or are reasonably likely to materially affect, our internal control over financialreporting.**ITEM 9B.** **OTHER INFORMATION**     None.
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**PART III****ITEM 10.** **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**     Information concerning directors, executive officers and nominees and our code of ethics isincorporated by reference from our definitive proxy statement relating to our 2010 Annual Meetingof Stockholders to be filed with the SEC on or before April 30, 2010.**ITEM 11.** **EXECUTIVE COMPENSATION**     Information concerning executive compensation is incorporated by reference from our definitiveproxy statement relating to our 2010 Annual Meeting of Stockholders to be filed with the SEC on orbefore April 30, 2010.**ITEM 12.** **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**     Information concerning security ownership and securities issuable under equity compensationplans is incorporated by reference from our definitive proxy statement relating to our 2010 AnnualMeeting of Stockholders to be filed with the SEC on or before April 30, 2010.**ITEM 13.** **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**     Information concerning certain relationships and related transactions, and directorindependence, is incorporated by reference from our definitive proxy statement relating to our 2010Annual Meeting of Stockholders to be filed with the SEC on or before April 30, 2010.**ITEM 14.** **PRINCIPAL ACCOUNTANT FEES AND SERVICES**     Information concerning principal accountant fees and services is incorporated by referencefrom our definitive proxy statement relating to our 2010 Annual Meeting of Stockholders to be filedwith the SEC on or before April 30, 2010.
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**PART IV****ITEM 15.** **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES** (a) The financial statements filed as part of this report are listed separately in theIndex of Financial Statements on page F-1 of this report.  (b) Exhibits   **Exhibit**  **No.** **Description**3.1 Amended and Restated Certificate of Incorporation of the Registrant(incorporated by reference to Exhibit 3.1 to RailAmerica, Inc.’s FormS-4 filed on October 20, 2009).   3.2 Amended and Restated Bylaws of the Registrant (incorporated by referenceto Exhibit 3.2 to RailAmerica, Inc.’s Form S-4 filed on October 20,2009).   4.1 Stockholders Agreement by and between RailAmerica, Inc. and RRAcquisition Holding, LLC (incorporated by reference to Exhibit 4.1 toRailAmerica, Inc.’s Form S-4 filed on October 20, 2009).   4.2 Indenture, dated as of June 23, 2009, by and between RailAmerica, Inc.,the guarantors named therein, as Guarantors, and U.S. Bank NationalAssociation, as Trustee and Notes Collateral Agent (incorporated byreference to Exhibit 4.3 to RailAmerica, Inc.’s Form S-1 filed on July27, 2009).   4.3 Form of 9.25% Notes due 2017 (included in Exhibit 4.2).   10.1 Credit Agreement, dated as of June 23, 2009, among RailAmerica, Inc.,RailAmerica Transportation Corp., the several lenders from time to timeparties thereto, Citicorp North America, Inc. and Citigroup GlobalMarkets Inc. (incorporated by reference to Exhibit 10.1 to Amendment No.1 to RailAmerica, Inc.’s Form S-1 filed on September 1, 2009).   10.2 RailAmerica, Inc. 2008 Omnibus Stock Incentive Plan (incorporated byreference to Exhibit 10.2 to Amendment No. 2 to RailAmerica, Inc.’s FormS-1 filed on September 22, 2009).+   10.3 RailAmerica, Inc. 2009 Omnibus Stock Incentive Plan (incorporated byreference to Exhibit 99.1 to RailAmerica, Inc.’s Form S-8 filed onOctober 13, 2009).+   10.4 Form of Indemnification Agreement with directors and officers(incorporated by reference to Exhibit 10.4 to Amendment No. 2 toRailAmerica, Inc.’s Form S-1 filed on September 22, 2009).   10.5 Form of Management Shareholder Award Agreement (incorporated byreference to Exhibit 10.5 to Amendment No. 3 to RailAmerica, Inc.’s FormS-1 filed on September 29, 2009).+   10.6 Form of Amended and Restated Restricted Share Agreement for BonusRestricted Shares under the RailAmerica, Inc. Omnibus Stock IncentivePlan (incorporated by reference to Exhibit 10.6 to Amendment No. 3 toRailAmerica, Inc.’s Form S-1 filed on September 29, 2009).+   10.7 Form of Director Restricted Share Agreement (incorporated by referenceto Exhibit 10.7 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filedon September 29, 2009).+   10.8 Employment Agreement, dated as of September 28, 2009, by and betweenRailAmerica, Inc. and John Giles (incorporated by reference to Exhibit10.8 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filed onSeptember 29, 2009).+   10.9 Employment Agreement, dated as of September 28, 2009, by and betweenRailAmerica, Inc. and Clyde Preslar (incorporated by reference toExhibit 10.9 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filed onSeptember 29, 2009).+   10.10 Employment Agreement, dated as of September 28, 2009, by and betweenRailAmerica, Inc. and David Rohal (incorporated by reference to Exhibit10.10 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filed onSeptember 29, 2009).+   10.11 Employment Agreement, dated as of September 28, 2009, by and betweenRailAmerica, Inc. and Paul Lundberg (incorporated by reference toExhibit 10.11 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filedon September 29, 2009).+   10.12 Employment Agreement, dated as of September 28, 2009, by and betweenRailAmerica, Inc. and Charles Patterson (incorporated by reference toExhibit 10.12 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filedon September 29, 2009).+
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   **Exhibit**  **No.** **Description**10.13 Employment Agreement, dated as of September 28, 2009, by and betweenRailAmerica, Inc. and Scott Williams (incorporated by reference toExhibit 10.13 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1 filedon September 29, 2009).+   10.14 Form of FECR Rail Corp. Consulting Agreement (incorporated by referenceto Exhibit 10.14 to Amendment No. 3 to RailAmerica, Inc.’s Form S-1filed on September 29, 2009).+   10.15 Form of FECR Rail Corp. Restricted Stock Unit Award Agreement(incorporated by reference to Exhibit 10.15 to Amendment No. 3 toRailAmerica, Inc.’s Form S-1 filed on September 29, 2009).+   10.16 Form of Florida East Coast Industries, Inc. Consulting Agreement(incorporated by reference to Exhibit 10.16 to Amendment No. 3 toRailAmerica, Inc.’s Form S-1 filed on September 29, 2009).+   10.17 Form of Florida East Coast Industries, Inc. Restricted Stock Unit AwardAgreement (incorporated by reference to Exhibit 10.17 to Amendment No. 3to RailAmerica, Inc.’s Form S-1 filed on September 29, 2009).+   21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit21.1 to RailAmerica, Inc.’s Form S-4 filed on October 20, 2009).   23.1 Consent of Ernst & Young LLP.   31.1 Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer   31.2 Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer   32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of2002   32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of2002 + Executive Compensation Plan or Arrangement.
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SIGNATURES     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.      RAILAMERICA, INC.