##### Table of Contents



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  o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
 Commission file number 0-20618  RAILAMERICA, INC. 
  Delaware
    
    65-0328006(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification Number)5300 Broken Sound Blvd., N.W., Boca Raton, Florida
    
    33487(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (561) 994-6015 Securities Registered Pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS
    
    NAME OF EACH EXCHANGE ON WHICH REGISTEREDCommon Stock, $.001 Par Value
    
    New York Stock ExchangeCommon Stock Purchase Rights
    
    New York Stock Exchange
 Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes þ No o The aggregate market value of the voting stock held by non-affiliates of the registrant as of June
30, 2004 computed by reference to the average bid and asked prices of registrants common stock
reported on the New York Stock Exchange on such date was $541.6 million. The number of shares outstanding of registrants Common Stock, $.001 par value per share, as of
March 11, 2005 was 37,754,199. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by
reference from the registrants Definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A.   1




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TABLE OF CONTENTS PAGEPART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    10Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    14Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 7a. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    37Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    38Item 9a. Controls and Procedures
    
    
    38Item 9b. Other Information
    
    
    38PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    39Item 11. Executive Compensation
    
    
    39Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    39Item 13. Certain Relationships and Related Transactions
    
    
    39Item 14. Principal Accountant Fees and Services
    
    
    39PART IVItem 15.
Exhibits and Financial Statement Schedules
    
    
    40Signatures
    
    
    44Code of EthicsSubsidiaries of the RegistrantConsent of PricewaterhouseCoopersSection 302 Principal Executive Officer CertificationSection 302 Principal Financial Officer CertificationSection 906 Principal Executive Officer CertificationSection 906 Principal Financial Officer Certification
  2




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This Form 10-K contains certain forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995 and information relating to RailAmerica, Inc. and its
subsidiaries that are based on the beliefs of our management and that involve known and unknown
risks and uncertainties. When used in this report, the terms anticipate, believe, estimate,
expect and intend and words or phrases of similar import, as they relate to us or our
subsidiaries or our management, are intended to identify forward-looking statements. These
statements reflect the current risks, uncertainties and assumptions related to various factors
including, without limitation, currency risk, competitive factors, general economic conditions,
customer relations, fuel costs, the interest rate environment, governmental regulation and
supervision, the inability to successfully integrate acquired operations, weather, the ability to
service debt, one-time events and other factors described under the heading Factors affecting our
operating results, business prospects and market price of stock and elsewhere in this report and
in other filings made by us with the Securities and Exchange Commission. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from those described in
this report as anticipated, believed, estimated or intended. We undertake no obligation to update,
and we do not have a policy of updating or revising, these forward-looking statements. Except where
the context otherwise requires, the terms we, us, or our refer to the business of
RailAmerica, Inc. and its consolidated subsidiaries. 
 PART I 
 ITEM 1. BUSINESS GENERAL We are the largest owner and operator of short line freight railroads in North America. We own,
lease or operate a diversified portfolio of 44 railroads with approximately 8,800 miles of track
located in the United States and Canada. Through our diversified portfolio of rail lines, we
operate in numerous geographic regions with varying concentrations of commodities hauled. Our
business strategy is to focus on our North American railroad operations. Accordingly, during 2004,
we sold our Australian and Chilean railroads. We seek to grow both through the expansion of the
traffic base on our existing railroads and acquisitions of additional North American railroads. In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million of cash, a secured instrument for $5.7
million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no
later than February 2007, both bearing interest at LIBOR plus 3%. Ferronors results of operations
for the periods presented have been reclassified to discontinued operations in our consolidated
financial statements. In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). In December 2004, we recorded an additional payment of AUD $7 million
(US $5 million) based on the changes in the net assets of Freight Australia from September 30, 2003
through August 31, 2004. The Share Sale Agreement also provides various representations and
warranties by RailAmerica to the buyer. Freight Australias results of operations for the periods
presented have been reclassified to discontinued operations in our consolidated financial
statements. Since 2000, we have grown significantly through the following:  
    In February 2000, we acquired RailTex, Inc., a holding company that owned 25
railroads in the United States and Canada, for $294.2 million.
    In January 2002, we acquired StatesRail, Inc., a holding company of 8 railroads in
the United States, for $84.4 million.
    In January 2002, we acquired ParkSierra Corp., a holding company of 3 railroads in
the United States, for $46.2 million.
    In May 2003, we acquired/leased a branch line, in Alabama and Mississippi, that is
contiguous to our existing Alabama and Gulf Coast Railway for $15.1 million.
    In June 2003, we acquired the San Luis & Rio Grande Railroad, a branch line in Colorado, for $7.2 million.
    In January 2004, we acquired the Central Michigan Railway for $25.3 million.
    In August 2004, we commenced operations under a 20 year lease agreement of the
Chicago, Fort Wayne & Eastern Railroad, for an initial lease payment of $10.0 million.
    In November 2004, we acquired/leased the Midland Subdivision, in Ohio, for $8.6
million. 3




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We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing
railroad companies. Our principal executive office is located at 5300 Broken Sound Blvd, N.W., Boca
Raton, Florida 33487, and our telephone number at that location is (561) 994-6015. Our Internet website address is www.railamerica.com. We make available free of charge on or
through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the Securities and Exchange
Commission, or SEC. The SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC at
http://www.sec.gov. We also make available on our website other reports filed with the SEC under
the Securities Exchange Act of 1934, as amended, including proxy statements and reports filed by
officers and directors under Section 16(a) of that Act. These reports may be found by selecting the
option entitled SEC FILINGS in the INVESTOR RELATIONS section on our website. Additionally, our
corporate governance guidelines, board committee charters, code of business conduct and ethics and
code of ethics for principal executive officers and senior financial officers are available on our
website and in print to any shareholder who requests them. Information contained in or connected to
our website is not part of this report. BUSINESS STRATEGY PROVIDING SUPERIOR CUSTOMER SERVICE. We strive to increase our revenue by providing
consistent, innovative, cost-efficient and reliable service to our customers. We work with
customers, potential customers, industrial development organizations and our Class I interchange
partners to develop creative transportation solutions. Our decentralized management structure is
an important element of our marketing strategy. We give significant discretion with respect to
sales and marketing activities to our local marketing managers and the General Managers of each
railroad. As part of our marketing efforts, we often schedule more frequent rail service, help
customers negotiate price and service levels with interchange partners and assist customers in
obtaining the quantity and type of rail equipment required for their operations. We also provide
non-scheduled train service on short notice to accommodate customers special or emergency needs.
We consider all of our employees to be customer service representatives and encourage them to
initiate and maintain regular contact with shippers. OPERATING SAFELY AND EFFICIENTLY. We are focused on operating safe railroads in an efficient
manner. Through training, supervision and safety programs, we have reduced our FRA frequency ratio
from 5.83 in 1999 to 2.75 in 2004. FRA frequency ratio is measured as reportable injuries per
200,000 man hours worked. In addition, we manage each of our railroads as an individual profit
center allowing local management to make decisions on how to operate the railroad efficiently and
profitably. We support the individual railroad operations with centralized purchasing, accounting,
human resources, information technology and legal services, allowing us to realize synergies and
economies of scale based on our size. CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Over the last eleven years, we have completed
twenty-eight acquisitions of railroad companies which owned or had equity interests in 61
railroads, for total consideration in excess of $700 million. We seek acquisition candidates that enable us to form geographic clusters of short lines,
thereby affording management economies of scale as well as marketing and operating synergies. To be
considered by us, acquisition candidates must typically be profitable, generate strong cash flows,
have potential for further growth and possess well-maintained infrastructures. Acquisition opportunities in North America generally come from three sources. First, certain
of the Class I railroads have been selling/leasing branch lines over the past year. We
acquired/leased two branch lines from CSX during 2004. We believe, based on our strong operating
performance and relationships with the Class I railroads, we are a logical choice to acquire
additional properties in the future. Second, as the short line industry itself continues to
consolidate, we believe our industry reputation, demonstrated access to capital, breadth of
geographic coverage and ability to efficiently evaluate and negotiate prospective transactions
place us in a good position to acquire other independent short lines or short line holding
companies. Third, as industrial companies sell their railroad operations, we believe our
cost-effective and customer oriented approach makes us a strong candidate to acquire these
railroads. 4




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In acquiring rail properties, we compete with other railroad operators, some of which have
greater financial resources than we do. Competition for rail properties is based primarily upon
price, operating history and financing capability. We believe our established reputation as a
successful acquirer and operator of short line rail properties, combined with our managerial
resources, effectively positions us to successfully compete for future acquisition opportunities. INDUSTRY OVERVIEW The U.S. railroad industry is dominated by major Class I railroads, which operated
approximately 99,000 miles of track in 2003. In addition to large railroad operators, there were
more than 540 short line and regional railroads, which operated approximately 42,000 miles of track
in 2003. The railroad industry is subject to regulation by various government agencies, primarily the
Surface Transportation Board, or STB. For regulatory purposes, the STB classifies railroads into
three groups: Class I, Class II and Class III, based on annual operating revenue. For 2003, the
Class I railroads each had operating revenue of at least $277.7 million, Class II railroads each
had revenue of $22.2 million to $277.6 million, and Class III railroads each had revenue of less
than $22.2 million. These thresholds are adjusted annually for inflation. In compiling data on the U.S. railroad industry, the Association of American Railroads, or
AAR, uses the STBs revenue threshold for Class I railroads. Regionals are railroads operating at
least 350 miles of rail line and/or having revenues between $40 million and the Class I revenue
threshold. Locals are railroads falling below the Regional criteria, plus switching and terminal
railroads. 2003 UNITED STATES INDUSTRY OVERVIEW Number of
    
    
    
    
    
    
    2003 RevenueType of Railroad
    
    Carriers
    
    
    Miles Operated
    
    
    (in billions)
    
    
    % of RevenueClass I
    
    
    7
    
    
    
    98,944
    
    
    $
    35.4
    
    
    
    92.4
    %Regional
    
    
    32
    
    
    
    15,648
    
    
    
    1.4
    
    
    
    3.7Local
    
    
    510
    
    
    
    26,347
    
    
    
    1.5
    
    
    
    3.9Total
    
    
    549
    
    
    
    140,939
    
    
    $
    38.3
    
    
    
    100.0
    %
 As a result of deregulation in 1980, Class I railroads have been able to concentrate on core,
long-haul routes, while divesting many of their low-density branch lines to smaller and more
cost-efficient freight railroad operators such as our company. Divesting branch lines allows Class
I railroads to increase car velocity, focus investment on their core network, lower their cost
structure and focus on the long-haul versus short-haul business. Because of the focus by short
line railroads on increasing traffic volume through increased customer service and more efficient
operations, traffic volume on short line railroads normally increase after divestiture by Class I
railroads. Consequently, these transactions often result in net increases in the divesting
carriers freight traffic because much of the business originating or terminating on branch lines
feeds into divesting carriers core routes. In 2004 the majority of the Class I railroad short line spin-offs were created by CSX
Transportation and BNSF Railway Company. The other Class I railroads had a limited number of short
line railroad opportunities. Class I railroads have been divesting short line candidates via a
variety of means: (a) outright sale for cash consideration, (b) a lease of the railroad
right-of-way for a period ranging from 10 to 25 years, or (c) a lease of the land and a sale of the
track and track-related structures. The current trend of the Class I railroads appears to favor
leases over sales. 5




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NORTH AMERICAN OPERATIONS We currently own, lease or operate 44 rail properties in North America, of which 43 are short
line freight railroads that provide transportation services for both on-line customers and Class I
railroads that interchange with our rail lines. Short line railroads are typically less than 350
miles long, serve a particular class of customers in a small geographic area and interchange with
Class I railroads. Short line rail operators primarily serve customers on their line by
transporting products to and from the Class I interchanges. Each of our North American rail lines
is typically the only rail carrier directly serving its customers. The ability to haul heavy and
large quantities of freight as part of a long-distance haul makes our rail services generally a
more effective, lower-cost alternative to other modes of transportation, including motor carriers.
In addition to our 43 short line railroads, we operate a tourist railroad in Hawaii. UNITED STATES. We own, lease or operate 35 short line rail properties and one tourist railroad
in the United States with approximately 7,000 miles of track. Our railroads are geographically
diversified and operate in 26 states. We have clusters of rail properties in the Southeastern,
Southwestern, Midwestern, Great Lakes, New England and Pacific Coast regions of the United States.
We believe that this cluster strategy provides economies of scale and helps achieve marketing and
operational synergies. CANADA. We own, lease or operate 8 short line rail properties in Canada with approximately
1,800 miles of track. Our Canadian properties are geographically diversified and operate in five
provinces and the Northwest territories. RAIL TRAFFIC Rail traffic may be categorized as interline, local or bridge traffic. Interline traffic
either originates or terminates with customers located along a rail line and is interchanged with
other rail carriers. Local traffic both originates and terminates on the same rail line and does
not involve other carriers. Bridge traffic passes over the line from one connecting rail carrier to
another without the carload being originated or terminated on the line. Interline and local traffic generated 88%, 87% and 87% of our total freight revenue in 2004,
2003 and 2002, respectively. We believe that high levels of interline and local traffic provide us
with greater stability of revenue because this traffic represents shipments to or from customers
located along our lines and cannot be easily diverted to other rail carriers, unlike bridge
traffic. In addition to competition with other rail carriers, our railroads compete directly with other
modes of transportation, principally motor carriers and, to a lesser extent, ship and barge
operators. The extent of this competition varies significantly among our railroads. Competition is
based primarily upon the rate charged and the transit time required, as well as the quality and
reliability of the service provided for an origin-to-destination package. To the extent other
carriers are involved in transporting a shipment, we cannot unilaterally control the rate and
quality of service. Cost reductions achieved by major rail carriers over the past several years
have generally improved their ability to compete with alternate modes of transportation. The following table summarizes freight revenue by type of traffic carried by our North
American railroads in 2004, 2003 and 2002 in dollars and as a percentage of total freight revenue. FREIGHT REVENUE
(DOLLARS IN THOUSANDS) 2004
    
    
    2003
    
    
    2002$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Interline
    
    $
    294,566
    
    
    
    83.0
    %
    
    $
    257,309
    
    
    
    82.9
    %
    
    $
    230,738
    
    
    
    81.2
    %Local
    
    
    18,126
    
    
    
    5.1
    %
    
    
    13,076
    
    
    
    4.2
    %
    
    
    16,924
    
    
    
    6.0
    %Bridge
    
    
    42,257
    
    
    
    11.9
    %
    
    
    39,844
    
    
    
    12.9
    %
    
    
    36,430
    
    
    
    12.8
    %$
    354,949
    
    
    
    100.0
    %
    
    $
    310,229
    
    
    
    100.0
    %
    
    $
    284,092
    
    
    
    100.0
    %
 6




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##### Table of Contents



All of our short line properties interchange traffic with Class I railroads. The
following table summarizes our significant connecting carriers in 2004, 2003 and 2002 by freight
revenue and carloads as a percentage of total interchanged (interline and bridge) traffic. INTERCHANGED TRAFFIC 2004
    
    
    2003
    
    
    2002Revenue
    
    
    Carloads
    
    
    Revenue
    
    
    Carloads
    
    
    Revenue
    
    
    CarloadsUnion Pacific Railroad
    
    
    28.1
    %
    
    
    26.9
    %
    
    
    28.8
    %
    
    
    27.9
    %
    
    
    30.2
    %
    
    
    28.3
    %Canadian National Railway
    
    
    22.2
    %
    
    
    20.3
    %
    
    
    21.7
    %
    
    
    18.1
    %
    
    
    22.2
    %
    
    
    19.9
    %CSX Transportation
    
    
    22.8
    %
    
    
    26.1
    %
    
    
    16.4
    %
    
    
    14.2
    %
    
    
    15.4
    %
    
    
    13.4
    %Burlington Northern Santa Fe Railway
    
    
    13.0
    %
    
    
    11.5
    %
    
    
    12.5
    %
    
    
    14.2
    %
    
    
    13.3
    %
    
    
    14.5
    %Norfolk Southern
    
    
    5.5
    %
    
    
    6.7
    %
    
    
    4.7
    %
    
    
    5.6
    %
    
    
    4.6
    %
    
    
    5.3
    %All other railroads
    
    
    8.4
    %
    
    
    8.5
    %
    
    
    15.9
    %
    
    
    20.0
    %
    
    
    14.3
    %
    
    
    18.6
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Charges for interchanged traffic are generally billed to the customers by the connecting
carrier and cover the entire transportation cost from origin to destination, including the portion
that travels over our lines. Our revenue is generally paid directly to us by the connecting
carriers rather than by customers and is payable regardless of whether the connecting carriers are
able to collect from the customers. The revenue payable by connecting carriers is set forth in
contracts entered into by each of our railroads with their respective connecting carriers and is
generally subject to periodic inflation- related adjustments. In 2004, we served approximately 1,800 customers in North America. These customers shipped
and/or received a wide variety of products. Although most of our North American railroads have a
well-diversified customer base, several of the smaller rail lines have one or two dominant
customers. In 2004 and 2003, our 10 largest North American customers accounted for approximately
21% and 27% of our North American transportation revenue, respectively. No individual customer
accounted for more than 10% of our revenue for the years ended 2004 and 2003. The following table sets forth, by number and percentage, the carloads hauled by our North
American railroads during the years ended December 31, 2004, 2003 and 2002. CARLOADS CARRIED BY COMMODITY GROUP 2004
    
    
    2003
    
    2002Commodity Group
    
    Carloads
    
    

    

%

    Carloads
    
    
    %
    
    
    Carloads
    
    
    %Agricultural & Farm Products
    
    
    106,591
    
    
    
    8.7
    %
    
    
    98,439
    
    
    
    8.7
    %
    
    
    94,963
    
    
    
    8.7
    %Autos
    
    
    28,034
    
    
    
    2.3
    %
    
    
    33,888
    
    
    
    3.0
    %
    
    
    43,843
    
    
    
    4.0
    %Chemicals
    
    
    104,368
    
    
    
    8.5
    %
    
    
    85,015
    
    
    
    7.5
    %
    
    
    83,401
    
    
    
    7.6
    %Coal
    
    
    149,584
    
    
    
    12.2
    %
    
    
    142,928
    
    
    
    12.6
    %
    
    
    134,082
    
    
    
    12.2
    %Food Products
    
    
    80,290
    
    
    
    6.5
    %
    
    
    63,704
    
    
    
    5.7
    %
    
    
    62,468
    
    
    
    5.7
    %Intermodal
    
    
    35,690
    
    
    
    2.9
    %
    
    
    35,622
    
    
    
    3.1
    %
    
    
    42,410
    
    
    
    3.9
    %Lumber & Forest Products
    
    
    130,953
    
    
    
    10.6
    %
    
    
    126,073
    
    
    
    11.1
    %
    
    
    124,025
    
    
    
    11.3
    %Metals
    
    
    89,082
    
    
    
    7.2
    %
    
    
    85,876
    
    
    
    7.6
    %
    
    
    76,854
    
    
    
    7.0
    %Metallic/Non-metallic Ores
    
    
    65,593
    
    
    
    5.3
    %
    
    
    55,408
    
    
    
    4.9
    %
    
    
    49,810
    
    
    
    4.5
    %Minerals
    
    
    53,259
    
    
    
    4.3
    %
    
    
    48,892
    
    
    
    4.3
    %
    
    
    45,867
    
    
    
    4.2
    %Paper Products
    
    
    105,158
    
    
    
    8.6
    %
    
    
    98,002
    
    
    
    8.7
    %
    
    
    94,471
    
    
    
    8.6
    %Petroleum Products
    
    
    55,517
    
    
    
    4.5
    %
    
    
    48,700
    
    
    
    4.3
    %
    
    
    41,512
    
    
    
    3.8
    %Railroad Equipment/Bridge Traffic
    
    
    191,264
    
    
    
    15.5
    %
    
    
    178,451
    
    
    
    15.8
    %
    
    
    179,582
    
    
    
    16.4
    %Other
    
    
    36,052
    
    
    
    2.9
    %
    
    
    30,144
    
    
    
    2.7
    %
    
    
    23,115
    
    
    
    2.1
    %Total
    
    
    1,231,435
    
    
    
    100.0
    %
    
    
    1,131,142
    
    
    
    100.0
    %
    
    
    1,096,403
    
    
    
    100.0
    %
 EMPLOYEES Currently, we have approximately 1,740 full-time railroad employees and 120 full-time
corporate employees. Approximately 850 of our railroad employees are subject to collective
bargaining agreements. 7




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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 the Vice
President of Safety and Operating Practices, involves all of our employees and is administered by
each Regional Vice President. Operating personnel are trained and certified in train operations,
hazardous materials handling, personal safety and all other areas subject to governmental rules and
regulations. Each U.S. employee involved in train operations is subject to pre-employment and
random drug testing whether or not required by federal regulation. We believe that each of our
North American railroads complies in all material respects with federal, state, provincial and
local regulations. Additionally, each railroad is given flexibility to develop more stringent
safety rules based on local requirements or practices. We also participate in committees of the
AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the
national grade crossing awareness program) and the American Short Line and Regional Railroad
Association Safety Committee. Our reportable injury frequency ratio, measured as reportable
injuries per 200,000 man hours worked, was 2.75 in 2004 as compared to 2.05 in 2003 and 3.05 in
2002. REGULATION UNITED STATES. Our subsidiaries in the United States are subject to various safety and other
laws and regulations administered by numerous government agencies, including (1) regulation by the
Surface Transportation Board, or STB, successor to the Interstate Commerce Commission, and the
Federal Railroad Administration, or FRA, (2) labor related statutes including the Railway Labor
Act, Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the Federal Employers
Liability Act, and (3) some limited regulation by agencies in the states in which we do business. The STB, established by the ICC Termination Act of 1995, has jurisdiction over, among other
matters, the construction, acquisition, or abandonment of rail lines, the consolidation or merger
of railroads, the assumption of control of one railroad by another railroad, the use by one
railroad of another railroads tracks through lease, joint use or trackage rights, the rates
charged for their transportation services, and the service provided by rail carriers. As a result of the 1980 Staggers Rail Act, railroads have received considerable rate and
market flexibility including the ability to obtain wholesale exemptions from numerous provisions of
the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized
and truck trailer traffic handled by railroads. Requirements for the creation of new short line
railroads or the expansion of existing short line railroads were substantially expedited and
simplified under the exemption process. On regulated traffic, railroads and shippers are permitted
to enter into contracts for rates and provision of transportation services without the need to file
tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable
freedom to raise or lower rates without objection from captive shippers. While the ICC Termination
Act retained maximum rate regulation on traffic over which railroads have exclusive control, the
new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB
on all traffic other than agricultural products. The FRA regulates railroad safety and equipment standards, including track maintenance,
handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and
operating practices and crew qualifications. CANADA. Our Canadian railroad subsidiaries are subject to regulation by various governmental
departments and regulatory agencies at the federal or provincial level depending on whether the
railroad in question falls within federal or provincial jurisdiction. A Canadian railroad generally
falls within the jurisdiction of federal regulation if the railroad crosses provincial or
international borders or if the Parliament of Canada has declared the railroad to be a federal work
or undertaking and in selected other circumstances. Any company which proposes to construct or
operate a railway in Canada which falls within federal jurisdiction is required to obtain a
certificate of fitness under the Canada Transportation Act, or CTA. Under the CTA, the sale of a
federally regulated railroad line is not subject to federal approval, although a process of
advertising and negotiating may be required in connection with any proposed discontinuance of a
federal railway. Federal railroads are governed by federal labor relations laws. Short line railroads located within the boundaries of a single province which do not otherwise
fall 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 new
legislation, which is more favorable to the operation of short line railroads than
previous provincial laws. Many of the provinces require as a condition of licensing under the
short line railroads acts that the 8




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##### Table of Contents



licensees comply with federal regulations applicable to safety
and other matters and remain subject to inspection by federal railway inspectors. Under some
provincial legislation, the sale of a provincially regulated railroad line is not subject to
provincial approval, although a process of advertising and negotiating may be required in
connection with any proposed discontinuance of a provincial railway. Acquisition of additional railroad operations in Canada, whether federally or provincially
regulated, may be subject to review under the Investment Canada Act, or ICA, a federal statute
which applies to the acquisition of a Canadian business or establishment of a new Canadian business
by a non-Canadian. In the case of an acquisition that is subject to review, the non-Canadian
investor must observe a statutory waiting period prior to completion and satisfy the Minister
responsible for the administration of the ICA that the investment will be of net benefit to Canada,
having 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), or CA. The CA contains provisions relating to premerger notification as well as
substantive merger provisions. An Acquisition that exceeds certain financial thresholds set out in the CA may be subject to
notification and observance of statutory waiting period prior to completion, during which time the
Commissioner of Competition (the Commissioner) will evaluate the impact of the acquisition upon
competition. In addition, the Commissioner has the jurisdiction under the CA to review an
acquisition that is a merger within the meaning of the CA in certain circumstances even where
notification is not filed. FREIGHT AUSTRALIA In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). In addition, the Share Sale Agreement provided for an additional
payment to RailAmerica of AUD $7 million (US $5 million) based on the changes in the net assets of
Freight Australia from September 30, 2003 through August 31, 2004, which was received in December
2004, and also provided various representations and warranties by RailAmerica to the buyer.
Freight Australias results of operations for the periods presented have been reclassified to
discontinued operations in our consolidated financial statements. FERRONOR In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million of cash, a secured instrument for $5.7
million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no
later than February 2007, both bearing interest at LIBOR plus 3%. Ferronors results of operations
for the periods presented have been reclassified to discontinued operations in our consolidated
financial statements. 9




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##### Table of Contents



ITEM 2. PROPERTIES NORTH AMERICAN RAILROAD PROPERTIES We operate over 8,800 miles of track in North America. The following map displays all of our North
American railroad properties as of March 11, 2005: (MAP) 10




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##### Table of Contents



The following table sets forth information with respect to the North American railroad
properties that we owned or leased as of March 11, 2005: DATE OF
    
    TRACK
    
    
    
    
    
    
    PRINCIPALRAILROAD
    
    ACQUISITION
    
    MILES
    
    
    STRUCTURE
    
    LOCATION
    
    COMMODITIESAlabama and Gulf Coast Railway
    
    Jan. 2002
    
    
    429
    
    
    Owned, Trackage rights
    
    Alabama,
    
    Forest and paper products,May 2003
    
    
    
    
    
    
    
    Florida
    
    chemicals, minerals, stoneArizona & California Railroad
    
    Jan. 2002
    
    
    297
    
    
    Owned, Trackage rights
    
    Arizona, California
    
    Cement, asphalt, forest products, petroleumCalifornia Northern Railroad
    
    Jan. 2002
    
    
    255
    
    
    Leased,
    
    California
    
    Food, metal, lumber, farm,Trackage rights
    
    
    
    chemicalsCape Breton
& Central Nova Scotia Railway
    
    Feb. 2000
    
    
    245
    
    
    Owned
    
    Nova Scotia
    
    Coal, paper, petroleumCarolina Piedmont Railroad
    
    Feb. 2000
    
    
    49
    
    
    Owned
    
    South Carolina
    
    Chemicals, food, mineralsCascade and
Columbia River Railroad
    
    Sept. 1996
    
    
    130
    
    
    Owned;
    
    Washington
    
    Lumber , minerals, agricultural productsCentral
Oregon & Pacific Railroad
    
    Feb. 2000
    
    
    449
    
    
    Owned; Leased; Trackage rights
    
    Oregon, California
    
    Lumber, paper, chemicalsCentral Railroad of Indiana
    
    Feb. 2000
    
    
    81
    
    
    Owned
    
    Indiana, Ohio
    
    Metal products, chemicals ,farm and food productsCentral
Railroad of Indianapolis
    
    Feb. 2000
    
    
    73
    
    
    Leased; Trackage rights
    
    Indiana
    
    Farm and food products, chemicals, metalsCentral Western Railway
    
    July 1999
    
    
    21
    
    
    Owned
    
    Alberta
    
    Agricultural productsChicago, Fort Wayne and Eastern Railroad
    
    July 2004
    
    
    276
    
    
    Leased
    
    Indiana, Ohio
    
    Agricultural products, metals and food productsConnecticut Southern Railroad
    
    Feb. 2000
    
    
    78
    
    
    Owned; Trackage rights
    
    Connecticut
    
    Lumber, paper products, chemicals, bridge trafficDallas Consolidated
    
    Feb. 2000
    
    
    305
    
    
    Leased
    
    Texas
    
    Minerals, food, paper(Dallas, Garland &
    
    
    
    
    
    
    
    
    
    
    
    products, chemicalsNortheastern Railroad andTexas Northeastern Railroad)E&N Railway
    
    Jan. 1999
    
    
    181
    
    
    Owned; Leased
    
    British Columbia
    
    Chemicals, agriculturalEastern Alabama Railway
    
    Jan. 2002
    
    
    25
    
    
    Owned
    
    Alabama
    
    MineralsGoderich-Exeter Railway
    
    Feb. 2000
    
    
    159
    
    
    Owned; Leased
    
    Ontario
    
    Auto parts, chemicals, non-metallics, mineralsHuron and Eastern Railway
    
    Mar. 1986
    
    
    328
    
    
    Owned;
    
    Michigan
    
    Agricultural products, food,(including Central Michigan Railway)
    
    May 1988
    
    
    
    
    
    leased;
    
    
    
    chemicals, coalJan. 2004
    
    
    
    
    
    Trackage rightsOhio Consolidated
    
    Feb. 2000
    
    
    684
    
    
    Owned;
    
    Michigan,
    
    Autos, bridge traffic,(Indiana & Ohio Railway ,
    
    Oct. 2004
    
    
    
    
    
    Leased
    
    Ohio, Indiana
    
    agricultural productsIndiana & Ohio Central Railroad andMidland Subdivision)Indiana Southern Railroad
    
    Feb. 2000
    
    
    176
    
    
    Owned;
    
    Indiana
    
    Coal, farm products,Trackage rights
    
    
    
    chemicalsKiamichi Railroad
    
    Jan. 2002
    
    
    230
    
    
    Owned,
    
    Arkansas,
    
    Coal, paper products,Trackage rights
    
    Oklahoma,
    
    minerals, forest productsTexasKyle Railroad
    
    Jan. 2002
    
    
    692
    
    
    Leased; owned
    
    Colorado,
    
    Agricultural products, coal,Kansas
    
    minerals
 11




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##### Table of Contents



DATE OF
    
    TRACK
    
    
    
    
    
    
    PRINCIPALRAILROAD
    
    ACQUISITION
    
    MILES
    
    
    STRUCTURE
    
    LOCATION
    
    COMMODITIESLahaina, Kaanapali & Pacific Railroad
    
    Jan. 2002
    
    
    6
    
    
    Owned, leased
    
    Hawaii
    
    N/ALakeland & Waterways Railway
    
    July 1999
    
    
    120
    
    
    Owned
    
    Alberta
    
    Paper products, petroleumMackenzie Northern Railway
    
    July 1999
    
    
    650
    
    
    Owned
    
    Alberta,
    
    Forest products,Northwest
    
    agricultural products,Territory
    
    paper productsMichigan Consolidated
    
    Feb. 2000
    
    
    118
    
    
    Owned
    
    Michigan
    
    Agricultural products,(Mid-Michigan Railroad,
    
    
    
    
    
    
    
    
    
    
    
    auto parts, non-metallic ores,Grand Rapids Eastern Railroad and
    
    
    
    
    
    
    
    
    
    
    
    mineralsMichigan Shore Railroad)Missouri & Northern
    
    Feb. 2000
    
    
    527
    
    
    Owned; leased;
    
    Missouri,
    
    Railroad equipment, coal,Arkansas Railroad
    
    
    
    
    
    
    
    trackage rights
    
    Arkansas,
    
    food products,Kansas
    
    agricultural productsNew England Central
    
    Feb. 2000
    
    
    343
    
    
    Owned;
    
    Vermont, New
    
    Lumber, paper products,Railroad
    
    
    
    
    
    
    
    Leased
    
    Hampshire,
    
    minerals, petroleumMassachusetts,ConnecticutOttawa Valley Railway
    
    July 1999
    
    
    389
    
    
    Leased
    
    Ontario
    
    Bridge trafficOtter Tail Valley Railroad
    
    Oct. 1996
    
    
    72
    
    
    Leased
    
    Minnesota
    
    Coal, agriculturalproducts, fertilizerPuget Sound and Pacific Railroad
    
    Jan. 2002
    
    
    150
    
    
    Owned,
    
    Washington
    
    Forest products, chemicals,Trackage rights
    
    
    
    intermodalSan Diego & Imperial
    
    Feb. 2000
    
    
    124
    
    
    Trackage rights
    
    California,
    
    Petroleum, paperValley Railroad
    
    
    
    
    
    
    
    
    
    
    
    products, lumberSan Joaquin Valley Railroad
    
    Jan. 2002
    
    
    341
    
    
    Owned,
    
    California
    
    Food products, petroleum,Trackage rights
    
    
    
    chemicals, mineralsSan Luis and Rio Grande Railway
    
    June 2003
    
    
    154
    
    
    Owned
    
    Colorado
    
    Minerals,agricultural productsSouth Carolina Central
    
    Feb. 2000
    
    
    97
    
    
    Owned
    
    South Carolina
    
    Chemicals, metals, coal,Railroad
    
    
    
    
    
    
    
    
    
    
    
    paper productsSouthern Ontario Railway
    
    July 1999
    
    
    54
    
    
    Leased
    
    Ontario
    
    Petroleum, metals,chemicalsToledo, Peoria and Western
    
    Sept. 1999
    
    
    293
    
    
    Owned;
    
    Indiana,
    
    Intermodal, agriculturalRailroad
    
    
    
    
    
    
    
    Trackage rights
    
    Illinois
    
    products, chemicalsVentura County Railroad
    
    Aug. 1998
    
    
    13
    
    
    Leased
    
    California
    
    Automobiles, chemicals,paper productsVirginia Consolidated
    
    Feb. 2000
    
    
    210
    
    
    Leased;
    
    Virginia,
    
    Metals, coal, minerals(Chesapeake & Albermarle
    
    
    
    
    
    
    
    Owned
    
    North CarolinaRailroad, North Carolina& Virginia Railroad, andVirginia SouthernRailroad)Total track miles
    
    
    
    
    8,824
 12




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##### Table of Contents



NORTH AMERICAN ROLLING STOCK The following tables summarize the composition, as of December 31, 2004, of our railroad
equipment fleet. FREIGHT CARSTYPE
    
    OWNED
    
    
    LEASED
    
    
    TOTALCovered hopper cars
    
    
    32
    
    
    
    2,351
    
    
    
    2,383Open top hopper cars
    
    
    105
    
    
    
    205
    
    
    
    310Box cars
    
    
    101
    
    
    
    2,681
    
    
    
    2,782Flat cars
    
    
    193
    
    
    
    1,875
    
    
    
    2,068Tank cars
    
    
    6
    
    
    
    4
    
    
    
    10Gondolas
    
    
    3
    
    
    
    570
    
    
    
    573Passenger cars
    
    
    10
    
    
    
    0
    
    
    
    10450
    
    
    
    7,686
    
    
    
    8,136
 LOCOMOTIVESHORSEPOWER/UNIT
    
    OWNED
    
    
    LEASED
    
    
    TOTALOver 2,000
    
    
    60
    
    
    
    275
    
    
    
    3351,500 to 2,000
    
    
    50
    
    
    
    63
    
    
    
    113Under 1,500
    
    
    17
    
    
    
    15
    
    
    
    32127
    
    
    
    353
    
    
    
    480
 Based on current and forecasted traffic levels on our railroads, management believes that our
present equipment, combined with the availability of other rail cars and/or locomotives for hire,
is adequate to support our operations. We believe that our insurance coverage with respect to our
property and equipment is adequate. ADMINISTRATIVE OFFICES AND OTHER We own a 59,500 square foot office building, located in Boca Raton, Florida, where our
executive offices are located. Of this space, 7,900 square feet are leased to a third party. In
addition, we lease approximately 21,000 square feet of office space in San Antonio, Texas for
approximately $500,000 annually. The lease expires December 31, 2005. 
 ITEM 3. LEGAL PROCEEDINGS In the ordinary course of conducting our business, we become involved in various legal actions
and other claims, some of which are currently pending. Litigation is subject to many uncertainties
and we may be unable to accurately predict the outcome of individual litigated matters. Some of
these matters possibly may be decided unfavorably to us. It is the opinion of management that the
ultimate liability, if any, with respect to these matters will not be material. Other than routine
litigation incidental to our business, no other litigation exists. On February 7, 2005, the Surface Transportation Board
entered an Order setting the
terms for sale of our Toledo, Peoria & Western Railways 76 mile La Harpe  Hollis Line in
western central Illinois to Keokuk Junction Railway Company, or KJRY,
as a result of KJRYs application
under the Feeder Line Statute, 49 USC sec. 10907. We believe that the STB-ordered
sale of the line at the mandated price of $4.2 million was not
in accordance with the rules and regulations governing such STB
action and did not reflect the lines value or adequately
compensate us as required by these rules and regulations. As a
result, we intend to appeal the Order to the
U.S. Circuit Court of Appeals. We are unable to predict the outcome of
this appeal, however, we do not believe the final outcome of this
matter will materially affect our financial position, results of operations or cash flows. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2004. 13




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY , RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES Our common stock began trading on the New York Stock Exchange (NYSE) on January 2, 2002 under
the symbol RRA. Prior to January 2, 2002, our common stock traded on the Nasdaq National Market
(Nasdaq) under the symbol RAIL. Set forth below is high and low price information for the common
stock as reported on the NYSE for each period presented. 2003
    
    High Sales Price
    
    
    Low Sales PriceFirst Quarter
    
    $
    7.65
    
    
    $
    4.44Second Quarter
    
    
    8.72
    
    
    
    6.05Third Quarter
    
    
    9.84
    
    
    
    7.16Fourth Quarter
    
    
    12.19
    
    
    
    8.63
 2004
    
    High Sales Price
    
    
    Low Sales PriceFirst Quarter
    
    $
    13.40
    
    
    $
    10.80Second Quarter
    
    
    14.75
    
    
    
    11.55Third Quarter
    
    
    14.73
    
    
    
    10.18Fourth Quarter
    
    
    13.39
    
    
    
    10.30
 2005
    
    High Sales Price
    
    
    Low Sales PriceFirst Quarter (through March 11)
    
    $
    13.40
    
    
    $
    11.55
 As
of March 11, 2005, there were approximately 548 holders of record and we believe at least
5,300 beneficial owners of our common stock. We have never declared or paid a dividend on our common
stock. Our senior credit agreement limits our ability to pay dividends. 14




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The results of our continuing operations for the years ended December 31, 2004, 2003, 2002,
2001 and 2000 include the results of certain railroads from the dates they were acquired by
purchase or lease as follows: Midland Subdivision effective October 15, 2004; Chicago, Fort Wayne &
Eastern Railroad effective July 31, 2004; Central Michigan Railway effective January 25, 2004; San
Luis and Rio Grande Railroad effective June 29, 2003; the Mobile Line, effective June 1, 2003;
StatesRail, effective January 4, 2002; ParkSierra, effective January 8, 2002; and RailTex,
effective February 1, 2000. The income statement data for the years ended December 31, 2004, 2003
and 2002 and the balance sheet data at December 31, 2004 and 2003 are derived from, and are
qualified by reference to, audited financial statements included elsewhere in this report and
should be read in conjunction with those financial statements and the notes thereto. The income
statement data set forth below for the periods ended December 31, 2001 and 2000 and the balance
sheet data as of December 31, 2002, 2001 and 2000 are derived from our financial statements not
included. Freight Australia, Ferronor, the Arizona Eastern Railway Company and West Texas and
Lubbock Railroad, all sold in 2004, have been presented as discontinued operations and thus have
been excluded from the income statement data and freight carloads within the operating data. AS OF AND FOR THEYEAR ENDED DECEMBER 31,(in thousands, except operating and per share data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000INCOME STATEMENT DATAOperating revenue
    
    $
    395,564
    
    
    $
    352,338
    
    
    $
    326,654
    
    
    $
    244,248
    
    
    $
    230,022Operating income
    
    
    42,291
    
    
    
    74,029
    
    
    
    64,966
    
    
    
    50,738
    
    
    
    46,186Income (loss) from continuing operations
    
    
    (21,395
    )
    
    
    24,161
    
    
    
    1,896
    
    
    
    6,672
    
    
    
    (5,892
    )Basic earnings (loss) per common share from
continuing operations
    
    $
    (0.61
    )
    
    $
    0.76
    
    
    $
    0.06
    
    
    $
    0.30
    
    
    $
    (0.36
    )Diluted earnings (loss) per common share from
continuing operations
    
    $
    (0.61
    )
    
    $
    0.74
    
    
    $
    0.06
    
    
    $
    0.28
    
    
    $
    (0.36
    )Weighted average common shares  Basic
    
    
    34,982
    
    
    
    31,806
    
    
    
    32,047
    
    
    
    21,510
    
    
    
    18,040Weighted average common shares  Diluted
    
    
    34,982
    
    
    
    34,336
    
    
    
    32,620
    
    
    
    22,706
    
    
    
    18,040BALANCE SHEET DATATotal assets
    
    $
    1,016,143
    
    
    $
    1,232,490
    
    
    $
    1,106,553
    
    
    $
    891,168
    
    
    $
    839,703Long-term obligations, including current maturities
    
    
    363,350
    
    
    
    330,839
    
    
    
    387,321
    
    
    
    301,687
    
    
    
    358,856Subordinated debt, including current maturities
    
    
    4,028
    
    
    
    143,040
    
    
    
    141,331
    
    
    
    144,988
    
    
    
    141,411Stockholders equity
    
    
    380,926
    
    
    
    371,760
    
    
    
    278,903
    
    
    
    220,959
    
    
    
    123,434OPERATING DATAFreight carloads (continuing operations)
    
    
    1,231,435
    
    
    
    1,131,142
    
    
    
    1,096,403
    
    
    
    887,502
    
    
    
    834,372Track mileage
    
    
    8,800
    
    
    
    13,300
    
    
    
    12,900
    
    
    
    11,000
    
    
    
    11,000Number of full time employees
    
    
    1,740
    
    
    
    2,700
    
    
    
    2,676
    
    
    
    2,180
    
    
    
    2,230
 FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF STOCK Substantial Debt and Debt Service. As of December 31, 2004, we had indebtedness of $367.4
million and, as a result, we incur significant interest expense. The degree to which we are
leveraged could have important consequences, including the following:  -
    our ability to obtain additional financing in the future for capital expenditures,
potential acquisitions, and other purposes may be limited or financing may not be available
on terms favorable to us or at all;-
    a substantial portion of our cash flows from operations must be used to pay our interest
expense and repay our debt, which reduces the funds that would otherwise be available to us
for our operations and future business opportunities; and-
    fluctuations in market interest rates will affect the cost of our borrowings to the
extent not covered by interest rate hedge agreements because our credit facilities bear
interest at variable rates and only a portion of our borrowings are covered by hedge
agreements. A default could result in acceleration of our indebtedness and permit our senior lenders to
foreclose on our assets. 15




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##### Table of Contents



As of December 31, 2004, we had no outstanding borrowings under our revolving credit facility.
This facility allows us to borrow a total of $100 million for any purpose and we may borrow up to
an additional $100 million of term debt in connection with acquisitions if we meet specified
conditions. If new debt is added to our current debt levels, the related risks that we face would
intensify. As of March 11, 2005, we had no borrowings outstanding under the revolving credit
facility. Covenant Restrictions. Our credit facilities contain numerous covenants imposing restrictions
on our ability to, among other things:  
    incur more debt;
    pay dividends, redeem or repurchase our stock or make other distributions;
    make acquisitions or investments;
    use assets as security in other transactions;
    enter into transactions with affiliates;
    merge or consolidate with others;
    dispose of assets or use asset sale proceeds;
    create liens on our assets; and
    extend credit. Our credit facilities also contain financial covenants that require us to meet a number of
financial ratios and tests. Our failure to comply with the obligations in our credit facilities
could result in events of default under the credit facilities, which, if not cured or waived, could
permit acceleration of our indebtedness, allowing our senior lenders to foreclose on our assets. Fuel Costs. Fuel costs were approximately 9.2% of our revenue for the year ended December 31,
2004, 7.0% for the year ended December 31, 2003 and 6.9% for the year ended December 31, 2002. Fuel
prices and supplies are influenced significantly by international, political and economic
circumstances. If fuel supply shortages or unusual price volatility were to arise for any reason,
the resulting higher fuel prices would significantly increase our operating costs. We did not have
any fuel hedges in place for 2004. For 2005, approximately 30% of our fuel costs are subject to
fuel hedges which will partially offset any increases in fuel costs. Acquisitions and Integration. We have acquired many railroads since we commenced operations in
1992 and intend to continue our acquisition program. Acquisitions result in greater administrative
burdens and operating costs and, to the extent financed with debt, additional interest costs. The
process of integrating our acquired businesses may be disruptive to our business and may cause an
interruption of, or a loss of momentum in, our business. If these disruptions and difficulties occur, they may cause us to fail to realize the cost
savings, revenue enhancements and other benefits that we expected to result from an acquisition and
may cause material adverse short and long-term effects on our operating results and financial
condition. Financing for acquisitions may come from several sources, including cash on hand and proceeds
from the incurrence of indebtedness or the issuance of additional common stock, preferred stock,
convertible debt or other securities. The issuance of any additional securities could result in
dilution to our stockholders. Continuing Relationships with Class I Carriers. The railroad industry in the United States
and Canada is dominated by a small number of Class I carriers that have substantial market control
and negotiating leverage. Almost all of the traffic on our North American railroads is interchanged
with Class I carriers. Our ability to provide rail service to our customers in North America
depends in large part upon our ability to maintain cooperative relationships with Class I carriers
with respect to, among other matters, freight rates, car supply, reciprocal switching, interchange
and trackage rights. In addition, loss of 16




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customers or service interruptions or delays by our Class I interchange partners relating to
customers who ship over our track, may decrease our revenue. Class I carriers are also sources of potential acquisition candidates as they continue to
divest themselves of branch lines to smaller rail operators. Failure to maintain good relationships
may adversely affect our ability to negotiate acquisitions of branch lines. Foreign Operations. We currently have railroad operations in Canada. The risks of doing
business in foreign countries include:  
    adverse changes in the economy of those countries;
    exchange rate fluctuations;
    adverse effects of currency exchange controls;
    restrictions on the withdrawal of foreign investment and earnings;
    government policies against ownership of businesses by non-nationals; and
    economic uncertainties including, among others, risk of renegotiation or modification of existing agreements or
arrangements with governmental authorities, exportation and transportation tariffs, foreign exchange restrictions and
changes in taxation structure. Environmental and Other Governmental Regulation. Our railroad and real estate ownership are
subject to extensive foreign, federal, state and local environmental laws and regulations. We could
incur significant costs as a result of any allegations or findings to the effect that we have
violated, or are strictly liable under these laws or regulations. We may be required to incur
significant expenses to investigate and remediate environmental contamination. We are also subject
to governmental regulation by a significant number of foreign, federal, state and local regulatory
authorities with respect to our railroad operations and a variety of health, safety, labor,
environmental, maintenance and other matters. Our failure to comply with applicable laws and
regulations could have a material adverse effect on us. Adverse economic conditions.Several of the commodities we transport come from industries with
cyclical business operations. As a result, prolonged negative changes in domestic and global
economic conditions affecting the producers and consumers of the commodities carried by us may
decrease our revenue. Natural events.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. Casualties and Insurance expenditures.We have obtained insurance coverage for losses
sustained by our railroads arising from personal injury and for property damage in the event of
derailments or other incidents. However, we are responsible for the first $750,000 of expenditures
per each incident under our general liability insurance policy and $1,000,000 of expenditures per
each incident under our property insurance policy. In addition, in each policy period, we are
responsible for the first $1 million of expenditures, in the aggregate, in a policy period on any
incidents excess of $750,000 under our general liability insurance policy. Severe accidents or
personal injuries could cause our liability to exceed our insurance limits which might have a
material adverse effect on our business and financial condition. Our annual insurance limits are
$100 million and $10 million on liability and property, respectively. In addition, adverse events
directly and indirectly applicable to us, including such things as derailments, accidents,
discharge of toxic waste, or other like occurrences in the industry, may result in additional
increases in our insurance premiums and/or our self insured retentions and could result in
limitations to the coverage under our existing policies. 17




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We pursue growth by seeking to increase the number of our carloads and our average rate per
carload and by continuing our selective acquisition program of seeking railroads that we believe
will provide operating efficiencies, strategic advantages and/or profit improvement opportunities.
Our operating costs include labor, equipment rents (locomotives and railcars), purchased services
(contract labor and professional services), diesel fuel, casualties and insurance, materials and
other expenses. Each of these costs is included in one of the following functional departments:
maintenance of way, maintenance of equipment, transportation, equipment rental, and selling,
general & administrative. In addition, depreciation of our fixed assets and asset sale gains and
losses are significant components of our operating income. Carload Growth and Acquisitions Total North American carloads increased by 8.9%, including 3.2% on a same railroad basis,
during the year ended 2004 compared to the year ended 2003, with the average rate per carload
increasing from $274 to $288. Same railroad amounts exclude amounts associated with railroads,
or portions of railroads, sold or acquired by the Company after January 1, 2004. During the second quarter of 2003, we acquired two branch lines, the 154 mile San Luis & Rio
Grande Railroad in Colorado and the 288 mile Mobile Line, which is contiguous with our existing
Alabama & Gulf Coast Railway. On January 25, 2004, we acquired the assets of the Central Michigan Railway Company, which
operates 100 miles of rail line in Michigan. The results of operations of this acquisition have
been included in our consolidated financial statements since this date. In July 2004, we executed an agreement with CSX Transportation, Inc. to lease 276 miles of
railroad known as the Chicago, Fort Wayne & Eastern Railroad for twenty years. We assumed control
of the operations on August 1, 2004. The results of operations of this railroad have been included
in our consolidated financial statements since this date. On June 28, 2004, we commenced operations of Mockingbird Yard in Dallas and 11 miles of track
through a 10 year agreement with the Union Pacific Railroad. Under terms of the agreement with
Union Pacific, the Dallas Garland & Northeastern Railroad will serve customers on the line, with
the intention of growing the business and creating a more efficient interchange with the Union
Pacific. On October 15, 2004, we executed an agreement with CSX Transportation, Inc. to purchase 107
miles of railroad from Cincinnati, Ohio to Columbus, Ohio, known as the Midland Subdivision. We
also entered into a 25 year lease of related real estate. The results of operations of this
acquisition have been included in our consolidated financial statements since this date. Divestitures and debt reduction A major focus for us in 2004 was to continue to decrease our leverage and focus exclusively on
our North American operations. Accordingly, during 2004 we completed the sale of our 55% equity
interest in Ferronor, a Chilean railroad, and Freight Australia, our Australian railroad. The
proceeds from these two sales have been used to reduce our long-term debt and repurchase a majority
of our senior subordinated notes. At December 31, 2004, we had reduced our net debt to total
capitalization ratio to 47.4% from 59.2% at December 31, 2003. In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million in cash, a secured instrument for $5.7
million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no
later than February 2007, both bearing interest at 90 day LIBOR plus 3%. During the year ended
December 31, 2004, we recognized a $4.0 million tax charge resulting from the sale of our interest
in Ferronor and the repatriation of the cash to the U.S. Ferronors results of operations have
been presented in discontinued operations on our consolidated financial statements. 18




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In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result
of foreign exchange hedges that were entered into during the third quarter of 2004. In addition,
the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7 million (US $5
million) based on the changes in the net assets of Freight Australia from September 30, 2003
through August 31, 2004, which was received in December 2004, and also provides various
representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica
for violations of most of the representations and warranties are capped at AUD $50 million (US
$39.5 million). We believe the ultimate impact of the representations and warranties will not have
a material impact on our future results of operations. However, they could have a material impact
on future cash flows. During the year ended December 31, 2004, we recognized a pre-tax gain of
$20.2 million, or $2.0 million, net of income taxes as a result of this sale. The $18.2 million
tax provision on the sale of Freight Australia includes a provision of $11.4 million for the
previously unremitted earnings of Freight Australia. The proceeds from the sale of Freight
Australia were used to repay senior debt and repurchase our senior subordinated notes. Freight
Australias results of operations have been reclassified to discontinued operations on our
consolidated financial statements. On September 29, 2004, we completed the purchase of $125.7 million of our $130 million
principal amount of senior subordinated notes due 2010. At the same time, we amended our credit
agreement to extend the maturity by two years, reduce the margin rate by 0.5%, borrow $350 million
in term loans and increase the availability of the U.S. dollar denominated revolving loans by $10
million. We recorded a charge of $31.8 million during the year ended December 31, 2004, associated
with these financing activities. During the second quarter of 2004, we committed to a plan to dispose of the Arizona Eastern
Railway Company. Subsequent to committing to the disposal plan, we determined that the expected
proceeds from the sale would be lower than anticipated and accordingly recorded an impairment
charge of $4 million during the third quarter of 2004. We completed the sale of the Arizona
Eastern Railway Company in December 2004 for $2.8 million in cash, resulting in a pretax gain on
the sale of $0.3 million, or $0.2 million after tax. The results of operations for the Arizona
Eastern Railway Company have been reclassified to discontinued operations for the periods
presented. During December 2004, we also completed the sale of our West Texas and Lubbock Railroad for
$1.8 million in cash and a long-term note of $3.6 million, resulting in a gain of $0.1 million
before and after tax. The results of operations for the West Texas and Lubbock Railroad have been
reclassified to discontinued operations for the periods presented. Commodity Mix Our railroads operate independently with their own management, employees and customer base.
They are spread out geographically and carry a diverse mix of commodities. For the year ended
December 31, 2004, bridge traffic accounted for 16%, coal accounted for 12%, and lumber and forest
products accounted for 11% of our carloads in North America. As a percentage of revenue, which is
impacted by several factors including the length of the haul, lumber and forest products generated
15%, chemicals generated 12% and paper products generated 10% of our North American freight revenue
for the year ended December 31, 2004. Bridge traffic, which neither originates nor terminates on
our line, generally has a lower rate per carload and generated 7% of our freight revenue during the
year ended December 31, 2004. Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. The critical financial statement accounts that are subject to significant estimation are
reserves for litigation, casualty and environmental matters, deferred income taxes and property,
plant and equipment depreciation methods. In accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, Accounting
for Contingencies, an accrual for a loss contingency is established if information available prior
to the issuance of the financial statements indicates that it is probable that a liability has been
incurred or an asset has been impaired and can be reasonably estimated. These estimates have been
developed in consultation with outside counsel handling our defense in these matters and are based
upon 19




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an analysis of potential results, assuming a combination of litigation and settlement
strategies. Subsequent changes to those estimates are reflected in our statements of income in the
period of the change. Deferred tax assets and liabilities are recognized based on differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. We regularly review our
deferred tax assets for recoverability and establish a valuation allowance based on historical
taxable income, projected future taxable income, and the expected timing of the reversals of
existing temporary differences. If we are unable to generate sufficient future taxable income, or
if there is a material change in the actual effective tax rates or time period within which the
underlying temporary differences become taxable or deductible, we could be required to establish an
additional valuation allowance against a portion of our deferred tax asset, resulting in an
increase in our effective tax rate and an adverse impact on earnings. Additionally, changes in our
estimates regarding the statutory tax rates to be applied to the reversal of deferred tax assets
and liabilities could materially affect the effective tax rate. Property, plant and equipment comprised 86% of our total assets as of December 31, 2004. These
assets are stated at cost, less accumulated depreciation. We use the group method of depreciation
under which a single depreciation rate is applied to the gross investment in our track assets.
Upon normal sale or retirement of track assets, cost less net salvage value is charged to
accumulated depreciation and no gain or loss is recognized. Expenditures that increase asset
values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to
operating expense when the work is performed. We periodically review the carrying value of our
long-lived assets for impairment. This review is based upon our projections of anticipated future
cash flows. While we believe that our estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect our evaluations. For a complete description of our accounting policies, see Note 1 to our consolidated
financial statements. 20




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##### Table of Contents



RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and Notes beginning on Page F-1. Our historical results of operations for our North American railroads include the operations
of our acquired railroads from the dates of acquisition as follows: NAME OF RAILROAD
    
    DATE OF ACQUISITIONStatesRail (8 railroads)
    
    January 2002ParkSierra (3 railroads)
    
    January 2002Mobile Line
    
    June 2003San Luis and Rio Grande Railway
    
    June 2003Central Michigan Railway
    
    January 2004Chicago, Fort Wayne & Eastern Railroad
    
    August 2004Midland Subdivision
    
    October 2004
 We disposed of certain railroads as follows: NAME OF RAILROAD
    
    DATE OF DISPOSITIONGeorgia Southwestern Railroad
    
    March 2002Texas New Mexico Railroad
    
    May 2002San Pedro & Southwestern Railway
    
    October 2003Arizona Eastern Railway Company
    
    December 2004West Texas and Lubbock Railroad
    
    December 2004
 As a result, the results of operations for the years ended December 31, 2004, 2003 and 2002
are not comparable in various material respects and are not indicative of the results which would
have occurred had the acquisitions or dispositions been completed at the beginning of the periods
presented. COMPARISON OF CONSOLIDATED OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 The following table sets forth the operating revenue and expenses by functional category for
our consolidated operations for the periods indicated (in thousands). For the years ended December 31,2004
    
    
    2003Operating revenue
    
    $
    395,564
    
    
    
    100
    %
    
    $
    352,338
    
    
    
    100
    %Operating expenses:Maintenance of way
    
    
    50,269
    
    
    
    12.7
    %
    
    
    37,464
    
    
    
    10.6
    %Maintenance of equipment
    
    
    14,295
    
    
    
    3.6
    %
    
    
    12,941
    
    
    
    3.7
    %Transportation
    
    
    121,719
    
    
    
    30.8
    %
    
    
    95,210
    
    
    
    27.0
    %Equipment rental
    
    
    40,614
    
    
    
    10.2
    %
    
    
    34,245
    
    
    
    9.7
    %Selling, general and administrative
    
    
    88,582
    
    
    
    22.4
    %
    
    
    77,878
    
    
    
    22.1
    %Net gain on sale of assets
    
    
    (4,022
    )
    
    
    -1.0
    %
    
    
    (3,262
    )
    
    
    -0.9
    %Impairment
of assets
    
    
    12,569
    
    
    
    3.2
    %
    
    
    
    
    
    
    0.0
    %Depreciation and amortization
    
    
    29,247
    
    
    
    7.4
    %
    
    
    23,833
    
    
    
    6.8
    %Total operating expenses
    
    
    353,273
    
    
    
    89.3
    %
    
    
    278,309
    
    
    
    79.0
    %Operating income
    
    $
    42,291
    
    
    
    10.7
    %
    
    $
    74,029
    
    
    
    21.0
    %
 21




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##### Table of Contents



The following table sets forth the operating revenue and expenses by natural category for our
consolidated operations for the periods indicated (in thousands). For the years ended December 31,2004
    
    
    2003Operating revenue
    
    $
    395,564
    
    
    
    100
    %
    
    $
    352,338
    
    
    
    100
    %Operating expenses:Labor and benefits
    
    
    133,922
    
    
    
    33.9
    %
    
    
    113,938
    
    
    
    32.3
    %Equipment rents
    
    
    42,448
    
    
    
    10.7
    %
    
    
    35,606
    
    
    
    10.1
    %Purchased services
    
    
    27,636
    
    
    
    7.0
    %
    
    
    23,743
    
    
    
    6.7
    %Diesel fuel
    
    
    37,652
    
    
    
    9.5
    %
    
    
    25,609
    
    
    
    7.3
    %Casualties and insurance
    
    
    22,103
    
    
    
    5.6
    %
    
    
    14,794
    
    
    
    4.2
    %Materials
    
    
    8,925
    
    
    
    2.2
    %
    
    
    7,896
    
    
    
    2.2
    %Joint facilities
    
    
    11,902
    
    
    
    3.0
    %
    
    
    8,258
    
    
    
    2.4
    %Other expenses
    
    
    30,891
    
    
    
    7.8
    %
    
    
    27,894
    
    
    
    7.9
    %Net gain on sale of assets
    
    
    (4,022
    )
    
    
    -1.0
    %
    
    
    (3,262
    )
    
    
    -0.9
    %Impairment
of assets
    
    
    12,569
    
    
    
    3.2
    %
    
    
    
    
    
    
    0.0
    %Depreciation and amortization
    
    
    29,247
    
    
    
    7.4
    %
    
    
    23,833
    
    
    
    6.8
    %Total operating expenses
    
    
    353,273
    
    
    
    89.3
    %
    
    
    278,309
    
    
    
    79.0
    %Operating income
    
    $
    42,291
    
    
    
    10.7
    %
    
    $
    74,029
    
    
    
    21.0
    %
 OPERATING REVENUE. Operating revenue increased by $43.2 million, or 12%, to $395.6 million in
the year ended 2004, from $352.3 million in the year ended 2003. Total carloads increased by
100,293, or 9%, to 1,231,435 in 2004 from 1,131,142 in 2003. Excluding revenue of $0.3 million in
2003 from the disposed San Pedro & Southwestern Railway, and $23.4 million in 2004 for the acquired
Mobile Line, San Luis & Rio Grande Railroad, Central Michigan Railway, Chicago Fort Wayne & Eastern
Railroad and Midland Subdivision, operating revenue increased $20.1 million or 6%, while carloads
increased by 36,392 or 3%. The increase in same railroad revenue is primarily due to the
increase in carloads, the strengthening of the Canadian dollar compared to the U.S. Dollar, which
positively impacted operating revenue by $5.6 million for the year ended December 31, 2004, as well
as changes in commodity mix and fuel surcharges. Non-freight revenue for the year ended December
31, 2003 included $1.0 million from the sale of easements along several of our railroad properties. The increase in the average rate per carload to $288 in the year ended December 31, 2004, from
$274 in 2003, was primarily due to the improvement in the Canadian dollar, the acquisition of the
Mobile Line and the Central Michigan Railway, which resulted in higher rates per carload due to
increased lengths of haul, changes in commodity mix and the fuel surcharges. The following table compares North American freight revenue, carloads and average freight
revenue per carload for the years ended December 31, 2004 and 2003: For the year ended
    
    
    For the year ended(dollars in thousands, except average rate per carload)
    
    December 31, 2004
    
    
    December 31, 2003Freight
    
    
    
    
    
    
    Average rate
    
    
    Freight
    
    
    
    
    
    
    Average rateRevenue
    
    
    Carloads
    
    
    per carload
    
    
    Revenue
    
    
    Carloads
    
    
    per carloadLumber & Forest Products
    
    $
    54,089
    
    
    
    130,953
    
    
    $
    413
    
    
    $
    51,380
    
    
    
    126,073
    
    
    $
    408Chemicals
    
    
    41,399
    
    
    
    104,368
    
    
    
    397
    
    
    
    30,957
    
    
    
    85,015
    
    
    
    364Paper Products
    
    
    34,245
    
    
    
    105,158
    
    
    
    326
    
    
    
    29,565
    
    
    
    98,002
    
    
    
    302Agricultural & Farm Products
    
    
    33,924
    
    
    
    106,591
    
    
    
    318
    
    
    
    30,708
    
    
    
    98,439
    
    
    
    312Metal
    
    
    31,865
    
    
    
    89,082
    
    
    
    358
    
    
    
    26,835
    
    
    
    85,876
    
    
    
    312Coal
    
    
    28,145
    
    
    
    149,584
    
    
    
    188
    
    
    
    24,479
    
    
    
    142,928
    
    
    
    171Food Products
    
    
    26,710
    
    
    
    80,290
    
    
    
    333
    
    
    
    20,517
    
    
    
    63,704
    
    
    
    322Railroad Equipment/Bridge Traffic
    
    
    24,457
    
    
    
    191,264
    
    
    
    128
    
    
    
    23,390
    
    
    
    178,451
    
    
    
    131Petroleum Products
    
    
    21,098
    
    
    
    55,517
    
    
    
    380
    
    
    
    18,282
    
    
    
    48,700
    
    
    
    375Minerals
    
    
    19,291
    
    
    
    53,259
    
    
    
    362
    
    
    
    17,304
    
    
    
    48,892
    
    
    
    354Metallic/Non-metallic Ores
    
    
    18,790
    
    
    
    65,593
    
    
    
    286
    
    
    
    15,157
    
    
    
    55,408
    
    
    
    274Other
    
    
    10,423
    
    
    
    36,052
    
    
    
    289
    
    
    
    9,328
    
    
    
    30,144
    
    
    
    309Autos
    
    
    6,737
    
    
    
    28,034
    
    
    
    240
    
    
    
    8,092
    
    
    
    33,888
    
    
    
    239Intermodal
    
    
    3,776
    
    
    
    35,690
    
    
    
    106
    
    
    
    4,235
    
    
    
    35,622
    
    
    
    119Total
    
    $
    354,949
    
    
    
    1,231,435
    
    
    $
    288
    
    
    $
    310,229
    
    
    
    1,131,142
    
    
    $
    274
 22




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##### Table of Contents



Lumber and forest product revenue was $54.1 million in the year ended December 31, 2004,
compared to $51.4 million in the year ended December 31, 2003, an increase of $2.7 million or 5%.
This increase is primarily due to a strong demand for lumber as a result of new construction. Chemical revenue was $41.4 million in the year ended December 31, 2004, compared to $31.0
million in the year ended December 31, 2003, an increase of $10.4 million or 34%. This increase is
primarily due to the Mobile Line, Central Michigan Railway and Chicago, Fort Wayne & Eastern
Railroad acquisitions. Paper products revenue was $34.2 million in the year ended December 31, 2004, compared to
$29.6 million in the year ended December 31, 2003, an increase of $4.6 million or 16%. This
increase is due to the Mobile Line, Central Michigan Railway and the Chicago, Fort Wayne & Eastern
Railroad acquisitions, an increase in paper production in Nova Scotia, increased business with
existing customers in Oklahoma and New England and the strengthening of the Canadian dollar,
partially offset by a decrease in carloads in Oregon as a result of a paper mill closure and
Alabama as a result of Hurricane Ivan. Agricultural and farm products revenue was $33.9 million in the year ended December 31, 2004,
compared to $30.7 million in the year ended December 31, 2003, an increase of $3.2 million or 10%.
This increase is primarily due to the improved wheat crop in Kansas compared to prior year and
service to a new business in northwest Canada, partially offset bumper crop of corn and soybeans in
the Midwest as a result of a drought in the region. Metals revenue was $31.9 million in the year ended December 31, 2004, compared to $26.8
million in the year ended December 31, 2003, an increase of $5.1 million or 19%. This increase is
primarily due to a customers plant expansion in North Carolina, a pipeline project in Kansas and
the Mobile Line and Chicago, Fort Wayne & Eastern Railroad acquisitions. Coal revenue was $28.1 million in the year ended December 31, 2004, compared to $24.5 million
in the year ended December 31, 2003, an increase of $3.6 million or 15%. This increase is a result
of increased production at an existing customer in Arkansas, the acquisition of the Central
Michigan Railway, new business in Nova Scotia and Indiana and the strengthening of the Canadian
dollar. Food products revenue was $26.7 million in the year ended December 31, 2004, compared to $20.5
million in the year ended December 31, 2003, an increase of $6.2 million or 30%. This increase is
due to new business moving soybeans and other products in Washington, increased business with
existing customers in California and Texas and the acquisition of the Chicago, Fort Wayne & Eastern
Railway. Railroad equipment and bridge traffic revenue was $24.5 million in the year ended December 31,
2004, compared to $23.4 million in the year ended December 31, 2003, an increase of $1.1 million or
5%. This increase is due to carload moves for a utility company in Arkansas returning to
historical levels in 2004 from an abnormally low level in 2003 and additional haulage by Class I
carriers. Petroleum products revenue was $21.1 million in the year ended December 31, 2004, compared to
$18.3 million in the year ended December 31, 2003, an increase of $2.8 million or 15%. This
increase is primarily due to an increase in the demand for petroleum products in Southern Ontario
and Colorado, new business in Indiana, a strong propane market and the Chicago, Fort Wayne &
Eastern Railroad acquisition. Minerals revenue was $19.3 million in the year ended December 31, 2004, compared to $17.3
million in the year ended December 31, 2003, an increase of $2.0 million or 11%. This increase is
due to new fertilizer business in Indiana, new contracts in Alabama as a result of the Mobile Line
acquisition, a strong demand for asphalt in Colorado and increased business with customers in Texas
and Arizona. Metallic and non-metallic ores revenue was $18.8 million in the year ended December 31, 2004,
compared to $15.2 million in the year ended December 31, 2003, an increase of $3.6 million or 24%.
This increase is due to the acquisitions of the Mobile Line, San Luis & Rio Grande Railroad and
Chicago, Fort Wayne & Eastern Railroad, increased carloads with existing customers in Texas, North
Carolina and Alabama and new customer business in Oklahoma. Other revenue was $10.4 million in the year ended December 31, 2004, compared to $9.3 million
in the year ended December 31, 2003, an increase of $1.1 million or 12%. This increase is
primarily due to the Central Michigan Railway 23




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##### Table of Contents



acquisition, a strong market for steel scrap and increased carloads with new and existing
customers in Connecticut to move debris. Autos revenue was $6.7 million in the year ended December 31, 2004, compared to $8.1 million
in the year ended December 31, 2003, a decrease of $1.4 million or 17%. This decrease is primarily
due to the loss of business to another form of transportation in Michigan and customers losing
contracts with the large automotive producers. Intermodal revenue was $3.8 million in the year ended December 31, 2004, compared to $4.2
million in the year ended December 31, 2003, a decrease of $0.4 million or 11%. This decrease is
due to the closure of an intermodal facility in Indiana. OPERATING EXPENSES. Operating expenses increased to $353.3 million in the year ended December
31, 2004, from $278.3 million in the year ended 2003. The operating ratio, defined as total
operating expenses divided by total operating revenue, was 89.3% in 2004 compared to 79.0% in 2003.
The increase in the operating ratio is primarily due to an impairment charge of $12.6 million on
the E&N Railway, the charge of $6.7 million for the retirement of our former CEO and higher fuel
and casualty costs in 2004. Both periods include corporate general and administrative, which had
previously been classified as corporate overhead. MAINTENANCE OF WAY. Maintenance of way expenses increased $12.8 million, or 34%, to $50.3
million in 2004 from $37.5 million in 2003 primarily due to the acquisitions in 2004 of the Midland
Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the impact of
a full year from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande Railway
as well as higher casualty costs in 2004 and the strengthening of the Canadian Dollar. As a
percentage of revenue, maintenance of way increased to 12.7% in 2004, from 10.6% in 2003, primarily
due to higher casualty costs in the year ended 2004. The increase in casualty costs is due to both
a greater number of FRA reportable train incidents as well as FRA reportable personal injuries in
2004 compared to 2003. During 2004, we experienced 66 FRA reportable train incidents compared to
52 in 2003. Our injury frequency ratio in 2004 was 2.75 compared to 2.05 in 2003. MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense increased $1.4 million, or 10%, to
$14.3 million in 2004 from $12.9 million in 2003 primarily due to the acquisitions in 2004 of the
Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the
impact of a full year from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande
Railway as well as the strengthening of the Canadian Dollar. Maintenance of equipment decreased as
a percentage of revenue to 3.6% in 2004, from 3.7% in 2003. TRANSPORTATION. Transportation expense increased $26.5 million, or 28% to $121.7 million in
2004 from $95.2 million in 2003 due to the increase in carloads for both same railroad and
acquisitions, as well as higher fuel prices and the strengthening of the Canadian Dollar. As a
percentage of revenue, transportation expense increased to 30.8% in 2004 from 27.0% in 2003. This
increase is primarily due to higher fuel costs, which accounted for a 2.3 percentage point
increase, and higher joint facility costs, which accounted for a 0.6 percentage point increase.
Joint facility costs increased as a result of trackage rights and switching fees associated with
the Mobile Line and Central Michigan Railway acquisitions. Fuel costs averaged $1.37 per gallon in
2004 compared to $1.00 per gallon in 2003, resulting in a $9.5 million increase in fuel expense in
2004. EQUIPMENT RENTAL. Equipment rental increased $6.4 million, or 19%, to $40.6 million in 2004
from $34.2 million in 2003 primarily due to the acquisitions in 2004 of the Midland Subdivision,
the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the impact of a full year
from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande Railway as well as
the strengthening of the Canadian Dollar. As a percentage of revenue, equipment rental increased
to 10.2% in 2004, compared to 9.7% in 2003, due to higher car hire expense resulting from Class I
congestion and additional railcar leases to support increased lumber traffic in California. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased
$10.7 million, or 14%, to $88.6 million in 2004 from $77.9 million in 2003 primarily due to the
$6.7 million charge related to the retirement of our former CEO. In accordance with the terms of
the severance agreement, $3.1 million was paid into a deferred compensation account and is
maintained as a long-term asset and liability on our balance sheet. In addition, 0.1 million stock
options were vested, 1.2 million stock options were extended for three years and 24,918 restricted
shares were vested, resulting in a non-cash charge of $3.6 million. Our former CEO continues to be
eligible for future payments under our Long Term Incentive Plan through 2007. No amount has been
accrued for any future payments which he may receive. Selling, general and administrative expense
increased as a percentage of revenue to 22.4% in 2004, from 22.1% in 2003 or $10.7 million
primarily 24




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due to the charge for our former CEOs retirement. Excluding this charge, which accounted for
a 1.3 percentage point increase, selling, general and administrative expense decreased as a
percentage of revenue to 21.1% in 2004 from 22.1% in 2003 due to the increase in revenue while the
absolute amount spent on selling, general, and administrative expenses remained relatively flat. ASSET SALES. Net gains on sales of assets were comparable at $4.0 million and $3.3 million
for the years ended December 31, 2004 and 2003, respectively. IMPAIRMENT OF ASSETS. During the third quarter of 2004, we committed to a plan to dispose of
the E&N Railway. As a result of several factors, including the expectation of minimal future
operating cash flows and potential limitations on the use of certain of the real estate, we do not
expect significant proceeds from this disposal and accordingly, recorded an impairment charge of
$12.6 million during 2004. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $5.4 million,
or 23%, to $29.2 million in 2004 from $23.8 million in 2003 primarily due to the acquisitions in
2004 of the Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan
Railroad, and the impact of a full year from the 2003 acquisitions of the Mobile Line and the San
Luis and Rio Grande Railway. As a percentage of revenue, depreciation and amortization increased
to 7.4% in 2004, from 6.8% in 2003. INTEREST AND OTHER EXPENSE. Interest and other expense, including amortization of deferred
financing costs, decreased $3.8 million to $28.6 million in 2004 from $32.4 million in 2003. This
decrease is primarily due to the conversion and redemption of the Junior Convertible Debentures at
July 31, 2004, the repurchase of our senior subordinated notes and the refinancing of our senior
credit facility in September 2004. Interest expense of $3.3 million and $4.9 million for the years
ended December 31, 2004 and 2003, respectively, has been allocated to discontinued operations. FINANCING COSTS. In September 2004, we incurred costs to refinance our senior credit facility
and to repurchase for our senior subordinated notes. The $39.5 million of costs consist of $7.7
million for the write-off of deferred loan costs associated with the original senior credit
facility, $19.2 million for the purchase of the senior subordinated notes and $12.6 million for the
write-off of deferred loan costs, original issue discount and bank fees related to the senior
subordinated notes. INCOME TAXES. Our effective tax rates in 2004 and 2003 for continuing operations were 17.4%
and 41.9%, respectively. The 2004 tax provision was impacted by the refinancing, CEO severance and
E&N impairment charges. The tax benefit on the refinancing charges was 33%, due to the recognition
of a foreign exchange gain for tax purposes; the tax benefit on the CEO severance charge was 16%,
due to the non-deductibility of the non-cash component of the charge; and the tax benefit on the
E&N impairment charge was 31%, due to managements assessment as to the expected utilization of the
deferred tax asset created by the charge. The effective tax rate in 2003 was impacted by recording
a provision of $1.5 million from an increase in the Ontario, Canada provincial tax rates. DISCONTINUED OPERATIONS. During the second quarter of 2004, we committed to a plan to dispose
of the Arizona Eastern Railway Company. Subsequent to committing to the disposal plan, we
determined that the expected proceeds from the sale would be lower than anticipated and accordingly
recorded an impairment charge of $4 million during the third quarter of 2004. We completed the
sale of the Arizona Eastern Railway Company during December 2004, for $2.8 million in cash,
resulting in a gain on the sale of $0.3 million, or $0.2 million after tax. The results of
operations for the Arizona Eastern Railway Company have been reclassified to discontinued
operations for the periods presented. For the year ended December 31, 2004 and 2003, the Arizona
Eastern Railway Company contributed a loss of $2.5 million and income of $0.5 million to the loss
from discontinued operations, respectively. The year ended 2004 results from operations includes
an impairment charge of $4.0 million, pre-tax, as discussed above. During the fourth quarter of 2004, we committed to a plan to dispose of the West Texas and
Lubbock Railroad. We completed the sale of the West Texas and Lubbock Railroad during December
2004, for $1.8 million in cash and a long term note for $3.8 million, resulting in a gain on the
sale of $0.1 million, before and after tax. The results of operations for the West Texas and
Lubbock Railroad have been reclassified to discontinued operations for the periods presented. For
the years ended December 31, 2004 and 2003, the West Texas and Lubbock Railroad contributed income
of $0.5 million and a loss of $0.02 million to the loss from discontinued operations, respectively. 25




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In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285
million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result
of foreign exchange hedges that were entered into during the third quarter of 2004. In addition,
the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7 million (US $5
million) based on the changes in the net assets of Freight Australia from September 30, 2003
through August 31, 2004, which was received in December 2004, and also provides various
representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica
for violations of most of the representations and warranties are capped at AUD $50 million (US
$39.5 million). During the year ended December 31, 2004, we recognized a gain of $20.2 million,
pre-tax and $2.0 million, net of income taxes on the sale. The $18.2 million tax provision on the
sale of Freight Australia includes a provision of $11.4 million for the previously unremitted
earnings of Freight Australia. The proceeds from sale of Freight Australia were used to repay
senior debt and repurchase our high yield senior notes. Freight Australias results of operations
have been presented in discontinued operations on our consolidated financial statements. The
results of Freight Australia have been included in the financial statements through the date of
sale of the entity, August 31, 2004. For the years ended December 31, 2004 and 2003, Freight
Australia contributed losses of $0.9 million, and $10.0 million, respectively, to the losses from
discontinued operations. In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean
railroad. Accordingly, we have presented the operating results and loss on sale of Ferronor in
discontinued operations for the periods presented. During the year ended December 31, 2004, we
recognized a $4.0 million tax charge resulting from the sale of our interest in Ferronor and the
repatriation of the cash to the U.S. For the year ended 2003, $0.02 million (net of tax) of income
is included in the loss from discontinued operations for Ferronor. No income or expense was
recognized from operations for 2004. 26




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##### Table of Contents



COMPARISON OF CONSOLIDATED OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 The following table sets forth the operating revenue and expenses by functional category for
our consolidated operations for the periods indicated (in thousands). For the years ended December 31,2003
    
    
    2002Operating revenue
    
    $
    352,338
    
    
    
    100
    %
    
    $
    326,654
    
    
    
    100
    %Operating expenses:Maintenance of way
    
    
    37,464
    
    
    
    10.6
    %
    
    
    33,431
    
    
    
    10.2
    %Maintenance of equipment
    
    
    12,941
    
    
    
    3.7
    %
    
    
    14,709
    
    
    
    4.5
    %Transportation
    
    
    95,210
    
    
    
    27.0
    %
    
    
    86,324
    
    
    
    26.4
    %Equipment rental
    
    
    34,245
    
    
    
    9.7
    %
    
    
    32,871
    
    
    
    10.1
    %Selling, general and administrative
    
    
    77,878
    
    
    
    22.1
    %
    
    
    80,183
    
    
    
    24.6
    %Net gain on sale of assets
    
    
    (3,262
    )
    
    
    -0.9
    %
    
    
    (9,155
    )
    
    
    -2.8
    %Impairment
of assets
    
    
    
    
    
    
    0.0
    %
    
    
    1,396
    
    
    
    0.4
    %Depreciation and amortization
    
    
    23,833
    
    
    
    6.8
    %
    
    
    21,929
    
    
    
    6.7
    %Total operating expenses
    
    
    278,309
    
    
    
    79.0
    %
    
    
    261,688
    
    
    
    80.1
    %Operating income
    
    $
    74,029
    
    
    
    21.0
    %
    
    $
    64,966
    
    
    
    19.9
    %
 The following table sets forth the operating revenue and expenses by natural category for our
consolidated operations for the periods indicated (in thousands). For the years ended December 31,2003
    
    
    2002Operating revenue
    
    $
    352,338
    
    
    
    100
    %
    
    $
    326,654
    
    
    
    100
    %Operating expenses:Labor and benefits
    
    
    113,938
    
    
    
    32.3
    %
    
    
    109,182
    
    
    
    33.4
    %Equipment rents
    
    
    35,606
    
    
    
    10.1
    %
    
    
    33,681
    
    
    
    10.3
    %Purchased services
    
    
    23,743
    
    
    
    6.7
    %
    
    
    29,517
    
    
    
    9.0
    %Diesel fuel
    
    
    25,609
    
    
    
    7.3
    %
    
    
    22,663
    
    
    
    6.9
    %Casualties and insurance
    
    
    14,794
    
    
    
    4.2
    %
    
    
    12,521
    
    
    
    3.8
    %Materials
    
    
    7,896
    
    
    
    2.2
    %
    
    
    8,340
    
    
    
    2.6
    %Joint facilities
    
    
    8,258
    
    
    
    2.4
    %
    
    
    7,228
    
    
    
    2.2
    %Other expenses
    
    
    27,894
    
    
    
    7.9
    %
    
    
    24,386
    
    
    
    7.5
    %Net gain on sale of assets
    
    
    (3,262
    )
    
    
    -0.9
    %
    
    
    (9,155
    )
    
    
    -2.8
    %Impairment
of assets
    
    
    
    
    
    
    0.0
    %
    
    
    1,396
    
    
    
    0.5
    %Depreciation and amortization
    
    
    23,833
    
    
    
    6.8
    %
    
    
    21,929
    
    
    
    6.7
    %Total operating expenses
    
    
    278,309
    
    
    
    79.0
    %
    
    
    261,688
    
    
    
    80.1
    %Operating income
    
    $
    74,029
    
    
    
    21.0
    %
    
    $
    64,966
    
    
    
    19.9
    %
 27




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##### Table of Contents



OPERATING REVENUE. Operating revenue increased by $25.7 million, or 7.9% to $352.3 million for
the year ended December 31, 2003 from $326.7 million for the year ended December 31, 2002, while
carloads increased 3.2% to 1,131,142 in 2003 from 1,096,403 in 2002. Excluding revenue of $1.6
million in 2002 from the disposed railroads, Texas New Mexico Railroad, Georgia Southwestern
Railroad and San Pedro and Southwestern Railway, and $9.8 million in 2003 from the acquired
railroads, San Luis and Rio Grande Railroad and the Mobile Line and the disposed railroad San Pedro
and Southwestern Railway, operating revenue increased $17.4 million, or 5.4%, while carloads
increased by 19,377, or 1.8%. The increase in same railroad revenue was due to a 12% improvement
in the Canadian dollar, which positively impacted operating revenue by $8.4 million for the year
ended December 31, 2003, and an increase in carloads, where eleven out of fourteen of our commodity
groups increased in 2003 compared to 2002. In addition, operating revenue in 2003 benefited from two short-term contracts which did not
recur in 2004. These contracts, which were to move logs in Arizona and soil in Illinois,
contributed a total of $2.7 million in revenue and 4,763 carloads during the year ended December
31, 2003. The increase in the average rate per carload to $274 in 2003 from $259 in 2002 was
primarily due to the improvement in the Canadian dollar. The following table compares North American freight revenue, carloads and average freight
revenue per carload for the years ended December 31, 2003 and 2002: For the year ended
    
    
    For the year ended(dollars in thousands, except average rate per carload)
    
    December 31, 2003
    
    
    December 31, 2002Freight
    
    
    
    
    
    
    Average rate
    
    
    Freight
    
    
    
    
    
    
    Average rateRevenue
    
    
    Carloads
    
    
    per carload
    
    
    Revenue
    
    
    Carloads
    
    
    per carloadLumber & Forest Products
    
    $
    51,380
    
    
    
    126,073
    
    
    $
    408
    
    
    $
    48,541
    
    
    
    124,025
    
    
    $
    391Chemicals
    
    
    30,957
    
    
    
    85,015
    
    
    
    364
    
    
    
    27,771
    
    
    
    83,401
    
    
    
    333Agricultural & Farm Products
    
    
    30,708
    
    
    
    98,439
    
    
    
    312
    

    
    
    27,819
    
    
    
    94,963
    
    
    
    293Paper Products
    
    
    29,565
    
    
    
    98,002
    
    
    
    302
    
    
    
    26,201
    
    
    
    94,471
    
    
    
    277Metal
    
    
    26,835
    
    
    
    85,876
    
    
    
    312
    
    
    
    22,896
    
    
    
    76,854
    
    
    
    298Coal
    
    
    24,479
    
    
    
    142,928
    
    
    
    171
    
    
    
    22,940
    
    
    
    134,082
    
    
    
    171Railroad Equipment/Bridge Traffic
    
    
    23,390
    
    
    
    178,451
    
    
    
    131
    
    
    
    22,237
    
    
    
    179,582
    
    
    
    124Food Products
    
    
    20,517
    
    
    
    63,704
    
    
    
    322
    
    
    
    19,787
    
    
    
    62,468
    
    
    
    317Petroleum Products
    
    
    18,282
    
    
    
    48,700
    
    
    
    375
    
    
    
    15,321
    
    
    
    41,512
    
    
    
    369Minerals
    
    
    17,304
    
    
    
    48,892
    
    
    
    354
    
    
    
    16,940
    
    
    
    45,867
    
    
    
    369Metallic/Non-metallic Ores
    
    
    15,157
    
    
    
    55,408
    
    
    
    274
    
    
    
    11,694
    
    
    
    49,810
    
    
    
    235Other
    
    
    9,328
    
    
    
    30,144
    
    
    
    309
    
    
    
    7,596
    
    
    
    23,115
    
    
    
    329Autos
    
    
    8,092
    
    
    
    33,888
    
    
    
    239
    
    
    
    9,827
    
    
    
    43,843
    
    
    
    224Intermodal
    
    
    4,235
    
    
    
    35,622
    
    
    
    119
    
    
    
    4,521
    
    
    
    42,410
    
    
    
    107Total
    
    $
    310,229
    
    
    
    1,131,142
    
    
    $
    274
    
    
    $
    284,091
    
    
    
    1,096,403
    
    
    $
    259
 Lumber and forest products revenue was $51.4 million in the year ended December 31, 2003
compared to $48.5 million in the year ended December 31, 2002, an increase of $2.9 million or 6%.
This increase was due to a short-term contract to haul logs in Arizona during 2003, a strong
housing market, an increase in demand for off-shore lumber and longer hauls of lumber in Alabama as
a result of the Mobile Line acquisition. Chemicals revenue was $31.0 million in the year ended December 31, 2003 compared to $27.8
million in the year ended December 31, 2002, an increase of $3.2 million or 11%. This increase was
primarily due to longer hauls in Alabama as a result of the Mobile Line acquisition, increased
carloads with existing customers and new business in South Carolina. Agricultural and farm products revenue was $30.7 million in the year ended December 31, 2003
compared to $27.8 million in the year ended December 31, 2002, an increase of $2.9 million or 10%.
This increase was due to an improved wheat harvest in Kansas in 2003, partially offset by a poor
2002 harvest in southern Ohio and Indiana, which impacted 2003 carloads and the closure of a grain
customer in California. Paper products revenue was $29.6 million in the year ended December 31, 2003 compared to $26.2
million in the year ended December 31, 2002, an increase of $3.4 million or 13%. This increase was
primarily due to new contracts and longer hauls in Alabama as a result of the Mobile Line
acquisition, an increase in paper production in Nova Scotia, and the strengthening of the Canadian
dollar, partially offset by a decrease in carloads in Oregon as a result of a paper mill closure. 28




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##### Table of Contents



Metals revenue was $26.8 million in the year ended December 31, 2003 compared to $22.9 million
in the year ended December 31, 2002, an increase of $3.9 million or 17%. This increase was due to
an increase in carloads from existing customers in Ohio, North Carolina and South Carolina, new
hauls in Alabama as a result of the Mobile Line acquisition and the strengthening of the Canadian
dollar, partially offset by a decrease in carloads in California as a result of customer production
problems. Coal revenue was $24.5 million in the year ended December 31, 2003 compared to $22.9 million
in the year ended December 31, 2002, an increase of $1.6 million or 7%. This increase was the
result of increased carloads with utility companies in Oklahoma, Indiana and Arkansas and new
business in Indiana, partially offset by a decrease in carloads from the Powder River Basin due to
severe weather in early 2003. Bridge traffic revenue was $23.4 million in the year ended December 31, 2003 compared to $22.2
million in the year ended December 31, 2002, an increase of $1.2 million or 5%. This increase was
primarily due to an increase in bridge traffic in Canada along with the strengthening of the
Canadian dollar, partially offset by a decrease related to a General Motors contract that Canadian
National Railway lost to CSX Transportation in Ohio. Food products revenue was $20.5 million in the year ended December 31, 2003 compared to $19.8
million in the year ended December 31, 2002, an increase of $0.7 million or 4%. This increase was
primarily due to increased hauls in California as a result of a good tomato harvest and new hauls
in Alabama as a result of the Mobile Line acquisition partially offset by a decrease in carloads in
Kansas due to a poor sunflower seed harvest. Petroleum products revenue was $18.3 million in the year ended December 31, 2003 compared to
$15.3 million in the year ended December 31, 2002, an increase of $3.0 million or 19%. This
increase was primarily due to new petroleum coke moves for a customer in Canada, new business to
move liquefied petroleum gas in New England, new business to move asphalt in Kansas and the
strengthening of the Canadian dollar. Minerals
revenue was $17.3 million in the year ended December 31,
2003 compared to $16.9
million in the year ended December 31, 2002, an increase of $0.4 million or 2%. This increase was
the result of new hauls on the Mobile Line, an increase in roofing granule moves due to a strong
housing market and new calcium carbonate moves in Alabama, partially offset by fewer cement and
limestone moves in New England and a reduction in copper concentrate moves in Arizona. Metallic and non-metallic ores revenue was $15.2 million in the year ended December 31, 2003
compared to $11.7 million in the year ended December 31, 2002, an increase of $3.5 million or 30%.
This increase was due to the acquisitions of the Mobile Line and San Luis and Rio Grande Railroad,
a short-term contract to move soil in Illinois and increased traffic with existing customers in
Texas. Other revenue was $9.3 million in the year ended December 31, 2003 compared to $7.6 million in
the year ended December 31, 2002, an increase of $1.7 million or 23%. This increase was primarily
due to a short-term contract in Illinois, partially offset by a decrease in ammunition moves in
Washington. Autos revenue was $8.1 million in the year ended December 31, 2003 compared to $9.8 million in
the year ended December 31, 2002, a decrease of $1.7 million or 18%. This decrease related
primarily to a General Motors contract that Canadian National Railway lost to CSX Transportation in
Ohio. Intermodal revenue was $4.2 million in the year ended December 31, 2003 compared to $4.5
million in the year ended December 31, 2002, a decrease of $0.3 million or 6%. This decrease was
primarily due to the loss of intermodal business in the Midwest, partially offset by a new contract
to move solid waste containers in Washington. OPERATING EXPENSES. Operating expenses increased $16.6 million to $278.3 million in the year
ended December 31, 2003 from $261.7 million in 2002 primarily due to the 12% increase in the
Canadian dollar, the acquisitions of the Mobile Line and San Luis and Rio Grande Railroad, higher
transportation labor costs associated with the increased carloads, higher fuel prices compared to
2002 and increased casualty and insurance costs. The operating ratio, defined as total operating
expenses divided by total operating revenue, was 79.0% in 2003 compared to 80.1% in 2002. Both
periods include the addition of expenses to selling, general and administrative, which had
previously been classified as corporate overhead. MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage of revenue to 10.6%
in the year 29




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##### Table of Contents



ended December 31, 2003 from 10.2% in 2002, due to higher contract labor costs in 2003 related
to brush control, bridge repairs and rail testing as a result of increased preventive maintenance
initiatives. MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense decreased as a percentage of
revenue to 3.7% in the year ended December 31, 2003 from 4.5% in 2002. The decrease is primarily
due to the outsourcing of certain car repair activities, which also reduced car repair revenue. TRANSPORTATION. Transportation expense increased as a percentage of revenue to 27.0% in the
year ended December 31, 2003 from 26.4% in 2002 with higher fuel and casualty costs primarily
accounted for the increase in expense. Fuel costs were $1.00 per gallon in 2003 compared to $0.87
per gallon in 2002 resulting in a $3.4 million increase in fuel expense in 2003, net of a $1.6
million benefit in 2003 for our fuel hedge. Casualty and insurance expenses were up $1.8 million in
2003 from 2002. Notwithstanding the increase in casualties and insurance, our personal injury
frequency ratio, based upon the industry standard of personal injuries per 200,000 man hours,
decreased in 2003 to 2.05 from 3.05 in 2002. EQUIPMENT RENTAL. Equipment rental decreased as a percentage of revenue to 9.7% in the year
ended December 31, 2003 from 10.1% in 2002 due to improved management of leased cars. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense decreased as
a percentage of revenue to 22.1% in the year ended December 31, 2003 from 24.6% in 2002. This
decrease was primarily due to the write-off of $3.3 million in 2002 for the failed bid costs in
connection with the proposed acquisition of National Rail and FreightCorp, two government-owned
railroads in Australia, a $1.4 million restructuring charge in 2002 relating to the consolidation
of the accounting and human resource functions from San Antonio to Boca Raton and a $1.0 million
restructuring charge relating to the termination of certain executives in December 2002. ASSET SALES. As part of our strategic plan, we continually review our portfolio for under
performing, non-core or non-strategic assets that can be sold. Net gains on sales of assets were
$3.3 million for the year ended December 31, 2003. This gain primarily relates to land sales in
Illinois, North Carolina and Washington, which resulted in net gains of $1.8 million. Net gains on
sales of assets were $9.2 million for the year ended December 31, 2002, which primarily relate to
the sale of the Georgia Southwestern Railroad in March 2002 resulting in a gain of $4.5 million and
a sale of right-of-ways resulting in a gain of $3.5 million. IMPAIRMENT OF ASSETS. On December 31, 1998, we ceased all motor carrier operations and leased
substantially all of the operating assets of that segment for periods up to 24 months to an
unrelated third party. The third party elected not to renew the lease or purchase the assets upon
expiration of the leases in 2000 and all assets were then classified as held for sale. Due to a
deterioration in the value of the assets as a result of the weak economic conditions and the lack
of servicing of the assets, an impairment charge of $1.4 million was recorded during the year ended
December 31, 2002. All of the equipment was sold as of December 31, 2003, with the sales proceeds
approximating the remaining book value. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was comparable at 6.8% of
revenue in the year ended December 31, 2003 and 6.7% in 2002. INTEREST AND OTHER EXPENSE. Interest expense, including amortization of financing costs,
decreased from $35.9 million in 2002 to $32.4 million in 2003. The decrease in interest expense
from 2002 to 2003 is primarily due to the refinancing of our senior debt in May 2002, which
resulted in a lower interest rate. Interest expense of $4.6 million and $4.9 million for 2002 and
2003, respectively, has been allocated to discontinued operations. FINANCING COSTS. In connection with the May 2002 refinancing of our senior debt, we terminated
our existing interest rate swaps. Because these hedging instruments were designated as hedges of
the cash flows under the previous senior debt facility, SFAS No. 133 required the entire balance in
other accumulated comprehensive loss to be charged to earnings. Accordingly, a charge of $17.1
million was recorded in other income (expense) during the year ended December 31, 2002. Also in
connection with the refinancing of our senior debt in May 2002, we wrote off the unamortized
balance of the deferred loan costs relating to our old senior credit facility for a total charge of
$6.6 million. We also incurred a charge of $2.0 million during 2002 to write-off other refinancing
related costs incurred in connection with our May 2002 refinancing. INCOME TAXES. Our effective tax rates in 2003 and 2002 for continuing operations were 41.9%
and 44.2%, respectively. In 2003, we recorded a provision of $1.5 million from an increase in the
Ontario, Canada provincial tax rates. 30




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DISCONTINUED OPERATIONS.
In December 2004, we completed the sale of the Arizona Eastern Railway Company. The results
of operations for the Arizona Eastern Railway Company have been reclassified to discontinued
operations for the periods presented. For the year ended December 31, 2003 and 2002, the Arizona
Eastern Railway Company contributed income of $0.5 million and a loss of $0.6 million to
discontinued operations. In December 2004, we completed the sale of the West Texas and Lubbock Railroad. Accordingly,
the results of operations for the West Texas and Lubbock Railroad have been reclassified to
discontinued operations for the periods presented. For the year ended December 31, 2003, the West
Texas and Lubbock Railroad contributed a loss of $0.02 million to discontinued operations. The
entitys financial results were breakeven for the year ended 2002. In August 2004, we completed the sale of Freight Australia to Pacific National. Accordingly,
we classified the operating results of Freight Australia for each of the years presented in
discontinued operations through the date of sale of the entity, August 31, 2004. For the years
ended December 31, 2003 and 2002, Freight Australia contributed losses of $10.0 million, and $0.2
million, respectively, to discontinued operations. In February 2004, we completed the sale of our 55% equity interest in Ferronor. Accordingly,
we classified the operating results of Ferronor for each of the years presented in discontinued
operations. As such, the income statements for the years ended 2003 and 2002, include $0.02 million
and $1.0 million (net of tax), respectively, of income from discontinued operations for Ferronor. In May 2002, we sold the Texas New Mexico Railroad for $2.3 million resulting in a pretax gain
of $1.3 million ($0.8 million, after tax). The gain has been included in discontinued operations
for the year ended December 31, 2002. This gain was partially offset by an escrow settlement from
the sale of Kalyn Siebert, our previously discontinued trailer manufacturing operations, which
resulted in a loss of $0.4 million, after tax, in 2002. LIQUIDITY AND CAPITAL RESOURCES  COMBINED OPERATIONS The discussion of liquidity and capital resources that follows reflects our consolidated
results and includes all of our subsidiaries. Our principal source of liquidity is cash generated
from operations. In addition, we may fund any additional liquidity requirements through borrowings
under our $100 million revolving credit facility. Cash flows provided by operations of $48.1
million less capital expenditures of $75.8 million resulted in a net outflow of $27.7 million for
the year ended December 31, 2004 compared to a net outflow of $3.0 million for the year ended
December 31, 2003. The increase in net cash outflow is primarily due to the $10 million initial
lease payment to CSX, changes in working capital and the timing of capital projects in North
America and Australia. Due to the capital intensive nature of our business, we believe this is an
important cash flow measure. Our long-term business strategy includes the selective acquisition and disposition of
transportation-related businesses. Accordingly, we may require additional equity and/or debt
capital in order to consummate acquisitions or undertake major business development activities. It
is impossible to predict the amount of capital that may be required for such acquisitions or
business development, and whether sufficient financing for such activities will be available on
terms acceptable to us, if at all. One of our strategic goals has been to reduce our net debt (defined as total debt less cash
and cash equivalents) to 50% of total capitalization (defined as net debt plus stockholders
equity). As of December 31, 2004, our net debt is 47.4% of total capitalization as compared to
58.3% at December 31, 2003. The components of our plan to achieve this goal included the sale of
non-strategic non-core assets, including the sale of Ferronor and Freight Australia, with proceeds
used to reduce debt; conversions of our Junior Convertible Subordinated Debentures which matured on
July 31, 2004; and the ongoing reduction of debt utilizing cash flow from operations. The
achievement of this plan was highly dependent upon the completion of the sale of Ferronor, which
was sold during the first quarter of 2004, and the sale of Freight Australia, which was sold during
the third quarter of 2004. In addition, $21.9 million of our $22.5 million of Junior Convertible
Subordinated Debentures converted into common shares pursuant to their terms during 2004. The remaining $600,000 was
redeemed for cash during the third quarter of 2004. As part of this plan, in September 2004, we
completed the purchase of $125.7 million of our $130.0 million principal amount of senior
subordinated notes due 2010. At the same time, we amended our credit agreement to extend the
maturity by two years, reduced the margin rate by 0.5%, borrowed $350 million in term loans and
increased the availability of U.S. dollar denominated revolving loans by $10 million. 31




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Operating Activities Our cash provided by operating activities decreased $20.4 million, to $48.1 million, for the
year ended December 31, 2004, from $68.5 million for the comparable period in 2003. The decrease in
cash flows from operating activities is primarily due to the $10.0 million initial lease payment on
the Chicago, Fort Wayne & Eastern Railroad, a $3.7 million increase in working capital accounts and
the $3.1 million cash payment associated with our former CEOs retirement. Total cash provided by
operating activities for the year ended December 31, 2004, consists of a net loss of $25.9 million,
$43.1 million in depreciation and amortization, an add-back of $39.5 million for financing costs,
$16.6 million in impairment charges, $9.5 million in deferred income taxes and other and an
add-back of $3.6 million for the non-cash portion of the charge for the former CEOs retirement,
partially offset by the $10.0 million initial lease payment to CSX, $25.3 million of asset sale
gains and $3.7 million of net increases in working capital accounts compared to total cash provided
by operating activities for the year ended December 31, 2003, which consisted of $14.7 million of
net income, $46.8 million of depreciation and amortization, and $13.0 million in deferred taxes and
other, partially offset by net increase in working capital accounts of $2.8 million and $3.3
million in asset sale gains. Our cash provided by operating activities increased $29.9 million to $68.5 million in 2003
from $38.6 million in 2002. The improvement in cash flows from operating activities was primarily
due to the termination of the interest rate swaps and related costs in connection with our debt
refinancing in 2002 as well as improved working capital management in 2003, partially offset by a
decrease in operating cash flows from Australia due to a drought. Total cash provided by operating
activities in 2003 consisted of $14.7 million in net income, $46.8 million in depreciation and
amortization and $13.0 million in deferred taxes and other, partially offset by $2.8 million of
changes in working capital accounts and $3.3 million of asset sale gains compared to total cash
provided by operating activities for the year ended December 31, 2002, which consisted of $2.2
million in net income, $41.3 million of depreciation and amortization, $25.4 million of refinancing
costs and $3.0 million of deferred taxes and other, partially offset by $9.7 million in asset sale
gains and $23.5 million of changes in working capital accounts. Investing Activities Cash provided by investing activities was $110.7 million in 2004 compared to cash used of
$88.1 million in 2003. The increase is primarily due to the net cash proceeds of $198.8 million
received on the sale of Freight Australia. Additionally, capital expenditures in 2004, were $75.8
million, or $4.3 million higher than capital expenditures in 2003. This increase was due to higher
capitalized maintenance projects in Australia as a result of the increased grain tonnage and the
appreciation of the Australian dollar and maintenance projects in North America related to
acquisitions. Capital expenditures in North America were $62.3 million in 2004, compared to $64.5
million in 2003. Asset sale proceeds were $222.7 million in 2004 compared to $11.2 million in
2003, primarily due to the sale of Freight Australia in August 2004 and Ferronor in February 2004.
We expect capital expenditures in 2005 to be approximately $60.0 million. Cash used in investing activities was $88.1 million in 2003 compared to $150.1 million in
2002. The decrease was primarily due to the use of cash for the acquisitions of ParkSierra and
StatesRail, which totaled $89.4 million in 2002 compared to cash used for acquisitions of $25.8
million in 2003 primarily for the Mobile Line and San Luis and Rio Grande Railroad. Capital
expenditures for the years ended December 31, 2003 and 2002 were $71.5 million and $65.7 million,
respectively. Asset sale proceeds were $11.2 million for the year ended December 31, 2003 compared
to $9.3 million in 2002. Deferred acquisition costs and other accounted for $2.0 million of cash
used in 2003 compared to $5.7 million in 2002. Financing Activities Cash used in financing activities was $148.4 million for the year ended December 31, 2004
compared to cash provided of $1.5 million in the year ended 2003. The decrease of $149.9 million
was primarily due to the repurchase of the senior subordinated notes during 2004 and the repayment
of the Australian component of our senior debt following the sale of Freight Australia. Cash
proceeds from the exercise of options and warrants increased $27.1 million to $28.8 million in 2004
from $1.7 million in 2003. Cash provided by financing activities was $1.5 million in 2003 compared to $79.3 million in
2002. The decrease of $77.8 million was primarily due to $50.0 million of borrowings in January
2002 used to finance the acquisitions of ParkSierra and StatesRail and an additional $50.0 million
of borrowings in connection with refinancing of the senior credit facility in May 2002. The
primary source of cash in 2003 was $47.7 million of borrowings on the revolving credit facility and
$1.7 million of 32




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proceeds from exercises of stock options, partially offset by $46.5 million of debt payments
and the purchase of treasury stock for $1.2 million. As of December 31, 2004, we had a working capital deficit of $6.6 million, including cash on
hand of $24.3 million, and $100.0 million of availability under our revolving credit facility,
compared to a working capital deficit of $17.1 million, cash on hand of $13.7 million and $86.0
million of availability under our revolving credit facility at December 31, 2003. The working
capital improvement at December 31, 2004, compared to December 31, 2003, is primarily due to the
conversion and redemption of our junior convertible subordinated debentures during the year ended
2004, the sale of Ferronor, which had a working capital deficit of $7.0 million at December 31,
2003, and the proceeds from the sale of Freight Australia. The junior convertible subordinated
debentures were convertible into common stock prior to July 31, 2004, at a conversion price of $10
per share. As of December 31, 2004, all of our junior convertible subordinated debentures have
been converted or redeemed. In July 2004, we entered into a twenty year lease for a 276 mile
railroad, known as the Chicago, Fort Wayne & Eastern Railroad, from CSX Transportation, Inc. for a
$10.0 million up-front cash lease payment and an annual lease payment of approximately $1.2
million. Our cash flows from operations and borrowings under our credit agreements historically
have been sufficient to meet our ongoing operating requirements, capital expenditures for property,
plant and equipment, and to satisfy our debt service requirements. On September 29, 2004, we entered into an amended and restated $450 million senior credit
facility. The facility consists of a $350 million term loan facility with a $313 million U.S.
tranche and a $37 million Canadian tranche and a $100 million revolving loan facility with a $90
million U.S. dollar tranche and a $10 million Canadian dollar tranche. The term loans mature on
September 30, 2011 and require 1% annual principal amortization. The revolving loans mature on
September 30, 2010. We also may incur additional indebtedness under the credit facility consisting
of up to $100 million aggregate principal amount of additional term loans to fund acquisitions,
subject to the satisfaction of conditions set forth in the amended and restated credit agreement,
including the consent of the Administrative Agent and Lead Arranger and the compliance with all
financial covenants set forth in the agreement on a pro forma basis on the date of the additional
borrowing. As of December 31, 2004, we had no U.S. or Canadian dollar loans outstanding under the
revolving credit facility. In connection with the amended and restated credit agreement, we
incurred a $7.7 million write-off of deferred loan costs related to the original senior credit
facility. At our option, loans under the amended and restated senior credit facility bear interest at
either  
    the alternative base rate, defined as the greater of (i) UBS AGs prime rate and
(ii) the Federal Funds Effective Rate plus 0.50% if such loan is a Term Loan or U.S.
Revolving Loan, or the Canadian Prime Rate, if such loan is a Canadian revolving loan,
and defined as the greater of (i) UBS AGs Canadian prime rate or (ii) the average rate
for 30 day Canadian Dollar bankers acceptances plus 1.0% per annum, plus, in each
case, a specified margin ranging from 1.25 to 0.75 basis points for term loans and 1.00
to 0.25 basis points for revolving loans, determined based on our leverage ratio, which
was 1.00% for term loans and 0.75% for revolving loans at December 31, 2004, or
    the reserve-adjusted LIBO rate plus a specified margin ranging from 2.25 to 1.75
basis points for term loans and 2.00 to 1.25 basis points for revolving loans,
determined based on our leverage ratio, which was 2.00% for term loans and 1.75% for
revolving loans at December 31, 2004. The default rate under the amended and restated senior credit facility is 2.0% above the
otherwise applicable rate. The U.S. term loan and the U.S. dollar denominated revolver are
collateralized by the assets of, and guaranteed by, us and most of our U.S. subsidiaries. The
Canadian term loan and the Canadian dollar denominated revolver are collateralized by the assets
of, and guaranteed by, us and most of our U.S. and Canadian subsidiaries. The loans were provided
by a syndicate of banks with UBS Securities LLC, as lead arranger, UBS AG, Stamford Branch, as
administrative agent and The Bank of Nova Scotia, as collateral agent. Our amended and restated senior credit facility includes numerous covenants imposing
significant financial and operating restrictions on us. The covenants limit our ability to, among
other things:  
    incur more debt,
    redeem or repurchase our common stock,
    pay dividends or make other distributions, 33




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
    make acquisitions or investments,
    use assets as security in other transactions,
    enter into transactions with affiliates,
    merge or consolidate with others,
    dispose of assets or use asset sale proceeds,
    create liens on our assets,
    make certain payments or capital expenditures, and
    extend credit. In addition, the amended and restated senior credit facility also contains financial covenants
that require us to meet a number of financial ratios and tests. Our ability to meet these ratios
and tests and to comply with other provisions of the amended and restated senior credit facility
can be affected by events beyond our control. Failure to comply with the obligations in the amended
and restated senior credit facility could result in an event of default, which, if not cured or
waived, could permit acceleration of the term loans and revolving loans or other indebtedness which
could have a material adverse effect on us. We were in compliance with each of these covenants as
of December 31, 2004, and anticipate being in compliance with our covenants for the next twelve
months. Our amended and restated senior credit facility allows us to invest in permitted acquisitions
of up to $50 million in any one transaction but not to exceed $300 million over the seven year term
of the amended and restated credit facility and requires us to be in compliance with our financial
covenants on a pro forma basis taking into account the acquisition and any related financing for
the prior four fiscal quarters. Although we have no current plans to make acquisitions that do not
meet these criteria, if proposed acquisitions exceed these limits we would seek to obtain waivers
from the lenders or their consent to amend the relevant provisions. To date, we have used
approximately $8.6 million of the $300 million acquisition limit. We do not believe these
restrictions are likely to affect our acquisition program. On September 29, 2004, we repurchased approximately $125.7 million of our $130 million
principal amount 12-7/8% senior subordinated notes due August 15, 2010, through a tender offer and
consent solicitation launched on August 31, 2004. Prior to expiration of the consent solicitation
on September 14, 2004, holders of most of the outstanding notes tendered their securities and
consented to the proposed amendments to the related indenture. The supplemental indenture
incorporating the proposed amendments, which remove most of the restrictive covenants contained in
the indenture, became effective on September 29, 2004, upon our acceptance for purchase of the
tendered notes, and is binding upon the holders of the notes that were not tendered in the tender
offer. We used proceeds from the sale of our Australian subsidiary and from the amended and
restated senior credit facility to fund the purchase of the notes. In addition to the premium
charge of approximately $19.2 million for the purchase of the notes, we incurred non-cash charges
of approximately $12.4 million related to the write-off of deferred loan costs and original issue
discounts of the notes. We expect to realize a reduction of approximately $20 million in annual
interest expense as a result of the repurchase of our senior subordinated notes and amendment and
restatement of our senior credit facility. It is our intent to call the remaining notes on August
15, 2005, at which time the call price will be $1.064375 per note. On April 10, 2003, we entered into two interest rate collar corridors for a total notional
amount of $100 million with an effective date of November 24, 2003, expiring on November 24, 2005.
The fair value of these interest rate collar corridors was a net receivable of $0.3 million at
December 31, 2004. On August 13, 2004, we entered into an interest rate swap for a notional amount of $50 million
for the period commencing November 24, 2004, through November 24, 2005. The fair value of this
swap was a net receivable of $0.1 million at December 31, 2004. On August 13, 2004, we entered into an interest rate cap for a notional amount of $50 million
with an effective date of November 24, 2004, expiring on November 24, 2005. The fair value of this
cap was a net receivable of $0.1 million at December 31, 2004. 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 fair value of
this swap was a net liability of $0.4 million at December 31, 2004. 34




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On December 8, 2004, we entered into an interest rate cap for a notional amount of $50 million
with an effective date of November 25, 2005, expiring on November 24, 2006. The fair value of this
cap was a net receivable of $0.1 million at December 31, 2004. All
of these interest rate swaps, caps and corridors, qualify, are designated and are
accounted for as cash flow hedges under SFAS No. 133. More information related to these cash flow
hedges can be found under Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Contractual Obligations Two primary uses of the cash provided by our operations are capital expenditures and debt
service. The following table represents the minimum future payments on our existing long-term debt
and lease obligations as of December 31, 2004: 2006 -
    
    
    2008 -
    
    
    AfterTOTAL
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    2009Long-term debt
    
    $
    350,000
    
    
    $
    5,213
    
    
    $
    6,966
    
    
    $
    6,966
    
    
    $
    330,855Subordinated debt
    
    $
    4,265
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    4,265Capital lease obligations
    
    $
    3,371
    
    
    $
    485
    
    
    $
    1,079
    
    
    $
    1,067
    
    
    $
    740Operating lease obligations
    
    $
    134,615
    
    
    $
    26,395
    
    
    $
    46,238
    
    
    $
    27,054
    
    
    $
    34,928Other long-term liabilities
    
    $
    9,979
    
    
    $
    399
    
    
    $
    902
    
    
    $
    5,835
    
    
    $
    2,843Total contractual cash obligations (1)
    
    $
    502,230
    
    
    $
    32,492
    
    
    $
    55,185
    
    
    $
    40,922
    
    
    $
    373,631
   (1)
    
    There were no material purchase obligations outstanding as of December 31, 2004. Common Stock Repurchase Program We occasionally repurchase our common stock under our share repurchase program. These
repurchases are limited to $5 million per year pursuant to our borrowing arrangements. In July
2002, our board of directors authorized a 2 million share repurchase program through December 31,
2003, subject to restrictions under our borrowing arrangements. During the year ended December 31,
2003, we repurchased 187,300 shares at a total cost of $1.2 million. No shares were repurchased
during 2004. 35




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RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board, or FASB, issued a revision to Statement
of Financial Accounting Standards, No. 123 (revised 2004), Share Based Payment SFAS No. 123R,
which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends Statement No.
95, Statement of Cash Flows. Under SFAS No. 123R, companies must calculate and record in the
income statement the cost of equity instruments, such as stock options and employee stock purchase
plans, awarded to employees for services received; pro forma disclosure is no longer permitted. The
cost of equity instruments is to be measured based on the fair value of the instrument on the date
they are granted and is required to be recognized over the period during which the employees are
required to provide services in exchange for the equity instruments. This pronouncement is
effective in the first interim or annual reporting period beginning after June 15, 2005. We intend
to adopt the prospective method of accounting for the stock based compensation for the third
quarter beginning July 1, 2005. We have not yet determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under SFAS 123 in Note 1 of the Notes
to Consolidated Financial Statements. In October 2004, the American Jobs Creation Act of 2004 (the Jobs Act) was signed into law. The
Jobs Act created a temporary dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are met. Such repatriations must occur in
either an enterprises last tax year that began before the enactment date, or the first tax year
that begins during the one-year period beginning on the date of enactment. In December 2004, the FASB issued FASB Staff Position 109-2 Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP
109-2), which indicates that the lack of clarification of certain provisions within the Jobs Act
and the timing of the enactment necessitate a practical exception to the SFAS No. 109, Accounting
for Income Taxes, (SFAS No. 109) requirement to reflect in the period of enactment the effect of
a new tax law. Accordingly, an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings. FSP 109-2 requires that the provisions of SFAS No. 109 be applied as an
enterprise decides on its plan for reinvestment or repatriation of its unremitted foreign earnings.
Based on preliminary identification of potential repatriation and reinvestment opportunities, we
expect that adoption of the repatriation provision of the Act will not have a material effect on
the consolidated financial statements. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We currently use derivatives to hedge against increases in fuel prices and interest rates. We
formally document the relationship between the hedging instrument and the hedged items, as well as
the risk management objective and strategy for the use of the hedging instrument. This
documentation includes linking the derivatives that are designated as cash flow hedges to specific
assets or liabilities on the balance sheet, commitments or forecasted transactions. When we enter
into a derivative contract, and at least quarterly, we assess whether the derivative item is
effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting
from ineffectiveness, as defined by SFAS No. 133, is recognized in current period earnings. For
derivative instruments that are designated and qualify as cash flow hedges, the effective portion
of the gain or loss on the derivative instrument is recorded in Accumulated Other Comprehensive
Income (Loss), a separate component of Stockholders Equity, and reclassified into earnings in the
period during which the hedge transaction affects earnings. We monitor our hedging positions and credit ratings of our counterparties and do not
anticipate losses due to counterparty non-performance. FOREIGN CURRENCY. Our foreign currency risk arises from owning and operating railroads in
Canada. As of December 31, 2004, we had not entered into any currency hedging transactions to
manage this risk. A decrease in the Canadian dollar could negatively impact our reported revenue
and earnings for the affected period. During 2004, the Canadian dollar increased 8%. The increase
in the Canadian dollar led to an increase of $5.6 million in reported revenue and $0.5 million
increase in reported operating income in 2004, compared to 2003. INTEREST RATES. Our interest rate risk results from issuing variable rate debt obligations, as
an increase in interest rates would result in lower earnings and increased cash outflows. 36




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On April 10, 2003, we entered into two interest rate collar corridors for a total notional
amount of $100 million with an effective date of November 24, 2003, expiring on November 24, 2005.
Under the terms of these interest rate collar corridors the LIBOR component of our interest rates
can fluctuate between 1.50% and 2.81%. However, if LIBOR exceeds 5.00%, we are responsible for
interest at that LIBOR rate. The interest rate collar corridors qualify, are designated and are
accounted for as cash flow hedges under SFAS No. 133. The fair value of these interest rate collar
corridors was a net receivable of $0.3 million at December 31, 2004. On August 13, 2004, we entered into an interest rate swap for a notional amount of $50 million
for the period commencing November 24, 2004, through November 24, 2005. The swap qualifies, is
designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the terms of the
interest rate swap, we are required to pay a fixed interest rate of 2.655% on $50 million while
receiving a variable interest rate equal to the 90 day LIBOR rate. The fair value of this swap was
a net receivable of $0.1 million at December 31, 2004. On August 13, 2004, we entered into an interest rate cap for a notional amount of $50 million
with an effective date of November 24, 2004, expiring on November 24, 2005. Under the terms of
this cap, the LIBOR component of our interest rate can fluctuate up to 3.00%. The cap qualifies,
is designated and is accounted for as a cash flow hedge under SFAS No. 133. The fair value of this
cap was a net receivable of $0.1 million at December 31, 2004. 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 swap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, we are required to pay a fixed interest rate of 4.05% on $100
million while receiving a variable interest rate equal to the 90 day LIBOR rate. The fair value of
this swap was a net liability of $0.4 million at December 31, 2004. On December 8, 2004, we entered into an interest rate cap for a notional amount of $50 million
with an effective date of November 25, 2005, expiring on November 24, 2006. Under the terms of
this cap, the LIBOR component of our interest rate can fluctuate up to 4.00%. The cap qualifies,
is designated and is accounted for as a cash flow hedge under SFAS No. 133. The fair value of this
cap was a net receivable of $0.1 million at December 31, 2004. DIESEL FUEL. We are exposed to fluctuations in diesel fuel prices, as an increase in the price
of diesel fuel would result in lower earnings and increased cash outflows. Fuel costs represented
9% of total revenues during the year ended December 31, 2004. Due to the significance of fuel costs
to our operations and the historical volatility of fuel prices, we maintain a program to hedge
against fluctuations in the price of our diesel fuel purchases. Each one-cent change in the price
of fuel would result in approximately a $0.3 million change in fuel expense on an annual basis. The fuel-hedging program includes the use of derivatives that are accounted for as cash flow
hedges. We did not have any hedges in place for 2004. As of December 31, 2004, we have entered
into fuel swap agreements to hedge the equivalent of 750,000 gallons per month (approximately 30%
of consumption) from December 2004 through December 2005, at an average price of $1.45 per gallon,
including transportation and distribution costs. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of RailAmerica, the accompanying notes thereto and the
report of independent registered certified public accounting firm are included as part of this Form
10-K and immediately follow the signature page of this Form 10-K. 37




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ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 
 ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of December 31,
2004, our principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are effective to ensure that the information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 are
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms. MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our evaluation under the COSO
framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2004. Our managements assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers
LLP, an independent registered certified public accounting firm, as stated in their report which is
included herein. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes in our internal
control over financial reporting which occurred during the fourth quarter of fiscal year 2004 which
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 38




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors, executive officers and nominees and our code of ethics is
incorporated by reference from our definitive proxy statement relating to our 2005 Annual Meeting
of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 30,
2005. 
 ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from our definitive
proxy statement relating to our 2005 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A on or before April 30, 2005. 
  ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information concerning security ownership and securities issuable under equity compensation
plans is incorporated by reference from our definitive proxy statement relating to our 2005 Annual
Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A on or before
April 30, 2005. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by
reference from our definitive proxy statement relating to our 2005 Annual Meeting of Stockholders
to be filed with the Commission pursuant to Regulation 14A on or
before April 30, 2005. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning principal accounting fees and services is incorporated by reference
from our definitive proxy statement relating to our 2005 Annual Meeting of Stockholders to be filed
with the Commission pursuant to Regulation 14A on or before
April 30, 2005. 39




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 2.1
    
    Amended and Restated Agreement and Plan of Merger, dated as of November 26, 2001 by and among
RailAmerica, Inc., ParkSierra Acquisition Corp. and ParkSierra Corp. (30)2.2
    
    Merger Agreement, dated as of October 12, 2001, among RailAmerica, Inc., StatesRail Acquisition Corp.
and StatesRail, Inc. (32)2.3
    
    Stock Purchase Agreement, dated October 12, 2001, among RailAmerica, Inc., New StatesRail Holdings,
Inc., StatesRail L.L.C., West Texas and Lubbock Railroad Company, Inc. and the Members of StatesRail
L.L.C. (32)2.4
    
    Letter Agreement, dated as of October 12, 2001 between the parties to Exhibits 2.2 and 2.3 above. (32)2.5
    
    Asset Purchase Agreement, dated November 25, 2003, among the Huron and Eastern Railway Company, Inc.
and the Straits Corporation. (41)2.6
    
    Lease and purchase of rail improvements agreement, dated as of October 13, 2004, between the Indiana &
Ohio Central Railroad Company Inc. and CSX Transportation, Inc. (40)3.1
    
    Amended and Restated Certificate of Incorporation of Registrant, as amended (2)3.2
    
    By-laws of RailAmerica, Inc. as amended and restated (36)3.3
    
    Certificate Of Amendment to Amended and Restated Certificate of Incorporation of RailAmerica, Inc. (31)4.1
    
    Form of Common Stock Purchase
Rights Agreement, dated as of January 6, 1998, between RailAmerica, Inc. and American Stock Transfer & Trust Company (6)4.2
    
    Certificate of Designation of Series A Convertible Redeemable Preferred Stock (19)4.3
    
    Third Amendment to the Rights Agreement, dated as of January 13, 2000, between RailAmerica, Inc. and
American Stock Transfer & Trust Company (10)4.6
    
    Fourth Amendment to the Rights Agreement, dated as of April 13, 2000, between RailAmerica, Inc. and
American Stock Transfer and Trust Company (21)4.7
    
    Waiver and Supplemental Agreement, dated as of April 13, 2000, among RailAmerica, Inc. and EGS
Associates, L.P., EGS Partners, L.L.C., BEV Partners, L.P., Jonas Partners, L.P., EGS Management,
L.L.C., William Ehrman, Frederic Greenberg, Jonas Gerstl and Juli Oliver (22)4.8
    
    Indenture, dated as of August 14, 2000, between RailAmerica Transportation Corp., the Guarantors named
therein and Wells Fargo Bank Minnesota, N.A. (24)4.13
    
    First Supplemental Indenture (32)4.14
    
    Second Supplemental Indenture (32)4.15
    
    Third Supplemental Indenture (42)4.16
    
    Fourth Supplemental Indenture (42)10.45
    
    RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan (2)+10.46
    
    RailAmerica, Inc. 1995 Employee Stock Purchase Plan (2)+
 40




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10.63
    
    RailAmerica, Inc. 1998 Executive Incentive Compensation Plan (7)+10.80
    
    Form of Change in Control Agreements between RailAmerica, Inc. and certain executive officers (32) +10.81
    
    Service Agreement, dated April 4, 2001, between RailAmerica, Inc. and Marinus van Onselen and first
amendment thereto. (32) +10.82
    
    Amended and Restated Executive Employment Agreement, dated as of January 1, 2002, between RailAmerica,
Inc. and Gary O. Marino. (32) +10.83
    
    Amended and Restated Executive Employment Agreement, dated as of January 1, 2002, between RailAmerica,
Inc. and Donald D. Redfearn. (32) +10.84
    
    Employment Agreement, dated as of January 1, 2002, between RailAmerica, Inc. and Gary M. Spiegel. (32)+10.86
    
    Amendment No. 1 to Credit Agreement (34)10.87
    
    Deferred Compensation Plan, as amended (34) +10.88
    
    Adoption Agreement relating to Deferred Compensation Plan, as amended (34) +10.89
    
    Long Term Incentive Plan, as amended (35) +10.90
    
    Annual Incentive Plan (35) +10.91
    
    Separation Agreement, dated as of November 14, 2003, between RailAmerica, Inc. and Gary M. Spiegel.(37)10.92
    
    Separation Agreement, dated as of April 7, 2004, between RailAmerica, Inc. and Gary O. Marino. (38)10.93
    
    Land and track lease agreement, dated as of July 26, 2004, between the Central Railroad Company of
Indianapolis and CSX Transportation, Inc. (39)10.94
    
    Amendment to the land and track lease agreement, dated as of July 30, 2004, between the Central
Railroad Company of Indianapolis and CSX Transportation, Inc. (39)10.95
    
    Amended and Restated Credit Agreement, dated as of September 29, 2004, among RailAmerica, Inc., Palm
Beach Rail Holdings, Inc., RailAmerica Transportation Corp., as Borrower, RailAmerica Canada Corp., as
the Canadian Term Borrower, Railink Canada Ltd., as the Canadian Revolver Borrower, as the Lenders,
UBS Securities LLC, as sole Lead Arranger and Bookrunner, UBS AG, Stamford Branch, as Administrative
Agent, and the Bank of Nova Scotia, as Collateral Agent. (43)10.96
    
    Employment agreement, dated as of August 1, 2004, between RailAmerica, Inc. and Charles Swinburn. (40)+10.97
    
    Amendment to the Amended and Restated Employment agreement, dated as of July 5, 2004, between
RailAmerica, Inc. and Donald D. Redfearn. (40)+10.98
    
    Employment agreement, dated as of July 22, 2004, between RailAmerica, Inc. and Rodney J. Conklin. (40)+10.99
    
    Employment agreement, dated as of June 16, 2004, between RailAmerica, Inc. and Michael J. Howe. (40)+10.100
    
    Change in control severance agreement, dated as of August 1, 2004, between RailAmerica, Inc. and
Charles Swinburn. (40)14.1
    
    Code of Ethics21.1
    
    Subsidiaries of Registrant23.1
    
    Consent of PricewaterhouseCoopers LLP
 41




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31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer32.1
    
    Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.32.2
    
    Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
  (2)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-QSB for the quarter ended September 30, 1995, filed with the Securities and Exchange
Commission on November 12, 1995.  (6)
    Incorporated by reference to exhibit No. 4.1 filed as part of RailAmerica, Inc.s
Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on
January 8, 1998.  (7)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended March 31, 1998, filed with the Securities and Exchange
Commission on May 14, 1998.  (10)
    Incorporated by reference to exhibit 4.1 filed as part of RailAmerica, Inc.s Form 8-K as of
January 13, 2000, filed with the Securities and Exchange Commission on January 26, 2000.  (19)
    Incorporated by reference to the exhibit of the same number filed as part of RailAmerica,
Inc.s Form 10-K for the year ended December 31, 1998 filed with the Securities and Exchange
Commission on March 31, 1999.  (21)
    Incorporated by reference to Exhibit 4.1 filed as part of RailAmerica, Inc.s Form 8-K, dated
April 13, 2000.  (22)
    Incorporated by reference to Exhibit 4.2 filed as part of RailAmerica, Inc.s Form 8-K, dated
April 13, 2000.  (24)
    Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica, Inc.s
Registration Statement on Form S-4, Registration No. 333-45196.  (30)
    Incorporated by reference to the Annex A, filed as part of RailAmerica, Inc.s Registration
Statement on Form S-4, Registration No. 333-75290.  (31)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange
Commission on April 2, 2001.  (32)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange
Commission on April 1, 2002.  (33)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended June 30, 2002, filed with the Securities and Exchange
Commission on August 14, 2002.  (34)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange
Commission on March 27, 2003.  (35)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended March 31, 2003, filed with the Securities and Exchange
Commission on May 9, 2003.  (36)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended June 30, 2003, filed with the Securities and Exchange
Commission on August 8, 2003.  (37)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange
Commission on March 15, 2004. 42




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##### Table of Contents



(38)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended March 31, 2004, filed with the Securities and Exchange
Commission on May 10, 2004.  (39)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended June 30, 2004, filed with the Securities and Exchange
Commission on August 4, 2004.  (40)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 10-Q for the quarter ended September 30, 2004, filed with the Securities and Exchange
Commission on November 9, 2004.  (41)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 8-K, filed with the Securities and Exchange Commission on February 9, 2004.  (42)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 8-K, filed with the Securities and Exchange Commission on October 5, 2004.  (43)
    Incorporated by reference to the same exhibit number filed as part of RailAmerica, Inc.s
Form 8-K/A, filed with the Securities and Exchange Commission on October 6, 2004.    43




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##### Table of Contents



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, thereunto
duly authorized. RAILAMERICA, INC.By:
    
    /s/ MICHAEL J. HOWEMichael J. Howe, Executive Vice President andChief Financial Officer (Principal Financial Officer)Dated March 16, 2005
 In accordance with the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates indicated. SIGNATURES
    
    TITLE
    
    DATE/s/ CHARLES SWINBURN
    
    Chief Executive Officer and Director
    
    March 16, 2005(Principal Executive Officer)Charles Swinburn/s/ WILLIAM G. PAGONIS
    
    Chairman of the Board of Directors
    
    March 16, 2005William G. Pagonis/s/ DONALD D. REDFEARN
    
    President, Chief Administrative Officer,
    
    March 16, 2005Secretary and DirectorDonald D. Redfearn/s/ DOUGLAS R. NICHOLS
    
    Director
    
    March 16, 2005Douglas R. Nichols/s/ RICHARD RAMPELL
    
    Director
    
    March 16, 2005Richard Rampell/s/ HAROLD R. CURTIS
    
    Director
    
    March 16, 2005Harold R. Curtis/s/ JOHN M. SULLIVAN
    
    Director
    
    March 16, 2005John M. Sullivan/s/ FERD C. MEYER, JR.
    
    Director
    
    March 16, 2005Ferd C. Meyer, Jr./s/ ROBERT J. RABIN
    
    Senior Vice President and Corporate Controller
    
    March 16, 2005(Principal Accounting Officer)Robert J. Rabin
 44




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RAILAMERICA, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS The following consolidated financial statements of RailAmerica, Inc. and Subsidiaries are referred
to in Item 8: PAGESReport of Independent Registered Certified Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets  December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Income  For the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Stockholders Equity  For the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Cash Flows  For the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8 - F-46
 F-1




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REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of RailAmerica, Inc: We have completed an integrated audit of RailAmerica, Inc.s 2004 consolidated financial statements
and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003
and 2002 consolidated financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits, are presented
below. Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, cash flows and shareholders equity, present fairly, in all material
respects, the financial position of RailAmerica, Inc. and its subsidiaries at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. As described in Note 1, the Company changed its method of accounting for debt extinguishments in
2003. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report on Internal Control
Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2004 based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control  Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii)
provide reasonable F-2




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assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Miami, Florida
March 15, 2005 F-3




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RAILAMERICA, INC. AND SUBSIDIARIES 
  DECEMBER 31,
    
    2004
    
    
    2003(In thousands,except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,331
    
    
    $
    13,714Accounts and notes receivable, net of allowance of
$518 and $498, respectively
    
    
    63,414
    
    
    
    52,312Current assets of discontinued operations
    
    
    
    
    
    
    36,319Other current assets
    
    
    14,935
    
    
    
    12,118Total current assets
    
    
    102,680
    
    
    
    114,463Property, plant and equipment, net
    
    
    875,883
    
    
    
    826,646Long-term assets of discontinued operations
    
    
    
    
    
    
    263,007Other assets
    
    
    37,580
    
    
    
    28,374Total assets
    
    $
    1,016,143
    
    
    $
    1,232,490LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    6,097
    
    
    $
    25,093Accounts payable
    
    
    61,276
    
    
    
    34,851Accrued expenses
    
    
    41,950
    
    
    
    31,290Current liabilities of discontinued operations
    
    
    
    
    
    
    40,338Total current liabilities
    
    
    109,323
    
    
    
    131,572Long-term debt, less current maturities
    
    
    357,253
    
    
    
    327,280Subordinated debt
    
    
    4,028
    
    
    
    121,506Deferred income taxes
    
    
    149,306
    
    
    
    150,784Long-term liabilities of discontinued operations
    
    
    
    
    
    
    115,907Other liabilities
    
    
    15,307
    
    
    
    13,681635,217
    
    
    
    860,730Commitments and contingenciesStockholders equity:Common stock, $0.001 par value, 60,000,000 shares authorized;
37,389,660 shares issued and outstanding at December 31, 2004
and 32,094,387 shares issued and outstanding at December 31, 2003
    
    
    37
    
    
    
    32Additional paid in capital and other
    
    
    319,417
    
    
    
    262,384Retained earnings
    
    
    36,806
    
    
    
    62,745Accumulated other comprehensive income
    
    
    24,666
    
    
    
    46,599Total stockholders equity
    
    
    380,926
    
    
    
    371,760Total liabilities and stockholders equity
    
    $
    1,016,143
    
    
    $
    1,232,490
 The accompanying Notes are an integral part of the Consolidated Financial Statements. F-4




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RAILAMERICA, INC. AND SUBSIDIARIES 
  FOR THE YEARS ENDED DECEMBER 31,
    
    2004
    
    
    2003
    
    
    2002(In thousands, except earnings per share data)Operating revenue
    
    $
    395,564
    
    
    $
    352,338
    
    
    $
    326,654Operating expenses:Transportation
    
    
    226,897
    
    
    
    179,861
    
    
    
    167,335Selling, general and administrative
    
    
    88,582
    
    
    
    77,877
    
    
    
    80,183Net gain on sale of assets
    
    
    (4,022
    )
    
    
    (3,262
    )
    
    
    (9,155
    )Impairment of assets
    
    
    12,569
    
    
    
    
    
    
    
    1,396Depreciation and amortization
    
    
    29,247
    
    
    
    23,833
    
    
    
    21,929Total operating expenses
    
    
    353,273
    
    
    
    278,309
    
    
    
    261,688Operating income
    
    
    42,291
    
    
    
    74,029
    
    
    
    64,966Interest and other expense, including amortization costs of
$3,742, $4,810, and $4,686, respectively
    
    
    (28,642
    )
    
    
    (32,432
    )
    
    
    (35,910
    )Financing costs
    
    
    (39,549
    )
    
    
    
    
    
    
    (25,556
    )Income (loss) from continuing operations before income taxes
    
    
    (25,900
    )
    
    
    41,597
    
    
    
    3,500Provision (benefit) for income taxes
    
    
    (4,505
    )
    
    
    17,436
    
    
    
    1,604Income (loss) from continuing operations
    
    
    (21,395
    )
    
    
    24,161
    
    
    
    1,896Discontinued operations:Gain (loss) on disposal of discontinued business (net of
income
taxes of $22,384 and $161 )
    
    
    (1,706
    )
    
    
    
    
    
    
    387Loss from operations of discontinued business
(net of income taxes of $1,805, $4,195 and $889,
respectively)
    
    
    (2,838
    )
    
    
    (9,471
    )
    
    
    (130
    )Net income (loss)
    
    $
    (25,939
    )
    
    $
    14,690
    
    
    $
    2,153Basic earnings (loss) per common share:Continuing operations
    
    $
    (0.61
    )
    
    $
    0.76
    
    
    $
    0.06Discontinued operations
    
    
    (0.13
    )
    
    
    (0.30
    )
    
    
    0.01Net income (loss)
    
    $
    (0.74
    )
    
    $
    0.46
    
    
    $
    0.07Diluted earnings (loss) per common share:Continuing operations
    
    $
    (0.61
    )
    
    $
    0.74
    
    
    $
    0.06Discontinued operations
    
    
    (0.13
    )
    
    
    (0.28
    )
    
    
    0.01Net income (loss)
    
    $
    (0.74
    )
    
    $
    0.46
    
    
    $
    0.07Weighted average common shares outstanding:Basic
    
    
    34,982
    
    
    
    31,806
    
    
    
    32,047Diluted
    
    
    34,982
    
    
    
    34,336
    
    
    
    32,620
 The accompanying Notes are an integral part of the Consolidated Financial Statements. F-5




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RAILAMERICA, INC. AND SUBSIDIARIES 
  STOCKHOLDERS EQUITYAdditionalNumber of
    
    
    
    
    
    
    Paid-In
    
    
    
    
    
    
    OtherFOR THE YEARS ENDED DECEMBER 31,
    
    Shares
    
    
    Par
    
    
    Capital
    
    
    Retained
    
    
    Comprehensive2004, 2003 AND 2002
    
    Issued
    
    
    Value
    
    
    and Other
    
    

    Earnings
    
    
    Income (Loss)
    
    
    Total(In thousands)Balance, January 1, 2002
    
    
    28,842
    
    
    $
    29
    
    
    $
    224,248
    
    
    $
    45,902
    
    
    $
    (49,220
    )
    
    $
    220,959Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,153
    
    
    
    
    
    
    
    2,153Change in market value of derivative
instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,472
    )
    
    
    (2,472
    )Realized loss on derivatives designated as
hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,737
    
    
    
    10,737Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,399
    
    
    
    10,399Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,817Issuance of common stock
    
    
    3,485
    
    
    
    3
    
    
    
    41,144
    
    
    
    
    
    
    
    
    
    
    
    41,147Exercise of stock options
    
    
    83
    
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    
    
    
    
    589Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    109Warrants issued
    
    
    
    
    
    
    
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    204Purchase of treasury stock
    
    
    (530
    )
    
    
    
    
    
    
    (4,922
    )
    
    
    
    
    
    
    
    
    
    
    (4,922
    )Balance, December 31, 2002
    
    
    31,880
    
    
    
    32
    
    
    
    261,372
    
    
    
    48,055
    
    
    
    (30,556
    )
    
    
    278,903Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,690
    
    
    
    
    
    
    
    14,690Change in market value of derivative
instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    215Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,940
    
    
    
    76,940Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,845Issuance of common stock
    
    
    209
    
    
    
    
    
    
    
    461
    
    
    
    
    
    
    
    
    
    
    
    461Exercise of stock options
    
    
    192
    
    
    
    
    
    
    
    1,592
    
    
    
    
    
    
    
    
    
    
    
    1,592Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    185Purchase of treasury stock
    
    
    (187
    )
    
    
    
    
    
    
    (1,226
    )
    
    
    
    
    
    
    
    
    
    
    (1,226
    )Balance, December 31, 2003
    
    
    32,094
    
    
    
    32
    
    
    
    262,384
    
    
    
    62,745
    
    
    
    46,599
    
    
    
    371,760Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,939
    )
    
    
    
    
    
    
    (25,939
    )Change in market value of derivative
instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734
    
    
    
    734Realization of cumulative translation
adjustment from the sale of Freight
Australia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,119
    )
    
    
    (30,119
    )Cumulative translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,452
    
    
    
    7,452Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,872
    )Issuance of common stock
    
    
    40
    
    
    
    
    
    
    
    1,367
    
    
    
    
    
    
    
    
    
    
    
    1,367Conversion of junior subordinated debentures
    
    
    2,120
    
    
    
    2
    
    
    
    21,086
    
    
    
    
    
    
    
    
    
    
    
    21,088Exercise of stock options
    
    
    1,606
    
    
    
    2
    
    
    
    14,155
    
    
    
    
    
    
    
    
    
    
    
    14,157Extension/ vesting of stock options
    
    
    
    
    
    
    
    
    
    
    3,164
    
    
    
    
    
    
    
    
    
    
    
    3,164Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    2,599
    
    
    
    
    
    
    
    
    
    
    
    2,599Exercise of warrants
    
    
    1,530
    
    
    
    1
    
    
    
    14,662
    
    
    
    
    
    
    
    
    
    
    
    14,663Balance, December 31, 2004
    
    
    37,390
    
    
    $
    37
    
    
    $
    319,417
    
    
    $
    36,806
    
    
    $
    24,666
    
    
    $
    380,926
 The accompanying Notes are an integral part of the Consolidated Financial Statements. F-6




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES 
  FOR THE YEARS ENDED DECEMBER 31,
    
    2004
    
    
    2003
    
    
    2002(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (25,939
    )
    
    $
    14,690
    
    
    $
    2,153Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    43,075
    
    
    
    46,753
    
    
    
    41,251Financing costs
    
    
    39,549
    
    
    
    
    
    
    
    25,433Net gain on sale or disposal of properties
    
    
    (25,304
    )
    
    
    (3,262
    )
    
    
    (9,705
    )Impairment of assets
    
    
    16,595
    
    
    
    
    
    
    
    Initial lease payment to CSX
    
    
    (10,000
    )
    
    
    
    
    
    
    Amortization of CSX lease payment
    
    
    698
    
    
    
    
    
    
    
    Non-cash CEO retirement costs
    
    
    3,600
    
    
    
    
    
    
    
    Deferred income taxes and other
    
    
    9,500
    
    
    
    13,040
    
    
    
    2,960Changes in operating assets and liabilities, net of
acquisitions and dispositions:Accounts receivable
    
    
    (14,964
    )
    
    
    (3,659
    )
    
    
    2,766Other current assets
    
    
    (4,428
    )
    
    
    (1,853
    )
    
    
    673Accounts payable
    
    
    17,291
    
    
    
    4,827
    
    
    
    (5,640
    )Accrued expenses
    
    
    (3,821
    )
    
    
    1,036
    
    
    
    (9,919
    )Other assets and liabilities
    
    
    2,225
    
    
    
    (3,102
    )
    
    
    (11,365
    )Net cash provided by operating activities
    
    
    48,077
    
    
    
    68,470
    
    
    
    38,607CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant and equipment
    
    
    (75,800
    )
    
    
    (71,508
    )
    
    
    (65,682
    )Proceeds from sale of assets, net of cash on hand
    
    
    222,741
    
    
    
    11,227
    
    
    
    9,291Acquisitions, net of cash acquired
    
    
    (33,209
    )
    
    
    (25,846
    )
    
    
    (89,359
    )Change in restricted cash in escrow
    
    
    
    
    
    
    
    
    
    
    1,357Deferred transaction costs and other
    
    
    (3,063
    )
    
    
    (1,970
    )
    
    
    (5,680
    )Net cash provided by (used in) investing activities
    
    
    110,669
    
    
    
    (88,097
    )
    
    
    (150,073
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of long-term debt
    
    
    494,478
    
    
    
    48,162
    
    
    
    457,870Principal payments on long-term debt
    
    
    (523,815
    )
    
    
    (46,454
    )
    
    
    (358,639
    )Repurchase of senior subordinated notes
    
    
    (144,905
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    28,843
    
    
    
    1,681
    
    
    
    386Purchase of treasury stock
    
    
    
    
    
    
    (1,226
    )
    
    
    (4,922
    )Financing costs
    
    
    (2,976
    )
    
    
    (695
    )
    
    
    (15,383
    )Net cash provided by (used in) financing activities
    
    
    (148,375
    )
    
    
    1,468
    
    
    
    79,312Effect of exchange rates on cash
    
    
    246
    
    
    
    2,986
    
    
    
    1,280Net increase (decrease) in cash
    
    
    10,617
    
    
    
    (15,173
    )
    
    
    (30,874
    )Cash, beginning of period
    
    
    13,714
    
    
    
    28,887
    
    
    
    59,761Cash, end of period
    
    $
    24,331
    
    
    $
    13,714
    
    
    $
    28,887
 The accompanying Notes are an integral part of the Consolidated Financial Statements. F-7




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES 
  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of RailAmerica, Inc. and
all of its subsidiaries (the Company). All of RailAmericas consolidated subsidiaries are
wholly-owned except Empresa De Transporte Ferroviario S.A. (Ferronor), a Chilean railroad, in
which the Company had a 55% equity interest until it was sold in February 2004. All intercompany
balances and transactions have been eliminated. Certain prior period amounts have been reclassified
to conform to the 2004 presentation. During the second quarter of 2004, the Company committed to a plan to dispose of the Arizona
Eastern Railway Company. Subsequent to committing to the disposal plan, the Company determined
that the expected proceeds from the sale would be lower than anticipated and accordingly recorded
an impairment charge of $4 million during the third quarter of 2004. The Company completed the
sale of the Arizona Eastern Railway Company in December 2004 for $2.8 million in cash, resulting in
a gain on the sale of $0.3 million, or $0.2 million after tax. The results of operations for the
Arizona Eastern Railway Company have been reclassified to discontinued operations for the periods
presented. During December 2004, the Company also completed the sale of its West Texas and Lubbock Railroad
for $1.8 million in cash and a long term note of $3.6 million, resulting in a gain of $0.1 million
before and after tax. The results of operations for the West Texas and Lubbock Railroad have been
reclassified to discontinued operations for the periods presented. In August 2004, the Company completed the sale of Freight Australia to Pacific National for AUD
$285 million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a
result of foreign exchange hedges that were entered into during the third quarter of 2004. In
addition, the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7
million (US $5 million) based on the changes in the net assets of Freight Australia from September
30, 2003 through August 31, 2004, which was received in December 2004, and also provides various
representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica
for violations of most of the representations and warranties are capped at AUD $50 million (US
$39.5 million). The Company believes the ultimate impact of the representations and warranties
will not have a material impact on the Companys future results of operations. However, they could
have a material impact on future cash flows. The proceeds from the sale of Freight Australia were
used to repay senior debt and repurchase the Companys senior subordinated notes. Freight
Australias results of operations for the periods prior to the sale on August 31, 2004, have been
reclassified to discontinued operations in the Companys consolidated financial statements. In February 2004, the Company completed the sale of its 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million in cash, a secured instrument for $5.7
million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no
later than February 2007, both bearing interest at 90 day LIBOR plus 3%. During the year ended
December 31, 2004, the Company recognized a $4.0 million tax charge resulting from the sale of its
interest in Ferronor and the repatriation of the cash to the U.S. Ferronors results of operations
for the periods prior to the sale date on February 2, 2004, have been reclassified to discontinued
operations in the Companys consolidated financial statements. The Companys principal operations consist of rail freight transportation in North America. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from those estimates. F-8




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, continued CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments purchased with a maturity of three months or
less at the date of purchase to be cash equivalents. The Company maintains its cash in demand
deposit accounts, which at times may exceed insurance limits. As of December 31, 2004, the Company
had approximately $23.9 million of cash in excess of insurance limits. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, which are recorded at historical cost, are depreciated and amortized
on a straight-line basis over their estimated useful lives. Costs assigned to property purchased as
part of an acquisition are based on the fair value of such assets on the date of acquisition. The Company self-constructs portions of its track structure and rebuilds certain of its rolling
stock. In addition to direct labor and material, certain indirect costs are capitalized.
Expenditures which significantly increase asset values or extend useful lives are capitalized.
Repairs and maintenance expenditures are charged to operating expense as incurred. The Company uses the group method of depreciation under which a single depreciation rate is applied
to the gross investment in its track assets. Upon normal sale or retirement of track assets, cost
less net salvage value is charged to accumulated depreciation and no gain or loss is recognized.
The Company periodically reviews its assets for impairment by comparing the projected undiscounted
cash flows of those assets to their recorded amounts. Impairment charges are based on the excess of
the recorded amounts over their estimated fair value, as measured by the discounted cash flows. The Company incurs certain direct labor, contract service and other costs associated with the
development and installation of internal-use computer software. Costs for newly developed software
or significant enhancements to existing software are capitalized. Research, preliminary project,
operations, maintenance and training costs are charged to operating expense when the work is
performed. Depreciation has been computed using the straight-line method based on estimated useful lives as
follows: Buildings and improvements
    
    20-33 yearsRailroad track and ties
    
    30-40 yearsRailroad track improvements
    
    3-10 yearsLocomotives, transportation and other equipment
    
    5-30 yearsOffice equipment and capitalized software
    
    5-10 years
 INCOME TAXES The Company utilizes the liability method of accounting for deferred income taxes. This method
requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax assets are also established for the
future tax benefits of loss and credit carryovers. The liability method of accounting for deferred
income taxes requires a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized. F-9




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued REVENUE RECOGNITION The Company recognizes freight revenue after the freight has been moved from origin to destination,
which is not materially different from the recognition of revenues as shipments progress due to the
relatively short length of our railroads. Other revenue, which primarily includes demurrage,
switching, and storage fees, is recognized when the service is performed. FOREIGN CURRENCY TRANSLATION The financial statements and transactions of the Companys foreign operations are maintained in
their local currency, which is their functional currency, except for Chile, where the U.S. dollar
was used as the functional currency. Where local currencies are used, assets and liabilities are
translated at current exchange rates in effect at the balance sheet date. Translation adjustments,
which result from the process of translating the financial statements into U.S. dollars, are
accumulated in the cumulative translation adjustment account, which is a component of accumulated
other comprehensive income in stockholders equity. Revenues and expenses are translated at the
average exchange rate for each period. Gains and losses from foreign currency transactions are
included in net income. At December 31, 2004, accumulated other comprehensive income included $24.9
million of cumulative translation adjustments. STOCK-BASED COMPENSATION As of December 31, 2004, the Company has two stock-based employee compensation plans. The Company
accounts for those plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No stock option-based
employee compensation cost is reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Year Ended December 31,(in thousands, except earnings per share data)
    
    2004
    
    
    2003
    
    
    2002Net income (loss), as reported
    
    $
    (25,939
    )
    
    $
    14,690
    
    
    $
    2,153Less: Total stock-based employee compensation
determined under fair value based method for all
awards, net of related tax effects
    
    
    (1,446
    )
    
    
    (2,586
    )
    
    
    (4,257
    )Pro forma net income (loss)
    
    $
    (27,385
    )
    
    $
    12,104
    
    
    $
    (2,104
    )Earnings (loss) per share:Basic-as reported
    
    $
    (0.74
    )
    
    $
    0.46
    
    
    $
    0.07Basic-pro forma
    
    $
    (0.78
    )
    
    $
    0.38
    
    
    $
    ( 0.07
    )Diluted-as reported
    
    $
    (0.74
    )
    
    $
    0.46
    
    
    $
    0.07Diluted-pro forma
    
    $
    (0.78
    )
    
    $
    0.38
    
    
    $
    (0.07
    )
 F-10




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board, or FASB, issued a revision to Statement
of Financial Accounting Standards, No. 123 (revised 2004), Share Based Payment SFAS No. 123R,
which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends
Statement No. 95, Statement of Cash Flows. Under SFAS No. 123R, companies must calculate and
record in the income statement the cost of equity instruments, such as stock options and employee
stock purchase plans awarded to employees for services received. Pro forma disclosure is no longer
permitted. The cost of equity instruments is to be measured based on the fair value of the
instrument on the date they are granted and is required to be recognized over the period during
which the employees are required to provide services in exchange for the equity instruments. This
pronouncement is effective in the first interim or annual reporting period beginning after June 15,
2005. Management intends to adopt the prospective method of accounting for stock based
compensation for the third quarter beginning July 1, 2005. They have not yet determined whether
the adoption will result in amounts that are similar to the current pro forma disclosures under
SFAS 123 disclosed above. In October 2004, the American Jobs Creation Act of 2004 (the Jobs Act) was signed into law. The
Jobs Act created a temporary dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are met. Such repatriations must occur in
either an enterprises last tax year that began before the enactment date, or the first tax year
that begins during the one-year period beginning on the date of enactment. In December 2004, the FASB issued FASB Staff Position 109-2 Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP
109-2), which indicates that the lack of clarification of certain provisions within the Jobs Act
and the timing of the enactment necessitate a practical exception to the SFAS No. 109, Accounting
for Income Taxes, (SFAS No. 109) requirement to reflect in the period of enactment the effect of
a new tax law. Accordingly, an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of
foreign earnings. FSP 109-2 requires that the provisions of SFAS No. 109 be applied as an
enterprise decides on its plan for reinvestment or repatriation of its unremitted foreign earnings.
Based on preliminary identification of potential repatriation and reinvestment opportunities, the
Company expects that adoption of the repatriation provision of the Act will not have a material
effect on the consolidated financial statements. F-11




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of common shares
outstanding during the year. For the year ended December 31, 2004, diluted earnings per share is calculated using the same
number of shares as the basic earnings per share calculation because potentially dilutive common
shares arising out of stock options and warrants and convertible debt are anti-dilutive due to the
net loss. Had the Company reported net income, approximately 1.1 million additional shares would
have been included in the diluted earnings per share calculation for options and warrants for the
year ended 2004, and, depending on the amount of earnings, 0.8 million shares, would have been
included in the diluted earnings per share calculation for the convertible debt. An additional 0.5
million options and warrants still would have been excluded from the calculation for the twelve
months ended December 31, 2004, as such securities would continue to be anti-dilutive even if the
Company reported income. For the years ended December 31, 2003 and 2002, diluted earnings per share is calculated using the
sum of the weighted average number of common shares outstanding plus potentially dilutive common
shares arising out of stock options, warrants and convertible securities. Options and warrants
totaling 6.4 million and 4.4 million were excluded from the diluted earnings per share calculation
for the years ended December 31, 2003 and 2002, respectively, as well as assumed conversion of
$21.8 million (2.2 million shares) of convertible debentures in 2002, as such securities were
anti-dilutive. The following is a summary of the income (loss) from continuing operations available for common
stockholders and weighted average shares outstanding (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Income (loss) from continuing operations (basic)
    
    $
    (21,395
    )
    
    $
    24,161
    
    
    $
    1,896Interest on convertible debt
    
    
    
    
    
    
    1,279
    
    
    
    Income (loss) from continuing operations available
to common stockholders (diluted)
    
    $
    (21,395
    )
    
    $
    25,440
    
    
    $
    1,896Weighted average shares outstanding (basic)
    
    
    34,982
    
    
    
    31,806
    
    
    
    32,047Assumed conversion:Options and warrants
    
    
    
    
    
    
    350
    
    
    
    573Convertible debentures
    
    
    
    
    
    
    2,180
    
    
    
    Weighted average shares outstanding (diluted)
    
    
    34,982
    
    
    
    34,336
    
    
    
    32,620
 F-12




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS In August 2004, the Company completed the sale of Freight Australia to Pacific National for AUD
$285 million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a
result of foreign exchange hedges that were entered into during the third quarter of 2004. In
addition, the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7
million (US $5 million) based on the changes in the net assets of Freight Australia from September
30, 2003 through August 31, 2004, which was received in December 2004, and also provides various
representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica
for violations of most of the representations and warranties are capped at AUD $50 million (US
$39.5 million). The Company believes the ultimate impact of the representations and warranties
will not have a material impact on the Companys future results of operations. However, they could
have a material impact on future cash flows. During the year ended December 31, 2004, the Company
recognized a pre-tax gain of $20.2 million, or $2.0 million, after-tax on the sale of Freight
Australia. The $18.2 million tax provision on the sale of Freight Australia includes a provision
of $11.4 million for the previously unremitted earnings of Freight Australia. The proceeds from
the sale of Freight Australia were used to repay senior debt and repurchase the Companys senior
subordinated notes. Freight Australias results of operations have been classified as discontinued
operations on the Companys consolidated financial statements. In addition, the assets and
liabilities of Freight Australia have been classified as assets and liabilities of discontinued
operations on the December 31, 2003 balance sheet. Interest expense was allocated to the Australian discontinued operations as permitted under the
Emerging Issues Task Force Issue No. 87-24, Allocation of Interest to Discontinued Operations,
for all periods presented. For the twelve months ended December 31, 2004, 2003 and 2002, $3.3
million, $4.9 million and $4.6 million, respectively, of interest expense was allocated to
discontinued operations. The interest allocations were calculated based upon the ratio of net
assets to be discontinued less debt that is required to be paid as a result of the disposal
transaction to the sum of total net assets of the Company plus consolidated debt, less debt
required to be paid as a result of the disposal transaction and debt that can be directly
attributed to other operations of the Company. The results of operations for Freight Australia were as follows (in thousands) (2004 results
included through the date of sale, August 31, 2004): For the twelve months ended December 31,2004
    
    
    2003
    
    
    2002Operating revenue
    
    $
    103,194
    
    
    $
    96,370
    
    
    $
    94,915Operating income (loss)
    
    
    4,778
    
    
    
    (7,453
    )
    
    
    4,594Pretax loss
    
    
    (1,482
    )
    
    
    (14,565
    )
    
    
    (2,937
    )Income tax benefit
    
    
    (604
    )
    
    
    (4,566
    )
    
    
    (1,237
    )Loss from discontinued operations, net of tax
    
    $
    (878
    )
    
    $
    (9,999
    )
    
    $
    (1,700
    )
 F-13




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS, continued The major classes of assets and liabilities of Freight Australia were as follows (in thousands): For the twelve months endedDecember 31, 2003Accounts receivable, net
    
    $
    20,965Other current assets
    
    
    6,998Total current assets
    
    
    27,963Property, plant and equipment, net
    
    
    210,604Other assets
    
    
    3,980Total assets
    
    $
    242,547Current maturities of long-term debt
    
    $
    600Accounts payable
    
    
    22,033Accrued expenses
    
    
    2,300Total current liabilities
    
    
    24,933Long-term debt, less current maturities
    
    
    58,800Deferred income taxes
    
    
    15,152Other liabilities
    
    
    16,234Total liabilities
    
    $
    115,119
 During the second quarter of 2004, the Company committed to a plan to dispose of the Arizona
Eastern Railway Company. Subsequent to committing to the disposal plan, the Company determined
that the expected proceeds from the sale would be lower than anticipated and accordingly recorded
an impairment charge of $4 million during the third quarter of 2004. The Company completed the
sale of the Arizona Eastern Railway Company during December 2004, for $2.8 million in cash,
resulting in a gain on the sale of $0.3 million, or $0.2 million after tax. The results of
operations for the Arizona Eastern Railway Company have been reclassified to discontinued
operations for the periods presented. The results of operations for the Arizona Eastern Railway Company were as follows (in thousands): For the twelve months ended December 31,2004
    
    
    2003
    
    
    2002Operating revenue
    
    $
    5,178
    
    
    $
    5,735
    
    
    $
    5,933Operating income (loss)
    
    $
    (3,879
    )
    
    $
    894
    
    
    $
    945Income (loss) from discontinued operations
    
    $
    (3,879
    )
    
    $
    894
    
    
    $
    945Income tax provision (benefit)
    
    
    (1,474
    )
    
    
    375
    
    
    
    359Income (loss) from discontinued operations, net of tax
    
    $
    (2,405
    )
    
    $
    519
    
    
    $
    586
 F-14




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS, continued During the fourth quarter of 2004, the Company committed to a plan to dispose of the West Texas and
Lubbock Railroad. The Company completed the sale of the West Texas and Lubbock Railroad during
December 2004, for $1.8 million in cash and a long term note for $3.8 million, resulting in a gain
on the sale of $0.1 million, before and after tax. The results of operations for the West Texas
and Lubbock Railroad have been reclassified to discontinued operations for the periods presented. The results of operations for the West Texas and Lubbock Railroad were as follows (in thousands): For the twelve months ended December 31,2004
    
    
    2003
    
    
    2002Operating revenue
    
    $
    286
    
    
    $
    309
    
    
    $
    742Operating income (loss)
    
    $
    720
    
    
    $
    (20
    )
    
    $
    Income (loss) from discontinued operations
    
    $
    720
    
    
    $
    (20
    )
    
    $
    Income tax provision (benefit)
    
    
    273
    
    
    
    (8
    )
    
    
    Income (loss) from discontinued operations, net of tax
    
    $
    447
    
    
    $
    (12
    )
    
    $
    
 In February 2004, the Company completed the sale of its 55% equity interest in Ferronor, a Chilean
railroad, for $18.1 million, consisting of $10.8 million in cash, a secured instrument for $5.7
million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no
later than February 2007, both bearing interest at 90 day LIBOR plus 3%. During the quarter ended
March 31, 2004, the Company recognized a $4.0 million tax charge resulting from the sale of its
interest in Ferronor and the repatriation of the cash to the U.S. Ferronors results of operations
have been presented in discontinued operations on the Companys consolidated financial statements. The results of operations for Ferronor were as follows (in thousands): For the twelve months ended December 31,2004
    
    
    2003
    
    
    2002Operating revenue
    
    $
    
    
    
    $
    26,165
    
    
    $
    22,619Operating income
    
    $
    
    
    
    $
    2,160
    
    
    $
    3,100Income from discontinued operations
    
    $
    
    
    
    $
    27
    
    
    $
    974Income tax provision (benefit)
    
    
    
    
    
    
    5
    
    
    
    (10
    )Income from discontinued operations, net of tax
    
    $
    
    
    
    $
    22
    
    
    $
    984
 F-15




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DISCONTINUED OPERATIONS, continued The major classes of assets and liabilities for Ferronor were as follows (in thousands): For the twelve months endedDecember 31, 2003Accounts receivable, net
    
    $
    3,601Inventory
    
    
    3,888Other current assets
    
    
    867Total current assets
    
    
    8,356Property, plant and equipment, net
    
    
    48,423Other assets
    
    
    Total assets
    
    $
    56,779Current portion of long-term debt
    
    $
    7,201Accounts payable
    
    
    4,100Accrued expenses
    
    
    4,104Total current liabilities
    
    
    15,405Long-term debt
    
    
    10,746Subordinated debt
    
    
    1,670Minority interest and other liabilities
    
    
    13,306Total liabilities
    
    $
    41,127
 F-16




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. EXPANSION OF OPERATIONS In October 2004, the Companys wholly-owned subsidiary, the Indiana & Ohio Central Railroad Inc.,
signed an agreement with CSX Transportation, Inc. to purchase 107 miles of railroad from
Cincinnati, Ohio to Columbus, Ohio, known as the Midland Subdivision, for $8.6 million. The
Company also entered into a 25 year lease of related real estate. On October 15, 2004, the Company
paid the $8.6 million by drawing on the U.S. dollar denominated revolver. The Company assumed
control of the Midland Subdivisions operations on October 16, 2004. The pro forma impact of this
acquisition is not material. In July 2004, the Companys wholly-owned subsidiary, the Central Railroad Company of Indianapolis,
executed an agreement with CSX Transportation, Inc. to lease 276 miles of railroad known as the
Chicago, Fort Wayne & Eastern Railroad (CF&E) for twenty years, with two five-year extensions.
This agreement required a $10 million initial payment and annual lease payments of approximately
$1.2 million for the term of the lease. The Company is amortizing the $10 million payment on a
straight-line basis over the 20 year term of the lease. The annual lease payments may vary
depending upon the extent to which the CF&Es unit trains utilize CSX locomotive power during the
preceding lease year. The results of operations of the CF&E have been included in the Companys
consolidated financial statements since August 1, 2004. The $10 million initial payment has been
classified as an operating activity on the consolidated statement of cash flows. On January 25, 2004, the Companys wholly-owned subsidiary, the Huron and Eastern Railway, acquired
the assets of the Central Michigan Railway Company, which operates 100 miles of rail line in
Michigan, for $25.3 million in cash from the Straits Corporation. In addition, if the Company
enters into a transaction with CSX for the purchase, sale or operation of certain rail segments in
Michigan and the Company realizes synergies from increased revenue or decreased operating costs
from such a transaction, a contingent payment of up to $6 million will be payable to the Straits
Corporation. If such payment is made in the future, it would increase property, plant and
equipment for the amount of the payment.. The results of operations of this acquisition have been
included in the Companys consolidated financial statements since the date of the acquisition. The
pro forma impact of this acquisition is not material. The following table presents the balances of
each major asset and liability caption of Central Michigan Railway Company as of the acquisition
date (in thousands): Central Michigan Railway Co.
    
    January 25, 2004Accounts receivable, net
    
    $
    943Other current assets
    
    
    205Total current assets
    
    
    1,148Property, plant and equipment, net
    
    
    24,667Total assets
    
    $
    25,815Accounts payable
    
    $
    521Total current liabilities
    
    
    521Total liabilities
    
    $
    521
 On June 1, 2003, the Company acquired 288 miles of track and trackage rights connecting to the
Alabama and Gulf Coast Railway for total consideration of $15.1 million in cash. On June 29, 2003,
the Company acquired a 154 mile branch line in Colorado through its newly formed subsidiary, San
Luis & Rio Grande Railroad Company, for consideration of $7.2 million in cash. During the first
quarter of 2003, the Company acquired 2.6 miles of track connecting to the Dallas, Garland &
Northeastern Railroad and 71.5 miles of track on the west-end of the Toledo, Peoria &Western
Railway for total consideration of $3.6 million in cash. The pro forma impact of these acquisitions
is not material. F-17




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. EXPANSION OF OPERATIONS, continued On January 4, 2002, the Company acquired StatesRail, Inc. (StatesRail), a privately owned group
of railroads headquartered in Dallas, Texas, which owned and operated eight railroads (including
seven freight railroads and a tourist railroad in Hawaii) with 1,647 miles of track in 11 states.
Total consideration for the acquisition was $84.4 million, consisting of $66.5 million in cash and
1.7 million shares of the Companys common stock valued at $17.9 million. In March 2004, we agreed
to accept $1.3 million in settlement of our escrow claims. Such amount was reflected as an
adjustment of our purchase price in the first quarter of 2004. The following table presents the
balances of each major asset and liability caption of StatesRail as of the acquisition date (in
thousands): StatesRail, Inc.
    
    January 4, 2002Cash
    
    $
    140Accounts receivable, net
    
    
    9,057Other current assets
    
    
    1,888Total current assets
    
    
    11,085Property, plant and equipment, net
    
    
    111,033Other assets
    
    
    850Total assets
    
    $
    122,968Current portion of long-term debt
    
    $
    60Accounts payable
    
    
    4,408Accrued expenses
    
    
    7,323Total current liabilities
    
    
    11,791Long-term debt
    
    
    1,457Deferred income taxes
    
    
    25,298Total liabilities
    
    $
    38,546
 On January 8, 2002, the Company acquired ParkSierra Corp. (ParkSierra), a privately owned group
of railroads headquartered in Napa, California, which owned and operated three freight railroads
with 703 miles of track in four western states. Total consideration for the acquisition was $46.2
million, consisting of $23.2 million in cash and 1.8 million shares of the Companys common stock
valued at $23 million. The following table presents the balances of each major asset and liability
caption of ParkSierra as of the acquisition date (in thousands): ParkSierra Corp.
    
    January 8, 2002Cash
    
    $
    899Accounts receivable, net
    
    
    3,793Other current assets
    
    
    1,475Total current assets
    
    
    6,167Property, plant and equipment, net
    
    
    62,226Total assets
    
    $
    68,393Accounts payable
    
    $
    1,937Accrued expenses
    
    
    1,256Total current liabilities
    
    
    3,193Deferred income taxes
    
    
    18,875Other long-term liabilities
    
    
    108Total liabilities
    
    $
    22,176
 F-18




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. EXPANSION OF OPERATIONS, continued The cash components of the StatesRail and ParkSierra acquisitions were financed through available
cash and an additional $50 million term loan under the Companys prior senior credit facility (see
Note 8). The results of operations of StatesRail and ParkSierra have been included in the Companys
consolidated financial statements since the dates of their respective acquisitions. In January 2002, the Company submitted a bid for the acquisition of National Rail and FreightCorp,
two government-owned railroads in Australia. Subsequently, the Company was notified that another
entity was awarded the bid. Accordingly, the Company recorded a charge in selling, general and
administrative expense during the year ended 2002 of $3.3 million for the direct costs incurred in
preparing, submitting and financing the bid. 5. DISPOSITIONS In October 2003, the Company sold the San Pedro and Southwestern Railway for $2.6 million in cash.
The operating results of this railroad were not material. No gain or loss was recognized on this
transaction. In December 2002, the Company sold a right-of-way in South Carolina for total consideration of
$4.25 million consisting of cash of $1.05 million and a short-term note of $3.2 million. The
short-term note was paid in full on its due date of October, 31, 2003. The net gain on the
transaction was $3.5 million. In May 2002, the Company sold the Texas New Mexico Railroad and certain operating assets for total
consideration of $2.25 million consisting of cash of $0.55 million, a short-term note of $0.85
million and a long-term note of $0.85 million, resulting in a net gain of $0.8 million which is
included in discontinued operations for the year ended December 31, 2002. The results of
operations for the Texas New Mexico Railroad were not material. The short-term note accrued
interest at 10% and was due on November 15, 2002 and the long-term note accrues interest at 7% and
is due on May 24, 2007. In December 2002, $0.4 million was paid on the short-term note, $0.15
million was added to the long-term note due on May 24, 2007 and the remaining balance of $0.3
million was extended until December 11, 2006 at an interest rate of 7%. In March 2002, the Company sold the Georgia Southwestern Railroad and certain operating assets for
total consideration of $7.1 million, including a long-term note for $0.8 million, resulting in a
gain of $4.5 million. The note receivable bears interest at 5% and is due February 28, 2007. The
results of operations for the Georgia Southwestern Railroad were not material. F-19




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER BALANCE SHEET DATA Other current assets consist of the following as of December 31, 2004 and 2003 (in thousands): 2004
    
    
    2003Unbilled reimbursable projects
    
    $
    6,691
    
    
    $
    4,089Track supplies
    
    
    3,402
    
    
    
    4,370Prepaid expenses and other
    
    
    4,842
    
    
    
    3,659$
    14,935
    
    
    $
    12,118
 Accrued expenses consist of the following as of December 31, 2004 and 2003 (in thousands): 2004
    
    
    2003Accrued warranty reserve
    
    $
    14,884
    
    
    $
    Accrued property damage expense
    
    
    7,040
    
    
    
    4,084Accrued compensation and benefits
    
    
    4,032
    
    
    
    6,314Other accrued liabilities
    
    
    15,994
    
    
    
    20,892$
    41,950
    
    
    $
    31,290
 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following as of December 31, 2004 and 2003 (in
thousands): 2004
    
    
    2003Land
    
    $
    192,724
    
    
    $
    192,102Buildings and improvements
    
    
    20,179
    
    
    
    19,768Railroad track and improvements
    
    
    725,364
    
    
    
    641,931Locomotives, transportation and
other equipment
    
    
    54,625
    
    
    
    60,493992,892
    
    
    
    914,294Less: accumulated depreciation
    
    
    (117,009
    )
    
    
    (87,648
    )$
    875,883
    
    
    $
    826,646
 F-20




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES Long-term debt consists of the following as of December 31, 2004 and 2003 (in thousands): 2004
    
    
    2003Amended and restated senior credit facilities:U.S. Term Loan
    
    $
    313,000
    
    
    $
    Canadian Term Loan
    
    
    37,000
    
    
    
    Revolver
    
    
    
    
    
    
    Senior credit facilities:U.S. Term Loan
    
    
    
    
    
    
    262,350Canadian Term Loan
    
    
    
    
    
    
    42,500Australian Term Loan
    
    
    
    
    
    
    59,400Revolver
    
    
    
    
    
    
    14,000Other long-term debt (including capital leases)
    
    
    13,350
    
    
    
    11,989363,350
    
    
    
    390,239Less: current maturities
    
    
    6,097
    
    
    
    4,159Long-term debt, less current maturities
    
    $
    357,253
    
    
    $
    386,080
 On September 29, 2004, the Company entered into an amended and restated $450 million senior credit
facility. The facility consists of a $350 million term loan facility, with a $313 million U.S.
tranche and a $37 million Canadian tranche, and a $100 million revolving loan facility with a $90
million U.S. dollar tranche and a $10 million Canadian dollar tranche. The term loans mature on
September 30, 2011 and require 1% annual principal amortization and bear interest at LIBOR plus 2%,
or 4.38% as of December 31, 2004. The revolving loans mature on September 30, 2010 and bear
interest at LIBOR plus 1.75%. We also may incur additional indebtedness under the credit facility
consisting of up to $100 million aggregate principal amount of additional term loans to fund
acquisitions, subject to the satisfaction of conditions set forth in the amended and restated
credit agreement, including the consent of the Administrative Agent and Lead Arranger and
compliance with all financial covenants set forth in the agreement on a pro forma basis on the date
of the additional borrowing. As of December 31, 2004, the Company had no outstanding balance under
the revolving credit facility. As the amended and restated credit agreement was treated as an
extinguishment of debt under EITF 96-19, Debtors Accounting for Modification or Exchange of Debt
Instruments, $7.7 million of deferred loan costs related to the original senior credit facility
were written off. These costs are reflected in Financing costs on the Consolidated Statements of
Income. The U.S. term loan and the U.S. dollar denominated revolver are collateralized by the assets of and
guaranteed by the Company and most of its U.S. subsidiaries. The Canadian term loan and the
Canadian dollar denominated revolver are collateralized by the assets of and guaranteed by the
Company and most of its U.S. and Canadian subsidiaries. The loans were provided by a syndicate of
banks with UBS Securities LLC, as lead arranger, UBS AG, Stamford Branch, as administrative agent
and The Bank of Nova Scotia as collateral agent. F-21




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES, continued In addition, the amended and restated senior credit facility also contains financial covenants that
require the Company to meet a number of financial ratios and tests. The Companys ability to meet
these ratios and tests and to comply with other provisions of the amended and restated senior
credit facility can be affected by events beyond the Companys control. Failure to comply with the
obligations in the amended and restated senior credit facility could result in an event of default,
which, if not cured or waived, could permit acceleration of the term loans and revolving loans or
other indebtedness which could have a material adverse effect on the Company. The Company was in
compliance with each of these covenants as of December 31, 2004 and anticipates being in compliance
with its covenants for the next twelve months. The aggregate annual maturities of long-term debt are as follows (in thousands): 2005
    
    $
    6,0972006
    
    
    4,4392007
    
    
    4,5082008
    
    
    4,5832009
    
    
    9,285Thereafter
    
    
    334,438$
    363,350
 During the years ended December 31, 2004, 2003 and 2002 interest of approximately $0.6 million,
$0.5 million, and $0.6 million, respectively, was capitalized for on-going capital improvement
projects. On May 4, 2000, the Company entered into two interest rate swap agreements for a total notional
amount of $212.5 million. The agreements, which had a term of three years, required the Company to
pay a fixed interest rate of 7.23% while receiving a variable interest rate equal to the 90 day
LIBOR rate. In May 2001, the interest rate swap agreements were extended for two years and the
fixed pay rate was reduced to 6.723%. In connection with the refinancing in May 2002, the Company
terminated these existing interest rate swaps. Because these hedging instruments were designated
as hedges of the cash flows under the previous senior debt facility, SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, required the entire balance in other accumulated
comprehensive income to be charged to earnings. Accordingly, a charge of $17.1 million was
recorded in other income (expense) during the year ended December 31, 2002. In addition, the
Company recorded to other income (expense) a charge of $6.7 million in the year ended December 31,
2002, to write off the unamortized deferred loan costs relating to the prior senior credit
facility, as of the date of refinancing. In connection with the refinancing of the senior credit facility in May 2002, the Company entered
into two step-up collars for a total notional amount of $75 million with an effective date of
November 24, 2002 and expiring on November 24, 2004. Under the terms of these collars, the LIBOR
component of the Companys interest rates can fluctuate within specified ranges. From November 24,
2002 through May 24, 2003, the floor and cap were 2% and 4.5%, from May 24, 2003 through November
24, 2003, the floor and cap were 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the
floor and cap were 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the floor and cap
were 4% and 5.75%. The collars qualified, were designated and accounted for as cash flow hedges
under SFAS No. 133. These swaps terminated as planned on November 24, 2004. On November 8, 2002, the Company entered into two interest rate swaps for a total amount of $300
million for the period commencing December 5, 2002 through November 24, 2003. Under the terms of
the interest rate swaps, the LIBOR component of the Companys interest rate was fixed at 1.62% on
$300 million of debt. The swaps qualified, designated and were accounted for as cash flow hedges
under SFAS No. 133. These swaps terminated as planned on November 24, 2003. F-22




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES, continued On April 10, 2003, the Company entered into two interest rate collar corridors for a total notional
amount of $100 million with an effective date of November 24, 2003 and expiring on November 24,
2005. Under the terms of these interest rate collar corridors the LIBOR component of the Companys
interest rates can fluctuate between 1.50% and 2.81%. However, if LIBOR exceeds 5.00%, the Company
is responsible for interest at that LIBOR rate. The interest rate collar corridors qualify, are
designated and are accounted for as cash flow hedges under SFAS No. 133. The fair value of these
interest rate collar corridors was a net receivable of $0.3 million at December 31, 2004. On June 25, 2003, the Company entered into two interest rate swaps for a total notional amount of
$100 million for the period commencing November 24, 2003 through November 24, 2004. The swaps
qualified, were designated and were accounted for as cash flow hedges under SFAS No. 133. Under
the terms of the interest rate swaps, the Company was required to pay a fixed interest rate of
1.16% on $50 million and 1.19% on the remaining $50 million while receiving a variable interest
rate equal to the 90 day LIBOR rate. These swaps terminated as planned on November 24, 2004 and
thus had no fair value at December 31, 2004. On August 13, 2004, the Company entered into an interest rate swap for a notional amount of $50
million for the period commencing November 24, 2004, through November 24, 2005. The swap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, the Company is required to pay a fixed interest rate of 2.655% on
$50 million while receiving a variable interest rate equal to the 90 day LIBOR. The fair value of
this swap was a net receivable of $0.1 million at December 31, 2004. On August 13, 2004, the Company entered into an interest rate cap for a notional amount of $50
million with an effective date of November 24, 2004, expiring on November 24, 2005. Under the
terms of this cap, the LIBOR component of the Companys interest rate can fluctuate up to 3.00%.
The cap qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. The
fair value of this cap was a net receivable of $0.1 million at December 31, 2004. On November 30, 2004, the Company 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 swap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, the Company is required to pay a fixed interest rate of 4.05% on
$100 million while receiving a variable interest rate equal to the 90 day LIBOR rate. The fair
value of this swap was a net liability of $0.4 million at December 31, 2004. On December 8, 2004, the Company entered into an interest rate cap for a notional amount of $50
million with an effective date of November 25, 2005, expiring on November 24, 2006. Under the
terms of this cap, the LIBOR component of the Companys interest rate can fluctuate up to 4.00%.
The cap qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. The
fair value of this cap was a net receivable of $0.1 million at December 31, 2004. F-23




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT AND LEASES, continued Leases The Company has several finance leases for equipment. Certain of these leases are accounted for as
capital leases and are presented separately below. The minimum annual lease commitments at December
31, 2004 are as follows (in thousands): CAPITAL
    
    
    OPERATINGLEASES
    
    
    LEASES2005
    
    $
    485
    
    
    $
    26,3952006
    
    
    517
    
    
    
    24,1572007
    
    
    562
    
    
    
    22,0812008
    
    
    610
    
    
    
    17,3832009
    
    
    457
    
    
    
    9,671Thereafter
    
    
    740
    
    
    
    34,928Total minimum lease payments
    
    $
    3,371
    
    
    $
    134,615Less amount representing interest
    
    
    (618
    )Total obligations under capital leases
    
    $
    2,753Less current maturities of obligations under capital
leases
    
    
    (331
    )Obligations under capital leases payable after one year
    
    $
    2,422
 Rental expense under operating leases for continuing operations was approximately $28.5 million,
$23.3 million, and $22.4 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The following table presents Ferronors long-term debt balances, which are included in Long-term
liabilities of discontinued operations in the balance sheet for the year ended December 31, 2003
(in thousands): 2003Credit facility with Banco de Desarrollo,
    
    $
    7,552Credit facility with Banco Security, interest rate
rate of 7.50% - 8.76%
    
    
    6,148Other long-term debt
    
    
    4,24717,947Less current maturities
    
    
    7,201Long-term debt, less current maturities
    
    $
    10,746
 Ferronors long-term debt was assumed in the sale of the Companys equity interest in February 2004
(See Note 3). F-24




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. SUBORDINATED DEBT In August 2000, RailAmerica Transportation Corp. (RTC), a wholly-owned subsidiary of the Company,
sold units consisting of $130.0 million of 12-7/8% senior subordinated notes due 2010 and warrants
to purchase 1,411,414 shares of the Companys common stock in a private offering, for gross
proceeds of $122.2 million after deducting the initial purchasers discount. All of the Companys
U.S. subsidiaries are guarantors of the senior subordinated notes. From August 16, 2003 through
August 14, 2005, the Company may not redeem the senior subordinated notes and subsequent to August
14, 2005, the Company may redeem the senior subordinated notes for 106.438% of their principal
amount. The premium reduces annually on a sliding scale until they may be redeemed at their
principal amount commencing August 15, 2008. On September 29, 2004, the Company repurchased $125.7 million of its $130 million principal amount
senior subordinated notes due August 15, 2010 through a tender offer and consent solicitation
launched on August 31, 2004. Prior to expiration of the consent solicitation on September 14,
2004, holders of a majority of the outstanding notes tendered their securities and consented to the
proposed amendments to the related indenture. The supplemental indenture incorporating the
proposed amendments, which remove most of the restrictive covenants contained in the indenture,
became effective on September 29, 2004. The proceeds from the sale of Freight Australia and from
the amended and restated senior credit facility were used to fund the purchase of the notes. In
addition to the premium charge of approximately $19.2 million for the repurchase of the notes, the
Company incurred charges of approximately $12.4 million related to the write-off of deferred loan
costs and original issue discounts of the notes that were repurchased during the year ended
December 31, 2004. This charge is included in Financing costs on the Consolidated Statement of
Income. In August 1999, the Company issued $22.5 million aggregate principal amount of junior convertible
subordinated debentures. Interest on the debentures accrued at the rate of 6% per annum and was
payable semi-annually. The debentures were convertible, at the option of the holder, into shares of
RailAmerica at a conversion price of $10. The debentures which matured on July 31, 2004, were
general unsecured obligations and ranked subordinate in right of payment to all senior
indebtedness. There were no conversions of the junior convertible subordinated debentures into
common stock during 2002 and 2003. During the twelve months ended December 31, 2004, $21.2 million
of the Companys junior convertible subordinated debentures were converted to common stock, leaving
an outstanding balance of $0.6 million, which was repaid in August 2004. 10. COMMON STOCK TRANSACTIONS The Company occasionally repurchases its common stock under its share repurchase program. Such
repurchases are limited to $5 million per year pursuant to its borrowing arrangements. In July
2002, the Board of Directors authorized a 2 million share repurchase program through December 31,
2003, subject to restrictions under the Companys borrowing arrangements. During the year ended
December 31, 2003 the Company repurchased 187,300 shares at a total cost of $1.2 million. The
Company did not repurchase any shares during the year ended December 31, 2004. As of December 31, 2004, the Company has a total of 1,215,991 warrants outstanding at an exercise
price of $6.60 and with an expiration date of August 15, 2010. F-25




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAX PROVISION Income (loss) from continuing operations before income taxes for the years ended December 31, 2004,
2003 and 2002 consists of (in thousands): 2004
    
    
    2003
    
    
    2002Domestic
    
    $
    (24,157
    )
    
    $
    27,257
    
    
    $
    (883
    )Foreign subsidiaries
    
    
    (1,743
    )
    
    
    14,340
    
    
    
    4,383$
    (25,900
    )
    
    $
    41,597
    
    
    $
    3,500
 The provision for income taxes for the years ended December 31, 2004, 2003 and 2002 consists of (in
thousands): 2004
    
    
    2003
    
    
    2002Federal income taxes:Current
    
    $
    3,354
    
    
    $
    
    
    
    $
    Deferred
    
    
    1,486
    
    
    
    6,978
    
    
    
    (2,341
    )4,840
    
    
    
    6,978
    
    
    
    (2,341
    )State income taxes:Current
    
    
    5,121
    
    
    
    1,284
    
    
    
    1,140Deferred
    
    
    11
    
    
    
    354
    
    
    
    (795
    )5,132
    
    
    
    1,638
    
    
    
    345Foreign income taxesCurrent
    
    
    9,491
    
    
    
    3,053
    
    
    
    2,140Deferred
    
    
    (3,389
    )
    
    
    63
    
    
    
    732Change in tax law
    
    
    
    
    
    
    1,509
    
    
    
    6,102
    
    
    
    4,625
    
    
    
    2,872Total income tax provision
    
    $
    16,074
    
    
    $
    13,241
    
    
    $
    876
 The following summarizes the total income tax provisions for each of the years ended December 31,
2004, 2003 and 2002 (in thousands): 2004
    
    
    2003
    
    
    2002Continuing operations
    
    $
    (4,505
    )
    
    $
    17,436
    
    
    $
    1,604Discontinued operations
    
    
    20,579
    
    
    
    (4,195
    )
    
    
    (728
    )Total income tax provision
    
    $
    16,074
    
    
    $
    13,241
    
    
    $
    876
 The differences between the U.S. federal statutory tax rate and the Companys effective rate from
continuing operations are as follows (in thousands): 2004
    
    
    2003
    
    
    2002Income tax provision (benefit), at 35%
    
    $
    (9,065
    )
    
    $
    14,559
    
    
    $
    1,225Statutory federal surtax exemption
    
    
    259
    
    
    
    (416
    )
    
    
    (35
    )Net benefit due to difference between U.S. &
Foreign tax rates
    
    
    (32
    )
    
    
    457
    
    
    
    275Net provision due to tax law changes in Canada
    
    
    
    
    
    
    1,509
    
    
    
    Permanent differences
    
    
    614
    
    
    
    (420
    )
    
    
    (179
    )Additional provision due to senior debt refinancing
    
    
    1,435
    
    
    
    
    
    
    
    State income taxes, net
    
    
    746
    
    
    
    846
    
    
    
    (744
    )Other, net
    
    
    369
    
    
    
    52
    
    
    
    (160
    )Valuation allowance

    
    
    1,169
    
    
    
    849
    
    
    
    1,222Tax provision
    
    $
    (4,505
    )
    
    $
    17,436
    
    
    $
    1,604
 F-26




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAX PROVISION, continued The components of deferred income tax assets and liabilities as of December 31, 2004 and 2003 are
as follows (in thousands): 2004
    
    
    2003Deferred tax
assets:Net operating loss carryforward
    
    $
    36,874
    
    
    $
    61,380Alternative minimum tax credit
    
    
    1,700
    
    
    
    783Accrued expenses
    
    
    15,338
    
    
    
    9,074Total deferred tax assets
    
    
    53,912
    
    
    
    71,237Less: valuation allowance
    
    
    (8,018
    )
    
    
    (6,849
    )Total deferred tax assets, net
    
    
    45,894
    
    
    
    64,388Deferred
tax liabilities:Property, plant and equipment
    
    
    (194,766
    )
    
    
    (230,087
    )Other
    
    
    (434
    )
    
    
    (48
    )Total deferred tax liabilities
    
    
    (195,200
    )
    
    
    (230,135
    )Net deferred tax liability
    
    $
    (149,306
    )
    
    $
    (165,747
    )
 The liability method of accounting for deferred income taxes requires a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. It is managements belief that it is
more likely than not that a portion of the deferred tax assets will not be realized. The Company
has established a valuation allowance of $8.0 million at December 31, 2004 and $6.8 million at
December 31, 2003. The table below sets forth the changes in the deferred tax asset valuation
allowance (in thousands): AmountDecember 31, 2002
    
    $
    5,563Charged to expense
    
    
    1,168Charged to other accounts
    
    
    118December 31, 2003
    
    
    6,849Charged to expense
    
    
    1,169December 31, 2004
    
    $
    8,018
 The following is a summary of net operating loss carryforwards by jurisdiction as of December 31,
2004 (in thousands): Amount
    
    
    Expiration PeriodU.S.  Federal
    
    $
    78,293
    
    
    
    2021  2023U.S.  State
    
    
    168,096
    
    
    
    2005  2024Luxembourg
    
    
    94
    
    
    
    NoneCanada
    
    
    7,719
    
    
    
    2006  2014$
    254,202
 As part of certain acquisitions, the Company acquired net operating loss carryforwards for federal
and state income tax purposes. The utilization of the acquired tax loss carryforwards may be
limited by the Internal Revenue Code Section 382. These tax loss carryforwards expire in the years
2005 through 2024. F-27




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAX PROVISION, continued As of December 31, 2004, no provision has been made for U.S. income taxes on undistributed earnings
of the Canadian subsidiaries as it is the intention of management to utilize those earnings in
their operations for an indefinite period of time. However, the American Jobs Creation Act of 2004
(the Act) created a temporary dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are met. Although the Act was signed into
law in October 2004, the practical application of a number of the provisions of the repatriation
provision remain unclear. Tax authorities are expected to provide clarifying language on the key
elements of the repatriation provisions. However, the clarifying language is expected to affect the
Companys evaluation of the economic value of implementing any individual opportunity and its
ability to meet the overall qualifying criteria. As a result, the Company will be unable to
complete a determination of the Acts effect on its plan for reinvestment or repatriation of
foreign earnings until the clarifying language is released. Amounts under consideration for application of the temporary dividend received deduction as a
result of the repatriation provision range from $1 million to $5 million. Such repatriations would
impact the income tax provision from a range of approximately $100,000 to $500,000. The Company
expects to complete its evaluation of this matter within a reasonable period of time after
clarifying language is released. 12. STOCK OPTIONS AND RESTRICTED STOCK The Company has stock option plans under which employees and non-employee directors may be granted
options to purchase shares of the Companys common stock at the fair market value at the date of
grant. Options generally vest in two or three years and expire in ten years from the date of the
grant. The Company has adopted the disclosure-only provisions of SFAS No. 123. See Note 1 for the
total compensation costs that would have been recognized in 2004, 2003, and 2002 if the stock
options issued were valued based on the fair value at the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in 2004, 2003
and 2002: dividend yield 0.0%, 0.0% and 0.0%; expected volatility of 45%, 46% and 46%; risk-free
interest rate of 3.7%, 2.6% and 3.0%; and expected lives of 5, 5 and 5 years. The weighted average
fair value of options granted for 2004, 2003 and 2002 were $5.59, $3.68, and $4.52, respectively. Information regarding the above options for 2004, 2003 and 2002 is as follows: WEIGHTED
    
    
    
    
    
    
    WEIGHTEDNUMBER OF
    
    
    AVERAGE
    
    
    NUMBER OF
    
    
    AVERAGEOUTSTANDING
    
    
    EXERCISE
    
    
    SHARES
    
    
    EXERCISESHARES
    
    
    PRICE
    
    
    EXERCISABLE
    
    
    PRICEOutstanding at January 1, 2002
    
    
    3,946,302
    
    
    $
    9.37Granted
    
    
    1,876,000
    
    
    $
    10.31Exercised
    
    
    (82,912
    )
    
    $
    6.79Forfeited
    
    
    (98,159
    )
    
    $
    11.02Outstanding at December 31, 2002
    
    
    5,641,231
    
    
    $
    9.69
    
    
    
    3,921,857
    
    
    $
    9.25Granted
    
    
    227,150
    
    
    $
    8.50Exercised
    
    
    (191,423
    )
    
    $
    7.80Forfeited
    
    
    (458,783
    )
    
    $
    10.52Outstanding at December 31, 2003
    
    
    5,218,175
    
    
    $
    9.64
    
    
    
    4,585,966
    
    
    $
    9.60Granted
    
    
    288,000
    
    
    $
    13.09Exercised
    
    
    (1,541,153
    )
    
    $
    8.71Forfeited
    
    
    (94,982
    )
    
    $
    9.98Outstanding at December 31, 2004
    
    
    3,870,040
    
    
    $
    10.24
    
    
    
    3,599,570
    
    
    $
    10.12Authorized at December 31, 2004
    
    
    6,175,910
 F-28




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK OPTIONS AND RESTRICTED STOCK , continued The following table summarizes information about stock options outstanding at December 31, 2004: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice
    
    of Options
    
    
    Life
    
    
    Price
    
    
    of Options
    
    
    Price$3.50-$7.50
    
    
    230,566
    
    
    
    3.86
    
    
    $
    6.05
    
    
    
    230,566
    
    
    $
    6.05$7.51-$10.00
    
    
    1,084,465
    
    
    
    4.92
    
    
    $
    8.63
    
    
    
    1,019,912
    
    
    $
    8.64$10.01-$12.50
    
    
    2,249,134
    
    
    
    5.35
    
    
    $
    11.01
    
    
    
    2,199,134
    
    
    $
    11.00$12.51-$14.45
    
    
    305,875
    
    
    
    8.85
    
    
    $
    13.53
    
    
    
    149,958
    
    
    $
    13.583,870,040
    
    
    
    
    
    
    
    
    
    
    
    3,599,570
 The Company maintains an Employee Stock Purchase Plan for all full-time employees. Each employee
may have payroll deductions as a percentage of their compensation, not to exceed $25,000 per year.
The purchase price equals 85% of the fair market value of a share of the Companys common stock on
certain dates during the year. For the years ended December 31, 2004, 2003 and 2002, 28,558, 38,845
and 25,081 shares of common stock, respectively, were sold to employees under this plan. In June 2003, the Companys Board of Directors authorized the issuance of 170,650 restricted shares
of common stock to various management level employees. Restricted stock awards are expensed
ratably over the vesting period. Restricted stock awards granted are scheduled to vest over five
years. Grants may vest earlier upon a qualifying disability, death, retirement or change in
control. This grant includes a performance element that allows vesting to accelerate when certain
performance measures are met. These measures are based upon the attainment of a specific
Consolidated Earnings Per Share (EPS) of the Company for the calendar year ending immediately
preceding the applicable vesting date. If the measure is met for the first calendar year, then
one-third of the restricted stock will vest on the first anniversary. This is true for the next two
years and remains applicable for the fourth year if one of the previous years targets are not met.
On the fifth anniversary of the grant date, any remaining balance of unvested shares will become
fully vested. For 2003 and 2004, the EPS targets were not achieved. Unearned compensation will be
recognized as compensation expense ratably over the remaining vesting periods. The restricted
stock amortization and accelerated vesting expense totaled $0.5 million for the year ended December
31, 2004. F-29




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest from financing activities during 2004, 2003 and 2002 was $37.0 million,
$33.7 million and $41.0 million, respectively. Cash paid for income taxes during 2004, 2003 and
2002 was $7.3 million, $3.1 million and $0.2 million, respectively. In January 2004, the Company entered into a seven year capital lease agreement in the amount of
$2.12 million for the lease of fourteen locomotives from Merrill Lynch. During the year ended December 31, 2004, $21.9 million of our $22.5 million of Junior Convertible
Subordinated Debentures converted into common shares pursuant to their terms. The amounts included in depreciation and amortization on the Consolidated Statement of Cash Flows
are comprised of the depreciation and amortization expense for both continuing and discontinued
operations as well as the amortization of deferred financing costs for both continuing and
discontinued operations. The following table summarizes the net cash used in acquisitions, net of cash acquired, for the
years ended December 31, 2004, 2003, and 2002 (in thousands): 2004
    
    
    2003
    
    
    2002Common stock issued for businesses acquired
    
    $
    
    
    
    $
    
    
    
    $
    40,905Details of acquisitions:Working capital components, other than cash
    
    
    
    
    
    
    
    
    
    
    (1,860
    )Property and equipment
    
    
    (33,384
    )
    
    
    (26,941
    )
    
    
    (173,249
    )Other assets
    
    
    (675
    )
    
    
    
    
    
    
    (9
    )Goodwill
    
    
    850
    
    
    
    
    
    
    
    (850
    )Notes payable and loans payable
    
    
    
    
    
    
    
    
    
    
    1,531Deferred income taxes payable
    
    
    
    
    
    
    1,095
    
    
    
    44,173Net cash used in acquisitions
    
    $
    (33,209
    )
    
    $
    (25,846
    )
    
    $
    (89,359
    )
 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company currently uses derivatives to hedge against increases in fuel prices and interest
rates. The Company formally documents the relationship between the hedging instrument and the
hedged item, as well as the risk management objective and strategy for the use of the hedging
instrument. This documentation includes linking the derivatives that are designated as cash flow
hedges to specific assets or liabilities on the balance sheet, commitments or forecasted
transactions. The Company assesses at the time a derivative contract is entered into, and at least
quarterly, whether the derivative item is effective in offsetting the changes in fair value or cash
flows. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, is recognized in current period
earnings. For derivative instruments that are designated and qualify as cash flow hedges, the
effective portion of the gain or loss on the derivative instrument is recorded in Accumulated Other
Comprehensive Income as a separate component of Stockholders Equity and reclassified into earnings
in the period during which the hedge transaction affects earnings. The Company monitors its hedging positions and credit ratings of its counterparties and does not
anticipate losses due to counterparty nonperformance. Fuel costs represented 9% of total revenues during 2004. Due to the significance of fuel expenses
to the operations of the Company and the volatility of fuel prices, the Company periodically hedges
against fluctuations in the price of its fuel purchases. The fuel hedging program includes the use
of derivatives that are accounted for as cash flow hedges under SFAS No. 133. For 2005,
approximately 30% of the Companys fuel costs are subject to fuel hedges. As of December 31, 2004,
we have entered into fuel swap agreements to hedge the equivalent of 750,000 gallons per month from
January 2005 through December 2005, at an average price of
$1.45 per gallon, including transportation and distribution costs. The fair value of
these hedges was a net liability of $0.4 million at December 31, 2004. F-30




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued Interest on the Companys senior credit facility is payable at variable rates indexed to LIBOR. To
partially mitigate the volatility of LIBOR, the Company entered into two interest rate swaps in May
2000. These swaps were accounted for as cash flow hedges under SFAS No. 133 and qualified for the
short cut method of recognition. The interest rate swaps locked in a LIBOR rate of 7.23% on $212.5
million of debt for a three-year period. In 2001, the Company extended the interest rate swaps for
two years and reduced the LIBOR rate to 6.723%. As noted in Note 8, the Company terminated its
interest rate swaps and reclassified $17.1 million from accumulated other comprehensive income
against earnings during the year ended 2002, in connection with the refinancing of the senior
credit facility in May 2002. On April 10, 2003, the Company entered into two interest rate collar corridors for a total notional
amount of $100 million with an effective date of November 24, 2003 and expiring on November 24,
2005. Under the terms of these interest rate collar corridors the LIBOR component of the Companys
interest rates can fluctuate between 1.50% and 2.81%. However, if LIBOR exceeds 5.00%, the Company
is responsible for interest at that LIBOR rate. The interest rate collar corridors qualify, are
designated and are accounted for as cash flow hedges under SFAS No. 133. The fair value of these
interest rate collar corridors was a net receivable of $0.3 million at December 31, 2004. On June 25, 2003, the Company entered into two interest rate swaps for a total notional amount of
$100 million for the period commencing November 24, 2003 through November 24, 2004. The swaps
qualified, were designated and were accounted for as cash flow hedges under SFAS No. 133. Under
the terms of the interest rate swaps, the Company was required to pay a fixed interest rate of
1.16% on $50 million and 1.19% on the remaining $50 million while receiving a variable interest
rate equal to the 90 day LIBOR rate. These swaps terminated as planned on November 24, 2004 and
thus had no fair value at December 31, 2004. On August 13, 2004, the Company entered into an interest rate swap for a notional amount of $50
million for the period commencing November 24, 2004, through November 24, 2005. The swap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, the Company is required to pay a fixed interest rate of 2.655% on
$50 million while receiving a variable interest rate equal to the 90 day LIBOR rate. The fair
value of this swap was a net receivable of $0.1 million at December 31, 2004. F-31




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued On August 13, 2004, the Company entered into an interest rate cap for a notional amount of $50
million with an effective date of November 24, 2004, expiring on November 24, 2005. Under the
terms of this cap, the LIBOR component of the Companys interest rate can fluctuate up to 3.00%.
The cap qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. The
fair value of this cap was a net receivable of $0.1 million at December 31, 2004. On November 30, 2004, the Company 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 swap
qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. Under the
terms of the interest rate swap, the Company is required to pay a fixed interest rate of 4.05% on
$100 million while receiving a variable interest rate equal to the 90 day LIBOR rate. The fair
value of this swap was a net liability of $0.4 million at December 31, 2004. On December 8, 2004, the Company entered into an interest rate cap for a notional amount of $50
million with an effective date of November 25, 2005, expiring on November 24, 2006. Under the
terms of this cap, the LIBOR component of the Companys interest rate can fluctuate up to 4.00%.
The cap qualifies, is designated and is accounted for as a cash flow hedge under SFAS No. 133. The
fair value of this cap was a net receivable of $0.1 million at December 31, 2004. Fluctuations in the market interest rate will affect the cost of our remaining borrowings. At
December 31, 2004, Accumulated Other Comprehensive Income included income of $0.2 million, net of
taxes, relating to the interest rate collars and swaps. Were the Company to refinance the debt with
terms different than the terms of the debt currently hedged, the hedged transaction would no longer
be effective and any deferred gains or losses would be immediately recognized into income. Management believes that the fair value of its senior long-term debt approximates its carrying
value based on the variable rate nature of the financing, and for all other long-term debt based on
current borrowing rates available with similar terms and maturities. The fair value of the senior
subordinated notes is $4.7 million (face amount of $4.3 million) as of December 31, 2004, based on
the quoted market price. 15. PENSION AND OTHER BENEFIT PROGRAMS The Company maintains a pension plan for a majority of its Canadian railroad employees, with both
defined benefit and defined contribution components. DEFINED BENEFIT  The defined benefit component applies to approximately 60 employees who
transferred employment directly from Canadian Pacific Railway Company (CPR) to a subsidiary of
RailLink, Ltd. The defined benefit portion of the plan is a mirror plan of CPRs defined benefit
plan. The employees that transferred and joined the mirror plan were entitled to transfer or buy
back prior years of service. As part of the arrangement, CPR transferred to the Company the
appropriate value of each employees pension entitlement. F-32




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION AND OTHER BENEFIT PROGRAMS, continued The following chart summarizes the benefit obligations, assets, funded status and rate assumptions
associated with the defined benefit plan for the years ended December 31, 2004, 2003 and 2002 (in
thousands): January 1, 2004 to
    
    
    January 1, 2003 to
    
    
    January 1, 2002 toDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002EXCHANGE RATE BEGINNING OF YEAR
    
    $
    0.77
    
    
    $
    0.63
    
    
    $
    0.63EXCHANGE RATE END OF YEAR
    
    $
    0.83
    
    
    $
    0.77
    
    
    $
    0.63CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of period
    
    $
    4,973
    
    
    $
    3,910
    
    
    $
    3,282Service cost
    
    
    116
    
    
    
    96
    
    
    
    64Interest cost
    
    
    321
    
    
    
    310
    
    
    
    230Plan participants contributions
    
    
    126
    
    
    
    231
    
    
    
    96Actuarial loss (gain)
    
    
    (22
    )
    
    
    580
    
    
    
    244Settlements
    
    
    0
    
    
    
    (916
    )
    
    
    0Curtailments
    
    
    0
    
    
    
    (96
    )
    
    
    0Benefits paid
    
    
    (42
    )
    
    
    (11
    )
    
    
    (6
    )Foreign currency exchange rate changes
    
    
    387
    
    
    
    869
    
    
    
    0Benefit obligation at end of period
    
    $
    5,859
    
    
    $
    4,973
    
    
    $
    3,910CHANGE IN PLAN ASSETSFair value of plan assets at beginning of period
    
    $
    3,525
    
    
    $
    3,064
    
    
    $
    3,164Actual return on plan assets
    
    
    253
    
    
    
    443
    
    
    
    (291
    )Employer contribution
    
    
    327
    
    
    
    129
    
    
    
    100Plan participants contributions
    
    
    126
    
    
    
    135
    
    
    
    97Settlements
    
    
    0
    
    
    
    (916
    )
    
    
    0Benefits paid
    
    
    (42
    )
    
    
    (11
    )
    
    
    (6
    )Foreign currency exchange rate changes
    
    
    275
    
    
    
    681
    
    
    
    0Fair value of plan assets at end of period
    
    $
    4,464
    
    
    $
    3,525
    
    
    $
    3,064Funded
status - (accrued) benefit cost
    
    $
    (1,395
    )
    
    $
    (1,448
    )
    
    $
    (846
    )Unrecognized net actuarial loss
    
    
    1,213
    
    
    
    1,183
    
    
    
    853Unrecognized prior service cost
    
    
    157
    
    
    
    164
    
    
    
    182Prepaid (accrued) benefit cost
    
    $
    (25
    )
    
    $
    (101
    )
    
    $
    189ASSUMPTIONSDiscount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.50
    %Expected return on plan assets
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    7.00
    %Rate of compensation increase
    
    
    3.50
    %
    
    
    3.50
    %
    
    
    4.00
    %Inflation rate
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.50
    %COMPONENTS OF NET PERIODIC BENEFIT COST IN
PERIODService cost
    
    $
    116
    
    
    $
    96
    
    
    $
    64Interest cost
    
    
    321
    
    
    
    310
    
    
    
    230Expected return on plan assets
    
    
    (266
    )
    
    
    (262
    )
    
    
    (222
    )Amortization of prior service cost
    
    
    20
    
    
    
    18
    
    
    
    15Amortization of net actuarial loss
    
    
    53
    
    
    
    38
    
    
    
    0Curtailment loss
    
    
    0
    
    
    
    40
    
    
    
    0Settlement loss
    
    
    0
    
    
    
    219
    
    
    
    0Net periodic pension cost
    
    $
    244
    
    
    $
    459
    
    
    $
    87
 F-33




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION AND OTHER BENEFIT PROGRAMS, continued December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    Target AllocationPlan Assets (Market Value) for the years ending:
    
    2004
    
    
    2003
    
    
    2002
    
    
    2005Integra Strategic Allocated Pool Fund
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Fund holdings by class:a) Equity securities
    
    
    59.7
    %
    
    
    59.3
    %
    
    
    60.7
    %
    
    
    60.0
    %b) Debt securities
    
    
    39.8
    %
    
    
    36.7
    %
    
    
    36.1
    %
    
    
    40.0
    %c) Real estate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %d) Other (including cash)
    
    
    0.5
    %
    
    
    4.0
    %
    
    
    3.2
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expected long-term rate of return on assets
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    7.00
    %Expected rate of return on equity securities
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Expected rate of return on debt securities
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.75
    %
 December 31,
    
    
    December 31,
    
    
    December 31,For the year ended:
    
    2004
    
    
    2003
    
    
    2002(in thousands)Projected benefit obligation
    
    $
    5,859
    
    
    $
    4,973
    
    
    $
    3,910Accumulated benefit obligation
    
    $
    4,398
    
    
    $
    3,726
    
    
    $
    2,793Fair value of plan assets
    
    $
    4,464
    
    
    $
    3,525
    
    
    $
    3,064
 December 31,
    
    
    December 31,
    
    
    December 31,Cash Flows (in thousands) For the years ended:
    
    2004
    
    
    2003
    
    
    2002Employer contributionsCurrent service payments
    
    $
    136
    
    
    $
    129
    
    
    $
    100Unfunded liability payments
    
    
    191
    
    
    
    0
    
    
    
    0Total
    
    $
    327
    
    
    $
    129
    
    
    $
    100Participant contributions
    
    $
    126
    
    
    $
    135
    
    
    $
    97Benefit payments
    
    $
    42
    
    
    $
    11
    
    
    $
    6
 Estimated Future Benefit Payments(in thousands)2005
    
    $
    582006
    
    
    512007
    
    
    722008
    
    
    422009
    
    
    402010
    
    
    642011-2019
    
    $
    440
 F-34




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PENSION AND OTHER BENEFIT PROGRAMS, continued DEFINED CONTRIBUTION PLANS- The defined contribution component applies to a majority of the
Companys Canadian railroad employees that are not covered by the defined benefit component. The
Company contributes 3% of a participating employees salary to the plan. Pension expense for the
year ended December 31, 2004, 2003 and 2002 for the defined contribution members was $0.8 million,
$0.6 million and $0.5 million, respectively. The Company maintains a contributory profit sharing plan as defined under Section 401(k) of the
U.S. Internal Revenue Code. The Company made contributions to this plan at a rate of 50% of the
employees contribution up to a maximum annual contribution of $1,500 per eligible employee.
Starting January 1, 2005, the Company has increased the contribution per employee to $2,500 for
Railroad Retirement employees and $5,000 for FICA employees. In addition, an employee becomes 100%
vested with respect to the employer contributions after completing four years of service starting
in 2004 versus five years in previous years. Employer contributions
during the years ended December
31, 2004, 2003 and 2002 were approximately $0.9 million, $0.7 million and $0.6 million,
respectively. 16. COMMITMENTS AND CONTINGENCIES In the ordinary course of conducting its business, the Company becomes involved in various legal
actions and other claims, which are pending or could be asserted against the Company. Litigation is
subject to many uncertainties, the outcome of individual litigated matters is not predictable with
assurance, and it is reasonably possible that some of these matters may be decided unfavorably to
the Company. It is the opinion of management that the ultimate liability, if any, with respect to
these matters will not have a material adverse effect on the Companys financial position, results
of operations or cash flows. On February 7, 2005, the Surface Transportation Board entered an Order setting the terms
for sale of the Companys Toledo, Peoria &Western Railways 76 mile La Harpe  Hollis Line in
western central Illinois to Keokuk Junction Railway Company, or KJRY,
as a result KJRYs application
under the Feeder Line Statute, 49 USC sec. 10907. Management believes that the STB-ordered
sale of the line at the mandated price of $4.2 million was not
in accordance with the rules and regulations governing such STB
action and did not reflect the lines value or adequately
compensate the Company as required by these rules and regulations. As a result, the Company intends to appeal the Order to the
U.S. Circuit Court of Appeals. Management is unable to predict the
outcome of this appeal, however, it is not believed that the final outcome of this
matter will materially affect the Companys financial position, results of operations or cash
flows. In the fourth quarter of 2003, a tunnel at the Companys Central Oregon & Pacific Railroad
experienced a significant fire, the cause of which has not been determined. The Company has
insurance coverage up to $10 million to cover the reconstruction of the tunnel. The Company has
concluded that the total costs to repair and reconstruct the tunnel will exceed its insurance
coverage and has recorded a $1.4 million charge during the year ended December 31, 2004. The Company has a $3.7 million contingent obligation, under certain events of default or if line
abandonment occurs, to the Canadian National Railroad in connection with its properties. The
contingent obligation bears no interest and has no pre-defined terms of payment or maturity. The Companys operations are subject to extensive environmental regulation. The Company records
liabilities for remediation and restoration costs related to past activities when the Companys
obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance
activities to current operations are expensed as incurred. The Companys recorded liabilities for
these issues represent its best estimates (on an undiscounted basis) of remediation and restoration
costs that may be required to comply with present laws and regulations. It is the opinion of
management that the ultimate liability, if any, with respect to these matters will not have a
material adverse effect on the Companys financial position, results of operations or cash flows. F-35




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. RETIREMENT COSTS On April 7, 2004, the Companys former CEO retired from the Company. In accordance with the terms
of his severance agreement, $3.1 million was paid into a deferred compensation account and is
maintained as a long-term asset and liability on the Companys balance sheet. In addition, 0.1
million stock options were vested, 1.2 million stock options were extended for three years and
24,918 restricted shares were vested resulting in a non-cash charge of $3.6 million. The former
CEO continues to be eligible for future payments under the Companys Long Term Incentive Plan
through 2007. No amount has been accrued for any future payments which he may receive. 18. IMPAIRMENT COSTS During the third quarter of 2004, the Company committed to a plan to dispose of the E&N Railway.
As a result of several factors, including the expectation of minimal future operating cash flows
and potential limitations on the use of certain of the real estate, the Company does not expect
significant proceeds from this disposal and accordingly, has recorded an impairment charge of $12.6
million during the year ended December 31, 2004. On December 31, 1998, the Company ceased all motor carrier operations and leased substantially all
of the operating assets of that segment for periods up to 24 months to an unrelated third party.
The third party elected not to renew the lease or purchase the assets upon expiration of the leases
in 2000 and all assets were then classified as held for sale. Due to a deterioration in the value
of the assets as a result of the weak economic conditions and the lack of servicing of the assets,
an impairment charge of $1.4 million was recorded during the year ended December 31, 2002. All of
the equipment was sold as of December 31, 2003, with the sales proceeds approximating the remaining
book value. F-36




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. SEGMENT INFORMATION The Companys continuing operations have been classified into two business segments: North American
rail transportation and International rail transportation. The North American rail transportation
segment includes the operations of the Companys railroad subsidiaries in the United States and
Canada, as well as corporate expenses and has been restated for the exclusion of the Arizona
Eastern Railway Company and the West Texas and Lubbock Railroad operations except for total assets
and capital expenditures, due to their reclassification to discontinued operations. The
international segment has been restated for the exclusion of the Chilean and Australian operations
except for total assets and capital expenditures, due to their reclassification to discontinued
operations. Business and geographical segment information for the years ended December 31, 2004, 2003 and 2002
is as follows (in thousands): YEAR ENDED DECEMBER 31, 2004: NORTH AMERICA
    
    
    INTERNATIONALCONSOLIDATED
    
    
    UNITED STATES
    
    
    CANADA
    
    
    CHILE
    
    
    AUSTRALIARevenue
    
    $
    395,564
    
    
    $
    317,486
    
    
    $
    78,078
    
    
    $
    
    

    
    $
    Depreciation and
amortization
    
    $
    29,247
    
    
    $
    23,781
    
    
    $
    5,466
    
    
    $
    
    
    
    $
    Loss before
income taxes
    
    $
    (25,900
    )
    
    $
    (24,157
    )
    
    $
    (1,743
    )
    
    $
    
    
    
    $
    Interest expense
    
    $
    28,642
    
    
    $
    26,908
    
    
    $
    1,734
    
    
    $
    
    
    
    $
    Total assets
    
    $
    1,016,143
    
    
    $
    828,807
    
    
    $
    187,336
    
    
    $
    
    
    
    $
    Capital expenditures
    
    $
    75,800
    
    
    $
    49,465
    
    
    $
    12,877
    
    
    $
    
    
    
    $
    13,458
 YEAR ENDED DECEMBER 31, 2003: NORTH AMERICA
    
    
    INTERNATIONALCONSOLIDATED
    
    
    UNITED STATES
    
    
    CANADA
    
    
    CHILE
    
    
    AUSTRALIARevenue
    
    $
    352,338
    
    
    $
    281,505
    
    
    $
    70,833
    
    
    $
    
    
    
    $
    Depreciation and
amortization
    
    $
    23,833
    
    
    $
    19,590
    
    
    $
    4,243
    
    
    $
    
    
    
    $
    Income before
income taxes
    
    $
    41,597
    
    
    $
    27,258
    
    
    $
    14,339
    
    
    $
    
    
    
    $
    Interest expense
    
    $
    32,499
    
    
    $
    30,652
    
    
    $
    1,847
    
    
    $
    
    
    
    $
    Total assets
    
    $
    1,232,490
    
    
    $
    746,085
    
    
    $
    183,278
    
    
    $
    59,011
    
    
    $
    244,116Capital expenditures
    
    $
    71,508
    
    
    $
    44,034
    
    
    $
    10,257
    
    
    $
    2,189
    
    
    $
    15,028
 YEAR ENDED DECEMBER 31, 2002: NORTH AMERICA
    
    
    INTERNATIONALCONSOLIDATED
    
    
    UNITED STATES
    
    
    CANADA
    
    
    CHILE
    
    
    AUSTRALIARevenue
    
    $
    326,654
    
    
    $
    267,577
    
    
    $
    59,077
    
    
    $
    
    
    
    $
    Depreciation and
amortization
    
    $
    21,929
    
    
    $
    18,054
    
    
    $
    3,875
    
    
    $
    
    
    
    $
    Income (loss) before
income taxes
    
    $
    3,500
    
    
    $
    (883
    )
    
    $
    4,383
    
    
    $
    
    
    
    $
    Interest expense
    
    $
    35,910
    
    
    $
    32,630
    
    
    $
    3,280
    
    
    $
    
    
    
    $
    Total assets
    
    $
    1,106,553
    
    
    $
    715,615
    
    
    $
    141,853
    
    
    $
    56,209
    
    
    $
    192,876Capital expenditures
    
    $
    65,682
    
    
    $
    37,980
    
    
    $
    8,587
    
    
    $
    2,021
    
    
    $
    17,094
 F-37




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. UNAUDITED QUARTERLY FINANCIAL DATA All quarterly financial data has been restated to reflect Ferronors, Freight Australias, Arizona
Eastern Railway Companys and West Texas and Lubbock Railroads results in discontinued operations.
The diluted earnings per share for each quarter will not necessarily add-up to the amount reported
for the entire fiscal year on the Consolidated Statements of Income due to variations in the
calculation for each quarter related to convertible debt. Quarterly financial data for 2004 is as follows (in thousands, except per share amounts): FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTHQUARTER
    
    
    QUARTER
    
    
    QUARTER
    
    
    QUARTEROperating revenue
    
    $
    95,943
    
    
    $
    96,149
    
    
    $
    99,968
    
    
    $
    103,504Operating income
    
    $
    15,818
    
    
    $
    10,671
    
    
    $
    3,436
    
    
    $
    12,366Income
(loss) from continuing operations
    
    $
    4,715
    
    
    $
    (13
    )
    
    $
    (30,570
    )
    
    $
    4,473Net income (loss)
    
    $
    1,275
    
    
    $
    1,611
    
    
    $
    (33,139
    )
    
    $
    4,314Basic income (loss) from continuing operations per share
    
    $
    0.14
    
    
    $
    0.00
    
    
    $
    (0.84
    )
    
    $
    0.12Diluted income (loss) from continuing operations per share
    
    $
    0.14
    
    
    $
    0.00
    
    
    $
    (0.84
    )
    
    $
    0.12
 Quarterly financial data for 2003 is as follows (in thousands, except per share amounts): FIRST
    
    
    SECOND
    
    
    THIRD
    
    
    FOURTHQUARTER
    
    
    QUARTER
    
    
    QUARTER
    
    
    QUARTEROperating revenue
    
    $
    84,720
    
    
    $
    85,277
    
    
    $
    89,831
    
    
    $
    92,510Operating income
    
    $
    16,785
    
    
    $
    18,490
    
    
    $
    20,395
    
    
    $
    18,359Income from continuing
operations
    
    $
    5,666
    
    
    $
    6,659
    
    
    $
    7,001
    
    
    $
    4,835Net income
    
    $
    4,333
    
    
    $
    4,693
    
    
    $
    4,233
    
    
    $
    1,431Basic income from continuing operations per share
    
    $
    0.18
    
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.15Diluted income from continuing operations per share
    
    $
    0.17
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.15
 F-38




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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION In August 2000, RailAmerica Transportation Corp. (Issuer), a wholly-owned subsidiary of
RailAmerica, Inc. (Parent), sold units including 12 7/8% senior subordinated notes, which were
subsequently exchanged for notes registered with the Securities and Exchange Commission. On
September 29, 2004, the Company repurchased $125.7 million of its $130.0 million senior
subordinated notes (See Note 9). The notes are guaranteed by the Parent, the domestic subsidiaries
of the Issuer and Palm Beach Rail Holding, Inc. All guarantor subsidiaries are 100% owned by the
Parent. These guarantees are full and unconditional and joint and several. All amounts in the
following tables are in thousands. RAILAMERICA, INC.
Consolidating Balance Sheet
At December 31, 2004
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash
    
    $
    400
    
    
    $
    7,634
    
    
    $
    152
    
    
    $
    16,145
    
    
    $
    
    
    
    $
    24,331Accounts and notes receivable, net
    
    
    
    
    
    
    276
    
    
    
    53,923
    
    
    
    9,215
    
    
    
    
    
    
    
    63,414Current assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other current assets
    
    
    110
    
    
    
    605
    
    
    
    11,396
    
    
    
    2,824
    
    
    
    
    
    
    
    14,935Total current assets
    
    
    510
    
    
    
    8,515
    
    
    
    65,471
    
    
    
    28,184
    
    
    
    
    
    
    
    102,680Property, plant and equipment, net
    
    
    
    
    
    
    1,090
    
    
    
    711,862
    
    
    
    162,931
    
    
    
    
    
    
    
    875,883Long-term assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other assets
    
    
    7,896
    
    
    
    3,297
    
    
    
    12,992
    
    
    
    13,395
    
    
    
    
    
    
    
    37,580Investment in and advances to affiliate
    
    
    267,523
    
    
    
    369,973
    
    
    
    (22,616
    )
    
    
    (285
    )
    
    
    (614,595
    )
    
    
    Total assets
    
    $
    275,929
    
    
    $
    382,875
    
    
    $
    767,709
    
    
    $
    204,225
    
    
    $
    (614,595
    )
    
    $
    1,016,143Liabilities and Stockholders EquityCurrent liabilities:Current maturities of long-term debt
    
    $
    4,662
    
    
    $
    
    
    
    $
    884
    
    
    $
    551
    
    
    $
    
    
    
    $
    6,097Accounts payable
    
    
    336
    
    
    
    1,501
    
    
    
    50,257
    
    
    
    9,182
    
    
    
    
    
    
    
    61,276Accrued expenses
    
    
    1,438
    
    
    
    1,097
    
    
    
    20,292
    
    
    
    19,123
    
    
    
    
    
    
    
    41,950Current liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    6,436
    
    
    
    2,598
    
    
    
    71,433
    
    
    
    28,856
    
    
    
    
    
    
    
    109,323Long-term debt, less current maturities
    
    
    308,338
    
    
    
    
    
    
    
    12,466
    
    
    
    36,449
    
    
    
    
    
    
    
    357,253Subordinated debt
    
    
    4,028
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028Deferred income taxes
    
    
    (8,323
    )
    
    
    (3,650
    )
    
    
    141,394
    
    
    
    19,885
    
    
    
    
    
    
    
    149,306Long-term liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    
    525
    
    
    
    3,001
    
    
    
    6,637
    
    
    
    5,144
    
    
    
    
    
    
    
    15,307Stockholders equity:Common stock
    
    
    
    
    
    
    37
    
    
    
    638
    
    
    
    
    
    
    
    (638
    )
    
    
    37Additional paid-in capital
    
    
    758
    
    
    
    319,417
    
    
    
    497,424
    
    
    
    74,545
    
    
    
    (572,727
    )
    
    
    319,417Retained earnings
    
    
    (35,986
    )
    
    
    36,806
    
    
    
    38,262
    
    
    
    14,287
    
    
    
    (16,563
    )
    
    
    36,806Accumulated other comprehensive income
    
    
    153
    
    
    
    24,666
    
    
    
    (545
    )
    
    
    25,059
    
    
    
    (24,667
    )
    
    
    24,666Total stockholders equity
    
    
    (35,075
    )
    
    
    380,926
    
    
    
    535,779
    
    
    
    113,891
    
    
    
    (614,595
    )
    
    
    380,926Total liabilities and stockholders equity
    
    $
    275,929
    
    
    $
    382,875
    
    
    $
    767,709
    
    
    $
    204,225
    
    
    $
    (614,595
    )
    
    $
    1,016,143
 F-39




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC.
Consolidating Statement of Income
For the year ended December 31, 2004
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue
    
    $
    
    
    
    $
    135
    
    
    $
    317,351
    
    
    $
    78,078
    
    
    $
    
    
    
    $
    395,564Operating expenses:Transportation
    
    
    
    
    
    
    
    
    
    
    181,118
    
    
    
    45,779
    
    
    
    
    
    
    
    226,897Selling, general and administrative
    
    
    
    
    
    
    14,894
    
    
    
    65,665
    
    
    
    8,023
    
    
    
    
    
    
    
    88,582Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    (3,922
    )
    
    
    (100
    )
    
    
    
    
    
    
    (4,022
    )Impairment
of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,569
    
    
    
    
    
    
    
    12,569Depreciation and amortization
    
    
    
    
    
    
    240
    
    
    
    23,541
    
    
    
    5,466
    
    
    
    
    
    
    
    29,247Total operating expenses
    
    
    
    
    
    
    15,134
    
    
    
    266,402
    
    
    
    71,737
    
    
    
    
    
    
    
    353,273Operating income (loss)
    
    
    
    
    
    
    (14,999
    )
    
    
    50,949
    
    
    
    6,341
    
    
    
    
    
    
    
    42,291Interest and other expense
    
    
    (2,507
    )
    
    
    (955
    )
    
    
    (23,919
    )
    
    
    (1,261
    )
    
    
    
    
    
    
    (28,642
    )Financing costs
    
    
    (38,465
    )
    
    
    (294
    )
    
    
    
    
    
    
    (790
    )
    
    
    
    
    
    
    (39,549
    )Equity in earnings of subsidiaries
    
    
    16,436
    
    
    
    (8,517
    )
    
    
    
    
    
    
    
    
    
    
    (7,919
    )
    
    
    Income (loss) from continuing
operations before income taxes
    
    
    (24,536
    )
    
    
    (24,765
    )
    
    
    27,030
    
    
    
    4,290
    
    
    
    (7,919
    )
    
    
    (25,900
    )Provision (benefit) for income taxes
    
    
    (13,968
    )
    
    
    1,174
    
    
    
    7,036
    
    
    
    1,253
    
    
    
    
    
    
    
    (4,505
    )Income (loss) from continuing operations
    
    
    (10,568
    )
    
    
    (25,939
    )
    
    
    19,994
    
    
    
    3,037
    
    
    
    (7,919
    )
    
    
    (21,395
    )Gain (loss) on sale of discontinued
operations (net of tax)
    
    
    2,051
    
    
    
    
    
    
    
    194
    
    
    
    (3,951
    )
    
    
    
    
    
    
    (1,706
    )Loss from discontinued operations (net of tax)
    
    
    
    
    
    
    
    
    
    
    (1,960
    )
    
    
    (878
    )
    
    
    
    
    
    
    (2,838
    )Net income (loss)
    
    $
    (8,517
    )
    
    $
    (25,939
    )
    
    $
    18,228
    
    
    $
    (1,792
    )
    
    $
    (7,919
    )
    
    $
    (25,939
    )
 F-40




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the year ended December 31, 2004
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (8,517
    )
    
    $
    (25,939
    )
    
    $
    18,228
    
    
    $
    (1,792
    )
    
    $
    (7,919
    )
    
    $
    (25,939
    )Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    3,156
    
    
    
    619
    
    
    
    23,980
    
    
    
    15,320
    
    
    
    
    
    
    
    43,075Financing costs
    
    
    38,465
    
    
    
    294
    
    
    
    
    
    
    
    790
    
    
    
    
    
    
    
    39,549Equity in earnings of subsidiaries
    
    
    (16,436
    )
    
    
    8,517
    
    
    
    
    
    
    
    
    
    
    
    7,919
    
    
    
    Net gain on sale of assets
    
    
    (20,290
    )
    
    
    
    
    
    
    (4,866
    )
    
    
    (148
    )
    
    
    
    
    
    
    (25,304
    )Impairment of assets
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    12,595
    
    
    
    
    
    
    
    16,595Initial lease payment to CSX
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    (10,000
    )Amortization of CSX lease payment
    
    
    
    
    
    
    
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    698Non-cash CEO retirement costs
    
    
    
    
    
    
    3,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,600Deferred income taxes and other
    
    
    3,768
    
    
    
    2,016
    
    
    
    (1,027
    )
    
    
    4,743
    
    
    
    
    
    
    
    9,500Changes in operating assets and liabilities, net
of acquisitions and dispositionsAccounts receivable
    
    
    
    
    
    
    (55
    )
    
    
    (10,032
    )
    
    
    (4,877
    )
    
    
    
    
    
    
    (14,964
    )Other current assets
    
    
    (45
    )
    
    
    (217
    )
    
    
    (5,394
    )
    
    
    1,228
    
    
    
    
    
    
    
    (4,428
    )Accounts payable
    
    
    46
    
    
    
    923
    
    
    
    24,789
    
    
    
    (8,467
    )
    
    
    
    
    
    
    17,291Accrued expenses
    
    
    (8,292
    )
    
    
    (1,674
    )
    
    
    3,163
    
    
    
    2,982
    
    
    
    
    
    
    
    (3,821
    )Other assets and liabilities
    
    
    (109
    )
    
    
    505
    
    
    
    (870
    )
    
    
    2,699
    
    
    
    
    
    
    
    2,225Net cash provided by (used in) operating activities
    
    
    (8,254
    )
    
    
    (11,411
    )
    
    
    42,669
    
    
    
    25,073
    
    
    
    
    
    
    
    48,077Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (7
    )
    
    
    (49,458
    )
    
    
    (26,335
    )
    
    
    
    
    
    
    (75,800
    )Proceeds from sale of assets, net of cash on-hand
    
    
    198,928
    
    
    
    
    
    
    
    14,653
    
    
    
    9,160
    
    
    
    
    
    
    
    222,741Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (33,209
    )
    
    
    
    
    
    
    
    
    
    
    (33,209
    )Deferred transaction costs and other
    
    
    
    
    
    
    (923
    )
    
    
    
    
    
    
    (2,140
    )
    
    
    
    
    
    
    (3,063
    )Net cash provided by (used in) investing activities
    
    
    198,928
    
    
    
    (930
    )
    
    
    (68,014
    )
    
    
    (19,315
    )
    
    
    
    
    
    
    110,669Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    445,625
    
    
    
    
    
    
    
    
    
    
    
    48,853
    
    
    
    
    
    
    
    494,478Principal payments on long-term debt
    
    
    (408,976
    )
    
    
    (600
    )
    
    
    8,767
    
    
    
    (123,006
    )
    
    
    
    
    
    
    (523,815
    )Repurchase of senior subordinated notes
    
    
    (144,905
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,905
    )(Disbursements)/receipts on intercompany debt
    
    
    (81,792
    )
    
    
    (8,487
    )
    
    
    16,590
    
    
    
    73,689
    
    
    
    
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    28,843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,843Financing costs
    
    
    (2,976
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,976
    )Net cash provided by (used in) financing activities
    
    
    (193,024
    )
    
    
    19,756
    
    
    
    25,357
    
    
    
    (464
    )
    
    
    
    
    
    
    (148,375
    )Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    246Net decrease in cash
    
    
    (2,350
    )
    
    
    7,415
    
    
    
    12
    
    
    
    5,540
    
    
    
    
    
    
    
    10,617Cash, beginning of period
    
    
    2,750
    
    
    
    219
    
    
    
    140
    
    
    
    10,605
    
    
    
    
    
    
    
    13,714Cash, end of period
    
    $
    400
    
    
    $
    7,634
    
    
    $
    152
    
    
    $
    16,145
    
    
    $
    
    
    
    $
    24,331
 F-41




---



##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC.
Consolidating Balance Sheet
At December 31, 2003
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent Assets:Cash
    
    $
    2,750
    
    
    $
    219
    
    
    $
    140
    
    
    $
    10,605
    
    
    $
    
    
    
    $
    13,714Accounts and notes receivable
    
    
    
    
    
    
    246
    
    
    
    43,024
    
    
    
    9,042
    
    
    
    
    
    
    
    52,312Current assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,319
    
    
    
    
    
    
    
    36,319Other current assets
    
    
    67
    
    
    
    (176
    )
    
    
    9,130
    
    
    
    3,097
    
    
    
    
    
    
    
    12,118Total current assets
    
    
    2,817
    
    
    
    289
    
    
    
    52,294
    
    
    
    59,063
    
    
    
    
    
    
    
    114,463Property, plant and equipment, net
    
    
    
    
    
    
    1,321
    
    
    
    667,506
    
    
    
    157,819
    
    
    
    
    
    
    
    826,646Long-term assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263,007
    
    
    
    
    
    
    
    263,007Other assets
    
    
    15,034
    
    
    
    2,035
    
    
    
    4,767
    
    
    
    6,538
    
    
    
    
    
    
    
    28,374Investment in and advances to affiliates
    
    
    334,653
    
    
    
    375,033
    
    
    
    41,444
    
    
    
    (6,841
    )
    
    
    (744,289
    )
    
    
    Total assets
    
    $
    352,504
    
    
    $
    378,678
    
    
    $
    766,011
    
    
    $
    479,586
    
    
    $
    (744,289
    )
    
    $
    1,232,490Liabilities and Stockholders EquityCurrent Liabilities:Current maturities of long-term debt
    
    $
    2,650
    
    
    $
    21,534
    
    
    $
    409
    
    
    $
    500
    
    
    $
    
    
    
    $
    25,093Accounts payable
    
    
    (5,310
    )
    
    
    (10,705
    )
    
    
    46,410
    
    
    
    4,456
    
    
    
    
    
    
    
    34,851Accrued expenses
    
    
    7,515
    
    
    
    2,621
    
    
    
    18,118
    
    
    
    3,036
    
    
    
    
    
    
    
    31,290Current liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,338
    
    
    

    
    
    
    
    40,338Total current liabilities
    
    
    4,855
    
    
    
    13,450
    
    
    
    64,937
    
    
    
    48,330
    
    
    
    
    
    
    
    131,572Long-term debt, less current maturities
    
    
    273,700
    
    
    
    
    
    
    
    11,580
    
    
    
    42,000
    
    
    
    
    
    
    
    327,280Subordinated debt
    
    
    121,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,506Deferred income taxes
    
    
    (17,569
    )
    
    
    (6,532
    )
    
    
    147,561
    
    
    
    27,324
    
    
    
    
    
    
    
    150,784Long-term liabilities of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,907
    
    
    
    
    
    
    
    115,907Other liabilities
    
    
    1,531
    
    
    
    
    
    
    
    7,348
    
    
    
    4,802
    
    
    
    
    
    
    
    13,681Stockholders equity:Common stock
    
    
    
    
    
    
    32
    
    
    
    3,263
    
    
    
    63,589
    
    
    
    (66,852
    )
    
    
    32Additional paid-in capital
    
    
    758
    
    
    
    262,384
    
    
    
    495,027
    
    
    
    84,042
    
    
    
    (579,827
    )
    
    
    262,384Retained earnings
    
    
    (31,313
    )
    
    
    62,745
    
    
    
    36,295
    
    
    
    35,992
    
    
    
    (40,974
    )
    
    
    62,745Accumulated other comprehensive income
    
    
    (964
    )
    
    
    46,599
    
    
    
    
    
    
    
    57,600
    
    
    
    (56,636
    )
    
    
    46,599Total stockholders equity
    
    
    (31,519
    )
    
    
    371,760
    
    
    
    534,585
    
    
    
    241,223
    
    
    
    (744,289
    )
    
    
    371,760Total liabilities and stockholders equity
    
    $
    352,504
    
    
    $
    378,678
    
    
    $
    766,011
    
    
    $
    479,586
    
    
    $
    (744,289
    )
    
    $
    1,232,490
 F-42




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC
Consolidating Statement of Income
For the Year Ended December 31, 2003
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue
    
    $
    
    
    
    $
    148
    
    
    $
    281,357
    
    
    $
    70,833
    
    
    $
    
    
    
    $
    352,338Operating expenses:Transportation
    
    
    
    
    
    
    
    
    
    
    142,079
    
    
    
    37,782
    
    
    
    
    
    
    
    179,861Selling, general and administrative
    
    
    35
    
    
    
    8,892
    
    
    
    61,353
    
    
    
    7,597
    
    
    
    
    
    
    
    77,877Gain on sale of assets (net)
    
    
    
    
    
    
    (4
    )
    
    
    (2,964
    )
    
    
    (294
    )
    
    
    
    
    
    
    (3,262
    )Depreciation and amortization
    
    
    
    
    
    
    251
    
    
    
    19,345
    
    
    
    4,237
    
    
    
    
    
    
    
    23,833Total operating expenses
    
    
    35
    
    
    
    9,139
    
    
    
    219,813
    
    
    
    49,322
    
    
    
    
    
    
    
    278,309Operating (loss) income
    
    
    (35
    )
    
    
    (8,991
    )
    
    
    61,544
    
    
    
    21,511
    
    
    
    
    
    
    
    74,029Interest and other expense
    
    
    (4,834
    )
    
    
    12,090
    
    
    
    (32,517
    )
    
    
    (7,171
    )
    
    
    
    
    
    
    (32,432
    )Equity in earnings of subsidiaries
    
    
    12,652
    
    
    
    9,425
    
    
    
    
    
    
    
    
    
    
    
    (22,077
    )
    
    
    Income from continuing
operations before income taxes
    
    
    7,783
    
    
    
    12,524
    
    
    
    29,027
    
    
    
    14,340
    
    
    
    (22,077
    )
    
    
    41,597Provision for income taxes
    
    
    (1,642
    )
    
    
    (2,166
    )
    
    
    13,048
    
    
    
    8,196
    
    
    
    
    
    
    
    17,436Income from continuing operations
    
    
    9,425
    
    
    
    14,690
    
    
    
    15,979
    
    
    
    6,144
    
    
    
    (22,077
    )
    
    
    24,161Income (loss) from discontinued operations (net of tax)
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    (9,977
    )
    
    
    
    
    
    
    (9,471
    )Net income
    
    $
    9,425
    
    
    $
    14,690
    
    
    $
    16,485
    
    
    $
    (3,833
    )
    
    $
    (22,077
    )
    
    $
    14,690
 F-43




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2003
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    9,425
    
    
    $
    14,690
    
    
    $
    16,485
    
    
    $
    (3,833
    )
    
    $
    (22,077
    )
    
    $
    14,690Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    3,792
    
    
    
    1,005
    
    
    
    19,689
    
    
    
    22,267
    
    
    
    
    
    
    
    46,753Equity in earnings of subsidiaries
    
    
    (12,652
    )
    
    
    (9,425
    )
    
    
    
    
    
    
    
    
    
    
    22,077
    
    
    
    Gain on sale or disposal of properties
    
    
    
    
    
    
    (4
    )
    
    
    (2,964
    )
    
    
    (294
    )
    
    
    
    
    
    
    (3,262
    )Deferred income taxes and other
    
    
    (3,003
    )
    
    
    (1,976
    )
    
    
    13,810
    
    
    
    4,209
    
    
    
    
    
    
    
    13,040Changes in operating assets and liabilities,
net of acquisitions and dispositions:Accounts receivable
    
    
    
    
    
    
    (71
    )
    
    
    (3,308
    )
    
    
    (280
    )
    
    
    
    
    
    
    (3,659
    )Other current assets
    
    
    (67
    )
    
    
    219
    
    
    
    3,173
    
    
    
    (5,178
    )
    
    
    
    
    
    
    (1,853
    )Accounts payable
    
    
    421
    
    
    
    (54
    )
    
    
    (2,253
    )
    
    
    6,713
    
    
    
    
    
    
    
    4,827Accrued expenses
    
    
    380
    
    
    
    (369
    )
    
    
    2,842
    
    
    
    (1,817
    )
    
    
    
    
    
    
    1,036Other assets and liabilities
    
    
    28
    
    
    
    (408
    )
    
    
    (244
    )
    
    
    (2,478
    )
    
    
    
    
    
    
    (3,102
    )Net cash provided by (used in) operating activities
    
    
    (1,676
    )
    
    
    3,607
    
    
    
    47,230
    
    
    
    19,309
    
    
    
    
    
    
    
    68,470Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (155
    )
    
    
    (43,879
    )
    
    
    (27,474
    )
    
    
    
    
    
    
    (71,508
    )Proceeds from sale of properties
    
    
    
    
    
    
    3,500
    
    
    
    7,415
    
    
    
    312
    
    
    
    
    
    
    
    11,227Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (25,846
    )
    
    
    
    
    
    
    
    
    
    
    (25,846
    )Deferred acquisition costs and other
    
    
    
    
    
    
    (791
    )
    
    
    
    
    
    
    (1,179
    )
    
    
    
    
    
    
    (1,970
    )Net cash provided by (used in) investing activities
    
    
    
    
    
    
    2,554
    
    
    
    (62,310
    )
    
    
    (28,341
    )
    
    
    
    
    
    
    (88,097
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    47,700
    
    
    
    
    
    
    
    73
    
    
    
    389
    
    
    
    
    
    
    
    48,162Principal payments on long-term debt
    
    
    (36,350
    )
    
    
    
    
    
    
    (343
    )
    
    
    (9,761
    )
    
    
    
    
    
    
    (46,454
    )Disbursements/receipts on intercompany debt
    
    
    (6,229
    )
    
    
    (15,292
    )
    
    
    15,121
    
    
    
    6,400
    
    
    
    
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    1,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,681Purchase of treasury stock
    
    
    
    
    
    
    (1,226
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,226
    )Deferred financing costs paid
    
    
    (695
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (695
    )Net cash provided by (used in) financing activities
    
    
    4,426
    
    
    
    (14,837
    )
    
    
    14,851
    
    
    
    (2,972
    )
    
    
    
    
    
    
    1,468Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,986
    
    
    
    
    
    
    
    2,986Net (decrease) increase in cash
    
    
    2,750
    
    
    
    (8,676
    )
    
    
    (229
    )
    
    
    (9,018
    )
    
    
    
    
    
    
    (15,173
    )Cash, beginning of period
    
    
    
    
    
    
    8,895
    
    
    
    369
    
    
    
    19,623
    
    
    
    
    
    
    
    28,887Cash, end of period
    
    $
    2,750
    
    
    $
    219
    
    
    $
    140
    
    
    $
    10,605
    
    
    $
    
    
    
    $
    13,714
 F-44




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##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC.
Consolidating Statement of Income
For the Year Ended December 31, 2002
(in thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenue
    
    $
    
    
    
    $
    
    
    
    $
    267,576
    
    
    $
    59,078
    
    
    $
    
    
    
    $
    326,654Operating expenses:Transportation
    
    
    
    
    
    
    
    
    
    
    134,097
    
    
    
    33,238
    
    
    
    
    
    
    
    167,335Selling, general and administrative
    
    
    187
    
    
    
    25,230
    
    
    
    50,014
    
    
    
    4,752
    
    
    
    
    
    
    
    80,183Gain on sale of assets (net)
    
    
    
    
    
    
    101
    
    
    
    (9,191
    )
    
    
    (65
    )
    
    
    
    
    
    
    (9,155
    )Impairment
of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,396
    
    
    
    
    
    
    
    1,396Depreciation and amortization
    
    
    92
    
    
    
    200
    
    
    
    17,762
    
    
    
    3,875
    
    
    
    
    
    
    
    21,929Total operating expenses
    
    
    279
    
    
    
    25,531
    
    
    
    192,682
    
    
    
    43,196
    
    
    
    
    
    
    
    261,688Operating (loss) income
    
    
    (279
    )
    
    
    (25,531
    )
    
    
    74,894
    
    
    
    15,882
    
    
    
    
    
    
    
    64,966Interest and other expense
    
    
    (7,168
    )
    
    
    (1,532
    )
    
    
    (23,797
    )
    
    
    (3,413
    )
    
    
    
    
    
    
    (35,910
    )Equity in earnings of subsidiaries
    
    
    21,177
    
    
    
    (701
    )
    
    
    
    
    
    
    
    
    
    
    (20,476
    )
    
    
    Financing costs
    
    
    (25,559
    )
    
    
    21,001
    
    
    
    (14,158
    )
    
    
    (6,840
    )
    
    
    
    
    
    
    (25,556
    )Income from continuing
operations before income taxes
    
    
    (11,829
    )
    
    
    (6,763
    )
    
    
    36,939
    
    
    
    5,629
    
    
    
    (20,476
    )
    
    
    3,500Provision for income taxes
    
    
    (11,128
    )
    
    
    (8,916
    )
    
    
    18,565
    
    
    
    3,083
    
    
    
    
    
    
    
    1,604Income from continuing operations
    
    
    (701
    )
    
    
    2,153
    
    
    
    18,374
    
    
    
    2,546
    
    
    
    (20,476
    )
    
    
    1,896Gain from sale of discontinued operations (net of tax)
    
    
    
    
    
    
    
    
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    387Income from discontinued operations (net of tax)
    
    
    
    
    
    
    
    
    
    
    586
    
    
    
    (716
    )
    
    
    
    
    
    
    (130
    )Net income
    
    $
    (701
    )
    
    $
    2,153
    
    
    $
    19,347
    
    
    $
    1,830
    
    
    $
    (20,476
    )
    
    $
    2,153
 F-45




---



##### Table of Contents



RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2002
(In thousands) NonCompany
    
    
    Guarantor
    
    
    GuarantorIssuer
    
    
    (Parent)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    (701
    )
    
    $
    2,153
    
    
    $
    19,347
    
    
    $
    1,830
    
    
    $
    (20,476
    )
    
    $
    2,153Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    3,795
    
    
    
    955
    
    
    
    18,162
    
    
    
    18,339
    
    
    
    
    
    
    
    41,251Financing costs
    
    
    25,433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,433Equity in earnings of subsidiaries
    
    
    (21,177
    )
    
    
    701
    
    
    
    
    
    
    
    
    
    
    
    20,476
    
    
    
    Gain on sale or disposal of properties
    
    
    
    
    
    
    101
    
    
    
    (10,588
    )
    
    
    782
    
    
    
    
    
    
    
    (9,705
    )Deferred income taxes and other
    
    
    (12,306
    )
    
    
    (7,545
    )
    
    
    20,152
    
    
    
    2,659
    
    
    
    
    
    
    
    2,960Changes in operating assets and liabilities,
net of acquisitions and dispositions:Accounts receivable
    
    
    
    
    
    
    (1,151
    )
    
    
    4,780
    
    
    
    (863
    )
    
    
    
    
    
    
    2,766Other current assets
    
    
    22
    
    
    
    2,483
    
    
    
    (1,555
    )
    
    
    (277
    )
    
    
    
    
    
    
    673Accounts payable
    
    
    
    
    
    
    (727
    )
    
    
    (4,776
    )
    
    
    (137
    )
    
    
    
    
    
    
    (5,640
    )Accrued expenses
    
    
    (1,777
    )
    
    
    (1,751
    )
    
    
    (2,167
    )
    
    
    (4,224
    )
    
    
    
    
    
    
    (9,919
    )Other assets and liabilities
    
    
    (17,057
    )
    
    
    4,210
    
    
    
    (1,739
    )
    
    
    3,221
    
    
    
    
    
    
    
    (11,365
    )Net cash provided by (used in) operating
activities
    
    
    (23,768
    )
    
    
    (571
    )
    
    
    41,616
    
    
    
    21,330
    
    
    
    
    
    
    
    38,607Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    
    
    
    
    (646
    )
    
    
    (37,334
    )
    
    
    (27,702
    )
    
    
    
    
    
    
    (65,682
    )Proceeds from sale of properties
    
    
    
    
    
    
    963
    
    
    
    7,963
    
    
    
    365
    
    
    
    
    
    
    
    9,291Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (89,359
    )
    
    
    
    
    
    
    
    
    
    
    (89,359
    )Change in restricted cash in escrow
    
    
    
    
    
    
    
    
    
    
    1,357
    
    
    
    
    
    
    
    
    
    
    
    1,357Deferred acquisition costs and other
    
    
    
    
    
    
    (3,008
    )
    
    
    
    
    
    
    (2,672
    )
    
    
    
    
    
    
    (5,680
    )Net cash used in investing activities
    
    
    
    
    
    
    (2,691
    )
    
    
    (117,373
    )
    
    
    (30,009
    )
    
    
    
    
    
    
    (150,073
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    343,500
    
    
    
    
    
    
    
    556
    
    
    
    113,814
    
    
    
    
    
    
    
    457,870Principal payments on long-term debt
    
    
    (346,254
    )
    
    
    
    
    
    
    (883
    )
    
    
    (11,502
    )
    
    
    
    
    
    
    (358,639
    )Disbursements/receipts on intercompany debt
    
    
    41,905
    
    
    
    (21,356
    )
    
    
    76,408
    
    
    
    (96,957
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    
    
    
    
    385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    385Purchase of treasury stock
    
    
    
    
    
    
    (4,921
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,921
    )Deferred financing costs paid
    
    
    (15,383
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,383
    )Net cash provided by (used in) financing activities
    
    
    23,768
    
    
    
    (25,892
    )
    
    
    76,081
    
    
    
    5,355
    
    
    
    
    
    
    
    79,312Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,280
    
    
    
    
    
    
    
    1,280Net increase (decrease) in cash
    
    
    
    
    
    
    (29,154
    )
    
    
    324
    
    
    
    (2,044
    )
    
    
    
    
    
    
    (30,874
    )Cash, beginning of period
    
    
    
    
    
    
    38,049
    
    
    
    45
    
    
    
    21,667
    
    
    
    
    
    
    
    59,761Cash, end of period
    
    $
    
    
    
    $
    8,895
    
    
    $
    369
    
    
    $
    19,623
    
    
    $
    
    
    
    $
    28,887
 F-46