GENESEE & WYOMING INC.
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

for the quarter ended June 30, 2004 Commission File No. 001-31456

GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)

     
Delaware   06-0984624
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
66 Field Point Road, Greenwich, Connecticut   06830
     
(Address of principal executive offices)   (Zip Code)
     
(203) 629-3722    
     
(Telephone No.)    

         Shares of common stock outstanding as of the close of business on July 27, 2004:

         
Class   Number of Shares Outstanding
Class A Common Stock
    24,221,761  
Class B Common Stock
    2,650,122  

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] YES [  ] NO

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

[X] YES [  ] NO

 


 

INDEX

         
Part I — Financial Information    
         
Item 1. Financial Statements (Unaudited):   Page
         
      3
         
      4
         
      5
         
      6 - 18
         
Item 2.     19 - 37
         
Item 3.     38
         
Item 4.     38
         
Part II — Other Information   39
         
Item 1.     39
         
Item 2.     39
         
Item 3.     39
         
Item 4.     39
         
Item 5.     39 - 40
         
Item 6.     40
         
Index to Exhibits   40
         
Signatures   41

2


 

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

                                 
    Three Months   Six Months
    Ended June 30,   Ended June 30,
    2004   2003   2004   2003
OPERATING REVENUES
  $ 74,062     $ 62,937     $ 146,464     $ 121,798  
 
                               
OPERATING EXPENSES:
                               
Transportation
    23,360       20,905       48,026       41,752  
Maintenance of ways and structures
    7,599       6,963       14,486       13,101  
Maintenance of equipment
    11,048       9,157       22,729       18,153  
General and administrative
    13,720       11,032       26,693       22,199  
Net loss (gain) on sale and impairment of assets
          175       (94 )     176  
Depreciation and amortization
    4,754       3,843       9,484       7,568  
 
                               
Total operating expenses
    60,481       52,075       121,324       102,949  
 
                               
INCOME FROM OPERATIONS
    13,581       10,862       25,140       18,849  
Interest expense
    (2,283 )     (2,167 )     (4,718 )     (4,510 )
Other income, net
    231       386       425       713  
 
                               
Income before income taxes and equity earnings
    11,529       9,081       20,847       15,052  
Provision for income taxes
    4,351       3,702       7,984       5,875  
 
                               
Income before equity earnings
    7,178       5,379       12,863       9,177  
Equity in net income of international affiliates:
                               
Australian Railroad Group
    3,475       2,130       7,217       4,144  
South America
    183       186       223       (91 )
 
                               
Net income
  $ 10,836     $ 7,695     $ 20,303     $ 13,230  
 
                               
 
                               
Net income available to common stockholders — Basic
  $ 9,580     $ 6,252     $ 17,310     $ 10,674  
 
                               
Net income available to common stockholders — Diluted
  $ 10,658     $ 7,402     $ 19,824     $ 12,644  
 
                               
Basic earnings per Class A common share
  $ 0.44     $ 0.31     $ 0.82     $ 0.54  
 
                               
Weighted average Class A shares — Basic
    21,726       19,938       21,051       19,879  
 
                               
Diluted earnings per common share
  $ 0.39     $ 0.28     $ 0.72     $ 0.47  
 
                               
Weighted average shares — Diluted
    27,544       26,707       27,490       26,650  
 
                               

The accompanying notes are an integral part of these consolidated financial statements.

3


 

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)

                 
    June 30,   December 31,
    2004   2003
ASSETS
               
CURRENTS ASSETS:
               
Cash and cash equivalents
  $ 8,450     $ 11,118  
Accounts receivable, net
    54,899       54,656  
Materials and supplies
    5,879       5,204  
Prepaid expenses and other
    7,275       6,204  
Deferred income tax assets, net
    3,528       3,010  
 
               
Total current assets
    80,031       80,192  
 
               
PROPERTY AND EQUIPMENT, net
    315,863       315,345  
INVESTMENT IN UNCONSOLIDATED AFFILIATES
    118,618       117,664  
GOODWILL
    24,466       24,522  
INTANGIBLE ASSETS, net
    78,402       79,357  
OTHER ASSETS, net
    10,552       10,093  
 
               
Total assets
  $ 627,932     $ 627,173  
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Current portion of long-term debt
  $ 6,409     $ 6,589  
Accounts payable
    61,758       57,472  
Accrued expenses
    16,741       13,902  
 
               
Total current liabilities
    84,908       77,963  
 
               
LONG-TERM DEBT, less current portion
    127,633       151,433  
DEFERRED INCOME TAX LIABILITIES, net
    45,495       41,840  
DEFERRED ITEMS—grants from governmental agencies
    42,704       42,667  
DEFERRED GAIN—sale/leaseback
    3,641       3,982  
OTHER LONG-TERM LIABILITIES
    14,083       14,843  
MINORITY INTEREST
    3,467       3,365  
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (converted June 2004 into 3,668,478 shares at $6.81 per share of Class A Common Stock)
          23,994  
STOCKHOLDERS’ EQUITY:
               
Class A Common Stock, $0.01 par value, one vote per share; 90,000,000 shares authorized; 27,740,265 and 23,697,287 shares issued and 24,208,813 and 20,167,875 shares outstanding (net of 3,531,452 and 3,529,412 shares in treasury) on June 30, 2004 and December 31, 2003, respectively
    277       237  
Class B Common Stock, $0.01 par value, ten votes per share; 15,000,000 shares authorized; 2,650,122 shares issued and outstanding on June 30, 2004 and December 31, 2003
    27       27  
Additional paid-in capital
    158,855       131,890  
Retained earnings
    150,737       130,913  
Accumulated other comprehensive income
    8,734       16,599  
Less treasury stock, at cost
    (12,629 )     (12,580 )
 
               
Total stockholders’ equity
    306,001       267,086  
 
               
Total liabilities and stockholders’ equity
  $ 627,932     $ 627,173  
 
               
The accompanying notes are an integral part of these consolidated financial statements.

4


 

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

                 
    Six Months Ended
    June 30,
    2004   2003
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 20,303     $ 13,230  
Adjustments to reconcile net income to net cash provided by operating activities — Depreciation and amortization
    9,484       7,568  
Deferred income taxes
    2,929       4,128  
(Gain) loss on disposition of property
    (94 )     176  
Equity in net income of international affiliates
    (7,440 )     (4,053 )
Minority interest expense
    102       67  
Tax benefit realized upon exercise of stock options
    956       648  
Changes in assets and liabilities —
               
Accounts receivable
    (605 )     3,922  
Materials and supplies
    (744 )     (493 )
Prepaid expenses and other
    (1,138 )     1,496  
Accounts payable and accrued expenses
    7,263       (4,181 )
Other assets and liabilities, net
    (305 )     558  
 
               
Net cash provided by operating activities
    30,711       23,066  
 
               
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment, net of proceeds from government grants
    (11,561 )     (7,135 )
Locomotive upgrade project
          (97 )
Dividend from unconsolidated international affiliate
          132  
Proceeds from disposition of property, including sale-leaseback
    294       526  
 
               
Net cash used in investing activities
    (11,267 )     (6,574 )
 
               
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Principal payments on long-term borrowings
    (99,407 )     (71,743 )
Proceeds from issuance of long-term debt
    76,300       55,000  
Net proceeds from employee stock purchases
    1,937       1,414  
Dividends paid on Redeemable Convertible Preferred Stock
    (411 )     (500 )
 
               
Net cash used in financing activities
    (21,581 )     (15,829 )
 
               
 
               
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    (531 )     638  
 
               
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (2,668 )     1,301  
CASH AND CASH EQUIVALENTS, beginning of period
    11,118       11,028  
 
               
CASH AND CASH EQUIVALENTS, end of period
  $ 8,450     $ 12,329  
 
               
CASH PAID DURING PERIOD FOR:
               
Interest
  $ 4,767     $ 4,023  
Income taxes
  $ 1,413     $ 1,044  
 
               
The accompanying notes are an integral part of these consolidated financial statements.

5


 

GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:

     The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries. References to “GWI” or the “Company” mean Genesee & Wyoming Inc. and, unless the context indicates otherwise, its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of management, the unaudited financial statements for the three-month and six-month periods ended June 30, 2004 and 2003, are presented on a basis consistent with audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. As discussed in Note 3, the Company adopted EITF 03-06 which provides new guidance for the calculation of Basic and Diluted Earnings Per Share. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s 2003 Form 10-K. Certain prior period balances have been reclassified to conform to the 2004 presentation.

2. EXPANSION OF OPERATIONS:

     On December 31, 2003, the Company completed the purchase from Georgia-Pacific Corporation (GP) of all of the issued and outstanding shares of common stock of the Chattahoochee Industrial Railroad (CIRR), the Arkansas Louisiana & Mississippi Railroad Company (ALM), and the Fordyce and Princeton RR Co. (F&P, and collectively, the GP Railroads) for approximately $54.9 million in cash. The purchase price was allocated to current assets ($2.7 million), property and equipment ($37.6 million), and intangible assets ($27.1 million), less current liabilities assumed ($12.5 million). As contemplated with the acquisition, the Company implemented a severance program which is included in the table below. The aggregate cost of the severance program, $1.0 million at December 31, 2003, is considered a liability assumed in the acquisition, and as such, was allocated to the purchase price. In conjunction with the acquisition, the Company entered into two Transportation Services Agreements (TSAs) which are 20-year agreements for the GP Railroads to provide rail transportation service to GP. One of the TSAs has been determined to be an intangible asset and approximately $27.1 million of the purchase price has been allocated to this asset. This TSA asset is being amortized on a straight-line basis over a 30 year life, which is the expected life of the plant being served, beginning January 1, 2004. No value was assigned to the other TSA. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement.

     The table below sets forth a roll-forward of the activity affecting the restructuring reserves established in acquisitions, including the number of employees and actual cash payments for severance:

6


 

Schedule of Acquisition Restructuring Activity

         
    Three Months Ended
    June 30,
    2004
Number of Employees:
       
Number of planned terminations related to 2003 acquisitions — beginning of period
    9  
Additions to planned terminations during the period
    1  
 
       
Actual number of employees terminated during the period
    8  
Number of remaining planned terminations as of the end of the period
    2  
 
       
Restructuring Reserves:
       
Liabilities established in purchase accounting for acquisitions in 2003 —  beginning of period — March 31, 2004
  $ 645,000  
Additions to liability reserve during the period
    89,000  
Cash payments during the period
    555,000  
 
       
Balance at end of period
  $ 179,000  
 
       

For U.S. tax purposes, the Company has made elections under Internal Revenue Code Section 338 to treat the GP Railroads as a purchase of assets.

Pro Forma Financial Results

     The following table summarizes the Company’s pro forma operating results for the three-month and six-month periods ended June 30, 2003, as if the GP Railroads had been acquired as of the beginning of 2003. Actual results for the three-month and six-month periods ended June 30, 2004 are presented for comparison purposes (in thousands, except per share amounts):

                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    Actual   Pro forma   Actual   Pro forma
    2004   2003   2004   2003
Operating revenues
  $ 74,062     $ 67,061     $ 146,464     $ 130,478  
Net income
    10,836       7,878       20,303       13,463  
Basic earnings per share
  $ 0.44     $ 0.32     $ 0.82     $ 0.55  
Diluted earnings per share
  $ 0.39     $ 0.29     $ 0.72     $ 0.48  

     The pro forma operating results include the acquisition of the GP Railroads adjusted for depreciation expense, net of tax resulting from the step-up of GP Railroads property based on appraised values, and incremental interest expense, net of tax related to borrowings used to fund the GP Railroads acquisition.

     The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had all the transactions been completed as of the assumed dates and for the periods presented and are not intended to be a projection of future results or trends.

7


 

3. EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share (EPS) (in thousands, except per share amounts):

                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2004   2003   2004   2003
Numerators:
                               
Net income
  $ 10,836     $ 7,695     $ 20,303     $ 13,230  
Preferred Stock dividends and accretion
    178       293       479       586  
Net income allocated to participating preferred stockholders
    1,078       1,150       2,514       1,970  
 
                               
Net income available to Class A Common stockholders — Basic
  $ 9,580     $ 6,252     $ 17,310     $ 10,674  
 
                               
Net income allocated to participating preferred stockholders
    1,078       1,150       2,514       1,970  
 
                               
Net income available to Class A Common stockholders — Diluted
  $ 10,658     $ 7,402     $ 19,824     $ 12,644  
 
                               
Denominators:
                               
Weighted average Class A Common Shares outstanding — Basic
    21,726       19,938       21,051       19,879  
Weighted average Mandatory Redeemable Convertible Preferred Stock (converted to class A common stock in the second quarter of 2004)
    2,445       3,668       3,057       3,668  
Weighted average Class B Common Shares outstanding
    2,689       2,708       2,698       2,708  
Dilutive effect of employee stock options
    684       393       684       395  
 
                               
Weighted average shares — Dilutive
    27,544       26,707       27,490       26,650  
 
                               
Income per common share:
                               
Basic
  $ 0.44     $ 0.31     $ 0.82     $ 0.54  
 
                               
Diluted
  $ 0.39     $ 0.28     $ 0.72     $ 0.47  
 
                               

Stock Split

     On February 11, 2004, the Company announced a three-for-two common stock split in the form of a 50% stock dividend distributed on March 15, 2004 to stockholders of record as of February 27, 2004. All share, per share and par value amounts presented herein have been restated to reflect the retroactive effect of the stock split.

Public Offering of Class A Common Stock through Conversion of Class A Preferred Stock

     On June 1, 2004, upon the conversion by The 1818 Fund III, L.P., a private equity partnership managed by Brown Brothers Harriman & Co., of 22,886 shares of the Company’s then outstanding Series A Preferred Stock, the Company issued 3,358,303 shares of its Class A Common Stock to The 1818 Fund III, L.P., and these shares were sold in a secondary public offering. Certain of the Company’s stockholders granted

8


 

the underwriters of the offering a 30-day option to purchase up to an additional 503,745 shares of Class A Common Stock to cover any over-allotments. The 1818 Fund III, L.P. accounted for 310,175 of such shares, all of which were sold, and certain management stockholders accounted for the remaining 193,570 shares, all of which were sold. The Company incurred $523,000 of costs in the second quarter of 2004 related to this offering. The Company received no proceeds from the secondary offering.

Emerging Issues Task Force (EITF):

Issue No. 03-06 — “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”

     During the second quarter the Company adopted EITF 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” that provides additional guidance related to the calculation of earnings per share under SFAS No. 128, “Earnings per Share,” which includes application of the “two-class” method in computing earnings per share, identification of participating securities, and requirements for the allocation of undistributed earnings (and losses) to participating securities.

     EITF 03-06 is effective for the quarter ending June 30, 2004 and requires retroactive restatement for all periods presented. The calculation for basic EPS now excludes the Company’s Class B Common Stock from the denominator and includes the share equivalents of the Series A Preferred Stock for periods prior to its conversion. The diluted EPS calculation is now calculated on net income less Series A Preferred Stock dividends and accretion in the numerator. As a result of the retroactive restatement, the adoption of EITF 03-06 reduced basic and diluted EPS by $.02 and $.01, respectively for the three months ended June 30, 2003 and $.02 and $.02, respectively for the six months ended June 30, 2003.

Dividends

     At the discretion of the Board of Directors, the Company can declare dividends to holders of Class A Common Stock. In the event that dividends are declared (other than stock dividends) to holders of Class B Common Stock, holders of Class A Common Stock would be entitled to dividends at least ten percent greater. In the event of a dividend other than a Regular Dividend as defined in the Certificate of Incorporation, holders of the previously issued Series A Preferred Stock would have also been entitled to equivalent dividends based on the number of common shares convertible, prior to the June 2004 conversion.

4. EQUITY INVESTMENTS

Australian Railroad Group

     Australian Railroad Group Pty. Ltd. (ARG) is a company which is 50%-owned by the Company and is accounted for under the equity method of accounting. The related equity earnings in this investment are shown within the equity in net income of international affiliates section in the accompanying consolidated statements of income. The following are U.S. GAAP condensed balance sheets of ARG as of June 30, 2004 and December 31, 2003, and the related condensed consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2004 and 2003 (in thousands of U.S. dollars). For the dates and periods indicated below, one Australian dollar could be exchanged into the following amounts of U.S. dollars:

9


 

         
As of June 30, 2004
  $ 0.70  
As of December 31, 2003
  $ 0.75  
Average for the three months ended June 30, 2004
  $ 0.72  
Average for the three months ended June 30, 2003
  $ 0.64  
Average for the six months ended June 30, 2004
  $ 0.74  
Average for the six months ended June 30, 2003
  $ 0.62  

Australian Railroad Group Pty. Ltd.
Condensed Consolidated Balance Sheets
(in thousands of U.S. dollars)

                 
    June 30, 2004   December 31, 2003
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 32,977     $ 26,618  
Accounts receivable, net
    47,182       47,764  
Materials and supplies
    10,195       10,033  
Prepaid expenses and other
    5,740       3,069  
 
               
Total current assets
    96,094       87,484  
PROPERTY AND EQUIPMENT, net
    453,905       478,808  
DEFERRED INCOME TAX ASSETS, net
    71,552       80,193  
OTHER ASSETS, net
    7,535       5,476  
 
               
Total assets
  $ 629,086     $ 651,961  
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 44,938     $ 42,310  
Current income tax liabilities
    148        
 
               
Total current liabilities
    45,086       42,310  
LONG-TERM BANK DEBT
    342,657       367,892  
DEFERRED INCOME TAX LIABILITIES, net
    16,148       14,271  
OTHER LONG-TERM LIABILITIES
    1,911       2,031  
FAIR VALUE OF INTEREST RATE SWAPS
    7,510       9,133  
SUBORDINATED NOTES TO STOCKHOLDERS
    10,769       11,562  
 
               
Total non-current liabilities
    378,995       404,889  
REDEEMABLE PREFERRED STOCK OF STOCKHOLDERS
    15,100       16,212  
TOTAL STOCKHOLDERS’ EQUITY
    189,905       188,550  
 
               
Total liabilities and stockholders’ equity
  $ 629,086     $ 651,961  
 
               

10


 

Australian Railroad Group Pty. Ltd.
Condensed Consolidated Statements of Income
(in thousands of U.S. dollars)

                                 
    Three Months Ended   Six Months Ended
    June 30, 2004   June 30, 2003   June 30, 2004   June 30, 2003
Operating revenues
  $ 81,717     $ 59,912     $ 164,070     $ 113,272  
 
                               
Operating expenses
    65,257       46,574       129,970       87,607  
Restructuring costs
                      267  
 
                               
Total operating expenses
    65,257       46,574       129,970       87,874  
 
                               
Income from operations
    16,460       13,338       34,100       25,398  
Interest expense
    (6,855 )     (7,633 )     (14,203 )     (14,697 )
Other income, net
    338       779       741       1,538  
 
                               
Income before income taxes
    9,943       6,484       20,638       12,239  
Provision for income taxes
    2,994       2,224       6,206       3,951  
 
                               
Net income
  $ 6,949     $ 4,260     $ 14,432     $ 8,288  
 
                               

Australian Railroad Group Pty. Ltd.
Condensed Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)

                 
    Six Months Ended
    June 30, 2004   June 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 14,432     $ 8,288  
Adjustments to reconcile net income to net cash provided by operating activities —
Depreciation and amortization
    13,097       10,875  
Deferred income taxes
    6,367       5,265  
Net loss (gain) on sale and impairment of assets
    471       (633 )
Changes in assets and liabilities
    (3,675 )     (4,320 )
 
               
Net cash provided by operating activities
    30,692       19,475  
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
    (22,883 )     (12,003 )
Proceeds from disposition of property and equipment
    835       2,716  
Transfer to restricted funds on deposit
          (3,396 )
 
               
Net cash used in investing activities
    (22,048 )     (12,683 )
 
               
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH AND CASH EQUIVALENTS
    (2,285 )     1,809  
 
               
INCREASE IN CASH AND CASH EQUIVALENTS
    6,359       8,601  
CASH AND CASH EQUIVALENTS, beginning of period
    26,618       5,882  
 
               
CASH AND CASH EQUIVALENTS, end of period
  $ 32,977     $ 14,483  
 
               

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South America

     Ferroviaria Oriental S.A. (Oriental) is a company which is 22.89%-owned by the Company and is accounted for under the equity method of accounting. The related equity earnings in this investment are shown within the equity in net income of international affiliates section in the accompanying consolidated statements of income. Oriental has a U.S. functional currency and the following condensed results of operations for the three-month and six-month periods ended June, 2004 and 2003 are based on accounting principles generally accepted in the United States (in thousands):

                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2004   2003   2004   2003
Operating revenues
  $ 7,851     $ 6,667     $ 14,490     $ 11,420  
Net income
    1,705       1,325       2,737       1,336  

Condensed balance sheet information for Oriental as of June 30, 2004 and December 31, 2003:

                 
    June 30, 2004   December 31, 2003
Current assets
  $ 10,380     $ 14,374  
Non-current assets
    56,792       55,237  
 
               
Total assets
  $ 67,172     $ 69,611  
 
               
Current liabilities
    4,858       5,617  
Non-current liabilities
    5,097       4,702  
Senior debt
    1,665       1,568  
Shareholders’ equity
    55,552       57,724  
 
               
Total liabilities and shareholders’ equity
  $ 67,172     $ 69,611  
 
               

     The above data does not include non-recourse debt of $12.0 million held at an intermediate unconsolidated affiliate or any of the general and administrative, interest or income tax costs at various intermediate unconsolidated affiliates. The Company’s share of the various costs from the intermediate unconsolidated affiliates is $249,000 and $141,000 for the three months and $456,000 and $288,000 for the six months ended June 30, 2004 and 2003, respectively, and is included in the Company’s equity income reported for South America for the three-month and six-month periods ended June 2004 and 2003, respectively.

     As noted previously, the Company holds its equity interest in Oriental through a number of intermediate holding companies, and the Company accounts for its interest in Oriental under the equity method of accounting. The Company indirectly holds a 12.52% equity interest in Oriental through an interest in Genesee & Wyoming Chile (GWC), and the Company holds its remaining 10.37% equity interest in Oriental through other companies. GWC is an obligor of non-recourse debt of $12.0 million, which has an adjustable interest rate dependent on operating results of Oriental. This non-recourse debt is secured by a lien over GWC’s 12.52% indirect equity interest in Oriental.

     This debt became due and payable on November 2, 2003. Due to the political and economic unrest and uncertainties in Bolivia, it has become difficult for GWC to refinance this debt and the Company has chosen not to repay the non-recourse obligation. GWC entered into discussions with its creditors on plans to restructure the debt, and as a result of those discussions, GWC obtained a written waiver of

12


 

principal repayment from the creditors which expired on January 31, 2004. Negotiations with the creditors continue, and currently, none of GWC’s creditors have commenced court proceedings to (i) collect on the debt or (ii) exercise their rights pursuant to the lien.

     If the Company were to lose its 12.52% equity stake in Oriental due to creditors exercising their lien on GWC’s indirect equity interest in Oriental, the Company would write-off its investment in Oriental held through GWC, which on June 30, 2004 amounted to $272,000. Because the $12.0 million of debt is serviced by the income generated by GWC, the Company’s loss of the 12.52% equity interest in Oriental would not have a material adverse impact on the Company’s future equity income. A default, acceleration or effort to foreclose on the lien under the non-recourse debt will have no impact on the Company’s remaining 10.37% equity interest in Oriental because that equity interest is held indirectly through holding companies outside of GWC’s ownership in Oriental. The Company generates substantially all of its equity income through the 10.37% ownership interest.

     Oriental has no obligations associated with the $12.0 million debt. In addition, a default, acceleration or effort to foreclose on the lien under the non-recourse debt would not result in a breach of a representation, warranty, covenant, cross-default or acceleration under the Company’s Senior Credit Facility.

5. COMMITMENTS AND CONTINGENCIES:

     Legal Proceedings — On March 31, 2004, Messrs. Chambers and Wheeler filed a complaint against Genesee & Wyoming Inc. in the Chancery Court of Delaware. The complaint relates to the sale by the plaintiffs in April of 1999 to the Company of their ownership interests in certain of the Company’s Canadian operations. Under the terms of the purchase agreement, among other things, the plaintiffs were granted options to purchase up to 270,000 shares of the Company’s Class A Common Stock at an exercise price of $2.56 per share if certain of the Company’s Canadian operations had achieved certain financial performance targets in any annual period between 1999 and 2003. The complaint alleges that these financial performance targets have been met, and the plaintiffs are seeking, among other things, a declaratory judgment that the options granted under the purchase agreement have vested and are exercisable. The Company has determined that the Canadian operations at issue failed to achieve these financial performance targets in any of the required years, and it intends to vigorously defend this lawsuit.

     In addition, the Company is a defendant in certain lawsuits resulting from its operations. The Company believes that it has adequate provisions in the financial statements for any expected liabilities which may result from disposition of such lawsuits. While it is possible that some of the foregoing matters may be resolved at a cost greater than that provided for, the Company believes that the ultimate liability, if any, will not be material to its operating results, financial condition or liquidity.

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6. COMPREHENSIVE INCOME:

     Comprehensive income is the total of net income and all other non-owner changes in equity. The following table sets forth the Company’s comprehensive income, net of tax, for the three-month and six-month periods ended June, 2004 and 2003 (in thousands):

                 
    Three Months Ended
    June 30,
    2004   2003
Net income
  $ 10,836     $ 7,695  
 
               
Other comprehensive income (loss):
               
Foreign currency translation adjustments Net unrealized gains (losses) on qualifying cash flow hedges, net of tax (benefit) of $674 and ($517), respectively Net unrealized gains (losses) on qualifying cash
    (11,109 )     12,725  
flow hedges of Australian Railroad Group, net of
    1,099       (776 )
tax (benefit) of $427 and ($362), respectively
    1,423       (1,046 )
 
               
Comprehensive income
  $ 2,249     $ 18,598  
 
               
 
    Six Months Ended
    June 30,
    2004   2003
Net income
  $ 20,303     $ 13,230  
Other comprehensive income (loss):
               
Foreign currency translation adjustments Net unrealized gains (losses) on qualifying cash flow hedges, net of tax (benefit) of $438 and (505), respectively Net unrealized gains (losses) on qualifying cash flow hedges of Australian Railroad Group, net of tax
    (9,178 )     18,322  
(benefit) of $256 and ($801), respectively
    716       (758 )
Minimum pension liability adjustment, net of benefit of
    598       (1,871 )
$0 and ($186), respectively
          (435 )
 
               
Comprehensive income
  $ 12,439     $ 28,488  
 
               
 
     The following table sets forth the components of accumulated other comprehensive income, net of tax, included in the consolidated balance sheets as of June 30, 2004, and December 31, 2003 (in thousands):
 
    June 30, 2004   December 31, 2003
Net accumulated foreign currency translation adjustments
  $ 12,660     $ 21,839  
Net unrealized (losses) on qualifying cash flow hedges Net unrealized (losses) on qualifying cash flow hedges of Australian Railroad Group
    (704 )     (1,420 )
Net unrealized minimum pension liability adjustment,
    (2,598 )     (3,196 )
net of tax
    (624 )     (624 )
Accumulated other comprehensive income as reported
  $ 8,734     $ 16,599  
 
               

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7. GEOGRAPHIC AREA INFORMATION:

     The table below sets forth the Company’s geographic area data for its consolidated operations for the three-month and six-month periods ended June 30, 2004 and 2003:

Geographic Area Data

                                 
    Three Months Ended   Six Months Ended
    2004   2003   2004   2003
Operating Revenues:
                               
United States
  $ 56,178     $ 44,962     $ 109,742     $ 87,404  
Canada
    10,071       9,509       21,443       18,360  
Mexico
    7,813       8,466       15,279       16,034  
 
                               
Total operating revenues
  $ 74,062     $ 62,937     $ 146,464     $ 121,798  
 
                               
 
    As of
Long-lived assets located in:   June 30, 2004
United States
  $ 455,101  
Canada
    55,466  
Mexico
    37,334  
 
       
Total long-lived assets
  $ 547,901  
 
       

8. DERIVATIVE FINANCIAL INSTRUMENTS:

     The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the potential impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. Management believes that its use of derivative instruments to manage risk is in the Company’s best interest. However, the Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility.

     Accounting for Derivative Financial Instruments

Interest Rate Risk

     The Company uses interest rate swap agreements to manage its exposure to changes in interest rates for its floating rate debt. Interest rate swap agreements are accounted for as cash flow hedges. Gains or losses on the swaps, representing interest rate differentials to be received or paid on the swaps, are recognized in the consolidated statements of income as a reduction or increase in interest expense, respectively. In accordance with the derivative accounting requirements, the change in the fair value of the derivative instrument is recorded in the consolidated balance sheets as a component of current assets or liabilities, and the effective portion of the change in the value of the derivative instrument is recorded in other comprehensive income. The ineffective portion of the change in the fair value of the derivative instrument, along with the gain or loss on the hedged item, is recorded in earnings and reported in the consolidated statements of income in interest expense.

     During 2003, 2002 and 2001, the Company entered into various interest rate swaps fixing its base interest rate by exchanging its variable LIBOR interest rates on long-term debt for a fixed interest rate. The swaps expire at various dates through September 2007 and the fixed base rates range from 3.35% to 5.46%. At June 30, 2004 and December 31, 2003, the notional amount under these agreements was $57.9 million and $60.6 million, respectively and the fair value of these interest rate swaps was a negative $1.1 million and $2.2 million, respectively.

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Foreign Currency Exchange Rate Risk

     The Company uses purchased options to manage foreign currency exchange rate risk related to certain projected cash flows related to foreign operations. Foreign currency exchange rate options are accounted for as cash flow hedges. In accordance with the derivative accounting requirements, the change in the fair value of the derivative instrument is recorded in the consolidated balance sheets as a component of current assets or liabilities, and the effective portion of the change in the value of the derivative instrument is recorded in other comprehensive income. The ineffective portion of the change in the fair value of the derivative instrument, along with the gain or loss on the hedged item, is recorded in earnings and reported in the consolidated statements of income in interest expense.

     During 2004 and 2003, the Company entered into various exchange rate options that establishes exchange rates for converting Mexican Pesos to U.S. Dollars, two of which were outstanding as of June 30, 2004. One of these options, which expires in September 2004, gives the Company the right to sell Mexican Pesos for U.S. Dollars at an exchange rate of 12.61 Mexican Pesos to the U.S. Dollar. The other option, which expires in March 2005, gives the Company the right to sell Mexican Pesos for U.S. Dollars at an exchange rate of 13.34 Mexican Pesos to the U.S. Dollar. The Company paid up-front premiums for these options of $49,000 and $28,000 in the quarters ended September 30, 2003, and June 30, 2004, respectively. At June 30, 2004 and December 31, 2003, the notional amount under exchange rate options was $4.7 million and $5.3 million, respectively. At June 30, 2004 and December 31, 2003, the fair value of currency exchange rate options was $19,000 and $17,000, respectively.

9. INTANGIBLE AND OTHER ASSETS, NET AND GOODWILL:

     Acquired intangible assets are as follows (in thousands):

                                                 
INTANGIBLE ASSETS:   June 30, 2004   December 31, 2003
    Gross                   Gross        
Amortizable intangible   Carrying   Accumulated           Carrying   Accumulated   Net
assets:   Amount   Amortization   Net Assets   Amount   Amortization   Assets
Chiapas-Mayab Operating License (Mexico)
  $ 6,856     $ 1,084     $ 5,772     $ 7,058     $ 999     $ 6,059  
Amended and Restated Service Assurance Agreement (Illinois & Midland Railroad)
    10,566       431       10,135       10,566       216       10,350  
Transportation Services Agreement (GP Railroads)
    27,055       451       26,604       27,055             27,055  
Non-amortizable intangible assets:
                                               
Track Access Agreements (Utah Railway)
    35,891             35,891       35,891             35,891  
 
                                               
Total Intangible Assets
    80,368       1,966       78,402       80,570       1,213       79,357  
 
                                               
OTHER ASSETS:
                                               
Deferred financing costs
    6,701       2,451       4,250       6,607       1,841       4,766  
Other assets
    6,364       62       6,302       5,370       43       5,327  
 
                                               
Total Other Assets
    13,065       2,513       10,552       11,977       1,884       10,093  
 
                                               
Total Intangible and Other Assets
  $ 93,433     $ 4,479     $ 88,954     $ 92,547     $ 3,097     $ 89,450  
 
                                               

     The Chiapas-Mayab Operating License is being amortized over 30 years which is the life of the concession agreement with the Mexican Communications and Transportation Department. The Chiapas-Mayab Operating License is subject to exchange rate changes resulting from conversion of Mexican Pesos to U.S. Dollars at different periods.

16


 

     On July 23, 2003 as a result of a settlement agreement with Commonwealth Edison Company, the Company amended and restated the Service Assurance Agreement and began to amortize the Amended and Restated Service Assurance Agreement (ARSAA). The estimate of the useful life of the ARSAA asset is based on the Company’s estimate that the useful life of the coal-fired electricity generation plant to which the Company provides service will be in service through 2027. Prior to the settlement date, upon adoption of SFAS No. 142, the Service Assurance Agreement was determined to have an indefinite useful life and therefore was not subject to amortization.

     The Transportation Services Agreement, entered into in conjunction with the GP transaction (the TSA), is a 20-year agreement to provide exclusive rail transportation service to GP facilities. The Company believes that the customer’s facilities have a 30-year economic life and that the Company will continue to be the exclusive rail transportation service provider until the end of the plant’s useful life. Therefore, the TSA is being amortized on a straight-line basis over a 30-year life beginning January 1, 2004.

     The Track Access Agreements are perpetual trackage agreements assumed in the Company’s acquisition of Utah Railway Company. Under SFAS No. 142 these assets have been determined to have an indefinite useful life and therefore are not subject to amortization.

     Deferred financing costs are amortized over terms of the related debt using the effective-interest method for the fixed term debt and using the straight-line method for the revolving loan portion of debt.

     Other assets consist primarily of executive split dollar life insurance, assets held for sale and a minority equity investment in an agricultural facility. Executive split dollar life insurance is the present value of life insurance benefits which the Company funds but that are owned by executive officers. The Company retains a collateral interest in the policies’ cash values and death benefits. Assets held for sale or future use primarily represent surplus track and locomotives.

     Upon adoption of SFAS No. 142, amortization of goodwill was discontinued as of January 1, 2002. The changes in the carrying amount of goodwill are as follows:

                 
    Six Months Ended   Twelve Months Ended
    June 30, 2004   December 31, 2003
Goodwill:
               
Balance at beginning of period
  $ 24,522     $ 24,174  
Goodwill acquired during period
           
Amortization
           
Currency translation adjustment
    (56 )     348  
Impairment losses
           
 
               
Balance at end of period
  $ 24,466     $ 24,522  
 
               

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10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:

Components of net periodic benefit cost

Three months ended June 30

                                 
                    Other
                    Retirement
    Pension   Benefits
    2004   2003   2004   2003
Service cost
  $ 57     $ 45     $ 28     $ 25  
Interest cost
    53       48       68       69  
Expected return on plan assets
    (32 )     (23 )            
Amortization of transition liability
    36       36              
Amortization of prior service cost
                       
Amortization of (gain) loss
    6       3       21       5  
 
                               
Net periodic benefit cost
  $ 120     $ 109     $ 117     $ 99  
 
                               

Six months ended June 30

                                 
                    Other
                    Retirement
    Pension   Benefits
    2004   2003   2004   2003
Service cost
  $ 114     $ 90     $ 55     $ 50  
Interest cost
    107       96       137       139  
Expected return on plan assets
    (65 )     (45 )            
Amortization of transition liability
    71       71              
Amortization of prior service cost
                       
Amortization of (gain) loss
    13       7       42       10  
 
                               
Net periodic benefit cost
  $ 240     $ 219     $ 234     $ 199  
 
                               

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $216,701 to its pension plan in 2004. As of June 30, 2004, $135,385 of contributions have been made. The Company presently anticipates contributing an additional $81,316 to fund its pension plan in 2004 for a total of $216,701.

11. RECENTLY ISSUED ACCOUNTING STANDARDS:

Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act 0f 2003

     In May 2004, the Financial Accounting Standards Board (FASB) recently issued the following FASB issued Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” FSP 106-2. FSP 106-2 provides guidance on the accounting, disclosure, effective date and transition related to the Prescription Drug Act. FSP 106-2 is effective for the third quarter 2004, which begins on July 1, 2004. Accordingly, an actuarial assessment is being prepared to evaluate the potentially positive effects of FSP 106-2 on the Company’s postretirement benefit plans and its Consolidated Financial Statements.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in the Company’s 2003 Form 10-K.

Forward-Looking Statements

     This report and other documents referred to in this report may contain forward-looking statements based on current expectations, estimates and projections about the Company’s industry, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions, including the following risks applicable to all of the Company’s operations: risks related to the acquisition and integration of railroads; difficulties associated with customers, competition, connecting carriers, employees and partners; derailments; adverse weather conditions; unpredictability of fuel costs; changes in environmental and other laws and regulations to which the Company is subject; general economic and business conditions; and additional risks associated with the Company’s foreign operations. Therefore, actual results may differ materially from those expressed or forecast in any such forward-looking statements. Such risks and uncertainties include, in addition to those set forth in this Item 2, those noted in the Company’s 2003 Form 10-K under “Risk Factors.” The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

General

     The Company is a holding company whose subsidiaries and unconsolidated affiliates own and/or operate short line and regional freight railroads and provide related rail services in North America, South America and Australia. The Company generates revenues primarily from the movement of freight over track owned or operated by its railroads. The Company also generates non-freight revenues primarily by providing freight car switching and rail services such as railcar leasing, repair and storage to industrial companies with extensive railroad facilities within their complexes, to shippers along its lines, and to the Class I railroads that connect with its North American lines.

     For a complete description of the Company’s accounting policies, see Note 2 to the audited consolidated financial statements for the year ended December 31, 2003 included in the Company’s 2003 Form 10-K.

     On December 31, 2003, the Company completed the purchase from Georgia-Pacific Corporation (GP) of all of the issued and outstanding shares of common stock of the Chattahoochee Industrial Railroad (CIRR), the Arkansas Louisiana & Mississippi Railroad Company (ALM), and the Fordyce and Princeton RR Co. (F&P, collectively, the GP Railroads) for approximately $54.9 million in cash. The purchase price was allocated to current assets ($2.7 million), property and equipment ($37.6 million), and intangible assets ($27.1 million), less current liabilities assumed ($12.5 million). As contemplated with the acquisition, the Company implemented a severance program. The aggregate cost of the severance program, $1.0 million, is considered a liability assumed in the acquisition, and as such, was allocated to the purchase price. In conjunction with the acquisition, the Company entered into two Transportation Services Agreements (TSAs) which are 20-year agreements for the GP Railroads to provide rail transportation service to GP. One of the TSAs was determined to be an intangible asset and approximately $27.1

19


 

million of the GP Railroads’ purchase price was allocated to this asset. This TSA asset is being amortized on a straight-line basis over a 30 year life, which is the expected life of the plant being served, beginning January 1, 2004. No value was assigned to the other TSA. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement.

Results of Operations

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

   Operating Revenues

     Operating revenues (which exclude revenues from the Company’s equity investments) were $74.1 million in the quarter ended June 30, 2004 compared to $62.9 million in the quarter ended June 30, 2003, an increase of $11.2 million or 17.7%. The increase was attributable to $6.2 million in revenues from the new GP Railroads and $5.0 million in revenues from existing operations. The $11.2 million increase in operating revenues consisted of $8.8 million in freight revenues of which $4.8 million was from the new GP Railroads and $4.0 million was from existing operations, and $2.4 million in non-freight revenues of which $1.4 million was from the new GP Railroads and $1.0 million was from existing operations. The $5.0 million increase on existing operations was primarily attributable to $4.0 million in freight revenues which mainly consisted of a $1.9 million increase in coal, coke and revenue in the Company’s Illinois, Utah and New York-Pennsylvania Regions, a $686,000 net increase in revenue from metals, a $481,000 net increase in revenue from chemicals and plastics, and a $1.0 million increase in switching revenues in the Company’s Rail Link Region. The following table compares freight revenues, carloads and average freight revenues per carload for the quarters ended June 30, 2004 and 2003:

Freight Revenues and Carloads Comparison by Commodity Group
Quarters Ended June 30, 2004 and 2003
(dollars in thousands, except average per carload)

                                                                                 
                                                                    Average
                                                                    Freight
    Freight Revenues   Carloads   Revenues
            % of           % of           % of           % of   Per Carload
Commodity Group   2004   Total   2003   Total   2004   Total   2003   Total   2004   2003
Coal, Coke & Ores
  $ 12,062       21.6 %   $ 9,805       20.8 %     49,259       31.3 %     40,132       29.9 %   $ 245     $ 244  
Pulp & Paper
    9,770       17.5 %     7,943       16.8 %     23,206       14.7 %     19,105       14.3 %     421       416  
Lumber & Forest Products
    6,327       11.3 %     4,580       9.7 %     19,428       12.3 %     14,777       11.0 %     326       310  
Petroleum Products
    6,134       11.0 %     6,183       13.1 %     8,185       5.2 %     7,707       5.8 %     749       802  
Minerals & Stone
    5,693       10.2 %     5,821       12.3 %     15,728       10.0 %     14,672       10.9 %     362       397  
Metals
    5,450       9.7 %     4,678       9.9 %     17,530       11.1 %     16,528       12.3 %     311       283  
Chemicals & Plastics
    4,103       7.3 %     2,856       6.1 %     7,808       5.0 %     5,958       4.4 %     525       479  
Farm & Food Products
    2,947       5.3 %     2,599       5.5 %     6,914       4.4 %     6,591       4.9 %     426       394  
Autos & Auto Parts
    1,854       3.3 %     1,706       3.6 %     4,213       2.7 %     4,234       3.2 %     440       403  
Intermodal
    630       1.1 %     431       0.9 %     1,736       1.1 %     1,692       1.3 %     363       255  
Other
    937       1.7 %     551       1.3 %     3,455       2.2 %     2,612       2.0 %     271       211  
 
                                                                               
Total
  $ 55,907       100.0 %   $ 47,153       100.0 %     157,462       100.0 %     134,008       100.0 %     355       352  
 
                                                                               

     Total carloads were 157,462 in the quarter ended June 30, 2004 compared to 134,008 in the quarter ended June 30, 2003, an increase of 23,454, or 17.5%. The increase consisted of 12,455 from the new GP Railroads and 10,999 from existing operations due largely to an increase of 8,084 from carloads of coal, coke and ores in the

20


 

Company’s Illinois, Utah and New York-Pennsylvania Regions, a net increase of 1,056 from carloads of minerals and stone, a net increase of 777 from carloads of metals and a net increase of 2,130 from carloads of all other commodities combined, offset by a net decrease of 1,048 carloads from pulp and paper primarily in the Company’s Oregon and New York-Pennsylvania Regions. The net increase of 1,056 carloads from minerals and stone consisted of an increase of 971 carloads in the Company’s Canada Region and a net increase of 809 carloads in the Company’s combined US Regions, offset by a decrease of 724 carloads in the Company’s Mexico Region. The net increase of 777 from carloads of metals consisted of an increase of 1,928 from carloads in the Company’s New York-Pennsylvania Region offset by a net decrease of 1,151 from carloads in all other regions combined. Average revenue per carload increased slightly to $355 in the quarter ended June 30, 2004, compared to $352 per carload in the quarter ended June 30, 2003, an increase of 0.9%.

     Non-freight revenues were $18.2 million in the quarter ended June 30, 2004 compared to $15.8 million in the quarter ended June 30, 2003, an increase of $2.4 million or 15.0%. The $2.4 million increase was attributable to $1.5 million of non-freight revenues from the new GP Railroads of which $906,000 was car hire revenue, and a net increase of $883,000 from existing operations. The net increase of $883,000 from existing operations consisted of a $1.3 million increase in switching primarily in the Rail Link Region, offset by a net decrease of $414,000 from all other non-freight revenues combined. The following table compares non-freight revenues for the quarters ended June 30, 2004 and 2003:

Non-Freight Revenues Comparison
Quarters Ended June 30, 2004 and 2003
(dollars in thousands)

                                 
    2004   2003
            % of           % of
            Non-Freight           Non-Freight
    $   Revenue   $   Revenue
Railroad and industrial switching
  $ 9,644       53.1 %   $ 8,335       52.8 %
Car hire and rental income
    2,657       14.6 %     1,722       10.9 %
Car repair services
    1,494       8.2 %     1,056       6.7 %
Other operating income
    4,360       24.1 %     4,671       29.6 %
 
                               
Total non-freight revenues
  $ 18,155       100.0 %   $ 15,784       100.0 %
 
                               

Operating Expenses

     Operating expenses were $60.5 million in the quarter ended June 30, 2004, compared to $52.1 million in the quarter ended June 30, 2003, an increase of $8.4 million or 13.9%. The increase was attributable to $3.8 million in operating expenses from the new GP Railroads and an increase of $4.6 million in operating expenses from existing operations. The following table sets forth a comparison of the Company’s operating expenses in the quarters ended June 30, 2004 and 2003:

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Operating Expense Comparison
Quarters Ended June 30, 2004 and 2003
(dollars in thousands)

                                 
    2004   2003
            % of           % of
            Operating           Operating
    $   Revenues   $   Revenues
Labor and benefits
  $ 24,950       33.7 %   $ 21,933       34.8 %
Equipment rents
    6,334       8.6 %     4,302       6.8 %
Purchased services
    4,498       6.1 %     4,913       7.8 %
Depreciation and amortization
    4,754       6.4 %     3,843       6.1 %
Diesel fuel
    5,646       7.6 %     4,449       7.1 %
Casualties and insurance
    3,653       4.9 %     3,328       5.3 %
Materials
    3,611       4.9 %     3,969       6.3 %
Net loss on sale and impairment of assets
          0.0 %     175       0.3 %
Other expenses
    7,035       9.5 %     5,163       8.2 %
 
                               
Total operating expenses
  $ 60,481       81.7 %   $ 52,075       82.7 %
 
                               

     Labor and benefits expense was $24.9 million in the quarter ended June 30, 2004 compared to $21.9 million in the quarter ended June 30, 2003, an increase of $3.0 million or 13.8%. The increase was attributable to $1.3 million in labor and benefits expense from the new GP Railroads and an increase of $1.7 million from existing operations. The increase from existing operations was due to a $1.3 million increase in labor and benefits expense related to increased freight shipments and regular wage increases and $389,000 related to revised executive benefit plans.

     Equipment rents were $6.3 million in the quarter ended June 30, 2004 compared to $4.3 million in the quarter ended June 30, 2003, an increase of $2.0 million or 47.2%. The increase was attributable to $978,000 in freight car operating lease and car hire expense from the new GP Railroads and an increase of $1.0 from existing operations primarily due to car hire expense from increased freight shipments.

     Depreciation and amortization expense was $4.8 million in the quarter ended June 30, 2004 compared to $3.8 million in the quarter ended June 30, 2003, an increase of $911,000 or 23.7%. The increase was attributable to $566,000 from the new GP Railroads and an increase of $345,000 from existing operations including $107,000 related to the Amended and Restated Service Assurance Agreement which the Company began amortizing in July 2003.

     Diesel fuel expense was $5.6 million in the quarter ended June 30, 2004 compared to $4.4 million in the quarter ended June 30, 2003, an increase of $5.5 million or 24.2%. The increase was attributable to $122,000 from the new GP Railroads and an increase of $1.1 million on existing operations primarily due to a 17.0% increase in the consolidated average price per gallon and increased consumption due to carload increases.

     All other expenses combined were $18.8 million in the quarter ended June 30, 2004 compared to $17.5 million in the quarter ended June 30, 2003, an increase of $1.2 million or 7.1%. The increase was attributable to $958,000 from the new GP Railroads and $291,000 from existing operations. The increase of $291,000 was primarily due to $523,000 of costs related to the Company’s public offering (See Note 3 to Consolidated Financial Statements).

22


 

Operating Ratio

     The Company’s operating ratio (total operating expenses as a percentage of operating revenues) improved to 81.7% in the quarter ended June 30, 2004 from 82.7% in the quarter ended June 30, 2003 due to the performance of both the Company’s existing and recently acquired railroads.

Interest Expense

     Interest expense was $2.3 million in the quarter ended June 30, 2004 compared to $2.2 million in the quarter ended June 30, 2003, an increase of $116,000, or 5.4%.

Other Income, Net

     Other income, net in the quarter ended June 30, 2004, was $231,000 compared to $386,000 in the quarter ended June 30, 2003, a decrease of $155,000. Other income, net consists primarily of exchange rate transaction gains (losses) from foreign dollar-denominated cash accounts and interest income.

   Income Taxes

     The Company’s effective income tax rate in the quarter ended June 30, 2004 was 37.7% compared to 40.8% in the quarter ended June 30, 2003. The decrease was primarily attributable to a decrease in the effective tax rate for the Company’s Canada and Mexico Regions. Canada’s rate reduction was due to a decrease in the statutory rate. In Mexico, for tax purposes, the Company’s subsidiaries recognize exchange gain or loss on their US dollar based assets and liabilities. As a result, the depreciation of the Mexican peso compared to the US dollar in the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003 resulted in a lower effective tax rate.

   Equity in Net Income of Unconsolidated International Affiliates

     Equity earnings of unconsolidated international affiliates, net were $3.7 million in the quarter ended June 30, 2004, compared to $2.3 million in the quarter ended June 30, 2003, an increase of $1.4 million. Equity earnings in the quarter ended June 30, 2004, consisted of $3.5 million from Australian Railroad Group and $183,000 from South America affiliates. Equity earnings in the quarter ended June 30, 2003, consisted of $2.1 million from Australian Railroad Group and $186,000 from South America affiliates. See additional information regarding ARG’s financial results in Supplemental Information – Australian Railroad Group.

   Net Income and Earnings Per Share

     The Company’s net income in the quarter ended June 30, 2004 was $10.8 million compared to net income of $7.7 million in the quarter ended June 30, 2003, an increase of $3.1 million. The increase in net income was the result of an increase in net income from operations of $1.8 million and an increase in equity in net income of unconsolidated international affiliates of $1.3 million.

     Basic Earnings Per Share in the quarters ended June 30, 2004 and 2003 were $0.44 and $0.31 respectively, on weighted average shares of 21.7 million and 19.9 million respectively. Diluted Earnings Per Share in the quarters ended June 30, 2004 and 2003 were $0.39 and $0.28 respectively, on weighted average shares of 27.5 million and 26.7 million respectively.

23


 

Supplemental Information – Australian Railroad Group

     ARG is a company owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. The Company accounts for its 50% ownership in ARG under the equity method of accounting. As a result of the strengthening of the Australian dollar relative to the U.S. dollar in 2004, the average currency translation rate for the quarter ended June 30, 2004 was 12.5% more favorable than the rate for the quarter ended June 30, 2003, the impact of which should be considered in the following discussions of equity earnings, freight and non-freight operating revenues, and operating expenses.

     In the quarters ended June 30, 2004 and 2003, the Company recorded $3.5 million and $2.1 million, respectively, of equity earnings in the equity in net income of international affiliates – Australian Railroad Group caption in the accompanying consolidated statements of income.

Freight Revenues

Australian Railroad Group
Freight Revenues and Carloads by Commodity Group
Quarters Ended June 30, 2004 and 2003
(U.S. dollars in thousands, except average per carload)

                                                                                 
                                                                    Average
                                                                    Freight
                                                                    Revenues
    Freight                                   Per
    Revenues   Carloads   Carload
Commodity Group   2004   % of Total   2003   % of Total   2004   % of Total   2003   % of Total   2004   2003
Grain
  $ 25,670       37.9 %   $ 15,662       31.8 %     69,661       28.1 %     41,005       19.9 %   $ 368     $ 382  
Other Ores and Minerals
    14,055       20.7 %     11,210       22.8 %     25,657       10.4 %     25,500       12.3 %     548       440  
Iron Ore
    10,872       16.0 %     8,194       16.6 %     51,050       20.6 %     41,597       20.1 %     213       197  
Alumina
    4,733       7.0 %     4,173       8.5 %     39,720       16.0 %     38,646       18.7 %     119       108  
Bauxite
    2,920       4.3 %     2,916       5.9 %     30,034       12.1 %     32,105       15.6 %     97       91  
Hook and Pull (Haulage)
    451       0.7 %     884       1.8 %     2,521       1.0 %     1,592       0.8 %     179       555  
Gypsum
    903       1.3 %     655       1.3 %     12,614       5.1 %     10,677       5.2 %     72       61  
Other
    8,169       12.1 %     5,527       11.3 %     16,629       6.7 %     15,321       7.4 %     491       361  
 
                                                                               
Total
  $ 67,773       100.0 %   $ 49,221       100.0 %     247,886       100.0 %     206,443       100.0 %     273       238  
 
                                                                               

     ARG’s freight revenues were $67.8 million in the quarter ended June 30, 2004, compared to $49.2 million in the quarter ended June 30, 2003, an increase of $18.6 million or 37.7%. The increase in freight revenues was led by a $10.0 million increase in grain, due to the record harvest in Western Australia and a new customer in New South Wales; a $2.8 million increase in other ores and minerals, led by increased nickel related shipments; and a $2.7 million increase in iron ore, due to production expansion at ARG’s largest iron ore customer and a new customer in Western Australia. All other commodities combined increased $3.1 million. In local currency, freight revenues increased 22.3% in the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003.

     Total ARG carloads were 247,886 in the quarter ended June 30, 2004, compared to 206,443 in the quarter ended June 30, 2003, an increase 41,443, or 20.1%. The increase was primarily the result of a 28,656 carload increase in grain, a 9,453 carload increase in iron ore, and a 1,937 carload increase in gypsum. Average freight revenue per carload increased from $238 to $273, primarily due to the appreciation of the Australian dollar relative to the U.S. dollar.

24


 

\

Non-Freight Revenues

     The following table compares ARG’s non-freight revenues for the quarters ended June 30, 2004 and 2003.

Australian Railroad Group
Non-Freight Revenues Comparison
Quarters Ended June 30, 2004 and 2003
(U.S. dollars in thousands)

                                 
            % of           % of
    2004   Total   2003   Total
Third party track access fees
  $ 5,924       42.4 %   $ 3,886       36.3 %
Alice Springs to Darwin Line
    1,574       11.3 %     4,047       37.9 %
Other operating income
    6,446       46.3 %     2,758       25.8 %
 
                               
Total non-freight revenues
  $ 13,944       100.0 %   $ 10,691       100.0 %
 
                               

     ARG’s non-freight revenues were $13.9 million in the quarter ended June 30, 2004, compared to $10.7 million in the quarter June 30, 2003, an increase of $3.3 million or 30.4%. ARG’s non-freight revenue increase was attributable to higher third party access fees and other operating income, primarily fuel sales to other railroads, offset by a decrease from the Alice Springs to Darwin (ASD) line due to completion of construction. In local currency, non-freight revenue increased 16.8% in the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003.

Operating Expenses

     ARG’s operating expenses were $65.3 million in the quarter ended June 30, 2004, compared to $46.6 million in the quarter ended June 30, 2003, an increase of $18.7 million or 40.1%. The following table sets forth a comparison of ARG’s operating expenses in the quarters ended June 30, 2004 and 2003:

Australian Railroad Group
Operating Expense Comparison
Quarters Ended June 30, 2004 and 2003
(U.S. dollars in thousands)

                                 
    2004   2003
            % of           % of
            Operating           Operating
    $   Revenues   $   Revenues
Labor and benefits
  $ 14,945       18.3 %   $ 10,983       18.3 %
Equipment rents
    821       1.0 %     368       0.6 %
Purchased services
    20,263       24.8 %     14,190       23.7 %
Depreciation and amortization
    6,383       7.8 %     5,718       9.5 %
Diesel fuel used in operations
    5,871       7.2 %     3,590       6.0 %
Diesel fuel for sales to third parties
    4,666       5.7 %     1,444       2.4 %
Casualties and insurance
    1,339       1.6 %     3,031       5.1 %
Materials
    3,549       4.3 %     2,590       4.3 %
Net loss (gain) on sale and impairment of assets
    (13 )     0.0 %     (208 )     (0.3 %)
Other expenses
    7,433       9.2 %     4,868       8.1 %
 
                               
Total operating expenses
  $ 65,257       79.9 %   $ 46,574       77.7 %
 
                               

25


 

     Labor and benefits expense, as a percentage of revenues, did not change in the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. In local currency, labor and benefits increased 21.1%. The increase was due to higher freight volumes, particularly the strong grain movements and the new business in New South Wales.

     Purchased services expense increased to 24.8% of revenue in the quarter ended June 30, 2004, compared to 23.7% of revenues in the quarter ended June 30, 2003. In local currency, purchased services increased 27.6%. The increase was primarily due to the use of contract locomotive engineers and higher rail grinding expense.

     Depreciation and amortization expense, as a percentage of revenues, decreased to 7.8% in the quarter ended June 30, 2004, compared to 9.5% in the quarter ended June 30, 2003. In local currency, depreciation and amortization decreased 0.4%. The decrease was due to lower amortization expense related to a reduction in prepaid lease premium intangible asset recorded in December 2003, partially offset by higher depreciation related to an increase in depreciable assets due to capital expenditures. The reduction in prepaid lease premium intangible asset was the result of a ruling issued by the Australian tax authorities whereby the tax basis of the asset was set at an amount greater than the financial statement basis. Accordingly, a deferred tax asset was recorded with a corresponding reduction in the prepaid lease premium intangible asset.

     Diesel fuel used in operations increased to 7.2% of revenues in the quarter ended June 30, 2004, compared to 6.0% of revenues in the quarter ended June 30, 2003. In local currency, fuel used in operations increased 47.0%. The increase was due to higher freight volumes on existing lines, the new business in New South Wales, the contract operations in the Northern Territory (ASD) and an increase in fuel prices.

     The cost of diesel fuel sold to third parties increased to 5.7% of revenues in the quarter ended June 30, 2004, compared to 2.4% of revenues in the quarter ended June 30, 2003. In local currency, the cost of diesel fuel sold to third parties increased 188.6%. The increase was due to a higher volume of fuel sales to other railroads and an increase in fuel prices.

     Casualties and insurance costs decreased to 1.6% of revenues in the quarter ended June 30, 2004, compared to 5.1% of revenues in the quarter ended June 30, 2003. In local currency, casualties and insurance decreased 61.1%. The decrease was due to improved safety performance and a decrease in insurance costs.

     Materials expense, as a percentage of revenues, did not change in the quarter ended June 30, 2004, compared to the quarter ended June 30, 2003. In local currency, materials expense increased 23.5%. The increase was due to higher rolling stock maintenance costs.

     Other expenses, as a percentage of revenues, increased to 9.2% in the quarter ended June 30, 2004, compared to 8.1% in the quarter ended June 30, 2003. In local currency, other expenses increased 36.4%. The increase was primarily due to track access fees and various other increases in administrative costs.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

   Operating Revenues

     Operating revenues (which exclude revenues from the Company’s equity investments) were $146.5 million in the six months ended June 30, 2004, compared to $121.8 million in the six months ended June 30, 2003, an increase of $24.7 million or 20.3%. The increase was attributable to $12.1 million in revenues from the new GP Railroads and $12.6 million in revenues from existing operations. The $24.7 million increase in operating revenues consisted of $19.0 million in freight revenues of which $9.3 million was from the new GP Railroads and $9.7 million was from existing

26


 

operations, and $5.7 million in non-freight revenues of which $2.9 million was from the new GP Railroads and $2.8 million was from existing operations. The $12.6 million increase in operating revenues from existing operations was attributable to a $4.4 million revenue increase from the Company’s Canada Region of which $1.9 million was due to the 8.4% appreciation of the Canadian dollar relative to the U.S. dollar and $2.5 million was primarily attributable to stronger freight revenues; a $2.6 million increase in operating revenues, primarily freight revenues, from the New York-Pennsylvania Region; a $1.5 million increase in operating revenues, primarily freight revenues, in the Oregon Region; and a $2.4 million increase in operating revenues in the Rail Link Region, primarily due to increased switching operations. The following table compares freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 2004 and 2003:

Freight Revenues and Carloads Comparison by Commodity Group
Six Months Ended June 30, 2004 and 2003
(dollars in thousands, except average per carload)

                                                                                 
                                                                    Average
                                                                    Freight
    Freight Revenues   Carloads   Revenues
            % of           % of           % of           % of   Per Carload
Commodity Group   2004   Total   2003   Total   2004   Total   2003   Total   2004   2003
Coal, Coke & Ores
  $ 22,799       20.6 %   $ 19,648       21.4 %     93,301       30.2 %     82,111       31.1 %   $ 244     $ 239  
Pulp & Paper
    19,290       17.4 %     15,269       16.7 %     46,190       15.0 %     36,979       14.0 %     418       413  
Petroleum Products
    12,448       11.2 %     12,671       13.8 %     16,495       5.3 %     16,397       6.2 %     755       773  
Lumber & Forest Products
    12,165       11.0 %     8,443       12.1 %     37,462       12.1 %     26,856       10.9 %     325       314  
Metals
    11,105       10.0 %     8,585       9.4 %     35,368       11.5 %     30,388       11.5 %     314       283  
Minerals & Stone
    10,829       9.8 %     11,097       9.2 %     28,393       9.2 %     28,665       10.2 %     381       387  
Chemicals & Plastics
    7,975       7.2 %     5,434       6.0 %     15,276       4.9 %     11,633       5.6 %     522       467  
Farm & Food Products
    7,739       7.0 %     5,491       5.9 %     18,366       6.0 %     14,862       4.4 %     421       369  
Autos & Auto Parts
    3,596       3.2 %     3,235       3.5 %     8,410       2.7 %     7,991       3.0 %     428       405  
Intermodal
    1,182       1.1 %     788       0.9 %     3,100       1.0 %     2,988       1.1 %     381       264  
Other
    1,589       1.4 %     1,018       1.1 %     6,309       2.0 %     5,068       2.0 %     252       201  
 
                                                                               
Total
  $ 110,717       100.0 %   $ 91,679       100.0 %     308,670       100.0 %     263,938       100.0 %     359       347  
 
                                                                               

     Total carloads were 308,670 in the six months ended June 30, 2004, compared to 263,938 in the six months ended June 30, 2003, an increase of 44,732, or 16.9%. The increase consisted of 24,383 carloads from the new GP Railroads and 20,349 carloads from existing operations. The increase of 20,349 carloads from existing operations was due largely to a 9,527 increase from carloads of coal, coke and ores in the Illinois, Utah and New York-Pennsylvania Regions, a 4,484 increase from carloads of metals primarily in the New York-Pennsylvania Region, a 3,215 increase from carloads of farm and food products primarily in the Canada Region, and a 2,416 increase from carloads of lumber and forest products primarily in the Oregon and New York-Pennsylvania Regions. The average revenue per carload increased to $359 in the six months ended June 30, 2004, compared to $347 per carload in the six months ended June 30, 2003, an increase of 3.5%.

     Non-freight revenues were $35.7 million in the six months ended June 30, 2004, compared to $30.1 million in the six months ended June 30, 2003, an increase of $5.6 million or 18.7%. The $5.6 million increase was attributable to $2.9 million of non-freight revenues from the new GP Railroads of which $1.7 million was car hire revenue, and a $2.7 million increase on existing operations of which $2.5 million

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was switching primarily in the Company’s Rail Link Region. The following table compares non-freight revenues for the six months ended June 30, 2004 and 2003:

Non-Freight Operating Revenues Comparison
Six Months Ended June 30, 2004 and 2003
(dollars in thousands)

                                 
    2004   2003
            % of           % of
            Non-Freight           Non-Freight
    $   Revenue   $   Revenue
Railroad and industrial switching
  $ 18,632       52.1 %   $ 16,071       53.4 %
Car hire and rental income
    5,488       15.4 %     3,502       11.6 %
Car repair services
    2,825       7.9 %     2,197       7.3 %
Other operating income
    8,802       24.6 %     8,349       27.7 %
 
                               
Total non-freight revenues
  $ 35,747       100.0 %   $ 30,119       100.0 %
 
                               

Operating Expenses

     Operating expenses were $121.3 million in the six months ended June 30, 2004, compared to $102.9 million in the six months ended June 30, 2003, an increase of $18.4 million or 17.8%. The increase was attributable to $7.6 million in operating expenses from the new GP Railroads and an increase of $10.8 million in operating expenses from existing operations. The following table sets forth a comparison of the Company’s operating expenses in the six months ended June 30, 2004 and 2003:

Operating Expense Comparison
Six Months Ended June 30, 2004 and 2003
(dollars in thousands)

                                 
    2004   2003
            % of           % of
            Operating           Operating
    $   Revenues   $   Revenues
Labor and benefits
  $ 51,346       35.1 %   $ 43,800       36.0 %
Equipment rents
    13,215       9.0 %     8,800       7.2 %
Purchased services
    8,779       6.0 %     8,956       7.4 %
Depreciation and amortization
    9,484       6.5 %     7,568       6.2 %
Diesel fuel
    11,291       7.7 %     9,620       7.9 %
Casualties and insurance
    7,360       5.0 %     6,299       5.2 %
Materials
    7,319       5.0 %     7,665       6.3 %
Net loss on sale and impairment of assets
    (94 )     (0.1 %)     176       0.1 %
Other expenses
    12,624       8.6 %     10,065       8.2 %
 
                               
Total operating expenses
  $ 121,324       82.8 %   $ 102,949       84.5 %
 
                               

     Labor and benefits expense was $51.3 million in the six months ended June 30, 2004, compared to $43.8 million in the six months ended June 30, 2003, an increase of $7.5 million or 17.2%. The increase was attributable to $2.7 million in labor and benefits expense from the new GP Railroads and an increase of $4.8 million from existing operations. The increase from existing operations was due to a $3.9 million increase in labor and benefits expense related to increased freight

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shipments, regular wage increases, the 8.4% appreciation of the Canadian dollar and $872,000 related to revised executive benefit plans.

     Equipment rents were $13.2 million in the six months ended June 30, 2004, compared to $8.8 million in the six months ended June 30, 2003, an increase of $4.4 million or 50.2%. The increase was attributable to $2.1 million in freight car operating lease and car hire expense from the new GP Railroads and an increase of $2.3 million from existing operations primarily due to car hire expense on increased freight shipments.

     Depreciation and amortization expense was $9.5 million in the six months ended June 30, 2004, compared to $7.6 million in the six months ended June 30, 2003, an increase of $1.9 million or 25.3%. The increase was attributable to $1.1 million from the new GP Railroads and an increase of $785,000 from existing operations including $214,000 related to the Amended and Restated Service Assurance Agreement which the Company began amortizing in July 2003.

     Diesel fuel expense was $11.3 million in the six months ended June 30, 2004, compared to $9.6 million in the six months ended June 30, 2003, an increase of $1.7 million or 17.4%. The increase was attributable to $240,000 from the new GP Railroads and an increase of $1.4 million from existing operations due to an 8.2% increase in the consolidated average price per gallon and increased fuel consumption due to carload increases.

     Casualties and insurance expense was $7.4 million in the six months ended June 30, 2004, compared to $6.3 million in the six months ended June 30, 2003, an increase of $1.1 million or 16.8%. The increase was primarily attributable to a $775,000 increase in derailment expense and a $316,000 increase in FELA and third party claims from existing operations.

     All other expenses combined were $28.6 million in the six months ended June 30, 2004, compared to $26.9 million in the six months ended June 30, 2003, an increase of $1.7 million or 6.6%. The increase was attributable to $1.6 million from the new GP Railroads and $170,000 from existing operations.

Operating Ratio

     The Company’s operating ratio (total operating expenses as a percentage of operating revenues) improved to 82.8% in the six months ended June 30, 2004 from 84.5% in the six months ended June 30, 2003 due to the performance of both the Company’s existing and recently acquired railroads.

Interest Expense

     Interest expense was $4.7 million in the six months ended June 30, 2004, compared to $4.5 million in the six months ended June 30, 2003, an increase of $208,000, or 4.6%.

Other Income, Net

     Other income, net in the six months ended June 30, 2004, was $425,000 compared to $713,000 in the six months ended June 30, 2003, a decrease of $288,000. Other income, net consists primarily of exchange rate transaction gains (losses) on foreign dollar-denominated cash accounts and interest income.

Income Taxes

     The Company’s effective income tax rate in the six months ended June 30, 2004, was 38.3% compared to 39.0% in the six months ended June 30, 2003. The decrease was primarily attributable to a decrease in the effective tax rate of the Company’s Canada and Mexico Regions. Canada’s rate reduction was due to a decrease in the

29


 

statutory rate. In Mexico, for tax purposes, the Company’s subsidiaries recognize exchange gain or loss on their US dollar based assets and liabilities. As a result, the depreciation of the Mexican peso compared to the US dollar in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 resulted in a lower effective tax rate.

Equity in Net Income of Unconsolidated International Affiliates

     Equity earnings of unconsolidated international affiliates, net, were $7.4 million in the six months ended June 30, 2004, compared to $4.0 million in the six months ended June 30, 2003, an increase of $3.4 million. Equity earnings in the six months ended June 30, 2004, consisted of $7.2 million from Australian Railroad Group and $223,000 from South America affiliates. Equity earnings in the six months ended June 30, 2003, consisted of $4.1 million from Australian Railroad Group offset by an equity loss of $91,000 from South America affiliates. See additional information regarding ARG’s financial results in Supplemental Information – Australian Railroad Group.

Net Income and Earnings Per Share

     The Company’s net income was $20.3 million in the six months ended June 30, 2004, compared to net income of $13.2 million in the six months ended June 30, 2003, an increase of $7.1 million. The increase in net income was the result of an increase in net income from operations of $3.7 million and an increase in equity in net income of unconsolidated international affiliates of $3.4 million.

     Basic Earnings Per Share in the six months ended June 30, 2004 and 2003 were $0.82 and $0.54 respectively, on weighted average shares of 21.1 million and 19.9 million respectively. Diluted Earnings Per Share in the six months ended June 30, 2004 and 2003 were $0.72 and $0.47 respectively, on weighted average shares of 27.5 million and 26.7 million respectively.

Supplemental Information – Australian Railroad Group

     ARG is a company owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. The Company accounts for its 50% ownership in ARG under the equity method of accounting. As a result of the strengthening of the Australian dollar relative to the U.S. dollar in 2004, the average currency translation rate for the six months ended June 30, 2004 was 19.4% more favorable than the rate for the six months ended June 30, 2003, the impact of which should be considered in the following discussions of equity earnings, freight and non-freight operating revenues, and operating expenses.

     In the six months ended June 30, 2004 and 2003, the Company recorded $7.2 million and $4.1 million, respectively, of equity earnings in the equity in net income of international affiliates – Australian Railroad Group caption in the accompanying consolidated statements of income.

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Freight Revenues

Australian Railroad Group
Freight Revenues and Carloads by Commodity Group
Six Months Ended June 30, 2004 and 2003
(U.S. dollars in thousands, except average per carload)

                                                                                 
                                                                    Average
                                                                    Freight
                                                                    Revenues
    Freight                                   Per
    Revenues   Carloads   Carload
Commodity Group   2004   % of Total   2003   % of Total   2004   % of Total   2003   % of Total   2004   2003
Grain
  $ 51,931       37.4 %   $ 27,411       29.6 %     136,224       27.5 %     68,817       17.2 %   $ 381     $ 398  
Other Ores and Minerals
    29,133       21.0 %     21,399       23.1 %     53,815       10.9 %     50,295       12.6 %     541       425  
Iron Ore
    22,334       16.1 %     15,680       16.9 %     101,529       20.5 %     84,604       21.2 %     220       185  
Alumina
    9,752       7.0 %     7,944       8.6 %     79,136       16.0 %     76,082       19.1 %     123       104  
Bauxite
    6,132       4.4 %     5,670       6.1 %     60,251       12.1 %     64,004       16.0 %     102       89  
Hook and Pull (Haulage)
    915       0.7 %     1,682       1.8 %     5,297       1.1 %     2,893       0.7 %     173       581  
Gypsum
    1,911       1.4 %     1,310       1.4 %     25,407       5.1 %     21,306       5.3 %     75       61  
Other
    16,605       12.0 %     11,481       12.5 %     33,822       6.8 %     31,335       7.9 %     491       366  
 
                                                                               
Total
  $ 138,713       100.0 %   $ 92,577       100.0 %     495,481       100.0 %     399,336       100.0 %     280       232  
 
                                                                               

     ARG’s freight revenues were $138.7 million in the six months ended June 30, 2004, compared to $92.6 in the six months ended June 30, 2003, an increase of $46.1 million or 49.8%. The increase in freight revenues was led by a $24.5 million increase in grain, due to the record harvest in Western Australia and a new customer in New South Wales; a $7.7 million increase in other ores and minerals, led by increased nickel related shipments; and a $6.7 million increase in iron ore, due to production expansion at ARG’s largest iron ore customer and a new customer in Western Australia. All other commodities combined increased $7.2 million. In local currency, freight revenues increased 24.9% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003.

     Total ARG carloads were 495,481 in the six months ended June 30, 2004, compared to 399,336 in the six months ended June 30, 2003, an increase 96,145, or 24.1%. The increase was primarily the result of a 67,407 carload increase in grain, a 16,925 carload increase in iron ore, a 4,101 carload increase in gypsum, and a 3,520 carload increase in other ores and minerals. Average freight revenue per carload increased from $232 to $280, primarily due to the strength of the Australian dollar relative to the U.S. dollar.

Non-Freight Revenues

     The following table compares ARG’s non-freight revenues for the six months ended June 30, 2004 and 2003.

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Australian Railroad Group
Non-Freight Revenues Comparison
Six Months Ended June 30, 2004 and 2003
(U.S. dollars in thousands)

                                 
            % of           % of
    2004   Total   2003   Total
Third party track access fees
  $ 10,909       43.0 %   $ 7,513       36.3 %
Alice Springs to Darwin Line
    3,187       12.6 %     7,911       38.2 %
Other operating income
    11,261       44.4 %     5,271       25.5 %
 
                               
Total non-freight revenues
  $ 25,357       100.0 %   $ 20,695       100.0 %
 
                               

     ARG’s non-freight revenues were $25.4 million in the six months ended June 30, 2004, compared to $20.7 million in the six months June 30, 2003, an increase of $4.7 million or 22.5%. ARG’s non-freight revenue increase was primarily attributable to the appreciation of the Australian dollar. In local currency, non-freight revenue increased 2.7% in the six months ended June 30, 2004, compared to the six months ended June 30, 2003. The increase was due to higher third party access fees and other operating income, primarily fuel sales to other railroads, offset by a decrease from the Alice Springs to Darwin (ASD) line due to completion of construction.

Operating Expenses

     ARG’s operating expenses were $130.0 million in the six months ended June 30, 2004, compared to $87.9 million in the six months ended June 30, 2003, an increase of $42.1 million or 47.9%. The following table sets forth a comparison of ARG’s operating expenses in the six months ended June 30, 2004 and 2003:

Australian Railroad Group
Operating Expense Comparison
Six Months Ended June 30, 2004 and 2003
(U.S. dollars in thousands)

                                 
    2004   2003
            % of           % of
            Operating           Operating
    $   Revenues   $   Revenues
Labor and benefits
  $ 29,201       17.8 %   $ 20,617       18.2 %
Equipment rents
    1,531       0.9 %     722       0.6 %
Purchased services
    39,325       24.0 %     26,850       23.7 %
Depreciation and amortization
    13,097       8.0 %     10,875       9.6 %
Diesel fuel used in operations
    12,026       7.3 %     7,011       6.2 %
Diesel fuel for sales to third parties
    8,164       5.0 %     2,963       2.6 %
Casualties and insurance
    4,798       2.9 %     4,881       4.3 %
Materials
    6,852       4.2 %     5,434       4.8 %
Net loss (gain) on sale and impairment of assets
    471       0.3 %     (633 )     (0.6 %)
Other expenses
    14,505       8.8 %     9,154       8.2 %
 
                               
Total operating expenses
  $ 129,970       79.2 %   $ 87,874       77.6 %
 
                               

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     Labor and benefits expense, as a percentage of revenues, decreased to 17.8% in the six months ended June 30, 2004, compared to 18.2% in the six months ended June 30, 2003. In local currency, labor and benefits increased 18.1%. The increase was due to higher freight volumes, particularly the strong grain movements and the new business in New South Wales.

     Purchased services expense increased to 24.0% of revenue in the six months ended June 30, 2004, compared to 23.7% of revenues in the six months ended June 30, 2003. In local currency, purchased services increased 22.4%. The increase was primarily due to the use of contract locomotive engineers.

     Depreciation and amortization expense, as a percentage of revenues, decreased to 8.0% in the six months ended June 30, 2004, compared to 9.6% in the six months ended June 30, 2003. In local currency, depreciation and amortization increased 0.4%.

     Diesel fuel used in operations increased to 7.3% of revenues in the six months ended June 30, 2004, compared to 6.2% of revenues in the six months ended June 30, 2003. In local currency, fuel used in operations increased 43.4%. The increase was due to higher freight volumes on existing lines, the new business in New South Wales, the contract operations in the Northern Territory (ASD), and an increase in fuel prices.

     The cost of diesel fuel sold to third parties increased to 5.0% of revenues in the six months ended June 30, 2004, compared to 2.6% of revenues in the six months ended June 30, 2003. In local currency, the cost of diesel fuel sold to third parties increased 130.5%. The increase was due to a higher volume of fuel sales to third parties and an increase in fuel prices.

     Casualties and insurance costs decreased to 2.9% of revenues in the six months ended June 30, 2004, compared to 4.3% of revenues in the six months ended June 30, 2003. In local currency, casualties and insurance decreased 19.2%. The decrease was due to improved safety performance and a decrease in insurance costs.

     Materials expense, as a percentage of revenues, decreased to 4.2% in the six months ended June 30, 2004, compared to 4.8% in the six months ended June 30, 2003. In local currency, materials expense increased 5.5%. The increase was due to higher rolling stock maintenance costs.

     Net loss (gain) on sale and impairment of assets as a percentage of revenues, changed from a gain of 0.6% in the six months ended June 30, 2003 to a loss of 0.3% in the six months ended June 30, 2004. The net loss in the six months ended June 30, 2004 was due to asset write offs in South Australia related to a detailed asset review. In the six months ended June 30, 2003 asset dispositions resulted in a net gain.

     Other expenses, as a percentage of revenues, increased to 8.8% in the six months ended June 30, 2004, compared to 8.2% in the six months ended June 30, 2003. In local currency, other expenses increased 32.6%. The increase was primarily due to track access fees and various other increases in administrative costs related to the new business in New South Wales.

33


 

Liquidity and Capital Resources

     During the six months ended June 30, 2004 the Company generated cash flow from operating activities of $30.7 million, invested $11.6 million in capital assets (net of $1.6 million in state grant funds received for track rehabilitation and construction) and received $1.9 million in proceeds from employee stock purchases. The Company paid $411,000 of dividends on the Company’s Redeemable Convertible Preferred Stock and reduced its debt by $23.1 million during this same period primarily by using cash provided by operations.

     During the six months ended June 30, 2003 the Company generated cash flows from operating activities of $23.1 million, invested $7.2 million in capital assets (net of $469,000 in state grant funds received for track rehabilitation and construction), received $132,000 in cash from unconsolidated affiliates, received $526,000 in proceeds from the disposition of property, and received $1.4 million in proceeds from employee stock purchases. The Company paid $500,000 of dividends on the Company’s Redeemable Convertible Preferred Stock and reduced its debt by $16.7 million during this same period primarily by using cash provided by operations

     The Company has budgeted approximately $29.2 million in capital expenditures in 2004, of which $19.8 million is for track rehabilitation and $9.4 million is for equipment. Included in the budget is approximately $2.7 million to exercise an early buyout of 36 leased locomotives and approximately $3.0 million to rehabilitate 16 miles of track to access a new coal-fired power plant customer. The capital expenditures for track rehabilitation are net of $4.3 million that is expected to be funded by rehabilitation grants from state and federal agencies. Due to seasonal weather restrictions on track rehabilitation projects primarily in the northeast United States and Canada, only approximately $11.6 million of budgeted capital expenditures was completed as of June 30, 2004.

     At June 30, 2004 the Company had long-term debt, including current portion, totaling $134.0 million, which comprised 30.5% of its total capitalization. At December 31, 2003 the Company had long-term debt, including current portion, totaling $158.0 million, which comprised 35.2% of its total capitalization including the Convertible Preferred.

     The Company has historically relied primarily on cash generated from operations to fund working capital and capital expenditures relating to ongoing operations, while relying on borrowed funds and stock issuances to finance acquisitions and investments in unconsolidated affiliates. The Company believes that its cash flow from operations, together with amounts available under the credit facilities, will enable the Company to meet its liquidity and capital expenditure requirements relating to ongoing operations for at least the duration of the credit facilities.

Mexican Financings

     On December 7, 2000, one of the Company’s subsidiaries in Mexico, Servicios, entered into three promissory notes payable (Notes) totaling $27.5 million with variable interest rates based on LIBOR plus 3.5 percentage points. Two of the Notes, aggregating $16.8 million, have an eight year term with combined semi-annual principal payments of $1.4 million which began March 15, 2003, and continue through the maturity date of September 15, 2008. The third Note, in the amount of $10.5 million, has a nine year term with principal payments of $750,000 due semi-annually which began March 15, 2003, with a maturity date of September 15, 2009. The Notes are secured by essentially all the assets of Servicios and its subsidiary, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V., (FCCM), and a pledge of the Company’s shares of Servicios and FCCM. The Company is obligated to provide up to $8.0 million of funding to its Mexican subsidiaries, if necessary, to meet their investment or financial obligations prior to completing the investment phase of the project funded by the Notes (“Physical Completion”), consisting of several

34


 

obligations related to capital investments, operating performance and management systems and controls. In addition, the Company is obligated to provide $7.5 million in funding to Servicios to meet its debt service obligations prior to completing the financial phase of the project (“Financial Completion”), consisting of several financial performance thresholds. At present, FCCM has yet to achieve Physical Completion or Financial Completion. Based on current circumstances, it is probable that the Company will have to fund a portion of its funding obligation in order to meet the future principal repayment obligations of the Notes. The Notes contain certain financial covenants which Servicios is in compliance with as of June 30, 2004.

     In conjunction with the refinancing of FCCM and Servicios, the International Finance Corporation (IFC) (the primary lender to Servicios) invested $1.9 million of equity in Servicios for a 12.7% indirect interest in FCCM. Along with its equity investment, IFC received a put option exercisable in 2005 to sell its equity stake back to the Company. The put price will be based on a multiple of earnings before interest, taxes, depreciation and amortization. The Company increases its minority interest expense if the value of the put option exceeds the minority interest. Exercise of this put option by the IFC would result in a future cash outflow for the Company.

     Mexican Fuel Tax Credits — Under prior tax regulations, FCCM could apply diesel fuel tax credits it earned to a variety of its federal tax obligations, including income taxes, payroll taxes and value added taxes. In 2003, FCCM utilized approximately $3.3 million in such fuel tax credits. However, effective January 2004, due to Mexican tax regulations that allow railroads to apply these tax credits only to income tax related obligations, FCCM became unable to utilize such fuel tax credits. If this regulation remains in place FCCM would face additional annual cash payment obligations for the next few years until it generates sufficient taxable income to utilize such credits. This additional burden will make it more difficult for FCCM and Servicios to satisfy their debt obligations and increases the likelihood that the Company will have to fund all or a portion of its funding obligation. Company personnel are working with Secretary of Communications and Transportation and Mexican tax authorities to attempt to revise the tax regulation, but the Company can offer no assurance that it will be successful.

Supplemental Information – North America

     Free Cash Flow Description and Discussion – The Company views Free Cash Flow as an important financial measure of how well it is managing its assets. Subject to the limitations discussed below, Free Cash Flow is a useful indicator of cash flow that may be available for use by the Company. Free Cash Flow is defined as Net Cash Provided by Operating Activities less Net Cash Used in Investing Activities, excluding the Cost of Acquisitions. Key limitations of the Free Cash Flow measure include the assumptions that the Company will be able to refinance its existing debt when it matures, and meet other cash flow obligations from financing activities, such as required amortization of debt. Free Cash Flow is not intended to represent, and should not be considered more meaningful than, or as an alternative to, measures of cash flow determined in accordance with Generally Accepted Accounting Principles.

     The following table sets forth reconciliation for Net Cash Provided by Operating Activities to Free Cash Flow:

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    Six Months Ended
    June 30,
    2004   2003
Net cash provided by operating activities
  $ 30,711     $ 23,066  
Net cash used in investing activities
    (11,267 )     (6,574 )
Cash used for acquisitions
           
 
               
Free cash flow
  $ 19,444     $ 16,492  
 
               

     Impact of Foreign Currencies on Operating Revenues – In the six months ending June 30, 2004, foreign currency translation had a positive impact on consolidated North America revenues primarily due to the strengthening of the Canadian dollar. The following table sets forth the impact of foreign currency translation on reported operating revenues:

Operating Revenues
(dollars in thousands)

                                 
    Six Months Ended June,
    2004   2003
            Currency   Revenue Excluding    
    As Reported   Translation Impact   Currency Impact   As Reported
U.S. Operating Revenues
  $ 101,580       n/a     $ 101,580     $ 87,404  
Canada Operating Revenues
    29,605     $ 2,293       27,312       18,360  
Mexico Operating Revenues
    15,279       (857 )     16,136       16,034  
 
                               
Total Operating Revenues
  $ 146,464     $ 1,436     $ 145,028     $ 121,798  
 
                               

Supplemental Information — Australian Railroad Group

     ARG’s Free Cash Flow is defined as net cash provided by operating activities, less net cash used in investing activities, excluding the cash transfer to (from) restricted funds. The prior discussion concerning the usefulness and limitations associated with the Company’s Free Cash Flow also apply to the discussion of ARG’s Free Cash Flow. In addition, the Company has no access or right to any of ARG’s Free Cash Flow other than as a shareholder, and any dividend or distribution of cash by ARG must be approved by ARG’s board of directors, the Company and the Company’s 50/50 partner, Wesfarmers. The following table sets forth a reconciliation of ARG’s net cash provided by operating activities to its Free Cash Flow:

                 
    Six Months Ended
    June 30,
    2004   2003
Net cash provided by operating activities
  $ 30,692     $ 19,475  
Net cash used in investing activities
    (22,048 )     (9,287 )
Cash transfer to restricted funds(a)
          (3,396 )
 
               
Free cash flow
  $ 8,644     $ 6,792  
 
               


(a)   Cash transfer to restricted funds represents cash deposited in an escrow account for mandated capital expenditures.

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     Impact of Foreign Currency on ARG’s Operating Revenues and Net Income – In the six months ending June 30, 2004, foreign currency translation had a positive impact on ARG’s operating revenues and net income due to the strengthening of the Australian dollar. The following table sets forth the impact of foreign currency translation on reported operating revenues and net income:

ARG Operating Revenues and Net Income
(U.S. dollars in thousands)

                                 
    Six Months Ended June 30,
    2004   2003
            Currency   Revenue Excluding    
    As Reported   Translation Impact   Currency Impact   As Reported
Operating Revenues
  $ 164,070     $ 26,606     $ 137,464     $ 113,272  
 
                               
Net Income
  $ 14,432     $ 2,340     $ 12,092     $ 8,288  
 
                               

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     During 2003, 2002 and 2001, the Company entered into various interest rate swaps fixing its base interest rate by exchanging its variable LIBOR interest rates on long-term debt for a fixed interest rate. The swaps expire at various dates through September 2007 and the fixed base rates range from 3.35% to 5.46%. At June 30, 2004 and December 31, 2003, the notional amount under these agreements was $57.9 million and $60.6 million, respectively and the fair value of these interest rate swaps was a negative $1.1 million and $2.2 million, respectively.

     During 2004 and 2003, the Company entered into various exchange rate options that established exchange rates for converting Mexican Pesos to U.S. Dollars, one of which expires in September 2004, and gives the Company the right to sell Mexican Pesos for U.S. Dollars at an exchange rate of 12.61 Mexican Pesos to the U.S. Dollar, the other which expires in March 2005, and gives the Company the right to sell Mexican Pesos for U.S. Dollars at an exchange rate of 13.34 Mexican Pesos to the U.S. Dollar. The Company paid up-front premiums for these options of $49,000 and $28,000 in the quarters ended March 31, 2003, and June 30, 2004, respectively. At June 30, 2004 and December 31, 2003, the notional amount under exchange rate options was $4.7 million and $5.3 million, respectively. At June 30, 2004 and December 31, 2003, the fair value of exchange rate currency options was $19,000 and $15,000, respectively.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s report under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2004. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

     There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The Company is a defendant in certain lawsuits resulting from its operations. There have been no material developments in any litigation matters previously disclosed. The Company believes that it has adequate provisions in the financial statements for any expected liabilities which may result from disposition of such lawsuits. While it is possible that some of the foregoing matters may be resolved at a cost greater than that provided for, the Company believes that the ultimate liability, if any, will not be material to its operating results, financial condition or liquidity.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES — NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES — NONE

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 12, 2004, the Stockholders of the Company voted on the following proposals at the Annual Meeting:

Proposal 1: To elect three directors to serve for a three-year term expiring in 2007:

                 
    For   Authority Withheld
Louis S. Fuller
    48,471,413       765,008  
Philip J. Ringo
    47,941,681       1,294,740  
Mark A. Scudder
    48,479,005       757,416  

The other directors, whose terms of office continued after the meeting, are Robert W. Anestis, Mortimer B. Fuller, III, T. Michael Long, Robert M. Melzer, Peter O. Scannell and Hon. M. Douglas Young, P.C.

Proposal 2: To adopt the Genesee & Wyoming Inc. 2004 Omnibus Incentive Plan:

         
For
    44,928,813  
Against
    1,466,485  
Abstain
    8,425  
Broker non-votes
    2,832,698  

Proposal 3: To approve and ratify the selection of PricewaterhouseCoopers LLP as the Company’s independent auditors for the year ending December 31, 2004:

         
For
    49,120,213  
Against
    115,038  
Abstain
    1,170  

ITEM 5. OTHER INFORMATION — NONE

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         
(A).   EXHIBITS — SEE INDEX TO EXHIBITS
 
       
(B).   REPORTS ON FORM 8-K
 
       
  (a)   Report dated May 3, 2004 reporting on Item 5. Other Events and Regulation FD Disclosure. This report furnished the Company’s press release regarding its filing a registration statement on Form S-3 with the Securities and Exchange Commission.
 
       
  (b)   Report dated May 3, 2004 reporting on Item 12. Disclosure of Results of Operations and Financial Condition. This report furnished the Company’s press release regarding the Company’s financial results for the first quarter of 2004.

INDEX TO EXHIBITS

     
(10.1)
  Genesee & Wyoming Inc. 2004 Deferred Compensation Plan for highly compensated employees and directors dated May 7, 2004
 
   
(31.1)
  Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
 
   
(31.2)
  Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
 
   
(32.1)
  Section 1350 Certifications

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
    GENESEE & WYOMING INC.
 
       
Date: August 6, 2004
  By:   /s/John C. Hellmann
       
      Name: John C. Hellmann
Title: Chief Financial Officer
 
       
Date: August 6, 2004
  By:   /s/James M. Andres
       
      Name: James M. Andres
Title: Chief Accounting Officer and Global Controller

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