RailAmerica, Inc.

Dawn of a New Era in Railroading

RailAmerica Corporate Video on CD

RailAmerica, Inc. 5300 Broken Sound Boulevard NW 2000 Annual Report Boca Raton, Florida 33487 (561) 994-6015 www..com CORPORATE HEADQUARTERS 5300 Broken Sound Boulevard NW Boca Raton, Florida 33487 (561) 994-6015 CORPORATE OFFICES (561) 994-4629 (facsimile) Corporate Headquarters Boca Raton, Florida Regional Office San Antonio, Texas REGISTRAR AND TRANSFER AGENT Regional Office San Francisco, California American Stock Transfer and Trust Company NORTH AMERICAN RAILROADS New York, New York Cape Breton & Central Railway Stellarton, Nova Scotia, Canada (800) 937-5449 Carolina Piedmont Railroad Laurens, South Carolina Cascade & Columbia River Railroad Omak, Washington ANNUAL MEETING OF SHAREHOLDERS Central Oregon & Pacific Railroad Roseburg, Oregon RailAmerica, Inc. June 22, 2001 at 10 a.m. EDT Central Railroad Company of Indiana Cincinnati, Boca Raton Marriott Hotel Central Railroad Company of Indianapolis Kokomo, Indiana (www.railamerica.com), 5150 Town Center Circle Central Western Railway Stettler, Alberta, Canada Boca Raton, Florida Chesapeake & Albemarle Railroad Elizabeth City, North Carolina the world’s largest short Connecticut Southern Railroad East Hartford, Connecticut line and regional rail- INVESTOR INQUIRIES Dakota Rail Hutchinson, Minnesota To receive copies of reports filed with the Dallas, Garland & Northeastern Railroad Garland, Texas road operator, owns 39 Securities and Exchange Commission or

Esquimalt & Nanaimo Railway Nanaimo, Vancouver Island, Company Profile short line and regional other information about RailAmerica, contact British Columbia, Canada Wayne A. August, Assistant Vice President of Georgia Southwestern Railroad Smithville, Georgia railroads operating over Investor Relations, at the corporate offices, Goderich-Exeter Railway Kitchener, , Canada or email at [email protected]. Grand Rapids Eastern Railroad Grand Rapids, approximately 11,000 Huron & Eastern Railway Vassar, Michigan route miles in the United COMPANY WEBSITE Indiana & Ohio Rail Corporation Cincinnati, Ohio Visit our website at www.railamerica.com Indiana Southern Railroad Petersburg, Indiana States, Canada, to obtain recent press releases, quarterly Lakeland & Waterways Railway Edmonton, Alberta, Canada reports and additional information about MacKenzie Northern Railway McLennan, Alberta, Canada and the Republic of Chile. RailAmerica, including how to receive a Muskegon, Michigan In North America, the hard copy of our Annual Report, as well as Mid-Michigan Railroad Greenville, Michigan to sign up to receive Company information Missouri & Northern Arkansas Railroad Carthage, Missouri Company’s railroads via email. New England Central Railroad St. Albans, Vermont North Carolina & Railroad Ahoskie, North Carolina operate in 22 states and INDEPENDENT AUDITORS North Bay, Ontario, Canada six Canadian provinces. PricewaterhouseCoopers LLP Otter Tail Valley Railroad Fergus Falls, Minnesota Fort Lauderdale, Florida Saginaw Valley Railway Vassar, Michigan Internationally, the San Diego & Imperial Valley Railroad San Diego, California Company operates an Company Information STOCK LISTING South Carolina Central Railroad Hartsville, South Carolina Nasdaq National Markett (NNM) Railway Hamilton, Ontario, Canada additional 4,300 route Symbol: RAIL Texas-New Mexico Railroad Hobbs, New Mexico Texas Northeastern Railroad Garland, Texas miles under track access STOCK PRICE RANGE Toledo, Peoria & Western Railroad East Peoria, Illinois High Sales Low Sales Port Hueneme, California arrangements in 2000 Price Price Virginia Southern Railroad Keysville, Virginia Australia and Argentina. Q1 $9.063 $5.750 West Texas & Lubbock Railroad Lubbock, Texas Designed by Curran & Connors, Inc. / www.curran-connors.com Q2 6.938 4.625 Q3 7.875 5.750 INTERNATIONAL RAILROADS Q4 8.000 5.688 Ferronor (Empresa de Transporte Ferroviario S.A.) Coquimbo, Chile High Sales Low Sales , Australia 1999 Price Price Q1 $10.250 $7.688 Q2 10.313 8.750 Q3 10.750 9.125 Q4 9.938 7.063 Financial Highlights 1996-2000

($ thousands, except earnings per share) 2000 1999 1998 1997 1996

Income Statement Data Rail Operating Revenues $357,936 $129,818 $ 39,136 $24,496 $12,020 Rail Operating Income 70,034 25,279 5,781 3,365 2,529 Income from Continuing Operations 9,608 6,025 113 288 478 Diluted Earnings Per Share from Continuing Operations $0.49$ 0.43 $ 0.01 $ 0.02 $ 0.09 Pro forma(1) Diluted Earnings Per Share from Continuing Operations $0.74$ 0.43 $ 0.01 $ 0.02 $ 0.09 Net Income 11,661 9,921 4,401 1,939 505 Net Income Per Diluted Share $0.60$ 0.77 $ 0.45 $ 0.22 $ 0.10 Pro forma(1) Net Income Per Diluted Share $0.85$ 0.77 $ 0.45 $ 0.22 $ 0.10 Weighted Average Diluted Shares Outstanding 18,267 11,665 9,778 8,587 5,114

Balance Sheet Data Total Assets $839,703 $443,929 $130,964 $95,141 $65,215 Long-term Debt 358,856 162,827 66,327 47,603 37,788 Subordinated Debt 141,411 122,449 — 2,212 2,212 Stockholders’ Equity (incl. Preferred Stock) 130,047 78,297 41,642 26,814 15,992 (1) Pro forma for year 2000 special items consisting of acquisition-related costs, a non-cash foreign exchange loss and non- recurring asset sale gains, which combined result in an addback of $4.6 million after-tax, or $.25 per diluted share.

Rail Operating Revenues EBITDA* Total Assets Stockholders « Equity (in millions) (in millions) (in millions) (in millions) $96.1 $839.7 $130.0 $357.9 $78.3 $443.9 $34.5 $129.8 $41.6 $131.0 $26.8 $39.1 $95.1 $8.3 $16.0 $65.2 $24.5 $5.2 $3.6 $12.0 ´00 ´00 ´00 ´00 ´99 ´99 ´99 ´99 ´98 ´98 ´98 ´98 ´97 ´97 ´97 ´97 ´96 ´96 ´96 ´96

*Earnings before interest, taxes, depreciation and amortization

1 Chairman’s Letter

With railroads being part of industrialized soci- rose 176 percent to $358 million, operating income ety for the past two centuries, one may find it hard to increased 177 percent to $70 million, EBITDA climbed believe that RailAmerica is bringing anything novel to 179 percent to $96 million and income from continu- railroading today, much less ushering in “a new dawn ing operations increased 59 percent to $10 million. in railroading.” Many have said that railroads are After the successful completion of our RailTex dinosaurs, an “old economy” business that has been acquisition in early 2000, we solidified our long-term losing market share and has outlasted their useful- capital structure. Working within the constraints of a ness—how could RailAmerica make such a daring tight credit market, we replaced three high interest statement in the face of such criticism of the industry? bridge loans with permanent financing. We success- The answer lies within the world’s largest and preem- fully consummated an institutional finance package inent short line and regional railroad operator and its consisting of $330 million in term loans and $50 million latest financial achievements, its talented management in a revolving credit facility. In addition, we com- team, its innovative approach to rail service, and pleted a high yield bond financing for $130 million in finally, its proven growth strategy. Combined, they a challenging capital market environment during the create a Company working to grow the business, help summer of 2000. These transactions allowed us to change the industry and enhance shareholder value. reduce future interest expense, enhance cash flow and solidify our balance sheet. 2000 Financial Achievements Recognizing the need to reduce debt incurred in RailAmerica continued its remarkable growth in 2000, connection with our acquisition activities over the achieving record revenues, carloads, operating income, past several years, management implemented a plan EBITDA and net income. Our carloads reached nearly to identify and monetize certain non-core, non-strategic 1.2 million, up 193 percent, while “same railroad” car- assets. This process produced proceeds from sales loads rose 9 percent over the prior year. Revenues and other transactions totaling over $120 million as of

In 2000, RailAmerica celebrated our fifteenth year as a rail operator. The Company was formed in 1986 when we purchased the 83-mile Huron & Eastern Railroad (right) in Michigan from Class I carrier CSX. year-end 2000. Included in the assets sold were Kalyn/Siebert, Inc., our truck trailer manufacturing operations, five small railroads, our 26 percent minor- ity equity interest in Railway Corporation, and other non-operating real estate and non-essential track and rolling stock. To better utilize the value of our core rolling stock, we commenced the process of executing a total of approximately $150 million in off- balance sheet operating leases through the sale and leaseback of locomotives and railcars—completing $22 million of such transactions in December 2000. Through our asset rationalization and sale/ leaseback programs, we have been able to reduce our debt to equity ratio from over 5 times after the RailTex acquisition, to less than 3.7 times at December 31, 2000. Additionally, these programs have allowed us to increase our focus on our major, core railroads and generate significant cash proceeds, enabling us to fur- ther enhance shareholder value. Gary O. Marino Chairman, President & CEO Talented Management As we celebrate our fifteenth year of business at RailAmerica, I have always acknowledged our fine President & Chief Financial Officer. Gary, a 30-year management team and staff and how vital their contri- railroad veteran from CSX and , brings a butions have been, and will continue to be, in making wealth of rail operating expertise to our Company. this company a success. Bennett, a former KPMG partner with over 30 years The core of our management team has been of finance and accounting experience, is a highly together since our inception, but we have also respected executive who possesses solid business and enhanced the team with a corporate governance experi- number of experienced execu- ence. It will be Bennett’s role tives and many other quality to administer this Company’s staff members over the years. RailAmerica continued its global financial accounting and Most recently, we integrated remarkable growth in 2000, controls, while Gary’s proven the two talented senior and achieving record revenues, record of integrating opera- mid-level management staffs carloads, operating income, tions and producing bottom- line results gives us the ability of RailAmerica and RailTex EBITDA and net income. and coordinated the activities to enhance the quality, effi- conducted at our headquarters ciency and cost effectiveness in Boca Raton with those at of the rail services provided by our regional office in San Antonio, the former head- our North American operations. These additions have quarters of RailTex. In the field, a regional structure allowed us to round out our executive team and pre- was created that allows our superb general managers, pare for the effective management of our future growth. most of whom have many years of Class I rail experi- ence, to have direct control and fiscal responsibility Exceptional Rail Service for their rail operations. All of what RailAmerica achieved in 2000 occurred in At our headquarters we bolstered the finance, a general business environment that was both excit- strategic planning, legal, human resources, engineer- ing and challenging. As an industry, railroads had to ing and operations areas with fine management talent deal with rising fuel prices and interest rate changes this past year. Of particular note, Gary M. Spiegel was that added to the cost and unpredictability of doing named Chief Operating Officer, North American Rail business. Due to our significant operations in Australia, Group and Bennett Marks joined as Senior Vice we were confronted with volatility in the value of the

2-3 Australian dollar. However, our strong organic rail service. Our marketing representatives work growth, aided by our diverse geographic locations directly with existing customers to ensure that our rail and the diversified commodities that we move, transportation services are tailored to their needs, helped to mitigate these factors. In total, no one com- while aggressive marketing strategies convince new modity makes up more than 10 percent of our car- shippers to convert from truck to rail. The final ele- loads and approximately 35 percent of our revenues ment of this service is our “partner” relationships with are derived from our international properties, with our Class I connections, who are able to provide the the remainder spread among 22 U.S. states and six long haul, or wholesale, portion of rail service with Canadian provinces. great efficiency. Proving that challenges bring out the best in our We were able to offer this exceptional service people, our Central Oregon & Pacific and Indiana & while keeping expenses in line. As a matter of fact, Ohio railroads received awards for excellence in mar- our North American railroad operating ratio (ratio keting by the American Short Line & Regional of expenses to revenues) for the year, excluding Railroad Association (ASLRRA) in 2000. In addition, acquisition-related costs and non-recurring gains from nine other RailAmerica short line railroads were rec- asset sales, was 76.1 percent—one of the best ratios ognized for outstanding safety by the ASLRRA. In in the entire industry. Our new regionalized operating Chile, after more than a year of negotiations, our structure, combined with the cost savings and syner- Ferronor railroad signed an historic agreement with gies captured from the RailTex integration, allowed us the Argentinean-based General Belgrano Railroad. to offset the nearly $7 million of additional expenses This agreement established the first regular inter- incurred during the year due to higher fuel prices. country freight service between two countries that Internationally, revenues improved 52 percent to were clashing with each other not long ago. $125 million and carloads rose 38 percent in 2000. In North America, our revenues rose 415 percent Propelled by strong grain traffic and new business to $231 million, while “same railroad” carloads were under its new 5-year contract with logistics specialist, up seven percent in 2000—an outstanding achieve- Specialized Container Transport (SCT), our Freight ment that was driven by our excellent retail rail cus- Australia railroad achieved record results in 2000. This tomer service. With over 1,500 customers on our rail transcontinental “hook-and-pull” service with SCT is lines, we aim to meet and exceed their transportation just one of the long-term contracts signed by Freight needs by providing customized, reliable and timely Australia that have allowed them to surpass the

Revenue Mix* Commodity Mix*

29% Australia 17% Bridge Traffic

6% Minerals

3% Other

16% Canada 7% Agricultural Products (N.A.)

7% Agricultural Products (Australia)

9% Lumber & Forest Products

13% U.S. Northeast 6% Paper Products

10% U.S. Southeast 8% Iron Ore (Chile)

6% Coal

5% Metals/Steel

12%U.S. Midwest 4% Autos/Auto Parts

9% U.S. Northwest 3% Food Products

5% U.S. Southwest 10% Chemicals

3% Intermodal (N.A.)

6% Chile 6% Intermodal (Australia)

*Based on 2000 revenues of $358M *Based on 2000 carloads of 1.2M US$100 million mark in revenues. Ferronor, on the The market for domestic short line rail acquisi- strength of its long-term contracts with its mining tions is starting to expand as mergers between Class I’s customers, was able to grow revenues 20 percent to and consolidations among short line and regional $23 million in 2000. railroads have opened up several thousand miles of rail lines for sale. Opportunities also exist in interna- Solid Growth Strategy tional markets as more government-owned railway Over the past 15 years, we have built a larger, systems are being privatized every year. We intend to stronger company—one now gaining the recognition look at those prospects that are strategically impor- of both the financial and media markets. RailAmerica, tant, particularly in regions where we currently operate in the past 12 months, has been featured in the Wall and can achieve significant cost savings and syner- Street Journal, Florida Trend magazine, Business gies. Finally, any rail acquisitions that we pursue must Week and numerous other publications. In October meet our stringent operating criteria and, most impor- 2000, we were recognized by Forbes magazine as one tantly, must be accretive to earnings and improve our of “The 200 Best Small Companies in America.” debt leverage and coverage ratios. These accolades are nice, but what have we In summary, we are encouraged by the inherent done to enhance shareholder value? In 2000, we suc- strength and diversity of our worldwide rail opera- cessfully achieved our main objectives, the integration tions. We are now the preeminent short line rail oper- of RailTex and permanent refinancing of our acquisi- ator in North America, and we operate two of the tion debt. Although we have most successful railroads in made great strides in reducing South America and Australia. our debt-to-equity ratio over We fully intend to continue We fully intend to continue the past year, we have not to grow our 11,000-mile rail to grow our 11,000-mile completed the task. system, while at the same rail system, while at the same For the five years ending time reducing our financial time reducing our financial December 31, 2000, on aver- leverage and increasing our age, our revenues have grown leverage and increasing free cash flow. We believe 134 percent, our EBITDA 127 our free cash flow. that these efforts will make percent, our operating income RailAmerica an even stronger, 107 percent, and our net more dynamic entrepreneurial income 119 percent—impressive results for a company with superior profitability and enhanced Company in an industry that was considered obso- shareholder value. lete. These achievements have also been recognized As you can see, we are creating a new paradigm by the stock market. Our stock has outpaced the for the rail industry, a new global rail business, a new S&P500, the Russell 2000 Index and our peers, with a standard for an old industry. Yes, we are helping to total return of 171 percent over last five years ended usher in a new dawn in railroading. March 31, 2001. In fact, over the past twelve months ending March 31, 2001, our stock has grown a remarkable 48 percent. Sincerely, We are confident that we can continue to signifi- cantly grow the business in the new millennium. We expect to maximize the benefits of our portfolio of railroads through both acquisitions and divestitures in order to enhance overall operations.

4-5 Yesterday, trains were the iron horses of the industrial age, powerful locomotives moving bulk freight from shipper to receiver with the greatest of ease. Trains criss-crossed the nation as carloads of freight changed hands from one railroad to the next. Business was good for an industry with a storied past. Unfortunately, customer service also became a thing of the past. Rail service was slow, erratic and unreliable, shipper’s cars were even lost in the nation’s vast rail system. Customers, seeking better serv- ice for the movement of their goods, were driven to other modes of transportation. Today, RailAmerica is ushering in a new dawn in railroading. Although we still move bulk freight the old fash- ioned way with powerful locomotives, we are also responsive, innovative and customer-oriented. Working to bring shippers back to rail and keeping them satisfied is our way of life. Our short line rail- roads in the United States and Canada are the industry’s premier feeder lines, providing enhanced retail rail service for more than 1,500 customers. In Chile and Australia, we have transplanted our new way of railroading to make these formerly government-owned enterprises some of the most profitable, customer-focused freight railroads in the world.

6-7 North American Rail Group • 37 short line railroads • Operate in 22 U.S. States and 6 Canadian provinces • 6,260 miles of track • 1,320 employees • 368 locomotives & 4,271 railcars United States & Canadian Operations

Every day, RailAmerica’s North American rail- with the ASLRRA’s “Jake” safety award, and the Missouri road personnel focus on meeting and exceeding cus- Northern Arkansas railroad won the ASLRRA’s presti- tomer expectations by providing dependable retail gious “Copper” safety award in the 200,001 to 500,000 rail service at reasonable rates. In 2000, a record man-hour category. 839,451 carloads of product from approximately 1,500 Working directly with existing customers, customers were moved along its 6,260 miles of North RailAmerica’s marketing representatives ensure that American rail lines and interchanged with Class I rail transportation services are customized to their partner carriers. The Company’s North American rail- needs, while aggressive marketing strategies convince roads delivered revenues of $231 million in 2000, a new shippers to convert from other modes of transpor- 465 percent increase over 1999. Despite higher fuel tation to rail. In fact, RailAmerica was successful in expenses, the railroad operating converting nearly 100 cus- ratio, adjusted for acquisition- tomers from truck to rail for related costs, improved to 76.1 “RailAmerica’s strength as shipping products in North percent in 2000. a retail rail operator is our ability America in 2000—and in the By empowering its employ- to improve carloadings through a process removed approximately ees, local management and 9,000 trucks from the highways. crews are able to respond combination of efficient opera- One reason for this promptly to customer needs, tions, superior customer service tremendous success is the providing flexible and econom- and aggressive marketing.” Company’s proven record of ical solutions for shippers and Gary Spiegel, Executive Vice President & COO, customer service that helps receivers. Logistically, market- North American Rail Group to capture new business. Two ing personnel, train dispatchers, RailAmerica railroads, the Cen- track and equipment mainte- tral Oregon & Pacific (CORP) nance workers, information technology specialists and Indiana & Ohio (I&O), were recognized for and office staff all work together as a team to provide excellence in marketing by the ASLRRA in 2000. up-to-the-minute data to field employees for the CORP won the marketing award for an innovative effective delivery of rail service. In North America, marketing solution that allowed one of its major trains are dispatched from one of four centralized customers, Timber Products, to convert a truck move- state-of-the-art regional dispatching centers. ment of veneer to rail, resulting in over 1,000 new rail Operationally, RailAmerica places a strong emphasis carloads, or the equivalent of approximately 3,300 on the safety of its employees and the communities trucks. The I&O, partnering with its sister RailAmerica served. In 2000, Federal Railroad Administration railroad, the Central Railroad of Indiana, won its (FRA) reportable injuries were reduced 53 percent, marketing award for capturing significant pig iron while total injuries and FRA derailments both fell 40 traffic inbound to North Star/BHP Steel Company. percent. In addition, a total of eight RailAmerica rail- This traffic was previously moved by a combination roads were recognized in 2000 for outstanding safety of vessel and truck.

8-9 Australian Operations

Since acquiring the former V/Line Freight railroad Most recently, Freight Australia signed a new in May 1999, RailAmerica’s Freight Australia has 5-year, A$60 million exclusive transportation agreement become the premier privately-owned rail operator in to provide transcontinental “hook-and-pull” rail serv- Australia. By bringing U.S. railway practices and pro- ice for one of the nation’s leading freight forwarders, cedures to the country, Freight Australia has helped to Specialized Container Transport (SCT). Under the change the culture and operating methodology for this agreement, Freight Australia provides comprehensive former deficit ridden, government-owned railroad, while management of train services for SCT’s Melbourne- allowing for a smooth transition to private enterprise. Perth-Melbourne trains, which carry thousands of The results of this transition are literally phenome- tons of freight each week on this vital, transcontinen- nal. Freight Australia saw rev- tal east-west corridor. In order enues increase to $102 million “We like to refer to Freight to make this service more in 2000, from $63 million in the Australia as a role model for pri- competitive, Freight Australia 10 months of 1999, RailAmerica’s implemented an innovative in- first year of ownership. Most vatised rail in Australia. route refueling process for impressive is the profitability In just 20 months we have imple- these long distance trains. as measured by EBITDA, where mented a tremendous turn- Investment in infrastructure Freight Australia saw an $11 around in the profitability of the has allowed Freight Australia million increase to $26 million business.” to grow and will continue to in 2000 over 1999. In addition, be essential to meet long-term Marinus van Onselen, Chief Executive Officer, Freight Australia’s operating Freight Australia demand. To that end, the rail- ratio improved to 80 percent in road has commenced conver- 2000 from 81 percent in 1999. Key to these results was sion of up to 700 grain wagons to increase capacity a bumper grain harvest in early 2000 and new business from 76 tons to 100 tons; purchased a new generation initiatives in interstate and transcontinental operations. 4,000 horsepower V-class locomotive; begun a program With about 45 percent of its business tied to the to re-power and re-equip G-, X- and T-class locomo- agricultural market, Freight Australia was successful in tives; upgraded and re-opened the Sale-Bairnsdale securing major, long-term transportation contracts rail line; doubled the log wagon fleet; re-built 50 wag- with its largest grain customer within six months of ons for rice haulage; converted open wagons for 40- commencing operations—a very important step due foot containers; converted 50 wagons for high-speed to open access initiatives in Australia. Also in its first standard gauge use; and overhauled, updated and year, Freight Australia gained new business that replaced administrative and IT systems. expanded its rail service beyond traditional state boundaries to other regions of Australia. Freight Australia • Based in Melbourne, Australia • 3,150 miles of track • 3,887 miles of track access • 650 employees • 106 locomotives & 2,644 railcars

10-11 Ferronor • Based in Coquimbo, Chile • 1,400 miles of track • 386 miles of track access • 260 employees • 31 locomotives & 963 railcars Chilean Operations

Ferronor, RailAmerica’s first international railroad, contract with Compania Minera Huasco (CMH) signed has succeeded where most others have failed in in 1997, the railroad has completed a $24 million capital South America. Since its inception in February 1997, project focusing on improving infrastructure and rolling this railroad has exceeded expectations for growth stock required to move the more than 5.2 million tons and service, with revenues growing to $23 million in of iron ore annually from CMH’s Los Colorados mine 2000, from $7 million in that first year. During this located in central Chile. Further north, in the heart of same period, carloads have grown six times over to the Atacama desert, Ferronor transports mineral salts approximately 109,000 in 2000, and EBITDA from less under an 11-year, 3.5 million ton contract with SQM than $1 million to approximately $5 million in 2000. Nitratos S.A. (Soquimich). This long-term contract Although a 1,400-mile long provided for Ferronor to invest north-south railroad serving “Ferronor’s historical agreement $9.5 million in upgrading infra- the mining region of northern with Argentina, combined with structure and rolling stock, while Chile, Ferronor is operated as its long-term take-or-pay mining in return Soquimich agreed to a series of east-west short lines increase annual production and linking a number of iron ore, transportation contracts, provide carloadings with Ferronor. cement, mineral salt, copper a substantial base from which In October 2000, Ferronor and limestone mines and pro- to continue growing this took a giant leap in the race to duction facilities to the Pacific successful business.” become the leader in South ports. Many of the same U.S.- W. Graham Claytor, III, Senior Vice President, America’s rail freight transpor- based short line railroad oper- International Rail Group tation market with its historic ating procedures have been agreement with Belgrano utilized to increase business efficiency at Ferronor. Cargas, S.A., the operator of the General Belgrano The railroad has improved operations through a com- railroad in Argentina. Ferronor now operates freight bination of service initiatives and capital improvements, trains 618 kilometers (386 miles) from Chile’s border allowing mining companies to rely on a railroad that at Socompa to Guemes, Argentina—marking the first was once unreliable and unresponsive under govern- time ever that Chilean trains traverse Argentine soil ment ownership. on a regular basis. This service provides international Since taking over the rail line, Ferronor has signed shippers in South America with a more efficient mode major, take-or-pay contracts with mining companies of moving their goods across the continent from worth more than $285 million over the next 10-20 Atlantic ports to Pacific ports, making Chile and years. These long-term commitments have allowed Argentina more competitive in world markets. Ferronor to invest in infrastructure and therefore grow business from the mines. Associated with its 20-year

12- Strategic Advantages

RailAmerica achieved record results in 2000— In addition to its people, another competitive due primarily to the hard work of its talented manage- advantage for RailAmerica is its diversification. The ment team, staff and field personnel, now numbering Company has assembled a portfolio of 39 railroads over 2,200 individuals worldwide. With robust growth that have geographic and commodity diversity second projected for the next several years, the Company’s to none. No one product commodity makes up more management team was strengthened in key areas dur- than 10 percent of carloads and approximately 35 per- ing 2000 and early 2001. Significant appointments cent of revenues are derived from international prop- include Gary Spiegel, Executive Vice President & Chief erties. In 2000, this diversification helped RailAmerica Operating Officer for North America, and Bennett Marks, realize nine percent growth in “same railroad” car- Senior Vice President & Chief loads—three to four times the Financial Officer. Both of these “We have built a larger, industry average. Additionally, appointments, as well as much stronger company—one that has RailAmerica has no direct rail needed additions in strategic allowed us to improve competition in the markets planning, law, human resources it serves. and operations, have created rail operations, capture RailAmerica expects to a more vibrant, experienced cost savings and achieve continue to maximize the ben- leadership team ready to superior growth in an efits and synergies of its rail work together to achieve the ‘old-economy’ industry.” portfolio through both acquisi- Company’s strategic goals. Bennett Marks, Senior Vice President & tions and divestitures. The For the past 15 years the Chief Financial Officer Company intends to look at Company has been a leader in acquisition prospects that make acquiring and integrating railroads, achieving cost strategic sense, particularly in areas where cost savings savings through the consolidation of back-office func- and synergies can be achieved among regional opera- tions and expense reductions through clustering of tions. Divesting of the Company’s smaller, non-strategic field operations. This leadership crosses all bound- assets and railroads allows management to focus on its aries within the organization. RailAmerica is one of major, core rail properties. This program, combined the few railroad companies exporting U.S.-based rail with the Company’s $150 million rolling stock management and operating expertise overseas. And sale/leaseback program that commenced in late 2000, due to its successful international experience, the has the added benefit of generating proceeds that will Company is viewed as one of the premier interna- be used to lower the Company’s overall debt level. tional rail operators in the world. RailAmerica Data • 39 short line and regional railroads • Operate on three continents, in five countries • 10,810 miles of track • 1,151,743 carloads moved in 2000 • 2,239 employees

14-15 Financial Section Management’s Discussion and Analysis ...... 17 Consolidated Statements of Report of Independent Certified Stockholders’ Equity ...... 28 Public Accountants ...... 24 Consolidated Statements Report of Independent Accountants ...... 25 of Cash Flows ...... 29 Consolidated Balance Sheets ...... 26 Notes to Consolidated Consolidated Statements of Income ...... 27 Financial Statements ...... 30 Management’s Discussion and Analysis

General We disposed of certain railroads during 2000 as follows: Our principal operations consist of the operations Minnesota Northern Railroad August 2000 of North American short line freight railroads and St. Croix Valley Railroad August 2000 international regional railroads. We haul various South Central Tennessee Railroad December 2000 Industrial Railroad December 2000 products for our customers corresponding to their Ontario L’Orignal Railway December 2000 local operating areas. We recognize railroad trans- As a result, the results of operations for the years portation revenue after services are provided. ended December 31, 2000, 1999 and 1998 are not On February 4, 2000, we acquired RailTex, Inc. comparable in various material respects and are not (“RTEX”) for approximately $128 million in cash, indicative of the results which would have occurred assumption of $105.3 million in debt and approxi- had the acquisitions or dispositions been completed mately 6.6 million shares of our common stock, at the beginning of the periods presented. valued at $60.8 million. RailTex owned and operated The following table sets forth the operating revenues 25 short line freight railroads with approximately and expenses (in thousands) for our North American 4,100 miles of track concentrated in the southeastern, railroad operations for the periods indicated. All midwestern, Great Lakes and New England regions results of operations discussed in this section are of the United States and eastern Canada. In connec- for our North American railroads only, unless other- tion with the acquisition, we entered into a credit wise indicated. agreement providing $330 million of senior term loans and $50 million of senior revolving loans. Years Ended December 31, 2000 1999 1998 In addition, one of our wholly-owned subsidiaries Revenues $231,445 $ 44,924 $18,067 issued $95 million of subordinated bridge notes and Operating Expenses: Maintenance of way 25,448 5,920 1,974 another wholly-owned subsidiary issued $55 million Maintenance of of asset sale bridge notes in connection with the equipment 13,101 2,068 682 acquisition. All of the bridge notes were repaid Transportation 70,958 12,232 3,605 Equipment rental 15,842 4,512 2,296 in 2000. (Gain) loss on sale of assets (12,063) 355 (79) Set forth below is a discussion of the historical General and administrative 41,062 6,496 3,095 results of operations for our North American Depreciation and amortization 16,430 3,594 1,570 and international railroad operations as well as Total operating expenses 170,778 35,177 13,143 a discussion of corporate overhead. Operating income $ 60,667 $ 9,747 $ 4,924

North American Railroad Operations Comparison of North American Railroad Operating Our historical results of operations include the Results For the Years Ended December 31, 2000 and 1999 operations of our acquired railroads from the dates of acquisition as follows: Operating revenues. Operating revenue increased Name of Railroad Date of Acquisition by $186.5 million, or 415%, to $231.4 million for Ventura County Railroad September 1998 the year ended December 31, 2000 from $44.9 mil- E&N Railway January 1999 lion for the year ended December 31, 1999. North RaiLink properties (“RaiLink”) (6 railroads) August 1999 American carloads totaled 839,451 for the year ended Toledo, Peoria and Western Railroad (“TPW”) September 1999 RailTex properties (25 railroads) February 2000

RailAmerica, Inc. and Subsidiaries 16-17 Management’s Discussion and Analysis (continued)

December 31, 2000, an increase of 684,460 com- hauls a significant amount of bridge traffic at a lower pared to 154,991 carloads in the prior year. These rate per car than the Company’s other rail lines and increases were primarily due to the acquisitions of intermodal traffic on the newly acquired TPW TPW, RaiLink and RailTex which on a combined which also moves at a lower rate per car than the basis contributed $206.9 million in revenue and Company’s other rail lines. Carloads handled totaled 782,614 carloads for the year ended December 31, 154,991 for the year ended December 31, 1999, an 2000 compared to $18.1 million in revenue and increase of 105,472, or 213%, compared to 49,519 94,309 carloads for the year ended December 31, for the year ended December 31, 1998. The increase 1999. Transportation revenue per carload remained was primarily due to the acquisitions of E&N fairly constant at $239 and $238 for the years ended Railroad, the RaiLink properties and TPW, which December 31, 2000 and 1999 respectively. moved 7,839, 77,328 and 16,981 carloads, respec- tively, for the year ended December 31, 1999. Operating expenses. Operating expenses increased by $135.6 million, or 385%, to $170.8 million for the Operating expenses. Operating expenses increased year ended December 31, 2000 from $35.2 million $22.0 million, or 168%, to $35.2 million for the year for the year ended December 31, 1999. The increase ended December 31, 1999 from $13.1 million for the was due to the acquisitions of TPW, RaiLink and year ended December 31, 1998. The increase was RailTex which on a combined basis contributed primarily due to the acquisitions of E&N Railroad, $164.6 million in operating expenses for the year the RaiLink properties and TPW, which had $4.4 mil- ended December 31, 2000 compared to $14.4 million lion, $11.1 million and $3.4 million, respectively, in for the year ended December 31, 1999. The increase operating expenses for the year ended December 31, was partially offset by a $9.1 million gain on sale of 1999 and the write-off of $0.6 million in costs related land on a Texas railroad and a $3.0 million gain on to the discontinuance of the Valley Railway. the sale of certain railroad subsidiaries. Additionally, Operating expenses, exclusive of gains and losses increased fuel costs impacted our operating expenses on sales, as a percentage of operating revenue, were by approximately $4.4 million over expected amounts 77.5% and 73.2% for 1999 and 1998, respectively. during 2000. Operating expenses, as a percentage Exclusive of the write-off of costs at the Delaware of operating revenue, exclusive of the gain on sale Valley Railway, the operating ratio was 76.9% for 1999. of assets, were 79.0% and 77.5% for the years ended December 31, 2000 and 1999, respectively. International Railroad Operations

Comparison of North American Railroad Operating Freight Australia Results For the Years Ended December 31, 1999 The results of operations for the years ended and 1998 December 31, 2000 and 1999 include the operations Operating revenues. Operating revenue increased of Freight Australia from its date of acquisition, $26.9 million, or 149%, to $44.9 million for the year May 1, 1999. Therefore, the results of operations ended December 31, 1999 from $18.1 million for the for the year ended December 31, 2000 are not year ended December 31, 1998. The increase was comparable to the prior year in certain material primarily due to increased carloads resulting from respects and are not indicative of the results which 1999 acquisitions. The transportation revenue per would have occurred had the acquisition been carload decreased to $238 from $303 per car primarily consummated January 1, 1999. due to the acquisition of a rail line in Canada that The following table sets forth the operating revenues Operating income was lower in 2000 by $2.0 mil- and expenses (in thousands) for Freight Australia’s lion due to the decline in the Australian dollar railroad operations for the year ended December 31, exchange rate. 2000 and the period from May 1, 1999 to December Ferronor 31, 1999. 2000 1999 The following table sets forth the operating revenues Revenues: $102,204 $63,358 and expenses (in thousands) for Ferronor’s railroad Operating expenses: operations for the years ended December 31, 2000, Transportation 70,118 42,742 1999 and 1998. General and administrative 6,253 5,169 2000 1999 1998 Depreciation and amortization 5,438 3,429 Revenues: $22,873 $19,115 $15,924 Total operating expenses 81,809 51,340 Operating expenses: Operating income $ 20,395 $12,018 Transportation 15,505 11,964 8,982 General and administrative 2,494 2,222 1,724 Comparison of Freight Australia’s Operating Results Depreciation and For the Years Ended December 31, 2000 and 1999 amortization 2,278 1,231 706 Total operating expenses 20,277 15,417 11,412 Operating revenues. Operating revenues increased Operating income $ 2,596 $ 3,698 $ 4,512 $38.8 million, or 61%, to $102.2 million for the year ended December 31, 2000 from $63.4 million for Comparison of Ferronor’s Operating Results For the the year ended December 31, 1999. The increase in Years Ended December 31, 2000 and 1999 operating revenue was primarily due to the 1999 period including only eight months of operations. Operating revenues. Operating revenue increased Freight Australia’s carloads were 203,536 for the year $3.8 million, or 20%, to $22.9 million for the year ended December 31, 2000, an increase of 71,051, ended December 31, 2000 from $19.1 million for or 35%, compared to 132,485 for the year ended the year ended December 31, 1999. Ferronor’s car- December 31, 1999. Revenue per carload was $406 loads handled totaled 108,756 for the year ended for 2000 versus $366 for 1999. The increase in rev- December 31, 2000, an increase of 14,921 or 16%, enue per carload was primarily due to a change in compared to 93,835 for the year ended December commodity mix from 1999 to 2000. 31, 1999. The increase in both carloads and revenue is related to the commencing of operations in the Operating expenses. Operating expenses increased fourth quarter of 1999 on a new long-term contract. $30.5 million, or 59%, to $81.8 million for the year ended December 31, 2000 from $51.3 million for Operating expenses. Operating expenses increased the period May 1, 1999 through December 31, 1999. $4.9 million, or 32%, to $20.3 million for the year The increase in operating expenses was primarily ended December 31, 2000 from $15.4 million for the due to the 1999 period including only eight months year ended December 31, 1999. The increase was of operations. Operating expenses, as a percentage due to start up costs related to a new long-term con- of operating revenue, were 80.0% and 81.0% for the tract which commenced in late 1999. Depreciation years ended December 31, 2000 and 1999. Operating expense increased in 2000 by $1 million over prior expenses were negatively impacted in 2000 by rising year due to capital expenditures relating to new fuel prices in the amount of $2.5 million. contracts. Operating expenses, as a percentage of operating revenue, were 89% and 81% for the years ended December 31, 2000 and 1999, respectively.

RailAmerica, Inc. and Subsidiaries 18-19 Management’s Discussion and Analysis (continued)

Comparison of Ferronor’s Operating Results For the December 31, 2000 from $5.2 million for the year Years Ended December 31, 1999 and 1998 ended December 31, 1999. Corporate overhead increased $1.1 million, or 27%, to $5.2 million for the Operating revenues. Operating revenue increased year ended December 31, 1999 from $4.1 million for $4.2 million, or 28%, to $19.1 million for the year the year ended December 31, 1998. The increases ended December 31, 1999 from $14.9 million for the in each of the specified periods were related to the year ended December 31, 1998. Ferronor’s carloads additional costs incurred to manage the acquired rail- handled totaled 93,835 for the year ended December roads and to establish a strong management team to 31, 1999, an increase of 25,819, or 38%, compared handle our continued growth. For the year ended to 68,016 for the year ended December 31, 1998. December 31, 2000, we incurred $6.7 million of costs The increase in both carloads and revenue is due to related to our acquisition of RailTex and our unsuc- Ferronor commencing movement of iron ore out cessful acquisition bid for Westrail, an Australian rail- of the El Algarrabo mine in late March 1998 and the road. We also recognized a $2.9 million non-cash Los Colorados mine in July 1998 and nitrates out foreign exchange loss related to the debt associated of the Minsal mine during 1999. These increases with the acquisition of Freight Australia. Such debt were offset slightly by a decrease in the international was refinanced in February 2000. traffic out of Argentina and Bolivia due to the slow- down in the world economy in the second quarter Interest expense. Interest expense, including amor- of 1998. tization of financing costs, has increased from $4.9 million in 1998 to $20.5 million in 1999 and $56.0 Operating expenses. Operating expenses increased million in 2000. This increase is primarily attributable $4.0 million, or 35%, to $15.4 million for the year to the financing of our acquisitions of V/Line Freight, ended December 31, 1999 from $11.4 million for the TPW and Railink in 1999 and RailTex in 2000. year ended December 31, 1998. The increase was due to Ferronor commencing movement of iron ore Income taxes. Our effective tax rate in 2000 was out of the El Algarrabo mine in late March 1998 and 23.5%. This rate, as well as the rates in 1999 and the Los Colorados mine in July 1998 and nitrates out 1998, are impacted by the allocation of income taxes of the Minsal mine during 1999. Operating expenses, between continuing operations, discontinued opera- as a percentage of operating revenue, were 80.7% tions and extraordinary items. We believe our effec- and 76.5% for the years ended December 31, 1999 tive tax rate for 2001 will be approximately 31%. and 1998, respectively. The operating ratio increase Extraordinary loss. Pursuant to the refinancing of was due primarily to the loss in 1999 of international our debt in February 2000, we recorded an extraor- traffic which is typically higher margin business. dinary charge for the year ended December 31, 2000 for the loss on early extinguishment of debt of $2.9 Corporate Overhead and Other million, after-tax. In connection with the issuance Corporate overhead. Corporate overhead services of subordinated debt in August 2000 we recorded performed for our subsidiaries include overall strate- an extraordinary charge of $1.1 million for early gic planning, marketing, accounting, finance, cash extinguishment of debt, net of income taxes. management, payroll, engineering and tax return Discontinued operations. We recorded net earn- preparation. Corporate overhead, which is included ings from our discontinued operations of $8.3 million in selling, general and administrative expenses in the in 2000 compared to $3.9 million in 1999 and $4.3 consolidated statements of income, increased $7.2 million in 1998. In connection with the acquisition million, or 138%, to $12.4 million for the year ended of RailTex, we refinanced our investment in our trailer manufacturing operations resulting in addi- stock in a private offering, for gross proceeds of tional interest expense of $7.3 million in 2000. In $122.2 million after deducting the initial purchasers’ December 2000, we sold our trailer manufacturing discount. The net proceeds received from the operations for $38.5 million resulting in a gain of issuance of the units were used to repay all $95.0 approximately $11.5 million, net of income taxes. million of subordinated bridge notes issued by RTC, $20.0 million of the asset sale bridge notes Cumulative effect of accounting change. We issued by Palm Beach Rail Holdings, Inc. (“PBRH”) recorded a $2.3 million charge associated with a and approximately $1.8 million of term loans under change in accounting principle. Such charge resulted our senior credit facilities. All of our U.S. subsidiaries from a beneficial conversion feature associated with are guarantors of the senior subordinated debt. warrants in connection with the junior convertible subordinated debentures issued in 1999. This was a In February 2000, we entered into a credit agreement result of a change during 2000 of the applicable and two bridge note facilities in connection with the accounting literature. acquisition of RailTex and the refinancing of substan- tially all of both our and RailTex’s existing debt. The Liquidity and Capital Resources— credit agreement provides (1) a $125 million Term A Combined Operations loan, (2) a $205 million Term B loan, and (3) a $50 million revolving credit facility which includes $30 The discussion of liquidity and capital resources that million of U.S. dollar denominated loans, $10 million follows reflects our consolidated results and includes of Canadian dollar denominated loans and $10.0 all subsidiaries. million of Australian dollar denominated loans. The Our cash provided by operating activities was $44 Term A loan and the revolving loans mature on million for the year ended December 31, 2000. This December 31, 2005 and the Term B loans mature amount includes $12 million in net income and $35 December 31, 2006. At our option, the senior credit million in depreciation and amortization. facilities will bear interest at either (1) the alternative base rate, or ABR, (defined as greater of (i) The Cash used in investing activities was $122 million Bank of Nova Scotia’s prime rate and (ii) the Federal for the year ended December 31, 2000. The primary Funds Effective Rate plus 0.005%) plus 1.75% for the uses of cash during 2000 were for the acquisition revolving credit facilities and for the Term A loan of RailTex, including costs, of $149 million, and the facility and 2.00% for the Term B loan facility, or purchase of property, plant and equipment with (2) LIBOR plus 3.00% for the revolving credit facility an aggregate cost of $63 million. These were partially and for the Term A loan facility and the 3.25% for offset by the proceeds of $97 million from sale of the Term B loan facility; provided, that the addi- certain assets. tional amounts added to ABR and the LIBOR for the Cash provided by financing activities was $80 million revolving credit facility and the Term A loan facility for 2000. This consisted primarily of net borrowings is subject to adjustment based on changes in our under debt agreements of $101 million used to fund leverage ratio. The loans are collateralized by substan- the RailTex acquisition, partially offset by cash used tially all of our assets other than Ferronor, and the for deferred loan costs of $19 million. loans are guaranteed by all of our subsidiaries other than Ferronor. Freight Australia guarantees only the In August 2000, RailAmerica Transportation Corp. Australian dollar revolving loans and our Canadian (“RTC”) sold units consisting of $130.0 million of subsidiaries guarantee only the Canadian dollar 7 12 ⁄8% senior subordinated notes due 2010 and revolving loans. warrants to purchase 1,411,414 shares of our common

RailAmerica, Inc. and Subsidiaries 20-21 Management’s Discussion and Analysis (continued)

Our new credit facilities include numerous covenants proceeds from the sale of the truck trailer manufac- imposing significant financial and operating restric- turing operations. tions on our business. The covenants place restric- In connection with the issuance of the asset sale tions on our ability to, among other things: incur bridge notes, the purchasers of these notes received more debt; pay dividends, redeem or repurchase our 0.433 million warrants to purchase our common stock or make other distributions; make acquisitions stock at an exercise price of $7.75 per share. The or investments; use assets as security in other trans- warrants have a five-year maturity. actions; enter into transactions with affiliates; merge or consolidate with others; dispose of assets or use As of December 31, 2000, we had a working capital asset sale proceeds; create liens on our assets; and deficit of $7.6 million compared to working capital of extend credit. $24.0 million as of December 31, 1999. Cash on hand was $13.1 million as of December 31, 2000 com- The new credit facilities also contain financial cove- pared to $11.6 million as of December 31, 1999. Our nants that require us to meet a number of financial cash flows from operations historically have been ratios and tests. Our ability to meet these ratios and sufficient to meet our ongoing operating require- tests and to comply with other provisions of the ments, capital expenditures for property, plant and new credit facilities can be affected by events beyond equipment, and to satisfy our interest requirements. our control. Our failure to comply with the obliga- tions in our new credit facilities could result in an We expect that our future cash flows will be sufficient event of default under our new credit facilities, for our current and contemplated operations for at which, if not cured or waived, could permit acceler- least the next twelve months. We anticipate using ation of our indebtedness or other indebtedness cash flows and borrowings for anticipated capital which would have a material adverse effect on us. expenditures of approximately $45 million for the As of December 31, 2000, we were in compliance upgrading of existing rail lines and purchases of with these financial covenants. locomotives and equipment. We do not presently anticipate any other significant capital expenditures Interest on our new credit facility is payable at vari- over the next twelve months. able rates. To partially mitigate the interest rate risk on the credit facilities we entered into interest rate Based on our current debt levels, we anticipate debt swaps in May 2000. The interest rate swaps lock in service for the next twelve months to be approxi- a LIBOR rate of 7.23% on $212.5 million of debt for mately $65 million including principal and interest. a three-year period. Fluctuations in the market interest We anticipate that a portion of the debt service will rate will affect the cost of our remaining borrowings. be paid from the operating cash flow of Freight Assuming current debt levels, the effect of a 1% Australia. A material change in the currency exchange increase in interest rates on this remaining debt rate between the U.S. dollar and Australian dollar would result in an increase in interest expense of could adversely affect our ability to service the debt. $1.2 million for the year ended December 31, 2001. Our long-term business strategy includes the selec- At the time of our purchase of RailTex, RTC issued tive acquisition of additional transportation-related a $95 million of subordinated bridge note. The sub- businesses. Accordingly, we may require additional ordinated note was fully paid off in August 2000 equity and/or debt capital in order to consummate

7 with the net proceeds from the issuance of its 12 ⁄8% acquisitions or undertake major development activi- senior subordinated notes. In addition, PBRH issued ties. It is impossible to predict the amount of capital $55 million of asset sale bridge notes. In December that may be required for those acquisitions or devel- 2000, we repaid the asset sale bridge notes with the opment, and there is no assurance that sufficient financing for those activities will be available on terms acceptable to us, if at all. As of March 23, 2001, we The financial position and results of operations of had $34.3 million of availability under our revolving our Canadian and Australian subsidiaries are meas- credit facilities. We also had $9.6 million of cash. ured using the local currency as the functional currency. Assets and liabilities are translated into Inflation U.S. dollars at exchange rates in effect at year-end, while revenues and expenses are translated at average Inflation in recent years has not had a significant exchange rates prevailing during the year. The impact on our operations. We believe that inflation resulting translation gains and losses are charged will not adversely affect us in the future unless it directly to accumulated other comprehensive income, increases substantially and we are unable to pass a component of stockholders’ equity, and are not through the increases in our freight rates. See dis- included in income until realized through the sale or cussion of fuel prices in Market Risk section. liquidation of the investment. At December 31, 2000, the accumulated other comprehensive loss totaled Recent Accounting Pronouncements $17.8 million.

In June 1998, the Financial Accounting Standards Interest rates. Our interest rate risk results from Board, or FASB, issued Statement of Financial holding variable rate debt obligations, as an increase Accounting Standards, or SFAS, No. 133, “Accounting in interest rates would result in lower earnings and for Derivative Instruments and Hedging Activities,” increased cash outflows. which establishes accounting and reporting standards The interest rate on our credit facility is payable for derivative instruments and hedging activities. at variable rates. To partially mitigate the interest rate SFAS No. 133 requires all derivatives to be measured risk on the new credit facilities, we entered into at fair value and recognized as either assets or liabili- interest rate swaps in May 2000. The interest rate ties on the balance sheet. Furthermore, the account- swaps lock in a LIBOR rate of 7.23% on $212.5 mil- ing for changes in the fair value of a derivative (i.e. lion of debt for a three-year period. Fluctuation in gains and losses) depends on the intended use of the market interest rate will affect the cost of our the derivative. The Company adopted SFAS No. 133 remaining borrowings. The effect of a 1% increase in on January 1, 2001, and will record a liability of interest on the remaining borrowings would result approximately $7 million, net of income taxes of in an increase in interest expense of $1.2 million for $3 million, with a corresponding charge to equity the twelve months ended December 31, 2001. relating to the interest rate swaps in the first quarter of 2001. Diesel fuel. We are exposed to fluctuations in diesel fuel prices, as an increase in the price of diesel fuel Market Risk would result in lower earnings and increased cash outflows. Prior to our acquisition of RailTex, RailTex Foreign currency. Our foreign currency risk arises had entered into a contract to hedge against fuel from owning and operating railroads in Canada price increases with a cap which fixed the price of and Australia. At December 31, 2000, we had not 725,000 gallons of diesel fuel per month for the entered into any transactions to manage this risk. A period July 1999 to June 2000 at $0.45 per gallon. No decrease in either of these foreign currencies would fuel hedging is in place after June 30, 2000. The negatively impact our earnings for the affected effect of a $0.01 increase in fuel prices would result period. A majority of our revenue and debt in Chile in an increase in fuel expense of approximately is U.S. dollar denominated. Therefore, we are not $40,000 per month. negatively impacted by a decline in the value of the Chilean peso.

RailAmerica, Inc. and Subsidiaries 22-23 Report of Independent Certified Public Accountants

To the Stockholders of RailAmerica, Inc.

In our opinion, based upon our audits and the it relates to the amounts included for Empresa De report of other auditors, the accompanying consoli- Transporte Ferroviario S.A. as of December 31, 1999 dated balance sheets and the related consolidated and for the years ended December 31, 1999 and statements of income, stockholders’ equity and cash 1998, is based solely on the report of the other audi- flows present fairly, in all material respects, the tors. We conducted our audits of these statements financial position of RailAmerica, Inc. and its subsid- in accordance with auditing standards generally iaries at December 31, 2000 and 1999, and the accepted in the United States of America which results of their operations and their cash flows require that we plan and perform the audit to obtain for each of the three years in the period ended reasonable assurance about whether the financial December 31, 2000, in conformity with accounting statements are free of material misstatement. An principles generally accepted in the United States audit includes examining, on a test basis, evidence of America. These financial statements are the respon- supporting the amounts and disclosures in the finan- sibility of the Company’s management; our respon- cial statements, assessing the accounting principles sibility is to express an opinion on these financial used and significant estimates made by management, statements based on our audits. As of December 31, and evaluating the overall financial statement presen- 1999 and for the years ended December 31, 1999 tation. We believe that our audits and the report of and 1998, we did not audit the financial statements other auditors provide a reasonable basis for our of Empresa De Transporte Ferroviario S.A., a 55% opinion expressed above. owned subsidiary of the Company, which statements reflect total assets of $87,555,000 as of December 31, 1999, and total revenues of $19,115,000 and $15,312,000 for the years ended December 31, 1999 and 1998. Those statements were audited by other PricewaterhouseCoopers LLP auditors whose report thereon has been furnished Ft. Lauderdale, Florida to us, and our opinion expressed herein, insofar as March 15, 2001 Report of Independent Accountants

To the Shareholders of Ferronor S.A.:

We have audited the balance sheet of Empresa estimates made by the management, as well as eval- De Transporte Ferroviario S.A. (“Ferronor”) as of uating the overall financial statement presentation. December 31, 1999, and the related statements We believe that our audits provide a reasonable of income and cash flows for the years ended basis for our opinion. December 31, 1999 and 1998. These financial state- In our opinion, the financial statements referred to ments are the responsibility of the Company’s man- above present fairly, in all material respects, the agement. Our responsibility is to express an opinion financial position of Ferronor as of December 31, on these financial statements based on our audits. 1999, and the results of operations and its cash flow We have conducted our audits of these statements in for the years ended December 31, 1999 and 1998 accordance with auditing standards generally accepted in conformity with generally accepted accounting in Chile, which are substantially consistent with those principles in the United States of America. followed in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Charles A. Bunce An audit includes examining, on a test basis, evidence ARTHUR ANDERSEN—LANGTON CLARKE supporting the amounts and disclosures in the finan- cial statements. An audit also includes assessing February 4, 2000 the accounting principles used and the significant Santiago, Chile

RailAmerica, Inc. and Subsidiaries 24-25 Consolidated Balance Sheets

December 31, 2000 and 1999 2000 1999 (in thousands) Assets Current assets: Cash and cash equivalents $ 13,090 $ 11,598 Restricted cash in escrow 4,539 — Accounts and notes receivable 62,864 40,857 Other current assets 19,551 13,429 Net assets of discontinued operations — 14,996 Total current assets 100,044 80,880 Property, plant and equipment, net 715,020 347,617 Other assets 24,639 15,432

Total assets $839,703 $443,929

Liabilities, Redeemable Preferred Stock and Stockholders’ Equity Current liabilities: Current maturities of long-term debt $ 20,558 $ 17,811 Accounts payable 39,752 23,732 Accrued expenses 47,305 15,379 Total current liabilities 107,615 56,922 Long-term debt, less current maturities 338,298 145,016 Subordinated debt 141,411 122,449 Deferred income taxes 87,288 15,382 Minority interest and other liabilities 35,044 25,863 709,656 365,632 Commitments and contingencies Redeemable convertible preferred stock, $0.01 par value, $25 liquidation value; 278,400 issued and outstanding at December 31, 2000 378,400 issued and outstanding at December 31, 1999 6,613 8,830 Stockholders’ equity: Common stock, $0.001 par value, 60,000,000 authorized; 18,623,320 issued and outstanding at December 31, 2000 12,610,875 issued and 11,894,136 outstanding at December 31, 1999 19 13 Additional paid-in capital 118,502 47,797 Retained earnings 29,162 18,171 Accumulated other comprehensive income (loss) (24,249) 3,486 Total stockholders’ equity 123,434 69,467 Total liabilities, redeemable preferred stock and stockholders’ equity $839,703 $443,929

The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statements of Income

For the Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 (in thousands, except earnings per share) Operating revenue $357,936 $129,818 $39,136 Operating expenses: Transportation 210,972 79,439 22,096 Selling, general and administrative 62,093 19,550 9,075 Net gain on sale and impairment of assets (11,184) (3,629) (360) Depreciation and amortization 26,021 9,179 2,544 Total operating expenses 287,902 104,539 33,355 Operating income 70,034 25,279 5,781 Interest expense, including amortization costs of $4,854, $4,203 and $465, respectively (55,950) (20,490) (4,944) Minority interest and other income (expense) (1,526) 449 (1,724) Income (loss) from continuing operations before income taxes 12,558 5,238 (887) Provision (benefit) for income taxes 2,950 (787) (1,000) Income from continuing operations 9,608 6,025 113 Discontinued operations: Gain on disposal of discontinued segment (net of income taxes of $6,850) 11,527 —— Income (loss) from operations of discontinued segment (net of income taxes of ($1,650), $2,300, and $2,530 , respectively) (3,226) 3,896 4,288 Income before extraordinary item and cumulative effect of accounting change 17,909 9,921 4,401 Extraordinary loss from early extinguishment of debt (net of income taxes of $2,200) (3,996) —— Cumulative effect of accounting change (2,252) —— Net income $ 11,661 $ 9,921 $ 4,401

Net income available to common stockholders $ 10,991 $ 8,886 $ 4,401

Basic earnings per common share: Continuing operations $0.50$ 0.45 $ 0.01 Discontinued operations 0.45 0.35 0.45 Extraordinary item (0.22) —— Cumulative effect of accounting change (0.12) —— Net income $0.61$ 0.80 $ 0.46 Diluted earnings per common share: Continuing operations $0.49$ 0.43 $ 0.01 Discontinued operations 0.45 0.34 0.44 Extraordinary item (0.22) —— Cumulative effect of accounting change (0.12) —— Net income $0.60$ 0.77 $ 0.45 Weighted average common shares outstanding: Basic 18,040 11,090 9,553 Diluted 18,267 11,665 9,778

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

RailAmerica, Inc. and Subsidiaries 26-27 Consolidated Statements of Stockholders’ Equity

Stockholders’ Equity Number of Additional Other

For the Years Ended December 31, Shares Par Paid-in Retained Comprehensive 2000, 1999 and 1998 Issued Value Capital Earnings Income (loss) Total (in thousands) Balance, January 1, 1998 $ 9,130 $ 9 $ 21,906 $ 4,884 $ 15 $ 26,814 Net income — — — 4,401 — 4,401 Cumulative translation adjustments — — — — 456 456 Total comprehensive income 4,857 Issuance of common stock 138 — 677 — — 677 Purchase of treasury stock — — (1,838) — — (1,838) Exercise of stock options and warrants 405 — 1,983 — — 1,983 Conversion of debt 534 1 2,267 — — 2,268 Balance, December 31, 1998 10,207 10 24,995 9,285 471 34,761 Net income — — — 9,921 — 9,921 Cumulative translation adjustments — — — — 3,015 3,015 Total comprehensive income 12,936 Issuance of common stock 1,438 1 12,028 — — 12,029 Purchase of treasury stock — — (1,224) — — (1,224) Exercise of stock options 141 — 732 — — 732 Conversion of debt 564 1 3,332 — — 3,333 Conversion of preferred stock 261 1 2,006 — — 2,007 Issuance of warrants — — 5,928 — — 5,928 Preferred stock dividends and accretion — — — (1,035) — (1,035) Balance, December 31, 1999 12,611 13 47,797 18,171 3,486 69,467 Net income — — — 11,661 — 11,661 Cumulative translation adjustments — — — — (27,735) (27,735) Total comprehensive loss (16,074) Issuance of common stock 6,652 7 60,917 — — 60,924 Exercise of stock options 49 — 269 — — 269 Conversion of redeemable securities 339 — 2,669 — — 2,669 Warrants issued — — 8,841 — — 8,841 Purchase of treasury stock — — (1,992) — — (1,992) Retirement of treasury stock (1,028) (1) 1 — — — Preferred stock dividends and accretion — — — (670) — (670) Balance, December 31, 2000 $18,623 $19 $118,502 $29,162 $(24,249) $123,434

The accompanying notes are an integral part of the consolidated financial statements. Consolidated Statements of Cash Flows

For the Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 (in thousands) Cash flows from operating activities: Net income $ 11,661 $ 9,921 $ 4,401 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,566 14,134 4,157 Write-off of deferred loan costs 4,857 —— Interest paid in kind 5,806 —— Minority interest in income of subsidiary 995 1,551 1,672 Equity interest in earnings of affiliate (554) (230) — Gain on insurance settlement — (4,069) — (Gain) loss on sale or disposal of properties (29,554) 118 (360) Cumulative effect of accounting change 2,252 —— Deferred income taxes (2,797) 3,402 913 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable 3,654 (2,246) (886) Other current assets 2,455 (4,102) (8,080) Accounts payable 2,239 3,244 2,411 Accrued expenses 5,759 3,326 720 Other liabilities 4,071 (2,295) — Deposits and other (977) (1,254) 512 Net cash provided by operating activities 44,433 21,500 5,460 Cash flows from investing activities: Purchase of property, plant and equipment (62,499) (51,391) (28,129) Proceeds from sale of properties and investments 96,654 1,163 2,089 Acquisitions, net of cash acquired (148,922) (8,453) (1,757) Deposit on purchase agreement — — (1,962) Cash held in discontinued operations — (656) (674) Change in restricted cash in escrow (4,539) —— Deferred acquisition costs and other (2,711) 639 (613) Net cash used in investing activities (122,017) (58,698) (31,046) Cash flows from financing activities: Proceeds from issuance of long-term debt 549,235 182,085 56,007 Principal payments on long-term debt (448,107) (150,183) (35,724) Sale of convertible preferred stock — 4,095 7,515 Sale of common stock — 11,868 1,032 Proceeds from exercise of stock options 234 581 871 Preferred stock dividends paid (289) (843) — Purchase of treasury stock (1,992) (1,224) (1,838) Deferred financing costs paid (18,980) (2,755) (937) Net cash provided by financing activities 80,101 43,624 26,926 Net increase in cash 2,517 6,426 1,340 Effect of exchange rates on cash (1,025) 87 — Cash, beginning of period 11,598 5,085 3,745 Cash, end of period $ 13,090 $ 11,598 $ 5,085

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

RailAmerica, Inc. and Subsidiaries 28-29 Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies Property, Plant and Equipment Property, plant and equipment are recorded at his- Organization and Principles of Consolidation torical cost. Costs assigned to property purchased as The accompanying consolidated financial statements part of an acquisition are based on the fair value of include the accounts of RailAmerica, Inc. and all of such assets on the date of acquisition. Improvements its subsidiaries (the “Company”). All of RailAmerica’s are capitalized, and expenditures for maintenance consolidated subsidiaries are wholly-owned except and repairs are charged to operations as incurred. Empresa De Transporte Ferroviario S.A. (“Ferronor”), Gains or losses on sales and retirements of proper- a Chilean railroad, in which the Company has a ties are included in the determination of the results 55% equity interest. All significant intercompany of operations. The Company periodically reviews its balances and transactions have been eliminated. assets for impairment by comparing the projected Certain prior period amounts have been reclassified undiscounted cash flows of those assets to their to conform to the 2000 presentation. recorded amounts. Impairment charges are based on the excess of the recorded amounts over their The Company’s principal operations consist of rail fair value. freight transportation in North America, Chile and Australia. The Company hauls varied products for its Depreciation has been computed using the straight- customers corresponding to their local operating line method based on estimated useful lives as follows: areas, primarily paper and forest products and agri- Buildings and improvements 20–33 years cultural commodities in North America, agricultural Railroad track 30–40 years Railroad track improvements 3–10 years commodities in Australia and iron ore and nitrates Locomotives, transportation in Chile. and other equipment 5–30 years Office equipment 5–10 years Use of Estimates The preparation of financial statements in conformity Income Taxes with generally accepted accounting principles requires The Company utilizes the liability method of management to make estimates and assumptions accounting for deferred income taxes. This method that affect the reported amounts of assets and lia- requires recognition of deferred tax assets and lia- bilities and disclosure of contingent assets and liabili- bilities for the expected future tax consequences of ties at the dates of the financial statements and the events that have been included in the financial state- reported amounts of revenues and expenses during ments or tax returns. Under this method, deferred the reporting periods. Actual results could differ from tax assets and liabilities are determined based on the those estimates. difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect Cash and Cash Equivalents for the year in which the differences are expected to The Company considers all highly liquid instruments reverse. Deferred tax assets are also established for purchased with a maturity of three months or less the future tax benefits of loss and credit carryovers. at the date of purchase to be cash equivalents. The liability method of accounting for deferred income taxes requires a valuation allowance against Concentration of Credit Risk deferred tax assets if, based on the weight of avail- The Company maintains its cash in demand deposit able evidence, it is more likely than not that some or accounts which at times may exceed insurance all of the deferred tax assets will not be realized. limits. As of December 31, 2000, the Company had approximately $3.9 million of cash in excess of insurance limits. Revenue Recognition Recent Accounting Pronouncements The Company recognizes transportation revenue In June 1998, the Financial Accounting Standards after services are provided. For the years ended Board issued Statement of Financial Accounting December 31, 2000, 1999 and 1998, 9%, 27% and Standards (“SFAS”) No. 133, “Accounting for Derivative 62%, and 19%, 15% and 30%, of the Company’s Instruments and Hedging Activities,” which estab- North American revenue was derived from inter- lishes accounting and reporting standards for deriva- changing with Burlington Northern Santa Fe Railway tive instruments and hedging activities. SFAS No. 133 and CSX Transportation, respectively. For the years requires all derivatives to be measured at fair value ended December 31, 2000 and 1999, 25% and 20%, and recognized as either assets or liabilities on the 24% and 4%, and 10% and 29%, of the Company’s balance sheet. Furthermore, the accounting for North American revenue was derived from inter- changes in the fair value of a derivative (i.e. gains changing with Canadian National Railway, Union and losses) depends on the intended use of the Pacific Railroad and , derivative. The Company adopted SFAS No. 133 on respectively. The Company had two customers in January 1, 2001, and will record a liability of approx- Chile who represented 38% and 44%, respectively, imately $7 million, net of incomes taxes of $3 mil- in 2000 and 43% and 40%, respectively, in 1999 of lion, with a corresponding charge to equity relating the Chilean revenue. Two customers in Australia to the interest rate swaps in the first quarter of 2001. represented 19% and 17% in 2000, and 21% and 19% in 1999, respectively, of the Australian revenue. 2. Earnings Per Share

Foreign Currency Translation Basic earnings per share is calculated using the The financial statements and transactions of the weighted average number of common shares out- Company’s foreign operations are maintained in standing during the year. For the years ended their functional currency, except for Chile, where the December 31, 2000 and 1999, income from contin- U.S. dollar is used as the functional currency. Where uing operations is reduced by preferred stock functional currencies are used, assets and liabilities dividends and accretion for the basic earnings per are translated at current exchange rates in effect share computation. at the balance sheet date. Translation adjustments, Diluted earnings per share is calculated using the which result from the process of translating the sum of the weighted average number of common financial statements into United States dollars, are shares outstanding plus potentially dilutive common accumulated in the cumulative translation adjustment shares arising out of stock options and warrants. account, which is a component of accumulated other Options and warrants totaling 4.3 million, 1.8 million comprehensive income. Revenues and expenses and 0.3 million were excluded from the diluted are translated at the average exchange rate for each earnings per share calculation for the years ended period. Gains and losses from foreign currency December 31, 2000, 1999 and 1998, respectively, as transactions are included in net income. well as assumed conversion of $29.2 million in 2000 and $26.5 million in 1999 of convertible preferred stock and convertible debentures, as such securities are anti-dilutive for December 31, 2000 and 1999.

RailAmerica, Inc. and Subsidiaries 30-31 Notes to Consolidated Financial Statements (continued)

The following is a summary of the net income avail- Total revenue for the trailer manufacturing business able for common stockholders and weighted average was $34.7 million, $44.3 million and $39.9 million for shares for the diluted calculation (in thousands): the years ended December 31, 2000, 1999 and 1998,

Years Ended December 31, 2000 1999 1998 respectively. Interest expense of $7.3 million was Income from continuing charged to the manufacturing business in 2000, operations $ 9,608 $ 6,025 $ 113 representing the interest expense for the portion of Preferred stock dividends the asset sale bridge note which was repaid with the and accretion (670) (1,035) — Interest on convertible debt — 42 — proceeds from the sale of the trailer manufacturing Income available to business. Income (loss) before income taxes for the common stockholders $ 8,938 $ 5,032 $ 113 trailer manufacturing business was ($5.8) million, Basic weighted average $6.2 million and $6.9 million for the years ended shares outstanding 18,040 11,090 9,553 December 31, 2000, 1999 and 1998, respectively. Assumed conversion of options and warrants 227 379 225 Total assets in this business as of December 31, 1999 Assumed conversion of were $28.8 million. Total liabilities in this business convertible debt — 196 — as of December 31, 1999 were $13.9 million. Diluted weighted average shares outstanding 18,267 11,665 9,778 4. Acquisitions

3. Discontinued Operations On February 4, 2000, the Company acquired RailTex, Inc. for $128 million in cash, assumption of In February 2000, the Company finalized its plan to $105.3 million in debt and 6.6 million shares of the sell its trailer manufacturing operations. The trailer Company’s common stock, valued at $60.9 million. manufacturing operations consisted of Kalyn/Siebert, RailTex, the operator of 25 railroads over 4,100 miles L.P. (“KSLP”) and Kalyn/Siebert Canada (“KSC”). of rail lines in North America, became a wholly- This business has been accounted for as a discon- owned subsidiary of the Company. This transaction tinued operation and results of operations have was financed partially through the issuance of new been excluded from continuing operations in the debt (see Note 8). consolidated statements of operations for all periods presented. As part of the purchase price and in accordance with EITF 95-3, “Recognition of Liabilities in Connec- In December 2000, the Company sold KSLP for $32.5 tion with a Purchase Business Combination,” the million in cash including $3.5 million which is in Company recorded liabilities of $11.2 million which escrow at December 31, 2000. A gain of $21.0 was related to severance and change of control payments recognized. In December 2000, the Company sold to former RailTex employees. substantially all of the assets and business of KSC for $6 million in cash including $2 million which is in On September 3, 1999, the Company acquired The escrow at December 31, 2000. A loss of $2.6 million Toledo, Peoria and Western Railroad Corporation was recognized. (“TPW”) for $18 million (including the repayment of indebtedness), subject to certain adjustments. The Company funded the acquisition through its revolving line of credit. On July 26, 1999, the Company acquired RaiLink Ltd. The acquisition of VLF was financed through the (“RaiLink”) for approximately $49.8 million. RaiLink issuance of a $100 million bridge note, which has and its 26.3% owned affiliate, Quebec Railway since been repaid. Corporation, operated 11 regional railways covering All of the above acquisitions were accounted for as approximately 2,500 miles of track in Alberta, the purchases and their results have been included since Northwest Territories, Ontario, Quebec and New the dates of acquisition. The following unaudited pro Brunswick. A portion of the funding for the transac- forma summary presents the consolidated results of tion was provided by the Company’s revolving line operations as if these acquisitions had occurred at of credit. The balance of the funding came from a the beginning of 2000 and 1999 and do not purport private offering of the Company’s junior convertible to be indicative of what would have occurred had subordinated debt. During the fourth quarter of the acquisitions been made as of those dates or of 2000, the Company sold its interest in the Quebec results which may occur in the future. (In thousands Railway Corporation (see Note 5). except earnings per share) On April 30, 1999, the Company acquired the assets 2000 1999 and liabilities comprising the railroad freight busi- Operating revenue $372,010 $365,452 Income from continuing operations $ 11,708 $ 12,734 ness of V/Line Freight Corporation (“VLF”), a corpo- Earnings per share— ration established by the Government of the State continuing operations of , Australia. VLF was established in March Basic $ 0.59 $ 0.65 Diluted $ 0.57 $ 0.61 1997 as part of Victoria’s transportation privatization process and assumed many of the activities formerly The significant adjustments related to the above carried out by the V/Line Freight business unit of the years represent the inclusion of revenue in Australia Public Transportation Corporation of the Government for track access fees which were previously paid of Victoria. to the government, elimination of certain operating costs, elimination of costs related to the acquisitions, Under the Sale of Assets Agreement the Company inclusion of depreciation differences on the revalua- acquired all of the locomotives, wagons, motor vehi- tion of property, plant and equipment, additional cles, equipment, stock, spare parts inventory and interest expense based on an increase in long-term accounts receivable, certain business, brand and trade obligations, amortization of intangible assets and the names and trademarks, and the outstanding business related income tax effects. contracts of VLF for a purchase price of $49.0 million. In connection with the acquisition, Freight Australia 5. Dispositions also entered into other agreements, including a pri- mary infrastructure lease with the Director of Public During 2000, the Company sold several non-core Transport of Australia and various facilities leases, railroads and various other non-core assets for total access agreements, maintenance and service agree- proceeds of $44.0 million, resulting in a net gain ments and other miscellaneous agreements. Pursuant of $11.2 million. to the infrastructure lease, Freight Australia received a 45-year lease of the non-electrified intrastate During 1997, the Company sold substantially all the Victorian railway tracks and infrastructure. Freight assets of (“GBR”) to a company Australia prepaid in cash the net present value of the owned by its Vice Chairman, for $1.45 million, which rental payments for the infrastructure lease totaling consisted of cash of $0.3 million, an $0.8 million approximately $54.0 million. Freight Australia com- promissory note and a $0.35 million mortgage note menced operations of the rail-based freight business at an interest rate of 8.5%. The promissory note and on May 1, 1999.

RailAmerica, Inc. and Subsidiaries 32-33 Notes to Consolidated Financial Statements (continued)

mortgage note were collateralized by the land, build- 7. Property, Plant and Equipment ings and track assets of Gettysburg Railway. A gain of approximately $0.2 million was recognized on the Property, plant and equipment consist of the follow- transaction. As of December 31, 2000, $1.15 million ing as of December 31, 2000 and 1999 (in thousands): of notes receivable from related parties are included 2000 1999 in accounts and notes receivable on the consolidated Land $127,737 $ 34,345 balance sheet. All obligations were paid in full in Buildings and improvements 14,665 8,683 Railroad track and improvements 460,108 186,670 February 2001. Locomotives, transportation and other equipment 151,786 135,309 6. Other Balance Sheet Data 754,296 365,007 Less accumulated depreciation 39,276 17,390 Other current assets consist of the following as of $715,020 $347,617 December 31, 2000 and 1999 (in thousands): Depreciation expense was approximately $25.1 mil- 2000 1999 lion, $9.2 million and $2.5 million for the years ended Track supplies $10,068 $ 9,929 Prepaid expenses and other 9,483 3,500 December 31, 2000, 1999 and 1998, respectively. $19,551 $13,429 In the fourth quarter of 1999, a $4.1 million gain was recognized on an insurance settlement from an Accrued liabilities consist of the following as of accident which destroyed certain locomotives and December 31, 2000 and 1999 (in thousands): railcars in Australia. 2000 1999 During 2000, the Company completed $22.2 million Accrued interest expense $10,727 $ 820 Accrued compensation and benefits 5,633 1,160 in locomotive sale/leaseback transactions. Other accrued liabilities 30,945 13,399 $47,305 $15,379 8. Long-Term Debt

Other assets consist of the following as of December Long-term debt consists of the following at 31, 2000 and 1999 (in thousands): December 31, 2000 and 1999 (in thousands): 2000 1999 2000 1999 Deferred loan costs, net $16,808 $ 6,657 Senior credit facilities. See below $319,714 $121,005 Deposits and other 7,831 8,775 Credit facility with Banco $24,639 $15,432 de Desarrollo, see below 10,462 10,261 Credit facility with Banco Security, interest rate of 7.12%—8.4% 7,499 5,102 Deferred loan costs are being amortized utilizing Mortgage note payable, bearing the interest method over the term of the respective interest at 7.85%, due in fixed term loans. monthly installments of $46 (including interest), with a final payment of $4,827 in January Other liabilities consist of the following at December 2010. Corporate office building 31, 2000 and 1999 (in thousands): serves as collateral 5,927 6,000 2000 1999 Other long-term debt 15,254 20,459 Minority interest $10,484 $ 9,489 358,856 162,827 Accrued liabilities 10,970 — Less current maturities 20,558 17,811 Long service leave 6,565 7,663 Long-term debt, less current Annual leave 3,677 6,087 maturities $338,298 $145,016 Other 3,348 2,624 $35,044 $25,863 In February 2000, the Company entered into a credit In connection with the February 2000 debt refinanc- agreement and two bridge notes in connection with ing, including the refinancing of RailTex’s debt, the the acquisition of RailTex and the refinancing of Company recorded an extraordinary charge of $2.2 most of the Company’s and RailTex’s existing debt. million for early extinguishments of debt, net of The credit agreement provides (i) a $125 million income taxes. Term A loan, initially bearing interest at LIBOR plus In February 1999, Ferronor refinanced certain short- 3.00% (9.72% at December 31, 2000), (ii) a $205 mil- term debt with Banco de Desarrollo. The refinancing lion Term B loan, initially bearing interest at LIBOR consists of two credit lines. The first credit line is a plus 3.25% (9.97% at December 31, 2000), and (iii) a $5.0 million facility which bears interest at the inter- $50 million revolving credit facility which includes bank cost plus 1.75% (9.05% at December 31, 2000) $30 million of U.S. dollar denominated loans, $10 with interest to be paid over 120 equal monthly million of Canadian dollar denominated loans and installments and principal to be paid over 96 equal $10.0 million of Australian dollar denominated loans installments beginning two years from the funding. with an initial interest rate of LIBOR plus 3.00%. The second credit line is a $7.7 million facility All of the capital stock of all the Company’s U.S. which bears interest at LIBOR plus 2.75% (10.05% subsidiaries serve as collateral for the credit facilities. at December 31, 2000) and is payable in 120 equal As of December 31, 2000, the two bridge notes have monthly installments (including interest). been repaid. (See Note 9). The aggregate annual maturities of long-term debt The Term A loan requires principal payments of are as follows (in thousands): 5% in 2000, 10% in 2001, 15% in 2002, 20% in 2003, 2001 $ 20,558 and 25% in both 2004 and 2005. The Term B loan 2002 26,653 requires principal payments of 1% per year through 2003 29,251 2005 and a balloon maturity at December 31, 2006. 2004 33,109 2005 52,089 The revolving loan matures on December 31, 2005. Thereafter 197,196 The outstanding balances as of December 31, 2000 $358,856 of the Term A loan, Term B loan and revolving loan are $110.4 million, $191.6 million and $17.7 During the years ended December 31, 2000, 1999 million, respectively. and 1998 interest of approximately $1,257, $1,386 and $465, respectively, was capitalized for ongoing The Company’s borrowings include covenants which capital improvement projects. impose financial and operating restrictions on the Company’s ability to, among other things: incur more On May 4, 2000, the Company entered into two debt; pay dividends, redeem or repurchase its stock interest rate swap agreements for a total notional or make other distributions; make acquisitions or amount of $212.5 million. The agreements, which investments; use assets as security in other transac- have a term of three years, require the Company to tions; enter into transactions with affiliates; merge pay a fixed interest rate of 7.23% while receiving a or consolidate with others; dispose of assets or use variable interest rate equal to the 90 day LIBOR rate. asset sale proceeds; create liens on its assets; and extend credit. The facilities also contain financial covenants that require the Company to meet a number of financial ratios and tests.

RailAmerica, Inc. and Subsidiaries 34-35 Notes to Consolidated Financial Statements (continued)

Leases In connection with the issuance of the bridge notes The Company entered into equipment finance leases for the RailTex acquisition, the purchasers of such for certain tractors, trailers and other equipment notes received 0.433 million warrants to purchase expiring at various times through 2003. Certain of common stock at an exercise price of $7.75 per these leases are accounted for as capital leases. The share, expiring in 2010. financing of the purchase of the tractors, trailers In connection with the financing for VLF, the and equipment under these capital leases was Company issued to a bank warrants to acquire capitalized using the implicit interest rate at the 750,000 shares of the Company’s Common Stock at inception of the respective leases. an exercise price of $9.75 per share and warrants Minimum annual lease commitments at December 31, to acquire 50,000 shares of the Company’s common 2000 are as follows (in thousands): stock at an exercise price of $7.79 per share. The Capital Operating bridge loan was repaid in February 2000 in con- Leases Leases junction with the acquisition of RailTex. 2001 $1,240 $12,587 2002 1,268 11,051 In addition to the bridge loan Freight Australia issued 2003 60 10,014 2004 — 9,219 approximately $2.0 million in subordinated debt to 2005 — 8,242 a vendor of Freight Australia (“Vendor Debt”). The Thereafter — 23,478 Company also issued $2.64 million of convertible Total $2,568 $74,591 debt in lieu of cash payments for fees owed to its investment banker in the transaction. The convertible Rental expense under operating leases was approxi- debt was converted in July 1999 into 272,415 shares mately $9.0 million, $3.4 million and $2.7 million for of common stock. the years ended December 31, 2000, 1999 and 1998, respectively. In August 1999, the Company issued $22.5 million aggregate principal amount of junior convertible 9. Subordinated Debt subordinated debentures. Interest on the debentures accrues at the rate of 6% per annum and is payable In August 2000, RailAmerica Transportation Corp. semi-annually. The debentures are convertible, at the (“RTC”), the Company’s wholly-owned subsidiary, option of the holder, into shares of RailAmerica at a 7 sold units consisting of $130.0 million of 12 ⁄8% conversion price of $10. The debentures mature on senior subordinated notes due 2010 and warrants July 31, 2004, are general unsecured obligations and to purchase 1,411,414 shares of the Company’s rank subordinate in right of payment to all senior common stock in a private offering, for gross pro- indebtedness. At RailAmerica’s option, the debentures ceeds of $122.2 million after deducting the initial may be redeemed at par plus accrued interest, in purchasers’ discount. All of the Company’s U.S. sub- whole or in part, if the closing price of RailAmerica’s sidiaries are guarantors of the senior subordinated common stock is above 200% of the conversion notes. The net proceeds received from the issuance price for 10 consecutive trading days. During 2000, of the units were used to pay $115.0 million of $350,000 of the junior convertible subordinated bridge notes and approximately $1.8 million of term debentures were converted into common stock. loans under the Company’s senior credit facilities, resulting in an extraordinary charge of $1.8 million, The Company recognized a $2.3 million charge in net of taxes, associated with the early extinguish- the fourth quarter of 2000 for the beneficial conver- ment of debt. sion feature included in the junior convertible sub- ordinated debentures. This charge is shown as the cumulative effect of an accounting change. 10. Redeemable Preferred Stock convertible subordinated debentures. The warrants are exercisable through August 5, 2004 at an exer- In January 1999, the Company completed a private cise price of $10.50 per share, subject to adjustment offering of $11.6 million of Series A Convertible under selected circumstances. Warrants to purchase Redeemable Preferred Stock (“Preferred Stock”). The 200,000 shares of common stock at an exercise price Company sold 464,400 shares of Preferred Stock at of $10.50 per share through July 31, 2001 were a price of $25 per share. The Preferred Stock pays issued to the placement agent in connection with annual dividends of 7.5%, is convertible into shares the private offering. of the Company’s common stock at a price of $8.25 per share and is non-voting. The Preferred Stock is In August 1998, the Company’s Board of Directors mandatorily redeemable five years from its issuance. authorized a share repurchase program to buy back During 1999, 86,000 shares of the Preferred Stock up to 1,000,000 shares of its common stock (limited were converted and 100,000 shares were converted to $2 million per year pursuant to the new senior in 2000. Accretion of costs were $119,681 and credit facilities). As of December 31, 2000, the $192,510 for the years ended December 31, 2000 Company had purchased 756,650 shares with a total and 1999 respectively. cost of $5.1 million. The shares were retired in 2000.

A company owned by a director of the Company In March 1999, the Company completed a private served as the exclusive placement agent for the placement of approximately $12.5 million of restricted Company’s private placement which had a final common stock. Pursuant to the offering, the Company close in January 1999. A portion of the proceeds sold approximately 1.4 million shares of its com- were received by the Company and closed in mon stock at a price of $8.81 per share and issued December 1998. The Company paid a total of $0.8 approximately 212,000 warrants to purchase an million in placement fees and cost reimbursements equivalent number of shares of common stock at during December 1998 and the first quarter of 1999 an exercise price of $10.13 per share within one on this transaction and issued two-year warrants year of the transaction’s closing date. A company to purchase 140,727 shares of common stock at owned by one of the Company’s directors acted as an exercise price of $8.25 per share. The warrants placement agent and received approximately $0.4 expired unexercised on January 31, 2001. million in fees and cost reimbursement and one- year warrants to purchase 141,504 shares of the 11. Common Stock Transactions Company’s common stock at an exercise price of $10.13. All of the warrants issued for this transaction In June 2000, the Company engaged an investment expired unexercised on March 3, 2000. banking firm to assist the Company’s Board of Directors in evaluating the issuance of the senior 12. Income Tax Provision subordinated notes, for which it issued three-year warrants to purchase 150,000 shares of the Company’s Income before income taxes for the years ended common stock. Of these warrants, 75,000 are at an December 31, 2000, 1999 and 1998 consists of exercise price of $5.50 and 75,000 are at an exercise (in thousands): 2000 1999 1998 price of $6.50. Domestic $ (8,723) $ 2,868 $3,941 In August 1999, the Company issued warrants to Foreign subsidiaries 26,334 8,566 1,990 purchase 676,363 shares of common stock to $17,611 $11,434 $5,931 the investors in the private offering of its junior

RailAmerica, Inc. and Subsidiaries 36-37 Notes to Consolidated Financial Statements (continued)

The provision for income taxes for the years ended The components of deferred income tax assets and December 31, 2000, 1999 and 1998 consists of liabilities as of December 31, 2000 and 1999 are as (in thousands): follows (in thousands): 2000 1999 1998 2000 1999 Federal income taxes: Deferred tax assets: Current $ 334 $ 15 $ 232 Net operating loss carryforwards $ 11,829 $ 7,667 Deferred 2,494 1,234 1,039 Alternative minimum tax credit 1,125 790 2,828 1,249 1,271 Accrued expense/reserves 5,201 4,478 Other 1,128 108 State income taxes: Current 700 149 281 Total deferred assets 19,283 13,043 Deferred (1,548) (106) (55) Less: valuation allowance (999) (321) (848) 43 226 Total deferred assets, net 18,284 12,722 Deferred tax liabilities: Foreign income taxes: Property, plant and equipment 107,188 29,162 Current 2,435 857 33 Deferred revenue (2,478) 495 Deferred 1,535 2,197 — Other 862 1,875 Change in tax law — (2,835) — Net deferred tax liability $ (87,288) $(18,810) 3,970 219 33 Total income tax provision $ 5,950 $ 1,511 $ 1,530 The liability method of accounting for deferred

The following summarizes the total income tax provi- income taxes requires a valuation allowance against sions for each of the years ended December 31, 2000, deferred tax assets if, based on the weight of avail- 1999 and 1998 (in thousands): able evidence, it is more likely than not that some 2000 1999 1998 or all of the deferred tax assets will not be realized. Continuing operations $ 2,950 $ (787) $(1,000) It is management’s belief that it is more likely than Discontinued operations 5,200 2,298 2,530 not that a portion of the deferred tax assets will not Extraordinary item (2,200) —— Total income tax provision $ 5,950 $ 1,511 $ 1,530 be realized. The Company has established a valua- tion allowance of $1.0 million at December 31, 2000 The differences between the U.S. federal statutory and $0.3 million at December 31, 1999, respectively. tax rate and the Company’s effective rate from con- Approximately $.8 million of the increase in the tinuing operations are as follows (in thousands): valuation allowance from December 31, 1999 to 2000 1999 1998 December 31, 2000 was related to deferred tax assets Income tax provision, at 35% $ 4,406 $ 1,833 $ (310) acquired in the acquisition of RailTex, Inc. Net benefit due to difference between U.S. & foreign The following is a summary of net operating loss tax rates (206) (561) (334) Net benefit due to tax law carryforwards by jurisdiction as of December 31, changes in Australia — (2,835) — 2000 (in thousands): Amortization of non- Expiration deductible warrants (602) 602 — Amount Period Other, net (559) 344 (238) Valuation allowance (89) (170) (118) U.S.—federal $ 3,086 2003—2020 U.S.—state 48,823 2001—2020 Tax provision $ 2,950 $ (787) $(1,000) Chile 1,336 None Australia 22,322 None The Company files a consolidated U.S. income Canada 2,666 2004—2007 tax return with its domestic subsidiaries. For state $78,233 income tax purposes, the Company and each of its domestic subsidiaries generally file on a separate As part of certain acquisitions, the Company acquired return basis in the states in which they do business. net operating loss carryforwards for federal and state The Company’s foreign subsidiaries file income tax income tax purposes. The utilization of the acquired returns in their respective jurisdictions. tax loss carryforwards is further limited by the Internal Revenue Code Section 382. These tax loss for awards in 2000, 1999 and 1998 consistent with carryforwards expire in the years 2001 through 2010. the provisions of SFAS No. 123, the Company’s net income and net income per share would have been No provision was made in 2000 for U.S. income reduced to the pro forma amounts indicated below taxes on undistributed earnings of the Chilean, (in thousands except per share information): Canadian or Australian subsidiaries as it is the inten- 2000 1999 1998 tion of management to utilize those earnings in their respective operations for an indefinite period of time. Net income—as reported $11,661 $9,921 $4,401 Net income—pro forma $ 8,076 $8,972 $3,562 13. Stock Options Basic net income per share— as reported $ 0.61 $ 0.80 $ 0.46 The Company has stock option plans under which Basic net income per share— employees and non-employee directors may be pro forma $ 0.41 $ 0.72 $ 0.37 granted options to purchase shares of Company Diluted net income per share— as reported $ 0.60 $ 0.77 $ 0.45 common stock at the fair market value at the date of grant. Options generally vest in two or three years Diluted net income per share— pro forma $ 0.41 $ 0.68 $ 0.36 and expire in ten years from the date of the grant.

The Company has adopted the disclosure-only provi- The fair value of each option grant is estimated sions of SFAS No. 123, “Accounting for Stock-Based on the date of grant using the Black-Scholes option- Compensation.” Accordingly, no compensation costs pricing model with the following weighted average have been recognized for the stock options issued assumptions used for grants in 2000, 1999 and 1998: during 2000, 1999 and 1998 as all stock options were dividend yield 0.0%, 0.0% and 0.0%; expected volatil- granted with an exercise price at least equal to the ity of 41%, 40% and 40%; risk-free interest rate of market price on the date of grant. Had compensation 6.50%, 5.80% and 5.50%; and expected lives of 5, cost for the Company’s stock options issued been 10 and 10 years. The weighted average fair value determined based on the fair value at the grant date of options granted for 2000, 1999 and 1998 were $4.75, $5.86, and $3.97, respectively.

Information regarding the above options for 2000, 1999 and 1998 is as follows: Weighted Weighted Number of Average Number of Average Outstanding Exercise Shares Exercise Shares Price Exercisable Price Outstanding at January 1, 1998 1,250,900 $ 4.10 Granted 551,000 $ 7.35 Exercised (237,950) $ 3.66 Forfeited (26,949) $ 3.58 Outstanding at December 31, 1998 1,537,001 $ 5.40 1,234,500 $ 5.26 Granted 455,000 $ 8.97 Exercised (141,168) $ 4.35 Forfeited (10,833) $ 5.09 Outstanding at December 31, 1999 1,840,000 $ 6.34 1,225,999 $ 5.40 Granted 1,882,558 $ 8.08 Exercised (48,969) $ 4.78 Forfeited (222,498) $ 7.64 Outstanding at December 31, 2000 3,451,091 $7.23 1,937,858 $6.50 Authorized at December 31, 2000 4,525,402

RailAmerica, Inc. and Subsidiaries 38-39 Notes to Consolidated Financial Statements (continued)

The following table summarizes information about stock options outstanding at December 31, 2000: Options Outstanding Options Exercisable Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price of options Life Price of Options Price $3.40–$5.00 782,450 4.91 $4.24 782,450 $4.24 $5.01–$7.00 650,391 9.01 $6.32 282,410 $6.28 $7.01–$9.75 2,018,250 8.61 $8.67 872,998 $8.60 3,451,091 1,937,858

In January 1995, the Company established an Employee Stock Purchase Plan open to all full-time employees. Each employee may have payroll deductions as a percentage of their compensation, not to exceed $25,000 per year. The purchase price equals 85% of the fair market value of a share of the Company’s Common Stock on January 1 or December 31, of any given year, whichever is lower. For the years ended December 31, 2000, 1999 and 1998, 11,749, 16,500 and 18,289 shares of common stock, respectively, were sold to employees under this plan.

14. Noncash Investing and Financing Activities

Cash paid for interest from continuing operations during 2000, 1999 and 1998 was $41.2 million, $16.3 million and $5.7 million, respectively. Cash paid for income taxes during 2000, 1999 and 1998 was $4.0 million, $1.3 million and $0.2 million, respectively. (in thousands) 2000 1999 1998 Common stock issued for businesses acquired $ 60,773 $ — $ 453 Warrants issued for business acquired — 3,031 — Debt issued for business acquired 105,376 173,493 — Acquisition costs accrued — 4,897 31 Details of acquisitions: Working capital components, other than cash 6,109 (5,827) (801) Property and equipment (390,468) (217,965) (2,484) Other assets (6,980) (4,834) (962) Deferred loan costs — (6,959) — Goodwill — (972) (355) Notes payable and loans payable 3,148 35,466 1,921 Deferred income taxes payable 73,120 11,217 440 Minority interest — —— Net cash used in acquisitions $(148,922) $ (8,453) $(1,757)

15. Fair Value of Financial Instruments 16. Pension and Other Benefit Programs

Management believes that the fair value of its senior The Company maintains a pension plan for a major- long-term debt approximates its carrying value based ity of its Canadian railroad employees, with both on the variable nature of the financing and for all defined benefit and defined contribution components. other long-term debt based on current borrowing Defined benefit. The defined benefit component rates available with similar terms and maturities. applies to approximately 60 employees who trans- The fair value of the senior subordinated notes is ferred employment directly from Canadian Pacific $125,450 as of December 31, 2000. Railway Company (“CPR”) to a subsidiary of RaiLink, Ltd. The defined benefit portion of the plan is a mirror plan of CPR’s defined benefit plan. The employees that transferred and joined the mirror plan were entitled to transfer or buy back prior years of service. As part of the arrangement, CPR transferred to the Company the appropriate value of each employee’s pension entitlement.

The following chart summarizes the benefit obligations, assets, funded status and rate assumptions associated with the defined benefit plan (in thousands) for the year ended December 31, 2000 and the period from August 1, 1999 to December 31, 1999. 2000 1999 Change in benefit obligation: Benefit obligation at beginning of period $2,853 $2,710 Service cost 47 26 Interest cost 150 79 Plan participants’ contributions 67 38 Benefits paid (3) 0 Benefit obligation at end of period $3,114 $2,853 Change in plan assets: Fair value of plan assets at beginning of period $2,655 $2,445 Actual return on plan assets 340 132 Employer contributions 93 37 Plan participants’ contributions 116 41 Benefits paid (3) 0 Fair value of plan assets at end of period $3,201 $2,655 Funded status: Prepaid (accrued) benefit cost $87 $ (198) Rate Assumptions 7.00% 7.00% Discount rate 7.00% 7.00% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 4.50% 4.50% Components of net periodic benefit cost: Service cost $47 $26 Interest cost 150 79 Expected return on plan assets (147) (83) Net obligation at date of adoption 16 17 Net periodic pension cost $66 $39

Freight Australia’s employees participate in the by the defined benefit component. The Company Victorian government’s superannuation funds. The contributes 3% of a participating employee’s salary contributions made by Freight Australia are as fol- to the plan. Pension expense for the year ended lows (in thousands) for the year ended December December 31, 2000 and for the period August 1, 31, 2000 and the period from May 1, 1999 to 1999 to December 31, 1999 for the defined contribu- December 31, 1999. tion members was $0.2 million and $0.1 million, 2000 1999 respectively. Victorian Superannuation Fund $ 140 $62 State Superannuation Fund 972 647 Profit Sharing Plan 263 Transport Fund 194 The Company maintains a contributory profit shar- Freight Victoria Fund 161 53 ing plan as defined under Section 401(k) of the Total contributions $1,536 $956 U.S. Internal Revenue Code. The Company made

Defined contribution. The defined contribution contributions to this plan at a rate of 50% of the component applies to a majority of the Company’s employees’ contribution up to a maximum annual Canadian railroad employees that are not covered contribution of $1,500 per eligible employee. An

RailAmerica, Inc. and Subsidiaries 40-41 Notes to Consolidated Financial Statements (continued)

employee becomes 100% vested with respect to the The Company has a $4.7 million contingent obliga- employer contributions after completing six years tion, under certain events of default or if line aban- of service. Employer contributions during the years donment occurs, to the Canadian National Railroad ended December 31, 2000, 1999 and 1998 were in connection with its properties. The contingent approximately $286,000, $81,000 and $66,000, obligation bears no interest and has no pre-defined respectively. terms of payment or maturity.

The Company’s operations are subject to extensive 17. Commitments and Contingencies environmental regulation. The Company records lia- In the second quarter of 2000, certain parties filed bilities for remediation and restoration costs related property damage claims totaling approximately to past activities when the Company’s obligation is $32.5 million against Mackenzie Northern Railway, probable and the costs can be reasonably estimated. a wholly-owned subsidiary of RailAmerica, and Costs of ongoing compliance activities to current others in connection with fires that allegedly occurred operations are expensed as incurred. The Company’s in 1998. The Company intends to vigorously defend recorded liabilities for these issues represent its these claims, and has insurance coverage to approxi- best estimates (on an undiscounted basis) of reme- mately $13.0 million to cover these claims. The diation and restoration costs that may be required Company’s insurer has reserved $9.8 million for to comply with present laws and regulations. At these matters. A loss, if any, in excess of our insur- December 31, 2000 these recorded liabilities were ance policy coverage may adversely affect the not material. Although these costs cannot be pre- Company’s cash flow and financial condition. dicted with certainty, management believes that the ultimate outcome of identified matters will not have In the ordinary course of conducting its business, the a material adverse effect on the Company’s consoli- Company becomes involved in various legal actions dated results of operations or financial condition. and other claims which are pending or could be asserted against the Company. Litigation is subject 18. Segment Information to many uncertainties, the outcome of individual liti- gated matters is not predictable with assurance, and The Company’s continuing operations have been it is reasonably possible that some of these matters classified into three business segments: North may be decided unfavorably to the Company. It is American rail transportation, Australian rail trans- the opinion of management that the ultimate liability, portation, and Chilean rail transportation. The North if any, with respect to these matters will not have a American rail transportation segment includes the material adverse effect on the Company’s financial operations of the Company’s railroad subsidiaries position, results of operations or cash flows. in the United States and Canada.

Business and geographical segment information for the years ended December 31, 2000, 1999 and 1998 (dollar amounts in thousands) is as follows: North America Consolidated United States Canada Chile Australia Year Ended December 31, 2000 Revenue $357,936 $169,354 $63,505 $22,873 $102,204 Depreciation and amortization $ 26,021 $ 14,052 $ 4,253 $ 2,278 $ 5,438 Income (loss) before income taxes $ 12,558 $ (19,194) $13,752 $ 954 $ 17,046 Interest expense $ 51,096 $ 47,811 $ 431 $ 2,383 $ 471 Total assets $839,703 $635,746 $83,724 $57,629 $ 62,604 Capital expenditures $ 62,449 $ 24,566 $ 9,570 $10,018 $ 18,345 Notes to Consolidated Financial Statements (continued)

North America Consolidated United States Canada Chile Australia Year Ended December 31, 1999 Revenue $ 129,818 $ 27,166 $ 20,179 $ 19,115 $ 63,358 Depreciation and amortization $ 9,179 $ 2,428 $ 2,091 $ 1,231 $ 3,429 Income (loss) before income taxes $ 5,238 $ (2,979) $ 919 $ 1,473 $ 5,825* Interest expense $ 16,287 $ 3,926 $ 3,203 $ 1,595 $ 7,563 Total assets $ 428,932 $ 115,295 $ 99,038 $ 52,022 $ 162,577 Capital expenditures $ 51,391 $ 14,604 $ 11,841 $ 13,389 $ 11,557 Year Ended December 31, 1998 Revenue $ 39,136 $ 18,960 $ 4,252 $ 15,924 $ — Depreciation and amortization $ 2,544 $ 1,838 $ — $ 706 $ — Income (loss) before income taxes $ (887) $ (2,327) $ (142) $ 1,580 $ 2 Interest expense $ 4,479 $ 3,104 $ 109 $ 1,266 $ — Total assets $ 117,081 $ 74,628 $ 2,672 $ 37,786 $ 1,995 Capital expenditures $ 28,129 $ 15,109 $ 213 $ 12,807 $ — *Amount includes $4.1 million casualty gain.

19. Unaudited Quarterly Financial Data

Quarterly financial data for 2000 is as follows (in thousands except per share amounts): First Second Third Fourth Quarter Quarter Quarter Quarter Operating revenue $81,000 $96,047 $90,970 $89,919 Operating income $13,966 $23,705 $16,837 $15,526 Income (loss) from continuing operations $ (889) $ 7,588 $ 1,844 $ 1,065 Net income (loss) $ (3,182) $ 7,553 $ 237 $ 7,053 Basic income (loss) from continuing operations per share $ (0.06) $ 0.40 $ 0.09 $ 0.05 Diluted income (loss) from continuing operations per share $ (0.06) $ 0.36 $ 0.09 $ 0.05

Quarterly financial data for 1999 is as follows (in thousands except per share amounts): First Second Third Fourth Quarter Quarter Quarter Quarter Operating revenue $11,062 $28,816 $39,678 $50,262 Operating income $ 1,628 $ 4,373 $ 6,602 $12,676 Income (loss) from continuing operations $ 39 $ 7,588 $ 1,844 $ 1,065 Net income (loss) $ 1,203 $ 7,553 $ 237 $ 7,053 Basic income (loss) from continuing operations per share $ (0.02) $ 0.10 $ 0.17 $ 0.18 Diluted income (loss) from continuing operations per share $ (0.02) $ 0.10 $ 0.16 $ 0.17

The above amounts differ from those included in the Form 10-Q’s filed during 1999 due to the trailer manu- facturing segment being included in discontinued operations for all periods reported in these consolidated financial statements.

20. Guarantor Financial Statement Information

In August 2000, RailAmerica Transportation corp. (“Issuer”), a wholly-owned subsidiary of RailAmerica, Inc.

7 (“Parent”), sold units including 12 ⁄8% senior subordinated notes, which are registered with the Securities and Exchange Commission. The notes are guaranteed by the Parent, the domestic subsidiaries of the Issuer and Palm Beach Rail Holding, Inc.

Financial information regarding the Issuer, the Parent, the Guarantor Subsidiaries and the Non-Guarantor subsidiaries is included in the notes to the consolidated financial statements of the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000.

RailAmerica, Inc. and Subsidiaries 42-43 Executive Information

BOARD OF DIRECTORS COMMITTEES OF THE BOARD Gary O. Marino Charles Swinburn Audit Chairman, President & CEO Attorney Richard Rampell (chair) RailAmerica, Inc. Morgan, Lewis & Bockius Douglas R. Nichols Donald D. Redfearn Former Deputy Assistant Secretary John M. Sullivan for Policy & International Affairs, Executive Vice President, Chief Compensation U.S. Dept. of Transportation Administrative Officer & Secretary Ferd. C. Meyer, Jr. (chair) RailAmerica, Inc. Douglas R. Nichols William G. Pagonis John H. Marino President & Founder Charles Swinburn Chairman & President First London Securities Executive Delaware Transportation Group, Inc. Corporation, Inc. Gary O. Marino (chair) Chairman Emeritus, RailAmerica, Inc. Ferd. C. Meyer, Jr. Donald D. Redfearn Of Counsel Richard Rampell Richard Rampell Chief Executive Officer Salans Hertzfeld Heilbronn Rampell and Rampell, P.A. Christy & Viner Government Affairs John M. Sullivan (chair) John M. Sullivan William G. Pagonis John H. Marino Retired President & CEO Executive Vice President—Logistics Douglas R. Nichols Haug Die Casting, Inc. Sears Roebuck & Company Charles Swinburn Former U.S. Federal Railroad Lieutenant General (3-star), Administrator U.S. Army, Retired

COMPANY OFFICERS Gary O. Marino Walter Zorkers Gary Laakso Chairman, President & CEO Senior Vice President Vice President Regulatory Counsel Donald D. Redfearn Strategic Planning Robert W. Libby Executive Vice President, Chief Mick Burkart Vice President Acquisition Administrative Officer & Secretary Midwest Region Vice President Planning and Implementation, Gary M. Spiegel Larry W. Bush North American Rail Group Executive Vice President & Vice President Financial Planning M. Scott Linn Chief Operating Officer, North & Internal Audit Vice President Engineering American Rail Group Todd N. Cecil Charles W. Moore W. Graham Claytor, III Vice President Real Estate Atlantic Region Vice President Senior Vice President J. Preston Claytor Jan Polley International Rail Group Vice President Safety & Northeast Region Vice President Bennett Marks Operating Practices Robert J. Rabin Senior Vice President & Michael E. Emmons Vice President & Chief Financial Officer Vice President Information Systems Corporate Controller Marinus van Onselen David Eyermann Alfred M. Sauer Chief Executive Officer Lone Star Region Vice President Vice President Business Development Freight Australia Terry K. Forsman Shawn I. Smith R. Joe Conklin Vice President Human Resources Northwest Region Vice President Senior Vice President— Julie B. Herbort David L. Smoot Southern Corridor, North American Vice President, Chief Financial Southeast Region Vice President Rail Group Officer & Director of Peter Turrell Jack F. Conser Administration, North American Vice President International Senior Vice President Rail Group Operations Transportation, North American Michael J. Howe Rail Group Hal R. Valeché Vice President & Treasurer Vice President Corporate Development Robert C. Parker Ross Kemp Senior Vice President— James H. Wagner Chief Financial Officer Northern Corridor, North American Vice President Mechanical Freight Australia Rail Group John T. “Jack” White Vice President & General Counsel CORPORATE HEADQUARTERS 5300 Broken Sound Boulevard NW Boca Raton, Florida 33487 (561) 994-6015 CORPORATE OFFICES (561) 994-4629 (facsimile) Corporate Headquarters Boca Raton, Florida Regional Office San Antonio, Texas REGISTRAR AND TRANSFER AGENT Regional Office San Francisco, California American Stock Transfer and Trust Company NORTH AMERICAN RAILROADS New York, New York Cape Breton & Central Stellarton, Nova Scotia, Canada (800) 937-5449 Carolina Piedmont Railroad Laurens, South Carolina Cascade & Columbia River Railroad Omak, Washington ANNUAL MEETING OF SHAREHOLDERS Central Oregon & Pacific Railroad Roseburg, Oregon RailAmerica, Inc. June 22, 2001 at 10 a.m. EDT Central Railroad Company of Indiana Cincinnati, Ohio Boca Raton Marriott Hotel Central Railroad Company of Indianapolis Kokomo, Indiana (www.railamerica.com), 5150 Town Center Circle Central Western Railway Stettler, Alberta, Canada Boca Raton, Florida Chesapeake & Albemarle Railroad Elizabeth City, North Carolina the world’s largest short Connecticut Southern Railroad East Hartford, Connecticut line and regional rail- INVESTOR INQUIRIES Dakota Rail Hutchinson, Minnesota To receive copies of reports filed with the Dallas, Garland & Northeastern Railroad Garland, Texas road operator, owns 39 Securities and Exchange Commission or

Esquimalt & Nanaimo Railway Nanaimo, Vancouver Island, Company Profile short line and regional other information about RailAmerica, contact British Columbia, Canada Wayne A. August, Assistant Vice President of Georgia Southwestern Railroad Smithville, Georgia railroads operating over Investor Relations, at the corporate offices, Goderich-Exeter Railway Kitchener, Ontario, Canada or email at [email protected]. Grand Rapids Eastern Railroad Grand Rapids, Michigan approximately 11,000 Huron & Eastern Railway Vassar, Michigan route miles in the United COMPANY WEBSITE Indiana & Ohio Rail Corporation Cincinnati, Ohio Visit our website at www.railamerica.com Indiana Southern Railroad Petersburg, Indiana States, Canada, Australia to obtain recent press releases, quarterly Lakeland & Waterways Railway Edmonton, Alberta, Canada reports and additional information about MacKenzie Northern Railway McLennan, Alberta, Canada and the Republic of Chile. RailAmerica, including how to receive a Michigan Shore Railroad Muskegon, Michigan In North America, the hard copy of our Annual Report, as well as Mid-Michigan Railroad Greenville, Michigan to sign up to receive Company information Missouri & Northern Arkansas Railroad Carthage, Missouri Company’s railroads via email. New England Central Railroad St. Albans, Vermont North Carolina & Virginia Railroad Ahoskie, North Carolina operate in 22 states and INDEPENDENT AUDITORS Ottawa Valley Railway North Bay, Ontario, Canada six Canadian provinces. PricewaterhouseCoopers LLP Otter Tail Valley Railroad Fergus Falls, Minnesota Fort Lauderdale, Florida Saginaw Valley Railway Vassar, Michigan Internationally, the San Diego & Imperial Valley Railroad San Diego, California Company operates an Company Information STOCK LISTING South Carolina Central Railroad Hartsville, South Carolina Nasdaq National Markett (NNM) Hamilton, Ontario, Canada additional 4,300 route Symbol: RAIL Texas-New Mexico Railroad Hobbs, New Mexico Texas Northeastern Railroad Garland, Texas miles under track access STOCK PRICE RANGE Toledo, Peoria & Western Railroad East Peoria, Illinois High Sales Low Sales Ventura County Railroad Port Hueneme, California arrangements in 2000 Price Price Virginia Southern Railroad Keysville, Virginia Australia and Argentina. Q1 $9.063 $5.750 West Texas & Lubbock Railroad Lubbock, Texas Designed by Curran & Connors, Inc. / www.curran-connors.com Q2 6.938 4.625 Q3 7.875 5.750 INTERNATIONAL RAILROADS Q4 8.000 5.688 Ferronor (Empresa de Transporte Ferroviario S.A.) Coquimbo, Chile High Sales Low Sales Freight Australia Melbourne, Australia 1999 Price Price Q1 $10.250 $7.688 Q2 10.313 8.750 Q3 10.750 9.125 Q4 9.938 7.063 RailAmerica, Inc.

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RailAmerica, Inc. 5300 Broken Sound Boulevard NW 2000 Annual Report Boca Raton, Florida 33487 (561) 994-6015 www.railamerica.com