Railamerica, Inc. (RRA) - Description of business

GENERAL

     We are a leading owner and operator of short line and regional freight railroads in North America. We own, lease and/or operate a diversified portfolio of 43 railroads with approximately 8,000 miles of track located in the United States and Canada. Through our diversified portfolio of rail lines, we operate in numerous geographic regions with varying concentrations of commodities hauled. We seek to grow both through the expansion of the traffic base on our existing railroads and acquisitions of additional North American railroads.

     Pursuant to this strategy, we have completed the following acquisitions since 2000:

	•		In February 2000, we acquired RailTex, Inc., a holding company that owned 25 railroads in the United States and Canada, for $294.2 million.
	•		In January 2002, we acquired StatesRail, Inc., a holding company of 8 railroads in the United States, for $84.4 million.
	•		In January 2002, we acquired ParkSierra Corp., a holding company of 3 railroads in the United States, for $46.2 million.
	•		In May 2003, we acquired/leased a branch line in Alabama and Mississippi that is contiguous to our existing Alabama and Gulf Coast Railway for $15.1 million.
	•		In June 2003, we acquired the San Luis & Rio Grande Railroad, a branch line in Colorado, for $7.2 million.
	•		In January 2004, we acquired the Central Michigan Railway for $25.3 million.
	•		In August 2004, we commenced operations under a 20 year lease agreement of the Chicago, Fort Wayne & Eastern Railroad, for an initial lease payment of $10.0 million.
	•		In October 2004, we acquired the Midland Subdivision in Ohio for $8.6 million.
	•		In September 2005, we commenced operations under a 25 year lease agreement for the Fremont, Michigan Line.
	•		In September 2005, we acquired the Alcoa Railroad Group, comprising four railroads in the U.S., for $77.8 million.

     In addition, as part of our strategy, we continually review our portfolio of railroads. Our review is based on past and projected cash flows, infrastructure needs, marketing opportunities, operating complexity, as well as other qualitative factors.

     Based on these reviews, we have divested the following railroads since 2000:

	•		August 2000, Minnesota Northern Railroad and the St. Croix Valley Railroad
	•		December 2000, South Central Tennessee Railroad
	•		December 2000, Pittsburgh Industrial Railroad

	•		December 2000, Ontario L’Original Railway
	•		December 2001, Dakota Rail, Inc.
	•		March 2002, Georgia Southwestern Railroad
	•		May 2002, Texas New Mexico Railroad
	•		October 2003, San Pedro & Southwestern Railway
	•		February 2004, Ferronor
	•		August 2004, Freight Australia
	•		December 2004, Arizona Eastern Railway Company
	•		December 2004, West Texas and Lubbock Railroad
	•		December 2005, San Luis & Rio Grande Railroad
	•		January 2006, Mackenzie Northern Railway, Lakeland & Waterways Railway and Central Western Railway, collectively referred to as the Alberta Railroad Properties

     We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing railroad companies. Our principal executive office is located at 5300 Broken Sound Blvd, N.W., Boca Raton, Florida 33487, and our telephone number at that location is (561) 994-6015.

     Our Internet website address is www.railamerica.com. We make available free of charge, on or through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also make available on our website other reports filed with the SEC under the Securities Exchange Act of 1934, as amended, including proxy statements and reports filed by officers and directors under Section 16(a) of that Act. These reports may be found by selecting the option entitled “SEC FILINGS” in the “INVESTOR RELATIONS” section on our website. Additionally, our corporate governance guidelines, board committee charters, code of business conduct and ethics and code of ethics for principal executive officers and senior financial officers are available on our website and in print to any stockholder who requests them. Information contained in or connected to our website is not part of this report.

BUSINESS STRATEGY

     OPERATING SAFELY AND EFFICIENTLY. We are focused on operating safe railroads in an efficient manner. Through training, supervision and safety programs, we have reduced our Federal Railroad Administration, or FRA, personal injury frequency ratio from 5.83 in 1999 to 2.24 in 2005. The FRA personal injury frequency ratio is measured as reportable injuries per 200,000 man hours worked. In addition, we manage each of our railroads as an individual profit center allowing local management to make decisions on how to operate the railroad efficiently and profitably. We support the individual railroad operations with centralized purchasing, accounting, human resources, information technology, legal and other services, allowing us to realize synergies and economies of scale based on our size.

     PROVIDING SUPERIOR CUSTOMER SERVICE. We strive to increase our revenue by providing consistent, innovative, cost-efficient and reliable service to our customers. We work with customers, potential customers, industrial development organizations and our Class I interchange partners to develop creative transportation solutions. Our decentralized management structure is an important element of our marketing strategy. We give significant discretion with respect to sales and marketing activities to our local marketing managers and the General Managers of each railroad. As part of our marketing efforts, we often schedule more frequent rail service, help customers negotiate price and service levels with interchange partners and assist customers in obtaining the quantity and type of rail equipment required for their operations. We occasionally provide non-scheduled train service on short notice to accommodate customers’ special or emergency needs. We consider all of our employees to be customer service representatives and encourage them to initiate and maintain regular contact with shippers.

     CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Over the last eleven years, we have completed twenty-nine acquisitions of railroad companies which owned or had equity interests in 65 railroads, for total consideration in excess of $780 million.

     We seek acquisition candidates that enable us to form geographic clusters of short lines, thereby affording management economies of scale as well as marketing and operating synergies. To be considered by us, acquisition candidates must typically be profitable, generate strong cash flows, have potential for further growth and possess well-maintained infrastructures.

     Acquisition opportunities in North America generally come from three sources. First, certain of the Class I railroads have been selling or leasing branch lines over the past several years. We entered into a lease for a branch line from CSX during 2005. We believe, based on our strong operating performance and relationships with the Class I railroads, we are a logical choice to acquire additional properties in the future. Second, as the short line industry itself continues to consolidate, we believe our industry reputation, demonstrated access to capital, breadth of geographic coverage and ability to efficiently evaluate and negotiate prospective transactions place us in a good position to acquire other independent short lines or short line holding companies. Third, as industrial companies sell their railroad operations, we believe our cost-effective and customer oriented approach makes us a strong candidate to acquire these railroads. We acquired four short line railroads from Alcoa, Inc. during 2005.

     In acquiring rail properties, we compete with other railroad operators, some of which have greater financial resources than we do. Competition for rail properties is based primarily upon price, operating history and financing capability. We believe our established reputation as a successful acquirer and operator of short line rail properties, combined with our managerial resources, effectively positions us to successfully compete for future acquisition opportunities.

     ANALYZE AND DIVEST OF POOR PERFORMING RAILROADS. We continually review our portfolio of railroads. Our review is done based on past and projected cash flows, infrastructure needs, marketing opportunities, operating complexity, as well as other qualitative factors. If after performing our analysis, we determine that a railroad is not meeting our internal criteria for continued ownership we develop a strategy to improve the operations of the railroad either through changes in the operating plan and/or new marketing initiatives. These changes are made working in conjunction with our Class I interchange partners. If, after a period of time, the railroad continues to not meet our internal criteria, we consider other strategic options for the railroad, including divestiture.

INDUSTRY OVERVIEW

     The U.S. railroad industry is dominated by Class I railroads, that operated approximately 97,500 miles of track in 2004. In addition to large railroad operators, there were more than 540 short line and regional railroads, operating approximately 43,000 miles of track in 2004.

     The railroad industry is subject to regulation by various government agencies, including the Surface Transportation Board, or STB. For regulatory purposes, the STB classifies railroads into three groups: Class I, Class II and Class III, based on annual operating revenue. For 2004, the Class I railroads each had operating revenue of at least $289.4 million, Class II railroads each had revenue of $23.1 million to $289.3 million, and Class III railroads each had revenue of less than $23.1 million. These thresholds are adjusted annually for inflation.

     In compiling data on the U.S. railroad industry, the Association of American Railroads, or AAR, uses the STB’s revenue threshold for Class I railroads. Regionals are railroads operating at least 350 miles of rail line and/or having revenues between $40 million and the Class I revenue threshold. Locals are railroads falling below the Regional criteria, plus switching and terminal railroads.

2004 UNITED STATES INDUSTRY OVERVIEW

		Number of							2004 Revenue
Type of Railroad		Carriers			Miles Operated			(in billions)			% of Revenue
Class I			7				97,496			$	39.1				92.9	%
Regional			31				15,641				1.4				3.3
Local			518				27,109				1.6				3.8
Total			556				140,246			$	42.1				100.0	%

     As a result of deregulation in 1980, Class I railroads have been able to concentrate on core, long-haul routes, while selling or leasing many of their low-density branch lines to smaller and more cost-efficient freight railroad operators such as our

company. Divesting branch lines allows Class I railroads to increase car velocity, focus investment on their core network, lower their cost structure and focus on the long-haul versus short-haul business. Because of the focus by short line railroads on increasing traffic volume through increased customer service and more efficient operations, traffic volume on short line railroads normally increases after divestiture by Class I railroads. Consequently, these transactions often result in net increases in the divesting carriers’ freight traffic because much of the business originating or terminating on branch lines feeds into divesting carriers’ core routes.

     In 2005 the majority of the Class I railroad short line spin-offs were derived from CSX Transportation and Burlington Northern Santa Fe Railway. The other Class I railroads created a limited number of short line railroad opportunities. Class I railroads have been divesting short line candidates via a variety of means: (a) outright sale for cash consideration, (b) lease of the railroad right-of-way for a period ranging from 10 to 25 years, or (c) lease of the land and a sale of the track and track-related structures. Currently, the Class I railroads appear to favor leases over sales.

RAILROAD OPERATIONS

     We currently own, lease or operate 43 rail properties in North America, of which 42 are short line freight railroads that provide transportation services for both on-line customers and Class I railroads that interchange with our rail lines. Short line railroads are typically less than 350 miles long, serve a particular class of customers in a small geographic area and interchange with Class I railroads. Short line rail operators primarily serve customers on their line by transporting products to and from interchange points with the Class I railroads. Each of our North American rail lines is typically the only rail carrier directly serving its customers. The ability to haul heavy and large quantities of freight as part of a long-distance haul makes our rail services generally a more effective, lower-cost alternative to other modes of transportation, including motor carriers. In addition to our 42 short line railroads, we operate a tourist railroad in Hawaii.

     UNITED STATES. We own, lease or operate 37 short line rail properties and one tourist railroad in the United States with approximately 7,000 miles of track. Our railroads are geographically diversified and operate in 26 states. We have clusters of rail properties in the Southeastern, Southwestern, Midwestern, Great Lakes, New England and Pacific Coast regions of the United States. We believe that this cluster strategy provides economies of scale and helps achieve marketing and operational synergies.

     CANADA. We own, lease or operate 5 short line rail properties in Canada with approximately 1,000 miles of track. Our Canadian properties are geographically diversified and operate in four provinces.

RAIL TRAFFIC

     Rail traffic may be categorized as interline, local or bridge traffic. Interline traffic either originates or terminates with customers located along a rail line and is interchanged with other rail carriers. Local traffic both originates and terminates on the same rail line and does not involve other carriers. Bridge traffic passes over the line from one connecting rail carrier to another without the carload originating or terminating on the line.

     Interline and local traffic combined generated 89%, 88% and 87% of our total freight revenue in 2005, 2004 and 2003, respectively. We believe that high levels of interline and local traffic provide us with greater stability of revenue because this traffic represents shipments to or from customers located along our lines and cannot be easily diverted to other rail carriers, unlike bridge traffic.

     In addition to competition with other rail carriers, our railroads compete directly with other modes of transportation, principally motor carriers and, to a lesser extent, ship and barge operators. The extent of this competition varies significantly among our railroads. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided for an origin-to-destination package. To the extent other carriers are involved in transporting a shipment, we cannot unilaterally control the rate and quality of service. Cost reductions achieved by major rail carriers over the past several years have generally improved their ability to compete with alternate modes of transportation.

     The following table summarizes freight revenue by type of traffic carried by our North American railroads in 2005, 2004 and 2003 in dollars and as a percentage of total freight revenue.

FREIGHT REVENUE
(DOLLARS IN THOUSANDS)

		2005			2004			2003
		$			%			$			%			$			%
Interline		$	318,754				84.3	%		$	272,988				82.6	%		$	238,832				82.6	%
Local			17,562				4.6	%			17,679				5.4	%			12,735				4.4	%
Bridge			41,784				11.1	%			39,714				12.0	%			37,661				13.0	%
		$	378,100				100.0	%		$	330,381				100.0	%		$	289,228				100.0	%

     All of our short line properties interchange traffic with Class I railroads. The following table summarizes our significant connecting carriers in 2005, 2004 and 2003 by freight revenue and carloads as a percentage of total interchanged (interline and bridge) traffic.

INTERCHANGED TRAFFIC

		2005		2004		2003
		Revenue		Carloads		Revenue		Carloads		Revenue		Carloads
Union Pacific Railroad			26.8	%			25.4	%			28.7	%			27.3	%			31.1	%			28.5	%
CSX Transportation			19.5	%			17.2	%			19.1	%			16.1	%			18.9	%			15.1	%
Canadian National Railway			16.2	%			14.7	%			17.3	%			16.8	%			14.5	%			14.3	%
Burlington Northern Santa Fe Railway			13.5	%			11.8	%			14.2	%			12.2	%			14.4	%			15.1	%
Canadian Pacific			7.0	%			13.8	%			6.4	%			12.0	%			7.3	%			12.3	%
Norfolk Southern			5.7	%			6.8	%			5.9	%			7.1	%			5.4	%			6.0	%
All other railroads			11.3	%			10.3	%			8.4	%			8.5	%			8.4	%			8.7	%
			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%

     Charges for interchanged traffic are generally billed to the customers by the connecting carrier and cover the entire transportation cost from origin to destination, including the portion that travels over our lines. Our revenue is generally paid directly to us by the connecting carriers rather than by customers and is payable regardless of whether the connecting carriers are able to collect from the customers. The revenue payable by connecting carriers is set forth in contracts entered into by each of our railroads with their respective connecting carriers and is generally subject to periodic inflation-related adjustments.

     In 2005, we served approximately 1,700 customers in North America. These customers shipped and/or received a wide variety of products. Although most of our North American railroads have a well-diversified customer base, several of the smaller rail lines have one or two dominant customers. In 2005, 2004 and 2003, our ten largest North American customers accounted for approximately 25%, 24% and 26% of our North American transportation revenue, respectively. No individual customer accounted for more than 10% of our revenue for the years ended 2005, 2004 and 2003.

     The following table sets forth, by number and percentage, the carloads hauled by our North American railroads during the years ended December 31, 2005, 2004 and 2003.

CARLOADS CARRIED BY COMMODITY GROUP

		2005		2004		2003
Commodity Group		Carloads		%		Carloads		%		Carloads		%
Agricultural & Farm Products			106,043				8	%			97,397				8	%			90,463				8	%
Autos			24,619				2	%			28,034				2	%			33,888				3	%
Chemicals			112,475				9	%			103,410				9	%			82,383				8	%
Coal			150,344				12	%			149,584				13	%			142,928				13	%
Food Products			87,973				7	%			79,618				7	%			63,192				6	%
Intermodal			33,444				3	%			35,231				3	%			35,618				3	%
Lumber & Forest Products			126,421				10	%			119,012				10	%			115,482				11	%
Metals			98,874				8	%			88,309				8	%			84,907				8	%
Metallic/Non-metallic Ores			69,090				6	%			59,835				5	%			51,278				5	%
Minerals			59,700				5	%			53,093				5	%			48,796				4	%
Paper Products			89,899				7	%			88,552				7	%			81,745				7	%
Petroleum Products			48,260				4	%			44,730				4	%			39,027				4	%
Railroad Equipment/Bridge Traffic			201,275				16	%			191,237				16	%			178,167				17	%
Other			40,618				3	%			36,010				3	%			29,718				3	%
Total			1,249,035				100	%			1,174,052				100	%			1,077,592				100	%

EMPLOYEES

     Currently, we have approximately 2,000 full-time employees, including 110 full-time corporate employees. Approximately 900 of our railroad employees are subject to collective bargaining agreements.

SAFETY

     We endeavor to conduct safe railroad operations for the benefit and protection of employees, customers and the communities served by our railroads. Our safety program, led by our Vice President of Safety and Operating Practices, involves all of our employees and is administered by each Regional Vice President. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to governmental rules and regulations. Each U.S. employee involved in train operations is subject to pre-employment and random drug testing whether or not required by federal regulation. We believe that each of our North American railroads complies in all material respects with federal, state, provincial and local regulations. Additionally, each railroad is given flexibility to develop more stringent safety rules based on local requirements or practices. We also participate in committees of the AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the national grade crossing awareness program) and the American Short Line and Regional Railroad Association Safety Committee. Our FRA reportable injury frequency ratio, measured as reportable injuries per 200,000 man hours worked, was 2.24 in 2005 as compared to 2.80 in 2004. For 2005, the industry average for all railroads was 2.28 while the industry average for short line railroads was 3.49.

REGULATION

     UNITED STATES. Our subsidiaries in the United States are subject to various safety and other laws and regulations administered by numerous government agencies, including (1) regulation by the STB, successor to the Interstate Commerce Commission, and the FRA, (2) labor related statutes including the Railway Labor Act, the Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the Federal Employer’s Liability Act, and (3) some limited regulation by agencies in the states in which we do business.

     The STB, established by the ICC Termination Act of 1995, has jurisdiction over, among other matters, the construction, acquisition, or abandonment of rail lines, the consolidation or merger of railroads, the assumption of control of one railroad by another railroad, the use by one railroad of another railroad’s tracks through lease, joint use or trackage rights, the rates charged for their transportation services, and the service provided by rail carriers.

     As a result of the 1980 Staggers Rail Act, railroads have received considerable rate and market flexibility including the ability to obtain wholesale exemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized and truck trailer traffic handled by railroads. Requirements for the creation of new short line railroads or the expansion of existing short line railroads were substantially expedited and simplified under the exemption process. On regulated traffic, railroads and shippers are permitted to enter into contracts for rates and provision of transportation services without the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable freedom to raise or lower rates without objection from captive shippers. While the ICC Termination Act retained maximum rate regulation on traffic over which railroads have exclusive control, the new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB on all traffic other than agricultural products.

     The FRA regulates railroad safety and equipment standards, including track maintenance, handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and operating practices and crew qualifications.

     CANADA. Our Canadian railroad subsidiaries are subject to regulation by various governmental departments and regulatory agencies at the federal or provincial level depending on whether the railroad in question falls within federal or provincial jurisdiction. A Canadian railroad generally falls within the jurisdiction of federal regulation if the railroad crosses provincial or international borders or if the Parliament of Canada has declared the railroad to be a federal work or undertaking and in selected other circumstances. Any company which proposes to construct or operate a railway in Canada which falls within federal jurisdiction is required to obtain a certificate of fitness under the Canada Transportation Act, or CTA. Under the CTA, the sale of a federally regulated railroad line is not subject to federal approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a federal railway. Federal railroads are governed by federal labor relations laws.

     Short line railroads located within the boundaries of a single province which do not otherwise fall within the federal jurisdiction are regulated by the laws of the province in question, including laws as to licensing and labor relations. Most of Canada’s ten provinces have enacted new legislation, which is more favorable to the operation of short line railroads than previous provincial laws. Many of the provinces require as a condition of licensing under the short line railroads acts that the licensees comply with federal regulations applicable to safety and other matters and remain subject to inspection by federal railway inspectors. Under some provincial legislation, the sale of a provincially regulated railroad line is not subject to provincial approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a provincial railway.

     Acquisition of additional railroad operations in Canada, whether federally or provincially regulated, may be subject to review under the Investment Canada Act, or ICA, a federal statute which applies to the acquisition of a Canadian business or establishment of a new Canadian business by a non-Canadian. In the case of an acquisition that is subject to review, the non-Canadian investor must observe a statutory waiting period prior to completion and satisfy the Minister responsible for the administration of the ICA that the investment will be of net benefit to Canada, giving regard to certain evaluative factors set out in the legislation.

     Any contemplated acquisitions may also be subject to the provisions of the Competition Act (Canada), or CA. The CA contains provisions relating to premerger notification as well as substantive merger provisions. An acquisition that exceeds certain financial thresholds set out in the CA may be subject to notification and observance of a statutory waiting period prior to completion, during which time the Commissioner of Competition (the “Commissioner”) will evaluate the impact of the

acquisition upon competition. In addition, the Commissioner has the jurisdiction under the CA to review an acquisition that is a “merger” within the meaning of the CA in certain circumstances, even where notification is not filed.

RAILROAD RETIREMENT

     Railroad industry personnel are covered by the Railroad Retirement System instead of Social Security. Our contributions under the Railroad Retirement System have been approximately triple those of employees in industries covered by Social Security. The Railroad Retirement System, funded primarily by payroll taxes on covered employers and employees, includes a benefit roughly equivalent to Social Security (Tier I), an additional benefit similar to that allowed in some private defined-benefit plans (Tier II), and other benefits. For 2005, the Railroad Retirement System required up to a 20.25 percent contribution by railroad employers on eligible wages, while the Social Security and Medicare Acts only required a 7.65 percent contribution on similar wage bases.

ITEM 1A. RISK FACTORS

      We have substantial debt and debt service requirements which could have adverse consequences on our business . As of December 31, 2005, we had indebtedness of $433.9 million and, as a result, we incur significant interest expense. The degree to which we are leveraged could have important consequences, including the following:

	—		our ability to obtain additional financing in the future for capital expenditures, potential acquisitions, and other purposes may be limited or financing may not be available on terms favorable to us or at all;
	—		a substantial portion of our cash flow from operations must be used to pay our interest expense and repay our debt, which reduces the funds that would otherwise be available to us for our operations and future business opportunities; and
	—		fluctuations in market interest rates will affect the cost of our borrowings to the extent not covered by interest rate hedge agreements because our credit facilities bear interest at variable rates and only a portion of our borrowings are covered by hedge agreements.

     A default could result in acceleration of our indebtedness and permit our senior lenders to foreclose on our assets. Our competitors may operate on a less leveraged basis and may have significantly greater operating and financing flexibility than we do.

     As of December 31, 2005, we had $5.0 million of outstanding borrowings under our revolving credit facility. This facility allows us to borrow a total of $100 million for any purpose and we may borrow up to an additional $25 million of term debt in connection with acquisitions if we meet specified conditions. If new debt is added to our current debt levels, the related risks that we face would intensify. As of March 10, 2006, we had $1.5 million outstanding under the revolving credit facility.

      The credit agreement governing our senior credit facilities contains covenants that significantly restrict our operations . Our credit facilities contain numerous covenants imposing restrictions on our ability to, among other things:

	—		incur more debt;
	—		redeem or repurchase our common stock;
	—		pay dividends or make other distributions;
	—		make acquisitions or investments;
	—		use assets as security in other transactions;
	—		enter into transactions with affiliates;

	—		merge or consolidate with others;
	—		dispose of assets or use asset sale proceeds;
	—		create liens on our assets;
	—		make certain payments or capital expenditures;
	—		extend credit; and
	—		withstand a future downturn in our business.

     Our credit facilities also contain financial covenants that require us to meet a number of financial ratios and tests. Our failure to comply with the obligations in our credit facilities could result in events of default under the credit facilities, which, if not cured or waived, could permit acceleration of our indebtedness, allowing our senior lenders to foreclose on our assets.

      Rising fuel costs could materially adversely affect our business . Fuel costs were approximately 11% of our revenue for the year ended December 31, 2005, 9% for the year ended December 31, 2004 and 7% for the year ended December 31, 2003. Fuel prices and supplies are influenced significantly by international, political and economic circumstances. If fuel supply shortages or unusual price volatility were to arise for any reason, the resulting higher fuel prices would significantly increase our operating costs. During 2005, we offset a portion of higher fuel costs through our fuel surcharge program. However, to the extent that we are unable to maintain and expand the existing fuel surcharge program, increases in fuel prices could have an adverse effect on our operating results, financial condition or liquidity.

      As part of our railroad operations, we frequently transport hazardous materials. We are required to transport hazardous materials to the extent of our common carrier obligation. An accidental release of hazardous materials could result in significant loss of life and extensive property damage. The associated costs could have an adverse effect on our operating results, financial condition or liquidity.

      The availability of qualified personnel and an aging workforce may adversely affect our operations. Changes in demographics, training requirements and the availability of qualified personnel, particularly train crew members, could negatively affect our service levels. Our efforts to attract and retain qualified personnel may be hindered due to increased demand in the job market. Unpredictable increases in demand for rail services may exacerbate these risks and may have an adverse effect on our operating results, financial condition or liquidity.

      Some of our employees belong to labor unions and strikes or work stoppages could adversely affect our operations. Many of our employees are union-represented. Our union employees work under collective bargaining agreements with various labor organizations. Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. If our union-represented employees were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or their terms and conditions in future labor agreements were renegotiated, we could experience significant disruption of our operations higher ongoing labor costs.

      Our inability to integrate acquired businesses successfully could have adverse consequences for our business. Our acquisition program could be materially affected by the availability of suitable candidates and competition from other companies for the purchase of available candidates. We have acquired many railroads since we commenced operations in 1992 and intend to continue our acquisition program. The success of our acquisition program will depend on, among other things the availability of suitable candidates and competition from other companies for the purchase of available candidates. Financing for acquisitions may come from several sources, including cash on hand and proceeds from the incurrence of indebtedness or the issuance of additional common stock, preferred stock, convertible debt or other securities. The issuance of any additional securities could result in dilution to our stockholders.

     Acquisitions result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs. The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our business.

     If these disruptions and difficulties occur, they may cause us to fail to realize the cost savings, revenue enhancements and other benefits that we expected to result from an acquisition and may cause material adverse short and long-term effects on our operating results and financial condition.

      Because we depend on Class I railroads for our operations, our business and financial results may be adversely affected if our relationships with Class I carriers deteriorates . The railroad industry in the United States and Canada is dominated by a small number of Class I carriers that have substantial market control and negotiating leverage. Almost all of the traffic on our North American railroads is interchanged with Class I carriers. Our ability to provide rail service to our customers in North America depends in large part upon our ability to maintain cooperative relationships with Class I carriers with respect to, among other matters, freight rates, car supply, reciprocal switching, interchange, trackage rights and fuel surcharges. In addition, loss of customers or service interruptions or delays by our Class I interchange partners relating to customers who ship over our track, may decrease our revenue.

     Class I carriers are also sources of potential acquisition candidates as they continue to divest branch lines. Failure to maintain good relationships may adversely affect our ability to negotiate acquisitions of branch lines.

      We are subject to the risks of doing business in foreign countries . We currently have railroad operations in Canada. The risks of doing business in foreign countries include:

—		adverse changes in the economy of those countries;
—		exchange rate fluctuations;
—		government policies against ownership of businesses by non-nationals; and
—		economic uncertainties including, among others, risk of renegotiation or modification of existing agreements or arrangements with governmental authorities, exportation and transportation tariffs, foreign exchange restrictions and changes in taxation structure.

      We are subject to significant governmental and environmental regulation of our railroad operations. The failure to comply with environmental and other governmental regulations could have a material adverse effect on us . Our railroad and real estate ownership is subject to extensive foreign, federal, state and local environmental laws and regulations. We could incur significant costs as a result of any allegations or findings to the effect that we have violated or are strictly liable under these laws or regulations. We may be required to incur significant expenses to investigate and remediate environmental contamination. We are also subject to governmental regulation by a significant number of foreign, federal, state and local regulatory authorities with respect to our railroad operations and a variety of health, safety, labor, environmental, maintenance and other matters. Our failure to comply with applicable laws and regulations could have a material adverse effect on us.

      A downturn in the economy could negatively affect demand for our services. Several of the commodities we transport come from industries with cyclical business operations. As a result, prolonged negative changes in domestic and global economic conditions affecting the producers and consumers of the commodities carried by us may decrease our revenue.

      Severe weather and natural disasters could disrupt normal business operations, which could result in increased costs and liabilities and decreases in revenues. Severe weather conditions and other natural phenomena, including earthquakes, hurricanes, fires and floods, may cause significant business interruptions and result in increased costs, increased liabilities and decreased revenue.

      We may face liability for casualty losses which are not covered by insurance. We have obtained insurance coverage for losses sustained by our railroads arising from personal injury and for property damage in the event of derailments or other incidents. Personal injury claims made by our railroad employees are subject to the Federal Employers’ Liability Act (“FELA”), rather than state workers’ compensation laws. Currently, we are responsible for the first $750,000 of expenditures per each incident under our general liability insurance policy and $1 million of expenditures per each incident under our property insurance policy. In addition, in each policy period, under our general liability insurance policy we are responsible for the first $1 million of expenditures, in the aggregate, on any incidents in excess of $750,000. Severe accidents or personal injuries could cause our liability to exceed our insurance limits which might have a material adverse effect on our business and financial condition. Our annual insurance limits are $100 million and $15 million on liability and property, respectively. In addition, adverse events directly and indirectly applicable to us, including such things as derailments, accidents, discharge of toxic waste, or other like occurrences in the industry, can be expected to result in increases in our insurance premiums and/or

our self insured retentions and could result in limitations to the coverage under our existing policies. We are currently involved in discussions with our insurers on the renewal of, and adjustments to our insurance coverage, which would revise some terms of coverage for future occurrences.

      Future acts of terrorism or war, as well as the threat of war, may cause significant disruptions in our business operations. Terrorist attacks, such as those that occurred on September 11, 2001, as well as the more recent attacks on the transportation systems in Madrid and London, any government response to those types of attacks and war or risk of war may adversely affect our results of operations, financial condition or liquidity. Our rail lines and facilities could be direct targets or indirect casualties of an act or acts of terror, which could cause significant business interruption and result in increased costs and liabilities and decreased revenues, which could have an adverse effect on our operating results and financial condition. Such effects could be magnified where releases of hazardous materials are involved. Any act of terror, retaliatory strike, sustained military campaign or war or risk of war may have an adverse effect on our operating results and financial condition by causing or resulting in unpredictable operating or financial conditions, including disruptions of rail lines, volatility or sustained increase of fuel prices, fuel shortages, general economic decline and instability or weakness of financial markets which could restrict our ability to raise capital. In addition, insurance premiums charged for some or all of our coverage could increase dramatically or certain coverage may not be available to us in the future.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.