Exhibit 99.1
SUMMIT VIEW, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE | ||||
Audited Consolidated Financial Statements of Summit View, Inc. and Subsidiaries: | ||||
Independent Auditors’ Report | 1 | |||
Consolidated Balance Sheets as of December 31, 2007 and 2006 | 2 | |||
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2007 and 2006 | 4 | |||
Consolidated Statements of Changes in Stockholder’s Equity for the Years Ended December 31, 2007 and 2006 | 5 | |||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006 | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Unaudited Consolidated Financial Statements of Summit View, Inc. and Subsidiaries: | ||||
Unaudited Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 | 16 | |||
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007 | 18 | |||
Unaudited Consolidated Changes in Retained Earnings for the Nine Months Ended September 30, 2008 and 2007 | 19 | |||
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 | 20 | |||
Notes to Unaudited Consolidated Financial Statements | 21 |
To the Board of Directors
Summit View, Inc. and Subsidiaries
Coshocton, Ohio
Independent Auditors’ Report
We have audited the accompanying consolidated balance sheets of Summit View, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income and comprehensive income, changes in stockholder’s equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summit View, Inc. and Subsidiaries at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/GBQ Partners LLC
Columbus, Ohio
May 16, 2008
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2007 and 2006
ASSETS | ||||||||
2007 | 2006 | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 5,100,796 | $ | 2,061,883 | ||||
Accounts receivable | 5,242,518 | 4,216,169 | ||||||
Prepaid expenses | 135,600 | 136,254 | ||||||
Total current assets | 10,478,914 | 6,414,306 | ||||||
Property and Equipment | ||||||||
Track and improvements | 42,474,254 | 40,464,445 | ||||||
Machinery and equipment | 14,819,542 | 13,006,160 | ||||||
Buildings and improvements | 2,176,419 | 2,334,238 | ||||||
Land | 4,476,795 | 4,474,646 | ||||||
Furniture and fixtures | 237,667 | 115,169 | ||||||
64,184,677 | 60,394,658 | |||||||
Less: accumulated depreciation and amortization | (27,395,010 | ) | (23,103,499 | ) | ||||
Total property and equipment | 36,789,667 | 37,291,159 | ||||||
Other Assets | ||||||||
Cash surrender value of life insurance policies | 124,378 | — | ||||||
Loan costs and operating rights, net of accumulated | 37,303 | 48,715 | ||||||
Total other assets | 161,681 | 48,715 | ||||||
TOTAL ASSETS | $ | 47,430,262 | $ | 43,754,180 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
2
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets(Continued)
December 31, 2007 and 2006
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||
2007 | 2006 | |||||
Current Liabilities | ||||||
Note payable – line of credit | $ | — | $ | 1,000,000 | ||
Current portion of long-term debt | 2,892,857 | 2,892,857 | ||||
Current portion of obligation under capital lease | — | 229,813 | ||||
Current portion of deferred revenue – grant | 326,134 | 133,082 | ||||
Accounts payable | 1,162,505 | 2,310,271 | ||||
Accrued liabilities | 1,745,750 | 614,998 | ||||
Income and sundry taxes payable | 2,313,025 | 1,420,254 | ||||
Total current liabilities | 8,440,271 | 8,601,275 | ||||
Long-Term Liabilities | ||||||
Long-term debt | 4,178,201 | 7,071,058 | ||||
Deferred revenue – grant | 2,406,590 | 1,863,148 | ||||
Deferred compensation | 150,000 | — | ||||
Deferred income taxes | 3,224,903 | 4,592,736 | ||||
Total long-term liabilities | 9,959,694 | 13,526,942 | ||||
Total liabilities | 18,399,965 | 22,128,217 | ||||
Stockholder’s Equity | ||||||
Common stock, 750 shares authorized, 100 shares | 500 | 500 | ||||
Additional paid-in capital | 119,936 | 119,936 | ||||
Retained earnings | 28,909,861 | 21,505,527 | ||||
Total stockholder’s equity | 29,030,297 | 21,625,963 | ||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 47,430,262 | $ | 43,754,180 | ||
The accompanying notes are an integral part of the consolidated financial statements.
3
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2007 and 2006
2007 | 2006 | |||||||
Operating Revenues | $ | 58,185,016 | $ | 46,695,046 | ||||
Operating Expenses: | ||||||||
Transportation | 16,590,428 | 14,642,443 | ||||||
Locomotive repair and maintenance | 4,288,269 | 4,191,832 | ||||||
Maintenance of way | 14,483,042 | 9,027,829 | ||||||
Depreciation and amortization | 4,313,694 | 3,896,049 | ||||||
Car repair | 1,096,315 | 1,250,065 | ||||||
Other taxes | 555,759 | 589,470 | ||||||
General and administrative | 7,305,336 | 6,930,278 | ||||||
Gain on sale of property and equipment | (554,830 | ) | (77,370 | ) | ||||
Total operating expenses | 48,078,013 | 40,450,596 | ||||||
Income from Operations | 10,107,003 | 6,244,450 | ||||||
Other (Expense) Income: | ||||||||
Interest expense | (569,206 | ) | (806,283 | ) | ||||
Gain on the discontinuance of interest rate hedges | — | 201,725 | ||||||
Total other income (expense) | (569,206 | ) | (604,558 | ) | ||||
Income before Provision for Income Taxes | 9,537,797 | 5,639,892 | ||||||
Provision for (Benefit from) Income Taxes: | ||||||||
Current | 3,501,296 | 1,782,890 | ||||||
Deferred | (1,367,833 | ) | (2,241,446 | ) | ||||
Total provision for (benefit from) income taxes | 2,133,463 | (458,556 | ) | |||||
Net Income | 7,404,334 | 6,098,448 | ||||||
Other Comprehensive Income: | ||||||||
Discontinuance of interest rate hedges | — | (122,725 | ) | |||||
Comprehensive Income | $ | 7,404,334 | $ | 5,975,723 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder’s Equity
For the Years Ended December 31, 2007 and 2006
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total Stockholder’s Equity | |||||||||||||
Balance at December 31, 2005 | $ | 500 | $ | 119,936 | $ | 122,725 | $ | 15,407,079 | $ | 15,650,240 | |||||||
Net income | — | — | — | 6,098,448 | 6,098,448 | ||||||||||||
Discontinuance of interest-rate hedges | — | — | (122,725 | ) | — | (122,725 | ) | ||||||||||
Balance at December 31, 2006 | 500 | 119,936 | — | 21,505,527 | 21,625,963 | ||||||||||||
Net income | — | — | — | 7,404,334 | 7,404,334 | ||||||||||||
Balance at December 31, 2007 | $ | 500 | $ | 119,936 | $ | — | $ | 28,909,861 | $ | 29,030,297 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007 and 2006
2007 | 2006 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 7,404,334 | $ | 6,098,448 | ||||
Adjustments to reconcile net income to net cash and cash | ||||||||
Depreciation and amortization | 4,313,694 | 3,896,049 | ||||||
Gain on sale of property and equipment | (554,830 | ) | (77,370 | ) | ||||
Deferred taxes | (1,367,833 | ) | (2,241,446 | ) | ||||
Deferred compensation | 150,000 | — | ||||||
Increase in cash surrender value of life insurance | 5,622 | — | ||||||
Gain on the discontinuance of the interest rate hedges | — | (201,725 | ) | |||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | (1,026,349 | ) | (1,202,170 | ) | ||||
Prepaid expenses | 654 | (2,729 | ) | |||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable | (1,147,766 | ) | 362,530 | |||||
Accrued liabilities | 1,130,752 | (495,860 | ) | |||||
Income and sundry taxes payable | 892,771 | 271,091 | ||||||
Total adjustments | 2,396,715 | 308,370 | ||||||
Net cash provided by operating activities | 9,801,049 | 6,406,818 | ||||||
Cash Flows from Investing Activities: | ||||||||
Proceeds from the sale of property and equipment | 722,815 | 140,172 | ||||||
Acquisition of property and equipment | (3,069,213 | ) | (3,054,239 | ) | ||||
Acquisition of property and equipment with grant funding | (899,562 | ) | (1,996,230 | ) | ||||
Deferred revenue – grant | 736,494 | 1,996,230 | ||||||
Premiums paid on cash surrender value of life insurance | (130,000 | ) | — | |||||
Decrease in other assets | — | 14,500 | ||||||
Net cash used in investing activities | (2,639,466 | ) | (2,899,567 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net (payments) borrowings on note payable – line of credit | (1,000,000 | ) | 1,000,000 | |||||
Payments of long-term debt | (2,892,857 | ) | (3,888,323 | ) | ||||
Payments on obligation under capital lease | (229,813 | ) | (115,781 | ) | ||||
Proceeds from the discontinuance of the interest rate hedges | — | 182,725 | ||||||
Net cash used in financing activities | (4,122,670 | ) | (2,821,379 | ) | ||||
Net increase in cash | 3,038,913 | 685,872 | ||||||
Cash and Cash Equivalents – Beginning of Year | 2,061,883 | 1,376,011 | ||||||
Cash and Cash Equivalents – End of Year | $ | 5,100,796 | $ | 2,061,883 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 728,440 | $ | 846,416 | ||||
Income taxes | 1,215,000 | 1,170,000 | ||||||
Supplemental Disclosure of Non-Cash Investing Activities: | ||||||||
Acquisition of property and equipment financed | $ | — | $ | 345,594 |
The accompanying notes are an integral part of the consolidated financial statements.
6
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Nature and Scope of Operations
Summit View, Inc. (SVI) was incorporated in April 1988. Summit View, Inc, is the parent corporation of wholly owned subsidiaries that include Ohio Central Railroad, Inc., (OHCR), The Columbus & Ohio River Rail Road Company (CUOH), The Youngstown Belt Railroad Company (YBRR), Ohio Southern Railroad, Inc., (OSRR), Youngstown & Austintown Railroad, Inc., (YARR), The Warren & Trumbull Railroad, Incorporated (WTRR), Pittsburgh & Ohio Central Railroad Company (POHC), Ohio & Pennsylvania Railroad Company (OHPA), The Mahoning Valley Railway Company (MVRR), The Aliquippa & Ohio River Railroad (AORR) and Performance Railway Services Company (PRSC). During 2006, PRSC’s name was changed to Air Partners N155A Company (APC). The subsidiaries operate freight rail businesses.
During December 2002, Phoenix Logistics, Ltd., (PLL), a limited liability company, was formed having common ownership with Summit View, Inc. PLL acquired land and buildings for $649,366. The consolidated financial statements include the account balances of PLL, which consist of cash, land, building, accrued liabilities and sundry taxes payable. All debt was repaid during 2006.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of SVI and its wholly owned subsidiaries. An affiliated company under common ownership with SVI, PLL, is also included in the consolidation. All material inter-company balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
A significant portion of SVI’s revenue is derived from freight interchange agreements with several railroads and a power plant located in the states of Ohio and Pennsylvania. Operating revenues are recognized for financial purposes when the freight changes carriers at the interchange points or is delivered to the power plant.
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SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Summary of Significant Accounting Policies(continued)
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment between 30 and 90 days from the date of the invoice. Accounts receivable are stated at the amount billed to the customer. Customer account balances over 120 days old are considered delinquent. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amount that will not be collected. Management individually reviews all accounts receivable balances that exceed 120 days from invoice date and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. A valuation allowance was not recorded for the years ended December 31, 2007 and 2006, based on management’s review of the historical bad debt experience and management’s belief that all accounts receivable are fully collectible.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives of the related assets. Maintenance and repairs are charged to operations when incurred. Renewals and betterments of a nature considered to materially extend the useful lives of the assets are capitalized. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts, and any gain or loss is reflected in income. Depreciation and amortization for financial reporting purposes are computed using the straight-line method over the following useful lives:
Track and improvements | 5 – 15 years | |
Machinery and equipment | 5 – 14 years | |
Buildings and improvements | 30 – 40 years | |
Furniture and fixtures | 5 – 10 years |
During 2007 and 2006, SVI received grant funds from the State of Pennsylvania on a reimbursement basis to upgrade and make useable a section of track on the POHC rail line. SVI is accounting for this activity by recording the track asset and a corresponding deferred revenue liability. These amounts will be reduced equally over the period of the life of the track through depreciation and recognition of the same proportional amount of deferred revenue.
8
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Summary of Significant Accounting Policies (continued)
Income Taxes
A consolidated income tax return is filed by SVI that includes the activity of the Subsidiaries. Income tax expense is allocated among the consolidated group based upon the individual subsidiaries taxable income.
A provision has been made for income taxes that provide for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus the net change during the year in deferred tax assets and liabilities. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial and income tax reporting purposes. The differences relate primarily to the use of different depreciation methods and lives for property and equipment and carry forward tax credits relating to a short line railroad credit that was enacted beginning in 2005. The tax credit carry forward was $2,700,000 and $2,580,000 at December 31, 2007 and 2006, respectively. The credit will begin to expire in 2026.
2007 | 2006 | |||||||
Total deferred tax asset | $ | 2,700,000 | $ | 2,580,000 | ||||
Total deferred tax liabilities | (5,924,903 | ) | (7,172,736 | ) | ||||
Net deferred tax liabilities | $ | (3,224,903 | ) | $ | (4,592,736 | ) | ||
A reconciliation of income tax expense at the statutory rate to SVI’s actual income tax (benefit) expense is shown below:
2007 | 2006 | |||||||
Expected income tax expense at the statutory income tax rate – federal and state (34% for 2007, 39% for 2006) | $ | 3,245,000 | $ | 2,223,890 | ||||
Effect of adjustment to deferred tax asset and expense due to change in tax law | (477,000 | ) | (1,600,000 | ) | ||||
Current year tax credit generated | (1,830,600 | ) | (980,000 | ) | ||||
Permanent differences | 560,000 | — | ||||||
Effect of applicable state tax rates | 504,000 | — | ||||||
Other | 132,063 | (102,446 | ) | |||||
$ | 2,133,463 | $ | (458,556 | ) | ||||
9
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Summary of Significant Accounting Policies (continued)
Loan Costs and Operating Rights
Costs incurred in obtaining loan fees and operating rights were capitalized. The costs of obtaining the operating rights are being amortized over a five-year period. Loan origination fees are being amortized over the life of the loan. Amortization expense was $11,412 and $15,626 for the years ended December 31, 2007 and 2006, respectively.
Derivative Financial Instruments
Derivative financial instruments are used by SVI to manage risks associated with interest rate market volatility. SVI does not hold or issue derivative financial instruments for trading purposes. SVI has designated its debt and interest rate swap agreement to be an integrated transaction. Accordingly, the interest rate swap agreement is being accounted for as a hedge, and the differential to be paid or received is recognized as an adjustment to interest expense over the life of the agreement. The management of SVI decided during 2006 to discontinue the interest rate swap agreements, and therefore, there were no such agreements at December 31, 2006.
Advertising and Promotion
SVI expenses advertising costs as incurred. Advertising and promotion expense amounted to $224,804 and $139,937 for the years ended December 31, 2007 and 2006, respectively.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, demand deposits and a money market account held by banks.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued FIN No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This new statement will be effective for SVI for the year ended December 31, 2008. The impact of FIN No. 48 has not been evaluated by management.
Cash and Cash Equivalents
SVI maintains its cash in 24 accounts with two financial institutions, with balances periodically exceeding the $100,000 FDIC insurance limit. The carrying value is a reasonable estimate of the fair value.
10
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Notes Payable – Line of Credit
SVI has a $1,000,000 line of credit with a financial institution. Interest is charged on the outstanding balance at the one-month LIBOR plus 1.5% (6.10% and 7.33% at December 31, 2007 and 2006, respectively) and is due monthly. There were no outstanding borrowings on the line of credit as of December 31, 2007. The outstanding balance on the line of credit as of December 31, 2006 was $1,000,000. During 2007, the line of credit maturity date was extended until August 2009. The line of credit is due on demand and collateralized by substantially all assets of SVI.
Long-Term Debt
Long-term debt consisted of the following at December 31:
2007 | 2006 | |||||||
Notes payable to a bank, due in monthly principal installments of $125,000 through March 2011. Interest is payable monthly at the one-month LIBOR plus 1.75% (6.35% and 7.82% at December 31, 2007 and 2006, respectively). The note is secured by substantially all assets of SVI. | $ | 4,750,000 | $ | 6,250,000 | ||||
Notes payable to a bank, due in monthly principal installments of $116,071 through August 2009. Interest is payable monthly at the one-month LIBOR plus 1.75% and 1.50% (6.35% and 7.57% at December 31, 2007 and 2006, respectively). The note is secured by substantially all assets of SVI. | 2,321,058 | 3,713,915 | ||||||
7,071,058 | 9,963,915 | |||||||
Less: current portion of long-term debt | (2,892,857 | ) | (2,892,857 | ) | ||||
$ | 4,178,201 | $ | 7,071,058 | |||||
Future principal payments required as of December 31, are as follows:
2008 | $ | 2,892,857 | |
2009 | 2,428,201 | ||
2010 | 1,500,000 | ||
2011 | 250,000 | ||
Total | $ | 7,071,058 | |
11
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Long-Term Debt (continued)
The above bank debts and the note payable—line of credit are subject to certain covenants and restrictions, including maintenance of certain financial requirements of which SVI was in compliance at December 31, 2007.
Deferred Revenue
SVI records deferred revenue with regard to grant monies received to upgrade and make useable track on the POHC rail line. The total amount of the deferred revenue was $2,732,724 for the year ending December 31, 2007. These amounts will be recognized as revenue on a systematic basis that corresponds to the depreciation on the asset recorded. The period of recognition will be 15 years which is equivalent to the years of depreciation of the asset.
Future recognition of deferred revenue at December 31, 2007 is as follows:
2008 | $ | 326,134 | |
2009 | 326,134 | ||
2010 | 326,134 | ||
2011 | 326,134 | ||
Thereafter | 1,428,188 | ||
$ | 2,732,724 | ||
Nonqualified Deferred Compensation Plan
During 2007, SVI adopted a nonqualified deferred compensation plan for the benefit of certain key employees. The plan is discretionary and the deferred compensation expense and liability for the year ended December 31, 2007 was $150,000. The plan provides, among other things, for certain deferred compensation to take effect upon the employee’s death, retirement or disability. The deferred compensation liability is being funded by the cash surrender value of life insurance and a money market account on the accompanying balance sheet.
Obligation under Capital Lease
In 2006, SVI entered into a lease agreement for use of machinery that is accounted for as a capital lease. The lease is secured by the leased asset. SVI has recorded the cost of this asset in property and equipment in the amount of $345,594, less accumulated amortization of $53,892, as of December 31, 2006. Amortization expense for the asset held under capital lease, which is included in depreciation and amortization expense, was $53,892 for the year ended December 31, 2006. As of March 2007, the capital lease was paid in full and title to the related equipment was transferred to SVI. As a result, the capital lease obligation was classified as a current liability at December 31, 2006.
12
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Interest Rate Hedging Liability
During November 2004, SVI entered into an interest rate swap agreement for an aggregate notional amount of $6,750,000, amortizing to zero on the expiration date of October 31, 2009. The outstanding notional amount at December 31, 2007 and 2006 was $0. Under the interest rate swap agreement, SVI was entitled to receive monthly interest rate payments at the one-month LIBOR and was required to make monthly interest payments at a fixed rate of 3.80%. During 2006, the management of SVI discontinued the agreement, and therefore, there was no balance at December 31, 2006.
During 2002, SVI entered into an interest rate swap agreement for an aggregate notional amount of $7,312,500, amortizing to zero on the expiration date of December 1, 2007. The outstanding notional amount at December 31, 2007 and 2006 was $0. Under the interest rate swap agreement, SVI was entitled to receive monthly interest rate payments at the one-month LIBOR) and was required to make monthly interest payments at a fixed rate of 3.70%. During 2006, the management of SVI discontinued the agreement, and therefore, there was no balance at December 31, 2006.
Operating Leases
CUOH operates a railroad line for the State of Ohio, through a lease, for a period of five years, expiring in July 2008, with options to renew for additional five-year periods based upon its performance. Lease fees totaled $726,000 in both 2007 and 2006.
During 2007, the Company entered into an operating lease through 2013 for the use of equipment. Total lease fees for 2007 totaled $0. The first payment will be made in 2008.
The Company leases railcars from unrelated parties under lease arrangements accounted for as operating leases. Lease expense related to the railcars was $1,629,945 and $1,421,319 for the years ended December 31, 2007 and 2006, respectively.
The following is a summary of SVI’s future minimum lease commitments under the above leases:
2008 | $ | 1,413,000 | |
2009 | 1,413,000 | ||
2010 | 142,500 | ||
2011 | 142,500 | ||
2012 | 142,500 | ||
Thereafter | 142,500 | ||
$ | 3,396,000 | ||
13
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Self-Insured Medical
It is SVI’s policy to self-insure medical coverage. Therefore, a provision is made for the estimated costs of known and anticipated claims. SVI has stop-loss coverage for medical claims in excess of $30,000 per individual, per year. Because of the inherent uncertainties in estimating claims, it is at least reasonably possible that SVI’s estimated claims could change in the near term. The outstanding balance of the accrual for self-insured coverage was $100,000 and $117,000 as of December 31, 2007 and 2006, respectively.
401(k) Savings Plan
SVI has a 401(k) savings plan whereby employees may elect to make contributions pursuant to a salary-reduction agreement upon meeting age and length-of-service requirements. Effective March 1, 2007, SVI makes a 100% matching contribution of the electing employees’ deferral up to 3% of the employees’ compensation for the plan year; and a 50% match for contributions between 3% and 6%. Prior to March 1, 2007, SVI made contribution matches of 50% up to 6% of employee compensation. Matching contributions to the plan for 2007 and 2006 were $366,525 and $170,085, respectively.
Commitments
SVI’s subsidiaries had entered into agreements with the Ohio Department of Transportation (ODOT) for track rehabilitation funding through the end of the current year. The rehabilitated track must be maintained with certain safety standards for a period of 10 years after the projects are completed. If SVI fails to maintain the track within the safety standards, it is required to repay ODOT a proportionate share of the funding for the years remaining under the agreement. In the opinion of management, SVI is expected to meet or exceed safety standards beyond the required period.
Contingencies
Lawsuits
SVI is subject to legal proceedings and claims, which have arisen in the ordinary course of its business and have not been finally adjudicated. Management is vigorously defending these lawsuits and does not believe that there will be any judgments against SVI. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operation or liquidity of SVI.
14
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
Contingencies (continued)
Environmental Matters
The risk of incurring environmental liability – for acts and omissions, past, present and future – is inherent in the railroad business. However, based on its assessments of the facts and circumstances now known, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on SVI’s financial position, results of operations or liquidity of SVI.
Economic Dependency
SVI’s subsidiaries obtain a majority of their revenue from freight interchange agreements with several railroads and a power plant. The loss of a major interchange agreement could have a material adverse effect on SVI.
Concentrations
At December 31, 2007, three customers’ balances made up approximately 37% of the total accounts receivable. At December 31, 2006, three customers’ balances made up approximately 61% of the total accounts receivable.
Three customers represented 68% of the total operating revenue for the year ending December 31, 2007. Three customers represented 65% of the total operating revenue for the year ending December 31, 2006.
Subsequent Event
Subsequent to year-end, SVI made dividend payments to the owner in the amount of approximately $6,900,000. These payments result in a covenant violation with regard to bank debt. Following year-end, SVI requested and received a bank waiver regarding this covenant.
15
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2008 and December 31, 2007
(Unaudited)
ASSETS | ||||||||
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 2,757,544 | $ | 5,100,796 | ||||
Accounts receivable, net | 6,720,755 | 5,242,518 | ||||||
Prepaid expenses | 1,555 | 135,600 | ||||||
Total current assets | 9,479,854 | 10,478,914 | ||||||
Property and Equipment | ||||||||
Track and improvements | 43,560,646 | 42,474,254 | ||||||
Machinery and equipment | 12,357,119 | 14,819,542 | ||||||
Buildings and improvements | 2,071,419 | 2,176,419 | ||||||
Land | 4,436,794 | 4,476,795 | ||||||
Furniture and fixtures | 237,667 | 237,667 | ||||||
62,663,645 | 64,184,677 | |||||||
Less: accumulated depreciation and amortization | (29,396,098 | ) | (27,395,010 | ) | ||||
Total property and equipment | 33,267,547 | 36,789,667 | ||||||
Other Assets | ||||||||
Cash surrender value of life insurance policies | — | 124,378 | ||||||
Loan costs and operating rights, net of accumulated | — | 37,303 | ||||||
Total other assets | — | 161,681 | ||||||
TOTAL ASSETS | $ | 42,747,401 | $ | 47,430,262 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets(Continued)
September 30, 2008 and December 31, 2007
(Unaudited)
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||
September 30, | December 31, | |||||
2008 | 2007 | |||||
Current Liabilities | ||||||
Current portion of long-term debt | $ | 11,276,786 | $ | 2,892,857 | ||
Current portion of deferred revenue – grant | 169,802 | 326,134 | ||||
Accounts payable | 2,315,837 | 1,162,505 | ||||
Accrued liabilities | 1,575,831 | 1,745,750 | ||||
Income and sundry taxes payable | 767,560 | 2,313,025 | ||||
Total current liabilities | 16,105,816 | 8,440,271 | ||||
Long-Term Liabilities | ||||||
Long-term debt | 1,549,629 | 4,178,201 | ||||
Deferred revenue – grant | 2,959,595 | 2,406,590 | ||||
Deferred compensation | 150,000 | 150,000 | ||||
Deferred income taxes | 3,583,885 | 3,224,903 | ||||
Total long-term liabilities | 8,243,109 | 9,959,694 | ||||
Total liabilities | 24,348,925 | 18,399,965 | ||||
Stockholder’s Equity | ||||||
Common stock, 750 shares authorized, 100 shares | 500 | 500 | ||||
Additional paid-in capital | 119,936 | 119,936 | ||||
Retained earnings | 18,278,040 | 28,909,861 | ||||
Total stockholder’s equity | 18,398,476 | 29,030,297 | ||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 42,747,401 | $ | 47,430,262 | ||
The accompanying notes are an integral part of the consolidated financial statements.
17
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Operating Revenues | $ | 18,806,497 | $ | 15,297,163 | $ | 50,081,069 | $ | 43,824,588 | ||||||||
Operating Expenses: | ||||||||||||||||
Transportation | 4,859,741 | 3,735,564 | 14,703,784 | 11,850,687 | ||||||||||||
Locomotive repair and maintenance | 1,202,848 | 993,105 | 3,291,290 | 2,911,030 | ||||||||||||
Maintenance of way | 4,753,184 | 5,063,465 | 9,969,052 | 11,579,877 | ||||||||||||
Depreciation and amortization | 1,157,926 | 1,008,602 | 3,397,937 | 3,032,905 | ||||||||||||
Car repair | 661,485 | 268,115 | 1,427,274 | 743,021 | ||||||||||||
Other taxes | 45,255 | 10,805 | 335,514 | 417,000 | ||||||||||||
General and administrative | 11,400,251 | 1,483,717 | 15,271,603 | 5,090,447 | ||||||||||||
Loss (gain) on sale of property and equipment | 33,348 | — | 32,848 | (530,053 | ) | |||||||||||
Total operating expenses | 24,114,038 | 12,563,373 | 48,429,302 | 35,094,914 | ||||||||||||
(Loss) Income from Operations | (5,307,541 | ) | 2,733,790 | 1,651,767 | 8,729,674 | |||||||||||
Other (Expense) Income: | ||||||||||||||||
Interest income | 17,165 | 52,463 | 20,483 | 115,274 | ||||||||||||
Interest expense | (56,256 | ) | (168,560 | ) | (175,666 | ) | (564,388 | ) | ||||||||
Total other (expense) income | (39,091 | ) | (116,097 | ) | (155,183 | ) | (449,114 | ) | ||||||||
(Loss) income before Provision for Income Taxes | (5,346,632 | ) | 2,617,693 | 1,496,584 | 8,280,560 | |||||||||||
(Benefit from) Provision for Income Taxes: | ||||||||||||||||
Current | (2,272,473 | ) | 1,172,150 | 974,837 | 3,830,388 | |||||||||||
Deferred | (88,231 | ) | (59,290 | ) | (231,911 | ) | (177,895 | ) | ||||||||
Total (benefit from) provision for income taxes | (2,360,704 | ) | 1,112,860 | 742,926 | 3,652,493 | |||||||||||
Net (Loss) Income | $ | (2,985,928 | ) | $ | 1,504,833 | $ | 753,658 | $ | 4,628,067 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
18
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Changes in Retained Earnings
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
Nine Months Ended September 30, | |||||||
2008 | 2007 | ||||||
Retained earnings at beginning of period | $ | 28,909,861 | $ | 21,505,527 | |||
Net earnings | 753,658 | 4,628,067 | |||||
Asset dividend distribution | (1,343,154 | ) | — | ||||
Cash dividends paid | (10,042,325 | ) | — | ||||
Retained earnings at end of period | $ | 18,278,040 | $ | 26,133,594 | |||
The accompanying notes are an integral part of the consolidated financial statements.
19
SUMMIT VIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 753,658 | $ | 4,628,067 | ||||
Adjustments to reconcile net income to net cash and cash | ||||||||
Depreciation and amortization | 3,397,937 | 3,032,905 | ||||||
Amortization of deferred grant | (153,970 | ) | (99,812 | ) | ||||
Loss (gain) on sale of property and equipment | 32,848 | (530,053 | ) | |||||
Deferred taxes | 358,982 | (177,895 | ) | |||||
Decrease in cash surrender value of life insurance | 124,378 | — | ||||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | (1,478,237 | ) | (1,913,698 | ) | ||||
Prepaid expenses | 134,045 | 136,254 | ||||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable | 1,153,332 | 666,627 | ||||||
Accrued liabilities | (169,919 | ) | (50,051 | ) | ||||
Income and sundry taxes payable | (1,545,465 | ) | 1,694,138 | |||||
Total adjustments | 1,853,931 | 2,758,415 | ||||||
Net cash provided by operating activities | 2,607,589 | 7,386,482 | ||||||
Cash Flows from Investing Activities: | ||||||||
Proceeds from the sale of property and equipment | 500 | 715,723 | ||||||
Acquisition of property and equipment | (664,373 | ) | (1,846,629 | ) | ||||
Net cash used in investing activities | (663,873 | ) | (1,130,906 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net (payments) borrowings on note payable – line of credit | — | (1,000,000 | ) | |||||
Borrowings on short-term debt | 8,500,000 | — | ||||||
Payments of long-term debt | (2,744,643 | ) | (1,245,300 | ) | ||||
Payments under capital lease | — | (229,813 | ) | |||||
Dividends paid | (10,042,325 | ) | — | |||||
Net cash used in financing activities | (4,286,968 | ) | (2,475,113 | ) | ||||
Net (decrease) increase in cash | (2,343,252 | ) | 3,780,463 | |||||
Cash and Cash Equivalents – Beginning of Year | 5,100,796 | 2,061,884 | ||||||
Cash and Cash Equivalents – End of Year | $ | 2,757,544 | $ | 5,842,347 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
20
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Nature and Scope of Operations
Summit View, Inc. (SVI) was incorporated in April 1988. SVI, is the parent corporation of wholly owned subsidiaries that include Ohio Central Railroad, Inc., (OHCR), The Columbus & Ohio River Rail Road Company (CUOH), The Youngstown Belt Railroad Company (YBRR), Ohio Southern Railroad, Inc., (OSRR), Youngstown & Austintown Railroad, Inc., (YARR), The Warren & Trumbull Railroad, Incorporated (WTRR), Pittsburgh & Ohio Central Railroad Company (POHC), Ohio & Pennsylvania Railroad Company (OHPA), The Mahoning Valley Railway Company (MVRR), The Aliquippa & Ohio River Railroad (AORR) and Air Partners N155A Company (APC). The subsidiaries operate freight rail businesses.
During December 2002, Phoenix Logistics, Ltd., (PLL), a limited liability company, was formed having common ownership with Summit View, Inc. PLL acquired land and buildings for $649,366. The consolidated financial statements include the account balances of PLL, which consist of cash, land, building, accrued liabilities and sundry taxes payable.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of SVI and its wholly owned subsidiaries (the Company). An affiliated company under common ownership with SVI, PLL, is also included in the consolidation. All material intercompany balances and transactions are eliminated in consolidation. These interim consolidated financials statements have been prepared by the Company, without audit, and accordingly do not contain all disclosures which would be required in a full set of financial statements in accordance with accounting principles generally accepted in the United States of America (United States GAAP). In the opinion of management, the unaudited financial statements for the three and nine months ended September 30, 2008 and 2007, are presented on a basis consistent with the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The consolidated balance sheet data for 2007 was derived from the audited financial statements but does not include all disclosures required by United States GAAP.
The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2007.
Accounts Receivable
Accounts receivable consisted of the following as of September 30, 2008 and December 31, 2007:
September 30, 2008 | December 31, 2007 | ||||||
Accounts receivable - trade | $ | 7,671,748 | $ | 5,242,518 | |||
Less: allowance for doubtful accounts | (950,993 | ) | — | ||||
Accounts receivable, net | $ | 6,720,755 | $ | 5,242,518 | |||
Long-Term Debt
In September 2008, the Company obtained a short-term note from a financial institution for $8,500,000. The proceeds from the note were primarily used to pay discretionary bonuses in September 2008.
21
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Income Taxes
The Company’s effective income tax rate in the three months ended September 30, 2008, was a benefit of 44.2% compared with a provision of 42.5% in the three months ended September 30, 2007. The Company’s effective income tax rate in the nine months ended September 30, 2008, was 49.6% compared with 44.1% in the nine months ended September 30, 2007.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This new statement will be effective for SVI for the year ended December 31, 2008. The Company does not expect the adoption of FIN 48 to impact the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007, and for interim periods within those years. On February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2 which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Company adopted SFAS 157 on January 1, 2008, and it did not have a material impact on its consolidated financial statements. However, the Company has not applied the provisions of the standard to its property and equipment, goodwill and certain other assets, which are measured at fair value for impairment assessment, nor to any business combinations. The Company will apply the provisions of the standard to these assets and liabilities beginning January 1, 2009, as required by FSP FAS 157-2.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R retains the fundamental requirements of the original pronouncement requiring that the acquisition method be used for all business combinations. SFAS 141R defines the acquirer, establishes the acquisition date and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS 141R also requires acquisition-related costs to be expensed as incurred. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption of SFAS 141R is prohibited. The provisions of SFAS 141R will be effective for the Company for all business combinations with an acquisition date on or after January 1, 2009.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), which has been established by the FASB as a framework for entities to identify the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with United States GAAP. SFAS 162 is not expected to result in a change in current practices. SFAS 162 is effective January 15, 2009. The Company does not expect the adoption of SFAS 162 to impact the Company’s consolidated financial statements.
Commitments and Contingencies
SVI’s subsidiaries had entered into agreements with the Ohio Department of Transportation (ODOT) for track rehabilitation funding through the end of the current year. The rehabilitated track must be maintained with certain safety standards for a period of 10 years after the projects are completed. If SVI fails to maintain the track within the safety standards, it is required to repay ODOT a proportionate share of the funding for the years remaining under the agreement. In the opinion of management, SVI is expected to meet or exceed safety standards beyond the required period.
22
SUMMIT VIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Lawsuits
SVI is subject to legal proceedings and claims, which have arisen in the ordinary course of its business and have not been finally adjudicated. Management is vigorously defending these lawsuits and does not believe that there will be any judgments against SVI. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operation or liquidity of SVI.
Environmental Matters
The risk of incurring environmental liability – for acts and omissions, past, present and future – is inherent in the railroad business. However, based on its assessments of the facts and circumstances now known, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on SVI’s financial position, results of operations or liquidity of SVI.
Subsequent Event
On October 1, 2008, the Company announced that it was acquired by Genesee & Wyoming Inc. (GWI), headquartered in Greenwich, Connecticut, for $234.3 million in cash, subject to adjustment for final working capital. The cash purchase price included contingent consideration of approximately $7.5 million, which will be paid to the seller upon satisfaction of certain conditions. The sale is subject to the approval of the Surface Transportation Board, which is pending.
On October 3, 2008, the United States enacted the Emergency Economic Stabilization Act of 2008 (Stabilization Act of 2008), which included the renewal of the Short Line Tax Credit. The Short Line Tax Credit, which had been in existence from 2005 through 2007, expired on December 31, 2007. The Stabilization Act of 2008 extends the credit through December 31, 2009, and is retroactive to January 1, 2008. The Stabilization Act of 2008 provides for an income tax credit equal to 50 percent of qualified railroad track maintenance expenditures, subject to an annual limitation of $3,500 multiplied by the number of track miles owned or leased by the Company. In addition, the Stabilization Act of 2008 changed the amount of credit allowed against regular tax by removing the previous limitation based on the Company’s Alternative Minimum Tax (AMT). As a result of this change, the Company can utilize the Short Line Tax Credit to offset 75% of its regular United States income tax, subject to the total Short Line Tax Credit available.
23