OTHER PERTINENT INFORMATION
We maintain our web site at www.continentalrailcorporation.com. Information on this web site is not a part of this report.
Unless specifically set forth to the contrary, when used in this prospectus the terms “Continental Rail", the "Company," "we", "us", "our" and similar terms refer to Continental Rail Corp., a Nevada corporation, and its subsidiaries, including Transportation Management Services, Inc. a Michigan corporation which we refer to as TMS, Continental Rail Holdings Corp. a Nevada corporation which we refer to as Continental Rail Holdings (CRHC), Continental Rail Leasing, Corp., a Florida corporation which we refer to as Continental Rail Leasing (CRLC) and Continental Rail Leasing Corp., an Alberta Canada extra-provincial corporation. In addition, “2013” refers to the year ended December 31, 2013, “2014” refers to the year ended December 31, 2014, and “2015” refers to the year ending December 31, 2015.
All share and per share information presented in this prospectus gives effect to the 1:200 reverse stock split of our outstanding common stock effective July 25, 2013.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward looking statements. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements contained in this Report speak only as of the date of this report, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
Such forward-looking statements include statements regarding, among other things, matters associated with:
This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found at various places throughout this report including, but not limited to the discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and "Business." Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this Form 10-K generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.
Although forward-looking statements in this report reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and factors that may cause actual results to be materially different from those discussed in these forward-looking statements. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Accordingly, you are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation.
ITEM 1. BUSINESS.
Overview
We are a freight rail transportation holding company. Our operations will be conducted through two divisions:
Our railroad freight division plans to acquire strategic short line and regional freight railroads, initially with revenues in the range of $2 million to $10 million annually. Post-acquisitions, we expect to grow the acquired railroads’ revenue and income base through innovative and efficient operations, combined with strategic marketing initiatives. These expectations, however, are highly anticipatory in nature, are subject to a number of assumptions and may not be achievable by us. After an initial platform has been established, we expect to seek to acquire railroads with much larger scale.
We expect that our rail rolling stock leasing division will pursue acquisitions of existing rail car and locomotive leasing companies and/or directly purchase rolling stock for lease to our freight railroads as well as third party rail customers. Our rail rolling stock leasing division will seek to acquire rail-related service companies to partner with our freight railroad operations. These rail-related service companies include railroad equipment, maintenance, supply, parts, repair, manufacturing and construction firms.
We also expect to provide management and advisory services to rail entities in matters involving transportation and logistics, marketing, engineering, finance and regulatory matters. These services will be provided through our Continental Rail Holdings subsidiary.
In pursuit of our business plan, in July 2013 we acquired TMS, a company which provides railroad consulting services. The principal of TMS was John H. Marino, Jr., who currently is an executive officer and director of our company. TMS offers a wide variety of consulting services for operational areas of a short line railroad, including railroad operations, railroad real estate and maintenance of way. During 2013 TMS consulted with an industrial customer regarding its desire to reactive an abandoned railroad. Following its acquisition, we have integrated TMS into our Continental Rail Holdings subsidiary, which is our railroad freight division.
We are in the early stages of implementing our business model and we presently do not own any short line or regional freight railroads or any rolling stock or locomotives for lease to railroads. To date, our operational efforts have included identifying acquisition targets, early stage discussion with these targets, establishing a relationship with a financing source and equity capital raising activities. We have also focused our efforts on securing management contracts which will permit us to generate revenues without the need to raise capital to acquire railroads or rolling stock.
In order to acquire railroads and rolling stock, we will need to raise significant capital. Our current activities with respect to capital raise are focused on institutional lenders, funds and banks that can assist in providing the necessary funding for the acquisition of short line railroads. Additional efforts have been made to obtain funding for the leasing of rail cars though financial institutions that specialize in this type of funding.
While we have been, and continue to be, engaged in early and late stage discussions with a number of potential acquisition targets and funding sources, we are not a party to a binding agreement with any target or funding sources and there are no assurances we will ever reach that stage. Accordingly, while our business plan remains unchanged, as a result of our nominal assets and nominal operations we meet the definition of a "shell company" under Federal securities laws.
Our business strategy
Our goal will be to provide customers with a total suite of transportation services focused on exceptional customer service, safe rail operations, tailored transportation solutions, professional and reliable service, and strong partnerships with the communities we serve.
Our rail freight division will seek to acquire short line and regional freight railroad acquisitions in North America. Subject to the availability of sufficient capital, we plan to make two to four acquisitions per year during our first five years of operation. With over 560 short line and regional railroads in the U.S., we believe that there are significant opportunities to acquire attractive rail properties from Class I railroads, industrial corporations and independently owned short line railroad owners. Our management’s experience is that many industrial corporations seek to spin off the railroad assets as a way to monetize their investment or divest a non-core business, while independent short line owners often seek a strategic exit. Class I railroads, seeking to improve efficiency, are continuing to “right-size” their properties by divesting non-core, low density lines.
With these numerous opportunities, our management has utilized its industry knowledge and experience to identify multiple viable acquisition opportunities. Management is targeting railroads with annual revenues in the range of $2 million to $10 million.
We will target rail lines that have strong earnings before income taxes, depreciation and amortization, or EBITDA, margins and consistent, predictable growth. We believe that these potential acquisitions must have certain characteristics, including:
Once acquired, we expect to be able to improve the acquired rail operations through one or more of the following factors:
Increase line density/carloads per mile: We expect that our marketing will be conducted in four stages. First, every shipper on the line will be interviewed, with the focus on bringing business back to the railroad that had been switched to truck. We will seek to accomplish this through more competitive pricing and better service levels, such as on-demand service as opposed to scheduled service. Second, we will seek to increase the number of carloads currently shipped by existing customers, again through better pricing and service, and incentive pricing. Third, we will seek out new customers near the rail line, to which we can provide a new siding, transloading facility or other transportation alternatives. Lastly, we will work with industrial development representatives in the local communities to have new shippers relocate on the rail line.
Improve customer service: Our customer service efforts will be headed by regional sales personnel, and supplemented by the local railroad management. In addition, we will require that each general manager meet periodically with every major shipper to assess their need for the coming year as part of the budget process. Finally, we expect to provide rail service on demand, rather than scheduled service which we believe will enable us to augment our rail services to meet individual customer needs, thereby gaining a competitive advantage over Class I railroads that typically employ a rigid scheduled service that may be less convenient to the customer and may fail to meet changing customer demands.
Improve safety: We will follow a model that places a high degree of importance on safety. A safety director will be appointed to reduce the incidence of accidents per track mile, with the goal of lower insurance costs as well as decreased personal injury and property costs associated with accidents.
Achieve lower operating costs: Through our internal analysis of variable and discretionary expenses, and the examination of redundant and avoidable costs, we expect to implement a focused budgeting process that seeks to lower overall operating costs on acquired rail lines. Typically, Class I railroads are burdened with maintenance standards that are greater than the short lines. For example, trains operated by Class 1 railroads operate at faster speeds to stay on schedule, which requires higher line maintenance standards and high horsepower locomotives. Short lines, on the other hand, can operate at speeds necessary only to reach an interchange point on time. This allows the short line to utilize low horsepower, typically less expensive, locomotives and to maintain the line to match the lower speeds. In addition, Class I railroads incur labor costs which are greater than those of short line railroads due to union contracts that dictate higher rates and more restrictive work rules. Although some short lines employ unionized labor, generally the labor rates are substantially lower than those of Class I railroads, and its work rules permit cross-functionality. For example, an individual worker can operate the train, perform maintenance tasks, or complete office work – all on the same day.
Achieve price increases: Base rate per carload is often determined at the time the line is acquired from the prior owner or Class I railroad. Thereafter, the rate can increase through one or more mechanisms including a pre-determined percentage, implementation of the rail cost adjustment factor (“RCAF”), which is a rail-specific consumer price index adjustment, and/or direct negotiation between the shipper, the Class I railroad and the owner of the short line railroad. The rate can also be supplemented by surcharges such as a fuel surcharge. Typically rates are increased on an annual basis.
Rationalization of assets: Railroads often possess unneeded real estate, buildings, and equipment. If, based upon our internal analysis the acquired company has excess assets, we expect to sell those assets.
Integration of corporate functions: Once multiple railroad assets have been purchased, corporate functions such as accounting, purchasing and legal will be consolidated at the corporate level to eliminate redundancies.
We are not a party to any agreements or letters of intent related to any railroad acquisitions as of the date of this prospectus. Based upon our internal analysis, we believe the average acquisition costs for each railroad will range from $5 million to $15 million. We expect to fund acquisitions through equity and debt financings. Our ability to consummate any acquisition, however, is dependent on our ability to raise the necessary capital. As we do not have any firm commitments for any capital, the timing of these proposed acquisitions is unknown as this time.
Rail rolling stock leasing division
Subject to the availability of capital, our rail rolling stock leasing division will pursue acquisitions of existing rail car and locomotive leasing companies and/or directly purchase rolling stock for lease to our railroads and to our rail customers. We expect to lease the equipment to our rail customers, other railroads and third party rail customers. Our goal is to grow the rolling stock fleet through a cascaded leasing program as dictated by customer demand. Our strategy is to seek financing whereby the asset is retained by the financing company and we will manage, operate and maintain the leased rail cars. This division will also seek to acquire rail-related service companies including railroad equipment, maintenance and repair firms. We also expect to provide management and advisory services to rail entities in matters involving transportation and logistics, marketing, engineering, finance and regulatory matters. We do not, however, currently have any rolling stock, locomotives or rail customers.
Based upon our internal analysis, we believe that there are significant opportunities in the rail equipment market. According to the AAR, in 2012 there were 1.2 million rail cars in the U.S. fleet. The trend has been for the larger Class I railroads to lease equipment due to the high cost of maintaining equipment. Small railroads often lease equipment due to capital constraints. In 2009, according to the AAR, Class I railroads owned or operated approximately 24,700 locomotives, while the small railroads owned or operated 4,050 locomotives. Railroads both large and small often resort to leasing locomotives to cover peak or seasonal traffic demands or to minimize capital outlays.
Subject to the availability of sufficient capital, we anticipate building a fleet of rail freight cars for lease of approximately 5,000 units, and a locomotive lease fleet of approximately 150 units. While small in comparison to larger leasing company fleets, we intend to pursue market opportunities where agreements are customized to serve specific customer needs – not in direct competition with larger fleets served by companies such as GE Rail Car, GATX, Wells Fargo, and others. Many larger car and locomotives lessors will occasionally reduce their fleets in order to concentrate on specific equipment types. We believe that this practice will create opportunities for our company, permitting us to focus on customers requiring smaller equipment orders or unique equipment types.
We have established contacts with a number of potential sellers of rolling stock, as well as companies interested in maintaining our fleet at such time as we have acquired rolling stock. We plan to partner with mechanical service providers to repair and maintain our equipment at an expected lower cost than the large Class I railroads and leasing companies, who often have higher labor costs due to union work rules and wages.
As of the date of this report, however, we have not entered into any firm agreement with any companies to either purchase or maintain rolling stock. We expect that the cost to acquire this fleet will be approximately $100 million. However, as our ability to implement this portion of our business plan is dependent upon raising the necessary capital, and as we do not presently have firm commitments for the capital, we are unable at this time to project when we may be able to make the first of the necessary acquisitions to accomplish this goal.