ITEM 1. BUSINESS
GENERAL
Wisconsin Central Transportation Corporation ("WCTC") was incorporated under the laws of the State of Delaware in 1987. The principal offices of WCTC are located at One O'Hare Centre, Suite 9000, 6250 N. River Road, Rosemont, Illinois 60018, telephone (847) 318-4600. All dollar amounts in this report are stated in U.S. dollars unless otherwise indicated.
WCTC is a holding company which conducts its business through subsidiaries and minority-owned corporations. Its North American rail business is conducted through its wholly-owned consolidated subsidiaries, Wisconsin Central Ltd. ("WCL"), Fox Valley & Western Ltd. ("FV&W"), WCL Railcars, Inc., Wisconsin Chicago Link Ltd. ("WCLL"), Sault Ste. Marie Bridge Company ("SSM"), WC Canada Holdings, Inc. ("WCCHI") and Algoma Central Railway Inc. ("ACRI"). Its transportation business in the United Kingdom, New Zealand and Australia (referred to herein as "international business") is conducted by Wisconsin Central International, Inc. ("WCI"), another wholly-owned consolidated subsidiary, through its minority-owned affiliates in each of those countries.
Our North American business began in 1987 when we acquired a rail system of approximately 2,000 route miles in Wisconsin, the Upper Peninsula of Michigan, northeastern Illinois and eastern Minnesota from another railroad. We began freight operations with approximately 600 employees, 85 locomotives and 2,900 railcars. Since 1987, we have acquired additional rail lines in Wisconsin, Michigan and Ontario and increased our business from new and continuing customers. At December 31, 1999, our North American rail system comprised approximately 2,855 route miles, and had approximately 2,230 employees, 244 locomotives and 13,900 railcars. The railroad's principal gateways are Chicago, Duluth/Superior, Green Bay, Milwaukee, Minneapolis/St. Paul and Sault Ste. Marie, Ontario. These gateways permit us to connect with other railroads serving these locations. See "North American Business".
Our international business began in 1993 when we led a consortium which acquired the government-owned rail and ferry businesses in New Zealand. In the period from 1995 to 1997 a consortium that we led acquired most of the rail freight business in the United Kingdom. In late 1997 we led a consortium that acquired the government-owned rail lines in Tasmania, and we are actively seeking to participate in the privatization of additional railroad companies in Australia. In 1998 our consortium was named preferred bidder to operate railroad assets in Jordan. See "International Business".
DEVELOPMENTS SINCE JANUARY 1, 1999
Increased Ownership in EWS
In June and August 1999, we increased our ownership interest in English Welsh & Scottish Railway Holdings Limited ("EWS") from approximately 33% to approximately 39%, through private purchases with a total price of $31.6 million. These transactions were funded from our existing credit facilities. In March 2000, we are further increasing our ownership interest in EWS to approximately 42% through the exercise of options with a total exercise price of approximately $6.2 million. This transaction will also be funded from our existing credit facilities.
Management Reorganization
In July 1999, Edward A. Burkhardt announced his resignation as our Chairman, Chief Executive Officer and Director effective August 31, 1999. As a result of agreements entered into with Mr. Burkhardt, as well as the reorganization of other personnel, a $3.9 million pre-tax charge was recorded in the third quarter of 1999 for management reorganization costs.
Agreement with BNSF and CN
On December 20, 1999, The Burlington Northern Santa Fe Corporation ("BNSF") and Canadian National Railway Company ("CN") filed a pre-filing notification with the Surface Transportation Board ("STB") announcing their intent to file an application for common control with the STB. In March 2000, our Company together with BNSF and CN announced an agreement that will allow us to expand our merchandise freight service to points throughout the upper Midwest and Ontario, Canada, utilizing haulage rights on the combined BNSF/CN system following regulatory approval of their proposed combination. In addition to enlarging our service territory through haulage rights covering approximately 10,000 route miles, the agreement provides us with additional trackage rights on Chicago area tracks of BNSF and CN; establishes terms for our use of BNSF's intermodal ramp in Cicero, Illinois; preserves, consolidates and enhances the operational flexibility of the contracts under which we currently provide haulage services for CN between Superior, Wisconsin, and Chicago; mitigates the potential loss of business resulting from the BNSF and CN combination; and defines and secures several other interests and rights of our Company. On March 17, 2000, the STB issued a decision placing a 15-month moratorium on all large railroad mergers while the STB considers new merger rules. BNSF and CN have appealed this decision to the United States Court of Appeals for the District of Columbia Circuit.
Stock Repurchase Program
In March 2000, our Board of Directors authorized up to $35.0 million to be utilized for the repurchase of shares of our Common Stock. The stock repurchase program will be conducted over the next year. We intend to repurchase our Common Stock, from time to time, through open market purchases or in negotiated private transactions. Actual repurchase decisions will be based upon factors such as the stock price and general economic and market conditions.
NORTH AMERICAN BUSINESS
Operations
Our North American business has grown over the past five years as a result of acquisitions and increased business from customers as shown in the following table:
- ------------ (1) Excludes disputed switching charges of $13.3 million discussed in Note 16 to the consolidated financial statements included in Item 8.
(2) Operating ratio represents operating expenses as a percentage of operating revenues. The 1996 percentage excludes disputed switching charges of $13.3 million discussed in Note 16 to the consolidated financial statements included in Item 8.
Our operating philosophy emphasizes safety, customer service and high productivity from our employees. We use primarily two person train crews. Employees are paid on a salaried basis. We follow a program of cross-training employees to perform a number of related functions.
The following table summarizes our North American work force by function:
AVERAGE NUMBER OF EMPLOYEES
We serve a competitive market area in North America which demands consistent, high quality train service. Our North American rail network is divided into 14 main lines and 17 secondary lines. Main lines are those with the heaviest use, while secondary lines provide service to on-line customers. Train service is provided seven days per week on main lines and five or six days per week on secondary lines. Our train service is designed to provide a flow of cars from key origination points at least once every 24 hours. This flow moves on scheduled trains between specified locations, exchanging or adding cars at each stop.
Under the current regulatory framework in North America, shipments by rail may move either under a tariff or under a transportation contract. Shipments performed under contract, generally one year in duration, make up approximately two-thirds of our North American business. These contracts generally have cost escalation clauses based on various indices that are representative of the related costs. Our transportation contracts also typically provide that a specified percentage of a customer's particular commodity must be shipped pursuant to the contract. Payments are due from customers upon receipt of billing. In general, where a shipment involves more than one railroad, the carrier delivering to the final destination receives and then distributes payment for all of the participating carriers. Payments due to and from other railroads are netted on a monthly basis.
Customers and Traffic
The volume of our North American business in 1999, as measured by carloads handled (including as a carload each loaded trailer or container), was 563,200 carloads (excluding wholesale freight haulage traffic) generating $326.3 million in gross freight revenues. Of these carloads, 88.1% were originating or terminating business (i.e., business to or from a point on our lines) or local business (i.e., business which both originates and terminates on our lines). We believe that this high percentage of originating, terminating and local business adds stability to our business volume due to our marketing-oriented approach and our ability to customize service for customers within our territory. The remainder of our North American business was overhead business. Overhead business is received from other railroads at interchange points in our territory and moved to another point in the territory for interchange to another railroad. Our ability to handle certain overhead business is restricted by contract. See Item 2.
Item 2. "Properties".
The following table shows the composition of our North American 1999 traffic (excluding wholesale freight haulage) by class:
1999 VOLUME BY CLASS
The 25 largest customers of our North American business accounted for approximately 73.3% of our volume and 70.9% of our gross freight revenues in 1999. Ten shippers (Consolidated Papers, Inc., Cleveland-Cliffs, Inc., The Mead Corporation, Champion International Corp., Quad/Graphics, Georgia Pacific Corp., Wisconsin Public Service Corp., Minnesota Mining and Manufacturing Co., U.S. Steel Corp. and
Weyerhaeuser Corp.) accounted for approximately 45.9% of our gross freight revenues in North America in 1999. Consolidated Papers, Inc. accounted for 12.0% of our gross freight revenues in North America in 1999. Our volume is subject to general economic conditions and specific situations within customers' respective industries as well as generally to the effects of competition.
We also provide wholesale freight haulage services for CN's intermodal, carload and bulk commodity trains between Superior, Wisconsin and Chicago. Wholesale freight haulage services are not included in our carload statistics or our calculation of largest customers. Revenue related to these wholesale freight haulage services is included in other operating revenues. If CN were included in our customer calculation, it would be among the ten largest customers.
Commodities Base
We transport a wide variety of commodities for our North American customers. The following table summarizes our North American volume and gross freight revenues for 1999 by commodity group. A discussion of the individual commodity groups follows the table.
PAPER AND OTHER FOREST PRODUCTS. Paper and other forest products accounted for 40.9% of our gross freight revenues and 26.4% of our North American volume in 1999. Paper and other forest products that we carry include a wide variety of paper products, woodpulp, pulpboard (a packaging material), lumber and wood fibers. We provide direct rail service to major woodpulp and paper manufacturers in central and northeastern Wisconsin, the Upper Peninsula of Michigan and Ontario. The distribution and marketing patterns for different types of forest products vary, as do the seasonality and cyclicality of the markets. Much of our forest products business generally follows the cycles of the paper industry. Generally, this commodity grouping is influenced by the paper production levels in the territories that we serve.
MINERALS. Minerals accounted for 30.1% of our gross freight revenues and 43.6% of our North American volume in 1999. The principal minerals that we haul in our North American operations are metallic ore, coal, clay products and roofing granules. Metallic ore consists primarily of shipments to steel producers in Alabama and Ohio as well as shipments to Escanaba, Michigan for transloading to lake vessels. Low sulfur coal is carried inbound to electric utility plants in Wisconsin and high sulfur coal is carried inbound to paper companies and other industries in Wisconsin. Inbound clay products are used in paper production and in the iron ore pelletizing process. Outbound roofing granules originate at manufacturing facilities in Wisconsin. Other mineral products that we carry are sand and stone.
INDUSTRIAL PRODUCTS. Industrial products accounted for 14.5% of our gross freight revenues and 9.6% of our North American volume in 1999. Industrial products that we haul include chemicals and petroleum products, which are hauled inbound to paper companies and fertilizer distributors that we serve, and steel, which is hauled primarily from Canadian producers to various points throughout North America.
FOOD AND GRAIN. Food and grain products totaled 6.2% of our gross freight revenues and 5.4% of our North American volume in 1999. Corn, barley, malt and canned and frozen vegetables make up most of this group.
INTERMODAL. Intermodal volume consists of over-the-road trailers and shipping containers hauled on railroad flat cars. The trailer and container business handles truck-competitive, time-sensitive commodities. This business represented 3.9% of our gross freight revenues and 11.4% of our North American volume in
1999. We have intermodal facilities in Chicago and in Arcadia, Green Bay, Neenah and Stevens Point, Wisconsin.
OTHER. Other commodities accounted for 4.4% of our gross freight revenues and 3.6% of our North American volume in 1999. Other commodities include waste and scrap and miscellaneous freight.
Seasonality
Our gross freight revenues from quarter to quarter during the course of a year have not historically been subject to significant seasonal changes. Our operating expenses for the first quarter historically have been somewhat higher than for any other quarter, primarily due to adverse weather conditions.
Competition
Our railroad operations in North America are subject to competition from trucks, other rail carriers and lake vessels. Competition with rail carriers and lake vessels is usually based on price, while competition with trucks can be based on price, service or both. Trucks are our dominant competition, competing actively for shipments of nearly all commodities that we handle, especially intermodal traffic and forest products. Rail competition exists principally in the Duluth/Superior to Chicago corridor. Lake vessels generally compete for bulk commodities such as coal and ore. Our pricing and service decisions are also impacted by competition among our customers and their competitors, as we must provide pricing and service that help keep our customers competitive in their markets.
Marketing
We emphasize superior service to our customers and have created a marketing organization designed to identify and quickly respond to customers' needs. We structure our services to provide consistent transit times and ready availability of quality equipment. Our marketing strategy includes decentralized pricing authority to enable marketing personnel with specific market knowledge and direct customer contact to make pricing decisions within established guidelines. This quick and independent reaction to market opportunities, together with clear delegation of authority and responsibility, provides for effective customer relations and enables us to retain and increase our base of business. In recognition of our excellent service during the years 1988 through 1998, LOGISTICS MANAGEMENT & DISTRIBUTION REPORT, a respected trade publication, presented us with its "Quest for Quality" award for each of those years. The award for 1999 has not yet been presented. The award is based on customer surveys encompassing service, equipment, convenience, price and sales criteria. We have also received many awards from our customers recognizing our excellent service.
Employee Relations
At December 31, 1999, we employed 2,230 full-time employees. Our employees, after meeting certain requirements and subject to current union contracts, are eligible to participate in our employee stock purchase plans, savings plans and bonus plans.
The 336 conductors employed by WCL, FV&W and SSM have been represented by the United Transportation Union ("UTU") since 1997. During 1999, we successfully negotiated an initial labor contract with the UTU that was ratified by its members. The agreement settles wage and work rule issues through 2000.
The 342 engineers employed by WCL, FV&W and SSM have been represented by the Brotherhood of Locomotive Engineers ("BLE") since 1997. During 1999, we successfully negotiated an initial labor contract with the BLE that was ratified by its members. The agreement settles wage and work rule issues through 2000.
ACRI's approximately 135 non-management employees are represented by various collective bargaining organizations.
The remainder of our employees are not represented by collective bargaining organizations.
Environmental Matters
Our North American operations are subject to various federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations, which are implemented
principally by the U.S. Environmental Protection Agency ("USEPA") and comparable state agencies, govern the management of hazardous wastes, the discharge of pollutants into the air and into surface and underground waters, and the manufacture, handling, transportation, storage and disposal of certain substances. One such law, the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), which is also known as the "Superfund" law, generally imposes joint and several liability for clean-up and enforcement costs, without regard to fault or the legality of the original conduct, on current and predecessor owners and operators of a site. Much of our real property has been used for industrial purposes or leased to commercial and industrial companies whose activities may have resulted in discharges onto the property. Consequently, our railroads may be responsible under CERCLA and other applicable federal and state statutes for all or a part of the costs to clean up sites at which contaminants have been released by them, their lessees, predecessor owners or lessees of properties, or other third parties. Prior owners of a portion of our rail operating properties have agreed to indemnify us with respect to contamination or non-compliance with environmental laws arising prior to our acquisition of the subject sites. In addition, several of the states in which our railroads operate make available reimbursement programs for clean-up of contamination.
We believe that the operations of our railroads are in material compliance with current laws and regulations. We estimate that any expense incurred in maintaining compliance with current laws and regulations will not have a material effect on our financial position, financial results of operations or capital expenditures. However, there can be no assurance that the current regulatory requirements will not change, or that currently unforeseen environmental incidents will not occur, or that past non-compliance with environmental laws will not be discovered on our rail operating properties that may not be subject to indemnification or reimbursement of remediation costs.
See Item 3.
ITEM 3. LEGAL PROCEEDINGS
Employees of our U.S. railroads are covered by the Federal Employers' Liability Act ("FELA"), rather than state workers' compensation systems. Under FELA, damage awards for injuries and deaths of railroad employees are settled by negotiation or litigation based on the comparative negligence of the employee and the employer and are not subject to limitations on the amount of recovery (as recoveries are under workers' compensation systems).
Our railroads are currently subject to a number of claims and legal actions that arose in the ordinary course of business, including FELA claims by employees and personal injury claims (including wrongful death
claims) by third parties. We believe these claims, taking into account reserves and applicable insurance, will not have a material adverse effect on our financial position or annual financial results of operations. Adverse judgments with respect to these claims, individually or in the aggregate, in excess of related reserves and applicable insurance, could have a material adverse effect on our financial position or annual financial results of operations.
In October 1995, the Circuit Court of Dane County ruled in favor of a Wisconsin Department of Revenue ("WDR") retroactive assessment of personal property taxes for the tax years 1990 through 1993 against all Wisconsin railroads, including WCL and FV&W. As a result of the ruling, we recognized the $3.0 million retroactive assessment, as well as accrued interest of $0.7 million, in our 1995 consolidated statement of income. WCL, FV&W and the other railroads involved appealed the ruling to the Wisconsin Court of Appeals. On December 16, 1999, the Wisconsin Court of Appeals found in favor of the railroads and reversed the decision of the Dane County Circuit Court. The WDR has filed a petition for review with the Wisconsin Supreme Court. No amounts have been recorded in our 1999 consolidated financial statements related to this Appellate Court decision.
WCL and FV&W have been named as "potentially responsible parties" under state spill statutes or CERCLA with respect to contamination at a number of sites on their properties. As a potentially responsible party, WCL or FV&W as the owners or lessees of these sites have been identified by state or federal environmental authorities as parties that may have an obligation (jointly and severally with predecessor and concurrent owners and lessees and other third parties) to pay for the cost of remediation of those sites. However, we believe that any expense we may incur in connection with the cleanup of such sites will not have a material adverse effect on our financial condition or annual financial results of operations. As part of our normal operations, our railroads transport hazardous materials from time to time, which may expose them to claims and potential liability for injuries to employees, other persons, property and the environment. See Item 1. "Business - Regulation".
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding each person who serves as one of our executive officers:
Mr. Power has served as our President and Chief Executive Officer since September 1999. Prior to September 1999, Mr. Power served as our Executive Vice President and Chief Financial Officer since our formation in 1987. Mr. Power is a director of the Company and each of our subsidiaries other than ACRI and WCCHI, and has served as such since 1987. Mr. Power also serves as a director of Tranz Rail and ATN, and is chairman of EWS. Mr. Power has 32 years of railroad management experience.
Mr. McCarren has served as President and Chief Executive Officer of our North American operating subsidiaries since September 1999. From July 1996 to August 1999, Mr. McCarren served as Executive Vice President and Chief Operating Officer of our North American operating subsidiaries. Mr. McCarren has served as a director of the Company since December 1998. From 1990 to 1996, Mr. McCarren served as President of Gateway Western Railway Company. From 1988 to 1990, Mr. McCarren served as the General Superintendent - Transportation for the Chicago, Missouri and Western Railway. Mr. McCarren has 21 years of railroad management experience.
Mr. Russ has served as Executive Vice President and Chief Financial Officer of the Company since September 1999. From May 1999 to September 1999, Mr. Russ served as Vice President of the Company. From January 1994 to April 1999, Mr. Russ served as Executive Manager and Chief Financial Officer of Tranz Rail. Prior to serving at Tranz Rail, Mr. Russ served as our Treasurer from 1987 to 1993. Mr. Russ began his railroad career in 1973 and has 19 years of railroad management experience.
Mr. Fisk has served as Executive Vice President - Corporate Development of the Company since September 1999. From 1996 to 1999, Mr. Fisk served as Engineering Director of EWS. Prior to serving at EWS, Mr. Fisk served as Mechanical Superintendent - Locomotive for our North American operating subsidiaries from 1987 to 1996. Mr. Fisk began his railroad career in 1970 and has 26 years of railroad management experience.
Mr. Bradshaw has served as Vice President - Corporate Development of the Company since June 1998. From June 1994 to June 1998, Mr. Bradshaw served as Group General Manager, Operations for Tranz Rail. From November 1993 to June 1994, Mr. Bradshaw served as General Manager, Rail Operations for Tranz Rail. Prior to serving at Tranz Rail, Mr. Bradshaw served as Vice President and General Manager of WCL from 1987 to November 1993. Mr. Bradshaw has 26 years of railroad management experience.
Ms. Coady has served as Vice President - Human Resources and Claims of the Company since November 1999. From 1996 to 1999, Ms. Coady served as Assistant Vice President, Human Resources of our North American operating subsidiaries. From 1993 to 1996, Ms. Coady served as Superintendent of Transportation of FV&W's Fox Valley Division. Prior to joining our Company in 1993, Ms. Coady was employed by the Fox River Valley Railroad, most recently as Director of Human Resources.
Ms. Gilbert has served as Vice President - General Counsel of our North American operating subsidiaries since October 1999. From 1996 to 1999, Ms. Gilbert served as General Counsel of our North American operating subsidiaries. Prior to that time, Ms. Gilbert served as Assistant General Counsel of our North American operating subsidiaries since our formation in 1987. Ms. Gilbert began her legal career as trial counsel for the Federal Trade Commission and joined the railroad industry in 1983.
Mr. Kelly has served as Vice President and Chief Accounting Officer of the Company since September 1988. He serves as Vice President and Chief Financial Officer of our North American operating subsidiaries. Prior to joining the Company, Mr. Kelly served as Corporate Controller for Spiegel, Inc. (a catalog retailer) from 1987 to 1988, as an independent consultant during 1986, and as Vice President, Finance for Wilton Enterprises, Inc. (a distributor of housewares) during 1985.
Mr. Kerbs has served as Vice President - Engineering of our North American operating subsidiaries since 1987. From 1974 until 1987, Mr. Kerbs was employed by the Chicago and Northwestern Transportation Corporation ("CNW"), most recently as Director of Maintenance Operations. Mr. Kerbs has 35 years of railroad management experience.
Mr. Schauer has served as Vice President - Marketing of our North American operating subsidiaries since October 1988, and served as Assistant Vice President, Marketing, of WCL from 1987 until October 1988. From 1986 until 1987, Mr. Schauer was employed by CNW as General Marketing Manager. Mr. Schauer has 25 years of railroad management experience.
Mr. Terbell has served as Vice President and General Manager of our North American operating subsidiaries since November 1993. Prior to that time, Mr. Terbell served as WCL's Eastern Division Transportation Manager since 1987. From 1973 until 1987, Mr. Terbell was employed by CNW, most recently as Assistant Division Manager - Engineering. Mr. Terbell has 25 years of railroad management experience.
Mr. Nadrowski has served as Vice President - Mechanical of our North American operating subsidiaries since 1987. From 1985 until 1987, Mr. Nadrowski was involved in the ownership and operation of a marina and a motel in Wisconsin. Mr. Nadrowski has 29 years of railroad management experience.
Mr. White has served as Vice President - Corporate Development of the Company since November 1999. From 1996 to 1999, Mr. White served as Vice President - Human Resources of our Company. Prior to joining our Company, Mr. White held a variety of positions with Tranz Rail and its predecessors from 1962 to 1996, most recently as Executive Manager, Personnel. Mr. White has 28 years of railroad management experience.
Mr. Mickey has served as Treasurer of the Company and its subsidiaries since May 1996. Prior to that time, Mr. Mickey served as Assistant Controller of WCL from 1990 to 1996. From 1984 to 1990, Mr. Mickey was employed by Arthur Andersen & Co., most recently as audit manager.
The executive officers of the Company are elected annually by and serve at the discretion of the Company's Board of Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is available for quotation through The Nasdaq Stock Market(R) under the symbol "WCLX". On March 20, 2000 there were approximately 2,070 record holders of our Common Stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of our Common Stock as quoted through The Nasdaq Stock Market(R):
PRICE PER SHARE ---------------------- CALENDAR PERIOD HIGH LOW --------------- ---------- ----------
1998:
First Quarter...................................... $ 30.75 $ 23.00 Second Quarter..................................... 28.25 19.75 Third Quarter...................................... 23.50 12.56 Fourth Quarter..................................... 20.06 13.88
1999:
First Quarter...................................... $ 17.88 $ 12.56 Second Quarter..................................... 22.38 12.38 Third Quarter...................................... 20.00 13.50 Fourth Quarter..................................... 15.25 12.44
We have not paid and have no current plans to pay dividends on our Common Stock. We currently intend to retain all earnings for use in our business. The payment of any future dividends will be determined by the Board of Directors in light of the future prevailing conditions, including our earnings, financial condition and requirements, restrictions in financing agreements, business conditions and other factors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Includes partial year (11 months) results of the operation of the Duck Creek North lines acquired January 1997. (2) The 1996 amount is shown net of disputed switching charges of $13.3 million discussed in Note 16 to the consolidated financial statements included in Item 8. (3) The 1998 amount includes $5.4 million related to the March 1998 sale of the Company's rights under a five-year transportation agreement discussed in Note 15 to the consolidated financial statements included in Item 8. (4) Interest expense includes $0.3 million, $1.2 million, $0.9 million and $2.9 million in 1999, 1998, 1997 and 1996, respectively, resulting from the arbitration ruling discussed in Note 16 to the consolidated financial statements included in Item 8. (5) Includes partial year (10 months) results of EWS's principal freight business, acquired February 1996. (6) Extraordinary items result from early extinguishment of debt obligations and are stated net of related income tax benefits.
The operating data below presents additional information about our North American operations.
(1) Includes partial year (11 months) results of the operation of the Duck Creek North lines acquired January 1997. (2) A revenue ton mile equals weight in tons of freight carried for hire multiplied by the distance in miles between origin and destination. (3) Revenue per ton mile equals net freight revenue divided by revenue ton miles of freight volume. (4) Operating ratio represents operating expenses as a percentage of operating revenues. The 1996 percentage excludes the effect of disputed switching charges of $13.3 million discussed in Note 16 to the consolidated financial statements included in Item 8.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements, related notes and other financial information included in Item 8. "Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS: 1999 COMPARED TO 1998
Net income for 1999 was $66.9 million compared with $76.3 million for 1998, a decrease of $9.4 million, or 12.4%.
OPERATING REVENUES. Operating revenues for North American operations in 1999 were $362.7 million compared with $344.1 million for 1998, an increase of $18.7 million or 5.4%. Volume, as measured by carloads handled (including as a carload each loaded trailer or container), for 1999 was 563,200 carloads (excluding haulage traffic) compared with 547,662 carloads in 1998, an increase of 15,538 carloads or 2.8%.
The following table compares our 1999 and 1998 revenues:
Gross freight revenues in all commodity groups for 1999 were unfavorably affected by merger-related industry service problems in the eastern U.S. Gross freight revenues for 1999 increased in three of six commodity groups compared with 1998, with an overall increase of 1.0%. Carload volume also increased in three of six commodity groups compared to 1998, with an overall increase of 2.8%. The following table compares volume (in carloads), gross freight revenues and average revenue per carload by commodity group (excluding wholesale freight haulage) for the years 1999 and 1998:
Paper and other forest products volume and gross freight revenues decreased by 2.5% and 1.8%, respectively, primarily due to competitive pressure from imports of printing paper as well as the conversion of certain overhead lumber shipments to a wholesale freight haulage arrangement.
Volume and gross freight revenues for minerals increased 4.3% and 7.0%, respectively, primarily due to increased demand for roofing material and increases in rail shipments of iron ore sourced from the upper Midwest, partially offset by reductions in sand and stone. Volume and gross freight revenues for coal
remained substantially unchanged compared to the prior year. Sand and stone volume and gross freight revenues decreased primarily due to a reduction in shipments of aggregates from our operating territory.
Volume and gross freight revenues for industrial products decreased by 8.1% and 6.8%, respectively, primarily due to a reduction in steel shipments from a major customer of ACRI caused by continued pressure on the steel industry from low priced imports from offshore countries.
Food and grain volume and gross freight revenues increased 11.2% and 6.0%, respectively, primarily due to increases in shipments of corn and other grains in our operating territory. Intermodal volume and gross freight revenues increased by 21.5% and 22.8%, respectively, primarily due to increased market share resulting from service improvements during 1999. Other volume and gross freight revenues decreased by 1.9% and 5.7%, respectively, primarily due to decreases in shipments of scrap metal to casting producers in our operating territory.
Wholesale freight haulage revenue, which is not included in our gross freight revenues, increased $17.0 million in 1999 to $29.8 million. The increase is primarily related to a full year in 1999 of a wholesale freight haulage agreement with CN that began in August 1998.
OPERATING EXPENSES. Operating expenses were $272.6 million for 1999, an increase of $20.3 million, or 8.1%, compared with 1998. The largest increases in operating expenses occurred in equipment rents, property taxes, depreciation and casualty and insurance costs. Our operating ratio (operating expenses as a percentage of operating revenues) was 75.2% for 1999, compared to 73.3% in 1998.
The following table sets forth a comparison of our operating expenses during 1999 and 1998:
* Not meaningful.
Labor expense for 1999 increased 3.5% compared with 1998 primarily due to an average 3% increase in wage rates at the beginning of 1999 and a 10% increase in the costs of our medical and dental programs, partially offset by a 1% decrease in the average work force and a $4.7 million decrease in incentive expense. Labor expense as a percentage of operating revenues decreased to 31.9% in 1999 compared with 32.5% in 1998.
Diesel fuel expense for 1999 increased $0.3 million or 1.4% versus 1998 due primarily to a 5.1% increase in fuel consumption, partially offset by a 3.4% reduction in the 1999 average fuel price compared to 1998. We have hedge arrangements covering approximately 39% and 40% of our expected North American fuel consumption for the first half of 2000 and the second half of 2000, respectively. We enter into hedge arrangements to reduce our exposure to price volatility and can give no assurance that the hedge arrangements will yield lower costs than spot market purchases. See Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we utilize various financial instruments which inherently have some degree of market risk. The quantitative and qualitative information presented below describe significant aspects of our financial instrument programs which have material market risk.
Interest Rate Sensitivity. We are exposed to changes in interest rates primarily as a result of our borrowing activities, which include fixed and floating rate debt used to maintain liquidity and fund our business operations. The nature and amount of long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. We are not currently a party to any interest rate risk management transactions. The table below presents principal cash flows and related weighted average interest rates by contractual maturity dates of debt instruments as of December 31, 1999.
Commodity Price Sensitivity. We have a program to hedge against fluctuations in the price of our diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities, and various commodity swap and collar transactions which are accounted for as hedges. Based on historical information, we believe there is a significant correlation between the market prices of diesel fuel and #2 heating oil, and our swap and collar transactions are typically based on the delivery price of #2 heating oil. Our contracts require us to purchase a defined quantity at a defined price. Such transactions are generally settled in cash with the counter party. As of December 31, 1999, we had hedge arrangements covering approximately 39% of our expected fuel consumption for the first half of 2000 and approximately 40% of our expected fuel consumption for the second half of 2000. As of December 31, 1999, 12.0 million notional gallons were included in diesel fuel swaps and collar arrangements at weighted average contract prices ranging from $.3975 to $.5025 per gallon. This price does not include taxes, transportation costs, additives and certain other fuel handling costs. As of December 31, 1999, the unrealized gain on these hedges was $2.7 million. Gains and losses from hedge transactions are deferred and matched to specific fuel purchases. At December 31, 1999, we also maintained fuel inventories used in normal operations which were not material to our overall financial position and therefore represent no significant market exposure.
Our North American operating subsidiaries and our international affiliates consume significant quantities of diesel fuel, which has in recent months risen in price to a near historically high level. This price increase is largely due to a cutback in production by oil producing nations. Although we believe that diesel fuel prices will return to more reasonable levels, no guarantee can be made that this will happen or when it will happen. Also we cannot be assured that we will be able to pass this diesel fuel price increase on to our customers.
Investment in Affiliates. The value in U.S. dollars of our investment in companies outside the United States and of our equity in the earnings of those companies fluctuates from time to time as the value in U.S. dollars of the currencies of those countries fluctuates. We do not hedge this exposure. We have entered into zero cost collar arrangements to hedge a portion of our foreign currency exposure on future management fees from EWS which are payable in pounds sterling. The collars have put strike prices ranging from $1.5500 to $1.6000 and call strike prices ranging from $1.6520 to $1.6935 with a notional amount of (pound)1.95 million as of December 31, 1999. As of December 31, 1999, there was no unrealized gain or loss on these collar arrangements.
We do not purchase or hold derivative financial instruments for trading purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
INDEPENDENT AUDITORS' REPORT ............................................ 27
FINANCIAL STATEMENTS
Consolidated Balance Sheets ........................................... 28-29 Consolidated Statements of Income ..................................... 30 Consolidated Statements of Changes in Stockholders' Equity ............ 31 Consolidated Statements of Cash Flows ................................. 32 Notes to Consolidated Financial Statements ............................ 33-46
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Wisconsin Central Transportation Corporation:
We have audited the consolidated balance sheets of Wisconsin Central Transportation Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Wisconsin Central Transportation Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois February 1, 2000
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Wisconsin Central Transportation Corporation ("WCTC") operates approximately 2,855 route miles of railway serving Wisconsin, Illinois, Minnesota, Michigan's Upper Peninsula and Ontario through its principal operating subsidiaries, Wisconsin Central Ltd. ("WCL"), Fox Valley & Western Ltd. ("FV&W"), Sault Ste. Marie Bridge Company ("SSM") and Algoma Central Railway Inc. ("ACRI"). WCTC, through its Wisconsin Central International, Inc. ("WCI") subsidiary, also holds a 24% equity interest in Tranz Rail Holdings Limited ("Tranz Rail"), which provides transportation services in New Zealand, a 39% equity interest in English Welsh and Scottish Railway Holdings Limited ("EWS"), which provides transportation services in Great Britain, and a 33% equity interest in Australian Transport Network Limited ("ATN") which provides transportation services in Australia.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements presented herein include the results of operations of WCTC and its wholly-owned subsidiaries. WCTC and its subsidiaries are referred to herein as the Company. All intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments in money market instruments with original maturities of less than 30 days and are stated at cost which equals redemption value. Checks that have been issued but have not cleared the bank are included in accounts payable.
MATERIALS AND SUPPLIES
Materials and supplies consist mainly of fuel oil and items for improvement and maintenance of roadway, structures and equipment, and are stated at the lower of cost or market utilizing average costs. As of December 31, 1999, the Company had entered into hedging positions for approximately 39% and 40% of its expected North American fuel consumption for the first half of 2000 and the second half of 2000, respectively. Gains and losses on such transactions are deferred and matched to specific fuel purchases.
INVESTMENTS IN INTERNATIONAL AFFILIATES/CURRENCY TRANSLATION
The Company's investments in its international affiliates are accounted for under U.S. generally accepted accounting principles utilizing the equity method of accounting. Under this method, the Company's share of the net income of these investments is recorded in the Company's financial statements when earned and dividends are credited against the investment in affiliates when received.
The translation of foreign currency amounts into U.S. dollars is performed for balance sheet accounts using period-end exchange rates and for revenue and expense accounts using the average exchange rate during the period. Gains or losses resulting from currency translation are included in stockholders' equity. All dollar amounts included herein are stated in U.S. dollars.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
PROPERTIES
Properties are recorded at cost. Depreciation is principally computed using composite group straight- line rates. Average depreciable lives utilized by the Company are summarized as follows:
ASSET CLASS YEARS
Roadway properties.......................................... 41 Bridges..................................................... 52 Signals and communication systems........................... 28 Locomotives and freight cars................................ 36
Additions and improvements to track structures are capitalized. Repair and maintenance costs are charged to expense. When roadway property other than land is sold, the costs of the assets less the sales proceeds are charged to accumulated depreciation. Gains or losses resulting from sales of land not required for railroad operations are included in "other income" in the consolidated statements of income. Overhead costs related to track additions and improvements are also capitalized. During 1999, 1998 and 1997, approximately $1.3 million, $1.2 million, and $1.0 million, respectively, of interest was capitalized on construction-in-progress.
ENVIRONMENTAL REMEDIATION LIABILITIES
The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of initial remediation feasibility studies. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
REVENUES
Freight revenues are recognized as shipments progress. Other revenues consist primarily of demurrage, switching, haulage and passenger revenues.
USE OF ESTIMATES
The preparation of 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to conform with the 1999 presentation.
(2) INTERNATIONAL AFFILIATES
The Company's international business is conducted through affiliates located in the United Kingdom, New Zealand and Australia.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INVESTMENTS IN INTERNATIONAL AFFILIATES
The Company's investments in its international affiliates are summarized as follows:
EQUITY IN NET INCOME OF INTERNATIONAL AFFILIATES
The Company's equity in net income of its international affiliates is summarized below. The Company's investment in ATN was made in November 1997.
ENGLISH WELSH & SCOTTISH RAILWAY HOLDINGS LIMITED
The Company currently owns approximately 39% of EWS which provides most of the rail freight services in Great Britain, operates freight trains through the English Channel tunnel and carries mail for the Royal Mail. The EWS businesses were acquired from British Rail in privatization transactions during the period from late 1995 to late 1997, with the acquisition of the principal rail freight business occurring in February 1996. During 1999, the Company increased its ownership interest in EWS from approximately 33% to approximately 39% through private purchases with a total price of $31.6 million. The Company has made approximately $85.0 million of cash investments in EWS.
The Company has been granted options to acquire additional shares in EWS to compensate it for its leadership of the consortium. In addition, EWS has issued options to certain of its officers and directors, and warrants to the investment banking firm that facilitated the acquisition of EWS. Assuming that all options and warrants are exercised, the Company's equity interest in EWS will be approximately 38%.
The Company is party to a management services agreement with EWS under which the Company provides management services to EWS, including principally making available the services of certain Company executives for full-time employment by EWS, training of EWS personnel by the Company and making available the expertise and consulting services of other Company executives. Amounts earned by the Company from EWS for services under the management services agreement (not including the services of Company executives who are paid directly by EWS) were $2.0 million, $2.3 million and $2.2 million in 1999, 1998 and 1997, respectively. The management services agreement is subject to renewal on an annual basis.
Four of the directors of the Company are directors and hold shares and options of EWS.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TRANZ RAIL HOLDINGS LIMITED
The Company currently owns approximately 24% of Tranz Rail, which operates a 2,400 route mile freight and passenger rail business, an interisland ferry business and a trucking business in New Zealand. The Company has made approximately $22.2 million of cash investments in Tranz Rail, and has received approximately $28.8 million in proceeds from a return of capital and dividends through December 31, 1999.
The Company is party to a management services agreement with Tranz Rail under which the Company provides management services to Tranz Rail, including principally making available the services of certain Company executives for full time employment by Tranz Rail, training of Tranz Rail personnel by the Company and making available the expertise and consulting services of other Company executives. Amounts earned by the Company from Tranz Rail for services under the management services agreement (not including the services of Company executives who are paid directly by Tranz Rail) were $0.5 million, $0.7 million, and $1.1 million in 1999, 1998, and 1997, respectively. The management services agreement is subject to renewal on an annual basis.
Five of the directors of the Company are directors and hold shares and options of Tranz Rail.
AUSTRALIAN TRANSPORT NETWORK LIMITED
A consortium of investors, including WCI, Tranz Rail, Berkshire Partners LLC ("Berkshire"), an American private equity firm, and Fay Richwhite, a New Zealand investment firm, formed ATN and acquired the government-owned rail business in late 1997 and a private-industry railroad in 1998 in Tasmania, an island state of Australia. WCI owns approximately 33% and Tranz Rail owns approximately 27% of ATN, which provides all the commercial rail freight service in Tasmania over its 555 route mile rail system. WCI's equity investment in ATN approximated $5.8 million.
In connection with the establishment of ATN and subsequent capital contributions by its shareholders, Berkshire and Fay Richwhite each granted the Company options to purchase an additional 1.21% of the shares of ATN at any time during a five year period ending November 14, 2002. The options initially had an exercise price equal to 104% of the price all shareholders initially paid for their shares of ATN; that price increases by approximately 3.5% at each anniversary of the funding of ATN.
Four of the directors of the Company are directors of ATN.
PARTICIPATION OF BERKSHIRE PARTNERS
Berkshire, of which one of the directors of the Company, EWS, Tranz Rail and ATN is an executive officer, director and beneficial owner of shares, has participated in each of the investment consortiums related to the Company's international affiliates. Berkshire continues to hold shares in Tranz Rail, EWS and ATN.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SUMMARY FINANCIAL INFORMATION
The combined results of operations and financial position of the Company's international affiliates are summarized below (ATN is included from November 14, 1997):
The borrowing arrangements of EWS and ATN each contain provisions which substantially restrict their ability to transfer funds to the Company in the form of cash dividends, loans and advances. Tranz Rail's net assets are not similarly restricted.
The Company's retained earnings included undistributed earnings of international affiliates of $134.9 million and $114.6 million at December 31, 1999 and 1998, respectively.
OTHER INFORMATION
The Company filed a Form 10-K/A (an amendment to Form 10-K) with the Securities and Exchange Commission ("SEC") containing EWS's financial statements for each of its fiscal years ended March 31, 1997, 1998, 1999, and expects to file a Form 10-K/A for EWS's fiscal year ending March 31, 2000. The Form 10-K/A is filed within six months after EWS's fiscal year end.
Tranz Rail is subject to the reporting requirements of the Securities Exchange Act of 1934 applicable to a foreign private issuer, and accordingly, files reports and other information with the SEC.
(3) ACQUISITIONS
DUCK CREEK NORTH LINES
On January 27, 1997, SSM completed the purchase of 198 route miles of railroad track and trackage rights in Wisconsin and the Upper Peninsula of Michigan. The rail lines are commonly known as the "Duck Creek North" lines. The rail lines, together with contiguous property and associated facilities, were acquired for approximately $85.0 million plus provisions for labor protection and other liabilities of $2.8 million and acquisition costs of $0.8 million.
WAUSAU/HAYWARD LINES
On May 31, 1997, WCL began operations over 18 route miles of rail lines serving Wausau and Hayward, Wisconsin. WCL acquired the track for $3.9 million.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) ACCRUED EXPENSES
(5) OTHER REVENUES
(6) LONG-TERM DEBT
Long-term debt consists of the following:
In January 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission registering $250 million of debt securities for potential issuance to the public. In April 1998, the Company sold $150 million of these debt securities in a public offering. The net proceeds from the sale were used to repay outstanding borrowings under the Company's bank revolving credit facility. The debt securities mature on April 15, 2008 and bear interest at 6.625% and yield 6.676%. In conjunction with the sale of these securities, the Company incurred $3.3 million in debt issuance costs that are being amortized to interest expense over the life of the debt.
Other long-term debt consists of government-financed interest free loans supporting railroad infrastructure improvements that promote economic development in the jurisdictions served by such government entities.
The Company maintains an unsecured revolving credit facility (the "Revolver") with a syndicate of banks with a capacity of $175.0 million, which allows the Company to choose various floating rate options.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Revolver is scheduled to expire on October 31, 2000 and outstanding borrowings totaling $169.5 million are classified as short-term at December 31, 1999. The Company pays commitment fees on the unused amount of the Revolver and a facility fee based on the Revolver's total capacity. Such fees vary based on the Company's credit rating and leverage ratio. Principal reductions are not required under the Revolver prior to its expiration date. The effective interest rate on outstanding borrowings under the Revolver at December 31, 1999 was 6.6%. The Company also maintains a separate Canadian revolving credit agreement held by ACRI (the "ACRI Revolver"). The ACRI Revolver has a capacity of $8.3 million with terms, covenants and margins similar to the WCTC Revolver. The ACRI Revolver is scheduled to expire on October 31, 2000 and outstanding borrowings totaling $8.3 million are classified as short-term at December 31, 1999. During 1999, the Company added another revolving credit agreement with a capacity of $50 million that expires June 30, 2000 to augment its existing loan facilities. No amounts were outstanding under this agreement at December 31, 1999. The Company's aggregate unused borrowing availability under its loan facilities was $55.0 million at December 31, 1999, after giving effect to outstanding borrowings and the letter of credit described below.
In 1999 the Company entered into a guaranty of 33% of ATN's total credit facility of AUD8.5 million.
The Company obtained a $0.5 million letter of credit in connection with a bid submission for a concession agreement with the Government of Jordan to operate the assets of a railway company in that country.
Maturities of debt at December 31, 1999 for each of the years 2000 through 2004 and thereafter were as follows:
YEAR AMOUNT ---- ----------- (in thousands) 2000.................................................... $ 180,280 2001.................................................... 2,416 2002.................................................... 2,350 2003.................................................... 1,866 2004.................................................... 1,348 Thereafter............................................. 154,873 ----------- Total................................................... $ 343,133 ===========
The financing arrangements of the Company limit its ability to pay dividends on its capital stock, incur additional indebtedness, create liens on its assets, repurchase shares of its capital stock, and make certain loans, investments or guarantees.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, other current assets, short-term variable rate debt and other current liabilities approximate fair value. The Company estimates the fair value of its long-term, fixed rated debt based on quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities. The fair value of the Company's long-term, fixed rate debt at December 31, 1999 was $146.0 million as compared to a carrying amount of $162.9 million. The unrealized gain on the Company's fuel hedging positions at December 31, 1999 was $2.7 million.
(8) SALE-LEASEBACK TRANSACTIONS
The Company has entered into sale-leaseback transactions (predominantly relating to equipment) with third-party financing institutions. These transactions have resulted in gains which have been reflected as deferred income in the Company's consolidated balance sheets. The gains on sale-leaseback transactions are amortized over the terms of the related operating leases.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table indicates the future amortization of deferred gains on sale-leaseback transactions:
YEAR AMOUNT ---- --------- (in thousands)
2000................................................. $ 1,255 2001................................................. 1,255 2002................................................. 1,141 2003................................................. 1,020 2004................................................. 1,020 Thereafter........................................... 3,369 --------- Total................................................ $ 9,060 =========
(9) LEASES
Total operating lease expense (predominantly relating to equipment) amounted to $34.5 million, $30.5 million, and $29.3 million in 1999, 1998, and 1997, respectively.
Minimum future lease payments under operating leases that have remaining non-cancelable lease terms in excess of one year are as follows:
YEAR AMOUNT ---- ----------- (in thousands)
2000................................................ $ 31,398 2001................................................ 29,724 2002................................................ 28,771 2003................................................ 27,072 2004................................................ 23,094 Thereafter.......................................... 141,664 --------- Total............................................... $ 281,723 =========
(10) BENEFIT PLANS
PROFIT-BASED INCENTIVE PLANS
The Company has profit-based incentive plans for all full-time employees. Amounts accrued under these plans were based primarily upon meeting or exceeding targeted operating results set at the beginning of the plan year. During 1999, 1998 and 1997, $4.5 million, $10.4 million and $3.4 million, respectively, were accrued under provisions of these incentive plans.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STOCK OPTION PLANS
The Company has four stock option plans under which certain key management employees and members of the Company's Board of Directors may be granted options to purchase shares of the Company's common stock. Options may have a duration of up to 10 years and have an exercise price not less than the fair market value of the common stock at the time of the grant. A summary of activity in the Company's stock option plans as of December 31, 1999 is presented below:
Of the options outstanding at December 31, 1999 under the Company's stock option plans, 1,734,969 were vested and fully exercisable, 118,000 will vest in 2000, and 12,500 will vest in 2001.
Summarized information about the Company's stock options outstanding at December 31, 1999 is as follows:
WEIGHTED- AVERAGE REMAINING RANGE OF OPTIONS CONTRACTUAL EXERCISE PRICE OUTSTANDING LIFE IN YEARS -------------- ----------- -------------
$ 12.00 - $ 17.63 1,507,269 7.2 $ 20.31 - $ 24.50 158,200 8.4 $ 29.67 - $ 36.50 200,000 6.8
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
EMPLOYEE STOCK PURCHASE PLANS
In 1991, the Company adopted an Employee Stock Purchase Plan ("Purchase Plan"). Under the Purchase Plan, all eligible employees who elect to participate are granted an option to purchase, one year following the date of grant, a number of common stock shares not to exceed 7.5% of their annual base salary divided by the purchase price per share through payroll deductions over the course of the year following the date of grant. The purchase price per share under the Purchase Plan is the lesser of 85% of the market value of the common stock as of the grant date or 85% of the market value on the exercise date. In December 1995, the Company established a plan similar to the Purchase Plan for ACRI (collectively, the two plans are referred to as the "Purchase Plans"). Information regarding the Purchase Plans is summarized below:
At December 31, 1999, participating employees have accumulated $0.7 million under the Purchase Plans through payroll deductions that can be used to purchase shares of common stock in 2000.
STOCK-BASED COMPENSATION PRO FORMA INFORMATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") establishes financial accounting and reporting standards for stock-based compensation plans. SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument, and gives entities a choice of recognizing related compensation expense by adopting the new fair value method or continuing to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APBO 25"). The Company has elected to continue to account for stock-based compensation using the method prescribed in APBO 25. Accordingly, no compensation cost has been recognized for the Company's stock-based employee compensation plans. Had compensation cost for the Company's stock-based employee compensation plans been recorded based on the fair value method prescribed by SFAS 123, the Company's net income and earnings per common share would have been reduced to the pro forma amounts indicated below:
For purposes of the above pro forma calculations, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for various grants: expected volatility ranging from 33% to 35% for options granted in 1995 through 1997, and ranging from 35% to 41% for options granted in 1998 and 1999; risk-free interest rate ranging from 4.3% to 6.7% based upon the date of the option grant; and expected lives of four to six years.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
OTHER
All U.S. employees of the Company are covered under the Railroad Retirement Act. All Canadian employees are covered under the government-sponsored Canadian Pension Plan and the ACRI Employee Retirement Savings Plan ("Savings Plan"). Under the Savings Plan, employees may elect to contribute up to 5% of their income on a pre-tax basis to the Savings Plan. The Company matches twice the amount contributed by each employee up to a maximum of 10%. In 1999, 1998 and 1997, such matching contributions by the Company amounted to $0.5 million, $0.6 million and $0.6 million, respectively.
(11) INCOME TAXES
The Company files consolidated federal income tax returns which include all of its U.S. subsidiaries and a provincial Canadian income tax return for ACRI.
Deferred income taxes are accounted for in accordance with the asset and liability method by applying current statutory tax rates to (a) temporary differences between the financial statement carrying amount and the tax bases of assets and liabilities and (b) net operating loss and alternative minimum tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of the enactment date.
No provision is made for U.S. income taxes applicable to undistributed earnings of ACRI and the foreign affiliates that are indefinitely reinvested in those entities. Undistributed earnings of ACRI and the foreign affiliates amounted to $137.3 million at December 31, 1999. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to a reduction for foreign tax credits) and withholding taxes payable to the various foreign countries. It is not practicable to determine the amount of U.S. income taxes or foreign withholding taxes that would be payable upon the remittance of those earnings.
The provision for income taxes consists of the following:
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred income tax expense (benefits) are attributable to the following temporary differences and carryforwards:
The tax effects of temporary differences that give rise to significant portions of the deferred tax (liabilities) assets are presented below:
The net deferred tax liability is classified in the consolidated balance sheets as follows:
The reconciliation of the statutory tax rate to the effective income tax rate is as follows:
The Company had net operating loss carryforwards ("NOLs") at December 31, 1999 for income tax purposes totaling $16.8 million, which will begin to expire in 2011. The Company expects to be able to utilize these NOLs to offset future tax liabilities.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) RELATED PARTY TRANSACTIONS
LEGAL SERVICES
Oppenheimer Wolff & Donnelly ("OW&D") provides the Company with legal and other services in connection with various labor matters, litigation, regulatory issues, acquisition and corporate matters. The amounts paid OW&D by the Company for services during 1999, 1998 and 1997 were $1.0 million, $1.1 million and $1.0 million, respectively. A director and stockholder of WCTC was of counsel to OW&D during a portion of 1999 and all of 1998 and 1997.
McLachlan, Rissman & Doll ("MR&D") provides the Company with legal and other services in connection with various corporate and acquisition and financing matters. The amounts paid MR&D by the Company for services during 1999, 1998 and 1997 were $828,000, $334,000 and $438,000, respectively. A member of MR&D is a director and stockholder of WCTC.
OTHER
Information regarding other related party transactions appears in Note 2 - International Affiliates.
(13) SIGNIFICANT CUSTOMERS
In 1999 and 1998, one customer accounted for 12.0% and 12.4%, respectively, of the Company's gross freight revenues. In 1997 no single customer accounted for more than 10% of the Company's gross freight revenues.
(14) OTHER INCOME
(15) SALE OF RIGHTS UNDER TRANSPORTATION AGREEMENT
In March 1998, the Company sold for $5.4 million its rights under a five-year transportation agreement that was scheduled to terminate in 1999. The amount, paid in two equal installments in March 1998 and March 1999, was recorded as non-operating income in the Company's consolidated statement of income for the year ended December 31, 1998.
(16) DISPUTED SWITCHING CHARGES
On June 4, 1993, WCL was served with a complaint filed by the Baltimore & Ohio Chicago Terminal Railway Company ("BOCT") in the United States District Court for the Northern District of Illinois, Eastern Division. In its complaint, the BOCT claimed that WCL owed BOCT for intermediate switching and car hire reclaim charges allegedly incurred from July 1988 through February 1993. Arbitration hearings were held in 1995, and in June 1996 the arbitration panel ruled in favor of BOCT. The arbitration panel's ruling awarded BOCT $16.8 million of disputed switching and car hire reclaim charges, and $2.5 million of interest relating to such charges. Based upon the arbitration panel's ruling, the Company recorded in its 1996 consolidated statement of income pretax provisions of $15.8 million, representing amounts awarded in excess of previously recorded accruals. Additional interest of $0.3 million, $1.2 million, $0.9 million and $0.4 million was accrued on the unpaid award amount in 1999, 1998, 1997 and 1996,
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
respectively. The U.S. District Court issued a final ruling on the case affirming the arbitration award on August 28, 1997. WCL appealed this ruling to the U.S. Court of Appeals, which affirmed the District Court's ruling and denied WCL's petition for rehearing. WCL's petition for a writ of certiorari was denied by the U.S. Supreme Court on March 19, 1999. All amounts owed were paid to BOCT in 1999. In April 1997, WCL filed a petition with the Surface Transportation Board ("STB") contesting substantially all BOCT switching charges. That matter is pending before the STB.
(17) CONTINGENCIES
PROPERTY TAX DISPUTE
In October 1995, the Circuit Court of Dane County ruled in favor of a Wisconsin Department of Revenue ("WDR") retroactive assessment of personal property taxes for the tax years 1990 through 1993 against all Wisconsin railroads, including WCL and FV&W. As a result of the ruling, the Company recognized the $3.0 million retroactive assessment, as well as accrued interest of $0.7 million, in its 1995 consolidated statement of income. WCL, FV&W and the other railroads involved appealed the ruling to the Wisconsin Court of Appeals. On December 16, 1999, the Wisconsin Court of Appeals, found in favor of the railroads and reversed the decision of the Dane County Circuit Court. The WDR has filed a petition for review with the Wisconsin Supreme Court. No amounts have been recorded in the Company's 1999 consolidated financial statements related to this Appellate Court decision.
OTHER
The Company's railroads are involved in various other legal actions, including personal injury, property damage and environmental clean up matters. WCL and FV&W have also been identified as potentially responsible parties by various federal and state authorities for remediation of various waste disposal sites. While the final outcome with respect to these matters cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company's financial position or its annual financial results of operations.
(1) The sum of the quarterly earnings per share amounts does not equal the total due to rounding.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I above for information regarding executive officers of the Company. The remainder of the information required by Item 10 is incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this Report:
(2) Schedules
All schedules have been omitted as not applicable or not required or because the information required to be shown therein is included in the financial statements or notes thereto.
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this report.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
The Company filed no reports on Form 8-K during the quarter ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
(Registrant) By: /s/ THOMAS F. POWER, JR. -------------------------------- Thomas F. Power, Jr., PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: MARCH 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ ROLAND V. MCPHERSON Director ------------------------ (Roland V. McPherson)
Date: MARCH 23, 2000
By: Director ------------------------ (John W. Rowe)
Date:
By: /s/ A. FRANCIS SMALL Director ------------------------ (A. Francis Small)
Date: MARCH 24, 2000
By: /s/ THOMAS E. EVANS Director ------------------------ (Thomas E. Evans)
Date: MARCH 23, 2000
EXHIBITS INDEX
NUMBER EXHIBIT
3.1 Restated Certificate of Incorporation of the registrant, as amended (Incorporated by reference to Exhibit 3 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)
3.2 By-laws of the Registrant, as amended (Incorporated by reference to Exhibit 3.2 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
4.1 Credit Agreement dated November 21, 1994 among registrant, Bank of America National Trust and Savings Association and the Banks signatory thereto (Incorporated by reference to Exhibit 4(a) to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) (see Exhibits 4.2 and 4.3 for subsequent amendment)
4.2 Amendment No. 1, dated October 23, 1995, to the Credit Agreement filed as Exhibit 4.1 (Incorporated by reference to Exhibit 4(C) to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
4.3 Second Amendment, dated December 17, 1996, to the Credit Agreement filed as Exhibit 4.1 (Incorporated by reference to Exhibit 4(C) to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996)
4.4 Indenture dated April 21, 1998 between the registrant and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.1 to registrant's Registration Statement on Form S-3 (Registration No. 333-44049) filed under the Securities Act on January 12, 1998)
4.5 Form of Security issued by registrant pursuant to Indenture filed as Exhibit 4.4 (Incorporated by reference to Exhibit 4.2 to registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, registrant is not filing any instrument with respect to long-term debt in cases in which the amount of debt securities authorized under the instrument does not exceed 10 percent of the total assets of registrant. Registrant agrees to furnish a copy of each such instrument to the Commission upon request.
10.1 Stockholders Agreement of the registrant dated October 11, 1987 as amended April 1, 1991 (Incorporated by reference to Exhibit 10(q) to registrant's Registration Statement on Form S-1 (Registration No. 33-39939) filed under the Securities Act and declared effective by the Securities and Exchange Commission on May 21, 1991) (See Exhibit 10.2 for subsequent amendment)
10.2 Amendment No. 2, dated April 1, 1992, to Stockholders Agreement filed as Exhibit 10.1 (Incorporated by reference to Exhibit 10(aa) to registrant's Registration Statement on Form S-1 (Registration No. 33-52022) filed under the Securities Act and declared effective by the Commission on December 14, 1992)
10.3 Key Management Stock Option Plan of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10(s) to registrant's Registration Statement on Form S-1 (Registration No. 33-39939) filed under the Securities Act and declared effective by the Securities and Exchange Commission on May 21, 1991) (See Exhibit 10.4 for subsequent amendment)
10.4 Amendment No. 1 to Key Management Stock Option Plan filed as Exhibit 10.3 (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10K) (Incorporated by reference to Exhibit 10(ii) to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10.5 Long Term Deferred Compensation Plan of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10(jj) to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10.6 Director Stock Option Plan of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 4.1 to registrant's Registration Statement on Form S-8 (Registration No. 33-84088) filed under the Securities Act on September 19, 1994) (See Exhibits 10.7 and 10.8 for subsequent supplement and amendment)
10.7 Supplement to Director Stock Option Plan filed as Exhibit 10.6 (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 4.2 to registrant's Registration Statement on Form S-8 (Registration No. 33-84088) filed under the Securities Act on September 19, 1994)
10.8 Amendment No. 1 to Director Stock Option Plan filed as Exhibit 10.6 (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K)
10.9 Management Incentive Compensation Plan of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10(f) to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1997)
10.10 1997 Long-Term Incentive Plan of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 4.3 to registrant's Registration Statement on Form S-8 (Registration No. 333-35493) filed under the Securities Act on September 12, 1997)
10.11 1998 Stock Option Plan for New Directors of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 4.3 to registrant's Registration Statement on Form S-8 (Registration No. 333-69529) filed under the Securities Act on December 23, 1998)
10.12 1999 Non-Employee Director Compensation Plan of the registrant (Compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10.1 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.13 Agreement dated July 7, 1999 by and between the registrant and Edward A. Burkhardt pertaining to resignation and related matters (Management contract identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10.2 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.14 Registration Rights Agreement dated July 17, 1999 by and between the registrant and Edward A. Burkhardt (Management contract identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10.3 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.15 Deed Relating to the Sale and Purchase of Shares and Options in English Welsh & Scottish Railway Holdings Limited dated August 6, 1999 by and between Wisconsin Central International, Inc. and Edward A. Burkhardt (Management contract identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10.4 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.16 Assignment dated August 6, 1999 by Wisconsin Central International, Inc. to Edward A. Burkhardt pertaining to potential railroad transaction in Estonia (Management contract identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10.5 to registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
21.1 Subsidiaries of registrant (Incorporated by reference to Exhibit 21 to registrant's Annual Report on Form 10-K for fiscal year ended December 31, 1997)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule