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., 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, and its minority-owned affiliates in each of those countries. WCTC and its subsidiaries are referred to together as the "Company".
The Company's North American business began in 1987 when it was formed to acquire a rail system of approximately 2,000 route miles in Wisconsin, the Upper Peninsula of Michigan, northeastern Illinois and eastern Minnesota from another railroad. The Company began freight operations with approximately 600 employees, 85 locomotives and 2,900 railcars. Since 1987, the Company has acquired additional rail lines in Wisconsin, Michigan and Ontario and increased its business from new and continuing customers. At December 31, 1998, the Company's North American rail system comprised approximately 2,855 route miles, and it had approximately 2,270 employees, 244 locomotives and 13,400 railcars. The railroad's principal gateways are Chicago, Duluth/Superior, Green Bay, Milwaukee, Minneapolis/St. Paul and Sault Ste. Marie, Ontario. These gateways permit the Company to connect with other railroads serving these locations. See "North American Business".
The Company's international business began in 1993 when it led a consortium which acquired the government-owned rail and ferry businesses in New Zealand. In the period from 1995 to 1997 a consortium led by the Company acquired most of the rail freight business in the United Kingdom. In late 1997 the Company led a consortium that acquired the government-owned rail lines in Tasmania, and the Company is actively seeking to participate in the privatization of additional railroad companies in Australia. See "International Business".
Developments Since January 1, 1998 - ----------------------------------
Sale of Debt Securities
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 to take advantage of the long-term interest rate level as well as the Company's improved creditworthiness. 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 which are being amortized to interest expense over the life of the debt. Concurrently with the public sale of debt securities, the Company reduced the total capacity under its bank revolving credit facility from $325 million to $175 million.
Canadian National Agreement
In June 1998, the Company reached a 20 year agreement with Canadian National Railway Company ("CN") under which the Company provides haulage services for CN's carload and bulk commodity trains between Superior, Wisconsin and Chicago. The agreement includes a performance-based fee structure. The Company expects to make capacity improvements to meet its obligations under this agreement. The Company began providing service under this agreement in August 1998. Revenue from this haulage agreement totaled $8.7 million in 1998.
Sale of Rights Under Transportation Agreement
Prior to November 1997, the Company, together with another railroad, handled metallic ore movements from the upper Midwest to a steel mill in Utah under a five year transportation agreement that was scheduled to terminate in 1999. In March 1998, the Company sold its rights under this transportation agreement for $5.4 million. The amount, payable in two equal installments in March 1998 and March 1999, was recorded as non-operating income in the Company's financial statements. The Company received its first installment of $2.7 million in March 1998.
Safety Compliance Agreement with FRA
In February 1998, WCL and FV&W agreed to a one year extension period for the voluntary cooperative Safety Compliance Agreement with the Federal Railroad Administration ("FRA") pursuant to the Safety Assurance and Compliance Program ("SACP") which was originally entered into in February 1997. The SACP is a program to permit railroads and the FRA to develop and monitor agreed upon programs to improve safety conditions on a systematic basis throughout a railroad. The SACP focus is on improving track conditions, inspection procedures and training for railroad employees. As a result of the Safety Compliance Agreement, the Company increased capital expenditures to improve safety and increase the utility of its track. The Company also incurred certain additional operating expenses related to the disruption of regular train service while the track improvements were made. The SACP expired in February 1999 and was not renewed.
Aqaba Railway Company
In November 1998, the Company announced that a consortium including WCI was named as the preferred bidder for a 25 year concession contract to operate the assets of the Aqaba Railway Company ("ARC") which is currently owned by the Government of Jordan ("GOJ"). The ARC system includes approximately 300 kilometers of railroad trackage that primarily serves the Jordan Phosphates Mines Company ("JPMC") hauling phosphate, sulphur and phosphoric acid. As preferred bidder, the consortium is negotiating a final concession agreement with the GOJ and a final transportation agreement with JPMC. If an agreement is reached, the Company expects to make an investment in the concession company of up to approximately $9.0 million over two years for an approximate 33% share. The funds for the Company's investment will be derived from internally generated funds and borrowings under existing credit facilities.
North American Business - -----------------------
Operations
The Company's 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 the disputed switching charges of $13.3 million discussed in Note 17 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 the disputed switching charges of $13.3 million discussed in Note 17 to the consolidated financial statements included in Item 8.
The Company's operating philosophy emphasizes safety, customer service and high productivity from its employees. The Company uses primarily two and three person train crews, with an average crew size of 2.2 persons. Employees are paid on a salaried basis. The Company follows a program of cross-training its employees to perform a number of related functions.
The following table summarizes the Company's North American work force by function:
Average Number of Employees
The Company serves a competitive market area in North America which demands consistent, high quality train service. The Company's 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. The Company's 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 the Company's North American business. These contracts generally have cost escalation clauses based on various indices that are representative of the related costs. The Company's 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 the Company's North American business, as measured by carloads handled (including as a carload each loaded trailer or container), was 547,662 carloads (excluding haulage traffic) in 1998 generating $323.1 million in gross freight revenues. Of these carloads, 90.1% were originating or terminating business (i.e. business to or from a point on the Company's lines) or local business (i.e., business which both originates and terminates on the Company's lines). This percentage is higher than in 1997 (84.9%) due primarily to the conversion of certain intermodal overhead traffic to a haulage arrangement in late 1997. The Company believes that this high percentage of originating, terminating and local business gives its traffic added stability, due to the Company's marketing-oriented approach and its ability to customize service for customers within its territory. The remainder of the Company's North American business was overhead business. Overhead business is received from other railroads at interchange points in the Company's territory and moved to another point in the territory for interchange to another railroad. The Company's ability to handle certain overhead business is restricted by contract. See Item 2.
ITEM 2. PROPERTIES - ------------------
The Company's principal North American properties are 2,633 route miles of operating rail lines (1,806 route miles of main lines and 827 route miles of secondary lines), 222 route miles of trackage rights (contractual rights to operate over lines of railroad owned by others), associated yards, terminals, repair facilities and contiguous real estate. The following table sets forth the Company's North American operating rail lines:
The Company also owns 120 route miles of abandoned rail lines and rail lines not currently operated.
The majority of the Company's main line from Chicago to Stevens Point, Wisconsin (238 route miles) is in FRA Class IV condition, permitting speeds up to 50 m.p.h. for freight trains. The Company's other main lines are primarily FRA Class III lines, permitting speeds up to 40 m.p.h., and the Company considers them appropriate to handle current and expected traffic on those lines. Secondary lines are primarily FRA Class II lines, permitting speeds up to 25 m.p.h., which the Company also considers appropriate for current and expected traffic volume. Class designations of rail lines are made or revised based on track inspections. Additionally, all of the main lines are inspected with an electronic rail defect detector car at least once annually. The Company's maintenance and track improvement plans are designed to preserve class designations at least at their present levels.
The Company has trackage rights that provide the Company access into Chicago, Duluth/Superior, Milwaukee and Minneapolis/St. Paul. The Company's trackage rights include restrictions on the use of rail lines into Milwaukee and Minneapolis/St. Paul. The effect of these restrictions is that the Company cannot use the lines to access those locations to handle most overhead business. The Company also has rights
under various leases, joint facility agreements and transportation contracts. The Company is a lessee of locomotives, railcars and maintenance equipment. The Company's joint facility agreements include various operating and maintenance agreements with other railroads under which certain railroad properties (such as track, switches, crossings, interchanges and bridges) are jointly used and maintained.
The Company owns and operates car and locomotive repair facilities located in Fond du Lac, Stevens Point and Green Bay, Wisconsin, Gladstone and Escanaba, Michigan and Sault Ste. Marie, Ontario. These facilities service the Company's locomotives and railcars and offer equipment repair services to other carriers and the Company's customers. The Company also owns a metallic ore transload dock and storage facility in Escanaba, Michigan. The ore dock site includes a pier used to transload iron ore into cargo ships which are docked at the pier. The pier is capable of docking four ships at a time.
At December 31, 1998, the Company's North American equipment fleet consisted of 244 locomotives (177 owned and 67 leased) and 13,427 freight cars (4,592 owned and 8,835 leased). The average age of the locomotives and freight cars in the Company's fleet is 33 years and 21 years, respectively. Despite their age, the Company's locomotives and freight cars have achieved good availability, primarily as a result of the Company's preventive maintenance program. Of the Company's current fleet of locomotives and freight cars, 56% and 57%, respectively, were acquired new or have been rebuilt or received a major overhaul since 1987. The Company's availability rates with respect to its locomotive and railcar fleet were 90.0% and 97.2%, respectively, in 1998.
The Company owns various parcels of non-operating real estate that are contiguous to its rail lines. Some of this real estate is leased to third parties, on varying terms, generating lease income of $1.5 million, $1.4 million and $1.4 million in 1998, 1997 and 1996, respectively. In addition, the Company has, since inception, sold certain of its excess assets. The proceeds and pre- tax gains recognized with respect to these sales from 1994 through 1998 are as follows:
The Company's strategy is to sell excess assets, but there can be no assurances as to the Company's ability to sell its remaining excess assets or as to the prices the Company will receive if and when it sells excess assets.
The quality of the Company's title to its owned rights-of-way varies. The Company's properties were acquired by its predecessors over extended periods of time and by different companies. Accordingly, the original conveyancing documents were not standardized and are subject to judicial interpretation as to the interest conveyed to the original acquiring railroad. In cases involving other railroads, deeds have sometimes been construed to create either an easement for railroad purposes or an ownership interest that terminated upon the cessation of use for railroad purposes. At the time of each acquisition of rail properties, the Company obtained either a representation from the seller or title insurance (or both) to the effect that the Company would have sufficient interest in the acquired properties to operate a railroad. However, if the Company ceases to operate its railroad over a parcel, the Company's interest in the parcel could revert to adjacent landowners or to others holding a reversionary interest. In Wisconsin, the Company's right to dispose of property is limited by a Wisconsin statute that gives the state the right of first refusal with respect to any property to be sold by a railroad. Because of their age, buildings and structures on the Company's rail properties are also often subject to historical preservation review prior to disposition.
In the acquisition of the Company's various North American rail lines, the sellers typically retained mineral rights and rights to a portion of the revenues from fiber optic cable easements. The Company's share of revenue from fiber optic cable easements has been insignificant.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
Employees of the Company's 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).
The Company's railroads are currently subject to a number of claims and legal actions that arose in the ordinary course of business, including FELA claims by their employees and personal injury claims (including wrongful death claims) by third parties. The Company believes these claims, taking into account reserves and applicable insurance, will not have a material adverse effect on the Company's 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 the Company's financial position or annual financial results of operations.
In connection with the March 4, 1996 derailment in Weyauwega, Wisconsin, a complaint was filed against WCL on March 26, 1996 by nine individuals seeking to represent the class of persons who suffered damages as a result of this derailment. After all potential claimants were notified, thirteen families and two businesses joined the lawsuit. In January 1998, the lawsuit was settled as to all plaintiffs. In addition, two businesses have filed separate suits for damages, one in the Circuit Court of Waupaca County, Wisconsin and the other in the U.S. District Court for the Eastern District of Wisconsin. The Waupaca County matter has been dismissed and no appeal was taken. The U.S. District Court for the Eastern District of Wisconsin dismissed the case brought in that court. The plaintiffs appealed to the Seventh Circuit Court of Appeals. Their appeal was dismissed on jurisdictional grounds. The Company anticipates the plaintiffs may appeal that ruling. It is the opinion of management that the resolution of this matter will not have a material adverse effect on the Company's financial position or its annual financial results of operations.
On June 4, 1993, WCL was served with a complaint filed by the Baltimore & Ohio Chicago Terminal Railroad 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. In April 1997, WCL filed a petition with the STB contesting substantially all BOCT switching charges. That matter is pending before the STB. 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 in September 1997. Along with the appeal, WCL posted a $23.5 million letter of credit to cover amounts that may be payable to BOCT if all appeals and proceedings prove unsuccessful. In August 1998, the Court of Appeals affirmed the District Court's ruling and in October 1998 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. Separately, during the U.S. District Court proceedings, WCL was authorized to pursue with the STB various matters included in the 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. WCL, FV&W and the other railroads involved have appealed the statutory law rulings. 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. In January 1999, after voluntarily dismissing other issues involved in the case, WCL, FV&W and the other railroads involved appealed the statutory law ruling to the Wisconsin Court of Appeals. The railroads, including WCL and FV&W, had also filed suits in state court which alleged discrimination in the assessment of taxes. In 1998, the railroads voluntarily dismissed the discrimination claims to proceed with the appeal of the 1990 to 1993 retroactive assessment. WCL and FV&W separately filed suit challenging other WDR tax valuation practices with respect to their 1994 through 1997 tax bills. In 1998, WCL and FV&W reached settlement with the WDR on the valuation practices which resulted in a reduction of the 1994 through 1997 tax bills of $0.9 million.
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, the Company believes that any expenses it may incur in connection with the cleanup of such sites will not have a material adverse effect on its financial condition or annual financial results of operations. As part of its normal operations, the Company's 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.
On April 2, 1996, WCL received a request for documents from the U.S. Department of Justice ("DOJ") relating to the demolition of a foundry and roundhouse on WCL's property in Waukesha, Wisconsin, performed by contractors for WCL in 1993. A request for additional documents was received on November 21, 1996. WCL has complied with the requests. Previously, in March 1994, WCL had received a Notice of Violation of the Clean Air Act (the "Act") and the National Emission Standard for Asbestos (the "Asbestos NESHAP") promulgated thereunder from the USEPA in connection with the demolition. The Notice of Violation alleged that WCL violated the Clean Air Act and the Asbestos NESHAP because of the failure of the demolition contractor hired by WCL to provide notice of its intent to demolish a building containing asbestos and the failure of the contractor to have on the site during demolition an authorized representative trained in NESHAP. The Notice of Violation did not specify any penalty or demand any relief. The USEPA held a conference with WCL on April 11, 1994 to discuss the Notice of Violation prior to a determination of any enforcement action to be taken under section 113 of the Act. In June 1997, WCL was notified by the EPA that the DOJ had determined there was no cause to seek criminal prosecution against WCL or any individual employee. On March 10, 1998, the Company received notice that the DOJ was considering a federal court action against WCL seeking injunctive relief and civil penalties in an unspecified amount, unless the matter was settled. On November 9, 1998, the parties entered into a consent Decree settling the matter for $85,000.
On December 15, 1997, the State of Wisconsin enacted a law prohibiting the use of single person crews on locomotives and trains operating in Wisconsin. On December 31, 1997, WCL, along with the Burlington Northern Sante Fe, Union Pacific Corporation and Soo Line Railroad Company filed a complaint in the U.S. District Court for the Eastern District of Wisconsin seeking to have the state statute declared, among other things, preempted by Federal law. On October 28, 1998, the District Court granted the railroads' motion in part and denied it in part, finding that the state law was preempted as to qualification of train crew members but not preempted as to crew size issues. The railroads and the State have appealed this decision to the Seventh Circuit Court of Appeals. If the statute is determined to be valid, it would restrain the future ability of the Company's railroads to undertake single person crew operations in Wisconsin.
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 the Company's executive officers:
Mr. Burkhardt has served as a director, President and Chief Executive Officer of the Company since its formation in 1987. He was elected to the additional position of Chairman in January 1996. He also serves as a director, President and Chief Executive Officer of each of the Company's subsidiaries. Mr. Burkhardt is also a director and Chairman of the Board of Tranz Rail, a director and Chairman and Chief Executive Officer of EWS and a director and the Chairman of the Board of ATN. He is also the President and Treasurer of the San Luis Central Railroad Company. From 1967 to 1987, Mr. Burkhardt was employed by Chicago and North Western Transportation Company ("CNW"), most recently as Vice President, Transportation. Mr. Burkhardt has 38 years of railroad management experience.
Mr. Power has served as a director, Executive Vice President and Chief Financial Officer of the Company since its formation in 1987. He serves as Executive Vice President and Chief Financial Officer of each of the Company's subsidiaries and as a director of each of the Company's subsidiaries other than ACRI and WCCHI. Mr. Power also serves as a director of Tranz Rail, EWS and ATN. From 1985 to 1987, Mr. Power was self-employed. From 1970 to 1985, Mr. Power was employed by the Chicago, Milwaukee, St. Paul and Pacific Railroad Company ("Milwaukee Road"), most recently as Chief Financial Officer. Mr. Power has 31 years of railroad management experience.
Mr. McCarren has served as Executive Vice President and Chief Operating Officer of the Company's operating subsidiaries since July 8, 1996. 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. From 1978 to 1988, Mr. McCarren held various operating positions with Conrail. Mr. McCarren has 20 years of railroad management experience.
Mr. Bradshaw has served as a Vice President of WCTC 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. From 1969 until 1987, Mr. Bradshaw was employed by CNW, most recently as Assistant Vice President and Division Manager, Northern Division. Mr. Bradshaw has 25 years of railroad management experience.
Mr. Kelly has served as Vice President, Finance, of WCTC since September 1988. He serves in the same capacity with each of the Company's 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. From 1969 to 1985, Mr. Kelly held various positions with Arthur Andersen & Co., United Stationers, Inc. (a wholesaler of office products) and McKesson Corporation (a supplier of drug and health care products).
Mr. Kerbs has served as Vice President, Engineering, of the Company's operating subsidiaries since 1987. From 1974 until 1987, Mr. Kerbs was employed by CNW, most recently as Director of Maintenance Operations. Mr. Kerbs has 34 years of railroad management experience.
Mr. Schauer has served as Vice President, Marketing, of the Company's 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. From 1963 to 1985, Mr. Schauer was employed by the Milwaukee Road in various positions, most recently as Director of Marketing and Pricing. Mr. Schauer has 24 years of railroad management experience.
Mr. Terbell has been employed as Vice President and General Manager of the Company's 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 24 years of railroad management experience.
Mr. Nadrowski has been employed as Vice President, Mechanical, of the Company's 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. From 1966 to 1985, Mr. Nadrowski was employed by the Milwaukee Road, most recently as Assistant Vice President and Chief Mechanical Officer. Mr. Nadrowski has 28 years of railroad management experience.
Mr. Currie has served as Vice President, Planning of WCTC since May 1, 1996. From 1989 to 1995, Mr. Currie served as Vice President - Engineering and Vice President and Chief Transportation Officer at CSX Transportation. From 1985 to 1989, Mr. Currie served as Executive Vice President - Operations for the Soo Line Railroad Company. Prior thereto, Mr. Currie was employed by the Burlington Northern Railroad Company (now Burlington Northern Sante Fe) and its predecessor companies from 1961 to 1985, most recently as Senior Vice President -Maintenance and Transportation. Mr. Currie has 38 years of railroad management experience.
Mr. White has served as Vice President, Human Resources, of WCTC and its subsidiaries since March 4, 1996. Prior to joining the 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 37 years of railroad management experience.
Mr. Mickey has served as Treasurer of WCTC 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
The Company's Common Stock is available for quotation through the NASDAQ National Market System under the symbol "WCLX". On March 24, 1999, there were approximately 2,100 record holders of the Company's Common Stock. The following table sets forth, for the periods indicated, the high and low sales prices per share of the Company's Common Stock as quoted through the NASDAQ National Market System:
The Company has not paid and has no current plans to pay dividends on its Common Stock. The Company currently intends to retain all earnings for use in the Company's business. The payment of any future dividends will be determined by the Board of Directors in light of the future prevailing conditions, including the Company's 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, 198 route miles of railroad track and trackage rights acquired January 1997. (2) Includes partial year (10 months) results of EWS' principal freight business, acquired February 1996. (3) Includes partial year (11 months) results of ACRI, acquired January 1995. (4) The 1996 amount is shown net of disputed switching charges of $13.3 million arising from the June 1996 arbitration ruling in favor of BOCT. See Note 17 to the consolidated financial statements. (5) 1998 amount includes $5.4 million related to the March 1998 sale of the Company's rights under a five year transportation agreement. See "Developments Since January 1, 1998" included in Item 1. (6) Interest expense includes $1.2 million, $0.9 million and $2.9 million in 1998, 1997 and 1996, respectively, resulting from the BOCT arbitration ruling. See Note 17 to the consolidated financial statements. (7) 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 the Company's North American operations.
(1) Includes partial year (11 months) results of the operation of the Duck Creek North lines, acquired January 1997. (2) Includes partial year (11 months) results of ACRI, acquired January 1995. (3) A revenue ton mile equals weight in tons of freight carried for hire multiplied by the distance in miles between origin and destination. (4) Revenue per ton mile equals net freight revenue divided by revenue ton miles of freight volume. (5) Operating ratio represents operating expenses as a percentage of operating revenues. The 1996 percentage excludes the effect of the disputed switching charges of $13.3 million discussed in Note 17 to the consolidated financial statements.
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 the Company's consolidated financial statements, related notes and other financial information included in Item 8. "Financial Statements and Supplementary Data."
Results of Operations: 1998 Compared to 1997 - ---------------------------------------------
The Company's net income for 1998 was $76.3 million compared with $77.4 million for 1997. Net income decreased by $1.1 million, or 1.5% from 1997 to 1998.
Operating Revenues. Operating revenues for North American operations in 1998 were $344.1 million compared with $333.5 million for 1997, an increase of $10.6 million or 3.2%. Volume, as measured by carloads handled (including as a carload each loaded trailer or container), for 1998 was 547,662 carloads (excluding haulage traffic) compared with 565,625 carloads in 1997, a decrease of 17,963 carloads or 3.2%.
The following table compares the Company's 1998 and 1997 revenues:
Operating Revenue Comparison 1998 vs. 1997
Gross freight revenues for 1998 decreased in three of six commodity groups compared with 1997, with an overall decrease of 0.5%. Carload volume decreased in three of six commodity groups compared to 1997, with an overall decrease of 3.2%. Haulage revenues increased by $11.9 million over 1997, consisting of $3.2 million related to the CN intermodal haulage agreement which began in November 1997 and $8.7 million related to the CN carload haulage agreement which began in August 1998. See Item 1. "Business - Developments Since January 1, 1998". The following table compares volume (in carloads), gross freight revenues and average revenue per carload by commodity group for the years 1998 and 1997:
Carload and Gross Freight Revenue Comparison By Commodity Group 1998 vs. 1997
Volume and gross freight revenues for minerals decreased 0.7% and 6.2%, respectively, primarily due to a decrease in metallic ore shipments, partially offset by increased shipments of other minerals, including aggregates, clay products and coal. Volume for 1997 included 23,945 carloads of metallic ore handled under a five year transportation agreement that was scheduled to terminate in 1999. No carloads were handled under this agreement in 1998 because the Company sold its rights under the agreement in March 1998. See
Item 1. "Business - Developments Since January 1, 1998." In addition, with the steel industry generally under pressure from low price imports, a major customer of ACRI closed an iron ore mining operation in Canada in July 1998. Sand and stone volume increased primarily due to increased shipments of construction aggregates from producers in the Company's operating territory. Volume and gross freight revenues for clay products increased primarily due to increased consumption of coating clays used in the paper industry. Volume and gross freight revenues for coal increased primarily due to increased demand for inbound coal from Wisconsin fossil fuel electric plants and increased market share.
Paper and other forest products volume and gross freight revenues increased by 0.2% and 3.6%, respectively, primarily due to the Company's increased market share of lumber shipments originating in Canada and market share increases of coated paper. The paper industry has been under price and supply pressure from imports, a continuing effect of the Asian economic crisis.
Intermodal volume and gross freight revenues decreased by 25.9% and 30.7%, respectively, primarily due to the conversion of approximately 19,600 intermodal units to a haulage arrangement with CN. Intermodal units subject to the haulage agreement are not included in the Company's business volume. 1998 gross freight revenues excludes approximately $4.1 million earned under this haulage agreement. Revenue from the haulage agreement is included in other operating revenues.
Volume and gross freight revenues for industrial products increased by 3.3% and 6.6%, respectively, primarily due to increased overhead shipments of petroleum coke. Food and grain volume and gross freight revenues increased 8.4% and 10.9%, respectively, primarily due to increased corn shipments in the Company's operating territory. Other volume and gross freight revenues decreased by 9.2% and 3.4%, respectively, primarily due to a reduction in demand for scrap steel by casting producers in the Company's operating territory.
Operating Expenses. Operating expenses were $252.3 million for 1998, a decrease of $3.5 million, or 1.4%, compared with 1997. The largest decreases in operating expenses occurred in diesel fuel, equipment rents, casualty and insurance and property taxes, partially offset by increases in labor, joint facilities and depreciation. The Company's operating ratio (operating expenses as a percentage of operating revenues) was 73.3% for 1998, compared to 76.7% in 1997.
The following table sets forth a comparison of the Company's operating expenses during 1998 and 1997:
Operating Expense Comparison 1998 vs. 1997
Labor expense for 1998 increased 10.0% compared with 1997 primarily due to an average 3% increase in wage rates at the beginning of 1998, a 2% increase in the average work force and a $5.8 million increase in incentive expense due to the improvement in North American operating income. Labor expense as a percentage of operating revenues increased to 32.5% in 1998 compared with 30.4% in 1997.
Diesel fuel expense for 1998 decreased $1.9 million or 8.8% versus 1997 due primarily to a 9.2% reduction in the 1998 average fuel price compared to 1997, offset by a slight increase in fuel consumption in 1998. The Company has hedge arrangements covering approximately 57% of its expected fuel consumption for the first half of 1999 and approximately 50% of its expected fuel consumption for the balance of 1999. The
Company enters into hedge arrangements to reduce its exposure to price volatility and can give no assurance that the hedge arrangements will yield lower costs than spot market purchases.
Materials expense for 1998 decreased $0.5 million or 1.8% versus 1997 primarily due to a reduction in repair costs for freight cars owned by other railroads, offset by decreased billing to such railroads. Net equipment rents for 1998 decreased $6.7 million or 22.2% primarily due to a 17% reduction in transit times as a result of improved operating performance, as well as a 35% reduction in intermodal lease costs due to the conversion of approximately 19,600 intermodal units to a haulage arrangement with CN. Net joint facilities expense increased $0.3 million compared to 1997, primarily due to the routing of trains to accelerate movements through the Chicago corridor.
Depreciation expense for 1998 increased $2.1 million or 11.9% primarily due to higher capital spending programs on track and structures and to support increasing volume levels related to the CN haulage arrangement. Casualty and insurance expense for 1998 decreased by $3.4 million or 28.5% primarily due to lower personal injury claim costs as a result of improvements in safety performance. Property taxes for 1998 decreased by $2.0 million or 38.2% primarily due to the successful appeal of property tax assessments for the tax years 1994 through 1997 as well as lower assessments for 1998. Other operating expenses decreased in part due to reductions in contracted train crews as a result of improved operating performance and reductions in repair costs associated with derailments.
Other Income (Expense) and Income Taxes. In March 1998, the Company sold its rights under a five year transportation agreement that was scheduled to terminate in 1999 for $5.4 million which was recorded as other non-operating income. See Item 1. "Business - Developments Since January 1, 1998." Other income for 1998 was $1.3 million, $0.1 million more than 1997. This change is primarily attributable to an increase in rental income from non-operating properties.
Interest expense for 1998 was $17.2 million, an increase of $2.5 million over 1997, primarily due to the increased borrowings related to the Company's 1998 capital spending program as well as a slight increase in the overall interest rate on the Company's long-term debt as a result of the issuance of the public debt securities discussed in Item 1. "Developments Since January 1, 1998." Such securities currently have a higher interest rate than the borrowings under the Company's revolving credit facilities. Included in interest expense is $1.2 million and $0.9 million for 1998 and 1997, respectively, related to the BOCT arbitration award. The income tax provision for 1998 was $32.2 million, an increase of $6.8 million over 1997 due to the increase in pre-tax income.
Equity in Net Income of Affiliates. The Company's results for 1998 included equity in net income of its affiliates of $27.2 million compared to $38.6 million for 1997.
EWS. The contribution from EWS to the Company's equity in net income of affiliates in 1998 was $21.7 million versus $29.9 million for 1997. In 1998 EWS generated $897.3 million in operating revenues compared to $855.4 million for the year earlier period, an increase of 4.9%. Operating expenses in 1998 were $807.6 million, an increase of 12.5% over the 1997 level.
The increase in EWS's operating revenues is primarily the result of the November 1997 acquisition of Railfreight Distribution ("RfD"), the former British Rail subsidiary designated to operate freight services through the English Channel tunnel, and the acquisition of the National Power ("NP") rail unit in March 1998. Excluding the contributions for RfD and the NP rail unit, operating revenues decreased by 6% compared to 1997. This decrease is primarily the result of recently renegotiated transportation contracts which reduced freight rates to competitive market levels. In addition, domestic steel production in Great Britain was under pressure due to a worldwide oversupply of steel. The increase in EWS's operating expenses is also primarily attributable to the acquisition of RfD and the NP rail unit. Excluding the operating expenses added by these acquisitions, operating expenses in 1998 were slightly less than in 1997.
During 1998 EWS continued the restructuring of its operations as part of its conversion from a government owned railway to a privately owned, market-based transport provider. EWS's restructuring is dependent upon the acquisition of new locomotives and railcars, both to replace obsolete equipment and to provide capacity for future growth. In 1996 and 1997, EWS ordered 280 locomotives to be built by General Motors Corporation and delivered during the period from 1998 to 2000. In 1997, EWS also ordered 2,500 railcars from a new British subsidiary of Thrall Car Manufacturing Company to be delivered over a five year
period. Deliveries of both the new locomotives and railcars began in 1998. The cost of the new locomotives and railcars cannot be precisely determined at this time, but the total cost will likely exceed $650 million.
Tranz Rail. The contribution from Tranz Rail to the Company's equity in net income of affiliates in 1998 was $4.9 million versus $8.7 million in 1997. The decrease in Tranz Rail's contribution is largely the result of continued softness in the New Zealand and Asian economies. Also contributing to the decrease in Tranz Rail's contribution is the decline in the average value of the New Zealand dollar versus the U.S. dollar which was US $0.54 per NZ dollar for 1998 vs. US $0.66 per NZ dollar in 1997 or a decline of 18%. In 1998, Tranz Rail generated $309.8 million in operating revenues compared to $382.1 million for 1997, a decrease of 18.9%. Operating expenses in 1998 were $270.3 million, a decrease of 18.6% versus the 1997 level. In its local New Zealand currency, Tranz Rail's 1998 operating revenues were slightly less than 1997 and its operating expenses remained flat as compared to 1997.
Tranz Rail is subject to the reporting requirements of the Securities Exchange Act of 1934 applicable to a foreign private issuer, and, accordingly, files certain reports and other information with the Securities and Exchange Commission.
ATN. The contribution from ATN to the Company's equity in net income of affiliates was $0.7 million in 1998. ATN's operations began in November 1997 and the 1997 contribution from ATN was immaterial. In 1998 ATN generated operating revenues of $18.6 million and operating expenses of $15.0 million.
Currency Fluctuation. The value in U.S. dollars of the Company's investments in companies outside the United States and of the Company's equity in the earnings of those companies will fluctuate from time to time as the value in U.S. dollars of the currencies of those countries fluctuates. Accordingly, the Company's net earnings and stockholders' equity may fluctuate as the value of those currencies fluctuates.
Results of Operations: 1997 Compared to 1996 - ---------------------------------------------
The Company's net income for 1997 was $77.4 million compared with $48.4 million for 1996. Net income for 1996 was reduced by a total of $11.4 million, net of income taxes, due to the BOCT arbitration award and an extraordinary item associated with the early retirement of debt. These items are discussed in further detail in the notes to consolidated financial statements. Excluding these unusual items, net income increased by $17.6 million, or 29.4% over 1996.
Operating Revenues. Operating revenues for 1997 were $333.5 million compared with $278.4 million for 1996, excluding the switching charges awarded in the BOCT arbitration, an increase of $55.1 million or 19.8%. Volume, as measured by carloads handled for 1997 was 565,625 carloads compared with 464,149 carloads in 1996, an increase of 101,476 carloads or 21.9%.
The following table compares the Company's 1997 and 1996 revenues:
Operating Revenue Comparison 1997 vs. 1996
- ------------ * Not meaningful.
Gross freight revenues for 1997 increased in 5 of 6 commodity groups compared with 1996, with an overall increase of 18.6%. Carload volume increased in 5 of 6 commodity groups compared to 1996 for an overall increase of 21.9%. The following table compares volume (in carloads), gross freight revenues and average revenue per carload by commodity group for the years 1997 and 1996:
Carload and Gross Freight Revenue Comparison By Commodity Group 1997 vs. 1996
The business added by the January 1997 acquisition of the Duck Creek North lines, 198 route miles of railroad track and trackage rights in northeastern Wisconsin and the Upper Peninsula of Michigan (the "Duck Creek North Acquisition"), contributed to the Company's overall increases in volume and gross freight revenues. Volume for metallic ore increased by nearly 70,200 carloads over 1996 primarily due to shipments handled on the Duck Creek North lines. Volume of other minerals increased as well. Sand and stone volume increased primarily due to increased shipments of limestone handled over the Duck Creek North lines as well as increases in construction aggregates from producers in the Company's operating territory. Volume and gross freight revenues for clay products increased primarily due to increased consumption of coating clays used in the paper industry. Volume and gross freight revenues for coal increased primarily due to increased demand from Wisconsin fossil fuel electric plants for inbound coal.
Paper and other forest products volume and gross freight revenues increased by 5.9% and 16.1%, respectively, primarily due to an overall strengthening of the paper market. In addition, volume and gross freight revenues for lumber increased primarily due to increased market share and higher revenues per carload due to longer hauls.
Intermodal volume and gross freight revenues increased by 13.6% and 24.1%, respectively, due to increased market share and growth in the Company's joint rate intermodal service with CN which started on April 1, 1996. In November 1997, the Company and CN converted the joint rate intermodal service agreement to a haulage arrangement. Intermodal units subject to the haulage agreement with CN are not included in the Company's business volume. 1997 volume and gross freight revenues exclude approximately 4,900 carloads and approximately $0.9 million, respectively, related to intermodal shipments handled under this haulage agreement. Revenue from the haulage agreement is included in other operating revenues.
Volume and gross freight revenues for industrial products increased by 5.7% and 10.0%, respectively, primarily due to increased overhead shipments of petroleum coke. Food and grain volume and gross freight revenues decreased 4.9% and 2.2%, respectively, primarily due to lower corn shipments as a result of a poor 1996 corn crop as well as a reduction of malt and barley shipments due to a plant renovation at a major grain customer. Other volume and gross freight revenues increased by 8.7% and 13.4%, respectively, primarily due to increased demand for scrap steel by casting producers in the Company's operating territory, as well as increased overall market demand.
Operating Expenses. Operating expenses were $255.8 million for 1997, an increase of $29.4 million, or 13.0%, compared with 1996. The additional business added by the Duck Creek North Acquisition contributed to the Company's increases in operating expenses. The largest increases in operating expenses occurred in labor, materials, equipment rents, depreciation, casualty and insurance and other operating expenses. The Company's operating ratio (operating expenses as a percentage of operating revenues) was 76.7% in 1997, compared to 81.3% in 1996, excluding in 1996 the switching charges awarded in the BOCT arbitration.
The following table sets forth a comparison of the Company's operating expenses during 1997 and 1996:
Operating Expense Comparison 1997 vs. 1996
Labor expense for 1997 increased 12.6% compared with 1996 primarily due to an average 3.5% increase in wage rates at the beginning of 1997 and an 8.1% increase in the average work force primarily as a result of the Duck Creek North Acquisition. Labor expense as a percentage of operating revenues improved to 30.4% in 1997 compared with 32.4% in 1996.
Materials expense for 1997 increased $3.7 million or 15.9% over 1996 primarily due to increased repair costs for freight cars owned by other railroads, offset by increased billing to such railroads, as well as increased trackage and facilities associated with the Duck Creek North Acquisition. Net equipment rents for 1997 increased $1.8 million or 6.2% primarily due to increased congestion due to track improvement activity in the Company's operating territory. Depreciation expense for 1997 increased primarily due to the addition of the Duck Creek North lines. Casualty and insurance expense for 1997 increased by $2.5 million or 27.2% primarily due to higher personal injury claim costs as well as various costs associated with derailments. Included in the increase in other operating expenses are increases in utility expenses and contracted track maintenance primarily due to the addition of the Duck Creek North lines, as well as contracted train crews, business expenses and general expenses associated with the increased volume.
Diesel fuel expense for 1997 increased $0.4 million or 1.9% over 1996 due to a 3.8% increase in fuel usage associated with increased volume, offset by a 1.8% reduction in the 1997 average fuel price compared to 1996. Net joint facilities expense decreased $1.8 million compared to 1996 primarily due to improved train movements through the Chicago corridor as well as rate reductions for certain facilities.
Other Income, Interest Expense and Income Taxes. Other income for 1997 was $1.2 million, $0.6 million less than 1996. This change was primarily attributable to a reduction of interest income on short-term money market investments as well as a reduction of gains on sales of excess assets.
Interest expense for 1997 was $14.7 million, an increase of $2.9 million over 1996, primarily due to the increased borrowings to finance the Duck Creek North Acquisition. Included in interest expense is $0.9 million and $2.9 million for 1997 and 1996, respectively, related to the BOCT arbitration award. The income tax provision for 1997 was $25.4 million, an increase of $14.1 million over 1996 due to the increase in pre-tax income.
Equity in Net Income of Affiliates. The Company's results for 1997 included equity in net income of its affiliates of $38.6 million as compared to $32.7 million for 1996.
EWS. The contribution from EWS to the Company's equity in net income of affiliates in 1997 was $29.9 million versus $22.8 million for 1996. EWS's results for 1996 reflect a partial year of operation of the three trainload freight companies ("TLFs") (acquired February 24, 1996). In 1997 EWS generated $855.4 million in operating revenues compared to $742.4 million for the year earlier period, an increase of 15.2%. Operating expenses in 1997 were $718.2 million, an increase of 18.2% over the 1996 level.
During 1997 EWS restructured its operations as part of its conversion from a government owned railway to a privately owned, market-based transport provider. EWS implemented a series of labor agreement changes which provide for increased flexibility and productivity from its work force. EWS also negotiated a new track access agreement that provides for a higher fixed cost component and a much lower variable cost component for access to the Railtrack network. The new track access agreement should permit new traffic to be added in the future at relatively low marginal cost. EWS has also renegotiated most of its significant transportation contracts, in general reducing prices to market-based levels from the artificial levels established during government ownership.
In November 1997 EWS acquired RfD, the former British Rail subsidiary designated to operate freight services through the English Channel tunnel. RfD suffered from significant operating losses prior to its acquisition by EWS, and EWS's 1997 results were adversely affected by the inclusion of RfD's results from November 22, 1997.
EWS's restructuring is dependent upon the acquisition of new locomotives and railcars, both to replace obsolete equipment and to provide capacity for future growth. In 1996, EWS ordered 250 locomotives to be built by General Motors Corporation and delivered during the period from 1998 to 2000. In 1997, EWS ordered 30 additional locomotives from General Motors to be delivered in 1999 and 2000. In 1997, EWS also ordered 2,500 railcars from a new British subsidiary of Thrall Car Manufacturing Company to be delivered over a five year period commencing in 1998. The cost of the new locomotives and railcars cannot be precisely determined at this time, but the total cost will likely exceed $650 million.
Tranz Rail. The contribution from Tranz Rail to the Company's equity in net income of affiliates in 1997 was $8.7 million versus $9.9 million in 1996. Tranz Rail's 1997 contribution was reduced as a result of the decline in the value of the New Zealand dollar versus the U.S. dollar. This decrease in exchange rates resulted from softness in both the New Zealand and Asian economies. In 1997, Tranz Rail generated $382.1 million in operating revenues compared to $395.7 million for the year earlier period, a decrease of 3.4%. Operating expenses in 1997 were $332.2 million, an increase of 4.0% over the 1996 level. In its local New Zealand currency, Tranz Rail's 1997 operating revenues were 0.3% higher than 1996 and its operating expenses were 8.0% higher than 1996. Tranz Rail's 1997 operating expenses include a special one-time charge of $11.1 million for costs incurred and to be incurred in connection with plans to improve the efficiency of its operations.
Liquidity and Capital Resources - --------------------------------
Cash generated from operations is the Company's primary source of liquidity and is used principally for capital expenditures, debt service and working capital requirements. The Company also generates cash from asset sales and from financing activities. From 1994 through 1998, the Company generated cash in the amounts of $372.2 million from operations, $58.5 million from the sale and salvage of assets, $132.3 million from increased debt and $14.3 million from equity issuances. The Company has also received cash of $21.0 million in a return of capital and $5.6 million in dividends from Tranz Rail. These cash amounts were primarily used to fund $429.6 million of capital expenditures, $112.4 million of asset acquisitions and $64.8 million in investments in affiliates. At December 31, 1998, the Company had $273.8 million of total debt outstanding, which constituted 38.1% of its total capitalization.
In September 1997, the Company appealed the ruling by the U.S. District Court in connection with the BOCT dispute to the U.S. Court of Appeals, as discussed under Item 3. "Legal Proceedings". In connection with the appeal, the Company obtained a $23.5 million letter of credit payable to BOCT if all appeals and proceedings prove unsuccessful. The Company also obtained a $0.5 million letter of credit in connection with the bid submission for the concession agreement with the GOJ to operate the assets of the ARC as discussed under Item 1. "Business - Developments Since January 1, 1998".
The Company maintains an unsecured $175.0 million revolving credit facility with a syndicate of banks. This facility allows the Company to choose from various floating rate interest options and is scheduled to expire on October 31, 2000. The Company expects to either extend or replace its revolving credit facility prior
to its expiration. At December 31, 1998, the Company's aggregate unused borrowing and letter of credit availability under its loan facilities was $47.9 million.
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 to take advantage of the long-term interest rate level as well as the Company's improved creditworthiness. 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 which are being amortized to interest expense over the life of the debt.
In December 1998, the Company sold equipment for $19.0 million as part of a sale and leaseback transaction. The proceeds of this transaction were used to pay outstanding borrowings under the Company's revolving credit facility. A gain of $1.8 million on the transaction is being amortized over the twelve year life of the related lease.
The Company's liquidity to date has been significantly enhanced because it has not had to pay current income taxes (other than the Alternative Minimum Tax) as a result of net operating loss carryforwards ("NOLs") for income tax purposes. These NOLs are largely the result of temporary differences in the recognition of certain revenues and expenses for financial and income tax purposes. The Company has recorded a deferred liability for the temporary differences on its consolidated balance sheets. At December 31, 1998, the Company's NOLs for tax purposes were approximately $30.7 million, which will begin to expire in 2008. The Company expects to be able to fully utilize these NOLs to offset future tax liabilities.
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 capital stock, and make certain loans, investments or guarantees. In addition, EWS's and ATN's borrowing arrangements contain provisions which substantially restrict their ability to transfer funds to the Company in the form of cash dividends, loans or advances. Tranz Rail's net assets are not similarly restricted.
Capital expenditures totaled $124.1 million in 1998, an increase of $12.2 million over 1997. The increase in capital expenditures in 1998 over 1997 consists of a $14.9 million increase in roadway and structure improvements and a $2.7 million decrease in expenditures for equipment. The roadway and structure increase includes increased expenditures for bridge renewals, switching and signaling to improve the Company's track structure to support increasing traffic levels related to the CN carload haulage agreement. The decrease in equipment expenditures reflects a reduction in the acquisition of freight cars and locomotives compared to 1997.
The following table sets forth the Company's capital expenditures for the periods indicated:
_________________ (1) Includes communications and signals, bridges and other improvements. (2) Excludes $92.5 million, $19.4 million and $0.5 million in 1997, 1995 and 1994, respectively, expended to acquire additional rail lines and pay related transaction costs.
The following table presents a summary of the Company's improvements for roadway and structures for the periods indicated:
Roadway and Structure Improvements
- ------------------ (1) A portion of the roadway and structure improvements in 1996, 1995 and 1994 were funded by Metra, the commuter rail division of the Regional Transportation Authority which operates the commuter rail system for northeast Illinois, including on a portion of WCL's trackage in Illinois. (2) Surfacing is the process by which track is aligned and cross-leveled in conjunction with the application of ballast and the installation of ties.
The Company believes that its cash flow from operations, together with available amounts under its revolving credit facilities, will allow it to meet its liquidity and capital expenditure requirements.
Inflation - ---------
The Company has experienced moderately adverse effects of inflation through increases in labor costs, fringe benefit costs, payroll taxes, equipment costs, prices of materials and other purchased items and services. The Company's transportation contracts typically include escalation clauses that increase the Company's revenues based on various measures of inflation. Overall, however, freight rates have not kept up with inflation and also have been held down and at times reduced by competitive market pressures. The impact of inflation on future performance cannot be discerned due to factors beyond the Company's control, such as government policy, world-wide economic conditions and competition.
Year 2000 - ---------
In 1997 WCTC began to assess and modify its computer systems so that they can process transactions involving the Year 2000 ("Y2K") and beyond. The Company's Y2K efforts have been a high priority since then. Costs to modify these systems are currently estimated to be $1.6 million and are expensed as incurred. Of this amount, approximately $0.4 million was expensed through December 31, 1998. In addition the Company plans to replace certain hardware and systems with a total cost estimated to be approximately $1 million. Through December 31, 1998, approximately $0.5 million of this amount has been spent and capitalized. As of December 31, 1998, approximately 70% of the Company's systems have been modified and Y2K modifications and testing will continue throughout 1999.
Railroad Operating Systems - The Company's wholly owned operating subsidiaries lease or license certain railroad operating systems from Union Pacific Technologies ("UPT"), a division of the Union Pacific Corporation. These systems represent a significant portion of the Company's total systems and UPT has the responsibility for making such systems Y2K compliant. UPT reported that all of the mainframe systems leased or licensed from them by the Company are Y2K compliant with other systems (primarily client server systems) scheduled to become Y2K compliant by mid-1999. The Company generally incurs no additional charges from UPT for making their systems Y2K compliant. UPT, along with the Company, will continue to review and test these systems throughout 1999.
Financial and Administrative Systems - The Company generally utilizes off-the-shelf software which it runs on IBM AS/400 hardware for its financial and administrative systems. In addition, the IBM AS/400 platform along with personal computers, including client-server systems, are utilized in a variety of ways throughout the operations of the Company. This hardware and software is expected to be modified or replaced by the middle of 1999 and tested throughout that year.
Electronic Interchange - WCTC has electronic exchange of information with customers, vendors, other railroads, and financial institutions. The railroad industry has agreed to a standard 4-digit year for all electronic
interchanges which the Company expects to be able to use by March 31, 1999. In addition, the Company is in the process of contacting other parties with whom it exchanges data to determine the status of their Y2K modification efforts. The Company expects to be able to process electronic interchange transactions in existing formats with proper interpretation of the century date by the middle of 1999. The Company is working with UPT in testing the new standard with other railroads and with its trading partners.
Vendor Supplied and Embedded Systems - In addition to traditional computer hardware and software, the Company utilizes a variety of vendor supplied equipment, machinery and systems which contain embedded systems or software that could experience Y2K problems. The Company is contacting and working with its suppliers on those items that are critical to operations or safety related and with other railroads on those items that are common to the industry. As of December 31, 1998, these efforts were approximately 40% complete with the remainder expected to be substantially completed by the middle of 1999. Testing will continue throughout 1999.
Contingency Plans - The Company plans to develop and have in place contingency plans for areas of particular concern by the end of the third quarter of 1999.
WCTC believes that its systems will be successfully and timely modified. However the failure to do so, or the failure to become Y2K compliant on the part of third parties with whom the Company does business or is dependent upon, could materially impact the operations and financial results of the Company for the year 2000.
The Company's international affiliates are also dealing with Y2K compliance. The Company's investments in those affiliates and its equity in their earnings could be affected by the outcome of their Y2K efforts.
EWS - EWS is replacing approximately one-third of its information systems with Y2K compliant systems, retiring some non-compliant systems, and remediating the remainder of its systems so that it will be Y2K compliant. EWS projects that it will be Y2K compliant on all critical systems, components and processes by July 1999. EWS's expenditures for Y2K compliance were approximately $1.8 million through December 31, 1998, and it estimates that an additional $9.0 million will be required, in addition to the cost of replacement systems. The railway system used by EWS is owned and operated by Railtrack, and EWS's operations and financial results could be materially adversely affected if Railtrack fails to achieve Y2K compliance. Railtrack has indicated that it will be Y2K compliant, and EWS is maintaining close liaison with Railtrack's Y2K program. EWS is developing contingency plans within each of its business areas and with key customers to deal with problems that may arise out of Y2K non-compliance.
Tranz Rail - Tranz Rail has replaced its core financial systems with a new system that is Y2K compliant and is updating its other systems to be Y2K compliant. Tranz Rail reports that it is substantially Y2K compliant at December 31, 1998. Tranz Rail's capital expenditures for new financial systems and Y2K compliance were approximately NZ$19.0 million through December 31, 1998 and it estimates that an additional NZ$1.0 million of such expenditures will be required. Tranz Rail is currently developing contingency plans to cover unexpected failures of essential supplies or undetected internal process faults should they occur.
Both the Company and it affiliates could be adversely affected, directly and indirectly, by any general disruption in business activity that results from actual or feared failures related to Y2K problems.
Recent Accounting Pronouncements - --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133 generally provides for matching the timing of gain or loss recognition of a) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or b) the earnings effect of the hedged forecasted transaction. The Company does not expect that adoption of SFAS No. 133 will have a material effect on the Company's financial position or its annual financial results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
In the ordinary course of business, the Company utilizes various financial instruments which inherently have some degree of market risk. The quantitative and qualitative information presented below describe significant aspects of the Company's financial instrument programs which have material market risk.
Interest Rate Sensitivity. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include fixed and floating rate debt used to maintain liquidity and fund its 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. The Company is 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, 1998.
Commodity Price Sensitivity. The Company has a program to hedge against fluctuations in the price of its 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. Swap transactions are typically based on the delivery price of #2 heating oil and require the Company to purchase a defined quantity at a defined price. Swap transactions are generally settled in cash with the counter party. Based on historical information, the Company believes there is a significant correlation between the market prices of diesel fuel and #2 heating oil. As of December 31, 1998, the Company had hedge arrangements covering approximately 57% of its expected fuel consumption for the first half of 1999 and approximately 50% of its expected fuel consumption for the balance of 1999. As of December 31, 1998, 15.9 million notional gallons were included in diesel fuel swaps at a weighted average contract price of $.5016 per gallon. This price does not include taxes, transportation costs and certain other fuel handling costs. As of December 31, 1998, the unrealized loss on these swaps was $2.6 million. Additionally, at December 31, 1998, the Company maintained fuel inventories used in normal operations which were not material to the Company's overall financial position and therefore represent no significant market exposure.
Investment in Affiliates. The value in U.S. dollars of the Company's investment in companies outside the United States and of the Company's equity in the earnings of those companies will fluctuate from time to time as the value in U.S. dollars of the currencies of those countries fluctuates. The Company does not currently use foreign currency forward exchange contracts to hedge its foreign currency exposure. Accordingly, the Company's net worth and net earnings may fluctuate as the value of those currencies fluctuates.
The Company does not purchase or hold derivative financial instruments for trading purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois February 3, 1999
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
Assets ------
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.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
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 operates approximately 2,400 route miles of railway nationwide in New Zealand, a 33% equity interest in English Welsh and Scottish Railway Holdings Limited ("EWS"), whose subsidiaries operate railways in Great Britain, and a 33% equity interest in Australian Transport Network Limited ("ATN") which operates 450 route miles of railway statewide in Tasmania, 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, 1998, the Company had entered into hedging positions for approximately 57% of its expected fuel consumption for the first half of 1999 and approximately 50% of its expected fuel consumption for the balance of 1999. 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:
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 1998, 1997 and 1996, approximately $1.2 million, $1.0 million and $0.8 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 1998 presentation.
(2) Extraordinary Charge --------------------
In 1996, the Company prepaid $20.0 million of 10.20% fixed-rate senior term notes and paid a prepayment penalty of $2.7 million. This resulted in an extraordinary charge of $1.6 million, net of income taxes.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) 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 and acquisition and corporate matters. The amounts paid OW&D by the Company for services during 1998, 1997 and 1996 were $1.1 million, $1.0 million and $1.2 million, respectively. A director and stockholder of WCTC is of counsel to OW&D.
McLachlan, Rissman & Doll ("MR&D") provides the Company with legal and other services in connection with various corporate, acquisition and financing matters. The amounts paid MR&D by the Company for services during 1998, 1997 and 1996 were $334,000, $438,000 and $61,000, respectively. A member of MR&D is a director and stockholder of WCTC.
Other -----
Information regarding other related party transactions appears in Note 15 - International Affiliates.
(4) Accrued Expenses ----------------
Major components of accrued expenses included:
(5) Other Revenues --------------
Other revenues consists of the following:
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 which are being amortized to interest expense over the life of the debt.
The Company maintains an unsecured revolving credit facility (the "Revolver") with a syndicate of banks with a capacity of $175.0 million, decreased from $325.0 million concurrent with the sale of the public debt securities. The Revolver allows the Company to choose various floating rate options and is scheduled to expire on October 31, 2000. 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, 1998 was 5.6%. The unused amount of the Revolver was $44.0 million at December 31, 1998, after giving effect to outstanding borrowings and the letters of credit described below.
Other long-term debt consists of $3.9 million in borrowings under a separate Canadian dollar revolving credit agreement held by ACRI (the "ACRI Revolver") plus $10.8 million in government-financed interest free loans supporting railroad infrastructure improvements which promote economic development in the jurisdictions served by such government entities. The ACRI Revolver has a capacity of $7.8 million with terms, covenants and margins similar to the WCTC Revolver, and is scheduled to expire on October 31, 2000.
In September 1997, the Company obtained an irrevocable letter of credit in the amount of $23.5 million to collateralize the Company's obligation in connection with the Company's appeal of an arbitration ruling as discussed in Note 17 - Contingencies. The letter of credit expires in September 1999. The Company also 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. This letter of credit expires in June 1999.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of debt at December 31, 1998 for each of the years 1999 through 2003 and thereafter were as follows:
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 -----------------------------------
At December 31, 1998, the Company's financial instruments consist of cash, receivables, other current assets, fuel hedging positions, current liabilities and debt. The carrying amounts of these financial instruments approximate their fair values at December 31, 1998.
(8) 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 $118.2 million at December 31, 1998. 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.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The provision for income taxes consists of the following:
The components of deferred income tax expense were as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax (liabilities) assets are presented below:
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1998 for income tax purposes totaling $30.7 million, which will begin to expire in 2008. The Company expects to be able to utilize these NOLs to offset future tax liabilities.
(9) 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 targeted operating results set at the beginning of the plan year. During 1998, 1997 and 1996, $10.4 million, $3.4 million and $3.3 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, 1998 is presented below:
Of the options outstanding at December 31, 1998 under the Company's stock option plans, 903,569 were vested and fully exercisable, 128,750 will vest in 1999, 18,750 will vest in 2000 and 12,500 will vest in 2001.
Summarized information about the Company's stock options outstanding at December 31, 1998 is as follows:
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. 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, 1998, participating employees have accumulated $0.9 million under the Purchase Plans through payroll deductions that can be used to purchase shares of common stock in 1999.
Stock-Based Compensation Pro Forma Information ----------------------------------------------
In October 1995, the Financial Accounting Standards Board issued its Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). 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 of 33% for options granted in 1995 and ranging from 34% to 40% for options granted in 1996 through 1998; 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. Pro forma net income reflects only
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
options granted subsequent to January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost for options granted prior to January 1, 1995 is not considered.
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 1998, 1997 and 1996, such matching contributions by the Company amounted to $0.6 million, $0.6 million and $0.9 million, respectively.
(10) 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.
The following table indicates the future amortization of deferred gains on sale-leaseback transactions:
(11) Leases ------
Total operating lease expense (predominantly relating to equipment) amounted to $30.5 million, $29.3 million, and $30.4 million in 1998, 1997, and 1996, respectively.
Minimum future lease payments under operating leases that have remaining noncancelable lease terms in excess of one year are as follows:
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Other Income ------------
(13) Sale of Rights Under Transportation Agreement ---------------------------------------------
In March 1998, the Company sold its rights under a five year transportation agreement that was scheduled to terminate in 1999 for $5.4 million. The amount, payable 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. The Company received its first installment of $2.7 million in March 1998.
(14) Significant Customers ---------------------
In 1998, one customer accounted for 12.4% of the Company's gross freight revenues. In 1997 and 1996, no single customer accounted for more than 10% of the Company's gross freight revenues.
(15) International Affiliates ------------------------
The Company's international business is conducted through affiliates located in the United Kingdom, New Zealand and Australia.
Investments in International Affiliates ---------------------------------------
The Company's investments in its international affiliates are summarized as follows:
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Equity in Net Income of International Affiliates ------------------------------------------------
The Company's equity in net income of its international affiliates is summarized below. EWS' principal rail freight business is included from February 1996. The Company's investment in ATN was made in November 1997.
English Welsh & Scottish Railway Holdings Limited -------------------------------------------------
The Company currently owns approximately 33% 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. The Company has invested approximately $53.4 million in EWS.
The Company has been granted performance-based 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 33%.
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 the President of the Company. 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 $2.3 million, $2.2 million and $1.6 million in 1998, 1997 and 1996, respectively. The management services agreement is subject to renewal on an annual basis.
Four of the directors of the Company are directors of, and hold shares and options of, EWS.
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 invested approximately $22.2 million in Tranz Rail, and has received approximately $26.6 million in proceeds from return of capital and dividends through December 31, 1998.
Tranz Rail completed an initial public offering of its common stock on June 18, 1996 and is listed on the Nasdaq stock market in the United States and on the New Zealand Stock Exchange in New Zealand. Total market capitalization of Tranz Rail as of December 31, 1998 was approximately $271.7 million.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 the President of the Company. 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 $0.7 million, $1.1 million, and $0.7 million in 1998, 1997, and 1996 respectively. The management services agreement is subject to renewal on an annual basis.
Six of the directors of the Company are directors of, and hold shares or options (or both) of Tranz Rail.
Australian Transport Network Limited ------------------------------------
A consortium of investors, including WCI, Tranz Rail, Berkshire Partners ("Berkshire"), an American private equity firm and Fay Richwhite, a New Zealand investment firm, formed ATN and in November 1997 acquired the government-owned rail business in Tasmania, an island state of Australia, for approximately $15.4 million in a privatization transaction. WCI owns approximately 33% of ATN, which provides all the commercial rail freight service in Tasmania over its 450 route mile rail system. WCI's equity investment in ATN approximated $5.1 million.
In connection with the establishment of ATN, each of Berkshire and Fay Richwhite 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.
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.
Summary Financial Information -----------------------------
The combined results of operations and financial position of the Company's international affiliates are summarized below (EWS' principal rail freight business is included from February 24, 1996 and ATN is included from November 14, 1997):
Combined Condensed Balance Sheet Information:
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Combined Condensed Income Statement Information:
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 $114.6 million and $89.6 million at December 31, 1998 and 1997, respectively.
(16) 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.
(17) Contingencies -------------
Lomira Derailment -----------------
On November 22, 1997, eleven cars of a WCL train derailed in Lomira, Wisconsin. Several of the cars collided with a portion of the wall of a nearby factory, damaging the factory, killing one factory worker and injuring four others. No lawsuits have been filed. Settlements have been reached with the factory and the wife and daughter of the deceased. WCL intends to use its best efforts to settle any other claims that arise as a result of this accident. It is the opinion of management that the resolution of these matters will not have a material adverse effect on the Company's financial position or its annual financial results of operations.
Weyauwega Derailment --------------------
On March 4, 1996, WCL had a derailment in Weyauwega, Wisconsin involving thirty-five cars, fourteen of which contained propane or liquified petroleum gas and two of which contained sodium hydroxide solution. The total cost for the derailment is currently estimated at $28.0 million. The Company believes that its insurance policies will cover substantially all the costs of this derailment, in excess of $2.5 million of deductibles. During the first quarter of 1996, the Company recorded a pretax provision of $2.5 million for the combined deductibles under its property damage and liability insurance policies. Through December 31, 1998, the Company had funded approximately $27.2 million in costs incurred as a result of this derailment and had received approximately $23.9 million in reimbursements from insurance companies. Two businesses have filed separate suits for damages, one in the District Court
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of Waupaca County, Wisconsin and the other in the U.S. District Court for the Eastern District of Wisconsin. The Waupaca County matter has been dismissed and no appeal was taken. The U.S. District Court for the Eastern District of Wisconsin dismissed the case brought in that court. The Plaintiffs appealed to the Seventh Circuit Court of Appeals. Their appeal was dismissed on jurisdictional grounds. The Company anticipates the Plaintiffs may appeal that ruling. It is the opinion of management that the resolution of this matter will not have a material adverse effect on the Company's financial position or its annual financial results of operations.
BOCT Complaint --------------
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 $1.2 million, $0.9 million and $0.4 million was accrued on the unpaid award amount in 1998, 1997 and 1996, respectively.
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. 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 in September 1997. Along with the appeal, WCL posted a $23.5 million letter of credit to cover amounts which may be payable to BOCT if all appeals and proceedings prove unsuccessful. In August 1998, the Court of Appeals affirmed the District Court's ruling and in October 1998 denied WCL's petition for rehearing. WCL has filed a writ of certiorari with the U.S. Supreme Court. Separately, during the U.S. District Court proceedings, WCL was authorized to pursue with the STB various matters included in the dispute.
Waukesha Environmental Matter -----------------------------
On April 2, 1996, WCL received a request for documents from the U.S. Department of Justice ("DOJ") relating to the demolition of a foundry and roundhouse on WCL's property in Waukesha, Wisconsin, performed by contractors for WCL in 1993. A request for additional documents was received on November 21, 1996. WCL has complied with the requests. Previously, in March 1994, WCL had received a Notice of Violation of the Clean Air Act (the "Act") and the National Emission Standard for Asbestos (the "Asbestos NESHAP") promulgated thereunder from the U.S. Environmental Protection Agency ("USEPA") in connection with the demolition. The Notice of Violation alleged that WCL violated the Clean Air Act and the Asbestos NESHAP because of the failure of the demolition contractor hired by WCL to provide notice of its intent to demolish a building containing asbestos and the failure of the contractor to have on the site during demolition an authorized representative trained in NESHAP. The Notice of Violation did not specify any penalty or demand any relief. The USEPA held a conference with WCL on April 11, 1994 to discuss the Notice of Violation prior to a determination of any enforcement action to be taken under section 113 of the Act. WCL has not been informed whether the 1996 request for documents is related to the 1994 Notice of Violation. In June 1997, WCL was notified by the EPA that the DOJ had determined there was no cause to seek criminal prosecution against WCL or any individual employee. On March 10, 1998, the Company received notice that the DOJ is considering a federal court action against WCL seeking injunctive relief and civil penalties in an unspecified amount, unless the matter is settled. On November 9, 1998, the parties entered into a consent Decree settling the matter for $85,000.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. WCL, FV&W and the other railroads involved have appealed the statutory law rulings. 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. In January 1999, after voluntarily dismissing other issues involved in the case, WCL, FV&W and the other railroads involved appealed the statutory law ruling to the Wisconsin Court of Appeals. The railroads, including WCL and FV&W, had also filed suits in state court which alleged discrimination in the assessment of taxes. In 1998, the railroads voluntarily dismissed the discrimination claims to proceed with the appeal of the 1990 to 1993 retroactive assessment. WCL and FV&W separately filed suit challenging other WDR tax valuation practices with respect to their 1994 through 1997 tax bills. In 1998, WCL and FV&W reached settlement with the WDR on the valuation practices which resulted in a reduction of the 1994 through 1997 tax bills of $0.9 million.
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 a 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.
(18) Unaudited Quarterly Financial Data ----------------------------------
(1) 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:
(a) (1) Financial Statements
(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, 1998.
The Company filed no reports on Form 8-K during the quarter ended December 31, 1998.
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/ Edward A. Burkhardt ------------------------ Edward A. Burkhardt, Chairman, President and Chief Executive Officer
Date: March 26, 1999 ---------------
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.
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 Amendment dated March 16, 1999 to the By-laws of the registrant
3.3 By-laws of the Registrant, as amended to date
4.1 Credit Agreement dated as of 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 as of 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 as of 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 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 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)
10.2 Supplement to Director Stock Option Plan (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)
10.3 Long Term Deferred Compensation Plan of the registrant dated December 9, 1993 (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)
10.4 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 10.5 for subsequent amendment)
Number Exhibit ------ -------
10.5 Amendment No. 1, dated May 20, 1993, to Key Management Stock Option Plan (amending Key Management Stock Option Plan filed as Exhibit 10.4) (compensatory plan or arrangement identified as such pursuant to Item 14(a)(3) of Form 10-K) (Incorporated by reference to Exhibit 10(ii) to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993)
10.6 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)
10.7 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 10.8 for subsequent amendment)
10.8 Amendment No. 2 to Stockholders Agreement dated as of April 1, 1992 (amending Stockholders Agreement filed as Exhibit 10.7) (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)
10.9 1997 Long-Term Incentive Plan (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)
10.10 1998 Stock Option Plan for New Directors (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)
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