U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-620
-----
DETROIT & CANADA TUNNEL CORPORATION
- --------------------------------------------------------------
(Name of small business issuer in its charter)
Michigan 38-0477830
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
100 East Jefferson Avenue, Detroit, Michigan 48226
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (313) 567-4422
--------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
( X ) Yes ( ) No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ( )
Revenues for the fiscal year ended October 31, 1996 were $10,708,718.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 29, 1997, was $13,172,814.
The number of outstanding shares of the issuer's common stock as of January
29, 1997, was 676,027.
DOCUMENTS INCORPORATED BY REFERENCE
Certain previously filed documents are incorporated by reference in Part
IV of this Form.
Transitional Small Business Disclosure format (check one) Yes ( ) No ( x )
Total pages : __
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Registrant, Detroit & Canada Tunnel Corporation (the "Corporation"), is a
Michigan corporation reorganized in 1936. The Corporation operates an
approximately one mile long international Tunnel beneath the Detroit River
connecting the downtown business and shopping districts of Detroit, Michigan,
and Windsor, Ontario, Canada (the "Tunnel"). The Corporation leases the
Detroit Tunnel properties from the City of Detroit as described in Item 2
below. The Windsor Tunnel properties are owned by the City of Windsor. The
Corporation operates the entire Tunnel for itself and the City of Windsor
under a Joint Operating Agreement. The Corporation has exercised options to
lease the Detroit Tunnel properties through November 3, 2020.
The Corporation leases a portion of its office facility to the United States
General Services Administration (GSA), as described below. In addition to
making lease payments, the GSA reimburses the Corporation for maintenance and
operating services provided. The lease agreement expires in 2000 and allows
one five year renewal.
In addition to the foregoing, the Corporation maintains investment
portfolios. Equity investments are classified as available-for-sale
securities and accordingly, are recorded at fair value. Other Investments
includes partnership interests carried at cost adjusted for partnership
profits and losses.
Source of Gross Revenues :
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Passenger Cars 60.6% 59.7%
Commuter Cars 15.4% 15.6%
Commercial Vehicles 3.1% 3.3%
----- -----
Total Tolls 79.1% 78.6%
Rent and Lease Income 12.4% 10.0%
Miscellaneous Income 8.5% 11.4%
----- -----
100.0% 100.0%
</TABLE>
Operating Agreements
The Corporation operates the Canadian portion of the tunnel pursuant to a
Joint Operating Agreement with the City of Windsor which agreement was
effective November 1, 1991 for an initial five year term, has been extended
and expires on October 31, 1997. The agreement provides for expense sharing,
reimbursement of operating expenses paid by the Corporation on behalf of the
City of Windsor, cost sharing for capital improvements and a management fee.
Seasonality
Tunnel traffic and resulting revenue are seasonal, with higher traffic and
revenue occurring during the summer months when weather is good and tourism
is highest.
2
<PAGE>
Competition
Competition for Tunnel traffic is provided by the Ambassador Bridge which
connects the cities of Detroit and Windsor at a point west on the Detroit
River. The Corporation's competitive position is affected by the geographic
location of the Tunnel relative to the bridge, the height and length
restrictions imposed on Tunnel commercial traffic and the quality of
available customs inspection facilities.
Employees
As of October 31, 1996, the Corporation and its subsidiary employed 118
persons, of whom approximately 64 persons were employed in the United States
and of whom approximately 104 were employed full time. Some of the
Corporation's U.S. employees are covered by a collective bargaining agreement
expiring in 1998. Some of the Corporation's Canadian employees are covered by
a collective bargaining agreement expiring in 1997.
ITEM 2. DESCRIPTION OF PROPERTY
The Corporation leases and subleases the Detroit Tunnel properties from the
City of Detroit as follows:
<TABLE>
<CAPTION>
Square Footage
--------------
<S> <C>
Main Plaza and Structures thereon 108,824
(100 East Jefferson Avenue)
Commercial Vehicle Off-Site Inspection Compound 35,511
(Atwater and Rivard Streets)
Vehicular Tunnel North of International Boundary 50,424
</TABLE>
The Corporation's lease of these properties expires November 3, 2020,
pursuant to options exercised in fiscal 1991. These properties other than the
vehicular tunnel are in part subleased to the General Services Administration
for use by the U.S. Customs and U.S. Immigration and Naturalization Services.
Rent is payable under the lease to the City of Detroit in the amount of 20%
of average annual net operating income derived from United States tunnel
operations, as defined in the lease. The Corporation and the City of Windsor
are engaged in a major tunnel renovation program. See "Management's
Discussion and Analysis or Plan of Operation - Changes in Financial
Condition."
ITEM 3. LEGAL PROCEEDINGS
Windsor Property Tax Assessments
The Corporation is contesting its 1985, 1986, 1987, 1988 and 1990 Windsor
property tax assessments before an Ontario tax tribunal on the grounds that
the assessments do not recognize the effect of Windsor's option to obtain the
Windsor Tunnel properties on the value of the option properties. The trial
judge determined that the option should not be considered in such assessments
and the Corporation's subsidiary appealed this determination. On August 8,
1990, the appeal was decided in the Corporation's favor by the Ontario
Divisional Court. On December 18, 1995, the Divisional Court decision was
upheld by the Court of Appeal for Ontario. Leave to appeal to the Supreme
Court of Canada was denied in September, 1996. No date for a hearing before
the Assessment Review Board has been scheduled, and the Corporation is unable
to estimate the amount of tax refund it may ultimately receive or the timing
of any payment.
3
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) under the symbol DTUN.
The following table sets forth the high and low bid prices on NASDAQ and cash
dividends paid for each quarterly period during fiscal 1996 and 1995:
<TABLE>
<CAPTION>
Dividends per Share
Fiscal 1996 Fiscal 1995 -------------------
----------- ---------- Fiscal Fiscal
Quarter Ended High Low High Low 1996 1995
- ------------- ---- --- ---- --- ------ ------
<S> <C> <C> <C> <C> <C> <C>
January 31 33 1/4 24 26 25 1/2 $.125 $.125
April 30 36 31 25 1/2 25 1/4 .125 .125
July 31 36 30 3/4 24 3/4 24 3/4 .125 .125
October 31 52 34 1/4 25 24 1/2 .125 .125
</TABLE>
As of December 23,1996, there were 431 shareholders of record of the
Corporation.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
I. Results of Operations
A. Fiscal 1996 Compared to 1995
Toll revenue was $8,778,035 in 1996, a 17.3% increase overall from 1995
revenues of $7,482,575. This increase in revenue corresponds to a 8.4%
increase in traffic volume of 4,464,219 and 4,121,566 vehicles, respectively,
due to casino related traffic increases and a toll increase of $0.25 per car
effective March 1, 1996. Effective with the toll increase, the fare is
US$2.00 and Cdn$2.50 per car. Pursuant to the terms of the JOA, tolls from
vehicles originating in Windsor are collected on behalf on the City of
Windsor and consequently are not a component of the Corporation's revenues.
Approximately 60% of toll revenues originating in Detroit and reflected in
these financial statements are collected in United States currency. The
casino opened in May, 1994 and is located in downtown Windsor near the tunnel
facility. A second gaming facility in Windsor opened in December, 1995. A
new, permanent casino is scheduled to open in mid-to-late 1997.
Management Fee revenue was $539,000 and $620,281 in 1996 and 1995
respectively. The reduction is a result of a change in the formula under the
JOA.
Revenues from the GSA were $1,315,000 for 1996 and $872,000 in 1995 and are
included in Rental and Lease Income. Current year revenues include a one-time
payment of $448,000 received pursuant to the conclusion of GSA's review of
expense reimbursements to the Corporation for maintenance and operating
services provided since 1989.
4
<PAGE>
Short term investments are recorded at cost, which approximates fair value.
This caption principally includes seven day putable money market securities
backed by a bank letter of credit. Equity investments consist of common stocks
traded on national exchanges and are recorded at fair value. Other
Investments which includes partnership interests are carried at cost adjusted
for partnership profits and losses. Realized gains and losses on the
disposition of equity investments are based on average cost. There were no
transactions in equity investments during 1996; proceeds and gross realized
gains from sales of available-for-sale securities were $31,786 and $8,816 in
1995. There were no gross unrealized losses in these years.
Foreign currency transaction loss was $4,564 in 1996 compared to a gain of
$23,839 in 1995 as the value of the Canadian dollar remained fairly stable,
though slightly weaker overall, as compared to the United States dollar.
Interest and dividend revenues were $398,765 in 1996, a decrease of 14.2%
from 1995 revenues of $464,553 corresponding to the decrease in invested
balances as they were utilized to fund construction work.
The caption "Other Income - net" includes various items of a miscellaneous
nature.
Tunnel Operations Expense consists primarily of employee related costs,
overhead expenses and repairs, and remain fairly constant from year to year.
B. Fiscal 1995 Compared to 1994
Toll revenue was $7,482,575 in 1995, a 16.4% increase overall from 1994
revenues of $6,427,609. This increase in revenue corresponds to a 15.3%
increase in traffic volume of 4,121,566 and 3,567,484, respectively, due to
casino related traffic increases.
Foreign currency transaction gain was $23,839 in 1995 compared to a loss of
$46,002 in 1994 as the value of the Canadian dollar rose against the United
States dollar.
Interest and dividend revenues were $464,553 in 1995, a decrease of 20.4%
from 1994 revenues of $583,814 corresponding to the decrease in invested
balances as they were utilized to fund construction work.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Continued
II. Liquidity
During 1996, the Corporation met its dividend, operating and construction
capital needs using cash provided from operating activities. In 1996, 79.1%
of revenue came from tunnel operations. Cash dividends were paid in the
amount of $338,766 in 1996. A $4 million line of credit is available from a
bank to meet short term cash needs; no borrowings have taken place during
1996 or 1995.
Short term investments are recorded at cost, which approximates fair value.
This caption principally includes seven day putable money market securities
backed by a bank letter of credit which are readily convertible into cash
should the need arise. Equity investments consist of common stocks traded on
national exchanges and are recorded at fair value. Other Investments which
includes partnership interests are carried at cost adjusted for partnership
profits and losses. The Corporation's Equity and Other Investments are
salable through a broker upon short notice.
5
<PAGE>
The Corporation does not use Accounts Payable to fund Property, Plant and
Equipment purchases. It is the Corporation's policy to pay its Accounts
Payable invoices, including those for Property, Plant and Equipment, when due
according to vendor contract or invoice terms.
III. Changes in Financial Condition
The Corporation and the City of Windsor are engaged in a major renovation of
the tunnel property that began in 1991.
In 1996, the company completely replaced the tunnel lighting system. The
scope of this project included all new light fixtures, wiring and controls.
The project cost was approximately $3.0 million shared equally with the City
of Windsor. Expenditures for all capital projects by the Corporation were
$1.8 and $2.8 million during fiscal 1996 and 1995, respectively. The balance
of the Company's major renovation plans includes the upgrade of the air
ventilation system, primary electrical power controls and the restoration of
the river bed cover material over the tunnel in the Detroit River. The
Company is engaging recognized engineering firms to conduct current
condition assessments of the tunnel's electrical, mechanical and ventilation
systems and tunnel cover conditions. This engineering is expected to be
completed in 1997. Projected expenditures for fiscal 1997 are expected to be
$3.6 million. From these assessments, a detailed design, more precise
estimated costs and work plans will be developed. Currently, it is expected
that the complete upgrade of the electrical, mechanical and ventilation
systems will cost approximately $15.0 million over a three year period from
1998 through 2000, shared equally with the City of Windsor. This will provide
more efficient, reliable operation and energy savings of the tunnel's
ventilation systems. The replacement of the tunnel river bed cover back to
original design standards preserves the structural integrity of the tunnel
and is currently estimated to cost $3.0 million in the time period of 2000 to
2001, also shared equally with the City of Windsor.
Construction projects will be funded through current earnings, utilization of
short term investments and if necessary, short term draws against the line of
credit. During fiscal 1994 the Corporation borrowed against its line of
credit to meet short term capital project financing needs; the amount was
repaid shortly after the end of that fiscal year. There have been no
borrowings during 1996 or 1995.
The effect of the current year's construction projects is reflected in the
balance sheet, in the net decrease in Cash and Short Term Investments as
payments were made and in the increase in Property, Plant and Equipment as
completed projects were capitalized.
Deferred tax benefits relate principally to postretirement benefits which
will be paid in future periods.
The Postretirement Benefits Liability reflects the Corporation's adoption of
The Financial Accounting Standards Board Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". See Financial
Statement Footnote ( 6 ) for additional information.
The Corporation purchased 6,000 shares of its common stock at market prices
for a total cost of $159,003 in 1995, there were no re-purchases in 1996.
IV. General
On February 7, 1997, the Corporation's shareholders approved an Agreement and
Plan of Merger, dated November 14, 1996. Pursuant to the merger, the
Corporation will become the wholly-owned subsidiary of Hyde Park Tunnel
Holdings L.L.C. and each outstanding share of common stock will be converted
into the right to receive $54.00 in cash. A closing is expected in March,
1997.
6
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
DETROIT & CANADA TUNNEL CORPORATION
AND
SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
CASH $ 3,053,010 $ 2,129,988
SHORT TERM INVESTMENTS 5,509,893 4,840,847
ACCOUNTS RECEIVABLE, Net of allowance
for doubtful accounts of $12,500 and $5,000 1,444,184 1,057,094
PREPAID EXPENSES 405,299 446,199
------------ ------------
TOTAL CURRENT ASSETS 10,412,386 8,474,127
------------ ------------
LONG TERM INVESTMENTS
EQUITY INVESTMENTS - Available for Sale 2,007,362 1,573,768
OTHER INVESTMENTS 673,800 673,800
------------ ------------
2,681,162 2,247,568
------------ ------------
PROPERTY, PLANT & EQUIPMENT
Leasehold Improvements 13,055,826 11,694,880
Equipment 1,559,908 1,157,898
------------ ------------
14,615,734 12,852,778
Accumulated Depreciation and Amortization (2,445,438) (2,025,624)
------------ ------------
12,170,295 10,827,154
------------ ------------
DEFERRED INCOME TAX BENEFIT 172,488 415,000
------------ ------------
$ 25,436,332 $ 21,963,850
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DETROIT & CANADA TUNNEL CORPORATION
AND
SUBSIDIARIES
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
October 31
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 1,355,818 $ 960,616
ACCRUED PAYROLL & VACATION 57,346 135,556
ACCRUED TAXES 296,685 301,965
OTHER ACCRUED LIABILITIES 136,772 115,507
----------- -----------
TOTAL CURRENT LIABILITIES 1,846,622 1,513,644
----------- -----------
POSTRETIREMENT BENEFITS 3,503,000 3,383,744
----------- -----------
STOCKHOLDERS' INVESTMENT
COMMON STOCK, 1,000,000 shares authorized, 3,382,965 3,382,965
676,027 issued and outstanding
CAPITAL SURPLUS 28,124 28,124
RETAINED EARNINGS 15,585,627 12,851,549
UNREALIZED NET GAIN ON INVESTMENT
SECURITIES AVAILABLE FOR SALE 1,089,994 803,823
----------- -----------
20,086,710 17,066,461
----------- -----------
$25,436,332 $21,963,850
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DETROIT & CANADA TUNNEL CORPORATION
AND
SUBSIDIARIES
Consolidated Statements of Operations
For the years ended
<TABLE>
<CAPTION>
October 31
1996 1995
---- ----
<S> <C> <C>
OPERATING REVENUE
Tolls $ 8,778,035 $ 7,482,575
Management Fee 539,000 620,281
Rental and Lease Income 1,391,683 953,090
----------- -----------
10,708,718 9,055,946
----------- -----------
OPERATING EXPENSES
Tunnel Operations 5,920,408 5,733,764
Taxes Other than Income 647,288 537,652
Foreign Currency Transaction (Gain)Loss 4,564 (23,839)
----------- -----------
6,572,259 6,247,577
----------- -----------
4,136,459 2,808,369
----------- -----------
OTHER INCOME
Interest and Dividends 398,765 464,553
Other Income - net 95,871 (5,060)
----------- -----------
494,635 459,493
----------- -----------
Income before taxes 4,631,094 3,267,862
Provision for income taxes 1,559,000 1,252,412
----------- -----------
Net Income $ 3,072,094 $ 2,015,450
=========== ===========
Net Income per Average Share $ 4.54 $ 2.97
=========== ===========
Dividends declared per share $ 0.500 $ 0.500
=========== ===========
Average Shares Outstanding 676,027 678,078
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DETROIT & CANADA TUNNEL CORPORATION
AND
SUBSIDIARIES
Consolidated Statements of Stockholders' Investment
For the Years Ended October 31, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Net Gain on
Investment
Securities
Common Capital Retained Available
Stock Surplus Earnings for Sale Total
------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balances at November 1, 1994 $ 3,412,965 $ 28,124 $ 11,303,869 $ 0 $ 14,744,958
Net Income 2,015,450 2,015,450
Cash dividend of $0.50 per share (338,766) (338,766)
Common stock purchase (6,000 shares) (30,000) (129,003) (159,003)
Adjustment to beginning balance for
change in accounting method, net
of income taxes of $294,254 571,203 571,203
Change in unrealized gain on
investment securities available for
sale, net of income taxes of $119,835 232,620 232,620
------------ ------------
Balances at October 31, 1995 $ 3,382,965 $ 28,124 $ 12,851,549 $ 803,823 $ 17,066,461
============ ============ ============ ============ ============
Net Income 3,072,094 3,072,094
Cash dividend of $0.50 per share (338,016) (338,016)
Common stock purchase 0 0
Change in unrealized gain on 286,171 286,171
investment securities available for
sale, net of income taxes of $147,423
Balances at October 31, 1996 $ 3,382,965 $ 28,124 $ 15,585,627 $ 1,089,994 $ 20,086,710
============ ============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DETROIT & CANADA TUNNEL CORPORATION
AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended
<TABLE>
<CAPTION>
October 31
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,072,094 $ 2,015,450
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Postretirement Benefits 119,256 231,545
Depreciation and amortization 444,813 407,382
Loss (Gain) on sale of investments, net 0 (8,816)
Loss (Gain) on sale of property (252) 20,177
Cash provided (used ) by changes in
Operating assets and liabilities:
Accounts receivable (387,090) (64,636)
Prepaid expenses 40,899 (82,187)
Accounts payable (669,402) (961,213)
Accrued liabilities (56,945) (73,642)
Accrued taxes (5,280) (1,257,295)
Deferred tax liabilities 95,089 182,911
----------- -----------
Net cash provided by (used in)
operating activities 2,653,182 409,676
Cash flows from investing activities:
Purchase of investment securities 0 (50,323)
Proceeds from sale of investment securities 0 31,786
Net change in short term investments (669,046) 2,850,808
Purchase of property, plant & equipment (727,199) (2,246,586)
Proceeds from sale of property 4,101 0
----------- -----------
Net cash provided by (used in)
investing activities (1,392,144) 585,685
Cash flows from financing activities:
Dividends paid (338,016) (338,766)
Purchase of common stock 0 (159,003)
----------- -----------
Net cash used by financing activities (338,016) (497,769)
----------- -----------
Net increase (decrease) in cash 923,022 497,593
Cash at beginning of period 2,129,988 1,632,395
----------- -----------
Cash at end of period $ 3,053,010 $ 2,129,988
=========== ===========
Supplemental non-cash investing and operating
disclosure information:
Additions to property, plant & equipment
included in accounts payable $ 1,064,604 $ 526,192
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
DETROIT & CANADA TUNNEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
The consolidated financial statements include the accounts of Detroit &
Canada Tunnel Corporation and its wholly-owned Canadian subsidiary (the
Corporation) after elimination of intercompany accounts and transactions.
The U.S. tunnel properties are leased from the City of Detroit. The lease
agreement with the City of Detroit provides for the Corporation's right to
operate the U.S. portion of the tunnel after 1990 in three ten year intervals
through 2020. The annual rent is 20% of average annual net operating income
derived from United States tunnel operations, as defined. Rent expense was
$203,000 in 1996 and $186,000 in 1995. Current and prior year rent expense
was partially offset by utilization of certain credits due from the City.
The Corporation operates the Canadian portion of the tunnel pursuant to a
Joint Operating Agreement with the City of Windsor which provides for
expiration in November, 1997. The agreement provides for expense sharing,
reimbursement of operating expenses paid by the Corporation on behalf of the
City of Windsor, cost sharing for capital improvements and a management fee.
The Management Fee, separately disclosed in the Statement of Operations was
$539,000 and $620,281 on 1996 and 1995, respectively. The Corporation is
currently engaged in negotiations with the City of Windsor to extend the
Joint Operating Agreement.
The Corporation leases a portion of its office facility to the United States
General Services Administration (GSA). In addition to making lease payments,
the GSA reimburses the Corporation for maintenance and operating services
provided. The lease agreement expires in 2000 and allows one five year
renewal. Revenues from the GSA were $1,315,000 for 1996 and $872,000 in 1995
and are included in Rental and Lease Income. Current year revenues include a
one-time payment of $448,000 received pursuant to the conclusion of GSA's
review of expense reimbursements to the Corporation for maintenance and
operating services provided since 1989.
All reimbursable and shared cost items with the City of Windsor and GSA are
billed and reimbursed through Accounts Receivable, consequently these amounts
are not reflected in the Corporation's Statement of Operations.
<PAGE>
(2) SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation: Significant intercompany balances and
transactions of the Corporation have been eliminated.
Cash : Cash includes interest bearing demand deposits.
Foreign Currency Transactions: The functional currency of the Corporation and
its subsidiary is the U.S. dollar. Certain transactions of the Corporation
and its subsidiary are denominated in Canadian dollars. Foreign currency
transaction gains or losses result from exchange rate fluctuations between
the U.S. and Canadian dollars and are recognized in the period in which the
exchange rate changes.
Depreciation and Amortization: Depreciation and amortization are calculated
on a straight-line basis over the estimated useful lives of the assets, which
for equipment ranges from five to seven years. The amortization period for
the Corporation's leasehold interest in the US tunnel properties reflects the
Corporation's exercise of its lease option through 2020.
Investment Securities: Effective November 1, 1994, the Corporation adopted
the provisions of Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (FAS115)
which requires that investments in certain equity and debt securities be
classified as either held-to-maturity, available-for-sale or trading.
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Available-for-sale securities are stated at fair value, with unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity.
Income Taxes: Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
(3) INVESTMENTS
Short term investments are recorded at cost, which approximates fair value.
This caption principally includes seven day putable money market securities
backed by a bank letter of credit. Equity investments are classified as
available-for-sale securities and accordingly, are recorded at fair value.
Other Investments which includes partnership interests are carried at cost
adjusted for partnership profits and losses. Realized gains and losses on the
disposition of equity investments are based on average cost. There were no
transactions in equity investments during 1996; proceeds and gross realized
gains from sales of available-for-sale securities were $31,786 and $8,816 in
1995. There were no gross unrealized losses in these years.
In accordance with Statement of Financial Accounting Standard No. 115, the
Corporation recorded additional unrealized gains of $286,171 (net of $147,423
of deferred income tax) in 1996 and $232,620 (net of $119,835 of deferred
income tax) in 1995.
<PAGE>
(4) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets are as
follows :
<TABLE>
<CAPTION>
Domestic :
Deferred tax liabilities: 1996 1995
---- ----
<S> <C> <C>
Depreciation $ 395,000 $ 255,000
FAS 115 562,000 414,000
Pension 56,000 71,000
Other 23,000 24,000
---------- ----------
1,031,000 764,000
---------- ----------
Deferred tax asset:
Postretirement benefits 1,190,000 1,150,000
Other 13,000 29,000
---------- ----------
1,207,000 1,179,000
---------- ----------
Net Deferred tax asset $ 172,000 $ 415,000
========== ==========
<CAPTION>
Foreign:
Deferred tax asset:
<S> <C> <C>
Foreign tax credit carry over $ 486,000 $ 486,000
Valuation Allowance 486,000 486,000
---------- ----------
Net Deferred tax asset $ -0- $ -0-
========== ==========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Liability Liability
Method Method
Current: 1996 1995
--------- ---------
<S> <C> <C>
United States 1,513,000 812,500
Canada (49,000) 375,000
--------- ---------
1,464,000 1,187,500
<CAPTION>
Deferred:
<S> <C> <C>
United States 95,000 65,000
Canada -0- -0-
95,000 65,000
--------- ---------
1,559,000 1,252,500
========= =========
Deferred unrealized gain on investment 562,000 414,089
========= =========
</TABLE>
Income taxes paid were $1,364,14 and $1,746,176 in 1996 and 1995
respectively. A reconciliation of the Corporation's effective tax rate to the
federal statutory tax rate follows :
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Tax at federal statutory rate of 34% $1,596,815 $1,111,073
Effect of state and local taxes 65,522 65,528
Effect of foreign taxes (48,568) 110,000
Permanent differences (54,769) (34,101)
---------- ----------
$1,559,000 $1,252,500
========== =========
</TABLE>
The Corporation provided for income taxes on the unremitted earnings of its
Canadian subsidiary which it repatriated during fiscal 1996.
<PAGE>
(5) PENSION PLANS
The Corporation has pension plans covering substantially all of its
employees. The Corporation's funding policy for these plans is to make the
minimum annual contribution required by the applicable government
regulations. Plan assets are invested in various money market, stock and bond
funds. Benefits under the plans are based on years of service and the
employee's average compensation during the last ten years of employment for
salaried employees and on years of service and a contractually established
rate for union employees.
Components of pension expense are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost $ 160,952 $ 148,452
Interest cost 287,933 277,176
Actual return on assets (676,632) (527,218)
Net amortization and deferral 296,068 195,410
--------- ---------
Net pension expense $ 68,321 $ 93,820
========= =========
Assumptions used:
Discount rate 7.50% 7.50%
Rate of compensation increase 5.00% 5.00%
Expected long term rate of
return on assets 8.00% 8.00%
</TABLE>
Plan funded status and amounts recognized in consolidated balance sheets as
of October 31 :
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $4,019,066 $3,295,090
========== ==========
Accumulated benefit obligation $4,125,481 $3,434,380
========== ==========
Projected benefit obligation $4,477,074 $3,828,287
Fair value of plan assets 4,728,973 4,472,004
---------- ----------
Funded status 251,899 643,717
Unrecognized net asset at 10/31 (210,100) (267,638)
Unrecognized prior service cost 687,095 310,911
Unrecognized net (gain) loss (479,056) (412,807)
Minimum liability -0- -0-
---------- ----------
Prepaid pension $ 249,838 $ 274,184
========== ==========
</TABLE>
<PAGE>
(6) OTHER POSTRETIREMENT BENEFITS
In addition to the Corporation's pension plans, the Corporation sponsors
defined benefit health care plans covering substantially all of its employees
who have 10 years of service and have attained age 60 while in service with
the Corporation. The plans have various cost sharing features such as
deductibles and co-pays. The Corporation's policy is to fund the cost of
medical benefits in amounts determined at the discretion of management.
The following table presents the funded status of the plans reconciled with
amounts recognized in the Corporation's balance sheet ( in thousands) :
<TABLE>
<CAPTION>
October 31, 1996 October 31, 1995
---------------- ----------------
US Canadian US Canadian
Accumulated postretirement benefit -- -------- -- --------
obligation:
<S> <C> <C> <C> <C>
Retirees $ 725 $ 624 $ 730 $ 573
Fully eligible active participants 357 175 455 288
Other active participants 574 242 780 196
------- ------- ------- -------
1,656 1,041 1,965 1,057
Plan assets at fair value -0- -0- -0- -0-
Funded status (1,656) (1,041) (1,965) (1,057)
Unrecognized net gain (loss) (756) (148) (331) (88)
Unrecognized prior service cost 46 52 -0- 57
Unrecognized transition asset (obligation) -0- -0- -0- -0-
------- ------- ------- -------
Prepaid (accrued) postretirement
benefit cost $(2,366) $(1,137) $(2,296) $(1,088)
======= ======= ======= =======
</TABLE>
Net periodic postretirement benefit cost includes the following components :
<TABLE>
<CAPTION>
October 31, 1996 October 31, 1995
---------------- ----------------
US Canadian US Canadian
-- -------- -- --------
<S> <C> <C> <C> <C>
Service cost $ 46 $ 25 $ 65 $ 25
Interest cost 113 72 141 77
Return on plan assets -0- -0- -0- -0-
Amortization of:
Unrecognized net gain (loss) (43) (6) (11) -0-
Unrecognized prior service cost 4 5 -0- 5
Unrecognized transition
asset (obligation) -0- -0- -0- -0-
----- ----- ----- -----
Net periodic postretirement benefit expense $ 120 $ 96 $ 195 $ 107
===== ===== ===== =====
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits was 10.6% and 11% for medical and 8.9% and 9.2% for
dental, in 1996 and 1995 respectively. Both rates are assumed to decrease
gradually to 6% by 2007 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of October 31, 1996 by $3,115,600 and the aggregate of
the service and interest cost components of net periodic postretirement
benefit cost for 1996 to $305,800. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8.0% at
October 31, 1996.
<PAGE>
(7) LINE OF CREDIT
The Corporation has a $4,000,000 line of credit with a bank. Interest is at
the bank's prime rate at the date of issuance and there is no compensating
balance requirement.
(8) COMMITMENTS
The Corporation has outstanding commitments at October 31, 1996 of $492,520
for the continued renovation of the tunnel facility.
(9) SUBSEQUENT EVENT
On February 7, 1997, the Corporation's shareholders approved an Agreement and
Plan of Merger, dated November 14, 1996. Pursuant to the merger, the
Corporation will become the wholly owned subsidiary of Hyde Park Tunnel
Holdings L.L.C. and each outstanding share of common stock will be converted
into the right to receive $54.00 in cash. A closing is expected in March,
1997.
<PAGE>
[ Letterhead of Ernst & Young LLP ]
Report of Independent Auditors
Board of Directors and Stockholders
Detroit & Canada Tunnel Corporation
We have audited the accompanying consolidated balance sheets of Detroit
& Canada Tunnel Corporation and subsidiaries as of October 31, 1996
and 1995, and the related consolidated statements of operations,
stockholders' investment, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 consolidated financial
position of Detroit & Canada Tunnel Corporation and subsidiaries at
October 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
December 15, 1996
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is certain information with respect to the executive officers
of the Corporation:
Directors & Executive Officers Age Positions and Offices Held
- ------------------------------ --- --------------------------
Henry Penn Wenger 69 Director
Douglas L. Bridges 53 Director
Charles C. Stewart 71 Director
Donald M. Vuchetich 50 President, Chief Executive Officer,
and Director
Charles J. O'Brien 61 Secretary and Vice President -
Administration
David C. Canavesio 46 Treasurer and Vice President -
Finance
Henry Penn Wenger, a director since 1983, is an Oil Producer and Investor.
Douglas L. Bridges, a director since 1987, is Senior Vice President-Sales,
First of Michigan Corporation, member if the New York Stock Exchange.
Charles C. Stewart, a director since 1984, is President of Lawrie Petroleum
Co., Director of Mutual Oil & Gas Co., and OMNICOR, Inc.
Donald M. Vuchetich has been Chief Executive Officer of the Corporation since
September 1990, President of the Corporation since November 1990 and a
Director of the Corporation since December 1990. Mr. Vuchetich was a
marketing consultant with CIM/Data from 1985 through 1990, and now maintains
a private marketing consultant practice.
Charles J. O'Brien has been Secretary of the Corporation since 1987 and Vice
President Administration of the Corporation since December 1990. Mr. O'Brien
was Treasurer of the Corporation from 1976 to 1991, Assistant Secretary of
the Corporation from 1976 to February 1987 and Assistant Treasurer from 1973
to 1976 and held various positions with the Corporation before 1973.
David C. Canavesio has been Treasurer and Vice President - Finance of the
Corporation since March 1991. Prior to 1991, Mr. Canavesio served as Vice
President - Finance and Administration and Secretary of Trans Continental
Airlines, Inc. from October 1985. Trans Continental Airlines, Inc. filed for
protection under the federal bankruptcy laws in October 1990, and operated
under the protection of such laws during the remainder of Mr. Canavesio's
tenure with such Corporation.
7
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to certain executive
officers for the fiscal years ended October 31, 1994, 1995 and 1996. No other
executive officer of the Company received an annual salary and bonus of more
than $100,000 in any of such years.
<TABLE>
<CAPTION>
Annual Compensation
Name and Fiscal ------------------- All Other
Principal Position Year Salary Bonus Compensation(1)
------------------ ------ ------ ----- ---------------
<S> <C> <C> <C> <C>
Donald M. Vuchetich 1994 $130,000 $45,000 $7,133
President, Chief Executive 1995 135,000 45,000 1,800
Officer and Director 1996 139,000 50,000 900
David C. Canavesio 1994 95,750 3,700 7,702
Treasurer and Vice 1995 99,550 3,800 1,033
President - Finance 1996 103,050 7,500 1,106
<FN>
(1) Represents contributions made by the Company under the Detroit-Windsor
Tunnel 401(k) Plan and in 1994, compensation received for temporary
duties.
</TABLE>
Pursuant to an amended employment agreement, Mr. Vuchetich has agreed to
spend at least two-thirds of his time on the Company's business and will
receive compensation plus a discretionary bonus. Mr. Vuchetich's employment
may be terminated by either party at any time. In the event of a termination
by the Company for other than cause, the agreement entitles Mr. Vuchetich to
severance pay equal to his salary for the unexpired portion of the calendar
term, but no less than two months salary.
The Company also has severance agreements with Messrs. Vuchetich and
Canavesio under which they would receive compensation of salary and bonus for
two years and one year respectively, less other severance payments received
from the Company, upon involuntary termination of employment after a change
of control.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 23, 1996
regarding the beneficial ownership of the Corporation's Common Stock by each
director of the Corporation, each person known by the Corporation to
beneficially own more than 5% of the outstanding shares of Common Stock, each
executive officer of the Corporation named in the Executive Compensation
table set forth above, and all the directors and executive officers as a
group:
<TABLE>
<CAPTION>
Percentage of
Name of Number of Shares Outstanding Common
Beneficial Owner Beneficially Owned Stock
---------------- ------------------ ------------------
<S> <C> <C>
Henry Penn Wenger 431,955 63.9%
CenTra, Inc. (1) 37,800 5.6%
Levy, Harkins & Co., Inc. (1) 37,000 5.5%
Donald M. Vuchetich 0
Douglas L. Bridges 0
Charles C. Stewart 100 *
All Directors and Executive
Officers as a Group (6 persons) 432,055
8
<PAGE>
<FN>
* Indicates an amount less than 1%.
(1) Based on information contained in a Form 13D filed with the Securities and
Exchange Commission (the "SEC"). According to the Form 13D filed with the SEC
by Levy, Harkins & Co., Inc. ("L&H"), 35,000 of these shares are owned by
discretionary account customers of L&H as to which each such customer and L&H
share voting power and as to which L&H has sole dispositive power, and 2,000
of these shares are owned by an employee benefit plan of L&H as to which each
such employee and L&H share voting power and as to which L&H has sole
dispositive power.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report :
Exhibit 3.1 Restated Articles of Incorporation, filed as
Exhibit 3.1 to the Registrant's Annual Report on Form
10-K for the year ended October 31, 1990, are
incorporated herein by this reference.
Exhibit 3.2 Bylaws, filed as Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended October
31, 1990, are incorporated herein by this reference.
Exhibit 10 Joint Operating Agreement, filed as Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the
year ended October 31, 1991, is incorporated herein
by this reference.
Exhibit 21 Subsidiaries of the Registrant, filed as Exhibit
22 to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1990, are incorporated
herein by this reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation during the last
quarter of the fiscal year ended October 31, 1996.
9
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DETROIT & CANADA TUNNEL CORPORATION
BY :/s/ Donald M. Vuchetich
------------------------
Donald M. Vuchetich
Chief Executive Officer and President
(Principal Executive Officer)
Date March 5, 1997
-------------
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
indicated.
Signature Date
/s/ Douglas L. Bridges March 5, 1997
- ------------------------------------ -----------------
Douglas L. Bridges
Director
/s/ Charles C. Stewart March 5, 1997
- ------------------------------------ -----------------
Charles C. Stewart
Director
10
<PAGE>
/s/ Donald M. Vuchetich March 5, 1997
- ------------------------------------ -----------------
Donald M. Vuchetich
Director
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> $ 3,053,010
<SECURITIES> 5,509,893
<RECEIVABLES> 1,444,184
<ALLOWANCES> 12,500
<INVENTORY> 0
<CURRENT-ASSETS> 10,412,386
<PP&E> 14,615,734
<DEPRECIATION> (2,445,438)
<TOTAL-ASSETS> 25,436,332
<CURRENT-LIABILITIES> 1,846,622
<BONDS> 0
3,382,965
0
<COMMON> 0
<OTHER-SE> 15,613,751
<TOTAL-LIABILITY-AND-EQUITY> 25,436,332
<SALES> 0
<TOTAL-REVENUES> 11,203,353
<CGS> 0
<TOTAL-COSTS> 6,572,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,631,094
<INCOME-TAX> 1,559,000
<INCOME-CONTINUING> 3,072,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,072,094
<EPS-PRIMARY> 4.54
<EPS-DILUTED> 4.54
</TABLE>
