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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
transition period
from _________________ to ___________________
Commission File Number 0-19150
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WISCONSIN CENTRAL TRANSPORTATION
CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3541743
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6250 N. River Road, Suite 9000
Rosemont, Illinois 60018
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (847) 318-4600
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
Indicate by check [X] whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate by check [X] if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.[ ]
<PAGE>
The aggregate market value (based on the closing sales price on March 19, 1997
as reported by NASDAQ) of the voting stock of the registrant beneficially held
by non-affiliates of the registrant was approximately $1.641 billion. For the
sole purpose of making this calculation, the term "non-affiliate" has been
interpreted to exclude directors and executive officers of the registrant. Such
interpretation is not intended to be, and should not be construed to be, an
admission by the registrant or such directors or executive officers that such
directors and executive officers are "affiliates" of the registrant, as that
term is defined under the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of the
Registrant's Common Stock as of March 19, 1997: 50,829,979 shares
DOCUMENT INCORPORATED BY REFERENCE
Certain information in the registrant's Proxy Statement for its Annual Meeting
to be held May 15, 1997, to be filed pursuant to Regulation 14A, is incorporated
by reference in Part III hereof.
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<PAGE>
TABLE OF CONTENTS
Page
----
Disclaimer Regarding Forward-Looking Statements................. 1
PART I
Item
1. Business........................................................ 1
2. Properties...................................................... 11
3. Legal Proceedings............................................... 13
4. Submission of Matters to a Vote of Security Holders............. 13
Executive Officers of the Registrant............................ 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 16
6. Selected Financial Data......................................... 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 19
8. Financial Statements and Supplementary Data..................... 28
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 50
PART III
10. Directors and Executive Officers of the Registrant.............. 50
11. Executive Compensation.......................................... 50
12. Security Ownership of Certain Beneficial Owners and Management.. 50
13. Certain Relationships and Related Transactions.................. 50
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................ 51
<PAGE>
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements that are "forward-looking", within
the meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other matters, the belief, expectations, plans, and
estimates of the Company with respect to certain future events, the impact of
governmental regulation, the cost of compliance with environmental regulations
and the actions to be taken by others and similar expressions concerning matters
that are not historical facts. Such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors that could cause actual events to differ
materially from those expressed in those statements.
PART I
ITEM 1. BUSINESS
Wisconsin Central Transportation Corporation ("WCTC") is incorporated under
the laws of the State of Delaware. 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 doing business 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"),
Wisconsin Central International, Inc. ("WCI"), WC Canada Holdings, Inc. and
Algoma Central Railway Inc. ("ACRI"). WCTC and its subsidiaries are referred to
together as the "Company".
The Company operates the largest regional railroad in the United States and
the largest railroad in the State of Wisconsin. In addition to Wisconsin, the
Company provides service to the Upper Peninsula of Michigan, northeastern
Illinois, eastern Minnesota and Ontario. The Company's operations utilize
approximately 3,000 route miles of track and trackage rights, 235 locomotives
and approximately 12,800 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.
The Company, through WCL, acquired its original 2,015 route mile railroad
system from the Soo Line Railroad Company ("Soo") in October 1987 (the "Original
Acquisition"). In December 1991, the Company purchased from Soo an additional
line of railroad running approximately 102 route miles from Superior to
Ladysmith, Wisconsin (the "Ladysmith Line"). In July 1992, the Company purchased
from the Chicago and North Western Transportation Company ("CNW") a line of
railroad that runs generally parallel to the Ladysmith Line and extends
approximately 98 route miles from Superior to Cameron, Wisconsin (the "Cameron
Line"). The Company combined the best portions of these lines into a single line
and upgraded the resulting line. The acquisition of the Ladysmith Line and the
Cameron Line are collectively referred to as the "Head of the Lakes
Acquisitions". WCL's current operations utilize 2,021 route miles of track and
trackage rights.
In August 1993, the Company, through FV&W, purchased the rail assets of
three railroads in Wisconsin including Fox River Valley Railroad Corporation,
Green Bay and Western Railroad Company and The Ahnapee & Western Railway
Company. These acquisitions are collectively referred to as the "FV&W
Acquisition". FV&W's rail assets currently consist of approximately 456 route
miles of track and trackage rights.
The Company, through WCI, has an equity interest in Tranz Rail Holdings
Limited ("Tranz Rail"), formerly named New Zealand Rail Limited, which is
discussed in detail below under "Investment in Tranz Rail Holdings Limited".
1
<PAGE>
On January 31, 1995, the Company consummated the acquisition of the railway
assets of Algoma Central Corporation ("ACC") through the Company's ACRI
subsidiary. This acquisition is referred to as the "ACRI Acquisition" and is
described in detail below under "ACRI Acquisition". ACRI's rail assets currently
consist of approximately 322 route miles of track and trackage rights.
In 1995 and early 1996, the Company, through WCI, was part of a consortium
that acquired various rail assets of British Rail. This investment is discussed
in detail below under "Investments in English Welsh & Scottish Railway Holdings
Limited".
RECENT DEVELOPMENT - DUCK CREEK NORTH ACQUISITION
On January 27, 1997, SSM completed the purchase of 207 route miles of
railroad track and trackage rights in Wisconsin and the Upper Peninsula of
Michigan from the Union Pacific Railroad Company ("Union Pacific"). The rail
lines, commonly known as the "Duck Creek North" lines, extend from North Green
Bay, Wisconsin to Ishpeming, Michigan; from Powers to Antoine, Michigan; from
Quinnesec, Michigan to Niagara, Wisconsin; and from Cascade to Palmer, Michigan.
Freight shipments over the lines consist of materials for the paper industry and
high volumes of iron ore used in steel-making which are shipped from the
Marquette ore range to Escanaba, Michigan for transshipment to vessels. The rail
lines, together with contiguous property and associated facilities, were
purchased for approximately $85.0 million of cash. The purchase was funded
through borrowings under existing revolving credit facilities. This acquisition
is referred to herein as the "Duck Creek North Acquisition."
INVESTMENTS IN ENGLISH WELSH & SCOTTISH RAILWAY HOLDINGS LIMITED
In the fourth quarter of 1995, a consortium of investors, including WCI and
an affiliate of Berkshire Partners, an American private equity firm
("Berkshire") of which one of the Company's directors is an executive officer,
director and beneficial owner of shares, established a holding company, North
and South Railways Limited, now named English Welsh & Scottish Railway Holdings
Limited ("EW&S"), to acquire various rail assets of British Rail from the
British government as a part of its privatization of British Rail. On December
9, 1995, EW&S acquired Rail express systems Limited ("Res"). The principal
activity of Res is the carriage of letters for the Royal Mail, a division of the
British Post Office. On February 24, 1996, EW&S acquired British Rail's three
trainload freight companies ("TLFs"), Loadhaul Limited, Mainline Freight Limited
and Transrail Freight Limited. EW&S employs approximately 6,600 staff utilizing
910 locomotives and 19,300 freight cars to haul primarily bulk commodities such
as coal, ore, steel and aggregates throughout Great Britain.
WCI had invested approximately $45.0 million in EW&S for a 31% ownership
interest as of December 31, 1996. The Company has been granted performance-based
options to acquire additional shares in EW&S to compensate it for its leadership
of the consortium, and has entered into a management service agreement with
EW&S, under which the Company earned compensation of $1.6 million in 1996. In
addition, EW&S has issued options to certain of its officers and directors, and
warrants to the investment banking firm that facilitated the acquisition of
EW&S. On February 21, 1997, the Company invested an additional $8.4 million to
exercise a portion of these options, increasing its equity ownership position to
approximately 34%.
The Company accounts for its investment in EW&S under U.S. generally
accepted accounting principles ("GAAP") utilizing the equity method of
accounting. The Company's 1996 results included equity in the net income of EW&S
of $22.8 million.
EW&S has entered into an agreement with British Rail to purchase an
additional freight operating company, Railfreight Distribution, the primary
business of which is the operation of freight trains through the English Channel
tunnel. Railfreight Distribution has not been profitable, and the consideration
for the purchase will be nominal. The transaction will be consummated following
regulatory clearance from the European Union, which is expected in April 1997.
2
<PAGE>
ACRI ACQUISITION
On January 31, 1995, the Company consummated the acquisition of the railway
assets of ACC that are operated by ACRI. ACRI consists of approximately 322
route miles of track and trackage rights between Sault Ste. Marie, Ontario and
Hearst, Ontario. The rail lines were purchased for approximately $8.2 million,
financed in part by the Province of Ontario, through the Northern Ontario
Heritage Fund Corporation. In related transactions, the Company acquired 879
railcars and 23 locomotives from ACC for approximately $11.1 million and ACC's
communications system, maintenance and shop equipment, inventory and
miscellaneous assets for $5.0 million.
The principal commodities shipped over ACRI lines are iron ore, paper,
forest products and steel products. Principal customers include Algoma Steel
Inc. and St. Marys Paper Ltd. ACRI has connections with Canadian Pacific Rail
System, Canadian National Railways ("CN"), Ontario Northland Railway and WCL in
Sault Ste. Marie, Ontario. ACRI also provides passenger services between Sault
Ste. Marie and Hearst, Ontario and operates the Agawa Canyon tour trains.
In 1996, ACRI operated with an average of approximately 229 employees
compared with the approximately 450 employees previously used by ACC in running
the rail operations. Most of the ACRI employees work in train operations and
maintenance. Although operating as a separate company, ACRI has contracted with
WCL for certain administrative functions such as marketing and customer service.
WCL's data system has been extended to link all ACRI customers with WCL and the
North American rail computer network.
METRA
In 1995, the Company reached agreement with the commuter rail division of
the Regional Transportation Authority ("Metra"), the commuter rail system for
northeastern Illinois, to permit Metra's use of WCL's tracks between Chicago and
Antioch, Illinois for commuter service, which commenced in August 1996. The
commuter service is operated by Metra using its own equipment and personnel.
Metra currently operates ten trains per day over the route, which is
approximately 40 miles long. The trackage rights agreement that permits Metra
access to WCL's tracks provides that Metra may operate up to 20 trains per day
over the route, after additional capital improvements are made by Metra. WCL
receives $2.5 million annually as compensation for permitting use of the route.
In addition, performance incentives could increase WCL's annual compensation by
$0.5 million per year. Metra has agreed to indemnify the Company with respect to
personal injury and property damages incurred in connection with Metra's
operations, except in certain limited circumstances.
As part of the arrangement, Metra has funded the capital improvements
necessary to upgrade WCL's line between Chicago and Antioch to speeds of over 50
m.p.h. In addition, four additional passing sidings and other capital
improvements were funded by Metra, increasing the overall capacity of the line.
Through 1996, track improvements funded by Metra in this corridor included
65,600 ties, 5.8 miles of continuous welded rail, 89,800 tons of ballast and
resurfacing the line.
INVESTMENT IN TRANZ RAIL HOLDINGS LIMITED
On July 20, 1993, a consortium of investors, including WCI, entered into a
purchase agreement with the government of New Zealand to acquire all the stock
of Tranz Rail. WCI's equity investment approximated $16.0 million for
approximately 27% of the common stock of Tranz Rail. In 1994 and 1995, the
Company paid $3.3 million and $2.9 million, respectively, to exercise options
that increased its equity ownership to approximately 30%. On June 26, 1995,
Tranz Rail returned capital to shareholders through a pro rata repurchase of
shares. WCTC's share of the capital returned was $21.0 million, which the
Company has used to retire debt. The capital returned was derived primarily from
proceeds of the 1994 sale of Tranz Rail's investment in a telecommunications
company.
Tranz Rail is a 2,500 route mile railroad which operates the only
commercial rail service in New Zealand. Prior to July 20, 1993, it was a
state-owned enterprise operating under a special charter from the New Zealand
3
<PAGE>
government. As of December 31, 1996, the railroad had 4,506 full-time
employees, 341 locomotives and approximately 7,000 freight cars. In addition to
freight and passenger rail service, Tranz Rail also operates regularly scheduled
general commercial ferry service linking New Zealand's north and south islands.
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. As a result of this offering, the
Company's ownership position declined to 23% from 30%. As of December 31, 1996,
the Company owned the equivalent of 9,561,639 American Depository Shares ("ADS")
of Tranz Rail with a quoted closing price on NASDAQ of $17.69 per ADS. Each ADS
represents three issued and fully paid ordinary shares of Tranz Rail. Total
market value of the Company's holdings in Tranz Rail as of December 31, 1996 was
approximately $169.1 million.
In connection with becoming a public company, Tranz Rail adopted a general
policy of paying cash dividends, initially at the rate of NZ$0.17 per ordinary
share per year. The Company received its first dividend on March 11, 1997 in the
amount of U.S.$3.4 million.
The Company accounts for its investment in Tranz Rail under U.S. GAAP
utilizing the equity method of accounting. The Company's 1996 results included
equity in the net income of Tranz Rail of $9.9 million.
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.
WEYAUWEGA ACCIDENT
On March 4, 1996, the Company 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. Although no
one was injured in the derailment, all residents within two miles of the site
were evacuated for approximately sixteen days. In addition, many structures
received water damage as a result of frozen pipes. The total cost for the
derailment is currently estimated at $27.3 million. The Company believes that
its insurance policies will cover substantially all these costs, in excess of
the $2.5 million of deductibles, due to the derailment. Through December 31,
1996, the Company had funded $24.8 million in costs incurred as a result of this
derailment and received $17.4 million in reimbursements from insurance
companies. The Company's Consolidated Balance Sheet includes an insurance
receivable of $7.4 million as of December 31, 1996. 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. The
Company has been successful in resolving the vast majority of claims directly
with the claimants. Through December 31, 1996, approximately 98% of affected
residents and 97% of affected businesses had resolved their claims against the
Company. See also "Legal Proceedings".
BOCT ARBITRATION
On June 10, 1996, an arbitration panel ruled against the Company in a
dispute with the Baltimore and Ohio Chicago Terminal Railroad Company ("BOCT")
regarding intermediate switching and car hire reclaim charges allegedly incurred
from July 1988 through February 1993. The arbitration panel awarded BOCT $16.8
million plus $2.5 million of interest. Based upon the arbitration panel's
ruling, the Company recorded pretax provisions of $15.8 million, representing
amounts awarded in excess of previously recorded accruals. For a discussion of
the history and status of this arbitration proceeding, see "Legal Proceedings".
4
<PAGE>
OPERATIONS
Prior to 1991, the Company operated over the 2,015 route miles of track
acquired by WCL at the inception of the Company in 1987. In December 1991 and
1992, the Company's system and opportunities were expanded when it added
approximately 100 miles of trackage in the Head of the Lakes Acquisitions, which
created better access to Canadian markets. In August 1993, the Company acquired
trackage in Wisconsin in the FV&W Acquisition that currently consists of 456
miles. In January 1995, the Company acquired the 322 miles of trackage involved
in the ACRI Acquisition. In January 1997, the Company acquired the 207 miles of
trackage involved in the Duck Creek North Acquisition.
These acquisitions have contributed to the Company's growth over the past
five years as is shown in the following table.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues (in thousands) ............ $ 275,438<F1> $ 263,427 $ 211,139 $ 151,691 $ 124,364
Annual growth ............................. 4.6% 24.8% 39.2% 22.0% 9.4%
Total carloads (number) ...................... 464,149 436,286 358,825 257,326 205,512
Annual growth ............................. 6.4% 21.6% 39.4% 25.2% 14.3%
Average number of employees .................. 2,086 1,970 1,575 1,185 1,011
Annual growth ............................. 5.9% 25.1% 32.9% 17.2% 5.0%
Operating ratio <F2>.......................... 81.3%<F3> 74.8%<F4> 74.1% 77.0% 78.8%
<FN>
- ----------------
<F1> Excludes the disputed switching charges of $13.3 million discussed in Note
15 to the Consolidated Financial Statements.
<F2> Operating ratio represents operating expenses as a percentage of operating
revenues.
<F3> Excludes the disputed switching charges and the $2.5 million of insurance
deductibles for the Weyauwega derailment discussed in Note 15 to the
Consolidated Financial Statements.
<F4> Excludes the $3.0 million retroactive property tax assessment for the years
1990 to 1993 from the Wisconsin Department of Revenue discussed in Note 15
to the Consolidated Financial Statements.
</FN>
</TABLE>
The Company's operating philosophy emphasizes rapid movement of traffic 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 has structured its operations so that it can
assign its employees to tasks on an as-needed basis without regard to
traditional rail industry crafts, which increases productivity. The Company
follows a program of cross-training its employees to perform a number of related
functions.
The following table sets forth various measurements of the Company's
productivity over the past five years:
<TABLE>
<CAPTION>
Productivity Data
Year Ended December 31,
1996 1995 1994 1993 1992
--------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Total employees (average) ............. 2,086 1,970 1,575 1,185 1,011
Total employee hours worked (thousands) 4,617 4,369 3,642 2,878 2,433
Labor ratio<F1>........................ 32.7%<F2> 31.3% 32.1% 32.9% 33.7%
Revenue ton miles per
employee hour worked<F3>............ 2,120 2,169 1,980 1,795 1,598
<FN>
- -----------------
<F1> Labor ratio equals total labor expense charged to operating expenses as
a percentage of operating revenues.
<F2> Excludes the disputed switching charges discussed in Note 15 to the
Consolidated Financial Statements.
<F3> A revenue ton mile equals the product of weight in tons of freight carried
for hire and the distance in miles between the origin and destination.
</FN>
</TABLE>
5
<PAGE>
The following table summarizes the work force by function:
<TABLE>
<CAPTION>
Average Number of Employees
Year Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------- ------ -----
<S> <C> <C> <C> <C> <C>
General and administrative........................ 136 136 115 95 91
Marketing......................................... 39 40 35 30 26
Engineering (maintenance of way).................. 640 580 463 352 302
Mechanical (maintenance of equipment)............. 411 414 332 253 212
Transportation.................................... 860 800 630 455 380
----- ------ ------ ----- ----
Total........................................ 2,086 1,970 1,575 1,185 1,011
===== ====== ====== ===== =====
</TABLE>
The Company serves a competitive market area which dictates the need for
consistent, high quality train service. The Company's 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, shipments by rail can 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 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
Volume, as measured by carloads handled (including as a carload each loaded
trailer or container), was 464,149 carloads in 1996 generating $273.8 million in
gross revenues. Of these carloads, 78.3% were generated by 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). The Company's volume in 1995 and 1994 was similar, with 76.5%
and 79.2%, respectively, of the carloads being generated by originating,
terminating and local business. The Company believes that this high percentage
of originating, terminating and local business gives its volume 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
business was overhead. 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. "Properties".
6
<PAGE>
The following table shows the composition of the Company's 1996 traffic by
class:
<TABLE>
<CAPTION>
1996 Volume by Class
Carloads Gross Revenues
-------- --------------
% of Dollars in % of
Number Total millions Total
------ ----- -------- -----
<S> <C> <C> <C> <C>
Local ............................................. 100,005 21.5% $ 48.2 17.6%
Originating......................................... 103,422 22.3 69.5 25.4
Terminating......................................... 160,345 34.5 112.8 41.2
Overhead............................................ 100,377 21.7 43.3 15.8
------- ------ --------- ------
Total........................................... 464,149 100.0% $ 273.8 100.0%
======= ====== ========= ======
</TABLE>
The Company's 25 largest customers accounted for approximately 60% of its
volume and approximately 64% of its gross revenues in 1996. Ten shippers
(Consolidated Papers, Inc., The Mead Corporation, Algoma Steel Inc., Geneva
Steel, Quad/Graphics, Wisconsin Public Service Corporation, Georgia Pacific
Corp., Noranda, Inc., Kimberly Clark Corp., and Champion International Corp.)
accounted for approximately 39% of the Company's gross revenues in 1996. The
Company's volume is subject to general economic conditions and specific
situations within customers' respective industries as well as generally to the
effects of competition.
COMMODITIES BASE
The Company transports a wide variety of commodities for its customers. The
following table summarizes the Company's traffic for 1996 by commodity group. A
detailed discussion of the individual commodity groups follows the table.
<TABLE>
<CAPTION>
1996 Commodity Group Mix
Carloads Gross Revenues
-------- --------------
% of Dollars in % of
Number Total millions Total
------ ----- -------- -----
<S> <C> <C> <C> <C>
Paper............................................... 41,389 8.9% $ 37.5 13.7%
Woodpulp............................................ 39,382 8.5 35.8 13.1
Pulpboard........................................... 20,071 4.3 11.6 4.2
Lumber products..................................... 20,890 4.5 16.6 6.1
Wood fibers......................................... 22,304 4.8 11.6 4.2
Chemicals and petroleum products.................... 39,326 8.5 32.7 12.0
Intermodal.......................................... 62,533 13.5 12.1 4.4
Sand, stone and minerals............................ 32,468 7.0 13.8 5.0
Metallic ore........................................ 73,699 15.9 28.1 10.3
Clay products and granules.......................... 21,536 4.6 20.5 7.5
Coal................................................ 28,578 6.2 11.6 4.2
Food and grain...................................... 26,707 5.8 17.6 6.4
Waste and scrap..................................... 18,184 3.9 11.8 4.3
Steel............................................... 14,263 3.1 10.5 3.9
Miscellaneous....................................... 2,819 0.5 2.0 0.7
--------- ------ -------- -------
Total........................................... 464,149 100.0% $ 273.8 100.0%
========= ====== ======== =======
</TABLE>
Paper, Woodpulp and Pulpboard. Paper and related products are among the
principal commodities transported by the Company. The Company provides direct
rail service to major woodpulp and paper manufacturers in central and
northeastern Wisconsin, the Upper Peninsula of Michigan and Ontario. In 1996,
paper, woodpulp and pulpboard (a packaging material) represented 21.7% of the
Company's volume and 31.0% of its gross revenues. In addition to these products,
the Company transports a number of commodities related to paper-making (such as
chemicals and clay), which are described separately below. The paper related
products volume is primarily inbound raw materials for paper producers. The
Company's paper producing customers are diverse, producing many types of paper
and related products, including
7
<PAGE>
magazine stock, writing papers, packaging papers and sanitary products. The
distribution and marketing patterns for the different types of products vary, as
do the seasonality and cyclicality of the markets. Outbound paper products
transported by the Company consist of finished or heavy paper products, such as
printing paper, kraft (brown) paper and pulpboard. Sanitary papers are
transported predominantly by truck due to their relatively low weight and
off-line delivery requirements.
Lumber Products and Wood Fibers. Lumber products and wood fibers, including
pulpwood and wood chips, accounted for 9.3% of the Company's 1996 volume and
10.3% of its 1996 gross revenues. Lumber shipments are generally dependent on
construction activity, while wood fiber shipments are dependent on paper
production activity.
Chemical and Petroleum Products. Chemical and petroleum products are
primarily moved inbound to the Company's customers, principally paper companies
and fertilizer distributors. These products accounted for 8.5% of the Company's
1996 volume and 12.0% of its 1996 gross revenues. Major chemicals in this group
include sodium alkalides, potassium compounds and plastic materials.
Intermodal. Intermodal volume consists of over-the-road trailers and
shipping containers hauled on railroad flat cars. The trailer and container
business handles truck-competitive, time-sensitive commodities. This business
represented 13.5% of the Company's 1996 volume and 4.4% of its 1996 gross
revenues. The Company has intermodal facilities in Chicago, Illinois and
Arcadia, Green Bay, Neenah and Stevens Point, Wisconsin. On April 1, 1996, the
Company joined with CN to create a new joint rate intermodal service agreement
that provides U.S. and Canadian customers with transit time savings in the
Chicago/Western Canada corridor by utilizing the Company's lines which offer the
shortest mileage from Chicago to Superior.
Sand, Stone and Minerals. Sand, stone and mineral products represented 7.0%
of the Company's volume and 5.0% of its gross revenues in 1996. Volume in this
classification consists primarily of sand and stone quarried in the Company's
service territory.
Metallic Ore. Metallic ore volume accounted for 15.9% of the Company's
volume and 10.3% of its gross revenues in 1996. The Company's metallic ore
volume is seasonal and subject to competitive bidding. On August 19, 1994, the
Company, together with Southern Pacific Lines (now part of Union Pacific), began
to handle iron ore from the upper Midwest to Geneva Steel's mill in Utah. In
1996, volume for this five-year move approximated 32,200 carloads. With the
acquisition of Southern Pacific Lines by Union Pacific, the Company believes it
is doubtful that this move will continue after its current term. A significant
portion of the SSM volume consists of metallic ore shipments from the Marquette
ore range to Escanaba, Michigan for transshipment to vessels.
Clay Products and Granules. Clay products and granules represented 4.6% of
the Company's volume and 7.5% of its gross revenues in 1996. Roofing granules
originating at manufacturing facilities located in Wausau and Kremlin, Wisconsin
constituted 45% of these carloads. Kaolin clay, which is a primary raw material
used in paper production, makes up most of the other 55% of these carloads.
Coal. Coal accounted for 6.2% of the Company's volume and 4.2% of its gross
revenues in 1996. The Company handles two categories of coal traffic: (1) unit
trainloads of low sulfur, low BTU coal from the Powder River Basin of Wyoming to
electric utility plants in Green Bay and Weston, Wisconsin, and (2) multiple
carload lots of low to high sulfur, high BTU coal originating in Indiana,
Kentucky and Illinois and moving to Wisconsin paper companies and other
industrial users.
Food and Grain. Food and grain products totaled 5.8% of the Company's
volume and 6.4% of its gross revenues in 1996. Corn, barley, malt and canned and
frozen vegetables make up the bulk of this group.
Other. The Company's remaining volume is composed of waste and scrap
(3.9%), steel products (3.1%) and miscellaneous freight (0.5%).
COMPETITION
The Company's railroad operations are subject to competition from trucks,
other rail carriers and lake vessels. Competition with rail carriers and lake
vessels is usually based on price, while competition with trucks can be based on
price, service or both. Trucks are the dominant competition to the Company,
8
<PAGE>
competing actively for shipments of nearly all commodities handled by the
Company, especially intermodal traffic and paper products. Rail competition
exists principally in the Duluth/Superior to Chicago corridor. Lake vessels
generally compete for bulk commodities such as coal and ore. The Company's
pricing and service decisions are also impacted by competition among the
Company's customers and their competitors, as the Company must provide pricing
and service that keep its customers competitive in the market.
MARKETING
The Company emphasizes superior service to its customers and has created a
marketing organization designed to identify and quickly respond to customers'
needs. The Company's marketing strategy includes the creation of an atmosphere
of decentralized pricing authority to enable marketing personnel with specific
market knowledge and direct customer contact to make pricing decisions within
established guidelines. This quick and independent reaction to market
opportunities, together with clear delegation of authority and responsibility,
has improved customer relations and enabled the Company to retain and increase
its base of business. In recognition of the Company's excellent service during
the years 1988 through 1995, Distribution, a respected trade publication,
presented the Company with its "Quest for Quality" award for each of those
years. The award for 1996 has not yet been presented. The award is based on
customer surveys encompassing service, equipment, convenience, price and sales
criteria. The Company has received many awards from its customers recognizing
its excellent service.
EMPLOYEE RELATIONS
At December 31, 1996, the Company employed 2,047 full-time employees,
including 46 on temporary assignments. Except for ACRI and a minor hold-over
representation of certain FV&W employees, the Company's employees are not
represented by collective bargaining organizations. The collective bargaining
agreements in effect on ACRI are designed to reflect WCL practices. In past
years, there have been various unsuccessful attempts by various unions to
represent those employees not represented by collective bargaining
organizations. The most recent attempt was in late 1996 when the National
Mediation Board conducted elections to determine if the Company's engineering
employees would choose to be represented by a labor union. In early 1997, the
Company was notified that only 13.6% of such employees voted to be represented
by a union, falling short of the simple 50% majority required by the Railway
Labor Act to effect union representation.
The Company's employees, after meeting certain eligibility requirements,
are able to participate in the Company's employee stock purchase plans, savings
plans and bonus plans.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment. These
environmental laws and regulations, which are implemented principally by the
Environmental Protection Agency and comparable state agencies, govern the
management of hazardous wastes, the discharge of pollutants into the air and
into surface and underground waters, and the manufacture, handling,
transportation, storage and disposal of certain substances. One such law, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), which is also known as the "Superfund" law, generally imposes joint
and several liability for clean-up and enforcement costs, without regard to
fault or the legality of the original conduct, on current and predecessor owners
and operators of a site. Much of the Company's real property has been used for
industrial purposes or leased to commercial and industrial companies whose
activities may have resulted in discharges onto the property. Consequently, the
Company may be responsible under CERCLA and other applicable federal and state
statutes for all or a part of the costs to clean up sites at which wastes have
been released by the Company, its lessees, predecessor owners or lessees of
properties, or other third parties. Prior owners of a majority of the Company's
rail operating properties have agreed to indemnify the Company with respect to
contamination or non-compliances with environmental laws arising prior to the
Company's acquisition of the subject sites. In addition, several of the states
in which the Company operates make available reimbursement programs for clean-up
of contamination.
9
<PAGE>
The Company has been named as a "potentially responsible party" with
respect to contamination at a number of sites on its properties. However, the
Company believes that any expense it may incur in connection with the clean-up
of such sites will not have a material adverse effect on the financial condition
of the Company. As part of its normal operations, the Company transports
hazardous materials from time to time, which may expose the Company to claims
and potential liability for injuries to employees, other persons, property and
the environment.
The Company has received requests for documents from the United States
Department of Justice ("DOJ") in an investigation involving a potential
violation of federal laws governing the inspection and removal of asbestos and
the provision of notice relating to those activities in connection with a 1993
demolition project in Waukesha, Wisconsin on property owned by the Company. The
Company is cooperating with the DOJ's investigation and has provided all
requested documents. The penalty for such violation includes criminal
prosecution with a fine of up to $500,000 per violation or civil enforcement
with a fine of up to $25,000 per day for each violation.
The Company believes that the operations of its railroads are in material
compliance with current laws and regulations. The Company estimates that any
expense incurred in maintaining compliance with current laws and regulations
will not have a material effect on the Company's earnings or capital
expenditures. However, there can be no assurance that the current regulatory
requirements will not change, or that currently unforeseen environmental
incidents will not occur, or that past non-compliance with environmental laws
will not be discovered on the Company's properties that may not be subject to
indemnification or reimbursement.
REGULATION
In addition to environmental, safety and other regulation applicable to all
businesses, railroads are subject to regulation by federal agencies, primarily
the Service Transportation Board ("STB") and the Federal Railroad Administration
("FRA"), and by state departments of transportation and some other state and
local regulatory agencies. (ACRI's operations are subject to Canadian rail
regulations which are generally similar, but differ in certain respects, from
their U.S. counterparts. Only U.S. regulation is described below.) The STB has
jurisdiction over, among other things, prices charged for services and service
levels. It also has jurisdiction over acquisition, extension or abandonment of
rail lines, consolidation, merger, or acquisition of control of rail common
carriers, and the imposition of labor protection conditions in connection with
some of the foregoing. The FRA has jurisdiction over railroad track, equipment
and operating safety standards. State agencies regulate certain local safety
issues, such as adequacy of grade crossings.
Generally, a railroad is free to adjust the level of prices on its business
freely. In those instances in which a railroad is found not to face effective
competition and found to have prices which yield revenue in excess of a
prescribed revenue-to-variable cost ratio, the STB has authority to investigate
the price reasonableness. In addition to maximum price regulation, an individual
railroad's ability to adjust its prices is constrained by the regulation of
prices that apply to business interchanged between railroads.
For purposes of rail regulation, the STB classifies railroads by revenues,
with the largest, most heavily regulated railroads being referred to as "Class
I" railroads and smaller railroads being referred to as "Class II" or "Class
III" railroads. WCL and FV&W are classified as Class II railroads, while SSM is
classified as a Class III railroad.
On February 7, 1997, WCL and FV&W entered into a voluntary cooperative
Safety Compliance Agreement with the FRA pursuant to the Safety Assurance and
Compliance Program ("SACP"). The SACP is a program, initiated by the FRA in
March of 1995, 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 WCL and FV&W program, which is expected to continue for
approximately one year, will focus on improving track conditions, inspection
procedures and training for railroad employees.
10
<PAGE>
INSURANCE
The Company maintains $125.0 million in third party liability insurance
coverage for personal injuries, including death, property damage and other
specified risks of its operations in excess of a self-insured retention of $2.0
million per occurrence (except for ACRI which has a self-insured retention of
$0.5 million per occurrence). The Company also maintains $20.0 million in all
risks property damage coverage, including property of shippers, in excess of
retentions of $750,000 per occurrence with respect to rail accidents and $50,000
per occurrence with respect to non-rail incidents. In addition, the Company
maintains $25.0 million in directors' and officers' liability insurance with a
Company retention of $350,000. The Company believes its insurance is proper in
light of its experience and the experience of the rail industry. However, the
Company can give no assurance as to the adequacy, availability or cost of
insurance in the future.
ITEM 2. PROPERTIES
The Company's principal properties are 2,798 route miles of operating rail
lines (1,856 route miles of main lines and 942 route miles of secondary lines),
208 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 operating
rail lines:
Owned
---------------------------
Main Secondary Total Trackage Total
Lines Lines Owned Rights Operated
----- ----- ----- ------ --------
WCL .................... 1,074 758 1,832 189 2,021
FV&W ................... 338 102 440 16 456
ACRI ................... 295 26 321 1 322
SSM .................... 149 56 205 2 207
----- --- ----- --- -----
Total ............. 1,856 942 2,798 208 3,006
===== === ===== === =====
The Company also owns 34 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 (238.3 route miles) is in FRA Class IV condition, permitting up to 50
m.p.h. speeds for freight trains. The Company's other main lines are primarily
FRA Class III lines, permitting up to 40 m.p.h. speeds, and the Company
considers them appropriate to handle current and expected traffic on those
lines. Secondary lines are primarily FRA Class II lines, permitting up to 25
m.p.h. speeds, which the Company also considers appropriate for current and
expected traffic volume. Class designations of rail lines are made or revised
based on annual track inspections. Additionally, all of the main lines have been
inspected with an electronic rail defect detector car at least once annually
over the last five years. 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 over Soo include restrictions on the use of Soo's rail lines
into Milwaukee and Minneapolis/St. Paul. The effect of these restrictions is
that the Company cannot use Soo's lines to access those locations to handle most
overhead business (i.e., business routed through the Company's system for
delivery from one carrier to another).
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 large iron ore dock and storage facility in
Escanaba, Michigan. The ore dock site includes a pier approximately 2,800 feet
long used to transport iron ore to and from cargo ships which are docked at the
pier. The pier is capable of docking four ships at a time.
The Company also has rights under various leases, joint facility agreements
and transportation contracts. The Company is lessee of locomotives, railcars and
maintenance equipment. The Company's joint facility agreements include various
operating and maintenance
11
<PAGE>
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 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 $2.0 million, $1.3 million
and $1.2 million in 1996, 1995 and 1994, respectively.
In addition, the Company has sold certain of its excess assets since
inception. The proceeds and pre-tax gains recognized with respect to these sales
from 1992 through 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
--------- --------- -------- -------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Proceeds from sales of excess assets.............. $ 1,210 $ 2,109 $ 1,236 $ 1,909 $ 2,911
Pre-tax gain from sales of excess assets.......... 1,015 794 1,036 1,735 2,383
</TABLE>
The Company's strategy is to sell excess assets, but there can be no
assurance 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.
At December 31, 1996, the Company's equipment fleet consisted of 235
locomotives (169 owned and 66 leased) and 12,831 freight cars (4,734 owned and
8,097 leased). The average age of the locomotives and freight cars in the
Company's fleet is 31 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, 50% and 52%,
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 89.7% and 98.1%, respectively, in 1996.
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 the Original Acquisition,
the Company obtained both a representation from Soo and title insurance to the
effect that the Company would have sufficient interest in its properties to
operate a railroad. The Company received similar assurances with respect to
properties acquired in subsequent acquisitions. 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.
As part of the Original Acquisition, Soo retained the rights to all gross
revenues from fiber optic cables and equipment which, under agreements existing
at the time of the Original Acquisition, were located on the properties acquired
by the Company. Soo also retained the rights to 50% of net revenues derived
under easements, licenses or leases pertaining to fiber optic cables and
equipment which may be located on those properties under agreements entered into
after the Original Acquisition. Soo retained similar rights as to the Ladysmith
Line, and CNW retained similar rights as to the Cameron Line. The Company's
share of the revenues from fiber optic easement agreements has been
insignificant. In addition, Soo, CNW and Union Pacific retained mineral rights
with respect to the Ladysmith Line, the Cameron Line and Duck Creek North,
respectively.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company's employees are covered by the Federal Employers' Liability Act
("FELA"), as opposed to 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 is currently subject to a number of claims and legal actions
that arose in the ordinary course of business, including FELA claims by its
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.
Adverse judgments in 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.
In connection with the March 4, 1996 derailment in Weyauwega, Wisconsin, a
complaint was filed against the Company on March 26, 1996 by nine individuals
seeking to represent the class of persons who suffered damages as a result of
this derailment. The complaint seeks punitive and treble damages. Any punitive
damages and treble damages may not be covered by the Company's insurance. The
Company does not believe there is any basis for an award of such damages. On
July 9, 1996, the court declined to certify a class action lawsuit against the
Company. The court did, however, indicate it would appoint a guardian ad litem
to review all settlements made on behalf of affected minors and would notify all
claimants who had not settled their claims of the existence of the action so
that these claimants would have the option of joining the lawsuit should they
desire. Since that date, the court has decided not to appoint a guardian ad
litem. All potential claimants were notified, and thirteen families and two
businesses joined the lawsuit. Discovery is ongoing. In addition, one business
has filed a separate suit for damages in the District Court of Waupaca County.
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.
On June 4, 1993, WCL was served with a complaint filed by the 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 Chicago from October 24, 1995
to November 9, 1995. On June 10, 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
pretax provisions of $15.8 million, representing amounts awarded in excess of
previously recorded accruals. The litigation between BOCT and the Company
continues. The U.S. District Court has affirmed the arbitration award and also
authorized WCL to pursue the defenses that were not subject to arbitration,
including claims to be brought before the STB.
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. WCTC and the other railroads involved are
considering an appeal of 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 $727,000, in its 1995 consolidated statement of income. The
railroads, including WCL and FV&W, have also filed suits in state courts which
allege discrimination in the assessment of taxes. WCL and FV&W have separately
filed suit challenging other WDR tax valuation practices with respect to their
1994, 1995 and 1996 tax bills.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about each person who serves as
one of the Company's executive officers:
<TABLE>
<CAPTION>
Age as of
Name March 1, 1997 Position with Company
---- ------------- ---------------------
<S> <C> <C>
Edward A. Burkhardt 58 Chairman, President and Chief Executive Officer
Thomas F. Power, Jr. 56 Executive Vice President and Chief Financial Officer
J. Reilly McCarren 40 Executive Vice President and Chief Operating Officer, WCL,
FV&W, ACRI and SSM
Walter C. Kelly 53 Vice President, Finance
Glenn J. Kerbs 56 Vice President, Engineering, WCL, FV&W, ACRI and SSM
William R. Schauer 52 Vice President, Marketing, WCL, FV&W, ACRI and SSM
J. Edward Terbell 44 Vice President and General Manager, WCL, FV&W, ACRI and SSM
Robert F. Nadrowski 50 Vice President, Mechanical, WCL, FV&W, ACRI and SSM
Earl J. Currie 57 Vice President, Planning
Richard P. White 51 Vice President, Human Resources
Marty J. Mickey 34 Treasurer
</TABLE>
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 serves as a director and the
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 and a
director and Chairman and Chief Executive Officer of EW&S. From 1967 to 1987,
Mr. Burkhardt was employed by CNW, most recently as Vice President,
Transportation. Mr. Burkhardt has 36 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. Mr. Power is also a director of Tranz Rail and EW&S. From 1985 to 1987,
Mr. Power was a private consultant. From 1970 to 1985, Mr. Power was employed by
the Chicago, Milwaukee, St. Paul and Pacific Railroad Company, most recently as
Chief Financial Officer. Mr. Power has over 29 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. 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 18 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 32
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 the Original Acquisition until October 1988.
From 1986 until
14
<PAGE>
1987, Mr. Schauer was employed by CNW as General Marketing Manager. From 1963 to
1985, Mr. Schauer was employed by the Chicago, Milwaukee, St. Paul and Pacific
Railroad Company in various positions, most recently as Director of Marketing
and Pricing. Mr. Schauer has 22 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 the
Original Acquisition. From 1973 until 1987, Mr. Terbell was employed by CNW,
most recently as Assistant Division Manager - Engineering. Mr. Terbell has 22
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 Chicago,
Milwaukee, St. Paul and Pacific Railroad Company, most recently as Assistant
Vice President and Chief Mechanical Officer. Mr. Nadrowski has 26 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 Soo.
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 36 years of railroad management experience.
Mr. White has served as Vice President, Human Resources, of WCTC and its
operating subsidiaries since March 4, 1996. Prior to joining the Company, Mr.
White held a variety of positions with Tranz Rail and its predecessors from
1962-1996, most recently as Executive Manager, Personnel.
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
1990-1996. 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.
15
<PAGE>
PART II
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 19, 1997, there were
approximately 1,450 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, after adjusting for a three-for-one stock split effective May 31, 1996,
of the Company's Common Stock as quoted through the NASDAQ National Market
System:
Price Per Share
---------------
Calendar Period High Low
--------------- ---- ---
1995:
First Quarter........................................ $ 17.00 $ 13.17
Second Quarter....................................... 19.13 15.63
Third Quarter........................................ 22.92 16.08
Fourth Quarter....................................... 22.50 18.58
1996:
First Quarter........................................ $ 27.58 $ 20.46
Second Quarter....................................... 38.75 21.83
Third Quarter........................................ 40.00 29.25
Fourth Quarter....................................... 42.50 34.50
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.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996 1995 <F1> 1994 1993 <F2> 1992
---------- ---------- ---------- --------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues:
Operating revenues before disputed
switching charges....................... $ 275,438 $ 263,427 $ 211,139 $ 151,691 $124,364
Disputed switching charges................ (13,278)<F3> --- --- --- ---
--------- --------- --------- --------- --------
Total operating revenues.................. 262,160 263,427 211,139 151,691 124,364
Operating expenses:
Weyauwega derailment and retroactive
property tax assessment................. 2,500 <F4> 3,030 <F5> --- --- ---
Other..................................... 223,888 196,938 156,514 116,843 98,008
--------- -------- ---------- ---------- ---------
Total operating expenses.................. 226,388 199,968 156,514 116,843 98,008
--------- -------- ---------- ---------- ---------
Income from operations....................... 35,772 63,459 54,625 34,848 26,356
Gains on sales of excess assets.............. 1,015 794 1,036 1,735 2,383
Rental income................................ 2,039 1,323 1,241 847 955
Other income (expense), net.................. 1,717 382 771 (342) (1,972)
Interest on disputed switching charges and
retroactive property tax assessment....... (2,493)<F3> (727)<F5> --- --- ---
Interest expense............................. (9,315) (9,084) (9,901) (7,798) (9,886)
--------- -------- ---------- ---------- ---------
Income before income taxes,
equity in net income of affiliates,
extraordinary items and cumulative
effect of accounting change............... 28,735 56,147 47,772 29,290 17,836
Provision for income taxes................... 11,378 22,170 19,068 11,944 6,955
--------- -------- ---------- ---------- ---------
Income before equity in net income of
affiliates, extraordinary items and
cumulative effect of accounting change.... 17,357 33,977 28,704 17,346 10,881
Equity in net income of affiliates........... 32,677 <F6> 10,655 9,578 1,490 ---
--------- -------- ---------- ---------- ---------
Income before extraordinary items and
cumulative effect of accounting change.... 50,034 44,632 38,282 18,836 10,881
Extraordinary items....................... (1,602) (2,123) (1,587) (1,398) ---
Cumulative effect of change in
accounting for income taxes............. --- --- --- (2,067) ---
--------- -------- ---------- ---------- ---------
Net income................................... $ 48,432 $ 42,509 $ 36,695 $ 15,371 $ 10,881
========= ======== ========== ========== =========
Earnings per common share outstanding<F7> :
Income before extraordinary items
and cumulative effect of
accounting change....................... $ 0.99 $ 0.89 $ 0.77 $ 0.38 $ 0.28
Extraordinary items....................... (0.03) (0.04) (0.03) (0.03) ---
Cumulative effect of accounting change.... --- --- --- (0.04) ---
--------- --------- ---------- ---------- ---------
Net income................................ $ 0.96 $ 0.85 $ 0.74 $ 0.31 $ 0.28
========= ========= ========== ========== =========
Average common shares outstanding............ 50,647 50,242 49,787 49,572 38,904
========= ========= ========== ========== =========
Cash dividends per common share.............. $ --- $ --- $ --- $ --- $ ---
========= ========= ========== ========== =========
<FN>
- -----------------
<F1> Includes partial year (11 months) results of ACRI.
<F2> Includes partial year results of FV&W (4 months) and Tranz Rail (6 months).
<F3> Represents disputed switching charges and related interest for the June
1996 arbitration ruling in favor of BOCT. See Note 15 to the Consolidated
Financial Statements.
<F4> Represents a charge to cover insurance deductibles associated with the
Weyauwega derailment discussed in Note 15 to the Consolidated Financial
Statements.
<F5> Represents a charge and accrued interest for a retroactive property tax
assessment for the years 1990 to 1993 from the Wisconsin Department of
Revenue. See Note 15 to the Consolidated Financial Statements.
<F6> Includes partial year results of the TLFs from February 24, 1996 through
December 31, 1996.
<F7> All per share data have been restated to reflect a two-for-one stock split
in the form of a stock dividend on July 5, 1994, and a three-for-one stock
split in the form of a stock dividend on May 31, 1996.
</FN>
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1996 1995<F1> 1994 1993<F2> 1992
---------- ---------- ---------- ---------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............................. $ 691,275 $ 550,530 $ 434,538 $ 390,367 $ 283,805
Investment in affiliates................. 114,652<F3> 41,416 33,612 17,532 ---
Total debt............................... 165,034 137,340 102,500 134,155 81,574
Stockholders' equity..................... 299,146 237,695 190,478 149,674 133,685
Debt to total capitalization............. 35.6% 36.6% 35.0% 47.3% 37.9%
Operating Data:
Revenue ton miles of freight traffic
(millions) <F4>...................... 9,786 9,478 7,210 5,166 3,887
Revenue per ton mile (cents) <F5>........ 2.6 2.6 2.8 2.8 3.1
Operating ratio <F6>..................... 81.3% 74.8% 74.1% 77.0% 78.8%
Revenue ton miles per freight
train hour (thousands) <F4>......... 44 39 40 37 33
Revenue ton miles per locomotive
in service (millions) <F4>........... 47 45 45 42 39
Fuel consumption (thousand gallons)...... 28,537 28,432 21,646 15,789 12,607
Fuel cost per gallon (average, in cents). 75 66 66 66 66
Revenue ton miles per gallon of fuel<F4>. 343 333 333 327 308
Total carloads........................... 464,149 436,286 358,825 257,326 205,512
Carloads from originating, terminating
and local traffic.................... 78.3% 76.5% 79.2% 79.1% 79.5%
Gross revenues from originating,
terminating and local traffic........ 84.2% 84.3% 85.1% 82.1% 83.8%
Net freight loss and damage as a percent
of gross freight revenues <F7>...... 0.23% 0.41% 0.38% 0.43% 0.34%
<FN>
- ----------------
<F1> Includes partial year (11 months) results of ACRI.
<F2> Includes partial year results of FV&W (4 months) and Tranz Rail (6 months).
<F3> Includes partial year results of the TLFs from February 24, 1996 through
December 31, 1996.
<F4> A revenue ton mile equals the product of weight in tons of freight carried
for hire and the distance in miles between origin and destination.
<F5> Revenue per ton mile equals net freight revenue divided by revenue ton
miles of freight volume.
<F6> Operating ratio represents operating expenses as a percentage of operating
revenues. The 1996 percentage excludes the disputed switching charges of
$13.3 million and the $2.5 million of insurance deductibles for the
Weyauwega derailment discussed in Note 15 to the Consolidated Financial
Statements. The 1995 percentage excludes the $3.0 million retroactive
property tax assessment discussed in Note 15 to the Consolidated Financial
Statements.
<F7> Net freight loss and damage is the cost to the Company of damaged and
destroyed customer freight, net of salvage and insurance recoveries. The
1996 percentage excludes the effects of the Weyauwega derailment discussed
in Note 15 to the Consolidated Financial Statements.
</FN>
</TABLE>
18
<PAGE>
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 elsewhere in Item 8. "Financial Statements and Supplementary Data".
RESULTS OF OPERATIONS: 1996 COMPARED TO 1995
The Company's net income for 1996 was $48.4 million compared with $42.5
million for 1995. Net income for 1996 was reduced by $9.5 million, net of income
taxes, due to the BOCT arbitration award and associated interest, by $1.5
million, net of income taxes, due to the Weyauwega derailment and by $1.6
million, net of income taxes, due to an extraordinary item associated with the
early retirement of debt. Net income for 1995 was unfavorably affected by an
extraordinary charge associated with early retirement of debt which totaled $2.1
million, net of income taxes, and a charge for a retroactive property tax
assessment, plus accrued interest, which totaled $2.3 million, net of income
taxes. These items are discussed in further detail in the Notes to Consolidated
Financial Statements. The Company's income, exclusive of the effects of these
items was $61.1 million for 1996 compared to $46.9 million for 1995, an increase
of 30.2%.
Operating Revenues. Revenues for 1996 were $262.2 million compared with
$263.4 million for 1995. Operating revenues for the year of 1996 were negatively
affected by the switching charges awarded in the BOCT arbitration. Excluding
these switching charges, operating revenue for 1996 increased by $12.0 million
or 4.6% to $275.4 million. Volume, as measured by carloads handled (including as
a carload each loaded trailer or container), for 1996 was 464,149 carloads
compared with 436,286 carloads in 1995, an increase of 27,863 carloads or 6.4%.
The following table compares the Company's 1996 and 1995 revenues.
<TABLE>
<CAPTION>
Operating Revenue Comparison
1996 vs. 1995
1996 % of Gross 1995 % of Gross %
Revenues Revenues Revenues Revenues Change
-------- -------- -------- -------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Gross revenues..................................... $ 273,793 100.0 % $ 260,679 100.0 % 5.0 %
Allowances, absorptions and adjustments............ (15,752) (5.8) (14,174) (5.4) (11.1)
----------- ------ ----------- ------
Net freight revenues............................... 258,041 94.2 246,505 94.6 4.7
Switching, demurrage, passenger
and other revenues............................ 17,397 6.4 16,922 6.5 2.8
----------- ------ ----------- ------
Operating revenues before disputed
switching charges............................. 275,438 100.6 263,427 101.1 4.6
Disputed switching charges......................... (13,278) (4.8) --- --- <F1>
----------- ------ ----------- ------
Operating revenues................................. $ 262,160 95.8 % $ 263,427 101.1 % (0.5) %
=========== ======= =========== =======
<FN>
- -------------
<F1> Not meaningful.
</FN>
</TABLE>
19
<PAGE>
Gross revenues for 1996 increased in 9 of 15 commodity groups compared
with 1995, with an overall increase of 5.0%. Carload volume increased in 9 of 15
commodity groups compared to 1995 for an overall increase of 6.4%. The following
table compares volume (in carloads), gross revenues and average revenue per
carload by commodity group for the years 1996 and 1995:
<TABLE>
<CAPTION>
Carload and Gross Revenue Comparison By Commodity Group
1996 vs. 1995
Average
Revenue
Carloads Gross Revenues Per Carload
------------------- ------------------------ -----------------
Commodity Group 1996 1995 1996 1995 1996 1995
- ------------------------------------------ -------- ------ --------- ---------- -------- -------
(in thousands, except carload amounts)
<S> <C> <C> <C> <C> <C> <C>
Paper...................................... 41,389 39,085 $ 37,519 $ 35,430 $ 906 $ 906
Woodpulp................................... 39,382 37,806 35,824 33,265 910 880
Pulpboard.................................. 20,071 19,999 11,561 11,275 576 564
Lumber products............................ 20,890 18,228 16,618 12,251 795 672
Wood fibers................................ 22,304 21,218 11,589 10,901 520 514
Chemicals and petroleum products........... 39,326 42,523 32,743 34,113 833 802
Intermodal................................. 62,533 41,987 12,054 7,559 193 180
Sand, stone and minerals................... 32,468 24,924 13,767 10,503 424 421
Metallic ore............................... 73,699 79,129 28,100 30,262 381 382
Clay products and granules................. 21,536 22,963 20,474 22,089 951 962
Coal....................................... 28,578 23,511 11,606 10,241 406 436
Food and grain............................. 26,707 30,208 17,550 19,538 657 647
Waste and scrap............................ 18,184 18,905 11,818 12,190 650 645
Steel products............................. 14,263 12,390 10,549 8,909 740 719
Miscellaneous.............................. 2,819 3,410 2,021 2,153 717 631
------- ------- --------- ----------
Total...................................... 464,149 436,286 $ 273,793 $ 260,679 590 597
======= ======= ========= ==========
</TABLE>
Intermodal volume increased by more than 20,500 carloads or 48.9% over
1995 primarily due to market share increases in trucking company business and
the new joint rate intermodal service which the Company started with CN on April
1, 1996. Other large increases in volume and gross revenues occurred in paper,
woodpulp, lumber, sand, stone and minerals, coal and steel.
Paper and woodpulp gross revenues increased by 5.9% and 7.7%,
respectively, primarily due to an increased market share for shipments by rail
versus truck. Volume and gross revenues for lumber increased by 14.6% and 35.6%,
respectively, primarily due to increased market share and higher revenues per
carload due to longer hauls.
Volume and gross revenues for sand, stone and minerals increased by 30.3%
and 31.1%, respectively, primarily due to increased market shares in cement and
aggregates as well as an increase in sand shipments for the oil and gas
industry. Volume and gross revenues for coal increased by 21.6% and 13.3%,
respectively, primarily due to increased market share of inbound coal for
Wisconsin utilities. Volume and gross revenues for steel increased by 15.1% and
18.4%, respectively, primarily due to increased demand from a major customer of
ACRI.
Volume and gross revenues for clay products decreased by 6.2% and 7.3%,
respectively, primarily due to a slowdown in shipments of roofing granules and
coating clays for the paper industry. Metallic ore revenues declined by 7.1%
primarily due to sourcing changes and more limited use of winter rail programs
by certain steel companies. Food and grain volume and gross revenues declined by
11.6% and 10.2%, respectively, primarily due to a slowdown in starch traffic for
the paper industry and a reduction in corn shipments due to poor crop
conditions.
Operating Expenses. Operating expenses were $226.4 million for 1996, an
increase of $26.4 million, or 13.2%, compared with 1995. The Weyauwega
derailment described in Note 15 to the Consolidated Financial Statements led to
a $2.5 million increase in operating expenses in 1996 to account for the
combined deductible under the Company's two insurance policies. The 1995 amount
was impacted by the $3.0 million
20
<PAGE>
property tax assessment discussed in Note 15 to the Consolidated Financial
Statements. Excluding these items, operating expenses for 1996 were $223.9
million, compared with $196.9 million in 1995, an increase of 13.7%. Other
increases in operating expenses occurred in labor, fuel, equipment rents,
materials, joint facilities, depreciation and casualties and insurance. The
Company's operating ratio (operating expenses as a percentage of operating
revenues) was 86.4% for 1996, including the accrual for the switching charges
awarded in the BOCT arbitration and the insurance deductible related to the
Weyauwega derailment. Excluding these items in 1996 and the retroactive property
tax assessment in 1995, the Company's operating ratio was 81.3% compared to
74.8% for 1995. The following table sets forth a comparison of the Company's
operating expenses during 1996 and 1995:
<TABLE>
<CAPTION>
Operating Expense Comparison
1996 vs. 1995
1996 1995 % Change
----------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Labor expense (including payroll taxes
and fringe benefits)........................................ $ 90,144 $ 82,499 9.3%
Diesel fuel.................................................... 21,497 18,598 15.6
Materials...................................................... 23,374 20,209 15.7
Equipment rents, net........................................... 28,360 25,421 11.6
Joint facilities, net.......................................... 3,788 1,942 95.1
Depreciation................................................... 13,132 11,318 16.0
Casualty and insurance......................................... 6,862 6,167 11.3
Weyauwega insurance deductible................................. 2,500 --- <F1>
Property taxes................................................. 5,975 5,722 4.4
Retroactive property tax assessment............................ --- 3,030 <F1>
Other operating................................................ 30,756 25,062 22.7
----------- -----------
Operating expenses............................................. $ 226,388 $ 199,968 13.2%
=========== ===========
<FN>
- -------------
<F1> Not meaningful.
</FN>
</TABLE>
Labor expense for 1996 increased 9.3% compared with 1995 primarily due to
an average 4.5% increase in wage rates at the beginning of 1996 and a 5.9%
increase in the average work force to handle the increased volume. Labor expense
as a percentage of operating revenues increased to 32.7% in 1996 compared with
31.3% in 1995.
Diesel fuel expense for 1996 increased $2.9 million or 15.6% over 1995
levels, as fuel prices increased by 14.8%. As of March 5, 1997, the Company has
hedge arrangements for approximately 51% of its expected fuel consumption for
the first half of 1997, approximately 75% of its expected fuel consumption for
the balance of 1997 and approximately 25% of its expected fuel consumption for
1998. The Company enters into hedge arrangements to reduce its exposure to price
volatility and can give no assurance that the hedge arrangements will yield a
lower cost than spot market purchases.
Materials expense rose for 1996 primarily as a result of increased costs
associated with maintenance of the Company's railcar and locomotive fleet,
largely due to unusually severe weather during winter and spring months. Net
equipment rents for 1996 increased $2.9 million or 11.6% over 1995 levels
primarily due to additional equipment under operating leases as a result of
sale-leaseback transactions in 1995 and traffic congestion in the Chicago
corridor. Net joint facilities expense increased $1.8 million in 1996 primarily
due to congestion through the Chicago corridor as well as costs associated with
the CN intermodal service which started on April 1, 1996. Depreciation expense
increased primarily as a result of the additional 1996 and 1995 property
improvements. Casualty and insurance expense increased by $0.7 million or 11.3%
primarily due to derailments. Included in the increase in other operating
expenses are increases in utility expenses, business expenses, rail testing,
freight claims and general expense increases associated with the increased
volume.
21
<PAGE>
Other Income, Interest Expense and Income Taxes. Other income for 1996 was
$4.8 million, $2.3 million higher than 1995. This change was primarily
attributable to $1.6 million in incremental management fees related to the EW&S
investment.
Included in interest expense for 1996 is $2.5 million of interest related
to the BOCT arbitration award, while 1995 interest expense includes interest of
$0.7 million associated with the retroactive property tax assessment. Other
interest expense increased $0.2 million in 1996 to $9.3 million, primarily due
to increased borrowings used to fund the EW&S investment, offset by the
restructuring of debt which occurred in late 1995, resulting in a lower
effective interest rate. The income tax provision for 1996 was $11.4 million, a
decrease of $10.8 million over 1995, primarily due to the reduction of pretax
income as a result of the disputed switching charges and interest awarded in the
BOCT arbitration.
Equity in Net Income of Affiliates. The Company's results for 1996
included equity in net income of its affiliates of $32.7 million as compared to
$10.7 million for 1995.
EW&S contributed $22.8 million to the Company's equity in net income of
affiliates in 1996. EW&S's results for 1996 reflect a partial year of operation
of the TLFs (beginning February 24, 1996) and a full year of operation for Res,
a relatively small portion of EW&S's total operations. Because the acquired
companies had separate existence for only a brief period of time and purchased
many of their services from affiliates prior to the acquisition, comparisons to
earlier periods would not be meaningful. EW&S is in the process of restructuring
its operations as part of a plan to reduce operating costs, but due to
regulatory requirements the restructuring of its train operations did not
commence until October 1996. Results for 1996 reflect revenues under
transportation contracts negotiated prior to the acquisition which provided for
higher prices than are expected in subsequent periods.
The contribution from Tranz Rail to the Company's equity in net income of
affiliates in 1996 was $9.9 million, versus $10.7 million from Tranz Rail a year
ago. Tranz Rail's 1996 contribution was affected by the decline in the Company's
ownership position as a result of Tranz Rail's 1996 initial public offering.
Tranz Rail's 1996 results reflect a 1.3% increase in its operating revenues.
RESULTS OF OPERATIONS: 1995 COMPARED TO 1994
The Company's net income for 1995 was $42.5 million compared with $36.7
million for 1994, an increase of 15.8%. Both 1995 and 1994 net income were
affected by unusual charges. Net income for 1995 was reduced by a total of $4.4
million (net of income taxes), by the combination of an extraordinary item
related to the prepayment of debt and the recognition of a retroactive
assessment of personal property taxes. Net income for 1994 was reduced by $1.6
million (net of income taxes) for the effects of an extraordinary charge
associated with debt restructuring. These items are described in the Notes to
Consolidated Financial Statements. Income before these unusual items for 1995
was $46.9 million, an increase of $8.6 million or 22.5% over 1994.
Operating Revenues. Revenues for 1995 were $263.4 million compared with
$211.1 million for 1994, an increase of $52.3 million or 24.8%. Volume, as
measured by carloads handled (including as a carload each loaded trailer or
container), for 1995 was 436,286 carloads compared with 358,825 carloads in
1994, an increase of 77,461 carloads or 21.6%.
22
<PAGE>
The following table compares the Company's 1995 and 1994 revenues.
<TABLE>
<CAPTION>
Operating Revenue Comparison
1995 vs. 1994
1995 % of Gross 1994 % of Gross %
Revenues Revenues Revenues Revenues Change
-------- -------- -------- -------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Gross revenues..................................... $ 260,679 100.0% $ 216,393 100.0% 20.5%
Allowances, absorptions and adjustments............ (14,174) (5.4) (15,342) (7.1) 7.6
---------- ------ ---------- ------
Net freight revenues............................... 246,505 94.6 201,051 92.9 22.6
Switching, demurrage, passenger
and other revenues............................. 16,922 6.5 10,088 4.7 67.7
---------- ------ ---------- ------
Operating revenues................................. $ 263,427 101.1% $ 211,139 97.6% 24.8
========== ====== ========== ======
</TABLE>
Gross revenues for 1995 increased in 14 of 15 commodity groups compared
with 1994, with an overall increase of 20.5%. Carload volume increased in 12 of
15 commodity groups compared to 1994 for an overall increase of 21.6%. The
following table compares volume (in carloads), gross revenues and average
revenue per carload by commodity group for the years 1995 and 1994:
<TABLE>
<CAPTION>
Carload and Gross Revenue Comparison By Commodity Group
1995 vs. 1994
Average
Revenue
Carloads Gross Revenues Per Carload
------------------- ----------------------- ---------------
Commodity Group 1995 1994 1995 1994 1995 1994
- ------------------------------------------ -------- ------ --------- --------- ------ ------
(in thousands, except carload amounts)
<S> <C> <C> <C> <C> <C> <C>
Paper...................................... 39,085 35,872 $ 35,430 $ 29,791 $ 906 $ 830
Woodpulp................................... 37,806 36,229 33,265 28,745 880 793
Pulpboard.................................. 19,999 19,519 11,275 10,254 564 525
Lumber products............................ 18,228 17,580 12,251 11,040 672 628
Wood fibers................................ 21,218 20,636 10,901 10,264 514 497
Chemicals and petroleum products........... 42,523 34,731 34,113 28,788 802 829
Intermodal................................. 41,987 42,595 7,559 6,757 180 159
Sand, stone and minerals................... 24,924 18,931 10,503 8,500 421 449
Metallic ore............................... 79,129 34,738 30,262 14,664 382 422
Clay products and granules................. 22,963 23,730 22,089 21,459 962 904
Coal....................................... 23,511 18,472 10,241 8,442 436 457
Food and grain............................. 30,208 28,069 19,538 18,156 647 647
Waste and scrap............................ 18,905 17,137 12,190 10,590 645 618
Steel products............................. 12,390 5,127 8,909 5,386 719 1,051
Miscellaneous.............................. 3,410 5,459 2,153 3,557 631 652
-------- ------- --------- ---------
Total...................................... 436,286 358,825 $ 260,679 $ 216,393 597 603
======= ======= ========= =========
</TABLE>
The business added by ACRI's operations contributed significantly to the
Company's overall increases in volume and gross revenues. ACRI's volume
contributed over 30,000 additional carloads to the Company's totals for 1995
over 1994. Commodity groups with the largest percentage increases were metallic
ore, sand, stone and minerals, chemicals and petroleum products, woodpulp,
paper, steel products and coal. Variances in these commodity groups are
discussed below.
Volume for metallic ore increased by 44,391 carloads primarily due to
Geneva Steel movements as well as seasonal movements for steel producers during
the first quarter of 1995. Since August 1994, WCL and Southern Pacific Lines
have been handling metallic ore from the Upper Midwest to Geneva Steel's mill in
Utah. Volume in 1995 for this five-year move exceeded 30,600 carloads, compared
with approximately 10,400 carloads in 1994.
23
<PAGE>
Volume and gross revenues for sand, stone and minerals increased by 31.7%
and 23.6%, respectively, primarily due to new markets developed for Wisconsin
construction aggregates. Traffic volume and gross revenues for chemicals and
petroleum products increased by 22.4% and 18.5%, respectively, due to increased
asphalt and petroleum coke movements and increased potash shipments resulting
from market share increases.
Woodpulp and paper gross revenues increased by 15.7% and 18.9%,
respectively, primarily due to market growth and longer movements as a result of
the ACRI Acquisition. Steel volume increased by 7,263 carloads primarily as the
result of the ACRI Acquisition. Coal volume and gross revenues increased by
27.3% and 21.3%, respectively, primarily due to an increased market share.
Operating Expenses. Operating expenses were $200.0 million for 1995, an
increase of $43.5 million, or 27.8%, compared with 1994. This increase was
primarily a result of the growth from the ACRI Acquisition and the Company's
increased business. Additionally, the Company's operating income and operating
expenses were unfavorably affected by the retroactive property tax assessment
described in Note 15 to the Consolidated Financial Statements. Excluding the
assessment, WCTC's operating income for the year was $66.5 million, or 21.7%
over the $54.6 million recorded in 1994. WCTC's operating ratio (operating
expenses as a percentage of operating revenues) prior to the property tax
assessment was 74.8%, compared with the 74.1% recorded during 1994. The
following table sets forth a comparison of the Company's operating expenses
during 1995 and 1994:
<TABLE>
<CAPTION>
Operating Expense Comparison
1995 vs. 1994
1995 1994 % Change
----------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Labor expense (including payroll taxes
and fringe benefits)........................................ $ 82,499 $ 67,843 21.6%
Diesel fuel.................................................... 18,598 14,139 31.5
Materials...................................................... 20,209 14,919 35.4
Equipment rents, net........................................... 25,421 19,281 31.8
Joint facilities, net.......................................... 1,942 2,488 (21.9)
Depreciation................................................... 11,318 9,437 19.9
Casualty and insurance......................................... 6,167 4,449 38.6
Property taxes................................................. 5,722 5,634 1.6
Retroactive property tax assessment............................ 3,030 --- <F1>
Other operating................................................ 25,062 18,324 36.8
----------- -----------
Operating expenses............................................. $ 199,968 $ 156,514 27.8
=========== ===========
<FN>
- -------------
<F1> Not meaningful.
</FN>
</TABLE>
Labor expense for 1995 increased 21.6% compared with 1994 primarily due to
an average 4.5% increase in wage rates at the beginning of 1995 and a 25.1%
increase in the average work force to handle the increased volume. These factors
were offset by a decrease of $2.3 million or 45.1% from 1994 in expenses for
employee bonus plans (including related payroll taxes). Labor expense as a
percentage of operating revenues improved to 31.3% in 1995 compared with 32.1%
in 1994.
Diesel fuel expense for 1995 increased $4.5 million or 31.5% over 1994
levels, as consumption increased by 31.4%. Materials expense rose for 1995
primarily as a result of growth in the Company's railcar and locomotive fleet,
the increased trackage associated with the Company's ACRI Acquisition and
increases in base business. Net equipment rents for 1995 increased $6.1 million
or 31.8% over 1994 levels primarily due to additional equipment under operating
leases as a result of sale-leaseback transactions in 1994 and 1995 and new
leases entered into because of the Company's increased traffic, offset in part
by favorable variances in car hire earnings from such equipment. Net joint
facilities expense decreased in 1995 primarily as a result of the increased
billings to other railroads for use of the Company's trackage acquired in the
Head
24
<PAGE>
of the Lakes Acquisitions. Depreciation expense increased primarily as a result
of the additional 1995 and 1994 property improvements and the ACRI Acquisition.
Casualty and insurance expense increased by $1.7 million or 38.6% primarily due
to derailments. Included in the increase in other operating expenses are
increases in utility expenses, business expenses, advertising and other expenses
associated with the ACRI passenger service and general expense increases
associated with the increased volume.
Other Income, Interest Expense and Income Taxes. Other income for 1995 was
$2.5 million, $0.5 million lower than 1994. This change was primarily
attributable to a $1.3 million decline in rentals of non-operating equipment.
Such equipment was under per diem leases for most of 1994; however, such leases
expired during 1995 and the cars were added to the Company's operations. This
was offset by a $0.7 million reduction in the amortization expense associated
with financing costs, as the majority of the Company's financing costs were
written off as part of an extraordinary charge in the fourth quarter of 1994
associated with a debt restructuring.
The strong 1995 results of Tranz Rail reflect the Company's philosophy of
providing transportation services at competitive pricing to customers. The
Company's 30% equity investment in Tranz Rail resulted in a $10.7 million
contribution to net income for 1995, compared to the $9.6 million contribution
for 1994. Included in the Company's 1994 equity in the net income of Tranz Rail
was a nonrecurring capital gain of $2.1 million on the sale of Tranz Rail's
investment in a telecommunications company. Tranz Rail's 1995 results reflect a
6.9% increase in its operating revenues and a 1.8 percentage point improvement
in its operating ratio from 1994.
Interest expense was also adversely affected by the retroactive property
tax assessment discussed in Note 15 to the Consolidated Financial Statements.
Other interest expense decreased by $0.8 million or 8.3% for 1995 compared with
1994 primarily due to reductions in the average amount of debt outstanding. The
income tax provision for 1995 was $22.2 million, an increase of $3.1 million
over 1994 primarily due to higher pre-tax income.
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 1992 through 1996, the Company generated cash in the
amounts of $243.5 million from operations, $46.2 million from the sale of
assets, $62.2 million from increased debt and $57.6 million from equity
issuances. The Company has also received cash of $21.0 million in a return of
capital from Tranz Rail. These cash amounts were primarily used to fund $266.2
million of capital expenditures, $95.0 million of asset acquisitions and $67.3
million in investments in affiliates. At December 31, 1996, the Company had
$165.0 million of total debt outstanding, which constituted 35.6% of its total
capitalization.
The Company maintains an unsecured revolving long-term debt facility with
a syndicate of banks with a capacity of $325.0 million. This facility allows the
Company to choose from various floating rate options and is scheduled to expire
at the end of 2000. In the fourth quarter of 1996, the availability under this
facility was increased from $200.0 million to $325.0 million. At December 31,
1996, the Company's aggregate unused borrowing availability under its loan
facilities was $178.5 million. On January 27, 1997, this amount declined by
$85.0 million upon the consummation of the Duck Creek North Acquisition
discussed in Note 14 to the Consolidated Financial Statements.
25
<PAGE>
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, 1996, the
Company's NOLs for tax purposes were approximately $39.7 million, which will
begin to expire in 2004. However, 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, EW&S's borrowing arrangements contain
provisions which substantially restrict its 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 $68.8 million in 1996, a decrease of $3.8
million over 1995. Variances in capital expenditures in 1996 from 1995 consist
of a $6.9 million increase in roadway and structure improvements and a $10.6
million decrease in expenditures for equipment. The roadway and structure
increase includes expenditures for rail and tie replacements to improve the
Company's track structure to support increasing traffic levels. The Company
expects its roadway and structures capital expenditures to increase further as a
result of the Safety Compliance Agreement with the FRA, as discussed in Item 1.
"Business - Regulation". The decrease in equipment expenditures reflects the
reduction in the acquisition of freight cars and locomotives compared to 1995.
During 1996, 1995 and 1994, the Company also obtained the use of approximately
$1.5 million, $53.5 million and $25.1 million, respectively, of additional
equipment under long-term operating leases.
The following table sets forth the Company's capital expenditures for the
periods indicated:
<TABLE>
<CAPTION>
Capital Expenditures
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Roadway and structures <F1>.................. $ 56,304 $ 49,416 $ 35,347 $ 27,033 $ 17,115
Locomotive, railcar and other
transportation equipment................. 12,454 23,098 17,025 24,930 3,461
---------- --------- ---------- --------- ---------
Total <F2>............................ $ 68,758 $ 72,514 $ 52,372 $ 51,963 $ 20,576
========== ========= ========== ========= =========
<FN>
- ------------------
<F1> Includes communications and signals, bridges and other improvements.
<F2> Excludes $19.4 million, $0.5 million, $69.2 million and $6.0 million in
1995, 1994, 1993 and 1992, respectively, expended to acquire additional
rail lines and pay related transaction costs.
</FN>
</TABLE>
26
<PAGE>
The following table presents a summary of the Company's improvements for
roadway and structures for the periods indicated:
<TABLE>
<CAPTION>
Roadway and Structure Improvements
Year Ended December 31,
-------------------------------------------------------------
1996<F1> 1995<F1> 1994<F1> 1993 1992
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Track miles surfaced <F2>..................... 949 884 754 749 592
Track miles of rail installed................. 50.7 45.3 32.8 24.5 27.2
Tons of ballast applied (in thousands)........ 416.6 369.3 326.1 311.3 219.2
Ties installed (in thousands)................. 280.4 236.0 214.8 149.4 122.5
<FN>
- ------------------
<F1> 1994 includes 46 miles of surfacing, 11,500 tons of ballast and 47,800 ties
funded by Metra. 1995 includes 4 miles of surfacing, 7,200 tons of ballast
and 4,600 ties funded by Metra. 1996 includes 96 miles of surfacing, 71,100
tons of ballast, 5.8 miles of rail and 13,200 ties funded by Metra.
<F2> Surfacing is the process by which track is aligned and cross-leveled in
conjunction with the application of ballast and the installation of ties.
</FN>
</TABLE>
The Company believes that its cash flow from operations, together with
available amounts under its bank loan facilities, will allow it to meet its
liquidity and capital expenditure requirements through the expiration of those
facilities. The Company expects to extend or replace its existing loan
facilities prior to their expiration. In addition, the Company intends to
continue to pursue sales of certain excess real estate, rail and other materials
and locomotives. Although the Company will continue to pursue such sales of
excess assets, it believes that its ability to make principal and interest
payments on its outstanding indebtedness and to meet its consolidated liquidity
and capital expenditure requirements will not be dependent on such sales.
INFLATION
The Company has experienced moderately adverse effects of inflation
through increases in labor costs, fringe benefit costs, payroll taxes, diesel
fuel costs, prices of materials and other purchased items and services,
equipment and costs of capital. 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.
SEASONALITY
The Company's gross revenues from quarter to quarter during the course of
a year have not historically been subject to significant seasonal changes. The
Company's operating expenses for the first quarter historically have been
somewhat higher than for any other quarter, primarily due to adverse weather
conditions.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
PAGE
----
INDEPENDENT AUDITORS' REPORT ............................... 29
FINANCIAL STATEMENTS
Consolidated Balance Sheets .............................. 30-31
Consolidated Statements of Income ........................ 32
Consolidated Statements of Changes in Stockholders' Equity 33
Consolidated Statements of Cash Flows .................... 34
Notes to Consolidated Financial Statements ............... 35-49
28
<PAGE>
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, 1996 and 1995,
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, 1996. 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, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 27, 1997
29
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
Assets
December 31,
-------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 5,637 $ 5,303
Receivables, net of allowance for doubtful accounts of
$2,256 and $2,096 at December 31, 1996 and 1995........................ 74,118 56,737
Receivables from insurance companies...................................... 7,425 ---
Income taxes receivable................................................... 2,804 900
Note receivable........................................................... --- 13,213
Materials and supplies.................................................... 17,530 17,245
Deferred income taxes..................................................... 1,475 1,400
Other current assets...................................................... 2,641 2,821
----------- ----------
Total current assets................................................... 111,630 97,619
Investment in affiliates..................................................... 114,652 41,416
Properties:
Roadway and structures.................................................... 438,101 383,905
Equipment................................................................. 90,683 78,764
----------- ----------
Total properties....................................................... 528,784 462,669
Less accumulated depreciation............................................. (63,791) (51,174)
----------- ----------
Net properties......................................................... 464,993 411,495
----------- ----------
Total assets........................................................... $ 691,275 $ 550,530
=========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
Liabilities and Stockholders' Equity
December 31,
--------------------------------
1996 1995
---------- ---------
<S> <C> <C>
Current liabilities:
Short-term debt........................................................... $ 731 $ 13,619
Accounts payable.......................................................... 44,428 40,155
Accrued expenses.......................................................... 74,442 54,228
Accrued disputed switching charges and associated interest................ 19,271 3,500
Interest payable.......................................................... 731 746
----------- ----------
Total current liabilities.............................................. 139,603 112,248
Long-term debt............................................................... 164,303 123,721
Other liabilities............................................................ 4,028 3,693
Deferred income taxes........................................................ 73,244 60,772
Deferred income.............................................................. 10,951 12,401
----------- ----------
Total liabilities...................................................... 392,129 312,835
Stockholders' equity:
Preferred stock, par value $1.00; authorized
1,000,000 shares; none issued or outstanding........................... --- ---
Common stock, par value $.01; authorized 150,000,000
shares; issued and outstanding, 50,778,867 shares
and 50,459,418 shares in 1996 and 1995, respectively................... 508 505
Paid in capital........................................................... 108,405 104,801
Cumulative translation adjustment......................................... 14,012 4,600
Retained earnings......................................................... 176,221 127,789
----------- ----------
Total stockholders' equity............................................. 299,146 237,695
----------- ----------
Total liabilities and stockholders' equity............................. $ 691,275 $ 550,530
=========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
Year ended December 31,
-------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Freight...................................................... $ 258,041 $ 246,505 $ 201,051
Other........................................................ 17,397 16,922 10,088
Disputed switching charges................................... (13,278) --- ---
---------- ---------- ----------
Operating revenues........................................ 262,160 263,427 211,139
Expenses:
Roadway and structures....................................... 37,069 32,867 25,821
Equipment.................................................... 63,037 58,072 42,664
Transportation............................................... 93,145 74,769 60,786
General and administrative................................... 33,137 31,230 27,243
Retroactive property tax assessment.......................... --- 3,030 ---
---------- ---------- ----------
Operating expenses........................................ 226,388 199,968 156,514
---------- ---------- ----------
Income from operations.......................................... 35,772 63,459 54,625
Other income (expense):
Interest on disputed switching charges....................... (2,493) --- ---
Interest on retroactive property tax assessment.............. --- (727) ---
Other interest expense....................................... (9,315) (9,084) (9,901)
Other income................................................. 4,771 2,499 3,048
---------- ---------- ----------
Total other income (expense), net......................... (7,037) (7,312) (6,853)
---------- ---------- ----------
Income before income taxes, equity in net income
of affiliates and extraordinary items........................ 28,735 56,147 47,772
Provision for income taxes...................................... 11,378 22,170 19,068
---------- ---------- ----------
Income before equity in net income of affiliates
and extraordinary items...................................... 17,357 33,977 28,704
Equity in net income of affiliates.............................. 32,677 10,655 9,578
---------- ---------- ----------
Income before extraordinary items............................... 50,034 44,632 38,282
Extraordinary items............................................. (1,602) (2,123) (1,587)
---------- ---------- ----------
Net income...................................................... $ 48,432 $ 42,509 $ 36,695
========== ========== ==========
Earnings per common share outstanding:
Income before extraordinary items............................ $ 0.99 $ 0.89 $ 0.77
Extraordinary items.......................................... (0.03) (0.04) (0.03)
---------- ---------- ----------
Net income................................................... $ 0.96 $ 0.85 $ 0.74
========== ========== ==========
Average shares outstanding...................................... 50,647 50,242 49,787
========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
Common Stock Cumulative
-------------------- Paid in Translation Retained
Shares Amount Capital Adjustment Earnings Total
------ ------ ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ......................... 49,662 $ 497 $100,592 $ -- $ 48,585 $149,674
Common stock issued --
Employee Stock Purchase Plan .................... 119 1 670 -- -- 671
Common stock issued --
Key Management Stock Option Plan ................ 160 1 279 -- -- 280
Foreign currency translation adjustment ........... -- -- -- 3,158 -- 3,158
Net income ........................................ -- -- -- -- 36,695 36,695
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 ......................... 49,941 499 101,541 3,158 85,280 190,478
Common stock issued --
Employee Stock Purchase Plan .................... 109 2 997 -- -- 999
Common stock issued --
Key Management Stock Option Plan ................ 409 4 2,263 -- -- 2,267
Foreign currency translation adjustment ........... -- -- -- 1,442 -- 1,442
Net income ........................................ -- -- -- -- 42,509 42,509
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ......................... 50,459 505 104,801 4,600 127,789 237,695
Common stock issued --
Employee Stock Purchase Plan .................... 94 1 1,301 -- -- 1,302
Common stock issued --
Key Management Stock Option Plan ................ 226 2 2,303 -- -- 2,305
Foreign currency translation adjustment ........... -- -- -- 9,412 -- 9,412
Net income ........................................ -- -- -- -- 48,432 48,432
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ......................... 50,779 $ 508 $108,405 $ 14,012 $176,221 $299,146
======== ======== ======== ======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 48,432 $ 42,509 $ 36,695
Reconciliation of net income to net cash
provided by operating activities:
Extraordinary items....................................... 1,602 2,123 1,587
Depreciation and amortization............................. 13,591 11,830 10,506
Deferred income taxes..................................... 12,397 18,244 13,420
Equity in net income of affiliates........................ (32,677) (10,655) (9,578)
Gains on property sales................................... (1,015) (794) (1,036)
Deferred gain on sale-leaseback of equipment,
net of amortization.................................. (1,450) (1,030) 6,869
Changes in working capital:
Note receivable...................................... 13,213 (13,213) ---
Receivables from insurance companies................. (7,425) --- ---
Other receivables.................................... (17,381) (18,074) (4,046)
Materials and supplies............................... (285) (1,507) (2,892)
Other current assets, excluding
deferred income taxes............................ (2,183) (509) 369
Accrued disputed switching charges and
associated interest.............................. 15,771 3,500 ---
Other current liabilities, excluding debt............ 24,472 9,990 18,162
Other, net................................................ 335 (394) (2,327)
--------- --------- ---------
Net cash provided by operating activities.......................... 67,397 42,020 67,729
--------- --------- ---------
Cash flows from investing activities:
Property additions............................................ (68,758) (72,514) (52,372)
Property acquisitions......................................... --- (19,381) (518)
Property sales and other transactions......................... 3,143 8,730 19,835
Investments in affiliates..................................... (31,147) (16,752) (3,344)
Return of capital from affiliates............................. --- 21,045 ---
--------- --------- ---------
Net cash used for investing activities............................. (96,762) (78,872) (36,399)
--------- --------- ---------
Cash flows from financing activities:
Debt issued................................................... 60,907 109,840 42,500
Repayment of debt............................................. (33,213) (75,000) (74,155)
Debt prepayment penalty....................................... (1,602) (2,123) (316)
Issuance of common stock, net................................. 3,607 3,266 951
--------- --------- ---------
Net cash provided by (used for) financing activities............... 29,699 35,983 (31,020)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... 334 (869) 310
Cash and cash equivalents, beginning of year....................... 5,303 6,172 5,862
--------- --------- ---------
Cash and cash equivalents, end of year............................. $ 5,637 $ 5,303 $ 6,172
========= ========= =========
Supplemental cash flow information:
Cash paid (received) during the year for:
Interest ................................................. $ 10,093 $ 10,852 $ 11,212
Income taxes.............................................. (165) 6,235 3,124
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
34
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation - Stock Split
On May 16, 1996, the Company's Board of Directors announced a
three-for-one split of the Company's common stock in the form of a common
stock dividend payable on May 31, 1996 to shareholders of record as of
May 17, 1996. The stated par value of each share was not changed from
$.01. All share and per share amounts have been restated to reflect this
common stock split.
(2) Summary of Significant Accounting Policies
Nature of Business
Wisconsin Central Transportation Corporation ("WCTC") operates
approximately 3,000 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 23% equity interest
in Tranz Rail Holdings Limited ("Tranz Rail"), which operates 2,500 route
miles of railway nationwide in New Zealand, and a 31% equity interest in
English Welsh and Scottish Railway Holdings Limited ("EW&S"), whose
subsidiaries operate railways in Great Britain.
Principles of Consolidation
The consolidated financial statements presented herein include the
results of operations of WCTC and its wholly owned subsidiaries.
Wisconsin Central Transportation Corporation and its subsidiaries are
hereinafter referred to 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 haven't 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 which
approximate FIFO. As of December 31, 1996, the Company had entered into
hedging positions for approximately 34% of its expected fuel consumption
through the first half of 1997 and approximately 19% of its expected fuel
consumption for the balance of 1997. Gains and losses on such
transactions are deferred and matched to specific fuel purchases.
Investment in Affiliates/Currency Translation
The Company's 23% ownership of Tranz Rail and 31% ownership of EW&S (See
Note 13 - Investment in 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 reflected in the Company's financial statements when
earned and dividends are credited against the investment in affiliates
when received.
The translation of the applicable foreign currencies into U.S. dollars is
performed for balance sheet accounts using period end exchange rates and
for revenue and expense accounts using an average exchange rate during
the period. Gains or losses resulting from translation are included in
stockholders' equity. All dollar amounts included herein are stated in
U.S. dollars.
35
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Properties
Properties are recorded at cost. Depreciation is principally computed
using composite group straight-line rates. Average depreciable lives
utilized by the Company are summarized as follows:
Asset Class Years
----------- -----
Roadway Properties.......................................... 40
Bridges..................................................... 51
Signals and Communication Systems........................... 24
Locomotives and Freight Cars................................ 33
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 1996,
1995 and 1994, approximately $763 thousand, $870 thousand and $684
thousand, respectively, of interest was capitalized on
construction-in-progress.
Revenues
Revenues are recognized as shipments progress. Other revenues consist
primarily of demurrage, switching 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 1996 presentation.
(3) Extraordinary Items
As discussed in Note 5 - Long-term Debt, the Company prepaid $20.0
million of 10.20% fixed-rate senior term notes using a combination of
increased borrowings under its revolving credit agreement (the
"Revolver") and cash on hand in 1996. In connection therewith, the
Company paid a prepayment penalty of $2.7 million. This resulted in an
extraordinary charge of $1.6 million, net of income taxes, in the fourth
quarter of 1996.
In 1995, the Company prepaid $40.0 million of 11.625% fixed-rate senior
term notes using a combination of increased borrowings under its Revolver
and cash on hand. In connection therewith, the Company paid a prepayment
penalty of $3.5 million. This resulted in an extraordinary charge of $2.1
million, net of income taxes, in the third quarter of 1995.
36
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1994, the Company paid prepayment penalties and incurred other costs
of $316 thousand, and wrote off $2.3 million of non-cash deferred
financing costs in connection with a debt refinancing, resulting in an
extraordinary charge of $1.6 million, net of income taxes, in the fourth
quarter of 1994.
(4) Related Party Transactions
Legal Services
Oppenheimer, Wolff & Donnelly ("OW&D") provides the Company with legal
services in connection with various labor matters, litigation, regulatory
issues and corporate matters. The amounts paid OW&D by the Company for
services during 1996, 1995 and 1994 were $1.2 million, $1.0 million and
$0.7 million, respectively. A director and stockholder of WCTC was a
member of OW&D until August 1994 and presently is of counsel to OW&D.
McLachlan, Rissman & Doll ("MR&D") provides the Company with legal
services in connection with various corporate and financing matters. The
amounts paid MR&D by the Company for services during 1996, 1995 and 1994
were $61 thousand, $320 thousand and $319 thousand, respectively. One
member of MR&D is a director and stockholder of WCTC.
Consulting Services
In 1995 and 1994, the Company used the services of Railroad Financial
Corporation ("RFC") to assist in the negotiation of various purchases,
sales and leases of freight cars. In 1995 and 1994, the cost of such
services amounted to $196 thousand and $237 thousand, respectively, and
is included in the payments under the long-term operating leases RFC
helped negotiate. Two directors of the Company are stockholders and
directors of RFC.
Investment in Affiliates
Information regarding other related party transactions appears in Note 13
- Investment in Affiliates.
(5) Long-term Debt
Long-term debt consists of the following:
December 31,
------------------------
1996 1995
------- ------
(in thousands)
10.20% senior term notes .............. $ -- $ 20,000
WCTC revolving credit agreement ....... 146,500 94,787
Other ................................. 17,803 8,934
-------- --------
Total long-term debt .................. $164,303 $123,721
======== ========
The Company maintains an unsecured Revolver with a syndicate of banks
with a capacity of $325.0 million, increased in 1996 from $200.0 million.
The Revolver allows the Company to choose various floating rate options
and is scheduled to expire at the end of 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 stock 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, 1996 was 5.9%.
37
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other long-term debt consists of $8.8 million in borrowings under a
separate Canadian dollar revolving credit agreement held by ACRI (the
"ACRI Revolver") plus $9.0 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 $8.8 million with terms,
covenants and margins similar to the WCTC Revolver.
In 1996, the Company prepaid $20.0 million in 10.20% fixed-rate senior
term notes outstanding using a combination of increased borrowings under
the Revolver and cash on hand. In connection with the note prepayment,
the Company paid a prepayment penalty of $2.7 million (See Note 3 -
Extraordinary Items).
In December 1995, the Company borrowed $13.2 million under its Revolver
to specifically fund the note receivable described in Note 13 -
Investment in Affiliates. This borrowing, which was repaid in the first
quarter of 1996, was included with short-term debt in the consolidated
balance sheet as of December 31, 1995.
Maturities of debt at December 31, 1996 for each of the years 1997
through 2001 and thereafter were as follows:
Year Amount
---- ------
(in thousands)
1997............................................... $ 731
1998............................................... 731
1999............................................... 731
2000............................................... 155,987
2001............................................... 731
Thereafter......................................... 6,123
------------
Total.............................................. $ 165,034
============
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.
(6) Fair Value of Financial Instruments
At December 31, 1996, 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, 1996.
(7) 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 temporary
differences between the financial statement carrying amount and the tax
bases of assets and liabilities. 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. However, when dividends are received, applicable U.S. income
taxes are accrued.
38
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The provision for income taxes consists of the following:
Year ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Current:
Federal ........... $ (1,148) $ 3,115 $ 5,539
State ............. 129 811 109
-------- -------- --------
Total current (1,019) 3,926 5,648
-------- -------- --------
Deferred:
Federal ........... 10,746 15,494 11,169
State ............. 1,651 2,750 2,251
-------- -------- --------
Total deferred 12,397 18,244 13,420
-------- -------- --------
Total ................. $ 11,378 $ 22,170 $ 19,068
======== ======== ========
The components of deferred income tax expense were as follows:
Year ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Depreciation and amortization .. $ 17,077 $ 18,749 $ 15,284
Sale-leaseback transactions .... 613 (731) (2,620)
Alternative minimum tax ........ 2,234 (1,643) (5,816)
Net operating loss carryforwards (7,534) 1,707 5,587
Provisions for bad debts,
casualties, claims and other
expenses ................... 7 162 985
-------- -------- --------
Total .......................... $ 12,397 $ 18,244 $ 13,420
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities (assets) are presented below:
December 31,
-----------------
1996 1995
---- ----
(in thousands)
Deferred tax liabilities principally due to
differences in depreciation on properties .. $ 103,195 $ 86,118
Deferred tax assets:
Net operating loss carryforwards ........... (15,195) (7,661)
Alternative minimum tax credit carryforwards (8,869) (11,103)
Sale-leaseback transactions ................ (5,378) (5,991)
Accruals and allowances for bad debts,
casualties, claims and other
expenses .............................. (1,984) (1,991)
--------- ---------
Total deferred tax assets ............. (31,426) (26,746)
--------- ---------
Net deferred tax liability ............ $ 71,769 $ 59,372
========= =========
39
<PAGE>
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:
December 31,
--------------------
1996 1995
---- ----
(in thousands)
Non-current deferred tax liability........ $ 73,244 $ 60,772
Current deferred tax asset................ (1,475) (1,400)
---------- ----------
Net deferred tax liability............ $ 71,769 $ 59,372
========== ==========
The reconciliation of the statutory tax rate to the effective income tax
rate is as follows:
Year ended December 31,
----------------------
1996 1995 1994
---- ---- ----
Statutory rate ................... 35.0% 35.0% 35.0%
State income taxes, net of federal
tax benefit ................... 4.0 4.1 4.3
Other ............................ 0.6 0.4 0.6
---- ---- ----
Effective rate ................... 39.6% 39.5% 39.9%
==== ==== ====
As a result of temporary differences, the Company had net operating loss
carryforwards ("NOLs") at December 31, 1996 for income tax purposes
totaling $39.7 million, which will begin to expire in 2004. The Company
expects to be able to utilize these NOLs to offset future tax
liabilities.
(8) Benefit Plans
The Company has profit-based incentive plans for all employees. Amounts
accrued under these plans were based primarily upon targeted operating
results set at the beginning of the plan year. During 1996, 1995 and
1994, $3.3 million, $3.3 million and $6.3 million, respectively, were
accrued under provisions of these incentive plans.
In 1991, the Company adopted a Key Management Stock Option Plan ("Key
Option Plan") under which certain key management employees may be granted
options to purchase shares of the Company's common stock. Options may
have a duration of up to 10 years and an exercise price not less than the
fair market value of the common stock at the time of the grant. The
exercise prices for options granted through 1996 under the Key Option
Plan were equal to fair market value as of the grant date. Information
regarding the Key Option Plan is summarized below:
Average Number
Option of
Price Shares
----- ------
Options outstanding at December 31, 1993 $ 2.84 512,280
Granted in 1994 .................... 13.42 1,140,000
Exercised in 1994 .................. 2.80 (176,085)
--------
Options outstanding at December 31, 1994 11.02 1,476,195
Exercised in 1995 .................. 6.22 (436,083)
--------
Options outstanding at December 31, 1995 13.02 1,040,112
Granted in 1996 .................... 29.68 150,000
Exercised in 1996 .................. 11.69 (238,412)
--------
Options outstanding at December 31, 1996 15.98 951,700
========
Options available for grant at
December 31, 1996 ................... -- 79,560
========
Total options exercised through
December 31, 1996 ................... $ 6.86 888,740
========
40
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Of the options outstanding at December 31, 1996 under the Key Option
Plan, 763,480 were vested and fully exercisable, 68,220 will vest in
1997, 30,000 will vest in 1998 and 90,000 will vest in 1999. At December
31, 1996, the range of exercise prices and the weighted-average remaining
contractual life of outstanding options under the Key Option Plan was
$13.42 to $31.50 and 7.9 years, respectively.
In 1991, the Company also 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:
Average Number
Option of
Price Shares
----- ------
Shares authorized for purchase .......... 2,625,000
Purchased through December 31, 1993.. $ 3.08 (338,142)
Purchased in 1994 ................... 5.67 (118,998)
Purchased in 1995 ................... 9.17 (108,924)
Purchased in 1996 ................... 13.88 (93,824)
----------
Total shares available to be purchased... 1,965,112
==========
At December 31, 1996, participating employees have accumulated $1.2
million under the Purchase Plans through payroll deductions that can be
used to purchase shares of common stock in 1997.
In 1994, the Company adopted a Director Stock Option Plan ("Director
Plan") which provides for the automatic annual grant to members of the
Board of Directors of options to purchase a specified number of shares of
common stock at a price equal to the fair market value of those shares as
of the date of the grant. Options to acquire up to an aggregate of
900,000 shares of common stock may be granted under the Director Plan, of
which 138,000 have been granted and were fully vested at December 31,
1996. Options granted under the Director Plan vest and become fully
exercisable after six months from the date of the grant. Information
regarding the Director Plan is summarized below:
Average Number
Option of
Price Shares
----- ------
Options outstanding at December 31, 1993......... $ --- ---
Granted in 1994.............................. 12.00 60,000
--------
Options outstanding at December 31, 1994......... 12.00 60,000
Granted in 1995.............................. 17.09 42,000
--------
Options outstanding at December 31, 1995......... 14.10 102,000
Granted in 1996.............................. 30.84 36,000
--------
Options outstanding at December 31, 1996......... 18.46 138,000
========
Options available for grant at
December 31, 1996.............................. --- 762,000
========
At December 31, 1996, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options under
the Director Plan was $12.00 to $30.84 and 6.6 years, respectively.
41
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In October 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards 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:
1996 1995
--------- ---------
Net income - as reported (in thousands)... $ 48,432 $ 42,509
Net income - pro forma (in thousands) .... 47,044 42,249
Earnings per common share - as reported... 0.96 0.85
Earnings per common share - pro forma .... 0.93 0.84
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 36% for options granted in 1996; risk-free interest
rate ranging from 5.4% to 6.7% based upon the date of the option grant;
and expected lives of four years. Pro forma net income reflects only
options granted in 1996 and 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.
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 1996 and 1995,
such matching contributions by the Company amounted to $882 thousand and
$552 thousand, respectively.
(9) Sale-Leaseback Transactions
During 1995 and 1994, the Company entered into sale-leaseback
transactions predominantly relating to equipment with third-party
financing institutions which resulted in net gains of $110 thousand and
$7.5 million, respectively. For accounting purposes these amounts, as
well as similar deferred gains from prior years, have been reflected as
deferred income on the consolidated balance sheets. The gains on
sale-leaseback transactions are amortized over the terms of the related
operating leases.
42
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table indicates the future amortization of these deferred
gains on sale-leaseback transactions:
Year Amount
---- ------
(in thousands)
1997............................................... $ 1,121
1998............................................... 1,121
1999............................................... 1,121
2000............................................... 1,121
2001............................................... 1,121
Thereafter......................................... 5,346
---------
Total.............................................. $ 10,951
=========
(10) Leases
Total operating lease expense (predominantly relating to equipment)
amounted to $30.4 million, $28.1 million and $20.8 million in 1996, 1995
and 1994, respectively.
Minimum future lease payments under operating leases that have remaining
noncancelable lease terms in excess of one year are as follows:
Year Amount
---- ------
(in thousands)
1997............................................... $ 27,423
1998............................................... 26,623
1999............................................... 25,293
2000............................................... 24,095
2001............................................... 24,275
Thereafter......................................... 196,256
------------
Total.............................................. $ 323,965
============
(11) Other Income
The components of other income include the following:
Year ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Management fees from affiliates...... $ 2,285 $ 700 $ 700
Rental income........................ 2,039 1,323 1,241
Gains on property sales.............. 1,015 794 1,036
Financing and organization
cost amortization................ (459) (512) (1,069)
Rentals of non-operating equipment... --- 237 1,501
Other, net........................... (109) (43) (361)
--------- --------- ---------
Total............................ $ 4,771 $ 2,499 $ 3,048
========= ========= =========
Information regarding management fees from affiliates is discussed in
Note 13 - Investment in Affiliates.
43
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Significant Customers
In 1996, 1995 and 1994, freight transportation services provided by the
Company to two customers accounted for 14.6%, 14.4% and 15.0%,
respectively, of the Company's gross freight revenues.
(13) Investment in Affiliates
Tranz Rail Holdings Limited
On July 20, 1993, a consortium of investors, including WCI, entered into
a purchase agreement with the government of New Zealand to acquire all
the stock of Tranz Rail, a 2,500 route mile railroad which provides the
only rail service in New Zealand. WCI's equity investment approximated
$16.0 million for approximately 27% of the common stock of Tranz Rail. In
1994 and 1995, the Company paid $3.3 million and $2.9 million,
respectively, to exercise options that increased its equity ownership
position to approximately 30%.
On June 26, 1995, Tranz Rail returned capital to shareholders through a
pro rata repurchase of shares. WCTC's share of the capital returned was
$21.0 million which the Company used to retire debt. The capital returned
was derived primarily from proceeds of the 1994 sale of Tranz Rail's
investment in a telecommunications company.
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. As a result
of this offering, the Company's ownership position declined to 23% from
30%. As of December 31, 1996, the Company owned the equivalent of
9,561,639 American Depository Shares ("ADS") of Tranz Rail with a quoted
closing price on NASDAQ of $17.69 per ADS. Each ADS represents three
issued and fully paid ordinary shares of Tranz Rail. Total market value
of the Company's holdings in Tranz Rail as of December 31, 1996 was
approximately $169.1 million.
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 two 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 the two Company executives who
are paid directly by Tranz Rail) were $0.7 million for each of the years
in the three-year period ended December 31, 1996. The Management Services
Agreement has a current term ending December 31, 1997, subject to
extensions by agreement on a year to year basis.
Six of the directors of the Company are directors of, and hold shares or
options (or both) of Tranz Rail.
44
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
English Welsh & Scottish Railway Holdings Limited
In the fourth quarter of 1995, a consortium of investors, including the
Company and an affiliate of Berkshire Partners, an American private
equity firm ("Berkshire") of which one of the Company's directors is an
executive office, director and beneficial owner of shares, established a
holding company, EW&S, to acquire various rail assets of British Rail
from the British government as a part of its privatization of British
Rail. On December 9, 1995, EW&S acquired Rail express systems Limited
("Res"). The principal activity of Res is the carriage of letters for the
Royal Mail, a division of the British Post Office. On February 24, 1996,
EW&S acquired British Rail's three trainload freight companies ("TLFs"),
Loadhaul Limited, Mainline Freight Limited and Transrail Freight Limited,
the principal activity of which is the hauling of bulk commodities such
as coal, iron, steel and aggregates throughout Great Britain.
The Company invested approximately $45 million for an approximate 32%
ownership interest in EW&S. Of this amount, WCI had invested
approximately $13.2 million through December 31, 1995 in connection with
EW&S's acquisition of Res. During 1996, EW&S sold shares to certain of
its officers and directors (including certain officers and directors of
the Company), with the effect of reducing the Company's equity interest
to approximately 31% as of December 31, 1996. The Company has been
granted performance-based options to acquire additional shares in EW&S to
compensate it for its leadership of the consortium. In addition, EW&S has
issued options to certain of its officers and directors, and warrants to
the investment banking firm that facilitated the acquisition of EW&S.
Assuming that all options and warrants are exercised, the Company's
equity interest in EW&S will be approximately 34%.
In connection with the EW&S investment, the Company loaned $13.2 million
to Berkshire in December 1995 to temporarily finance its portion of the
purchase price. This loan earned interest at approximately 9.0% and was
repaid on February 22, 1996, prior to the consummation of the purchase of
the three TLFs.
The Company is party to a Management Services Agreement with EW&S under
which the Company provides management services to EW&S, including
principally making available the services of three Company executives for
full time employment by EW&S, training of EW&S personnel by the Company
and making available the expertise and consulting services of the
President of the Company. Amounts earned by the Company from EW&S for
services under the Management Services Agreement (not including the
services of the three Company executives who are paid directly by EW&S)
were $1.6 million in 1996. The Management Services Agreement has a
current term ending February 23, 1998, subject to extensions by agreement
on a year to year basis.
Four of the directors of the Company are directors of, and hold shares
and options of, EW&S.
45
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summary Financial Information
The results of operations and financial position of Tranz Rail and EW&S
prepared in conformity with U.S. generally accepted accounting principles
are summarized below for the year ended December 31, 1996 (except for the
TLFs which are for the period from February 24, 1996 through December 31,
1996):
Tranz Rail EW&S
---------- ----
(in thousands)
Condensed Income Statement Information:
Operating revenues................... $ 395,690 $ 742,440
Operating income..................... 76,279 135,051
Net income........................... 37,384 71,810
Condensed Balance Sheet Information:
Current assets....................... $ 98,076 $ 272,639
Total assets......................... 455,475 1,012,794
Current liabilities.................. 58,506 242,459
Total liabilities.................... 182,303 772,499
Total equity......................... 273,172 240,295
EW&S's borrowing arrangements contain provisions which substantially
restrict its 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 following table presents the Company's investment in affiliates at
December 31, 1996 and its equity in net income of affiliates for the year
ended December 31, 1996 (except for the TLFs which are for the period
from February 24, 1996 through December 31, 1996):
Tranz Rail EW&S
---------- ----
(in thousands)
Equity in net income of affiliates...... $ 9,850 $ 22,827
Investment in affiliates................ $ 39,991 $ 74,661
The Company's retained earnings included undistributed earnings of
affiliates of $54.4 million and $21.7 million at December 31, 1996 and
1995, respectively.
(14) Acquisitions
Algoma Central
On January 31, 1995, the Company consummated the acquisition of the
railway assets of Algoma Central Corporation ("ACC") which are operated
by ACRI. ACRI consists of approximately 322 route miles of track between
Sault Ste. Marie, Ontario and Hearst, Ontario. The rail lines were
purchased for approximately $8.2 million, financed in part by the
Province of Ontario, through the Northern Ontario Heritage Fund
Corporation ("Heritage Fund"). The Heritage Fund's financing included a
$0.7 million non-voting preferred stock investment in ACRI. The Heritage
Fund is not entitled to any dividends for at least 10 years. In related
transactions, the Company acquired 879 railcars and 23 locomotives from
ACC for approximately $11.1 million, and ACC's existing communications
system, maintenance and shop equipment, inventory and miscellaneous
assets for $5.0 million. In connection with this acquisition, the Company
incurred $0.9 million and $0.6 million of acquisition and organization
costs, respectively. The pro forma effects on the Company's reported
results assuming the ACRI acquisition was consummated at the beginning of
1995 are not material.
46
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Duck Creek North
On January 27, 1997, SSM completed the purchase of 207 route miles of
railroad track and trackage rights in Wisconsin and the Upper Peninsula
of Michigan from the Union Pacific Railroad Company. The rail lines,
commonly known as the "Duck Creek North" lines, include contiguous
property and associated facilities from North Green Bay, Wisconsin to
Ishpeming, Michigan; from Powers to Antoine, Michigan; from Quinnesec,
Michigan to Niagara, Wisconsin; and from Cascade to Palmer, Michigan.
Freight shipments over the lines consist of materials for the paper
industry and high volumes of iron ore used in steel-making which are
shipped from the Marquette ore range to Escanaba, Michigan for
transshipment to vessels. SSM will continue such operations in the
future. The purchase price of the rail lines, subject to certain final
adjustments, was approximately $85.0 million, which was funded through
borrowings under the Revolver.
(15) Contingencies
Weyauwega Derailment
On March 4, 1996, the Company 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
$27.3 million. The Company believes that its insurance policies will
cover substantially all these costs, in excess of the $2.5 million of
deductibles, due to the derailment. Through December 31, 1996, the
Company had funded $24.8 million in costs incurred as a result of this
derailment and received $17.4 million in reimbursements from insurance
companies. The Company's consolidated balance sheet includes an insurance
receivable of $7.4 million as of December 31, 1996. 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. A complaint was filed against the Company on March
26, 1996 by nine individuals seeking to represent the class of persons
who suffered damages as a result of this derailment. The complaint seeks
punitive and treble damages. Any punitive damages and treble damages may
not be covered by the Company's insurance. The Company does not believe
there is any basis for an award of such damages. All potential claimants
were notified, and thirteen families and two businesses joined the
lawsuit. Discovery is ongoing. In addition, one business has filed a
separate suit for damages in the District Court of Waupaca County. 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.
BOCT Complaint
On June 4, 1993, WCL was served with a complaint filed by the Baltimore
and 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 Chicago from
October 24, 1995 to November 9, 1995. On June 10, 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.
47
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Based upon the arbitration panel's ruling, the Company recorded pretax
provisions of $15.8 million in 1996, representing amounts awarded in
excess of previously recorded accruals. Additional interest through
December 31, 1996 of $417 thousand has been accrued on the unpaid award
amount and is included in other interest expense in the 1996 consolidated
statement of income.
The litigation between BOCT and the Company continues. The U.S. District
Court has affirmed the arbitration award and also authorized WCL to
pursue the defenses that were not subject to arbitration, including
claims to be brought before the Surface Transportation Board.
Waukesha
On April 2, 1996, WCL received a request for documents from the U.S.
Department of Justice ("DOJ") requesting documents relating to the
demolition of a foundry and roundhouse on the Company'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 USEPA held a conference with WCL on
April 11, 1994 to discuss the notice prior to a determination of any
enforcement action to be taken under section 113 of the Act. If the DOJ
or the USEPA determines that an action should be brought against the
Company, the Company will vigorously defend itself. If it were to be
determined that WCL violated the Asbestos NESHAP, WCL could be subject to
criminal prosecution with fines of up to $500 thousand per violation or
civil enforcement with fines of up to $25 thousand per day for each
violation.
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. WCTC and the other railroads
involved are pursuing the remaining issues in the case and intend to
appeal 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.
The railroads, including WCL and FV&W, have also filed suits in state
courts which allege discrimination in the assessment of taxes. WCL and
FV&W have separately filed suit challenging other WDR tax valuation
practices with respect to their 1994, 1995 and 1996 tax bills.
Other
The Company is involved in various other legal actions, including
personal injury, property damage and environmental clean up matters. The
Company has also been identified as a potentially responsible party 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.
48
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Unaudited Quarterly Financial Data
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1996:
Operating revenues......... $ 65,028 $ 56,204 <F1> $ 71,825 $ 69,103 $ 262,160
Operating income........... 4,415<F2> 1,570 <F1> 16,922 12,865 35,772
Income before
extraordinary item....... 8,066<F2> 7,528 <F1> 17,071 17,369 50,034
Net income................. 8,066<F2> 7,528 <F1> 17,071 15,767<F3> 48,432
Earnings per common
share.................... 0.16<F2> 0.15 <F1> 0.34 0.31<F3> 0.96
1995:
Operating revenues......... $ 62,897 $ 64,254 $ 69,890 $ 66,386 $ 263,427
Operating income........... 13,917 16,225 17,845 15,472 63,459
Income before
extraordinary item....... 9,865 12,165 11,036 11,566 44,632
Net income................. 9,865 12,165 8,913 <F4> 11,566 42,509
Earnings per common
share.................... 0.20 0.24 0.18 <F4> 0.23 0.85
<FN>
- ----------------
<F1> Includes a reduction of operating revenues of $13,278 related to
the June 10, 1996 arbitration ruling in favor of BOCT for disputed
switching charges. Interest charges of $2,493 on the disputed
charges were also recognized at this time. Combined, the effect of
the disputed switching charges and related interest reduced net
income by $9,526, or $0.19 per common share in the second quarter
(See Note 15 - Contingencies).
<F2> Includes a pretax provision of $2,500, or a reduction of net
income of $1,510 or $0.03 per common share, to cover insurance
policy deductibles related to the March 4, 1996 derailment at
Weyauwega, Wisconsin (See Note 15 - Contingencies).
<F3> Includes an extraordinary charge of $1,602, or $0.03 per common
share (net of income taxes), in connection with the Company's
early repayment of debt (See Note 3 - Extraordinary Items).
<F4> Includes an extraordinary charge of $2,123 or $0.04 per common
share (net of income taxes) in connection with the Company's early
repayment of debt (See Note 3 - Extraordinary Items).
Additionally, operating income is net of a $3,030 retroactive
property tax assessment for the years 1990 - 1993 from the
Wisconsin Department of Revenue. Interest of $727 on the
assessment was also recognized. Combined, the effect of the
property tax assessment and related interest reduced net income by
$2,273 (See Note 15 - Contingencies).
</FN>
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's proxy statement to be filed
pursuant to Regulation 14A.
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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's proxy statement to be filed
pursuant to Regulation 14A.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this Report:
Location
--------
(a) (1) Financial Statements
Consolidated Balance Sheets................................. 30-31
Consolidated Statements of Income........................... 32
Consolidated Statements of Changes in Stockholders' Equity.. 33
Consolidated Statements of Cash Flows....................... 34
Notes to Consolidated Financial Statements.................. 35-49
(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,
1996.
The Company filed no reports on Form 8-K during the
quarter ended December 31, 1996.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, President
and Chief Executive Officer
Date: March 21, 1997
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.
Signature Title
By: /s/ Edward A. Burkhardt President, Chief Executive Officer
(Edward A. Burkhardt) and Director
(Principal Executive Officer)
Date: March 21, 1997
By: /s/ Thomas F. Power, Jr. Executive Vice President,
(Thomas F. Power, Jr.) Chief Financial Officer and Director
(Principal Financial Officer)
Date: March 21, 1997
By: /s/ Walter C. Kelly Vice President, Finance
(Walter C. Kelly) (Principal Accounting Officer)
Date: March 21, 1997
By: /s/ Thomas W. Rissman Director
(Thomas W. Rissman)
Date: March 21, 1997
By: /s/ Carl Ferenbach Director
(Carl Ferenbach)
Date: March 21, 1997
52
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
3 ARTICLES OF INCORPORATION AND BY-LAWS
3(a) 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(b) By-laws of the registrant, as amended to date (Incorporated
by reference to Exhibit 3(a) to registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991)
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4(a) 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(b) and (c) for subsequent amendment)
4(b) Amendment No. 1, dated as of October 23, 1995, to the Credit
Agreement filed as Exhibit 4(a) (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(c) Second Amendment, dated as of December 17, 1996, to the
Credit Agreement filed as Exhibit 4(a)
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 MATERIAL CONTRACTS
10(a) 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 4.1 to registrant's
Registration Statement on Form S-8 (Registration No.
33-84088) filed under the Securities Act on September 19,
1994)
10(b) 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(c) 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(d) 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 (e) for subsequent amendment)
10(e) Amendment No. 1, dated May 20, 1993, to Key Management Stock
Option Plan (amending Key Management Stock Option Plan filed
as Exhibit 10(d)) (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(f) 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(t) to registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
53
<PAGE>
Exhibit No. Description
----------- -----------
10(g) 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(h) for subsequent
amendment)
10(h) Amendment No. 2 to Stockholders Agreement dated as of April
1, 1992 (amending Stockholders Agreement filed as Exhibit
10(g)) (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(i) Asset Purchase Agreement dated as of November 30, 1996
between Union Pacific Railroad Company and Sault Ste. Marie
Bridge Company
11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
11 Statement re Computation of per Share Earnings
21 SUBSIDIARIES OF THE REGISTRANT
21 Subsidiaries of Wisconsin Central Transportation Corporation
(Incorporated by reference to Exhibit 21 to registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995)
23 CONSENTS OF EXPERTS AND COUNSEL
23 Consent of KPMG Peat Marwick LLP
27 FINANCIAL DATA SCHEDULE
27 Financial Data Schedule
54
Exhibit 4(c)
SECOND AMENDMENT
Dated as of December 17, 1996
THIS SECOND AMENDMENT, dated as of December 17, 1996 (this "Second
Amendment"), amends the Credit Agreement, dated as of November 21, 1994 as
previously amended by the First Amendment dated October 23, 1995 (the "Credit
Agreement"), among WISCONSIN CENTRAL TRANSPORTATION CORPORATION (the "Company"),
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent, BANK OF
AMERICA ILLINOIS, as Issuing Bank, and the other financial institutions party
thereto. Capitalized terms used in this Second Amendment and not otherwise
defined herein have the meanings ascribed to such terms in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Credit Agreement
which provides for the Banks to make extensions of credit to the Company from
time to time; and
WHEREAS, the parties hereto desire to amend the Credit
Agreement as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1 AMENDMENTS. Effective on (and subject to the occurrence of)
the Second Amendment Effective Date (as hereinafter defined), the Credit
Agreement shall be amended as follows:
1.1 Applicable Fee Percentage. The table set forth in the
definition of "Applicable Fee Percentage" in Section 1.1 of the
Credit Agreement is amended to read as follows:
Applicable Fee Applicable Fee Applicable Fee
Percentage for Percentage for Percentage for
Pricing Level Commitment Fees Facility Fees L/C Fees
- ---------------------------------------------------------------------
Level I 0.0500% 0.0750% 0.1875%
- ---------------------------------------------------------------------
Level II 0.0500% 0.0875% 0.2250%
- ---------------------------------------------------------------------
Level III 0.0575% 0.1250% 0.3000%
- ---------------------------------------------------------------------
Level IV 0.0900% 0.1750% 0.4500%.
<PAGE>
1.2 Applicable Margin. The table set forth in the
definition of "Applicable Margin" in Section 1.1 of the Credit
Agreement is amended to read as follows:
Applicable Margin Applicable Margin
for Offshore for
Pricing Level Rate Loans CD Rate Loans
- --------------------------------------------------------------------
Level I 0.2000% 0.3250%
- --------------------------------------------------------------------
Level II 0.2550% 0.3800%
- --------------------------------------------------------------------
Level III 0.3000% 0.4250%
- --------------------------------------------------------------------
Level IV 0.4550% 0.5800%.
1.3 Interest Period. Clause (iii) of the proviso to the
definition of "Interest Period" in Section 1.1 of the Credit
Agreement is amended by deleting "October 31, 1999" and inserting
in its place "October 31, 2000".
1.4 Investment/Restricted Payment Cap. The definition of
"Investment/Restricted Payment Cap" in Section 1.1 of the Credit
Agreement is deleted.
1.5 Majority Banks. The definition of "Majority Banks" in
Section 1.1 of the Credit Agreement is amended to read as
follows:
"Majority Banks" means, at all times, (a) at any time prior to
the Revolving Termination Date Banks then holding at least 51% of the
Commitments, or after the Revolving Termination Date if no Loans are
outstanding, Banks holding at least 51% of the Commitments on the
Revolving Termination Date, and (b) otherwise, Banks then holding at
least 51% of the Loans.
1.6 Permitted Receivables Securitization. Section 1.1 of
the Credit Agreement is amended by inserting the following
definition of Permitted Receivables Securitization in proper
alphabetical order:
"Permitted Receivables Securitization" means any trade
receivables securitization provided (i) no Default or Event of Default
exists at the time of any disposition or creation of any Lien pursuant
to any such transaction, or would result therefrom, (ii) the amount by
which the outstanding balance of the pool of receivables transferred or
on which a Lien has been granted exceeds $70,000,000 at any time would
be permitted to be incurred as Funded Debt without breaching
-2-
<PAGE>
Section 8.14 and at any time any such excess exists the amount of such
excess is treated as Funded Debt for purposes of calculating the
Leverage Ratio, and (iii) any excess servicing spread or cash
collateral associated with such trade receivables securitization is
deducted from the net worth of the Company and the Restricted
Subsidiaries for the purpose of calculating all financial tests under
this Agreement.
1.7 Revolving Termination Date. Clause (a) of the
definition of "Revolving Termination Date" is amended by deleting
"October 31, 1999" and inserting in its place "October 31, 2000".
1.8 Accounting Principles. Subsection 1.3(a) of the Credit
Agreement is amended to read as follows:
(a) Unless the context otherwise clearly requires and except
as set forth in the definition of Permitted Receivables Securitization,
all accounting terms not expressly defined herein shall be construed,
and all financial computations required under this Agreement shall be
made, in accordance with GAAP consistently applied; provided that if
any change in GAAP from that applied in the preparation of the
financial statements referred to in Section 6.11 is occasioned by the
promulgation of rules, regulations, pronouncements and opinions by or
required by the Accounting Principle Board, Financial Accounting
Standards Board or the American Institute of Certified Public
Accountants, the initial announcement of which is made after the
Closing Date, and results in a change in the method of regulation or
calculation of the covenants set forth in Section 8.13, 8.14 or 8.15,
the parties hereto agree to enter into good faith negotiations in order
to amend such provisions so as to reflect such changes with the desired
result that the criteria for evaluating the Company's financial
condition shall be the same after such changes as if such changes had
not been made; and provided, further, that until such time as the
parties hereto agree upon such amendments, such financial covenants,
standards and terms shall be construed and calculated as though such
change had not taken place.
1.9 Revised Commitments. Schedule 2.1 of the Credit
Agreement is amended to read as set forth in Exhibit A hereto.
1.10 Interest Periods for Committed Loans. Section 2.3(d)
of the Credit Agreement is amended to read as follows:
(d) After giving effect to any Committed Borrowing, there may
not be more than nine different Interest Periods in effect in respect
of all Committed Loans and, if the
-3-
<PAGE>
Agent is then acting as the Bid Agent, Bid Loans together then
outstanding.
1.11 Interest Periods for Bid Loans. Clause (b) of the
second proviso to Section 2.5 of the Credit Agreement shall be
amended to read as follows:
(b) at any time the Agent is acting as the Bid Agent, the
number of Interest Periods for Bid Loans then outstanding plus the
number of Interest Periods for Committed Loans together then
outstanding exceeds nine.
1.12 Senior Debt Rating. Article VII of the Credit
Agreement is amended by inserting the following Section 7.10
following Section 7.9 thereof:
Section 7.10 Maintenance of Senior Debt Rating. On
an annual basis and within 45 days after receipt, the
Company will provide evidence of its current senior debt
rating by Moody's or S&P as documented by said rating agency
to the Agent and all Banks; it being agreed that any rating
of a rating agency for which the Company does not so provide
such evidence, and for which the Agent and the Banks do not
otherwise have evidence of a current rating of the Company's
senior debt, shall not be considered in determining the
applicable Pricing Level (in which case the Pricing Level
shall be determined based on the rating of the rating agency
for which the Company did provide such evidence or for which
the Agent and the Banks do have such evidence and/or the
Leverage Ratio, as provided in this Agreement) and that
there shall be no other consequence of the failure of the
Company to comply with the requirements of this sentence.
Further, the Company shall promptly notify the Agent of any
change in or withdrawal of the Company's senior debt rating
by Moody's or S&P when the Company becomes aware of any such
change or withdrawal.
1.13 Liens on Acquired Property. Subsection 8.1(j) of the
Credit Agreement is amended to read as follows:
(j) security interests on any property acquired or held by the
Company or any Restricted Subsidiary in the ordinary course of
business, securing Indebtedness incurred or assumed for the purpose of
financing all or any part of the cost of acquiring such property;
provided that (i) any such Lien attaches to such property concurrently
with or within 180 days after the acquisition thereof, (ii) such Lien
attaches solely to the property so acquired in such transaction, and
(iii) the principal amount of the debt secured thereby does not exceed
100% of the cost of such property;
-4-
<PAGE>
1.14 Liens on Receivables. Subsection 8.1(v) of the Credit Agreement is
amended by deleting "and" at the end thereof. Subsection 8.1(w) of the Credit
Agreement is deleted and the following subsection 8.1(w) and subsection 8.1(y)
are inserted in its place:
(w) Liens on trade receivables that are the
subject of a Permitted Receivables Securitization
incurred in connection with such Permitted Receivables
Securitization; and
(y) other Liens securing obligations not in
excess of $1,000,000 in principal amount at any one
time outstanding in the aggregate.
1.15 Disposition of Assets. Subsection 8.2(d) of the Credit Agreement
is amended by deleting "and" at the end thereof. Subsection 8.2(e) of the Credit
Agreement is deleted and the following subsection 8.2(e) and subsection 8.2(f)
are inserted in its place:
(e) dispositions of trade receivables pursuant to
Permitted Receivables Securitizations; and
(f) dispositions of real and personal property not otherwise
permitted hereunder (other than any trade receivables securitization or
other dispositions of trade receivables, the permissibility of which
shall be considered under subsection 8.2(e)) which are made for fair
market value; provided that (i) at the time of any disposition, a
Default or an Event of Default shall not exist or result from such
disposition, (ii) the aggregate sales price from such disposition shall
be paid in cash, and (iii) the aggregate book value of all assets
disposed of by the Company and its Restricted Subsidiaries pursuant to
such dispositions since the Closing Date may not exceed 30% of Net
Tangible Assets owned by the Company and its Restricted Subsidiaries as
of the end of the most recently ended fiscal quarter; and provided,
further that to the extent the net proceeds from any such disposition
are reinvested within 180 days of the disposition giving rise thereto
in similar assets of equivalent value acquired by the Company or any
Restricted Subsidiary the value of such disposed of assets shall not be
included in the calculation contained in clause (iii) next above.
1.16 Limitation on Indebtedness. Subsection 8.5(c) of the Credit
Agreement is amended by deleting "the Insurance Company Debt" and inserting
"[Reserved]" in its place. Subsection 8.5(d) of the Credit Agreement is amended
by deleting "$20,000,000" and inserting "$25,000,000" in its place.
-5-
<PAGE>
1.17 Certain Investments. Subsection 8.4(d) of the Credit
Agreement is amended to read as follows:
(d) investments incurred in order to consummate Acquisitions
otherwise permitted herein, provided that (i) such Acquisitions are
undertaken in accordance with all applicable Requirements of Law; and
(ii) the prior, effective consent or approval to such Acquisition of
the board of directors or equivalent governing body of the acquiree is
obtained; and provided, further that the permissibility of investments
to consummate Acquisitions of Unrestricted Subsidiaries shall be
considered under subsection 8.4(f).
1.18 Certain Other Investments. Subsection 8.4(f) and
subsection 8.4(g) of the Credit Agreement and the proviso
appearing after subsection 8.4(g) are deleted and the following
subsection 8.4(f) and proviso are inserted in their place:
(f) investments in or loans to Unrestricted Subsidiaries and
investments in other Persons not specifically permitted by subsection
8.4(a) through subsection 8.4(e) above or subsection 8.4(g) below with
an aggregate Outstanding Amount at any time not exceeding 50% of the
consolidated net worth of the Company and its Restricted Subsidiaries
at the end of the most recently completed fiscal quarter of the Company
(exclusive of any net worth of Unrestricted Subsidiaries). "Outstanding
Amount" for purposes of this subsection 8.4(f) means, with respect to
any investment or loan, the amount of such investment or loan (or with
respect to any Commitment to make an investment or loan, the amount of
such Commitment) as reduced by (x) cash repayments of principal (and
the reduction of unused commitments), in the case of loans, and (y)
cash dividends or other returns of capital or divestures paid in cash,
in each case net of all taxes payable thereon (and the reductions of
any unused commitments to make investments);
provided that no investment or loan permitted pursuant to subsections
8.4(d), (e) and (f) may be made if before or after giving effect to any
such investment or loan a Default or Event of Default shall exist; and
1.19 Conforming Changes to Investment Covenant. Subsection 8.4(e) of
the Credit Agreement is amended by deleting the reference to "subsection 8.4(g)"
and inserting in its place "subsection 8.4(f)". In addition, subsection 8.4(h)
of the Credit Agreement is amended by deleting "(h)" at the beginning thereof
and inserting "(g)" in its place.
-6-
<PAGE>
1.20 Contingent Obligations. Subsection 8.9(e) of the
Credit Agreement is amended to read as follows:
(e) additional Contingent Obligations not otherwise permitted
hereunder; provided that, at the time of creation, incurrence or
assumption of such Contingent Obligation, the amount of such Contingent
Obligation (determined in a manner consistent with the last sentence of
the definition thereof) of the Company or the Restricted Subsidiary in
question would be permitted to be treated, without a Default or an
Event of Default occurring or continuing to exist as a result thereof,
as Funded Debt permitted to be incurred by the Company without
breaching Section 8.14, and thereafter such amount, so long as the
related Contingent Obligation exists, shall be treated as Funded Debt
for the purpose of calculating the Leverage Ratio; and provided,
further, Contingent Obligations of Restricted Subsidiaries permitted
pursuant to this subsection 8.9(e) shall (x) only support Indebtedness
of the Company or its Subsidiaries, (y) not, in the case of Contingent
Obligations supporting Indebtedness of the Company, at any time exceed
$100,000,000 in the aggregate for all such Contingent Obligations and
(z) not, in the case of Contingent Obligations supporting Indebtedness
of the Subsidiaries of the Company, at any time exceed $20,000,000 in
the aggregate for all such Contingent Obligations (in the case of
clauses (x) and (y), determined in a manner consistent with the last
sentence of the definition of Contingent Obligation).
1.21 Restricted Payments. Paragraph (iii) of subsection
8.10(b) of the Credit Agreement is amended to read as follows:
(iii) declare or pay cash dividends to its stockholders and purchase,
redeem or otherwise acquire shares of its capital stock or warrants,
rights or options to acquire any such shares for cash, provided, that
(A) immediately after giving effect to such proposed action, no Default
or Event of Default would exist, (B) Net Income for the fiscal quarter
prior to the fiscal quarter in which such payment is made was greater
than zero, and (C) the aggregate of all payments with respect to any of
the foregoing since the First Amendment Effective Date would not exceed
50% of Net Income for the period beginning January 1, 1995 and ending
on the last day of the fiscal quarter prior to the fiscal quarter in
which such payment is made.
1.22 Sault Ste. Marie Bridge Company. The status of Sault
Ste. Marie Bridge Company ("Sault Ste. Marie") is changed from an
Unrestricted Subsidiary to a Restricted Subsidiary and
-7-
<PAGE>
Schedule 6.16 to the Credit Agreement is amended to reflect such change.
SECTION 2 ADDITION OF BANK; ASSIGNMENTS.
2.1 New Bank. The Chase Manhattan Bank (the "New Bank") hereby:
confirms that it has received a copy of the Credit Agreement, the exhibits
thereto and the First Amendment thereto; and acknowledges and agrees that
neither the Agent nor the Issuing Bank has made any representation or warranty
about the creditworthiness of the Company or any other party to the Amended
Credit Agreement (as defined below) or any other Loan Document or with respect
to the legality, validity, sufficiency or enforceability of the Amended Credit
Agreement or any other Loan Document or the value of any security therefor. Upon
the effectiveness of this Second Amendment, the New Bank shall be a party to the
Amended Credit Agreement and have all the rights and obligations of a "Bank"
thereunder and agrees to be bound by the terms and conditions thereof.
2.2 Assignments of Committed Loans on Second Amendment
Effective Date. By its execution of this Agreement each of the
Banks agrees, and the Company and the Agent acknowledge, that:
(a) effective as of the Second Amendment Effective Date, each
of The Northern Trust Company, Firstar Bank Milwaukee, N.A. and Harris
Trust and Savings Bank (each, an "Assignor Bank") hereby (i) sells and
assigns to The First National Bank of Boston, The Bank of New York, The
Bank of Nova Scotia and The Chase Manhattan Bank (each, an "Assignee
Bank"), without recourse or warranty (except as set forth in clause (d)
of this Section 2.2), (A) the principal amount of such Assignor Bank's
outstanding Committed Loans necessary so that after giving effect to
such assignments the retained portion of each Committed Loan of such
Assignor Bank is outstanding in accordance with such Bank's Pro Rata
Share (determined giving effect to this Second Amendment) and (B) the
percentage of such Assignor Bank's participations in all outstanding
Letters of Credit necessary so that after giving effect to such
assignments each participation of such Assignor Bank in each such
Letter of Credit are outstanding in accordance with such Bank's Pro
Rata Share (determined giving effect to this Second Amendment)
(provided, that each Assignor Bank retains the right to receive unpaid
interest accrued on the Committed Loans and to but excluding the Second
Amendment Effective Date and L/C Fees attributable to the period prior
to the Second Amendment Effective Date) (such principal amount of such
Committed Loans together with such percentages of such participations,
is herein called the "Assigned Interest");
-8-
<PAGE>
(b) effective as of the Second Amendment Effective Date, each
Assignee Bank hereby purchases the Assigned Interests and assumes the
obligations with respect to the participations in the Letters of Credit
included therein in an amount so that after giving effect to such
assignments and assumptions each Assignee Bank owns Committed Loans for
each Committed Borrowing and participations in Letters of Credit in
accordance with such Bank's Pro Rata Share (determined giving effect to
this Second Amendment);
(c) each Assignee Bank will pay to the Agent (for the account
of the Assignor Banks), not later than 2 P.M., Chicago time, on the
Second Amendment Effective Date, an amount equal to the principal
amount of the Committed Loans being purchased by such Assignee Bank
pursuant to Section 2.2(a) and after the receipt of such funds the
Agent shall pay to each Assignor Bank an amount equal to the principal
amount of the Committed Loans being sold by such Assignor Bank pursuant
to Section 2.2(b);
(d) as of the Second Amendment Effective Date, prior to giving
effect to any sale, assignment and delegation under this Section 2.2 as
of such date, each Assignor Bank represents and warrants, as to the
assignment effected by such Assignor Bank, that as of the Second
Amendment Effective Date such Assignor Bank is the legal and beneficial
owner of the Assigned Interests being assigned by it hereunder, that it
has the right and power to assign such Assigned Interests and that such
Assigned Interests are free and clear of any adverse claim or
encumbrance created or permitted by such Assignor Bank;
(e) from and after the Second Amendment Effective Date, the
Agent shall make all payments under this Agreement in respect of the
Assigned Interest, other than retained rights to interest payments and
fees as set forth in clause (a) above, to the Assignee Banks; and
(f) the Interest Period and interest rate for each Offshore
Rate a portion of which is assigned pursuant to this Section 2.2 shall
be unaffected by such assignment and no Bank shall be entitled to any
claim under Section 4.4(d) of the Credit Agreement as a result of such
assignment.
2.3 Payment of Fees. On the Second Amendment Effective Date, the
Company shall pay to the Agent for the account of each Bank (other than the New
Bank):
(a) the Commitment Fee accrued up to the Second
Amendment Effective Date calculated as provided in the Credit
Agreement except that for the purposes of such payment, the
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<PAGE>
Commitment Fee shall be based upon the average daily unused portion of the
combined Commitments for the period commencing on the first day of the current
calendar quarter to but excluding the Second Amendment Effective Date (it being
agreed that the payment of the Commitment Fee due at the end of the current
calendar quarter shall be the Commitment Fee accrued during, and shall be based
upon the average daily unused portion of the combined Commitments for, the
period commencing on the Second Amendment Effective Date through the end of the
current calendar quarter); and
(b) the Facility Fee accrued up to the Second Amendment
Effective Date (it being agreed that the payment of the Facility Fee due at the
end of the current calendar quarter shall be the Facility Fee accrued during the
period commencing on the Second Amendment Effective Date through the end of the
current calendar quarter).
SECTION 3 REPRESENTATIONS AND WARRANTIES. The Company
represents and warrants to the Banks as follows:
3.1 Credit Agreement Warranties. Each representation and warranty of
the Company set forth in Article VI of the Credit Agreement, as amended by this
Second Amendment (as so amended, the "Amended Credit Agreement"), is true and
correct as of the date of the execution and delivery of this Second Amendment by
the Company, with the same effect as if made on such date.
3.2 Authorization; No Conflict. The (a) execution and delivery by (i)
the Company of this Second Amendment, (ii) Sault Ste. Marie of the Guaranty and
(iii) each Restricted Subsidiary of the Consent of Guarantors (as hereinafter
defined), and (b) performance by (i) the Company of its obligations under the
Amended Credit Agreement, and (ii) each Restricted Subsidiary of the Guaranty,
are within the corporate powers of the Company and each Restricted Subsidiary,
as applicable, have been duly authorized by all necessary corporate action on
the part of the Company and each Restricted Subsidiary, have received all
necessary governmental approval, and do not and will not (x) violate any
provision of law or of any order, decree or judgment which is binding on the
Company or any Restricted Subsidiary, (y) contravene or conflict with, or result
in a breach of, any provision of the Organization Documents of the Company or
any Restricted Subsidiary or of any agreement, indenture, instrument or other
document which is binding on the Company or any Restricted Subsidiary or (z)
result in, or require, the creation or imposition of any Lien on any property of
the Company or any Restricted Subsidiary.
3.3 Validity and Binding Nature. Upon the execution and
delivery hereof by all of the parties hereto, each of this Second
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<PAGE>
Amendment and the Amended Credit Agreement will be the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
3.4 Guaranty. After the effectiveness of this Second Amendment, the
Guaranty will continue in full force and effect and will continue to be the
legal, valid and binding obligation of each Restricted Subsidiary, enforceable
against each Restricted Subsidiary in accordance with its terms.
SECTION 4 SECOND AMENDMENT EFFECTIVE DATE. The amendments set forth in
Section 1 hereof shall become effective, as of the day and year first above
written, on such date (the "Second Amendment Effective Date") when all of the
following conditions precedent have been satisfied:
4.1 Documents. The Agent shall have received all of the following, each
in form and substance satisfactory to the Agent and the Banks:
(a) counterparts of this Second Amendment executed by all
of the parties hereto;
(b) counterparts of the Guaranty executed by Sault Ste.
Marie;
(c) the consent substantially in the form of Exhibit B attached hereto
(the "Consent of Guarantors") executed by each Restricted Subsidiary;
(d) certified copies of resolutions of the Board of Directors of the
Company authorizing or ratifying the execution and delivery of this
Second Amendment and the performance by the Company of its obligations
under the Amended Credit Agreement;
(e) a certificate of the Secretary or an Assistant Secretary of the
Company certifying the names of the officer or officers authorized to
sign this Second Amendment, together with a sample of the true
signature of each such officer;
(f) certified copies of resolutions of the Board of Directors of each
Restricted Subsidiary authorizing or ratifying the execution and
delivery of the Consent of Guarantors (and the Guaranty in the case of
Sault Ste. Marie) and the performance of each Restricted Subsidiary of
its obligations under the Guaranty;
(g) a certificate of the Secretary or Assistant Secretary
of each Restricted Subsidiary certifying the names of the
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<PAGE>
officer or officers of such Restricted Subsidiary authorized
to sign the Consent of Guarantors (and the Guaranty in the
case of Sault Ste. Marie);
(h) the opinion of counsel for the Company and Restricted
Subsidiaries in substantially the form of Exhibit C attached
hereto;
(i) a certificate of the Company as to the satisfaction of
the conditions set forth in Sections 4.2 and 4.3 of this
Second Amendment;
(j) evidence of the Company's current S&P rating as
published by S&P in their August 1996 Global Sector Review;
and
(k) such other documents as the Agent or any Bank may reasonably
request in connection with the Company's authorization, execution and
delivery of this Second Amendment.
4.2 No Default. No Event of Default or Default shall
exist.
4.3 Representations and Warranties. The representations and warranties
set forth in Section 3 of this Second Amendment are true and correct on such
date with the same effect as if made on such date.
SECTION 5 MISCELLANEOUS.
5.1 Continuing Effectiveness, etc. The Credit Agreement, as hereby
amended, and each other Loan Document shall remain in full force and effect and
is hereby ratified and confirmed in all respects. After the Second Amendment
Effective Date, all references in the Credit Agreement to "this Agreement", and
all references in any Loan Document to "Credit Agreement", shall refer to the
Amended Credit Agreement unless the context otherwise requires.
5.2 Counterparts. This Second Amendment may be executed in any number
of counterparts and by different parties on separate counterparts, and each such
counterpart shall be deemed to be an original but all such counterparts shall
together constitute one and the same Second Amendment.
5.3 Governing Law. This Second Amendment shall be a
contract made under and governed by the internal laws of the
State of Illinois without regard to principles of conflicts of
law.
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<PAGE>
5.4 Successors and Assigns. This Second Amendment shall be binding upon
the parties hereto and their respective successors and assigns, and shall inure
to the benefit of the parties hereto and the respective successors and assigns
of the Banks and the Agent.
5.5 Loan Document. This Second Amendment is a Loan
Document.
[signature pages immediately follow]
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<PAGE>
Delivered at Chicago, Illinois, as of the day and year first above
written.
WISCONSIN CENTRAL TRANSPORTATION
CORPORATION
By:/s/ Thomas F. Power, Jr.
Name: Thomas F. Power, Jr.
Title: Executive V.P. - C.F.O.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Agent
By:/s/ Bridget Garavalia
Name: Bridget Garavalia
Title: Managing Director
BANK OF AMERICA ILLINOIS, as
Issuing Bank
By:/s/ Bridget Garavalia
Name: Bridget Garavalia
Title: Managing Director
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a
Bank providing Bid Loans
By:/s/ Bridget Garavalia
Name: Bridget Garavalia
Title: Managing Director
<PAGE>
BANK OF AMERICA ILLINOIS, as a
Bank
By:/s/ Bridget Garavalia
Name: Bridget Garavalia
Title: Managing Director
THE FIRST NATIONAL BANK OF
BOSTON
By:/s/ Linda W. McSweeney
Name: Linda W. McSweeney
Title: Vice President
THE BANK OF NEW YORK
By:/s/ John M. Lokay, Jr.
Name: John M. Lokay, Jr.
Title: Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By:/s/ R. Bruce Anthony
Name: R. Bruce Anthony
Title:Commercial Banking Officer
THE NORTHERN TRUST COMPANY
By:/s/ Brian D. Beitz
Name: Brian D. Beitz
Title: Vice President
<PAGE>
HARRIS TRUST AND SAVINGS BANK
By:/s/ Frank F. Pagura, Jr.
Name: Frank F. Pagura, Jr.
Title: Vice President
THE BANK OF NOVA SCOTIA
By:/s/ F.C.H. Ashby
Name: F.C.H. Ashby
Title:Senior Manager Loan Operations
THE CHASE MANHATTAN BANK
By:/s/ Timothy J. Storns
Name: Timothy J. Storns
Title: Credit Executive
<PAGE>
Exhibit A to Second Amendment
SCHEDULE 2.1
COMMITMENTS
AND PRO RATA SHARES
Pro Rata
Bank Commitment Share
---- ---------- -----
Bank of America Illinois $ 81,250,000 25.0000000%
The First National Bank 50,000,000 15.3846154
of Boston
The Bank of New York 50,000,000 15.3846154
The Northern Trust Company 40,000,000 12.3076923
Firstar Bank Milwaukee, N.A. 25,000,000 7.6923077
Harris Trust and Savings Bank 40,000,000 12.3076923
The Bank of Nova Scotia 25,000,000 7.6923077
The Chase Manhattan Bank 13,750,000 4.2307692
TOTAL $325,000,000 100%
<PAGE>
Exhibit B to Second Amendment
CONSENT OF GUARANTORS
Each of the undersigned has issued a Guaranty, dated as of November 21,
1994 (the "Guaranty"), in favor of Bank of America National Trust and Savings
Association (individually and as Agent), Bank of America Illinois (individually
and as Issuing Bank) and the other Banks which are parties to the Credit
Agreement, dated as of November 21, 1994 (the "Credit Agreement"), among
Wisconsin Central Transportation Corporation, Bank of America National Trust and
Savings Association, as Agent, Bank of America Illinois, as Issuing Bank, and
the Banks party thereto. Each of the undersigned hereby consents to Wisconsin
Central Transportation Corporation's execution and delivery of the Second
Amendment to the Credit Agreement dated as of December 17, 1996. Each of the
undersigned hereby confirms that the Guaranty continues in full force and effect
as a guaranty of the Liabilities (as defined in the Guaranty) after giving
effect to such amendment.
This Consent may be executed in any number of counterparts and by
different parties on separate counterparts.
IN WITNESS WHEREOF, each of the undersigned has caused this Consent to
be executed and delivered as of December 17, 1996.
WISCONSIN CENTRAL LTD.
By:
Name:
Title:
FOX VALLEY & WESTERN LTD.
By:
Name:
Title:
WCL RAILCARS, INC.
By:
Name:
Title:
-1-
<PAGE>
SAULT STE. MARIE BRIDGE COMPANY
By:
Name:
Title:
-2-
<PAGE>
Exhibit C to Second Amendment
December 17, 1996
To: Bank of America National
Trust and Savings
Association, as Agent,
Bank of America Illinois,
as Issuing Bank,
and Bank of America
National Trust and Savings
Association, Bank of
America Illinois, The First
National Bank of Boston,
The Bank of New York,
Firstar Bank Milwaukee, N.A.,
The Northern Trust Company,
Harris Trust and
Savings Bank, The Bank of
Nova Scotia, and The Chase
Manhattan Bank as Banks party
to the Credit Agreement
hereinafter referred to
Re: Credit Agreement, dated as of November 21, 1994, as amended by the
First Amendment dated October 23, 1995 (the "Credit Agreement"), among
Wisconsin Central Transportation Corporation, Bank of America National
Trust and Savings Association, as Agent, Bank of America Illinois, as
Issuing Bank, and the other financial institutions party thereto
Ladies and Gentlemen:
We have acted as counsel to Wisconsin Central Transportation
Corporation, a Delaware corporation (the "Company"), and its Restricted
Subsidiaries in connection with the negotiation, execution and delivery of the
Second Amendment, dated the date hereof (the "Amendment"), to the
above-captioned Credit Agreement. Capitalized terms used in this opinion and not
otherwise defined herein shall have the respective meanings specified therefor
in the Credit Agreement. We are providing this opinion to the Agent and each
Bank at the request of our client and in accordance with Section 4.1(h) of the
Amendment.
We advise you that a partner of the firm is an officer and director of
the Company and the Restricted Subsidiaries, a shareholder of the Company and a
trustee of a trust that is also a shareholder of the Company.
<PAGE>
In connection with this opinion letter, we have examined executed
counterparts of the Amendment, the Guaranty executed by Sault Ste. Marie Bridge
Company (the "SSM Guaranty") and the Consent of Guarantors (the "Consent") and
such other documents, records and other matters as we have considered necessary
in connection with the expression of the opinions hereinafter set forth. We have
assumed: (a) the genuineness of the signatures on all documents and instruments
(except for the signatures of the officer of the Company on the Amendment, of
each of the Restricted Subsidiaries on the Consent and of Sault Ste. Marie
Bridge Company on the SSM Guaranty); and (b) that the Amendment, the Credit
Agreement as amended by the Amendment (the "Amended Credit Agreement") and the
Consent constitute the legal, valid and binding obligation of the respective
parties thereto, if any, other than the Company and the Restricted Subsidiaries.
Based upon the foregoing, we are of the opinion that:
1. Each of the Company and each of its Subsidiaries (other than WC Canada
Holdings, Inc. and Algoma Central Railway Inc. as to which we express no
opinion):
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation as set
forth in Schedule I hereto;
(b) has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its assets, carry on its business,
execute and deliver the Amendment and the Consent and perform its obligations
under the Amended Credit Agreement and the Guaranty; and
(c) is duly qualified as a foreign corporation and is licensed and in good
standing under the laws of the jurisdictions set forth on Schedule I hereto.
Wisconsin Central Ltd. and Fox Valley & Western Ltd. have not qualified to do
business in Wisconsin since Wisconsin only requires an out-of-state railroad to
qualify to do business in that state if such railroad first transacted business
in the State of Wisconsin after January 1, 1994. Wisconsin Central Ltd. and Fox
Valley & Western Ltd. each began transacting business in Wisconsin prior to
January 1, 1994, so the failure to qualify to do business in Wisconsin does not
affect either railroad's ability to operate its railroad in Wisconsin.
2. The execution and delivery by the Company of the Amendment and the
performance by the Company of the Amended Credit Agreement, the execution and
delivery by Sault Ste. Marie Bridge Company of the SSM Guaranty and the
execution and delivery by each Restricted Subsidiary of the Consent and the
performance by each Restricted Subsidiary of the Guaranty, have been duly
authorized by all necessary corporate action, and do not and will not: (a)
contravene the terms of any of such Person's Organization Documents; (b)
conflict with or result in any breach or contravention of, or the creation of
any Lien under, (i) any document evidencing any Contractual Obligation to which
such Person is a party and of which we have knowledge after due inquiry, or (ii)
any order, injunction, writ or decree of any Governmental Authority to which
such Person or its property is subject; or (c) violate any Requirement of Law.
-2-
<PAGE>
3. No approval, consent, exemption, authorization, or other action by,
or notice to, or filing with, any Governmental Authority is necessary or
required in connection with the execution, delivery or performance by, or
enforcement against, the Company or any of its Restricted Subsidiaries of the
Amendment, the Amended Credit Agreement, the Consent, the Guaranty or any other
Loan Document.
4. Each of the Amendment and the Amended Credit Agreement and each of
the Consent and the Guaranty constitutes the legal, valid and binding obligation
of the Company and its Restricted Subsidiaries, respectively, enforceable
against such Person in accordance with its respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws affecting the enforcement of creditors' rights generally, by equitable
principles including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether
enforceability is considered in a proceeding in equity or at law), and, in the
case of the Guaranty, by laws regarding fraudulent transfers and obligations.
5. To the best of our knowledge, there are no actions, suits,
proceedings, claims or disputes pending at law, in equity, in arbitration or
before any Governmental Authority, against the Company, or any of its Restricted
Subsidiaries or any of their respective properties which purport to adversely
affect the legality, validity, binding effect or enforceability of the
Amendment, the Amended Credit Agreement, the Consent or the Guaranty. To the
best of our knowledge, no injunction, writ, temporary restraining order or any
order of any nature has been issued by any court or other Governmental Authority
purporting to enjoin or restrain the execution, delivery or performance of the
Amendment, the Amended Credit Agreement, the Consent or the Guaranty, or
directing that the transactions provided for therein not be consummated as
therein provided.
6. None of the Company, any Person controlling the Company, or any
Subsidiary, is an "Investment Company" within the meaning of the Investment
Company Act of 1940. The Company is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, any state public
utilities code, or any other Federal or state statute or regulation limiting its
ability to incur Indebtedness.
7. As of the date hereof, the Company has no Subsidiaries other than
those specifically disclosed in part (a) of Schedule 6.16 to the Credit
Agreement and Algoma Central Railway Inc., an Unrestricted Subsidiary.
We express no opinion as to the enforceability of (i) any provision for
the payment of interest on interest or (ii) any waiver of the right to trial by
jury.
The opinions set forth in this letter are limited to the Federal laws
of the United States of America, the laws of the State of Illinois, the Michigan
Business Corporation Act and the General Corporation Laws of the State of
Delaware.
This opinion letter is being furnished to you and may be relied upon
only by you and any permitted assignee or transferee in connection with the
Amended Credit
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<PAGE>
Agreement and the transactions described therein. The opinions expressed herein
are limited in all respects to the law existing on the date hereof.
Very truly yours,
McLACHLAN, RISSMAN & DOLL
By
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<PAGE>
SCHEDULE I
TO OPINION OF
McLACHLAN, RISSMAN & DOLL
Jurisdiction of Foreign
Name of Corporation Organization Qualifications
- ------------------- ------------ --------------
Wisconsin Central Delaware Illinois
Transportation Corporation
Wisconsin Central Ltd. Illinois Minnesota
Michigan
Fox Valley & Western Ltd. Illinois None
WCL Railcars, Inc. Illinois None
Wisconsin Central Delaware None
International, Inc.
Sault Ste. Marie Michigan None
Bridge Company
-5-
Exhibit 10(i)
ASSET PURCHASE AGREEMENT
BETWEEN
UNION PACIFIC RAILROAD COMPANY
AND
SAULT STE. MARIE BRIDGE COMPANY
DATED AS OF
NOVEMBER 30, 1996
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS.................................................... 1
2. PURCHASE AND SALE OF ASSETS
2.1 General........................................... 4
2.2 Special Inventory................................. 4
3. EXCLUSION OF ASSETS
3.1 Contracts......................................... 4
3.2 Current Assets.................................... 5
3.3 Corporate Records................................. 5
3.4 Claims And Litigation............................. 5
4. PURCHASE PRICE
4.1 Amount Of Cash Purchase Price..................... 5
4.2 Adjustment Of Purchase Price...................... 5
4.3 Payment Of Purchase Price......................... 5
4.4 Allocation Of Purchase Price...................... 5
4.5 Qualified Intermediary............................ 6
5. CHANGES IN ASSETS
5.1 Loss Of And Damage To Assets...................... 6
5.2 Determination Of Value Absent Agreement........... 7
5.3 Estimation And Final Determination Procedures..... 7
6. TAX ALLOCATION, LEASE INCOME, CAPITALIZED
LEASES AND LABOR PROTECTION
6.1 Proration Of Taxes................................ 8
6.2 Lease Rentals And License Income.................. 8
6.3 Labor Protection.................................. 9
7. ASSUMPTION OF LIABILITIES AND OBLIGATIONS
7.1 Liabilities To Be Assumed......................... 9
7.2 Liabilities Not To Be Assumed..................... 10
7.3 Insurance......................................... 10
7.4 No Third Party Rights............................. 10
8. REPRESENTATIONS AND WARRANTIES
8.1 Disclaimer Of Representations And Warranties...... 11
8.2 General Representations And Warranties Of Seller.. 11
8.3 Environmental Representations And
Warranties Of Seller.............................. 13
8.4 Representations And Warranties By Purchaser....... 14
8.5 Survival.......................................... 15
8.6 Condition Of Assets............................... 15
9. CONDITIONS TO THE CLOSING
9.1 Obligation Of Purchaser To Close.................. 16
9.2 Obligation Of Seller To Close..................... 17
10. CLOSING
10.1 Place Of Closing.................................. 18
10.2 Time Of Closing................................... 18
10.3 Deliveries By Purchaser At Closing................ 18
i
<PAGE>
10.4 Deliveries By Seller At Closing................... 19
11. BOOKS AND RECORDS
11.1 Access To Books And Records....................... 19
11.2 Securities Law Compliance......................... 20
12. OPERATIONS PRIOR TO CLOSING
12.1 Operations Prior To Closing....................... 21
13. EMPLOYEES.................................................. 22
14. CONSENTS AND APPROVALS
14.1 Board and HSR Approvals........................... 22
15. INDEMNIFICATION
15.1 Purchaser's Indemnification....................... 23
15.2 Seller's Indemnification.......................... 23
15.3 Procedures........................................ 23
16. TERMINATION
16.1 Grounds For Termination............................... 25
17. MISCELLANEOUS
17.1 Title And Other Descriptions.......................... 26
17.2 Waiver................................................ 26
17.3 Expenses.............................................. 26
17.4 Transitional Matters.................................. 26
17.5 Car Supply............................................ 27
17.6 Entire Agreement...................................... 27
17.7 Choice Of Law......................................... 27
17.8 Severability.......................................... 27
17.9 Counterparts.......................................... 27
17.10 Headings............................................. 28
17.11 Successors And Assigns............................... 28
17.12 Notice............................................... 28
Appendix A - Description of Assets
Appendix A-1 - Legal Description of Real Estate
Appendix A-2 - Personal Property Excluding Special Inventory
Schedule I - Operating Contracts
Schedule II - Transportation Contracts
Schedule III - Excluded Contracts
Appendix B - Allocation of Purchase Price
Appendix C - Administration and Proration Procedures
Appendix D - Special Inventory
Appendix E - Environmental Operations Obligations Schedule
Appendix F - Map
Exhibit 1 - Form of Sellers' Counsel's Opinion
Exhibit 2 - Form of Purchaser's Counsel's Opinion
Exhibit 3 - Disclosure Schedule
Exhibit 4 - Form of Quit Claim Deed
Exhibit 5 - Form of Personal Property Sale Order
ii
<PAGE>
ASSET PURCHASE AGREEMENT
Sault Ste. Marie Bridge Company ("Purchaser"), a Michigan corporation, and Union
Pacific Railroad Company ("Seller"), a Utah corporation agree as follows:
1. DEFINITIONS
The following terms when used with initial capitalization in this
Agreement, whether in the singular or the plural, have the meanings
ascribed to them below:
"Agreement" means this Asset Purchase Agreement, including its
Appendices and Exhibits.
"Assets" means the assets of Seller identified in Appendix A to this
Agreement.
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. ss.9601 et seq.
"Closing Place" has the meaning given to it in Section 10.1 of this
Agreement.
"Closing Date" has the meaning given to it in Section 10.2 of this
Agreement.
"Board" means the Surface Transportation Board established under 49
U.S.C. ss.10101 et seq. or any successor agency.
"Contracts" means contracts, rate contracts, leases, commitments,
agreements and arrangements.
"Designated Qualified Intermediary" means a "qualified intermediary" as
defined in United States Treasury Regulations under Internal Revenue
Code Section 1031 designated by Seller pursuant to Section 4.5 of this
Agreement.
"Environmental Law" means any law, judgment, decree, order, license,
rule or regulation pertaining to environmental matters, including
without limitation, those arising under the Resource Conservation and
Recovery Act of 1976, as amended (42 U.S.C. ss.6901 et seq.), CERCLA,
the Superfund Amendments and Reauthorization Act of 1986, as amended
(Pub. L. 99-499, Pub. L. 99563, Pub. L. 100-202 and Pub. L. 101-144),
the Clean Water Act, as amended (33 U.S.C. ss.1251 et seq.), the Clean
Air Act, as amended (42 U.S.C. ss.7401 et seq.), the Toxic Substances
Control Act, as amended (15 U.S.C. ss.2601 et seq.), the Safe Drinking
Water Act, as amended (42 U.S.C. ss.300 et seq.), the Emergency
Planning and Community Right-to-Know Act of 1986, as amended (42 U.S.C.
ss.1101 et seq.) and
1
<PAGE>
any other federal, state or local statute, regulation, ordinance, order
or decree pertaining to the environment.
"Hazardous Substances" means any "hazardous waste" as defined by 42
U.S.C. ss.6903(5), any "medical waste" as defined by 42 U.S.C.
ss.6903(40), any "hazardous substance" as defined by 42 U.S.C.
ss.9601(14), any "pollutant or contaminant" as defined by 42 U.S.C.
ss.9601(33), any "hazardous chemical" pursuant to 29 CFR ss.
1910.1200(c), any substance designated pursuant to 40 CFR Part 302, any
"extremely hazardous substance" pursuant to 40 CFR Part 355, any "toxic
chemical" pursuant to 40 CFR Part 372, and any toxic substance, oil,
petroleum, hazardous material or other chemical or substance deemed
hazardous by an Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, 15 U.S.C. ss.18a.
"Special Inventory" means inventory and miscellaneous tools associated
with the normal operation and maintenance of the ore cars, ore docks
and associated ore dock facilities and other materials and supplies
unique to the current operations on the Rail Lines. All Special
Inventory is listed on Appendix D.
"Knowledge" and "Known" when used in this Agreement to modify a
representation, warranty or other statement of a party, means that the
facts or situations described in the representation, warranty or other
statement as being to the knowledge of such party are believed to be
true and correct by the president, each vice president (including
senior vice presidents, executive vice presidents, and vice presidents
with other similar designations), and each senior officer or such party
who is principally responsible for the subject matter involved, and, if
an additional person is specified, also by such additional person,
after suitable investigation.
"Labor Protection" means those reasonable and necessary costs incurred
in connection with the affected employees relative to the transaction
contemplated by this Agreement, but which are limited to: (1) labor
protection costs which may be mandated by any governmental agency; (2)
contractual obligations of the Seller to affected employees as of the
date of execution of the Agreement to the extent such obligations
necessarily arise as a result of the transaction and are not mitigated
by any governmental agency action; and (3) any portion of labor costs
related to this transaction which may be incurred by the Seller and
which Purchaser agrees in writing to reimburse Seller.
2
<PAGE>
"Permitted Encumbrances" means any
A. liens for taxes, assessments, levies, fees and other
governmental charges not yet due or payable or which,
if due and unpaid, are being contested in good faith
and by appropriate proceedings,
B. mechanics' and materialmen's liens and similar
charges incurred in the ordinary course of Seller's
business,
C. utility easements, licenses or permits located on or
crossing any portion of the Assets that do not
materially interfere with railroad operations on the
Rail Lines,
D. road crossing agreements with governmental
authorities or private parties that do not materially
interfere with railroad operations on the Rail Lines,
E. leases, easements, trackage rights agreements and
tenancy agreements existing as of the date of this
Agreement which are assumed by Purchaser in
accordance with this Agreement,
F. easements, licenses, permits, or similar rights of
others that do not materially affect the value, use,
enjoyment or occupancy of the real or personal
property so encumbered,
G. rights of reverter which have not been violated and
will not be violated as long as the affected real
property is used for railroad purposes,
H. encumbrances specifically agreed to by Purchaser in a
separate writing delivered to the Seller,
I. matters customarily excepted by title companies in
their commitments for title insurance or title
policies as "standard exceptions",
J. minor defects or irregularities of title or interest,
K. rights reserved to or vested in any governmental
authority with respect to the Assets or their
regulation, and
L. acts done by, through or under Purchaser, its
employees, agents and contractors.
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"Purchase Price" has the meaning given to it in Section 4.1 of this
Agreement.
"Purchaser" means Sault Ste. Marie Bridge Company, a Michigan
corporation.
"Quit Claim Deed" means the Quit Claim Deed for the real property
included in the Assets, the form of which is set forth as Exhibit 4 to
this Agreement.
"Rail Lines" means the lines of railroad shown generally on Appendix F,
railroad track and the handling, storage, loading, unloading and dock
facilities included in the Assets which are owned or operated by
Seller.
"Seller" means Union Pacific Railroad Company, a Utah corporation.
"Special Inventory" means inventory and miscellaneous tools associated
with the normal operation and maintenance of the ore cars, ore docks
and associated ore dock facilities and other materials and supplies
unique to the current operations on the Rail Lines. All Special
Inventory is listed on Appendix D.
2. PURCHASE AND SALE OF ASSETS
2.1 GENERAL
Under the terms and subject to the conditions contained in this
Agreement, Seller agrees to sell and transfer to Purchaser free and
clear of all liens and encumbrances (other than Permitted
Encumbrances), and Purchaser agrees to purchase on an "as is, where is"
basis, on the Closing Date all of the Assets.
2.2 SPECIAL INVENTORY
Purchaser agrees to purchase from Seller, in addition to the Assets, on
or before the Closing Date, not less than $500,000 worth of the Special
Inventory from that listed on Appendix D.
3. EXCLUSION OF ASSETS
3.1 CONTRACTS
The Assets do not include any rights under Contracts not
assumed by Purchaser under this Agreement and all records of
Seller relating to such Contracts.
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3.2 CURRENT ASSETS
The Assets do not include any accounts receivable, cash on
hand or deposit and cash equivalents, inventory and other
current assets of the Seller, except Special Inventory
purchased pursuant to Section 2.2 above, and Contracts and
intangibles specifically identified in Appendix A-2.
3.3 CORPORATE RECORDS
The Assets do not include general ledgers, minute books, tax
returns and similar records required for the Seller's
corporate and tax purposes.
3.4 CLAIMS AND LITIGATION
The Assets do not include rights under claims and litigation
or settlements of such claims and litigation by or against
Seller.
4. PURCHASE PRICE
4.1 AMOUNT OF CASH PURCHASE PRICE
The purchase price ("Purchase Price") for the Assets is
$85,000,000 in cash plus the price of Special Inventory
purchased pursuant to Section 2.2 above.
4.2 ADJUSTMENT OF PURCHASE PRICE
The Purchase Price is subject to adjustment in accordance with
Sections 5 and 6 below.
4.3 PAYMENT OF PURCHASE PRICE
The Purchase Price, as adjusted, shall be paid at the Closing
by wire transfer of immediately available funds to one or more
bank accounts designated by Seller's Designated Qualified
Intermediary prior to the Closing or, at the Seller's
Designated Qualified Intermediary's sole election, by one or
more cashier's checks.
4.4 ALLOCATION OF PURCHASE PRICE
The Purchase Price shall be allocated to the Assets as set
forth on Appendix B. In order to facilitate a like kind
exchange under I.R.C. 1031, the Purchaser agrees to make
payment to the Designated Qualified Intermediary. Purchaser
shall have no responsibility to the Seller for the application
of the Purchase Price paid pursuant to instructions given
pursuant to this Section.
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4.5 QUALIFIED INTERMEDIARY
Notwithstanding any other term or condition of this Agreement,
if so required by Seller, Purchaser will fully cooperate with
Seller in all respects in structuring and completing this sale
pursuant to this Agreement so as to effect a disposition of
Relinquished Property, as hereinafter defined, in connection
with a multiple party deferred like-kind exchange transaction
for Seller's purposes pursuant to Section 1031 of the Internal
Revenue Code of 1986, as amended ("Code"). In particular, but
not by way of limitation, Purchaser will consent to the
assignment by Seller of Seller's rights with respect to the
transfer of the property described in this Agreement (or any
portion thereof) to a Qualified Intermediary prior to the
closing of this sale, including the Assignment by Seller to
such Qualified Intermediary of Seller's right to receive the
Purchase Price. The terms Relinquished Property and Qualified
Intermediary as used herein shall have the meanings ascribed
to them in Treasury regulations under Code Section 1031.
Transfer of any rights or interest to a Qualified Intermediary
should not relieve either party of its obligations under this
Agreement.
5. CHANGES IN ASSETS
5.1 LOSS OF AND DAMAGE TO ASSETS
If between the date of this Agreement and the Closing Date,
Assets with a fair market value in excess of $100,000 in the
aggregate are sold, lost, destroyed or condemned, or suffer
any material damage and are not replaced or repaired prior to
the Closing Date, then,
A. at the option of Seller, Seller may cancel this
Agreement.
B. if Seller does not cancel this Agreement, at the
option of Purchaser, either
(i) the Cash Purchase Price shall be reduced by
the excess of
(a) the fair market value of the Assets
immediately prior to the sale, loss,
destruction, condemnation or damage,
over
(b) the salvage value, if any, of the
Assets immediately following the
sale, loss, destruction,
condemnation or damage, or
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(ii) no reduction to the Cash Purchase Price
shall be made, and the Seller shall, on the
Closing Date, assign to Purchaser all sale,
insurance or condemnation proceeds payable
to the Seller on account of the loss,
destruction, condemnation or damage pursuant
to an assignment reasonably satisfactory to
Purchaser and pay to Purchaser that portion,
if any, of any deductible amount under any
insurance applicable to the claim for loss,
destruction or damage.
5.2 DETERMINATION OF VALUE ABSENT AGREEMENT
If the parties cannot agree upon the fair market value and the
salvage value of the Assets which are sold, lost, destroyed or
condemned or suffer material damage prior to Closing, such
amounts shall be estimated for the purpose of Closing and
determined by an independent appraiser as provided in Section
5.3.
5.3 ESTIMATION AND FINAL DETERMINATION PROCEDURES
If the fair market value and the salvage value of Assets need
to be estimated for purposes of Closing, Purchaser and Seller
shall each deliver to the other within 30 days after Closing a
written estimate of the fair market value and salvage value,
and for purposes of Closing the Cash Purchase Price shall be
provisionally adjusted based upon the arithmetic mean of the
two written estimates. Within 30 days after the Closing,
Purchaser and Seller shall jointly designate an appraiser or
other expert ("Expert"). The Expert so selected shall sit in
Chicago, Illinois, and may hear evidence and examine any
property or equipment he considers appropriate for purposes of
rendering a decision. Except as otherwise provided in this
Agreement, the rules of the American Arbitration Association
shall control the proceedings. After hearing or viewing any
evidence he considers appropriate (but in any event within 90
days after the designation of the Expert), the Expert shall
render a decision, which shall consist of the selection of
either Purchaser's or Seller's written estimate (and the
Expert shall not render any decision other than the selection
of one of the two written estimates). The decision of the
Expert shall be final and shall not be subject to appeal.
After the decision has been rendered, the losing party shall
pay in immediately available funds the difference between the
amount paid at Closing based upon the provisional adjustment
and the amount that should have been paid based upon the final
decision, together with interest on the difference from the
Closing Date until paid, calculated on the basis of the
variable prime rate (corporate base rate) established by The
First National Bank of Chicago plus 150 basis points. The fees
and costs of the Expert shall be shared equally by the
parties.
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6. TAX ALLOCATION, LEASE INCOME,
CAPITALIZED LEASES AND LABOR PROTECTION
6.1 PRORATION OF TAXES
Purchaser shall declare and pay any and all applicable sales,
use or property taxes, fees or assessments payable by a buyer
in the jurisdictions in which the Rail Lines are located and
shall reimburse Seller for any such payments required of and
made by Seller (if any) as a result of the sale of the Rail
Lines. Real property ad valorem taxes, franchise fees, and
special assessments, if any, shall be prorated between Seller
and Purchaser as of the date of Closing. Purchaser shall be
responsible for paying any and all such taxes, fees or
assessments accruing for the period on or after the date of
Closing. Seller shall pay or reimburse Purchaser for
Purchaser's payment, if any, of 1996 ad valorem taxes, 1996
franchise fees and the pro rata portion of special assessments
attributable to 1996. In addition, Seller shall be liable to
Purchaser for Seller's pro-rata portion of the ad valorem
taxes, franchise fees and special assessments on the Rail
Lines as determined by the formula in the following sentence.
On or before the Closing Date, Seller shall pay to Purchaser
an amount equal to Seller's 1995 ad valorem taxes, franchise
fees and special assessments as the case may be on the Rail
Lines multiplied by a fraction, the numerator of which is the
number of days from January 1, 1997 to and including the
Closing Date and the denominator of which is 365. The Seller's
pro rata portion shall be recalculated when 1997 ad valorem
taxes, franchise fees and special assessments, as the case may
be, are known, and the parties shall settle any differences
owing within 30 days. Notwithstanding the foregoing, with
respect to any abandoned right-of-way transferred by Seller to
Purchaser by this Agreement, Purchaser shall assume
responsibility for the payment of any unpaid locally assessed
property taxes, special assessments or similar unpaid charges
with respect to such abandoned right-of-way.
6.2 LEASE RENTALS AND LICENSE INCOME
Lease rentals and license income received by Seller or
expected to be received by Seller (which is not already by its
terms calculated on a per diem basis) shall be prorated to the
Closing Date and the amount due Purchaser, if any, paid within
90 days after Closing.
6.3 LABOR PROTECTION
The parties acknowledge that they anticipate that Purchaser, a
Class III carrier, shall acquire the Assets pursuant to 49 USC
ss.10902 and will not be subject to the imposition of labor
protection on the transaction under that section. Seller may
separately provide labor protection, including relocation and
severance costs, under applicable collective bargaining
agreements
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between Seller and various representatives of certain of its
employees or other labor protection actions deemed necessary
by the Seller, in Seller's sole determination, as a result of
this transaction. Purchaser agrees to reimburse Seller for up
to but no more than $1,000,000 of the Labor Protection cost
actually paid by Seller as a result of this transaction.
Payment shall be made by Purchaser to Seller no more than
monthly on the basis of written statements indicating the
aggregate amount and character of Labor Protection costs
actually paid. Purchaser shall be responsible for no Labor
Protection reimbursement to Seller submitted later than 24
months after the Closing. If this transaction is subject to
the imposition of Labor Protection in excess of Class III
labor protection, Purchaser agrees to reimburse Seller for the
first $1,000,000 of Labor Protection cost actually paid by
Seller as a result of this transaction. Seller will use
reasonable efforts to minimize all Labor Protection costs.
Purchaser will seek to fill its job requirements on the Rail
Lines first from employees of Seller currently working on the
Rail Lines provided, however, Purchaser shall have no
obligation to hire any individual who does not meet
Purchaser's employment standards as established solely at the
discretion of Purchaser.
7. ASSUMPTION OF LIABILITIES AND OBLIGATIONS
7.1 LIABILITIES TO BE ASSUMED
As of the Closing, Purchaser agrees to assume, discharge and
pay in accor dance with their respective terms and to become
responsible for the liabilities and obligations of the Seller
associated with the Assets including but not limited to all
orders, licenses, permits and ordinances issued by any court,
governmental entity, body, agency, or commission related to
the liabilities and obligations of the Seller associated with
the Assets and which have been disclosed to Purchaser in
writing, and under all executory Contracts expressly assumed
by Purchaser, to the extent those liabilities and obligations
accrue or apply after the Closing. Notwithstanding the
foregoing, Purchaser shall (i) assume responsibility for all
claims, loss, damage and liability with respect to the Assets
which occurs, is discovered or is claimed after the Closing
which arises out of any action or failure to act on the part
of Purchaser which subsequently results in a violation of
Environmental Law; and (ii) abide by all court orders and all
amendments thereto as they apply to Seller as scheduled on the
Environmental Operations Obligations Schedule attached hereto
as Appendix E and hereby made a part of this Agreement.
Purchaser shall not be responsible for any monetary damages
specified in such orders.
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7.2 LIABILITIES NOT TO BE ASSUMED
Except as expressly provided elsewhere in this Agreement,
Purchaser shall not be obligated to assume any liability or
obligation in connection with the matters described in the
following clauses:
A. any litigation, arbitration, claim or similar
liability of any type with respect to the Assets or
Seller's ownership thereof, which is based on or
arises out of an event or circumstance occurring
prior to the Closing;
B. obligations under any plan to which the Seller
contributes pursuant to the applicable provisions of
the Employee Retirement Income Security Act of 1974,
as amended, or under any other employee benefit plan,
pension plan or similar plan;
C. all claims against or obligations of Seller arising
out of or in connec tion with any labor agreement or
arrangement; and
D. any other liability not specifically assumed pursuant
to the terms of this Agreement.
7.3 INSURANCE
The provisions of this Section shall not be construed to
constitute the assumption of any liabilities or obligations in
a manner which would avoid the applicability of any insurance
policy with respect to any event or circumstance arising prior
to the Closing.
7.4 NO THIRD PARTY RIGHTS
This Section is not intended to create any rights in favor of
any person other than Purchaser and Seller.
8. REPRESENTATIONS AND WARRANTIES
8.1 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THE SALE AND PURCHASE AND THE OTHER TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT SHALL BE WITHOUT REPRE SENTATION OR WARRANTY
OF ANY KIND BY THE SELLER, EXCEPT FOR THE REPRESENTATIONS AND
WARRANTIES OF THE SELLER SET FORTH IN SECTIONS 8.2 AND 8.3
BELOW. WITHOUT LIMITING THE GENERALITY OF THE PRECEDING
SENTENCE, THE SELLER DISCLAIMS ANY REPRESENTATION OR WARRANTY,
EXPRESS OR
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IMPLIED, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO THE ASSETS, AND AVERS THAT SUCH ASSETS
ARE BEING SOLD "AS IS, WHERE IS". All instruments of transfer
may negate all express or implied representations or
warranties (except those contained in this Agreement).
8.2 GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
A. Seller is a validly organized and existing
corporation, in good standing under the laws of the
State of Utah. Seller has the necessary authority to
own property and conduct its business as now
conducted in the States of Wisconsin and Michigan.
B. All necessary corporate action of Seller required in
connection with the execution and delivery of this
Agreement and the consummation of the transactions
contemplated by this Agreement has been author ized
and obtained. Subject to the effectiveness of the
exemption or approval by the Board and any applicable
requirements under the HSR Act, (i) Seller has
obtained all necessary governmental authorizations
and approvals (or waivers of such authorizations or
approvals) required in connection with this
Agreement, and (ii) this Agreement constitutes the
valid and binding obligation of Seller enforceable
against Seller in accordance with its terms, except
as such enforcement may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws
affecting rights of creditors generally and general
principles of equity.
C. Except as set forth on Exhibit 3, the sale of the
Assets and the consummation of the other transactions
contemplated by this Agreement will not result in any
breach of or default under, violate the conditions
of, or accelerate any obligation under, either
Seller's articles of incorporation or bylaws or any
agreement, mortgage, lease, deed, order, law,
judgment or rule to which either Seller is a party or
by which either Seller or its property is bound,
which breach, default, violation or acceleration
would have a materially adverse effect on that
Seller, the Assets or the business currently
conducted with the Assets.
D. No agent, broker or other person acting pursuant to
the authority or direction of Seller is entitled to
any commission or finder's fee in connection with the
transactions contemplated by this Agreement for which
Purchaser is or may become liable.
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E. Except as set forth on Exhibit 3, there are no
actions, suits, or proceedings pending or, to the
Knowledge of Seller, threatened against Seller or its
properties in any court or before any federal, state,
local or other governmental agency which, if decided
adversely to Seller, would prohibit the execution,
delivery and performance of this Agreement by Seller
or would materially adversely affect the Assets or
the business currently conducted with the Assets.
F. As of the Closing, the Assets will not be subject to
any liens, security interests or other encumbrances,
except for Permitted Encumbrances.
G. Seller has sufficient interest in the Assets to
permit the operation of the Rail Lines as presently
conducted, and to the Knowledge of Seller there are
no claims which would affect in any material respect
its interest in the Assets so as to materially
adversely affect Purchaser's ability to conduct
operations with the Assets following the Closing as
currently conducted.
H. To the Knowledge of Seller, each material Contract to
be assigned to Purchaser is in full force and effect
and no default has occurred under the Contract which
would have a materially adverse effect on the Assets
or Purchaser's ability to conduct operations with the
Assets as currently conducted following the Closing.
Seller has not expressly waived or assigned to any
other person any of its rights under any of the
Contracts, and each of the Contracts may be assigned
to Purchaser without impairment of any rights under
the Contract, except (1) as set forth on Exhibit 3
and (2) those Contracts the loss of rights under
which would not have a materially adverse effect on
the Assets or Purchaser's ability to conduct
operations following the Closing with the Assets as
currently conducted.
I. The traffic and revenue data for the Rail Lines for
the 1994 and 1995 calendar years of Seller provided
to Purchaser by Seller accurately reflect in all
material respects actual operating history of Seller
for the periods indicated.
J. To the Knowledge of Seller, Seller is not a party to
any indenture, security, contract or other agreement
or subject to any judgment, order, writ or decree
which would (1) impose any materially adverse
condition upon Purchaser, the Assets or the operation
of the Rail Lines or result in the loss of any
material rights currently possessed or used by Seller
or otherwise materially adversely affect or
materially restrict the Assets or the operation of
the Rail Lines as a result of the sale of the Assets
to Purchaser as contemplated by this Agreement
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or (2) materially adversely affect Purchaser's
ability to conduct the operations of the Rail Lines
following Closing as currently conducted.
8.3 ENVIRONMENTAL REPRESENTATIONS OF SELLER
Seller represents as follows, except as set forth on the
Disclosure Schedule which is attached hereto as Exhibit 3 and
hereby made a part of this Agreement and on the
Environmental-Operations Obligations Schedule which is
attached hereto as Appendix E and hereby made a part of this
Agreement:
A. There are no actions, suits or proceedings pending
or, to the Knowl edge of Seller, threatened against
Seller with respect to the Assets or the operation of
the Rail Lines in any court or before any federal,
state, local or other governmental agency under any
Environmental Law.
B. Seller is in material compliance with all applicable
Environmental Laws with respect to the Assets and the
operation of the Rail Lines.
C. To the Knowledge of Seller's Assistant Vice President
Environmental Management, Seller has received no
written notice from any third party (including,
without limitation, any federal, state or local
govern mental agency) (1) that it has been identified
by the United States Environmental Protection Agency
as a potentially responsible party under CERCLA with
respect to a site included within the Assets listed
on the National Priorities List (40 CFR Part 300
Appendix B (1990)); (2) that any Hazardous Substance
has been discovered on a site included within the
Assets; or (3) that any site included within the
Assets is the subject of any ongoing or ordered
remedial investigation, removal or other response
action pursuant to any Environmental Law.
D. Seller has undertaken a review of assets and
operations, the results of which are reflected in the
Disclosure Schedule to determine whether; (1) any
portion of the Assets has been used for the handling,
storage, disposal or processing of Hazardous
Substances except in material compliance with
applicable Environmental Laws, (2) any underground
storage tanks for Hazardous Substances are located
in, on or about the Assets, (3) the Assets contain
asbestos, urea formaldehyde foam insulation or
transformers or other equipment containing
polychlorinated biphenyls, and (4) there have been
releases of Hazardous Substances in, on, under or
from the Assets except in material compliance with
Environmental Laws. The Disclosure Schedule is
Seller's good faith effort to identify any such
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Assets or operations. Seller specifically disclaims
any representation with respect to such matters.
8.4 REPRESENTATIONS AND WARRANTIES BY PURCHASER
Purchaser represents and warrants to Seller as follows:
A. Purchaser is a validly organized and existing
Michigan corporation, in good standing. Purchaser has
the necessary authority to purchase and own property
and conduct its business as now conducted in the
states of Michigan and Wisconsin.
B. All necessary corporate action of Purchaser required
in connection with the execution and delivery of this
Agreement and the consumma tion of the transactions
contemplated by this Agreement has been authorized
and obtained. Subject to the effectiveness of the
exemp tion or approval by the Board and any
applicable requirements under the HSR Act, (i)
Purchaser has obtained all necessary governmental
authorizations and approvals (or waivers of such
authorizations or approvals) required in connection
with this Agreement, and (ii) this Agreement
constitutes the valid and binding obligation of
Purchaser enforceable against Purchaser in accordance
with its terms, except as enforcement may be limited
by applicable bankruptcy, insolvency, moratorium or
similar laws affecting rights of creditors generally
and general principles of equity.
C. The purchase of the Assets and the consummation of
the transactions contemplated by this Agreement will
not result in any default under, violate the
conditions of or accelerate any obligation under any
material agreement, order, law, judgment or rule to
which Purchaser is a party or by which it is bound.
D. No agent, broker or other person acting pursuant to
the authority or direction of Purchaser is entitled
to any commission or finder's fee in connection with
the transactions contemplated by this Agreement for
which Sellers are or may become liable.
E. There are no actions, suits or proceedings pending
or, to the Knowl edge of Purchaser, threatened
against Purchaser in any court or before any federal,
state, local or other governmental agency which, if
decided adversely to the Purchaser, would prohibit
the execution, delivery and performance of this
Agreement by Purchaser.
F. The sale of the Assets and the consummation of the
other transactions contemplated by this Agreement
will not result in any
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breach of or default under, violate the conditions
of, or accelerate any obligation under, either
Purchaser's articles of incorporation or bylaws or
any agreement, mortgage, lease, deed, order, law,
judgment or rule to which either Purchaser is a party
or by which either Purchaser or its property is
bound, which breach, default, violation or
acceleration would have a materially adverse effect
on the Purchaser, the Assets or the business
currently conducted with the Assets or any other
assets of the Purchaser.
8.5 SURVIVAL
The representations and warranties contained in this Agreement
shall survive the Closing and any termination of this
Agreement and shall remain in full force and effect for three
years after the Closing (five years after the Closing with
respect to the representations and warranties contained in
Sections 8.3 and 8.4).
8.6 CONDITION OF ASSETS
Except as specifically provided in this Section 8, neither
Seller nor Purchaser makes, and each expressly disclaims, any
representation or warranty regard ing the condition of the
Assets, including any Hazardous Substances or any other
conditions, whether or not hazardous, affecting the surface or
subsur face (including groundwater) thereof.
9. CONDITIONS TO THE CLOSING
9.1 OBLIGATION OF PURCHASER TO CLOSE
The obligation of Purchaser to effect the Closing of the
transactions contem plated by this Agreement is subject to the
satisfaction at or prior to the Closing of the following
conditions:
A. The representations and warranties of Seller
contained in Section 8 of this Agreement shall have
been true in all material respects when made and at
the time of Closing as if those representations and
warranties had been made at that time.
B. Seller shall have performed and complied in all
material respects with all agreements and conditions
required by this Agreement to be performed or
complied with by Seller prior to or at the Closing.
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C. Purchaser shall have received the opinion of Seller's
counsel dated as of the Closing Date, substantially
in the form attached to this Agreement as Exhibit 1.
D. Any waiting period (including any extensions) under
the HSR Act applicable to the consummation of the
transactions contemplated by this Agreement shall
have expired or been terminated.
E. The Board shall have approved the transactions
contemplated by this Agreement under the ICC
Termination Act of 1995 or exempted the transactions
contemplated by this Agreement from the provisions of
the ICC Termination Act of 1995 requiring Surface
Transportation Board approval, and that approval or
exemption shall have become final or effective (as
the case may be).
F. No condition, other than Labor Protection, shall have
been imposed by the Board in connection with the
transactions contemplated by this Agreement which has
a material and significant adverse effect on the cost
of the transaction or value of the transaction to
Purchaser or on Purchaser's ability to own, use or
operate the Assets taken as a whole in substantially
the same manner as Seller owned, used or operated the
Assets.
G. Between the date of this Agreement and the Closing,
no unrepaired physical loss or damage shall have
occurred to the Assets resulting in a shut-down of
any material portion of the operation of the Rail
Lines as of the Closing.
H. Purchaser shall have received an executed copy of
each document, agreement and instrument referred to
in this Agreement required to be executed and
delivered by Seller prior to or at the Closing.
The satisfaction of any of the conditions set forth in this
subsection may be waived by Purchaser in writing delivered at
or prior to the Closing.
9.2 OBLIGATION OF SELLER TO CLOSE
The obligation of Seller to effect the transactions
contemplated by this Agreement is subject to the satisfaction
prior to or at the Closing of the following conditions:
A. The representations and warranties of Purchaser set
forth in Section 8 of this Agreement shall have been
true in all material respects when
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made and at the time of the Closing as if those
representations and warranties had been made at that
time.
B. Purchaser shall have performed and complied in all
material respects with all agreements and conditions
required by this Agreement to be performed or
complied with by them prior to or at the Closing.
C. Any waiting period (including any extensions) under
the HSR Act applicable to the consummation of the
transactions contemplated by this Agreement shall
have expired or been terminated.
D. The Board shall have approved the transactions
contemplated by this Agreement under the ICC
Termination Act of 1995 or exempted the transactions
contemplated by this Agreement from the provisions of
the ICC Termination Act of 1995 requiring Board
approval, and that approval or exemption shall have
become final or effective (as the case may be).
E. Seller shall have received the opinion of Purchaser's
counsel dated as of the Closing, substantially in the
form attached to this Agreement as Exhibit 2.
F. Seller shall have received an executed copy of each
document, agreement and instrument referred to in
this Agreement required to be executed and delivered
by Purchaser prior to or at the Closing.
G. No condition other than Labor Protection shall have
been imposed by the Board in connection with the
transactions contemplated by this Agreement which has
a significant and adverse effect on the cost of the
transaction or value of the transaction to Seller.
The satisfaction of any condition set forth in this subsection
may be waived by Seller in writing delivered at or prior to
the Closing.
10. CLOSING
10.1 PLACE OF CLOSING
The Closing of the transactions contemplated by this Agreement
shall take place at the offices of Seller at Chicago, Illinois
or at such- other mutually agreed upon location (the "Closing
Place").
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10.2 TIME OF CLOSING
The Closing shall take place on a mutually agreeable date not
later than the 20th business day following the date on which
an order by the Board approv ing the acquisition of the Assets
by Purchaser has become final or the date on which an
exemption from approval by the Board becomes effective, but in
no event shall the Closing Date, as hereinafter defined, occur
prior to January 2, 1997. The date on which the Closing occurs
is referred to in this Agreement as the "Closing Date".
10.3 DELIVERIES BY PURCHASER AT CLOSING
At the Closing, Purchaser shall pay to Seller the Cash
Purchase Price, through Seller's Designated Qualified
Intermediary, if so requested, as adjusted, deliver to Seller
its undertakings to assume, perform and discharge the
liabilities and obligations of Seller to the extent assumed by
Purchaser under this Agreement, and deliver such other
documents or instruments as are required of Purchaser in order
to effect or evidence the consummation of the actions
contemplated by this Agreement.
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10.4 DELIVERIES BY SELLER AT CLOSING
At the Closing, Seller shall:
A. Effect the transfer of the Assets to Purchaser by the
Quit Claim Deed(s) in recordable form (as permitted
for filing by a railroad or transmitting utility
where allowed) in substantially the form attached as
Exhibit 4 to this Agreement, Personal Property Sale
Order in substantially the form attached as Exhibit 5
to this Agreement, assignments and other documents of
transfer reasonably required to transfer the
interests of Seller in the Assets to Purchaser
consistent with the terms of this Agreement (which
deeds, Personal Property Sale Order, assignments and
other documents may reflect payment of such specific
portions of the Purchase Price as requested by
Purchaser, provided that such allocations and
direction will not be inconsistent with Appendix B or
the provisions of Section 1060 of the Internal
Revenue Code of 1986, as amended).
B. Furnish to Purchaser an affidavit of the type
referred to in Section 1445 (b) (2) of the Internal
Revenue Code of 1986, as amended, if Seller wishes to
avoid the withholding of taxes as provided in Section
1445.
C. Take all other reasonable steps that Purchaser
reasonably requests in order to effectuate the
transactions contemplated by this Agreement,
including the assignment of all Contracts that
Purchaser is to assume pursuant to this Agreement.
11. BOOKS AND RECORDS
11.1 ACCESS TO BOOKS AND RECORDS
A. Prior to Closing, Seller will permit employees and
agents of Purchaser (including consultants) and its
lenders, during normal business hours and on
reasonable notice, to have access to Seller's
properties for the purpose of inspecting the Assets
and to inspect and copy Contracts, books, agreements,
plans, reports and other records reflecting or
reasonably relating to the Assets. Seller may have
representatives present during any inspection, and
may obtain any written reports produced by
environmental consultants to Purchaser in connection
with inspections of the Assets. Seller will cooperate
with Purchaser's and its lenders', investigation of
the Assets and the status of title to the Assets, and
shall use its reasonable efforts to obtain consents
from third parties necessary for Purchaser or its
consultants to inspect
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transportation contracts with those third parties.
Prior to Closing (including if Closing never occurs),
Purchaser agrees that all information and records
obtained by Purchaser or its lenders pursuant to this
Section shall be maintained as confidential. If, due
to competitive factors, Seller refuses to deliver
information to Purchaser for review, Seller shall
deliver such information to an independent consultant
retained by Purchaser who agrees to keep such
information confidential from all parties, including
Purchaser, except for summaries that have been
previously reviewed by Seller and reasonably
determined not to have a competitive impact. If
Seller does not respond to a request to review a
summary within three days, the summary will be
considered not to have a competitive impact.
Purchaser shall not be obligated to maintain as
confidential or to require its lenders to maintain as
confidential any information obtained from Seller
which is publicly available, which is readily
ascertainable from public sources, which is either
known to them at the time the information was
disclosed or is rightfully obtained from a third
party, and in either case was not subject to an
obligation of confidentiality, or which is the
subject of a subpoena or other legal process. No
investigation involving the collection of air, water,
soil or other samples or any other physically
invasive or disruptive procedure, shall be conducted
without Seller's prior consent.
B. From and after the Closing,
(i) Purchaser will make available to Seller,
under reasonable conditions, any records of
Seller transferred to Purchaser pursuant to
this Agreement necessary for Seller's
corporate or tax purposes; and
(ii) Seller will cooperate with Purchaser to make
available to Purchaser, under reasonable
conditions, any records of Seller that may
be useful to Purchaser in the ownership or
operation of the Assets or the performance
of obligations assumed by Purchaser.
11.2 SECURITIES LAW COMPLIANCE
Seller shall, if requested by Purchaser or its corporate
parent in connection with any document required to be filed
with the Securities and Exchange Commission with respect to
the transactions contemplated by this Agreement (whether
before or after the Closing Date), provide Purchaser with
financial information and financial statements necessary to
permit Purchaser to comply with its obligations under the
federal securities laws.
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12. OPERATIONS PRIOR TO CLOSING
12.1 OPERATIONS PRIOR TO CLOSING
Seller agrees that, except with the written consent of
Purchaser, from the date of this Agreement to the Closing:
A. Seller shall operate the Rail Lines in the ordinary
course and will use its reasonable efforts to
preserve for Purchaser the good will of suppli ers,
customers and others having business relationships
with Seller;
B. Seller will not grant (or make any material amendment
to) any track age rights, operating rights, licenses,
permits, easements or encum brances affecting the
Assets;
C. Seller will not sell, lease, assign, mortgage,
hypothecate or otherwise transfer or dispose of any
of the Assets (other than Inventory used in the
ordinary course of business);
D. Seller shall maintain, repair and renew the Assets in
the ordinary course, consistent with past practices
(and in any event to a condition equal to their
condition on the date of this Agreement, ordinary
wear and tear excepted);
E. Seller shall maintain in full force and effect
insurance coverage (including any self-insurance
programs) of the types and in the amounts in
existence on April 1, 1996 with respect to the
Assets;
F. Seller shall maintain in full force and effect all
Contracts, licenses, authorizations and approvals
necessary for or related to the operation and use of
the Assets as currently operated and used; provided,
however, that Seller may amend, extend or terminate
Contracts, licenses, authorizations and approvals in
the ordinary course of business; and
G. Seller shall cause all transportation contracts
entered into after the date of this Agreement to
either specifically permit or not prohibit assignment
to a purchaser of the Rail Lines.
13. EMPLOYEES
Purchaser shall bear the sole obligation of negotiating with and
entering into employment relationships with prospective employees of
Purchaser, and Seller shall have no obligation in that regard. Seller
agrees that Purchaser may solicit any of
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its employees on the Rail Lines for employment. Nothing in this
Agreement shall be interpreted to require Purchaser to hire any
specific employee or any specific number of employees, whether or not
currently covered by a collective bargaining agreement or employment
contract.
14. CONSENTS AND APPROVALS
14.1 BOARD AND HSR APPROVALS
Purchaser and Seller each will cooperate with one another and
use their best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to
prepare all necessary documentation (including, without
limitation, furnishing all information required under the HSR
Act, if applica ble), to effect promptly all necessary filings
and to satisfy all other conditions and obtain all necessary
permits, consents, approvals, orders and authoriza tions of or
any exemptions by, all third parties and all governmental
entities necessary to consummate the transactions contemplated
by this Agreement. Purchaser shall be solely responsible for
filings or proceedings before the Board with respect to the
approval of the acquisition of the Assets or securing an
exemption from that approval and Purchaser's corporate parent
shall be solely responsible for filings or proceedings before
the Board with respect to approval of the common control of
two or more carriers following the acquisition of the Assets
by Purchaser or securing an exemption from that approval.
Seller will, without cost to Purchaser or its parent,
cooperate in the filings and proceedings before the Board and
provide any necessary data in connection with securing
approvals or exemptions. Prior to filing any application for
approval or exemption with the Board, Purchaser will deliver a
draft copy to Seller with sufficient time for Seller to
comment upon the application. Any costs, including filing
fees, associated with any filing before the Board or under the
HSR Act shall be borne solely by Purchaser.
Each party will keep the others apprised of the status of any
inquiries made of such party by the Board, the Federal Trade
Commission, the Department of Justice, the Securities and
Exchange Commission or any other governmental agency or
authority (or members of their respective staffs) with respect
to this Agreement or the transactions contemplated by this
Agreement.
15. INDEMNIFICATION
15.1 PURCHASER'S INDEMNIFICATION
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Purchaser shall defend, indemnify and hold harmless the Seller
from and against all claims, losses, costs and expenses
(including attorneys fees and expenses) which arise out of or
are based on (i) the ownership or operation of the Assets
after the Closing, (ii) any material misrepresentation or
material breach of warranty by Purchaser and (iii) all
liabilities of Seller assumed by Purchaser pursuant to this
Agreement.
15.2 SELLER'S INDEMNIFICATION
Subject to the terms of all Allocation and Proration
Agreements and alloca tion and proration provisions in this
Agreement, and except to the extent liabilities are assumed by
Purchaser under paragraph 7.1 of this Agreement, Seller shall
defend, indemnify and hold harmless Purchaser from and against
all claims, losses, costs and expenses (including attorneys,
fees and expenses) which arise out of or are based on (i) the
ownership or operation of the Assets by Seller prior to the
Closing; (ii) any material misrepresentation or material
breach of warranty by Seller; (iii) any lien, encumbrance,
claim or security interest (including Permitted Encumbrances
only to the extent described in clauses A. and B. of the
definition of Permitted Encumbrances) that arose or attached
as a result of events, operations or ownership prior to the
Closing, (iv) all liabilities of Seller that are not assumed
by Purchaser pursuant to this Agreement and (v) any breach of
an Environmental Law by Seller or any contamination in, on,
about or under the Assets at any time prior to the Closing
(whether or not remaining after the Closing).
15.3 PROCEDURES
The party seeking indemnification pursuant to Sections 15.1 or
15.2 above (the "Indemnified Party') shall give the party
obligated to indemnify (the "Indemnifying Party") written
notice in accordance with Section 17.12 of any claim or
assertion of liability by a third party with respect to which
the Indemnified Party is seeking indemnification (a "Claim").
The Indemnifying Party shall have the right to undertake the
defense of such Claim (by counsel or other representatives of
its own choosing and reasonably acceptable to the Indemnified
Party) at the Indemnifying Party's sole risk and cost.
Notwithstanding the fact that the Indemnifying Party
undertakes the defense of a Claim, if there is a reasonable
probability that the Claim may materially and adversely affect
the Indemnified Party, the Indemnified Party (by counsel or
through other representatives of its own choosing) shall have
the right, at its expense, to participate in the defense,
compromise or settlement of the Claim.
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If the Indemnifying Party undertakes the defense of a Claim,
(i) the Indemni fying Party shall keep the Indemnified Party
informed of the status of the defense and furnish the
Indemnified Party with copies of all documents, instruments
and information reasonably requested by the Indemnified Party
in connection with the Claim; (ii) the Indemnified Party (by
counsel or other representatives of its own choosing and at
its own expense) shall have the right to consult with the
Indemnifying Party (and its counsel and representa tives)
concerning the Claim, and the Indemnifying Party and the
Indemnified Party (and their respective counsel and
representatives) shall cooperate with respect to the Claim;
and (iii) the Indemnifying Party shall not, without the
written consent of the Indemnified Party, settle or compromise
a Claim or consent to the entry of a judgment without
obtaining from the claimant or plaintiff an unconditional
release of all liability of the Indemnified Party in respect
of such Claim in a form satisfactory to the Indemnified Party
and under circumstances which do not require the Indemnified
Party to pay any money or consent to the taking or withholding
of any action affecting it or any of its properties, assets or
businesses.
If the Indemnifying Party does not elect to undertake the
defense of a Claim or fails to defend the Claim within a
reasonable time after notice of the Claim, the Indemnified
Party shall have the right to undertake the defense,
compromise or settlement of the Claim (by counsel or other
representatives of the Indemnified Party's own choosing) on
behalf of, for the account of and at the risk and cost of the
Indemnifying Party. In such event, the Indemnify ing Party
shall pay (in addition to any other sums required to be paid
under the terms of this Agreement) the costs and expenses
incurred by the Indemnified Party in connection with the
defense, settlement or compromise of the Claim as and when
those costs are incurred.
16. TERMINATION
16.1 GROUNDS FOR TERMINATION
This Agreement and the consummation of the transactions
contemplated by this Agreement may be terminated prior to the
Closing:
A. By the agreement in writing of Seller and Purchaser
at any time,
B. By either Purchaser or Seller if the Closing does not
occur prior to March 31, 1997 and the failure of the
Closing to occur is not due to the fault of, or
breach of this Agreement by, any party,
C. By Purchaser, if Seller has made a material
misrepresentation in, or if Seller is guilty of a
material breach of the representations and
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<PAGE>
warranties of Seller contained in, this Agreement, or
if there has been a failure by Seller to comply with
any of its material obligations under this Agreement,
and such material misrepresentation or breach of
warranty or material failure has not been cured after
30 days' written notice from Purchaser to Seller,
D. By Seller, if Purchaser has made a material
misrepresentation in, or if Purchaser is guilty of a
material breach of the representations and warranties
of Purchaser contained in, this Agreement, or if
there has been a failure by Purchaser to comply with
any of its material obliga tions under this
Agreement, and such material misrepresentation or
breach of warranty or material failure has not been
cured after 30 days written notice from Seller to
Purchaser,
E. By either Purchaser or Seller if the Board shall have
disapproved the transactions contemplated by this
Agreement and such disapproval shall have become
final and not subject to further proceedings or
appeal, whether by lapse of time or otherwise, or
F. By either Purchaser or Seller, if any conditions
imposed by the Board materially change the economics
of this transaction for that party.
Termination by Purchaser or Seller pursuant to paragraphs C.
or D. above shall not relieve the non-terminating party of any
liability for misrepresenta tion or breach.
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17. MISCELLANEOUS
17.1 TITLE AND OTHER DESCRIPTIONS
Prior to the Closing, the description of the Assets may be
changed by mutual agreement of Purchaser and Seller to add or
delete items of tangible property or Contracts. From time to
time after the Closing, at Purchaser's request and without
further consideration, Seller will execute and deliver other
instruments of conveyance and transfer and take other actions
as Purchaser reasonably requires to convey, transfer to and
vest in Purchaser whatever title Seller may have in and to the
Assets, and to put Purchaser in possession of the Assets. In
the case of Contracts and rights, if any, that cannot be
transferred effectively without the consent of third parties,
Seller will request these consents promptly and will make all
reasonable efforts to obtain the consents. From time to time
after the Closing, at Seller's request and without further
consideration, Purchaser will execute and deliver other
instruments of conveyance, transfer and assumption and take
other actions as Seller reasonably requires to assume the
liabilities and obligations of Seller to be assumed by
Purchaser pursuant to this Agreement.
17.2 WAIVER
Purchaser may in writing extend the time for or waive
performance of any of the obligations, representations or
warranties of Seller under this Agreement. Seller may in
writing take similar action with respect to the obligations,
repre sentations or warranties of Purchaser under this
Agreement.
17.3 EXPENSES
Purchaser shall be responsible for and shall pay all expenses,
including attorney's fees, incurred by Purchaser in connection
with this Agreement and the consummation of the transactions
contemplated by this Agreement, and Seller shall be
responsible for and shall pay all expenses, including
attorney's fees, incurred by Seller in connection with this
Agreement and the consummation of the transactions
contemplated by this Agreement.
17.4 TRANSITIONAL MATTERS
A. Seller and Purchaser agree to the Administration and
Proration Procedures contained in attached Appendix
C.
B. Prior to the Closing, Purchaser and Seller may agree
on different or additional procedures to implement
their respective rights and obliga tions, including
procedures which are required to minimize or avoid
any disruption of the settlement of interline
accounts by draft in the normal course of business.
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17.5 CAR SUPPLY
Seller will, for a period of up to six months after the
Closing Date, permit the non-ore cars customarily used for
loading on the Rail Lines to remain in service on the Rail
Lines on a normal car hire basis. Purchaser will use its best
efforts to acquire sufficient replacement equipment during
that six month period, and Seller shall have the right to
remove from availability any non-ore cars that are not needed
to service shippers on the Rail Lines.
17.6 ENTIRE AGREEMENT
This Agreement, including the Appendices and Exhibits attached
to this Agreement, constitutes the entire agreement and
understanding between Seller and Purchaser with respect to the
sale and purchase of the Assets and the other transactions
contemplated by this Agreement. All prior representations,
understandings and agreements between the parties with respect
to the purchase and sale of the Assets and the other actions
contem plated by this Agreement are superseded by the terms of
this Agreement.
17.7 CHOICE OF LAW
The provisions of this Agreement shall be construed and
interpreted in accor dance with the laws of the State of
Illinois, including for the purposes of choice of law, as
though all acts and omissions related to this Agreement
occurred in that State.
17.8 SEVERABILITY
The provisions of this Agreement shall, where possible, be
interpreted in a manner necessary to sustain their legality
and enforceability; the unenforceability of any provision of
this Agreement in a specific situation shall not affect the
enforceability of that provision in other situations or of
other provisions of this Agreement.
17.9 COUNTERPARTS
This Agreement may be executed in two or more original
counterparts, each of which shall for all purposes be
considered an original of this Agreement.
17.10 HEADINGS
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Section and subsection headings contained in this Agreement
are inserted for convenience of reference only, shall not be
deemed to be a part of this Agreement for any purpose, and
shall not in any way define or affect the meaning,
construction or scope of any of the provisions of this
Agreement.
17.11 SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon, and inure to the benefit
of the respec tive successors and assigns of the parties.
Purchaser may assign its rights under this Agreement, in whole
or in part, to a wholly-owned subsidiary of Purchaser or any
wholly-owned subsidiary of Wisconsin Central Transporta tion
Corporation.
17.12 NOTICE
All notices given pursuant to this Agreement shall be
delivered by hand, sent by United States registered or
certified mail, postage prepaid, delivered by recognized
express mail or overnight courier service, or delivered by
electronic facsimile with a confirmation copy delivered by any
of the preced ing methods, addressed as follows (or to another
address or person as a party may specify on notice to the
other):
A. If to Seller:
Union Pacific Railroad Company
1416 Dodge Street
Omaha, Nebraska 68179
Attention: Warren Wilson,
Senior Manager Rail Line Planning
with copies to:
1416 Dodge Street
Omaha, Nebraska 68179
Attention: Director Joint Facilities
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B. If to Purchaser:
Wisconsin Central Ltd.
One O'Hare Centre
Suite 9000
6250 N. River Road
Rosemont, Illinois 60017-5062
Attention: Edward A. Burkhardt,
Thomas F. Power,
William Schauer
with copies to:
Thomas Rissman, Esq.
McLachlan, Rissman & Doll
6 West Hubbard Street
Suite 500
Chicago, Illinois 60610
Attention: Thomas W. Rissman
29
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Dated as of November 30, 1996.
UNION PACIFIC RAILROAD COMPANY
/s/ Jerry Davis
By: Jerry Davis
Its: President & Chief Operating
Officer
Attest:
By: /s/ C.W. Saylors
Title: Asst. Secretary
SAULT STE. MARIE BRIDGE COMPANY
/s/ J. Reilly McCarren
By: J. Reilly McCarren
Its: EVP/COO
Attest:
By: /s/ Thomas W. Rissman
Title: Secretary
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APPENDIX A
DESCRIPTION OF ASSETS
The Assets consist of the real estate legally described in Appendix A-1 and
personal property, rights, intangibles and interests described in Sections A and
B below, but exclude the assets described in Section C below. Section A contains
a general description of the Assets. Section B more specifically identifies
certain Assets described in Section A; however, the omission of any Asset from
Section B shall not imply the exclusion of any Asset described in Section A. If
there is any conflict or contradiction between Sections A, B and C, Section C
shall in all cases supersede Sections A and B.
A. GENERAL DESCRIPTION
The Assets consist of Seller's estate, right, title and interest in the
following:
1. The Rail Lines, which consist of the following continuous
lines of railroad:
(i) The Escanaba Subdivision from North Green Bay, WI to
Ishpeming, MI;
(ii) The Iron Mountain Branch and the Antoine Industrial
Lead from Powers, MI to Antoine, MI;
(iii) The Niagara Industrial Lead from Quinnesec, MI to
Niagara, WI; and
(iv) The Palmer Industrial Lead from Cascade, MI to
Palmer, MI.
2. All written interchange agreements, all joint facility
agreements, all trackage agreements, all paired track
agreements and all trackage and operating rights granted to or
otherwise owned, used, held for use or otherwise held by
Seller which relate to the Rail Lines;
3. All interests in and agreements relating to industry and side
tracks and facilities which form a part of or relate to the
Rail Lines;
4. All operating rail property, including without limitation, the
roadbed, rail, track (including the main track, side tracks,
spur tracks, drill tracks, connecting tracks, yard tracks,
industry tracks and team tracks), connections, bridges,
stations, culverts, structures, and signal facilities, parking
and storage areas, depots, yards, shops, signaling and related
equipment, buildings (including fixtures) owned, used, held
for use or otherwise held by Seller in connection with or that
relate to the operation, use or enjoyment of the Rail Lines,
Appendix A-Page 1
<PAGE>
wherever located and any other personal property used for rail
operations and not removed by Seller within thirty (30) days
after Closing;
5. All leases, easements, licenses, rights-of-way or other
interests in real property owned, leased, used, held for use
or otherwise held by Seller in connection with the operation,
use or enjoyment of the Rail Lines;
6. Personal Property as listed on Appendix A-2;
7. All Contracts in connection with the operation, use or
enjoyment of the Rail Lines or the other Assets (including,
without limitation, public and private grade crossing
agreements, and pipeline, wireline, fiber optic and other
utility service agreements);
8. All franchises, privileges, licenses and permits conferred,
given, owned, acquired, appropriated, used or useful for any
purpose in connection with the operation, use or enjoyment of
the Rail Lines or the other Assets (including, without
limitation, an assignment of the radio frequency licenses used
in operation of the Rail Lines);
9. All manufacturers, or other third-party's warranties with
respect to the Assets;
10. All rights, benefits and privileges of Seller in its capacity
as grantor, licensor, lessor or franchiser, or in any similar
capacity, arising out of or under any Contract, easement,
franchise, right-of-way, license or lease relating to the Rail
Lines or other Assets;
11. All Contracts between Seller and any receiver or shipper for
the movement of traffic over the Rail Lines, and any Contracts
with participating transportation companies pertaining to the
movement of traffic; to the extent that transportation
contracts cover both the Rail Lines and movements by Seller
over other rail lines which it will continue to operate after
closing, all rights in such contracts as related to the Rail
Lines;
12. All of Sellers' rights relating to the ownership or operation
of the Rail Lines under Contracts (including, without
limitation, any Contracts, environmental indemnifications,
trackage rights, joint facility or car agreements with other
railroads, any transportation contracts with shippers and any
other indemnification and similar agreements relating to
environmental matters);
13. All yards, intermodal terminals, lumber transfer facilities,
bulk transfer facilities, distribution centers or other
facilities associated with the Rail Lines;
14. The current records for: historical traffic and revenue data,
(in machine readable form, where applicable), customer and
supplier lists,
Appendix A-Page 2
<PAGE>
correspondence and legal files, freight tariffs, switching
tariffs, demurrage agreements, track profiles, schematics,
blueprints, drawings, valuation, track and other maps,
surveys, acquisition deeds, instruments, diagrams of railroad
plant and structures, specifications, signal diagrams,
engineering photographs, engineering data, easement and
betterment maps, real estate documents and records,
construction, repair, maintenance and asset history records,
and other books, papers, appraisals, files and records
pertaining primarily to the Rail Lines or the other Assets,
wherever located;
15. The Escanaba Ore Dock including all fixtures, material
handling facilities including but not limited to ore unloading
facilities, conveyor systems, ore storage and reclaim
equipment and ore vessel loading equipment.
16. All other real and personal property of every kind and
character whatsoever and every estate and interest therein.
B. SPECIFIC IDENTIFICATION OF CERTAIN ASSETS
The Assets described generally above include, without limitation, the assets
identified in this Section B.
Purchaser shall acquire the following material Contracts:
1. Contracts Relating to Rail Operations, Real Property
Contracts, Leases, Licenses and Easements. The Contracts
listed on Attached Schedule I.
2. Transportation Contracts. Purchaser shall assume Seller's
rights and obligations with respect to the Rail Lines under
the Price Documents listed on Schedule II.
3. Contracts Relating to Environmental Matters. None. See Exhibit
3.
C. EXCLUDED ASSETS
The Assets do not include the following assets:
1. Any labor or employment agreement;
2. Any lease of office space or other Contract with affiliates of
Seller providing for shared overhead expense, tax sharing or
similar inter-corporate matters;
3. The Contracts listed on attached Schedule III.
Appendix A-Page 3
<PAGE>
4. The exclusions of real property and real property interests as
set forth on Appendix A-1 and on Exhibit 4 to the Agreement.
5. Except as set forth on Appendix A-2, all inventory, fuel,
supplies and other materials relating to or acquired or used
for locomotive or car repair, trackage, signal, structure and
building maintenance, or otherwise in connection with the
operation, use or enjoyment of the Rail Lines or the other
Assets;
6. Except as set forth on Appendix A-2, all furniture, fixtures
and equipment, signal and dispatching equipment, other
equipment, tools (both heavy and light), power tools,
machinery, and maintenance of way equipment owned, used or
held for use or otherwise held in, on or in connection with
the Rail Lines or the other Assets;
7. Except as set forth on Appendix A-2, the motor vehicles and
maintenance vehicles used on or in connection with the Rail
Lines;
8. Subsurface and mineral rights as referenced or excepted on
Exhibit 4 to the Agreement.
Appendix A-Page 4
<PAGE>
APPENDIX C
ADMINISTRATION AND PRORATION PROCEDURES
1. DEFINITIONS.
In addition to the other definitions contained in the Agreement to
which this Appendix is attached, the following terms when used with
initial capitalization in this Appendix, whether in the singular or the
plural, have the meanings ascribed to them below:
A. "Closing Effectiveness" means 11:59 p.m. on the Closing Date.
B. "Waybill" means a shipment document generated from a valid
bill of lading tendered to the originating railroad or from a
customarily equivalent industry practice.
2. ALLOCATION OF REVENUES.
A. Seller shall be entitled to tariff, division, or contractual
share of all freight revenue, switching revenue, and loss and
damage collectible, and shall be liable for tariff, division,
or contractual share of all freight revenue (including shipper
allowances and interline divisions), switching revenue,
switching absorptions, and loss and damage payable, with
respect to (i) revenue freight originated on the Rail Lines
with a bill of lading date on or prior to the Closing
Effectiveness and (ii) revenue freight traffic terminated at
Waybill destination by Seller on the Rail Lines on or prior to
the Closing Effectiveness. In all cases, the amounts described
in this subparagraph (a) shall include subsequent corrections,
statements of differences, overcharge claims and other
adjustments.
B. Purchaser shall be entitled to tariff, division, or
contractual share of all freight revenue, switching revenue,
and loss and damage collectible, and shall be liable for
tariff, division, or contractual share of all freight revenue
(including shipper allowances and interline divisions),
switching revenue, switching absorptions, and loss and damage
payable, with respect to (i) revenue freight traffic
originated on the Rail Lines with a bill of lading date
subsequent to the Closing Effectiveness and (ii) revenue
freight traffic terminated at Waybill destination by
Appendix C-Page 1
<PAGE>
Purchaser on the Rail Lines subsequent to the Closing
Effectiveness. In all cases, the amounts described in this
subparagraph (b) shall include subsequent corrections,
statements of differences, overcharge
claims and other adjustments.
C. All Waybills and bills of lading for revenue freight traffic
located on the Rail Lines as of the Closing Effectiveness
shall be the property of Purchaser and Seller will take such
steps as necessary to secure such documents for Purchaser
prior to Closing Effectiveness. Following the Closing,
Purchaser shall provide Seller with such copies as Seller
reasonably requests for hazardous material documentation or
billing purposes.
3. SHIPPER ALLOWANCES.
Seller shall be responsible for all shipper allowances accruing before
the Closing Effectiveness, and Purchaser shall be responsible for all
shipper allowances accruing after the Closing Effectiveness with
respect to movements over the Rail Lines (and not over Seller's
remaining lines of railroad). Certain transportation contracts that are
to be assigned to and assumed by Purchaser may include shipper
allowance provisions that contain incentive payments or measurements
affecting the ultimate amount that will be due to the shipper under the
contract that cannot be determined at Closing. Examples include,
without limitation, shipper allowances based upon volume, revenue,
production percentage or service guarantees during a period that
extends beyond the Closing Date. If the amount of a shipper allowance
becomes determinable after Closing and results in either a payment to
or refund from a shipper, such payment or refund, as determined under
the contract as in effect immediately prior to Closing, shall be
prorated between Seller and Purchaser on the basis of the factors
affecting such allowance (e.g., volume or revenue) arising from
Waybills dated before and after the Closing Effectiveness. Purchaser
will settle with the shipper and pay or invoice Seller its proportional
share of the receivable or payable. In addition, with respect to any
shipper allowances that are accrued for as of the Closing Date,
Purchaser shall settle with the shipper and will invoice Seller for the
amount due (unless that amount was included in an adjustment of the
Purchase Price at Closing).
4. DEMURRAGE AND DETENTION.
Appendix C-Page 2
<PAGE>
For shippers other than "average agreement shippers," all demurrage and
detention revenue accruing on cars released prior to the Closing
Effectiveness will be Seller's. All demurrage and detention revenue
accruing on cars released after the Closing Effectiveness will be
Purchaser's. For "average agreement shippers," any demurrage revenues
on cars relating to any period in which the Closing occurs shall be
prorated for such period on the basis of the actual number of calendar
days in such period before and after the Closing Effectiveness and will
be settled upon collection from the shipper. Seller will provide copies
of all demurrage and detention agreements and related records as soon
as possible, and in any event within 5 days after Closing.
5. EQUIPMENT RENTALS.
For purposes of equipment rentals, all freight cars, trailers and
containers that are not a part of the Assets (equipment leased under a
lease that is included in the Assets shall be considered equipment that
is a part of the Assets) but that are located on the Rail Lines shall
be considered interchanged by Seller to Purchaser as of the Closing
Effectiveness. Seller shall be liable for or entitled to equipment
rentals for periods before that time and Purchaser for periods after
that time.
6. PAYROLL TAXES.
If Purchaser is able to, and elects to, calculate its liability for
Railroad Retirement (Tiers I and II), Railroad Unemployment and
Railroad Unemployment Repayment taxes (collectively, "Payroll Taxes")
for the year in which the Closing occurs and with respect to employees
hired by Purchaser who were former Seller employees, by taking into
account compensation paid to such employees by Seller prior to Closing,
then Purchaser shall be liable to Seller for 50% of the Payroll Tax
Savings (as defined below). The "Payroll Tax Savings" shall be the
amount equal to the excess, if any, of (i) the liability for Payroll
Taxes Purchaser would have been required to pay with respect to its
employees who were former Seller employees if Purchaser could not have
calculated such liability for Payroll Taxes by taking into account
compensation paid to such employees by Seller prior to Closing over
(ii) the actual amount of liability for such Payroll Taxes payable by
Purchaser with respect to its employees who were former Seller
employees for the year of Closing. The amount payable to Seller, if
any, will be paid no later than March 31 of the year following the year
in which Closing occurs. Seller agrees to provide Purchaser with all
necessary information required to allow Purchaser
Appendix C-Page 3
<PAGE>
to calculate Payroll Taxes by taking into account compensation paid
prior to Closing to Purchaser's employees who were former Seller
employees.
7. JOINT FACILITIES.
Joint facility bills (both payable and receivable) relating to any
period in which the Closing occurs, shall be prorated for that period,
and liability or entitlement shall be apportioned between Seller and
Purchaser, on the basis of the dates before and after the Closing Date
on which the underlying work was performed, if available, or if not
available on the basis of the actual number of calendar days in the
applicable period occurring before and after the Closing Date.
Appendix C-Page 4
<PAGE>
8. CASUALTIES TO FOREIGN EQUIPMENT.
Liability for repairs to, or the casualty value of, foreign cars or
locomotives damaged or destroyed while in service on the Rail Lines
shall be allocated on the basis of the time and date such cars or
locomotives were damaged or destroyed, with liability being Seller's if
the damage or destruction occurred in an incident prior to the Closing
Effectiveness and Purchaser's if the damage or destruction occurred in
an incident after the Closing Effectiveness.
9. ALLOCATION OF OTHER EXPENSES.
All other expense items payable, including but not limited to
utilities, patron switching and purchased services, relating to any
period in which the Closing occurs, shall be prorated for that period,
and liability shall be apportioned between Seller and Purchaser, on the
basis of the dates before and after the Closing Date on which the
underlying work was performed, if available, or if not available on the
basis of the actual number of calendar days in the applicable period
occurring before and after the Closing Date.
10. ACCOUNTS PAYABLE.
Purchaser shall not be responsible for any accounts payable of Seller
of any type including, but not limited to, accounts payable with
respect to interline accounts, joint facilities and trackage rights
payments owed, incurred or in any way in whole or in part expended but
not yet paid as of the Closing Date. Purchaser shall promptly forward
to Seller any invoices or demands with respect to those accounts
payable. All accounts payable of Seller with regard to goods received
or services rendered on or subsequent to the Closing Date shall be the
responsibility of Purchaser. Seller shall promptly forward to Purchaser
any invoices or demands with respect to those accounts. If Purchaser or
Seller receives an invoice or demand for payment for goods received in
part by Seller and in part by Purchaser or services rendered in part to
Seller and in part to the Purchaser, the invoice or demand shall be
forwarded, if necessary, to Purchaser, and shall be paid by Purchaser
on or before its due date. Purchaser shall invoice Seller for the
portion of the invoice or demand that relates to goods received or
services rendered prior to the Closing Date.
11. ACCOUNTS RECEIVABLE.
Appendix C-Page 5
<PAGE>
All accounts receivable of Seller, of any type, including but not
limited to accounts receivable representing interline accounts, joint
facilities and trackage rights revenues owed, incurred or in any way
earned but not yet received as of the Closing Date, shall be Seller's
property. Purchaser shall promptly forward to Seller any checks or
other payments it receives with respect to these accounts. If Purchaser
receives a check or other payment for goods delivered in part by Seller
and in part by the Purchaser or services rendered in part by Seller and
in part by Purchaser, Purchaser shall promptly remit to Seller that
portion of the payment received with respect to goods delivered by
Seller or services rendered by Seller.
12. PAYMENT.
Seller and Purchaser shall each pay any invoice rendered by the other
pursuant to this Appendix within 30 days of receipt.
Appendix C-Page 6
<PAGE>
APPENDIX E
ENVIRONMENTAL OPERATIONS OBLIGATIONS SCHEDULE
1. Consent Order dated December 19, 1974.
2. Amendment to consent order dated November 8, 1978.
3. Order terminating jurisdiction of the federal court
dated January 5, 1984.
<PAGE>
EXHIBIT 3
DISCLOSURE SCHEDULE
My name is Donald R. York and I am Manager Environmental Field Operations for
the Union Pacific Railroad Company (UPRR). I have conducted a survey of all
environmentally related activities or facilities on the following former Chicago
and North Western Railway Company sub-divisions now owned and operated by Union
Pacific Railroad Company:
1. Duck Creek North
2. Oconto Falls
3. Marinette
4. Partridge (Including Ore Dock)
5. Antoine
6. Palmer Spur
7. Niagara Spur
Based upon system surveys conducted by various UPRR personnel in 1996 and
verified this year, the following are noted:
Fueling Areas (all tanks above ground)
Presently in operation
Escanaba - 50,700 gallon capacity
storage tank at P&H
Facility
Iron Mountain - 20,000 gallon storage tank
No longer in operation but still at site
Marinette - 20,000 gallon - empty
Pollution Control Facilities
Escanaba - Gravity oil separator installed in leased facility.
- Baghouse filter system at dumper building, wet
suppressant spray systems at dumper, transfer
point, and belts.
Asbestos Locations
Marinette - Piping inside baggage room building next to depot.
Exhibit 3-Page 1
<PAGE>
No other reported asbestos locations.
Hazardous Waste Generation
Escanaba - Mineral spirits used in parts cleaning
operations - when loaded with oil, mixed
with waste oil and shipped to Proviso Yard,
Northlake, Illinois for disposal -
considered non-hazardous when spent.
- Chlorinated electrical parts cleaner sprayed
on parts using aerosol cans - evaporates.
Underground Storage Tanks
All known underground fuel storage tanks reported to me have
been removed. Two underground storage tanks remain at
Escanaba, one containing Nalco Magnesium Chloride for road
spraying, the other containing Nalco dust suppressant for
dumper building and conveyor belts.
Noise/Dust Complaints
There have been periodic complaints from adjoining property
owners of noise and dust from the Escanaba Ore Dock. There are
no current proceedings relating to noise or dust. (See
Appendix E to Asset Purchase Agreement dated as of November
30, 1996 between Union Pacific Railroad Company and Sault Ste.
Marie Bridge Company.)
Based on reports provided to me, I am not aware of any other environmentally
related activities or facilities in connection with the property subject to the
sale.
Remediation Sites
In compliance with an order from the Michigan Department of
National Resources, the UPRR is currently remediating property
in Rock, Michigan, the site of a former leased bulk oil
facility.
NIOSH
Employees at the Escanaba Ore Dock have filed a complaint with
NIOSH complaining of dust generated by the handling of mine
tailings at the facility. The UPRR is not aware of the status
of this complaint.
Exhibit 3-Page 2
<PAGE>
EXHIBIT NO. 11
<TABLE>
<CAPTION>
Statement re Computation of Per Share Earnings
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
($ in thousands, except per share amounts)
For the Year Ended
December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before extraordinary items .................... $ 50,034 $ 44,632 $ 38,282
Extraordinary items .................................. (1,602) (2,123) (1,587)
-------------- -------------- --------------
Net income ........................................... $ 48,432 $ 42,509 $ 36,695
============== ============== ==============
Weighted average common shares outstanding:
Primary ......................................... 50,647,000 50,242,000 49,787,000
============== ============== ==============
Fully diluted ................................... 51,842,000 51,642,000 50,843,000
============== ============== ==============
Earnings per common share outstanding - primary:
Income before extraordinary items ............... $ 0.99 $ 0.89 $ 0.77
Extraordinary items ............................. (0.03) (0.04) (0.03)
-------------- -------------- --------------
Net income .................................. $ 0.96 $ 0.85 $ 0.74
============== ============== ==============
Earnings per common share outstanding - fully diluted:
Income before extraordinary items ............... $ 0.96 $ 0.86 $ 0.75
Extraordinary items ............................. (0.03) (0.04) (0.03)
-------------- -------------- --------------
Net income .................................. $ 0.93 $ 0.82 $ 0.72
============== ============== ==============
</TABLE>
EXHIBIT NO. 23
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors and Stockholders
Wisconsin Central Transportation Corporation:
We consent to incorporation by reference in the previously filed registration
statements (No. 33-40820, No. 33-65678, No. 33-84088 and No. 33-80309) on Form
S-8 of Wisconsin Central Transportation Corporation of our report dated January
27, 1997, relating to the consolidated balance sheets of Wisconsin Central
Transportation Corporation and subsidiaries as of December 31, 1996 and 1995,
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, 1996, which report appears in the December 31, 1996 annual report
on Form 10-K of Wisconsin Central Transportation Corporation.
KPMG Peat Marwick LLP
Chicago, Illinois
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement
of Income for the Year Ended December 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,637
<SECURITIES> 0
<RECEIVABLES> 76,374
<ALLOWANCES> 2,256
<INVENTORY> 17,530
<CURRENT-ASSETS> 111,630
<PP&E> 528,784
<DEPRECIATION> 63,791
<TOTAL-ASSETS> 691,275
<CURRENT-LIABILITIES> 139,603
<BONDS> 164,303
0
0
<COMMON> 508
<OTHER-SE> 298,638
<TOTAL-LIABILITY-AND-EQUITY> 691,275
<SALES> 0
<TOTAL-REVENUES> 262,160
<CGS> 0
<TOTAL-COSTS> 226,388
<OTHER-EXPENSES> (4,771)
<LOSS-PROVISION> 600
<INTEREST-EXPENSE> 11,808
<INCOME-PRETAX> 28,735
<INCOME-TAX> 11,378
<INCOME-CONTINUING> 17,357
<DISCONTINUED> 0
<EXTRAORDINARY> 1,602
<CHANGES> 0
<NET-INCOME> 48,432
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.93
</TABLE>
