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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
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Commission File Number 0-19150
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION
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(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 North River Road, Suite 9000
Rosemont, Illinois 60018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (847) 318-4600
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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 the number of shares outstanding of the
Issuer's common stock as of July 31, 1998: 51,135,344 shares
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION
FORM 10-Q
Quarter Ended June 30, 1998
CONTENTS PAGE
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.................................. 1
Consolidated Statements of Income............................ 3
Consolidated Statements of Cash Flows........................ 4
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
Item 6. Exhibits and Reports on Form 8-K............................. 12
Signatures................................................................. 13
Index to Exhibits.......................................................... 14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
Assets
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 3,235 $ 4,630
Receivables, net of allowance for doubtful accounts of $1,722
and $1,628 at June 30, 1998 and December 31, 1997.................................. 81,468 79,722
Income taxes receivable............................................................... 1,750 2,106
Materials and supplies................................................................ 27,650 20,560
Deferred income taxes................................................................. 1,250 1,250
Other current assets.................................................................. 1,540 1,277
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Total current assets............................................................... 116,893 109,545
Investment in affiliates.................................................................. 164,625 152,489
Properties:
Roadway and structures................................................................ 645,533 609,932
Equipment............................................................................. 126,849 116,781
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Total properties................................................................... 772,382 726,713
Less accumulated depreciation......................................................... (86,469) (77,888)
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Net properties..................................................................... 685,913 648,825
Deferred financing and organization costs, net............................................ 3,678 737
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Total assets....................................................................... $ 971,109 $ 911,596
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
Liabilities and Stockholders' Equity
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Short-term debt....................................................................... $ 1,426 $ 1,387
Accounts payable...................................................................... 46,415 47,077
Accrued expenses...................................................................... 88,048 80,390
Accrued disputed switching charges and associated interest............................ 21,221 20,611
Interest payable...................................................................... 2,474 1,370
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Total current liabilities.......................................................... 159,584 150,835
Long-term debt............................................................................ 280,708 279,383
Other liabilities......................................................................... 4,568 4,664
Deferred income taxes..................................................................... 111,478 97,199
Deferred income........................................................................... 9,270 9,830
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Total liabilities.................................................................. 565,608 541,911
Stockholders' equity:
Preferred stock, par value $1.00; authorized 1,000,000
shares; none issued or outstanding................................................. --- ---
Common stock, par value $0.01; authorized 150,000,000 shares;
issued and outstanding, 51,034,683 shares at June 30, 1998
and 51,011,042 shares at December 31, 1997......................................... 510 510
Paid in capital....................................................................... 112,806 112,492
Accumulated other comprehensive income................................................ (918) 3,036
Retained earnings..................................................................... 293,103 253,647
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Total stockholders' equity......................................................... 405,501 369,685
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Total liabilities and stockholders' equity......................................... $ 971,109 $ 911,596
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
For the Quarter Ended For the Six Months
June 30, Ended June 30,
----------------------- -------------------------
1998 1997 1998 1997
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues........................................... $ 84,959 $ 84,993 $ 168,916 $ 165,254
Operating expenses:
Roadway and structures.................................. 11,880 10,562 25,552 22,831
Equipment ........................................... 14,240 17,206 31,161 36,347
Transportation.......................................... 25,708 26,506 53,416 51,521
General and administrative.............................. 9,192 9,572 18,860 18,323
--------- -------- ---------- ----------
Operating expenses.................................. 61,020 63,846 128,989 129,022
--------- -------- ---------- ----------
Income from operations....................................... 23,939 21,147 39,927 36,232
Other income (expense):
Sale of rights under transportation agreement........... --- --- 5,445 ---
Interest expense........................................ (4,276) (3,673) (8,484) (6,852)
Other, net ........................................... 236 317 374 595
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Total other income (expense), net................... (4,040) (3,356) (2,665) (6,257)
--------- -------- ---------- ----------
Income before income taxes and
equity in net income of affiliates...................... 19,899 17,791 37,262 29,975
Provision for income taxes................................... 7,879 7,047 14,754 11,870
--------- -------- ---------- ----------
Income before equity in
net income of affiliates................................ 12,020 10,744 22,508 18,105
Equity in net income of affiliates........................... 7,007 9,937 16,948 20,210
--------- -------- ---------- ----------
Net income................................................... $ 19,027 $ 20,681 $ 39,456 $ 38,315
========= ======== ========== ==========
Earnings per common share:
Basic .................................................. $ 0.37 $ 0.41 $ 0.77 $ 0.75
========= ======== ========== ==========
Diluted ................................................ $ 0.37 $ 0.40 $ 0.77 $ 0.75
========= ======== ========== ==========
Average common shares outstanding:
Basic................................................... 51,028 50,858 51,021 50,830
========= ======== ========== ==========
Diluted ................................................ 51,354 51,409 51,361 51,411
========= ======== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
For the Six Months Ended
June 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 39,456 $ 38,315
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization...................................................... 9,813 8,509
Deferred income taxes.............................................................. 14,279 11,835
Equity in net income of affiliates................................................. (16,948) (20,210)
Gains on property sales............................................................ (134) (301)
Net amortization of deferred gain on sale-leaseback of equipment................... (560) (560)
Changes in working capital:
Accounts receivable........................................................... (1,746) (2,876)
Materials and supplies........................................................ (7,090) (11,205)
Other current assets, excluding deferred income taxes......................... 93 (113)
Current liabilities........................................................... 8,710 16,941
Other, net......................................................................... (405) 383
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Net cash provided by operating activities.............................................. 45,468 40,718
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Cash flows from investing activities:
Property acquisitions.................................................................. --- (92,497)
Property additions..................................................................... (47,904) (36,647)
Property sales and other transactions.................................................. 1,454 2,457
Investment in affiliates............................................................... --- (8,401)
Dividend from affiliate................................................................ 1,167 3,374
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Net cash used for investing activities................................................. (45,283) (131,714)
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Cash flows from financing activities:
Proceeds from sale of debt securities.................................................. 150,000 ---
Repayments of long-term debt........................................................... (148,636) ---
Other long-term debt issued............................................................ --- 88,368
Debt issuance costs.................................................................... (3,258) ---
Issuance of common stock under stock option plans...................................... 314 1,503
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Net cash (used for) provided by financing activities................................... (1,580) 89,871
--------- ---------
Net decrease in cash and cash equivalents.............................................. (1,395) (1,125)
Cash and cash equivalents, beginning of period......................................... 4,630 5,637
--------- ---------
Cash and cash equivalents, end of period............................................... $ 3,235 $ 4,512
========= =========
Supplemental cash flow information: Cash paid during the period for:
Interest........................................................................... $ 7,230 $ 5,423
Income taxes....................................................................... 278 35
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Basis of Presentation
The consolidated financial statements presented herein present the results
of operations of Wisconsin Central Transportation Corporation ("WCTC") and its
wholly owned 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, through WCI, also holds a 33% equity
interest in English Welsh and Scottish Railway Holdings Limited ("EWS"), whose
subsidiaries operate railways in Great Britain, a 23% equity interest in Tranz
Rail Holdings Limited ("Tranz Rail"), which operates a nationwide railway in New
Zealand, and a 33% equity interest in Australian Transport Network Limited
("ATN") which provides all the commercial rail freight service in Tasmania, an
island state of Australia. WCTC and its subsidiaries are hereinafter referred to
as the Company. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
the Company's audited financial statements and the notes thereto for the year
ended December 31, 1997. In the opinion of management, the information provided
in these statements reflects all adjustments necessary to present fairly such
information. The results of operations for any interim period are not
necessarily indicative of the results of operations for an entire year.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
Comprehensive Income Information
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The Company's comprehensive
income consists of (a) net income as reported in the statements of income and
(b) other comprehensive income (loss), which is comprised solely of foreign
currency translation adjustments. The Company has not recorded income tax
effects of its foreign currency translation adjustments. For the six months of
1998, comprehensive income was $35.5 million, as compared to comprehensive
income of $35.0 million for the first six months of 1997. The accumulated amount
of other comprehensive income through the date of each balance sheet is
presented as a component of stockholders' equity. Comprehensive income will be
reported in a separate financial statement in each of the Company's future
annual reports.
Sale of Debt Securities
In January 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission registering $250 million of notes for
potential issuance to the public. In April 1998, the Company sold $150 million
of these debt securities in a public offering to take advantage of the long-term
interest rate level as well as the Company's improved creditworthiness. The net
proceeds from the sale have been used to repay outstanding borrowings under the
Company's bank revolving credit facility. The debt securities mature on April
15, 2008 and bear interest at 6.625% and yield 6.676%. In conjunction with the
sale of these securities, the Company incurred $3.3 million in debt issuance
costs which will be amortized to interest expense over the life
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of the debt. Concurrent with the public sale of debt securities, the Company
reduced the total capacity under its bank revolving credit facility from $325
million to $175 million.
Canadian National Agreement
In June 1998, the Company reached a long-term agreement with Canadian
National Railway Company ("CN") under which the Company will provide haulage
services for CN's carload and bulk commodity trains between Superior, Wisconsin
and Chicago, Illinois. The agreement is for 20 years and is renewable. The
agreement calls for accelerated transit times, includes a performance-based fee
structure, and provides for capacity improvements which the Company expects to
make in it's Superior-Chicago corridor.
Sale of Rights Under Transportation Agreement
Prior to November 1997, the Company, together with another railroad,
handled metallic ore movements from the upper Midwest to a steel mill in Utah
under a five year transportation agreement that was scheduled to terminate in
1999. In March 1998, the Company sold its rights under this transportation
agreement for $5.4 million. The amount, payable in two equal installments in
March 1998 and March 1999, was recorded as non-operating income in the Company's
financial statements. The Company received its first installment of $2.7 million
in March 1998.
Safety Compliance Agreement with FRA
In February 1998, WCL and FV&W agreed to a one year extension period for
the voluntary cooperative Safety Compliance Agreement with the Federal Railroad
Administration ("FRA") pursuant to the Safety Assurance and Compliance Program
("SACP") which was originally entered into in February 1997. The SACP is a
program to permit railroads and the FRA to develop and monitor agreed upon
programs to improve safety conditions on a systematic basis throughout a
railroad. The SACP is focusing on improving track conditions, inspection
procedures and training for railroad employees. As a result of the Safety
Compliance Agreement, the Company increased capital expenditures in 1997 to
improve safety and increase the utility of its track. The Company also incurred
certain additional operating expenses related to the disruption of regular train
service while the track improvements were made. The Company expects the
increased level of capital spending and operating expenses to continue during
the one-year extension period of the Safety Compliance Agreement.
ATN Acquisition
In November 1997 the Company led a consortium which acquired the
government-owned rail business in Tasmania, an island state of Australia, for
approximately $15.4 million in a privatization transaction. The Company owns
approximately 33% of the Australian company, Australian Transport Network
Limited ("ATN"), which provides all the commercial rail freight service in
Tasmania over a 460 route mile rail system. The Company invested approximately
$5.1 million in ATN. The purchase was funded through borrowings under existing
revolving credit facilities.
Lomira Derailment
In November 1997, eleven cars of a WCL train derailed in Lomira, Wisconsin.
Several of the cars collided with a portion of the wall of a nearby factory,
damaging the factory, killing one factory worker and injuring four others. No
lawsuits have been filed. WCL intends to use its best efforts to settle any
claims that may arise as a result of this accident. 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,
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including property of shippers, in excess of retentions of $1.0 million per
occurrence with respect to rail accidents. The Company believes any costs
incurred as a result of this derailment in excess of self-insured retentions
will be covered under its insurance policies.
Duck Creek North Acquisition
On January 27, 1997, SSM completed the purchase of 195 route miles of
railroad track and trackage rights in Wisconsin and the Upper Peninsula of
Michigan from another railroad. The rail lines are commonly known as the "Duck
Creek North" lines. The rail lines, together with contiguous property and
associated facilities, were purchased for approximately $85.0 million of cash
plus provisions for labor protection and other reserves of $2.8 million and
deferred acquisition costs of $0.8 million. The purchase was funded through
borrowings under existing revolving credit facilities. This acquisition is
referred to herein as the "Duck Creek North Acquisition".
Waukesha Environmental Matter
On April 2, 1996, WCL received a request for documents from the U.S.
Department of Justice ("DOJ") relating to the demolition of a foundry and
roundhouse on WCL's property in Waukesha, Wisconsin, performed by contractors
for WCL in 1993. A request for additional documents was received on November 21,
1996. WCL has complied with the requests. Previously, in March 1994, WCL had
received a Notice of Violation of the Clean Air Act (the "Act") and the National
Emission Standard for Asbestos (the "Asbestos NESHAP") promulgated thereunder
from the USEPA in connection with the demolition. The Notice of Violation
alleged that WCL violated the Clean Air Act and the Asbestos NESHAP because of
the failure of the demolition contractor hired by WCL to provide notice of its
intent to demolish a building containing asbestos and the failure of the
contractor to have on the site during demolition an authorized representative
trained in NESHAP. The Notice of Violation did not specify any penalty or demand
any relief. The USEPA held a conference with WCL on April 11, 1994 to discuss
the Notice of Violation prior to a determination of any enforcement action to be
taken under section 113 of the Act. WCL has not been informed whether the 1996
request for documents is related to the 1994 Notice of Violation. In June 1997,
WCL was notified by the EPA that the DOJ had determined there was no cause to
seek criminal prosecution against WCL or any individual employee. On March 10,
1998, the Company received notice that the DOJ is considering a federal court
action against WCL seeking injunctive relief and civil penalties in an
unspecified amount, unless the matter is settled. WCL plans to seek a reasonable
settlement and to defend itself vigorously if such a settlement is not possible.
If it were to be determined that WCL violated the Asbestos NESHAP or the Act,
WCL could be subject to fines of up to $25,000 per day for each violation.
BOCT Complaint
On June 4, 1993, WCL was served with a complaint filed by the Baltimore &
Ohio Chicago Terminal Railway Company ("BOCT") in the United States District
Court for the Northern District of Illinois, Eastern Division. In its complaint,
the BOCT claimed that WCL owed BOCT for intermediate switching and car hire
reclaim charges allegedly incurred from July 1988 through February 1993.
Arbitration hearings were held in 1995, and in June 1996 the arbitration panel
ruled in favor of BOCT. The arbitration panel's ruling awarded BOCT $16.8
million of disputed switching and car hire reclaim charges, and $2.5 million of
interest relating to such charges. Additional interest of $1.9 million has been
accrued on the unpaid award amount through June 30, 1998.
In April 1997, WCL filed a petition with the Surface Transportation Board
("STB") contesting substantially all BOCT switching charges. That matter is
pending before the STB. The U.S. District Court issued a final ruling on the
case affirming the arbitration award on August 28, 1997. WCL appealed this
ruling to the U.S. Court of Appeals in September 1997. Along with the appeal,
WCL posted a $23.5 million letter of credit to cover amounts which may be
payable to BOCT if the appeal is unsuccessful. Separately, during the U.S.
District Court proceedings, WCL was authorized to pursue with the STB various
matters included in the dispute.
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Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and related notes included herein.
Results of Operations: Second Quarter 1998 Compared to Second Quarter 1997
The Company's net income for the quarter ended June 30, 1998 was $19.0
million compared to $20.7 million for the same period in 1997.
Operating revenues. Operating revenues during the quarter ended June 30,
1998 were $85.0 million, the same as the year ago quarter. Gross revenues for
the quarter ended June 30, 1998 increased in three of six commodity groups,
compared with the same period in 1997. Volume, as measured by carloads handled
(including as a carload each trailer or container), for the quarter ended June
30, 1998 approximated 138,400 carloads compared with approximately 145,700
carloads in 1997.
Volume and gross revenues for paper and other forest products increased by
1% and 4%, respectively, primarily due to the Company's increased market share
of lumber shipments originating in Canada, as well as woodfiber for the paper
industry. Volume and gross revenues for industrial products increased by 8% and
12%, respectively, primarily due to increased demand for inbound unfinished
steel for a major customer of ACRI. Food and grain volume and gross revenues
increased by 3% and 5%, respectively, primarily due to the Company's increased
market share of corn shipments.
Volume and gross revenues for minerals decreased by 4% and 9%,
respectively, primarily due to a decrease in metallic ore shipments. The second
quarter 1997 included approximately 8,900 carloads of metallic ore handled under
a five year transportation agreement that was scheduled to terminate in 1999. No
carloads were handled under this agreement in the second quarter of 1998. As
discussed in the Notes to Consolidated Financial Statements, the Company's
rights under this transportation agreement were sold in the first quarter of
1998.
Volume and gross revenues for intermodal shipments decreased by 36% and
37%, respectively, primarily due to the conversion of approximately 6,200
intermodal units to a haulage arrangement. Intermodal units subject to this
haulage agreement are not included in the Company's carload volume. Haulage
revenue of approximately $1.0 million for the second quarter of 1998 is included
in other operating revenue.
Operating expenses. Operating expenses for the second quarter of 1998 were
$61.0 million, a decrease of $2.8 million or 4% compared to last year. The
decrease is attributable primarily to a reduction in equipment rents, material
and fuel costs, offset in part by increases in labor and depreciation. The
Company's operating ratio (operating expenses as a percentage of operating
revenues) was 71.8% in the second quarter of 1998, compared to 75.1% in the
second quarter of 1997. Operating income for the second quarter of 1998 was
$23.9 million, $2.8 million or 13% higher than last year.
Net equipment rent expense decreased by $2.9 million or 37% primarily due
to a 24% reduction in transit times as a result of improved operating
performance. Material costs decreased by $0.8 million or 11% primarily due to a
reduction in repair costs for freight cars. Fuel expense decreased by $0.6
million or 11% in the second quarter of 1998 compared with the same period of
1997 primarily as a result of a 2% decrease in fuel consumption and a 9%
decrease in fuel prices. Labor expense increased by $1.5 million or 6% in the
second quarter of 1998 as compared to the same period in 1997 primarily due to
an average 3.0% increase in wages and salaries granted to employees at the
beginning of the year, as well as a 4% increase in the work force in expectation
of higher business volumes. Depreciation increased by $0.4 million or 10%
primarily due to higher
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capital spending programs related to the Safety Compliance Agreement with the
FRA discussed in the Notes to Consolidated Financial Statements.
Interest expense and income taxes. Interest expense increased $0.6 million
in the second quarter of 1998 to $4.3 million, primarily due to the increased
borrowings related to the higher capital spending programs, as well as a
slightly higher effective interest rate as a result of the $150 million sale of
public debt securities as discussed in the Notes to Consolidated Financial
Statements.
The income tax provision for the second quarter of 1998 was $7.9 million,
an increase of $0.8 million from the second quarter of 1997, due to an increase
in pre-tax income.
Equity in net income of affiliates. The Company's 1998 second quarter
results included equity in net income of its affiliates of $7.0 million as
compared to $9.9 million for the same period of 1997. The Company's equity in
the net income of EWS for the second quarter of 1998 was $5.6 million versus
$7.5 million in the same quarter a year ago. EWS's second quarter 1998 operating
revenues increased by 6%, while operating expenses increased by 9% over the same
period. Factors contributing to EWS results were recently renegotiated
transportation contracts which reduced freight rates to market levels, reduced
volumes of coal shipments due to mild weather and the assimilation of the recent
acquisition of Railfreight Distribution. The Company believes that, although the
second quarter 1998 results were adversely affected, the reduced freight rates
are a competitive necessity and are consistent with EWS's business plan. The
Company's equity in the net income of Tranz Rail for the second quarter of 1998
was $1.4 million, versus $2.5 million in the same quarter a year ago. The
decrease in Tranz Rail's contribution is largely the result of continued
softness in the New Zealand and Asian economies and the corresponding decline in
the average value of the New Zealand dollar versus the U.S. dollar.
Results of Operations: First Six Months of 1998 Compared to First Six
Months of 1997
The Company's net income for the six months ended June 30, 1998 was $39.5
million compared to $38.3 million for the same period in 1997.
Operating revenues. Operating revenues during the six months ended June 30,
1998 were $168.9 million compared with $165.3 million for the same period in
1997. Gross revenues for the six months ended June 30, 1998 increased in three
of six commodity groups, compared with the same period in 1997. Volume, as
measured by carloads handled, for the six months ended June 30, 1998
approximated 275,000 carloads compared with approximately 283,200 carloads in
1997.
Volume and gross revenues for paper and other forest products increased by
3% and 5%, respectively, primarily due to the Company's increased market share
of lumber shipments originating in Canada, woodfiber for the paper industry and
continued strong demand for coated paper. Volume and gross revenues for
industrial products increased by 10% and 13%, respectively, primarily due to
increased demand for inbound unfinished steel for a major customer of ACRI. Food
and grain volume and gross revenues increased by 4% and 8%, respectively,
primarily due to the Company's increased market share of corn shipments.
Volume and gross revenues for minerals decreased by 1% and 7%,
respectively, primarily due to a decrease in metallic ore shipments. The first
six months of 1997 included approximately 15,800 carloads of metallic ore
handled under a five year transportation agreement that was scheduled to
terminate in 1999. No carloads were handled under this agreement in the first
six months of 1998. As discussed in the Notes to Consolidated Financial
Statements, the Company's rights under this transportation agreement were sold
in the first quarter of 1998. Volume for the first six months of 1998 included
metallic ore shipments for a full six-months from the Company's Duck Creek North
lines which were acquired on January 27, 1997.
Volume and gross revenues for intermodal shipments decreased by 32% and
33%, respectively, primarily due to the conversion of approximately 12,600
intermodal units to a haulage arrangement. Intermodal units
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subject to this haulage agreement are not included in the Company's carload
volume. Haulage revenue of approximately $2.2 million for the first six months
of 1998 is included in other operating revenue.
Operating expenses. Operating expenses for the first six months of 1998
were $129.0 million, the same as the year ago period. Operating expenses for
1998 included increases in labor, casualty costs and depreciation, offset by
decreases in equipment rents and fuel costs. The Company's operating ratio
(operating expenses as a percentage of operating revenues) was 76.4% for the
first six months of 1998, compared to 78.1% for the same period of 1997.
Operating income for the first six months of 1998 was $39.9 million, $3.7
million or 10% higher than last year.
Labor expense increased by $5.0 million or 10% in the first six months of
1998 as compared to the same period in 1997 primarily due to an average 3.0%
increase in wages and salaries granted to employees at the beginning of the
year, as well as a 7% increase in the work force in expectation of higher
business volumes. Casualty costs increased by $1.1 million or 47% primarily due
to higher settlements in personal injury claims for the first six months of 1998
as compared to the same period in 1997. Depreciation increased by $1.2 million
or 15% primarily due to higher capital spending programs related to the Safety
Compliance Agreement with the FRA and the Duck Creek North Acquisition, both
discussed in the Notes to Consolidated Financial Statements. Net equipment rent
expense decreased by $5.5 million or 33% for the first six months of 1998,
primarily due to a 17% reduction in transit times as a result of improved
operating performance. Fuel expense decreased by $1.4 million or 12% in the
first six months of 1998 compared with the same period of 1997 primarily as a
result of a 13% decrease in fuel prices.
Interest expense and income taxes. Interest expense increased $1.6 million
in the first six months of 1998 to $8.5 million, primarily due to the increased
borrowings to finance the Duck Creek North Acquisition and the higher capital
spending programs, as well as a slightly higher effective interest rate as a
result of the $150 million sale of public debt securities as discussed in the
Notes to Consolidated Financial Statements.
The income tax provision for the first six months of 1998 was $14.8
million, an increase of $2.9 million from the same period of 1997, due to an
increase in pre-tax income.
Equity in net income of affiliates. The Company's results for the first six
months of 1998 included equity in net income of its affiliates of $16.9 million
as compared to $20.2 million for the same period of 1997. The Company's equity
in the net income of EWS for the first six months of 1998 was $13.5 million
versus $14.6 million for the same period a year ago. EWS's operating revenues
for the first six months of 1998 increased by 6%, while operating expenses
increased by 10% over the same period. Factors contributing to EWS results were
recently renegotiated transportation contracts which reduced freight rates to
market levels, reduced volumes of coal shipments due to mild weather and the
assimilation of the recent acquisition of Railfreight Distribution. The
Company's equity in the net income of Tranz Rail for the first six months of
1998 was $3.4 million, versus $5.7 million for the same period a year ago. The
decrease in Tranz Rail's contribution is largely the result of continued
softness in the New Zealand and Asian economies and the corresponding decline in
the average value of the New Zealand dollar versus the U.S. dollar.
Financial Condition: June 30, 1998 Compared to December 31, 1997
The Company generated cash in the amount of $49.8 million during the first
six months of 1998 from operations, a cash dividend received from Tranz Rail,
the sale of assets, net issuances of long-term debt and equity issuances. These
resources, as well as cash on hand, were used to finance capital-related
expenditures of $47.9 million and debt issue costs of $3.3 million related to
the sale of public debt securities discussed in the Notes to Consolidated
Financial Statements.
The Company had $282.1 million of total debt outstanding at June 30, 1998,
which constituted 41.0% of its total capitalization, compared to $280.8 million
of total debt outstanding at December 31, 1997, or 43.2% of its
-10-
<PAGE>
total capitalization. At June 30, 1998, the Company's aggregate unused borrowing
availability under its loan facilities totaled $40.0 million.
As discussed in the Notes to Consolidated Financial Statements, in April
1998, the Company sold $150 million of debt securities in a public offering to
take advantage of the long-term interest rate level as well as the Company's
improved creditworthiness. The net proceeds from the sale have been used to
repay outstanding borrowings under the Company's bank revolving credit facility.
The debt securities mature on April 15, 2008 and bear interest at 6.625% and
yield 6.676%. In conjunction with the sale of these securities, the Company
incurred $3.3 million in debt issuance costs which will be amortized to interest
expense over the life of the debt. Concurrent with the public sale of debt
securities, the Company reduced the total capacity under its bank revolving
credit facility from $325 million to $175 million.
Year 2000
The Company has established a committee to evaluate and manage the cost and
risk associated with the Company's hardware and software becoming year 2000
compliant and to minimize the impact on the Company's operations. The committee
has identified significant information systems that would be affected by year
2000 non-compliance and is in the process of implementing changes and
recommending alternative solutions for the year 2000. The Company's North
American railroad operating systems are leased from Union Pacific Corporation,
who is contractually obligated to make all necessary year 2000 changes to such
systems. To date, specific spending on year 2000 activities has not been
material. The cost of making the Company's remaining information systems and
software year 2000 compliant is also not estimated to be material. Additionally,
management is evaluating the impact of year 2000 compliance on other areas of
the Company. It is the opinion of management that the resolution of year 2000
issues will not have a material impact on the Company's financial position or
annual financial results of operations.
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 beliefs, expectations, plans and
estimates of the Company with respect to certain future events, the impact of
governmental regulation, the impact of litigation and regulatory proceedings,
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.
-11-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual stockholders' meeting was held on May 21, 1998. At the
meeting, Edward A. Burkhardt, Carl Ferenbach, Roland V. McPherson, Thomas F.
Power, Jr., Thomas W. Rissman, A. Francis Small and Robert H. Wheeler were
reelected as directors of the Company. Votes for election of directors were as
follows:
Votes Against or Abstentions and
Nominee Votes For Withheld Broker Non-Votes
- --------------- ---------- ---------------- ----------------
E. A. Burkhardt 40,634,600 897,204 0
C. Ferenbach 40,633,262 898,542 0
R. V. McPherson 40,815,415 716,389 0
T. F. Power, Jr. 40,633,110 898,694 0
T. W. Rissman 40,634,012 897,792 0
A. F. Small 40,624,779 907,025 0
R. H. Wheeler 40,634,000 897,804 0
Item 6. Exhibits and Reports on Form 8-K
The exhibit set forth on the accompanying Index to Exhibits are filed as
part of this report.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
-12-
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN CENTRAL TRANSPORTATION
CORPORATION
Date: August 14, 1998 By: /s/ Walter C. Kelly
------------------------------
Walter C. Kelly
Vice President, Finance
Date: August 14, 1998 By: /s/ Walter C. Kelly
------------------------------
Walter C. Kelly
Chief Accounting Officer
-13-
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
- ---------- ----------------------- ------------
27 Financial Data Schedule 18
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at June 30, 1998 (unaudited) and the
Condensed Consolidated Statement of Income for the Three Months Ended June 30,
1998 (unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,235
<SECURITIES> 0
<RECEIVABLES> 83,190
<ALLOWANCES> 1,722
<INVENTORY> 27,650
<CURRENT-ASSETS> 116,893
<PP&E> 772,382
<DEPRECIATION> 86,469
<TOTAL-ASSETS> 971,109
<CURRENT-LIABILITIES> 159,584
<BONDS> 280,708
0
0
<COMMON> 510
<OTHER-SE> 404,991
<TOTAL-LIABILITY-AND-EQUITY> 971,109
<SALES> 0
<TOTAL-REVENUES> 84,959
<CGS> 0
<TOTAL-COSTS> 61,020
<OTHER-EXPENSES> (236)
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 4,276
<INCOME-PRETAX> 19,899
<INCOME-TAX> 7,879
<INCOME-CONTINUING> 12,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,027
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
