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Wisconsin Central Shareholders Committee to Maximize Value
8600 West Bryn Mawr Avenue--Suite 500N
Chicago, Illinois 60631-3579
Telephone: 773-714-8669
November 13, 2000
Dear Fellow Shareholder:
The Wisconsin Central Shareholders Committee to Maximize Value was formed
because of our serious concern about the Company's deteriorating performance.
As the owner of 3.5 million shares, my objective is the same as yours--to
realize maximum value for this investment. Since my resignation as Chairman
and CEO in July 1999, WCLX's share price has plummeted. Over the period since
my departure through the day of our public announcement that we would seek
your support, this decline was greater than 43%. Over the past year, the
Company's domestic earnings fell by 12% despite excellent business conditions.
Results in the international subsidiaries have been much worse.
I urge you to join with us in our objective to reverse WCLX's decline and
to maximize shareholder value through a carefully focused program. Please
sign, date and return the enclosed WHITE consent card today.
Following my departure, new management was installed at English Welsh &
Scottish Railway and Tranz Rail (New Zealand), and results from these
companies have been disastrous. Earnings of EWS and Tranz Rail in the third
quarter of 2000 compared with 1999 are down 68% and 99% respectively, not
including a Tranz Rail special charge of NZ$16.5 million, which had the effect
of putting Tranz Rail deep in the red for the quarter. Earnings of Australian
Transport Network also declined by 98%. Overall WCLX earnings in the 12 months
ending June 30, 2000 fell 21% from the same period the year before. As a
result of this disappointing performance, share price has sharply declined.
Share price is the Board's scorecard, and the market has pronounced a harsh
verdict on the performance of the WCLX Board.
Apart from reshuffling the company's organization chart and imposing a
costly and bureaucratic holding company structure, we believe the Board has
been ineffective in addressing the growing problems at WCLX. They have allowed
the performance of the domestic operation to stagnate and have silently
witnessed the marked deterioration of overseas affiliates. In our view, every
one of the affiliated rail companies is currently suffering from rock-bottom
employee morale and a lack of confidence in top management. Both literally and
figuratively, we believe this situation is a disaster in progress in a service
industry that is heavily reliant on employee initiative and commitment.
In an apparent response to our filing, WCLX's Board and management have
seemingly undergone an eleventh-hour conversion. They now claim to have
adopted much of the Committee's program, in what we believe is primarily an
effort to preserve their positions and perquisites. We believe that their
last-minute decision to hire Goldman Sachs to help the Board "in evaluating
alternatives" reflects more on the incumbent Board's inability to enhance
value at WCLX than on any commitment to change.
In sharp contrast, the Committee has proposed a robust program for value
enhancement. We have assembled a highly experienced and capable group of
director nominees, who are committed to aggressive implementation of a
carefully focused program to maximize value. In our opinion, the Committee,
with its substantial expertise and experience in the railway industry, is far
better positioned to maximize value through the implementation of the
following initiatives.
THE COMMITTEE'S PROGRAM
1. Strengthen Domestic Operations and Position for Strategic Sale
The Committee aims to improve domestic operations and to put them back on a
growth track while exploring their sale to a strategic buyer. We propose to
begin talks with potential buyers as soon as possible. We
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believe a combination of WCLX with any of the six major North American rail
systems would create a highly competitive company that would realize synergies
through consolidation of route structures, materials purchasing, repair
activities and other functions.
2. Sell Off Underperforming Overseas Investments
The Committee proposes to dispose of chronically underperforming overseas
investments over which WCLX has no control. Shareholders should not suffer due
to what we believe is poor management by Berkshire Partners and Fay Richwhite
& Company, the venture capital firms that exert effective control over these
companies. We believe that there are a number of potential buyers for these
investments. We must act now rather than risk further deterioration in the
value of these holdings.
3. Discontinue Overseas Acquisitions
The Committee proposes to halt the Company's continuing and costly quest to
make additional overseas acquisitions through rail privatizations. In our
view, the present Board has wasted millions of dollars in the last 15 months
supporting an entire acquisition organization and participating in three
privatization sale processes (including a highly risky one in the Hashemite
Kingdom of Jordan). In light of the inflated prices being bid for these
properties, I believe we shareholders should count ourselves lucky that these
efforts have not produced results to date. We find it ludicrous that these
acquisition activities continue to consume large amounts of shareholders'
money.
4. Improve Corporate Governance
Your Committee proposes to improve the Company's corporate governance by
eliminating the classified or "staggered" Board. We believe this change is
important so that all directors can be held accountable to the shareholders
each year.
5. End Conflicts of Interest on the Board
Our nominees, other than the Chief Executive, would be truly outside
directors, and none would have conflicts of interest. In our view, the present
WCLX Board is shot-full of "insiders" with what appear to be personal
financial interests deviating from those of the shareholders. We believe that
conflicts of interest on the part of incumbent directors have been a major
factor in WCLX's decline.
Only two of the nine current Board members are truly independent outside
directors. Two directors are officers of the Company, and five others have
significant personal and corporate financial dealings with the Company and its
affiliates, thereby rendering them insiders in practical terms. Ask yourself:
will these directors be conflicted over maximizing value versus perpetuating
themselves in office?
Public reports made by WCLX and its affiliates indicate the following
payments totaling $15,773,000 to conflicted directors in the last eight years:
. WCLX paid $8,192,000 for legal services to Oppenheimer Wolff &
Donnelley, a law firm with which WCLX Chairman Robert H. Wheeler is
associated. In addition, WCLX pays Mr. Wheeler $150,000 per year plus
$40,000 for off-site "office expenses" and other considerations for
services as non-executive Chairman. (WCLX Proxy Statements and other
reports).
. WCLX paid $3,260,000 for legal services to McLachlan, Rissman & Doll, a
law firm in which WCLX director Thomas W. Rissman is Managing Partner.
In addition, WCLX pays $30,000 per year plus other considerations to Mr.
Rissman for services as a director. (WCLX Proxy Statements).
. EWS paid $618,000 for legal services to McLachlan, Rissman & Doll, Mr.
Rissman's law firm. (WCLX Forms 10-K/A).
. Tranz Rail paid McLachlan, Rissman & Doll $700,000 for legal services.
(Annual Reports for Tranz Rail Holdings Ltd.)
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. WCLX paid $1,029,000 for "financial advisory services" to Railroad
Financial Corporation, a firm in which Wisconsin Central directors
Thomas W. Rissman and Roland V. McPherson are controlling shareholders.
(WCLX Proxy Statements).
. EWS paid $1,043,000 to Railroad Financial Corporation. (WCLX Forms 10-
K/A)
. Tranz Rail paid $931,000 to Railroad Financial Corporation. (Tranz Rail
Holdings Annual Reports)
To the Committee's knowledge, none of the services for which payments are
being made to these directors or their affiliates have ever been competitively
sourced nor do we believe that services are being received commensurate with
value paid. Additionally, the Committee understands that Mr. Rissman has been
designated the project leader in the Company's to-date unsuccessful efforts to
participate in a consortium to privatize the Aqaba Railway of the Hashemite
Kingdom of Jordan and in the Company's efforts, also unsuccessful in the past
three years, to participate in additional Australian rail privatizations.
The Committee further believes that WCLX affiliate Australian Transport
Network made substantial payments to WCLX directors. As ATN is a privately
held corporation, there is no requirement that such payments be publicly
reported.
The Committee is also very concerned with the Company's various
relationships with Berkshire Partners and Fay Richwhite & Company, two venture
capital firms, and the conflict of interest of Berkshire Managing Director
Carl Ferenbach as a director of WCLX. Berkshire and Fay Richwhite co-invest
regularly and generally vote and act together. Neither owns shares in
Wisconsin Central (Mr. Ferenbach has a small personal holding), but together
they exercise effective control over each of the Company's overseas
affiliates, EWS, Tranz Rail and ATN. Because of Mr. Ferenbach's seat on the
Company's Board, Berkshire has been positioned to co-invest with the Company
in all its overseas ventures, and the Board has accorded a similar position to
Fay Richwhite. The Committee has no indication that Wisconsin Central has
competitively sourced equity capital for acquisitions, instead looking only to
Berkshire and Fay Richwhite.
The Committee believes Berkshire's objectives with regard to the overseas
investments it controls (with Fay Richwhite) diverge from those of Wisconsin
Central and its shareholders. For instance, Berkshire and Fay Richwhite
control the board of EWS, and EWS management, in our opinion, is significantly
underperforming. We believe it is clear that Wisconsin Central should take
action to correct the situation, but as a minority shareholder it is unable to
act unilaterally. This puts Wisconsin Central director Ferenbach directly in a
conflict of interest position. The Committee believes it is highly doubtful
that the Company will take steps, including assertion of its legal rights, to
replace EWS management as long as a representative of Berkshire sits on the
WCLX Board.
We believe that these significant conflicts of interest existing between
shareholder interests and incumbent members of the WCLX Board have been, and
continue to be, damaging to the Company's performance and prospects.
The Committee is proposing a robust program to correct these shortcomings,
eliminate the appearance of self-dealing, and restore effective management at
WCLX. Given the entanglements detailed above, it is difficult for us to
believe that a Board composed of so many insiders benefiting from such a large
flow of shareholder funds to their personal interests will take the lead in
disposing of major segments of the Company's holdings in a program to maximize
shareholder value.
6. Increase Share Buy-back
The Committee proposes the repurchase of WCLX shares as long as the market
is undervaluing them. This is an excellent way to increase shareholder value
by reducing the share float when shares can be purchased at a discount to
WCLX's intrinsic value. As cash is raised through the sale of overseas assets,
it will be used to support this program.
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WHAT COMES NEXT?
Your Committee has developed a focused program to maximize shareholder
value. We believe the incumbent Board has had no such program, although recent
announcements indicate that they are considering adopting our program as their
own. But who could better implement such a program: a Board that has
historically resisted such proposals and suffers from serious conflicts of
interest or a major shareholder group (holding almost twice the number of
shares of the incumbent Board) committed to change?
Management has responded to the poor financial results we are seeing by
cutting capital investment, maintenance spending and supervision. WCLX's
current top management was trained on The Milwaukee Road during the 1970's and
1980's--a company that wound up in bankruptcy and was liquidated.
In contrast, the WCLX team I led for 12 years built a great railroad and
simultaneously created significant value for investors by following totally
different principles. It is unfortunate that WCLX Board members don't appear
to have learned that the market pays a premium for railroads that maintain
their properties, become more competitive, and grow revenues and profits --
and will discount those that have lost such abilities.
Since your Committee announced its program to maximize shareholder value,
WCLX share price has increased by 34%. As discussed above, the incumbent Board
has now indicated that they are "evaluating" a copy-cat strategy, after
resisting such proposals in the past. The Board, with seven of the nine
directors having what we believe are significant conflicts of interest, has
sat on its hands while performance deteriorated and share price plummeted. Ask
yourself whether you believe that this Board, having "seen the light," has now
become true believers in maximizing shareholder value. We think not!
The future of your investment is at stake. We urge you to take control of
your own destiny as a WCLX shareholder by signing, dating and returning the
enclosed WHITE consent card today. Your Committee is dedicated to maximizing
shareholder value, but we can only do it with your support.
I will be available to talk with shareholders on these important issues,
and would be happy to personally take your call.
With best wishes,
Sincerely,
/s/ Edward A. Burkhardt
Edward A. Burkhardt
Chairman
IMPORTANT
If you have questions or need assistance voting your shares,
please contact Innisfree M&A Incorporated or
the Committee at the following telephone numbers:
INNISFREE M&A INCORPORATED: 888-750-5834 (toll-free)
THE COMMITTEE: 773-714-8669
Please do not sign or return the Company's blue revocation card.
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