Annual Report — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K Form 10-K for Fiscal Year Ended December 31, 1993 32 131K
2: EX-4.16B EX-4.16B Amendment Dated as of September 10, 1993 14 44K
3: EX-4.16C EX-4.16C Master Assignment & Acceptance Agreement 15 41K
4: EX-10.33A EX-10.33A Termination Agreements 6 14K
5: EX-10.53B EX-10.53B Amendment to 1992 Equity Incentive Plan 1 7K
6: EX-10.55 EX-10.55 AT&T Corporate Center Office Sublease 222 670K
7: EX-10.56 Material Contract 4 16K
8: EX-10.57 Material Contract 4 16K
9: EX-10.58 Material Contract 17 50K
10: EX-10.59 Material Contract 12 42K
11: EX-13 EX-13 1993 Annual Report - Portions Deemed Filed 32 118K
12: EX-21 EX-21 Subsidiaries 1 5K
EX-13 — EX-13 1993 Annual Report – Portions Deemed Filed
EX-13 | 1st Page of 32 | TOC | ↑Top | Previous | Next | ↓Bottom | Just 1st |
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Market for the Registrant's Common Equity and Related Stockholders Matters
Stock Listing
The company's common stock is traded on the New York, Midwest,
Philadelphia and Boston Stock Exchanges under the symbol CNW.
High Low
Fourth quarter 1993 25-1/8 19-1/2
Third quarter 1993 23 19
Second quarter 1993 24-1/4 19-7/8
First quarter 1993 23-1/8 19-1/8
Dividends
No dividends have been paid on the common stock during 1993 (see Note
6(d) to Consolidated Financial Statements).
Stockholders
As of December 31, 1993, there were 963 holders of record.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 1993, operating revenues increased $58.2 million, primarily due to a
23.1% increase in coal traffic volume. Increased coal revenues were partially
offset by significant losses of corn traffic due to substantial flooding in
the upper Midwest during June through September of 1993. Operating expenses,
excluding special charges, increased $48.3 million, reflecting the effects of
midwestern flooding and increased traffic levels. The Company believes the
net effect of reduced revenues and increased expenses related to the flooding
was approximately $14 million pretax.
In 1993, the Company continued its efforts to become the rail industry's
low-cost leader in the markets it serves. Cost reductions -- employee cuts,
facility consolidations and the centralization of operations -- have been the
primary strategy used to reach this goal. Since December of 1988, the Company
has decreased the size of its workforce by 24.4%.
The Company continued to improve its capital structure in 1993 through a
negotiated interest rate reduction for a portion of its senior secured debt
facilities (the "Debt Facilities"); through prepayments of debt, including the
remaining outstanding 15.5% senior subordinated debentures (the "Debentures");
and through the issuance of 1,371,265 shares of common stock in connection
with a secondary stock offering. In 1992 the Company effected a
recapitalization plan (the "Recapitalization") that redeemed or exchanged all
preferred stock, prepaid all borrowings under the prior credit agreement and
retired the majority of the Debentures. See Note 12 to Consolidated Financial
Statements.
Results of Operations: 1991-1993
Summary of Operations
(millions of dollars)
1993 1992 1991
Operating revenues $1,043.2 $985.0 $979.0
Operating expenses excluding special charges 829.1 780.8 788.2
Special charges 5.0 30.0 115.8
Total operating expenses $ 834.1 $810.8 $904.0
Operating income $ 209.1 $174.2 $ 75.0
Other income, net 11.0 8.1 11.1
Interest expense 105.4 126.1 156.8
Income (loss) before income taxes $ 114.7 $ 56.2 $(70.7)
Income taxes 50.7 18.8 (27.2)
Income (loss)* $ 64.0 $ 37.4 $(43.5)
*Before extraordinary items and cumulative effect of a change in method of
accounting.
2
The Company's 1993 income increased $26.6 million compared with 1992.
This increase reflects a $58.2 million revenue increase, a $25.0 million
reduction in special charges and a $20.7 million decrease in interest expense,
partially offset by a $48.3 million increase in operating expenses and a $31.9
million increase in income taxes.
The Company's 1992 income increased $80.9 million compared with 1991.
This increase reflects an $85.8 million reduction in special charges, a $30.7
million reduction in interest expense due to the Recapitalization and lower
interest rates, and a $7.4 million reduction in operating expenses partially
offset by a $46.0 million increase in income taxes.
The Company's 1993 operating income increased $34.9 million compared with
1992, due to a $58.2 million revenue increase and a $25.0 million reduction in
special charges, partially offset by a $48.3 million increase in operating
expenses reflecting the effects of increased traffic volume and midwestern
flooding.
The Company's 1992 operating income increased $99.2 million, compared
with 1991, due to an $85.8 million reduction in special charges and decreased
labor and fuel costs, partially offset by increased equipment rental and other
expenses. The Company recorded a $30.0 million pretax special charge in 1992
for severance payments and costs associated with the consolidation of the
Company's customer service functions and the closing of its Council Bluffs,
Iowa, diesel shop. The 1991 loss reflects a $115.8 million pretax special
charge for employee-reduction programs primarily covering train crew personnel
and increased casualty and environmental reserves.
Excluding special charges, the Company's 1993 operating income was $214.1
million, an increase of $9.9 million compared with 1992. Excluding special
charges, the Company's 1992 operating income was $204.2 million, an increase
of $13.4 million compared with 1991.
Operating Revenues
Net freight revenues were $932.7 million in 1993, an increase of $59.9
million (or 6.9%) compared with 1992. Net freight revenues were $872.8
million in 1992, an increase of $4.3 million (or 0.5%) compared with 1991.
The balance of the operating revenues resulted from commuter service and other
operations.
The following tables provide three-year comparisons of freight revenues
and loads by the Company's business groups.
3
[Enlarge/Download Table]
Revenue Comparison by Business Group (dollars in millions)
1993 1992 1991
Percent Percent Percent Percent Percent
change of total change of total of total
Gross from gross Gross from gross Gross gross
revenues 1992 revenues revenues 1991 revenues revenues revenues
Energy (Coal) $ 319.0 19.3 % 32.0% $267.3 (7.9)% 28.3% $290.2 31.0%
Agricultural
Commodities 211.3 (3.1) 21.2 218.1 4.5 23.1 208.7 22.3
Automotive,
Steel and
Chemicals 200.5 5.0 20.1 190.9 7.5 20.2 177.6 19.0
Intermodal 119.5 2.7 12.0 116.4 6.8 12.3 109.0 11.6
Consumer
Products 145.8 (4.1) 14.7 152.0 1.1 16.1 150.3 16.1
Gross freight
revenues $ 996.1 5.4 % 100.0% $944.7 1.0 % 100.0% $935.8 100.0%
Allowances,
absorptions,
& adjustments (63.4) (11.8) (71.9) 6.8 (67.3)
Net freight
revenues $ 932.7 6.9 % $872.8 0.5 % $868.5
Commuter 85.1 (4.8) 89.4 3.0 86.8
Other 25.4 11.4 22.8 (3.8) 23.7
Operating
revenues $1,043.2 5.9 % $985.0 0.6 % $979.0
Load Comparison by Business Group (loads in thousands)
1993 1992 1991
Percent Percent
change Percent change Percent Percent
Total from of total Total from of total Total of total
loads 1992 loads loads 1991 loads loads loads
Energy (Coal) 785.5 23.1 % 33.4% 638.0 (3.7)% 29.1% 662.6 31.7%
Agricultural
Commodities 304.5 (5.0) 12.9 320.6 8.3 14.6 296.1 14.1
Automotive,
Steel and
Chemicals 332.3 4.5 14.1 318.0 8.9 14.5 291.9 14.0
Intermodal 714.0 3.6 30.4 689.2 11.5 31.5 618.0 29.5
Consumer
Products 215.3 (4.9) 9.2 226.4 0.7 10.3 224.8 10.7
Total loads 2,351.6 7.3 % 100.0% 2,192.2 4.7 % 100.0% 2,093.4 100.0%
4
1993 Operating Revenues Compared to 1992
As reflected in the previous tables, 1993 revenues and volumes compared
to 1992 were higher in the Energy; Automotive, Steel and Chemicals; and
Intermodal business groups. Total volume increased 7.3% and net freight
revenues increased 6.9% in 1993 compared with 1992. Freight rates in 1993
decreased for the Energy business group due to contracts that were entered
into or renewed at rates lower than those previously realized. Average
revenue per load for all commodity groups as a whole remained stable,
decreasing slightly from $398 in 1992 to $397 in 1993.
Energy (Coal) - Coal transportation, primarily to utility customers, is
the Company's largest, single revenue-producing activity. Volume and revenues
increased compared with 1992 due to new contracts and increased coal
originations for existing customers handled by the Company's subsidiary,
Western Railroad Properties, Incorporated ("WRPI"), from the southern Powder
River Basin in Wyoming (the "Powder River Basin"). The increases were also
partially due to shipments in 1992 being lower than normal due to mild
weather. Revenue increases were less than volume increases due to new and
renewed contracts at rates lower than those in place in 1992. WRPI's net
freight revenues were $204.9 million and $169.0 million in 1993 and 1992,
respectively. WRPI loadings were 708,872 and 554,895 in 1993 and 1992,
respectively. Of the total coal loads handled in 1993, 90.7% originated on
WRPI compared with 87.3% in 1992. Coal shipments and revenue for 1994 are
expected to be higher than 1993.
Agricultural Commodities - Volume and gross revenues decreased compared
with 1992 due to midwestern flooding that reduced the quantity and quality of
the corn harvest in the Company's service territory. This decrease was
partially offset by an increase in fertilizer shipments required to replace
soil nutrients lost due to the flooding. Grain shipments for 1994 are
expected to remain depressed due to the reduced 1993 corn harvest.
Automotive, Steel and Chemicals - Volume and gross revenues increased due
to increased automobile production; improved market share from General Motors'
Janesville, Wisconsin plant; increased demand and market share for steel
shipments from on-line mills; increased soda ash shipments to glass producers
and new plastics business. These increases were partially offset by reduced
traffic due to Chrysler's Belvidere, Illinois assembly plant being closed for
model changeover during the last half of 1993. Volume and gross revenues are
expected to increase in 1994 due in part to resumption of production at the
Belvidere assembly plant.
Intermodal - Volume and gross revenues increased due to growth from
existing customers. Volume increases are slightly higher than revenue
increases as a result of traffic moving at lower rates due to market
pressures. Volume and revenue increases are expected to continue in 1994.
Consumer Products - Volume and revenues decreased compared to 1992. The
decrease is primarily due to business that has diverted to the Wisconsin
Central route due to that railroad's acquisition of the Fox River Valley
Railroad. Volume and revenues in 1994 are expected to remain flat.
5
1992 Operating Revenues Compared to 1991
Revenues and volumes for 1992 compared to 1991 were higher in all
business groups except Energy. Total volume increased 4.7% and net freight
revenues increased 0.5% in 1992 compared with 1991. Freight rates in 1992
remained stable for the Agricultural Commodities; Automotive, Steel and
Chemicals; and Consumer Products business groups, but decreased for the Energy
and Intermodal business groups due to market pressures. Average revenue per
load for all commodity groups as a whole decreased from $415 in 1991 to $398
in 1992.
Energy (Coal) - Volume and revenues decreased compared with 1991 for two
major reasons. First, coal shipments in the first quarter of 1991 were high
in order to meet WRPI-contracted minimum shipping requirements deferred from
1990 due in part to capacity constraints (alleviated by 1991 track
construction) and bad weather. Second, 1992 shipments were also lower due to
mild weather that decreased the demand for electricity. Revenues declined
more than volume as a result of weather-related changes in traffic mix, market
pressures and a decrease in the Rail Cost Adjustment Factor (a cost-based
measurement used to adjust contract pricing). WRPI's net freight revenues
were $169.0 million and $176.4 million in 1992 and 1991, respectively. WRPI
loadings were 554,895 and 572,888 in 1992 and 1991, respectively. Of the
total coal loads handled in 1992, 87.3% originated on WRPI compared with 86.8%
in 1991.
Agricultural Commodities - Volume and gross revenues increased compared
with 1991 due to increased shipments of corn, soybeans, prepared animal feed,
soybean meal, corn syrup, phosphate, potash and sulphur. Gross revenues did
not increase as much as volume due to a change in traffic mix from export to
processors, resulting in shorter hauls.
Automotive, Steel and Chemicals - Volume and gross revenues increased due
to new contracts for finished autos and the resumption of shipments to and
from General Motors' Janesville, Wisconsin, plant, which was closed during
1991 for model changeover. In addition, steel shipments improved slightly due
to an upturn in the domestic steel market from 1991 levels.
Intermodal - Volume and gross revenues increased due to two new customers
and growth from existing customers. Volume increases were higher than revenue
increases as a result of rate decreases caused by market pressures.
Consumer Products - Volume and revenues increased compared to 1991. The
increase was primarily due to bentonite clay moving to export and taconite
markets, more shipments of food products, and higher lumber traffic due to
market share increases and improved housing starts.
Operating Expenses
Operating expenses in 1993 were $23.3 million (or 2.9%) higher than 1992.
1993 operating expenses, before special charges, were $48.3 million (or 6.2%)
higher than 1992 primarily due to increased traffic volumes and the effects of
midwestern flooding, causing increased compensation and benefits, fuel and
material and purchased services expenses; and increased environmental
expenses.
6
Operating expenses in 1992 were $93.2 million (or 10.3%) lower than 1991.
Operating expenses, before special charges, in 1992 were $7.4 million (or
0.9%) lower than 1991, primarily due to reductions in compensation and
benefits (train crew-consist reductions) and diesel fuel expense, partially
offset by an increase in material and purchased services.
The following table is a three-year comparison of operating expenses:
Operating Expenses (dollars in millions)
Percent Percent
change change
from from
1993 1992 1992 1991 1991
Compensation and benefits $389.5 3.3 % $376.9 (4.0)% $392.5
Diesel fuel 70.1 18.8 59.0 (13.4) 68.1
Material & purchased services 75.4 18.4 63.7 21.8 52.3
Hire of freight equipment 62.1 6.9 58.1 3.2 56.3
Other rents 71.9 (1.2) 72.8 4.6 69.6
Depreciation 68.8 6.0 64.9 (2.8) 66.8
Casualties 42.3 16.9 36.2 (9.0) 39.8
Other* 49.0 (0.4) 49.2 15.0 42.8
Operating expenses before
special charges $829.1 6.2 % $780.8 (0.9)% $788.2
Special charges 5.0 NM 30.0 NM 115.8
Total operating expenses $834.1 2.9 % $810.8 (10.3)% $904.0
*Other includes property taxes, utilities, vehicle operating costs, FRA and
railroad association fees and other general expenses.
1993 Operating Expenses Compared to 1992
Compensation and benefits expense, excluding special charges for employee
reductions and relocations, increased in 1993 as a result of higher wage
levels and increased train crew costs due to traffic increases and midwestern
flooding, partially offset by a 1.8% decline in the average number of
employees. Payroll taxes decreased compared with 1992 due primarily to the
elimination of the railroad unemployment insurance repayment tax and a
reduction in the number of employees. Other fringe benefits increased due to
increased health and welfare costs and increased accruals for profit sharing
and management incentive compensation. Compensation and benefits expense, as
a percentage of operating revenues, were 37.3% in 1993 compared with 38.3% in
1992.
Diesel fuel expense increased due to a 12.8% increase in revenue ton
miles, less efficient operations due to midwestern flooding, severe winter
weather early in the year and a 0.9% increase in the average price per gallon.
Material and purchased services increased compared with 1992 due to
reduced billings for repairing foreign line cars; increased joint facility
expenses; and increased maintenance and transportation expenses due to
increased traffic volumes and midwestern flooding.
7
Hire of freight equipment increased due to increased traffic levels.
Other rents decreased due to reduced computer and locomotive rentals due to
lease expirations, partially offset by a volume-related increase in WRPI
contingent rent.
Depreciation increased compared with 1992 primarily due to increased
traffic levels on WRPI where track structure components are depreciated on the
unit of production method.
Casualties increased primarily due to an increased charge for
environmental liability and a 1992 reduction in personal injury expense due to
the favorable settlement of a serious personal injury case.
During 1993, the Company accrued a special charge of $5.0 million for
severance and related costs, relocation costs related to the closing of the
Company's Oelwein, Iowa diesel shop and a management fee payable to one of the
Company's previous principal stockholders. During 1992, the Company accrued a
special charge of $30.0 million for employee reductions related to the
consolidation of its customer service functions and the closing of its Council
Bluffs diesel shop.
1992 Operating Expenses Compared to 1991
Compensation and benefits expense, excluding special charges for employee
reductions and relocations, decreased in 1992 as a result of an 8.4% decline
in the average number of employees (primarily, train crew-consist reductions),
but was partially offset by higher wage levels. Payroll taxes decreased
compared with 1991 due to the reduction in the number of employees. Other
fringe benefits decreased due to reductions in employee levels, reduced health
and welfare costs and decreased accruals for management incentive
compensation. Compensation and benefits expense, as a percentage of operating
revenues, were 38.3% in 1992 compared with 40.1% in 1991.
Diesel fuel expense decreased compared with 1991 due to an 8.6% reduction
in the average price per gallon combined with a 2.9% reduction in usage due to
the acquisition of more fuel-efficient locomotives and continuing fuel
conservation programs.
Material and purchased services increased compared to 1991 due to reduced
billings for repairing foreign line cars and increased rail grinding and
intermodal services provided by contractors.
Hire of freight equipment increased due to new leases of open-top hoppers
in 1991 and gondolas in 1992. Other rents increased due to the lease of 35
new locomotives in the third quarter of 1991 and 11 rebuilt locomotives in
1992.
Depreciation decreased compared with 1991 primarily due to implementation
of new rates resulting from a depreciation study, and reduced traffic levels
on WRPI where track structure components are depreciated on the unit of
production method.
8
Casualties decreased primarily due to a reduction of personal injury
expense due to a favorable settlement of a serious case.
Other expense increased compared with 1991 primarily due to increased
software costs, FRA and railroad association fees, property taxes and non-
recurring litigation costs, partially offset by a decrease in bad debt
expense.
During 1992, the Company accrued a special charge of $30.0 million for
employee reductions related to the consolidation of its customer service
functions and the closing of its Council Bluffs diesel shop. During 1991, the
Company accrued a special charge of $76.8 million for employee reduction
programs covering train crew personnel and non-operating employees.
Additionally, the Company accrued a special charge of $39.0 million for
increased environmental liability and personal injury reserves.
Other Income, Net
See Note 3 to Consolidated Financial Statements for a summary of other
income, net.
Interest Expense
1993 interest expense decreased $20.7 million compared with 1992 due to
the Recapitalization, average lower interest rates and reduced debt levels.
1992 interest expense decreased $30.7 million compared with 1991 due to the
Recapitalization and lower average interest rates. On a pro forma basis,
assuming the Recapitalization had occurred January 1, 1992, interest expense
for 1992 would have been reduced by an additional $9.2 million. Included in
interest expense is amortization of financing fees totaling $8.1 million in
1993, $8.7 million in 1992 and $7.9 million in 1991.
Income Taxes
The income tax provision for 1993 increased $31.9 million compared with
1992 primarily due to a $58.5 million increase in taxable income and an
increase in the corporate tax rate. Approximately $7.1 million of the
increase is related to the impact of the higher corporate rate on prior years'
deferred taxes. The Company recognized tax benefits of $6.6 million in 1993
in connection with the extraordinary loss on prepayment of long-term debt.
Due to the availability of approximately $209 million of net operating
losses and $49 million of investment tax credits, the Company does not
anticipate payment of significant amounts of income taxes until 1996. See
Note 2 to Consolidated Financial Statements.
The income tax provision for 1992 increased $46.0 million compared with
1991 due to a $126.9 million increase in book taxable income, which was
partially offset by a $2.8 million reduction in the valuation allowance for
deferred tax assets. In 1992 the Company recognized tax benefits of $57.0
million and $1.5 million in connection with the extraordinary loss on the
Recapitalization and the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 106, "Accounting for Postretirement Benefits Other than
Pensions", respectively.
9
The income tax provision for 1991 reflects the adoption, effective
January 1, 1991, of SFAS No. 109, "Accounting for Income Taxes." The
cumulative effect of SFAS No. 109 for years prior to 1991 was $25.6 million.
See Note 1(f) to Consolidated Financial Statements.
Other Matters
The Company is a party to several proceedings before federal and state
regulatory agencies relating to environmental issues. The Company has been
named a potentially responsible party in several administrative proceedings
for the cleanup of various waste sites, including some Superfund sites. In
the opinion of management, based on the information currently available and
reserves provided for such costs, the ultimate liability resulting from these
environmental matters will not materially affect the results of operations or
financial position of the Company. See Note 8 to Consolidated Financial
Statements.
On July 28, 1993, the Company completed a secondary stock offering and
issued an additional 1,371,265 shares of common stock pursuant to the
underwriters exercise of over-allotment options. As part of the secondary
offering, the Company's previous principal stockholder, Blackstone Capital
Partners, sold substantially all their shares of common stock. See Note 6(b)
to Consolidated Financial Statements for discussion.
Asset Sales
The Company received net proceeds before income taxes from asset sales,
including excess rolling stock and non-operating real estate, of $9.9 million
in 1993, $12.8 million in 1992 and $21.4 million in 1991. The Company has
signed an agreement to sell its line from Norfolk to Chadron, Nebraska for
$6.3 million.
Liquidity
At December 31, 1993, the Company's working capital totaled a negative
$51.9 million, while cash and temporary cash investments totaled $70.9
million. The Company historically operates with negative working capital due
to a higher turnover rate for receivables than accounts payable. Consolidated
indebtedness is substantial in relation to its common stockholders' equity.
As of December 31, 1993, the Company had long-term indebtedness, including
current maturities, of $1.2 billion and common stockholders' equity of $226
million. The Company's ratio of long-term debt to total capitalization
decreased to 83.5% at December 31, 1993 from 89.5% at December 31, 1992.
The Company's cash requirements for financing and investing activities
are comprised of interest and principal payments under the Debt Facilties and
its other outstanding indebtedness and capital expenditures, primarily for
track improvements. The Company is required to make scheduled principal
repayments of approximately $59 million in 1994; $97 million in 1995; $109
million in 1996; $97 million in 1997; $175 million in 1998; and additional
amounts thereafter. The Debt Facilities and WRPI's debt require accelerated
debt payments if there is excess cash flow as defined in the respective
agreements.
10
The Company believes that its cash flow from operations, together with
approximately $47 million available on a revolving credit basis, will allow it
to meet its liquidity requirements, including debt service and capital
expenditures, during the foreseeable future. However, the Company's ability
to make principal and interest payments on its outstanding indebtedness and to
comply with the financial covenants under the Debt Facilities, including a
current ratio, an interest coverage ratio, a leverage ratio and a net worth
test, is dependent upon the Company's future performance and business growth,
which are subject to financial, economic, competitive and other factors
affecting the Company and its subsidiaries, many of which are beyond the
Company's control.
The Debt Facilities and certain other agreements materially restrict the
Company from paying dividends on or redeeming capital stock. See Note 6(d) to
the Consolidated Financial Statements.
Capital Expenditures
The Company allocates funds for capital expenditures based on its capital
needs indicated by its long-term planning and availability of internally
generated funds or suitable long-term financing.
Capital expenditures for 1993 were $115.8 million. The Company's 1994
capital expenditures are currently budgeted at approximately $152 million.
The majority of the capital expenditures program covers replacement of rail,
ties and other track material system-wide, expansion of train handling
capacity from the Powder River Basin by WRPI and construction of new
facilities to serve shippers.
The Company's 1993 capital expenditures included programs to consolidate
the Company's Minneapolis-St. Paul, Minnesota yard facilities and expand the
Company's Global II double-stack container terminal and approximately $4
million to replace property damaged by midwestern flooding. The Company
entered into operating lease agreements in 1993 covering 65 locomotives and
1,300 freight cars with a cost to the lessors of approximately $161 million,
with approximately $59 million of such equipment being received in 1993. The
Company expects to enter into additional operating lease agreements in 1994
for 65 locomotives and approximately 300 freight cars which have a cost to the
lessors of approximately $107 million.
1
CHICAGO AND NORTH WESTERN HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Millions of dollars except for per share amounts
Years Ended December 31,
1993 1992 1991
Operating revenues $1,043.2 $ 985.0 $ 979.0
Operating expenses excluding
special charges $ 829.1 $ 780.8 $ 788.2
Special charges 5.0 30.0 115.8
Total operating expenses $ 834.1 $ 810.8 $ 904.0
Operating income $ 209.1 $ 174.2 $ 75.0
Other income, net 11.0 8.1 11.1
Interest expense 105.4 126.1 156.8
Income (loss) before income taxes $ 114.7 $ 56.2 $ (70.7)
Income taxes:
Currently payable $ 1.3 $ - $ (2.0)
Deferred 49.4 18.8 (25.2)
$ 50.7 $ 18.8 $ (27.2)
Income (loss) before extraordinary item
and cumulative effect of a
change in method of accounting $ 64.0 $ 37.4 $ (43.5)
Extraordinary loss on prepayment of
long-term debt, net of income taxes (10.8) (91.0) (3.4)
Cumulative effect of change in method
of accounting for income taxes - - (25.6)
Cumulative effect of change in method of
accounting for other postretirement
benefits, net of income taxes - (2.6) -
Net income (loss) $ 53.2 $ (56.2) $ (72.5)
Preferred stock dividends - 11.9 30.3
Excess of liquidation value over
carrying value of preferred
stock called for redemption - 46.8 -
Income (loss) available for
common stockholders $ 53.2 $ (114.9) $ (102.8)
Earnings (loss) per common share:
Before extraordinary item and
cumulative effect of a change
in method of accounting $ 1.44 $ (.58) $(3.39)
Extraordinary item (.24) (2.50) (.15)
Cumulative effect of a change in
method of accounting - (.07) (1.18)
Total $ 1.20 $(3.15) $(4.72)
Shares used in earnings per share
computation (thousands) 44,261 36,457 21,763
See accompanying Notes to Consolidated Financial Statements.
2
CHICAGO AND NORTH WESTERN HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Millions of dollars
December 31,
1993 1992
ASSETS
Current assets:
Cash and temporary cash investments $ 70.9 $ 44.2
Accounts receivable, net of allowance
for doubtful accounts of $.2 and $.2 140.9 129.7
Materials and supplies 27.7 29.4
Prepaid expenses and other 9.3 11.4
$ 248.8 $ 214.7
Property:
Road $1,938.6 $1,844.4
Equipment 155.3 142.8
Accumulated depreciation (273.1) (205.8)
$1,820.8 $1,781.4
Other assets $ 66.3 $ 75.9
Total assets $2,135.9 $2,072.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 179.4 $ 171.7
Payroll and vacation pay 35.3 34.3
Interest 10.9 16.9
Taxes 16.2 13.3
Total, excluding long-term debt
due within one year $ 241.8 $ 236.2
Long-term debt due within one year 58.9 50.7
$ 300.7 $ 286.9
Casualties and environmental reserve 78.3 60.3
Other liabilities 84.3 89.6
Deferred income taxes 303.6 263.3
Long-term debt, excluding amounts
due within one year:
C&NW railroad 730.4 798.9
WRPI 412.4 429.0
Total long-term debt,
excluding amounts due within one year $1,142.8 $1,227.9
Total liabilities $1,909.7 $1,928.0
Stockholders' equity:
Common stock, par value $.01 per share,
authorized 250,000,000 shares of which
125,000,000 are non-voting; issued and
outstanding 43,650,561 and 41,902,131 shares,
respectively (of which 12,835,304 and
12,335,304, respectively, are non-voting) $ 0.4 $ 0.4
Capital surplus 537.5 508.5
Retained income (311.7) (364.9)
$ 226.2 $ 144.0
Total liabilities and stockholders' equity $2,135.9 $2,072.0
See accompanying Notes to Consolidated Financial Statements.
3
CHICAGO AND NORTH WESTERN HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars
Years Ended December 31,
1993 1992 1991
Cash flow from operating activities:
Net income (loss) $ 53.2 $ (56.2) $ (72.5)
Items not affecting cash flow from
operating activities:
Depreciation 68.8 64.9 66.8
Amortization of debt cost 8.1 8.7 7.9
Gain from sales of property, net (4.4) (1.9) (3.4)
Deferred income taxes 49.4 18.8 (25.2)
Extraordinary items, net 10.8 91.0 3.4
Cumulative effect of change
in method of accounting - 2.6 25.6
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (11.2) 25.2 (8.6)
(Increase) decrease in other current
assets except cash 3.8 7.1 (1.0)
Increase (decrease) in accounts payable
and accruals 5.6 (39.3) 9.3
Increase in noncurrent reserves for
special charges 3.0 12.7 54.3
Other, net (6.5) (5.5) (12.2)
Net cash flow from operating activities $ 180.6 $ 128.1 $ 44.4
Cash flow from financing activities:
Proceeds from debt financing $ 6.7 $ 758.5 $ 57.6
Proceeds from sale of common stock 26.4 216.0 -
Payments on debt (50.9) (54.1) (33.7)
Prepayment on long-term debt (32.9) (842.9) (112.2)
Repurchase of interest rate swap agreements - (7.2) (15.9)
Redeem preferred stock - (124.7) -
Net cash flow used for
financing activities $ (50.7) $ (54.4) $(104.2)
Cash flow from investing activities:
Additions to property $(115.4) $ (83.3) $ (84.4)
Proceeds from property dispositions 9.9 12.8 21.4
Other, net 2.3 (2.5) (0.2)
Net cash flow used for
investing activities $(103.2) $ (73.0) $ (63.2)
Increase (decrease) in cash and
temporary cash investments $ 26.7 $ 0.7 $(123.0)
Cash and temporary cash investments -
Beginning of period 44.2 43.5 166.5
End of period $ 70.9 $ 44.2 $ 43.5
See accompanying Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
a) Principles of Consolidation.
The consolidated financial statements reflect the operations of the
Company and its subsidiaries. All significant intercompany transactions
have been eliminated.
b) Revenue Recognition.
The Company allocates transportation revenue between reporting
periods based upon relative transit times.
c) Cash and Cash Equivalents.
The Company considers all short-term investments which have an
original maturity of less than ninety days as cash equivalents.
d) Materials and Supplies.
Materials and supplies consist mainly of fuel oil and items to be
used for maintenance of and additions to road and equipment properties
and are stated at average cost.
e) Property and Depreciation.
Property balances include assets under capital leases with costs
(before accumulated depreciation) of $256.6 million and $259.0 million at
December 31, 1993 and 1992, respectively.
Depreciation is provided at composite straight-line rates except that
the track structure components of the Company's subsidiary, Western
Railroad Properties, Incorporated ("WRPI"), are depreciated on the unit
of production method. For 1993, 1992 and 1991, the provision
approximated an annual rate of 4.4%, 4.2% and 4.5%, respectively.
Capital leases are depreciated over the terms of the respective leases
from 3 to 28 years. The average life was approximately 13 years for 1993
and 15 years for 1992 and 1991.
Additions and renewals constituting a unit of property are
capitalized. Other renewals, repairs and maintenance are charged to
expense. Track removal costs and costs of units of property retired or
replaced, less salvage, are charged to accumulated depreciation. All
overhead costs related to track construction and payroll additives
related to other construction are capitalized.
f) Changes in Method of Accounting.
Effective January 1, 1991, the Company adopted SFAS No. 109,
"Accounting for Income Taxes." Under the liability method specified by
SFAS No. 109, the deferred tax liability is determined based on the
temporary differences between the financial statement and tax bases of
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
assets and liabilities as measured by the enacted tax rates which are
expected to be in effect when these differences reverse. Deferred tax
expense is the result of changes in the liability for deferred taxes.
The cumulative effect of the change in the method of accounting for
income taxes, attributable to years prior to 1991, was a decrease in net
earnings of $25.6 million.
Effective January 1, 1992, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions."
The cumulative effect of the change in the method of accounting for other
postretirement benefits, attributable to the accumulated postretirement
benefit obligation ("APBO") for years prior to 1992, net of income taxes,
was a decrease in net earnings of $2.6 million.
Effective January 1, 1992, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The adoption had a
minimal impact upon the Company's results of operations and financial
position.
2. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Years ended December 31,
1993 1992 1991
(Millions of dollars)
Provision (benefit) from:
Continuing operations $ 50.7 $ 18.8 $(27.2)
Extraordinary loss (6.6) (57.0) (2.1)
Change in method of accounting - (1.5) -
Total income tax provision (benefit) $ 44.1 $(39.7) $(29.3)
Current - Federal $ 1.3 $ - $ (1.8)
- State - - (0.2)
Deferred 26.7 3.9 (5.4)
Loss carryover benefit used (generated) 16.1 (40.8) (21.9)
Reduction of deferred tax asset
valuation allowance - (2.8) -
Total income tax provision (benefit) $ 44.1 $(39.7) $(29.3)
The 1993 provision includes a $7.1 million charge to reflect the effect
of the increase in the federal corporate tax rate on the deferred tax balance
as of December 31, 1992.
Total income taxes reflected in the consolidated statement of income
differ from the amounts computed by applying the federal statutory corporate
tax rate as follows:
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
Years ended December 31,
1993 1992 1991
(Millions of dollars)
Tax provision (benefit):
At the federal statutory rate $ 32.5 $(30.4) $(24.1)
Change in federal corporate tax rate 7.1 - -
Reduction of deferred tax asset
valuation allowance - (2.8) -
Federal income tax provision $ 39.6 $(33.2) $(24.1)
State income tax provision 4.5 (6.5) (5.2)
Total income tax provision (benefit) $ 44.1 $(39.7) $(29.3)
As of December 31, 1993, the Company has net operating losses (NOLs) of
approximately $209 million and $134 million for regular and alternative
minimum taxes (AMTs), respectively. The Company's NOLs are recognized for
financial statement purposes as a reduction of the deferred tax liability and
expire as follows:
2000 $ 28 million 2007 $ 64 million
2002 8 million 2008 101 million
2005 8 million
In addition, the Company has approximately $49 million of investment tax
credits for tax return purposes which expire as follows:
1994 $ 6 million 1998 $ 4 million
1995 10 million 1999 9 million
1996 8 million 2000 5 million
1997 5 million 2001 2 million
These investment tax credits are subject to certain limitations as to
their future use. For financial statement purposes, the Company has
established a $38 million valuation reserve for credits which are unlikely to
be used. The estimate of NOLs and ITCs likely to be used was determined
using internal Company projections of future taxable income. The Company
generated a book gain before income taxes of $97 million in 1993 and book
losses before income taxes of $96 million in 1992 and $76 million in 1991.
Taxable gain for 1993 was somewhat lower, while taxable losses for 1992 and
1991 are somewhat higher, primarily due to temporary differences related to
property additions. The Company's projections to support the recognition of
these deferred tax assets do not require continued operating income
improvements but assume the elimination of the special charges for employee
reductions and extraordinary losses for refinancing. The employee reductions
and refinancings have increased pretax income by decreasing operating expenses
and interest expense.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
The components of the deferred tax liability include:
Amounts as of
December 31,
1993 1992
(millions of dollars)
Deferred tax liabilities:
Depreciation and basis differences $ 512.9 $ 520.6
All other 15.4 2.7
Total deferred tax liabilities $ 528.3 $ 523.3
Deferred tax assets:
Property treated as leased for tax purposes (59.6) (64.1)
Tax loss carryforwards (79.5) (98.2)
Accruals (59.2) (59.1)
Investment tax credit carryforwards, net of
valuation reserves of $37.6 and $43.1 (11.5) (11.5)
All other (14.9) (27.1)
Total deferred tax assets $(224.7) $(260.0)
Net deferred income tax liability $ 303.6 $ 263.3
3. OTHER INCOME, NET:
Years ended December 31,
(millions of dollars) 1993 1992 1991
Interest income $ 2.5 $ 2.8 $ 5.5
Gain from sales of property, net 4.4 1.9 3.4
Gain from sale of investment 1.6 - -
Rents from property not used for operations 3.9 3.7 3.8
Financing commitment fees (0.6) (0.8) (1.2)
Other, net (0.8) 0.5 (0.4)
Total $11.0 $ 8.1 $11.1
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
4. LONG-TERM DEBT
a) Non-Current Portion of Long-Term Debt:
Amounts as of
December 31,
1993 1992
(Millions of dollars)
C&NW railroad:
Senior Secured Notes due from 1998 to 2001 $ 465.0 $ 465.0
Term Loan due from 1995 to 1997 72.5 129.5
Standby Loan due from 1995 to 1998 132.7 126.7
Equipment and other obligations
due from 1995 to 2006 41.5 54.7
Capital lease obligations due from
1995 to 2005 (Note 5) 18.7 23.0
Total C&NW railroad $ 730.4 $ 798.9
WRPI:
Loan due from 1995 to 2002 $ 275.8 $ 291.8
Capital lease due from 1995 to 2011 (Note 5) 136.6 137.2
Total WRPI $ 412.4 $ 429.0
Total $1,142.8 $1,227.9
b) C&NW Railroad Debt.
Interest on the Company's senior secured debt facilities (the "Debt
Facilities") is based on floating rates plus various margins. Excluding the
WRPI debt, the composite interest rates net of the effect of interest rate
swap agreements at December 31, 1993, 1992 and 1991, were 7.1%, 8.3% and
10.2%, respectively. As of December 31, 1993 and 1992, interest rates on
$678.7 million and $731.2 million, respectively, of debt varied with the prime
rate, LIBOR or other short-term interest rates. The 1993 and 1992 amounts
included $425 million of fixed rate debt, reverse swapped to floating rate
through various dates in 1996. The Company has effectively fixed the interest
rate on $450 million of loans at 5.6% plus applicable margins through various
dates in 1994 and on $450 million of loans at 6.3% plus applicable margins
through April of 1995 by means of interest rate swap agreements. The Company
has limited the exposure of floating interest rates on $250 million of loans
to a maximum of 5% plus applicable margins from April, 1994 through April,
1995 and on $100 million of loans from April, 1995 through December, 1995 to a
maximum of 7% plus applicable margins by means of interest rate cap
agreements.
See Note 12 for a discussion of the Company's 1992 recapitalization.
c) WRPI Debt.
WRPI's property consists of a one-half interest in a 103-mile rail
line serving the southern Powder River Basin coal fields in Wyoming that
is jointly owned with the Burlington Northern Railroad, and approximately
107 miles of railroad that connects the jointly owned line to the lines
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
of the Union Pacific Railroad near Joyce, Nebraska. The Chicago and
North Western Transportation Company operates the project as agent for
its subsidiary WRPI. A trust for the benefit of a subsidiary of UP
("WRPI Trust") owns approximately 101 miles of the connector track and
certain of the support facilities and leases them to WRPI under a long-
term capital lease. WRPI owns the half interest in the jointly owned
line and the remainder of the assets.
WRPI's debt consists of a direct loan to WRPI (the "WRPI Loan") and a
loan to WRPI Trust, which is treated as a capital lease obligation by
WRPI; collectively, the "WRPI Loans." In addition to the WRPI Trust
capital lease, WRPI's capital lease obligations include approximately $32
million related to the initial equity investment in the lease.
The WRPI Loans bear interest at per annum rates calculated at the
option of WRPI or the WRPI Trust, as applicable, at a margin over the
Adjusted LIBOR Rate, the Alternate Base Rate or the Adjusted CD Rate (in
each case as defined in WRPI's debt agreement) as follows:
Adjusted Alternate Adjusted
LIBOR base rate CD rate
Through December 19, 1994 1.25% 0.25% 1.375%
December 20, 1994-December 19, 1998 1.50% 0.50% 1.625%
Thereafter 2.00% 1.00% 2.125%
The composite interest rates, net of the effect of interest rate swap
agreements as of December 31, 1993, 1992 and 1991 were 7.1%, 7.2% and
8.4%, respectively. The interest rates on $165 million of the WRPI Loans
are effectively fixed at 8.2% until February of 1996, plus applicable
margins by means of interest rate swap agreements.
The Company paid approximately $7.2 million in 1992 to terminate $135
million of WRPI swap agreements. This amount is amortized to interest
expense over the remaining life of the WRPI Loans.
d) Annual Debt Payments.
Scheduled principal payments (including capital lease obligations)
due in 1994 through 1998 are as follows:
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
Other
WRPI debt Total
(millions of dollars)
1994 $ 16.6 $ 42.3 $ 58.9
1995 22.7 74.5 97.2
1996 25.0 83.5 108.5
1997 32.1 64.5 96.6
1998 37.2 137.3 174.5
The Debt Facilities and WRPI Loans require accelerated debt payments
if there is excess cash flow as defined in the respective agreements.
e) Principal Encumbrances.
All of the Company's subsidiaries other than WRPI guarantee
borrowings under the Debt Facilities. All of the WRPI assets, except for
certain intercompany loans, secure the WRPI Loans.
f) Extraordinary Items.
The 1993 extraordinary loss resulted from the refinancing of a
portion of the Company's Debt Facilities. The total pretax loss was
$17.4 million and the related income tax benefit was $6.6 million.
The 1992 extraordinary loss resulted primarily from the retirement of
Debentures in connection with the Recapitalization (see Note 12). The
total pretax loss was $148.0 million and the related income tax benefit
was $57.0 million.
The 1991 extraordinary loss resulted from the writeoff of financing
fees and debt discount related to the Debentures repurchased in
connection with the refinancing of the WRPI Loans and a sale leaseback of
railroad equipment. The total pretax loss was $5.5 million and the
related income tax benefit was $2.1 million.
5. LONG-TERM LEASES
The Company has substantial lease commitments for railroad, highway and
data processing equipment, and WRPI has a lease for portions of the track
structure and related facilities for WRPI. Those leases which meet the
criteria established by SFAS No. 13 are capitalized. The remainder are
reported as operating leases.
Minimum annual rental commitments for noncancelable leases at December
31, 1993 were as follows:
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
Capital leases
Operating
C&NW Railroad WRPI leases
(Millions of dollars)
1994 $ 6.5 $ 11.7 $ 99.1
1995 5.1 11.7 102.8
1996 4.4 11.7 96.7
1997 2.7 11.7 89.7
1998 2.7 11.7 85.9
After 1998 12.5 187.1 540.6
Total $ 33.9 $ 245.6 $1,014.8
Less amount representing
interest on capital leases 10.5 108.4
Present value of net minimum
lease payments $ 23.4 $ 137.2
Lease rental expense for operating leases, including cancelable leases,
was as follows (millions of dollars):
1993 $111.3
1992 111.3
1991 109.4
The above amounts include insignificant amounts of rental income from
subleases. Excluded from such amounts are contingent rentals on freight cars
based on off-line car hire earnings of $0.3 million, $0.9 million and $1.4
million in 1993, 1992 and 1991, respectively. Also excluded from the above
amounts are contingent rentals payable by WRPI out of its cash flow of $18.2
million for 1993, $15.6 million for 1992 and $11.6 million for 1991.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
6. STOCKHOLDERS' EQUITY
a) Changes in Stockholders' Equity.
(millions of dollars)
Common Capital Retained
stock surplus income
December 31, 1990 $ 0.2 $ 112.5 $(108.4)
Net loss for the period - - (72.5)
Dividends on and accretion of
preferred stock* - - (30.3)
December 31, 1991 $ 0.2 $ 112.5 $(211.2)
Issuance of common stock 0.2 395.7 (38.8)
Net loss for the period - - (56.2)
Exercise of stock options - 0.3 -
Dividends on and accretion of
preferred stock* - - (11.9)
Excess of liquidation value over
carrying value of preferred stock
called for redemption* - - (46.8)
December 31, 1992 $ 0.4 $ 508.5 $(364.9)
Net income for the period - - 53.2
Issuance of common stock - 24.4 -
Exercise of stock options - 4.6 -
December 31, 1993 $ 0.4 $ 537.5 $(311.7)
*Preferred dividends of the Company, all paid in additional shares, were
13% per annum for each share of UP Convertible Preferred Stock, and 17%
per annum for each share of Merger Preferred Stock. See Note 12 for
discussion of preferred stock redemption.
b) Secondary Stock Offering.
During June of 1993 the Company filed a registration statement with
the Securities and Exchange Commission for the secondary offering of
13,712,645 shares of common stock. The secondary offering closed July
28, 1993 at a price of $19.25 per share. Blackstone Capital Partners,
L.P. ("Blackstone") and related investors sold 11,983,873 shares and DLJ
Capital Corporation ("DLJ") and related investors sold 2,228,772 shares,
substantially all of their respective shares. UP Rail, Inc. ("UP Rail"),
a subsidiary of Union Pacific Corporation, purchased 500,000 shares
from the selling stockholders, thereby increasing its ownership to
12,835,304 shares, all of which are non-voting. On January 29, 1993,
Union Pacific Corporation filed an application with the ICC requesting
approval to convert the non-voting common stock to common stock. A
decision is expected in late 1994.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
In connection with the secondary offering, the underwriters exercised
overallotment options under which the Company issued an additional
1,371,265 shares of common stock for which it received net proceeds after
underwriting discount and issuance expenses of approximately $24.4
million. Such net proceeds were used for the payment of a portion of the
amounts owing under the Company's Debt Facilities. Under the Debt
Facilities, the Company is allowed to pay cash dividends or increase its
capital expenditures by the $24.4 million amount of net proceeds.
c) Stock Option Agreements.
1,820,012 options on common stock, with an exercise price of $5.88,
were granted in 1989 and an additional 247,582 options were granted in
1990. Options became exercisable for 12.5% of the shares subject thereto
on each of the first, second and third anniversaries of the grant date.
In addition to the shares with respect to which options have become
exercisable as described in the previous sentence, 45% of the options
have become exercisable based on achievement of performance levels in
fiscal 1990-1993 and 17.5% may become exercisable for the remaining
options based on achievement of performance levels, subject to adjustment
by the Board of Directors, over the next fiscal year. As of December 31,
1993, 1,268,634 options were exercisable, 374,965 had been exercised and
77,323 had been canceled. In addition, 323,542 options, all of which are
exercisable, with exercise prices between $1.09 and $2.07 were granted in
1989 to certain executives. 50,000 of the 323,542 options have been
exercised as of December 31, 1993. All options expire on the tenth
anniversary of the grant date or earlier under certain circumstances.
996,000 options, with an exercise price of $21.375 were granted on
December 8, 1992. These options become exercisable for 20% of the shares
subject thereto, annually, beginning on the first anniversary of the
grant date and expire on the tenth anniversary of the grant date. 1,000
of these options have been exercised as of December 31, 1993. An
additional 1,104,000 options are available to be granted under the 1992
stock option plan.
d) Dividend Restrictions.
The Debt Facilities limit the Company's payment of dividends or
making other distributions with respect to the common stock to 10% of
income, as defined by the Debt Facilities, and the amount of proceeds
from equity issuances subsequent to the Recapitalization. Proceeds from
equity issuances may alternately be used for increased capital
expenditures, thereby decreasing the amount available for dividends. As
of December 31, 1993, the Company's potential dividend payments were
limited to $28.4 million.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
7. EMPLOYEE BENEFIT PLANS
a) Pensions.
The Company has a noncontributory defined benefit pension plan for
employees who are not covered by a collective bargaining agreement. The
benefits are based on years of service and the employee's average
compensation over the last five years of employment. These benefits are
reduced by eligible retirement benefits under the Company's Profit
Sharing and Retirement Savings Plan and the Railroad Retirement Act. The
Company makes annual contributions to the plan based on actuarial
determinations and cash requirements. The plan's assets are invested in
an immediate participation guaranty policy with an insurance company.
Net pension expense was $0.3 million in 1993 and 1992, and $0.5
million in 1991, which consisted primarily of interest on the projected
benefit obligation. The projected benefit obligation was $7.0 million
and $6.4 million as of December 31, 1993 and 1992, respectively.
The Company has accrued pension liabilities of $4.3 million and $4.5
million as of December 31, 1993 and 1992, respectively, consisting of the
projected benefit obligation and unrecognized net gains (losses) less the
fair value of plan assets. The fair value of plan assets was $2.9
million and $2.3 million as of December 31, 1993 and 1992, respectively.
Pension expense was determined using a weighted average discount rate
of 8.25%. The projected benefit obligation was determined using a
weighted average discount rate of 7.0% at December 31, 1993 and 8.25 % at
December 31, 1992. The expected long-term rate of return on plan assets
was 8.75%. The assumed rate of compensation increase was 6.0% at
December 31, 1993 and 7.5% at December 31, 1992.
b) Postemployment Benefits
SFAS No. 106 primarily affects the Company's plan under which life
insurance is provided for retired employees not covered under collective
bargaining agreements. The Company's plan is unfunded. Total operating
expense recognized for 1993 and 1992 was $0.4 million and $0.3 million,
respectively, consisting primarily of interest on the APBO.
Certain employees not covered by collective bargaining agreements
also have received postretirement health care benefits to age 65 under
special employee severance programs. The amount paid for these benefits,
which was accrued by the Company prior to the employees' retirement was
$1.2 million in 1993, $1.1 million in 1992 and $0.5 million in 1991.
The Company provides health care benefits through a multi-employer
insurance plan for retired employees between the ages of 62 and 65 who
are covered by collective bargaining agreements. The cost of these
benefits for retired employees was $1.7 million in 1993 and 1992 and $1.9
million in 1991.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
8. CONTINGENT LIABILITIES AND COMMITMENTS
The Company has approved a capital budget of $152 million for 1994 and plans
to acquire equipment under operating leases with a cost to the lessors of $107
million. Additionally, the Company will acquire $102 million of equipment for
which operating lease agreements were signed in 1993.
The Company's operations are subject to a variety of federal, state and
local environmental and pollution control statutes and regulations. The
Company has been named as a potentially responsible party ("PRP") in three
proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), and in one state Superfund
matter, all in the Midwest. The Company is also a defendant in one private
CERCLA cost recovery action. The current estimate of the total cost of
remediation for these five proceedings to all PRPs aggregates approximately
$78 million. The Company has assumed that other PRPs will pay appropriate
shares of remediation obligations, except when the Company is aware they are
incapable of doing so. In such instances, the Company has reapportioned the
potential liability and provided a reserve.
The Company is the lessor of real property under approximately 1,700
leases for commercial, agricultural and industrial uses and owns or leases
numerous other sites. The Company has additionally provided reserves for
environmental exposure from current and former railroad operating properties,
fueling facilities, leased properties and pending litigation and enforcement
actions. The Company's environmental exposure is reevaluated periodically.
At December 31, 1993, the Company's reserve for environmental liabilities
was $28 million. No offsets were credited for possible insurance recoveries,
as the Company believes, to a large extent, it would not be able to obtain
such recoveries. The reserve was determined based on the Company's
anticipated cost of remediation at all known sites, including those where no
claim or enforcement action has been issued, taking into consideration the
extent of damage and the Company's remediation cost history. The Company has
not discounted its environmental liabilities as the timing of remediation
payments is uncertain. Environmental regulations and remediation processes
are subject to future change, and determining the actual cost of remediation
will require further investigation and remediation experience. Therefore, the
ultimate cost cannot be determined at this time. However, while such cost may
vary from the Company's current estimate, the Company believes the difference
between its reserve and the ultimate liability will not be material.
The Company is a party to a number of other legal actions arising in the
ordinary course of business, including actions involving personal injury
claims. The Company believes that the legal actions will not have a material
adverse impact upon the financial position or results of operations of the
Company.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(millions of dollars except per share amounts)
1993 Quarters Ended March 31 June 30 September 30 December 31
Operating revenues $254.7 $257.0 $262.9 $268.6
Operating income 45.6 52.7 49.2 a/ 61.6
Income before
extraordinary item 14.6 18.7 6.2 24.5
Net income (loss) 14.6 18.7 (4.6) b/ 24.5
Income before extraordinary
item per share .33 .43 .14 .54
Net income (loss) per share .33 .43 (.10) .54
(millions of dollars except per share amounts)
1992 Quarters Ended March 31 June 30 September 30 December 31
Operating revenues $242.6 $240.0 $253.3 $249.1
Operating income 44.0 47.4 59.7 23.1 c/
Income before extraordinary
item and cumulative
effect of a change in
method of accounting 5.0 11.6 19.5 1.3
Net income (loss) (88.6) d/ 11.6 19.5 1.3
Income (loss) before
extraordinary item and
cumulative effect of a
change in method of
accounting per share (2.36) .22 .45 .03
Net income (loss) per share (6.66) .22 .45 .03
a/ Includes $5 million charge for employee buyouts, relocation costs and a
management fee payable to one of the Company's previous principal
stockholders.
b/ Includes a $10.8 million extraordinary charge from a debt refinancing.
c/ Includes $30 million employee reduction program costs.
d/ Includes a $91 million extraordinary charge in connection with the
Recapitalization (see Note 12).
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
10. RELATED PARTY TRANSACTIONS
Union Pacific Corporation and its subsidiaries ("UP") are related parties
as a result of their ownership of common stock of the Company. Blackstone
and DLJ were formerly related parties as a result of their or their
affiliates' ownership of common stock of the Company
The Company paid Blackstone $1.0 million in 1993 and 1992 and $0.8
million in 1991 for management and advisory fees, and $1.2 million in 1992
with respect to the Recapitalization. The Company paid DLJ $1.2 million in
fees in 1992 related to the Recapitalization, and $0.2 million in 1991 for
management and advisory services. In addition, DLJ, acting as a lead
underwriter, realized aggregate selling concessions of $2.3 million in
connection with the Company's 1993 secondary offering and $4.1 million in
connection with the Company's 1992 stock offering.
Repurchases of Debentures by the Company in 1991 included repurchases of
approximately $62.7 million face amount of such debentures from DLJ for an
aggregate purchase price of approximately $62.4 million.
In connection with the Recapitalization, the Company exchanged 10,153,304
shares of non-voting common stock for the outstanding UP Convertible Preferred
Stock and an additional cash investment of $28 million. In connection with
the secondary offering, UP Rail purchased an additional 500,000 shares of non-
voting common stock. See Note 6(b).
Approximately 65% of the Company's total loads in 1993, 62% in 1992 and
64% in 1991 were interchanged with the UP with revenue shared in accordance
with standard industry procedures. Pursuant to a trackage rights agreement,
approved by the Interstate Commerce Commission, among the Company and
subsidiaries of UP, the Company hauls certain traffic for subsidiaries of UP
under terms that preserve the Company's revenue on that traffic. Note 5
details WRPI capital lease payments (including contingent rent payable out of
cash flow) made to a trust for the benefit of a subsidiary of UP.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
11. OTHER DISCLOSURES
a) Additional Disclosures for Consolidated Statement of Cash Flows.
The following cash payments occurred in the periods shown:
1993 1992 1991
(millions of dollars)
Interest $103.0 $118.6 $151.3
Income taxes .9 - .2
The following noncash financing activities of the Company occurred in
the periods shown:
1993 1992 1991
(millions of dollars)
UP convertible preferred
stock dividend $ - $ 4.8 $ 16.4
Merger preferred stock
dividend and accretion - - 13.9
Exchange of UP convertible preferred
stock for non-voting common stock - 141.4 -
b) Cash Resources.
The Company has a credit line available through a $50 million
revolving credit facility. Approximately $47 million was available under
this credit line as of December 31, 1993.
c) Concentration of Credit Risk.
The Company is not dependent upon a single customer or on a
few customers. However, approximately 33% of the Company's 1993 traffic
was coal, primarily destined to electric utilities in the United States.
Approximately 65% of the Company's 1993 traffic was interchanged with
subsidiaries of the Union Pacific Corporation.
d) Fair Value of Financial Instruments.
The estimated fair value of the Company's financial instruments as of
December 31, 1993 was as follows:
Carrying Fair
value value
(millions of dollars)
Assets:
Cash and temporary cash investments $ 70.9 $ 70.9
Other current assets 177.9 177.9
Investments 5.6 5.6
Interest rate swap agreements - 3.3
Liabilities:
Current liabilities 300.7 300.7
Long-term debt 1,142.8 1,213.3
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Current Assets and Current Liabilities: The carrying value
approximates fair value due to the short maturity of these items.
Investments: The Company has a minor amount of assets accounted for
on the cost basis for which the Company believes the carrying value
approximates fair value.
Long-Term Debt: The fair value of long-term debt and related swaps
is estimated based on quoted market prices for similar issues.
12. RECAPITALIZATION
On April 7, 1992, the Company issued 20,069,463 shares of common stock,
of which 9,916,159 shares were issued to the public and 10,153,304 non-voting
shares were issued to UP Rail as part of a recapitalization plan (the
"Recapitalization") to: (i) eliminate dividends on its 17% Cumulative
Exchangeable Preferred Stock, par value $.01 per share (the "Merger Preferred
Stock") and 13% Cumulative Convertible Exchangeable Senior Pay-in-Kind
Preferred Stock, par value $.01 per share (the "UP Convertible Preferred
Stock") issued in connection with the acquisition of CNW Corporation in 1989
(the "Acquisition"); (ii) increase common stockholders' equity; and (iii)
reduce the interest costs of the Company's consolidated indebtedness. The
principal sources of funds in the Recapitalization were: (i) the public
common stock issuance; (ii) new senior secured debt facilities for borrowings
of up to $850 million ; and (iii) an investment by UP Rail of $28 million,
along with the surrender of the UP Convertible Preferred Stock in exchange for
the issuance of non-voting Common Stock to UP Rail.
The proceeds of the Recapitalization (approximately $1.2 billion) were
used to: (i) redeem all of the issued and outstanding shares of Merger
Preferred Stock at an aggregate redemption price equal to its liquidation
value plus accrued and unpaid dividends to the redemption date of May 8, 1992;
(ii) prepay all borrowings outstanding under the credit agreement (the "Merger
Credit Agreement") entered into in connection with the Acquisition; (iii)
retire $362 million of the 15-1/2% senior subordinated debentures due 2001
(the "Debentures") issued by a subsidiary of the Company in connection with
the Acquisition; (iv) exchange all of the issued and outstanding shares of UP
Convertible Preferred Stock (plus an additional cash investment by UP Rail of
$28 million) for 10,153,304 shares of non-voting common stock; (v) fund a
portion of employee severance costs; (vi) terminate certain interest rate swap
agreements; and (vii) pay financing and transaction costs. In connection with
the Recapitalization, the Company recorded a first quarter after-tax
extraordinary charge to earnings of approximately $91 million (net of $57
million of income taxes) related to the retirement of the Debentures and the
termination of the Merger Credit Agreement and a charge of approximately $47
million to accrete the Merger Preferred Stock to its liquidation value.
Concurrent with the common stock issuance, the Company effected an
approximate 32.25-for-one stock split. Share and per share data included in
the Consolidated Financial Statements have been restated for the stock split.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
On a pro forma basis, as of January 1, 1992, the Recapitalization would
have reduced 1992 interest expense by $9.2 million and eliminated all
preferred stock dividends.
13. SPECIAL CHARGES
The Company recorded a special charge of $5 million in 1993 for employee
severance and related costs, relocation costs related to the closing of the
Oelwein, Iowa diesel shop and a management fee payable to one of the Company's
previous principal stockholders.
The Company recorded a special charge of $30 million in 1992 for
severance and related costs to consolidate the Company's customer service
functions and close a diesel shop in Council Bluffs, Iowa.
In 1991 the Company recorded special charges totaling $115.8 million,
consisting of: (a) $76 million for severance and related costs pursuant to an
agreement with the United Transportation Union; (b) a $20 million increase to
the Company's environmental liability reserve; (c) a $19 million increase to
the Company's personal injury reserve; and (d) $0.8 million for an employee
reduction program covering non-operating contract personnel.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Chicago and North Western Holdings Corp.:
We have audited the accompanying consolidated balance sheets of Chicago
and North Western Holdings Corp. (a Delaware corporation) and subsidiaries as
of December 31, 1993 and 1992, and the related consolidated statements of
income and cash flows for the three years in the period ended December 31,
1993. These 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 financial statements referred to above present
fairly, in all material respects, the financial position of Chicago and North
Western Holdings Corp. and subsidiaries as of December 31, 1993 and 1992, and
the results of their operations and their cash flows for the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As explained in Note 1(f) to the financial statements, effective January
1, 1992, the Company changed its method of accounting for other postretirement
benefits and effective January 1, 1991, the Company changed its method of
accounting for income taxes.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
February 4, 1994
Dates Referenced Herein
| Referenced-On Page |
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This ‘10-K’ Filing | | Date | | First | | Last | | | Other Filings |
---|
| | |
| | 12/20/94 | | 20 | | | | | None on these Dates |
Filed on: | | 3/21/94 |
| | 2/4/94 | | 32 |
For Period End: | | 12/31/93 | | 1 | | 32 |
| | 7/28/93 | | 10 | | 23 |
| | 1/29/93 | | 23 |
| | 12/31/92 | | 10 | | 32 |
| | 12/8/92 | | 24 |
| | 5/8/92 | | 30 |
| | 4/7/92 | | 30 |
| | 1/1/92 | | 9 | | 32 |
| List all Filings |
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