<COVER>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 13-2626465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 Main Street, Suite 5900, Dallas, Texas
(Address of principal executive offices)
75201
(Zip Code)
(214) 743-5600
(Registrant's telephone number, including area code)
Indicate by check mark 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.
YES X NO
-------- --------
As of October 31, 1998, there were 247,375,588 shares of the
Registrant's Common Stock outstanding.
<INDEX>
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Condensed Consolidated Financial Statements:
CONDENSED STATEMENT OF CONSOLIDATED INCOME -
For the Three Months and Nine Months Ended
September 30, 1998 and 1997.................. 1
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL
POSITION - At September 30, 1998 and
December 31, 1997............................. 2
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
- For the Nine Months Ended September 30, 1998
and 1997...................................... 4
CONDENSED STATEMENT OF CONSOLIDATED RETAINED
EARNINGS - For the Nine Months Ended September
30, 1998 and 1997............................. 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.................................... 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 11
Item 3: Quantitative and Qualitative Disclosures About
Market Risk.................................... 20
PART II. OTHER INFORMATION
Item 1: Legal Proceedings................................. 21
Item 6: Exhibits and Reports on Form 8-K.................. 22
Signature.................................................. 23
<PAGE> 1
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME
For the Three Months and Nine Months Ended September 30, 1998 and 1997
(Amounts in Millions, Except Ratio and Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
----------------------------------
Operating Revenues ....................... $2,404 $2,575 $7,094 $7,817
Operating Expenses (Note 2):
Salaries, wages and employee benefits... 926 891 2,779 2,674
Equipment and other rents............... 329 336 1,038 969
Depreciation and amortization........... 253 244 751 732
Fuel and utilities (Note 4)............. 193 229 604 766
Purchased services...................... 164 171 504 500
Materials and supplies.................. 131 119 399 391
Other costs............................. 205 170 937 579
Total................................ 2,201 2,160 7,012 6,611
------ ------ ------ ------
Operating Income.......................... 203 415 82 1,206
Other Income - Net........................ 37 102 113 159
Interest Expense (Note 4)................. (189) (156) (526) (451)
------ ------ ------ ------
Income (Loss) before Income Taxes......... 51 361 (331) 914
Income Taxes (Benefit) Expense............ 19 124 (140) 329
Income (Loss) from Continuing Operations.. 32 237 (191) 585
------ ------ ------ ------
Discontinued Operations (Note 3):
Income (Loss) from Operations of
Discontinued Operations............ - 3 4 (1)
Estimated Loss on Disposal of
Discontinued Operations (net of
income taxes of $1 million and
$199 million, respectively)........ 6 - (256) -
------ ------ ------ -----
Income (Loss) from Discontinued Operations. 6 3 (252) (1)
------ ------ ------ ------
Net Income (Loss)......................... $ 38 $ 240 $ (443) $ 584
====== ====== ====== ======
Earnings Per Share (Note 9):
Basic:
Income(Loss)from Continuing Operations.. $ 0.13 $ 0.96 $(0.78) $ 2.38
Income(Loss)from Discontinued Operations 0.02 0.01 (1.02) -
------ ------ ------ ------
Net Income (Loss)....................... $ 0.15 $ 0.97 $(1.80) $ 2.38
====== ====== ====== ======
Diluted:
Income(Loss)from Continuing Operations.. $ 0.13 $ 0.95 $(0.78) $ 2.36
Income(Loss)from Discontinued Operations 0.02 0.01 (1.02) (0.01)
------ ------ ------ ------
Net Income (Loss)....................... $ 0.15 $ 0.96 $(1.80) $ 2.35
====== ====== ====== ======
Weighted Average Number of Shares (Basic).. 246.1 245.9 246.0 245.7
Weighted Average Number of Shares (Diluted) 246.7 248.6 246.0 248.0
Cash Dividends Per Share.................. $ 0.20 $ 0.43 $ 0.60 $ 1.29
Ratio of Earnings to Fixed Charges (Note 5) -- -- 0.4 2.5
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 2
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
------------ -----------
Current Assets:
Cash and temporary investments . . . . . . . . $ 554 $ 89
Accounts receivable - net (Note 4) . . . . . . 401 505
Materials and supplies . . . . . . . . . . . . 308 288
Other current assets . . . . . . . . . . . . . 234 357
Investment in Discontinued Operations (Note 3). 518 955
------- --------
Total Current Assets. . . . . . . . . . . . 2,015 2,194
------- --------
Investments:
Investments in and advances to affiliated
companies . . . . . . . . . . . . . . . . . . 508 443
Other investments. . . . . . . . . . . . . . . . 156 181
------- --------
Total Investments . . . . . . . . . . . . . 664 624
------- --------
Properties:
Railroad:
Road and other . . . . . . . . . . . . . . . . 24,624 23,610
Equipment. . . . . . . . . . . . . . . . . . . 7,497 7,084
------- -------
Total Railroad. . . . . . . . . . . . . . . 32,121 30,694
Other. . . . . . . . . . . . . . . . . . . . . . 77 70
------- -------
Total Properties. . . . . . . . . . . . . . 32,198 30,764
Accumulated depreciation . . . . . . . . . . . . (5,670) (5,240)
------- -------
Properties - Net . . . . . . . . . . . . . . . 26,528 25,524
------- -------
Other Assets . . . . . . . . . . . . . . . . . . . 222 185
------- -------
Total Assets. . . . . . . . . . . . . . . .$ 29,429 $ 28,527
======== ========
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 3
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Amounts in Millions, Except Share and Per Share Amounts)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- ------------
Current Liabilities:
Accounts payable................................ $ 531 $ 711
Accrued wages and vacation...................... 407 388
Accrued casualty costs.......................... 319 318
Dividends and interest.......................... 244 293
Income and other taxes.......................... 281 263
Debt due within one year........................ 178 229
Other current liabilities (Notes 2 and 7)....... 820 881
-------- --------
Total Current Liabilities.................... 2,780 3,083
-------- --------
Debt Due After One Year........................... 9,029 8,280
Deferred Income Taxes............................. 5,978 6,284
Accrued Casualty Costs............................ 675 678
Retiree Benefits Obligation....................... 782 752
Other Long-Term Liabilities (Notes 2 and 7)....... 1,056 1,225
Company-Obligated Mandatorily Redeemable
Convertible Preferred Securities (Note 6)....... 1,500 -
Stockholders' Equity:
Common stock, $2.50 par value, authorized
500,000,000 shares, 276,244,491 shares issued
in 1998, 276,047,556 shares issued in 1997.... 691 690
Paid-in surplus................................. 4,049 4,066
Retained earnings............................... 4,680 5,271
Treasury stock, at cost, 28,867,358 shares in
1998, 29,045,938 shares in 1997............... (1,791) (1,802)
-------- --------
Total Stockholders' Equity.................... 7,629 8,225
-------- --------
Total Liabilities and Stockholders' Equity.... $ 29,429 $ 28,527
======== ========
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 4
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Millions of Dollars)
(Unaudited)
1998 1997
------- --------
Cash from continuing operations:
Income (loss)from continuing operations ........... $ (191) $ 585
Non-cash charges to income:
Depreciation and amortization................... 751 732
Deferred income taxes........................... (122) 228
Other - net..................................... (182) (444)
Changes in current assets and liabilities.......... (96) 17
------- --------
Cash from continuing operations................. 160 1,118
------- --------
Cash flows from investing activities:
Cash provided by discontinued operations .......... 18 44
Capital investments................................ (1,760) (1,407)
Other - net........................................ 92 201
------- --------
Cash used in investing activities............... (1,650) (1,162)
------- --------
Cash flows from equity and financing activities:
Dividends paid..................................... (205) (317)
Debt repaid........................................ (1,751) (248)
Financings......................................... 3,956 645
Other - net........................................ (45) (25)
------- -------
Cash provided by equity and financing activities 1,955 55
------- -------
Net increase in cash and temporary investments.. $ 465 $ 11
======= ========
CONDENSED STATEMENT OF CONSOLIDATED RETAINED EARNINGS
For the Nine Months Ended September 30, 1998 and 1997
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
1998 1997
------- -------
Balance at Beginning of Year........................ $ 5,271 $ 5,262
Net Income (Loss)................................... (443) 584
------- -------
Total........................................... 4,828 5,846
Dividends Declared ($0.60 per share in 1998 and
$1.29 per share in 1997)........................ (148) (318)
------- -------
Balance at End of Period....................... $ 4,680 $ 5,528
======= =======
The accompanying accounting policies and notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE> 5
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Responsibilities for Financial Statements - The condensed consolidated
financial statements are unaudited and reflect all adjustments
(consisting only of normal and recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
Condensed Statement of Consolidated Financial Position at December 31,
1997 is derived from audited financial statements. The condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in
the Union Pacific Corporation (the Corporation or UPC) Annual Report
to Shareholders incorporated by reference in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997. The results
of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results for the entire year
ending December 31, 1998. Certain 1997 amounts have been reclassified
to conform to the 1998 financial statement presentation.
2. Acquisition of Southern Pacific Rail Corporation (Southern Pacific or
SP) - In connection with the continuing integration of Union Pacific
Railroad Company (UPRR or the Railroad) and its predecessors with
Southern Pacific's rail operations, UPC is continuing to eliminate
duplicate positions (primarily positions other than train crews),
relocate positions, merge or dispose of redundant facilities, dispose
of certain rail lines and cancel uneconomical and duplicative SP
contracts. The Corporation has also repaid certain of Southern
Pacific's debt obligations. UPC recognized a $958 million liability in
the Southern Pacific purchase price allocation for costs associated
with SP's portion of these activities.
Through September 30, 1998, approximately $460 million in merger-
related costs were charged against these reserves, principally
consisting of approximately $246 million and $76 million,
respectively, for severance and relocation payments made to
approximately 4,400 Southern Pacific employees and approximately $96
million for labor protection payments. The Corporation expects the
remaining merger payments will be made over the course of the next
three years as the rail operations of UPRR and SP are integrated and
labor negotiations are completed and implemented.
In addition, the Railroad expects to incur approximately $165 million
in acquisition-related costs for severing or relocating UPRR
employees, disposing of certain UPRR facilities, training and
equipment upgrading. These costs will be charged to expense as
incurred over the next three years. Results for the three and nine
months ended September 30, 1998 include $7 million and $36 million,
after tax, respectively, in acquisition-related operating costs.
3. Divestitures - Overnite: In May 1998, the Corporation's Board of
Directors approved a formal plan to divest UPC's investment in
Overnite Transportation Company (Overnite or OTC). As a result, UPC
recorded a $256 million after-tax loss (net of taxes of $199 million)
from the planned disposition of OTC, including results for the third
quarter of 1998 which are adjusted for certain intercompany items.
Although a planned initial public offering of the Corporation's entire
interest in Overnite (the IPO) was postponed in the third quarter,
management is continuing to monitor market conditions and will proceed
with the IPO when conditions warrant. Management is also considering
alternate means of disposing of its investment in OTC.
<PAGE> 6
OTC's results have been reported as a discontinued operation in the
accompanying consolidated financial statements for all periods
presented. Prior periods' financial statements have been restated to
conform with the current year's presentation. Operating revenues for
OTC were $257 million and $776 million, respectively, for the three
and nine months ended September 30, 1998 and $946 million and $961
million for the years ended December 31, 1997 and 1996, respectively.
OTC's capital expenditures were $11 million and $37 million,
respectively, for the three and nine months ended September 30, 1998
and $40 million and $10 million for the years ended December 31, 1997
and 1996, respectively. OTC's net income was $6 million and $13
million, respectively, for the three and nine months ended September
30, 1998, adjusted for certain intercompany items. OTC reported net
income of $4 million for the year ended December 31, 1997 and a net
loss of $43 million for the year ended December 31, 1996 (including
goodwill amortization of $20 million in both periods).
UPC intends to use the cash proceeds from the disposition of OTC for
general corporate purposes, including repayment of borrowings, working
capital requirements and capital expenditures.
Skyway: On November 4, 1998, the Corporation completed the sale of
Skyway Freight Systems, Inc. (Skyway), a wholly owned subsidiary.
Skyway provides contract logistics and supply chain management
services. The proceeds will be used to repay outstanding debt.
4. Financial Instruments - The Corporation uses derivative financial
instruments in limited instances for other than trading purposes to
manage risk as it relates to fuel prices and interest rates. Where
the Corporation has fixed interest rates or fuel prices through the
use of swaps, futures or forward contracts, the Corporation has
mitigated the downside risk of adverse price and rate movements;
however, it has also limited future gains from favorable movements.
The total credit risk associated with the Corporation's counterparties
was $23 million at September 30, 1998. The Corporation has not been
required to provide, nor has it received, any collateral relating to
its hedging activities.
The fair market value of the Corporation's derivative financial
instrument positions at September 30, 1998 was determined based upon
current fair market values as quoted by recognized dealers or
developed based upon the present value of future cash flows discounted
at the applicable zero coupon U.S. Treasury rate and swap spread.
Interest Rates - At September 30, 1998, the Corporation had
outstanding interest rate swaps on $152 million of notional principal
amount of debt (2% of the total debt portfolio) with a gross fair
market value asset position of $22 million and a gross fair market
value liability position of $20 million. These contracts mature over
the next two years. Interest rate hedging activity had no significant
effect on interest expense in the third quarter of 1998 and increased
interest expense by $3 million in the third quarter of 1997.
Fuel - At September 30, 1998, the Railroad had hedged approximately
49% of its estimated remaining 1998 diesel fuel consumption at $0.51
per gallon, on a Gulf Coast basis and approximately 37% of its
estimated 1999 diesel fuel consumption at $0.42 per gallon, on a Gulf
Coast basis. At September 30, 1998, the Railroad had outstanding swap
agreements covering its fuel purchases of $291 million, with gross and
net asset positions of less than $1 million. Fuel hedging increased
third quarter 1998 fuel expense by $25 million and third quarter 1997
fuel expense by approximately $1 million. For the nine months ended
September 30, fuel hedging increased 1998 fuel expense by $59 million
and 1997 fuel expense by approximately $1 million.
<PAGE> 7
Sale of Receivables - The Railroad has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of
accounts receivable. The amount of receivables sold fluctuates based
upon the availability of the designated pool of receivables and is
directly affected by changing business volumes and credit risks. At
December 31, 1997 and September 30, 1998, accounts receivable are
presented net of the $650 million and $580 million, respectively, of
receivables sold.
5. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed
charges has been computed on a total enterprise basis. Earnings
represent income from continuing operations less equity in
undistributed earnings of unconsolidated affiliates, plus income taxes
and fixed charges. Fixed charges represent interest, amortization of
debt discount and expense, and the estimated interest portion of
rental charges. For the nine months ended September 30, 1998, fixed
charges exceeded earnings by approximately $365 million.
6. Convertible Preferred Securities - On April 1, 1998, the Corporation
completed a private placement of $1.5 billion of 6-1/4% preferred
securities (the Convertible Preferred Securities) of Union Pacific
Capital Trust (the Trust), a statutory business trust sponsored by the
Corporation. Each of the Convertible Preferred Securities has a
stated liquidation amount of $50 and is convertible, at the option of
the holder thereof, into shares of UPC's common stock, par value $2.50
per share (the UPC Common Stock), at the rate of 0.7257 shares of UPC
Common Stock for each of the Convertible Preferred Securities,
equivalent to a conversion price of $68.90 per share of UPC Common
Stock, subject to adjustment under certain circumstances. The
Corporation owns all of the common securities of the Trust. Proceeds
from the sale of the Convertible Preferred Securities were used for
repayment of borrowings.
7. Commitments and Contingencies - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries.
Certain customers have submitted claims for damages related to
shipments delayed by the Railroad as a result of congestion problems,
and certain customers have filed lawsuits seeking relief related to
such delays. The nature of the damages sought by claimants includes,
but is not limited to, contractual liquidated damages, freight loss or
damage, alternative transportation charges, additional production
costs, lost business and lost profits. In addition, some customers
have asserted that they have the right to cancel contracts as a result
of alleged material breaches of such contracts by the Railroad. UPC
continues to evaluate the adequacy of its reserves for customer
claims.
The Railroad is also party to certain regulatory proceedings before
the Surface Transportation Board of the U.S. Department of
Transportation (STB). One proceeding pertains to rail service problems
in the western United States. As an outgrowth of this proceeding, the
STB issued an emergency service order imposing certain temporary
measures on the Railroad designed, among other things, to reduce
congestion on the Railroad's lines in the Houston, Texas area. On
July 31, 1998, the STB terminated the emergency service order. The
STB kept in place the requirement that the Railroad report certain
service data, which the Railroad had acknowledged the STB had the
authority to impose under a provision of the Interstate Commerce Act
separate from the emergency service provision. The STB also
prescribed, under another statutory provision separate from the
emergency service provision, a 45-day "wind-down" period during which
<PAGE> 7
certain rights that Texas Mexican Railway Company (Tex Mex) and The
Burlington Northern and Santa Fe Railway Company (BNSF) had received
under the emergency service order to handle the Railroad's traffic in
Houston would be continued. The 45-day "wind-down" period expired
September 17, 1998. A second proceeding, initiated under the STB's
continuing oversight jurisdiction with respect to the merger of the
Corporation and Southern Pacific (and separate from the STB's
regularly scheduled annual proceeding to review the implementation of
the merger and the effectiveness of the conditions that the STB
imposed on it), is for the purpose of considering the justification
for and advisability of any proposals for new remedial conditions to
the merger as they pertain to service in the Houston, Texas area and
surrounding coastal areas of Texas and Louisiana. Various parties
have filed applications in this proceeding seeking the imposition of
additional conditions to the merger including, among other things, the
granting of overhead trackage rights on certain of the Railroad's
lines in Texas, "neutral switching supervision" on certain of the
Railroad's branch lines, the opening to other railroads and switching
by a "neutral switching company" of numerous industries now exclusively
served by the Railroad in the Houston area, and the compulsory sale or
lease to other carriers of certain of the Railroad's lines and
facilities. The Railroad's response in opposition to the condition
requests was filed on September 18, 1998, and rebuttal in support of
the condition applications was filed on October 16, 1998. The
Railroad believes that the applications are without merit and
vigorously opposed them in its September 18 submission. Separately
from this proceeding, a shortline railroad, the Arkansas, Louisiana
and Mississippi Railroad (AL&M), has filed a request that an
additional condition be imposed on the merger allowing AL&M to
interchange traffic with BNSF. The Railroad has also opposed this
request. In addition, the STB has initiated various inquiries and
formal rulemaking proceedings regarding certain elements of rail
regulation following two days of hearings by the STB in April 1998 at
the request of two members of Congress and in response to shippers'
expressions of concern regarding railroad service quality, railroad
rates and allegedly inadequate regulatory remedies. There can be no
assurance that the proposals advanced by parties in the remedial
conditions proceeding or the proceedings initiated in response to the
rail regulation hearings will not be approved in some form. Should
the STB or Congress take aggressive action in the rail regulation
proceedings (e.g., by making purportedly competition-enhancing changes
in rate and route regulation and "access" provisions), the adverse
effect on the Railroad and other rail carriers could be material.
The Corporation is also subject to Federal, state and local
environmental laws and regulations, and is currently participating in
the investigation and remediation of numerous sites. Where the
remediation costs can be reasonably determined, and where such
remediation is probable, the Corporation has recorded a liability. In
addition, the Corporation periodically enters into financial and other
commitments and has retained certain contingent liabilities upon the
disposition of formerly-owned operations.
In addition, UPC and certain of its officers and directors are
currently defendants in two purported class actions, which have been
consolidated into one proceeding. The consolidated complaint alleges,
among other things, that the Corporation violated the federal
securities laws by failing to disclose material facts and making
materially false and misleading statements concerning the service,
congestion and safety problems encountered following the Corporation's
acquisition of Southern Pacific in 1996. These lawsuits were filed in
late 1997 in the United States District Court for the Northern
District of Texas and seek to recover unspecified amounts of damages.
<PAGE> 9
Management believes that the plaintiffs' claims are without merit and
intends to defend them vigorously. The defendants have moved to
dismiss this action, and the motion has been fully briefed.
In addition to the class action litigation, certain current and former
directors of the Corporation and the Railroad were named as defendants
in a purported derivative action filed on behalf of the Corporation
and the Railroad in the United States District Court for the Northern
District of Texas in late 1997. The derivative action alleged, among
other things, that the named current and former directors breached
their fiduciary duties to the Corporation and the Railroad by
approving the acquisition of Southern Pacific. The defendants moved
to dismiss the derivative action. In response, the plaintiffs sought
to voluntarily dismiss their claims, and the derivative action was
dismissed, without prejudice, by order of the court dated May 26,
1998.
On September 14, 1998, a different shareholder plaintiff filed a new
purported derivative action on behalf of the Corporation and the
Railroad in the District Court of Tarrant County, Texas, naming as
defendants the Corporation, the Railroad, and the current and certain
former directors of the Corporation and the Railroad. This new
derivative action alleges, among other things, that the named current
and former directors breached their fiduciary duties to the
Corporation and the Railroad by approving and implementing the
Southern Pacific merger without informing themselves of its impact or
ensuring that adequate controls were put in place and by causing UPC
and the Railroad to make misrepresentations about the Railroad's
service problems to the financial markets and regulatory authorities.
The defendants believe that these claims are without merit and intend
to defend them vigorously.
It is not possible at this time for the Corporation to fully determine
the effect of all unasserted claims on its consolidated financial
condition, results of operations or liquidity; however, to the extent
possible, where unasserted claims can be estimated and where such
claims are considered probable, the Corporation has recorded a
liability. The Corporation does not expect that any known lawsuits,
claims, environmental costs, commitments or guarantees will have a
material adverse effect on its consolidated financial condition.
8. Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting
Comprehensive Income" (FAS 130), that is effective for all periods in
1998, including interim periods. UPC has adopted the provisions of
FAS 130 effective January 1, 1998. The components of comprehensive
income include, among other things, changes in the market value of
derivative instruments which qualify for hedge accounting under
Statement No. 133, when adopted, and net loss recognized as an
additional pension liability but not yet recognized as net periodic
pension cost. The impact of adopting FAS 130 for the nine months ended
September 30, 1998 was approximately a $2 million after-tax reduction
of net income.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information", that is
effective in 1998. The Corporation currently complies with the
provisions of this Statement.
<PAGE> 10
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (FAS
132), that is effective in 1998. FAS 132 revises and standardizes
disclosures required by FAS 87, 88, and 106. This Statement will only
affect footnote disclosure and will not otherwise have an effect on
the consolidated financial statements of the Corporation.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), that will be
effective in 2000. Management is just beginning the process of
determining the effect, if any, FAS 133 will have on the Corporation's
financial statements.
9. Earnings Per Share - The following table provides a reconciliation
between basic and diluted earnings per share, in accordance with FAS
128, "Earnings Per Share":
(Dollars in Millions, Except Per Three Months Ended Nine Months Ended
Share Amounts) September 30 September 30
------------------ -----------------
1998 1997 1998 1997
Income Statement Data: ----- ----- ----- -----
Income(Loss)from Continuing
Operations $ 32 $ 237 $(191) $ 585
Interest associated with Convertible
Preferred Securities .............. 15 - 29 -
Income (Loss) Available to Common
Stockholders from Continuing
Operations ........................ 47 237 (162) 585
Income (Loss) from Discontinued
Operations ....................... 6 3 (252) (1)
Net Income (Loss) Available to Common
Stockholders ...................... 38 240 (443) 584
Weighted Average Number of Shares
Outstanding:
Basic ............................... 246.1 245.9 246.0 245.7
Dilutive effect of common stock
equivalents ....................... 22.4 2.7 16.0 2.3
----- ----- ----- -----
Diluted ............................. 268.5 248.6 262.0 248.0
===== ===== ===== =====
Earnings Per Share:
Basic:
Income (Loss) from Continued
Operations................... $0.13 $0.96 $(0.78) $2.38
Income (Loss) from Discontinued
Operations................... 0.02 0.01 (1.02) -
----- ----- ------ -----
Net Income (Loss)............... $0.15 $0.97 $(1.80) $2.38
===== ===== ====== =====
Diluted:
Income (Loss) from Continued
Operations................... $0.13 (a) $0.95 $(0.78)(a) $2.36
Income (Loss) from Discontinued
Operations .................. 0.02 0.01 (1.02) (0.01)
----- ----- ------ -----
Net Income (Loss)............... $0.15 (b) $0.96 $(1.80)(b) $2.35
===== ===== ====== =====
(a) Excludes the interest associated with the Convertible
Preferred Securities, which are anti-dilutive.
(b) Excludes the effect of anti-dilutive common stock
equivalents, which are 21.8 million and 16.0 million,
respectively, for the three and nine months ended September
30, 1998.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Overview - During the second quarter of 1998, Union Pacific Corporation
(the Corporation or UPC) restated all periods to reflect Overnite
Transportation Company (Overnite or OTC) as a discontinued operation due
to its planned sale. Since Union Pacific Railroad Company (UPRR or the
Railroad) is the remaining significant operating company of the
Corporation, corporate expenses, previously considered non-operating
expenses, are now included in Other Costs for all periods presented.
Previously, such expenses were presented below operating income. The
impact of reclassifying such expenses as operating expenses was to reduce
operating income by $18 million and $69 million, respectively, for the
three and nine months ended September 30, 1998 and $42 million and $96
million, respectively, for the three and nine months ended September 30,
1997.
Southern Pacific Rail Corporation (Southern Pacific or SP) Acquisition -
In September 1996, the Corporation completed its acquisition of Southern
Pacific and, throughout 1997 and 1998, continued the process of
integrating the operations of SP's rail subsidiaries into the operations
of the Railroad and its predecessors. The Corporation expects to complete
the full integration of the operations of UPRR and the Southern Pacific
rail subsidiaries over the next three years. The Corporation believes
that the full implementation of the merger will result in shorter routes,
faster transit times, better on-time performance, expanded single-line
service and more efficient traffic flow.
As a result of the SP acquisition, UPC now operates the largest rail
system in the United States, with 35,000 route miles linking Pacific Coast
and Gulf Coast ports to the Midwest and eastern U.S. gateways.
Overnite Divestiture - In May 1998, the Corporation's Board of Directors
approved a formal plan to divest UPC's investment in Overnite. See Note
3 to the condensed consolidated financial statements, which is
incorporated herein by reference, for a complete discussion of the effects
of the planned sale of OTC.
Congestion and Service Issues - As previously reported, congestion in and
around Houston and the coastal areas of Texas and Louisiana (the Gulf
Coast region) began to have a material adverse effect on the Corporation's
operations and earnings in the third quarter of 1997. System congestion
started in the Gulf Coast region and spread throughout the system during
the third and fourth quarters of 1997, and continued to adversely affect
the Railroad's operations and financial results during the first nine
months of 1998. The Railroad has adopted certain measures to alleviate
the congestion problems, and implementation of these service recovery
measures has significantly relieved congestion in the Gulf Coast region.
During the third quarter of 1998, service in the Railroad's Central
Corridor between Chicago and Utah was slowed by track maintenance and
capacity expansion work which is expected to be completed during 1999.
UPRR also experienced congestion on its lines in Northern California, in
the Los Angeles Basin and on the Sunset Route west of El Paso, Texas,
caused in part by two derailments on July 8 and July 9, 1998, tight crew
supply and limited track capacity in that region, and the learning curve
associated with the integration of the computer system of Southern Pacific
in the region with the Railroad's computer system, which commenced July
1, 1998. The Railroad has eliminated this congestion by various
<PAGE> 12
measures, including rerouting trains from this region to other portions
of its system. During the late third quarter and early fourth quarter of
1998, the Railroad's operations were also adversely affected by severe
weather in the southern portion of its system, including Hurricane
Georges, which disrupted operations in New Orleans and other parts of
Louisiana during the last three days of September, heavy rains that moved
from northern Texas through Oklahoma and into the Kansas City area on
October 3 and 4, heavy rains that resulted in severe flooding in central
and southern Texas later in the month of October, and heavy rains and
flooding across parts of Oklahoma and Kansas in early November. Despite
these weather problems, the Railroad has been able to respond quickly to
reroute traffic, repair damages caused by washouts and restore service
without severe or lengthy disruptions to the Railroad's operations,
reflecting the Railroad's overall progress in addressing the service and
congestion problems. Although progress has been made in improving
service, the Corporation expects these problems to continue to have an
adverse impact on 1998 results.
During the third quarter of 1998, the Corporation announced a new long-term
strategy to improve the effectiveness of the organization. This
effort will be focused on culture change, business process improvement and
decentralization, each of which is designed to improve customer
satisfaction, increase employee engagement, and improve financial results.
Quarter Ended September 30, 1998 Compared to September 30, 1997
The Corporation returned to profitability in the third quarter of 1998
after three consecutive quarterly losses by posting earnings of $38
million, down from $240 million in the third quarter of 1997. Despite
service improvements during the quarter, year-over-year results were
affected by service problems in the western part of the Railroad's system,
which were resolved during the quarter, traffic slow-downs related to
major track maintenance and capacity expansion efforts along the
Railroad's Central Corridor (scheduled to be completed during 1999),
severe weather in the southern portion of the Railroad's system and the
cost of continued service recovery. Operating income of $203 million for
the third quarter of 1998 compares to $415 million in last year's third
quarter, reflecting a year-over-year increase in pre-tax service-related
costs and lost revenues, as service issues began late in the third quarter
of 1997. The operating ratio for the third quarter of 1998 was 91.6%, up
7.7 points from 1997's 83.9%. Lost revenue and costs related to service
performance were the key drivers of the change.
REVENUE SUMMARY - Operating revenues were down $171 million (7%) at $2,404
million. Carloadings for the third quarter of 1998 of 2,021,969 were down
149,127 units, or 7%, from year-ago loads of 2,171,096. Declines were led
by continuing service issues, weakening demand for whole grain exports
(due to strong worldwide crop yields) and a soft export market (caused by
the Asian currency crisis impact). Average revenue per car (ARC) was
slightly off versus last year for the quarter at $1,126 per car from last
year's $1,131. The decline in ARC was driven by large volumes of very
low-ARC empty repositioning moves for intermodal traffic, higher low-ARC
stone moves, shortfalls of high-ARC steel traffic, and large volumes of
very low-ARC storage-in-transit (SIT) moves in the chemical business. The
following table summarizes the quarter-over-quarter change in rail
commodity revenue (CR) and ARC by commodity type (carloads in thousands
and commodity revenues in millions):
<PAGE> 13
Change % Change
----------------- --------------
Cars ARC CR Cars ARC CR Cars ARC CR
---- --- -- ---- --- -- ---- --- --
Automotive 141 $1,447 $ 204 (8) $(14) $ (14) (6) (1) (6)
Agriculture 213 1,566 334 (11) 38 (9) (5) 2 (3)
Intermodal 633 604 382 (106) (34) (89) (14) (5) (19)
Chemicals 232 1,657 385 (18) (71) (47) (7) (4) (11)
Energy 449 1,148 516 10 51 33 2 5 7
Industrial 354 1,289 456 (16) (88) (53) (4) (6) (10)
----- ------ ------ --- ---- ----- --- --- ----
Total 2,022 $1,126 $2,277 (149) $ (5) $(179) (7) -- (7)
===== ====== ====== === ==== ===== === === ====
Agricultural Products revenues fell 3% for the quarter, as loads finished
down 5% and ARC improved 2%. Key drivers included diversions of wet corn
milling products from the Railroad to trucks and other rails; congestion,
which limited canned and packaged, wheat, frozen and food grains
categories of agricultural products business; inexpensive corn replacing
feed-additives which lowered livestock/feed moves; and depressed corn
prices and very soft export demand which hurt corn traffic. Quarter-over-quarter
ARC was up 2% primarily due to price increases and improvements
in haul length for wheat moves.
Automotive revenues were down 6%, reflecting a 6% decline in volume and
a 1% decrease in ARC. Finished vehicles volumes were down 1% primarily due
to the impact of the General Motors (GM) strike, which cost the Railroad
approximately $21 million for the quarter. International business, down
22% in loadings, experienced lower Asian imports in addition to service-related
diversions. These declines were partially offset by Ford's new
Mixing Center business and strong Chrysler volumes (up 18%). Parts
volumes lost 10% year-over-year as Ford's volumes fell from the Railroad's
equipment shortages and GM switched from intermodal containers to boxcars,
which switch lowered parts carloadings as more parts fit in each boxcar.
ARC fell 1% as a result of large shortfalls of higher-ARC finished
vehicles due to the GM strike.
Chemicals shipments fell 7%, while ARC dropped 4% when compared to 1997
results. Congestion-related diversions to truck, barge and other
railroads plagued most business lines (especially liquid and dry
chemicals). In addition, the Asian crisis significantly reduced the
demand for export soda ash, as carloads were down nearly 11%, while
unplanned mine shutdown not only reduced traffic for phosphate rock, but
reduced the overall demand for phosphorus. The 4% decline in ARC was
largely due to lower high-ARC liquid and dry and soda ash moves, strong
movements of low-ARC plastics (softness in international market and
weakening prices hurt higher-ARC volumes) and the loss of long-haul
business due to slow train speeds.
Energy movements were up 2% versus 1997, while ARC was up 5%. Maintenance
and capacity-driven congestion in the Central Corridor continued to hamper
Powder River Basin (PRB) trains. However, PRB trains per day showed gains
year-over-year (25.2 in 1998 from 24.3 a year ago), and longer trains
(119.7 cars/train in the third quarter of 1998 vs. 117.3 in 1997) helped
boost quarter-over-quarter volumes. Colorado and Utah volumes were also
up for the quarter due to better service performance than 1997 levels.
The 5% increase in ARC was primarily a result of more high-ARC PRB
traffic.
Industrial Products posted a 4% volume decline and a 6% decline in ARC,
resulting in a 10% drop in revenues. Volumes continued to be plagued by
instances of equipment shortages and service issues (caused by slowed
local switching and congestion). A large portion of industrial products
moves occur in the South where congestion hit hardest, although service
<PAGE> 14
levels have continued to improve. Construction materials, metallic
minerals, cement, ferrous scrap, and consumer/machinery moves were all
affected by Southern congestion. In addition, several of the same
commodities have also been affected by Central Corridor congestion (due
to maintenance and capacity expansion) and congestion in the Western
portion of the Railroad's system, as the final portion of the Railroad's
operating system was brought on-line in July 1998. ARC fell 6% due to
product mix issues, largely strong low-ARC stone moves and shortfalls of
high-ARC steel traffic.
Intermodal revenue showed a 19% year-over-year decline, as volumes fell
14% and ARC fell 5%. Congestion issues and related diversions severely
affected several intermodal segments, especially Intermodal Marketing
Company (IMC)/truckload and less-than-truckload (LTL)/premium. Volumes
also suffered from weak exports (Asian currency crisis). A partial offset
was the impact of new APL business and the high demand for containers.
ARC fell as traffic mix shortfalls (relatively fewer high-ARC
IMC/truckload and LTL/premium loads) were exacerbated by increased volumes
of low-ARC empty repositioning moves--as equipment imbalances precipitated
by strong imports and weak exports caused customers to significantly
increase empty container repositioning.
EXPENSE SUMMARY - Operating expenses were $2,201 million for the third
quarter of 1998, $41 million (2%) worse than the third quarter 1997
operating expenses of $2,160 million. However, third quarter 1998
operations did improve significantly from the second quarter of 1998. The
following statistical table reflects the improvements in the Railroad's
operating performance:
1997 1998
---------------- -----------------
2nd 3rd 4th 1st 2nd 3rd
(Average Units Except Ratios) Qtr Qtr Qtr Qtr Qtr Qtr
- ----------------------------- --- --- --- --- --- ---
Seven-Day Carloadings (000's) 170.7 165.9 153.6 152.5 154.9 155.3
Train Speed (MPH) 18.4 15.0 13.2 13.8 14.0 14.4
Car Cycle Times (Days) 12.7 15.2 16.8 17.6 16.4 15.9
Operating Ratio 80.9 82.0 102.5 97.7 105.1 90.5
Labor Expense was $35 million (4%) higher than 1997. Slower train speeds
(which increased the number of train crews required), inflation and other
service-related cost overruns contributed to higher costs. These higher
costs were partially offset by lower volumes (gross-ton miles were down
3%) and the elimination of duplicative positions as part of merger
implementation.
Depreciation expense grew $9 million, or 4%, to $253 million, driven by
the Railroad's extensive capital programs in 1997 and 1998. The Railroad
spent over $2 billion on capital projects in 1997 and expects to spend
$2.2 billion in 1998, of which $400 million is merger-related.
Materials and Supplies costs for the quarter were up $12 million to $131
million, or 10%, from third quarter 1997. The increase reflects increased
maintenance of locomotives, freight cars and roadway machines. Material
costs for signal and communications equipment were also higher year-over-year.
Fuel and Utilities expenses were down $36 million, or 16%, from 1997. A
reduction in gross-ton miles year-over-year (down 3%) generated volume-related
fuel savings of $6 million versus 1997. Prices were down 7 cents
per gallon to 60 cents, saving $20 million. The fuel consumption rate of
1.36 gallons per thousand gross-ton miles improved 3% from last year's
1.40, lowering the Railroad's fuel costs by $6 million. Hedges of 58% of
third quarter fuel volumes increased fuel costs by $25 million, or 9 cents
per gallon (included in the cost per gallon information above). These
hedges have increased fuel expense by $59 million year-to-date.
<PAGE> 15
Rent Expense was down $7 million, or 2%, versus 1997. Cycle times were
above normal at 15.9 days. However, cycles were only 0.7 days higher than
year-ago levels, resulting in increased year-over-year service-related
costs of $5 million. Locomotives leased for service recovery resulted in
an additional $4 million. However, these increases were more than offset
by lower volumes due to service shortfalls.
Purchased Services and Other Costs increased $28 million, or 8%, from
1997, reflecting continued customer relations and service recovery costs.
Service recovery increased other costs by $43 million, driven by higher
liquidated damages on coal contracts, while crew transportation costs were
higher by $4 million. These cost increases were offset by BNSF's
increased use of trackage rights and merger-related cost savings on
computer costs and contract pricing.
NON-OPERATING COSTS - Other income, net fell $65 million, or 64%, from
1997, primarily reflecting reduced asset sales. Interest expense rose $33
million, reflecting higher debt levels and higher interest rates resulting
from a credit rating downgrade which occurred earlier in 1998. Income
taxes fell $105 million from 1997, primarily the result of lower pre-tax
income.
Nine Months Ended September 30, 1998 Compared to September 30, 1997
The Corporation posted a loss of $443 million for the first nine months
of 1998, compared to earnings of $584 million in 1997. 1998 results were
affected by slow train speeds and service issues that have been lessening
as the year has progressed. Operating income of $82 million for the
period compares to $1,206 million last year, reflecting a year-over-year
increase in pre-tax service-related costs and lost revenues, as service
issues began late in the third quarter of 1997. The year-to-date
operating ratio for 1998 was 98.8%, up 14.2 points from 1997's 84.6%.
REVENUE SUMMARY - Operating revenues were down $723 million (9%) at $7,094
million. Carloadings for the period were down 549,061 units, or 8%, from
year-ago loads of 6,504,713. Declines were led by continuing service
issues, weakening demand for whole grain exports (due to strong worldwide
crop yields), the GM strike and a soft export market (caused by the Asian
currency crisis impact). Average revenue per car was off 1% versus last
year at $1,134 per car from last year's $1,151. The decline in ARC was
driven by large volumes of very low-ARC empty repositioning moves for
intermodal traffic; higher low-ARC stone moves and shortfalls of high-ARC
steel traffic; large volumes of very low-ARC storage-in-transit moves in
the chemical business; the absence of long-haul Pacific Northwest grain
moves (due to the Asian currency crisis); and the new shorter-distance
Ford traffic. The following table summarizes the year-over-year change
in rail commodity revenue and ARC by commodity type (carloads in thousands
and commodity revenues in millions):
Change % Change
----------------- --------------
Cars ARC CR Cars ARC CR Cars ARC CR
---- --- ---- ---- --- --- ---- --- ---
Automotive 466 $1,455 $ 677 (8) $(38) $ (29) (2) (3) (4)
Agriculture 610 1,543 942 (88) (43) (166) (13) (3) (15)
Intermodal 1,859 601 1,116 (282) (26) (227) (13) (4) (17)
Chemicals 681 1,699 1,158 (63) (72) (161) (8) (4) (12)
Energy 1,319 1,138 1,501 (14) 20 11 (1) 2 1
Industrial 1,021 1,332 1,359 (94) (29) (159) (8) (2) (10)
----- ------ ------ ----- ----- ------ --- --- ----
Total 5,956 $1,134 $6,753 (549) $(17) $(731) (8) (1) (10)
===== ====== ====== ===== ===== ====== === === ====
<PAGE> 16
EXPENSE SUMMARY - Operating expenses were $7,012 million for the nine
months ended September 30, 1998, $401 million (6%) higher than 1997
operating costs of $6,611 million. Labor costs were $105 million (4%)
higher than 1997. Slower train speeds caused the need for increased train
crew levels, while inflation and other service-related cost overruns
contributed to higher costs. These higher costs were partially offset
by lower volumes (carloads down 8%) and the elimination of duplicative
positions as part of merger implementation. Depreciation expense grew $19
million, or 3%, to $751 million, driven by the Railroad's extensive
capital programs in 1997 and 1998. Materials and supplies costs were up
$8 million to $399 million, or 2%, from 1997, reflecting increased
maintenance of locomotives and freight cars, and higher material costs.
Fuel and utilities expenses were down $162 million, or 21%, from 1997.
A reduction in gross-ton miles year-over-year (down 7%) generated volume-related
fuel savings, while prices fell 9 cents per gallon (13%) to 62
cents. Rent expense was up $69 million, or 7%, versus 1997. Slower train
speeds caused car cycle times to run 3.1 days above 1997 levels.
Locomotives leased for service recovery also increased rent costs
year-over-year. These higher costs were offset by lower volumes due to service
shortfalls. Other costs, including purchased services, increased $362
million, or 34%, from 1997, largely reflecting costs associated with the
resolution of customer claims, as well as higher property taxes, contract
services and legal costs.
NON-OPERATING COSTS - Other income, net declined $46 million reflecting
the absence of the 1997 signboard business sale and various line sales.
Interest costs increased $75 million to $526 million, reflecting higher
interest costs for borrowings to fund capital spending which could not be
funded from operating cash flow at the Railroad due to the effects of
service recovery. Income taxes changed by $469 million to a benefit of
$140 million, primarily the result of lower pre-tax income.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
FINANCIAL CONDITION - For the nine months ended September 30, 1998, cash
from continuing operations was $160 million, compared to $1,118 million
in 1997. This $958 million decrease primarily reflects lower earnings and
timing of working capital requirements due to service issues, as well as
merger consolidation spending.
Cash used in investing activities was $1,650 million in the first nine
months of 1998 compared to $1,162 million in 1997. This 42% increase
primarily reflects higher capital spending for equipment, track renewal,
capacity and merger integration.
Cash provided by equity and financing activities was $1,955 million in the
first nine months of 1998 compared to $55 million in 1997. This change
in cash provided by equity and financing activities principally reflects
the need for UPC to borrow funds to support capital spending levels and
to replace operating cash shortfalls caused by service issues. The ratio
of debt to debt plus equity decreased to 50.2% at September 30, 1998,
compared to 50.8% at December 31, 1997 and 49.7% at September 30, 1997.
This change resulted from the private placement of the Convertible
Preferred Securities described below, which are considered as equity in
the calculation of the ratio of debt to debt plus equity, somewhat offset
by increased debt levels.
FINANCING ACTIVITIES - On April 1, 1998, the Corporation completed a
private placement of $1.5 billion of 6-1/4% preferred securities of Union
Pacific Capital Trust, a statutory business trust sponsored by the
Corporation (the Trust), which securities are convertible into common
stock of the Corporation at an initial conversion price of $68.90 (the
Convertible Preferred Securities).
<PAGE> 17
The Convertible Preferred Securities are presented as a separate line item
in the consolidated balance sheet as of September 30, 1998 between
liabilities and equity and appropriate disclosures are included in the
notes to the financial statements (see Note 6 to the condensed
consolidated financial statements). For financial reporting purposes, the
Corporation has recorded distributions payable on the Convertible
Preferred Securities as an interest charge to earnings in the statement
of consolidated income.
In July, 1998 the Corporation entered into a new credit facility which
increased its total lines of credit to $4 billion. In late September
1998, the Railroad successfully completed a leveraged lease financing of
72 locomotives via the issuance of Pass Through Certificates in the
principal amount of $101.5 million with a total equipment cost of $142.9
million. The related leases are being accounted for as operating leases.
In mid-October 1998, the Corporation issued $225 million in senior
unsecured notes which mature in 2001. Also in October, the Corporation
designated the balance of its shelf registration statement ($1.225
billion) as potentially available for a medium-term note program. By
November 12, 1998, the Corporation had issued $418 million under the
medium-term note program and intends to continue to issue debt from time
to time either pursuant to the medium-term program or in underwritten
transactions, with the proceeds of such issuances to be used for general
corporate purposes, including repayment of maturing debt or commercial
paper borrowings.
OTHER MATTERS
Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130), that is effective for all periods in 1998, including
interim periods. UPC has adopted the provisions of FAS 130 effective
January 1, 1998. The components of comprehensive income include, among
other things, changes in the market value of derivative instruments which
qualify for hedge accounting under Statement No. 133, when adopted, and
net loss recognized as an additional pension liability but not yet
recognized as net periodic pension cost. The impact of adopting FAS 130
for the nine months ended September 30, 1998 was approximately a $2
million after-tax reduction of net income.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", that is effective in
1998. The Corporation currently complies with the provisions of this
Statement.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (FAS 132),
that is effective in 1998. FAS 132 revises and standardizes disclosures
required by FAS 87, 88, and 106. This Statement will only affect footnote
disclosure and will not otherwise have an effect on the consolidated
financial statements of the Corporation.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), that will be
effective in 2000. Management is just beginning the process of
determining the effect, if any, FAS 133 will have on the Corporation's
financial statements.
Commitments and Contingencies - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries. In
addition, the Corporation and its subsidiaries are subject to various
Federal, state and local environmental laws and are currently
<PAGE> 18
participating in the investigation and remediation of various sites. A
discussion of certain claims, lawsuits and contingencies is set forth in
Note 7 to the condensed consolidated financial statements, which is
incorporated herein by reference.
Year 2000 - The Year 2000 (Y2K) compliance project at UPC includes
software (internally developed and purchased), hardware and embedded chips
inside equipment and machinery, primarily at the Railroad. The
Corporation's enterprise-wide project encompasses computer systems and
equipment in multiple data centers and a telecommunications network spread
over 23 states. Equipment containing embedded computer chips includes
locomotives, automated train switching systems, computer aided train
dispatching systems, signaling systems, computerized fueling stations,
weigh-in-motion scales, crane, lifts, PBX systems, elevators, and
computerized monitoring systems throughout UPC. The Corporation began
work early on its Y2K project, beginning research in 1994 and completing
an impact analysis of its mainframe COBOL systems in 1995. The Y2K
project has been a high priority since then.
UPC's Y2K Project is divided into five major initiatives, as follows:
The Mainframe Systems - consists of the Railroad's enterprise-wide
mainframe systems. Modifications of these systems are ahead of
schedule, and the Corporation estimates that approximately 90% of
these systems have been converted, tested and certified as Y2K
compliant as of September 30, 1998. The remainder are expected to be
completed by December 31, 1998. Periodic audits are planned during
1999 to ensure that certified programs remain Y2K complaint.
The Client Server Systems - consists of the Corporation's enterprise-wide
client server systems. Modifications of these systems are on
schedule, and the Corporation estimates that approximately 50% of all
critical client server systems have been converted, tested, and
certified as Y2K compliant as of September 30, 1998. The remainder
are expected to be completed by December 31, 1998. The non-critical
client server systems are scheduled to be certified as Y2K compliant
by mid-1999.
The User Department Developed Systems - consists of both mainframe and
PC-based systems developed by internal user departments.
Modifications of these systems are on schedule, and the Corporation
estimates that approximately 84% of these systems have been converted,
tested, and certified as Y2K compliant as of September 30, 1998.
Ninety-eight percent of the systems will be completed by December 31,
1998, and the remaining 2% are non-critical systems and will be
completed in the first quarter of 1999.
The Vendor Supplied and Embedded Systems - consists of vendor-supplied
software, desktop, mainframe and server hardware, databases and
operating systems, as well as, equipment and machinery with embedded
systems. Work on these components and systems is on schedule, and the
Corporation estimates that approximately 90% of the suppliers of these
systems have indicated that they have a solid plan in place to be Y2K
compliant in a timely manner. The review of the remaining 10% will
be completed in 1998, which will result in either solid plans or a
contingency direction. To assure safety and Y2K compliance, UPC is
testing selected critical software, hardware and embedded systems,
even if the vendor has already certified the product. UPC is working
with other railroads via involvement in various Association of
American Railroad (AAR) committees and is sharing information on the
compliance and testing of safety critical components common to the
industry. In addition, UPC has helped fund the development of a
shared web site for this purpose, and access to this information is
now available to participating railroads.
<PAGE> 19
The Electronic Commerce Systems - consists of all electronic exchanges
of information with customers, vendors, other railroads, and financial
institutions. The railroad industry has agreed on a standard 4-digit
year for all electronic interchanges. The Railroad expects to be able
to transmit and receive the new EDI standard which involves a 4-digit
year by January 1999. In addition, by December 1998, the Railroad
will be in position to continue to handle EDI transactions in existing
formats with proper interpretation of the century date. UPC is
working with the AAR in testing the new standard with other railroads
and with its trading partners.
For each of these initiatives, seven major categories of events have been
identified for which contingency plans are being developed. These
categories are 1) key data - integrity/loss, 2) critical software, 3)
critical hardware, 4) communications, 5) critical supplies and suppliers,
6) facilities, and 7) key personnel. The contingency plans also include
a Y2K command center which will be staffed 24 hours a day in the fourth
quarter of 1999 and continuing into early 2000 for any problems that might
occur due to Y2K. The staff will be composed of technical experts to fix
or advise what to fix if systems fail, and knowledgeable representatives
from each business unit. Preliminary contingency plans are on schedule
to be completed by year-end 1998 and will be adjusted as needed in 1999.
As of September 30, 1998, approximately 85% of the Corporation's systems
(excluding Overnite) have been certified as Y2K compliant, and the
majority of the remaining systems are expected to be modified by year-end
1998. Modification to Overnite's systems comprises approximately 10% of
UPC's total Y2K workload, and is estimated to be 70% complete. The
remaining modification to Overnite's systems is expected to be completed
in the first quarter of 1999. Costs to convert UPC's systems are expensed
as incurred. As of September 30, 1998, more than half of the costs of the
Y2K project, estimated to be $61 million in total, have been expensed.
Although the Corporation believes its systems will be successfully
modified, failure to modify its systems and purchased equipment, or
failure on the part of other entities with whom UPC exchanges or on whom
UPC relies for data, to successfully modify their systems, could
materially impact operations and financial results in the year 2000.
CAUTIONARY INFORMATION
Certain information included in this report contains, and other materials
filed or to be filed by the Corporation with the Securities and Exchange
Commission (as well as information included in oral statements or other
written statements made or to be made by the Corporation) contain or will
contain, forward-looking statements within the meaning of the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. Such forward-looking information may include, without
limitation, statements that the Corporation does not expect that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or other matters will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity and
other similar expressions concerning matters that are not historical
facts, and projections or predictions as to the Corporation's financial
or operational results. Such forward-looking information is or will be
based on information available at that time, and is or will be subject to
risks and uncertainties that could cause actual results to differ
materially from those expressed in the statements. Important factors that
could cause such differences include, but are not limited to whether the
Corporation is fully successful in overcoming its congestion-related
problems and implementing its service recovery plans and other financial
and operational initiatives, industry competition and regulatory
developments, natural events such as severe weather, floods and
<PAGE> 20
earthquakes, the effects of adverse general economic conditions, changes
in fuel prices, labor strikes, the impact of year 2000 systems problems
and the ultimate outcome of shipper claims related to congestion,
environmental investigations or proceedings and other types of claims and
litigation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation uses derivative financial instruments in limited instances
for other than trading purposes to manage risk as it relates to fuel
prices and interest rates. Where the Corporation has fixed interest rates
or fuel prices through the use of swaps, futures or forward contracts, the
Corporation has mitigated the downside risk of adverse price and rate
movements; however, it has also limited future gains from favorable
movements.
The Corporation addresses market risk related to these instruments by
selecting instruments whose value fluctuations correlate highly with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring minimum credit
standards for counterparties and periodic settlements. The total credit
risk associated with the Corporation's counterparties was $23 million at
September 30, 1998. The Corporation has not been required to provide, nor
has it received, any collateral relating to its hedging activities.
The fair market value of the Corporation's derivative financial instrument
positions at September 30, 1998 was determined based upon current fair
market values as quoted by recognized dealers or developed based upon the
present value of future cash flows discounted at the applicable zero
coupon U.S. Treasury rate and swap spread.
Interest Rates - The Corporation controls its overall risk relating to
fluctuations in interest rates by managing the proportion of fixed and
floating rate debt instruments within its debt portfolio over a given
period. Derivatives are used in limited circumstances as one of the tools
to obtain the targeted mix. The mix of fixed and floating rate debt is
largely managed through the issuance of targeted amounts of such debt as
debt maturities occur or as incremental borrowings are required. The
Corporation also obtains additional flexibility in managing interest cost
and the interest rate mix within its debt portfolio by issuing callable
fixed rate debt securities.
At September 30, 1998, the Corporation had outstanding interest rate swaps
on $152 million of notional principal amount of debt (2% of the total
debt portfolio) with a gross fair market value asset position of $22
million and a gross fair market value liability position of $20 million.
These contracts mature over the next two years. Interest rate hedging
activity had no significant effect on interest expense in the third
quarter of 1998 and increased interest expense by $3 million in the third
quarter of 1997.
Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance
of the fuel costs and the historical volatility of fuel prices, the
Railroad periodically use swaps, futures and forward contracts to mitigate
the impact of fuel price volatility. The intent of this program is to
protect the Corporation's operating margins and overall profitability from
adverse fuel price changes.
At September 30, 1998, the Railroad had hedged approximately 49% of its
estimated remaining 1998 diesel fuel consumption at $0.51 per gallon, on
a Gulf Coast basis and approximately 37% of its estimated 1999 diesel fuel
<PAGE> 21
consumption at $0.42 per gallon, on a Gulf Coast basis. At September 30,
1998, the Railroad had outstanding swap agreements covering fuel purchases
of $291 million, with gross and net asset positions of less than $1
million. Fuel hedging increased third quarter 1998 fuel expense by $25
million and third quarter 1997 fuel expense by approximately $1 million.
For the nine months ended September 30, fuel hedging increased 1998 fuel
expense by $59 million and 1997 fuel expense by approximately $1 million.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of certain legal proceedings affecting the Corporation
and/or certain of its subsidiaries set forth in Note 7 to the condensed
consolidated financial statements included in Item 1 of Part I of this
Report is incorporated herein by reference. In addition to those matters,
the following proceedings, or developments in proceedings presently
pending, arose or occurred during the third quarter of 1998.
SOUTHERN PACIFIC ACQUISITION: As previously reported, various appeals have
been filed with respect to the STB's August 12, 1996 decision (the
Decision) approving the acquisition of control of Southern Pacific by the
Corporation. All of the appeals have been consolidated in the U.S. Court
of Appeals for the District of Columbia Circuit. Oral argument in the case
was held on September 11, 1998, and the case is awaiting decision. The
Corporation believes that it is unlikely that the disposition of the
remaining appeals will have a material adverse impact on its consolidated
financial condition or its results of operations.
ENVIRONMENTAL MATTERS: As previously reported, the Railroad has received
approximately 20 Notices of Violation (NOVs) from the South Coast Air
Quality Management District (the District) relating to fumes emitted from
idling diesel locomotives at Slover siding near the Railroad's yard in
West Colton, California. Trains awaiting crews or room to enter the West
Colton yard have been parked at Slover siding with their engines running
for various amounts of time, causing exhaust fumes to enter the backyards
and homes of residents living along the siding. The District has cited
the Railroad for creating a public nuisance pursuant to the California
Health and Safety Code and the District's regulations. Each violation
carries a maximum civil penalty of $25,000 per day, which may be increased
in some circumstances to $50,000 per day. Although the Railroad modified
its operating procedures for trains entering the West Colton yard to
reduce the problem, the District entered an order with respect to the
situation which the Railroad believes is an impermissible burden on
interstate commerce and is preempted by applicable federal law. The
Railroad has filed an action in Federal district court seeking to overturn
the District's order on those grounds, but the court has not yet ruled on
this matter. The Railroad and the District have not entered into
discussions concerning settlement of the outstanding NOVs pending
resolution of this lawsuit. Accordingly, the exact amount of any payment
to the District in connection with the NOVs cannot be determined at this
time.
The Railroad has received notification that the District Attorney for San
Bernardino County, California has opened an investigation into the
Railroad's handling of several hazardous material spills in Barstow and
West Colton, California. The incident in Barstow involved a rear-end
collision between two trains near Barstow in August 1997 that resulted in
a spillage of locomotive diesel fuel and leakage from two tank cars
containing toxic chemicals. Three incidents in the West Colton yard in
1998 involved leaking tank cars and spills of diesel fuel from a derailed
locomotive. The District Attorney's office is investigating allegations
that cleanup procedures were not undertaken promptly and required notices
were not given in connection with these incidents. An initial indication
of fines exceeding $250,000 with respect to these incidents has been
<PAGE> 22
communicated by the District Attorney's office. While the Railroad
expects to enter into settlement negotiations with the District Attorney's
office, the exact amount of any fines or penalties that may be required
to be paid as a part of any settlement cannot be determined at this time.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Letter Agreement, dated September 8, 1998, between UPC
and Mr. Ivor J. Evans
10.2 1993 Stock Option and Retention Stock Plan of Union
Pacific Corporation, as amended as of September 24, 1998
10.3 1988 Stock Option and Restricted Stock Plan of Union
Pacific Corporation, as amended as of September 24, 1998
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 23, 1998, UPC filed a Current Report on Form 8-K
announcing second quarter 1998 results, which Report was refiled
on July 24, 1998 for the purpose of changing EDGAR data
concerning address information for UPC.
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: November 12, 1998
UNION PACIFIC CORPORATION
(Registrant)
/s/ John J. Koraleski
---------------------
John J. Koraleski
Controller
(chief accounting officer and
duly authorized officer)
<PAGE> EXHIBIT INDEX
UNION PACIFIC CORPORATION
EXHIBIT INDEX
Exhibit No. Description
10.1 Letter Agreement, dated September 8, 1998, between UPC
and Mr. Ivor J. Evans
10.2 1993 Stock Option and Retention Stock Plan of Union
Pacific Corporation, as amended as of September 24, 1998
10.3 1988 Stock Option and Restricted Stock Plan of Union
Pacific Corporation, as amended as of September 24,
1998
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
Exhibit 10.1
September 8, 1998
PERSONAL AND CONFIDENTIAL
-------------------------
Mr. Ivor J. Evans
13108 Conway Grove Lane
St. Louis, MO 63141
Dear Ike:
As we discussed in connection with your joining us as President and Chief
Operating Officer of Union Pacific Railroad, this confirms that you are
guaranteed a bonus of $300,000 for 1999, payable following the end of the
year. In addition, in the event you are involuntarily terminated within
three years of the date you commence employment, otherwise than for cause,
you will be entitled to a severance payment of two years' salary and bonus
(not including signing bonus) and early vesting of the Retention Stock
awarded to you in connection with your joining Union Pacific. For this
purpose, cause shall mean the willful engaging in conduct that is
demonstrably and materially injurious to the Company, monetarily or
otherwise.
If you concur with the above, please sign the second copy of this letter
and return it to me.
Sincerely,
/s/ Dick Davidson
------------------
DICK DAVIDSON
Approved: /s/ IVOR J. EVANS Dated: September 8, 1998
----------------- ------------------
Exhibit 10.2
1993
STOCK OPTION AND RETENTION STOCK PLAN
of
UNION PACIFIC CORPORATION
(Effective April 16, 1993 -
As Amended September 30, 1993,
July 28, 1994, April 24, 1997,
November 20, 1997 and September 24, 1998)
1993 STOCK OPTION AND RETENTION STOCK PLAN
OF UNION PACIFIC CORPORATION
1. PURPOSE
The purpose of the 1993 Stock Option and Retention Stock Plan of Union
Pacific Corporation is to promote and closely align the interests of
employees of Union Pacific Corporation and its shareholders by providing
stock based compensation. The Plan is intended to strengthen Union
Pacific Corporation's ability to reward performance which enhances long
term shareholder value; to increase employee stock ownership through
performance based compensation plans; and to strengthen the company's
ability to attract and retain an outstanding employee and executive team.
2. DEFINITIONS
The following terms shall have the following meanings:
"Act" means the Securities Exchange Act of 1934, as amended.
"Approved Leave of Absence" means a leave of absence of definite length
approved by the Senior Vice President - Human Resources of the Company,
or by any other officer of the Company to whom the Committee delegates
such authority.
"Award" means an award of Retention Shares pursuant to the Plan.
"Beneficiary" means any person or persons designated in writing by a
Participant to the Committee on a form prescribed by it for that purpose,
which designation shall be revocable at any time by the Participant prior
to his or her death, provided that, in the absence of such a designation
or the failure of the person or persons so designated to survive the
Participant, "Beneficiary" shall mean such Participant's estate; and
further provided that no designation of Beneficiary shall be effective
unless it is received by the Company before the Participant's death.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, or the
corresponding provisions of any successor statute.
"Committee" means the Committee designated by the Board to administer
the Plan pursuant to Section 3.
"Common Stock" means the Common Stock, par value $2.50 per share, of
the Company.
"Company" means Union Pacific Corporation, a Utah corporation,
or any successor corporation.
"Option" means each non-qualified stock option, incentive stock option
and stock appreciation right granted under the Plan.
"Optionee" means any employee of the Company or a Subsidiary (including
directors who are also such employees) who is granted an Option under the
Plan.
"Participant" means any employee of the Company or a Subsidiary
(including directors who are also such employees) who is granted an Award
under the Plan.
"Plan" means this 1993 Stock Option and Retention Stock Plan, as
amended from time to time.
"Retention Shares" means shares of Common Stock subject to an Award
granted under the Plan.
"Restriction Period" means the period defined in Section 9(a).
"Subsidiary" means any corporation of which the Company owns directly
or indirectly at least a majority of the outstanding shares of voting
stock.
"Vesting Condition" means any condition to the vesting of Retention
Shares established by the Committee pursuant to Section 9.
3. ADMINISTRATION
The Plan shall be administered by the Committee which shall be
comprised of not less than three members of the Board, none of whom shall
be employees of the Company or any Subsidiary. The Committee shall (i)
grant Options to Optionees and make Awards of Retention Shares to
Participants, and (ii) determine the terms and conditions of such Options
and Awards of Retention Shares, all in accordance with the provisions of
the Plan. The Committee shall have full authority to construe and
interpret the Plan, to establish, amend and rescind rules and regulations
relating to the Plan, to administer the Plan, and to take all such steps
and make all such determinations in connection with the Plan and Options
and Awards granted thereunder as it may deem necessary or advisable. Each
Option and grant of Retention Shares shall, if required by the Committee,
be evidenced by an agreement to be executed by the Company and the
Optionee or Participant, respectively, and contain provisions not
inconsistent with the Plan. All determinations of the Committee shall be
by a majority of its members and shall be evidenced by resolution, written
consent or other appropriate action, and the Committee's determinations
shall be final. Each member of the Committee, while serving as such,
shall be considered to be acting in his or her capacity as a director of
the Company.
4. ELIGIBILITY
To be eligible for selection by the Committee to participate in the
Plan an individual must be an employee of the Company or a Subsidiary.
Directors who are not full-time salaried employees shall not be eligible.
In granting Options or Awards of Retention Shares to eligible employees,
the Committee shall take into account the duties of the respective
employees, their present and potential contributions to the success of the
Company or a Subsidiary, and such other factors as the Committee shall
deem relevant in connection with accomplishing the purpose of the Plan.
5. STOCK SUBJECT TO THE PLAN
Subject to the provisions of Section 11 hereof, the maximum number and
kind of shares as to which Options or Retention Shares may at any time be
granted under the Plan are 16 million shares of Common Stock. Shares of
Common Stock subject to Options or Awards under the Plan may be either
authorized but unissued shares or shares previously issued and reacquired
by the Company. Upon the expiration, termination or cancellation (in
whole or in part) of unexercised Options, shares of Common Stock subject
thereto shall again be available for option or grant as Retention Shares
under the Plan. Shares of Common Stock covered by an Option, or portion
thereof, which is surrendered upon the exercise of a stock appreciation
right, shall thereafter be unavailable for option or grant as Retention
Shares under the Plan. Upon the forfeiture (in whole or in part) of a
grant of Retention Shares, the shares of Common Stock subject to such
forfeiture shall again be available for option or grant as Retention
Shares under the Plan if no dividends have been paid on the forfeited
shares, and otherwise shall be unavailable for such an option or grant.
6. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS
All non-qualified options under the Plan shall be granted subject to
the following terms and conditions:
(a) Option Price. The option price per share with respect to each
option shall be determined by the Committee but shall not be less than
100% of the fair market value of the Common Stock on the date the option
is granted, such fair market value to be determined in accordance with the
procedures to be established by the Committee.
(b) Duration of Options. Options shall be exercisable at such time or
times and under such conditions as set forth in the written agreement
evidencing such option, but in no event shall any option be exercisable
subsequent to the tenth anniversary of the date on which the option is
granted.
(c) Exercise of Option. Except as provided in Section 6(h), 6(i) or
8(c), the shares of Common Stock covered by an option may not be purchased
prior to the first anniversary of the date on which the option is granted
(unless the Committee shall determine otherwise), or such longer period
or periods, and subject to such conditions, as the Committee may
determine, but thereafter may be purchased at one time or in such
installments over the balance of the option period as may be provided in
the option. Any shares not purchased on the applicable installment date
may, unless the Committee shall have determined otherwise, be purchased
thereafter at any time prior to the final expiration of the option. To
the extent that the right to purchase shares has accrued thereunder,
options may be exercised from time to time by notice to the Company
stating the number of shares with respect to which the option is being
exercised.
(d) Payment. Shares of Common Stock purchased under options shall, at
the time of purchase, be paid for in full. All, or any portion, of the
option exercise price may, at the discretion of the Committee, be paid by
the surrender to the Company, at the time of exercise, of shares of
previously acquired Common Stock owned by the Optionee, to the extent that
such payment does not require the surrender of a fractional share of such
previously acquired Common Stock. In addition, to the extent permitted
by the Committee, the option exercise price may be paid by authorizing the
Company to withhold Common Stock otherwise issuable on exercise of the
option. Such shares previously acquired or shares withheld to pay the
option exercise price shall be valued at fair market value on the date the
option is exercised in accordance with the procedures to be established
by the Committee. A holder of an option shall have none of the rights of
a stockholder until the shares of Common Stock are issued to him or her.
If an amount is payable by an Optionee to the Company or a Subsidiary
under applicable withholding tax laws in connection with the exercise of
non-qualified options, the Committee may, in its discretion and subject
to such rules as it may adopt, permit the Optionee to make such payment,
in whole or in part, by electing to authorize the Company to withhold or
accept shares of Common Stock having a fair market value equal to the
amount to be paid under such withholding tax laws.
(e) Restrictions. The Committee shall determine, with respect to each
option, the nature and extent of the restrictions, if any, to be imposed
on the shares of Common Stock which may be purchased thereunder including
restrictions on the transferability of such shares acquired through the
exercise of such option. Without limiting the generality of the
foregoing, the Committee may impose conditions restricting absolutely or
conditionally the transferability of shares acquired through the exercise
of options for such periods, and subject to such conditions, including
continued employment of the Optionee by the Company or a Subsidiary, as
the Committee may determine.
(f) Purchase for Investment. The Committee shall have the right to
require that each Optionee or other person who shall exercise an option
under the Plan represent and agree that any shares of Common Stock
purchased pursuant to such option will be purchased for investment and not
with a view to the distribution or resale thereof or that such shares will
not be sold except in accordance with such restrictions or limitations as
may be set forth in the written agreement granting such option.
(g) Non-Transferability of Options. During an Optionee's lifetime,
the option may be exercised only by the Optionee. Options shall not be
transferable, except for exercise by the Optionee's legal representatives
or heirs.
(h) Termination of Employment. Upon the termination of an Optionee's
employment, for any reason other than death, the option shall be
exercisable only as to those shares of Common Stock which were then
subject to the exercise of such option, provided that (i) in the case of
disability as described below, any holding period required by Section 6(c)
shall automatically be deemed to be satisfied and (ii) the Committee may
determine that particular limitations and restrictions under the Plan
shall not apply, and such option shall expire according to the following
schedule (unless the Committee shall provide for shorter periods at the
time the option is granted):
(i) Retirement. Option shall expire, unless exercised,
five (5) years after the Optionee's retirement from the Company or
any Subsidiary under the provisions of the Company's or a
Subsidiary's pension plan.
(ii) Disability. Option shall expire, unless exercised,
five (5) years after the date the Optionee is eligible to receive
disability benefits under the provisions of the Company's or a
Subsidiary's long-term disability plan.
(iii) Gross Misconduct. Option shall expire upon receipt
by the Optionee of the notice of termination if he or she is
terminated for deliberate, willful or gross misconduct as
determined by the Company.
(iv) All Other Terminations. Option shall expire, unless
exercised, three (3) months after the date of such termination;
provided, the Committee may provide for a longer exercise period,
not to exceed three (3) years from the date of such termination or,
if later, three years from the date the option becomes exercisable
but not more than five years after the date of such termination. In
the event that such termination results from the disposition by the
Company of all or a part of its interest in, or the discontinuance
of the business of, a subsidiary, division or other business unit
of the Company, the Committee may provide for an exercise period of
up to five (5) years from the date of such termination.
(i) Death of Optionee. Upon the death of an Optionee during his
or her period of employment, the option shall be exercisable only as to
those shares of Common Stock which were subject to the exercise of such
option at the time of his or her death, provided that (i) any holding
period required by Section 6(c) shall automatically be deemed to be
satisfied and (ii) the Committee may determine that particular limitations
and restrictions under the Plan shall not apply, and such option shall
expire, unless exercised by the Optionee's legal representatives or heirs,
five (5) years after the date of death (unless the Committee shall provide
for a shorter period at the time the option is granted).
(j) Deferral. The Committee may permit an Optionee to elect to
defer receipt of all or part of the Common Stock issuable upon the
exercise of an option, pursuant to rules and regulations adopted by the
Committee. The Committee may permit the payment of cash in lieu of Common
Stock upon payment of the deferred amount.
In no event, however, shall any option be exercisable pursuant to Sections
6(h) or (i) subsequent to the tenth anniversary of the date on which it
is granted.
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
(a) General. The Committee may also grant a stock appreciation
right in connection with a non-qualified option, either at the time of
grant or by amendment. Such stock appreciation right shall cover the same
shares covered by such option (or such lesser number of shares of Common
Stock as the Committee may determine) and shall, except for the provisions
of Section 6(d) hereof, be subject to the same terms and conditions as the
related non-qualified option.
(b) Exercise and Payment. Each stock appreciation right shall
entitle the Optionee to surrender to the Company unexercised the related
option, or any portion thereof, and to receive from the Company in
exchange therefor an amount equal to the excess of the fair market value
of one share of Common Stock over the option price per share times the
number of shares covered by the option, or portion thereof, which is
surrendered. Payment shall be made in shares of Common Stock valued at
fair market value, or in cash, or partly in shares and partly in cash, all
as shall be determined by the Committee. The fair market value shall be
the value determined in accordance with procedures established by the
Committee. Stock appreciation rights may be exercised from time to time
upon actual receipt by the Company of written notice stating the number
of shares of Common Stock with respect to which the stock appreciation
right is being exercised, provided that if a stock appreciation right
expires unexercised, it shall be deemed exercised on the expiration date
if any amount would be payable with respect thereto. No fractional shares
shall be issued but instead cash shall be paid for a fraction or, if the
Committee should so determine, the number of shares shall be rounded
downward to the next whole share. If an amount is payable by an Optionee
to the Company or a Subsidiary under applicable withholding tax laws in
connection with the exercise of stock appreciation rights, the Committee
may, in its discretion and subject to such rules as it may adopt, permit
the Optionee to make such payment, in whole or in part, by electing to
authorize the Company to withhold or accept shares of Common Stock having
a fair market value equal to the amount to be paid under such withholding
tax laws.
(c) Restrictions. The obligation of the Company to satisfy any
stock appreciation right exercised by an Optionee subject to Section 16
of the Act shall be conditioned upon the prior receipt by the Company of
an opinion of counsel to the Company that any such satisfaction will not
create an obligation on the part of such Optionee pursuant to Section
16(b) of the Act to reimburse the Company for any statutory profit which
might be held to result from such satisfaction.
8. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS.
(a) General. The Committee may also grant incentive stock options
as defined under section 422 of the Code. All incentive stock options
issued under the Plan shall, except for the provisions of Sections 6(h)
and (i) and Section 7 hereof, be subject to the same terms and conditions
as the non-qualified options granted under the Plan. In addition,
incentive stock options shall be subject to the conditions of Sections
8(b),(c),(d) and (e).
(b) Limitation of Exercise. The aggregate fair market value
(determined as of the date the incentive stock option is granted) of the
shares of stock with respect to which incentive stock options are
exercisable for the first time by such Optionee during any calendar year,
under this Plan or any other stock option plans adopted by the Company,
its Subsidiaries or any predecessor companies thereof, shall not exceed
$100,000. If any incentive stock options become exercisable in any year
in excess of the $100,000 limitation, options representing such excess
shall become non-qualified options exercisable pursuant to the terms of
Section 6 hereof and shall not be exercisable as incentive stock options.
(c) Termination of Employment. Upon the termination of an
Optionee's employment, for any reason other than death, his or her
incentive stock option shall be exercisable only as to those shares of
Common Stock which were then subject to the exercise of such option
provided that (i) in the case of disability as described below, any
holding period required by Section 6(c) shall automatically be deemed to
be satisfied and (ii) the Committee may determine that particular
limitations and restrictions under the Plan shall not apply, and such
option shall expire as an incentive stock option (but shall become a
non-qualified option exercisable pursuant to the terms of Section 6 hereof
less the period already elapsed under such Section), according to the
following schedule (unless the Committee shall provide for shorter periods
at the time the incentive stock option is granted):
(i) Retirement. An incentive stock option shall expire,
unless exercised, three (3) months after the Optionee's retirement
from the Company or any Subsidiary under the provisions of the
Company's or a Subsidiary's pension plan.
(ii) Disability. In the case of an Optionee who is
disabled within the meaning of section 22(e)(3) of the Code, an
incentive stock option shall expire, unless exercised, one (1) year
after the earlier of the date the Optionee terminates employment or
the date the Optionee is eligible to receive disability benefits
under the provisions of the Company's or a Subsidiary's long-term
disability plan.
(iii) Gross Misconduct. An incentive stock option shall
expire upon receipt by the Optionee of the notice of termination if
he or she is terminated for deliberate, willful or gross misconduct
as determined by the Company.
(iv) All Other Terminations. An incentive stock option
shall expire, unless exercised, three (3) months after the date of
such termination.
In the case of incentive stock options granted after April 24, 1997,
the Committee may extend the period during which an incentive stock option
may be exercised as a non-qualified stock option to up to three (3) years
from the date of a termination not due to retirement, disability or gross
misconduct or, if later, three (3) years from the date the option becomes
exercisable but not more than five years after the date of such a
termination. In the case of incentive stock options granted after
September 24, 1998, in the event that a termination results from the
disposition by the Company of all or a part of its interest in, or the
discontinuance of the business of, a subsidiary, division or other
business unit of the Company, the Committee may extend the period during
which an incentive stock option may be exercised as a non-qualified stock
option to up to five (5) years from the date of such termination.
(d) Death of Optionee. Upon the death of an Optionee during his
or her period of employment, the incentive stock option shall be
exercisable as an incentive stock option only as to those shares of Common
Stock which were subject to the exercise of such option at the time of
death, provided that (i) any holding period required by Section 6(c) shall
automatically be deemed to be satisfied, and (ii) the Committee may
determine that particular limitations and restrictions under the Plan
shall not apply, and such option shall expire, unless exercised by the
Optionee's legal representatives or heirs, five (5) years after the date
of death (unless the Committee shall provide for a shorter period at the
time the option is granted).
(e) Leave of Absence. A leave of absence, whether or not an
Approved Leave of Absence, shall be deemed a termination of employment for
purposes of Section 8.
In no event, however, shall any incentive stock option be exercisable
pursuant to Sections 8(c) or (d) subsequent to the tenth anniversary of
the date on which it was granted.
9. TERMS AND CONDITIONS OF AWARDS OF RETENTION STOCK
(a) General. Retention Shares may be granted only to reward the
attainment of individual, Company or Subsidiary goals, or to attract or
retain officers or other employees of the Company or any Subsidiary, and
shall be granted subject to the attainment of performance goals unless the
Committee shall determine otherwise. With respect to each grant of
Retention Shares under the Plan, the Committee shall determine the period
or periods, including any conditions for determining such period or
periods, during which the restrictions set forth in Section 9(b) shall
apply, provided that in no event, other than as provided in Section 9(c)
or in the next sentence, shall such restrictions terminate prior to 3
years after the date of grant (the "Restriction Period"), and may also
specify any other terms or conditions to the right of the Participant to
receive such Retention Shares ("Vesting Conditions"). The Committee may
determine in its sole discretion to waive any or all of such restrictions
prior to end of the Restriction Period or the satisfaction of any Vesting
Condition. Subject to Section 9(c) and any such Vesting Condition, a
grant of Retention Shares shall be effective for the Restriction Period
and may not be revoked.
(b) Restrictions. At the time of grant of Retention Shares to a
Participant, a certificate representing the number of shares of Common
Stock granted shall be registered in the Participant's name but shall be
held by the Company for his or her account. The Participant shall have
the entire beneficial ownership interest in, and all rights and privileges
of a stockholder as to, such Retention Shares, including the right to vote
such Retention Shares and, unless the Committee shall determine otherwise,
the right to receive dividends thereon, subject to the following: (i)
subject to Section 9(c), the Participant shall not be entitled to delivery
of the stock certificate until the expiration of the Restriction Period
and the satisfaction of any Vesting Conditions; (ii) none of the Retention
Shares may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restriction Period or prior to the
satisfaction of any Vesting Conditions; and (iii) all of the Retention
Shares shall be forfeited and all rights of the Participant to such
Retention Shares shall terminate without further obligation on the part
of the Company unless the Participant remains in the continuous employment
of the Company or a Subsidiary for the entire Restriction Period, except
as provided by Sections 9(a) and 9(c), and any applicable Vesting
Conditions have been satisfied. Any shares of Common Stock or other
securities or property received as a result of a transaction listed in
Section 11 shall be subject to the same restrictions as such Retention
Shares unless the Committee shall determine otherwise.
(c) Termination of Employment.
(i) Disability and Retirement. Unless the Committee shall
determine otherwise at the time of grant of Retention Shares, if
(A) a Participant ceases to be an employee of the Company or a
Subsidiary prior to the end of a Restriction Period, by reason of
disability under the provisions of the Company's or a Subsidiary's
long-term disability plan or retirement under the provisions of the
Company's or a Subsidiary's pension plan either (i) at age 65 or
(ii) prior to age 65 at the request of the Company or a Subsidiary,
and (B) all Vesting Conditions have been satisfied, the Retention
Shares granted to such Participant shall immediately vest and all
restrictions applicable to such shares shall lapse. A certificate
for such shares shall be delivered to the Participant in accordance
with the provisions of Section 9(d).
(ii) Death. Unless the Committee shall determine otherwise
at the time of grant of Retention Shares, if (A) a Participant
ceases to be an employee of the Company or a Subsidiary prior to
the end of a Restriction Period by reason of death, and (B) all
Vesting Conditions have been satisfied, the Retention Shares
granted to such Participant shall immediately vest in his or her
Beneficiary, and all restrictions applicable to such shares shall
lapse. A certificate for such shares shall be delivered to the
Participant's Beneficiary in accordance with the provisions of
Section 9(d).
(iii) All Other Terminations. If a Participant ceases to
be an employee of the Company or a Subsidiary prior to the end of
a Restriction Period for any reason other than death, disability or
retirement as provided in Section 9(c)((i)) and (ii), the
Participant shall immediately forfeit all Retention Shares then
subject to the restrictions of Section 9(b) in accordance with the
provisions thereof, except that the Committee may, if it finds that
the circumstances in the particular case so warrant, allow a
Participant whose employment has so terminated to retain any or all
of the Retention Shares then subject to the restrictions of Section
9(b) and all restrictions applicable to such retained shares shall
lapse. A certificate for such retained shares shall be delivered
to the Participant in accordance with the provisions of Section
9(d).
(iv) Vesting Conditions Unless the Committee shall
determine otherwise at the time of grant of Retention Shares, if a
Participant ceases to be an employee of the Company for any reason
prior to the satisfaction of any Vesting Conditions, the
Participant shall immediately forfeit all Retention Shares then
subject to the restrictions of Section 9(b) in accordance with the
provisions thereof, except that the Committee may, if it finds that
the circumstances in the particular case so warrant, allow a
Participant whose employment has so terminated to retain any or all
of the Retention Shares then subject to the restrictions of Section
9(b) and all restrictions applicable to such retained shares shall
lapse. A certificate for such retained shares shall be delivered
to the Participant in accordance with the provisions of Section
9(d).
(d) Payment of Retention Shares. At the end of the Restriction
Period and after all Vesting Conditions have been satisfied, or at such
earlier time as provided for in Section 9(c) or as the Committee, in its
sole discretion, may otherwise determine, all restrictions applicable to
the Retention Shares shall lapse, and a stock certificate for a number of
shares of Common Stock equal to the number of Retention Shares, free of
all restrictions, shall be delivered to the Participant or his or her
Beneficiary, as the case may be. If an amount is payable by a Participant
to the Company or a Subsidiary under applicable withholding tax laws in
connection with the lapse of such restrictions, the Committee, in its sole
discretion, may permit the Participant to make such payment, in whole or
in part, by authorizing the Company to transfer to the Company Retention
Shares otherwise deliverable to the Participant having a fair market value
equal to the amount to be paid under such withholding tax laws.
(e) Deferral. The Committee may permit a Participant to elect to
defer receipt of all or part of any Retention Shares that would otherwise
be delivered, pursuant to rules and regulations adopted by the Committee.
The Committee may permit the payment of cash in lieu of Common Stock upon
payment of the deferred amount.
10. REGULATORY APPROVALS AND LISTING
The Company shall not be required to issue to an Optionee,
Participant or a Beneficiary, as the case may be, any certificate for any
shares of Common Stock upon exercise of an option or for any Retention
Shares granted under the Plan prior to (i) the obtaining of any approval
from any governmental agency which the Company, in its sole discretion,
shall determine to be necessary or advisable, (ii) the admission of such
shares to listing on any stock exchange on which the Common Stock may then
be listed, and (iii) the completion of any registration or other
qualification of such shares under any state or federal law or rulings or
regulations of any governmental body which the Company, in its sole
discretion, shall determine to be necessary or advisable.
11. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, rights offering,
separation, spin-off, reorganization or liquidation, or any other change
in the corporate structure or shares of the Company, the Board, upon
recommendation of the Committee, may make such equitable adjustments as
it may deem appropriate in the number and kind of shares authorized by the
Plan, in the option price of outstanding Options, and in the number and
kind of shares or other securities or property subject to Options or
covered by outstanding Awards.
12. TERM OF THE PLAN
No Options or Retention Shares shall be granted pursuant to the Plan
after April 16, 2003, but grants of Options and Retention Shares
theretofore granted may extend beyond that date and the terms and
conditions of the Plan shall continue to apply thereto.
13. TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time terminate the Plan with respect to any
shares of Common Stock not at that time subject to outstanding Options or
Awards, and may from time to time alter or amend the Plan or any part
thereof (including, but without limiting the generality of the foregoing,
any amendment deemed necessary to ensure that the Company may obtain any
approval referred to in Section 10 or to ensure that the grant of Options
or Awards, the exercise of Options or payment of Retention Shares or any
other provision or the Plan complies with Section 16(b) of the Act),
provided that no change with respect to any Options or Retention Shares
theretofore granted may be made which would impair the rights of an
Optionee or Participant without the consent of such Optionee or
Participant and, further, that without the approval of stockholders, no
alteration or amendment may be made which would (i) increase the maximum
number of shares of Common Stock subject to the Plan as set forth in
Section 5 (except by operation of Section 11), (ii) extend the term of the
Plan or (iii) change the class of eligible persons who may receive Options
or Awards of Retention Shares under the Plan. The Committee may amend the
Plan to extend the exercise period following an Optionee's termination of
an option granted prior to Sepember 24, 1998, but not beyond (i)in the
case of a termination resulting from the disposition by the Company of all
or a part of its interest in, or the discontinuance of the business of,
a subsidiary, division or other business unit of the Company, five years
from the date of termination and (ii)in the case of all other
terminations, not more than three years from the date of termination, or,
if later, three years from the date the option becomes exercisable but not
more than five years after the date of such termination.
14. LEAVE OF ABSENCE
Unless the Committee shall determine otherwise, a leave of absence
other than an Approved Leave of Absence shall be deemed a termination of
employment for purposes of the Plan. An Approved Leave of Absence shall
not be deemed a termination of employment for purposes of the Plan (except
for purposes of Section 8), but the period of such Leave of Absence shall
not be counted toward satisfaction of any Restriction Period or any
holding period described in Section 6(c).
15. GENERAL PROVISIONS
(a) Neither the Plan nor the grant of any Option or Award nor any
action by the Company, any Subsidiary or the Committee shall be held or
construed to confer upon any person any right to be continued in the
employ of the Company or a Subsidiary. The Company and each Subsidiary
expressly reserve the right to discharge, without liability but subject
to his or her rights under the Plan, any Optionee or Participant whenever
in the sole discretion of the Company or a Subsidiary, as the case may be,
its interest may so require.
(b) All questions pertaining to the construction, regulation,
validity and effect of the Plan shall be determined in accordance with the
laws of the State of Utah, without regard to conflict of laws doctrine.
16. EFFECTIVE DATE
The Plan shall become effective upon approval of the stockholders
of the Company.
Exhibit 10.3
1988
STOCK OPTION AND RESTRICTED STOCK PLAN
of
UNION PACIFIC CORPORATION
(Effective April 15, 1988 -
As Amended September 26, 1991, February 1, 1992,
April 24, 1997, November 20, 1997 and September 24,1998)
1988 STOCK OPTION AND RESTRICTED STOCK PLAN
OF UNION PACIFIC CORPORATION
1. PURPOSE.
The purpose of the 1988 Stock Option and Restricted Stock Plan of
Union Pacific Corporation (the "Plan") is to promote the interests of
Union Pacific Corporation (the "Company") and its shareholders by
strengthening its ability to attract and retain officers and key
employees in the employ of the Company or of any subsidiary of the
Company by furnishing additional incentives whereby such present and
future officers and key employees may be encouraged to acquire, or to
increase their acquisition of, the Company's common stock, thus
maintaining their personal interest in the Company's continued success
and progress. The Plan provides for the grant of non-qualified stock
options, incentive stock options, stock appreciation rights and shares
of Company common stock restricted in accordance with the provisions of
Section 8 below ("Restricted Shares"), all in accordance with the terms
and conditions set forth below. Unless otherwise required by the
context, the term "option" shall refer to non-qualified options,
incentive stock options and stock appreciation rights.
2. ADMINISTRATION.
The Plan shall be administered by a Stock Option Committee (the
"Committee"), to be designated by the Board of Directors of the Company
and to be comprised of not less than three members of the Board of
Directors who are not eligible to participate under the Plan. Members
of the Committee shall be appointed from time to time by the Board of
Directors for such terms as it shall determine, and may be removed by
the Board at any time with or without cause. The Committee shall have
complete authority to construe and interpret the Plan, to establish,
amend and rescind appropriate rules and regulations relating to the
Plan, to select persons eligible to participate in the Plan, to grant
options and Restricted Shares thereunder, to administer the Plan, to
make recommendations to the Board, and to take all such steps and make
all such determinations in connection with the Plan and the options and
Restricted Shares granted thereunder as it may deem necessary or
advisable. All determinations of the Committee shall be by a majority
of its members, and its determinations shall be final. Each member of
the Committee, while serving as such, shall be considered to be acting
in his capacity as a Director of the Company. Each eligible employee
(as defined below) to whom an option or Restricted Shares is granted is
hereinafter referred to as the "Optionee" or the "Participant",
respectively. The granting of an option or Restricted Shares pursuant
to the Plan shall take place when the Committee by resolution, written
consent or other appropriate action determines to grant such an option
to an Optionee at a particular price or such Restricted Shares to a
Participant. Each Option or grant of Restricted Shares shall, if
required by the Committee, be evidenced by a written agreement to be
duly executed and delivered by or on behalf of the Company and the
Optionee or Participant, respectively, and contain provisions not
inconsistent with the Plan.
3. ELIGIBILITY.
To be eligible for selection by the Committee to participate in
the Plan an individual must be an officer or key employee of the
Company, or of any subsidiary of the Company, as of the date on which
the Committee grants to such individual an option or Restricted Shares
(hereinafter collectively referred to as "eligible employees"). Those
Directors who are not full-time salaried officers or employees shall
not be eligible. Subject to the provisions of this Plan, options or
Restricted Shares may be granted to eligible employees in such number
and at such times during the term of this Plan as the Committee shall
determine, the Committee taking into account the duties of the
respective employees, their present and potential contributions to the
success of the Company, and such other factors as the Committee shall
deem relevant in connection with accomplishing the purpose of the Plan.
4. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 10 hereof, the maximum
number and kind of shares as to which options or Restricted Shares may
at any time be granted under the Plan are 8,400,000 shares of common
stock of the Company of the par value of $2.50 per share ("Common
Stock") of which shares no more than 400,000 shares of Common Stock may
be issued as grants of Restricted Shares under the Plan. Shares of
Common Stock subject to options or granted as Restricted Shares under
the Plan may, in the discretion of the Board of Directors of the
Company, be either authorized but unissued shares or shares previously
issued and reacquired by the Company. Upon the expiration, termination
or cancellation (in whole or in part) of unexercised options, shares of
Common Stock subject thereto shall again be available for option or
grant as Restricted Shares under the Plan. Shares of Common Stock
covered by an option, or portion thereof, which is surrendered upon the
exercise of a stock appreciation right, shall thereafter be unavailable
for option or grant as Restricted Shares under the Plan. Upon the
forfeiture (in whole or in part) of a grant of Restricted Shares, the
shares of Common Stock subject to such forfeiture shall again be
available for option or grant as Restricted Shares under the Plan.
5. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS.
All non-qualified options under the Plan shall be granted subject
to the following terms and conditions:
(a) Option Price. The option price per share with
respect to each option shall be determined by the Committee but
shall not be less than 100% of the fair market value of the
Common Stock on the date the option is granted, such fair market
value to be determined in accordance with the procedures to be
established by the Committee.
(b) Duration of Options. Options shall be exercisable at
such times and under such conditions as set forth in the written
agreement evidencing such option, but in no event shall any
option be exercisable subsequent to the tenth anniversary of the
date on which the option is granted.
(c) Exercise of Option. The shares of Common Stock
covered by an option may not be purchased prior to the first
anniversary of the date on which the option is granted (unless
the Committee shall determine otherwise), or such longer period
as the Committee may determine in a particular case, but
thereafter may be purchased at one time or in such installments
over the balance of the option period as may be provided in the
option. Any shares not purchased on the applicable installment
date may be purchased thereafter at any time prior to the final
expiration of the option. To the extent that the right to pur-
chase shares has accrued thereunder, options may be exercised
from time to time by notice to the Company stating the number of
shares with respect to which the option is being exercised.
(d) Payment. Shares of Common Stock purchased under
options shall, at the time of purchase, be paid for in full.
All, or any portion, of the option exercise price may, at the
discretion of the Committee, be paid by the surrender to the
Company, at the time of exercise, of shares of previously
acquired Common Stock owned by the Optionee, to the extent that
such payment does not require the surrender of a fractional share
of such previously acquired Common Stock. In addition, to the
extent permitted by the Committee, the option exercise price may
be paid by authorizing the Company to withhold Common Stock
otherwise issuable upon exercise of the option. Such shares
previously acquired or shares withheld to pay the option exercise
price shall be valued at fair market value on the date the option
is exercised in accordance with the procedures to be established
by the Committee. No shares shall be issued or delivered until
full payment therefor has been made. A holder of an option shall
have none of the rights of a stockholder until the shares of
Common Stock are issued to him. If an amount is payable by an
Optionee to the Company under applicable income tax laws in
connection with the exercise of non-qualified options, the
Committee may, in its discretion and subject to such rules as it
may adopt, permit the Optionee to make such payment, in whole or
in part, by electing to authorize the Company to withhold or
accept shares of Common Stock having a fair market value equal to
the amount to be paid under such income tax laws.
(e) Restrictions. The Committee shall determine, with
respect to each option, the nature and extent of the restric-
tions, if any, to be imposed on the shares of Common Stock which
may be purchased thereunder including restrictions on the
transferability of such shares acquired through the exercise of
such option. Without limiting the generality of the foregoing,
the Committee may impose conditions restricting absolutely the
transferability of shares acquired through the exercise of
options for such periods as the Committee may determine and,
further, that in the event the Optionee's employment by the
Company or a subsidiary terminates during the period in which
such shares are non-transferable, the Optionee shall be required
to sell such shares back to the Company at such price as the
Committee may specify in the option.
(f) Purchase for Investment. The Committee shall have
the right to require that each Optionee or other person who shall
exercise an option under the Plan, and each person into whose
name shares of Common Stock shall be issued, pursuant to the
exercise of an option, jointly with that of any Optionee,
represent and agree that any and all shares of Common Stock of
the Company purchased pursuant to such option will be purchased
for investment and not with a view to the distribution or resale
thereof or that such shares will not be sold except in accordance
with such restrictions or limitations as may be set forth in the
written agreement granting such option; provided, however, that
the foregoing provisions of this subparagraph (f) shall be
inoperative during any period of time when the Company has
obtained all necessary or advisable approvals from any govern-
mental agency and has completed all necessary or advisable regis-
trations or other qualification of shares of Common Stock as to
which options may from time to time be granted, all as
contemplated by Section 9 hereof.
(g) Non-Transferability of Options. During an Optionee's
lifetime, the option may be exercised only by him. Options shall
not be transferable, except for exercise by the Optionee's legal
representatives or beneficiaries.
(h) Termination of Employment. Upon the termination of
an Optionee's employment, for any reason other than death, his
option shall be exercisable only as to those shares of Common
Stock which were then subject to the exercise of such option
(unless the Committee shall determine in a specific case that
particular limitations and restrictions under the Plan shall not
apply) and such option shall expire according to the following
schedule:
(i) Retirement. Option shall expire, unless
exercised, five (5) years after the Optionee's retirement
from the Company or any subsidiary of the Company under the
provisions of the Company's or a subsidiary's pension
plans.
(ii) Disability. Option shall expire, unless
exercised, five (5) years after the date the Optionee is
eligible to receive disability benefits under the
provisions of the Company's or a subsidiary's long-term
disability plan.
(iii) Gross Misconduct. Option shall expire upon
receipt by Optionee of the notice of termination if he is
terminated for deliberate, willful or gross misconduct as
determined by the Company.
(iv) All Other Terminations. Option shall expire,
unless exercised, three (3) months after the date of such
termination; provided, the Committee may provide for a
longer exercise period, not to exceed three (3) years from
the date of such termination or, if later, three years from
the date the option becomes exercisable but not more than
five years after the date of such termination. In the event
that such termination results from the disposition by the
Company of all or a part of its interest in, or the
discontinuance of the business of, a subsidiary, division
or other business unit of the Company, the Committee may
provide for an exercise period of up to five (5) years from
the date of such termination.
(i) Death of Optionee. Upon the death of an Optionee
during his period of employment, his option shall be exercisable
only as to those shares of Common Stock which were subject to the
exercise of such option at the time of his death (unless the
Committee shall determine in a specific case that particular
limitations and restrictions under the Plan shall not apply) and
such option shall expire, unless exercised by his legal
representatives or beneficiaries, five (5) years after the date
of his death.
(j) The Committee may permit an Optionee to elect to
defer receipt of all or part of the Common Stock issuable upon
the exercise of an option, pursuant to rules and regulations
adopted by the Committee. The Committee may permit the payment
of cash in lieu of Common Stock upon payment of the deferred
amount.
In no event, however, shall any option be exercisable pursuant to
Sections 5(h) and (i) subsequent to the tenth anniversary of the date
on which it is granted.
6. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.
(a) General. The Committee may also grant a stock
appreciation right in connection with a non-qualified option,
either at the time of grant or by amendment. Such stock
appreciation right shall cover the same shares covered by such
option (or such lesser number of shares of Common Stock as the
Committee may determine) and shall, except for the provisions of
Section 5(d) hereof, be subject to the same terms and conditions
as the related non-qualified option.
(b) Exercise and Payment. Each stock appreciation right
shall entitle the Optionee to surrender to the Company
unexercised the related option, or any portion thereof, and to
receive from the Company in exchange therefor an amount equal to
the excess of the fair market value of one share of Common Stock
over the option price per share times the number of shares
covered by the option, or portion thereof, which is surrendered.
Payment shall be made in shares of Common Stock valued at fair
market value, or in cash, or partly in shares and partly in cash,
all as shall be determined by the Committee. The fair market
value shall be the value determined in accordance with procedures
established by the Committee. Stock appreciation rights may be
exercised from time to time upon actual receipt by the Company of
written notice stating the number of shares of Common Stock with
respect to which the stock appreciation right is being exercised.
No fractional shares shall be issued but instead cash shall be
paid for a fraction or, if the Committee should so determine, the
number of shares shall be rounded downward to the next whole
share. If an amount is payable by an Optionee to the Company
under applicable income tax laws in connection with exercises of
stock appreciation rights, the Committee may, in its discretion
and subject to such rules as it may adopt, permit the Optionee to
make such payment, in whole or in part, by electing to authorize
the Company to withhold or accept shares of Common Stock having a
fair market value equal to the amount to be paid under such
income tax laws.
(c) Restrictions. The obligation of the Company to
satisfy any stock appreciation right exercised by an Optionee
subject to Section 16 of the Securities Exchange Act of 1934, as
amended, shall be conditioned upon the prior receipt by the
Company of an opinion of counsel to the Company that any such
satisfaction will not create an obligation on the part of such
Optionee pursuant to Section 16(b) of such Act to reimburse the
Company for any statutory profit which might be held to result
from such satisfaction.
7. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS.
(a) General. The Committee may also grant incentive
stock options as defined under section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"). All incentive
stock options issued under the Plan shall, except for the
provisions of Sections 5(h) and (i) and Section 6 hereof, be
subject to the same terms and conditions as the non-qualified
options granted under the Plan provided that the third sentence
of Section 5(d) shall not apply to incentive stock options
granted prior to February 1, 1992. In addition, incentive stock
options shall be subject to the conditions of Sections 7(b), (c)
and (d).
(b) Limitation of Exercise. The aggregate fair market
value (determined as of the date the incentive stock option is
granted) of the shares of stock with respect to which incentive
stock options are exercisable for the first time by such Optionee
during any calendar year, under this Plan or any other stock
option plans adopted by the Company, its Subsidiaries or any
predecessor companies thereof, shall not exceed $100,000.
(c) Termination of Employment. Upon the termination of
an Optionee's employment, for any reason other than death, his
incentive stock option shall be exercisable only as to those
shares of Common Stock which were then subject to the exercise of
such option (unless the Committee shall determine in a specific
case that particular limitations and restrictions under the Plan
shall not apply), and such option shall expire as an incentive
stock option (but shall remain a non-qualified option exercisable
pursuant to the terms of Section 5 hereof less the time period
already elapsed under such Section), according to the following
schedule:
(i) Retirement. An incentive stock option shall
expire, unless exercised, three (3) months after the
Optionee's retirement from the Company or any Subsidiary of
the Company under the provisions of the Company's or a
subsidiary's pension plans.
(ii) Disability. In the case of an Optionee who
is disabled within the meaning of section 22(e)(3) of the
Code, an incentive stock option shall expire, unless
exercised, twelve (12) months after the date the Optionee
terminates employment or the date the Optionee is eligible
to receive disability benefits under the provisions of the
Company's or a subsidiary's long-term disability plan,
whichever is earlier.
(iii) Gross Misconduct. An incentive stock option
shall expire upon receipt by an Optionee of the notice of
termination if he is terminated for deliberate, willful or
gross misconduct as determined by the Company.
(iv) All Other Terminations. An incentive stock
option shall expire, unless exercised, three (3) months
after the date of such termination.
In the case of incentive stock options granted after
April 24, 1997, the Committee may extend the period during which
an incentive stock option may be exercised as a non-qualified
stock option to up to three (3) years from the date of a termination
not due to retirement, disability or gross misconduct or, if later,
three (3) years from the date the option becomes exercisable but not
more than five years after the date of such a termination.
(d) Death of Optionee. Upon the death of an Optionee
during his period of employment, his incentive stock option shall
be exercisable as an incentive stock option only as to those
shares of Common Stock which were subject to the exercise of such
option at the time of his death (unless the Committee shall
determine in a specific case that particular limitations and
restrictions under the Plan shall not apply), and such option
shall expire, unless exercised by his legal representatives or
beneficiaries, five (5) years after the date of his death.
In no event, however, shall any incentive stock option be exercisable
pursuant to Sections 7(c) and (d) subsequent to the tenth anniversary
of the date on which it was granted.
8. TERMS AND CONDITIONS OF RESTRICTED SHARES.
(a) General. With respect to each grant of Restricted
Shares under the Plan, the Committee, in its sole discretion,
shall determine the period during which the restrictions set
forth in Section 8(b) shall apply to such Restricted Shares (the
"Restricted Period"). The Restricted Period shall not be less
than 36 nor more than 60 consecutive months commencing with the
first day of the month in which the Restricted Shares are
granted. Subject to the provisions of Section 8(c), a grant of
Restricted Shares shall be effective for the Restricted Period
and may not be revoked. Approved leaves of absence of one year
or less shall not be deemed terminations or interruptions in
continuous service under this Section 8. Leaves of absence of
more than one year will be deemed to be terminations under this
Section unless the Committee determines otherwise.
(b) Restrictions. At the time of grant of Restricted
Shares to a Participant, a certificate representing the number of
shares of Common Stock granted shall be registered in his name
but shall be held by the Company for the account of the Participant.
The Participant shall have the entire beneficial ownership
interest in, and all rights and privileges of a stockholder as
to, such Restricted Shares, including the right to receive dividends
and the right to vote such Restricted Shares, subject to
the following restrictions: (i) subject to Section 8(c) hereof,
the Participant shall not be entitled to delivery of the stock
certificate until the expiration of the Restricted Period; (ii)
none of the Restricted Shares may be sold, transferred, assigned,
pledged, or otherwise encumbered or disposed of during the
Restricted Period; and (iii) all of the Restricted Shares shall be
forfeited and all rights of the Participant to such Restricted
Shares shall terminate without further obligation on the part of
the Company unless the Participant remains in the continuous
employment of the Company or a Subsidiary for the entire Restricted
Period in relation to which such Restricted Shares were
granted, except as provided by Section 8(c) hereof. Any shares
of Common Stock received as a result of a transaction listed in
Section 10 hereof shall be subject to the same restrictions as
such Restricted Shares unless the Committee shall determine
otherwise.
(c) Termination of Employment.
(i) Disability and Retirement. If a Participant
ceases to be an employee of the Company or a subsidiary prior
to the end of a Restricted Period by reason of disability (as
defined in Section 5(h)(ii) hereof) or retirement (as defined
in Section 5(h)(i) hereof), the number of Restricted Shares
granted to such Participant for such Restricted Period shall
be reduced in proportion to the Restricted Period (determined
on a monthly basis) remaining after the Participant ceases to
be an employee and all restrictions on such reduced number of
shares shall lapse. A certificate for such shares shall be
delivered to the Participant in accordance with the provisions
of Section 8(d) hereof. The Committee may, if it deems
appropriate, direct that the Participant receive a greater
number of shares of Common Stock free of all restrictions but
not exceeding the number of Restricted Shares then subject to
the restrictions of Section 8(b).
(ii) Death. If a Participant ceases to be an
employee prior to the end of a Restricted Period by reason of
death, the Restricted Shares granted to such participant
shall immediately vest in his beneficiary or estate and all
restrictions applicable to such shares shall lapse. A
certificate for such shares shall be delivered to the
Participant's beneficiary or estate in accordance with the
provisions of Section 8(d) hereof.
(iii) All Other Terminations. If a Participant ceases
to be an employee prior to the end of a Restricted Period for
any reason other than death, disability or retirement, the
Participant shall immediately forfeit all Restricted Shares
then subject to the restrictions of Section 8(b) hereof in
accordance with the provisions thereof, except that the
Committee may, if it finds that the circumstances in the
particular case so warrant, allow a participant whose employ-
ment has so terminated to retain any or all of the Restricted
Shares then subject to the restrictions of Section 8(b) and
all restrictions applicable to such retained shares shall
lapse. A certificate for such retained shares shall be
delivered to the Participant in accordance with the provisions
of Section 8(d) hereof.
(d) Payment of Restricted Shares. At the end of the
Restricted Period or at such earlier time as provided for in
Section 8(c) hereof or as the Committee may determine, all
restrictions applicable to the Restricted Shares shall lapse and a
stock certificate for a number of shares of Common Stock equal to the
number of Restricted Shares, free of all restrictions, shall be
delivered to the Participant or his beneficiary or estate, as the
case may be. The Company shall not be required to deliver any
fractional share of Common Stock but shall pay, in lieu thereof,
the fair market value (measured as of the date the restrictions
lapse) of such fractional share to the Participant or his beneficiary
or estate, as the case may be. If an amount is payable by a
Participant to the Company under applicable income tax laws in
connection with the lapse of such restrictions, the Committee may,
in its discretion and subject to such rules as it may adopt, permit
the Participant to make such payment, in whole or in part, by
electing to authorize the Company to transfer to the Company
Restricted Shares otherwise deliverable to the Participant having
a fair market value equal to the amount to be paid under such
income tax laws.
9. REGULATORY APPROVALS AND LISTING.
The Company shall not be required to issue any certificate or
certificates for shares of Common Stock upon the exercise of an option or
a stock appreciation right or the vesting of Restricted Shares granted
under the Plan prior to (i) the obtaining of any approval from any
governmental agency which the Company shall, in its sole discretion,
determine to be necessary or advisable, (ii) the admission of such shares
to listing on any stock exchange on which the Common Stock may then be
listed, and (iii) the completion of any registration or other
qualification of such shares under any state or Federal law or rulings or
regulations of any governmental body which the Company shall, in its sole
discretion, determine to be necessary or advisable.
10. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION.
In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, rights offering,
separation, reorganization or liquidation, or any other change in the
corporate structure or shares of the Company, the Board of Directors of
the Company, upon recommendation of the Committee, may make such equitable
adjustments, designed to protect against dilution, as it may deem
appropriate in the number and kind of shares authorized by the Plan
thereby and in the option price and, with respect to grants of Restricted
Shares, in the number and kind of shares covered thereby.
11. TERM OF PLAN.
No non-qualified option, incentive stock option, stock appreciation
right or Restricted Shares shall be granted pursuant to this Plan after
April 14, 1998, but non-qualified options, incentive stock options, stock
appreciation rights and grants of Restricted Shares theretofore granted
may extend beyond that date and the terms and conditions of this Plan
shall continue to apply thereto and to shares of Common Stock acquired
upon exercise of such options or stock appreciation rights.
12. TERMINATION OR AMENDMENT OF THE PLAN.
The Board of Directors may at any time terminate the Plan with re-
spect to any shares of the Company not at the time subject to option or
the provisions of Section 8, and may from time to time alter or amend the
Plan or any part thereof (including, but without limiting the generality
of the foregoing, any amendment deemed necessary to ensure that the Com-
pany may obtain any regulatory approval, referred to in clause (i) of
Section 9 hereof), provided that no change in any option or Restricted
Shares theretofore granted may be made which would impair the rights of
an Optionee or a Participant, respectively, without the consent of such
Optionee or Participant and, further, that without the approval of stock-
holders, no alteration or amendment may be made which would (i) increase
the maximum number of shares of Common Stock subject to the Plan as set
forth in Section 4 (except by operation of Section 10), (ii) extend the
term of the Plan or extend the term of options granted thereunder to
beyond the tenth anniversary of the date of grant, (iii) reduce the option
price at which options may be granted, or (iv) change the class of
eligible employees who may receive options or Restricted Shares under the
Plan. The Committee may amend the Plan to extend the exercise period
following an Optionee's termination of an option granted prior to Sepember
24, 1998, but not beyond (i)in the case of a termination resulting from
the disposition by the Company of all or a part of its interest in, or the
discontinuance of the business of, a subsidiary, division or other
business unit of the Company, five years from the date of termination and
(ii)in the case of all other terminations, not more than three years from
the date of termination, or, if later, three years from the date the
option becomes exercisable but not more than five years after the date of
such termination.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective April 15, 1988 upon approval of the
shareholders of the Company.
Exhibit 12
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(In Thousands, Except Ratios)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1998 1997
------ -------
Earnings:
Income (Loss) from continuing operations....... $(191) $ 585
Undistributed equity earnings.................. (34) (26)
----- ------
Total................................ (225) 559
----- ------
Income Taxes..................................... (140) 329
----- ------
Fixed Charges:
Interest expense including amortization of
debt discount.............................. 526 451
Portion of rentals representing an interest
factor..................................... 134 126
----- ------
Total................................ 660 577
----- ------
Earnings available for fixed charges............. $ 295 $1,465
===== ======
Total Fixed Charges -- as above.................. $ 660 $ 577
===== ======
Ratio of earnings to fixed charges (Note 5)...... 0.4 2.5
===== ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Third Quarter 1998 Financial Data Schedule
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<DEPRECIATION> 5670
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<BONDS> 9029
0
1500
<COMMON> 691
<OTHER-SE> 6938
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<TOTAL-REVENUES> 7094
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