FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1999
- 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.)
1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 271-5777
(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 29, 1999, there were 248,568,309 shares of the Registrant's
Common Stock outstanding.
<PAGE>
UNION PACIFIC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Consolidated Financial Statements:
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended September 30, 1999 and 1998.... 1
STATEMENT OF CONSOLIDATED INCOME
For the Nine Months Ended September 30, 1999 and 1998..... 2
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
At September 30, 1999 and December 31, 1998............... 3
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998..... 4
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999.............. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 6-14
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15-23
Item 3: Quantitative and Qualitative Disclosures About
Market Risk............................................... 23
PART II. OTHER INFORMATION
Item 1: Legal Proceedings............................................ 24-25
Item 6: Exhibits and Reports on Form 8-K............................. 25
Signature............................................................... 26
<PAGE> 1
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Three Months Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Millions, Except Per Share and Ratios 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues Rail and other (Note 2)................. $2,893 $2,660
---------------------------------------------------------
Operating Expenses Salaries, wages and employee benefits... 1,099 1,079
Equipment and other rents............... 341 349
Depreciation............................ 271 269
Fuel and utilities (Note 5)............. 212 204
Materials and supplies.................. 149 143
Casualty costs.......................... 82 119
Other costs (Note 10)................... 224 287
---------------------------------------------------------
Total................................... 2,378 2,450
---------------------------------------------------------
Income Operating Income........................ 515 210
Other income (Note 8)................... 24 36
Interest expense (Notes 5 and 6)........ (184) (188)
---------------------------------------------------------
Income before Income Taxes.............. 355 58
Income taxes............................ (137) (24)
---------------------------------------------------------
Income from Continuing Operations....... 218 34
Gain on Disposal of Discontinued
Operations, Net of
Income Taxes (Note 4)................ 27 -
---------------------------------------------------------
Net Income (Note 2)..................... $ 245 $ 34
- -------------------------------------------------------------------------------
Earnings Per Share Basic:
(Note 7) Income from Continuing Operations..... $ 0.88 $ 0.14
Gain on Disposal of Discontinued
Operations......................... 0.11 -
Net Income............................ $ 0.99 $ 0.14
Diluted:
Income from Continuing Operations..... $ 0.86 $ 0.14
Gain on Disposal of Discontinued
Operations......................... 0.10 -
Net Income............................ $ 0.96 $ 0.14
---------------------------------------------------------
Weighted Average Number of
Shares (Basic)........................ 246.6 246.1
Weighted Average Number of
Shares (Diluted)...................... 270.1 246.7
---------------------------------------------------------
Cash Dividends Per Share................ $ 0.20 $ 0.20
---------------------------------------------------------
Ratio of Earnings to Fixed
Charges (Note 9)...................... 2.5 1.2
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part
of these statements.
<PAGE> 2
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Nine Months Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Millions, Except Per Share and Ratios 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues Rail and other (Note 2)................. $8,406 $7,869
---------------------------------------------------------
Operating Expenses Salaries, wages and employee benefits... 3,232 3,247
Equipment and other rents............... 997 1,100
Depreciation............................ 809 800
Fuel and utilities (Note 5)............. 603 639
Materials and supplies.................. 439 433
Casualty costs.......................... 288 354
Other costs (Note 10)................... 720 1,192
---------------------------------------------------------
Total................................... 7,088 7,765
---------------------------------------------------------
Income Operating Income........................ 1,318 104
Other income (Note 8)................... 73 113
Interest expense (Notes 5 and 6)........ (554) (526)
---------------------------------------------------------
Income (Loss) before Income Taxes....... 837 (309)
Income taxes............................ (296) 127
---------------------------------------------------------
Income (Loss) from Continuing
Operations............................ 541 (182)
Gain (Loss) on Disposal of
Discontinued Operations, Net of
Income Taxes (Note 4)................. 27 (262)
---------------------------------------------------------
Net Income (Loss) (Note 2).............. $ 568 $ (444)
- -------------------------------------------------------------------------------
Earnings Per Share Basic:
(Note 7) Income (Loss) from Continuing
Operations.......................... $ 2.19 $(0.74)
Gain (Loss) on Disposal of
Discontinued Operations............. 0.11 (1.06)
Net Income (Loss)..................... $ 2.30 $(1.80)
Diluted:
Income (Loss) from Continuing
Operations.......................... $ 2.17 $ (.74)
Gain (Loss) on Disposal of
Discontinued Operations............. 0.10 (1.06)
Net Income (Loss)..................... $ 2.27 $(1.80)
---------------------------------------------------------
Weighted Average Number of
Shares (Basic)........................ 246.5 246.0
Weighted Average Number of
Shares (Diluted)...................... 269.6 246.0
---------------------------------------------------------
Cash Dividends Per Share................ $ 0.60 $ 0.60
---------------------------------------------------------
Ratio of Earnings to Fixed
Charges (Note 9)...................... 2.2 0.5
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part
of these statements.
<PAGE> 3
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Financial Position (Unaudited)
Union Pacific Corporation and Subsidiary Companies
- -------------------------------------------------------------------------------
Sep. 30, Dec. 31,
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------
Assets
<S> <C> <C> <C>
Current Assets Cash and temporary investments......... $ 198 $ 176
Accounts receivable (Note 5)........... 626 643
Inventories............................ 335 343
Current deferred tax asset............. 110 244
Other current assets................... 111 96
---------------------------------------------------------
Total.................................. 1,380 1,502
---------------------------------------------------------
Investments (Note 3) Investments in and advances to
affiliated companies................. 650 520
Other investments...................... 125 171
---------------------------------------------------------
Total.................................. 775 691
---------------------------------------------------------
Properties Cost................................... 34,128 33,145
Accumulated depreciation............... (6,726) (6,206)
---------------------------------------------------------
Net.................................... 27,402 26,939
---------------------------------------------------------
Other Other assets........................... 296 242
---------------------------------------------------------
Total Assets (Note 2).................. $29,853 $29,374
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
---------------------------------------------------------
Current Liabilities Accounts payable....................... $ 596 $ 586
Accrued wages and vacation payable..... 466 410
Accrued casualty costs................. 395 400
Income and other taxes payable......... 299 301
Dividends and interest payable......... 273 289
Debt due within one year (Note 6)...... 206 181
Other current liabilities (Note 3)..... 654 765
---------------------------------------------------------
Total.................................. 2,889 2,932
---------------------------------------------------------
Other Liabilities and Debt due after one year (Note 6)....... 8,502 8,511
Stockholders' Equity Deferred income taxes.................. 6,573 6,308
Accrued casualty costs................. 997 995
Retiree benefit obligations............ 848 803
Other long-term
liabilities (Notes 3, 4 and 10)...... 724 932
Company-Obligated Mandatorily
Redeemable Convertible Preferred
Securities (Note 6).................. 1,500 1,500
Common stockholders' equity (Page 5)... 7,820 7,393
---------------------------------------------------------
Total Liabilities and
Stockholders' Equity................. $29,853 $29,374
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part
of these statements.
<PAGE> 4
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Consolidated Cash Flows (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Nine Months Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------
Millions of Dollars 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from Operations Net Income (Loss)...................... $ 568 $ (444)
Deduct Gain (Loss) on Disposal of
Discontinued Operations............. 27 (262)
---------------------------------------------------------
Income (Loss) from
Continuing Operations............... 541 (182)
Non-cash charges to income:
Depreciation....................... 809 800
Deferred income taxes.............. 399 (125)
Other - net........................ (383) (147)
Changes in current assets and
liabilities......................... 101 (137)
---------------------------------------------------------
Cash Provided by Operations............ 1,467 209
---------------------------------------------------------
Investing Activities Capital investments.................... (1,350) (1,798)
Other - net (Note 3)................... 43 104
---------------------------------------------------------
Cash Used in Investing Activities...... (1,307) (1,694)
---------------------------------------------------------
Equity and Financing Dividends paid......................... (148) (205)
Activities (Note 6) Debt repaid ........................... (591) (1,754)
Net financings......................... 600 3,956
Other - net............................ 1 (45)
---------------------------------------------------------
Cash Provided by (Used in) Equity and
Financing Activities................. (138) 1,952
---------------------------------------------------------
Net Change in Cash and Temporary
Investments.......................... 22 467
Cash and Temporary Investments at
Beginning of Period.................. 176 90
---------------------------------------------------------
Cash and Temporary Investments at
End of Period........................ $ 198 $ 557
- -------------------------------------------------------------------------------
Change in Current Accounts receivable.................... $ 17 $ 68
Assets and Liabilities Inventories........................ 8 (18)
Other current assets................... 119 121
Accounts, wages and vacation payable... 66 (159)
Debt due within one year (Note 6)...... 25 (52)
Other current liabilities.............. (134) (97)
---------------------------------------------------------
Total.................................. $ 101 $ (137)
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part
of these statements.
<PAGE> 5
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Common Stockholders' Equity (Unaudited)
Union Pacific Corporation and Subsidiary Companies
For the Nine Months Ended September 30, 1999
- -------------------------------------------------------------------------------
Millions of Dollars 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock Common stock, $2.50 par value
(authorized 500,000,000 shares)
Balance at beginning of period
(276,335,423 shares issued)................... $ 691
-----------------------------------------------------------
Conversions, exercises of stock options and retention stock
forfeitures for the period
(14,777 net shares forfeited)................. -
-----------------------------------------------------------
Balance at end of period
(276,320,646 shares issued)................... 691
-----------------------------------------------------------
Paid-in Surplus Balance at beginning of period.................... 4,053
Conversions, exercises of stock
options and forfeitures......................... (17)
-----------------------------------------------------------
Balance at end of period.......................... 4,036
-----------------------------------------------------------
Retained Earnings Balance at beginning of period.................... 4,441
Net income........................................ 568
Cash dividends declared ($0.60 per share)......... (148)
-----------------------------------------------------------
Balance at end of period.......................... 4,861
-----------------------------------------------------------
Treasury Stock Balance at September 30, at cost
(28,481,390 shares)........................... (1,768)
-----------------------------------------------------------
Total Common Stockholders' Equity................. $ 7,820
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part
of these statements.
<PAGE> 6
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Responsibilities for Financial Statements - The 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 presented. The Statement of Consolidated
Financial Position at December 31, 1998 is derived from audited financial
statements. The 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, 1998 (the 1998
Annual Report). The results of operations for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results for
the entire year ending December 31, 1999. Certain 1998 amounts have been
reclassified to conform to the 1999 financial statement presentation.
2. Segmentation - UPC consists of one reportable segment, rail transportation
(Rail), and UPC's other product lines (Other Operations). The Rail segment
includes the operations of Union Pacific Railroad Company (UPRR), its
subsidiaries and rail affiliates (collectively, the Railroad). Other
Operations include the trucking product line (Overnite Transportation
Company or Overnite), as well as technology and insurance product lines,
corporate holding company operations, which largely support the Rail
segment, and all appropriate consolidating entries.
The following tables detail reportable financial information for UPC's
Rail segment and Other Operations for the three months and nine months
ended September 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Three Months Ended September 30, 1999 Other Operations[a]
-------------------
Millions of Dollars Rail Trucking Other[b] Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues
from external customers [c]... $ 2,606 $ 277 $ 10 $ 2,893
Net income [d].................. 234 8 3 245
Assets.......................... 28,864 883 106 29,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended September 30, 1998 Other Operations [a]
--------------------
Millions of Dollars Rail Trucking Other[b] Consolidated
-------------------------------------------------------------------------
Net sales and revenues
from external customers [c]... $ 2,360 $ 257 $ 43 $ 2,660
Net income (loss) [e]........... 67 4 (37) 34
Assets [f]...................... 28,291 1,365 122 29,778
-------------------------------------------------------------------------
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Nine Months Ended September 30, 1999 Other Operations [a]
--------------------
Millions of Dollars Rail Trucking Other[b] Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues
from external customers [c]... $ 7,576 $ 803 $ 27 $ 8,406
Net income (loss) [d]........... 589 28 (49) 568
Assets.......................... 28,864 883 106 29,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Months Ended September 30, 1998 Other Operations [a]
--------------------
Millions of Dollars Rail Truckin Other[b] Consolidated
-------------------------------------------------------------------------
Net sales and revenues
from external customers [c]... $ 6,961 $ 776 $ 132 $ 7,869
Net income (loss) [e]........... (87) 14 (371) (444)
Assets [f]...................... 28,291 1,365 122 29,778
-------------------------------------------------------------------------
</TABLE>
[a] "Other Operations" includes all product lines that are not significant
enough to warrant reportable segment classification.
[b] Included in the "Other" product line are the results of the corporate
holding company; Union Pacific Technologies, a provider of
transportation-related technologies; Wasatch Insurance Limited, a
captive insurance company; and all necessary consolidating entries.1998
also includes Skyway Freight Systems, Inc., a provider of contract
logistics and supply chain management services, which was sold in
November 1998.
[c] The Corporation does not have significant intercompany sales
activities. [d] "Other" includes the adjustment of a liability related
to the discontinued operations of a former subsidiary (Note 4).
[e] "Trucking" includes goodwill amortization of $5 million and $15
million for the three months and nine months ended September 30, 1998,
respectively.
[f] "Other" includes the write-down of the investment in Overnite in
connection with the attempted sale of Overnite (Note 4).
3. Acquisitions
Southern Pacific Rail Corporation (Southern Pacific or SP) - UPC consummated
the acquisition of Southern Pacific in September 1996. The acquisition of SP
was accounted for as a purchase and was fully consolidated into UPC's
results beginning in October 1996.
Merger Consolidation Activities - In connection with the acquisition and
continuing integration of UPRR and Southern Pacific's rail operations, UPC
is in the process of eliminating 5,200 duplicate positions, which are
primarily employees involved in activities other than train, engine and yard
activities. In addition, UPC is relocating 4,700 positions, merging or
disposing of redundant facilities and disposing of certain rail lines. The
Corporation is also canceling uneconomical and duplicative SP contracts.
To date, UPC has severed 2,900 employees and relocated 4,500 employees
due to merger implementation activities. UPC recognized a $958 million
pre-tax merger liability as part of the SP purchase price allocation for
costs associated with SP's portion of these activities. In addition, the
Railroad expects to incur $110 million in pre-tax acquisition-related costs
for severing or relocating UPRR employees, disposing of certain UPRR
facilities, training and equipment upgrading over the remainder of the
merger implementation period. Earnings for the three months ended September
30, 1999 and 1998 included $13 million and $7 million after-tax,
respectively, and for the nine months ended September 30, 1999 and 1998,
included $30 million and $36 million after-tax, respectively, for
acquisition-related costs for UPRR consolidation activities.
<PAGE> 8
The components of the merger liability as of September 30, 1999 were as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Original Cumulative Current
Millions of Dollars Reserve Activity Reserve
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Contractual obligations....................... $361 $361 $ -
Severance costs............................... 343 264 79
Contract cancellation fees and
facility and line closure costs............. 145 126 19
Relocation costs.............................. 109 89 20
- -------------------------------------------------------------------------------
Total......................................... $958 $840 $118
- -------------------------------------------------------------------------------
</TABLE>
Merger Liabilities - Merger liability activity reflects cash payments for
merger consolidation activities and reclassification of contractual
obligations from merger liabilities to contractual liabilities. The
Corporation expects that the remaining merger payments will be made over the
course of the next two years as labor negotiations are completed and
implemented, and related merger consolidation activities are finalized.
Mexican Railway Concession - During 1997, UPRR and a consortium of partners
were granted a 50-year concession to operate the Pacific-North and Chihuahua
Pacific lines in Mexico and a 25% stake in the Mexico City Terminal Company
at a price of $525 million. The consortium assumed operational control of
both lines in 1998. In March 1999, UPRR purchased an additional 13%
ownership interest for $87 million from one of its partners. UPRR now holds
a 26% ownership share in the consortium. The investment is accounted for
under the equity method.
4. Discontinued Operations
Adjustment to 1994 Loss on Disposal of Discontinued Operations - Net income
for the third quarter 1999 included a one-time after-tax gain of $27
million, net of taxes of $16 million, from the adjustment of a liability
established in connection with the discontinued operations of a former
subsidiary.
Attempted Sale of Overnite - In May 1998, the Corporation's Board of
Directors approved a formal plan to divest UPC's investment in Overnite
through an initial public offering (IPO). UPC recorded a $262 million
after-tax loss, net of a $198 million tax benefit, from discontinued
operations in the second quarter of 1998 to provide for the expected loss
from the sale of Overnite. During the fourth quarter of 1998, it became
apparent that, because of continued weakness in the IPO market, a successful
divestiture of Overnite within the one year time limit prescribed by
generally accepted accounting principles was no longer reasonably assured.
As a result, in the fourth quarter of 1998 the Corporation reclassified
Overnite's results to continuing operations and reversed the $262 million
loss from discontinued operations. Overnite's operating results have been
reclassified to continuing operations for all periods. Additionally, as
discussed in the 1998 Annual Report, the Corporation changed its method of
valuing goodwill during the fourth quarter of 1998. In connection with this
change in accounting policy, $547 million of goodwill related to the
acquisition of Overnite was written off during the fourth quarter of 1998.
5. Financial Instruments - The Corporation and its subsidiaries use derivative
financial instruments in limited instances and 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.
<PAGE> 9
Credit Risk - The total credit risk associated with the Corporation's
counterparties was $111 million at September 30, 1999. UPC has received
collateral relating to its hedging activity where the concentration of
credit risk was substantial.
Valuation - The fair market values of the Corporation's derivative financial
instrument positions at September 30, 1999 and December 31, 1998 were
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 U.S. Treasury rate and swap spread.
The following is a summary of the Corporation's financial instruments at
September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Millions of Dollars September 30, December 31,
Except Percentages and Average Commodity Prices 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Interest Rate Hedging:
Amount of debt hedged........................ $ 54 $ 150
Percentage of total debt portfolio........... 1% 2%
Rail Fuel Hedging:
Fuel purchases hedged for 1999............... $ 86 $ 343
Percentage of forecasted 1999 fuel
consumption hedged......................... 67% 64%
Average price of 1999 hedges outstanding
(per gallon) [a]........................... $0.41 $0.41
Fuel purchases hedged for 2000 [b]........... $ 50 -
Percentage of forecasted 2000 fuel
consumption hedged [b]..................... 10% -
Average price of 2000 hedges outstanding
(per gallon) [a] [b]....................... $0.40 -
Trucking Fuel Hedging:
Fuel purchases hedged for 1999............... $ 3 $ 10
Percentage of forecasted 1999 fuel
consumption hedged......................... 40% 41%
Average price of 1999 hedges outstanding
(per gallon) [a]........................... $0.45 $0.45
Fuel purchases hedged for 2000............... $ 2 -
Percentage of forecasted 2000 fuel
consumption hedged......................... 9% -
Average price of 2000 hedges
outstanding (per gallon) [a].............. $0.39 -
------------------------------------------------------------------------
</TABLE>
[a] Excludes taxes and transportation costs.
[b] Excludes written options held by counterparties which are not expected
to be exercised as of September 30, 1999.
<PAGE> 10
The asset and liability positions of the Corporation's outstanding
financial instruments at September 30, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
September 30, December 31,
Millions of Dollars 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Interest Rate Hedging:
Gross fair market asset position............... $ 47 $ 41
Gross fair market (liability) position......... (1) (5)
Rail Fuel Hedging:
Gross fair market asset position............... 62 -
Gross fair market (liability) position......... - (49)
Trucking Fuel Hedging:
Gross fair market asset position............... 2 -
Gross fair market (liability) position......... - (2)
---------------------------------------------------------------------------
Total asset (liability) position................... $110 $(15)
---------------------------------------------------------------------------
</TABLE>
The Corporation's use of financial instruments had the following impact
on pre-tax income for the three months and nine months ended September 30,
1999 and 1998:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
-----------------------------
September 30, September 30,
------------------------------
Millions of Dollars 1999 1998 1999 1998
------------------------------
<S> <C> <C> <C> <C>
Increase in interest expense from interest
rate hedging........................... $ - $ - $ 1 $ 1
Increase (decrease) in fuel expense from
Rail fuel hedging...................... (26) 25 (7) 59
Increase in fuel expense from
Trucking fuel hedging.................. (1) - - 2
---------------------------------------------------------------------------
(Increase) decrease in pre-tax income....... $(27) $25 $(6) $62
---------------------------------------------------------------------------
</TABLE>
Sale of Receivables - The Railroad has sold, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable to third parties through a bankruptcy-remote subsidiary (the
Subsidiary). The Subsidiary is collateralized by a $66 million note from
UPRR. 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 September 30, 1999 and December 31,
1998, accounts receivable are presented net of $576 million and $580
million, respectively, of receivables sold.
6. Debt
Credit Facilities - The Corporation had $1.2 billion of credit facilities
with various banks designated for general corporate purposes that expired in
the first quarter of 1999. Because of improvements in earnings and operating
cash flows during 1999, the Corporation no longer required this credit
capacity for operational purposes. A $2.8 billion credit facility, which
expires in 2001, remains outstanding.
Convertible Preferred Securities - Union Pacific Capital Trust (the Trust),
a statutory business trust sponsored and wholly owned by the Corporation,
has issued $1.5 billion aggregate liquidation amount of 6-1/4% Convertible
Preferred Securities (the CPS). Each of the CPS has a stated liquidation
amount of $50 and is convertible, at the option of the holder, into shares
of UPC's common stock, par value $2.50 per share (the Common Stock), at the
<PAGE> 11
rate of 0.7257 shares of Common Stock for each of the CPS, equivalent to a
conversion price of $68.90 per share of Common Stock, subject to adjustment
under certain circumstances. The CPS accrue and pay cash distributions
quarterly in arrears at the annual rate of 6-1/4% of the stated liquidation
amount. The Corporation owns all of the common securities of the Trust. The
proceeds from the sale of the CPS and the common securities of the Trust
were invested by the Trust in $1.5 billion aggregate principal amount of the
Corporation's 6-1/4% Convertible Junior Subordinated Debentures due April 1,
2028, which represent the sole assets of the Trust.
For financial reporting purposes, the Corporation has recorded
distributions payable on the CPS as an interest charge to earnings in the
statement of consolidated income.
Significant New Borrowings - During January 1999, the Corporation issued
$600 million of 6-5/8% debentures with a maturity date of February 1, 2029.
Also, during September 1999, the Corporation issued $150 million of 7 3/8%
notes with a maturity date of September 15, 2009. The proceeds from the
issuance of these debentures and notes were used for repayment of debt and
other general corporate purposes.
Shelf Registration Statement - Under currently effective shelf registration
statements, the Corporation may sell, from time to time, up to $850 million
in the aggregate of any combination of debt securities, preferred stock, or
warrants for debt securities or preferred stock in one or more offerings.
The Corporation has no immediate plans to issue equity securities.
7. Earnings Per Share - The following tables provide a reconciliation between
basic and diluted earnings per share for the three months and nine months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Three Months Ended
September 30,
-------------------
Millions, Except Per Share Amounts 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Income Statement Data:
Income from continuing operations................ $ 218 $ 34
Income available to common stockholders from
continuing operations........................ 218 34
Gain on disposal of discontinued operations...... 27 -
---------------------------------------------------------------------------
Net income available to common stockholders -
Basic.......................................... 245 34
Dilutive effect of interest associated with the
CPS [a]........................................ 14 -
---------------------------------------------------------------------------
Net income available to common stockholders -
Diluted........................................ $ 259 $ 34
---------------------------------------------------------------------------
Weighted-Average Number of Shares Outstanding:
Basic............................................ 246.6 246.1
Dilutive effect of common stock equivalents [b].. 23.5 0.6
---------------------------------------------------------------------------
Diluted.......................................... 270.1 246.7
---------------------------------------------------------------------------
Earnings Per Share:
Basic:
Income from continuing operations............ $0.88 $0.14
Gain on disposal of discontinued operations.. 0.11 -
---------------------------------------------------------------------------
Net income....................................... $0.99 $0.14
---------------------------------------------------------------------------
Diluted:
Income from continuing operations............ $0.86 $0.14
Gain on disposal of discontinued operations.. 0.10 -
---------------------------------------------------------------------------
Net income....................................... $0.96 $0.14
---------------------------------------------------------------------------
</TABLE>
[a] In 1998, the effect of $15 million of interest associated with the CPS
was anti-dilutive (Note 6).[b] 1998 excludes the effect of anti-dilutive
common stock equivalents related to the CPS, which were 21.8 million.
<PAGE> 12
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------
Millions, Except Per Share Amounts 1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Income Statement Data:
Income (Loss) from continuing operations............. $ 541 $ (182)
Income (Loss) available to common stockholders from
continuing operations............................ 541 (182)
Gain (Loss) on disposal of discontinued operations... 27 (262)
---------------------------------------------------------------------------
Net income (loss) available to common
stockholders - Basic............................... 568 (444)
Dilutive effect of interest associated with
the CPS [c]........................................ 44 -
---------------------------------------------------------------------------
Net income (loss) available to common stockholders -
Diluted............................................ $ 612 $ (444)
---------------------------------------------------------------------------
Weighted-Average Number of Shares Outstanding:
Basic................................................ 246.5 246.0
Dilutive effect of common stock equivalents [d]...... 23.1 -
---------------------------------------------------------------------------
Diluted.............................................. 269.6 246.0
---------------------------------------------------------------------------
Earnings Per Share:
Basic:
Income (Loss) from continuing operations......... $2.19 $(0.74)
Gain (Loss) on disposal of discontinued
operations..................................... 0.11 (1.06)
---------------------------------------------------------------------------
Net income (loss).................................... $2.30 $(1.80)
---------------------------------------------------------------------------
Diluted:
Income (Loss) from continuing operations......... $2.17 $(0.74)
Gain (Loss) on disposal of discontinued
operations..................................... 0.10 (1.06)
---------------------------------------------------------------------------
Net income (loss).................................... $2.27 $(1.80)
---------------------------------------------------------------------------
</TABLE>
[c] In 1998, the effect of $29 million of interest associated with the CPS
was anti-dilutive (Note 6).[d] 1998 excludes the effect of anti-dilutive
common stock equivalents related to options and the CPS, which were
1.5 million and 14.5 million, respectively.
8. Other Income - Other income included the following for the three months and
nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Three Months Ended
Millions of Dollars September 30,
--------- ---------
1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Net gain on asset dispositions......................... $ 18 $18
Rental income.......................................... 16 13
Interest income........................................ 2 6
Other - net............................................ (12) (1)
---------------------------------------------------------------------------
Total.................................................. $ 24 $36
---------------------------------------------------------------------------
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Nine Months Ended
Millions of Dollars September 30,
--------- ---------
1999 1998
---------------------------------------------------------------------------
<S> <C> <C>
Net gain on asset dispositions........................ $ 36 $62
Rental income......................................... 41 36
Interest income....................................... 10 17
Other - net........................................... (14) (2)
---------------------------------------------------------------------------
Total................................................. $ 73 $113
---------------------------------------------------------------------------
</TABLE>
9. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed charges
has been computed on a consolidated basis. Earnings represent income (loss)
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 the estimated
interest portion of rental charges. For the nine months ended September 30,
1998, fixed charges exceeded earnings by approximately $339 million.
10. Commitments and Contingencies - There are various claims and lawsuits
pending against the Corporation and certain of its subsidiaries. The
Corporation is also subject to Federal, state and local environmental laws
and regulations, pursuant to which it is currently participating in the
investigation and remediation of numerous sites. In addition, the
Corporation and its subsidiaries also periodically enter into financial and
other commitments and guarantees in connection with their businesses, and
have retained certain contingent liabilities upon the disposition of
formerly owned operations.
It is not possible at this time for the Corporation to determine fully
the effect of any or all unasserted claims on its consolidated financial
condition; 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 or results
of operations. Certain potentially significant contingencies relating to the
Corporation's and its subsidiaries' businesses are detailed below:
Customer Claims - Certain customers have submitted claims for damages
related to shipments delayed by the Railroad as a result of congestion
problems during 1997 and 1998, 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. The
Corporation has made no additional provisions for such claims in 1999.
Shareholder Lawsuits - UPC and certain of its directors and officers are
defendants in two purported class actions that 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.
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 and is awaiting a decision by
the Court.
<PAGE> 14
In addition to the class action litigation, a purported derivative
action was filed on behalf of the Corporation and UPRR in September 1998 in
the District Court for Tarrant County, Texas, naming as defendants the
then-current and certain former directors of the Corporation and UPRR and,
as nominal defendants, the Corporation and UPRR. The derivative action
alleges, among other things, that the named directors breached their
fiduciary duties to the Corporation and UPRR 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
UPRR to make misrepresentations about UPRR's service problems to the
financial markets and regulatory authorities. The Corporation's Board of
Directors established a special litigation committee consisting of three
independent directors to review the plaintiff's allegations and determine
whether it is in UPC's best interest to pursue them. The committee has
unanimously concluded that further prosecution of the derivative action on
behalf of the Corporation and UPRR is not in the best interest of either
such company. Accordingly, the Corporation and UPRR have filed a motion with
the Court to dismiss the derivative action. The plaintiff has not yet
responded to the motion. The individual defendants also believe that these
claims are without merit and intend to defend them vigorously.
11. Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that would have been effective January 1,
2000. In June 1999, the Financial Accounting Standards Board issued
Statement No. 137, "Accounting for Derivatives Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133"
postponing the effective date for implementing FAS 133 to fiscal years
beginning after June 15, 2000. While management is still in the process of
determining the full effect FAS 133 will have on the Corporation's financial
statements, management has determined that FAS 133 will increase the
volatility of the Corporation's asset, liability and equity (comprehensive
income) positions as the change in the fair market value of all financial
instruments the Corporation uses for fuel or interest rate hedging purposes
will, upon adoption of FAS 133, be recorded in the Corporation's Statement
of Financial Position (Note 5). In addition, to the extent fuel hedges are
ineffective due to pricing differentials resulting from the geographic
dispersion of the Corporation's operations, income statement recognition of
the ineffective portion of the hedge position will be required. Management
does not anticipate that the final adoption of FAS 133 will have a material
impact on UPC's consolidated financial statements.
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 Compared to
Three Months and Nine Months Ended September 30, 1998
Union Pacific Corporation (the Corporation or UPC) consists of one reportable
segment, rail transportation (Rail), and UPC's other product lines (Other
Operations). The Rail segment includes the operations of Union Pacific Railroad
Company (UPRR), its subsidiaries and rail affiliates (collectively, the
Railroad). Other Operations include the trucking product line (Overnite
Transportation Company or Overnite), as well as technology and insurance product
lines, corporate holding company operations, which largely support the Rail
segment, and all appropriate consolidating entries. All earnings per share
information is stated on a diluted basis.
CONSOLIDATED
Net Income - Net income for the three months and nine months ended September 30,
1999 was $245 million ($0.96 per share) and $568 million ($2.27 per share),
respectively, compared to $34 million ($0.14 per share) and a loss of $444
million ($1.80 per share) for the comparable periods in 1998. The increase was
driven primarily by improved operations and service levels at UPC's Rail unit
which resulted in higher revenues and lower expenses. Net income for the third
quarter of 1999 included a one-time after-tax gain of $27 million ($0.10 per
share) from the adjustment of a liability established in connection with the
discontinued operations of a former subsidiary. Net income for the nine months
ended September 30, 1998 included a $262 million after-tax provision for the
expected loss from the proposed sale of Overnite. In the fourth quarter of 1998,
the Corporation reclassified Overnite's results to continuing operations and
reversed the loss from discontinued operations (see Note 4 to the Consolidated
Financial Statements).
Operating Revenues - Operating revenues increased $233 million (9%) and $537
million (7%) for the three month and nine month periods ended September 30,
1999, respectively, over the comparable periods in 1998. The increase was
primarily due to higher volumes and revenues in all commodity lines of the Rail
unit, partially offset by the impact of selling Skyway Freight Systems, Inc.
(Skyway) in November of 1998. Skyway generated $44 million and $133 million in
revenue during the third quarter and first nine months of 1998, respectively.
Operating Expenses - For the three and nine month periods ended September 30,
1999, operating expenses decreased $72 million (3%) and $677 million (9%),
respectively, over the comparable periods in 1998. Salaries, wages and employee
benefit costs increased in the third quarter of 1999 over the third quarter of
1998, due to one-time costs related to the Southern Pacific merger recorded in
the third quarter of 1999 (see Note 3 to the Consolidated Financial Statements),
higher rail volume and inflation, partially offset by improved productivity.
Fuel and utilities costs also increased in the third quarter of 1999 over the
third quarter of 1998 due to increased volume, partially offset by lower prices
(see Note 5 to the Consolidated Financial Statements). Depreciation and
materials and supplies both increased slightly for both the three month and nine
month periods ended September 30, 1999 over the comparable periods in 1998. The
increase in depreciation expense reflects increased capital spending, while the
<PAGE> 16
increase in materials and supplies reflects higher rail volumes. All other
operating expense categories decreased in the third quarter of 1999 over the
comparable period in 1998. The factors primarily responsible for such decreases
are substantially the same in the three and nine month periods and are discussed
below.
For the nine month period, all operating expense categories decreased over
the comparable 1998 period. Salaries, wages and employee benefit costs decreased
due to improved productivity and lower corporate expenses, partially offset by
higher rail volume and inflation. Equipment and other rents expense decreased
primarily as a result of improved rail cycle times, partially offset by higher
rail volumes. Fuel and utilities costs were lower, as lower fuel prices and
improved fuel efficiency more than offset volume driven increases in fuel
consumption. Casualty costs decreased due to lower than expected settlement
costs at the Rail unit. The decrease in other costs in 1999 reflected the impact
in 1998 of the resolution of customer claims, the impact of the sale of Skyway,
lower state and local taxes (primarily sales and property taxes) and increased
benefits resulting from the continuing integration of Southern Pacific
operations.
Operating Income - Operating income increased $305 million and $1.2 billion for
the three and nine month periods ended September 30, 1999, over the comparable
periods in 1998, reflecting improved operations and service levels at UPC's Rail
unit, which resulted in decreased Rail operating expenses and increased Rail
revenues.
Non-Operating Items - Other income decreased $12 million in the third quarter of
1999 over the comparable period in 1998 due to the impact in the third quarter
of 1998 of a telecommunications contract buyout and the sale of a corporate
aircraft. Other income decreased $40 million for the nine months ended September
30, 1999 over the comparable period in 1998, reflecting the additional impact of
the sale of the Southern Pacific Rail Corporation (SP or Southern Pacific)
headquarters building and an insurance recovery for 1997 flood damage recorded
in the second quarter of 1998. Interest expense decreased in the third quarter
of 1999 over the third quarter of 1998, due to lower average debt in the third
quarter of 1999, but increased for the 1999 nine month period as a result of
increased average debt levels. Income taxes for both the three and nine month
periods increased over the comparable periods in 1998 due to higher income
before income taxes, partially offset by settlements related to prior tax years.
RAIL SEGMENT
Net Income - Rail operations reported net income of $234 million and $589
million for the three months and nine months ended September 30, 1999,
respectively, compared to net income of $67 million for the third quarter of
1998 and a net loss of $87 million for the 1998 nine month period. The increase
for both the three and nine month periods resulted primarily from improved
operations and service levels, increased revenues in all commodity lines and
lower operating costs.
Operating Revenues - Rail operating revenues increased $246 million (10%) to
$2,606 million and $615 million (9%) to $7,576 million for the quarter and nine
months ended September 30, 1999, respectively, over the comparable periods in
1998. Revenue carloads increased 9% and 7% for the three and nine month periods
ended September 30, 1999, respectively, over the comparable periods in 1998.
1999 commodity revenues, primarily automotive and industrial, were adversely
influenced due to the impact on rail traffic of the implementation of the joint
acquisition of Conrail.
<PAGE> 17
The following table summarizes rail commodity revenue, revenue carloads and
average revenue per car for the periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended, Nine Months Ended
September 30 September 30,
- ---------------------- Commodity Revenue -------------------
1999 1998 % Change In Millions of Dollars 1999 1998 % Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 367 $ 333 + 10% Agricultural $1,042 $ 938 + 11%
239 204 + 17 Automotive 767 676 + 13
398 384 + 4 Chemicals 1,195 1,158 + 3
560 516 + 9 Energy 1,656 1,501 + 10
492 455 + 8 Industrial Products 1,416 1,354 + 5
459 385 + 19 Intermodal 1,273 1,126 + 13
- -------------------------------------------------------------------------------
$2,515 $2,277 + 10% Total $7,349 $6,753 + 9%
- -------------------------------------------------------------------------------
Revenue Carloads
In Thousands
- -------------------------------------------------------------------------------
233 212 + 10% Agriculture 670 605 + 11%
167 140 + 19 Automotive 521 464 + 12
238 232 + 3 Chemicals 696 681 + 2
478 449 + 6 Energy 1,403 1,319 + 6
365 349 + 5 Industrial Products 1,045 1,005 + 4
719 640 + 12 Intermodal 2,026 1,882 + 8
- -------------------------------------------------------------------------------
2,200 2,022 + 9% Total 6,361 5,956 + 7%
- -------------------------------------------------------------------------------
Average Revenue per Car
- --------------------------------------------------------------------------------
$1,576 $1,574 -% Agriculture $1,550 $1,555 -%
1,430 1,450 - 1 Automotive 1,472 1,458 + 1
1,673 1,658 + 1 Chemicals 1,717 1,699 + 1
1,172 1,148 + 2 Energy 1,181 1,138 + 4
1,350 1,303 + 4 Industrial Products 1,356 1,348 + 1
638 602 + 6 Intermodal 628 598 + 5
- -------------------------------------------------------------------------------
$1,144 $1,126 + 2% Total $1,155 $1,134 + 2%
- -------------------------------------------------------------------------------
</TABLE>
Agricultural - Agricultural revenue increased for both the three and nine month
periods over the comparable periods in 1998, primarily due to stronger exports
and improved service levels, which resulted in increases in wheat, corn and
beverages.
Automotive - Automotive revenue increased for both the three and nine month
periods over the comparable periods in 1998, due to increased carloads caused by
strong domestic production, improvements in cycle times, price increases, and
the negative impact in 1998 of a strike against a major auto manufacturer. These
gains were partially offset by the negative impact on rail traffic of the
implementation of the joint acquisition of Conrail.
Chemical - Chemical revenue increased for both the three and nine month periods
over the comparable periods in 1998, due to improved service levels and recovery
in demand for plastics, liquid and dry chemical and phosphorous, which increased
carloads. These gains were partially offset by declines in soda ash and a
decline in demand for fertilizers. Average revenue per car improved due to
increased longer-haul plastics shipments and fewer shorter-haul petroleum and
export sulfur moves.
<PAGE> 17
Energy - Energy revenue increased for both the three and nine month periods over
the comparable periods in 1998 due to increases in the number of Powder River
Basin trains per day, tons per car and average train length. Powder River Basin
traffic was reduced during the Rail unit's planned 10-day maintenance outage in
June 1999. Colorado and Utah volumes also increased due to improved service.
Average revenue per car increased resulting from changes in traffic mix as
longer-haul Powder River Basin traffic increased.
Industrial Products - Industrial Products revenue increased for both the three
and nine month periods over the comparable periods in 1998 due to stronger
demand and improved cycle times. Carloads increased in lumber, stone and cement
due to strong construction demand, and recyclables grew due to new business.
Gains were partially offset by decreased steel loadings due to higher imports of
lower-priced foreign steel and lost volumes from a major steel producer who
filed for bankruptcy. Average revenue per car increased due to a combination of
price increases and product mix changes.
Intermodal - Intermodal revenue increased for both the three and nine month
periods over the comparable periods in 1998 due to increased carloads, and
increased average revenue per car. Carloads improved due to strong demand from
growth in imports from Asia, service improvements and a new premium service
offering. These gains were partially offset by a decline in exports to Asia due
to the Asian economic crisis. Average revenue per car increased due to positive
mix shifts and demand-driven price increases.
Operating Expenses - Operating expenses decreased $44 million (2%) and $540
million (8%) for the quarter and nine months ended September 30, 1999,
respectively.
Salaries, wages and employee benefit costs increased for the three and nine
month periods ended September 30, 1999 over the comparable periods in 1998, due
to one-time costs related to the Southern Pacific merger recorded in the third
quarter of 1999 (see Note 3 to the Consolidated Financial Statements), higher
rail volume and inflation, partially offset by improved productivity.
Equipment and other rents expenses decreased $9 million (3%) and $94
million (9%) for the quarter and nine months ended September 30, 1999,
respectively, due primarily to improvements in cycle time and lower prices,
partially offset by higher volume.
Fuel and utilities expenses were up $8 million (4%) and down $33 million
(6%) for the quarter and nine months ended September 30, 1999, respectively. The
quarterly increase was driven by higher volumes, while the year-to-date decrease
reflects lower fuel prices and improved consumption rates, partially offset by
higher volume. The Railroad hedged 68% and 69% of its fuel consumption for the
three and nine months periods ended September 30, 1999, respectively, which
decreased fuel costs by $26 million and $7 million, respectively. Expected fuel
consumption for the remaining three months of 1999 is 67% hedged at an average
of 41 cents per gallon (excluding taxes, transportation charges and regional
pricing spreads).
Casualty costs declined $34 million (33%) and $62 million (20%) for the
quarter and nine months ended September 30, 1999, respectively, primarily due to
the effect of lower than expected settlement costs. In addition, insurance costs
and costs for repairs on cars from other railroads were lower year over year.
Depreciation and materials and supplies both increased slightly for both
the three and nine month periods ended September 30, 1999 over the comparable
periods in 1998. The increase in depreciation expense reflects increased capital
spending, while the increase in materials and supplies reflects higher rail
volumes.
<PAGE> 19
Other costs decreased $39 million (16%) and $407 million (39%) for the
three and nine month periods ended September 30, 1999, respectively, reflecting
the impact on 1998 results from the resolution of customer claims, lower state
and local taxes (primarily sales and property taxes) and benefits resulting from
the continuing integration of Southern Pacific operations.
Operating Income - Operating income increased $290 million to $515 million and
$1.2 billion to $1.3 billion for the quarter and nine months ended September 30,
1999, respectively. Both 1999 and 1998 included the impact of one-time costs
related to the Southern Pacific merger for severance, relocation and training of
employees. The operating ratio for the third quarter of 1999 was 80.2%, 10.3
percentage points better than 1998's 90.5% operating ratio. The operating ratio
for the first nine months of 1999 was 82.6%, 15.1 percentage points better than
1998's 97.7% operating ratio.
Non-Operating Items - Other income decreased $22 million (49%) in the third
quarter of 1999 over 1998 due to the impact in the third quarter of 1998 of a
telecommunications contract buyout and the sale of a corporate aircraft. Other
income decreased $50 million (44%) for the nine months ended September 30, 1999
over the comparable period in 1998, reflecting the additional impact of the sale
of the SP headquarters building and an insurance recovery for 1997 flood damage
recorded in the second quarter of 1998. Interest expense decreased $4 million
(2%) in the third quarter of 1999 over the third quarter of 1998 due to lower
average debt in the third quarter of 1999. Interest expense increased $26
million (6%) for the nine months ended September 30, 1999 over the comparable
period in 1998 as a result of higher average debt levels year over year. Income
taxes increased $105 million for the three month period and $403 million for the
nine month period, respectively, reflecting higher income before income taxes.
OTHER OPERATIONS
Trucking Product Line
Net Income - Trucking net income was $8 million and $28 million, for the three
and nine month periods ended September 30, 1999, respectively, down from $9
million (excluding goodwill amortization of $5 million) and $29 million
(excluding good will amortization of $15 million) for the comparable periods in
1998. The decrease in net income for both periods was more than accounted for by
expenses related to Overnite's contingency plans in response to activity by the
International Brotherhood of Teamsters (Teamsters) and a brief job action in
July.
Operating Revenues - For the three and nine month periods ended September 30,
1999, trucking revenues increased $20 million (8%) to $277 million and $27
million (3%) to $803 million, respectively, over the comparable periods in 1998.
The revenue increase resulted from higher volume, reflecting a new product
offering in the northeast United States and Texas and from rate improvements
resulting from increased average length of haul and yield improvement.
Operating Expenses - For the three and nine month periods ended September 30,
1999, operating expenses increased $24 million (10%) to $269 million and $32
million (4%) to $770 million, respectively, over the comparable periods in 1998.
For the three and nine months ended September 30, 1999, salaries, wages and
employee benefit costs increased $14 million (9%) to $169 million and $26
million (6%) to $494 million, respectively, reflecting wage and benefit
enhancements and expenses related to Overnite's contingency plans in response to
Teamster activity. Fuel and utilities costs increased $2 million (18%) to $13
million for the three month period and $1 million (3%) to $35 million for the
nine month period, due to higher volumes and increased fuel price per gallon (57
<PAGE> 20
cents in the third quarter of 1999 compared to 48 cents in the third quarter of
1998), partially offset by favorable hedge activity. Forty percent of estimated
remaining 1999 fuel purchases are hedged at an average of 45 cents per gallon
(excluding taxes, transportation charges and regional pricing spreads).
Equipment and other rents increased $4 million (20%) for the three month period
due to costs related to Teamster activity and to the alleviation of congestion
caused by closure of a regional competitor.
Operating Income - Trucking operations generated operating income of $8 million
(excluding goodwill amortization of $5 million) for the third quarter of 1999
and $33 million (excluding goodwill amortization of $15 million) for the first
nine months of 1999 compared to $12 million and $38 million for the comparable
periods in 1998. The operating ratio for trucking operations (excluding goodwill
amortization in 1998) increased to 97.1% in 1999 from 95.3% in 1998 for the
third quarter and increased to 95.9% in 1999 from 95.1% in 1998 for the nine
months ended September 30, 1998.
Recent Events - On October 24, 1999, the Teamsters began a job action at certain
Overnite facilities. As of November 9, 1999, approximately 30 Overnite terminals
had some employees who did not cross picket lines, and approximately 870
employees, 6.7% of Overnite's workforce, did not report to work. Overnite is
operating under its strike contingency plan, and has deployed approximately 400
employee volunteers to other Overnite locations and is using approximately 200
temporary third-party replacement workers. The Teamster activity is expected to
negatively impact Overnite's results of operations in the fourth quarter of
1999.
The Teamsters are the certified and recognized bargaining agent at 22 of
Overnite's locations employing approximately 1,800 of Overnite's workforce of
approximately 13,000. Additionally, proceedings are pending in certain cases
where a Teamsters local union lost a representation election. See Part II, Item
1, "Legal Proceedings - Labor Matters."
Other Product Lines
Other operations include the technology and insurance product lines, as well as
the corporate holding company operations and all necessary consolidating entries
(see Note 2 to the Consolidated Financial Statements). For the three and nine
month periods ended September 30, 1999, operating revenues declined $33 million
and $105 million, respectively, over the comparable periods in 1998, due
primarily to the sale of Skyway in November 1998. For the three and nine months
ended September 30, 1999, operating expenses decreased $47 million and $154
million, respectively, reflecting the absence of 1999 costs associated with
Skyway and the consolidation of portions of the corporate staff with the Rail
unit's staff in Omaha, Nebraska. Operating losses for the three and nine month
periods ended September 30, 1999 over the comparable periods in 1998 declined
$14 million and $49 million, respectively, and losses from continuing operations
declined $13 million and $33 million, respectively, due to the corporate
reorganization and improved operations at the Corporation's technology division.
CHANGES IN FINANCIAL CONDITION AND OTHER DEVELOPMENTS
Financial Condition - During the first nine months of 1999, cash provided by
operations was $1.5 billion, compared to $209 million in 1998. This increase
reflects higher earnings at the Corporation's Rail segment. Working capital
improved due to continued emphasis on receivable collection efforts at the
Railroad and the timing of current liability payments.
<PAGE> 21
Cash used in investing activities was $1.3 billion in the first nine months
of 1999, compared to a use of $1.7 billion in 1998. This decrease primarily
reflects lower Rail capital spending, including merger-related spending, offset
by the purchase of an additional 13% ownership interest in the consortium
operating the Pacific-North and Chihuahua Pacific lines in Mexico for $87
million (see Note 3 to Consolidated Financial Statements).
Cash used in equity and financing activities was $138 million in the first
nine months of 1999, compared to $2.0 billion provided in 1998. Cash used in
1999 principally reflects lower net borrowings ($600 million in 1999 compared to
$4.0 billion in 1998) offset by debt repaid ($591 million in 1999 compared to
$1.8 billion in 1998) reflecting the private placement of the Convertible
Preferred Securities (the CPS) on April 1, 1998 (see Note 6 to the Consolidated
Financial Statements).
The ratio of debt to total capital employed (treating the CPS as a debt
instrument) was 56.6% at September 30, 1999 compared to 58.0% at December 31,
1998 and 58.4% at September 30, 1998. Including the CPS as an equity instrument,
the ratio of debt to total capital employed at September 30, 1999 was 48.3%
compared to 49.4% at December 31, 1998 and 50.2% at September 30, 1998.
At September 30, 1999 the Corporation had a $2.8 billion credit facility
outstanding. The facility is designated for general corporate purposes and
expires in 2001. During January 1999 the Corporation issued $600 million of 6
5/8% debentures with a maturity date of February 1, 2029. During September 1999
the Corporation issued $150 million of 7 3/8% notes with a maturity date of
September 15, 2009. The proceeds from the issuance of these debentures and notes
were used for repayment of debt and other general corporate purposes. Under
currently effective shelf registration statements, the Corporation may sell,
from time to time, up to $850 million in the aggregate of any combination of
debt securities, preferred stock, or warrants for debt securities or preferred
stock in one or more offerings. The Corporation has no immediate plans to issue
equity securities.
OTHER MATTERS
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 participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
guarantees and contingencies is set forth in Note 10 to the Consolidated
Financial Statements, which is incorporated herein by reference.
Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133), that would have been effective January 1, 2000.
In June 1999, the Financial Accounting Standards Board issued Statement No. 137,
"Accounting for Derivatives Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" postponing the effective date for
implementing FAS 133 to fiscal years beginning after June 15, 2000. While
management is still in the process of determining the full effect FAS 133 will
have on the Corporation's financial statements, management has determined that
FAS 133 will increase the volatility of the Corporation's asset, liability and
equity (comprehensive income) positions as the change in the fair market value
of all financial instruments the Corporation uses for fuel or interest rate
hedging purposes will, upon adoption of FAS 133, be recorded in the
Corporation's Statement of Financial Position (see Note 5 to the Consolidated
Financial Statements). In addition, to the extent fuel hedges are ineffective
<PAGE> 22
due to pricing differentials resulting from the geographic dispersion of the
Corporation's operations, income statement recognition of the ineffective
portion of the hedge position will be required. Management does not anticipate
that the final adoption of FAS 133 will have a material impact on UPC's
consolidated financial statements.
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 its Rail unit. 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, cranes, lifts, PBX
systems, elevators, and computerized monitoring systems throughout UPC. The Y2K
project started with research in 1994 and an impact analysis of the
Corporation's 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:
Mainframe Systems - These systems have been converted, tested and deemed to be
Y2K compliant as of December 31, 1998. Periodic audits are planned during the
remainder of 1999 to ensure these systems remain Y2K compliant.
Client Server Systems - All critical client server systems have been converted,
tested, and deemed to be Y2K compliant as of December 31, 1998. The non-critical
client server systems were deemed to be Y2K compliant as of June 30, 1999.
User Department Developed Systems - These systems consist of both mainframe and
PC-based systems developed by internal user departments. All of the systems were
deemed to be Y2K compliant as of June 30, 1999.
Vendor Supplied and Embedded Systems - These systems consist of vendor-supplied
software, desktop, mainframe and server hardware, databases and operating
systems, as well as equipment and machinery with embedded systems. One hundred
percent of the identified critical suppliers of these systems have indicated
that they have a comprehensive Year 2000 plan. To help assure safety and Y2K
compliance, UPC is testing selected critical software, hardware and embedded
systems, even if the vendor has already certified the product. The Corporation
is sharing information on the compliance and testing of safety critical
components common to the industry with the cooperation of the Association of
American Railroads (AAR).
Electronic Commerce Systems - These systems consist 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 data interchange (EDI). The Rail unit can now transmit and
receive the new EDI standard that involves a 4-digit year. The Corporation is
conducting additional Y2K testing with customers and trading partners using
current and older versions of EDI transactions in 1999.
In an effort to ensure that interfacing systems will operate successfully
in the year 2000 the Corporation is conducting integrated testing of individual
systems already deemed to be Y2K compliant. Although the formal testing is
complete, additional verification testing will continue through December 1999.
For each of these initiatives, seven major categories of events have been
identified for contingency plans. 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 that 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
<PAGE> 23
technical experts to fix or advise what to fix if systems fail and knowledgeable
representatives from each business unit. Contingency plans continue to be
developed and will be refined and adjusted throughout 1999.
As of June 30, 1999, 100% of the Corporation's systems (excluding trucking)
have been converted, tested, and deemed to be Y2K compliant. Modification to
trucking systems comprises approximately 10% of UPC's total Y2K workload and is
estimated to be 98% complete. The remaining modification to trucking's systems
is expected to be completed in the fourth quarter of 1999. Costs to convert
UPC's systems are expensed as incurred. As of September 30, 1999, more than 88%
of the costs of the Y2K project, estimated to be $61 million (pre-tax) in total,
have been expensed.
Although the Corporation believes its systems will be successfully
modified, failure by it, or by those from whom UPC purchases equipment, or by
other entities with whom UPC exchanges data, or on whom it relies for data, to
successfully modify their systems, could materially impact operations and
financial results in the year 2000.
CAUTIONARY INFORMATION
Certain information included within this report is, and other information
included within materials filed or to be filed 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), are or will be
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The forward-looking statements include,
without limitation, statements concerning projections, predictions or
expectations as to Union Pacific Corporation's and its subsidiaries' business,
financial or operational results; future economic performance; management
objectives; the outcome of claims; statements that UPC does not expect that
claims, lawsuits, environmental costs, commitments, contingent liabilities,
labor negotiations or other matters will have a material adverse affect on the
Corporation's consolidated financial position, results of operations or
liquidity; and other similar expressions concerning matters that are not
historical facts. Forward-looking information is based on information available
at the time and/or management's good faith belief with respect to future events,
and is 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 and its subsidiaries are fully successful in implementing their
financial and operational initiatives; industry competition, conditions and
performance; legislative and/or regulatory developments; natural events such as
severe weather, floods and earthquakes; the effects of adverse general economic
conditions; changes in fuel prices; labor stoppages; the impact of year 2000
systems problems; and the outcome of claims and litigation, including claims
arising from environmental investigations or proceedings. The Corporation
assumes no obligation to update forward-looking information to reflect actual
results, changes in assumptions or changes in other factors affecting
forward-looking information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure concerning market risk-sensitive instruments is set forth in Note 5
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.
<PAGE> 24
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 10 to the 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 1999.
Bottleneck Proceedings - As reported in the Corporation's Annual Report on Form
10-K for the year ended December 31, 1998 and Quarterly Report on Form 10-Q for
the quarter period ended March 31, 1999, the U.S. Court of Appeals for the
Eighth Circuit entered an order on February 10, 1999 affirming a prior decision
by the Surface Transportation Board of the U.S. Department of Transportation
(STB). The STB decision generally reaffirmed its existing position regarding the
obligation of rail carriers to provide rates for bottleneck segments (lines of
railroad that are served by a single railroad between a junction and an
exclusively-served shipper facility), and dismissed two complaint proceedings
filed by shippers challenging a class rate for the movement of coal to which
UPRR and a predecessor were parties. On April 23, 1999 the Eighth Circuit denied
a petition for rehearing filed by two of the shippers involved in the complaint
proceeding. On July 19, 1999 the Western Coal Traffic League filed a petition
for a writ of certiorari in the United States Supreme Court. The Supreme Court
denied the petition on October 18, 1999.
Labor Matters - The UPC 1998 10-K disclosed that the General Counsel of the
National Labor Relations Board (NLRB) is seeking a bargaining order remedy in 12
cases involving Overnite Transportation Company (Overnite), where a Teamsters
local union lost a representation election, and that in four of the 12 cases an
administrative law judge has ruled that the bargaining order remedy is
warranted. Overnite appealed that ruling to the NLRB. On November 10, 1999 the
NLRB upheld the decision of the administrative law judge in those four cases.
Overnite has appealed the NLRB's ruling. Additionally, during the second quarter
of 1999, an administrative law judge ruled in the remaining cases, determining
that the bargaining order remedy is warranted in seven of the eight cases.
Overnite has appealed that ruling to the NLRB.
Environmental Matters - As reported in the UPC 1998 10-K, the District Attorney
for San Bernardino County, California was investigating the Railroad's handling
of several hazardous material spills in Barstow and West Colton, California. In
the third quarter of 1999, the District Attorney and the Railroad agreed to a
settlement, and on July 28, 1999 a stipulated judgement against the Railroad in
the amount of $350,000 was entered by the San Bernardino Superior Court. The
Railroad also agreed to pay certain costs of San Bernardino County associated
with the incidents that were the subject of the investigation. These costs are
estimated at $20,000, but may ultimately be more or less than such amount.
Other Matters - On August 29, 1997, an Amtrak train, operating on UPRR tracks,
struck a car at a crossbuck-protected crossing near Warrensburg, Missouri,
injuring Kimberley R. Alcorn, a passenger in the car. Ms. Alcorn brought suit
against UPRR and Amtrak in the Circuit Court of Jackson County, Missouri
Division No. 10. On September 24, 1999, a jury found that Amtrak and UPRR were
negligent in causing the accident. The jury awarded Ms. Alcorn approximately
$40.3 million in compensatory damages, and, on September 29, 1999, found the
Railroad and Amtrak liable for an additional $120 million in punitive damages.
The defendants are pursuing multiple avenues of relief from the jury awards. The
Railroad believes that the damage awards are not supported by the facts or the
law, and that the trial court and/or the appellate courts will either grant a
new trial or will substantially reduce the amount of damages. Under the terms of
an existing agreement, Amtrak will continue to defend UPRR's interests in this
<PAGE> 25
litigation and UPRR believes that Amtrak and its insurers, under the terms of
the agreement, will hold UPRR harmless from any final judgment.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(a) Executive Stock Purchase Incentive Plan of Union Pacific
Corporation.
10(b) Written Description of Premium Exchange Program Pursuant to 1993
Stock Option and Retention Stock Plan of Union Pacific
Corporation.
12(a) Computation of Ratio of Earnings to Fixed Charges for the Three
Months Ended September 30, 1999.
12(b) Computation of Ratio of Earnings to Fixed Charges for the Nine
Months Ended September 30, 1999.
27 Financial data schedule.
(b) Reports on Form 8-K
On July 23, 1999, the UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the second quarter of 1999.
On October 21, 1999, UPC filed a Current Report on Form 8-K
announcing UPC's financial results for the third quarter of 1999.
<PAGE> SIGNATURE
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, 1999
UNION PACIFIC CORPORATION
(Registrant)
/s/ James R. Young
------------------
James R. Young
Senior Vice President - Finance and Controller
(Chief Accounting Officer and
Duly Authorized Officer)
<PAGE> EXHIBIT INDEX
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit No. Description of Exhibits Filed with this Statement
10(a) Executive Stock Purchase Incentive Plan of Union Pacific
Corporation.
10(b) Written Description of Premium Exchange Program Pursuant to 1993
Stock Option and Retention Stock Plan of Union Pacific
Corporation.
12(a) Computation of Ratio of Earnings to Fixed Charges for the Three
Months Ended September 30, 1999.
12(b) Computation of Ratio of Earnings to Fixed Charges for the Nine
Months Ended September 30, 1999.
27 Financial Data Schedule.
Exhibit 10 (a)
UNION PACIFIC CORPORATION
EXECUTIVE STOCK PURCHASE INCENTIVE PLAN
1. PURPOSE
The Union Pacific Executive Stock Purchase Incentive Plan (the "Plan") is
intended to (i) encourage and facilitate ownership of shares of the common stock
of Union Pacific Corporation (the "Company") by officers and other key
executives of the Company and its Subsidiaries, (ii) create a working
environment where participating executives of the Company and its Subsidiaries
share in the same risks and rewards as the Company's other shareholders, and
(iii) create a retention vehicle by:
? providing participating executives of the Company and its Subsidiaries with
an opportunity to significantly increase their ownership of common stock of
the Company coupled with incentive awards based on the performance of the
Company and its common stock and
? providing this opportunity in a manner that places participating executives
at risk in the event of inadequate Company performance.
2. DEFINITIONS
Except where the content otherwise indicates, the following definitions apply:
"Applied Dividends" means regular cash dividends on Common Stock purchased
pursuant to a Purchase Award which are to be applied to offset (partially or
wholly) interest accruing on the Purchase Loan as required pursuant to Section
7(d)(i) and which the Company's stock transfer agent shall be irrevocably
directed by each Participant to deliver directly to the Company for such purpose
to the extent required to comply with Section 7(d)(i).
"Board" means Board of Directors of the Company.
"Cause" means the deliberate, willful or gross misconduct of the Participant, as
determined by the Committee.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combination Deferred Award" means the grant to a Participant, upon the
Participant's exercise of the Purchase Award, of Deferred Performance Award #1,
Deferred Performance Award #2, Deferred Performance Award #3 and Deferred
Service Incentive Award, as described in Section 8.
"Commission" means the Securities and Exchange Commission.
"Committee" means the Compensation and Benefits Committee of the Board or such
other committee of the Board as may be designated by the Board, the Committee
being composed of not less than two persons who qualify as "disinterested
persons" as defined in Rule 16b-3(c)(2), as promulgated by the Commission under
the 1934 Act, or any successor definition adopted by the Commission.
"Common Stock" means the Common Stock, $2.50 par value per Share, of the
Company.
"Company" means Union Pacific Corporation, a Utah corporation, or any successor
corporation.
"Deferred Performance Awards" means the following awards, as described in
Section 8: Deferred Performance Award #1, Deferred Performance Award #2 and
Deferred Performance Award #3.
"Deferred Service Incentive Award" means the award so named and described in
Section 8.
"Designated Payment Date" means the date designated by the Company for a cash
payment to a Participant (or the estate of a deceased Participant) with respect
to any part or all of a Combination Deferred Award, which date shall be no later
than January 31, 2003 and, in the case of any cash payment with respect to a
Participant's Combination Deferred Award after the Participant's Termination of
Service because of death, no later than six months after such Termination of
Service.
"Effective Date" means the date the Plan is adopted by the Board.
"Interest Rate" means the "applicable federal rate" in effect on the Purchase
Date for loans with a final maturity date of January 31, 2006 with interest
compounded annually, as determined by Section 1274(d) of the Code.
"Market Price" with respect to a Share shall mean, for any given date (or in the
event such date is not a Trading Day with respect to the Share, the last Trading
Day prior to such date), the average of the high and low trading prices per
Share on such date, as reported in The Wall Street Journal listing of composite
transactions for New York Stock Exchange issues.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated by the Commission thereunder.
"Participant" means each eligible employee of the Company or any of its
Subsidiaries who is designated by the Committee to receive a Purchase Award.
"Performance Criteria" means the following three criteria:
Criterion #1: For twenty consecutive calendar days during the
Performance Period the Market Price of a Share has increased at least
15% over the Purchase Price;
Criterion #2: Either of the following two events has occurred:
(i) The Company has achieved annual earnings per Share equal to,
or greater than, $5.00 per Share during any calendar year in the
Performance Period or (ii) Criterion #3 has been achieved; and
Criterion #3: Either of the following two events has occurred:
(i) The Company has achieved annual earnings per Share equal to,
or greater than, $6.00 per Share during any calendar year in the
Performance Period or (ii) The Market Price of a Share for twenty
consecutive calendar days during the Performance Period has
equaled or exceeded $85.00.
"Performance Period" means, with respect to each Purchase Award, the period of
time beginning on the Purchase Date with respect to such Purchase Award and
ending on January 31, 2003.
"Plan" means this Union Pacific Corporation Executive Stock Purchase Incentive
Plan, as amended from time to time in accordance with the Plan's provisions.
"Purchase Award" means an award to a Participant permitting such Participant to
purchase Shares pursuant to Section 6 at the Purchase Price, together with
related Purchase Loan, Combination Deferred Award and Special Deferred Award
rights upon exercise of the Purchase Award.
"Purchase Date" means the date a Participant purchases Shares pursuant to a
Purchase Award.
"Purchase Loan" means an extension of credit to the Participant by the Company
evidenced by a Purchase Note.
"Purchase Note" means a full recourse promissory note with respect to the
Purchase Loan in substantially the same form as set forth on Exhibit A.
"Purchase Price" of a Share means fair market value of a Share on the Purchase
Date, as determined by the Committee.
"Remaining Balance" means the principal balance of the Purchase Loan (including
accrued but unpaid interest) outstanding immediately following the end of the
Performance Period and the making of any prepayments required by Section
7(d)(ii).
"Service" means employment with the Company or its Subsidiaries.
"Share" means a share of the Company's Common Stock.
"Special Criterion" means attaining a Market Price per Share which equals or
exceeds $100.00 for twenty consecutive calendar days during the Performance
Period.
"Special Deferred Award" means the grant to a Participant, upon the
Participant's exercise of the Purchase Award, of the Special Deferred Award, as
described in Section 9.
"Subsidiary" means a corporation (or partnership, joint venture, or other
enterprise) of which the Company owns or controls, directly or indirectly, 50%
or more of the outstanding shares of stock normally entitled to vote for the
election of directors (or comparable equity participation and voting power).
"Termination of Service" means a Participant's termination of Service such that
he or she is no longer an employee of either the Company or any of its
Subsidiaries for any reason whatsoever; provided, however, that, for purposes of
this Plan, a Participant who becomes subject to a long-term disability (within
the meaning of the Company's long-term disability plan (or the relevant
Subsidiary's long-term disability plan), as in effect from time to time) shall
be deemed to be continuing his or her Service during such period of long-term
disability.
"Total Purchase Price" means, with respect to each Participant, the Purchase
Price multiplied by the number of Shares purchased pursuant to the Participant's
Purchase Award.
"Trading Day" means, with respect to the Common Stock, a day on which the Common
Stock is publicly traded on the New York Stock Exchange.
3. SHARES SUBJECT TO THE PLAN
The aggregate number of Shares that may be issued under the Plan shall not
exceed 1,100,000 Shares.
4. TERM OF THE PLAN
The Plan shall become effective upon adoption by the Board. The Plan shall be
terminated on January 31, 2003; provided, that Combination Deferred Awards,
Special Awards and Purchase Loans outstanding as of such date shall not be
affected or impaired by the termination of the Plan; provided further that no
Purchase Awards shall be granted after December 31, 1999.
5. ELIGIBLE EMPLOYEES
All officers of the Company and other key executives of the Company and its
Subsidiaries who, in the opinion of the Committee, can materially influence the
long-term performance of the Company and/or its Subsidiaries are eligible to
receive a Purchase Award. The Committee shall have the power and complete
discretion to select those eligible employees who are to receive Purchase
Awards.
6. STOCK PURCHASE
(a) Grant of Purchase Award. The number of Shares purchasable under a Purchase
Award for any Participant and the Purchase Date shall be determined by the
Committee. The Committee shall, with respect to each Purchase Award, give
written notice to each Participant receiving such Purchase Award stating
(i) the maximum and minimum number (which numbers may be identical) of
Shares that may be purchased under the Purchase Award, (ii) the Purchase
Date and (iii) the Interest Rate and other terms pertaining to the Purchase
Loan.
(b) Exercise of Purchase Award. A Participant shall exercise a Purchase Award
by delivering to the Company on the Purchase Date (or within a reasonable
time thereafter specified by the Company) (i) a notice stating the number
of Shares (not less than the minimum number and not more than the maximum
number specified in the Purchase Award) such Participant elects to purchase
on the Purchase Date, and (ii) an executed Purchase Note and any other
documents required pursuant to the Plan. Any Participant who does not elect
to purchase at least the minimum number of Shares under the Purchase Award
on the Purchase Date (or within a reasonable time thereafter specified by
the Company) shall forfeit any rights under the Plan with respect to such
Purchase Award, including, without limitation, any right to receive a
Purchase Loan, Combination Deferred Award or Special Award related to such
Purchase Award.
(c) Closing Time. The exercise of the Purchase Award by a Participant, the
delivery of the Purchase Note and the issuance by the Company of the Shares
purchased pursuant to the Purchase Award shall be effective at 5:00 p.m.,
New York City time, on the Purchase Date (the "Closing Time"). After the
Closing Time, such Participant shall be a stockholder of the Company for
all purposes. Notwithstanding anything herein to the contrary, the
Committee shall have the absolute right, in its sole discretion, to revoke
any Purchase Award, including, without limitation, any right to receive a
Purchase Loan, Combination Deferred Award or Special Award related to such
Purchase Award, prior to the Closing Time.
7. LOAN PROVISIONS
(a) General. The Company shall extend a Purchase Loan to a Participant upon
exercise of a Purchase Award subject to the terms and conditions set forth
in this Section 7. The original principal amount of the Purchase Loan,
which shall be unsecured, shall be equal to the Total Purchase Price. Such
Purchase Loan shall be evidenced by a Purchase Note with full recourse
against the Participant as maker of the note. The obligations of the
Participant under the Purchase Note shall be unconditional and absolute
and, without limiting the generality of the foregoing, shall not be
released, discharged or otherwise affected by any change in the existence,
structure or ownership of the Company, or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting the Company or its
assets or the market value of the Common Stock or any resulting release or
discharge of any obligation of the Company or the existence of any claim,
set-off or other rights which the Participant may have at any time against
the Company or any other person, whether in connection with the Plan or
with any unrelated transactions, provided that nothing herein shall prevent
the assertion of any such claim by separate suit or counterclaim.
Notwithstanding anything to the contrary in this Section 7, the Company
shall not be required to make any Purchase Loan to a Participant if the
making of such Purchase Loan will (i) cause the Company to violate any
covenant or similar provision in any indenture, loan agreement or other
agreement, or (ii) violate any applicable federal, state or local law,
provided, that the failure to make such Purchase Loan shall be deemed to
revoke the exercise of the related Purchase Award unless otherwise
specified by the Participant or if the Company is not satisfied with the
creditworthiness of the Participant.
(b) Interest. Interest on the principal balance of the Purchase Loan shall
accrue annually, in arrears, at the Interest Rate.
(c) Term. The term of the Purchase Loan for any Participant shall begin on
such Participant's Purchase Date and, subject to prepayment as provided
in Sections 7(d) and 7(e), have a final maturity date of January 31,
2006. The Remaining Balance of the Purchase Loan shall be payable in
three equal annual installments on January 31, 2004, January 31, 2005
and January 31, 2006, with the interest accruing (offset by Applied
Dividends, if Criterion #1 was not achieved during the Performance
Period) on the unpaid Remaining Balance payable annually, in arrears, on
each such January 31.
(d) Prepayments Not Related to Termination of Service.
(i) Dividends. To the extent the Participant is entitled to regular cash
dividends on Common Stock purchased under the Plan, until the earlier of
the achievement of Performance Criterion #1 or payment in full of the
Purchase Loan (including accrued and unpaid interest), such dividends shall
be delivered by the Company's stock transfer agent to the Company to offset
(wholly or partially) the accrued interest on the Purchase Loan, pursuant
to an irrevocable written direction given by the Participant. Upon and
after the achievement of Performance Criterion #1, all such dividends shall
be paid directly to the Participant. If, prior to the achievement of
Performance Criterion #1, the Participant is entitled to regular cash
dividends which exceed the accrued interest on the Purchase Loan, such
excess shall be paid directly to the Participant.
(ii) Cash Payments with respect to Combination Deferred Award. In the event a
Participant (or the estate of a deceased Participant) receives any cash
payments with respect to the Participant's Deferred Performance Awards or
Deferred Service Incentive Award or any cash payments made by the Company
under Section 8(h)(i) after the earlier of (i) Termination of Service due
to death or (ii) the end of the Performance Period, the Participant (or the
Participant's estate) shall immediately (partially or wholly) prepay the
principal balance of the Purchase Loan (or the accrued and unpaid interest
thereon in the case of a cash payment with respect to Deferred Performance
Award #1), to the extent, if any, that such principal balance (or such
interest in the case of a cash payment with respect to Deferred Performance
Award #1) remains unpaid at such time, with an amount equal to the full
amount of all such cash payments upon receipt thereof.
(iii)Optional Prepayments. Any Participant (or the estate of a deceased
Participant) may prepay all of the Purchase Loan (including accrued and
unpaid interest) at any time, but partial prepayments shall not be
permitted.
(e) Prepayment Obligations Related to Termination of Service. In the event of a
Participant's Termination of Service because of death, any outstanding
balance (including accrued and unpaid interest) of the Purchase Loan shall
be due and payable in full six months from the date of the Participant's
death. In the event of a Participant's Termination of Service for any
reason other than death, any outstanding balance (including accrued and
unpaid interest) of the Purchase Loan shall be due and payable in full on
the later of (i) the 90th day following such Termination of Service or (ii)
the 90th day following the first date on which the Participant may sell the
Common Stock purchased under the Plan without incurring liability under the
federal securities laws, including Section 16 of the 1934 Act (limited, in
the case of Section 16, to liability relating to purchases or sale of
Common Stock or any derivative security occurring prior to the Termination
of Service). If (i) a Participant's Termination of Service is due to death
during the Performance Period or an involuntary Termination of Service
without Cause during the Performance Period, (ii) on the date the
outstanding balance of the Purchase Loan becomes due and payable pursuant
to this Section 7(e), the aggregate Market Price of the Shares acquired
under the Participant's Purchase Award is less than the sum of (x) the
outstanding balance of the Purchase Loan (including accrued and unpaid
interest) on such date, as reduced by any prepayment made pursuant to
Section 7(d), and (y) the income and employment tax liability resulting
from any cash payments with respect to the Combination Deferred Award, and
(iii) if all Shares so acquired are still held by the Participant (or the
Participant's estate), then, on such date (if so requested by the
Participant or the Participant's estate) the Company shall accept from the
Participant (or the Participant's estate) the surrender of all Shares so
acquired by the Participant in full satisfaction of the outstanding balance
of the Purchase Loan (including accrued and unpaid interest).
8. COMBINATION DEFERRED AWARD - DESCRIPTION, PAYMENT AND FORFEITURE
(a) Combination Deferred Award. Upon any Participant's exercise of the
Participant's Purchase Award, the Company shall grant the Participant a
Combination Deferred Award, consisting of Deferred Performance Award #1,
Deferred Performance Award #2, Deferred Performance Award #3 and Deferred
Service Incentive Award, subject to the terms and conditions set forth in
this Section 8. Any payment with respect to a Participant's Combination
Deferred Award shall be made by the Company on its behalf and/or on behalf
of the Subsidiary by which the Participant was employed on the Designated
Payment Date. Any Subsidiary which so employed the Participant shall
reimburse the Company for such payment. No payment shall be made by the
Company with respect to any Participant's Combination Deferred Award until
the Participant has made arrangements with respect to any federal, state or
local tax withholding requirements applicable to such payment which are
satisfactory to the Company
(b) Deferred Performance Award #1. In the event that Criterion #1 is achieved,
each Participant then holding a Deferred Performance Award #1 shall become
entitled to a deferred cash payment with respect thereto, subject to the
terms and conditions set forth in this Section 8. On the Designated Payment
Date, the Company shall pay to the Participant, with respect to Deferred
Performance Award #1, a cash amount equal to the interest accrued and
remaining unpaid on the Purchase Loan (after any application of Applied
Dividends) as of the Designated Payment Date. Further, if Criterion #1 has
been achieved during the Performance Period, but accrued interest on the
Purchase Loan is payable on January 31, 2004, January 31, 2005 and /or
January 31, 2006 pursuant to Section 7(c), then, on each such date, the
Company shall pay to the Participant, with respect to Deferred Performance
Award #1, a cash amount equal to the interest becoming payable on such
date.
(c) Deferred Performance Award #2. In the event that Criterion #2 is achieved,
each Participant then holding a Deferred Performance Award #2 shall become
entitled to a deferred cash payment with respect thereto, subject to the
terms and conditions set forth in this Section 8. On the Designated Payment
Date, the Company shall pay to the Participant, with respect to Deferred
Performance Award #2, a cash amount equal to one-third of the outstanding
principal balance of the Purchase Loan as of the Designated Payment Date.
(d) Deferred Performance Award #3. In the event that Criterion #3 is achieved,
each Participant then holding a Deferred Performance Award #3 shall become
entitled to a deferred cash payment with respect thereto, subject to the
terms and conditions set forth in this Section 8. On the Designated Payment
Date, the Company shall pay to the Participant, with respect to Deferred
Performance Award #3, a cash amount equal to one-third of the outstanding
principal balance of the Purchase Loan as of the Designated Payment Date.
(e) Deferred Service Incentive Award. If the Service of a Participant who holds
a Deferred Service Incentive Award is continuous from the Effective Date to
the end of the Performance Period, the Participant shall become entitled to
a deferred cash payment with respect to such award, subject to the terms
and conditions set forth in this Section 8. On the Designated Payment Date,
the Company shall pay to the Participant, with respect to the Deferred
Service Incentive Award, a cash amount equal to one-third of the
outstanding principal balance of the Purchase Loan as of the Designated
Payment Date.
(f) Forfeiture of Combination Deferred Award Upon Certain Sales of Shares and
Certain Prepayments of Purchase Loan. Notwithstanding any other provision
of this Section 8, a Participant's Combination Deferred Award shall be
immediately forfeited if the Participant, during the Performance Period,
either (i) sells any Shares acquired under a Purchase Award or (ii) makes
an optional prepayment on the Purchase Loan described in Section 7(d)(iii).
A transfer of a Participant's Shares to a revocable trust as to which the
Participant retains voting and investment power (which powers of
revocation, voting and investment may be shared with the Participant's
spouse) or a transfer to joint ownership with such Participant's spouse
shall not be deemed a sale for purposes of this Section 8(f) and, solely
for the purposes of this Plan, such Shares shall be deemed to be owned by
the Participant.
(g) Application of Payments Made Pursuant to Section 8. Notwithstanding any
other provision of this Section 8, an amount equal to the full amount of
any payment made by the Company pursuant to this Section 8 with respect to
a Deferred Performance Award and/or Deferred Service Incentive Award shall
be immediately applied in accordance with Section 7(d)(ii) to prepay
(partially or wholly) the principal balance of the Purchase Loan (or the
accrued and unpaid interest thereon in the case of a cash payment with
respect to Deferred Performance Award #1), to the extent, if any, that such
principal balance (or such interest in the case of a cash payment with
respect to Deferred Performance Award #1) remains unpaid on the Designated
Payment Date.
(h) Treatment of a Termination of Service.
(i) Upon a Participant's Termination of Service during the Performance Period
for any reason except death, the Participant shall forfeit the Combination
Deferred Award. Upon a Participant's Termination of Service during the
Performance Period due to death, unless the Participant shall have
previously forfeited the Combination Deferred Award pursuant to Section
8(f), the Participant's estate shall be entitled to a cash payment with
respect to (i) the Deferred Service Incentive Award calculated as if the
Participant's Service had continued through the end of the Performance
Period and (ii) any Deferred Performance Award as to which the related
Performance Criterion has been achieved before the Participant's death. On
the Designated Payment Date, the Company shall pay, to the deceased
Participant's estate, the cash amount provided in this Section 8 with
regard to each award described in the immediately preceding sentence.
(ii) If a Participant's Termination of Service is due to death during the
Performance Period or an involuntary Termination of Service without Cause
during the Performance Period and the Company accepts Shares acquired
pursuant to the Participant's Purchase Award in full satisfaction of the
Purchase Loan in accordance with the last sentence of Section 7(e), then,
no later than the fifth business day following such acceptance, the Company
shall pay to the Participant (or the Participant's estate) the cash amount
necessary for the reimbursement of any income and employment taxes payable
by the Participant (or the Participant's estate) as a result of (i) the
acceptance by the Company of such Shares in satisfaction of the Purchase
Loan, (ii) any payment made with respect to the Combination Deferred Award
and (iii) the reimbursement payment made pursuant to this Section 8(h)(ii).
9. SPECIAL DEFERRED AWARD
(a) Upon any Participant's exercise of the Participant's Purchase Award, the
Company shall grant the Participant a Special Deferred Award, subject to
the terms and conditions set forth in this Section 9. Any payment with
respect to a Participant's Special Deferred Award shall be made by the
Company on its behalf and/or on behalf of the Subsidiary by which the
Participant was employed on the Designated Payment Date. Any Subsidiary
which so employed the Participant shall reimburse the Company for such
payment.
(b) In the event that the Special Criterion is achieved, each Participant
then holding a Special Deferred Award shall be entitled to be reimbursed
by the Company on the Designated Payment Date for the federal income tax
payable on the amounts paid with respect to a Combination Deferred Award
pursuant to Section 8, subject to the terms and conditions set forth in
this Section 9. Such reimbursement shall be computed using the maximum
marginal rate for ordinary taxable income in effect on the Designated
Payment Date. The reimbursement for federal income tax under this
Section 9 shall not itself be grossed up for any federal income tax
payable as a result of this reimbursement.
(c) Notwithstanding any other provision of this Section 9, a Participant's
Special Deferred Award shall be immediately forfeited if the Participant,
during the Performance Period, either (i) sells any Shares acquired under a
Purchase Award or (ii) makes an optional prepayment on the Purchase Loan
described in Section 7(d)(iii). A transfer of a Participant's Shares to a
revocable trust as to which the Participant retains voting and investment
power (which powers of revocation, voting and investment may be shared with
the Participant's spouse) or a transfer to joint ownership with such
Participant's spouse shall not be deemed a sale for purposes of this
Section 9(iii) and, solely for the purposes of this Plan, such Shares shall
be deemed to be owned by the Participant.
(d) Termination of Service.
Upon a Participant's Termination of Service during the Performance
Period for any reason except death, the Participant shall forfeit the
Special Deferred Award. Upon a Participant's Termination of Service
during the Performance Period due to death, unless the Participant shall
have previously forfeited the Special Deferred Award pursuant to Section
9(c), the Participant's estate shall be entitled to be reimbursed by the
Company an amount calculated in accordance with Section 9(b) if the
related Special Criterion has been achieved before the Participant's
death. On the Designated Payment Date, the Company shall reimburse the
deceased Participant's estate the amount provided in this Section 9 with
regard to the Special Deferred Award described in the immediately
preceding sentence.
10. PLAN ADMINISTRATION
The Plan shall be administered by the Committee. If at any time no Committee
shall be in office, the functions of the Committee specified in the Plan shall
be exercised by the "disinterested directors" on the Board (as defined in Rule
16b-3(c)(2) under the 1934 Act). Subject to the provisions of the Plan, the
Committee shall interpret the Plan and make such rules as it deems necessary for
the proper administration of the Plan, shall make all other determinations
necessary or advisable for the administration of the Plan and shall correct any
defect or supply any omission or reconcile any inconsistency in the Plan in the
manner and to the extent that the Committee deems desirable to carry the Plan
into effect. Among other things, the Committee shall have the authority, subject
to the terms of the Plan, to determine (i) the individuals to whom the Purchase
Awards are granted, (ii) the time or times the Purchase Awards are granted,
(iii) the Purchase Dates for such Purchase Awards, (iv) the basis for any
Termination of Service, including whether or not it was for Cause or otherwise,
(v) the forms, terms and provisions of any documents under the Plan, including
amending or modifying the terms of the Plan. Without limiting the foregoing, in
the event of a recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation, spin-off or any other change in the
corporate structure or shares of the Company, the Committee may make such
adjustments as it deems appropriate in the Performance Criteria and other terms
of the Plan. Any action taken or determination made by the Committee pursuant to
this paragraph and the other paragraphs of the Plan in which the Committee is
given discretion shall be final and conclusive on all parties. The act or
determination of a majority of the Committee shall be deemed to be the act or
determination of the entire Committee. The Committee may consult with counsel,
who may be counsel to the Company, and such other advisors as the Committee may
deem necessary and/or desirable, and the members of the Committee shall not
incur any liability for any action taken in good faith in reliance upon the
advice of counsel or any other advisor.
11. AMENDMENT AND DISCONTINUANCE OF THE PLAN
The Board, upon the recommendation of the Committee, may amend, suspend or
terminate the Plan at any time, subject to the provisions of this Section 11. No
amendment, suspension or termination of the Plan may, without the consent of a
Participant, adversely affect such Participant's rights under the Plan in any
material respect.
12. MISCELLANEOUS PROVISIONS
(a) Unsecured Status of Claim. Participants and their beneficiaries, heirs,
successors and assigns shall have no legal or equitable rights,
interests or claims in any specific property or assets of the Company.
No assets of the Company shall be held under any trust for the benefit
of Participants, their beneficiaries, heirs, successors or assigns, or
held in any way as collateral security for the fulfillment of the
Company's obligations under the Plan.
Any and all of the Company's assets shall be, and shall remain, the
general unpledged and unrestricted assets of the Company. The Company's
obligations under the Plan shall be merely that of an unfunded and
unsecured promise of the Company to pay employee compensation benefits
in the future.
(b) Employment Not Guaranteed. Nothing contained in the Plan nor any action
taken in the administration of the Plan shall be construed as a contract
of employment or as giving a Participant any right to be retained in the
Service of the Company.
(c) Nonassignability. No person shall have any right to commute, sell, assign,
transfer, pledge, anticipate, mortgage or otherwise encumber, hypothecate
or convey in advance of actual receipt the deferred cash incentive, if any,
payable under the Plan, or any part thereof, or any interest therein, which
are, and all rights to which are, expressly declared to be unassignable and
nontransferable. No portion of the amounts payable shall, prior to actual
payment, be subject to seizure, attachment, lien or sequestration for the
payment of any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation of law in
the event of the Participant's or any other person's bankruptcy or
insolvency. Any such transfer or attempted transfer in violation of the
preceding provisions shall be considered null and void. In addition, no
derivative security (as defined in Rule 16a-1(c), as promulgated by the
Commission under the 1934 Act, or any successor definition adopted by the
Commission) issued under the Plan shall be transferable by a Participant
(to the extent transferable under the Plan) other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code, or Title I of the Employee Retirement Income
Security Act of 1974 or the rules promulgated thereunder.
(d) Separability, Validity. Transactions under this Plan are intended to
qualify under Rule 16b-3 of the 1934 Act. If any of the terms or
provisions of this Plan conflict with the requirements of Rule 16b-3,
then such terms and provisions shall be deemed inoperative to the extent
they so conflict with such requirements. In the event that any provision
of the Plan is held to be invalid, void or unenforceable, the same shall
not affect, in any respect whatsoever, the validity of any other
provision of the Plan.
(e) Withholding Tax. The Company shall, on its behalf and on behalf of its
Subsidiaries, withhold from all benefits due under the Plan an amount
sufficient to satisfy any federal, state and local tax withholding
requirements; provided, however, that each Participant shall make
arrangements satisfactory to the Company with respect to any such
withholding requirements applicable to the payments provided in Section 8
with respect to the Participant's Combination Deferred Award prior to the
making of such payments and any such withholding requirements applicable to
any acceptance by the Company of Shares in satisfaction of a Participant's
Purchase Loan pursuant to Section 7(e) prior to such acceptance.
(f) Applicable Law. The Plan shall be governed in accordance with the laws
of the State of Utah without regard to the application of the conflicts
of law provisions thereof. The obligation of the Company with respect to
the grant and exercise of Purchase Awards shall be subject to all
applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation,
the effectiveness of any registration statement required under the
Securities Act of 1933, as amended, and the rules and regulations of any
securities exchange on which the Common Stock may be listed.
(g) Inurement of Rights and Obligations. The rights and obligations under
the Plan shall inure to the benefit of, and shall be binding upon, the
Company, its successors and assigns, and the Participants and their
beneficiaries.
(h) Notice. All notices and other communications required or permitted to be
given under this Plan shall be in writing and shall be deemed to have
been duly given if delivered personally or mailed first class, postage
prepaid, as follows: (A) if to the Company--at its principal business
address to the attention of the Secretary; (B) if to any Participant--at
the last address of the Participant known to the sender at the time the
notice or other communication is sent.
(i) Exclusion from Pension and other Benefit Plan Computation. By exercise of a
Purchase Award, each Participant shall be deemed to have agreed that such
Purchase Award and any amounts paid with respect to a Deferred Performance
Award or a Deferred Service Incentive Award under Section 8, as applicable,
or with respect to a Special Deferred Award under Section 9, are special
incentive compensation that will not be taken into account, in any manner,
as salary, compensation or bonus in determining the amount of any payment
under any pension, retirement or other employee benefit plan of the Company
or any of its Subsidiaries. In addition, the estate and each beneficiary of
a deceased Participant shall be deemed to have agreed that such Purchase
Award and any Deferred Performance Award, Deferred Service Incentive Award
or Special Deferred Award, as applicable, will not affect the amount of any
life insurance coverage, if any, provided by the Company or any of its
Subsidiaries on the life of the Participant which is payable to such estate
or beneficiary under any life insurance plan covering employees of the
Company or any of its Subsidiaries.
Exhibit A
UNION PACIFIC CORPORATION
FULL RECOURSE PROMISSORY NOTE
("PURCHASE NOTE")
$[ ] [ ], 1999
FOR VALUE RECEIVED, the undersigned, (the "Borrower"), hereby
promises to pay to UNION PACIFIC CORPORATION, a Utah corporation (the
"Company"), or to the legal holder of this Purchase Note at the time of payment,
the principal sum (the "Principal Sum") of [ ] ($ ) in lawful money of the
United States of America. The Borrower also agrees to pay interest (computed on
the basis of a 365 or 366 day year, as the case may be) on any portion of the
Principal Sum that remains outstanding, from and after the effective date of
this Purchase Note until the entire Principal Sum has been paid in full, at
6.02%, compounded annually; provided, however, that in no event shall such
interest be charged to the extent it would violate any applicable usury law. The
obligations represented by this Purchase Note shall be with full recourse to the
Borrower. Each capitalized term used herein but not defined herein shall have
the meaning assigned to such term in the Union Pacific Corporation Executive
Stock Purchase Incentive Plan, as in effect on the date hereof (the "Plan"),
regardless of whether such Plan shall remain in effect.
The proceeds received by the Borrower shall be used solely to
acquire shares of common stock, par value $2.50 per share, of the Company
("Stock") (the shares so acquired being hereinafter referred to as the
"Shares").
This Purchase Note is subject to the following further terms and
conditions:
1. Principal and Interest. Subject to Sections 7(d) and (e) of
the Plan, the Principal Sum then outstanding and all accrued interest thereon
shall become due and payable on January 31, 2006. Subject to Sections 7(d) and
(e) of the Plan, the Remaining Balance shall be payable in three equal annual
installments on January 31, 2004, January 31, 2005 and January 31, 2006, with
the interest accruing on the unpaid Remaining Balance payable annually, in
arrears, on each such January 31.
2. Payment and Prepayment. All payments and prepayments of the
Principal Sum of and the accrued interest on this Purchase Note shall be made to
the Company or its order, or to the legal holder of this Purchase Note or such
holder's order, in lawful money of the United States of America (or by
assignment of cash awards which may become payable to the Borrower (or the
estate of the deceased Borrower) by the Company pursuant to the Plan and are
required by the Plan and Section 3 hereof to be immediately repaid by the
Borrower to the Company) at the principal offices of the Company (or at such
other place as the holder hereof shall notify the Borrower in writing). If any
date on which a payment shall be made is a Saturday, Sunday or legal holiday,
then such payment shall be made on the next succeeding business day. Upon full
and final payment of the Principal Sum of and interest accrued on this Purchase
Note, it shall be surrendered to the Borrower.
3. Prepayments Not Related to Termination of Service.
(a) Dividends. To the extent the Borrower is entitled to regular
cash dividends on the Shares, until Performance Criterion #1 has been achieved,
such dividends, if any, shall be applied by the Company to offset (wholly or
partially) the accrued interest on the outstanding principal amount of the
Purchase Note.
(b) Cash Payments with respect to Combination Deferred Award. In
the event the Borrower (or the estate of a deceased Borrower) receives any cash
payments with respect to the Borrower's Deferred Performance Awards or Deferred
Service Incentive Award or any cash payments made by the Company under Section
8(h)(i) of the Plan after the earlier of (i) Termination of Service due to death
or (ii) the end of the Performance Period, the Borrower (or the Borrower's
estate) shall immediately (partially or wholly) prepay the Principal Sum of this
Purchase Note (or the accrued and unpaid interest in the case of a cash payment
with respect to Deferred Performance Award #1), to the extent, if any, that the
Principal Sum (or such interest in the case of a cash payment with respect to
Deferred Performance Award #1) remains unpaid at such time, with an amount equal
to the full amount of all such cash payments upon receipt thereof.
(c) Optional Prepayments. The Borrower (or the estate of a
deceased Borrower) may prepay all of this Purchase Note (including accrued and
unpaid interest) at any time, but partial prepayments shall not be permitted.
4. Prepayment Obligations Related to Termination of Service. In
the event of the Borrower's Termination of Service because of death, any
outstanding balance (including accrued and unpaid interest) of this Purchase
Note shall be due and payable in full six months from the date of the Borrower's
death. In the event of the Borrower's Termination of Service for any reason
other than death, any outstanding balance (including accrued and unpaid
interest) of this Purchase Note shall be due and payable in full on the later of
(i) the 90th day following such Termination of Service or (ii) the 90th day
following the first date on which the Borrower may sell the Shares without
incurring liability under the federal securities laws. If (i) a Borrower's
Termination of Service is due to death during the Performance Period or an
involuntary Termination of Service without Cause during the Performance Period,
(ii) on the date the outstanding balance of this Purchase Note becomes due and
payable pursuant to this Section 4, the aggregate Market Price of the Shares
acquired under the Borrower's Purchase Award is less than the sum of the
outstanding balance of this Purchase Note (including accrued and unpaid
interest) on such date and the income and payroll tax liability resulting from
any cash payments with respect to the Combination Deferred Award, and (iii) if
all Shares so acquired are still held by the Borrower (or the Borrower's
estate), then, on such date (if so requested by the Borrower or the Borrower's
estate), the Company shall accept from the Borrower (or the Borrower's estate)
the surrender of all Shares so acquired by the Borrower in full satisfaction of
the outstanding balance of this Purchase Note (including accrued and unpaid
interest).
5. Remedies . Each of the following shall be Events of Default
under this Purchase Note:
(a) the Borrower defaults in the due and punctual payment of all
or any part of the principal of this Purchase Note when and as the same shall
become due and payable, whether at the stated maturity thereof, by notice of or
demand for prepayment, or otherwise;
(b) the Borrower defaults in the due and punctual payment of any
interest on this Purchase Note when and as such interest shall become due and
payable and such default shall have continued for a period of five days;
(c) the Borrower shall (i) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator; (ii) be generally unable to pay the Borrower's debts as such
debts become due; (iii) make a general assignment for the benefit of the
Borrower's creditors; (iv) commence a voluntary case under the United States
Bankruptcy Code or any successor or similar provision (collectively the "Code");
(v) file a petition seeking to take advantage of any other law of any
jurisdiction relating to bankruptcy, insolvency, or composition or readjustment
of debts; (vi) fail to controvert in a timely and appropriate manner, or
acquiesce in writing to, any petition filed against the Borrower in an
involuntary case under the Code; or (vii) take any action for the purpose of
effecting any of the foregoing;
(d) a proceeding or case shall be commenced, without the
application or consent of the Borrower, in any court of competent jurisdiction,
seeking (i) the liquidation of the Borrower's assets, or the composition or
readjustment of the Borrower's debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of any substantial part of the
Borrower's assets, or (iii) similar relief in respect of the Borrower under any
law of any jurisdiction relating to bankruptcy, insolvency, or the composition
or readjustment of debts, and such proceedings or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect for a period of
sixty (60) days; or an order for relief against the Borrower shall be entered in
an involuntary case under any bankruptcy, insolvency, composition, readjustment
of debt, liquidation of assets or similar law of any jurisdiction; or
(e) The Borrower has failed to make arrangements satisfactory to
the Company under Section 11(e) of the Plan with respect to any applicable
federal, state or local tax withholding requirements and such failure shall
continue for 15 days after notice of such failure has been delivered to the
Borrower by the Company.
If an Event of Default specified in clause (c) or (d) of this
Section 5 shall exist, this Purchase Note shall automatically become immediately
due and payable together with interest accrued thereon, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived.
If an Event of Default other than those specified in clause (c)
or (d) of this Section 5 shall exist, the holder of this Purchase Note may
exercise any right, power or remedy permitted to such holder by applicable law,
and shall have, in particular, without limiting the generality of the foregoing,
the right to declare the entire principal of, and interest accrued on, this
Purchase Note then outstanding to be, and this Purchase Note shall thereupon
become, forthwith due and payable, without any presentment, demand, protest, or
other notice of any kind, all of which are hereby expressly waived, and the
Borrower shall forthwith pay to the holder of this Purchase Note the entire
principal of, and interest accrued on, this Purchase Note.
6. Notice. For the purposes of this Purchase Note, notices,
demands and all other communications provided for herein shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed, if to the Borrower, to the address
inserted below the Borrower's signature on the final page hereof, and, if to the
Company, as follows:
To the Company:
Union Pacific Corporation
1416 Dodge Street
Omaha, NE 68179
Attention: Senior Vice President - Human Resources
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
7. Expenses. Borrower agrees to pay any and all out-of-pocket
costs and expenses, including without limitation, reasonable attorney's fees and
disbursements, incurred by the Company in connection with the enforcement of any
and all provisions of this Purchase Note and in regard to any defenses to this
Purchase Note or counterclaims brought in the action to enforce this Purchase
Note.
8. Miscellaneous. (a) Failure or Indulgence Not a Waiver. No
delay or failure by the Company or the holder of this Purchase Note in the
exercise of any right or remedy shall constitute a waiver thereof, and no single
or partial exercise by the holder hereof of any right or remedy shall preclude
other or future exercise thereof or the exercise of any other right or remedy.
(b) Assignment. This Purchase Note may be assigned only by the
Company and the benefits and obligations thereof shall inure to the Company's
successors and assigns.
(c) Invalid Provisions. If any provision of this Purchase Note is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provision shall be fully severable and
this Purchase Note shall be construed and enforced as if such illegal, invalid
or unenforceable provision had never comprised a part hereof and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision by its severance
herefrom. Any provision of this Purchase Note that is inapplicable to the
Borrower as a result of the fact that the Borrower's position with the Company
is in a non-production capacity shall not affect the balance of the Note.
(d) Headings. The headings contained in this Purchase Note are
for reference purposes only and shall not affect in any way the meaning or
interpretation of the provisions hereof.
(e) Not an Employment Contract. Nothing in this Purchase Note
shall confer upon the Borrower the right to continue in the employment of the
Company or any of its affiliates or affect any rights which the Company or any
Company affiliate may have to terminate the employment of the Borrower.
(f) Governing Law. The provisions of this Purchase Note shall be
governed by and construed in accordance with laws of the State of Utah, without
giving effect to the choice of law principles thereof.
(g) No Set-off. Borrower agrees that Borrower shall have no right
of set-off for any amount that may be owed to Borrower by the Company, whether
in connection with the Plan or with any unrelated transactions.
IN WITNESS WHEREOF, this Purchase Note has been duly executed and
delivered to the Company by the Borrower on the date first above written.
Borrower
Address:
--------------------------------
--------------------------------
--------------------------------
(Please print carefully)
Witness:
Written Description of Premium Exchange Program Pursuant to 1993 Stock Option
and Retention Stock Plan of
Union Pacific Corporation
On September 30, 1999 the Union Pacific Corporation ("UPC") Board of Directors
approved the Executive Incentive Premium Exchange Program (the "EIPEP"). Under
the EIPEP, an executive eligible to receive an award under the Union Pacific
Corporation Executive Incentive Plan (the "EIP") may elect to exchange all or a
portion of his or her right to receive an award under the EIP for grants of
retention stock units under the Union Pacific Corporation 1993 Stock Option and
Retention Stock Plan equal to 150% of the incentive amount foregone, with
retention stock units valued at the fair market value of UPC Common Stock on the
day incentive awards are approved. Retention stock units granted under the EIPEP
are generally subject to a three-year vesting period. If a participant's
employment is involuntarily terminated before the three-year period is met, the
participant retains the retention stock units equal to the original incentive
award foregone, plus a pro rata number of premium stock units based on the
number of full months the participant was employed during the three-year vesting
period. If a participant dies, the retention stock units vest immediately. Until
the retention stock units are vested, an amount equal to dividends are paid in
cash to the participant.
Retention stock units are paid out in shares of UPC Common Stock.
Exhibit 12(a)
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended September 30,
Millions of Dollars Except Ratios 1999 1998
- -------------------------------------------------------------------------------
Earnings
<S> <C> <C>
Income from Continuing Operations ................. $218 $ 34
Undistributed equity earnings...................... (14) (11)
- -------------------------------------------------------------------------------
Total.............................................. 204 23
- -------------------------------------------------------------------------------
Income Taxes........................................... 137 24
- -------------------------------------------------------------------------------
Fixed Charges:
Interest expense including amortization
of debt discount................................ 184 188
Portion of rentals representing an interest factor. 49 46
- -------------------------------------------------------------------------------
Total.............................................. 233 234
- -------------------------------------------------------------------------------
Earnings Available for Fixed Charges................... 574 281
- -------------------------------------------------------------------------------
Total Fixed Charges -- as above......................... $233 $234
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges (Note 9)............ 2.5 1.2
- -------------------------------------------------------------------------------
</TABLE>
Exhibit 12(b)
UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Nine Months Ended September 30,
Millions of Dollars Except Ratios 1999 1998
- -------------------------------------------------------------------------------
Earnings
<S> <C> <C>
Income (Loss) from Continuing Operations ........... $ 541 $(182)
Undistributed equity earnings....................... (33) (30)
- -------------------------------------------------------------------------------
Total............................................... 508 (212)
- -------------------------------------------------------------------------------
Income Taxes............................................ 296 (127)
- -------------------------------------------------------------------------------
Fixed Charges:
Interest expense including amortization
of debt discount................................. 554 526
Portion of rentals representing an interest factor.. 141 136
- -------------------------------------------------------------------------------
Total............................................... 695 662
- -------------------------------------------------------------------------------
Earnings Available for Fixed Charges.................... 1,499 323
- -------------------------------------------------------------------------------
Total Fixed Charges -- as above......................... $ 695 $ 662
- -------------------------------------------------------------------------------
Ratio of earnings to fixed charges (Note 9)............. 2.2 0.5
- -------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UPC Financial Data Sheet
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 198
<SECURITIES> 0
<RECEIVABLES> 626
<ALLOWANCES> 0
<INVENTORY> 335
<CURRENT-ASSETS> 1380
<PP&E> 34128
<DEPRECIATION> 6726
<TOTAL-ASSETS> 29853
<CURRENT-LIABILITIES> 2889
<BONDS> 8502
691
0
<COMMON> 0
<OTHER-SE> 7129
<TOTAL-LIABILITY-AND-EQUITY> 29853
<SALES> 0
<TOTAL-REVENUES> 8406
<CGS> 0
<TOTAL-COSTS> 7088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 554
<INCOME-PRETAX> 837
<INCOME-TAX> 296
<INCOME-CONTINUING> 541
<DISCONTINUED> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 568
<EPS-BASIC> 2.30
<EPS-DILUTED> 2.27
</TABLE>
