<COVER>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 1-01324
UNION PACIFIC RAILROAD COMPANY
(Exact name of Registrant as specified in its charter)
UTAH 13-6400825
(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) 271-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
____ ____
As of October 31, 1997, the Registrant had outstanding 62,220,244 shares
of its Common Stock, $10 par value, and 5,410,456 shares of its Class A Stock,
$10 par value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<INDEX>
UNION PACIFIC RAILROAD COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page Number
-----------
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION -
At September 30, 1997 and December 31, 1996. . . . . . . 1-2
CONDENSED STATEMENT OF CONSOLIDATED INCOME AND
RETAINED EARNINGS - For the Three Months and Nine
Months Ended September 30, 1997 and 1996 . . . . . . . . 3
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS - For
the Nine Months Ended September 30, 1997 and 1996 . . . 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. . . . 5-8
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 9-11
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 11-14
ITEM 5: CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE 1>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNION PACIFIC RAILROAD COMPANY AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars)
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
- ------ -------------- --------------
Current Assets:
Cash and temporary investments . . . . . $ 56 $ 78
Accounts receivable - net. . . . . . . . 509 298
Due from affiliated companies - net. . . 1,884 1,763
Material and supplies . . . . . . . . . 260 236
Other current assets . . . . . . . . . . 187 168
--------- ---------
Total Current Assets. . . . . . . . . 2,896 2,543
--------- ---------
Investments:
Investments in and advances to
affiliated companies (Note 3) . . . . 390 367
Other investments. . . . . . . . . . . . 151 159
--------- ---------
Total Investments . . . . . . . . . . 541 526
--------- ---------
Properties (Note 2):
Road . . . . . . . . . . . . . . . . . . 15,412 14,703
Equipment . . . . . . . . . . . . . . . 5,992 5,662
Other . . . . . . . . . . . . . . . . . 72 71
--------- ---------
Total Properties. . . . . . . . . . . 21,476 20,436
Accumulated depreciation . . . . . . (5,419) (4,914)
--------- ---------
Properties - Net. . . . . . . . . . . 16,057 15,522
--------- ---------
Intangible and Other Assets. . . . . . . . 201 156
--------- ---------
Total Assets . . . . . . . . . . . . . . $19,695 $18,747
========= =========
<PAGE 2>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Millions of Dollars, Except Share and Per Share Amounts)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
- ------------------------------------ ------------- --------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . $ 397 $ 436
Accrued wages and vacation . . . . . . . 354 288
Income and other taxes payable . . . . . 279 196
Casualty and other reserves. . . . . . . 242 274
Debt due within one year . . . . . . . . 187 93
Interest payable . . . . . . . . . . . . 52 43
Other current liabilities. . . . . . . . 356 287
--------- --------
Total Current Liabilities . . . . . . 1,867 1,617
--------- --------
Debt Due After One Year. . . . . . . . . . 1,361 1,418
--------- --------
Deferred Income Taxes . . . . . . . . . . 4,597 4,306
--------- --------
Due to UPC - Long-Term . . . . . . . . . . 3,273 3,086
--------- --------
Retiree Benefits Obligation . . . . . . . 495 483
--------- --------
Other Liabilities (Note 6) . . . . . . . . 1,364 1,442
--------- --------
Stockholder's Equity (Note 2):
Common stock - $10.00 par value;
92,000,000 shares authorized
and 62,220,244 outstanding in
1997 and 1996 . . . . . . . . . . . . 622 622
Class A stock - $10.00 par value;
8,000,000 shares authorized
and 5,410,456 outstanding
in both 1997 and 1996 . .. . . . . . 54 54
Capital surplus. . . . . . . . . . . . . 2,608 2,608
Retained earnings. . . . . . . . . . . . 3,454 3,111
--------- --------
Total Stockholder's Equity. . . . . . 6,738 6,395
--------- --------
Total Liabilities and
Stockholder's Equity. . . . . . . . $19,695 $18,747
========= ========
<PAGE 3>
UNION PACIFIC RAILROAD COMPANY AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For The Three Months and Nine Months Ended September 30, 1997 and 1996
(Millions of Dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------------------- ---------------------
Operating Revenues (Note 2). . $1,999 $1,713 $6,097 $5,115
------ ------- ------ ------
Operating Expenses:
Salaries, wages and
employee benefits . . . . 652 533 1,948 1,653
Equipment and other
rents . . . . . . . . . . 256 185 746 562
Depreciation and
amortization. . . . . . . 198 151 585 459
Fuel and utilities
(Note 4). . . . . . . . . 180 148 599 459
Materials and supplies . . . 98 94 312 294
Other costs. . . . . . . . . 236 182 756 569
------ ------- ------ ------
Total . . . . . . . . . . 1,620 1,293 4,946 3,996
------ ------- ------ ------
Operating Income . . . . . . . 379 420 1,151 1,119
Other Income - Net . . . . . . 96 68 184 149
Interest Expense (Note 4). . . (90) (97) (289) (292)
------ ------- ------- -------
Income Before Income Taxes . . 385 391 1,046 976
Income Taxes (Note 5). . . . . (148) (143) (388) (327)
------ ------ ------- -------
Net Income . . . . . . . . . . $ 237 $ 248 $ 658 $ 649
======= ======= ======= =======
Retained Earnings:
Beginning of period. . . . . $3,322 $2,762 $3,111 $4,139
Net income . . . . . . . . . 237 248 658 649
Dividends. . . . . . . . . . (105) (96) (315) (1,874)
------ ------- ------- -------
End of Period. . . . . . . . $3,454 $2,914 $3,454 $2,914
======= ====== ======= =======
<PAGE 4>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Millions of Dollars)
(Unaudited)
1997 1996
------- -------
Cash from Operations:
Net Income . . . . . . . . . . . . . . . . $ 658 $ 649
Non-Cash Charges to Income:
Depreciation and amortization . . . . . 585 459
Deferred income taxes . . . . . . . . . 145 85
Other - net . . . . . . . . . . . . . . (94) 881
Changes in Current Assets and Liabilities. (126) (742)
------- -------
Cash from Operations. . . . . . . . . . 1,168 1,332
------- -------
Investing Activities:
Capital Investments. . . . . . . . . . . . (1,190) (875)
Other - Net (Note 3) . . . . . . . . . . . 197 46
------- -------
Cash Used in Investing Activities. . . . . (993) (829)
------- -------
Equity and Financing Activities:
Debt Repaid . . . . . . . . . . . . . . . (128) (273)
Financings . . . . . . . . . . . . . . . 180 351
Cash Dividends Paid to Parent. . . . . . . (315) (289)
Advances to (from) Affiliated Companies -
Net . . . . . . . . . . . . . . . . . . 66 (259)
------- -------
Cash Used in Equity and Financing
Activities .. . . . . . . . . . . . . (197) (470)
------- -------
Net Increase(Decrease)in Cash and
Temporary Investments . . . . . . . . $ (22) $ 33
======= =======
<PAGE 5>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS: The condensed consolidated
financial statements of Union Pacific Railroad Company (the Company) are
unaudited and reflect all adjustments (consisting only of normal and
recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results
for the interim periods. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto, and the unaudited pro forma combined financial
statements and notes thereto, both contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. The results
of operations for the three months and nine months ended September 30,
1997 are not necessarily indicative of the results for the year ending
December 31, 1997.
2. ACQUISITIONS AND REORGANIZATION
Missouri Pacific Railroad Company (MPRR): On January 1, 1997, MPRR was
merged with and into the Company (the MPRR Merger), with the Company
continuing as the surviving entity. Immediately prior to the MPRR
Merger, MPRR was a wholly-owned, direct subsidiary of Union Pacific
Corporation (the Corporation) and the Company was at that time and
currently is a wholly-owned, indirect subsidiary of the Corporation.
As a result of the MPRR Merger, all of the outstanding capital shares
of MPRR, which consisted of 920 shares of MPRR Common Stock and 80 shares
of MPRR Class A Stock, were converted into 19,152,560 shares of the
Company's Common Stock and 1,665,440 shares of the Company's Class A
Stock, respectively. In addition, in connection with the MPRR Merger,
the 38,867,393 shares of the Company's Common Stock outstanding
immediately prior to the MPRR Merger were converted into 35,758,008
shares of the Company's Common Stock and 3,109,392 shares of the
Company's Class A Stock.
The Denver and Rio Grande Western Railroad Company (DRGW) and SPCSL Corp.
(SPCSL): On June 30, 1997, DRGW and SPCSL were merged with and into the
Company (the DRGW and SPCSL Mergers), with the Company continuing as the
surviving entity. Immediately prior to the DRGW and SPCSL Mergers,
DRGW and SPCSL were wholly-owned, direct subsidiaries of Southern Pacific
Transportation Company (SPT), and the Company and SPT were at that time
and are currently wholly-owned, indirect subsidiaries of the Corporation.
As a result of the DRGW and SPCSL Mergers, all of the outstanding capital
shares of DRGW, which consisted of 6,331 shares of DRGW Common Stock, and
SPCSL, which consisted of 1,000 shares of SPCSL Common Stock, were
converted into 2,908,488 and 316,756 shares of the Company's Common Stock
and 252,912 and 27,544 shares of the Company's Class A Stock,
respectively.
St. Louis and Southwestern Railway Company (SSW): On September 30,
1997, SSW was merged with and into SSW Merger Corp, with SSW Merger Corp
continuing as the surviving entity. Immediately thereafter SSW Merger
Corp was merged with and into the Company (collectively, the SSW Merger),
with the Company continuing as the surviving entity. Immediately prior
to the SSW Merger, SSW was a wholly-owned, direct subsidiary of SPT and
the Company and SPT were at that time and are currently wholly-owned,
indirect subsidiaries of the Corporation. As a result of the SSW Merger,
all of the outstanding shares of SSW Common Stock, which consisted of
173,300 shares were ultimately converted into 4,084,432 shares of the
Company's Common Stock and 355,168 shares of the Company's Class A Stock.
<PAGE 6>
The MPRR Merger, the DRGW and SPCSL Mergers and the SSW Merger
(collectively, the Affiliated Mergers) have been accounted for in a
manner similar to a pooling-of-interests combination of entities under
common control. As a result of the Affiliated Mergers, statements of
financial positions for the Company, MPRR, DRGW, SPCSL and SSW were
combined, as of January 1, 1997 with an increase in Common Stock,
Class A Stock, capital surplus and retained earnings of $233 million,
$54 million, $1,534 million and $718 million, respectively.
The Condensed Statement of Consolidated Income and the Condensed
Statement of Consolidated Cash Flows for the three months and nine
months ended September 30, 1996 present the Company's results of
operations and cash flows for such periods as if the MPRR Merger had
occurred on January 1, 1996. The Condensed Statement of Consolidated
Financial Position as of December 31, 1996 presents the Company's
financial position as of such date as though the Affiliated Mergers
had occurred on December 31, 1996. The Condensed Statement of
Consolidated Income and the Condensed Statement of Consolidated Cash
Flows for the three months and nine months ended September 30, 1997
present the Company's results of operations and cash flows for such
periods as if the Affiliated Mergers had all occurred on January 1, 1997.
These financial statements include DRGW, SPCSL and SSW's portion of the
allocated purchase price paid by the Corporation to acquire Southern
Pacific Rail Corporation.
Southern Pacific Rail Corporation (Southern Pacific or SP): In September
1996, the Corporation consummated the acquisition of Southern Pacific by
acquiring the remaining 75% of Southern Pacific common shares not
previously owned by the Corporation for a combination of cash and the
Corporation's Common Stock.
The business combination with Southern Pacific has been accounted for as
a purchase by the Corporation; however, SP's results (except for DRGW,
SPCSL and SSW) are not currently included in the Company's results.
The combination of Southern Pacific's rail operations with the Company's
rail operations is expected to be completed with the merger of the
Company and SPT in early 1998 and is expected to be accounted for in a
manner similar to a pooling of interest. The Company and SP operate as
a unified rail system which is hereinafter referred to as the Railroad.
In connection with the integration of the Company's and Southern Pacific's
rail operations, the Company expects to incur approximately $370 million
in acquisition-related costs through 1999 for severing or relocating the
Company's employees, disposing of certain of the Company's facilities,
training and equipment upgrading. These costs will be charged to
expense as incurred. Results for the three months and nine months ended
September 30, 1997 include $10 million and $46 million, respectively, in
one-time, acquisition-related operating costs, net of tax.
3. MEXICAN RAILWAY CONCESSION: On June 26, 1997, the Railroad and a
consortium of partners were granted the 50-year concession for the
Pacific North and Chihuahua Pacific lines in Mexico, and a 25 percent
stake in the Mexico City Terminal Company at a price of $525 million.
The Railroad holds a 13 percent ownership share, and has accounted for
its interest by the equity method. The consortium plans to assume
operational control of both lines in late 1997.
4. FINANCIAL INSTRUMENTS:
Risk Management: The Company uses derivative financial instruments in
limited instances to manage fuel price and interest rate risks. Where
the Company has fixed interest rates or fuel prices through the use of
swaps, futures or
<PAGE 7>
forward contracts, the Company has mitigated the downside risk of adverse
price and rate movements; however, it has also limited future gains from
favorable movements.
The Company addresses market risk related to these instruments by
selecting instruments whose value fluctuations correlate highly with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring minimum credit
standards for counterparties and periodic settlements. The total risk
associated with the Company's counterparties was $13 million at
September 30, 1997. The Company has not been required to provide, nor
has it received any collateral relating to its hedging activity.
The fair market values of the Company's derivative financial instrument
positions at September 30, 1997, were determined based upon current fair
market values as quoted by recognized dealers or developed based on the
present value of future cash flows discounted at the applicable U.S.
treasury rate and swap spread.
Fuel: Over the past three years, fuel costs approximated 10% of the
Railroad's total operating expenses. As a result of the significance of
the fuel costs and the historical volatility of fuel prices, the Company,
as a participant in the Railroad's fuel hedging program, periodically
uses swaps, futures and forward contracts to mitigate the impact of fuel
price volatility. The intent of this program is to protect the Railroad's
operating margins and overall profitability from adverse fuel price
changes. At September 30, 1997, the Railroad had hedged 40% and 12% of
its estimated remaining diesel fuel consumption for 1997 and 1998,
respectively, at $0.52 and $0.53 per gallon, respectively, on a Gulf
Coast basis. In addition, the Railroad had outstanding swap agreements
covering its fuel purchases in 1997 and 1998 of $156 million, with gross
and net asset positions of $13 million. Fuel hedging increased third
quarter 1997 fuel expense by $1 million and lowered third quarter 1996
fuel costs by $9 million. Fuel hedging increased the Railroad's nine
month 1997 fuel expense by $1 million and lowered the Company's nine
month 1996 fuel costs by $19 million.
Interest Rates: The Company controls its overall risk to fluctuations in
interest rates by managing the proportion of fixed and floating rate debt
instruments within its debt portfolio over a given period. Derivatives
are used in limited circumstances as one of the tools to obtain the
targeted mix. The mix of fixed and floating rate debt is largely managed
through the issuance of targeted amounts of such debt as debt maturities
occur or as incremental borrowings are required. The Company also
obtains additional flexibility in managing interest cost and the
interest rate mix within its debt portfolio by issuing callable fixed
rate debt securities. At September 30, 1997, the Company had outstanding
interest rate swaps on $113 million of notional principal amount of debt
(7% of the total debt portfolio, excluding obligations to the
Corporation) with gross and net fair market value liability positions
of $8 million. These contracts mature over the next one to eight years.
Interest rate hedging activity increased interest expense in the third
quarter of both 1996 and 1997 by $1 million. Interest rate hedging
activity increased interest expense in the first nine months of both 1997
and 1996 by $3 million.
5. INCOME TAXES: In the first quarter of 1996, the Company reached a
settlement with the Appeals Office of the Internal Revenue Service for
tax years 1978 through 1982. The settlement resulted in a tax refund of
$21 million.
6. COMMITMENTS AND CONTINGENCIES: There are various claims and lawsuits
pending against the Company. Certain customers have submitted claims
for damages related to shipments delayed in transit, while others have
indicated an intention to submit claims for damages arising out of
delays as a result of congestion problems. The nature of the damages
<PAGE 8>
sought include, but are not limited to, loss or damages to lading,
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 Company. The Federal
Railroad Administration has also indicated that it may take enforcement
actions against the Company based upon an in-depth inquiry and review
of safety practices.
The Company is also subject to Federal, state and local environmental
laws and regulations, and is currently participating in the investigation
and remediation of numerous sites. Where the remediation costs can be
reasonably determined, and where such remediation is probable, the
Company has recorded a liability. In addition, the Company periodically
enters into financial and other commitments and provides guarantees for
specific financial and contractual obligations of its subsidiaries and
affiliates.
It is not impossible at this time for the Company to fully determine the
effect of all unasserted claims on its consolidated financial condition,
results of operations or liquidity; however, the Company does not expect
that any known lawsuits, claims, environmental costs, commitments or
guarantees will have a material adverse effect on its financial
condition or operating results.
7. ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board (FASB) issued statement No. 130, "Reporting Comprehensive
Income," that will be effective in 1998. The Company anticipates minimal
impact from this Statement.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company currently
complies with most provisions of this Statement, and any incremental
disclosure required by that statement is expected to be minimal.
8. RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges
has been computed on a total enterprise basis. Earnings represent income
from continuing operations less equity in undistributed earnings of
unconsolidated affiliates, plus income taxes and fixed charges. Fixed
charges represent interest, amortization of debt premium, and the
estimated interest portion of rental charges.
<PAGE 9>
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to September 30, 1996
Recent Mergers: On January 1, 1997, Missouri Pacific Railroad Company (MPRR)
was merged with and into Union Pacific Railroad Company (the Company), with
the Company continuing as the surviving corporation (the MPRR Merger). The
MPRR Merger has been accounted for in a manner similar to a pooling-of-interest
combination of entities under common control (see Note 2 of the Condensed
Consolidated Financial Statements). As a result of the MPRR Merger, the
Company's results of operations for the three and nine months ended September
30, 1996 have been combined with MPRR's results of operations as though the
MPRR Merger had occurred on January 1, 1996. The following narrative analysis
of the Company's results of operations compares actual financial information
for the Company for the nine months ended September 30, 1997 with financial
information for the Company and MPRR on a combined basis for the nine months
ended September 30, 1996.
Also, on June 30, 1997, The Denver and Rio Grande Western Railway Company
(DRGW)and SPCSL Corp. (SPCSL) were merged with and into the Company, with the
Company continuing as the surviving corporation (the DRGW/SPCSL Mergers). On
September 30, 1997, the St. Louis and Southwestern Railroad Company (SSW) was
merged into SSW Merger Corp, with SSW Merger continuing as the surviving
entity and immediately thereafter, SSW Merger was merged into the Company with
the Company continuing as the surviving entity (collectively, the SSW Merger
and together with the DRGW/SPCSL Mergers, the Affiliated Mergers). The
Affiliated Mergers have also been accounted for in a manner similar to a
pooling-of-interest combination of entities under common control. As a result
of the Affiliated Mergers, the Company's results of operations for the period
ended September 30, 1997 have been combined with the results of DRGW, SPCSL
and SSW as though the Affiliated Mergers had occurred on January 1, 1997.
DRGW, SPCSL and SSW operations are not included in the September 30, 1996
operating results discussed below since common control was not effective
until September 11, 1996.
Railroad Operations: Third quarter 1997 rail operations were disrupted by
service and congestion issues. The Company's congestion problems started in
the Gulf Coast area during the summer and spread throughout the system as the
Railroad shifted resources to help mitigate the problem in the Gulf Coast.
Factors leading to the system congestion include crew shortages and necessary
track maintenance on Southern Pacific Rail Corporation lines, washouts due to
severe weather and congestion in the major Texas/Mexico gateways.
The cost of the congestion-related problems was approximately $100 million,
after tax, which reflected the combined results of lost business and higher
operating costs. Fourth quarter 1997 operations and financial performance
will be more severely affected by congestion-related problems than in the
third quarter--including lower revenue and incremental costs associated with
the implementation of the Service Recovery Plan--significantly reducing the
Company's financial results for the period. As a result, earnings for all of
1997 are expected to be less than 1996 restated results, and there may well
be a net loss for the fourth quarter 1997. There can be no assurance that
these problems will not continue to impact the Company during the first
quarter of 1998.
The Service Recovery Plan: To restore service to acceptable levels, the
Company implemented a Service Recovery Plan (the Plan) in early October 1997.
The Plan is focused on reducing the number of cars on the system and
restoring system velocity, which will result in more reliable service to
customers. Although the Company expects that the Plan will relieve current
congestion problems across the system by late 1997, a prolonged service
recovery could have an adverse material effect on the Company's future earnings
and cash flow.
<PAGE 10>
The Plan includes a number of temporary steps currently underway to reduce the
number of trains operating over the system and to improve system velocity and
service levels. These steps include: diverting trains from congested Southern
Corridor routes to less congested alternatives; temporarily transferring
business to several other railroads including Kansas City Southern, Burlington
Northern and Santa Fe Railway Company and Norfolk Southern Corporation;
combining shorter trains; reducing the number of locomotives in use on local
and maintenance-of-way service; accelerating the delivery of new locomotives;
adding manpower and capacity at locomotive repair shops; moving switching
activities from all of the major congested yards to other locations;
transferring switching to shortline railroads; hiring additional train and
engine employees; and taking a number of actions to use train crews more
efficiently in congested terminals.
Status Report - Through mid-November 1997, the Company has made ongoing
progress on reducing car inventories on the system and improving system
velocity. These results are being reported weekly to the Surface
Transportation Board. Based upon results to date, the Company anticipates
that service levels will continue to improve through the last quarter of 1997.
Results of Operations
Net income increased to $658 million for 1997. Operating income increased to
$1,151 million in 1997 from $1,119 million in 1996. Operating revenues for the
Company increased $982 million (19%) to $6.1 billion, reflecting a 25% increase
in carloadings due to the integration of DRGW, SPCSL and SSW operations. The
integration of DRGW, SPCSL and SSW business drove carloading gains in
intermodal (54%), energy (19%), automotive (30%), chemicals (17%),
industrial products (10%) and agricultural products (10%).
Operating expenses increased $950 million compared to 1996 to $4.95 billion.
Salaries and wages increased $295 million due to the addition of DRGW, SPCSL and
SSW expenses, higher traffic volumes and one-time merger implementation costs.
Equipment and other rents increased $184 million due to higher cycle times,
incremental cars being made available for grain customers and additional DRGW,
SPCSL and SSW expenses. Fuel and utilities increased $140 million due to the
integration of DRGW, SPCSL and SSW and higher volumes. Depreciation expense
increased $126 million because of continued capital spending programs for track
and roadway investment and the addition of DRGW, SPCSL and SSW asset bases to
depreciation expense and the re-evaluation of said assets in accounts for the
Southern Pacific acquisition. Other costs increased $187 million due to the
addition of DRGW, SPCSL and SSW and other volume-related contract costs for
maintenance, drayage and other third-party costs.
Other income increased $35 million, largely due to the sale of the Railroad's
signboard business. Interest expense decreased $3 million, the result of debt
refinancing activities. Income taxes increased $61 million, reflecting higher
operating and other income and the absence of a 1996 tax settlement (see Note 5
to the Condensed Consolidated Financial Statements).
Other Developments
Federal Railroad Administration (FRA) Review - The Company suffered three
severe accidents in mid-1997. As a result of these incidents, the FRA reviewed
the Company's operations and made several recommendations, including creating
a joint committee of the Company's management, labor and the FRA to review
and monitor all aspects of safety, adding an executive position for safety
reporting directly to the President, creating a safety hotline (direct to the
President), re-evaluating all existing training programs and increasing the
monitoring of train crew performance, crew fatigue and crew scheduling. All
such FRA proposals have been implemented by the Company. The Company has also
proposed a guaranteed time-off program for train and engine employees.
<PAGE 11>
During the last week of October, 1997, the Company experienced two additional
train collisions in Texas, which resulted in non-fatal injuries to train crew
employees. As a result of these incidents, the FRA sent additional inspectors
to Texas and other states to monitor the Company's operations.
Derailments in 1997 have cost the Company approximately $67 million in capital
and operating expense. During the first nine months of 1996 pro forma
derailment costs were $87 million. This decrease reflects safety improvements
year-to-date over the same pro forma period last year, including a 10% decline
in derailments.
Cautionary Information
Certain information included in this report contains, and other materials filed
or to be filed by the Company 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 Company) contain or will contain, forward-looking
statements within the meaning of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended. Such forward-looking
information may include, without limitation, statements that the Company does
not expect that lawsuits, claims, environmental costs, commitments, guarantees,
contingent liabilities, labor negotiations or other matters will have a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity and other similar expressions concerning
matters that are not historical facts, and projections as to the Company's
financial results. Such forward-looking information is or will be based on
information then available and is or will be subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in
the statements. Important factors that could cause such differences include
but are not limited to whether the Service Recovery Plan, referred to above,
achieves its goals, industry competition and regulatory developments, natural
events such as floods and earthquakes, the effects of adverse general economic
conditions, fuel price changes and the ultimate outcome of environmental
investigations or proceedings and other types of claims and litigation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Southern Pacific Acquisition: As previously reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K"),
various appeals have been filed with respect to the Surface Transportation
Board's ("STB") August 12, 1996 decision (the "Decision") approving the
acquisition of control of Southern Pacific Rail Corporation and its rail
affiliates (collectively, "SP") by the Corporation and its affiliates. All of
the appeals have been consolidated. On April 23, 1997, the City of Wichita and
Sedgwick County, Kansas, moved to withdraw their petition for review, and the
Court granted their motion on April 30, 1997. On August 11, 1997, the Court
established a briefing schedule under which briefs for petitioners and
supporting intervenors were due on October 10, 1997, the brief for respondents
is due December 9, 1997, briefs for intervenors supporting respondents are
due December 30, 1997, and reply briefs are due January 20, 1998.
On August 18, 1997, Geneva Steel Company moved to withdraw its petitions for
review, and the Court granted its motion on September 8, 1997. On October 3,
1997, the Corporation and its affiliates moved to dismiss their petitions for
review, and the Court granted their motion on October 7, 1997. On October 6,
1997, Kansas City Southern Railway Company ("KCS") moved to dismiss its
petitions for review; on October 7, 1997, Texas Mexican Railway Company
("Tex Mex") moved to dismiss its petition for review; and on October 10, 1997,
the United Transportation Union-General Committee of Adjustment (GO 401) moved
to dismiss its petition for review. The Court granted these motions on
October 22, 1997. The Company believes that it is unlikely that the
disposition of these appeals will have a material impact on its results of
operations.
<PAGE 12>
On May 7, 1997, the STB served a decision commencing the first annual proceeding
to implement the oversight condition it had imposed in the Decision. The
Corporation and its affiliates, and the Burlington Northern and Santa Fe Railway
Company ("BNSF"), filed reports required by the STB on July 1, 1997. BNSF and
other parties filed comments on August 1, 1997. The Corporation and its
affiliates, and others, filed replies on August 20, 1997. On October 27, 1997,
the STB served a decision containing its findings and recommendations based on
the record compiled in the first oversight proceeding. The STB concluded that
the merger, as conditioned, had thus far not caused any substantial competitive
harm, and it rejected various requested adjustments to the merger conditions.
The STB ordered the Corporation and BNSF to continue to report quarterly on
merger implementation, and to provide a comprehensive summary presentation in
the next progress report due on July 1, 1998. The STB order requires interested
parties to file comments concerning the next annual oversight proceeding on
August 14, 1998, and replies are due September 1, 1998.
Bottleneck Proceedings: As previously reported in the 1996 10-K, on August 27,
1996, the STB initiated a proceeding asking for arguments and evidence on the
issue of whether it should modify its existing regulations regarding the
prescription of, and challenge to, rates for rail service involving a segment
that is served by only one railroad between an interchange point and an
exclusively-served shipper facility (i.e., a bottleneck segment). The STB
proceeding also referred to pending motions to dismiss three individual
complaint proceedings filed by shippers challenging a class rate charged for
the movement of coal, two of which named the Company and Southern Pacific
Transportation Company ("SPT") as a party thereto. Neither complaint
proceeding individually involved a significant exposure for reparations.
However, if existing regulation of bottleneck movements were changed, future
revenue from such movements, including those covered by the complaint
proceedings, could be substantially reduced. On December 31, 1996, the STB
served a decision which generally reaffirmed earlier rulings regarding a rail
carrier's obligation to provide rates for bottleneck segments and assured the
right of rail carriers to differentially price traffic. It also dismissed
the two complaint proceedings in which the Company and SPT were defendants.
On April 30, 1997, the STB served a decision generally declining to reconsider
its December 31, 1996 decision, but clarifying that in certain circumstances
a "bottleneck" destination carrier that does not serve the origin for a
traffic movement may be required to provide a separately-challengeable common
carrier rate for the "bottleneck" portion of the movement. The STB decisions
are pending on appeal before the Eighth Circuit Court of Appeals, and oral
argument has been scheduled for November 18, 1997.
Rail Service Proceedings: Recently, the Company has been experiencing serious
congestion problems, especially on SP lines in the Gulf Coast area but also
affecting other lines of the system. In late September 1997, following an
intense analysis and planning effort, the Company adopted a comprehensive
Service Recovery Plan. The objective of this Plan is to return service to
normal within 90 days. The Service Recovery Plan involves additional
expenditures on locomotives and personnel and the diversion of traffic to
other carriers, among other measures.
The Company has reported to the STB in the ongoing oversight proceeding
regarding the UP/SP merger concerning the recent service problems and the
Service Recovery Plan. On October 2, 1997, the STB initiated a proceeding
entitled Ex Parte No. 573, Rail Service in the Western United States
("Ex Parte No. 573"), to provide interested persons the opportunity to report
on the status of rail service in the western United States and to review
proposals for solving the service problems that exist. The STB directed
interested parties to file written statements by October 23, 1997, and held a
hearing on October 27, 1997. The Corporation filed a written submission and
made an oral presentation at the STB hearing reporting further on its Service
Recovery Plan and the progress that is being made in implementing it.
A number of shippers, shipper organizations, public bodies and other railroads
also submitted both written and oral testimony. Some participants in the
proceeding asked the STB to allow the Service Recovery Plan
<PAGE 13>
time to work, while others requested that the STB take more active measures
to remedy service problems.
In addition, on October 21, 1997, the Society of the Plastics Industry, the
National Industrial Transportation League and the Chemical Manufacturers
Association filed a joint petition asking the STB to issue an emergency directed
service order designed to remedy the Company's recent service problems, but
without specifying any specific action. The Corporation filed a response
opposing the joint petition on October 24, 1997.
On October 31, 1997, the STB issued an emergency service order that it described
as an outgrowth of the STB proceedings in Ex Parte No. 573. The service order,
which by its terms expires in 30 days, imposes several temporary measures
designed to allow Tex Mex to divert some traffic off of the Company in order to
reduce congestion on the Company's lines in Houston, Texas. The STB also
directed the Company, as the Company had offered, to suspend rail transportation
service contract obligations of all shippers at Houston that wish to route
shipments over the Tex Mex instead of the Company during the period of the
service order. The service order also requires the Corporation to report to the
STB regarding service issues raised at the hearing in Ex Parte No. 573. The STB
rejected the more intrusive proposals that had been presented in connection with
the Ex Parte No. 573 proceedings so as not to impede the implementation of the
Service Recovery Plan. The STB indicated that it will hold a further hearing on
December 3, 1997, at which time the Corporation will be required to address the
progress it has made in addressing the recent service problems, after which the
STB will determine whether an extension of the service order is required and
whether any additional actions are necessary.
Two railroad competitors of the Company, BNSF and KCS, proposed that they be
sold or given access to, or granted the right to control, various Company
assets as a purported remedy for the Company's service problems. While the
Company has sought and received constructive assistance from other carriers to
deal with the congestion problems, the Company declined to agree to the BNSF
and KCS proposals on the grounds that they would worsen the problem, are
legally unjustified, and are aimed at obtaining competitive advantages that
were rejected by the STB in the UP/SP merger proceeding.
Some customers have submitted claims for damages related to shipments delayed in
transit while other customers have indicated an intention to submit claims for
damages arising out of delays to their shipments as a result of the congestion
problems. The nature of the damages sought include, but are not limited to,
loss or damages to lading, 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 Company. It is not possible
at this time to assess the likelihood or magnitude of such liability or the
likelihood that any of such contracts could be canceled by particular
customers. Each claim actually submitted to the Company is being reviewed and
resolved on the basis of the Company's contractual relationship with the
customer asserting the claim. As part of this process and the Service Recovery
Plan, the Company has offered to waive shippers' contract obligations for the
duration of the congestion crisis on a case-by-case basis, wherever routing
traffic over other railroads or other modes would assist the shipper and not
worsen the congestion on the Company.
The Company experienced a number of serious accidents in July and August 1997,
although most overall safety measures continue to improve. In August and
September 1997, the Federal Railroad Administration ("FRA") conducted an
in-depth inquiry into the Company's safety practices and made a number of
recommendations for improvements. Such recommendations include creating a
joint committee of management, labor and the FRA to review and monitor all
aspects of safety, adding an executive position for safety reporting directly
to the President, creating a safety hotline (direct to the President),
re-evaluating all existing training programs and increasing the monitoring of
train crew performance, crew fatigue
<PAGE 14>
and crew scheduling. All such recommendations have been implemented. The
FRA has indicated that it may take enforcement actions against the Company.
During the last week of October, 1997, the Company experienced two additional
train collisions in Texas, which resulted in non-fatal injuries to train crew
employees. As a result of these incidents, the FRA sent additional inspectors
to Texas and other states to monitor the Company's operations. The Company
also agreed voluntarily to introduce a guaranteed time-off program for 3,500
train and engine employees which would ensure that every such employee has two
consecutive calendar days off after working 14 consecutive calendar days.
This program is pending approval by the joint management, labor and FRA
committee formed to examine and adopt safety initiatives. Once adopted, this
program is expected to be expanded to the rest of the Company's system by
mid-December.
Item 5. Changes in Securities and Use of Proceeds
In connection with the merger of the St. Louis and Southwestern Railway Company
("SSW") into SSW Merger Corp and the merger of SSW Merger Corp into the Company
on September 30, 1997, the 173,300 shares of SSW Common Stock outstanding
immediately prior to such mergers, which were held by SPT, were ultimately
converted into 4,084,432 shares of the Company's Common Stock and 355,168
shares of the Company's Class A Stock. The foregoing issuances of the
Company's Common Stock and Class A Stock were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act
of 1933, as amended.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
3 - Amendments to the Amended and Restated Articles of
Incorporation of Union Pacific Railroad Company, effective
September 30, 1997
12 - Computation of Ratio of Earnings to Fixed Charges
27 - Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
Current report filed on October 10, 1997 describing the Company's
congestion, safety issues and Service Recovery Plan.
<PAGE 15>
SIGNATURES
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, on this 14th day of November, 1997.
UNION PACIFIC RAILROAD COMPANY
------------------------------
(REGISTRANT)
By /s/ Joseph E. O'Connor Jr.
---------------------------
Joseph E. O'Connor, Jr.
Chief Accounting Officer
By /s/ John J. Koraleski
----------------------
John J. Koraleski
Executive Vice President -
Finance & Administration
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3 Amendments to the amended and restated articles of
incorporation of Union Pacific Railroad Company,
effective September 30, 1997
12 Computation of ratio of earnings to
fixed charges
27 Financial data schedule
Exhibit 3
---------
AMENDMENTS TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
UNION PACIFIC RAILROAD COMPANY
The Amended and Restated Articles of Incorporation (the "Articles of
Incorporation") of Union Pacific Railroad Company, a Utah Corporation (the
Corporation"), are hereby amended as follows:
1. Article III, Section 3.1 of the Articles of Incorporation is hereby
amended to read in its entity as follows:
3.1 Authorized Capital. The Corporation is authorized to issue three classes
of capital stock to be designated, respectively, "Common Stock", "Class A
Stock" and "Redeemable Preference Shares." The total number of shares of all
classes of capital stock which the Corporation shall have authority to issue
shall be One Hundred Million Five Thousand Five Hundred (100,005,500). The
total number of authorized shares of Common Stock shall be Ninety-Two Million
(92,000,000), and the par value of each such share shall be Ten Dollars
($10.00). The total number of authorized shares of Class A Stock shall be
Eight Million (8,000,000), and the par value of each such share shall be Ten
Dollars ($10.00). The total number of authorized shares of Redeemable
Preference Shares shall be Five Thousand Five Hundred (5,500), with an initial
par value of $10,000 per share.
2. The following sentence is hereby added to the end of Article III, Section
3.3 of the Articles of Corporation:
Each holder of record of the Redeemable Preference Shares shall
have the rights and privileges, and shall be subject to the
restrictions and limitations, set forth in Article VI hereof.
3. The Articles of Incorporation are hereby amended to add the following new
provisions:
ARTICLE VI - REDEEMABLE PREFERENCE SHARES
Section 6.1. General The Redeemable Preference Shares shall be issued in the
manner, and shall have and be subject to the designations, privileges, powers,
preferences and rights, and the qualifications, limitations, restrictions, and
priorities, set forth herein:
(A) Definitions. For purposes of this Section 6.1, unless the context
otherwise requires:
"Share" shall mean a Redeemable Preference Share;
"Secretary" shall mean the U.S. Secretary of Transportation of the United
States or his or her designee (by delegation of authority the
Administrator of the Federal Railroad Administration, United States
Department of Transportation, hereinafter the "Administrator", or his or
her designee);
"Agreement" shall mean a written agreement between the Corporation and
the United States of America represented by the Secretary acting through
the Administrator, for the issuance and sale to the United States of the
Shares to which reference is made; and
"Mergers" means the merger of SSW into SSW Merger Corp. and the merger
of SSW Merger Corp. into the Corporation, both of which were effective
pm September 30, 1997; and
"SSW Redeemable Preference Shares" means those redeemable preference
shares originally issued by SSW which contained terms substantially
similar to the terms of the Shares as authorized in Article VI hereof and
which were ultimately converted into Shares issued by the Corporation as
a result of the Mergers; and
"SSW" means St. Louis Southwestern Railway Company, a Missouri
Corporation; and
The terms "original issuance date", "issuance date" and words of like
import shall mean the original issuance date of the SSW Redeemable
Preference Shares of the applicable series which were ultimately
converted into Shares as a result of the Mergers.
(B) Other Preference Shares. All Shares of any series shall rank equally and
be identical in all respects with all other series of Shares, except as
otherwise expressly provided in these Amended and Restated Articles of
Incorporation.
(C) Par Value. Each Share shall have an initial par value of $10,000.00.
Upon payment of any mandatory redemption installment of any Shares, the par
value of each such Share shall become an amount equal to the initial par value
of such Share reduced by the amount of such redemption installment on such
Share. The initial par value of any Share shall also be reduced by the amount
of any mandatory redemption installments paid by SSW with respect to any SSW
Redeemable Preference Shares that was ultimately converted into such Shares as
a result of the Mergers.
(D) Seniority.
(1) The Shares shall be senior in right to all common stock and
preferred stock of the Corporation, whenever issued, with respect to
dividend and redemption payments, and in the case of liquidation or
dissolution of the Corporation; but said Shares shall be subordinate, as
to dividend and redemption payments thereon and in the case of
liquidation or dissolution of the Corporation, to all of the
Corporation's Senior Debt, hereafter defined.
(2) As used herein, the term Senior Debt shall mean principal and
premium, if any, and accrued interest to the extent payable thereon,
whether outstanding on the issue date of the Shares or created thereafter
but prior to the time the Shares shall become a fixed interest debt
obligation of the Corporation (pursuant to the Section providing for the
issuance of each series of Shares hereunder or the Agreement) on all the
following indebtedness of the Corporation: (a) for money borrowed by the
Corporation, whether the same be evidenced by bonds, notes, equipment
trust certificates or debentures or evidenced by a loan agreement or an
indenture or similar instruments; or (b) for money borrowed by others and
assumed or guaranteed, directly or indirectly, by the Corporation; or (c)
constituting purchase money obligations or mortgage indebtedness for
payment of which the Corporation is directly or contingently liable, or
on which the Corporation customarily pays interest, including, but not
limited to, purchase money bonds, notes, debentures or mortgages,
conditional sale agreements, mortgages made or given or guaranteed by the
Corporation as mortgagor or guarantor, and assumed or guaranteed
mortgages upon property; or (d) under equipment lease obligations; or (e)
to general creditors, including lessors, trade creditors and employees
of the Corporation and (f) if prior to the time the Shares shall become
a fixed interest debt obligation of the Corporation, renewals, extensions
and refundings of such indebtedness.
(E) Dividends. The Board of Directors shall have no discretion in the
declaration and payment of dividends on the Shares. Each outstanding Share
shall be entitled to mandatory dividend payments payable annually on the
anniversary of the original issue thereof in accordance with the Payment
Schedule in the Section providing for the issuance of each series of Shares
hereunder, provided however, that such dividend shall be payable only if and
to the extent that (a) the Corporation has "Available Capital" (as defined
herein); and (b) the Corporation is not insolvent and the payment of such
dividend would not render the Corporation insolvent. The Administrator shall
be the sole determiner of whether conditions (a) and (b) above have been met.
"Available Capital" shall mean surplus or net profits or other capital legally
available for the payment of dividends, in accordance with the corporation law
of the Corporation's state of incorporation reduced by any amount the payment
of which the Administrator, in the Administrator's sole judgment, deems would
impair the safe operation of the railroad properties of the Corporation or the
maintenance of the usual standards of efficiency or economy of operation of
such properties. The determinations and judgments of the Administrator
provided for under clauses (a) and (b) of this paragraph shall be reached
following consideration of such information with respect thereto as the
Corporation may present to the Administrator not later than thirty (30) days
prior to the date specified for payment of such dividend. If the conditions
set forth in clauses (a) and (b) are met, either as to the entire amount of
such dividend or any part thereof, such dividend (or the part thereof with
respect to which such conditions are met) shall become an immediately due and
payable debt obligation of the Corporation to the extent such dividend is
payable. If any such dividend would not be payable (and is not fully paid)
because of failure to meet the conditions set forth in clauses (a) or (b), the
unpaid portion thereof shall cumulate until such conditions are met either as
to the entire unpaid portion or any part thereof, at which time the Corporation
shall pay such unpaid portion (or the part thereof with respect to which such
conditions are met) to the extent so payable. If not so paid, such payable
amount shall become an immediately due and payable debt obligation of the
Corporation. Unless and until the cumulated and then due dividends are fully
paid, the Corporation shall not make any distribution of assets, surplus, net
profits or other capital (whether by dividends, redemptions or otherwise) to
any other class of the Corporation's securities to which the Shares have
priority as to dividends or redemption installments thereon or in the case of
dissolution or liquidation. Nothing herein contained, however, gives any
holder of Shares the right and privilege to participate in the net profits of
the Corporation beyond the aforesaid fixed, preferential annual dividend.
Notwithstanding the foregoing, the Corporation shall have the right at its
option, to pay at any time part or all of any unpaid portion of a dividend
payable or cumulating pursuant hereto, provided that the Corporation is not
prohibited at such time from making such payment by the laws of the
Corporation's state of incorporation.
(F) Redemption.
(1) Each outstanding Share shall be entitled to mandatory redemption
installments payable annually on the anniversary date of the date of
issuance thereof in accordance with the Payment Schedule in the Section
providing for the issuance of each series of Shares hereunder, but not
to exceed in the aggregate the initial par value of such Share. Upon
payment of any mandatory redemption installment on any Share, the par
value of such Share shall become an amount equal to the initial par value
of such Share reduced by the amount of such redemption installment and
all previously paid redemption installments on such Share (including
redemption installments paid by SSW in respect of the SSW Redeemable
Preference Shares).
(2) The Board of Directors shall have no discretion in the
declaration and payment of redemption installments on Shares. Except
where prepaid in accordance with the terms and conditions set forth in
the Section providing for the issuance of each series of Shares
hereunder, each redemption installment shall be paid on its due date to
the extent that (a) the Corporation has Available Assets (as defined
herein), and (b) the Corporation is not insolvent and the payment of such
redemption installment would not render it insolvent. The Administrator
shall be the sole determiner of whether conditions (a) and (b) above have
been met. "Available Assets" shall mean assets of the Corporation
legally available for the redemption of shares of capital stock in
accordance with the corporation laws of the Corporation's state of
incorporation, reduced by any amount the payment of which the
Administrator, in the Administrator's sole judgment, deems would impair
the safe operation of the railroad properties of the Corporation or the
maintenance of the usual standards of efficiency or economy of operation
of such properties. The determinations and judgments of the
Administrator provided for under clauses (a) and (b) of this subparagraph
(2) shall be reached following consideration of such information with
respect thereto as the Corporation may present to the Administrator not
later than thirty (30) days prior to the date specified for payment of
such redemption installment. If the conditions set forth in clauses (a)
and (b) above are met, either as to the entire amount of such installment
or any part thereof, such installment (or the part thereof with respect
to which such conditions are met) shall become an immediately due and
payable debt obligation of the Corporation to the extent such installment
is payable. If any such redemption installment would not be payable (and
is not fully paid) because of a failure to meet the conditions set forth
in clauses (a) or (b) hereof, the unpaid portion thereof shall cumulate
until such conditions are met as to such unpaid portion to the extent
thereof, at which time the Corporation shall pay such unpaid portion (or
the part thereof with respect to which such conditions are met) to the
extent so payable. If not so paid, such payable amount shall become an
immediately due and payable debt obligation of the Corporation. Unless
and until the cumulated and then due redemption installments are fully
paid, the Corporation shall not make (I) any distribution of assets
(whether by dividend, redemption or otherwise) to any other class of the
Corporation's securities to which the Shares have priority as to
dividends or redemption installments thereon, or in the case of
liquidation or dissolution; or (ii) any voluntary distribution of assets
(whether by dividend, redemption, or otherwise) to any of the
Corporation's securities which have priority over the Shares as to
dividend or redemption installment thereon, without the Administrator's
prior written consent. Nothing herein contained, however, gives any
holder of Shares the right and privilege in the case of liquidation or
dissolution to participate in the assets of the Corporation beyond the
aggregate unredeemed par value of, and unpaid cumulated and unpaid
accrued dividends (contingent or fixed principal and vested and/or
accrued interest, as the case may be) on the Shares which have been
issued to such holder or the outstanding part thereof. Notwithstanding
the foregoing, the Corporation shall have the right at its option, to pay
at any time part or all of any unpaid portion of a redemption payment
payable or cumulating pursuant hereto, provided that the Corporation is
not prohibited at such time from making such payment by the laws of the
state of its incorporation.
(3) Upon payment of any mandatory redemption installment on any
Share, the par value of each such Share shall be reduced by the amount
of such redemption installment. If at any time Available Assets are
insufficient to pay the full amount of the redemption installments due
on Shares having the same date of issuance, such Available Assets shall
be applied pro rata to reduce the par value of such Shares. Inclusion
by the shareholders of this subparagraph (3) as part of this amendment
to the Amended and Restated Articles of Incorporation of the Corporation
shall constitute the approval by the shareholders, including the holder
or holders of the Shares, of all further amendments to the said Articles
necessary to reduce the par value of the Shares as contemplated
hereunder, and no further meeting of the shareholders, including the
holder or holders of the Shares, shall be required to effect such
amendments. Upon the reduction of the par value of the Shares hereunder,
the Corporation shall cause a Certificate of Amendment to be filed in
accordance with state law.
(4) Shares redeemed pursuant to subparagraphs (1) and (2) of this
Paragraph (F) shall be surrendered to the Corporation. Notwithstanding
that any certificate for Shares shall not have been surrendered to the
Corporation, the rights of the holders of such Shares shall cease and
such Shares shall be deemed no longer outstanding, if:
(a) in the case of optional redemption pursuant to the Section
providing for the issuance of each series of Shares hereunder,
notice shall have been given and, on or before the redemption
date specified in such notice, all funds necessary for such
redemption shall have been deposited in trust with the bank or
trust corporation specified in the notice; or
(b) in the case of mandatory redemption pursuant to
subparagraphs (1) and (3) hereof, payment shall have been made of
the outstanding par value of any Shares and any unpaid cumulated
dividends and unpaid accrued dividends (in excess of such unpaid
cumulated dividends) thereof, or if the address of the holder of
any such Shares is unknown, all funds necessary for such payment
shall have been deposited in trust with a national bank or trust
company for the benefit of such holder.
(5) Where dividends and redemption installments are to be paid from
coincidentally Available Capital and Available Assets, dividends and any
cumulations thereof are to be paid first and redemption installments and
any cumulations thereof are to be paid second. In no event shall there
be a full redemption of any Shares without full payment of all cumulated
and then due dividends thereon.
(G) Voting Rights.
(1) Other than as set forth in this Paragraph (G), or as required by
law, the Shares shall not have any voting rights in the conduct of the
business of the Corporation, and such Shares shall not have any voting
rights on any Transaction (as defined in Paragraph (I) hereof)
consummated in accordance with the provisions of said Paragraph (I).
(2) Whenever any dividend or redemption payment which is due on the
Shares (in accordance with the payment Schedule in the Section providing
for issuance of each series of Shares hereunder) shall have remained
unpaid for a period of four (4) months, whether or not payable as
provided herein, the holder or holders of the Shares shall have the
exclusive right to elect or appoint, in the manner hereinafter provided,
two persons to serve as members of the Board of Directors of the
Corporation, in which event the number of directors constituting the
Board of Directors shall be increased by two to reflect such newly
created directorships. Whenever the right of the holder or holders of
the Shares to elect or appoint two members of the Board of Directors
shall have vested, it shall be exercised initially in the most
expeditious manner, either by written consent of such holder or holders
as provided or permitted by law, or at an annual meeting of the
shareholders, or at a special meeting of shareholders called in
accordance with the By-Laws, and thereafter either by such written
consent or at such annual or special meeting. The term of office of the
directors so elected or appointed by the holder or holders of the Shares
shall continue until the next annual meeting or until their successors
are elected or appointed, provided that upon payment by the Corporation
of all dividend and redemption installments which are due, such terms
shall forthwith terminate. Any vacancies in the two specially created
directorships prior to such termination may be filed by written consent
of the holder or holders of the Shares. Notwithstanding the foregoing,
in no event shall such holder or holders be entitled at any time to elect
or appoint more than an aggregate of two members of the Corporation's
Board of Directors.
(H) Liquidation, Dissolution or Winding Up.
(1) In the event of any voluntary liquidation, dissolution or winding
up of the Corporation, but only in the event that the Shares shall not
have become a debt obligation of the Corporation pursuant to the
Agreement, the holders of Shares shall be entitled to receive, after
payment in full of Senior Debt, the outstanding par value plus any unpaid
cumulated and unpaid accrued dividends (in excess of unpaid cumulated
dividends) thereon.
(2) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, but only in the event that
the Shares shall have become a debt obligation of the Corporation
pursuant to the Agreement, the holders of Shares shall be entitled to
receive after payment in full of Senior Debt, the unpaid principal
thereof and all unpaid interest thereon due to the date of payment
whether accrued, contingent, cumulated or vested or whether previously
denoted par value and dividends.
(3) If the distributable assets are insufficient to make payment in
full in accordance with subparagraphs (1) and (2), such assets shall be
distributed pro rata to the holders of the Shares according to the
outstanding par value of such Shares held by each.
(I) Merger or Consolidation. In the case of any consolidation of the
Corporation with, or merger of the Corporation with or into, one or more
corporations (other than a consolidation or merger in which the Corporation is
the continuing corporation and which does not result in any reclassification
or change in securities of the Corporation), or in case of any sale or
conveyance to another corporation of the property of the Corporation as an
entirety or substantially as an entirety, in the case of a reclassification or
change of any outstanding equity security of the Corporation (other than a
change in par value, or from par value to no par value, or as a result of a
subdivision or combination) (any and all such events being herein called a
"Transaction"), the Corporation or such successor or purchasing corporation
shall give to the holders of the Shares written notice thereof at least twenty
(20) days prior to the effective date of the Transaction and shall have its
authorized representative certify to the holders that the holders of such
Shares then outstanding shall have the same rights and privileges upon the
effectiveness of such Transaction as the holders had immediately prior thereto.
Nothing herein, however, waives any of the holders' rights available under the
laws of the Corporation's state of incorporation.
(J) Agreement.
(1) Shares shall be subject to and entitled to the benefits of these
Articles and an Agreement. An Agreement gives the holders of a majority
of aggregate par value then outstanding of the Shares the rights, upon
the happening of certain events of default set forth in the Agreement,
to declare the Shares to be a fixed interest debt obligation of the
Corporation and/or to declare an acceleration of redemption payments (or
principal payments, as the case may be) to not less than 15 annual
payments (including payments already made), with such payments (or
further payments) to begin 10 days after declaration thereof (except, if
scheduled redemptions have already begun, to continue with the next
redemption installment) but not earlier than the 6th anniversary date of
the date of the original issuance of Shares and/or to declare an increase
in the dividend rate (or interest rate, as the case may be) on the Shares
in accordance with the Section providing for the issuance of each series
of Shares. Except as otherwise provided, commencing upon each such
declaration and until the next declaration each subsequent payment shall
be equal in total redemption and dividend (principal and interest)
amount. In the event of certain other events of default, including the
Corporation's discontinuance of business, making a general assignment for
the benefit of creditors, and filing a petition in bankruptcy, the Shares
shall automatically become a fixed interest debt obligation of the
Corporation and the redemption installments (or principal payments, as
the case may be) set forth in the Payment Schedule in the Section
providing for the issuance of each series of Shares hereunder shall
automatically accelerate to a maximum of 15 annual payments (including
payments already made), each subsequent payment to be equal in total
principal and interest amount, with such payments (or further payments)
to begin immediately upon the occurrence of such event of default
(except, if scheduled redemptions have already begun, to continue with
the next redemption installment) but not earlier than the 6th anniversary
date of the date of original issuance of the Shares, and the dividend
rate (or interest rate, as the case may be) on the Shares shall
automatically be to the highest permissible rate raised in accordance
with the Section providing for the issuance of each series of Shares.
Notwithstanding the provisions of this subparagraph, the Shares may
become a fixed interest debt obligation only if, when and to the extent
they may become a debt obligation without violating any provisions of the
laws of the Corporation's state of incorporation. The holders of the
Shares and the Corporation agree that in the event of any litigation
concerning the question of whether the provisions of the laws of the
Corporation's state of incorporation must be met in order that the Shares
become a fixed interest debt obligation of the Corporation pursuant to
an Agreement, no evidence other than the Agreement and the Shares as to
the intent of the parties to the Agreement on such question shall be
introduced by the parties to the Agreement. Except as otherwise provided
in this Paragraph (J) or an Agreement, upon the Shares becoming a fixed
interest debt obligation hereunder, the Payment Schedule in the Section
providing for the issuance of each series of Shares hereunder shall
represent fixed mandatory interest (at the dividend rate set forth in
such Section hereunder) and principal payments, and any unpaid cumulated
dividend and/or redemption installments (and contingent interest and/or
principal payments, as the case may be), shall respectively become
immediately due and payable accrued interest and principal (and any
accrued dividends or vested right to interest shall become immediately
accrued interest payable in accordance with the Payment Schedule in the
Section providing for the issuance of each series of Shares hereunder
except as otherwise provided in this Paragraph (J) or the Agreement) and
such fixed mandatory interest payments and fixed mandatory principal
payments shall be, when due, an absolute and unconditional obligation of
the Corporation and shall not be governed by statutory limitations
regarding distributions in respect of equity securities, nor by the
provisions of Paragraphs (E) and (F) hereof.
(2) If the Corporation shall classify the Shares as debt on any
balance sheet furnished to any class of its shareholders or creditors,
or otherwise issued publicly, such Shares shall automatically become a
subordinated debt obligation of the Corporation ("Subordinated Debt") as
of the date of such balance sheet, and dividend and redemption
installments thereon shall become, respectively, contingent interest and
principal payments, provided such Shares could lawfully become
Subordinated Debt. In such event, contingent interest will be payable
at the dividend rate set forth in the Section providing for the issuance
of each series of Shares hereunder and in accordance with the Payment
Schedule in such Section hereunder (except as otherwise provided in this
Paragraph (J) or the Agreement), provided, however, that the
Corporation's obligation to pay contingent interest shall be subject to
the conditions set forth in clauses (a) and (b) of Paragraph (E).
Contingent principal payments will be payable in accordance with the
provisions of Paragraph (F) hereof (except as otherwise provided in this
Paragraph (J) or the Agreement), provided, however, that the
Corporation's obligation to pay contingent principal payments shall be
subject to the conditions set forth in clauses (a) and (b) of
subparagraph (2) of Paragraph (F). Such Shares which have become
Subordinated Debt will be subordinate to Senior Debt of the Corporation.
The classification of the Shares as Debt and such Shares becoming
Subordinated Debt in accordance with this subparagraph shall not
constitute an event of default under the Agreement, but if an event of
default shall have occurred before or shall occur after such Shares have
become Subordinated Debt, such Subordinated Debt may become fixed
interest debt as that term is used in the Agreement when Shares directly
become fixed interest debt.
(K) No Waiver. The failure of any holder of Shares to exercise any rights
granted to it hereunder or under the share certificate shall not constitute a
waiver of such rights or of any other rights. Failure by any holder of Shares
to exercise any rights granted hereunder or under the share certificate, in the
event of non-payment of any required payment when due, shall not be deemed a
waiver of such non-payment or of further non-payments by the Corporation. The
remedies granted to the holders of Shares hereunder or under the share
certificate shall be deemed cumulative and not exclusive.
(L) Certificates. The Shares are issued subject to the following conditions
and each certificate for such Shares shall be marked or stamped substantially
as follows:
"The preferences and other rights, terms and conditions of the Redeemable
Preference Shares are as stated in the Corporation's Amended and Restated
Articles of Incorporation ("Articles"). A written description of such
preferences and other rights, terms and conditions will be supplied upon
request to each holder by the Corporation. This Certificate is issued
subject to the provisions limiting transfer or sale of the Shares of the
Corporation contained in the Articles, and neither this Certificate nor
any of the Shares represented by it may be sold, transferred or assigned,
except in accordance with the provisions of the Articles. A full
statement of said limitations upon transfer or sale will be furnished
upon request and without charge to any shareholder.
The Shares represented by this Certificate have not been registered under
the Securities Act of 1933, as amended, or any other state or Federal
laws, including the provisions of Section 11301 of Title 49 of the United
States Code (49 U.S.C. 11301). Such shares have been acquired for
investment and all holders thereof at any time hereby acknowledge and
agree that such shares may not be offered for sale, sold, delivered after
sale, transferred, pledged or hypothecated, nor will any assignee or
endorsee hereof be recognized as an owner hereof by the issuer for any
purpose, unless a Registration Statement under the Securities Act of 1933
as amended with respect to such Shares shall then be in effect and the
requirements of other applicable state and Federal laws, rules and
regulations, including Section 11301 of Title 49 of the United States
Code, shall have been complied with or unless the availability of an
exemption from registration shall be established to the satisfaction of
outside counsel for the Corporation, whose fees shall be paid by the
Corporation. In determining the availability of such an exemption such
counsel shall take into account the Corporation's obligation hereunder
to make available adequate current information concerning the
Corporation. The Corporation shall be under no obligation to pay for any
registration of such Shares under applicable state and Federal laws,
rules and regulations, or otherwise to pay (except for such outside
counsel fees) for any steps which might be necessary to accomplish a
transfer of such Shares under such laws. Upon the request of any holder
of such Shares or part thereof, the Corporation will make available
adequate current information concerning the Corporation to enable such
holder to sell such Shares or part thereof (whether or not a sale is then
contemplated) in compliance with such Federal and state laws, rules and
regulations to the extent such information shall not already be publicly
available. In addition, the United States of America (and no other
holder) hereby acknowledges and agrees that no such Shares shall be
transferred or conveyed except upon twenty (20) days prior written notice
to the Corporation of the terms and conditions of such proposed transfer
or conveyance and that, for twenty days after receipt of such notice, the
Corporation shall have the right of first refusal to purchase any such
Shares to be transferred or conveyed."
(M) Alteration of Rights. So long as any Shares are outstanding, the
Corporation shall not without the written consent or affirmative vote of the
holders of at least 2/3rds of such Shares, amend, alter or repeal the powers,
preferences or special rights of such Shares so as to affect them adversely.
Section 6.2 Series A. The relative rights, preferences, limitations and
restrictions of the Redeemable Preference Shares, Series A (the "Series A
Shares") which are not otherwise provided for in Section 6.1 hereunder are as
follows (terms not otherwise defined under this Section 6.2 shall have the
meanings given them in Section 6.1 hereunder):
(A) Dividends.
(1) The holders of Series A Shares shall be entitled to receive fixed
preferential annual dividends in cash at the rate of 4.2% on the then
outstanding par value thereof payable annually on the anniversary date
of the date of issuance thereof commencing on the 11th anniversary in
accordance with the payment schedule in Paragraph (c) hereunder (the
"Payment Schedule"); provided that for the purpose of this subparagraph
"the then outstanding par value" shall be determined for each year as if
all scheduled mandatory redemption installments had been paid, whether
or not such installments have in fact been paid.
(2) Except in the case of optional redemption of Series A Shares by
the Corporation according to the terms prescribed, each Series A Share
shall accrue a dividend of 50% of its initial par value commencing on the
10th anniversary date of its original issuance, which accrual shall be
payable in accordance with the provisions hereof. If, prior to or upon
any liquidation, dissolution or winding up of the Corporation, (a) such
Series A Share has become a Subordinated Debt obligation of the
Corporation (pursuant to these Articles or the Agreement), such dividend
accrual of 50% or the remaining unpaid portion thereof shall become a
vested right to interest to the extent of such unpaid portion, but shall
be payable only in accordance with such Agreement and these Articles, or
(b) such Series A Share shall become a fixed interest debt obligation of
the Corporation (pursuant to these Articles or the Agreement), such
dividend accrual of 50% or the remaining unpaid portion thereof, or such
vested right to interest or the remaining unpaid portion thereof, shall
become an immediate interest accrual to the extent of such unpaid
portion, but shall be payable only in accordance with the Agreement and
these Articles.
(3) Except as otherwise provided herein or in the Agreement the total
amount of dividends payable on each Series A Share shall not exceed 50%
of the initial par value thereof.
(B) Redemption.
(1) Prior to the 11th anniversary date of the date of issuance of any
Series A Shares, the Corporation may at its option redeem any number of
such Shares at any time at a redemption price of the initial par value
of such Shares plus a per Share premium of $203.00 (or such other amount
as correlates to the then determined yield to maturity multiplied by 100)
multiplied by the number of years (including fractional years as whole
years) such Shares were outstanding. If less than all of the outstanding
Series A Shares are to be redeemed, the Shares to be redeemed shall be
determined by lot or in any other fair and impartial manner normally used
to select Shares for redemption or as hereafter provided. If redemption
is to be by lot each certificate representing more than one Share shall
be assigned a number for each Share represented by such certificate.
(2) On or after the 11th anniversary date of the date of issuance of
any Series A Shares, the Corporation may at any time redeem Series A
Shares but no less than all such Shares having that same date of
issuance, at a redemption price of the then outstanding par value of such
Shares and all unpaid cumulated dividends thereon, plus a per Share
premium of $203.00 (or such other amount as correlates to the then
determined yield to maturity multiplied by 100) multiplied by the number
of years (including fractional years as whole years) such Shares were
outstanding. If such Shares shall have become contingent or fixed debt,
as the case may be, prepayment shall be in an amount computed hereby as
if the Shares had not become such.
(3) There shall be credited only against the premium payable on any
optionally redeemed Series A Shares (but not against the par value or
dividends thereof) the aggregate amount of dividends previously payable
and then paid on such optionally redeemed Series A Shares.
(4) Notice of optional redemption of Series A Shares shall be mailed,
addressed to the holders of record of the Shares to be redeemed at their
respective addresses as they shall appear on the stock books of the
Corporation at least 10 days prior to the date fixed for redemption.
(c) Payment Schedule for Series A Shares.
Redemption
Anniversary Date Dividends Installments
of Issuance Per Share Per Share
1980. . . . . . . . . . - -
1981. . . . . . . . . . - -
1982. . . . . . . . . . - -
1983. . . . . . . . . . - -
1984. . . . . . . . . . - -
1985. . . . . . . . . . - -
1986. . . . . . . . . . - -
1987. . . . . . . . . . - -
1988. . . . . . . . . . - -
1989. . . . . . . . . . - -
1990. . . . . . . . . . - -
1991. . . . . . . . . . $421.43 $328.57
1992. . . . . . . . . . 406.53 343.47
1993. . . . . . . . . . 393.20 356.80
1994. . . . . . . . . . 378.18 371.82
1995. . . . . . . . . . 362.53 387.47
1996. . . . . . . . . . 347.30 402.70
1997. . . . . . . . . . 329.23 420.77
1998. . . . . . . . . . 311.52 438.48
1999. . . . . . . . . . 293.06 456.94
2000. . . . . . . . . . 273.82 476.18
2001. . . . . . . . . . 253.77 496.23
2002. . . . . . . . . . 232.87 517.13
2003. . . . . . . . . . 211.09 538.91
2004. . . . . . . . . . 188.39 561.61
2005. . . . . . . . . . 164.73 585.27
2006. . . . . . . . . . 140.08 609.92
2007. . . . . . . . . . 114.38 635.62
2008. . . . . . . . . . 87.60 662.40
2009. . . . . . . . . . 59.69 690.31
2010. . . . . . . . . . 30.60 719.40
(D) Agreement. Series A Shares shall be subject to and entitled to the
benefits of these Articles and an Agreement. The Agreement gives the holders
of a majority of aggregate par value then outstanding of the Series A Shares
the rights, upon the happening of certain events of default set forth in the
Agreement, to declare the Series A Shares to be a fixed interest debt
obligation of the Corporation and/or to declare an acceleration of redemption
payments (or principal payments, as the case may be) to not less than 15 annual
payments (including payments already made), with such payments (or further
payments) to begin 10 days after declaration thereof (except, if scheduled
redemptions have already begun, to continue with the next redemption
installment) but not earlier than the 6th anniversary date of the date of the
original issuance of Series A Shares and/or to declare an increase in the
dividend rate (or interest rate, as the case may be) in the Series A Shares so
as to reflect a yield to maturity on the Series A Shares of 2.03% from the date
of original issuance to the declaration date and up to 6.68% from the
declaration date, which yields shall return to the holder not less than 150%
of the aggregate par value of the Shares (but with accrual and payment thereof
to commence not earlier than the 10th anniversary date of the date of original
issuance of the Series A Shares). Except as otherwise provided, commencing
upon each such declaration and until the next declaration each subsequent
payment shall be equal in total redemption and dividend (principal and
interest) amount. In the event of certain other events of default, including
the Corporation's discontinuance of business, making a general assignment for
the benefit of creditors, and filing a petition in bankruptcy, the Series A
Shares shall automatically become a fixed interest debt obligation of the
Corporation and the redemption installments (or principal payments, as the case
may be) set forth in the Payment Schedule in this Section shall automatically
accelerate to a maximum of 15 annual payments (including payments already
made), each subsequent payment to be equal in total principal and interest
amount, with such payments (or further payments) to begin immediately upon the
occurrence of such event of default (except, if scheduled redemptions have
already begun, to continue with the next redemption installment) but not
earlier than the 6th anniversary date of the date of original issuance of the
Series A Shares, and the dividend rate (or interest rate, as the case may be)
on the Series A Shares shall automatically be raised so as to reflect as yield
to maturity on the Series A Shares of 2.03% from the date of original issuance
to the date of such event of default and 6.68% from the date of such event of
default, which yields shall return to the holder not less than 150% of the
aggregate par value of the Shares (but with accrual and payment thereof to
commence not earlier than the 10th anniversary date of the date of original
issuance of the Series A Shares).
Notwithstanding the provisions of this subparagraph, the Series A Shares may
become a fixed interest debt obligation only if, when and to the extent they
may become a debt obligation without violating any provisions of the laws of
the Corporation's state of incorporation. The holders of the Series A Shares
and the Corporation agree that in the event of any litigation concerning the
question of whether the provisions of the laws of the Corporation's state of
incorporation must be met in order that the Series A Shares become a fixed
interest debt obligation of the Corporation pursuant to these Articles and the
Agreement, no evidence other than the Agreement and the Series A Shares as to
the intent of the parties to the Agreement on such question shall be introduced
by the parties to the Agreement. Except as otherwise provided in this
Paragraph (D) or the Agreement, upon the Series A Shares becoming a fixed
interest debt obligation hereunder, the Payment Schedule in this Section shall
represent fixed mandatory interest (at the dividend rate set forth in this
Section) and principal payments, and any unpaid cumulated dividend and/or
redemption installments (and contingent interest and/or principal payments, as
the case may be), shall respectively become immediately due and payable accrued
interest and principal (and any accrued dividends or vested right to interest
shall become immediately accrued interest payable in accordance with the
Payment Schedule in this Section except as otherwise provided in this Paragraph
(D) or the Agreement), and such fixed mandatory interest payments and fixed
mandatory principal payments shall be, when due, an absolute and unconditional
obligation of the Corporation and shall not be governed by statutory
limitations regarding distributions in respect of equity securities, nor by the
provisions of Paragraphs (E) and (F) of Section 6.1 hereof.
Section 6.3 Series B. Sections 6.1 and 6.2 herein shall apply to the
Redeemable Preference Shares issued to finance the rehabilitation of certain
parts of Armourdale Yard, Kansas City, Kansas, only if a court of competent
jurisdiction by a final, binding judgment determines that such Redeemable
Preference Shares shall be equity instruments in which case they shall be
denoted for purposes hereof as "Series B Shares."
The relative rights, preferences, limitations and restrictions of the Series
B Shares which are not otherwise provided for in Section 6.1 hereunder are as
follows (terms not otherwise defined under this Section 6.3 shall have the
meanings given them in Section 6.1 hereunder):
(A) Dividends.
(1) The holders of Series B Shares shall be entitled to receive fixed
preferential annual dividends in cash at the rate of 28.454524% on the
then outstanding par value thereof payable annually on the anniversary
date of the date of issuance commencing upon the date of issuance in
accordance with the payment schedule in Paragraph (C) hereunder (the
"Payment Schedule"); provided that for the purpose of this subparagraph
"the then outstanding par value" shall be determined for each year as if
all scheduled mandatory redemption installments had been paid, whether
or not such installments have in fact been paid.
(2) Except in the case of optional redemption of Series B Shares by
the Corporation according to the terms prescribed, each Series B Share
shall accrue a dividend commencing on the 10th anniversary date of its
original issuance, which accrual shall be payable in accordance with the
provisions hereof. If, prior to or upon any liquidation, dissolution or
winding up of the Corporation, (a) such Series B Share has become a
Subordinate Debt obligation of the Corporation (pursuant to these
Articles or the Agreement), such dividend accrual thereof shall become
a vested right to interest to the extent of such unpaid portion, but
shall be payable only in accordance with such Agreement and these
Articles, or (b) such Series B Share shall become a fixed interest debt
obligation of the Corporation (pursuant to these Articles or the
Agreement), such dividend accrual or the remaining unpaid portion
thereof, or such vested right to interest or the remaining unpaid portion
thereof, shall become an immediate interest accrual to the extent of such
unpaid portion, but shall be payable only in accordance with the
Agreement and these Articles.
(B) Redemption.
(1) Prior to the 6th anniversary date of the date of issuance of any
Series B Share, the Corporation may, at its option, redeem or cause to
be redeemed any number of such Series B Shares at any time, but only at
a redemption price of the then outstanding par value of each such Series
B Share and all unpaid, accrued dividends thereon to the date of such
redemption, plus a per Series B Share premium of four hundred ninety
dollars ($490) for each year (including fractional years as whole years)
such Series B Shares were outstanding. If less than all of the
outstanding Series B Shares are to be redeemed, the Series B Shares to
be redeemed shall be determined by lot or in any other fair and impartial
manner.
(2) After the 6th anniversary date of the date of issuance of any
Series B Share, the Corporation may, at its option, redeem or cause to
be redeemed at any time only all such Series B Shares having the same
date of issuance, and only at a redemption price equal to the then
outstanding par value of each such Series B Share and all unpaid, accrued
dividends thereon to the date of such redemption, plus a per Series B
Share premium of four hundred ninety ($490) for each year (including
fractional years as whole years) such Series B Shares were outstanding.
(3) There shall be credited only against the premium payable on any
optionally redeemed Series B Share (but not against the par value or
dividends thereof), the aggregate amount of dividends paid on such
optionally redeemed Series B Share.
(4) Notice of optional redemption of any Series B Share shall be
mailed and addressed to the Administrator in accordance with the manner
specified in Section 8.06 of the Series B Share Agreement.
(c) Payment Schedule for Series B Shares.
Period Par Value Dividends Total Payment
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 $1,215.50 0 $1,215.50
7 1,215.50 0 1,215.50
8 1,215.50 0 1,215.50
9 1,215.50 0 1,215.50
10 1,215.50 0 1,215.50
11 99.37 $1,116.13 1,215.50
12 127.65 1,087.85 1,215.50
13 163.97 1,051.53 1,215.50
14 210.63 1,004.87 1,215.50
15 270.56 944.94 1,215.50
16 347.55 867.95 1,215.50
17 446.44 769.06 1,215.50
18 573.47 642.03 1,215.50
19 736.65 478.85 1,215.50
20 946.21 269.29 1,215.50
---------- --------- ----------
$10,000.00 $8,232.50 $18,232.50
========== ========= ==========
(D) Agreement. Series B Shares shall be subject to, and entitled to the
benefits of an Agreement and these Articles. The holders of a majority of
aggregate par value outstanding of the Series B Shares may upon the happening
of certain events of default as set forth in the Agreement declare the Series
B Shares to be a fixed interest debt obligation of the Corporation and/or to
declare and/or to declare an increase in the dividend rate (or interest rate,
as the case may be) on the Series B Shares so as to reflect a yield to maturity
on the Series B Shares of 4.90% from the date of original issuance to the
declaration date and up to 8.72% from the declaration date (but with accrual
and payment thereof to commence not earlier than the 10th anniversary date of
the date of original issuance of the Series B Shares). Except as otherwise
provided, commencing upon each such declaration and until the next declaration
each subsequent payment shall be equal in total redemption and dividend
(principal and interest) amount. In the event of certain other events of
default, including the Corporation's discontinuance of business, making a
general assignment for the benefit of creditors, and filing a petition in
bankruptcy, the Series B Shares shall automatically become a fixed interest
debt obligation of the Corporation and the dividend rate (or interest rate, as
the case may be) on the Series B Shares shall automatically be raised so as to
reflect as yield to maturity on the Series B Shares of 4.90% from the date of
original issuance to the date of such event of default and 8.72% from the date
of such event of default (but with accrual and payment thereof to commence not
earlier than the 10th anniversary date of the date of original issuance of the
Series B Shares).
Notwithstanding the provisions of this subparagraph, the Series B Shares may
become a fixed interest debt obligation only if, when and to the extent they
may become a debt obligation without violating any provisions of the laws of
the Corporation's state of incorporation. The holders of the Series B Shares
and the Corporation agree that in the event of any litigation concerning the
question of whether the provisions of the laws of the Corporation's state of
incorporation must be met in order that the Series B Shares become a fixed
interest debt obligation of the Corporation pursuant to these Articles and the
Agreement, no evidence other than the Agreement and the Series B Shares as to
the intent of the parties to the Agreement on such question shall be introduced
by the parties to the Agreement. Except as otherwise provided in this
Paragraph (D) or the Agreement, upon the Series B Shares becoming a fixed
interest debt obligation hereunder, the Payment Schedule in this Section shall
represent fixed mandatory interest (at the dividend rate set forth in this
Section) and principal payments, and any unpaid cumulated dividend and/or
redemption installments (and contingent interest and/or principal payments, as
the case may be), shall respectively become immediately due and payable accrued
interest and principal (and any accrued dividends or vested right to interest
shall become immediately accrued interest payable in accordance with the
Payment Schedule in this Section except as otherwise provided in this Paragraph
(D) or the Agreement), and such fixed mandatory interest payments and fixed
mandatory principal payments shall be, when due, an absolute and unconditional
obligation of the Corporation and shall not be governed by statutory
limitations regarding distributions in respect of equity securities, nor by the
provisions of Paragraphs (E) and (F) of Section 6.1 hereof.
Exhibit 12
----------
UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts In Thousands, Except Ratios)
(Unaudited)
Nine Months
Ended September 30,
-------------------------
1997 1996
----------- -----------
Earnings:
Income from continuing operations. . . . . . $ 657,864 $ 648,987
Undistributed equity earnings (22,729) (28,158)
----------- -----------
Total. . . . . . . . . . . . . . . . . . 635,135 620,829
----------- -----------
Income Taxes . . . . . . . . . . . . . . . . 387,902 326,636
----------- -----------
Fixed Charges:
Interest expense including amortization
of debt premium . . . . . . . . . . . . 288,703 292,127
Portion of rentals representing an
interest factor. . . . . . . . . . . . . 104,984 77,720
----------- -----------
Total Fixed Charges. . . . . . . . . . . 393,687 369,847
----------- -----------
Earnings available for fixed charges . . . . . $1,416,724 $1,317,312
=========== ===========
Ratio of earnings to fixed charges (Note 8). . 3.6 3.6
=== ===
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