UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 1-8159
BURLINGTON NORTHERN INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1400580
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Continental Plaza, 777 Main St.
Fort Worth, Texas 76102-5384
(Address of principal executive offices) (Zip Code)
(817) 333-2000
(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_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding
Common stock, without par value
as of July 31, 1995 89,787,928 shares
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues $ 1,284 $ 1,192 $ 2,631 $ 2,402
Costs and expenses:
Compensation and benefits 451 426 940 873
Fuel 100 89 198 172
Materials 69 70 149 155
Equipment rents 116 111 232 217
Purchased services 110 115 214 232
Depreciation 99 89 198 176
Other 88 114 232 217
------- -------- ------- --------
Total costs and expenses 1,033 1,014 2,163 2,042
------- -------- ------- --------
Operating income 251 178 468 360
Interest expense 50 39 93 78
Other income (expense), net 12 (5) 15 (6)
------- -------- ------- --------
Income before income taxes and
cumulative effect of change in
accounting method 213 134 390 276
Income tax expense 83 52 152 107
------- -------- ------- --------
Income before cumulative effect of
change in accounting method 130 82 238 169
Cumulative effect of change in
accounting method, net of tax - - - (10)
------- -------- ------- --------
Net income $ 130 $ 82 $ 238 $ 159
======= ======== ======= ========
Primary earnings per common share:
Income before cumulative effect of
change in accounting method $ 1.37 $ .85 $ 2.51 $ 1.75
Cumulative effect of change in
accounting method - - - (.11)
------- -------- ------- --------
Primary earnings per common share $ 1.37 $ .85 $ 2.51 $ 1.64
======= ======== ======= ========
Shares used in computation
(in thousands) 90,834 90,244 90,546 90,286
Fully diluted earnings per common
share:
Income before cumulative effect
of change in accounting method $ 1.32 $ .84 $ 2.42 $ 1.74
Cumulative effect of change in
accounting method - - - (.11)
------- -------- ------- --------
Fully diluted earnings per
common share $ 1.32 $ .84 $ 2.42 $ 1.63
======= ======== ======= ========
Shares used in computation
(in thousands) 98,350 97,584 98,198 97,626
Dividends declared per common
share $ .30 $ .30 $ .60 $ .60
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1995 1994
-------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31 $ 27
Accounts receivable, net 667 697
Materials and supplies 130 100
Current portion of deferred income taxes 151 156
Other current assets 205 32
-------- ---------
Total current assets 1,184 1,012
Investment in Santa Fe Pacific Corporation 638 -
Property and equipment, net 6,493 6,311
Other assets 310 269
-------- ---------
Total assets $ 8,625 $ 7,592
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 539 $ 534
Compensation and benefits payable 282 264
Casualty and environmental reserves 225 248
Taxes payable 169 138
Accrued interest 47 45
Other current liabilities 74 96
Commercial paper 231 90
Current portion of long-term debt 31 32
-------- ---------
Total current liabilities 1,598 1,447
Long-term debt 2,194 1,697
Deferred income taxes 1,543 1,456
Casualty and environmental reserves 422 416
Other liabilities 336 339
-------- ---------
Total liabilities 6,093 5,355
-------- ---------
Stockholders' equity:
Convertible preferred stock, no par value,
$345 liquidation value; 25,000,000 shares
authorized; 6,900,000 shares issued;
6,889,657 shares and 6,900,000 shares
outstanding, respectively 336 337
Common stock, without par value, at stated
value, 300,000,000 shares authorized;
89,806,685 shares and 89,329,259 shares
issued, respectively 1 1
Additional paid-in capital 1,469 1,443
Retained earnings 659 485
Treasury stock, at cost, 64,749 shares
and 105,438 shares, respectively (3) (5)
Other 70 (24)
-------- ---------
Total stockholders' equity 2,532 2,237
-------- ---------
Total liabilities and stockholders'
equity $ 8,625 $ 7,592
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 238 $ 159
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting method - 10
Depreciation 198 176
Deferred income taxes 39 50
Changes in current assets and liabilities:
Accounts receivable, net 32 20
Materials and supplies (31) (27)
Other current assets (173) (135)
Accounts payable 5 17
Compensation and benefits payable 20 (15)
Casualty and environmental reserves (23) (12)
Taxes payable 33 17
Accrued interest 2 2
Other current liabilities (22) (23)
Changes in long-term casualty and environmental
reserves 6 (16)
Other, net (23) (28)
------- -------
Net cash provided by operating activities 301 195
------- -------
Cash flows from investing activities:
Investment in Santa Fe Pacific Corporation (500) -
Additions to property and equipment (376) (289)
Proceeds from property and equipment dispositions 17 22
Other, net (13) (13)
------- -------
Net cash used in investing activities (872) (280)
------- -------
Cash flows from financing activities:
Net increase in commercial paper 141 178
Proceeds from issuance of long-term debt 522 149
Payments on long-term debt (32) (181)
Dividends paid (64) (64)
Proceeds from exercise of common stock options 8 5
Other, net - (1)
------- -------
Net cash provided by financing activities 575 86
------- -------
Increase in cash and cash equivalents 4 1
Cash and cash equivalents:
Beginning of period 27 17
------- -------
End of period $ 31 $ 18
======= =======
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 88 $ 74
Income taxes paid, net of refunds 77 39
Supplemental noncash investing and financing
activities information:
Assets financed through capital lease obligations $ 3 $ 50
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting policies
The 1994 Annual Report on Form 10-K for Burlington Northern Inc. (BNI) and its
majority-owned subsidiaries (collectively BN) includes a summary of
significant accounting policies and should be read in conjunction with this
Form 10-Q. The principal subsidiary is Burlington Northern Railroad Company
(Railroad). The statements for the periods presented are condensed and do not
contain all information required by generally accepted accounting principles
to be included in a full set of financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly BN's financial position as of June 30, 1995 and
December 31, 1994 and the results of operations for the three-month and
six-month periods ended June 30, 1995 and 1994 and cash flows for the
six-month periods ended June 30, 1995 and 1994 have been included. The
results of operations for any interim period are not necessarily indicative of
the results of operations to be expected for the entire year. Certain prior
year data has been reclassified to conform to the current year presentation.
2. Earnings per common share
Primary earnings per common share are computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of
common shares and common share equivalents outstanding. Fully diluted
earnings per common share are computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding.
Common share equivalents are computed using the treasury stock method. An
average market price is used to determine the number of common share
equivalents for primary earnings per common share. The higher of the average
or end-of-period market price is used to determine common share equivalents
for fully diluted earnings per common share. In addition, the if-converted
method is used for convertible preferred stock when computing fully diluted
earnings per common share.
3. Agreement to merge and tender offers
As of June 29, 1994, BNI and Santa Fe Pacific Corporation (Santa Fe) entered
into an Agreement and Plan of Merger (the Original Agreement) pursuant to
which, on the terms and conditions set forth in the Original Agreement, Santa
Fe would merge (effected in the manner set forth below, the Merger) with and
into BNI, and BNI would be the surviving corporation and each share of Santa
Fe common stock would be converted into 0.27 of a share of BNI common stock.
The Original Agreement was subsequently amended as of October 26, 1994,
December 18, 1994 and January 24, 1995. The Original Agreement, as so
amended, is referred to as the Merger Agreement. Stockholders of BNI and
Santa Fe approved the Merger Agreement at special stockholders' meetings held
on February 7, 1995.
Pursuant to the Merger Agreement, BNI and Santa Fe were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i)
a merger of Santa Fe with and into BNI and (ii) the holding company structure
(the Holding Company Structure) described below. In order to ensure that the
transaction contemplated by the Merger Agreement qualifies as a tax-free
transaction for United States federal income tax purposes, the parties intend
to utilize the Holding Company Structure.
Under the Holding Company Structure, BNSF Corporation, a Delaware corporation
(BNSF), formed to effect the transaction in this manner, would create two
subsidiaries. One such subsidiary would merge into BNI, and the other such
subsidiary would merge into Santa Fe. Each holder of one share of BNI common
stock would receive one share of BNSF common stock and each holder of one
share of Santa Fe common stock, excluding the Santa Fe common stock acquired
by BNI in the Tender Offer referred to below and the Santa Fe common stock
held by Santa Fe as treasury stock, would receive not less than 0.40 and not
more than 0.4347 shares of BNSF common stock depending upon the number of
additional shares of Santa Fe common stock repurchased by Santa Fe as
permitted under the Repurchase Program discussed below. The Santa Fe common
stock acquired by BNI in the Tender Offer would remain outstanding and the
Santa Fe common stock held by Santa Fe as treasury stock would be canceled.
The rights of each stockholder of BNSF would be substantially identical to the
rights of a stockholder of BNI, and the Holding Company Structure would have
the same economic effect with respect to the stockholders of BNI and Santa Fe
as would a direct merger of BNI and Santa Fe. The Merger will be accounted
for under the purchase method of accounting upon consummation, and BNI's
investment will be included in the purchase price.
Also pursuant to the Merger Agreement, on December 23, 1994, BNI and Santa Fe
commenced tender offers, (together, the Tender Offer) to acquire 25 million
and 38 million shares of Santa Fe common stock, respectively, at $20 per share
in cash representing 13 percent and 20 percent, respectively, of the then
outstanding Santa Fe common stock. On February 6, 1995, BNI entered into a
five-year $500 million unsecured bank credit facility (the Tender Offer
Facility), whereby a group of banks agreed to finance BNI's purchase of
shares of Santa Fe common stock in the Tender Offer. Funding of the Tender
Offer was completed on February 21, 1995. At BNI's option, renewals of
borrowings can be obtained either through a competitive bid or a standby
procedure. Rates for borrowing under the standby procedure are, at BNI's
option, based upon the selected term of the London Interbank Offered Rate
(LIBOR) or certificate of deposit rate plus, in either case, a spread based
upon BNI's senior unsecured debt ratings and the amount borrowed under the
Tender Offer Facility, or an alternative base rate.
As of June 30, 1995, Santa Fe had borrowed $1,033 million from a syndicate of
financial institutions under a new credit agreement, of which $760 million was
used for the Santa Fe tender offer and the remaining borrowings were primarily
used to replace existing Santa Fe debt and pay related expenses.
Under the Repurchase Program as set forth in the Merger Agreement, Santa Fe is
permitted, at its discretion and subject to certain financial and performance
criteria of Santa Fe set forth in its credit agreement and the Merger
Agreement (including minimum cash flows, cash capital expenditures and maximum
total debt), to repurchase up to 10 million shares of Santa Fe common stock
prior to consummation of the Merger. The number of shares of BNSF common
stock to be issued in the Merger will not be affected by the number of
additional shares of Santa Fe common stock repurchased by Santa Fe under the
Repurchase Program. Accordingly, the exchange ratio of BNSF common shares to
be offered for each share of outstanding Santa Fe common stock upon
consummation of the Merger would be set at not less than 0.40 and not more
than 0.4347 shares. As of June 30, 1995, Santa Fe had repurchased
approximately 2.3 million shares which would result in an exchange ratio of
0.4073 shares.
As is typical in the context of a merger, certain benefits of officers and
employees vested upon approval of the Merger by the stockholders of BNI and
Santa Fe. In particular, on February 7, 1995, restrictions previously placed
upon certain BNI stock grants lapsed and the previously unearned compensation
relating to such restricted stock, included in BNI's stockholders' equity, was
charged to expense. The unearned compensation relating to restricted stock at
the time of vesting and related payroll taxes were approximately $24 million.
BNI expects to incur other costs related to the Merger, some of which will be
included in the determination of the total purchase price.
Consummation of the Merger is subject to approval by the Interstate Commerce
Commission (ICC) and other customary conditions. In connection with the ICC
proceedings, on January 27, 1995, BNI and Santa Fe requested the ICC to adopt
an expedited procedural schedule for reviewing the merger, based on a
timetable the ICC had proposed to adopt for all major railroad mergers. On
March 9, 1995, the ICC issued a schedule providing for a final decision on the
merger application on or before August 23, 1995. Interested parties,
including other railroads, shippers and state agencies, indicated their intent
to participate in the ICC proceeding on April 10, 1995. Railroad and The
Atchison, Topeka and Santa Fe Railway Company (ATSF) have entered into
agreements with Union Pacific Railroad Company; Southern Pacific
Transportation Company, The Denver Rio Grande Western Railroad Company, St.
Louis Southwestern Railway Company and SPCSL Corp.; and Kansas City Southern
Railway Company, among others, whereby those carriers agreed not to oppose the
ICC's approval of the Merger in exchange for grants of certain trackage
rights, haulage arrangements or other such arrangements. On July 20, 1995,
the ICC held a voting conference at which it voted to approve the Merger,
subject to limited conditions primarily regarding other carriers' operations
over Railroad's and ATSF's tracks. Given their limited nature, these
conditions will not impact the anticipated benefits of the Merger. It is
expected the ICC will issue a written decision approving the Merger on or
before August 23, 1995; the effective date of such decision will be set forth
therein.
4. Investment in Santa Fe Pacific Corporation
On February 21, 1995, BNI completed the acquisition of 25 million shares of
Santa Fe common stock at $20 per share. The transaction was financed through
the $500 million Tender Offer Facility which had a weighted average interest
rate of 6.74 percent at June 30, 1995.
The investment in Santa Fe (Investment), which represents approximately 16
percent of the outstanding common stock of Santa Fe, is accounted for under
the cost method and is classified as available for sale. As such, the
carrying value is adjusted for changes in the fair value, as determined by
quoted market prices, and any unrealized gain or loss is recorded, net of
deferred income taxes, as a component of stockholders' equity. At June 30,
1995, the Investment was increased by $138 million reflecting an unrealized
gain and stockholders' equity was increased by $85 million after deducting
deferred income taxes of $53 million.
5. Environmental reserves and other contingencies
BN's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. In order to comply with
such regulation and to be consistent with BN's corporate environmental policy,
BN's operating procedures include practices to protect the environment.
Amounts expended relating to such practices are inextricably contained in the
normal day-to-day costs of BN's business operations.
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws, BN
is potentially liable for the cost of clean-up of various contaminated sites
identified by the United States Environmental Protection Agency and other
agencies. BN has been notified that it is a potentially responsible party
(PRP) for study and clean-up costs at approximately 85 sites (the PRP sites)
and, in many instances, is one of several PRPs. BN generally participates in
the clean-up of these sites through cost-sharing agreements with terms that
vary from site to site. Costs are typically allocated based on relative
volumetric contribution of material, the amount of time the site was owned or
operated, and/or the portion of the total site owned or operated by each PRP.
However, under Superfund and certain other laws, as a PRP, BN can be held
jointly and severally liable for all environmental costs associated with a
site.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BN's liability for
environmental clean-up is both probable and a reasonable estimate of
associated costs can be made. Adjustments to initial estimates are recorded
as necessary based upon additional information developed in subsequent
periods. BN conducts an ongoing environmental contingency analysis, which
considers a combination of factors, including independent consulting reports,
site visits, legal reviews, analysis of the likelihood of participation in and
ability to pay for clean-up by other PRPs, and historical trend analyses.
BN is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 170 sites, including the PRP
sites, at which BN is being asked to participate in the clean-up of the sites
contaminated by material discharged into the environment. BN paid
approximately $10 million during the six months ended June 30, 1995 relating
to mandatory clean-up efforts, including amounts expended under federal and
state voluntary clean-up programs. Recoveries received from third parties,
net of legal costs incurred, were approximately $5 million during the six
months ended June 30, 1995. At this time, BN estimates that it will spend
approximately $110 million in future years to remediate and restore all known
sites, including $105 million pertaining to mandated sites, of which
approximately $75 million relates to the PRP sites. Of the $110 million, BN
estimates that it will spend $18 million during the remainder of 1995. Also,
BN anticipates that the majority of the $110 million will be paid out over a
period of less than seven years; however, some costs will be paid out over a
longer period, in some cases up to 40 years. At June 30, 1995, 24 sites
accounted for approximately $75 million of the accrual and no individual site
was considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include both asserted and
unasserted claims. At June 30, 1995, BN had accrued approximately $110
million for estimated future environmental costs and believes it is reasonably
possible, although not probable, that actual environmental costs could be
lower than the recorded reserve or as much as 50 percent higher. BN's best
estimate of unasserted claims was approximately $5 million as of June 30,
1995. Although recorded liabilities include BN's best estimates of all costs,
without reduction for anticipated recoveries from third parties, BN's total
clean-up costs at these sites cannot be predicted with certainty due to
various factors such as the extent of corrective actions that may be required,
evolving environmental laws and regulations, advances in environmental
technology, the extent of other PRPs' participation in clean-up efforts,
developments in ongoing environmental analyses related to sites determined to
be contaminated, and developments in environmental surveys and studies of
potentially contaminated sites. As a result, charges to income for
environmental liabilities could possibly have a significant effect on results
of operations in a particular quarter or fiscal year as individual site
studies and remediation and restoration efforts proceed or as new sites arise.
However, expenditures associated with such liabilities are typically paid out
over a long period, in some cases up to 40 years, and are therefore not
expected to have a material adverse effect on BN's consolidated financial
position, cash flow or liquidity.
6. Hedging activities
BN has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program includes forward purchases for delivery at fueling
facilities and exchange-traded petroleum futures contracts. The futures
contracts are accounted for as hedges which are marked to market with any
gains or losses associated with changes in market value being deferred and
recognized as a component of fuel expense in the period in which the
designated fuel is purchased and used. As of June 30, 1995, BN had entered
into agreements with fuel suppliers setting the price of fuel to be obtained
by taking physical delivery directly from such suppliers at a future date.
The average price of the approximately 106 million gallons which BN had
committed to purchase was approximately 50 cents per gallon, exclusive of
taxes, certain transportation costs and other charges. In addition, BN held
petroleum futures contracts representing approximately 68 million gallons at
an average price of approximately 50 cents per gallon. These contracts have
expiration dates ranging from July, 1995 to May, 1996.
BN's current fuel hedging program is designed to cover no more than 50 percent
of projected fuel requirements for the subsequent 12-month period; therefore,
hedge positions will not exceed actual fuel requirements. The current and
future fuel delivery prices are monitored continuously and hedge positions are
adjusted accordingly. In order to reduce risk associated with market
movements, fuel hedging transactions do not extend beyond a 12-month period.
BN purchases petroleum futures contracts only through regulated exchanges
(e.g. New York Mercantile Exchange). In order to effectively monitor the fuel
hedging activities, results of the program are summarized and reported to
senior management on a regular basis.
7. Other income (expense), net
Other income (expense), net includes the following (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1994 1995 1994
----- ------ ----- ------
<S> <C> <C> <C> <C>
Gain (loss) on property dispositions $ 7 $ (1) $ 9 $ 1
Interest income 5 - 6 1
Loss on sale of receivables - (2) - (4)
Miscellaneous, net - (2) - (4)
----- ------ ----- ------
Total $ 12 $ (5) $ 15 $ (6)
===== ====== ===== ======
</TABLE>
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Inc. (BNI) and its majority-owned
subsidiaries (collectively BN). The principal subsidiary is Burlington
Northern Railroad Company (Railroad).
CAPITAL RESOURCES AND LIQUIDITY
CASH FROM OPERATIONS AND OTHER RESOURCES
Cash generated from operations is BN's principal source of liquidity and is
primarily used for dividends and capital expenditures. For the first six
months of 1995, cash provided by operating activities increased $106 million
when compared with the first six months of 1994. This increase was
attributable primarily to a $79 million increase in net income and a net
noncash charge to earnings of $22 million related to restricted stock which
vested upon stockholder approval of the proposed merger with Santa Fe Pacific
Corporation (Santa Fe). These increases were partially offset by a $31
million increase in the purchase of equipment held in "Other current assets"
pending final financing arrangements. While current year cash from operations
was sufficient to fund dividends, it was not sufficient to also completely
fund capital expenditures and BNI's investment in Santa Fe; therefore, the
balance was financed with debt and operating leases. Available sources for
financing needs are discussed below.
On February 6, 1995, BNI entered into a five-year $500 million unsecured bank
credit facility (the Tender Offer Facility), whereby a group of banks agreed
to finance BNI's purchase of shares of Santa Fe common stock. At BNI's
option, renewals of borrowings can be obtained either through a competitive
bid or a standby procedure. Rates for borrowing under the standby procedure
are, at BNI's option, based upon the selected term of the London Interbank
Offered Rate (LIBOR) or certificate of deposit rate plus, in either case, a
spread based upon BNI's senior unsecured debt ratings and the amount borrowed
under the Tender Offer Facility, or an alternative base rate. On February 21,
1995, BNI borrowed $500 million under the Tender Offer Facility, which had a
weighted average interest rate of 6.74 percent at June 30, 1995. The proceeds
were used to acquire 25 million shares of Santa Fe common stock at $20 per
share.
Railroad maintains an effective program for the issuance, from time to time,
of commercial paper. These borrowings are supported by Railroad's bank
revolving credit agreements. Outstanding commercial paper balances are
considered as reducing available borrowings under these agreements. The bank
revolving credit agreements allow borrowings of up to $300 million on a
short-term basis and $500 million on a long-term basis. Annual facility fees
are currently 0.125 and 0.225 percent, respectively, and are subject to change
based upon changes in Railroad's senior secured debt ratings. At Railroad's
option, borrowings can be obtained through either a competitive bid or a
standby procedure. Rates for borrowings under the standby procedure are, at
Railroad's option, based upon LIBOR or certificate of deposit rate, plus in
either case, a spread based upon Railroad's senior secured debt ratings, or an
alternate base rate. The agreements are currently scheduled to expire on May
3, 1996 and May 6, 1999, respectively. The maturity value of commercial paper
outstanding at June 30, 1995 was $232 million, leaving a total of $68 million
of the short-term revolving credit agreement available and $500 million of the
long-term revolving credit agreement available. The maturity value of
commercial paper outstanding at December 31, 1994 was $91 million.
In 1993, BN entered into an agreement to acquire 350 alternating current
traction motor locomotives. In December 1994, the number of locomotives to be
acquired under this agreement was increased to 404. As of June 30, 1995, BN
had accepted delivery of 235 locomotives of which 151 units were financed
through operating leases, 25 units were financed through a cross-border
capital lease and 59 units were pending final financing arrangements. BN
anticipates additional deliveries under this agreement of approximately 50
units in 1995 as well as deliveries of between approximately 60 and 100 each
year for 1996 and 1997. Future cash from operations during this strategic
investment period may not, at times, be sufficient to completely fund
dividends as well as capital expenditures and the strategic investments.
Therefore, these requirements will likely be financed using a combination of
sources including, but not limited to, cash from operations, operating leases,
debt issuances and other miscellaneous sources. Each financing decision will
be based upon the most appropriate alternative available at such time.
BNI continues to maintain an effective registration statement on Form S-3 with
the Securities and Exchange Commission which will allow for the issuance from
time to time of up to $350 million aggregate principal amount of debt
securities.
CAPITAL EXPENDITURES AND RESOURCES
A breakdown of capital expenditures is set forth in the following table (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
----- -----
<S> <C> <C>
Road, roadway structures and real estate $ 297 $ 223
Equipment 79 66
----- -----
Total $ 376 $ 289
===== =====
</TABLE>
Capital roadway expenditures during the first six months of 1995 increased
when compared with the first six months of 1994 as a result of extensive
capacity expansion projects primarily in the Powder River Basin. BN projects
1995 capital spending to remain at a level comparable to 1994. As discussed
in "Cash from operations and other resources," BN has a commitment to acquire
404 alternating current traction motor locomotives through 1997, of which 235
had been accepted as of June 30, 1995. Also, BN will continue its
implementation of several strategic initiatives for transportation network
management using information systems technology. These commitments will
likely be financed using a combination of sources including, but not limited
to, cash from operations, operating leases, debt issuances and other
miscellaneous sources. Each financing decision will be based upon the most
appropriate alternative available at such time.
In addition to capital expenditures, BN continues to utilize operating leases
to fulfill certain equipment requirements. The method used to finance
equipment will depend upon current market conditions and other factors. In
both the first six months of 1995 and 1994, BN acquired new equipment to be
financed through long-term operating leases which were primarily for
alternating current traction motor locomotives.
DIVIDENDS
Common stock dividends declared for the first six months of 1995 and 1994 were
$.60 per common share. Dividends paid on common and preferred stock were $64
million during each of the six months ended June 30, 1995 and 1994. BNI
expects to continue its current policy of paying regular quarterly dividends
on its common and preferred stock; however, dividends are declared by the
Board of Directors based on profitability, capital expenditure requirements,
debt service and other factors.
CAPITAL STRUCTURE
BN's ratio of total debt to total capital was 49 percent at June 30, 1995
compared to 45 percent at December 31, 1994. This increase is substantially
attributable to BNI financing its purchase of 25 million shares of Santa Fe
common stock with debt of $500 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1994
BN recorded net income for the second quarter of 1995 of $130 million ($1.37
per common share, primary, on 90.8 million shares and $1.32 per common share,
fully diluted, on 98.4 million shares) compared with net income of $82 million
($.85 per common share, primary, on 90.2 million shares and $.84 per common
share, fully diluted, on 97.6 million shares) for the same period in 1994.
Results for the second quarter of 1995 were reduced by approximately $11
million of merger-related expenses, which included nonrecurring operating
expenses of $3 million and $8 million of interest expense. The corresponding
reduction in net income was approximately $7 million, or $.08 per common
share, primary and $.07 per common share, fully diluted.
REVENUES
The following table presents BN's revenue information by Railroad business
unit for the three months ended June 30, 1995 and 1994 and includes certain
reclassifications of prior year information to conform to current year
presentation:
<TABLE>
<CAPTION>
Revenues
Revenue Per Revenue
Revenues Ton Miles Ton Mile
1995 1994 1995 1994 1995 1994
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal $ 429 $ 417 37,952 35,030 1.13 1.19
Agricultural Commodities 232 153 12,276 6,148 1.89 2.49
Intermodal 188 172 6,378 5,784 2.95 2.97
Minerals 92 95 3,691 3,654 2.49 2.60
Food 69 69 2,446 2,415 2.82 2.86
Metals 72 66 2,996 2,877 2.40 2.29
Chemicals 74 73 2,693 2,537 2.75 2.88
Wood 62 70 2,964 3,398 2.09 2.06
Paper 52 50 1,712 1,686 3.04 2.97
Vehicles & Machinery 50 50 723 665 6.92 7.52
Shortlines and other (36) (23) (2,928) (2,054) - -
-------- -------- ------- -------
Total $ 1,284 $ 1,192 70,903 62,140 1.81 1.92
======== ======== ======= =======
</TABLE>
Total revenues for the second quarter of 1995 were $1,284 million compared
with revenues of $1,192 million for the same period in 1994. The $92 million
increase was primarily due to improved Agricultural Commodities revenues.
Coal revenues improved $12 million during the second quarter of 1995 due to
higher traffic levels. The traffic levels benefited primarily from new
business and an increase in demand for low-sulfur coal as a result of its
economic advantage and continued compliance with the Clean Air Act. Partially
offsetting the increase was a decline in yields as a result of continuing
competitive pricing pressures in contract negotiations and a change in traffic
mix.
Revenues from the transportation of Agricultural Commodities during the second
quarter of 1995 were $79 million greater than the second quarter of 1994.
This increase was principally caused by improvements in corn and soybean
revenues of $82 million and $7 million, respectively, partially offset by a
decrease in wheat revenues of $12 million. Both corn and soybean revenues
benefited primarily from increased crop production as well as higher traffic
volumes to the Pacific Northwest due to stronger export demand during the
second quarter of 1995. Wheat revenues declined due to weaker export demand
when compared with the strong demand in 1994. The shift in commodities to
lower yielding corn and soybeans from higher yielding wheat led to the
aggregate decrease in revenues per revenue ton mile.
Intermodal and Metals revenues increased $16 million and $6 million,
respectively, when compared with the second quarter of 1994. The improvement
in Intermodal revenues was largely due to a $15 million increase in
Intermodal-international revenues resulting from new business and continuing
growth of existing business. The improvement in Metals revenues was primarily
due to increased taconite and coal coke demand as production resumed at a
plant closed by a labor strike throughout the second quarter of 1994.
Aluminum and nonferrous ores revenues, which also contributed to improved
metals revenues, increased primarily due to higher demand.
Wood revenues for the second quarter of 1995 were $8 million less than the
second quarter of 1994. This decrease in Wood revenues was attributable to a
$6 million volume-driven decline in lumber revenues.
Second quarter revenues for Minerals, Food, Chemicals, Paper and Vehicles &
Machinery were relatively flat compared with the second quarter of 1994.
Shortlines and other, which are a net reduction of revenues, increased by $13
million when compared with the second quarter of 1994. This increase resulted
primarily from a $7 million increase in amounts due to shortline railroads
caused by more BN traffic on their lines.
EXPENSES
Total operating expenses for the second quarter of 1995 were $1,033 million
compared with expenses of $1,014 million for the same period in 1994. The
operating ratio was 80 percent in the second quarter of 1995, an improvement
of five percentage points compared with an operating ratio of 85 percent for
the second quarter of 1994.
Compensation and benefits expenses were $25 million greater compared with the
second quarter of 1994. Increased traffic levels as well as a 4 percent base
wage increase for union represented employees effective July 1994 caused
increased wages and related payroll taxes of approximately $15 million. A $7
million increase in health and welfare costs for union employees, due
primarily to an increase in insurance premium rates, and a $7 million increase
in incentive compensation expense also contributed to the higher compensation
and benefits expenses. These increases were partially offset by a $9 million
payroll tax refund in 1995.
Fuel expenses for the quarter were $11 million higher compared with the second
quarter of 1994 primarily due to a $7 million increase in consumption on
higher traffic levels. An increase in the average price paid for diesel fuel
of 2.6 cents per gallon to 60.2 cents per gallon in the second quarter of 1995
contributed to the remainder of the increase.
Materials expenses for the second quarter of 1995 were essentially flat
compared with the same period in 1994.
Equipment rents expenses were $5 million higher than the second quarter of
1994 principally due to an $8 million increase in lease rental expense as a
result of a larger fleet of leased freight cars as well as a business
volume-related increase in car hire expense for 1995. These increases were
partially offset by a $7 million decrease in payments for failure to achieve
service commitments compared with 1994 as BN improved service performance in
1995.
Purchased services expenses for the quarter decreased $5 million compared with
the second quarter of 1994. The most significant contributing factor was a
more than $5 million decrease in derailment-related expenses. Higher car
repair billings to third parties were offset by increases in fees paid for
professional services and environmental expenses in 1995.
Depreciation expense for the second quarter of 1995 was $10 million higher
than the same period in 1994 due to higher traffic levels and an increase in
the asset base.
Other operating expenses were $26 million lower compared with the second
quarter of 1994. Approximately $16 million of the decrease was due to
decreased costs associated with personal injury claims. In addition, $14
million of the decrease resulted from a gain on a sales-type capital lease of
freight cars. Decreased derailment expenses of approximately $6 million
associated with equipment and cargo losses also contributed to lower operating
expenses. These decreases were partially offset by employee severance
expenses of $7 million and merger-related expenses incurred in the second
quarter of 1995.
Interest expense for the quarter increased $11 million compared with the
second quarter in 1994, primarily resulting from the $500 million unsecured
debt incurred in 1995 to finance BN's investment in Santa Fe.
Other income (expense), net was $17 million higher in the second quarter of
1995 compared with the same period in 1994. This increase in income was due
to an $8 million increase in gains on property dispositions, interest income
of $5 million on a payroll tax refund in 1995 and the elimination of losses on
the sale of accounts receivable in 1995 as the sales agreement expired in
December 1994.
The effective tax rate was 39.0 percent for the second quarter of 1995
compared with 38.7 percent for the second quarter of 1994.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
BN recorded net income for the first six months of 1995 of $238 million ($2.51
per common share, primary, on 90.5 million shares and $2.42 per common share,
fully diluted, on 98.2 million shares) compared with net income of $159
million ($1.64 per common share, primary, on 90.3 million shares and $1.63 per
common share, fully diluted, on 97.6 million shares) for the same period in
1994. Results for 1995 were reduced by approximately $42 million of
merger-related expenses, which included nonrecurring operating expenses of $30
million primarily due to the vesting of restricted stock and $12 million of
interest expense. The corresponding reduction in net income was approximately
$26 million, or $.28 per common share, primary and $.27 per common share,
fully diluted. Results for 1994 were reduced by a $10 million, or $.11 per
common share, net of tax, cumulative effect of an accounting change for
postemployment benefits.
REVENUES
The following table presents BN's revenue information by Railroad business
unit for the six months ended June 30, 1995 and 1994 and includes certain
reclassifications of prior year information to conform to current year
presentation:
<TABLE>
<CAPTION>
Revenues
Revenue Per Revenue
Revenues Ton Miles Ton Mile
1995 1994 1995 1994 1995 1994
(In Millions) (In Millions) (In Cents)
<S> <C> <C> <C> <C> <C> <C>
Coal $ 883 $ 835 77,320 67,532 1.14 1.24
Agricultural Commodities 493 344 24,902 13,919 1.98 2.47
Intermodal 377 350 12,737 11,681 2.96 3.00
Minerals 178 181 7,063 7,061 2.52 2.56
Food 144 139 5,185 4,886 2.78 2.84
Metals 147 131 6,218 5,809 2.36 2.26
Chemicals 146 138 5,366 4,826 2.72 2.86
Wood 129 136 6,144 6,551 2.10 2.08
Paper 103 101 3,407 3,364 3.02 3.00
Vehicles & Machinery 97 97 1,414 1,293 6.86 7.50
Shortlines and other (66) (50) (5,858) (4,277) - -
-------- -------- -------- --------
Total $ 2,631 $ 2,402 143,898 122,645 1.83 1.96
======== ======== ======== ========
</TABLE>
Total revenues for the first six months of 1995 were $2,631 million compared
with revenues of $2,402 million for the same period in 1994. The $229 million
increase was primarily due to improved Agricultural Commodities and Coal
revenues.
Coal revenues improved $48 million during the first six months of 1995 due to
higher traffic levels caused primarily by new business, favorable weather
conditions early in the year and increased demand for low-sulfur coal from the
Powder River Basin. Partially offsetting this increase was a decline in
yields as a result of continuing competitive pricing pressures in contract
negotiations and a change in traffic mix.
Revenues from the transportation of Agricultural Commodities during the first
six months of 1995 were $149 million greater than the first six months of
1994. The increase was principally caused by improvements in corn and soybean
revenues of $152 million and $23 million, respectively, partially offset by a
decrease in wheat revenues of $26 million. Corn and soybean revenues
benefited primarily from increased crop production as well as higher traffic
volumes to the Pacific Northwest due to stronger export demand during the
first six months of 1995. Wheat revenues declined due to weaker export demand
when compared with the strong demand in 1994. The shift in commodities to
lower yielding corn and soybeans from higher yielding wheat led to the
aggregate decrease in revenues per revenue ton mile.
Intermodal and Metals revenues increased $27 million and $16 million,
respectively, when compared with the first six months of 1994. The
improvement in Intermodal revenues was largely due to a $27 million increase
in Intermodal-international revenues resulting from new business and
continuing growth of existing business. The improvement in Metals revenues
resulted primarily from increased taconite and coal coke revenues. Resumed
production at a plant closed by a labor strike during the first six months of
1994 accounted for the majority of the increase in taconite and coal coke
revenues.
Current year revenues for Chemicals increased $8 million while Wood revenues
declined $7 million when compared to the first six months of 1994. Strong
plastic demand contributed to the increase in Chemicals revenues; whereas,
lower traffic levels for lumber accounted for the majority of the decrease in
Wood revenues.
Minerals, Food, Paper and Vehicles & Machinery revenues for the current year
were relatively flat compared with the same period in 1994.
Shortlines and other, which are a net reduction of revenues, increased $16
million when compared with the first six months of 1994. This increase
resulted primarily from a higher volume of BN traffic moving over shortline
railroads which caused an $11 million increase in amounts due to the
shortlines.
EXPENSES
Total operating expenses for the first six months of 1995 were $2,163 million
compared with expenses of $2,042 million for the same period in 1994. Despite
the addition of $30 million of merger-related operating expenses during the
first six months of 1995, the operating ratio was 82 percent, an improvement
of three percentage points compared with an operating ratio of 85 percent for
the first six months of 1994.
Compensation and benefits expenses were $67 million greater compared with the
first six months of 1994. Increased traffic levels as well as a 4 percent
base wage increase for union represented employees effective July 1994 caused
increased wages and related payroll taxes of approximately $35 million. A $14
million increase in health and welfare costs for union employees, due
primarily to an increase in insurance premium rates, and increased incentive
compensation expense of approximately $12 million also contributed to the
higher compensation and benefits expenses. These increases were partially
offset by a payroll tax refund in 1995.
Fuel expenses for 1995 were $26 million higher compared with 1994 primarily
due to an $18 million increase in consumption from higher traffic volumes in
1995. An increase in the average price paid for diesel fuel of 2.3 cents per
gallon to 58.9 cents per gallon in the first six months of 1995 contributed to
the remainder of the increase.
Materials expenses for the first six months of 1995 decreased $6 million
compared with 1994 as decreases in car repair expense and track materials
costs in 1995 were partially offset by increased locomotive materials expense.
Equipment rents expenses were $15 million higher than the first six months of
1994 principally due to a $17 million increase in lease rental expense as a
result of a larger fleet of leased freight cars in 1995 as well as an increase
in the leasing of locomotives to meet power requirements. These increases
were partially offset by a $10 million decrease in payments for failure to
achieve service commitments compared with 1994 as BN improved service
performance in 1995.
Purchased services for the first six months of 1995 decreased $18 million from
the first six months of 1994. The most significant contributing factors were
lower derailment-related expenses and higher car repair billings to third
parties.
Depreciation expense for the first six months of 1995 was $22 million higher
than the same period in 1994 due to higher traffic levels and an increase in
the asset base.
Other operating expenses were $15 million higher compared with the first six
months of 1994. Approximately $30 million of the increase was due to expenses
associated with the proposed merger, primarily due to the vesting of
restricted stock. Increased severance expenses of approximately $13 million
and increased moving expenses, due to the completion of the centralized train
dispatching facility in the first quarter of 1995, also contributed to
higher operating expenses. These increases were partially offset by a $21
million decrease in costs associated with personal injury claims and the
recognition of a $14 million gain from a sales-type capital lease of freight
cars in the second quarter of 1995.
Interest expense for the period increased $15 million compared with the same
period in 1994, primarily resulting from the $500 million unsecured debt
incurred in 1995 to finance BN's investment in Santa Fe.
Other income (expense), net was $21 million higher in the first six months of
1995 compared with the same period in 1994. This increase in income was due
to an increase in gain on property dispositions, interest income received on
the settlement of a tax refund in 1995 and the elimination of losses on the
sale of accounts receivable in 1995 as the sales agreement expired in December
1994.
The effective tax rate was 39.0 percent for the first six months of 1995
compared with 38.7 percent for the first six months of 1994.
OTHER MATTERS
PROPOSED MERGER
As of June 29, 1994, BNI and Santa Fe entered into an Agreement and Plan of
Merger (the Original Agreement) pursuant to which, on the terms and conditions
set forth in the Original Agreement, Santa Fe would merge (effected in the
manner set forth below, the Merger) with and into BNI, and BNI would be the
surviving corporation and each share of Santa Fe common stock would be
converted into 0.27 of a share of BNI common stock. The Original Agreement
was subsequently amended as of October 26, 1994, December 18, 1994 and January
24, 1995. The Original Agreement, as so amended, is referred to as the Merger
Agreement. Stockholders of BNI and Santa Fe approved the Merger Agreement at
special stockholders' meetings held on February 7, 1995.
Pursuant to the Merger Agreement, BNI and Santa Fe were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i)
a merger of Santa Fe with and into BNI and (ii) the holding company structure
(the Holding Company Structure) described below. In order to ensure that the
transaction contemplated by the Merger Agreement qualifies as a tax-free
transaction for United States federal income tax purposes, the parties intend
to utilize the Holding Company Structure.
Under the Holding Company Structure, BNSF Corporation, a Delaware corporation
(BNSF), formed to effect the transaction in this manner, would create two
subsidiaries. One such subsidiary would merge into BNI, and the other such
subsidiary would merge into Santa Fe. Each holder of one share of BNI common
stock would receive one share of BNSF common stock and each holder of one
share of Santa Fe common stock, excluding the Santa Fe common stock acquired
by BNI in the Tender Offer referred to below and the Santa Fe common stock
held by Santa Fe as treasury stock, would receive not less than 0.40 and not
more than 0.4347 shares of BNSF common stock depending upon the number of
additional shares of Santa Fe common stock repurchased by Santa Fe as
permitted under the Repurchase Program discussed below. The Santa Fe common
stock acquired by BNI in the Tender Offer would remain outstanding and the
Santa Fe common stock held by Santa Fe as treasury stock would be canceled.
The rights of each stockholder of BNSF would be substantially identical to the
rights of a stockholder of BNI, and the Holding Company Structure would have
the same economic effect with respect to the stockholders of BNI and Santa Fe
as would a direct merger of BNI and Santa Fe. The Merger will be accounted
for under the purchase method of accounting upon consummation, and BNI's
investment will be included in the purchase price.
Also pursuant to the Merger Agreement, on December 23, 1994, BNI and Santa Fe
commenced tender offers, (together, the Tender Offer) to acquire 25 million
and 38 million shares of Santa Fe common stock, respectively, at $20 per share
in cash. The Tender Offer expired on February 8, 1995, with approximately
111.6 million shares of Santa Fe common stock tendered. As 63 million shares
of Santa Fe common stock in the aggregate were accepted for payment by BNI and
Santa Fe, tenders by Santa Fe stockholders were subject to proration. The
final proration factor for the Tender Offer was approximately 56.5 percent.
On February 6, 1995, BNI entered into the $500 million Tender Offer Facility,
whereby a group of banks agreed to finance BNI's purchase of shares of Santa
Fe common stock in the Tender Offer. Funding of the Tender Offer was
completed on February 21, 1995. At BNI's option, renewals of borrowings can
be obtained either through a competitive bid or a standby procedure. Rates
for borrowing under the standby procedure are, at BNI's option, based upon the
selected term of LIBOR or certificate of deposit rate plus, in either case, a
spread based upon BNI's senior unsecured debt ratings and the amount borrowed
under the Tender Offer Facility, or an alternative base rate.
As of June 30, 1995, Santa Fe had borrowed $1,033 million from a syndicate of
financial institutions under a new credit agreement, of which $760 million was
used for the Santa Fe tender offer and the remaining borrowings were primarily
used to replace existing Santa Fe debt and pay related expenses.
Under the Repurchase Program as set forth in the Merger Agreement, Santa Fe is
permitted, at its discretion and subject to certain financial and performance
criteria of Santa Fe set forth in its credit agreement and the Merger
Agreement (including minimum cash flows, cash capital expenditures and maximum
total debt), to repurchase up to 10 million shares of Santa Fe common stock
prior to consummation of the Merger. The number of shares of BNSF common
stock to be issued in the Merger will not be affected by the number of
additional shares of Santa Fe common stock repurchased by Santa Fe under the
Repurchase Program. Accordingly, the exchange ratio of BNSF common shares to
be offered for each share of outstanding Santa Fe common stock upon
consummation of the Merger would be set at not less than 0.40 and not more
than 0.4347 shares. As of June 30, 1995, Santa Fe had repurchased
approximately 2.3 million shares which would result in an exchange ratio of
0.4073 shares.
As is typical in the context of a merger, certain benefits of officers and
employees vested upon approval of the Merger by the stockholders of BNI and
Santa Fe. In particular, on February 7, 1995, restrictions previously placed
upon certain BNI stock grants lapsed and the previously unearned compensation
relating to such restricted stock, included in BNI's stockholders' equity, was
charged to expense. The unearned compensation relating to restricted stock at
the time of vesting and related payroll taxes were approximately $24 million.
BNI expects to incur other costs related to the Merger, some of which will be
included in the determination of the total purchase price.
Consummation of the Merger is subject to approval by the Interstate Commerce
Commission (ICC) and other customary conditions. In connection with the ICC
proceedings, on January 27, 1995, BNI and Santa Fe requested the ICC to adopt
an expedited procedural schedule for reviewing the merger, based on a
timetable the ICC had proposed to adopt for all major railroad mergers. On
March 9, 1995, the ICC issued a schedule providing for a final decision on the
merger application on or before August 23, 1995. Interested parties,
including other railroads, shippers and state agencies, indicated their intent
to participate in the ICC proceeding on April 10, 1995. Railroad and The
Atchison, Topeka and Santa Fe Railway Company (ATSF) have entered into
agreements with Union Pacific Railroad Company; Southern Pacific
Transportation Company, The Denver Rio Grande Western Railroad Company, St.
Louis Southwestern Railway Company and SPCSL Corp.; and Kansas City Southern
Railway Company, among others, whereby those carriers agreed not to oppose the
ICC's approval of the Merger in exchange for grants of certain trackage
rights, haulage arrangements or other such arrangements. On July 20, 1995,
the ICC held a voting conference at which it voted to approve the Merger,
subject to limited conditions primarily regarding other carriers' operations
over Railroad's and ATSF's tracks. Given their limited nature, these
conditions will not impact the anticipated benefits of the Merger. It is
expected the ICC will issue a written decision approving the Merger on or
before August 23, 1995; the effective date of such decision will be set forth
therein.
ENVIRONMENTAL ISSUES
BN's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. In order to comply with
such regulation and to be consistent with BN's corporate environmental policy,
BN's operating procedures include practices to protect the environment.
Amounts expended relating to such practices are inextricably contained in the
normal day-to-day costs of BN's business operations.
Under the requirements of the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund) and certain other laws, BN
is potentially liable for the cost of clean-up of various contaminated sites
identified by the United States Environmental Protection Agency and other
agencies. BN has been notified that it is a potentially responsible party
(PRP) for study and clean-up costs at approximately 85 sites (the PRP sites)
and, in many instances, is one of several PRPs. BN generally participates in
the clean-up of these sites through cost-sharing agreements with terms that
vary from site to site. Costs are typically allocated based on relative
volumetric contribution of material, the amount of time the site was owned or
operated, and/or the portion of the total site owned or operated by each PRP.
However, under Superfund and certain other laws, as a PRP, BN can be held
jointly and severally liable for all environmental costs associated with a
site.
Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and
restoration of sites determined to be contaminated. Liabilities for
environmental clean-up costs are initially recorded when BN's liability for
environmental clean-up is both probable and a reasonable estimate of
associated costs can be made. Adjustments to initial estimates are recorded
as necessary based upon additional information developed in subsequent
periods. BN conducts an ongoing environmental contingency analysis, which
considers a combination of factors, including independent consulting reports,
site visits, legal reviews, analysis of the likelihood of participation in and
ability to pay for clean-up by other PRPs, and historical trend analyses.
BN is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 170 sites, including the PRP
sites, at which BN is being asked to participate in the clean-up of the sites
contaminated by material discharged into the environment. BN paid
approximately $10 million during the six months ended June 30, 1995 relating
to mandatory clean-up efforts, including amounts expended under federal and
state voluntary clean-up programs. Recoveries received from third parties,
net of legal costs incurred, were approximately $5 million during the six
months ended June 30, 1995. At this time, BN estimates that it will spend
approximately $110 million in future years to remediate and restore all known
sites, including $105 million pertaining to mandated sites, of which
approximately $75 million relates to the PRP sites. Of the $110 million, BN
estimates that it will spend $18 million during the remainder of 1995. Also,
BN anticipates that the majority of the $110 million will be paid out over a
period of less than seven years; however, some costs will be paid out over a
longer period, in some cases up to 40 years. At June 30, 1995, 24 sites
accounted for approximately $75 million of the accrual and no individual site
was considered to be material.
Liabilities for environmental costs represent BN's best estimates for
remediation and restoration of these sites and include both asserted and
unasserted claims. At June 30, 1995, BN had accrued approximately $110 million
for estimated future environmental costs and believes it is reasonably
possible, although not probable, that actual environmental costs could be
lower than the recorded reserve or as much as 50 percent higher. BN's best
estimate of unasserted claims was approximately $5 million as of June 30,
1995. Although recorded liabilities include BN's best estimates of all costs,
without reduction for anticipated recoveries from third parties, BN's total
clean-up costs at these sites cannot be predicted with certainty due to
various factors such as the extent of corrective actions that may be required,
evolving environmental laws and regulations, advances in environmental
technology, the extent of other PRPs' participation in clean-up efforts,
developments in ongoing environmental analyses related to sites determined to
be contaminated, and developments in environmental surveys and studies of
potentially contaminated sites. As a result, charges to income for
environmental liabilities could possibly have a significant effect on results
of operations in a particular quarter or fiscal year as individual site
studies and remediation and restoration efforts proceed or as new sites arise.
However, expenditures associated with such liabilities are typically paid out
over a long period, in some cases up to 40 years, and are therefore not
expected to have a material adverse effect on BN's consolidated financial
position, cash flow or liquidity.
HEDGING ACTIVITIES
BN has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program includes forward purchases for delivery at fueling
facilities and exchange-traded petroleum futures contracts. The futures
contracts are accounted for as hedges which are marked to market with any
gains or losses associated with changes in market value being deferred and
recognized as a component of fuel expense in the period in which the
designated fuel is purchased and used. As of June 30, 1995, BN had entered
into agreements with fuel suppliers setting the price of fuel to be obtained
by taking physical delivery directly from such suppliers at a future date.
The average price of the approximately 106 million gallons which BN had
committed to purchase was approximately 50 cents per gallon, exclusive of
taxes, certain transportation costs and other charges. In addition, BN held
petroleum futures contracts representing approximately 68 million gallons at
an average price of approximately 50 cents per gallon. These contracts have
expiration dates ranging from July, 1995 to May, 1996.
BN's current fuel hedging program is designed to cover no more than 50 percent
of projected fuel requirements for the subsequent 12-month period; therefore,
hedge positions will not exceed actual fuel requirements. The current and
future fuel delivery prices are monitored continuously and hedge positions are
adjusted accordingly. In order to reduce risk associated with market
movements, fuel hedging transactions do not extend beyond a 12-month period.
BN purchases petroleum futures contracts only through regulated exchanges
(e.g. New York Mercantile Exchange). In order to effectively monitor the fuel
hedging activities, results of the program are summarized and reported to
senior management on a regular basis.
LABOR
In December 1994, BN and the railroad industry reached an agreement with the
Railroad Yardmasters Division (Yardmasters) of the United Transportation Union
which is effective through 1999 with respect to wages, work rules and all
other matters except health and welfare benefits. Health and welfare issues
are being addressed at the national level and will apply to BN's approximately
250 Yardmasters. Effective July 1, 1995, the Yardmasters received a 3 percent
base wage increase under the agreement.
Labor agreements currently in effect for unions other than the Yardmasters
include provisions which prohibited the parties from serving notices to change
wages, benefits, rules and working conditions prior to November 1, 1994. BN
joined with the other railroads to negotiate with the unions on a
multi-employer basis on November 1, 1994. At that time, all unions were
served proposals for productivity improvements as well as other changes.
Thereafter, unions also served notices on the railroads which proposed not
only increasing wages and benefits but also restoring many of the restrictive
work rules and practices that were modified or eliminated under the current
agreements. A number of the unions are also challenging the railroads' right
to negotiate on a multi-employer basis and the issue is currently pending in
the federal district courts in both Washington, D.C. and St. Louis, Missouri.
At this time, the railroads and most of the unions are proceeding in direct
negotiations on the proposals. Negotiations with four unions are in
mediation. The National Mediation Board has scheduled meetings with three of
the unions. The ultimate outcome of the negotiations cannot be predicted.
Under labor agreements currently in effect for most of the unionized work
force, a cost of living allowance of 9 cents per hour went into effect on July
1, 1995 as new agreements were not reached with those parties prior to that
time. The cost of living allowance was dependent upon changes in the Consumer
Price Index not to exceed three percent.
BN is a party to service interruption agreements under which BN would be
required to pay premiums of up to a maximum of approximately $70 million in
the event of work stoppages on other railroads. BN is also entitled to
receive payments under certain conditions if a work stoppage occurs on its
property.
During the second quarter of 1995, BN engaged in formal evaluations of its
non-union workforce requirements in certain areas. Based upon these
evaluations, BN expects to implement employment separation programs and record
a charge in the third quarter of 1995 for termination and pension-related
costs which could approximate $100 million.
Following the consummation of BN's proposed merger with Santa Fe, BN may
record charges for nonrecurring costs associated with the Merger. Such
nonrecurring costs are expected to relate to the elimination of duplicate
facilities, computer systems and other assets, as well as employee-related
payments.
OTHER
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This standard establishes the accounting and reporting requirements for
recognizing and measuring impairment of long-lived assets and related goodwill
to be either held and used or held for disposal. SFAS No. 121 is effective
for fiscal years beginning after December 15, 1995. BN is currently
evaluating the financial impact of adopting this standard including conditions
which may not be reasonably estimable, therefore, the impact is not
determinable at this time. The initial effect of adopting this standard would
be reported as a cumulative effect of a change in accounting method and
previously issued financial statements are not to be restated. BN has made no
decision on the exact timing of the adoption of this standard.
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WHEAT AND BARLEY TRANSPORTATION RATES
In September 1980 a class action lawsuit was filed against Railroad in United
States District Court for the District of Montana (District Court) challenging
the reasonableness of Railroad's export wheat and barley rates. The class
consists of Montana grain producers and elevators. The plaintiffs sought a
finding that Railroad's single car export wheat and barley rates for shipments
moving from Montana to the Pacific Northwest were unreasonably high and
requested damages in the amount of $64 million. In March 1981 the District
Court referred the rate reasonableness issue to the Interstate Commerce
Commission (ICC). Subsequently, the State of Montana filed a complaint at the
ICC challenging Railroad's multiple car rates for Montana wheat and barley
movements occurring after October 1, 1980.
The ICC issued a series of decisions in this case from 1988 to 1991. Under
these decisions, the ICC applied a revenue to variable cost test to the rates
and determined that Railroad owed $9,685,918 in reparations plus interest. In
its last decision, dated November 26, 1991, the ICC found Railroad's total
reparations exposure to be $16,559,012 through July 1, 1991. The ICC also
found that Railroad's current rates were below a reasonable maximum and
vacated its earlier rate prescription order.
Railroad appealed to the United States Court of Appeals for the District of
Columbia Circuit (D.C. Circuit) those portions of the ICC's decisions
concerning the post-October 1, 1980 rate levels. Railroad's primary
contention on appeal was that the ICC erred in using the revenue to variable
cost rate standard to judge the rates instead of Constrained Market
Pricing/Stand Alone Cost principles. The limited portions of decisions that
cover pre-October 1, 1980 rates were applied to the Montana District Court.
On March 24, 1992, the Montana District Court dismissed plaintiffs' case as to
all aspects other than those relating to pre-October 1, 1980 rates. On
February 9, 1993, the D.C. Circuit served its decision regarding the appeal of
the several ICC decisions in this case. The Court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as
Railroad had argued and remanded the case to the ICC for further
administrative proceedings.
On July 22, 1993, the ICC served an order in response to the D.C. Circuit's
February 9, 1993 decision. In its order, the ICC stated it would use the
Constrained Market Pricing/Stand Alone Cost Standards in assessing the
reasonableness of Railroad's wheat and barley rates moving from Montana to
Pacific Coast ports from 1978 forward. The ICC assigned the case to the
Office of Hearings to develop a procedural schedule. On October 28, 1994,
plaintiffs filed their opening evidence arguing that the revenue received by
Railroad exceeded the stand alone costs of transporting that traffic and that
Railroad's rates were unreasonably high. Railroad filed its evidence March
29, 1995, showing that the stand alone costs of transporting the traffic
exceeded the revenue derived by Railroad on that traffic and that
consequently, its rates were not unreasonably high. Plaintiffs filed their
rebuttal evidence on July 17, 1995.
COAL TRANSPORTATION CONTRACT LITIGATION
On April 26, 1991, an action was filed against Railroad in the 102nd Judicial
District Court for Bowie County, Texas seeking a reduction of the
transportation rates required to be paid under two contracts (Southwestern
Electric Power Company v. Burlington Northern Railroad Company, No.
D-102-CV-91-0720). The plaintiff, Southwestern Electric Power Company
(SWEPCO), was challenging the contract rates for transportation of coal to its
electric generating facilities at Cason, Texas and Flint Creek, Arkansas.
SWEPCO contended that productivity gains achieved by Railroad constituted
unusual economic conditions giving rise to a "gross inequity" because
Railroad's costs of providing service have been reduced over the contracts'
terms. On August 2, 1994, plaintiff filed an amendment to its complaint to
further allege that Railroad had been unjustly enriched by retaining
differences between the rates actually charged and those that should have been
charged. SWEPCO sought both prospective rate relief and recovery of alleged
past overcharges.
Railroad's primary contention was that both parties anticipated productivity
gains in the rail industry when negotiating the contracts and agreed that
Railroad would retain most of its productivity gains. Railroad further
contended that there was no agreement that transportation rates paid by SWEPCO
would be based on Railroad's costs of providing service.
On November 18, 1994, the jury rendered a verdict denying plaintiff's request
for prospective rate relief and that plaintiff take nothing on its principal
claims of "gross inequity." However, Railroad was assessed damages
approximating $56 million relating to plaintiff's alternative claim of unjust
enrichment. On January 20, 1995, the trial court rendered a judgment on the
verdict in an amount approximating $74 million, which included attorneys' fees
and interest. The judgment further awarded post judgment interest at 10
percent per annum and issued declaratory orders pertaining to the two
contracts. Railroad has appealed. In the opinion of outside counsel,
Railroad has a substantial likelihood of prevailing on appeal, although no
assurances can be given due to the uncertainties inherent in litigation.
Railroad filed Notice of Appeal in the case on February 17, 1995 and posted a
bond to stay enforcement of the judgment pending prosecution of all appeals.
ENVIRONMENTAL PROCEEDINGS
United States Department of Justice
On May 25, 1994, the United States Department of Justice (Department) filed
suit on behalf of the United States Environmental Protection Agency (EPA)
against Railroad in United States District Court for the Eastern District of
Wisconsin for the release of oil and hazardous substances into navigable
waters of the United States in the course of three derailments. Specifically
referenced are (1) the alleged release of hazardous substances into the
Nemadji River and its shoreline near Superior, Wisconsin, on June 20, 1992,
(2) the alleged release of oil into the North Platte River and its shoreline
near Guernsey, Wyoming, on January 9, 1993, and (3) the alleged release of oil
into a tributary of the Bighorn River near Worland, Wyoming, on May 6, 1993.
The suit claims that pursuant to 33 U.S.C. Section 1321(b)(7), Railroad is
liable to the United States for civil penalties of up to $25,000 per day of
violation or $1,000 per barrel of oil or per reportable quantity of each
hazardous substance discharged. The EPA initially calculated the statutory
maximum penalty associated with these three spills to be $10,137,000.
Railroad answered the complaint and opposed the penalties sought by the EPA.
In February 1995, Railroad and the EPA settled the case. Pursuant to the
compromise, Railroad will pay $1,500,000 to satisfy all claims by the United
States for fines, penalties, response costs and natural resource damages.
Railroad will also make a $100,000 contribution to a study (jointly approved
by Railroad and the Department) regarding methods or procedures to improve
rail safety and prevent derailments. In return for these payments, the
United States will release Railroad from all claims arising out of the three
derailments and provide Railroad contribution protection against claims by
other responsible parties who may later be pursued by the government for their
liability arising from the derailments.
A consent decree confirming the settlement was approved by the court on July
17, 1995.
State of Illinois
By letter dated January 5, 1995, the State of Illinois (the State) notified
Railroad and Beazer East, Inc. (Beazer) that it was preparing to file a
complaint against them for the recovery of penalties associated with alleged
violations of the Resource Conservation and Recovery Act (RCRA) at the
Galesburg Wood Treating Superfund Site in Galesburg, Illinois. The State has
informally alleged that it is seeking penalties in excess of $100,000. The
exact amount of the State's demand is unknown as Railroad has not been
provided with formal notice or detail to support the State's demand.
The alleged RCRA violations stem from Railroad's responsibility at the site as
it relates to contamination resulting from the operation of the wood treating
facility from 1907 to 1966 and its status as owner from 1966 to the present.
Koppers Company, Inc. (now Beazer East, Inc.) and subsequently Koppers
Industries, Inc. operated the facility from 1966 to the present. In March
1985, under the Comprehensive Environmental Response Compensation and
Liability Act, Railroad and Koppers Company, Inc. entered into a Consent Order
to perform a Remedial Investigation and Feasibility Study (RI/FS). Following
completion and submission of a RI Report and FS Report, the Illinois
Environmental Protection Agency (IEPA) reached a final decision on a remedial
action plan on June 29, 1989, and obtained concurrence from the United States
Environmental Protection Agency on June 30, 1989. The IEPA then proceeded to
negotiate with Railroad and Beazer to implement the remedial action plan. In
June 1994, the IEPA settled its claims against Railroad and Beazer for
implementing the final remedial action plan in People v. Koppers Company,
Inc., No. 83-CH-92, (9th Circuit Court, Knox County, Illinois), by entering
into a Consent Order effective August 30, 1994. Railroad and Beazer agreed in
the Consent Order to undertake certain other obligations but specifically to
implement the final remedial action plan. However, the Consent Order did not
resolve certain alleged RCRA violations which occurred prior to 1985.
MERGER-RELATED LITIGATION
Several complaints were filed by Santa Fe Pacific Corporation (Santa Fe)
stockholders in connection with BNI's proposed merger (the Merger) with Santa
Fe. These complaints, which were consolidated in a single class action,
generally alleged that members of the Santa Fe Board of Directors violated
their fiduciary duties of good faith, loyalty, care and disclosure by virtue
of various actions taken by them in connection with the Merger and in
connection with their rejection of a competing offer for Santa Fe from Union
Pacific Corporation. The complaints also alleged, among other things, that
BNI aided and abetted the Santa Fe Directors in such breaches. On May 31,
1995, the Court of Chancery of the State of Delaware dismissed the
consolidated complaint in all respects.
On June 2, 1995, the plaintiffs appealed the Court of Chancery's decision to
the Supreme Court of the State of Delaware. Briefing is in process, but no
schedule has been established for oral argument or decision. BNI believes the
appeal is without merit and intends to oppose it vigorously.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The date of the annual meeting was April 20, 1995.
(b) Not required
(c) The following matters were voted on at the meeting:
(1) The following persons were nominated and elected to serve as
directors of BNI:
<TABLE>
<CAPTION>
Affirmative Votes Absten- Broker
Name Votes Withheld ions Nonvotes
--------------------- ----------- -------- ------- --------
<C> <C> <C> <S> <C>
J.S. Blanton 75,709,705 317,951 None. None.
D.P. Davison 75,675,228 352,428 " "
D.J. Evans 75,689,385 338,271 " "
G. Grinstein 75,705,384 322,272 " "
B.C. Jordan 75,673,547 354,109 " "
B.F. Love 75,671,170 356,486 " "
A.R. Weber 75,711,579 316,072 " "
E.E. Whitacre, Jr. 75,731,528 296,128 " "
M.B. Yanney 75,726,659 300,997 " "
</TABLE>
(2) The 1995 Burlington Northern Inc. Restricted Stock Incentive
Plan was voted on and adopted.
<TABLE>
<CAPTION>
Affirmative Votes Absten- Broker
Votes Withheld ions Nonvotes
----------- ---------- ------- --------
<S> <C> <C> <C>
54,344,446 21,151,154 510,865 21,191
</TABLE>
(3) A stockholder proposal regarding stockholder approval of the
issuance of preferred stock for certain purposes was voted on
and failed.
<TABLE>
<CAPTION>
Affirmative Votes Absten- Broker
Votes Withheld ions Nonvotes
----------- ---------- --------- ---------
<S> <C> <C> <C>
34,083,257 33,098,805 1,529,786 7,315,808
</TABLE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
The following exhibits are filed as part of this report:
Designation Nature of Exhibit
10 The 1995 Burlington Northern Inc. Restricted
Stock Incentive Plan.
11 Computation of earnings per common share.
12 Computation of ratio of earnings to fixed
charges.
27 Financial Data Schedule.
B. Reports on Form 8-K
During the quarter covered by this report, there were no reports on
Form 8-K filed.
Items 2, 3 and 5 of Part II were not applicable and have been
omitted.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Burlington Northern Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 9th day of
August, 1995.
BURLINGTON NORTHERN INC.
By: /s/ David C. Anderson
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
EXHIBITS
TO
FORM 10-Q
For the quarter ended June 30, 1995
____________
BURLINGTON NORTHERN INC.
Commission file number 1-8159
<PAGE>
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
10 The 1995 Burlington Northern Inc. Restricted
Stock Incentive Plan.
11 Computation of earnings per common share.
12 Computation of ratio of earnings to fixed
charges.
27 Financial Data Schedule.
THE 1995 BURLINGTON NORTHERN INC.
RESTRICTED STOCK INCENTIVE PLAN
SECTION 1
Purpose
1.1 The purpose of The 1995 Burlington Northern Inc. Restricted Stock
Incentive Plan ("Plan") is to promote the interests of Burlington Northern Inc.
("Company") and its shareholders by strengthening its ability to attract and
retain officers, key employees and other personnel of ability and experience in
the employ of the Company and its subsidiaries by furnishing suitable
recognition of their ability and industry which contribute to the success of the
Company. The Plan provides for the grant of restricted shares of Company Common
Stock ("Awards") in accordance with the terms and conditions set forth below.
SECTION 2
Definitions
2.1 Unless otherwise required by the context, the following terms when
used in the Plan shall have the meanings set forth in this Section 2.1:
(a) Board of Directors: The Board of Directors of the Company.
(b) Change in Control: As used in this Plan, a Change in Control shall
be deemed to occur (i) if any person (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13(d)(3) of the Exchange Act), directly or indirectly, of securities of
the Company representing 20 percent or more of the combined voting power of the
Company's then outstanding securities; (ii) upon the first purchase of the
Company's Common Stock pursuant to a tender or exchange offer (other than a
tender or exchange offer made by the Company); (iii) the Effective Time of a
merger or consolidation of the Company, a sale or disposition of all or
substantially all of the Company's assets, or a plan of liquidation or
dissolution of the Company; or (iv) if, during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a majority
thereof, unless the election or nomination for the election by the Company's
stockholders of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of
the period. Provided however that notwithstanding any other provision in this
Plan, no Change in Control shall have occurred for purposes of the Plan unless
the first of the event or period set forth in (i) through (iv) shall have
commenced on or after January 1, 1995; provided further that in the event that
the BN-SFP merger is consummated, the beginning of the period described in (iv)
shall be the day after the new directors are first elected after consummation of
the BN-SFP merger.
(c) Code: The Internal Revenue Code of 1986, as amended and in effect
form time to time, and the temporary or final regulations of the Secretary of
the Treasury adopted pursuant to the Code.
(d) Committee: The Committee designated to administer the Plan
pursuant to the Provisions of Section 3.
(e) Common Stock: The Common Stock of the Company, without par value,
or such other class of shares or other securities as may be applicable pursuant
to the provisions of Section 5.
(f) Exchange Act: The Securities Exchange Act of 1934, as amended.
(g) Permanent Disability: Permanent Disability under this Plan means
such disability which would qualify a Recipient to receive benefits, after
satisfying the elimination period thereinunder the Burlington Northern Inc. Long
Term Disability Plan, as now or hereafter in effect.
(h) Subsidiary: An entity that is designated by the Committee as a
subsidiary for purposes of this plan and that is a corporation (or other form of
business association that is treated as a corporation for tax purposes) of which
shares (or other ownership interests) having more than 50 percent of the voting
power are owned or controlled, directly or indirectly, by the Company so as to
qualify as a "subsidiary corporation" (within the meaning of Code Section
425(f).
A-1
<PAGE>
(i) Retirement: Retirement means a termination of employment which,
for the purposes of this Plan only, has been approved by the Committee
and/or which constitutes a "retirement" under any applicable qualified
pension benefit plan maintained by the Company, or any Subsidiary thereof,
or, if such plan is applicable, then, which would constitute a "retirement"
under such a plan if such individual were a participant in that plan.
(j) Effective Time: As used in this Plan, Effective Time shall mean
the moment at which all of the following events shall have occurred: (1)
the shareholders of the Company shall have approved a merger or
consolidation, sale, or disposition of all or substantially all of the
Company's assets or a plan of liquidation or dissolution of the Company
requiring their approval; (ii) the shareholders of each other entity being
merged into or consolidated with the Company or into which the Company is
being merged shall have approved the merger or consolidation if the vote of
the stockholders of such entity or entities is required to authorize the
merger or consolidation; and (iii) all regulatory approvals (including the
approval and authorization by the Interstate Commerce Commission or
successor thereof of the merger or consolidation as approved by the
shareholders under (i) and (ii), necessary as a condition precedent to the
consummation of the merger or consolidation, sale, or disposition of all or
substantially all of the Company's assets or a plan of liquidation or
dissolution of the Company shall have been given in writing.
SECTION 3
Administration
3.1. The Plan shall be administered by a Committee, or Sub-Committee of a
Committee, of not less than three directors of the Company who shall be
appointed by its Board of Directors. Members of the Committee shall not be
eligible to participate under the Plan while serving on the Committee. No person
shall serve as a member of the Committee unless at the time of his appointment
and service he shall be a "disinterested person," as defined in Rule 16(b)(3) of
the General Rules and Regulations under the Exchange Act or any successor Act
then in effect.
3.2. The Committee shall have full authority to construe and interpret the
Plan, to establish, amend and rescind rules and regulations relating to the
Plan, to select persons eligible to participate in the Plan, to grant Awards
thereunder, to administer the Plan, to make recommendations to the Board, and to
take all such steps and to make all such determination in connection with the
Plan and the Awards granted thereunder as it may deem necessary or advisable,
which determination shall be final and binding upon all participants. The
Committee shall cause the Company, at its expense, to take any action related to
the Plan which may be required or necessary to comply with the provisions of any
federal or state law or any regulations issued thereunder.
3.3. Each member of the Committee, while serving as such, shall be
considered to be acting in his capacity as Director of the Company. Members of
the Board of Directors and members of the Committee acting under the Plan shall
be fully protected in relying in good faith upon the advice of counsel and shall
incur no liability except for willful misconduct in the performance of their
duties.
3.4. The fact that a member of the Board or Directors is, or shall
theretofore have been or thereafter may be, a person who has received or is
eligible to receive an Award shall not disqualify him from taking part in and
voting at any time as a member of the Board of Directors in favor of or against
any amendment or repeal of the Plan.
SECTION 4
Eligibility
4.1. To be eligible for selection by the Committee to participate in the
Plan, an individual must be a full-time employee of the Company, or of any
Subsidiary, as of the date on which the Committee grants to such individual an
Award, and who in the judgment of the Committee holds a position of
responsibility and
A-2
<PAGE>
has ability and experience to contribute to the Company's continued success.
Directors of the Company who are full-time salaried officers shall be eligible
to participate. Each eligible employee to whom an Award is granted is
hereinafter referred to as a "Recipient."
SECTION 5
Shares Available for the Plan
5.1. Subject to Section 5.2 hereof, the maximum number of shares for which
Awards may at any time be granted under the Plan is 1,500,000 shares of Common
Stock, from shares held in the Company's treasury or out of the authorized but
unissued shares of the Company, or partly out of each, as shall be determined by
the Board of Directors. All authorized and unissued shares (if any) issued as
Awards in accordance with the Plan shall be fully paid and non-assessable and
free from preemptive rights. Upon the reversion to the Company of any shares of
Common Stock which were the subject of an Award and were subsequently forfeited
for any reason whatsoever, the shares of Common Stock which were the subject of
such Award shall again be available for subsequent Awards under the Plan.
5.2. In the event of a recapitalization, stock split, stock dividend,
exchange of shares, merger, reorganization, consolidation, reclassification, or
otherwise change in the corporate structure or shares of the Company or similar
event, the Board of Directors, upon the recommendation of the Committee, may
make appropriate adjustments in the number of shares authorized for the Plan
and, with respect to outstanding Awards, the Committee shall make appropriate
adjustments in the number of shares of Common Stock which were the subject of
such Awards.
SECTION 6
Grant of Awards
6.1. Awards may be granted to eligible employees in such number and at
such times during the term of this Plan as the Committee shall determine, the
Committee taking into account the duties of the respective employees, their
present and potential contributions to the success of the Company, and such
other factors as the Committee shall deem relevant in accomplishing the purpose
of the Plan. The granting of an Award shall take place when the Committee, by
resolution, written consent or other appropriate action, determines to grant
such Award to a particular Recipient (the "Award Date") as hereinafter provided.
SECTION 7
Terms and Conditions of Restricted Stock Awards
7.1. Each Award shall specify the number of shares of Common Stock subject
thereto.
7.2. The Company may require that, in acquiring any shares of Common
Stock, the Recipient agree with, and represent to, the Company that he is
acquiring such shares of Common Stock for the purpose of investment and with no
present intention to transfer, sell or otherwise dispose of such shares except
such distribution by a legal representative as shall be required by will or the
laws of any jurisdiction in winding up the estate of any Recipient. Such shares
of Common Stock shall be transferable thereafter only if the proposed transfer
shall be permissible pursuant to the Plan and if, in the opinion of counsel (who
shall be satisfactory to the Company), such transfer shall at such time be in
compliance with applicable securities laws. The Recipient shall deliver to the
Company an agreement in writing, signed by him, in form and substance as set
forth in Exhibit A hereto annexed, and the Company shall forthwith acknowledge
its receipt thereof.
7.3. Shares of Common Stock shall forthwith, after the making of the
representation and delivery of the agreement required by Section 7.2 hereof, be
duly issued and a certificate or certificates for such shares shall be issued in
the Recipient's name. The Company may, in its discretion, determine to retain
such certificates until the termination of the "Restricted Period" (as such term
is defined in Section 7.5 hereof) with respect to any Award or portion thereof.
The Recipient, after issuance of a certificate, whether retained
A-3
<PAGE>
by the Company or delivered to him, shall thereupon be a shareholder with
respect to all the shares of Common Stock represented by such certificate or
certificates and shall have all the rights of a shareholder with respect to all
such shares of Common Stock, including the right to vote such shares of Common
Stock and to receive all dividends and other distributions (subject to the
provisions of Section 7.4 hereof) paid with respect to such shares of Common
Stock; provided, however, that such shares of Common Stock shall be subject to
the restrictions hereinafter described in Section 7.6. Certificates of Common
Stock representing the shares subject to such restrictions shall bear the
following legend:
The shares represented by this certificate are subject to certain
restrictions set forth in the 1995 Burlington Northern Inc. Restricted
Stock Incentive Plan (the "Plan"). All stock awarded pursuant to the Plan
shall revert to the Company upon termination of employment of the grantee
by the Company or the voluntary resignation by the grantee from his or her
employment with the Company prior to the termination of the "Restricted
Period" as such term is defined in the Plan subject to the authority of the
committee. Such shares shall be further restricted during the Restricted
Period so that during such Restricted Period such shares may not be sold,
transferred by gift, assigned or otherwise disposed of or pledged,
mortgaged, assigned as security or otherwise encumbered, and provided that
such Restricted Period shall terminate if, during such period, a Change in
Control occurs (as defined in the Plan) or the Recipient's employment with
the Company is terminated by reason of his or her death, Permanent
Disability, or Retirement (as such terms are defined in the Plan).
7.4 In the event that, as the result of a stock split or stock dividend or
combination of shares or any other change, or exchange for other securities, by
reclassification, reorganization, merger, consolidation, recapitalization or
otherwise, the Recipient shall, as the owner of shares of Common Stock subject
to restrictions hereunder, be entitled to new or additional or different shares
of stock or securities, the certificate or certificates for, or other evidences
of, such new or additional or different shares or securities shall also be
imprinted with a legend as provided in Section 7.3 and all provisions of the
Plan relating to restrictions and lapse of restrictions herein set forth shall
thereupon be applicable to such new or additional or different shares or
securities to the extent applicable to the shares of Common Stock with respect
to which they were distributed.
7.5 The term "Restricted Period" with respect to Awards shall mean a
period commencing on the Award Date of such shares of Common Stock to the
Recipient and ending on the date which is three years thereafter (as to
one-third of the amount of such respective Award), four years thereafter (as to
an additional one-third of the amount of such respective award), and five years
thereafter (as to the final one-third of the amount of such respective Award);
provided, however, that the Committee, in its sole and absolute discretion,
may, on, but only on, the Award Date, increase the duration of a Restricted
Period with respect to any Award (or any portion thereof) then being granted,
or, at any time, or from time to time, shorten a Restricted Period previously
established with respect to any Award, or any portion thereof, to any period of
time in excess of six months after the Award Date. In the event of a Recipient's
death, Permanent Disability or Retirement, the Restricted Period with respect to
all outstanding Awards previously made to such Recipient, as to which Awards or
any portions thereof the relevant Restricted Period(s) have not otherwise
previously ended, shall then, as a result of any of such events, forthwith end.
At the end of the Restricted Period with respect to any Award or any portion
thereof, all of the restrictions contained in Section 7.6 hereof on the shares
of Common Stock, as to which the Restricted Period had ended, shall terminate,
the right of reversion to the Company provided in Sections 7.6(b) and 8.2 hereof
shall cease, and full ownership of the particular shares of Common Stock shall
irrevocably vest in, and such shares of Common Stock shall be freely alienable
by, the Recipient.
7.6 The restrictions to which the shares of Common Stock shall be subject
shall be as follows:
(a) During the Restricted Period applicable to an Award, or any
portion thereof, except as otherwise specifically provided in the Plan,
none of the shares of Common Stock, which were or are the subject of such
Award, or portion thereof, shall be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of.
A-4
<PAGE>
(b) Except as otherwise provided in Sections 7.6(c), (d), and 9.1, if
the employment of a Recipient should be terminated for any reason, other
than such Recipient's death, Permanent Disability or Retirement, at any
time prior to the end of the relevant Restricted Period for an Award, the
Recipient shall forfeit all interest in such Award, or portion of such
Award, as to which the respective Restricted Period has not terminated, and
all necessary steps shall be taken immediately to transfer ownership of
such shares of Common Stock, which were the subject of such Award, or
portion of an Award, back to the Company.
(c) In the event of the Recipient's termination of employment for any
reason other than his or her death, Permanent Disability or Retirement, the
Committee may, in its sole and absolute discretion, waive the restrictions
set forth in Section 7.6(b) hereof with respect to all, or any portion of,
an Award or Awards.
(d) Notwithstanding the preceding provisions of this Section 7.6, the
Committee may cause and/or all Restricted Periods with respect to any
and/or all Awards, or portions thereof, to terminate prior to the
expiration of the previously established Restricted Periods of such Awards,
if substantially all of the assets and business of the Company are sold,
the Company is to be dissolved or liquidated, or the Company is to be
merged into or consolidated with another entity and the Company is not the
surviving corporation.
(e) Notwithstanding anything else to the contrary herein contained,
the Committee shall have the absolute right, at any time, or from time to
time, in its sole and absolute discretion, to reduce the time period of any
Restricted Period with respect to any Award or portion of an Award to any
length in excess of six months after the Award Date.
7.7. The restrictions set forth in Section 7.6 hereof, with respect to any
Award to which such Restricted Period was applicable, shall terminate as to such
Award, or portion thereof, in accordance with the time(s) and number(s) of
shares of Common Stock as to which the relevant Restricted Period expires. Upon
such expiration of the Restricted Period, replacement certificates shall be
issued for the number of shares of Common Stock with respect to which the
restrictions have lapsed, which certificates shall be free of the restrictions
imposed under Section 7.6.
7.8. Nothing in Section 7, or elsewhere in this Plan, shall preclude the
transfer of shares, on the death of the Recipient, to his legal representatives
or his estate or his designated beneficiary, or preclude such representatives
from transferring such shares, or any of them, to the person or persons entitled
thereto by will or designation or by the laws of descent and distribution.
SECTION 8
Limitations
8.1. No person shall at any time have any right to receive an allocation
of shares hereunder and no person shall have authority to enter into an
agreement for the making of an allocation or to make any representation or
warranty with respect thereto.
8.2. Recipients of Awards shall have no rights in respect thereof except
as set forth in the Plan. Except as provided in Section 7.2 or 7.8 hereof, such
rights may not be assigned or transferred except by will or by the laws of
descent and distribution and in the event that any attempt shall be made to
sell, exchange, transfer, pledge, hypothecate or otherwise dispose of any shares
of Common Stock held by the Recipient prior to the termination of the Restricted
Period in respect of such shares of Common Stock, then the shares of Common
Stock which are the subject of such attempted disposition shall be forfeited and
revert to the Company. Before issuance of shares of Common Stock, no such shares
of Common Stock shall be earmarked for the Recipients' accounts nor shall they
have any rights as stockholders with respect to such shares of Common Stock.
A-5
<PAGE>
SECTION 9
Change in Control
9.1. Notwithstanding any other Plan provisions pertaining to when a
relevant Restricted Period with respect to an Award shall terminate, the
Restricted Period as to all outstanding Awards shall automatically and
irrevocably terminate upon the occurrence of a Change in Control, without any
further action by the Committee or the Board of Directors whatsoever.
SECTION 10
Regulatory Approvals and Listing
10.1. Section 7.3 notwithstanding, the Company shall not be required to
issue any certificate for shares of Common Stock upon the grant of an Award
granted under the Plan prior to:
(a) The obtaining of any approval or ruling from the Securities and
Exchange Commission, the Internal Revenue Service or any other governmental
agency which the Company, in its sole discretion, shall determine to be
necessary or advisable.
(b) The listing of such shares on any stock exchange on which the
Common Stock may then be listed.
(c) The completion of any registration or other qualification of such
shares of Common Stock under any federal or state laws, rulings or
regulations of any governmental body which the Company, in its sole
discretion, shall determine to be necessary or advisable.
SECTION 11
Term of Plan
11.1. This Plan shall be void, and no rights to any Award, or portion
thereof, shall be held by any Recipient, unless this Plan is approved by the
stockholders of the Company within 12 months after the date the Plan is adopted
by the Board of Directors. Subject to the foregoing condition, Awards may be
granted pursuant to the Plan from time to time within the period commencing
April 13, 1995, and ending ten years after the earlier of the adoption of the
Plan by the Board of Directors or the approval of the Plan by the stockholders.
Awards theretofore granted may extend beyond such latter date and the terms and
conditions of the Plan shall continue to apply thereto and to shares of Common
Stock acquired upon exercise thereof.
SECTION 12
Amendment, Termination or Discontinuance of the Plan
12.1. Subject to the Board of Directors and this Section 12, the Committee
may from time to time make such amendments to the Plan as it may deem proper and
in the best interest of the Company without further approval of the Board of
Directors or stockholders of the Company, including, but not limited to, any
amendment necessary to ensure that the Company may obtain any regulatory
approval referred to in Section 10 hereof; provided, however, that no change in
any Award theretofore granted may be made without the consent of the Recipient
if such change would impair or diminish the rights of the Recipient to acquire
or retain any Award, or portion thereof, upon terms and conditions no more
onerous than those which would have applied under the Plan prior to such change.
12.2. The Committee and the Board of Directors may not amend the Plan
without the approval of the stockholders of the Company to (a) increase the
maximum number of shares of the Company subject to the Plan, except as permitted
by Section 5.2; (b) change the class of eligible employees who may receive
Awards under the Plan; (c) materially increase the benefits to Recipients under
the Plan; or (d) render any member of the Committee eligible to receive an
allocation at any time while he is serving on the Committee.
12.3. The Board of Directors may at any time suspend the operations of or
terminate the Plan with respect to any shares of Common Stock not at the time
subject to an Award.
A-6
<PAGE>
SECTION 13
MISCELLANEOUS
13.1. By acceptance of any Award under this Plan, each employee agrees that
such Award is special compensation, and that any amount paid will not affect (i)
the amount of any pension under any pension or retirement plan in which he
participates as an employee of the Company; (ii) the amount of coverage under
any group life insurance plan in which he participates as an employee of the
Company; or (iii) the benefits under any other benefit plan of any kind
heretofore or hereinafter in effect, under which the availability or amount of
benefits is related to compensation.
13.2. Designation of an employee as a Recipient shall not give any employee
any right to continued employment by the Company, and the right to dismiss any
employee at any time with or without assigning a reason therefor is specifically
reserved to the Company. Designation as a Recipient in the Plan or the receipt
of an Award with respect to any year shall not give an employee the right to
receive an Award with respect to any subsequent period.
13.3. No right or interest of any Recipient in the Plan shall be assignable
or transferable, or subject to any lien, directly, by operation of law, or
otherwise, including but not by way of limitation, execution, levy, garnishment,
attachment, pledge, and bankruptcy; and no right or interest of any Recipient
shall be liable for, or subject to, any obligation or liability of such
Recipient.
13.4. The Plan shall be governed by the laws of the State of Texas.
13.5. All costs and expenses incurred in the operation and administration
of this Plan shall be borne by the Company.
13.6. The Company is authorized to withhold any tax required to be withheld
from the amount considered as taxable compensation to the Recipient. In the
event that funds are not otherwise available to cover any required withholding
tax, the Recipient shall be required to provide such funds before shares shall
be issued to him. The Recipient will immediately notify the Company of any
election he may make under Section 83(b) of the Code (and under any successor
section thereto having similar import) with respect to any Award under this
Plan.
A-7
EXHIBIT 11
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1994 1995 1994
------- -------- ------- --------
Net income
-----------------------------------------
<S> <C> <C> <C> <C>
Primary:
Net income $ 130 $ 82 $ 238 $ 159
Convertible preferred stock dividends (6) (6) (11) (11)
------- -------- ------- --------
Net income available for common
stockholders $ 124 $ 76 $ 227 $ 148
======= ======== ======= ========
Fully diluted:
Net income $ 130 $ 82 $ 238 $ 159
======= ======== ======= ========
Weighted average number of shares
-----------------------------------------
Primary:
Average common shares outstanding 89.6 89.1 89.4 89.1
Common shares equivalents resulting
from assumed exercise of stock
options 1.2 1.1 1.1 1.2
------- -------- ------- --------
90.8 90.2 90.5 90.3
======= ======== ======= ========
Fully diluted:
Average common shares outstanding 89.6 89.1 89.4 89.1
Common shares resulting from assumed
conversion of convertible preferred
stock 7.3 7.4 7.3 7.4
Common share equivalents resulting
from assumed exercise of stock
options assuming full dilution 1.5 1.1 1.5 1.1
------- -------- ------- --------
98.4 97.6 98.2 97.6
======= ======== ======= ========
Earnings per common share:
Primary $ 1.37 $ .85 $ 2.51 $ 1.64
Fully diluted 1.32 .84 2.42 1.63
</TABLE>
Primary earnings per common share are computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of
common shares and common share equivalents outstanding. Fully diluted
earnings per common share are computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding.
Common share equivalents are computed using the treasury stock method. An
average market price is used to determine the number of common share
equivalents for primary earnings per common share. The higher of the average
or end-of-period market price is used to determine common share equivalents
for fully diluted earnings per common share. In addition, the if-converted
method is used for convertible preferred stock when computing fully diluted
earnings per common share.
Earnings per common share may not compute due to the level of rounding in this
exhibit.
EXHIBIT 12
BURLINGTON NORTHERN INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1995 1994 1995 1994
------ ------- ------ -------
Earnings:
<S> <C> <C> <C> <C>
Pre-tax income $ 213 $ 134 $ 390 $ 276
Add:
Interest and fixed charges,
excluding capitalized interest 50 39 93 78
Portion of rent under long-term
operating leases representative
of an interest factor 27 27 55 52
------ ------- ------ -------
Total earnings available for fixed
charges $ 290 $ 200 $ 538 $ 406
====== ======= ====== =======
Fixed charges:
Interest and fixed charges $ 51 $ 40 $ 95 $ 79
Portion of rent under long-term
operating leases representative
of an interest factor 27 27 55 52
------ ------- ------ -------
Total fixed charges $ 78 $ 67 $ 150 $ 131
====== ======= ====== =======
Ratio of earnings to fixed charges 3.72x 2.99x 3.59x 3.10x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information from Burlington Northern Inc.'s
consolidated financial statements as of and for the six month period ended June
30, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 31
<SECURITIES> 0
<RECEIVABLES> 695
<ALLOWANCES> 28
<INVENTORY> 130
<CURRENT-ASSETS> 1184
<PP&E> 10428
<DEPRECIATION> 3935
<TOTAL-ASSETS> 8625
<CURRENT-LIABILITIES> 1598
<BONDS> 2194
<COMMON> 1
0
336
<OTHER-SE> 2195
<TOTAL-LIABILITY-AND-EQUITY> 8625
<SALES> 0
<TOTAL-REVENUES> 2631
<CGS> 0
<TOTAL-COSTS> 2163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 390
<INCOME-TAX> 152
<INCOME-CONTINUING> 238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.42
</TABLE>
