SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1994
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 1-7092
ILLINOIS CENTRAL RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-2728842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(312) 755-7500
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
As of June 30, 1994, 100 common shares were outstanding.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF ILLINOIS
CENTRAL CORPORATION AND MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTIONS H(1) (a) AND (b) OF THE FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
FORM 10-Q
Three Months and Six Months Periods Ended June 30, 1994
CONTENTS
Part I - Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
Part II - Other Information:
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index E-1
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30
1994 1993 1994 1993
Revenues $ 145.2 $ 132.1 $ 292.7 $274.8
Operating expenses:
Labor and fringe
benefits 47.9 46.2 96.9 93.3
Leases and car hire 16.3 17.4 31.8 36.3
Diesel fuel 7.7 7.3 15.5 15.0
Materials and
supplies 9.3 8.6 20.1 18.1
Depreciation and
amortization 6.0 5.5 11.9 11.0
Other 13.9 9.2 23.8 17.3
Operating expenses 101.1 94.2 200.0 191.0
Operating income 44.1 37.9 92.7 83.8
Other income, net 1.1 1.2 2.1 2.2
Interest expense, net (6.0) (8.4) (12.9) (18.3)
Income before income
taxes, extraordinary
item and cumulative
effect of changes in
accounting principles 39.2 30.7 81.9 67.7
Provision for income
taxes 14.7 10.8 30.3 23.7
Income before extra-
ordinary item and
cumulative effect of
changes in account-
ing principles 24.7 19.9 51.6 44.0
Extraordinary item, - (23.4) - (23.4)
net
Cumulative effect of
changes in account-
ing principles - - (0.1)
Net Income $ 24.7 $ (3.5) $ 51.6 $ 20.5
ILLINOIS CENTRAL RAILROAD AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
ASSETS
Current assets: June 30, 1994 December 31, 1993
Cash and temporary cash
investments $3.7 $8.1
Receivables, net of allowance
for doubtful accounts
of $2.6 in 1994 and $3.1 in 1993 33.1 84.6
Materials and supplies, at average
cost 20.2 20.1
Assets held for disposition 9.1 9.1
Deferred income taxes - current 21.9 22.8
Other current asset 3.4 3.6
Total current assets 91.4 148.3
Investments
Properties:
Transportation:
Road and structures, including
land 965.7 947.9
Equipment 79.2 71.7
Other, principally land 40.3 40.4
Total properties 1,085.2 1,060.0
Accumulated depreciation (22.4) (19.3)
Net properties 1,062.8 1,040.7
Other assets 10.9 10.2
Total assets $ 1,179.8 $ 1,213.7
LIABILITIES STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-
term debt $ 1.1 $ 1.1
Accounts payable 53.4 51.7
Dividends payable - 15.0
Income taxes payable 9.5 3.5
Casualty and freight claims 16.5 24.7
Employee compensation and
vacations 11.6 15.8
Taxes other than income taxes 24.7 13.9
Accrued redundancy reserves 6.7 6.8
Other accrued expenses 28.4 28.4
Total current liabilities 151.9 160.9
Long-term debt 285.6 347.3
Deferred income taxes 199.9 200.6
Other liabilities and reserves 132.9 138.1
Contingencies and commitments
Stockholders' equity:
Common stock, par value $1
par value - -
Additional paid-in capital 128.7 128.6
Retained income 280.8 238.2
Total stockholders' equity 409.5 366.8
Total liabilities and
stockholder's equity $1,179.8 $1,213.7
The following notes are an integral part of the consolidated
financial statements
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Six Months Ended June 30,
1994 1993
Cash flows from operating
activities:
Net income $ 51.6 $ 20.5
Reconciliation of net income
to net cash provided by (used
for) operating activities:
Extraordinary item, net - 23.4
Cumulative effect of changes
in accounting principles - 0.1
Depreciation and amoritization 11.8 11.0
Deferred income taxes 0.2 18.0
Equity in undistributed earnings
of affiliates, net of dividends
received (0.3) (0.1)
Net gains on sales of real
estate 0.1 -
Cash changes in working capital 56.6 (3.8)
Changes in other assets (0.8) (1.8)
Changes in other liabilities
and reserves (3.2) (6.4)
Net cash provided by (used
for) operating activities 116.0 60.9
Cash flows from investing activites:
Additions to properties (35.4) (27.8)
Proceeds from real estate sales 0.2 0.3
Proceeds from equipment sales 2.8 2.1
Proceeds from sales of investments 0.2 0.2
Other 0.5 (2.1)
Net cash provided (used for)
investing activities (31.7) (27.3)
Cash flows from financing activities:
Proceeds from issuance of debt 33.0 214.6
Principal payments on debt (74.5) (244.4)
Net proceeds (payments) in
commercial paper (22.1) -
Dividends paid (24.0) (12.9)
Purchase of subsidiary's common
stock (1.1) (0.2)
Net cash provided by (used for)
financing activities (88.7) (42.9)
Changes in cash and temporary cash
investments (4.4) (9.3)
Cash and temporary cash investments
at beginning of period 8.1 25.6
Cash and temporary cash investments
at end of period $ 3.7 $ 16.3
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest (net of amount
capitalized) $ 13.5 $ 23.6
Income taxes $ 24.1 $ 6.0
The following notes are an integral part of the consolidated
financial statements.
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Except as described below, the accompanying unaudited consolidated
financial statements have been prepared in accordance with
accounting policies described in the 1993 Annual Report on Form 10-K
and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements
reflect all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. Interim
results are not necessarily indicative of results for the full year.
Certain 1993 amounts have been reclassified to conform with the
presentation used in the 1994 financial statements.
Income Per Share
Income per share has been omitted as the Railroad is a wholly-owned
subsidiary of Illinois Central Corporation ("IC").
2. Sale of Accounts Receivable
In the first quarter of 1994, the Railroad entered into a revolving
agreement to sell undivided percentage interests in certain of its
accounts receivable, with recourse, to a financial institution. The
agreement, which expires March 1997, allows for sales of accounts
receivable up to a maximum of $50 million. The Railroad services
the accounts receivable sold under the agreement. As of June 30,
1994 the Railroad received cash proceeds of $50.0 million as a
result of such sales of accounts receivable. The Railroad retains
the same exposure to credit loss as existed prior to the sale.
Costs related to the agreement will vary generally in correlation
with changes in prevailing interest rates. These costs, which are
included in Other Income, Net, were $.5 million and $.9 million for
the second quarter and six month period ended June 30, 1994,
respectively.
3. Dividends
On July 6, 1994, the Railroad paid a $9.2 million dividend to IC.
Certain provisions of the Railroad's debt agreements restrict the
level of dividends it may pay to IC. At June 30, 1994,
approximately $93 million was free of such restrictions.
4. Certain Investments in Debt and Equity Securities
Effective January 1, 1994, the Railroad adopted the Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS
No. 115 expands the use of fair value accounting for certain
investments in debt and equity securities but retains the use of the
amortized cost method for investments in debt securities that the
reporting enterprise has the positive intent and ability to hold to
maturity. All of the investments held by the Railroad are temporary
and held for less than 90 days. They are included in the
Consolidated Balance Sheet as part of Cash and Temporary Cash
Investments. For the periods presented, all investments were in
U.S. Corporate demand notes. It is the intent of the Railroad to
hold all debt securities to maturity, therefore, the following is
provided in accordance with SFAS No. 115 ($ in millions):
6-30-94 1-1-94
Aggregate fair value $ 1.3 $ 4.6
Gross unrealized holding gains $ - $ -
Gross unrealized holding losses $ - $ -
Amortized cost $ 1.3 $ 4.6
5. Recent Event
On July 19, 1994, the Company and Kansas City Southern
Industries, Inc. (KCSI) announced the signing of a letter of intent
providing for the acquisition of KSCI, excluding those businesses,
assets and operations which are not part of the business, assets and
operations of Transportation Services Division, which division
consists of the Kansas City Southern Railway ("KCSR") and certain
related assets. The letter of intent contemplates that the
acquisition will be accomplished by the merger of KCSI into the
Company (the "Merger") immediately following the spin-off by KCSI
to its shareholders of all of its equity interest in the businesses
constituting the financial services and information processing
operations and certain non-transportation assets of KCSI. As a
result of the Merger, KCSR will become a wholly owned subsidiary of
IC.
Pursuant to the Merger, KCSI shareholders will receive, on a
tax-free basis, a distribution of approximately 21.2 million shares
of Company common stock. In addition, the letter of intent
anticipates that the Company will assume up to approximately $929
million of KCSI indebtedness and provide $6 million to purchase
KCSI's preferred stock.
Either party can terminate the letter of intent if definitive
documentation is not executed within ninety days of the signing of
the letter of intent. To complete the acquisition, the KCSI must
receive a favorable tax ruling from the IRS and shareholders of both
companies must approve the transaction. Closing of the acquisition
is expected to occur in the first half of 1995. Since the
Interstate Commerce Commission (ICC) must approve the Company's
application to control two Class I railroads all of IC's interest
in the voting stock of the Illinois Central Railroad Company will
be placed in a voting trust immediately prior to closing of the
Merger and pending ICC approval. The ICC approval process is
expected to be completed within a year from the submission of an
application (in late 1994), but the ICC could take as many as 31
months to rule.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion below takes into account the financial condition
and results of operations of the Railroad for the periods presented
in the consolidated financial statements.
Results of Operations
Three Months Ended June 30, 1994 Compared to Three Months Ended June
30, 1993
Revenues for 1994 increased from the prior year quarter by $13.1
million or 9.9% to $145.2 million. The increase was a result of a
9.9% increase in the number of carloads coupled with increases in
other revenue, other than gross freight revenue, which were
partially offset by a decrease of 3.1% in gross freight revenue per
carload. For the quarter, the Railroad experienced carloading
increases in coal (32.6%), intermodal (47.6%) and chemicals (3.0%),
offset by decreased grain loads (14.7%). Prior year carloadings in
coal were adversely impacted by the United Mine Workers (UMW) strike
against several coal producers served by the Railroad.
Operating expenses for 1994 increased $6.9 million, or 7.3% as
compared to 1993. Increases in labor, materials and supplies and
depreciation were offset by decreased lease and car hire expense.
The shift in expense for leases and car hire to depreciation
reflects the Railroad's shift from leasing to ownership of its
fleet. Other expense for the 1994 second quarter was impacted by
non-recurring favorable adjustments to reserves recorded in 1993,
significant training and safety program costs and equipment costs
and buyouts for approximately $1.0 million each which are not
expected to be experienced in the future. Additionally, franchise
and ad valorem taxes have increased approximately $1.0 million year
over year.
Operating income for 1994 increased 16.4% ($6.2 million) to $44.1
million from $37.9 million in 1993, as a result of increased
revenues cited above, partially offset by increased operating
expenses.
Net interest expense decreased by 28.6% to $6.0 million as compared
to $8.4 million in 1993. As a result of the 1993 refinancing of the
Railroad's debt, the shift to receivable sales financing and the
changes in interest rates.
Six Months Ended June 30, 1994 Compared to Six Months Ended June 30,
1993
Revenues for 1994 increased from the prior year by $17.9 million or
6.5% to $292.7 million. The increase was a result of a 6.5%
increase in the number of carloads coupled with increases in other
revenue, other than gross freight revenue, which were partially
offset by a decrease of 2.3% in gross freight revenue per carload.
For the first six months of 1994 the Company experienced carloading
increases in coal (22.4%), intermodal (37.7%) and chemicals (3.5%)
offset by decreased grain loads (14.8%). The UMW strike negatively
impacted full year 1993 coal carloadings.
Operating expenses for 1994 increased $9.0 million, or 4.7% as
compared to 1993, reflecting the variances cited above for the three
months ended June 30, 1994.
Operating income for 1994 increased 10.6% ($8.9 million) to $92.7
million from $83.8 million in 1993, as a result of increased
revenues partially offset the increased operating expenses.
Net interest expense decreased 29.5% to $12.9 million as compared
to $18.3 million in 1993, primarily as a result of the 1993
refinancing of the Railroad's debt, the shift to receivable sales
financing and the changes in interest rates.
Effective January 1, 1993, the Railroad adopted both the Statement
of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" ("SFAS No. 106")
and the Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("SFAS No.
112"). SFAS No. 106 requires that future costs associated with
providing postretirement benefits be recognized as expense over the
employees' requisite service period. The pay-as-you-go method used
prior to 1993 recognized the expense on a cash basis. SFAS No. 112
establishes accounting standards for employers who provide
postemployment benefits and clarifies when the expense is to be
recognized. As a result of adopting these two standards the Company
recorded a decrease to net income of $84,000 (net of taxes of
$46,000) as a cumulative effect of changes in accounting principles.
In June 1994, the Railroad signed a marketing agreement with
Southern Pacific Railroad Corporation (SP) for the north/south
transport of intermodal units in the Chicago-Texas-Mexico market,
beginning July 1, 1994. At least 30,000 intermodal units which the
SP moves in this market annually will be routed more directly to and
from Chicago through Memphis over the Railroad's system.
Liquidity and Capital Resources
Operating Data: Six Months Ended June 30,
1994 1993
($ in millions)
Cash flows provided by (used for):
Operating activities $116.0 $ 60.9
Investing activities (31.7) (27.3)
Financing activities (88.7) (42.9)
Net change in cash and
temporary cash investments $ 4.4 $ (9.3)
Operating activities in 1994 provided $116.0 million in cash,
primarily from net income before depreciation and deferred taxes,
and the $50.0 million proceeds from the sale of accounts
receivables.
During 1994, additions to property of $35.4 million include
approximately $16.2 million for track and bridge rehabilitation and
approximately $11.0 million for equipment upgrades, including lease
conversions. The Railroad anticipates that base capital
expenditures for 1994 will be in the range of $45 million to $50
million and will concentrate on track maintenance, renewal of track
structures such as bridges, and upgrading the locomotive fleet. If
additional opportunities such as lease conversion occur in 1994, the
total capital spending including capitalized leases could range
between $65 million and $70 million. To date capital leases and
lease conversion have totaled approximately $9.9 million which
includes approximately $1.7 million converted in July 1994.
Expenditures for capital and lease conversions are expected to be
met from current operations and other available sources.
Over the last three years, management has concentrated on reducing
leverage, expanding funding sources, lowering funding costs and
upgrading the debt ratings issued by the rating services. The
latest steps in this process are a first quarter of 1994 agreement
with a financial institution whereby the Railroad sells certain of
its accounts receivables and the initiation in November 1993 of a
public commercial paper program.
In the first quarter of 1994, the Railroad entered into a
receivables purchase agreement to sell undivided percentage
interests in certain of its accounts receivable, with recourse, to
a financial institution. The agreement, which expires March 1997,
allows for sales of accounts receivable up to a maximum of $50
million. The Railroad services the accounts receivable sold under
the agreement. During the first half of 1994, the Railroad
received cash proceeds of $50.0 million as a result of such sales
of accounts receivable. The Railroad retains the same exposure to
credit loss as existed prior to the sale. Costs related to the
agreement will vary generally in correlation with changes in
prevailing interest rates. These costs, which are included in Other
Income, Net, were $.9 million for the six months ended June 30,
1994.
The commercial paper, issued by the Railroad, is rated A2 by S&P,
F2 by Fitch Investors Service, Inc. ("Fitch") and P3 by Moody's and
is supported by a $100 million Revolver with the Railroad's bank
lending group. At June 30, 1994, $16.0 million of commercial paper
was outstanding with an average interest rate of 4.78%. During the
first half, the amount outstanding ranged from $13.0 million to
$47.7 million. The Railroad views this program as a significant
long-term funding source and intends to issue replacement notes as
each existing issue matures and accordingly issuances are classified
as long-term.
At June 30, 1994, no amounts had been drawn under either the
Railroad's Revolver or Bank Line. The $100 million available under
the Revolver was limited to $80.0 million because $16.0 million in
commercial paper was outstanding and $4.0 million in letters of
credit had been issued. The Bank Line is structured as a 364-day
renewal instrument and the Railroad intends to renew it on an on-
going basis. At June 30, 1994, no amounts were outstanding.
The Railroad also has an uncommitted $25.0 million floating rate
Credit Facility. At June 30, 1994, no amounts were outstanding.
Various borrowings of the Railroad's subsidiaries are governed by
agreements which contain financial and operating covenants. All
entities were in compliance with these covenant requirements at June
30, 1994, and management does not anticipate any difficulty in
maintaining such compliance.
On July 6, 1994, the Railroad paid a $9.2 million dividend to IC.
Certain provisions of the Railroad's debt agreements restrict the
level of dividends it may pay to IC. At June 30, 1994,
approximately $93 million was free of such restriction.
The Railroad has paid approximately $2.9 million in the first half
of 1994 for costs associated with the various labor agreements
signed in 1992 and 1991. The Company anticipates that an additional
$3.7 million will be required in 1994 related to all such
agreements. These requirements are expected to be met from current
operating activities or other available sources. In June 1994, the
Brotherhood Railway Carman Division of the Transportation
Communication Union (BRC) and the Railroad signed an agreement
covering wage and work rule issues through 1999. The agreement was
ratified July 20, 1994. The BRC represents approximately 300
employees who inspect and maintain the Railroads' freight car fleet.
The Railroad has entered into various hedge agreements designed to
mitigate significant changes in fuel prices. As a result,
approximately 93% of the Railroad's short-term diesel fuel
requirements through March 1995 and 46% through June 1995 are
protected against significant price changes.
The Railroad is and will continue to be subject to extensive
regulation under environmental laws concerning, among other things,
discharges into the environment and the handling, storage,
transportation and disposal of waste and hazardous materials.
Inherent in the operations and real estate activities of the
Railroad and other railroads is the risk of environmental
liabilities. As discussed in Item 3. "Legal Proceedings," in the
Railroad's definitive Annual Report Form 10-K for the year ended
December 31, 1993, dated March 16, 1994, Commission File No. 1-7092,
several properties on which the Railroad currently or formerly
conducted operations are subject to governmental action in
connection with environmental damage. In the opinion of management,
the Railroad has adequate reserves to cover the costs for
investigation and remediation. However, there can be no assurance
that environmental conditions will not be discovered which might
individually or in the aggregate have a material adverse effect on
the Railroad's financial condition.
Recent Event
On July 19, 1994, IC and Kansas City Southern Industries, Inc.
(KCSI) announced the signing of a letter of intent providing for the
acquisition of the Kansas City Southern Railway and certain related
assets by IC.
KCSI shareholders will receive, on a tax-free basis, a distribution
of approximately 21.2 million shares of IC common stock. In
addition, the letter of intent anticipates that IC will assume
approximately $929 million of KCSI indebtedness and provide $6
million to purchase its preferred stock.
To complete the acquisition, a definitive agreement must be reached
in 90 days, the KCSI must receive a favorable tax ruling from the
IRS and shareholders of both companies must approve of the
transaction. Closing of the acquisition is expected to occur in the
first half of 1995. Since the Interstate Commerce Commission (ICC)
must approve the IC's application to control two Class I railroads
the Railroad will be placed in a voting trust upon closing of the
acquisition and pending ICC approval. The ICC approval process is
expected to be completed within a year from the submission of an
application (in late 1994), but the ICC could take as many as 31
months to rule.
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114").
SFAS No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate. This statement applies to financial
statements for fiscal years beginning after December 31, 1994, with
earlier adoption encouraged. The Railroad is currently evaluating
the impact of this statement, if any, on its reported results.
Early adoption is not anticipated.
Item 1. Legal Proceedings
Incorporated herein by reference is Item 3. - "Legal Proceedings"
in the Company's definitive Annual Report Form 10-K for the year
ended December 31, 1993, dated March 16, 1994, Commission File No.
1-7092. In addition, the following development is reported:
Environmental
Iselin Yard, Jackson, Tennessee
In June 1994, the Tennessee Department of Environment and
Conservation, issued an order requiring the Railroad and another
potentially responsible party to conduct studies and clean-up
activities in accordance with State directives.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
Signatures
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned hereto duly authorized.
ILLINOIS CENTRAL RAILROAD COMPANY
Dale W. Phillips
Vice President & Chief Financial
Officer
John V. Mulvaney
Controller
Date: August 8, 1994
