<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
SCHEDULE 14D-9/A
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
AMENDMENT NO. 2
-----------------
SANTA FE PACIFIC CORPORATION
(Name of Subject Company)
SANTA FE PACIFIC CORPORATION
(Name of Person(s) Filing Statement)
Common Stock, par value $1.00 per share
(Title of Class of Securities)
Common Stock - 802183 10 3
(CUSIP Number of Class of Securities)
------------------
Jeffrey R. Moreland
Vice President - Law and General Counsel
Santa Fe Pacific Corporation
1700 East Golf Road
Schaumburg, Illinois 60173-5860
(708) 995-6000
(Name, address and telephone number of person authorized to receive
notices and communications on behalf of the person(s) filing statement)
------------------
Copy to:
Scott J. Davis
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603-3441
(312) 782-0600
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<PAGE>
STATEMENT IN RESPONSE TO BURLINGTON NORTHERN/SANTA FE OFFER
Santa Fe Pacific Corporation (the "Company") hereby amends and
supplements its statement on Schedule 14D-9 (the "Original Schedule 14D-9")
filed with the Securities and Exchange Commission (the "Commission") on December
23, 1994 as amended by Amendment No. 1 thereto. Unless otherwise indicated
herein, each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Original Schedule 14D-9.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
The information set forth in the "Recommendation of SFP Board of
Directors" section of the Supplement dated January 13, 1995 to the Offer to
Purchase dated December 23, 1994, which is attached hereto as Exhibit 22, is
incorporated herein by reference.
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit 22 - Supplement dated January 13, 1995 to the Offer to
Purchase dated December 23, 1994.
Exhibit 23 - SFP's Annual Report on Form 10-K/A, amendment No. 2
filed October 5, 1994, for the year ended December 31,
1993.
Exhibit 24 - SFP's Current Report on Form 8-K/A dated August 3, 1994
and filed October 5, 1994.
Exhibit 25 - SFP's Quarterly Report on Form 10-Q for the period ended
September 30, 1994.
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete, and
correct.
January 13, 1995 /s/ Jeffrey R. Moreland
- ---------------- -----------------------
(Date) Jeffrey R. Moreland
Vice President - Law
and General Counsel
<PAGE>
EXHIBIT 99.22
SUPPLEMENT TO THE OFFER TO PURCHASE DATED DECEMBER 23, 1994
IMPORTANT NOTICE TO STOCKHOLDERS OF
SANTA FE PACIFIC CORPORATION
BURLINGTON NORTHERN INC.
AND
SANTA FE PACIFIC CORPORATION
HEREBY SUPPLEMENT THE OFFER TO PURCHASE FOR CASH
UP TO 63,000,000 SHARES OF COMMON STOCK
(INCLUDING THE ASSOCIATED PREFERRED SHARE PURCHASE RIGHTS)
OF
SANTA FE PACIFIC CORPORATION
AT
$20.00 NET PER SHARE
THE OFFER HAS BEEN EXTENDED. THE OFFER, PRORATION PERIOD AND WITHDRAWAL
RIGHTS WILL NOW EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY,
FEBRUARY 8, 1995, UNLESS FURTHER EXTENDED.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) AT LEAST 63,000,000
SHARES OF SANTA FE PACIFIC CORPORATION COMMON STOCK BEING VALIDLY TENDERED AND
NOT WITHDRAWN BEFORE THE EXPIRATION OF THE OFFER (THE "MINIMUM CONDITION"),
(2) SANTA FE PACIFIC CORPORATION ("SANTA FE") AND BURLINGTON NORTHERN INC.
("BURLINGTON NORTHERN") HAVING OBTAINED SUFFICIENT FINANCING ON TERMS
SATISFACTORY TO THEM TO PURCHASE 63,000,000 SHARES PURSUANT TO THE OFFER AND
(3) APPROVAL OF THE MERGER REFERRED TO BELOW BY THE STOCKHOLDERS OF SANTA FE
AND BURLINGTON NORTHERN. SANTA FE AND BURLINGTON NORTHERN DO NOT INTEND TO
WAIVE THE MINIMUM CONDITION. THE OFFER IS NOT CONDITIONED ON RECEIPT OF
INTERSTATE COMMERCE COMMISSION APPROVAL OF THE MERGER. SEE "THE TENDER OFFER--
14. CONDITIONS OF THE OFFER" OF THE OFFER TO PURCHASE DATED DECEMBER 23, 1994.
THE OFFER IS BEING MADE IN CONNECTION WITH THE AGREEMENT AND PLAN OF MERGER
BETWEEN BURLINGTON NORTHERN AND SANTA FE, AS AMENDED, PURSUANT TO WHICH SANTA
FE WILL MERGE WITH BURLINGTON NORTHERN (THE "MERGER"). THE BOARD OF DIRECTORS
OF SANTA FE HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER AND RECOMMENDS
THAT THOSE SANTA FE STOCKHOLDERS WHO WISH TO RECEIVE CASH FOR A PORTION OF
THEIR SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES. THE OFFER IS BEING
EFFECTED TO FACILITATE THE MERGER. SEE "RECOMMENDATION OF SFP BOARD OF
DIRECTORS."
----------------
Questions and requests for assistance or additional copies of the Offer to
Purchase, this Supplement, the Letter of Transmittal and the Notice of
Guaranteed Delivery may be directed to any of the Information Agents or either
of the Dealer Managers at their respective addresses and telephone numbers set
forth on the back cover of this Supplement. Additional copies of the Offer to
Purchase, this Supplement, the Letter of Transmittal and the Notice of
Guaranteed Delivery may also be obtained from brokers, dealers, commercial
banks or trust companies.
----------------
The Dealer Managers for the Offer are:
GOLDMAN, SACHS & CO. LAZARD FRERES & CO.
----------------
The date of this Supplement is January 13, 1995.
<PAGE>
To the Holders of Common Stock of
Santa Fe Pacific Corporation:
INTRODUCTION
The following information supplements and amends the Offer to Purchase dated
December 23, 1994 (the "Offer to Purchase") of Burlington Northern Inc., a
Delaware corporation ("BNI"), and Santa Fe Pacific Corporation, a Delaware
corporation ("SFP" and, together with BNI, the "Purchasers"), pursuant to which
the Purchasers are severally offering to purchase up to 63,000,000 shares in
the aggregate of the outstanding shares of common stock, par value $1.00 per
share, of SFP (the "SFP Common Stock," including the associated preferred share
purchase rights), upon the terms and subject to the conditions set forth in the
Offer to Purchase, as amended by this Supplement, and in the related Letter of
Transmittal (which collectively constitute the "Offer").
The Purchasers have supplemented the Offer with the information contained
herein. The Offer, proration period and related withdrawal rights were
originally scheduled to expire at 12:00 Midnight, New York City time, on
January 30, 1995. However, the Purchasers have extended the Offer, and the
Offer, proration period and withdrawal rights will now expire at 12:00
Midnight, New York City time, on Wednesday, February 8, 1995, unless further
extended.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) AT LEAST 63,000,000
SHARES OF SFP COMMON STOCK BEING VALIDLY TENDERED AND NOT WITHDRAWN BEFORE THE
EXPIRATION OF THE OFFER (THE "MINIMUM CONDITION"), (2) SFP AND BNI HAVING
OBTAINED SUFFICIENT FINANCING ON TERMS SATISFACTORY TO THEM TO PURCHASE
63,000,000 SHARES PURSUANT TO THE OFFER AND (3) APPROVAL OF THE MERGER REFERRED
TO BELOW BY THE STOCKHOLDERS OF SFP AND BNI. THE PURCHASERS DO NOT INTEND TO
WAIVE THE MINIMUM CONDITION. THE OFFER IS NOT CONDITIONED ON INTERSTATE
COMMERCE COMMISSION ("ICC") APPROVAL OF THE MERGER. SEE "THE TENDER OFFER--14.
CONDITIONS OF THE OFFER" OF THE OFFER TO PURCHASE.
THE BOARD OF DIRECTORS OF SFP HAS UNANIMOUSLY APPROVED THE OFFER AND THE
MERGER AND RECOMMENDS THAT THOSE SFP STOCKHOLDERS WHO WISH TO RECEIVE CASH FOR
A PORTION OF THEIR SHARES OF SFP COMMON STOCK ACCEPT THE OFFER. SEE
"RECOMMENDATION OF SFP BOARD OF DIRECTORS."
The Offer is being made pursuant to an Agreement and Plan of Merger dated as
of June 29, 1994, as amended by the Amendment thereto dated as of October 26,
1994 and Amendment No. 2 thereto dated as of December 18, 1994 (as so amended,
the "Merger Agreement") between SFP and BNI. Pursuant to the Merger Agreement,
and on the terms and subject to the conditions set forth therein, SFP will
merge with BNI, with BNI to be the surviving corporation in such Merger, and
each outstanding share of SFP Common Stock will be converted into the right to
receive 0.40 shares of BNI common stock, no par value per share (the "BNI
Common Stock"). See "The Tender Offer--10. Purpose of the Offer; The Merger
Agreement" of the Offer to Purchase. A copy of the Merger Agreement is attached
as Appendix A to the Offer to Purchase. As of January 12, 1995, 0.40 of a share
of BNI Common Stock had a value of $20.55, based on the closing market price of
BNI Common Stock as reported in The Wall Street Journal.
As of December 31, 1994, there were outstanding 188,301,537 shares of SFP
Common Stock and employee stock options ("Options") to purchase 14,470,071
shares of SFP Common Stock.
The purpose of the Offer is to acquire shares of SFP Common Stock and to
facilitate the Merger, which the Board of Directors of SFP believes is in the
best interest of SFP stockholders. The Offer also provides an opportunity to
existing stockholders of SFP to sell shares of SFP Common Stock at a premium
over recent trading prices. See "The Tender Offer--6. Price Range of SFP Common
Stock; Dividends" of the Offer to Purchase.
<PAGE>
Up to 63,000,000 shares of SFP Common Stock are to be purchased in the Offer;
any shares tendered in response to the Offer over and above such amount would
be subject to proration in accordance with the terms of the Offer. Proration
may result in SFP stockholders receiving cash for only a portion of any shares
of SFP Common Stock tendered, with the remaining consideration to be received
in the form of BNI Common Stock pursuant to the Merger after the receipt of ICC
approval and satisfaction or waiver of the other conditions to the Merger.
All information herein concerning BNI has been furnished by BNI, and all
information herein concerning SFP has been furnished by SFP. BNI has
represented and warranted to SFP, and SFP has represented and warranted to BNI,
that the particular information so furnished is true and complete.
The Offer does not constitute a solicitation of proxies for any meeting of
SFP's stockholders. Such solicitation by SFP will be made only pursuant to
separate proxy materials complying with the requirements of Section 14(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
addition, this Offer is neither an offer to sell nor a solicitation of offers
to buy any securities which may be issued in the Merger. The issuance of such
securities would have to be registered under the Securities Act of 1933, as
amended (the "Securities Act"), and such securities would be offered only by
means of a prospectus complying with the requirements of the Securities Act.
SFP is distributing a joint proxy statement/prospectus with respect to the
Merger.
IN ORDER TO VOTE FOR THE MERGER, AN SFP STOCKHOLDER IS REQUIRED TO SUBMIT A
PROXY OR VOTE IN PERSON AT THE SFP STOCKHOLDER MEETING SCHEDULED FOR FEBRUARY
7, 1995, OR ANY POSTPONEMENT OR ADJOURNMENT THEREOF.
Stockholders are urged to read the Offer to Purchase, this Supplement and the
related Letter of Transmittal carefully before deciding whether to tender their
shares of SFP Common Stock.
RECOMMENDATION OF SFP BOARD OF DIRECTORS
The Board of Directors of SFP has unanimously approved the Offer and the
Merger and recommends that those SFP stockholders who wish to receive cash for
a portion of their shares of SFP Common Stock accept the Offer.
The Offer is being effected to facilitate the Merger. The SFP Board believes
that a business combination of SFP and BNI is in the best long-term interests
of SFP and its stockholders. The Offer allows stockholders who wish to do so to
receive cash, at a premium over recent trading prices for SFP Common Stock,
without waiting for ICC approval of the Merger. At the same time, the revised
transaction structure allows SFP stockholders to participate in the ownership
of the combined company. The SFP Board believes that a BNI-SFP combination is
an excellent strategic fit, presents substantial long-term benefits and is
likely to receive ICC approval. The SFP Board has also concluded that the
revised Merger Agreement is superior to Union Pacific Corporation's ("UPC")
offer (which includes a tender offer), especially on a long-term basis. The
Board's reasons for reaching this conclusion included: (1) the Board believed
that a BNI-SFP merger is likely to receive ICC approval and, because of
anticipated increases in operating income from the Merger (which are expected
to result from both operating efficiencies and increased revenues), the Merger
will have significant long-term benefits for SFP stockholders; (2) the Board
believed that the long-term value of the UPC stock that SFP stockholders would
receive in a UPC-SFP merger is uncertain because a combination of the UPC and
SFP railroads is unlikely to receive ICC approval and, even if ICC approval
could be obtained, it would probably require UPC to make substantial
concessions to competing railroads; (3) the $20 per share that SFP stockholders
will receive pursuant to the Offer is greater than the $17.50 per share
available in UPC's tender offer; and (4) as of December 18, 1994, the market
value of 0.40 of a BNI common share (the exchange ratio in the Merger) exceeded
the market value of 0.354 of a UPC common share (the exchange ratio proposed by
UPC). See "The Tender Offer--6. Price Range of SFP Common Stock; Dividends" and
"--9. Background of the Merger and the Offer" of the Offer to Purchase.
2
<PAGE>
In making its recommendation, the Board considered the impact of the increase
in SFP debt that the Offer would require and concluded that incurring such debt
is prudent in light of SFP's ability to repay it and the benefits of the Offer
and the Merger for SFP's stockholders. SFP anticipates borrowing up to $1.31
billion (of which approximately $400 million will be to replace existing debt)
in connection with the Offer and related matters from a syndicate of banks
under a new credit agreement. In addition, the new credit agreement will
provide for a $250 million revolving credit facility for general corporate
purposes. The anticipated terms of such financings are summarized in the Offer
to Purchase. See "The Tender Offer--12. Source and Amount of Funds" of the
Offer to Purchase. SFP anticipates that its ability to borrow additional funds
will be restricted by the terms of the new credit agreement. SFP's credit
rating status was placed under review with direction uncertain by Moody's
Investors Service and on Credit Watch with developing implications by Standard
& Poor's prior to announcement of the Offer and continues in that status. It is
possible that SFP's credit ratings would be downgraded upon completion of the
Offer. SFP does not expect that any ratings downgrade, should one occur, would
impair its ability to maintain adequate liquidity to meet its ongoing
obligations.
The interest expense on SFP's anticipated borrowings would reduce SFP's net
income. Principal and interest on the debt being used by SFP to finance the
Offer, as well as other operating expenses and liquidity needs of SFP, are
expected to be funded by SFP during the period prior to the ICC's decision on
the Merger from cash generated before borrowings, currently available cash
balances and borrowings in excess of requirements in connection with the Offer.
Should the ICC not approve the Merger, SFP believes that, on a stand-alone
basis, it will be able to fund the debt service attributable to the debt
incurred in connection with the Offer through a combination of cash generated
before borrowings and refinancings in the capital markets. In either case, SFP
will have access to the $250 million revolving credit facility for general
corporate purposes, if required. Although the SFP Board believes that SFP's
proposed borrowing is prudent, it is possible that the need to repay the debt
incurred in its borrowing will have a detrimental effect on SFP, either before
the Merger or if the Merger cannot be consummated.
3
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF SFP
The unaudited pro forma financial statements have been prepared to give
effect to the SFP tender offer for 38 million shares of SFP Common Stock at $20
per share and the related borrowings and debt repayments (the "SFP
Recapitalization"). The SFP Recapitalization is reflected in the pro forma
balance sheet as if it occurred on December 31, 1993 and September 30, 1994 and
in the statements of operations as if it occurred on January 1, 1993.
The unaudited pro forma financial statements are prepared for illustrative
purposes only and are not necessarily indicative of the financial position or
results of operations that might have occurred had the applicable transaction
actually taken place on the dates indicated, or of future results of operations
or financial position. Consummation of the tender offer for SFP Common Stock is
conditioned upon, among other things, approval of the Merger by both SFP and
BNI stockholders.
4
<PAGE>
PRO FORMA SFP RECAPITALIZED BALANCE SHEET
AS OF SEPTEMBER 30, 1994
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SANTA FE SANTA FE
PACIFIC SFP PACIFIC
CORPORATION RECAPITALIZATION CORPORATION
HISTORICAL ADJUSTMENTS RECAPITALIZED
----------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......... $ 17 $-- $ 17
Accounts receivable, net.......... 98 -- 98
Other current assets.............. 246 -- 246
------ ---- ------
Total current assets............ 361 -- 361
Property and equipment, net......... 4,684 -- 4,684
Other assets........................ 271 27 (R.1) 298
------ ---- ------
Total assets.................... $5,316 $ 27 $5,343
====== ==== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................. $ 253 $-- $ 253
Other current liabilities......... 449 -- 449
Current portion of long-term debt
and commercial paper............. 192 -- 192
------ ---- ------
Total current liabilities....... 894 -- 894
Long-term debt...................... 890 843 (R.2) 1,733
Deferred income taxes............... 1,167 (19)(R.3) 1,148
Other liabilities................... 1,157 (3)(R.4) 1,154
------ ---- ------
Total liabilities............... 4,108 821 4,929
------ ---- ------
Stockholders' equity
Common stock...................... 190 -- 190
Paid-in capital................... 842 15 (R.4) 857
Retained earnings................. 263 (49)(R.4) 214
Treasury stock.................... (87) (760)(R.4) (847)
------ ---- ------
Total stockholders' equity...... 1,208 (794) 414
------ ---- ------
Total liabilities and stock-
holders' equity.............. $5,316 $ 27 $5,343
====== ==== ======
</TABLE>
(See accompanying Notes to Pro Forma SFP Recapitalized Financial Statements)
5
<PAGE>
PRO FORMA SFP RECAPITALIZED BALANCE SHEET
AS OF DECEMBER 31, 1993
UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SANTA FE SANTA FE
PACIFIC SFP PACIFIC
CORPORATION RECAPITALIZATION CORPORATION
HISTORICAL ADJUSTMENTS RECAPITALIZED
----------- ---------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......... $ 71 $ -- $ 71
Accounts receivable, net.......... 96 -- 96
Other current assets.............. 291 -- 291
------ ----- ------
Total current assets............ 458 -- 458
Properties and equipment, net....... 4,360 -- 4,360
Other assets........................ 556 27 (R.1) 583
------ ----- ------
Total assets.................... $5,374 $ 27 $5,401
====== ===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................. $ 241 $ -- $ 241
Other current liabilities......... 429 -- 429
Current portion of long-term debt
and commercial paper............. 185 -- 185
------ ----- ------
Total current liabilities....... 855 -- 855
Long-term debt...................... 991 843 (R.2) 1,834
Deferred income taxes............... 1,116 (19)(R.3) 1,097
Other liabilities................... 1,144 (3)(R.4) 1,141
------ ----- ------
Total liabilities............... 4,106 821 4,927
------ ----- ------
Stockholders' equity
Common stock...................... 190 -- 190
Paid-in capital................... 870 15 (R.4) 885
Retained earnings................. 340 (49)(R.4) 291
Treasury stock.................... (132) (760)(R.4) (892)
------ ----- ------
Total stockholders' equity...... 1,268 (794) 474
------ ----- ------
Total liabilities and stock-
holders' equity.............. $5,374 $ 27 $5,401
====== ===== ======
</TABLE>
(See accompanying Notes to Pro Forma SFP Recapitalized Financial Statements)
6
<PAGE>
PRO FORMA SFP RECAPITALIZED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1994
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SANTA FE SANTA FE
PACIFIC SFP PACIFIC
CORPORATION RECAPITALIZATION CORPORATION
HISTORICAL ADJUSTMENTS RECAPITALIZED
----------- ---------------- -------------
<S> <C> <C> <C>
Revenues......................... $ 1,970 $-- $ 1,970
Operating expenses
Compensation and benefits...... 625 -- 625
Fuel........................... 183 -- 183
Materials...................... 92 -- 92
Equipment rents................ 185 -- 185
Purchased services............. 282 -- 282
Depreciation................... 150 -- 150
Other.......................... 147 -- 147
------- ---- -------
Total operating expenses..... 1,664 -- 1,664
------- ---- -------
Operating income................. 306 -- 306
Interest expense................. 90 57 (R.5) 147
Other income (expense), net...... 49 -- 49
------- ---- -------
Income before income taxes....... 265 (57) 208
Income tax expense............... 112 (22)(R.6) 90
------- ---- -------
Income from continuing opera-
tions........................... $ 153 $(35) $ 118
======= ==== =======
Earnings per common share
Income from continuing opera-
tions......................... $ .81 $ .77(R.7)
======= =======
Number of shares used in computa-
tion of earnings per common
share (in thousands)............ 189,700 152,400(R.7)
</TABLE>
(See accompanying Notes to Pro Forma SFP Recapitalized Financial Statements)
7
<PAGE>
PRO FORMA SFP RECAPITALIZED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
UNAUDITED
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SANTA FE SANTA FE
PACIFIC SFP PACIFIC
CORPORATION RECAPITALIZATION CORPORATION
HISTORICAL ADJUSTMENTS RECAPITALIZED
----------- ---------------- -------------
<S> <C> <C> <C>
Revenues........................ $ 2,409 $ -- $ 2,409
Operating expenses
Compensation and benefits..... 800 800
Fuel.......................... 239 -- 239
Materials..................... 128 -- 128
Equipment rents............... 229 -- 229
Purchased services............ 322 -- 322
Depreciation.................. 188 -- 188
Other......................... 185 -- 185
------- ----- -------
Total operating expenses.... 2,091 -- 2,091
------- ----- -------
Operating income................ 318 -- 318
Interest expense................ 133 73 (R.5) 206
Gain on sale of California
lines.......................... 145 -- 145
Other income (expense), net..... 24 -- 24
------- ----- -------
Income before income taxes...... 354 (73) 281
Income tax expense.............. 177 (28)(R.6) 149
------- ----- -------
Income from continuing
operations..................... $ 177 $ (45) $ 132
======= ===== =======
Earnings per common share
Income from continuing
operations................... $ .95 $ .88(R.7)
======= =======
Number of shares used in
computation of earnings per
common share (in thousands).... 187,200 149,900(R.7)
</TABLE>
(See accompanying Notes to Pro Forma SFP Recapitalized Financial Statements)
8
<PAGE>
NOTES TO PRO FORMA SFP RECAPITALIZED FINANCIAL STATEMENTS
The SFP Recapitalization plan reflected in the pro forma financial statements
includes borrowing $1,075 million of $1,560 million in available bank
commitments at an assumed average interest rate of 9 percent (see "The Tender
Offer--12. "Source and Amount of Funds" of the Offer to Purchase for further
discussion) with the proceeds principally used for (i) financing the repurchase
of 38 million shares of its outstanding common stock at a price of $20 per
share or $760 million in total, (ii) the early retirement of $200 million of
outstanding senior indebtedness, and (iii) repayment of short-term borrowings
and payment of refinancing transaction costs.
Additionally, SFP will incur Merger transaction costs, including the
accelerated vesting of restricted stock and certain other transaction costs,
upon stockholder approval of the Merger.
R.1 OTHER ASSETS
Represents estimated debt issuance costs to be paid in connection with the
SFP Recapitalization, net of debt issue costs expensed in conjunction with the
retirement of debt.
R.2 LONG-TERM DEBT
Reflects the $1,075 million SFP Recapitalization borrowing less (i) the early
retirement of outstanding senior debt of $200 million and (ii) the repayment of
$32 million short-term borrowings which were outstanding at September 30, 1994.
After the SFP Recapitalization, projected principal repayments during the five
years 1995 through 1999 would be $203 million, $97 million, $218 million, $144
million and $187 million, respectively.
R.3 DEFERRED INCOME TAXES
Deferred income taxes have been reduced for the tax benefit of the costs of
retiring debt and the accelerated vesting of SFP's restricted stock described
in R.4. below at a rate of 39 percent.
R.4 STOCKHOLDERS' EQUITY
Paid-in capital has been increased by $15 million representing the fair value
of approximately 760,000 shares of restricted stock at an assumed $20 per
share, which vests upon shareholder approval.
Retained earnings has been reduced by $49 million to reflect costs, net of
taxes and costs accrued, associated with the SFP Recapitalization and the
Merger including expenses for early retirement of debt, accelerated vesting of
restricted stock, and estimated legal, investment banking and other transaction
costs. Costs of $22 million after taxes for the early retirement of debt will
be expensed as an extraordinary charge in the period the debt is retired. Costs
for the accelerated vesting of restricted stock of $7 million after taxes
(which is net of amounts already accrued) will be expensed in the period that
restrictions lapse. Merger transaction costs of $20 million will be expensed in
the period incurred.
Treasury stock has been increased by $760 million to reflect the purchase of
38 million shares of SFP Common Stock acquired through SFP's tender offer.
R.5 INTEREST EXPENSE
Reflects the estimated net increase in interest expense associated with debt
borrowings/repayments discussed in R.2. above.
R.6 INCOME TAX EXPENSE
Income tax expense reflects the effect of pro forma adjustments at an
estimated rate of 39 percent.
9
<PAGE>
R.7 EARNINGS PER COMMON SHARE
SFP weighted average shares outstanding have been reduced for SFP's cash
tender offer, net of restricted stock which will vest upon stockholder approval
of the Merger. SFP historical earnings per common share have been reduced to
reflect a decrease in income from continuing operations due to additional
interest expense discussed in R.5. above.
CERTAIN ADDITIONAL INFORMATION
HART-SCOTT-RODINO ACT
The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, applicable to BNI's purchase of shares of SFP Common Stock
pursuant to the Offer expired at 12:00 Midnight, January 11, 1995. Accordingly,
the condition to the Purchasers' obligation to accept for payment and pay for
shares of SFP Common Stock pursuant to the Offer set forth in clause (iii) of
the first paragraph of "The Tender Offer--14. Conditions of the Offer" in the
Offer to Purchase has been satisfied.
EXTENSION OF THE OFFER
If the Purchasers increase or decrease the number of shares of SFP Common
Stock being sought in the Offer and the Offer is scheduled to expire at any
time before the expiration of a period of 10 business days from, and including,
the date that notice of such increase or decrease is first published, sent or
given in the manner specified in the Offer to Purchase, the Offer will be
extended until the expiration of such period of 10 business days. The
Purchasers do not intend to waive the Minimum Condition nor do they intend to
increase the number of shares of SFP Common Stock being sought pursuant to the
Offer.
TRANSACTION IN SFP COMMON STOCK
On December 27, 1994, Mr. Robert D. Krebs made a charitable contribution of
15,818 shares of SFP Common Stock.
----------------
Except as otherwise set forth in this Supplement, the terms and conditions
set forth in the Offer to Purchase remain applicable in all respects to the
Offer. The information set forth herein should be read in conjunction with the
Offer to Purchase.
Santa Fe Pacific Corporation
Burlington Northern Inc.
January 13, 1995
10
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. The Letter of
Transmittal and certificates for SFP Common Stock and any other required
documents should be sent to the Depositary at one of the addresses set forth
below:
The Depositary for the Offer is:
First Chicago Trust Company of New York
By Mail: By Facsimile Transmission: By Hand:
(For Eligible Institutions Only)
Tenders & Exchanges (201) 222-4720 Tenders & Exchanges
P.O. Box 2564 Suite (201) 222-4721 14 Wall Street
4660 SFP Suite 4680 SFP
Jersey City, NJ 07303-2564 8th Floor
New York, NY 10005
Confirm Facsimile by Telephone:
(For Confirmation Only)
(201) 222-4707
Questions or request for assistance or additional copies of the Offer to
Purchase, this Supplement, the Letter of Transmittal and the Notice of
Guaranteed Delivery may be directed to any of the Information Agents or either
of the Dealer Managers at their respective addresses and telephone numbers set
forth below. Stockholders may also contact their broker, dealer, commercial
bank or trust company for assistance concerning the Offer.
The Information Agents are:
D.F. KING & CO., INC. MACKENZIE KISSEL BLAKE INC.
PARTNERS INC.
77 Water Street 156 Fifth Avenue 25 Broadway, 6th Floor
New York, New York New York, New York 10010 New York, New York 10004
10005 CALL TOLL FREE (800) 322-2885 CALL TOLL FREE (800)
CALL TOLL FREE (800) 554-7733
697-6974
The Dealer Managers for the Offer are:
GOLDMAN, SACHS & CO. LAZARD FRERES & CO.
85 Broad Street One Rockefeller Plaza
New York, New York 10004 New York, New York 10020
<PAGE>
EXHIBIT 99.23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K/A
AMENDMENT NO. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-8627
------------
SANTA FE PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3258709
(State of Incorporation) (I.R.S. Employer Identification No.)
1700 East Golf Road
Schaumburg, Illinois 60173-5860
(Address of principal executive offices, including zip code)
708/995-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
</TABLE>
------------
Securities registered pursuant to Section 12(g) of the Act: None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operations and Financial
Condition is hereby incorporated by reference to Exhibit 13 of this Report on
Form 10-K/A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of SFP and subsidiary companies,
together with the report thereon of Price Waterhouse LLP dated February 4,
1994, are hereby incorporated by reference to Exhibit 13 of this Report on Form
10-K/A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Consolidated Financial Statements:
Report of Independent Accountants dated February 4, 1994................... 19
Consolidated Statement of Operations for the three years ended
December 31, 1993......................................................... 20
Consolidated Balance Sheet at December 31, 1993 and 1992................... 21
Consolidated Statement of Cash Flows for the three years ended
December 31, 1993......................................................... 22
Consolidated Statement of Shareholders' Equity for the three years
ended December 31, 1993................................................... 23
Notes to Consolidated Financial Statements................................. 24
</TABLE>
3. Exhibits:
See Index to Exhibits for a description of the exhibits filed as a part of
this Report.
1
<PAGE>
SIGNATURES
SANTA FE PACIFIC CORPORATION, PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SANTA FE PACIFIC CORPORATION
/s/ Thomas N. Hund
By: _________________________________
Thomas N. Hund
Vice President and Controller
Dated: October 5, 1994
S-1
<PAGE>
SANTA FE PACIFIC CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
13 Santa Fe Pacific Corporation financial information. The
following financial information is included:
1. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
2. Consolidated Financial Statements:
Report of Independent Accountants 19
Consolidated Statement of Operations for the three
years ended December 31, 1993 20
Consolidated Balance Sheet at December 31, 1993 and
1992 21
Consolidated Statement of Cash Flows for the three
years ended December 31, 1993 22
Consolidated Statement of Shareholders' Equity for
the three years ended December 31, 1993 23
Notes to Consolidated Financial Statements 24
23(a) Consent of Independent Accountants.
</TABLE>
E-1
<PAGE>
EXHIBIT 13
CONSOLIDATED FINANCIAL REVIEW
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
REVENUE INFORMATION (IN MILLIONS)
SANTA FE RAILWAY OPERATING REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Freight Revenues
Intermodal Business Unit
Direct Marketing.................................. $ 404.1 $ 345.7 $ 290.5
Intermodal Marketing Companies.................... 376.6 398.4 402.2
International..................................... 196.1 168.2 150.1
-------- -------- --------
Total Intermodal Business Unit.................. 976.8 912.3 842.8
-------- -------- --------
Carload Business Unit
Chemicals and Petroleum........................... 281.3 282.7 258.6
Coal.............................................. 220.1 193.8 190.5
Vehicles and Parts................................ 191.2 136.7 144.1
Whole Grain....................................... 160.6 143.4 145.8
Minerals and Ores................................. 143.1 157.0 166.0
Forest Products................................... 121.6 115.9 102.7
Consumer Products................................. 113.9 117.1 116.2
Grain Products.................................... 82.3 80.4 71.1
Primary Metals.................................... 77.6 70.3 69.8
-------- -------- --------
Total Carload Business Unit..................... 1,391.7 1,297.3 1,264.8
-------- -------- --------
Total Revenue Before Adjustments.................... 2,368.5 2,209.6 2,107.6
Miscellaneous Adjustments........................... -- 3.3 5.5
-------- -------- --------
Total Freight Revenues.......................... 2,368.5 2,212.9 2,113.1
Other Revenues...................................... 40.7 38.8 40.4
-------- -------- --------
Total Operating Revenues........................ $2,409.2 $2,251.7 $2,153.5
======== ======== ========
SANTA FE PACIFIC GOLD--OPERATING REVENUES
Gold................................................ $ 228.7 $ 116.4 $ 67.2
Other............................................... 6.1 2.8 2.8
Coal and Aggregates................................. 63.8 101.4 109.4
-------- -------- --------
Total Operating Revenues........................ $ 298.6 $ 220.6 $ 179.4
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
1993 COMPARED WITH 1992
Santa Fe Pacific Corporation (SFP or Company) reported 1993 net income of
$338.8 million or $1.81 per share compared to a net loss of $104.5 million or
$0.57 per share last year. The increase
14
<PAGE>
in net income primarily relates to: (1) higher operating income of $345.2
million, $340.5 million of this increase is at The Atchison, Topeka and Santa
Fe Railway Company (Santa Fe Railway) principally due to a $320.4 million
special charge recorded in 1992 as well as increased business levels in 1993,
partially offset by the negative impact of midwest floods in 1993; (2) a $217.5
million pre-tax gain in 1993 on the exchange of mineral assets; (3) lower
interest expense of $37.8 million; and (4) a $163.0 million charge for an
accounting change in 1992. The above are partially offset by: (1) a $59.5
million decline in pre-tax gains on the sale of rail lines in California; and
(2) the increase in the federal income tax rate from 34% to 35% during 1993.
Special items in 1993 include pre-tax gains of $217.5 million on the exchange
of mineral assets (see Other Matters--Exchange of Mineral Assets), $145.4
million from the sale of rail lines in southern California (see Other Matters--
Sale of California Lines) and $21.6 million related to the favorable outcome of
arbitration and litigation settlements. In addition, 1993 includes $12.2
million of pre-tax expense for SFP's portion of environmental and litigation
charges at Santa Fe Pacific Pipeline Partners, L.P. (Pipeline Partnership), and
an increase in income tax expense of $32.0 million for the retroactive effect
from the date of enactment of the increase in the federal income tax rate from
34% to 35%.
Special items in 1992 include a pre-tax gain of $204.9 million from the sale
of rail lines in southern California (see Other Matters--Sale of California
Lines). Additionally, 1992 included pre-tax charges of $320.4 million at Santa
Fe Railway principally related to a new labor agreement, operations
centralization, and increased environmental accruals (see Other Matters--
Contingencies and Other Matters--Rail Restructuring) and $4.5 million for SFP's
portion of environmental charges at the Pipeline Partnership. Also, a charge of
$163.0 million after taxes was recorded for the adoption of Statement of
Financial Accounting Standards (SFAS) No.'s 106 and 112, on accounting for
postretirement and postemployment benefits other than pensions. This charge
represented the cumulative effect of the new principle on years prior to 1992.
Finally, an extraordinary charge of $5.0 million after taxes was recorded on
early extinguishment of debt.
Excluding special items in both years, SFP's 1993 net income was
approximately $167.6 million or $0.90 per share compared to $138.8 million or
$0.75 per share in 1992. The improved results are due to higher operating
income at Santa Fe Railway, Santa Fe Pacific Gold Corporation (SFP Gold) and
SFP's equity investment in the Pipeline Partnership and lower interest expense,
partially offset by reduced other income--net.
Santa Fe Railway
Operating income was $317.7 million and represents an increase of $340.5
million over the $22.8 million operating loss reported in 1992. The increase is
the result of the $320.4 million special charge in 1992 discussed above, as
well as continued growth in revenues despite an estimated $40 million in lost
revenue due to midwest floods, and increased efficiencies related to
operations, partially offset by increased expenses from higher traffic volumes
and from floods in the midwest. Operating income in 1993 increased 7% compared
to 1992 excluding the special charge, while the operating ratio of 86.8% was
even with adjusted 1992.
Santa Fe Railway operating revenues increased by $157.5 million or 7% in 1993
reflecting a 7% increase in carloadings while average revenue per car remained
constant. The volume increase occurred despite the midwest flooding.
Intermodal Business Unit (IBU) revenues increased by 7% to $976.8 million
primarily due to a 6% increase in carloadings. Continued growth of Santa Fe
Railway's alliance with J.B. Hunt was the principal factor for the 17% increase
in direct marketing revenues. International revenues improved by 17% reflecting
both continued growth in shipments from existing customers and new contracts.
Intermodal Marketing Companies' revenue declined 5% due to lower volumes. The
average IBU revenue per car increased 1% principally reflecting a shift in mix
to higher rated direct marketing traffic.
14--1
<PAGE>
Carload Business Unit (CBU) revenues increased by 7% to $1,391.7 million as
carloadings increased 8% while average revenue per car declined slightly.
Vehicles and parts revenues increased by $54.5 million to $191.2 million due
principally to new business related to a long-term automotive contract with
General Motors in the Arizona and southern California corridors which began in
December, 1992. Coal revenues increased 14% to $220.1 million and include
traffic related to Wisconsin Electric Power's long-term purchase agreement with
the Pittsburg & Midway Coal Mine located near Raton, New Mexico which began in
the third quarter of 1992. Whole grain revenues increased 12% to $160.6 million
reflecting both higher volumes due to a rise in export shipments and higher
average revenue per car due to longer haul shipments and rate increases.
Primary metals revenues of $77.6 million were $7.3 million higher principally
due to an increase in steel shipments along the west coast. Forest products
revenues rose 5% to $121.6 million due to favorable average revenue per car
reflecting a shift in mix to higher rated lumber products shipments. Minerals
and ores revenues declined 9% to $143.1 million due to sluggish international
markets and foreign competition in the sulphur and potash industries.
Santa Fe Railway operating expenses of $2,091.5 million decreased by $183.0
million from 1992, which included the $320.4 million special charge discussed
above. Compensation and benefits expense rose slightly as higher traffic levels
and cost escalations were offset by increased efficiencies, which include the
effect of a crew consist agreement reached in September 1992 with the United
Transportation Union reducing crew sizes on the eastern half of the railroad.
Revenue ton miles per average employee improved by 8% reflecting efficiencies
and volume growth. Fuel expense of $239.1 million rose $33.6 million reflecting
a 9% increase in consumption and a 7% higher price. The increase in consumption
reflects the higher traffic volumes as well as additional consumption
associated with flood-related train detours. The higher fuel price includes a
4.3 cent increase in federal tax on fuel which became effective October 1,
1993. Equipment rents expense increased by $43.4 million to $229.4 million due
to the higher traffic volume, the lease of equipment for new business and
additional expenses associated with flood-related train detours. Other expenses
rose by $51.6 million to $507.1 million due to the higher volume levels
including ramping/deramping and drayage costs for IBU shipments, and various
other contract service costs. Operating expenses increased by $137.4 million
excluding the 1992 special charge.
SFP Gold
SFP Gold operating income of $86.5 million increased by 13% or $10.2 million
reflecting a $78.0 million increase in revenues to $298.6 million, partially
offset by a $67.8 million increase in operating expenses. The increase in
revenues primarily reflects higher gold revenues of $112.3 million partially
offset by a $34.3 million decrease in revenues from coal and aggregate
operations. Higher gold revenues reflect increased sales from existing mines as
well as production in the second half of the year from mines received in the
exchange of assets with Hanson Natural Resources Company (Hanson), an affiliate
of Hanson, PLC. (see Other Matters--Exchange of Mineral Assets). Ounces sold
doubled to 591,000 in 1993, as sales from the Twin Creeks Mine (which
represents a combination of SFP Gold's Rabbit Creek Mine and the Chimney Creek
Mine received in the exchange) increased by 113% to 336,000 ounces. In
addition, Lone Tree Mine sold 143,000 ounces, an increase of 11,000 ounces over
1992 and the Mesquite Mine, obtained as part of the asset exchange, sold
112,000 ounces. The average price of gold sold of $387 an ounce was 2% below
1992 but 8% above the 1993 average spot price due to hedging activities.
Revenues from coal and aggregate operations declined as 1993 included only six
months of operations due to the exchange of these assets with Hanson. Operating
expenses increased by $67.8 million due to increases in gold production,
partially offset by lower operating expenses from coal and aggregate operations
due to the exchange with Hanson.
15
<PAGE>
Pipeline
SFP's equity investment in the Pipeline Partnership produced operating income
of $18.6 million including the $12.2 million special litigation and
environmental charge, a decrease of $5.5 million compared to 1992 which
included a $4.5 million special environmental charge. The Pipeline
Partnership's revenues increased 7% principally reflecting a 3% volume increase
and a 4% increase in average revenue per barrel. Operating expenses at the
Pipeline Partnership increased by $27.6 million due to a $17.0 million increase
in special charges and higher major maintenance and administrative expenses.
Excluding special items in both years, SFP's equity investment in the Pipeline
Partnership produced operating income of $30.8 million in 1993 compared to
$28.6 million in 1992.
Other Income--Net/Interest Expense
Other income--net increased by $4.7 million to $6.9 million reflecting $21.6
million related to favorable outcome of arbitration and litigation settlements,
partially offset by lower interest income and reduced income from real estate
activities. Interest expense declined by $37.8 million or 21% due principally
to lower outstanding debt as well as favorable variable interest rates.
Income Taxes
Income tax expense in 1993 includes an increase of approximately $32 million
which reflects the retroactive impact of the increase in the federal tax rate
from 34% to 35% from the date of enactment of the Omnibus Budget Reconciliation
Act of 1993, signed into law on August 10, 1993. A majority of this increase
relates to additional tax expense related to temporary differences at January
1, 1993. SFAS No. 109--"Accounting for Income Taxes" requires deferred taxes to
be provided using enacted tax rates in effect during the years in which the
differences are expected to reverse.
1992 COMPARED WITH 1991
SFP had a 1992 net loss of $104.5 million or $0.57 per share compared to net
income of $96.4 million or $0.54 per share in 1991. The decrease in net income
primarily relates to: (1) lower operating income of $264.4 million which
includes lower operating income at Santa Fe Railway due to a $320.4 million
special charge recorded in 1992 partially offset by higher business levels, and
higher operating income at SFP Gold; (2) lower other income-net of $29.6
million; and (3) a $163.0 million charge for an accounting change in 1992. The
above are partially offset by: (1) a $204.9 million pre-tax gain on the sale of
rail lines in California in 1992; and (2) lower interest expense of $46.2
million.
Excluding special items discussed previously, SFP's 1992 net income was
approximately $138.8 million or $0.75 per share compared to 1991 net income of
$96.4 million or $0.54 per share. This improvement in adjusted 1992 income is
due to higher operating income at Santa Fe Railway and SFP Gold and lower
interest expense, partially offset by lower other income--net.
Santa Fe Railway
Operating loss was $22.8 million and represents a decrease of $278.2 million
compared to operating income of $255.4 million reported in 1991. This decrease
was principally due to the 1992 special charge, partially offset by higher
business levels and increased operating efficiencies. Excluding the special
charge, operating income in 1992 increased 17% compared to 1991 while the
operating ratio as adjusted, improved from 88.1% in 1991 to 86.8% in 1992, the
result of higher revenues and increased efficiencies related to operating
expenses.
15--1
<PAGE>
Santa Fe Railway operating revenues increased by $98.2 million or 5% in 1992
due to a 6% increase in carloadings partially offset by a 1% decrease in the
average revenue per car.
IBU revenues increased by 8% to $912.3 million as carloadings were up 11%
while average revenue per car declined by 3%. Growth of J.B. Hunt shipments was
the principal factor for the 19% increase in direct marketing revenues.
International revenues improved by 12% principally reflecting continued growth
in shipments from existing customers. The average revenue per car declined due
to a shift in traffic mix, reflecting growth in international container
shipments which move at lower average rates, as well as competitive pressures
within all IBU segments.
CBU revenues increased by 3% to $1,297.3 million as carloadings increased 3%
while average revenue per car remained relatively constant. Chemicals and
petroleum revenues increased by 9% to $282.7 million due largely to increased
shipments of plastics and agricultural and industrial chemicals. Forest
products revenues increased by 13% to $115.9 million due to both favorable
volume and average revenue per car including a rebound in the housing market
which resulted in increased shipments of lumber and other forest products.
Grain products revenues of $80.4 million increased by $9.3 million reflecting
increased shipments of corn syrup, soybean meal and tapioca. The average
revenue per car within grain products was higher reflecting in part increases
in rates on export flour traffic. Minerals and ores revenues declined 5% to
$157.0 million as competitive pressures depressed sulphur and potash rates.
Vehicles and parts revenues decreased by $7.4 million to $136.7 million
principally reflecting declines in long haul traffic which caused the average
revenue per car to decline by 7%.
Santa Fe Railway operating expenses increased by $376.4 million to $2,274.5
million, and includes the $320.4 million special charge. Compensation and
benefits expense increased 2% reflecting increased levels of traffic and cost
escalations. Average employees for the year declined 4% to 14,218 partially due
to a new labor agreement with train crew personnel, and revenue ton miles per
average employee increased by 11% reflecting improved efficiency and volume
growth. Fuel expense of $205.5 million declined by $1.2 million principally
reflecting a 3% decline in price. Fuel consumption increased only 2% despite
the 6% increase in traffic volume, due to the lease of 90 new, fuel efficient
locomotives in 1992 as well as other conservation efforts. Equipment rents
expense increased by $23.8 million to $186.0 million due to the higher traffic
volume as well as the lease of locomotives. Materials and supplies expense
declined by 6% to $127.5 million principally reflecting reduced equipment
maintenance. Other expenses increased by $27.6 million to $455.5 million
largely reflecting volume related increases including ramping/deramping and
drayage costs for IBU shipments. Operating expenses increased by $56.0 million
excluding the special charge.
SFP Gold
SFP Gold operating income increased by 28% or $16.8 million to $76.3 million
reflecting a $41.2 million increase in revenues, partially offset by a $24.4
million increase in operating expenses. The increase in revenues primarily
reflects higher gold revenues of $49.2 million partially offset by a $8.0
million decrease in revenues from coal and aggregate operations. Higher gold
revenues principally reflect an 80% increase in sales to 295,000 ounces. Lone
Tree Mine, which began production in August, 1991, sold 132,000 ounces, an
increase of 104,000 ounces over 1991. Rabbit Creek sales increased by 36% to
157,000 ounces reflecting increased mine production. The average price of gold
sold of $394 an ounce was 4% below 1991 but 15% above the 1992 average spot
price due to hedging activities. Coal revenues declined due to a 19% decline in
sales partially offset by a 12% increase in price. Both are principally the
result of reduced spot market sales. Operating expenses increased by $24.4
million due to increases in gold production, partially offset by lower expenses
from coal and aggregate operations.
16
<PAGE>
Pipeline
SFP's equity investment in the Pipeline Partnership produced operating income
of $24.1 million including the $4.5 million special environmental charge. This
was a decrease of $3.0 million compared to 1991. The Pipeline Partnership's
revenues increased 6% principally reflecting an increase in average revenue per
barrel. Operating expenses at the Pipeline Partnership increased by $16.0
million due to a $10 million special environmental charge and higher
depreciation and facility costs. Excluding the special item in 1992, SFP's
equity investment in the Pipeline Partnership produced operating income of
$28.6 million in 1992 compared to $27.1 million in 1991.
Other Income-Net/Interest Expense
Other income-net declined by $29.6 million to $2.2 million reflecting reduced
income from real estate activities at Santa Fe Railway and lower interest
income. Interest expense declined by $46.2 million or 20% due to both lower
outstanding debt and favorable variable interest rates.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operations is generally SFP's primary source of liquidity
and for the year ended December 31, 1993 was $351.9 million. It primarily
consists of net earnings before depreciation and deferred taxes, reduced by
restructuring payments, which include employee severance, relocation costs and
other labor related payments. During 1993, additional cash of $247.9 million
was provided by the sale of assets at Santa Fe Railway, including $226.9
million from the sale of lines in southern California (see Other Matters--Sale
of California Lines). In addition, long-term borrowings provided $188.8 million
in cash while $72.5 million was received as principal payments on a note
receivable. Capital expenditures during 1993, including non-cash capital
expenditures of $157.6 million primarily for directly financed equipment
acquisitions and reimbursed projects at Santa Fe Railway, totaled $646.2
million. Capital expenditures in 1993 were significantly higher than in 1992
due to increased spending on rail expansion projects and
16--1
<PAGE>
facilities which include the Alliance, Texas intermodal and carload
transportation center and the Willow Springs, Illinois intermodal facility, and
the Lone Tree Mine expansion project at SFP Gold. Additionally, 1993 capital
expenditures reflect the purchase of 85 new locomotives valued at approximately
$100 million, while in 1992, 90 new locomotives with a fair market value in
excess of $100 million were acquired through an operating lease. Approximately
83% of capital expenditures were used for equipment and improvements to track
structure and rail facilities, and 17% for development of gold properties. Cash
expenditures were primarily funded through cash generated from operations and
project financings. Principal payments on long term borrowings and gold loans
during 1993 were $382.4 million, and include the use of $126.0 million of
proceeds from the sale of lines in southern California to retire debt.
For the year ended December 31, 1992, cash provided by operations was $312.2
million. Additionally, cash of $320.7 million was provided by the sale of
assets at Santa Fe Railway, including $255.0 million from the sale of lines in
southern California. In addition, $72.5 million was received as principal
payments on a note receivable. Capital expenditures during 1992, including non-
cash capital expenditures of $9.5 million, totaled $332.0 million.
Approximately 80% of capital expenditures were used for equipment and
improvements to track structure and facilities at Santa Fe Railway, and 20% for
development of mining properties. The expenditures were primarily funded
through cash generated from operations and project financings. Principal
payments on long term borrowings and gold loans during 1992 were $444.2
million, including $201.0 million of proceeds from the sale of lines in
southern California used to retire debt.
During the year ended December 31, 1991, cash provided by operations was
$241.9 million. Additional cash of $91.0 million was provided through the sale
of assets, principally branch lines and real estate at Santa Fe Railway. Also,
$36.3 million was received as a principal payment on a note receivable and
proceeds of $36.2 million were received from the sale of SFP stock. Capital
expenditures in 1991, including non-cash capital expenditures of $35.2 million
primarily related to directly financed equipment acquisitions at Santa Fe
Railway, totaled $330.7 million. Approximately 73% of capital expenditures were
used for equipment and improvements to track structure at Santa Fe Railway and
27% for development of mining properties. The expenditures were primarily
funded through the cash generated from operations, project and equipment
financings, and other sources. Principal payments on long-term borrowings and
gold loans during 1991 were $157.4 million.
Management anticipates that it will fund payment of current obligations in
1994 through internally generated funds. Current obligations include principal
payments on long term debt as well as commitments at Santa Fe Railway related
to operating leases, maintenance agreements for locomotives and minimum
payments under haulage agreements with other railroads (see Note 14: Leases and
Other Commitments). SFP capital expenditures in 1994 are anticipated to exceed
$600 million, including non-cash capital expenditures of approximately $150
million primarily for directly financed equipment acquisitions and reimbursed
projects at Santa Fe Railway. The remaining expenditures will be funded through
the use of internally generated funds as well as various financings. In
addition, Santa Fe Railway's agreement to sell accounts receivable expires in
December 1994 (see Note 9: Sales of Accounts Receivable). Currently, $225
million is outstanding under the agreement. It is the Company's intention to
replace or extend this agreement with a similar facility prior to the December
1994 expiration. The Company also has funds available through a $173.6 million
credit facility which can be used for general corporate purposes. No borrowings
were outstanding under the facility at December 31, 1993. In addition, in
December 1993, the Company filed a shelf registration statement with the
Securities and Exchange Commission (SEC), for the issuance of up to $250
million in debt securities, none of which had been issued as of December 31,
1993.
17
<PAGE>
At present, the payment of external and intercompany dividends are limited in
amount by certain debt covenants of the Company. At December 31, 1993 no
payment of external dividends was allowed; however, the Company believes that
it could change the designation of SFP Gold under the restrictive debt
agreement or distribute SFP Gold to SFP shareholders to eliminate the dividend
restriction.
Inflation
Because of the capital intensive nature of SFP's businesses and because
depreciation is based on historical cost, the full effect of inflation is not
reflected in operating expenses. An assumption that all operating assets were
replaced at current price levels would result in depreciation charges
substantially greater than historically reported amounts.
OTHER MATTERS
Exchange of Mineral Assets
On June 25, 1993, SFP Gold completed an asset exchange with Hanson, in which
SFP Gold received certain gold assets of a subsidiary of Hanson including
operating gold mines in Nevada and California, two late stage development
projects in Nevada and Montana and other gold prospects. Hanson acquired
essentially all coal assets of SFP Gold including the Lee Ranch Mine and
undeveloped coal reserves and six crushed stone and aggregate quarries. The
exchange was recorded as a purchase business combination. The fair value of the
gold assets for financial reporting purposes was approximately $425 million.
SFP recognized an after tax, non-cash gain of $108.3 million on the exchange
which represents the excess of the fair value of the gold assets received over
the sum of the carrying value of the coal and aggregate assets and expenses of
the exchange (see Note 3: Gain on Exchange of Mineral Assets).
17--1
<PAGE>
Potential SFP Gold Transactions
SFP is continuing to review the possibility of establishing the gold
operation as a separate public company. As part of this process SFP is
considering an initial public offering of up to 20% of SFP Gold stock, followed
by a distribution of the remaining interest in SFP Gold to SFP shareholders.
This evaluation and the timing of any distribution involve a number of
economic, business, legal, tax, and other considerations, including prior
approval from the SFP Board of Directors. The company is pursuing a ruling from
the Internal Revenue Service that a distribution of SFP Gold shares to existing
SFP shareholders would be tax free.
Sale of California Lines
In November 1992, Santa Fe Railway announced that it and eight southern
California transportation agencies had reached definitive agreements for the
sale to the agencies of certain interests in approximately 340 miles of rail
lines and additional property, for cash and relief of obligations to reimburse
certain state and county agencies for capital improvements previously paid for
by the agencies and the State of California. Santa Fe Railway retained all
rights necessary for its freight operations in southern California. The
transportation agencies anticipate using these facilities for commuter lines.
The sale encompassed three separate closings which occurred in December 1992
and March and June of 1993. Cash proceeds of $226.9 million in 1993 and $255.0
million in 1992 were received resulting in pre-tax gains of $145.4 million and
$204.9 million in 1993 and 1992, respectively (see Note 2: Gain on Sale of
California Lines). A substantial portion of the net proceeds in both years were
used to reduce outstanding debt. Both of the gains recognized are net of the
cost of the properties and other expenses of sale. Additionally, the 1993 gain
is net of an obligation retained by Santa Fe Railway which under certain
conditions, requires Santa Fe Railway to repurchase a portion of the properties
sold for $50 million.
Contingencies
The Company is subject to extensive regulation under federal, state, and
local environmental laws concerning, among other things, discharges to waters,
air emissions, toxic substances, and the generation, handling, storage,
transportation, and disposal of waste and hazardous materials. These laws and
regulations have the effect of increasing the cost and liabilities associated
with the conduct of operations. Environmental risks are also inherent in
railroad operations which frequently involve the transportation of chemicals
and other hazardous materials.
Santa Fe Railway expects it will become subject to new requirements
regulating air emissions from diesel locomotives that may increase its
operating costs in the future. By 1995, the United States Environmental
Protection Agency must issue regulations applicable to new locomotive engines.
Locomotive engines (other than new locomotive engines) may be regulated by
states based on standards and procedures which the State of California
ultimately adopts. The California standards are currently in the process of
being developed.
In addition, because many of SFP's land holdings are and have been used for
industrial or transportation related purposes or leased to commercial or
industrial companies whose activities may have resulted in discharges onto the
property, the Company is now subject and will from time to time continue to be
subject to environmental clean-up and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the "Superfund" law, generally imposes joint and
several liability for clean-up and
18
<PAGE>
enforcement costs, without regard to fault or the legality of the original
conduct, on current and predecessor owners and operators of a site.
Accordingly, SFP may be responsible under CERCLA and other federal and state
statutes for all or part of the costs to clean up sites at which certain
substances may have been released by the Company, its current lessees,
predecessor owners or lessees of properties, or other third parties.
At December 31, 1993, SFP had been named a potentially responsible party
(PRP) at 6 sites on the Environmental Protection Agency's (EPA) National
Priorities List (NPL). Additionally, SFP is potentially liable for the cost of
clean-up at other sites identified by the EPA and other agencies. Finally, SFP
has identified sites where costs exist for environmental clean-up and
monitoring (including where no claim has been asserted), and no agency is
currently involved. There are approximately 125 known environmental sites at
December 31, 1993 which include, among other things; closed facilities
including diesel locomotive repair shops, tie treating plants, fueling
facilities and underground storage tanks; property leased or sold to others and
current operating sites.
Estimates of the Company's ultimate liabilities associated with Superfund and
other environmental sites are difficult to predict with certainty due to, among
other factors, the number of parties involved, possible remediation
alternatives, lengthy time frames, evolving environmental laws and regulations,
and potential recoveries from third parties. Environmental costs include
initial site surveys and environmental studies of potentially contaminated
sites, costs for remediation and restoration of sites determined to be
contaminated, as well as post-closure and ongoing monitoring costs. The Company
has not included any reduction in costs for anticipated recovery from
insurance. Estimated costs at sites where SFP is a PRP are generally based on
cost sharing agreements which vary from site to site, after consideration of
the financial condition of other PRP's. These costs are typically allocated
based on volume of material contributed, the portion of the total site owned or
operated by each PRP, and/or the amount of time the site was owned or operated.
During 1992, management completed an internal assessment of Santa Fe
Railway's environmental liabilities, including a site-by-site analysis of
properties with potentially significant environmental exposure. As a result of
this review and analysis it was determined that an additional accrual of $67
million was appropriate to provide for future costs of this nature which was
recorded in the third quarter of 1992 as part of a rail special charge. In
addition, the Company monitors, on a regular basis, accruals for environmental
sites which have been identified, based on additional information developed in
subsequent periods. The additional information is based on a combination of
factors including independent consulting reports, site visits, legal reviews
and historical trend analysis.
Payments recorded against environmental liabilities totaled $13.5 million,
$6.3 million and $7.1 million for the years ended December 31, 1993, 1992 and
1991, respectively. The majority of these payments related to mandatory clean-
up efforts. Capital expenditures related to environmental sites were
insignificant during this three year period. At December 31, 1993 and December
31, 1992 the Company had accrued liabilities for environmental costs of
approximately $125 million and $121 million, respectively. The Company
anticipates that approximately 75% of the accrued costs at December 31, 1993
will be paid over the next five years, with approximately $25 million of
payments occurring in 1994. It is the opinion of SFP management that none of
the above items, when finally resolved, will have a material adverse effect on
the annual results of operations, financial position or liquidity of SFP,
although an adverse resolution of a number of these items in a single year
could have a material adverse effect on the results of operations for that
year.
SFP is also a party to a number of other legal actions and claims, including
employee injury claims, various governmental proceedings and private civil
suits arising in the ordinary course of business. While the final outcome of
these other legal actions cannot be predicted with certainty, considering among
other things, the meritorious legal defenses available, it is the opinion of
SFP management that none of these claims, when finally resolved, will have a
material adverse effect
18--1
<PAGE>
on the annual results of operations, financial position or liquidity of SFP,
although an adverse resolution of a number of these items in a single year
could have a material adverse effect on the results of operations for that
year.
Rail Restructuring
During the third quarter of 1992, Santa Fe Railway recorded a $253 million
pre-tax charge primarily for costs of a crew consist agreement on the eastern
half of the railroad and for centralization of certain transportation
functions.
The eastern lines crew consist agreement comprised $149 million of the
charge. The 1992 agreement is an update to a 1990 crew consist agreement. The
1992 agreement provides for further reductions in average crew size on through
freight trains and elimination of productivity payments which were required
when reduced crews were used. The 1992 eastern lines agreement, when combined
with a similar agreement reached earlier with trainmen on the other half of the
system, provides for through trains generally to operate with two person crews.
Estimated operating expense savings resulting from the eastern lines
agreement was approximately $25 million annually beginning in 1993. The
agreement covers approximately 2,000 employees. Costs of the agreement which
are provided for in the charge relate to a signing bonus of $10,000 per
employee, the present value of a $65,000 deferred benefit per employee payable
upon separation or retirement and the present value of reserve board costs.
Reserve board costs represent wages paid to employees rendered excess due to
reduced crews. When on reserve board status, employees are removed from active
service and receive a percentage of their normal wages. Eastern line reserve
boards initially contained approximately 500 members and will decline over time
through attrition and other factors.
The charge also included $73 million related to centralization. In 1992,
Santa Fe Railway decided to centralize many operating support functions.
Centralization activities began in late 1992 and by the fall of 1993, Railway
had centralized train dispatching, crew planning and fleet management in
Schaumburg, Illinois; crew management, customer service and mechanical
(equipment) administration in Topeka, Kansas; and other administrative and
operating support functions in Kansas City, Kansas. Annual savings resulting
from centralized functions are expected to be approximately $20 million, most
of which will be reflected annually beginning in 1994. Cost of centralization
included in the $73 million charge relates to approximately 700 relocations,
reductions of 600 administrative and clerical positions, and abandonment of
facilities. Most of the costs of centralization had been paid by December 31,
1993.
Additionally, the charge includes approximately $31 million for other cost
saving initiatives including an adjustment of accruals established for other
operating craft labor agreements reached in prior periods.
At December 31, 1993, the balance of the restructuring liability was $315.6
million. The majority of the balance represents future deferred benefit and
reserve board payments related to the 1992 eastern lines agreement and similar
agreements reached in and accrued for in prior years. Restructuring costs paid
were $80.9 million in 1993, $118.9 million in 1992 and $104.5 million in 1991.
In 1994, the Company expects payments of approximately $60 million. Future
payments will decline over time; however, certain separation benefits will not
be paid until employee retirement. Santa Fe Railway has obtained letters of
credit of approximately $18 million supporting certain of its obligations under
labor agreement.
Hedging Activities
SFP Gold's revenues and earnings are strongly influenced by world gold
prices, which fluctuate widely and over which SFP Gold has no control. In an
effort to minimize its exposure to fluctuations
18--2
<PAGE>
in the price of gold, SFP Gold engages in gold price hedging activities, when
deemed appropriate, which consists primarily of the use of forward sales and
option contracts. In recent years, SFP Gold's average price realized has
exceeded the average spot gold price. While there is no assurance that the
hedging program will continue to result in average sales prices in excess of
average spot gold prices, SFP Gold intends to continue to hedge, as
appropriate, based on gold market conditions and assessments of gold price
risk. To the extent the Company hedges portions of its gold production, it may
not fully participate in increases in spot gold prices on the portion of its
production that has been hedged. At December 31, 1993, forward sales contracts
have an aggregate sales value of approximately $224 million which commit SFP
Gold to the future delivery of 570,500 ounces of gold at an average price of
$393 per ounce. Scheduled delivery dates under the forward sales contracts
range from the beginning to the end of 1994. In addition, SFP Gold has
committed 114,000 ounces in 1994 under call options at prices ranging between
$375 and $385 per ounce and has purchased put options on 114,000 ounces at
strike prices ranging between $318 and $331 per ounce. These put and call
options expire at a rate of 9,500 ounces per month during 1994.
The Company enters into various commodity swap and collar transactions to
manage exposure against fluctuations in diesel fuel prices. The Company's fuel
hedging transactions are based upon commodities that are established in the
futures markets. The prices of these commodities have historically shown a high
degree of correlation with the Company's diesel fuel prices. Cash settlements
on contracts to hedge fuel prices are made at the end of a quarter and the
related gain or loss is included in fuel expense for that quarter. To the
extent the Company hedges portions of its fuel purchases, it may not fully
participate in decreases in fuel prices. At December 31, 1993, the Company had
entered into various agreements with several counterparties covering
approximately 260 million gallons which is anticipated to cover approximately
two-thirds of 1994 fuel purchases. Through swap arrangements the Company has
hedged approximately 205 million gallons at an average price of 48 cents.
Additionally, approximately 55 million gallons have been hedged through collar
arrangements which allow the price to float between average floor and ceiling
prices of 46 cents and 51 cents, respectively. These prices do not include
taxes, fuel handling costs and any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of the Company's
diesel fuel. The effects of the Company's fuel hedges was to increase operating
expense by $12.4 million in 1993 and to reduce operating expense by $0.9 million
and $5.6 million in 1992 and 1991, respectively.
From time to time, the Company enters into various interest rate hedging
transactions for various purposes, including managing exposure to fluctuations
in interest rates or establishing rates in anticipation of future debt
issuance. At December 31, 1993, the Company had entered into four related
interest rate swap transactions for a total notional principal amount of $100
million, for the purpose of establishing rates in anticipation of an expected
future debt offering. These swap transactions call for the payment of a fixed
interest rate of 6.2%, which was based upon ten year treasury notes, and the
receipt of a variable interest rate which was 3.5% at December 31, 1993. At the
time of the borrowing, which is also expected to have a term of ten years, the
swap will be closed out and any gain or loss relating to the terminated
interest rate swap will be amortized as an adjustment to interest expense over
the term of the borrowing.
The Company monitors its positions and the credit ratings of its
counterparties and does not currently anticipate losses due to counterparty
non-performance. The fair market value of the Company's fuel hedging
transactions at December 31, 1993 were unrealized losses of $9.2 million for
swap arrangements and $2.4 million for collar arrangements. The fair market
value of the Company's interest hedging transactions at December 31, 1993 was
not significant.
18--3
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
Santa Fe Pacific Corporation common stock is traded on the New York, Chicago
and Pacific Stock Exchanges. The quarterly price range per share for the years
1993 and 1992 is as follows:
<TABLE>
<CAPTION>
1993 1992
--------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter................................... $15 5/8 $12 3/4 $14 1/8 $11 1/8
Second Quarter.................................. $18 3/8 $14 1/2 $13 3/8 $11
Third Quarter................................... $19 1/8 $16 3/4 $12 7/8 $10 7/8
Fourth Quarter.................................. $22 1/2 $18 $13 7/8 $10 5/8
------- ------- ------- -------
</TABLE>
SFP paid a cash dividend of $0.10 per share in both 1993 and 1992. As of
January 31, 1994, there were approximately 75,000 holders of record of SFP
common stock.
18--4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders, Chairman and Board of Directors of Santa Fe Pacific
Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders'
equity present fairly, in all material respects, the financial position of
Santa Fe Pacific Corporation and subsidiary companies at December 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Note 18 to the consolidated financial statements includes a description of a
change in the method of accounting for postretirement and postemployment
benefits other than pensions effective January 1, 1992.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Kansas City, Missouri
February 4, 1994
19
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- --------
(IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
REVENUES
Rail............................................... $2,409.2 $2,251.7 $2,153.5
Gold............................................... 298.6 220.6 179.4
Pipeline........................................... 18.6 24.1 27.1
-------- -------- --------
Total revenues..................................... 2,726.4 2,496.4 2,360.0
-------- -------- --------
OPERATING EXPENSES
Rail............................................... 2,091.5 1,954.1 1,898.1
Rail Special Charge................................ -- 320.4 --
Gold............................................... 212.1 144.3 119.9
-------- -------- --------
Total operating expenses........................... 2,303.6 2,418.8 2,018.0
-------- -------- --------
Operating Income................................... 422.8 77.6 342.0
Other Income Net................................... 6.9 2.2 31.8
Gain on Sale of California Lines................... 145.4 204.9 --
Gain on Exchange of Mineral Assets................. 217.5 -- --
Interest Expense................................... 142.4 180.2 226.4
-------- -------- --------
Income Before Income Taxes......................... 650.2 104.5 147.4
Income Tax......................................... 311.4 41.0 51.0
-------- -------- --------
Income Before Extraordinary Charge and Cumulative
Effect of a Change in Accounting.................. 338.8 63.5 96.4
Extraordinary Charge on Early Retirement of Debt,
Net of Income Taxes............................... -- (5.0) --
Cumulative Effect of a Change in Accounting for
Postretirement and Postemployment Benefits, Net of
Income Taxes...................................... -- (163.0) --
-------- -------- --------
Net Income (Loss).............................. $ 338.8 $ (104.5) $ 96.4
======== ======== ========
INCOME (LOSS) PER SHARE OF COMMON STOCK
Before Extraordinary Charge and Cumulative Effect
of a Change in Accounting......................... $ 1.81 $ 0.34 $ 0.54
Extraordinary Charge............................... -- (0.03) --
Cumulative Effect of a Change in Accounting........ -- (0.88) --
-------- -------- --------
Net Income (Loss).............................. $ 1.81 $ (0.57) $ 0.54
======== ======== ========
Average Number of Common and Common Equivalent
Shares........................................ 187.2 184.8 178.0
======== ======== ========
</TABLE>
(See notes to consolidated financial statements)
20
<PAGE>
CONSOLIDATED BALANCE SHEET
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1992
-------- --------
(IN MILLIONS)
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, at cost which approximates
market.................................................. $ 96.4 $ 100.1
Accounts receivable, less allowances..................... 103.5 97.0
Inventories.............................................. 120.4 107.4
Note receivable--current................................. 72.5 72.5
Current portion of deferred income taxes................. 78.1 90.4
Other.................................................... 107.6 70.2
-------- --------
Total current assets................................... 578.5 537.6
-------- --------
Note Receivable.......................................... 36.2 108.7
Other Long-Term Assets................................... 326.1 359.8
-------- --------
Properties, Plant and Equipment.......................... 6,664.4 5,969.5
Less: Accumulated depreciation, depletion and amortiza-
tion.................................................... 1,668.2 1,630.2
-------- --------
Net properties........................................... 4,996.2 4,339.3
-------- --------
Total Assets........................................... $5,937.0 $5,345.4
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities................. $ 715.7 $ 723.3
Gold loans--current...................................... 15.4 12.9
Long-term debt due within one year....................... 190.7 205.8
-------- --------
Total current liabilities.............................. 921.8 942.0
-------- --------
Long-Term Debt Due After One Year........................ 1,185.1 1,245.7
Postretirement Benefits Liability........................ 291.2 283.2
Rail Restructuring Liability............................. 257.8 254.6
Gold Loans............................................... 133.8 149.3
Other Long-Term Liabilities.............................. 644.4 557.7
Deferred Income Taxes.................................... 1,234.6 984.4
-------- --------
Total Liabilities...................................... 4,668.7 4,416.9
-------- --------
COMMITMENTS AND CONTINGENCIES (See Note 14 and Note 15)
SHAREHOLDERS' EQUITY
Common stock, $1 par value, shares authorized, 600.0 mil-
lion; 1993 shares issued and outstanding, 190.0 million
and 185.6 million; 1992 shares issued and outstanding,
190.0 million and 181.8 million......................... 190.0 190.0
Paid-in capital.......................................... 869.7 966.7
Retained income.......................................... 340.3 19.9
Treasury stock, at cost.................................. (131.7) (248.1)
-------- --------
Total shareholders' equity............................. 1,268.3 928.5
-------- --------
Total Liabilities and Shareholders' Equity............. $5,937.0 $5,345.4
======== ========
</TABLE>
(See notes to consolidated financial statements)
21
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1992 1991
------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 338.8 $ (104.5) $ 96.4
Adjustments to reconcile net income (loss) to
operating cash flows:
Depreciation, depletion and amortization........ 247.9 216.1 208.4
Deferred income taxes........................... 215.8 66.2 20.9
Cumulative effect of a change in accounting for
postretirement and postemployment benefits, net
of income taxes................................ -- 163.0 --
Rail special charge............................... -- 320.4 --
Rail restructuring costs paid..................... (80.9) (118.9) (104.5)
Imputed interest expense.......................... 26.6 23.3 23.8
Gain on exchange of mineral assets................ (217.5) -- --
Gain on sales of property, plant and equipment.... (156.0) (218.7) (36.9)
Other--net........................................ (8.0) (23.8) 16.1
Changes in Working Capital:
Accounts receivable............................. (16.8) (13.9) 1.0
Inventories..................................... (9.9) (18.1) (4.5)
Accounts payable and accrued liabilities........ 48.8 47.9 51.5
Short term investments and other current assets. (36.9) (26.8) (30.3)
------- -------- ------
Net Cash Provided By Operating Activities..... 351.9 312.2 241.9
------- -------- ------
INVESTING ACTIVITIES
Cash used for capital expenditures................ (488.6) (322.5) (295.5)
Proceeds from the sale of property, plant and
equipment........................................ 247.9 320.7 91.0
Other--net........................................ 77.3 40.4 57.3
------- -------- ------
Net Cash Provided By (Used For) Investing
Activities................................... (163.4) 38.6 (147.2)
------- -------- ------
FINANCING ACTIVITIES
Proceeds from long-term borrowings and gold loans. 188.8 17.7 91.4
Principal payments on long-term borrowings and
gold loans....................................... (382.4) (444.2) (157.4)
Proceeds from sale of stock....................... -- -- 36.2
Decrease in restricted funds...................... -- 14.9 15.9
Cash dividends paid............................... (18.5) (18.2) (17.9)
Other--net........................................ 19.9 15.5 12.0
------- -------- ------
Net Cash Used For Financing Activities........ (192.2) (414.3) (19.8)
------- -------- ------
Increase (Decrease) In Cash and Cash Equivalents.. (3.7) (63.5) 74.9
Cash and Cash Equivalents:
Beginning of year................................. 100.1 163.6 88.7
------- -------- ------
End of year....................................... $ 96.4 $ 100.1 $163.6
======= ======== ======
</TABLE>
(See notes to consolidated financial statements)
22
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON TREASURY COMMON TREASURY PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL INCOME
--------- --------- ------ -------- -------- --------
(SHARES IN THOUSANDS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31,
1990................... 190,021 17,051 $190.0 $(516.9) $1,166.1 $ 72.5
1991 net income....... -- -- -- -- -- 96.4
Dividends declared.... -- -- -- -- -- (17.9)
Sale of common stock.. -- (4,043) -- 122.4 (86.2) --
Exercise of stock op-
tions................ -- (1,511) -- 45.8 (35.9) --
Shareholder rights re-
demption............. -- (1,311) -- 39.8 (31.2) (8.4)
Other................. -- 23 -- (0.3) 0.7 --
------- ------ ------ -------- -------- ------
BALANCE DECEMBER 31,
1991................... 190,021 10,209 $190.0 $(309.2) $1,013.5 $142.6
1992 net loss......... -- -- -- -- -- (104.5)
Dividends declared.... -- -- -- -- -- (18.2)
Exercise of stock op-
tions................ -- (1,995) -- 60.5 (46.4) --
Other................. -- (20) -- 0.6 (0.4) --
------- ------ ------ -------- -------- ------
BALANCE DECEMBER 31,
1992................... 190,021 8,194 $190.0 $(248.1) $ 966.7 $ 19.9
1993 net income....... -- -- -- -- -- 338.8
Dividends declared.... -- -- -- -- -- (18.5)
Exercise of stock op-
tions................ -- (3,231) -- 97.1 (73.8) --
Issuance of restricted
stock................ -- (777) -- 23.2 (23.2) --
Other................. -- 224 -- (3.9) -- 0.1
------- ------ ------ -------- -------- ------
BALANCE DECEMBER 31,
1993................... 190,021 4,410 $190.0 $ (131.7) $ 869.7 $340.3
======= ====== ====== ======== ======== ======
</TABLE>
- --------
Note: SFP has authorized common stock of 600 million shares with a par value of
$1.00. Also authorized are 200 million shares of preferred stock with a par
value of $1.00, none of which was outstanding at December 31, 1993.
(See notes to consolidated financial statements)
23
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Santa Fe Pacific Corporation and subsidiary companies (SFP or Company) which
are majority owned and controlled, directly or indirectly, by SFP. The equity
method is used to account for investments in 20% to 50% owned entities. All
significant intercompany transactions have been eliminated.
Reclassifications
Certain comparative prior year amounts in the consolidated financial
statements and notes have been reclassified to conform with the current year
presentation.
Statement of Cash Flows
SFP considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. In addition to amounts reported
as "Cash Used for Capital Expenditures," SFP had noncash capital expenditures
totaling $157.6 million, $9.5 million, and $35.2 million in 1993, 1992, and
1991, respectively. Noncash capital expenditures consist principally of
directly financed equipment acquisitions and reimbursed projects at The
Atchison, Topeka and Santa Fe Railway Company (Santa Fe Railway). The exchange
of mineral assets was a non-cash transaction and has been excluded from the
Statement of Cash Flows (see Note 3: Gain on Exchange of Mineral Assets).
Accounts Receivable
SFP maintains an allowance for doubtful accounts based upon the estimated
collectibility of all trade accounts receivable. Allowances for doubtful
accounts of $16.4 million and $11.2 million have been applied as a reduction of
accounts receivable at December 31, 1993 and 1992, respectively.
Other Current Assets
Other current assets include $76.8 million and $48.9 million at December 31,
1993 and 1992, respectively, of deferred mining costs at Santa Fe Pacific Gold
Corporation (SFP Gold).
Inventories
Material and supply inventories, which represent substantially all
inventories, are valued at the lower of cost (average or first-in, first-out)
or market.
Note Receivable
The note receivable included in the consolidated balance sheet relates to the
sale of a subsidiary in 1986. Principal payments of $72.5 million were received
in both 1993 and 1992. Remaining proceeds to be received from the note are
$72.5 million in 1994 and $36.2 million in 1995.
Properties
Properties are stated at cost and include capitalized interest incurred
during construction of $8.7 million in 1993, $3.8 million in 1992, and $4.4
million in 1991. Additions and replacements are capitalized. Expenditures for
maintenance and repairs are charged to income. Upon normal sale or retirement
of depreciable railroad property, cost less salvage, net of cost of removal, is
charged to accumulated depreciation and no gain or loss is recognized. With
respect to all other property sold or retired, gain or loss is recognized.
Depreciation of railroad properties is computed under the straight-line method.
Depreciation and depletion of gold operating properties is based on either the
unit-of-production or straight-line method.
24
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Rail revenue is recognized when freight is received from the shipper with a
corresponding accrual of the direct costs to complete delivery of the freight-
in-transit. Gold revenue is recognized when gold is shipped to customers.
Exploration and Development Costs
Exploration and development costs incurred in gold operations, prior to the
determination of the feasibility of proceeding with mining operations, are
expensed as incurred. Development costs incurred thereafter are capitalized and
amortized on a unit-of-production basis.
NOTE 2: GAIN ON SALE OF CALIFORNIA LINES
In November 1992, Santa Fe Railway announced that it and eight southern
California transportation agencies had reached definitive agreements for the
sale to the agencies of certain interests in approximately 340 miles of rail
lines and additional property, for cash and relief of obligations to reimburse
certain state and county agencies for capital improvements previously paid for
by the agencies and the State of California. Santa Fe Railway retained all
rights necessary for its freight operations in southern California. The
transportation agencies anticipate using these facilities for commuter lines.
The sale encompassed three separate closings which occurred in December 1992
and March and June of 1993. Cash proceeds of $226.9 million in 1993 and $255.0
million in 1992 were received resulting in pre-tax gains of $145.4 million and
$204.9 million in 1993 and 1992, respectively. Both of the gains recognized are
net of the cost of the properties and other expenses of the sale. Additionally,
the 1993 gain is net of an obligation retained by Santa Fe Railway which under
certain conditions, requires the repurchase of a portion of the properties sold
for $50 million. Proceeds of $126.0 million and $201.0 million were used to
retire debt in 1993 and 1992, respectively (see Note 11: Long-Term Debt).
NOTE 3: GAIN ON EXCHANGE OF MINERAL ASSETS
On June 25, 1993, SFP Gold closed an asset exchange with Hanson Natural
Resources Company (Hanson), an affiliate of Hanson, PLC. SFP Gold received
certain gold assets of Hanson, including two operating gold mines in Nevada and
California, two late stage development projects in Nevada and Montana and other
gold prospects. Hanson acquired essentially all coal assets of SFP Gold
including the Lee Ranch Mine and undeveloped coal reserves and six crushed
stone and aggregate quarries.
The exchange was recorded as a purchase of assets and accordingly, the
results from the gold assets have been reflected in operations prospectively
from the date of closing. The fair value of the gold assets for financial
reporting purposes was approximately $425 million. SFP recognized an after tax,
non-cash gain of $108.3 million on the exchange which represents the excess of
the fair value of the gold assets received over the sum of the carrying value
of the coal and aggregate assets and expenses of the exchange.
24--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents SFP's unaudited pro forma results of operations for
the years ended December 31, 1993 and 1992, respectively, assuming the exchange
had occurred at the beginning of each fiscal year, but excluding the gain on
the transaction, described above. The pro forma results include higher
amortization resulting from the write-up of the gold assets received in the
exchange. The pro forma results do not reflect any operating efficiencies and
cost savings which SFP believes are achievable with respect to the gold assets
received in the exchange.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992
----------- -----------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.............................................. $ 2,744.3 $ 2,582.8
----------- -----------
Income before extraordinary charge and cumulative
effect of a change in accounting..................... 220.6 62.9
Extraordinary charge.................................. -- (5.0)
Cumulative effect of a change in accounting........... -- (163.0)
----------- -----------
Net Income (Loss)..................................... $ 220.6 $ (105.1)
----------- -----------
Income per share of common stock
Before extraordinary charge and a change in
accounting......................................... $ 1.18 $ 0.34
Extraordinary charge................................ -- (0.03)
Cumulative effect of a change in accounting......... -- (0.88)
----------- -----------
Net Income (Loss) per share........................... $ 1.18 $ (0.57)
=========== ===========
</TABLE>
NOTE 4: RAIL OPERATING EXPENSES
The operating expenses of Santa Fe Railway, excluding the 1992 Rail Special
Charge discussed in Note 5, consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Compensation and benefits........................... $ 799.8 $ 798.8 $ 781.8
Fuel................................................ 239.1 205.5 206.7
Equipment rents..................................... 229.4 186.0 162.2
Depreciation and amortization....................... 188.4 180.8 184.3
Materials and supplies.............................. 127.7 127.5 135.2
Other............................................... 507.1 455.5 427.9
-------- -------- --------
Total........................................... $2,091.5 $1,954.1 $1,898.1
======== ======== ========
</TABLE>
NOTE 5: RAIL SPECIAL CHARGE
During 1992, Santa Fe Railway recorded a $320.4 million pre-tax special
charge which included provisions for restructuring and environmental.
Rail Restructuring
During the third quarter of 1992, Santa Fe Railway recorded a $253 million
pre-tax charge primarily for costs of a crew consist agreement on the eastern
half of the railroad and for centralization of certain transportation
functions.
25
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The eastern line crew consist agreement comprised $149 million of the charge.
The 1992 agreement is an update to a 1990 crew consist agreement. The 1992
agreement provides for further reductions in average crew size on through
freight trains and elimination of productivity payments which were required
when reduced crews were used. The 1992 eastern lines agreement, when combined
with a similar agreement reached earlier with trainmen on the other half of the
system, provides for through trains generally to operate with two person crews.
The agreement covers approximately 2,000 employees. Costs of the agreement
which are provided for in the charge relate to a signing bonus of $10,000 per
employee, the present value of a $65,000 deferred benefit per employee payable
upon separation or retirement and the present value of reserve board costs.
Reserve board costs represent wages paid to employees rendered excess due to
reduced crews. When on reserve board status, employees are removed from active
service and receive a percentage of their normal wages. Eastern line reserve
boards initially contained approximately 500 members and will decline over time
through attrition and other factors.
The charge also included $73 million related to centralization. In 1992,
Santa Fe Railway decided to centralize many operating support functions.
Centralization activities began in late 1992 and by the fall of 1993, Railway
had centralized train dispatching, crew planning and fleet management in
Schaumburg, Illinois; crew management, customer service and mechanical
(equipment) administration in Topeka, Kansas; and other administrative and
operating support functions in Kansas City, Kansas. Cost of centralization
included in the $73 million charge relates to approximately 700 relocations,
reductions of 600 administrative and clerical positions, and abandonment of
facilities. Most of the costs of centralization had been paid by December 31,
1993.
Additionally, the charge includes approximately $31 million for other cost
saving initiatives including an adjustment of accruals established for other
operating craft labor agreements reached in prior periods.
At December 31, 1993, the balance of the restructuring liability was $315.6
million. The majority of the balance represents future deferred benefit and
reserve board payments related to the 1992 eastern lines agreement and similar
agreements reached in and accrued for in prior years. Restructuring costs paid
were $80.9 million in 1993, $118.9 million in 1992 and $104.5 million in 1991.
In 1994, the Company expects payments of approximately $60 million. Future
payments will decline over time; however, certain separation benefits will not
be paid until employee retirement. Santa Fe Railway has obtained letters of
credit of approximately $18 million supporting certain of its obligations under
labor agreement.
Environmental
Approximately $67 million of the special charge was to increase accruals for
environmental clean-up and remediation, primarily on abandoned properties (see
Note 15: Contingencies). During 1993, payments charged to the environmental
reserve were approximately $13 million, with the majority of remaining
expenditures expected to be incurred over the next five years.
NOTE 6: PIPELINE PARTNERSHIP
A wholly owned subsidiary of SFP, SFP Pipeline Holdings, Inc. (Pipeline
Holdings), through its wholly owned subsidiary, holds an aggregate 44% common
unit ownership in Santa Fe Pacific Pipeline Partners, L.P. (Pipeline
Partnership), a Delaware limited partnership. This interest is held through a
2% general partner interest and a 42% limited partner interest. The Company
accounts for its interest in the partnership under the equity method.
25--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pipeline Holdings also issued the Pipeline Exchangeable Debentures (Pipeline
Debentures) (see Note 11: Long-Term Debt) which are traded on the New York
Stock Exchange and under certain circumstances are exchangeable for common
units that represent SFP's 42% limited partnership interest in the Pipeline
Partnership. Interest on the Pipeline Debentures is payable quarterly and is
equal to the greater of (a) distributions of cash from operations declared by
the Pipeline Partnership for such quarter on the number of common units for
which the Pipeline Debentures are then exchangeable or (b) 2% of the unpaid
Pipeline Debentures principal balance.
During 1993, 1992 and 1991, SFP, through its wholly owned subsidiaries,
received cash distributions of $25.1 million, $25.1 million, and $23.8 million,
respectively, from the Pipeline Partnership. Of these distributions $22.8
million, $22.8 million, and $22.0 million, respectively, were used to pay
interest costs on the Pipeline Debentures.
The following table sets forth selected financial data for the Pipeline
Partnership: Partnership:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
------ ------ ------
(IN MILLIONS, EXCEPT PER
UNIT DATA)
<S> <C> <C> <C>
Income Statement Data
Total revenues................................... $219.5 $205.0 $193.4
Operating income................................. 78.3(1) 91.4(1) 95.8
Interest expense................................. 37.1 36.9 36.9
Income before cumulative effect of accounting
change.......................................... 41.6 54.1 60.6
Cumulative effect of accounting change........... -- (16.4)(2) --
Net income....................................... 41.6 37.7 60.6
Per Unit Data
Income before accounting change.................. $ 2.13 $ 2.77 $ 3.10
Cumulative effect of accounting change........... -- (.84)(2) --
Net income....................................... 2.13 1.93 3.10
Cash distributions per unit...................... 2.80 2.80 2.75
------ ------ ------
<CAPTION>
DECEMBER 31,
----------------
1993 1992
------ ------
<S> <C> <C>
Balance Sheet Data
Total current assets............................. $ 67.7 $ 58.4
Net properties, plant and equipment.............. 616.6 618.1
Total assets..................................... 697.0 684.9
Total current liabilities........................ 35.6 21.6
Long-term debt................................... 355.0 355.0
Total partners' capital.......................... 265.9 279.0
====== ======
</TABLE>
- --------
(1) 1993 includes a $15 million special environmental charge and a $12 million
special litigation charge. 1992 includes a $10 million special
environmental charge.
(2) Reflects a change in accounting for postretirement and postemployment
benefits.
25--2
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: OTHER INCOME--NET
Other income--net consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Real estate activities.................................. $ 19.4 $ 23.9 $45.6
Interest income......................................... 12.8 19.9 32.0
Corporate administrative expenses....................... (24.2) (22.3) (20.0)
Accounts receivable fees................................ (8.3) (9.4) (14.5)
Arbitration/litigation settlements...................... 21.6 -- --
Other--net.............................................. (14.4) (9.9) (11.3)
------ ------ -----
Total............................................... $ 6.9 $ 2.2 $31.8
====== ====== =====
NOTE 8: INCOME TAXES
The provision for income taxes consisted of the following:
<CAPTION>
1993 1992 1991
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................... $ 66.8 $(24.6) $26.7
State................................................. 5.8 (0.6) 3.4
------ ------ -----
Total Current....................................... 72.6 (25.2) 30.1
------ ------ -----
Deferred:
Federal............................................... 213.3 54.3 18.1
State................................................. 25.5 11.9 2.8
------ ------ -----
Total Deferred...................................... 238.8 66.2 20.9
------ ------ -----
Total............................................... $311.4 $ 41.0 $51.0
====== ====== =====
Income taxes as reflected in the consolidated statement of operations differ
from the amounts computed by applying the statutory federal corporate tax rate
to income as follows:
<CAPTION>
1993 1992 1991
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax at statutory rate (35% in 1993, 34%
in 1992-1991).......................................... $227.5 $ 35.5 $50.1
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit............ 20.3 7.5 4.1
1% increase in federal tax rate....................... 25.5 -- --
Exchange of mineral assets............................ 23.5 -- --
Depletion............................................. (8.7) (3.5) (3.0)
Other................................................. 23.3 1.5 (0.2)
------ ------ -----
Total............................................... $311.4 $ 41.0 $51.0
====== ====== =====
</TABLE>
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," as of January 1, 1992
having previously accounted for income taxes under SFAS No. 96. The adoption of
SFAS No. 109 had no impact on 1992 net income. Both SFAS No. 96 and No. 109
required that deferred income taxes be determined based on temporary
differences between the financial reporting and tax basis of the Company's
assets and liabilities using enacted tax rates in effect during the years in
which the differences are expected to reverse.
26
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Omnibus Budget Reconciliation Act of 1993 resulted in an increase in the
maximum corporate federal income tax rate from 34% to 35% retroactive to
January 1, 1993. In accordance with SFAS No. 109, SFP recorded additional
income tax expense of $25.5 million, representing the impact of the 1% rate
increase on SFP's net beginning of year deferred income tax liability. The
impact of the tax increase as of August 10, 1993, the date of enactment, was
approximately $32 million. The difference between the $25.5 million impact as
of the beginning of the year and the $32 million impact as of August 10, 1993
is due to taxable income and temporary differences generated during the period
January 1, 1993 through August 10, 1993.
Principal temporary differences that gave rise to the net deferred tax
liability at December 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax debits:
Accrued liabilities not deductible until paid:
Restructuring......................................... $ 119.5 $ 144.6
Postretirement benefits............................... 113.3 108.2
Casualty and environmental............................ 114.8 112.8
Other................................................. 128.4 134.7
Non-expiring AMT credit carryforwards................... 106.9 88.0
Other................................................... 26.1 39.4
--------- ---------
Subtotal.............................................. $ 609.0 $ 627.7
--------- ---------
Deferred tax credits:
Depreciation............................................ $(1,303.1) $(1,231.8)
Condemnation sales...................................... (211.8) (123.1)
Other................................................... (250.6) (166.8)
--------- ---------
Subtotal.............................................. $(1,765.5) $(1,521.7)
--------- ---------
Net deferred tax liability.......................... $(1,156.5) $ (894.0)
========= =========
</TABLE>
During 1993 and 1992, SFP made income tax payments, net of refunds, of $23.9
million and $8.2 million, respectively. During 1991, SFP received net refunds
of $8.5 million.
The federal income tax returns of SFP have been examined through 1988. All
years prior to 1981 are closed. Issues relating to the years 1981-1988 are
being contested through various stages of administrative appeal. In addition,
SFP and its subsidiaries have various state income tax returns in the process
of examination, administrative appeal or litigation. Management believes that
adequate provision has been made for any adjustment which might be assessed for
open years through 1993.
NOTE 9: SALES OF ACCOUNTS RECEIVABLE
Santa Fe Railway has an agreement to sell, on a revolving basis, an undivided
percentage interest in certain accounts receivable, with limited recourse, to a
financial institution. The agreement, which expires in December 1994, allows
for sales of accounts receivable up to a maximum of $225.0 million. Santa Fe
Railway acts as collection agent under the agreement. The amount of accounts
receivable sold under the agreement was $225.0 million at both December 31,
1993 and 1992. The financial institution purchases an interest in a pool of
receivables that has
26--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
generally ranged from $250-$325 million during 1993 and 1992. Santa Fe Railway
is exposed to credit loss related to collection of accounts receivable to the
extent that the purchased interest exceeds the amount of accounts receivable
sold. Costs related to the agreement vary on a monthly basis and are generally
related to certain interest rates. These costs, which are included in Other
Income--Net, were $8.3 million, $9.4 million and $14.5 million in 1993, 1992
and 1991, respectively.
26--2
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1993 and 1992
consisted of the following:
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Accounts and wages payable....................................... $169.2 $172.0
Accrued claims................................................... 90.3 88.3
Rail restructuring............................................... 57.8 122.6
Vacations........................................................ 52.1 50.5
Taxes other than income taxes.................................... 36.9 39.5
Interest......................................................... 29.6 30.7
Other............................................................ 279.8 219.7
------ ------
Total........................................................ $715.7 $723.3
====== ======
</TABLE>
NOTE 11: LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN MILLIONS)
<S> <C> <C>
Equipment Obligations, weighted average rate of 8.9%,
maturing from 1994 to 2008................................ $ 478.9 $ 453.1
Pipeline Exchangeable Debentures, 10.4% (variable),
maturing 2010............................................. 219.0 219.0
Senior Notes, 12.65%, maturing from 1998 to 2000........... 200.0 200.0
Gold Master Credit Facility, 4.2% (variable) maturing from
1996 to 1998.............................................. 140.0 --
Term Loan, 4.0% (variable), maturing from 1994 to 1995..... 108.7 181.2
Mortgage Bonds, 4%, maturing 1995.......................... 95.8 95.8
Lone Tree Gold Facility 4.5% (variable) maturing from 1994
to 2000................................................... 60.0 17.7
Bank Term Loan, 4.1% (variable), maturing from 1994 to
1997...................................................... 50.0 130.8
Minerals Credit Agreement (variable)....................... -- 126.0
Other Obligations, 9.4% to 10.3%, maturing from 1994-2014.. 40.2 44.9
Debt discount.............................................. (16.8) (17.0)
-------- --------
Total long-term debt....................................... 1,375.8 1,451.5
-------- --------
Due within one year........................................ (190.7) (205.8)
-------- --------
Due after one year......................................... $1,185.1 $1,245.7
======== ========
</TABLE>
Under the Bank Term Loan, SFP has a $173.6 million revolving credit facility
for general corporate purposes. SFP pays commitment fees of 3/8% per annum on
the unused portion of the Bank Term Loan and revolving credit facility, payable
quarterly. As of December 31, 1993, no borrowings were outstanding under the
revolving credit facility.
In October 1993, SFP Gold entered into a $190 million unsecured revolving
credit facility involving several banks (Gold Master Credit Facility). SFP Gold
is required to pay a commitment fee of 0.05% on outstanding commitments and a
facility fee of 0.26% on outstanding borrowings. As of December 31, 1993,
$140.0 million was outstanding under the Gold Master Credit Facility. The use
of proceeds from the Gold Master Credit Facility is restricted to financing
transaction costs associated with the exchange of mineral assets (see Note 3:
Gain on Exchange of Mineral Assets), and financing working capital
requirements.
27
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All the assets of the Lone Tree Gold Mine are pledged as collateral for the
cash and gold borrowings under Lone Tree Mining, Inc.'s Gold Loan Agreement
(Lone Tree Gold Facility) (see Note 13: Deferred Gold Loans). Additionally,
cash and gold borrowings under the Lone Tree Gold Facility are guaranteed by
SFP.
In December 1992, SFP accelerated the repayment of borrowings related to a
1990 litigation settlement. The early extinguishment of debt resulted in an
extraordinary charge of $5.0 million, net of applicable tax benefits of $3.0
million, reflecting the write off of unamortized debt discount. Additionally,
in March 1993, SFP accelerated the repayment of $126.0 million associated with
the Minerals Credit Agreement. Both of the above repayments were made using a
portion of the 1992 and 1993 proceeds from Santa Fe Railway's sale of
California lines (see Note 2: Gain on Sale of California lines).
In December 1993, SFP filed a shelf registration statement with the SEC, for
the issuance of up to $250 million in debt securities, none of which had been
issued at December 31, 1993.
As of December 31, 1993, projected principal repayments of long term debt
during the five years 1994 through 1998, excluding capital leases, are $188.9
million, $218.5 million, $56.1 million, $102.5 million and $202.7 million,
respectively. Total interest paid was $120.7 million in 1993, $158.5 million in
1992 and $177.6 million in 1991.
Substantially all railroad property is subject to liens securing Mortgage
Bonds or Equipment Obligations. The payment of cash dividends by SFP is
restricted by various debt covenants. Such restrictions vary with levels of
income and other factors. At December 31, 1993, no payment of dividends was
allowed; however, the Company believes that it could change the designation of
SFP Gold under the restrictive debt agreement or distribute SFP Gold to SFP
shareholders to eliminate the dividend restriction. Certain other debt
agreements of the Company and its subsidiaries include covenants which place
limitations on indebtedness and intercompany dividends, require the maintenance
of various financial ratios, and restrict the disposition of assets. Pipeline
Holdings is contingently liable for $355.0 million of Pipeline Partnership
debt.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1993 and 1992, and the methods and assumptions used to estimate such fair
values, are as follows:
Cash and short-term investments
The fair value of cash and short-term investments approximates the carrying
amount because of the short maturity of those instruments.
Note Receivable
The fair value of the Note Receivable approximates the carrying amount as the
variable interest rate on the note approximates current interest rates.
Other Investments
SFP maintained an investment in common stock which became publicly traded
during 1993. The carrying value of the investment at December 31, 1993 was
$10.6 million. In January 1994, the investment was sold resulting in a pre-tax
gain of approximately $25 million. Additionally, SFP maintains various other
investments in common stock with a carrying value at December 31, 1993 and 1992
of approximately $17 million and $27 million, respectively, which are accounted
for under a cost basis. These investments are in non-publicly traded companies
which have no quoted market prices; therefore, a reasonable estimate of fair
value could not be made.
27--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
which would be offered to the Company for debt of the same remaining
maturities. The carrying value of debt at December 31, 1993 and 1992 was
$1,375.8 million and $1,451.5 million compared with estimated fair values of
approximately $1,595 million and $1,620 million, respectively.
NOTE 13: GOLD LOANS
SFP Gold has borrowed gold to finance the development of its Twin Creeks and
Lone Tree Mines. Proceeds from the sale of the borrowed gold are recorded as
gold loans at the average price realized. As SFP Gold delivers gold from
production, in repayment of the gold loan, revenue will be recorded at this
average loan price, reducing the gold loan balance accordingly.
Gold loan borrowings outstanding under loan and security agreements for the
Twin Creeks and Lone Tree Mines total $98.0 million and $51.2 million,
respectively, as of December 31, 1993, and $111.0 million and $51.2 million,
respectively, as of December 31, 1992. Under the agreements, all assets of the
mines are pledged as collateral. Interest on the borrowings are based on the
banks' cost of gold funding plus a credit spread of 1%. As of December 31,
1993, repayments under the agreements, in ounces of gold, during the next five
years 1994 through 1998 are 36,844; 67,552; 55,252; 55,252 and 64,484,
respectively.
NOTE 14: LEASES AND OTHER COMMITMENTS
SFP leases certain locomotives, freight cars, trailers, data processing
equipment and other property. Future minimum lease payments for operating
leases (which reflect operating leases having non-cancelable lease terms in
excess of one year) as of December 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1994.............................................................. $ 61.7
1995.............................................................. 56.2
1996.............................................................. 47.0
1997.............................................................. 36.7
1998.............................................................. 30.5
Later years....................................................... 174.7
------
Total minimum payments........................................ $406.8
======
</TABLE>
Rental expense for all operating leases was $97.7 million in 1993, $76.2
million in 1992 and $70.7 million in 1991. Contingent rentals and sublease
rentals were not significant.
Santa Fe Railway has entered into agreements with certain locomotive
suppliers which provide for maintenance on a portion of its locomotive fleet.
As of December 31, 1993, these agreements obligate Santa Fe Railway to make
minimum annual payments over periods ranging from two to eighteen years. Santa
Fe Railway has also entered into haulage agreements with other rail carriers
under which it is required to make minimum payments if specified traffic levels
are not met. In the aggregate, these agreements require minimum annual payments
of approximately $63 million in 1994, $52 million in 1995, $50 million in 1996,
$51 million in 1997, $52 million in 1998, and $327 million in total thereafter
through 2012. Payments under the agreements totaled approximately $68 million,
$62 million and $49 million in 1993, 1992 and 1991, respectively.
28
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the closing of the sale of California lines, Santa Fe
Railway has entered into various shared use agreements with the agencies which
require Santa Fe Railway to pay the agencies approximately $6.0 million
annually for the maintenance of track structure and facilities. In addition,
Santa Fe Railway is committed to acquire locomotives valued at approximately
$62 million in 1994. SFP Gold is committed to acquire mining equipment valued
at approximately $7.0 million in 1994.
SFP Gold's revenues and earnings are strongly influenced by world gold
prices, which fluctuate widely and over which SFP Gold has no control. In an
effort to minimize its exposure to fluctuations in the price of gold, SFP Gold
engages in gold price hedging activities, when deemed appropriate, which
consists primarily of the use of forward sales and option contracts. In recent
years, SFP Gold's average price realized has exceeded the average spot gold
price. While there is no assurance that the hedging program will continue to
result in average sales prices in excess of average spot gold prices, SFP Gold
intends to continue to hedge, as appropriate, based on gold market conditions
and assessments of gold price risk. To the extent the Company hedges portions
of its gold production, it may not fully participate in increases in spot gold
prices on the portion of its production that has been hedged. At December 31,
1993, forward sales contracts have an aggregate sales value of approximately
$224 million which commit SFP Gold to the future delivery of 570,500 ounces of
gold at an average price of $393 per ounce. Scheduled delivery dates under the
forward sales contracts range from the beginning to the end of 1994. In
addition, SFP Gold has committed 114,000 ounces in 1994 under call options at
prices ranging between $375 and $385 per ounce and has purchased put options on
114,000 ounces at strike prices ranging between $318 and $331 per ounce. These
put and call options expire at a rate of 9,500 ounces per month during 1994.
The Company enters into various commodity swap and collar transactions to
manage exposure against fluctuations in diesel fuel prices. The Company's fuel
hedging transactions are based upon commodities that are established in the
futures markets. The prices of these commodities have historically shown a high
degree of correlation with the Company's diesel fuel prices. Cash settlements
on contracts to hedge fuel prices are made at the end of a quarter and the
related gain or loss is included in fuel expense for that quarter. To the
extent the Company hedges portions of its fuel purchases, it may not fully
participate in decreases in fuel prices. At December 31, 1993, the Company had
entered into various agreements with several counterparties covering
approximately 260 million gallons which is anticipated to cover approximately
two-thirds of 1994 fuel purchases. Through swap arrangements the Company has
hedged approximately 205 million gallons at an average price of 48 cents.
Additionally, approximately 55 million gallons have been hedged through collar
arrangements which allow the price to float between average floor and ceiling
prices of 46 cents and 51 cents, respectively. These prices do not include
taxes, fuel handling costs and any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of the Company's
diesel fuel. The effects of the Company's fuel hedges was to increase operating
expense by $12.4 million in 1993 and to reduce operating expense by $0.9 million
and $5.6 million in 1992 and 1991, respectively.
From time to time, the Company enters into various interest rate hedging
transactions for various purposes, including managing exposure to fluctuations
in interest rates or establishing rates in anticipation of future debt
issuance. At December 31, 1993, the Company had entered into four related
interest rate swap transactions for a total notional principal amount of $100
million, for the purpose of establishing rates in anticipation of an expected
future debt offering. These swap transactions call for the payment of a fixed
interest rate of 6.2%, which was based upon ten year treasury notes, and the
receipt of a variable interest rate which was 3.5% at December 31, 1993. At
28--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the time of the borrowing, which is also expected to have a term of ten years,
the swap will be closed out and any gain or loss relating to the terminated
interest rate swap will be amortized as an adjustment to interest expense over
the term of the borrowing.
The Company monitors its positions and the credit ratings of its
counterparties and does not currently anticipate losses due to counterparty
non-performance. The fair market value of the Company's fuel hedging
transactions at December 31, 1993 were unrealized losses of $9.2 million for
swap arrangements and $2.4 million for collar arrangements. The fair market
value of the Company's interest hedging transactions at December 31, 1993 was
not significant.
NOTE 15: CONTINGENCIES
Environmental
The Company is subject to extensive regulation under federal, state and local
environmental laws concerning, among other things, discharges to waters, air
emissions, toxic substances, and the generation, handling, storage,
transportation, and disposal of waste and hazardous materials. These laws and
regulations have the effect of increasing the cost and liabilities associated
with the conduct of operations. Environmental risks are also inherent in
railroad operations which frequently involve the transportation of chemicals
and other hazardous materials.
Santa Fe Railway expects it will become subject to new requirements
regulating air emissions from diesel locomotives that may increase its
operating costs in the future. By 1995, the United States Environmental
Protection Agency must issue regulations applicable to new locomotive engines.
Locomotive engines (other than new locomotive engines) may be regulated by
states based on standards and procedures which the State of California
ultimately adopts. The California standards are currently in the process of
being developed.
In addition, because many of SFP's land holdings are and have been used for
industrial or transportation related purposes or leased to commercial or
industrial companies whose activities
28--2
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
may have resulted in discharges onto the property, the Company is now subject
and will from time to time continue to be subject to environmental clean-up and
enforcement actions. In particular, the federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), also known as the
"Superfund" law, generally imposes joint and several liability for clean-up and
enforcement costs, without regard to fault or the legality of the original
conduct, on current and predecessor owners and operators of a site.
Accordingly, SFP may be responsible under CERCLA and other federal and state
statutes for all or part of the costs to clean up sites at which certain
substances may have been released by the Company, its current lessees,
predecessor owners or lessees of properties, or other third parties.
At December 31, 1993, SFP had been named a potentially responsible party
(PRP) at 6 sites on the Environmental Protection Agency's (EPA) National
Priorities List (NPL). Additionally, SFP is potentially liable for the cost of
clean-up at other sites identified by the EPA and other agencies. Finally, SFP
has identified sites where costs exist for environmental clean-up and
monitoring (including where no claim has been asserted), and no agency is
currently involved. There are approximately 125 known environmental sites at
December 31, 1993 which include, among other things; closed facilities
including diesel locomotive repair shops, tie treating plants, fueling
facilities and underground storage tanks; property leased or sold to others and
current operating sites.
Estimates of the Company's ultimate liabilities associated with Superfund and
other environmental sites are difficult to predict with certainty due to, among
other factors, the number of parties involved, possible remediation
alternatives, lengthy time frames, evolving environmental laws and regulations,
and potential recoveries from third parties. Environmental costs include
initial site surveys and environmental studies of potentially contaminated
sites, costs for remediation and restoration of sites determined to be
contaminated, as well as post-closure and ongoing monitoring costs. The Company
has not included any reduction in costs for anticipated recovery from
insurance. Estimated costs at sites where SFP is a PRP are generally based on
cost sharing agreements which vary from site to site, after consideration of
the financial condition of other PRP's. These costs are typically allocated
based on volume of material contributed, the portion of the total site owned or
operated by each PRP, and/or the amount of time the site was owned or operated.
During 1992, management completed an internal assessment of Santa Fe
Railway's environmental liabilities, including a site-by-site analysis of
properties with potentially significant environmental exposure. As a result of
this review and analysis it was determined that an additional accrual of $67
million was appropriate to provide for future costs of this nature which was
recorded in the third quarter of 1992 as part of the rail special charge (see
Note 5: Rail Special Charge). In addition, the Company monitors, on a regular
basis, accruals for environmental sites which have been identified, based on
additional information developed in subsequent periods. The additional
information is based on a combination of factors including independent
consulting reports, site visits, legal reviews and historical trend analysis.
Payments recorded against environmental liabilities totaled $13.5 million,
$6.3 million and $7.1 million for the years ended December 31, 1993, 1992 and
1991, respectively. The majority of these payments related to mandatory clean-
up efforts. Capital expenditures related to environmental sites were
insignificant during this three year period. At December 31, 1993 and December
31, 1992 the Company had accrued liabilities for environmental costs of
approximately $125 million and $121 million, respectively. The Company
anticipates that approximately 75% of the accrued costs at December 31, 1993
will be paid over the next five years, with approximately $25 million of
payments occurring in 1994. It is the opinion of SFP management that none of
the above items, when finally resolved, will have a material adverse effect on
the annual results of operations, financial position or liquidity of SFP,
although an adverse resolution of a number of these items in a single year
could have a material adverse effect on the results of operations for that
year.
29
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Claims and Litigation
SFP is also a party to a number of other legal actions and claims, including
employee injury claims, various governmental proceedings and private civil
suits, arising in the ordinary course of business. While the final outcome of
these other legal actions cannot be predicted with certainty, considering among
other things, the meritorious legal defenses available, it is the opinion of
SFP management that none of these claims, when finally resolved, will have a
material adverse effect on the annual results of operations, financial position
or liquidity of SFP, although an adverse resolution of a number of these items
in a single year could have a material adverse effect on the results of
operations for that year.
NOTE 16: PENSION PLANS
SFP and its subsidiaries have two significant defined benefit pension plans,
the trusteed noncontributory Santa Fe Pacific Corporation Retirement Plan
(Retirement Plan) and the Santa Fe Pacific Corporation Supplemental Retirement
Plan (Supplemental Plan).
The Retirement Plan complies with Employee Retirement Income Security Act of
1974 (ERISA) requirements and covers substantially all officers and employees
of SFP and its subsidiaries not covered by collective bargaining agreements.
Benefits payable under the Retirement Plan are based on compensation during the
60 highest paid consecutive months of service during the ten years immediately
preceding retirement and years of service. SFP's funding policy is to
contribute annually not less than the ERISA minimum, and not more than the
maximum amount deductible for income tax purposes.
The Supplemental Plan is an unfunded plan that provides supplementary
retirement benefits primarily to certain executives.
Components of pension income and expense relating to the Retirement and
Supplemental Plans for 1993, 1992 and 1991 were as follows:
RETIREMENT PLAN
<TABLE>
<CAPTION>
1993 1992 1991
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Components of pension (income) expense
Service cost......................................... $ 6.6 $ 7.7 $ 8.7
Interest cost........................................ 42.4 39.6 40.4
Actual return on plan assets......................... (111.7) (59.1) (99.9)
Net amortization and deferral........................ 47.2 (5.4) 37.0
------- ------ ------
Total.............................................. $ (15.5) $(17.2) $(13.8)
======= ====== ======
</TABLE>
SUPPLEMENTAL PLAN
<TABLE>
<CAPTION>
1993 1992 1991
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Components of pension expense
Service cost........................................... $ 0.1 $ 0.1 $ 0.1
Interest cost.......................................... 0.7 0.7 0.7
Net amortization and deferral.......................... 0.5 0.6 0.6
------- ------ ------
Total................................................ $ 1.3 $ 1.4 $ 1.4
======= ====== ======
</TABLE>
29--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Plan assets and liabilities are measured at September 30. A reconciliation of
the funded status of the plans with amounts recorded is shown as follows:
RETIREMENT PLAN
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Plan assets at fair value, primarily invested in common stock,
and U.S. and corporate bonds.................................. $667.0 $597.5
Actuarial present value of projected benefit obligation
Accumulated benefit obligation
Vested..................................................... (540.7) (425.7)
Nonvested.................................................. (30.8) (29.3)
Provision for future salary increases........................ (43.5) (47.4)
------ ------
Excess of plan assets over projected benefit obligation........ 52.0 95.1
Unrecognized net (gain) loss................................... 31.3 (30.1)
Unrecognized prior service cost................................ 13.4 17.8
Unrecognized net transition asset being recognized ratably
through 2002.................................................. (16.1) (18.1)
------ ------
Prepaid pension asset.......................................... $ 80.6 $ 64.7
====== ======
</TABLE>
SUPPLEMENTAL PLAN
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of projected benefit obligation
Accumulated vested benefit obligation........................ $(8.6) $(7.4)
Provision for future salary increases........................ (0.6) (1.2)
------ ------
Projected benefit obligation................................... (9.2) (8.6)
Unrecognized net gain.......................................... (0.8) (1.2)
Unrecognized net transition obligation being recognized ratably
through 2003.................................................. 5.7 6.3
Adjustment required to recognize minimum liability............. (4.3) (3.9)
------ ------
Accrued pension liability...................................... $(8.6) $(7.4)
------ ------
Major assumptions (Retirement and Supplemental Plans):
Discount rate.................................................. 7.0% 8.5%
Rate of increase in compensation levels........................ 4.0% 5.5%
Expected return on market value of plan assets................. 9.75% 11.0%
====== ======
</TABLE>
29--2
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17: OTHER POSTRETIREMENT BENEFITS
In addition to the Company's defined benefit pension plans, salaried
employees who have attained age 55 and who have rendered ten years of service
are eligible for both medical benefits and life insurance coverage during
retirement. The retiree medical plan is contributory and provides benefits to
retirees, their covered dependents and beneficiaries. Retiree contributions are
adjusted annually. The plan also contains fixed deductibles, coinsurance and
out-of-pocket limitations. The life insurance plan is noncontributory and
covers retirees only.
The Company adopted SFAS No. 106 effective January 1, 1992 (see Note 18:
Change in Method of Accounting for Postretirement and Postemployment Benefits).
Components of net periodic postretirement benefit cost relating to the medical
plan and the life insurance plan were as follows:
MEDICAL PLAN
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Components of net periodic postretirement benefit cost
Service cost.................................................. $ 3.8 $ 5.4
Interest cost................................................. 15.3 18.4
Net amortization and deferral................................. (3.5) --
------ ------
Total....................................................... $ 15.6 $ 23.8
====== ======
</TABLE>
LIFE INSURANCE PLAN
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Components of net periodic postretirement benefit cost
Service cost................................................... $ 0.3 $ 0.2
Interest cost.................................................. 3.9 3.8
------ ------
Total........................................................ $ 4.2 $ 4.0
====== ======
</TABLE>
Prior to 1992, the costs of these benefits were generally recognized when
paid and for 1991 were $13.6 million.
SFP's policy is to fund benefits payable under the medical and life insurance
plans as due. The following table shows the reconciliation of the plans'
obligations to amounts accrued at December 31, 1993 and 1992. The Company uses
a September 30 measurement date.
MEDICAL PLAN
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees....................................................... $139.0 $114.4
Fully eligible active plan participants........................ 16.2 9.5
Other active plan participants................................. 80.2 57.1
------ ------
Accumulated postretirement benefit obligation.................... 235.4 181.0
------ ------
Unrecognized prior service credit................................ 42.1 45.6
Unrecognized net gain (loss)..................................... (39.7) 3.1
------ ------
Accrued postretirement liability................................. $237.8 $229.7
====== ======
</TABLE>
30
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LIFE INSURANCE PLAN
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees...................................................... $ 45.9 $ 43.6
Fully eligible active plan participants....................... 0.2 --
Other active plan participants................................ 5.1 4.3
------ ------
Accumulated postretirement benefit obligation................... 51.2 47.9
------ ------
Unrecognized net gain (loss).................................... (5.4) (1.3)
------ ------
Accrued postretirement liability................................ $ 45.8 $ 46.6
====== ======
</TABLE>
The unrecognized prior service credit will be amortized straight line over
the average future service to full eligibility of the active population.
For 1994, the assumed health care cost trend rate for managed care medical
costs is 11.5% and is assumed to decrease gradually to 5% by 2006 and remain
constant thereafter. For medical costs not in managed care, the assumed health
care cost trend rate is 14% and is assumed to decrease gradually to 5% by 2006
and remain constant thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation for the medical plan
by $36.5 million and the aggregate of the service and interest components of
net periodic postretirement benefit cost recognized in 1993 by $3.2 million. In
1993, the assumed health care cost trend rate for managed care medical costs
was 12% and was assumed to decrease gradually to 5.5% by 2006 and remain
constant thereafter. For medical costs not in managed care, the assumed health
care cost trend rate was 15% in 1993 and was assumed to decrease gradually to
6.5% by 2006 and remain constant thereafter.
The weighted-average discount rate assumed in determining the accumulated
postretirement benefit obligation was 7% and 8.5% in 1993 and 1992,
respectively. The assumed weighted-average salary increase was 4.0% and 5.5% in
1993 and 1992, respectively.
Other Plans
Under collective bargaining agreements, Santa Fe Railway participates in
multiemployer benefit plans which provide certain postretirement health care
and life insurance benefits for eligible union employees. Insurance premiums
paid attributable to retirees, which are generally expensed as incurred, were
$3.3 million, $3.5 million and $3.7 million in 1993, 1992 and 1991,
respectively.
NOTE 18: CHANGE IN METHOD OF ACCOUNTING FOR POSTRETIREMENT AND POSTEMPLOYMENT
BENEFITS
Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 106 requires that
an actuarial method be used to accrue the
30--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expected cost of postretirement health care and other benefits over employees'
years of service. SFAS No. 112 relates to benefits provided to former or
inactive employees after employment but before retirement and requires
recognition of these benefits if they are vested and payment is probable and
reasonably estimable. Prior to 1992, the cost of most postretirement and
certain postemployment benefits were expensed when paid. The cumulative effect
of this change in accounting attributable to years prior to 1992 was to
decrease 1992 net income by $163.0 million, net of the related income tax
benefit of $97.0 million. The impact of SFAS No. 106 comprises approximately
$158 million of the change. Additionally, expenses in 1992 were $14 million
higher than in 1991 as a result of the change in accounting for these costs.
NOTE 19: STOCK OPTION AND GROWTH PLANS
Under various plans, the most significant of which are the Santa Fe Pacific
Long Term Incentive Stock Plan (Long Term Plan) and the Santa Fe Pacific
Incentive Stock Compensation Plan (Incentive Compensation Plan), options have
been granted to employees to purchase common stock of SFP at a price not less
than the fair market value at the date of grant. Options are generally
exercisable no earlier than one year after the date of grant and expire ten
years after the date of grant. Under these plans, approximately 0.8 million
shares of restricted stock have been granted with the restrictions on such
shares lapsing no earlier than one year from the date of grant and upon the
attainment of certain corporate performance objectives or the completion of a
required vesting period.
A total of 10 million shares, excluding 2 million additional shares that may
be granted in exchange for shares tendered to the Company to pay for an option
exercise, and a total of 18.4 million shares may be used under the Long Term
Plan and Incentive Compensation Plan, respectively. The Long Term Plan replaced
the Incentive Compensation Plan and no new grants will be made under the
Incentive Compensation Plan. Under these plans, awards may be granted in the
form of (1) options to purchase SFP common stock; (2) shares of restricted
stock, which may be issued in combination with performance units; (3)
Performance Units; and (4) stock appreciation rights. Awards of 6.6 million
shares under the Long Term Plan and 14.6 million shares under the Incentive
Compensation Plan, of SFP common stock, net of options surrendered or
terminated, have been made in the form of options, stock appreciation rights,
and restricted stock.
31
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Approximately 4.9 million and 6.2 million of outstanding options at December
31, 1993 and 1992, respectively, were exercisable within the next year. Option
activity in all plans during 1993, 1992 and 1991 is summarized below:
<TABLE>
<CAPTION>
AVERAGE
SFP SHARES PRICE
---------- -------
<S> <C> <C>
Options outstanding at December 31, 1990..................... 15,610,892 $ 7.46
Granted...................................................... 343,700 7.22
Exercised.................................................... 2,022,221 6.21
Surrendered or terminated.................................... 2,887,071 9.20
----------
Options outstanding at December 31, 1991..................... 11,045,300 $ 7.23
Granted...................................................... 70,000 12.31
Exercised.................................................... 2,114,257 6.93
Surrendered or terminated.................................... 750,475 8.43
----------
Options outstanding at December 31, 1992..................... 8,250,568 $ 7.24
Granted...................................................... 5,814,770 17.17
Exercised.................................................... 3,284,947 7.21
Surrendered or terminated.................................... 176,544 9.91
----------
Options outstanding at December 31, 1993..................... 10,603,847 $12.65
========== ======
</TABLE>
NOTE 20: STOCKHOLDER RIGHTS PLAN AND SALE OF STOCK
In January 1991, the SFP Board of Directors voted to redeem by means of a
share distribution the rights to purchase Series A Junior Participating
Preferred Stock of SFP issued under a rights agreement. Holders of record of
the rights as of the close of business on February 15, 1991, received an amount
of SFP common stock, with a current market price equal to $0.05 per right in
March 1991. The redemption resulted in an issuance of approximately 1.3 million
shares of common stock.
In October 1991, SFP sold 4,043,039 shares of stock, and received net
proceeds of approximately $36.2 million. These shares were purchased as a
result of options which had been granted to underwriters to cover over-
allotments in conjunction with the sale of SFP stock by a significant
shareholder through a secondary offering. The shares were issued through use of
treasury stock held by the Company.
31--1
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 21: INFORMATION ON BUSINESS SEGMENTS
Identifiable assets at December 31, 1993, 1992, and 1991, and capital
expenditures and depreciation and amortization expenses for the three years
then ended, are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Identifiable assets
Rail............................................... $4,906.9 $4,603.8 $4,558.7
Gold............................................... 832.6 485.4 446.7
Pipeline........................................... 65.1 72.2 80.7
Corporate.......................................... 132.4 184.0 134.5
-------- -------- --------
Total.......................................... $5,937.0 $5,345.4 $5,220.6
======== ======== ========
Properties, plant and equipment
Rail
Track structure.................................. $2,326.8 $2,199.8 $2,202.9
Equipment........................................ 1,952.6 1,864.0 1,910.2
Other road properties............................ 1,478.9 1,337.5 1,264.6
Real estate and other............................ 127.8 122.7 116.6
-------- -------- --------
Total Rail..................................... $5,886.1 $5,524.0 $5,494.3
Gold............................................... 778.3 445.5 381.2
Corporate.......................................... -- -- 1.2
-------- -------- --------
Total.......................................... $6,664.4 $5,969.5 $5,876.7
======== ======== ========
Accumulated depreciation, depletion and
amortization
Rail
Track structure.................................. $ 558.0 $ 420.0 $ 465.5
Equipment........................................ 872.6 828.9 790.6
Other road properties............................ 140.1 279.6 278.3
Real estate and other............................ 7.0 6.8 7.0
-------- -------- --------
Total Rail..................................... $1,577.7 $1,535.3 $1,541.4
Gold............................................... 90.5 94.9 66.3
-------- -------- --------
Total.......................................... $1,668.2 $1,630.2 $1,607.7
======== ======== ========
Depreciation, depletion and amortization expense
Rail
Track structure.................................. $ 62.1 $ 60.8 $ 54.9
Equipment........................................ 92.1 89.4 93.1
Other road properties............................ 34.3 31.1 36.1
Real estate and other............................ -- -- 0.2
-------- -------- --------
Total Rail..................................... $ 188.5 $ 181.3 $ 184.3
Gold............................................... 59.4 34.8 23.7
Corporate.......................................... -- -- 0.4
-------- -------- --------
Total.......................................... $ 247.9 $ 216.1 $ 208.4
======== ======== ========
Capital expenditures
Rail............................................... $ 539.1 $ 265.5 $ 241.9
Gold............................................... 107.1 66.5 87.5
Corporate.......................................... -- -- 1.3
-------- -------- --------
Total.......................................... $ 646.2 $ 332.0 $ 330.7
======== ======== ========
</TABLE>
31--2
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22: SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1993 1992
---------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------ ------ ------ ------ ------- ------ ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $653.3 $675.0 $665.5 $732.6 $ 616.7 $605.4 $ 642.1 $632.2
Operating Income (Loss).. $105.5 $108.6 $ 65.2 $143.5 $ 96.3 $ 87.8 $(215.1) $108.6
Income (Loss)
Before Extraordinary
Charge and Accounting
Change................ $127.1 $147.5 $ (2.8) $ 67.0 $ 28.2 $ 26.5 $(165.1) $173.9
Extraordinary Charge on
Early Retirement of
Debt, Net of Income
Taxes................. -- -- -- -- -- -- -- (5.0)
Cumulative Effect of a
Change in Accounting
for Postretirement and
Postemployment Bene-
fits, Net of Income
Taxes................. -- -- -- -- (163.0) -- -- --
------ ------ ------ ------ ------- ------ ------- ------
Net Income (Loss)........ $127.1 $147.5 $ (2.8) $ 67.0 $(134.8) $ 26.5 $(165.1) $168.9
====== ====== ====== ====== ======= ====== ======= ======
Income (Loss) Per Common
Share Before Extraordi-
nary Charge and Account-
ing Change.............. $ 0.68 $ 0.79 $(0.01) $ 0.36 $ 0.15 $ 0.14 $ (0.89) $ 0.94
Extraordinary Charge..... -- -- -- -- -- -- -- (0.03)
Cumulative Effect of a
Change in Accounting.... -- -- -- -- (0.88) -- -- --
------ ------ ------ ------ ------- ------ ------- ------
Net Income (Loss) Per
Common Share............ $ 0.68 $ 0.79 $(0.01) $ 0.36 $ (0.73) $ 0.14 $ (0.89) $ 0.91
====== ====== ====== ====== ======= ====== ======= ======
</TABLE>
- --------
(1) The sum of net income (loss) per share for the four quarters of 1993 does
not equal net income (loss) per share for the full year due to incremental
shares resulting from stock options.
(2) 1993 income (loss) includes a first quarter $145.4 million pre-tax gain on
sale of California lines, a second quarter $217.5 million pre-tax gain on
the exchange of mineral assets, and a third quarter increase in income tax
expense of approximately $32 million reflecting the retroactive impact of
the increase in the federal income tax rate to 35%.
(3) 1992 income (loss) includes a third quarter $320.4 million pre-tax rail
special charge and a fourth quarter $204.9 million pre-tax gain on sale of
California lines.
NOTE 23: GOLD RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993 1992 1991 1990 1989
- ------------------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Proven and probable gold reserves (thousands of
ounces)
Contained.................................... 14,121 6,391 5,781 4,743 3,793
Portion projected recoverable................ 11,240 5,144 4,716 3,921 3,094
------ ----- ----- ----- -----
Average price received (per ounce)............. $387 $394 $410 $420 $445
Ounces produced (in thousands)................. 611 296 179 51 4
------ ----- ----- ----- -----
</TABLE>
32
<PAGE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in (i) the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-51435),
(ii) the Registration Statements on Form S-8 (Nos. 33-12072; 33-26814; 33-
33413; 33-41409; 33-60628; and 33-63208) and (iii) the Prospectus constituting
part of the Post-Effective Amendment 1-D on Form S-8 to the Registration
Statement on Form S-14 (No.2-87755) of Santa Fe Pacific Corporation of our
report dated February 4, 1994 appearing on page 19 of Exhibit 13 of this Form
10-K/A.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Kansas City, Missouri
October 5, 1994
<PAGE>
EXHIBIT 99.24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 3, 1994
----------------
SANTA FE PACIFIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
1-8627 36-3258709
(COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.)
----------------
1700 EAST GOLF ROAD, SCHAUMBURG, 60173-5860
ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(708) 995-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(NOT APPLICABLE)
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits: Included as Exhibit 99 is financial information restated to
reflect Santa Fe Pacific Corporation's gold operations as discontinued
operations. See Exhibit Index included herewith at E-1.
1
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
Santa Fe Pacific Corporation
(Registrant)
/s/ Thomas N. Hund
By: _________________________________
Thomas N. Hund
Vice President and Controller
Date: October 5, 1994
2
<PAGE>
SANTA FE PACIFIC CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
23 Consent of Independent Accountants.
99 Santa Fe Pacific Corporation financial information
restated for discontinued operations. The following
financial information is included:
2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 1
3. Consolidated Financial Statements:
Report of Independent Accountants 11
Consolidated Statement of Operations for the three
years ended December 31, 1993 12
Consolidated Balance Sheet at December 31, 1993 and
1992 13
Consolidated Statement of Cash Flows for the three
years ended December 31, 1993 14
Consolidated Statement of Shareholders' Equity for the
three years ended December 31, 1993 15
Notes to Consolidated Financial Statements 16
</TABLE>
E-1
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in (i) the Registration
Statements on Form S-8 (Nos. 33-12072; 33-26814; 33-33413; 33-41409; 33-60628;
and 33-63208), (ii) the Prospectus constituting part of the Registration
Statement on Form S-3 (No. 33-51435) and (iii) the Prospectus constituting part
of the Post-Effective Amendment 1-D on Form S-8 to the Registration Statement
on Form S-14 (No. 2-87755) of Santa Fe Pacific Corporation of our report dated
February 4, 1994, except for the retroactive restatement described in Note 2 of
the notes to consolidated financial statements, as to which the date is June
29, 1994, appearing on page 11 of Exhibit 99 of this Form 8-K/A.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Kansas City, Missouri
October 5, 1994
<PAGE>
EXHIBIT 99
CONSOLIDATED FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
REVENUE INFORMATION (In millions)
SANTA FE RAILWAY--OPERATING REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Freight Revenues
Intermodal Business Unit
Direct Marketing................................ $ 404.1 $ 345.7 $ 290.5
Intermodal Marketing Companies.................. 376.6 398.4 402.2
International................................... 196.1 168.2 150.1
-------- -------- --------
Total Intermodal Business Unit................ 976.8 912.3 842.8
-------- -------- --------
Carload Business Unit
Chemicals and Petroleum......................... 281.3 282.7 258.6
Coal............................................ 220.1 193.8 190.5
Vehicles and Parts.............................. 191.2 136.7 144.1
Whole Grain..................................... 160.6 143.4 145.8
Minerals and Ores............................... 143.1 157.0 166.0
Forest Products................................. 121.6 115.9 102.7
Consumer Products............................... 113.9 117.1 116.2
Grain Products.................................. 82.3 80.4 71.1
Primary Metals.................................. 77.6 70.3 69.8
-------- -------- --------
Total Carload Business Unit................... 1,391.7 1,297.3 1,264.8
-------- -------- --------
Total Revenue Before Adjustments.................... 2,368.5 2,209.6 2,107.6
Miscellaneous Adjustments........................... -- 3.3 5.5
-------- -------- --------
Total Freight Revenue......................... 2,368.5 2,212.9 2,113.1
Other Revenues...................................... 40.7 38.8 40.4
-------- -------- --------
Total Operating Revenues...................... $2,409.2 $2,251.7 $2,153.5
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
1993 Compared with 1992
Santa Fe Pacific Corporation ("SFP" or "Company") reported 1993 net income of
$338.8 million or $1.81 per share compared to a net loss of $104.5 million or
$0.57 per share last year. Income from continuing operations was $177.4 million
or $0.95 per share compared to $21.1 million or $0.11 in the prior year. The
increase in net income primarily relates to: (1) higher operating income of
$340.5 million at The Atchison, Topeka and Santa Fe Railway Company (Santa Fe
Railway) principally due to a $320.4 million special charge recorded in 1992 as
well as increased business levels in 1993, partially offset by the negative
impact of midwest floods in 1993; (2) lower interest expense of $31.1 million;
(3) higher income from discontinued operations partially due to an after-tax
gain of $108.3 million on the exchange of mineral assets in 1993; and (4) a
$163.0 million charge in 1992 for an accounting change. The above are partially
offset by: (1) a $59.5 million decline in pre-tax gains on the sale of rail
lines in California; and (2) the increase in the federal income tax rate from
34% to 35% during 1993.
1
<PAGE>
On June 29, 1994, SFP's Board of Directors approved the distribution of SFP's
interest in Santa Fe Pacific Gold Corporation ("SFP Gold") to SFP shareholders
(see Other Matters--Distribution of SFP Gold Subsidiary to Shareholders). As a
result, SFP Gold is reflected as a discontinued operation in the consolidated
financial statements. Income from discontinued operations, net of income taxes
was $161.4 million in 1993 compared to $42.4 million in 1992. The higher income
from discontinued operations in 1993 principally reflects an after-tax gain of
$108.3 million or $0.58 per share on an exchange of mineral assets.
Special items in 1993 include pre-tax gains of $145.4 million from the sale
of rail lines in southern California (see Other Matters--Sale of California
Lines) and $21.6 million related to the favorable outcome of arbitration and
litigation settlements. In addition, 1993 includes $12.2 million of pre-tax
expense for SFP's portion of environmental and litigation charges at Santa Fe
Pacific Pipeline Partners, L.P. ("Pipeline Partnership"), and an increase in
income tax expense of $27.7 million for the retroactive effect from the date of
enactment of the increase in the federal income tax rate from 34% to 35%.
Special items in 1992 include a pre-tax gain of $204.9 million from the sale
of rail lines in southern California (see Other Matters--Sale of California
Lines). Additionally, 1992 included pre-tax special charges of $320.4 million
at Santa Fe Railway principally related to a new labor agreement, operations
centralization and increased environmental accruals (See Other Matters--
Contingencies and Other Matters--Rail Restructuring) and $4.5 million for SFP's
portion of environmental charges at the Pipeline Partnership. Also, a charge of
$163.0 million after taxes was recorded for the adoption of Statement of
Financial Accounting Standards ("SFAS") No.'s 106 and 112, on accounting for
postretirement and postemployment benefits other than pensions. This charge
represented the cumulative effect of the new principle on years prior to 1992.
Finally, an extraordinary charge of $5.0 million after taxes was recorded on
early extinguishment of debt.
Excluding discontinued operations and special items in both years, SFP's 1993
net income was approximately $114.5 million or $0.61 per share compared to
$96.4 million or $0.52 per share in 1992. The improved results are due to
higher operating income at Santa Fe Railway, higher equity income from SFP's
investment in the Pipeline Partnership and lower interest expense, partially
offset by reduced other income (expense)--net.
Santa Fe Railway
Operating income was $317.7 million and represents an increase of $340.5
million over the $22.8 million operating loss reported in 1992. The increase is
the result of the $320.4 million special charge in 1992 discussed above, as
well as continued growth in revenues despite an estimated $40 million in lost
revenues due to midwest flooding, and increased efficiencies related to
operations, partially offset by increased expenses from higher traffic volumes
and from flooding in the midwest. Operating income in 1993 increased 7%
compared to 1992 excluding the special charge, while the operating ratio of
86.8% was even with adjusted 1992.
Operating revenues increased by $157.5 million or 7% in 1993 reflecting a 7%
increase in carloadings while average revenue per car remained constant. The
volume increase occurred despite the midwest flooding.
Intermodal Business Unit ("IBU") revenues increased by 7% to $976.8 million
primarily due to a 6% increase in carloadings. Continued growth of Santa Fe
Railway's alliance with J.B. Hunt was the principal factor for the 17% increase
in direct marketing revenues. International revenues improved by 17% reflecting
both continued growth in shipments from existing customers and new contracts.
Intermodal Marketing Companies' revenue declined 5% due to lower volumes. The
average IBU revenue per car increased 1% principally reflecting a shift in mix
to higher rated direct marketing traffic.
Carload Business Unit ("CBU") revenues increased by 7% to $1,391.7 million as
carloadings increased 8% while average revenue per car declined slightly.
Vehicles and parts revenues increased by $54.5 million to $191.2 million due
principally to new business related to a long-term automotive contract with
General Motors in the Arizona and southern California corridors which began in
December 1992. Coal revenues increased 14% to $220.1 million and include
traffic related to Wisconsin Electric Power's long-term purchase
2
<PAGE>
agreement with the Pittsburg & Midway Coal Mine located near Raton, New Mexico
which began in the third quarter of 1992. Whole grain revenues increased 12% to
$160.6 million reflecting both higher volumes due to a rise in export shipments
and higher average revenue per car due to longer haul shipments and rate
increases. Primary metals revenues of $77.6 million were $7.3 million higher
principally due to an increase in steel shipments along the west coast. Forest
products revenues rose 5% to $121.6 million due to favorable average revenue
per car reflecting a shift in mix to higher rated lumber products shipments.
Minerals and ores revenues declined 9% to $143.1 million due to sluggish
international markets and foreign competition in the sulphur and potash
industries.
Operating expenses of $2,091.5 million decreased by $183.0 million from 1992,
which included the $320.4 million special charge discussed above. Compensation
and benefits expense rose slightly as higher traffic levels and cost
escalations were offset by increased efficiencies, which include the effect of
a crew consist agreement reached in September 1992 with the United
Transportation Union reducing crew sizes on the eastern half of the railroad.
Revenue ton miles per average employee improved by 8% reflecting efficiencies
and volume growth. Fuel expense of $239.1 million rose $33.6 million reflecting
a 9% increase in consumption and a 7% higher price. The increase in consumption
reflects the higher traffic volumes as well as additional consumption
associated with flood-related train detours. The higher fuel price includes a
4.3 cent increase in federal tax on fuel which became effective October 1,
1993. Equipment rents expense increased by $43.4 million to $229.4 million due
to the higher traffic volume, the lease of equipment for new business and
additional expenses associated with flood-related train detours. Other expenses
rose by $51.6 million to $507.1 million due to the higher volume levels
including ramping/deramping and drayage costs for IBU shipments, and various
other contract service costs. Operating expenses increased by $137.4 million
excluding the 1992 special charge.
Equity in Earnings of Pipeline Partnership
SFP's investment in the Pipeline Partnership produced equity income of $18.6
million including the $12.2 million special litigation and environmental
charge, a decrease of $5.5 million compared to 1992 which included a $4.5
million special environmental charge. The Pipeline Partnership's revenues
increased 7% principally reflecting a 3% volume increase and 4% increase in
average revenue per barrel. Operating expenses at the Pipeline Partnership
increased by $27.6 million due to a $17.0 million increase in special charges
and higher major maintenance and administrative expenses. Excluding special
items in both years, SFP's equity investment in the Pipeline Partnership
produced income of $30.8 million in 1993 compared to $28.6 million in 1992.
Interest Expense/Other Income (Expense)--Net
Interest expense declined by $31.1 million or 19% due principally to lower
outstanding debt as well as favorable variable interest rates. Other income
(expense)--net increased by $6.1 million to $5.8 million reflecting $21.6
million related to favorable outcome of arbitration and litigation settlements,
partially offset by lower interest income and reduced income from real estate
activities.
Income Taxes
Income tax expense in 1993 includes an increase of approximately $27.7
million which reflects the retroactive impact of the increase in the federal
tax rate from 34% to 35% from the date of enactment of the Omnibus Budget
Reconciliation Act of 1993, signed into law on August 10, 1993. A majority of
this increase relates to additional tax expense related to temporary
differences at January 1, 1993. SFAS No. 109--"Accounting for Income Taxes"
requires deferred taxes to be provided using enacted tax rates in effect during
the years in which the differences are expected to reverse.
Discontinued Operations
Income from discontinued operations, net of income taxes increased $119.0
million due to an after-tax gain of $108.3 million related to the exchange of
assets with Hanson Natural Resources Company ("Hanson") and higher operating
income from gold. Ounces sold doubled to 591,000 in 1993, which reflects
increased
3
<PAGE>
sales from existing mines as well as production in the second half of the year
from mines received in the exchange of assets with Hanson. Operating income
from coal and aggregate operations declined by approximately $14 million as
1993 included only six months of operations due to the exchange of these assets
with Hanson.
1992 Compared with 1991
SFP had a 1992 net loss of $104.5 million or $0.57 per share compared to 1991
net income of $96.4 million or $0.54 per share. Income from continuing
operations was $21.1 million or $0.11 per share compared to $62.4 million or
$0.35 in 1991. The decrease in net income primarily relates to: (1) lower
operating income of $278.2 million which includes a $320.4 million special
charge recorded in 1992, partially offset by higher business levels; (2) lower
other income-net of $25.8 million; and (3) a $163.0 million charge for an
accounting change in 1992. The above are partially offset by: (1) a $204.9
million pre-tax gain on the sale of rail lines in California in 1992; (2) lower
interest expense of $44.4 million; and (3) higher income from discontinued
operations.
Excluding the special items in 1992 discussed previously, net income from
continuing operations for 1992 was $96.4 million or $0.52 per share compared to
net income from continuing operations of $62.4 million or $0.35 per share in
1991. This improvement in adjusted 1992 income from continuing operations is
due to higher operating income at Santa Fe Railway and lower interest expense,
partially offset by lower other income (expense)--net.
Santa Fe Railway
Operating loss was $22.8 million and represents a decrease of $278.2 million
compared to operating income of $255.4 million reported in 1991. This decrease
was principally due to the 1992 special charge, partially offset by higher
business levels and increased operating efficiencies. Excluding the special
charge, operating income in 1992 increased 17% compared to 1991 while the
operating ratio as adjusted, improved from 88.1% in 1991 to 86.8% in 1992.
Operating revenues increased by $98.2 million or 5% in 1992 due to a 6%
increase in carloadings partially offset by a 1% decrease in the average
revenue per car.
IBU revenues increased by 8% to $912.3 million as carloadings were up 11%
while average revenue per car declined by 3%. Growth of J.B. Hunt shipments was
the principal factor for the 19% increase in direct marketing revenues.
International revenues improved by 12% principally reflecting continued growth
in shipments from existing customers. The average revenue per car declined due
to a shift in traffic mix, reflecting growth in international container
shipments which move at lower average rates, as well as competitive pressures
within all IBU segments.
CBU revenues increased by 3% to $1,297.3 million as carloadings increased 3%
while average revenue per car remained relatively constant. Chemicals and
petroleum revenues increased by 9% to $282.7 million due largely to increased
shipments of plastics and agricultural and industrial chemicals. Forest
products revenues increased by 13% to $115.9 million due to both favorable
volume and average revenue per car including a rebound in the housing market
which resulted in increased shipments of lumber and other forest products.
Grain products revenues of $80.4 million increased by $9.3 million reflecting
increased shipments of corn syrup, soybean meal and tapioca. The average
revenue per car within grain products was higher reflecting in part increases
in rates on export flour traffic. Minerals and ores revenues declined 5% to
$157.0 million as competitive pressures depressed sulphur and potash rates.
Vehicles and parts revenues decreased by $7.4 million to $136.7 million
principally reflecting declines in long haul traffic which caused the average
revenue per car to decline by 7%.
Operating expenses increased by $376.4 million to $2,274.5 million, and
includes the $320.4 million special charge. Compensation and benefits expense
increased 2% reflecting increased levels of traffic and cost escalations.
Average employees for the year declined 4% to 14,218 partially due to a new
labor agreement
4
<PAGE>
with train crew personnel, and revenue ton miles per average employee increased
by 11% reflecting improved efficiency and volume growth. Fuel expense of $205.5
million declined by $1.2 million principally reflecting a 3% decline in price.
Fuel consumption increased only 2% despite the 6% increase in traffic volume,
due to the lease of 90 new, fuel efficient locomotives in 1992 as well as other
conservation efforts. Equipment rents expense increased by $23.8 million to
$186.0 million due to the higher traffic volume as well as the lease of
locomotives. Materials and supplies expense declined by 6% to $127.5 million
principally reflecting reduced equipment maintenance. Other expenses increased
by $27.6 million to $455.5 million largely reflecting volume related increases
including ramping/deramping and drayage costs for IBU shipments. Operating
expenses increased by $56.0 million excluding the special charge.
Equity in Earnings of Pipeline Partnership
SFP's investment in the Pipeline Partnership produced equity income of $24.1
million including the $4.5 million special environmental charge. This was a
decrease of $3.0 million compared to 1991. The Pipeline Partnership's revenues
increased 6% principally reflecting an increase in average revenue per barrel.
Operating expenses at the Pipeline Partnership increased by $16.0 million due
to a $10.0 million special environmental charge and higher depreciation and
facility costs. Excluding the special item in 1992, SFP's equity investment in
the Pipeline Partnership produced operating income of $28.6 million in 1992
compared to $27.1 million in 1991.
Interest Expense/Other Income (Expense)--Net
Interest expense declined by $44.4 million or 21% due to both lower
outstanding debt and favorable variable interest rates. Other income
(expense)--net declined by $25.8 million reflecting reduced income from real
estate activities at Santa Fe Railway and lower interest income.
Discontinued Operations
Income from discontinued operations, net of income taxes increased by 25% to
$42.4 million. Higher operating income from gold was partially offset by lower
operating income from coal and increased exploration and development costs.
Operating income from gold increased by approximately $19 million principally
reflecting an 80% increase in sales to 295,000 ounces. Operating income from
coal declined by $2.9 million due to a 19% decline in sales partially offset by
a 12% increase in price. Both are principally the result of reduced spot market
sales.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities from continuing operations is generally
SFP's primary source of liquidity and for the year ended December 31, 1993 was
$296.1 million. It primarily consists of net earnings before depreciation and
deferred taxes, reduced by restructuring payments, which include employee
severance, relocation costs and other labor related payments. During 1993,
additional cash of $247.6 million was provided by the sale of assets at Santa
Fe Railway, including $226.9 million from the sale of lines in southern
California (see Other Matters--Sale of California Lines). In addition, $72.5
million was received as principal payments on a note receivable. Capital
expenditures during 1993, including non-cash capital expenditures of $157.6
million primarily for directly financed equipment acquisitions and reimbursed
projects at Santa Fe Railway, totaled $539.1 million. Capital expenditures in
1993 were significantly higher than in 1992 due to increased spending on rail
expansion projects and facilities which include the Alliance, Texas intermodal
and carload transportation center and the Willow Springs, Illinois intermodal
facility, and improvements to track structure. Additionally, 1993 capital
expenditures reflect the purchase of 85 new locomotives valued at approximately
$100 million, while in 1992, 90 new locomotives with a fair market value in
excess of $100 million were acquired through an operating lease. Cash
expenditures were primarily funded through cash generated from continuing
operations. Principal payments on long term borrowings during 1993 were $242.6
million.
5
<PAGE>
For the year ended December 31, 1992, cash provided by operating activities
from continuing operations was $250.6 million. Additionally, cash of $319.0
million was provided by the sale of assets at Santa Fe Railway, including
$255.0 million from the sale of lines in southern California. In addition,
$72.5 million was received as principal payments on a note receivable. Capital
expenditures during 1992, including non-cash capital expenditures of $9.5
million, totaled $265.5 million and were used for equipment and improvements to
track structure and facilities at Santa Fe Railway. The expenditures were
primarily funded through cash generated from continuing operations. Principal
payments on long term borrowings during 1992 were $407.5 million, including
$201.0 million of proceeds from the sale of lines in southern California used
to retire debt.
During the year ended December 31, 1991, cash provided by operating
activities from continuing operations was $196.8 million. Additional cash of
$90.5 million was provided through the sale of assets, principally branch lines
and real estate at Santa Fe Railway. Also, $36.3 million was received as a
principal payment on a note receivable and proceeds of $36.2 million were
received from the sale of SFP stock. Capital expenditures in 1991, including
non-cash capital expenditures of $35.2 million primarily related to directly
financed equipment acquisitions at Santa Fe Railway, totaled $243.2 million and
were primarily used for equipment and improvements to track structure at Santa
Fe Railway. The expenditures were primarily funded through the cash generated
from continuing operations, equipment financings and other sources. Principal
payments on long-term borrowings during 1991 were $132.2 million.
Management anticipates that it will fund payment of current obligations from
continuing operations in 1994 through internally generated funds. Current
obligations include principal payments on long term debt as well as commitments
related to operating leases, maintenance agreements for locomotives and minimum
payments under haulage agreements with other railroads (see Note 13: Leases and
Other Commitments). Capital expenditures in 1994 are anticipated to approximate
$650 million, including non-cash capital expenditures of approximately $200
million primarily for directly financed equipment acquisitions and reimbursed
projects. The remaining expenditures will be funded through the use of
internally generated funds as well as various financings. In addition, Santa Fe
Railway's agreement to sell accounts receivable expires in December 1994 (see
Note 8: Sales of Accounts Receivable). At December 31, 1993, $225 million was
outstanding under the agreement. It is the Company's intention to replace or
extend this agreement with a similar facility prior to the December 1994
expiration. In addition, in December 1993, the Company filed a shelf
registration statement with the Securities and Exchange Commission ("SEC"), for
the issuance of up to $250 million in debt securities, none of which had been
issued as of December 31, 1993.
At present, the payment of external and intercompany dividends are limited in
amount by certain debt covenants of the Company. At December 31, 1993 no
payment of external dividends was allowed.
Inflation
Because of the capital intensive nature of SFP's businesses and because
depreciation is based on historical cost, the full effect of inflation is not
reflected in operating expenses. An assumption that all operating assets were
replaced at current price levels would result in depreciation charges
substantially greater than historically reported amounts.
OTHER MATTERS
Distribution of SFP Gold Subsidiary to Shareholders
On June 15, 1994, SFP Gold's, SFP's gold subsidiary, registration statement
for the initial public offering of 14.6% of its common stock became effective.
Approximately 19 million shares were sold at a price of $14 per share. On June
29, 1994, SFP's Board of Directors approved the distribution to SFP
shareholders of its remaining 85.4% interest in SFP Gold. As a result, SFP Gold
will become a separate, independent entity effective September 30, 1994.
Holders of record of SFP common stock as of September 12, 1994, will receive
6
<PAGE>
a distribution of one share of common stock of SFP Gold for every approximately
1.7 shares of SFP common stock held. Under a ruling obtained from the Internal
Revenue Service, the distributions are tax-free to SFP shareholders. The
consolidated financial statements and notes have been retroactively restated to
present SFP Gold as a discontinued operation.
Sale of California Lines
In November 1992, Santa Fe Railway announced that it and eight southern
California transportation agencies had reached definitive agreements for the
sale to the agencies of certain interests in approximately 340 miles of rail
lines and additional property, for cash and relief of obligations to reimburse
certain state and county agencies for capital improvements previously paid for
by the agencies and the State of California. Santa Fe Railway retained all
rights necessary for its freight operations in southern California. The
transportation agencies anticipate using these facilities for commuter lines.
The sale encompassed three separate closings which occurred in December 1992
and March and June of 1993. Cash proceeds of $226.9 million in 1993 and $255.0
million in 1992 were received resulting in pre-tax gains of $145.4 million and
$204.9 million in 1993 and 1992, respectively (see Note 3: Gain on Sale of
California Lines). A substantial portion of the net proceeds in both years were
used to reduce outstanding debt, including $126.0 million of debt related to
discontinued operations. Both of the gains recognized are net of the cost of
the properties, and other expenses of sale. Additionally, the 1993 gain is net
of an obligation retained by Santa Fe Railway which under certain conditions,
requires Santa Fe Railway to repurchase a portion of the properties sold for
$50 million.
Contingencies
The Company is subject to extensive regulation under federal, state, and
local environmental laws concerning, among other things, discharges to waters,
air emissions, toxic substances, and the generation, handling, storage,
transportation, and disposal of waste and hazardous materials. These laws and
regulations have the effect of increasing the cost and liabilities associated
with the conduct of operations. Environmental risks are also inherent in
railroad operations which frequently involve the transportation of chemicals
and other hazardous materials.
Santa Fe Railway expects it will become subject to new requirements
regulating air emissions from diesel locomotives that may increase its
operating costs in the future. By 1995, the United States Environmental
Protection Agency must issue regulations applicable to new locomotive engines.
Locomotive engines (other than new locomotive engines) may be regulated by
states based on standards and procedures which the State of California
ultimately adopts. The California standards are currently in the process of
being developed.
In addition, because many of SFP's land holdings are and have been used for
industrial or transportation related purposes or leased to commercial or
industrial companies whose activities may have resulted in discharges onto the
property, the Company is now subject and will from time to time continue to be
subject to environmental clean-up and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, generally imposes joint and
several liability for clean-up and enforcement costs, without regard to fault
or the legality of the original conduct, on current and predecessor owners and
operators of a site. Accordingly, SFP may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to clean up sites at
which certain substances may have been released by the Company, its current
lessees, predecessor owners or lessees of properties, or other third parties.
At December 31, 1993, SFP had been named a potentially responsible party
(PRP) at 6 sites on the Environmental Protection Agency's (EPA) National
Priorities List (NPL). Additionally, SFP is potentially liable for the cost of
clean-up at other sites identified by the EPA and other agencies. Finally, SFP
has
7
<PAGE>
identified sites where costs exist for environmental clean-up and monitoring
(including where no claim has been asserted), and no agency is currently
involved. There are approximately 125 known environmental sites at December 31,
1993 which include, among other things; closed facilities including diesel
locomotive repair shops, tie treating plants, fueling facilities and
underground storage tanks; property leased or sold to others and current
operating sites.
Estimates of the Company's ultimate liabilities associated with Superfund and
other environmental sites are difficult to predict with certainty due to, among
other factors, the number of parties involved, possible remediation
alternatives, lengthy time frames, evolving environmental laws and regulations,
and potential recoveries from third parties. Environmental costs include
initial site surveys and environmental studies of potentially contaminated
sites, costs for remediation and restoration of sites determined to be
contaminated, as well as post-closure and ongoing monitoring costs. The Company
has not included any reduction in costs for anticipated recovery from
insurance. Estimated costs at sites where SFP is a PRP are generally based on
cost sharing agreements which vary from site to site, after consideration of
the financial condition of other PRP's. These costs are typically allocated
based on volume of material contributed, the portion of the total site owned or
operated by each PRP, and/or the amount of time the site was owned or operated.
During 1992, management completed an internal assessment of Santa Fe
Railway's environmental liabilities, including a site-by-site analysis of
properties with potentially significant environmental exposure. As a result of
this review and analysis it was determined that an additional accrual of $67
million was appropriate to provide for future costs of this nature which was
recorded in the third quarter of 1992 as part of a rail special charge. In
addition, the Company monitors, on a regular basis, accruals for environmental
sites which have been identified, based on additional information developed in
subsequent periods. The additional information is based on a combination of
factors including independent consulting reports, site visits, legal reviews
and historical trend analysis.
Payments recorded against environmental liabilities totaled $13.5 million,
$6.3 million and $7.1 million for the years ended December 31, 1993, 1992 and
1991, respectively. The majority of these payments related to mandatory clean-
up efforts. Capital expenditures related to environmental sites were
insignificant during this three year period. At December 31, 1993 and December
31, 1992 the Company had accrued liabilities for environmental costs of
approximately $125 million and $121 million, respectively. The Company
anticipates that approximately 75% of the accrued costs at December 31, 1993
will be paid over the next five years, with approximately $25 million of
payments occurring in 1994. It is the opinion of SFP management that none of
the above items, when finally resolved, will have a material adverse effect on
the annual results of operations, financial position or liquidity of SFP,
although an adverse resolution of a number of these items in a single year
could have a material adverse effect on the results of operations for that
year.
SFP is also a party to a number of other legal actions and claims, including
employee injury claims, various governmental proceedings and private civil
suits, arising in the ordinary course of business. While the final outcome of
these other legal actions cannot be predicted with certainty, considering among
other things, the meritorious legal defenses available, it is the opinion of
SFP management that none of these claims, when finally resolved, will have a
material adverse effect on the annual results of operations, financial position
or liquidity of SFP, although an adverse resolution of a number of these items
in a single year could have a material adverse effect on the results of
operations for that year.
Rail Restructuring
During the third quarter of 1992, Santa Fe Railway recorded a $253 million
pre-tax charge primarily for costs of a crew consist agreement on the eastern
half of the railroad and for centralization of certain transportation
functions.
The eastern lines crew consist agreement comprised $149 million of the
charge. The 1992 agreement is an update to a 1990 crew consist agreement. The
1992 agreement provides for further reductions in average crew sizes on through
freight trains and elimination of productivity payments which were required
when reduced crews were used. The 1992 eastern lines agreement, when combined
with a similar agreement reached earlier with trainmen on the other half of the
system, provides for through trains generally to operate with two person crews.
8
<PAGE>
Estimated operating expense savings resulting from the eastern lines
agreement was approximately $25 million annually beginning in 1993. The
agreement covers approximately 2,000 employees. Costs of the agreement which
are provided for in the charge relate to a signing bonus of $10,000 per
employee, the present value of a $65,000 deferred benefit per employee payable
upon separation or retirement and the present value of reserve board costs.
Reserve board costs represent wages paid to employees rendered excess due to
reduced crews. When on reserve board status, employees are removed from active
service and receive a percentage of their normal wages. Eastern line reserve
boards initially contained approximately 500 members and will decline over time
through attrition and other factors.
The charge also included $73 million related to centralization. In 1992,
Santa Fe Railway decided to centralize many operating support functions.
Centralization activities began in late 1992 and by the fall of 1993, Railway
had centralized train dispatching, crew planning and fleet management in
Schaumburg, Illinois; crew management, customer service and mechanical
(equipment) administration in Topeka, Kansas; and other administrative and
operating support functions in Kansas City, Kansas. Annual savings resulting
from centralized functions are expected to be approximately $20 million, most
of which will be reflected annually beginning in 1994. Cost of centralization
included in the $73 million charge relates to approximately 700 relocations,
reductions of 600 administrative and clerical positions, and abandonment of
facilities. Most of the costs of centralization had been paid by December 31,
1993.
Additionally, the charge includes approximately $31 million for other cost
saving initiatives including an adjustment of accruals established for other
operating craft labor agreements reached in prior periods.
At December 31, 1993, the balance of the restructuring liability was $315.6
million. The majority of the balance represents future deferred benefit and
reserve board payments related to the 1992 eastern lines agreement and similar
agreements reached in and accrued for in prior years. Restructuring costs paid
were $80.9 million in 1993, $118.9 million in 1992 and $104.5 million in 1991.
In 1994, the Company expects payments of approximately $60 million. Future
payments will decline over time; however, certain separation benefits will not
be paid until employee retirement. Santa Fe Railway has obtained letters of
credit of approximately $18 million supporting certain of its obligations under
labor agreement.
Hedging Activities
The Company enters into various commodity swap and collar transactions to
manage exposure against fluctuations in diesel fuel prices. The Company's fuel
hedging transactions are based upon commodities that are established in the
futures markets. The prices of these commodities have historically shown a high
degree of correlation with the Company's diesel fuel prices. Cash settlements
on contracts to hedge fuel prices are made at the end of a quarter and the
related gain or loss is included in fuel expense for that quarter. To the
extent the Company hedges portions of its fuel purchases, it may not fully
participate in decreases in fuel prices. At December 31, 1993, the Company had
entered into various agreements with several counterparties covering
approximately 260 million gallons which is anticipated to cover approximately
two-thirds of 1994 fuel purchases. Through swap arrangements the Company has
hedged approximately 205 million gallons at an average price of 48 cents.
Additionally, approximately 55 million gallons have been hedged through collar
arrangements which allow the price to float between average floor and ceiling
prices of 46 cents and 51 cents, respectively. These prices do not include
taxes, fuel handling costs and any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of the Company's
diesel fuel. The effects of the Company's fuel hedges was to increase operating
expense by $12.4 million in 1993 and to reduce operating expense by $0.9 million
and $5.6 million in 1992 and 1991, respectively.
From time to time, the Company enters into various interest rate hedging
transactions for various purposes, including managing exposure to fluctuations
in interest rates or establishing rates in anticipation of future debt
issuance. At December 31, 1993, the Company had entered into four related
interest rate swap transactions for a total notional principal amount of $100
million, for the purpose of establishing rates in anticipation of an expected
future debt offering. These swap transactions call for the payment of a fixed
interest rate of 6.2%, which was based upon ten year treasury notes, and the
receipt of a variable interest
9
<PAGE>
rate which was 3.5% at December 31, 1993. At the time of the borrowing, which
is also expected to have a term of ten years, the swap will be closed out and
any gain or loss relating to the terminated interest rate swap will be
amortized as an adjustment to interest expense over the term of the borrowing.
The Company monitors its positions and the credit ratings of its
counterparties and does not currently anticipate losses due to counterparty
non-performance. The fair market value of the Company's fuel hedging
transactions at December 31, 1993 were unrealized losses of $9.2 million for
swap arrangements and $2.4 million for collar arrangements. The fair market
value of the Company's interest hedging transactions at December 31, 1993 was
not significant.
COMMON STOCK MARKET PRICES AND DIVIDENDS
Santa Fe Pacific Corporation common stock is traded on the New York, Chicago
and Pacific Stock Exchanges. The quarterly price range per share for the years
1993 and 1992 is as follows:
<TABLE>
<CAPTION>
1993 1992
--------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter............................. $15 5/8 $12 3/4 $14 1/8 $11 1/8
Second Quarter............................ $18 3/8 $14 1/2 $13 3/8 $11
Third Quarter............................. $19 1/8 $16 3/4 $12 7/8 $10 7/8
Fourth Quarter............................ $22 1/2 $18 $13 7/8 $10 5/8
</TABLE>
SFP paid a cash dividend of $0.10 per share in both 1993 and 1992.
As of January 31, 1994, there were approximately 75,000 holders of record of
SFP common stock.
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders, Chairman and Board of Directors
of Santa Fe Pacific Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders'
equity present fairly, in all material respects, the financial position of
Santa Fe Pacific Corporation and subsidiary companies at December 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Note 17 to the consolidated financial statements includes a description of a
change in the method of accounting for postretirement and postemployment
benefits other than pensions effective January 1, 1992.
As discussed in Note 2 to the consolidated financial statements, on June 29,
1994 Santa Fe Pacific Corporation's Board of Directors declared a special
dividend to holders of its common stock consisting of interests in its
subsidiary Santa Fe Pacific Gold Corporation. The consolidated financial
statements have been retroactively restated to present the subsidiary as a
discontinued operation.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Kansas City, Missouri February 4, 1994, except for the retroactive restatement
described in Note 2 of the notes to consolidated financial statements, as to
which the date is June 29, 1994.
11
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- --------
(IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Operating Revenues................................. $2,409.2 $2,251.7 $2,153.5
-------- -------- --------
Operating Expenses
Compensation and benefits........................ 799.8 798.8 781.8
Fuel............................................. 239.1 205.5 206.7
Equipment rents.................................. 229.4 186.0 162.2
Depreciation and amortization.................... 188.4 180.8 184.3
Materials and supplies........................... 127.7 127.5 135.2
Other............................................ 507.1 455.5 427.9
Rail special charge.............................. -- 320.4 --
-------- -------- --------
Total Operating Expenses....................... 2,091.5 2,274.5 1,898.1
-------- -------- --------
Operating Income (Loss)............................ 317.7 (22.8) 255.4
Equity in Earnings of Pipeline Partnership......... 18.6 24.1 27.1
Interest Expense................................... 133.4 164.5 208.9
Gain on Sale of California Lines................... 145.4 204.9 --
Other Income (Expense)--Net........................ 5.8 (0.3) 25.5
-------- -------- --------
Income From Continuing Operations Before Income
Taxes............................................. 354.1 41.4 99.1
Income Taxes....................................... 176.7 20.3 36.7
-------- -------- --------
Income from Continuing Operations.................. 177.4 21.1 62.4
Income from Discontinued Operations, Net of Income
Taxes............................................. 161.4 42.4 34.0
Extraordinary Charge on Early Retirement of Debt,
Net of Income Taxes............................... -- (5.0) --
Cumulative Effect of a Change in Accounting for
Postretirement and Postemployment Benefits, Net of
Income Taxes...................................... -- (163.0) --
-------- -------- --------
Net Income (Loss).............................. $ 338.8 $ (104.5) $ 96.4
======== ======== ========
Income (Loss) Per Share of Common Stock
Continuing Operations............................ $ 0.95 $ 0.11 $ 0.35
Discontinued Operations.......................... 0.86 0.23 0.19
Extraordinary Charge............................. -- (0.03) --
Cumulative Effect of a Change in Accounting...... -- (0.88) --
-------- -------- --------
Net Income (Loss).............................. $ 1.81 $ (0.57) $ 0.54
======== ======== ========
Average Number of Common and Common Equivalent
Shares............................................ 187.2 184.8 178.0
======== ======== ========
</TABLE>
(See notes to consolidated financial statements)
12
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1992
-------- --------
(IN MILLIONS)
ASSETS
------
<S> <C> <C>
Current Assets
Cash and cash equivalents, at cost which approximates
market.................................................. $ 70.3 $ 62.1
Accounts receivable, less allowances..................... 96.1 83.9
Materials and supplies................................... 92.3 87.7
Note receivable--current................................. 72.5 72.5
Current portion of deferred income taxes................. 99.3 103.9
Other.................................................... 27.2 19.4
-------- --------
Total current assets................................... 457.7 429.5
-------- --------
Note Receivable............................................ 36.2 108.7
Other Long-Term Assets..................................... 323.3 342.8
-------- --------
Properties, Plant and Equipment............................ 5,886.1 5,524.0
Less-accumulated depreciation and amortization............. 1,577.7 1,535.3
-------- --------
Net properties............................................. 4,308.4 3,988.7
-------- --------
Net Assets of Discontinued Operations...................... 248.4 76.7
-------- --------
Total Assets........................................... $5,374.0 $4,946.4
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable and accrued liabilities................. $ 669.8 $ 696.3
Long-term debt due within one year....................... 184.7 187.1
-------- --------
Total current liabilities.............................. 854.5 883.4
-------- --------
Long-Term Debt Due After One Year.......................... 991.1 1,119.6
Postretirement Benefits Liability.......................... 284.7 279.1
Rail Restructuring Liability............................... 257.8 254.6
Other Long-Term Liabilities................................ 601.7 553.6
Deferred Income Taxes...................................... 1,115.9 927.6
-------- --------
Total Liabilities...................................... 4,105.7 4,017.9
-------- --------
Commitments and Contingencies (See Note 13 and Note 14)
Shareholders' Equity
Common stock, $1 par value, shares authorized, 600.0
million; 1993 shares issued
and outstanding, 190.0 million and 185.6 million; 1992
shares issued and outstanding, 190.0 million and 181.8
million................................................. 190.0 190.0
Paid-in capital.......................................... 869.7 966.7
Retained income.......................................... 340.3 19.9
Treasury stock, at cost.................................. (131.7) (248.1)
-------- --------
Total shareholders' equity............................. 1,268.3 928.5
-------- --------
Total Liabilities and Shareholders' Equity............. $5,374.0 $4,946.4
======== ========
</TABLE>
(See notes to consolidated financial statements)
13
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Operating Activities
Net income (loss)................................ $ 338.8 $ (104.5) $ 96.4
Adjustments to reconcile net income (loss) to
operating cash flows:
Income from discontinued operations, net of
income taxes.................................. (161.4) (42.4) (34.0)
Depreciation and amortization.................. 188.4 180.8 184.3
Deferred income taxes.......................... 139.0 53.0 16.1
Cumulative effect of a change in accounting for
postretirement and postemployment benefits,
net of income taxes........................... -- 163.0 --
Rail special charge............................ -- 320.4 --
Rail restructuring costs paid.................. (80.9) (118.9) (104.5)
Imputed interest expense....................... 26.6 23.3 23.8
Gain on sales of property, plant and equipment. (156.0) (218.7) (36.9)
Other--net..................................... (22.4) (20.0) 17.6
Changes in Working Capital:
Accounts receivable.......................... (25.3) (7.5) (0.4)
Materials and supplies....................... (3.6) (11.2) 0.5
Accounts payable and accrued liabilities..... 51.6 40.0 60.5
Short term investments and other current
assets...................................... 1.3 (6.7) (26.6)
------- -------- -------
Net Cash Provided By Operating Activities--
Continuing Operations......................... 296.1 250.6 196.8
Discontinued Operations--Net................... 67.7 79.0 19.7
------- -------- -------
Net Cash Provided By Operating Activities...... 363.8 329.6 216.5
------- -------- -------
Investing Activities
Cash used for capital expenditures............... (381.5) (256.0) (208.0)
Proceeds from the sale of property, plant and
equipment....................................... 247.6 319.0 90.5
Other--net....................................... 70.3 43.8 58.0
Discontinued Operations--Net..................... (99.8) (68.2) (87.8)
------- -------- -------
Net Cash Provided By (Used For) Investing
Activities.................................... (163.4) 38.6 (147.3)
------- -------- -------
Financing Activities
Proceeds from long-term borrowings............... 6.5 -- 9.0
Principal payments on long-term borrowings....... (242.6) (407.5) (132.2)
Proceeds from sale of stock...................... -- -- 36.2
Cash dividends paid.............................. (18.5) (18.2) (17.9)
Other--net....................................... 20.7 16.0 11.8
Discontinued Operations--Net..................... 41.7 (4.6) 73.3
------- -------- -------
Net Cash Used For Financing Activities......... (192.2) (414.3) (19.8)
------- -------- -------
Increase (Decrease) In Cash and Cash Equivalents... 8.2 (46.1) 49.4
Cash and Cash Equivalents:
Beginning of year.................................. 62.1 108.2 58.8
------- -------- -------
End of year........................................ $ 70.3 $ 62.1 $ 108.2
======= ======== =======
</TABLE>
(See notes to consolidated financial statements)
14
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES
OF SHARES OF
COMMON TREASURY COMMON TREASURY PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL INCOME
------- --------- ------ -------- -------- --------
(SHARES IN THOUSANDS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1990. 190,021 17,051 $190.0 $(516.9) $1,166.1 $ 72.5
1991 net income........... -- -- -- -- -- 96.4
Dividends declared........ -- -- -- -- -- (17.9)
Sale of common stock...... -- (4,043) -- 122.4 (86.2) --
Exercise of stock options. -- (1,511) -- 45.8 (35.9) --
Stockholder rights
redemption............... -- (1,311) -- 39.8 (31.2) (8.4)
Other..................... -- 23 -- (0.3) 0.7 --
------- ------ ------ ------- -------- -------
Balance December 31, 1991. 190,021 10,209 $190.0 $(309.2) $1,013.5 $ 142.6
1992 net loss............. -- -- -- -- -- (104.5)
Dividends declared........ -- -- -- -- -- (18.2)
Exercise of stock options. -- (1,995) -- 60.5 (46.4) --
Other..................... -- (20) -- 0.6 (0.4) --
------- ------ ------ ------- -------- -------
Balance December 31, 1992. 190,021 8,194 $190.0 $(248.1) $ 966.7 $ 19.9
1993 net income........... -- -- -- -- -- 338.8
Dividends declared........ -- -- -- -- -- (18.5)
Exercise of stock options. -- (3,231) -- 97.1 (73.8) --
Issuance of restricted
stock.................... -- (777) -- 23.2 (23.2) --
Other..................... -- 224 -- (3.9) -- 0.1
------- ------ ------ ------- -------- -------
Balance December 31, 1993. 190,021 4,410 $190.0 $(131.7) $ 869.7 $ 340.3
======= ====== ====== ======= ======== =======
</TABLE>
- --------
Note: SFP has authorized common stock of 600 million shares with a par value of
$1.00. Also authorized are 200 million shares of preferred stock with a
par value of $1.00, none of which was outstanding at December 31, 1993.
(See notes to consolidated financial statements)
15
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Santa Fe Pacific Corporation and subsidiary companies ("SFP or Company") which
are majority owned and controlled, directly or indirectly, by SFP. The equity
method is used to account for investments in 20% to 50% owned entities. All
significant intercompany transactions have been eliminated.
Reclassifications
Certain comparative prior year amounts in the consolidated financial
statements and notes have been reclassified to conform with the current year
presentation.
Statement of Cash Flows
SFP considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. In addition to amounts reported
as "Cash Used for Capital Expenditures", SFP had non-cash capital expenditures
totaling $157.6 million, $9.5 million, and $35.2 million in 1993, 1992, and
1991, respectively. Non-cash capital expenditures consist principally of
directly financed equipment acquisitions and reimbursed projects at The
Atchison, Topeka and Santa Fe Railway Company ("Santa Fe Railway").
Accounts Receivable
SFP maintains an allowance for doubtful accounts based upon the estimated
collectibility of all trade accounts receivable. Allowances for doubtful
accounts of $16.4 million and $11.2 million have been applied as a reduction of
accounts receivable at December 31, 1993 and 1992, respectively.
Materials and Supplies
Material and supply inventories are valued at the lower of cost (average or
first-in, first-out) or market.
Note Receivable
The note receivable included in the consolidated balance sheet relates to the
sale of a subsidiary in 1986. Principal payments of $72.5 million were received
in both 1993 and 1992. Remaining proceeds to be received from the note are
$72.5 million in 1994 and $36.2 million in 1995.
Properties
Properties are stated at cost and include capitalized interest incurred
during construction of $8.2 million in 1993, $3.7 million in 1992, and $3.9
million in 1991. Additions and replacements are capitalized. Expenditures for
maintenance and repairs are charged to income. Upon normal sale or retirement
of depreciable railroad property, cost less salvage, net of cost of removal, is
charged to accumulated depreciation and no gain or loss is recognized. With
respect to all other property sold or retired, gain or loss is recognized.
Depreciation is computed under the straight-line method.
Revenue Recognition
Rail revenue is recognized when freight is received from the shipper with a
corresponding accrual of the direct costs to complete delivery of the freight-
in-transit.
16
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: DISCONTINUED OPERATIONS
On June 15, 1994, Santa Pacific Gold Corporation's ("SFP Gold"), SFP's gold
subsidiary, registration statement for the initial public offering of 14.6% of
its common stock became effective. Approximately 19 million shares were sold at
a price of $14 per share. On June 29, 1994, SFP's Board of Directors approved
the distribution to SFP shareholders of its remaining 85.4% interest in SFP
Gold. As a result, SFP Gold will become a separate, independent entity
effective September 30, 1994. Holders of record of SFP common stock as of
September 12, 1994, will receive a distribution of one share of common stock of
SFP Gold for every approximately 1.7 shares of SFP common stock held. Under a
ruling obtained from the Internal Revenue Service, the distributions are tax-
free to SFP shareholders. The consolidated financial statements and notes have
been retroactively restated to present SFP Gold as a discontinued operation.
Income from discontinued operations in 1993, 1992 and 1991 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992 1991
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................ $298.6 $220.6 $179.4
Income before income taxes.......................... 296.1 63.1 48.3
Income taxes........................................ 134.7 20.7 14.3
------ ------ ------
Income from discontinued operations................. $161.4 $ 42.4 $ 34.0
====== ====== ======
</TABLE>
In June 1993, SFP Gold closed an asset exchange with Hanson Natural Resources
Company ("Hanson"). SFP Gold received certain gold assets of Hanson, and Hanson
acquired essentially all coal and aggregate assets of SFP Gold. The exchange
was recorded as a purchase of assets and accordingly, the results from the gold
assets have been reflected in income prospectively from the date of closing.
Income from discontinued operations for 1993 includes an after-tax gain on the
exchange of $108.3 million.
NOTE 3: GAIN ON SALE OF CALIFORNIA LINES
In November 1992, Santa Fe Railway announced that it and eight southern
California transportation agencies had reached definitive agreements for the
sale to the agencies of certain interests in approximately 340 miles of rail
lines and additional property, for cash and relief of obligations to reimburse
certain state and county agencies for capital improvements previously paid for
by the agencies and the State of California. Santa Fe Railway retained all
rights necessary for its freight operations in southern California. The
transportation agencies anticipate using these facilities for commuter lines.
The sale encompassed three separate closings which occurred in December 1992
and March and June of 1993. Cash proceeds of $226.9 million in 1993 and $255.0
million in 1992 were received resulting in pre-tax gains of $145.4 million and
$204.9 million in 1993 and 1992, respectively. Both of the gains recognized are
net of the cost of the properties and other expenses of the sale. Additionally,
the 1993 gain is net of an obligation retained by Santa Fe Railway which under
certain conditions, requires the repurchase of a portion of the properties sold
for $50 million. Proceeds of $126.0 million were used to retire debt related to
discontinued operations in 1993; and proceeds of $201.0 million were used to
retire debt in 1992 (see Note 11: Long-Term Debt).
NOTE 4: RAIL SPECIAL CHARGE
During 1992, Santa Fe Railway recorded a $320.4 million pre-tax special
charge which included provisions for restructuring and environmental.
17
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rail Restructuring
During the third quarter of 1992, Santa Fe Railway recorded a $253 million
pre-tax charge primarily for costs of a crew consist agreement on the eastern
half of the railroad and for centralization of certain transportation
functions.
The eastern lines crew consist agreement comprised $149 million of the
charge. The 1992 agreement is an update to a 1990 crew consist agreement. The
1992 agreement provides for further reductions in average crew size on through
freight trains and elimination of productivity payments which were required
when reduced crews were used. The 1992 eastern lines agreement, when combined
with a similar agreement reached earlier with trainmen on the other half of the
system, provides for through trains generally to operate with two person crews.
The agreement covers approximately 2,000 employees. Costs of the agreement
which are provided for in the charge, relate to a signing bonus of $10,000 per
employee, the present value of a $65,000 deferred benefit per employee payable
upon separation or retirement and the present value of reserve board costs.
Reserve board costs represent wages paid to employees rendered excess due to
reduced crews. When on reserve board status, employees are removed from active
service and receive a percentage of their normal wages. Eastern line reserve
boards initially contained approximately 500 members and will decline over time
through attrition and other factors.
The charge also included $73 million related to centralization. In 1992,
Santa Fe Railway decided to centralize many operating support functions.
Centralization activities began in late 1992 and by the fall of 1993, Railway
had centralized train dispatching, crew planning and fleet management in
Schaumburg, Illinois; crew management, customer service and mechanical
(equipment) administration in Topeka, Kansas; and other administrative and
operating support functions in Kansas City, Kansas. Cost of centralization
included in the $73 million charge relates to approximately 700 relocations,
reductions of 600 administrative and clerical positions, and abandonment of
facilities. Most of the costs of centralization had been paid by December 31,
1993.
Additionally, the charge includes approximately $31 million for other cost
saving initiatives including an adjustment of accruals established for other
operating craft labor agreements reached in prior periods.
At December 31, 1993, the balance of the restructuring liability was $315.6
million. The majority of the balance represents future deferred benefit and
reserve board payments related to the 1992 eastern lines agreement and similar
agreements reached in and accrued for in prior years. Restructuring costs paid
were $80.9 million in 1993, $118.9 million in 1992 and $104.5 million in 1991.
In 1994, the Company expects payments of approximately $60 million. Future
payments will decline over time; however, certain separation benefits will not
be paid until employee retirement. Santa Fe Railway has obtained letters of
credit of approximately $18 million supporting certain of its obligations under
labor agreement.
Environmental
Approximately $67 million of the special charge was to increase accruals for
environmental clean-up and remediation, primarily on abandoned properties (see
Note 14: Contingencies). During 1993, payments charged to the environmental
reserve were approximately $13 million, with the majority of remaining
expenditures expected to be incurred over the next five years.
NOTE 5: PIPELINE PARTNERSHIP
A wholly owned subsidiary of SFP, SFP Pipeline Holdings, Inc. ("Pipeline
Holdings"), through its wholly owned subsidiary, holds an aggregate 44% common
unit ownership in Santa Fe Pacific Pipeline Partners, L.P. ("Pipeline
Partnership"), a Delaware limited partnership. This interest is held through a
2%
18
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
general partner interest and a 42% limited partner interest. The Company
accounts for its interest in the partnership under the equity method. Other
long-term assets include $61.5 million and $67.6 million at December 31, 1993
and 1992, respectively, for SFP's investment in the Pipeline Partnership.
Pipeline Holdings also issued the Pipeline Exchangeable Debentures ("Pipeline
Debentures") (see Note 11: Long-Term Debt) which are traded on the New York
Stock Exchange and under certain circumstances are exchangeable for common
units that represent SFP's 42% limited partnership interest in the Pipeline
Partnership. Interest on the Pipeline Debentures is payable quarterly and is
equal to the greater of (a) distributions of cash from operations declared by
the Pipeline Partnership for such quarter on the number of common units for
which the Pipeline Debentures are then exchangeable or (b) 2% of the unpaid
Pipeline Debentures principal balance.
During 1993, 1992 and 1991, SFP, through its wholly owned subsidiaries,
received cash distributions of $25.1 million, $25.1 million, and $23.8 million,
respectively, from the Pipeline Partnership. Of these distributions $22.8
million, $22.8 million, and $22.0 million, respectively, were used to pay
interest costs on the Pipeline Debentures.
The following table sets forth selected financial data for the Pipeline
Partnership:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
------ ------ ------
(IN MILLIONS, EXCEPT
PER UNIT DATA)
<S> <C> <C> <C>
Income Statement Data
Total revenues............................. $219.5 $205.0 $193.4
Operating income........................... 78.3(1) 91.4 (1) 95.8
Interest expense........................... 37.1 36.9 36.9
Income before cumulative effect of
accounting change......................... 41.6 54.1 60.6
Cumulative effect of accounting change..... -- (16.4)(2) --
Net income................................. 41.6 37.7 60.6
Per Unit Data
Income before accounting change............ $ 2.13 $ 2.77 $ 3.10
Cumulative effect of accounting change..... -- (.84)(2) --
Net income................................. 2.13 1.93 3.10
Cash distributions per unit................ 2.80 2.80 2.75
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1993 1992
------ ------
<S> <C> <C>
Balance Sheet Data
Total current assets..................................... $ 67.7 $ 58.4
Net properties, plant and equipment...................... 616.6 618.1
Total assets............................................. 697.0 684.9
Total current liabilities................................ 35.6 21.6
Long-term debt........................................... 355.0 355.0
Total partners' capital.................................. 265.9 279.0
</TABLE>
- --------
(1) 1993 includes a $15 million special environmental charge and a $12 million
special litigation charge. 1992 includes a $10 million special
environmental charge.
(2) Reflects a change in accounting for postretirement and postemployment
benefits.
19
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: OTHER INCOME (EXPENSE)--NET
Other income (expense)--net consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Real estate activities............................ $ 19.4 $ 23.9 $ 45.6
Interest income................................... 11.7 17.8 27.4
Corporate administrative expenses................. (24.2) (22.3) (20.0)
Accounts receivable fees.......................... (8.3) (9.4) (14.5)
Arbitration/litigation settlements................ 21.6 -- --
Other-net......................................... (14.4) (10.3) (13.0)
------ ------ ------
Total......................................... $ 5.8 $ (0.3) $ 25.5
====== ====== ======
</TABLE>
NOTE 7: INCOME TAXES
The provision for income taxes applicable to continuing operations consisted
of the following:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................ $ 33.5 $(32.0) $17.5
State.............................................. 4.2 (0.7) 3.1
------ ------ -----
Total Current.................................... 37.7 (32.7) 20.6
------ ------ -----
Deferred:
Federal............................................ 124.6 40.7 13.9
State.............................................. 14.4 12.3 2.2
------ ------ -----
Total Deferred................................... 139.0 53.0 16.1
------ ------ -----
Total............................................ $176.7 $ 20.3 $36.7
====== ====== =====
</TABLE>
Income taxes from continuing operations as reflected in the consolidated
statement of operations differ from the amounts computed by applying the
statutory federal corporate tax rate to income from continuing operations as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax at statutory rate (35% in 1993,
34% in 1992-1991)................................. $123.9 $14.1 $33.7
Increase(decrease) in taxes resulting from:
State income taxes, net of federal benefit....... 12.1 7.7 3.5
1% increase in federal tax rate.................. 23.5 -- --
Other............................................ 17.2 (1.5) (0.5)
------ ----- -----
Total.......................................... $176.7 $20.3 $36.7
====== ===== =====
</TABLE>
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," as of January 1,
1992 having previously accounted for income taxes under SFAS No. 96. The
adoption of SFAS No. 109 had no impact on 1992 net income. Both SFAS No. 96 and
No. 109 required that deferred income taxes be determined based on temporary
differences between the financial reporting and tax basis of the Company's
assets and liabilities using enacted tax rates in effect during the years in
which the differences are expected to reverse.
20
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Omnibus Budget Reconciliation Act of 1993 resulted in an increase in the
maximum corporate federal income tax rate from 34% to 35% retroactive to
January 1, 1993. In accordance with SFAS No. 109, SFP recorded additional
income tax expense of $23.5 million, representing the impact of the 1% rate
increase on SFP's net beginning of year deferred income tax liability. The
impact of the tax increase as of August 10, 1993, the date of enactment, was
approximately $27.7 million. The difference between the $23.5 million impact as
of the beginning of the year and the $27.7 million impact as of August 10, 1993
is due to taxable income and temporary differences generated during the period
January 1, 1993 through August 10, 1993.
Principal temporary differences that gave rise to the net deferred tax
liability at December 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax debits:
Accrued liabilities not deductible until paid:
Restructuring.................................. $ 119.5 $ 144.6
Postretirement benefits........................ 110.8 106.7
Casualty and environmental..................... 114.8 112.8
Other.......................................... 124.2 133.9
Non-expiring AMT credit carryforwards............ 93.7 73.9
Other............................................ 13.5 36.5
--------- ---------
Subtotal..................................... $ 576.5 $ 608.4
========= =========
Deferred tax credits:
Depreciation..................................... $(1,267.4) $(1,195.2)
Condemnation sales............................... (211.8) (123.1)
Other............................................ (113.9) (113.8)
--------- ---------
Subtotal..................................... $(1,593.1) $(1,432.1)
========= =========
Net deferred tax liability................... $(1,016.6) $ (823.7)
========= =========
</TABLE>
During 1993 and 1992, SFP made income tax payments, net of refunds, of $23.9
million and $8.2 million, respectively. During 1991, SFP received net refunds
of $8.5 million.
The federal income tax returns of SFP have been examined through 1988. All
years prior to 1981 are closed. Issues relating to the years 1981-1988 are
being contested through various stages of administrative appeal. In addition,
SFP and its subsidiaries have various state income tax returns in the process
of examination, administrative appeal or litigation. Management believes that
adequate provision has been made for any adjustment which might be assessed for
open years through 1993.
NOTE 8: SALES OF ACCOUNTS RECEIVABLE
Santa Fe Railway has an agreement to sell, on a revolving basis, an undivided
percentage interest in certain accounts receivable, with limited recourse, to a
financial institution. The agreement, which expires in December 1994, allows
for sales of accounts receivable up to a maximum of $225.0 million. Santa Fe
Railway acts as collection agent under the agreement. The amount of accounts
receivable sold under the agreement was $225.0 million at both December 31,
1993 and 1992. The financial institution purchases an interest in a pool of
receivables that has generally ranged from $250-$325 million during 1993 and
1992. Santa Fe Railway is exposed to credit loss related to collection of
accounts receivable to the extent that the purchased interest exceeds the
amount of accounts receivable sold. Costs related to the agreement vary on a
monthly basis and are generally related to certain interest rates. These costs,
which are included in Other Income (Expense)--Net, were $8.3 million, $9.4
million and $14.5 million in 1993, 1992 and 1991, respectively.
21
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: PROPERTIES, PLANT AND EQUIPMENT
The major classes of properties, plant and equipment are as follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN MILLIONS)
<S> <C> <C>
Track structure........................................ $2,326.8 $2,199.8
Equipment.............................................. 1,952.6 1,864.0
Other road properties.................................. 1,478.9 1,337.5
Real estate and other.................................. 127.8 122.7
-------- --------
Total.............................................. 5,886.1 5,524.0
Accumulated depreciation and amortization.............. 1,577.7 1,535.3
-------- --------
Net properties....................................... $4,308.4 $3,988.7
======== ========
</TABLE>
NOTE 10: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1993 and 1992
consisted of the following:
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Accounts and wages payable................................. $141.8 $154.5
Accrued claims............................................. 90.3 88.3
Rail restructuring......................................... 57.8 122.6
Vacations.................................................. 49.8 48.8
Taxes other than income taxes.............................. 34.3 34.3
Interest................................................... 28.1 28.3
Other...................................................... 267.7 219.5
------ ------
Total.................................................. $669.8 $696.3
====== ======
</TABLE>
NOTE 11: LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(IN MILLIONS)
<S> <C> <C>
Equipment Obligations, weighted average rate of 8.9%,
maturing from 1994 to 2008............................. $ 478.9 $ 453.1
Pipeline Exchangeable Debentures, 10.4%
(variable), maturing 2010.............................. 219.0 219.0
Senior Notes, 12.65%,
maturing from 1998 to 2000............................. 200.0 200.0
Term Loan, 4.0%
(variable), maturing from 1994 to 1995................. 108.7 181.2
Mortgage Bonds, 4%, maturing 1995....................... 95.8 95.8
Bank Term Loan, 4.1%
(variable), maturing from 1994 to 1997................. 50.0 130.8
Other Obligations, 9.4% to 10.3%, maturing from 1994-
2014................................................... 40.2 43.8
Debt discount........................................... (16.8) (17.0)
-------- --------
Total long-term debt................................ 1,175.8 1,306.7
Due within one year..................................... (184.7) (187.1)
-------- --------
Due after one year...................................... $ 991.1 $1,119.6
======== ========
</TABLE>
22
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the Bank Term Loan, SFP has a $173.6 million revolving credit facility
for general corporate purposes. SFP pays commitment fees of 3/8% per annum on
the unused portion of the Bank Term Loan and revolving credit facility, payable
quarterly. As of December 31, 1993, no borrowings were outstanding under the
revolving credit facility.
In December 1992, SFP accelerated the repayment of borrowings related to a
1990 litigation settlement. The early extinguishment of debt resulted in an
extraordinary charge of $5.0 million, net of applicable tax benefits of $3.0
million, reflecting the write off of unamortized debt discount. The repayment
was made using a portion of the 1992 proceeds from Santa Fe Railway's sale of
California Lines (see Note 3: Gain on Sale of California Lines).
In December 1993, SFP filed a shelf registration statement with the SEC, for
the issuance of up to $250 million in debt securities, none of which had been
issued at December 31, 1993.
As of December 31, 1993, projected principal repayments of long term debt
during the five years 1994 through 1998, excluding capital leases, are $182.9
million, $206.5 million, $50.1 million, $46.5 million and $100.7 million,
respectively. Total interest paid was $111.3 million in 1993, $142.2 million in
1992 and $160.5 million in 1991.
Substantially all railroad property is subject to liens securing Mortgage
Bonds or Equipment Obligations. The payment of cash dividends by SFP is
restricted by various debt covenants. Such restrictions vary with levels of
income and other factors. At December 31, 1993, no payment of dividends was
allowed. Certain other debt agreements of the Company and its subsidiaries
include covenants which place limitations on indebtedness and intercompany
dividends, require the maintenance of various financial ratios, and restrict
the disposition of assets. Pipeline Holdings is contingently liable for $355.0
million of Pipeline Partnership debt.
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1993 and 1992, and the methods and assumptions used to estimate such fair
values, are as follows:
Cash and short-term investments
The fair value of cash and short-term investments approximates the carrying
amount because of the short maturity of those instruments.
Note Receivable
The fair value of the Note Receivable approximates the carrying amount as the
variable interest rate on the note approximates current interest rates.
Other Investments
SFP maintained an investment in common stock which became publicly traded
during 1993. The carrying value of the investment at December 31, 1993 was
$10.6 million. In January 1994, the investment was sold resulting in a pre-tax
gain of approximately $25 million. Additionally, SFP maintains various other
investments in common stock with a carrying value at December 31, 1993 and 1992
of approximately $17 million and $27 million, respectively, which are accounted
for under a cost basis. These investments are in non-publicly traded companies
which have no quoted market prices; therefore, a reasonable estimate of fair
value could not be made.
23
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
which would be offered to the Company for debt of the same remaining
maturities. The carrying value of debt at December 31, 1993 and 1992 was
$1,175.8 million and $1,306.7 million compared with estimated fair values of
approximately $1,395 million and $1,475 million, respectively.
NOTE 13: LEASES AND OTHER COMMITMENTS
SFP leases certain locomotives, freight cars, trailers, data processing
equipment and other property. Future minimum lease payments for operating
leases applicable to continuing operations (which reflect operating leases
having non-cancelable lease terms in excess of one year) as of December 31,
1993 are summarized as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
1994........................................................ $ 60.2
1995........................................................ 55.1
1996........................................................ 46.1
1997........................................................ 36.0
1998........................................................ 30.1
Later years................................................. 174.5
------
Total minimum payments.................................. $402.0
======
</TABLE>
Rental expense for all operating leases applicable to continuing operations
was $94.9 million in 1993, $72.8 million in 1992 and $65.9 million in 1991.
Contingent rentals and sublease rentals were not significant.
Santa Fe Railway has entered into agreements with certain locomotive
suppliers which provide for maintenance on a portion of its locomotive fleet.
As of December 31, 1993, these agreements obligate Santa Fe Railway to make
minimum annual payments over periods ranging from two to eighteen years. Santa
Fe Railway has also entered into haulage agreements with other rail carriers
under which it is required to make minimum payments if specified traffic levels
are not met. In the aggregate, these agreements require minimum annual payments
of approximately $63 million in 1994, $52 million in 1995, $50 million in 1996,
$51 million in 1997, $52 million in 1998, and $327 million in total thereafter
through 2012. Payments under the agreements totaled approximately $68 million,
$62 million and $49 million in 1993, 1992 and 1991, respectively.
In connection with the closing of the sale of California lines, Santa Fe
Railway has entered into various shared use agreements with the agencies which
require Santa Fe Railway to pay the agencies approximately $6.0 million
annually for the maintenance of track structure and facilities. In addition,
Santa Fe Railway is committed to acquire locomotives valued at approximately
$62 million in 1994.
The Company enters into various commodity swap and collar transactions to
manage exposure against fluctuations in diesel fuel prices. The Company's fuel
hedging transactions are based upon commodities that are established in the
futures markets. The prices of these commodities have historically shown a high
degree of correlation with the Company's diesel fuel prices. Cash settlements
on contracts to hedge fuel prices are made at the end of a quarter and the
related gain or loss is included in fuel expense for that quarter. To the
extent the Company hedges portions of its fuel purchases, it may not fully
participate in decreases in fuel prices. At December 31, 1993, the Company had
entered into various agreements with several counterparties covering
approximately 260 million gallons which is anticipated to cover approximately
two-thirds of 1994 fuel purchases. Through swap arrangements the Company has
hedged approximately 205 million gallons at an average price of 48 cents.
Additionally, approximately 55 million gallons have been hedged through collar
24
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
arrangements which allow the price to float between average floor and ceiling
prices of 46 cents and 51 cents, respectively. These prices do not include
taxes, fuel handling costs and any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of the Company's
diesel fuel. The effects of the Company's fuel hedges was to increase operating
expense by $12.4 million in 1993 and to reduce operating expense by $0.9 million
and $5.6 million in 1992 and 1991, respectively.
From time to time, the Company enters into various interest rate hedging
transactions for various purposes, including managing exposure to fluctuations
in interest rates or establishing rates in anticipation of future debt
issuance. At December 31, 1993, the Company had entered into four related
interest rate swap transactions for a total notional principal amount of $100
million, for the purpose of establishing rates in anticipation of an expected
future debt offering. These swap transactions call for the payment of a fixed
interest rate of 6.2%, which was based upon ten year treasury notes, and the
receipt of a variable interest rate which was 3.5% at December 31, 1993. At the
time of the borrowing, which is also expected to have a term of ten years, the
swap will be closed out and any gain or loss relating to the terminated
interest rate swap will be amortized as an adjustment to interest expense over
the term of the borrowing.
The Company monitors its positions and the credit ratings of its
counterparties and does not currently anticipate losses due to counterparty
non-performance. The fair market value of the Company's fuel hedging
transactions at December 31, 1993 were unrealized losses of $9.2 million for
swap arrangements and $2.4 million for collar arrangements. The fair market
value of the Company's interest hedging transactions at December 31, 1993 was
not significant.
NOTE 14: CONTINGENCIES
Environmental
The Company is subject to extensive regulation under federal, state and local
environmental laws concerning, among other things, discharges to waters, air
emissions, toxic substances, and the generation, handling, storage,
transportation, and disposal of waste and hazardous materials. These laws and
regulations have the effect of increasing the cost and liabilities associated
with the conduct of operations. Environmental risks are also inherent in
railroad operations which frequently involve the transportation of chemicals
and other hazardous materials.
Santa Fe Railway expects it will become subject to new requirements
regulating air emissions from diesel locomotives that may increase its
operating costs in the future. By 1995, the United States Environmental
Protection Agency must issue regulations applicable to new locomotive engines.
Locomotive engines (other than new locomotive engines) may be regulated by
states based on standards and procedures which the State of California
ultimately adopts. The California standards are currently in the process of
being developed.
In addition, because many of SFP's land holdings are and have been used for
industrial or transportation related purposes or leased to commercial or
industrial companies whose activities may have resulted in discharges onto the
property, the Company is now subject and will from time to time continue to be
subject to environmental clean-up and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, generally imposes joint and
several liability for clean-up and enforcement costs, without regard to fault
or the legality of the original conduct, on current and predecessor owners and
operators of a site. Accordingly, SFP may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to clean up sites at
which certain substances may have been released by the Company, its current
lessees, predecessor owners or lessees of properties, or other third parties.
At December 31, 1993, SFP had been named a potentially responsible party
(PRP) at 6 sites on the Environmental Protection Agency's (EPA) National
Priorities List (NPL). Additionally, SFP is potentially liable for the cost of
clean-up at other sites identified by the EPA and other agencies. Finally, SFP
has identified sites where costs exist for environmental clean-up and
monitoring, (including where no claim has
25
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
been asserted) and no agency is currently involved. There are approximately 125
known environmental sites at December 31, 1993 which include, among other
things; closed facilities including diesel locomotive repair shops, tie
treating plants, fueling facilities and underground storage tanks; property
leased or sold to others and current operating sites.
Estimates of the Company's ultimate liabilities associated with Superfund and
other environmental sites are difficult to predict with certainty due to, among
other factors, the number of parties involved, possible remediation
alternatives, lengthy time frames, evolving environmental laws and regulations,
and potential recoveries from third parties. Environmental costs include
initial site surveys and environmental studies of potentially contaminated
sites, costs for remediation and restoration of sites determined to be
contaminated, as well as post-closure and ongoing monitoring costs. The Company
has not included any reduction in costs for anticipated recovery from
insurance. Estimated costs at sites where SFP is a PRP are generally based on
cost sharing agreements which vary from site to site, after consideration of
the financial condition of other PRP's. These costs are typically allocated
based on volume of material contributed, the portion of the total site owned or
operated by each PRP, and/or the amount of time the site was owned or operated.
During 1992, management completed an internal assessment of Santa Fe
Railway's environmental liabilities, including a site-by-site analysis of
properties with potentially significant environmental exposure. As a result of
this review and analysis it was determined that an additional accrual of $67
million was appropriate to provide for future costs of this nature which was
recorded in the third quarter of 1992 as part of the rail special charge (see
Note 4: Rail Special Charge). In addition, the Company monitors, on a regular
basis, accruals for environmental sites which have been identified, based on
additional information developed in subsequent periods. The additional
information is based on a combination of factors including independent
consulting reports, site visits, legal reviews and historical trend analysis.
Payments recorded against environmental liabilities totaled $13.5 million,
$6.3 million and $7.1 million for the years ended December 31, 1993, 1992 and
1991, respectively. The majority of these payments related to mandatory clean-
up efforts. Capital expenditures related to environmental sites were
insignificant during this three year period. At December 31, 1993 and December
31, 1992 the Company had accrued liabilities for environmental costs of
approximately $125 million and $121 million, respectively. The Company
anticipates that approximately 75% of the accrued costs at December 31, 1993
will be paid over the next five years, with approximately $25 million of
payments occurring in 1994. It is the opinion of SFP management that none of
the above items, when finally resolved, will have a material adverse effect on
the annual results of operations, financial position or liquidity of SFP,
although an adverse resolution of a number of these items in a single year
could have a material adverse effect on the results of operations for that
year.
Other Claims and Litigation
SFP is also a party to a number of other legal actions and claims, including
employee injury claims, various governmental proceedings and private civil
suits, arising in the ordinary course of business. While the final outcome of
these other legal actions cannot be predicted with certainty, considering among
other things, the meritorious legal defenses available, it is the opinion of
SFP management that none of these claims, when finally resolved, will have a
material adverse effect on the annual results of operations, financial position
or liquidity of SFP, although an adverse resolution of a number of these items
in a single year could have a material adverse effect on the results of
operations for that year.
NOTE 15: PENSION PLANS
SFP and its subsidiaries have two significant defined benefit pension plans,
the trusteed noncontributory Santa Fe Pacific Corporation Retirement Plan
("Retirement Plan") and the Santa Fe Pacific Corporation Supplemental
Retirement Plan ("Supplemental Plan").
The Retirement Plan complies with Employee Retirement Income Security Act of
1974 ("ERISA") requirements and covers substantially all officers and employees
of SFP and its subsidiaries not covered by collective bargaining agreements.
Benefits payable under the Retirement Plan are based on compensation
26
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
during the 60 highest paid consecutive months of service during the ten years
immediately preceding retirement and years of service. SFP's funding policy is
to contribute annually not less than the ERISA minimum, and not more than the
maximum amount deductible for income tax purposes.
The Supplemental Plan is an unfunded plan that provides supplementary
retirement benefits primarily to certain executives.
Components of pension income and expense applicable to continuing operations
relating to the Retirement and Supplemental Plans for 1993, 1992 and 1991 were
as follows:
<TABLE>
<CAPTION>
RETIREMENT PLAN
-----------------------
1993 1992 1991
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Components of pension (income) expense
Service cost................................... $ 6.0 $ 7.1 $ 8.2
Interest cost.................................. 41.9 39.1 40.0
Actual return on plan assets................... (110.4) (58.5) (99.0)
Net amortization and deferral.................. 46.6 (5.3) 37.4
------- ------ ------
Total........................................ $ (15.9) $(17.6) $(13.4)
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL
PLAN
--------------
1993 1992 1991
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Components of pension expense
Service cost............................................ $0.1 $0.1 $0.1
Interest cost........................................... 0.6 0.7 0.7
Net amortization and deferral........................... 0.5 0.6 0.6
---- ---- ----
Total................................................. $1.2 $1.4 $1.4
==== ==== ====
</TABLE>
Plan assets and liabilities are measured at September 30. A reconciliation of
the funded status of the plans with amounts recorded is shown as follows:
<TABLE>
<CAPTION>
RETIREMENT PLAN
----------------
1993 1992
------- -------
(IN MILLIONS)
<S> <C> <C>
Plan assets at fair value, primarily invested in
common stock, and U.S. and corporate bonds........... $ 657.3 $ 590.9
Actuarial present value of projected benefit
obligation
Accumulated benefit obligation
Vested............................................ (535.1) (422.4)
Nonvested......................................... (30.5) (29.1)
Provision for future salary increases............... (40.4) (45.4)
------- -------
Excess of plan assets over projected benefit
obligation........................................... 51.3 94.0
Unrecognized net (gain) loss.......................... 33.5 (27.5)
Unrecognized prior service cost....................... 13.4 17.8
Unrecognized net assets being recognized ratably
through 2002......................................... (16.1) (18.1)
------- -------
Prepaid pension asset................................. $ 82.1 $ 66.2
======= =======
</TABLE>
27
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL PLAN
------------------
1993 1992
-------- --------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of projected benefit
obligation
Accumulated vested benefit obligation.............. $ (8.3) $ (7.2)
Provision for future salary increases.............. (0.6) (1.2)
-------- --------
Projected benefit obligation......................... (8.9) (8.4)
Unrecognized net gain................................ (0.8) (1.4)
Unrecognized net transition obligation being
recognized ratably through 2003..................... 5.6 6.2
Adjustment required to recognize minimum liability... (4.2) (3.6)
-------- --------
Accrued pension liability............................ $ (8.3) $ (7.2)
-------- --------
Major assumptions
(Retirement and Supplemental Plans):
Discount rate........................................ 7.0% 8.5%
Rate of increase in compensation levels.............. 4.0% 5.5%
Expected return on market value of plan assets....... 9.75% 11.0%
</TABLE>
NOTE 16: OTHER POSTRETIREMENT BENEFITS
In addition to the Company's defined benefit pension plans, salaried
employees who have attained age 55 and who have rendered ten years of service
are eligible for both medical benefits and life insurance coverage during
retirement. The retiree medical plan is contributory and provides benefits to
retirees, their covered dependents and beneficiaries. Retiree contributions are
adjusted annually. The plan also contains fixed deductibles, coinsurance and
out-of-pocket limitations. The life insurance plan is noncontributory and
covers retirees only.
The Company adopted SFAS No. 106 effective January 1, 1992 (see Note 17:
Change in Method of Accounting for Postretirement and Postemployment Benefits).
Components of net periodic postretirement benefit cost applicable to continuing
operations relating to the medical plan and the life insurance plan were as
follows:
<TABLE>
<CAPTION>
MEDICAL PLAN
--------------
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Components of net periodic postretirement benefit cost
Service cost........................................... $ 3.3 $ 4.8
Interest cost.......................................... 15.1 18.2
Net amortization and deferral.......................... (3.4) --
------ ------
Total................................................ $ 15.0 $ 23.0
====== ======
<CAPTION>
LIFE
INSURANCE
PLAN
--------------
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Components of net periodic postretirement benefit cost
Service cost........................................... $ 0.2 $ 0.2
Interest cost.......................................... 3.9 3.8
------ ------
Total................................................ $ 4.1 $ 4.0
====== ======
</TABLE>
28
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1992, the costs of these benefits were generally recognized when
paid and for 1991 were $13.6 million.
SFP's policy is to fund benefits payable under the medical and life insurance
plans as due. The following table shows the reconciliation of the plans'
obligations to amounts accrued at December 31, 1993 and 1992. The Company uses
a September 30 measurement date.
<TABLE>
<CAPTION>
MEDICAL PLAN
--------------
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees................................................ $138.6 $114.1
Fully eligible active plan participants................. 16.1 9.5
Other active plan participants.......................... 76.1 54.7
------ ------
Accumulated postretirement benefit obligation............. 230.8 178.3
------ ------
Unrecognized prior service credit......................... 41.3 44.7
Unrecognized net gain (loss).............................. (40.3) 3.0
------ ------
Accrued postretirement liability.......................... $231.8 $226.0
====== ======
<CAPTION>
LIFE
INSURANCE
PLAN
--------------
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees................................................ $ 45.8 $ 43.5
Fully eligible active plan participants................. 0.2 --
Other active plan participants.......................... 4.9 4.1
------ ------
Accumulated postretirement benefit obligation............. 50.9 47.6
------ ------
Unrecognized net gain (loss).............................. (5.5) (1.3)
------ ------
Accrued postretirement liability.......................... $ 45.4 $ 46.3
====== ======
</TABLE>
The unrecognized prior service credit will be amortized straight line over
the average future service to full eligibility of the active population.
For 1994, the assumed health care cost trend rate for managed care medical
costs is 11.5% and is assumed to decrease gradually to 5% by 2006 and remain
constant thereafter. For medical costs not in managed care, the assumed health
care cost trend rate is 14% and is assumed to decrease gradually to 5% by 2006
and remain constant thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation for the medical plan
by $36.5 million and the aggregate of the service and interest components of
net periodic postretirement benefit cost recognized in 1993 by $3.2 million. In
1993, the assumed health care cost trend rate for managed care medical costs
was 12% and was assumed to decrease gradually to 5.5% by 2006 and remain
constant thereafter. For medical costs not in managed care, the assumed health
care cost trend rate was 15% in 1993 and was assumed to decrease gradually to
6.5% by 2006 and remain constant thereafter.
The weighted-average discount rate assumed in determining the accumulated
postretirement benefit obligation was 7% and 8.5% in 1993 and 1992,
respectively. The assumed weighted-average salary increase was 4.0% and 5.5% in
1993 and 1992, respectively.
29
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Plans
Under collective bargaining agreements, Santa Fe Railway participates in
multiemployer benefit plans which provide certain postretirement health care
and life insurance benefits for eligible union employees. Insurance premiums
paid attributable to retirees, which are generally expensed as incurred, were
$3.3 million, $3.5 million and $3.7 million in 1993, 1992 and 1991,
respectively.
NOTE 17: CHANGE IN METHOD OF ACCOUNTING FOR POSTRETIREMENT AND POSTEMPLOYMENT
BENEFITS
Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits". SFAS No. 106 requires that
an actuarial method be used to accrue the expected cost of postretirement
health care and other benefits over employees' years of service. SFAS No. 112
relates to benefits provided to former or inactive employees after employment
but before retirement and requires recognition of these benefits if they are
vested and payment is probable and reasonably estimable. Prior to 1992, the
cost of most postretirement and certain postemployment benefits were expensed
when paid. The cumulative effect of this change in accounting attributable to
years prior to 1992 was to decrease 1992 net income by $163.0 million, net of
the related income tax benefit of $97.0 million. The impact of SFAS No. 106
comprises approximately $158 million of the change. Additionally, pre-tax
expenses in 1992 were $14 million higher than in 1991 as a result of the change
in accounting for these costs.
NOTE 18: STOCK OPTION AND GROWTH PLANS
Under various plans, the most significant of which are the Santa Fe Pacific
Long Term Incentive Stock Plan ("Long Term Plan") and the Santa Fe Pacific
Incentive Stock Compensation Plan ("Incentive Compensation Plan"), options have
been granted to employees to purchase common stock of SFP at a price not less
than the fair market value at the date of grant. Options are generally
exercisable no earlier than one year after the date of grant and expire ten
years after the date of grant. Under these plans, approximately 0.8 million
shares of restricted stock have been granted with the restrictions on such
shares lapsing no earlier than one year from the date of grant and upon the
attainment of certain corporate performance objectives or the completion of a
required vesting period.
A total of 10 million shares, excluding 2 million additional shares that may
be granted in exchange for shares tendered to the Company to pay for an option
exercise, and a total of 18.4 million shares may be used under the Long Term
Plan and Incentive Compensation Plan, respectively. The Long Term Plan replaced
the Incentive Compensation Plan and no new grants will be made under the
Incentive Compensation Plan. Under these plans, awards may be granted in the
form of (1) options to purchase SFP common stock; (2) shares of restricted
stock, which may be issued in combination with performance units; (3)
Performance Units; and (4) stock appreciation rights. Awards of 6.6 million
shares under the Long Term Plan and 14.6 million shares under the Incentive
Compensation Plan, of SFP common stock, net of options surrendered or
terminated, have been made in the form of options, stock appreciation rights,
and restricted stock.
As a result of the approval by SFP's Board of Directors to distribute the
common stock of SFP Gold to SFP shareholders, it will be necessary to adjust
the outstanding options to maintain their economic value. The option price and
number of shares will be adjusted in accordance with Internal Revenue Code
Section 424.
30
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Approximately 4.9 million and 6.2 million of outstanding options at December
31, 1993 and 1992, respectively, were exercisable within the next year. Option
activity in all plans during 1993, 1992 and 1991 is summarized below:
<TABLE>
<CAPTION>
SFP AVERAGE
SHARES PRICE
---------- -------
<S> <C> <C>
Options outstanding at December 31, 1990............... 15,610,892 $ 7.46
Granted................................................ 343,700 7.22
Exercised.............................................. 2,022,221 6.21
Surrendered or terminated.............................. 2,887,071 9.20
----------
Options outstanding at December 31, 1991............... 11,045,300 $ 7.23
Granted................................................ 70,000 12.31
Exercised.............................................. 2,114,257 6.93
Surrendered or terminated.............................. 750,475 8.43
----------
Options outstanding at December 31, 1992............... 8,250,568 $ 7.24
Granted................................................ 5,814,770 17.17
Exercised.............................................. 3,284,947 7.21
Surrendered or terminated.............................. 176,544 9.91
----------
Options outstanding at December 31, 1993............... 10,603,847 $12.65
========== ======
</TABLE>
NOTE 19: STOCKHOLDER RIGHTS PLAN AND SALE OF STOCK
In January 1991, the SFP Board of Directors voted to redeem by means of a
share distribution the rights to purchase Series A Junior Participating
Preferred Stock of SFP issued under a rights agreement. Holders of record of
the rights as of the close of business on February 15, 1991, received an amount
of SFP common stock, with a current market price equal to $0.05 per right in
March 1991. The redemption resulted in an issuance of approximately 1.3 million
shares of common stock.
In October 1991, SFP sold 4,043,039 shares of stock, and received net
proceeds of approximately $36.2 million. These shares were purchased as a
result of options which had been granted to underwriters to cover over-
allotments in conjunction with the sale of SFP stock by a significant
shareholder through a secondary offering. The shares were issued through use of
treasury stock held by the Company.
31
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 20: SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1993 1992
----------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------ ------ ------- ------ ------- ------ ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues...... $583.2 $609.1 $585.8 $631.1 $ 545.2 $550.0 $ 577.8 $578.7
------ ------ ------- ------ ------- ------ ------- ------
Operating Income (Loss). $ 71.2 $ 82.2 $ 49.6 $114.7 $ 57.8 $ 65.5 $(238.0) $ 91.9
------ ------ ------- ------ ------- ------ ------- ------
Income (Loss)
Continuing Operations.. $106.4 $ 28.2 $ (10.3) $ 53.1 $ 9.4 $ 19.2 $(176.8) $169.3
Discontinued
Operations, Net of
Income Taxes.......... 20.7 119.3 7.5 13.9 18.8 7.3 11.7 4.6
Extraordinary Charge
on Early Retirement
of Debt, Net of
Income Taxes.......... -- -- -- -- -- -- -- (5.0)
Cumulative Effect of a
Change in Accounting
for Postretirement
and Postemployment
Benefits, Net of
Income Taxes.......... -- -- -- -- (163.0) -- -- --
------ ------ ------- ------ ------- ------ ------- ------
Net Income (Loss).... $127.1 $147.5 $ (2.8) $ 67.0 $(134.8) $ 26.5 $(165.1) $168.9
====== ====== ======= ====== ======= ====== ======= ======
Income (Loss) Per Common
Share
Continuing Operations.. $ 0.57 $ 0.15 $ (0.05) $ 0.28 $ 0.05 $ 0.10 $ (0.95) $ 0.91
Discontinued
Operations............ 0.11 0.64 0.04 0.08 0.10 0.04 0.06 0.03
Extraordinary Charge... -- -- -- -- -- -- -- (0.03)
Cumulative Effect of a
Change in Accounting.. -- -- -- -- (0.88) -- -- --
------ ------ ------- ------ ------- ------ ------- ------
Net Income (Loss) Per
Common Share........ $ 0.68 $ 0.79 $ (0.01) $ 0.36 $ (0.73) $ 0.14 $ (0.89) $ 0.91
====== ====== ======= ====== ======= ====== ======= ======
</TABLE>
- --------
(1) Quarterly results of operations have been reclassified to present SFP's
gold subsidiary as discontinued operations.
(2) The sum of income per share from discontinued operations and net income
(loss) per share for the four quarters of 1993 does not equal the related
net income (loss) per share for the full year due to incremental shares
resulting from stock options.
(3) 1993 income (loss) includes a first quarter $145.4 million pre-tax gain on
sale of California lines, and a third quarter increase in income tax
expense of approximately $27.7 million reflecting the retroactive impact of
the increase in the federal income tax rate to 35%.
(4) 1992 income (loss) includes a third quarter $320.4 million pre-tax rail
special charge and a fourth quarter $204.9 million pre-tax gain on sale of
California lines.
32
<PAGE>
EXHIBIT 99.25
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 Quarterly Period Ended September 30, 1994
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: 1-8627
SANTA FE PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3258709
(State of Incorporation) (I.R.S. Employer Identification No.)
1700 East Golf Road, Schaumburg, Illinois 60173-5860
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (708) 995-6000
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.
Shares Outstanding
Class at September 30, 1994
----------------------------- ---------------------------
Common Stock, $1.00 par value 186,996,400 shares
<PAGE>
PART I
FINANCIAL INFORMATION
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues $ 680.2 $ 585.8 $ 1,969.9 $ 1,778.1
-------- -------- ---------- ----------
Operating Expenses
Compensation and benefits 208.5 195.0 625.3 600.0
Contract services 104.2 85.7 282.3 239.8
Fuel 62.8 53.4 182.9 172.2
Equipment rents 62.9 65.4 185.3 170.1
Depreciation and amortization 50.4 47.6 149.6 140.4
Materials and supplies 26.8 33.9 91.6 98.1
Other 46.8 55.2 147.0 154.6
-------- -------- ---------- ----------
Total Operating Expenses 562.4 536.2 1,664.0 1,575.2
-------- -------- ---------- ----------
Operating Income 117.8 49.6 305.9 202.9
Equity in Earnings of Pipeline 9.3 (3.5) 26.3 11.1
Interest Expense 29.6 34.1 89.5 103.7
Gain on Sale of California Lines - - - 145.4
Other Income (Expense) - Net (10.0) 18.8 22.7 4.7
-------- -------- ---------- ----------
Income From Continuing
Operations Before Income
Taxes 87.5 30.8 265.4 260.4
Income Taxes 37.0 41.1 112.3 136.1
-------- -------- ---------- ----------
Income (Loss) From Continuing Operations 50.5 (10.3) 153.1 124.3
Income from Discontinued
Operations, Net of Income Taxes - 7.5 23.1 147.5
-------- -------- ---------- ----------
Net Income (Loss) $ 50.5 $ (2.8) $ 176.2 $ 271.8
======== ======== ========== ==========
Income (Loss) Per Share of Common Stock
Continuing Operations $ 0.27 $ (0.05) $ 0.81 $ 0.67
Discontinued Operations - 0.04 0.12 0.79
-------- -------- ---------- ----------
Net Income (Loss) $ 0.27 $ (0.01) $ 0.93 $ 1.46
======== ======== ========== ==========
Average Number of Common and
Common Equivalent Shares 189.3 187.5 189.7 186.7
======== ======== ========== ==========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
-1-
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents, at cost
which approximates market $ 16.5 $ 70.3
Accounts receivable, less allowances 98.3 96.1
Materials and supplies 97.1 92.3
Note receivable--current 36.2 72.5
Current portion of deferred income taxes 103.4 99.3
Other 9.1 27.2
-------- --------
Total current assets 360.6 457.7
-------- --------
Note Receivable - 36.2
Other Long-Term Assets 322.9 323.3
Properties, Plant and Equipment 6,176.5 5,886.1
Less--accumulated depreciation and amortization 1,544.5 1,577.7
-------- --------
Net properties 4,632.0 4,308.4
Net Assets of Discontinued Operations - 248.4
-------- --------
Total Assets $5,315.5 $5,374.0
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 702.0 $ 669.8
Notes payable and current maturities of long-term debt 191.6 184.7
-------- --------
Total current liabilities 893.6 854.5
-------- --------
Long-Term Debt Due After One Year 890.0 991.1
Postretirement Benefits Liability 257.7 284.7
Restructuring Liability 201.0 257.8
Other Long-Term Liabilities 698.2 601.7
Deferred Income Taxes 1,167.2 1,115.9
-------- --------
Total liabilities 4,107.7 4,105.7
-------- --------
Shareholders' Equity
Common stock 190.0 190.0
Paid-in capital 842.0 869.7
Retained income 262.9 340.3
Treasury stock, at cost (87.1) (131.7)
-------- --------
Total shareholders' equity 1,207.8 1,268.3
-------- --------
Total Liabilities and Shareholders' Equity $5,315.5 $5,374.0
======== ========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
-2-
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In millions)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1994 1993
--------- ---------
<S> <C> <C>
Operating Activities
Net Income $ 176.2 $ 271.8
Adjustments to reconcile net income to
operating cash flows:
Income from discontinued operations, net of
income taxes (23.1) (147.5)
Depreciation and amortization 149.6 140.4
Deferred income taxes 52.2 105.1
Rail restructuring costs paid (51.9) (65.4)
Imputed interest expense 15.5 20.6
Gain on sales of property, plant and equipment (3.4) (151.7)
Other - net (55.9) (18.0)
Changes in working capital:
Accounts receivable:
Sale of accounts receivable 40.0 -
Other changes (42.2) (39.4)
Materials and supplies (4.8) (14.2)
Accounts payable and accrued liabilities 32.2 75.8
Other 13.2 (1.9)
--------- ---------
Net Cash Provided By Operating Activities -
Continuing Operations 297.6 175.6
Discontinued Operations - Net 54.3 69.9
--------- ---------
Net Cash Provided by Operating Activities 351.9 245.5
--------- ---------
Investing Activities
Cash used for capital expenditures (333.2) (255.4)
Proceeds from the sale of property,
plant and equipment 16.2 236.6
Other - net 92.9 72.2
Discontinued Operations - Net (49.4) (85.7)
--------- ---------
Net Cash Used For Investing Activities (273.5) (32.3)
--------- ---------
Financing Activities
Proceeds from long-term borrowings 32.0 6.5
Principal payments on long-term borrowings (183.6) (154.0)
Cash dividends paid - (18.5)
Other - net 10.8 14.4
Discontinued Operations - Net 8.6 (97.4)
--------- ---------
Net Cash Used For Financing Activities (132.2) (249.0)
--------- ---------
Decrease in Cash and Cash Equivalents (53.8) (35.8)
Cash and Cash Equivalents:
Beginning of period 70.3 62.1
--------- ---------
End of period $ 16.5 $ 26.3
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 73.5 $ 78.6
Income taxes $ 48.8 $ 5.3
========= =========
</TABLE>
(See accompanying notes to Consolidated Financial Statements)
-3-
<PAGE>
SANTA FE PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) The consolidated financial statements should be read in conjunction with
the Santa Fe Pacific Corporation ("SFP", "Registrant" or "Company") Annual
Report on Form 10-K for the year ended December 31, 1993 ("1993 Form
10-K"), including those financial statements and notes thereto incorporated
by reference from the Registrant's 1993 Annual Report to Shareholders and
Amendment No. 1 and Amendment No. 2 on Form 10-K/A dated June 29, 1994 and
October 5, 1994, respectively, and the Company's Current Report on Form 8-K
dated August 3, 1994 (as amended by Form 8-K/A dated October 5, 1994),
which restated certain sections of the 1993 Form 10-K to reflect SFP's gold
subsidiary, Santa Fe Pacific Gold Corporation ("SFP Gold"), as a
discontinued operation.
(b) In the opinion of SFP management, the consolidated statement of operations
for the three and nine months ended September 30, 1994 and 1993 reflects
all adjustments necessary for a fair statement of the results of
operations. Except as otherwise disclosed, all adjustments are of a normal
recurring nature.
(c) The consolidated statement of operations for the three and nine months
ended September 30, 1994 is not necessarily indicative of the results of
operations for the full year 1994.
(d) On June 29, 1994, SFP's Board of Directors approved the distribution to SFP
shareholders of its remaining 85.4% interest in SFP Gold. Holders of record
of SFP common stock as of September 12, 1994, received a distribution on
September 30, 1994 of one share of common stock of SFP Gold for every
approximately 1.7 shares of SFP common stock held. Accordingly, certain
current year and comparative prior year amounts in the consolidated
financial statements have been reclassified to present SFP Gold as a
discontinued operation. Under a ruling obtained from the Internal Revenue
Service, the distribution is tax-free to SFP shareholders.
Through June 30, 1994 the Company had recorded 1994 net income of $23.1
million from discontinued operations which represented earnings from first
and second quarter operations, and estimated transaction and other costs
related to the distribution partially offset by estimated earnings prior to
the distribution on September 30, 1994. No adjustments were required to be
made to these estimates in the third quarter of 1994. Income from
discontinued operations for the three months ended September 30, 1993 and
the nine months ended September 30, 1993 and 1994 was as follows:
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<PAGE>
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1994 1993
---- ---- ----
(In millions)
Revenues $ 83.2 $273.7 $204.6
------ ------ ------
Income before income taxes 18.4 44.2 277.9
Income taxes 10.9 21.1 130.4
------ ------ ------
Income from discontinued operations $ 7.5 $ 23.1 $147.5
------ ------ ------
In June 1993, SFP Gold completed an asset exchange with Hanson Natural
Resources Company ("Hanson"). SFP Gold received certain gold assets of
Hanson, and Hanson acquired essentially all coal and aggregate assets of
SFP Gold. Income from discontinued operations for the nine months ended
September 30, 1993 includes an after tax gain on the exchange of $108.3
million or $0.58 per share.
(e) In June 1994, SFP changed the eligibility requirements for its
postretirement medical benefits, resulting in a pre-tax, non-cash
curtailment gain of $29.5 million related to employees who are no longer
currently eligible for benefits. The Atchison, Topeka and Santa Fe Railway
Company ("Santa Fe Railway") recorded $28.1 million of the gain which is
included in Other income (expense)-net. The remaining $1.4 million is
reflected in the Equity in Earnings of Pipeline.
(f) At September 30, 1994, Santa Fe Railway had entered into various commodity
swap transactions with several counterparties covering approximately 90
million gallons of diesel fuel in 1994 which is anticipated to cover
approximately 90% of remaining 1994 fuel purchases and 160 million gallons
in 1995 which is anticipated to cover approximately 40% of 1995 fuel
purchases. These swap arrangements have an average price of 48 cents per
gallon. This price does not include taxes, fuel handling costs and any
differences which may occur from time to time between the prices of
commodities hedged and the purchase price of the Santa Fe Railway's diesel
fuel. The effect of the fuel hedges was to decrease operating expense by
$0.4 million for the three months ended September 30, 1994 and to increase
operating expense by $2.2 million for the three months ended September 30,
1993, and to increase operating expense by $3.0 million and $6.5 million
for the nine months ended September 30, 1994 and 1993, respectively. The
fair market value of the Santa Fe Railway's fuel hedging transactions at
September 30, 1994 was an unrealized gain of $6.1 million.
In addition, at September 30, 1994 the Company had four related interest
rate swap transactions with a total notional principal amount of $100
million, for the purpose of establishing rates in anticipation of an
expected future debt offering. The swap transactions called for the payment
of a fixed interest rate of 6.2%, which was based upon ten year treasury
notes, and the
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<PAGE>
receipt of a variable interest rate. The fair value of the swap
transactions at September 30, 1994 was an unrealized gain of approximately
$9.4 million.
In conjunction with a debt offering closed on November 8, 1994, the Company
closed out the swap transactions which resulted in a gain of $10.9 million.
The gain will be amortized as an adjustment to interest expense over the
ten year term of the borrowing.
(g) As a result of the distribution of common stock of SFP Gold on September
30, 1994, the number of stock options outstanding increased by 6.7 million
accompanied with a decrease in the related exercise price, both which
complied with regulations under the Internal Revenue Code. The adjustments
resulted from a provision in existing plans to modify awards to reflect the
impact of the SFP Gold spin-off.
Additionally, the shareholders of SFP and Burlington Northern Inc. ("BNI")
are to each vote on the proposed merger of SFP and BNI at special
shareholder meetings scheduled to be held on November 18, 1994. The
approval by shareholders would constitute a "change in control" for SFP
thereby accelerating the vesting of or causing a lapse of restrictions
applicable to most outstanding stock options, restricted stock awards, and
other awards under the Santa Fe Pacific Long Term Incentive Stock Plan and
the Santa Fe Pacific Incentive Stock Compensation Plan. Specifically, if
the merger is approved by shareholders, the vesting of restricted stock
awards would result in a net charge of approximately $5 million in the
fourth quarter of 1994.
(h) In the first quarter of 1993, Santa Fe Railway completed the second stage
of three scheduled closings on the sale to eight southern California
transportation agencies of certain interests in approximately 340 miles of
rail lines and additional property. Santa Fe Railway received $166.9
million in cash proceeds resulting in a pre-tax gain of $145.4 million. The
gain recognized is net of the cost of the properties and other expenses of
the sale. Proceeds of $126 million were used to retire debt related to
discontinued operations. The final closing occurred in the second quarter
of 1993 in which proceeds of $60 million were received. No gain was
recognized under the final closing as proceeds were offset by the cost of
property, other expenses of the sale and an obligation retained by Santa Fe
Railway, which under certain conditions, requires the repurchase of a
portion of the properties sold for $50 million.
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<PAGE>
(i) SFP is a party to a number of legal actions and claims, various
governmental proceedings and private civil suits arising in the ordinary
course of business, including those related to environmental exposures and
employee injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things, the meritorious
legal defenses available, it is the opinion of SFP management that none of
these items, when finally resolved, will have a material adverse effect on
the annual results of operations, financial position or liquidity of SFP,
although an adverse resolution of a number of these items in a single year
could have a material adverse effect on the results of operations for that
year.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Current Quarter Compared with Same Quarter of Preceding Year
- ------------------------------------------------------------
SFP reported net income for the third quarter of $50.5 million or $0.27 per
share compared to a net loss of $2.8 million or $0.01 per share last year. The
increase in net income primarily relates to: 1) higher operating income due to
increased traffic levels, continued operating efficiencies, and the adverse
effects of flooding in the midwest in 1993; 2) a $12.8 million increase in
equity in earnings of Pipeline, which includes a $12.2 million special
litigation and environmental charge in 1993; 3) higher income taxes in 1993
which reflect a $27.7 million charge for the retroactive effect of an increase
in the federal income tax rate from 34% to 35%; and 4) lower interest expense.
The above improvements are partially offset by a $28.8 million decrease in other
income (expense)-net. Other income (expense)-net in 1993 included pre-tax
credits totaling $21.6 million related to the favorable outcome of arbitration
and litigation settlements. Income for the third quarter of 1993 also included
$7.5 million from the Company's discontinued gold operations. These gold
operations were treated as discontinued as of June 30, 1994 and made no
contribution to 1994 third quarter results.
Net income from continuing operations was $50.5 million or $0.27 per share in
1994 as compared to adjusted net income from continuing operations of $12.0
million or $0.07 per share in 1993. This increase is primarily due to higher
operating income and lower interest expense. Adjustments in the 1993 period
include the pipeline litigation and environmental charge, the retroactive
increase in tax rates, and the favorable arbitration and litigation settlements,
discussed above.
Operating income at Santa Fe Railway for the quarter was $117.8 million, an
increase of $68.2 million over the $49.6 million reported in the third quarter
of 1993. Operating revenues of $680.2 million, which includes revenue from
miscellaneous transportation related items, rose 16% as carloadings increased
11% and average revenue per car increased 4%. Freight revenues by commodity for
the three and nine months ended September 30, 1994 and 1993 were as follows:
-8-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
------ ------ -------- --------
(In millions)
<S> <C> <C> <C> <C>
Intermodal
Intermodal Marketing Companies $114.2 $ 87.4 $ 326.6 $ 279.7
Direct Marketing 136.1 96.2 376.7 284.8
International 57.9 49.0 162.8 144.9
------ ------ -------- --------
Total Intermodal 308.2 232.6 866.1 709.4
------ ------ -------- --------
Carload Commodities
Petroleum 37.1 32.8 108.1 104.9
Chemicals & Plastics 36.1 35.8 106.7 99.9
Consumer/Food Products 31.7 30.0 98.1 94.8
Building Materials & Paper Prod. 31.4 27.5 90.4 79.8
Metals 19.9 19.8 60.3 57.1
------ ------ -------- --------
Total Carload Commodities 156.2 145.9 463.6 436.5
------ ------ -------- --------
Bulk Products
Coal 60.2 56.7 178.0 164.3
Minerals, Ores & Other 36.9 36.7 111.3 116.0
Grain 35.9 45.1 95.3 122.8
Grain Products 21.5 18.9 63.2 60.5
------ ------ -------- --------
Total Bulk Products 154.5 157.4 447.8 463.6
------ ------ -------- --------
Automotive
Motor Vehicles 42.9 33.1 142.0 117.3
Vehicle Parts 6.1 5.6 19.5 21.0
------ ------ -------- --------
Total Automotive 49.0 38.7 161.5 138.3
------ ------ -------- --------
Total Freight Revenue $667.9 $574.6 $1,939.0 $1,747.8
====== ====== ======== ========
</TABLE>
Intermodal revenues increased 33% to $308.2 million, partially because this was
the business area most severely affected by the 1993 flood. Direct marketing
revenues increased 41% primarily due to increased less-than-truckload, Quantum
and UPS shipments. Intermodal marketing companies revenues increased 31%
primarily due to a 24% volume increase and rate increases on all traffic
originating or terminating in either Texas or Northern California. Carload
commodity revenues of $156.2 million were 7% higher than last year, principally
reflecting increased volumes in building materials & paper products, petroleum
and consumer/food products. Bulk products revenues declined 2% as lower grain
shipments were partially offset by higher volumes in coal and grain products.
Grain revenues were lower due to reduced export
- 9 -
<PAGE>
grain shipments, while coal traffic increased as utilities experienced increased
demand and continued to build inventory levels. Automotive revenues increased
27% to $49.0 million due to higher volumes and average revenue per car.
Quarterly operating expenses for Santa Fe Railway were $562.4 million, an
increase of 5% from last year reflecting both volume increases and inflation.
Compensation and benefits expense of $208.5 million increased 7% as the effects
of higher traffic levels were partially offset by operating efficiencies.
Contract services expense increased $18.5 million due to higher business volumes
and increased use of contracted locomotive maintenance, partially offset by the
absence of expenses incurred as a result of the 1993 flooding. Materials and
supplies expense decreased $7.1 million due to lower locomotive materials
expense. Other expense decreased $8.4 million due in part to 1993 detour
expenses incurred as a result of the floods.
SFP's investment in Santa Fe Pacific Pipeline Partners, L.P. ("Pipeline
Partnership") produced equity income of $9.3 million in the quarter compared to
a loss of $3.5 million in the prior year. The increase in equity income is
principally due to a $12.2 million special litigation and environmental charge
recorded in 1993 and an increase in commercial volumes.
Interest expense decreased $4.5 million reflecting lower debt levels. Other
income (expense)-net decreased $28.8 million due primarily to credits of $21.6
million related to the favorable outcome of arbitration and litigation
settlements recorded in the third quarter of 1993 and lower real estate income.
Year to Date 1994 Compared to Year to Date 1993
- -----------------------------------------------
SFP reported net income of $176.2 million or $0.93 per share for the nine months
ended September 30, 1994 compared to $271.8 million or $1.46 per share in 1993.
The decrease in net income primarily relates to a pre-tax gain of $145.4 million
recorded in 1993 related to the sale of rail lines in southern California as
discussed in Note (h) and lower income from discontinued operations, including a
$108.3 million after tax gain on the exchange of mineral assets in 1993. The
above are partially offset by a $103.0 million increase in operating income due
primarily to increased traffic levels, continued operating efficiencies and the
adverse effects of flooding in the midwest in 1993, as well as lower interest
expense and higher other income (expense)-net.
Adjusted net income from continuing operations was $123.5 million or $0.65 per
share in 1994 compared to $61.4 million or $0.33 per share in 1993. Results of
1994 have been adjusted to exclude a pre-tax credit of $29.5 million resulting
from a change in postretirement medical benefits eligibility requirements
discussed in Note (e), a $12.3 million pre-tax charge related to an adverse
appellate court decision and pre-tax gains of $34.2 million related to the sale
of an investment and a favorable litigation settlement. Results for 1993
-10-
<PAGE>
have been adjusted to exclude the third quarter special items discussed
previously and the gain on the sale of California lines.
Santa Fe Railway's operating income for the first nine months was $305.9 million
compared with $202.9 million a year earlier. Operating revenues of $1,969.9
million improved 11% as carloadings increased 9% and average revenue per car
increased 2%. Intermodal revenues increased 22% compared to last year
reflecting increased carloadings in the intermodal marketing company and direct
marketing segments, and higher average revenue per car in intermodal marketing
companies. Carload commodities revenues increased 6% primarily reflecting
increased volumes in building materials & paper products and chemicals &
plastics. Bulk products revenues declined 3% as lower export grain shipments
were partially offset by higher coal revenues. Automotive revenues increased
17% reflecting higher volumes and average revenue per car.
Operating expenses at Santa Fe Railway were $1,664.0 million, a 6% increase over
last year. Compensation and benefits expense was $25.3 million of 4% above last
year due to higher traffic levels, partially offset by operating efficiencies.
Contract services expense of $282.3 million was 18% above last year principally
reflecting higher volumes and increased use of contract services for locomotive
maintenance. Equipment rents expense of $185.3 million was 9% above last year
and fuel expense of $182.9 million was 6% above last year, both reflecting
increased business volumes.
Income from SFP's equity investment in the Pipeline Partnership of $26.3 million
increased by $15.2 million compared to last year, primarily due to the absence
of the $12.2 million third quarter 1993 special litigation and environmental
charge discussed previously, a $1.4 million credit related to the change in
postretirement benefits eligibility requirements recorded in 1994, and volume
increases at the Pipeline Partnership.
Interest expense of $89.5 million was $14.2 million lower due principally to
lower outstanding debt. Other income (expense)-net increased $18.0 million and
includes the net favorable impacts of 1994 special items including the credit
for the change in postretirement medical benefits eligibility requirements
discussed in Note (e), pre-tax gains of $34.2 million related to the sale of an
investment and a favorable litigation settlement, partially offset by the $12.3
million charge for an adverse appellate court decision. Other income (expense)-
net in 1993 included credits of $21.6 million related to the favorable outcome
of arbitration and litigation settlements. Excluding special items in both
years, other income (expense)-net declined $10.4 million from last year,
primarily the result of lower real estate income.
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<PAGE>
Financial Condition and Other Matters
- -------------------------------------
Year-to-Date Cash Flow
- ----------------------
For the nine months ended September 30, 1994, net cash provided by operating
activities from continuing operations totaled $297.6 million which includes net
income before depreciation and deferred taxes and a $40 million sale of accounts
receivable. Total capital expenditures for the first nine months of 1994, which
include noncash transactions, were $485.8 million. Noncash transactions of
$152.6 million primarily represent directly financed equipment acquisitions and
reimbursable projects. Capital spending principally related to equipment, new
facilities and improvements to track structure and other road properties and was
primarily funded through cash generated from continuing operations, equipment
financings, short-term borrowings and available cash balances. Total principal
payments on long-term borrowings were $183.6 million for the nine months ended
September 30, 1994. SFP's ratio of total debt to capital was 47% at September
30, 1994 compared to 48% at December 31, 1993.
Rail Restructuring
- ------------------
Benefits from the eastern lines crew consist agreement of approximately $25
million annually and from centralization of certain transportation functions of
approximately $20 million annually are being realized as expected and as
previously disclosed. Restructuring costs paid of $51.9 million for the first
nine months of 1994 are also being incurred as expected, with annual payments
estimated to be approximately $65 million in 1994.
Merger Activities
- -----------------
On June 29, 1994, and as amended on October 27, 1994, SFP and BNI entered into a
definitive Agreement and Plan of Merger ("Merger Agreement") which calls for SFP
to merge with and into BNI, with BNI being the surviving corporation ("Merger").
Upon consummation of the Merger, each SFP share outstanding will be converted
into the right to receive 0.34 of a share of BNI stock.
The Merger has been approved by the boards of directors of SFP and BNI, but is
still subject to a number of conditions, including approval by the shareholders
of both BNI and SFP and approval by the Interstate Commerce Commission ("ICC").
A special meeting of SFP shareholders is scheduled to be held on November 18,
1994 to vote on the Merger.
Union Pacific Corporation ("UPC") has submitted various non-binding proposals to
acquire SFP. Additionally, UPC has solicited proxies from SFP shareholders to
vote against the Merger. UPC's latest proposal dated November 8, 1994 proposes a
two-step transaction using a voting trust, in which UPC would first acquire
about 57% of SFP's outstanding shares through a cash tender offer at a price of
$17.50 per share, with the remaining SFP shares to be exchanged on the basis of
0.354 of a share of UPC common stock for each share of SFP stock upon merger of
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<PAGE>
the two companies ("the UPC Proposal"). Both the cash and stock portions of the
UPC Proposal would be fully taxable to SFP shareholders. On November 10, 1994
UPC commenced the tender offer contemplated by the UPC Proposal.
The UPC Proposal is contingent on a number of conditions including: there being
validly tendered and not withdrawn prior to the expiration of the proposal, a
number of SFP shares which constitutes at least a majority of the shares
outstanding; negotiation of a definitive merger agreement between SFP and UPC;
SFP shareholders not approving the Merger Agreement with BNI; UPC satisfaction
that Section 203 of the Delaware General Corporation Law has been complied with
or is invalid or otherwise inapplicable; termination of the Merger Agreement
with BNI; receipt of an opinion from the ICC Staff, satisfactory to UPC, that
the voting trust to be used is consistent with the policies of the ICC; approval
of the boards of directors of SFP and UPC; and approval by SFP shareholders.
ICC approval of the proposed merger would be required; however, such would not
effect consideration received by SFP shareholders due to the voting trust.
As part of the above proposal, UPC also left open its previously submitted
alternative proposal to acquire SFP, which proposed to exchange 0.407 shares of
UPC stock for each share of SFP stock. This proposal would require, among other
things, the termination of the Merger Agreement with BNI; negotiation of a
definitive merger agreement between SFP and UPC; approval of the boards of
directors and shareholders of SFP and UPC; and ICC approval.
SFP announced on November 11, 1994 that its board of directors is evaluating the
latest UPC proposal.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- --------------------------
On June 30, 1994, shortly after announcement of the proposed BNI-SFP merger, two
purported stockholder class action suits were filed in the Court of Chancery of
the State of Delaware (Miller v. Santa Fe Pacific Corporation, C.A. No. 13587;
Consentino v. Santa Fe Pacific Corporation, C.A. No. 13588). On July 1, 1994,
two additional purported stockholder class action suits were filed in the Court
of Chancery of the State of Delaware (Fielding v. Santa Fe Pacific Corporation,
C.A. No. 13591; Wadsworth v. Santa Fe Pacific Corporation, C.A. No. 13597).
The actions name as defendants SFP, the individual members of the SFP Board of
Directors and BNI. In general, the actions variously allege that SFP's
directors breached their fiduciary duties to the stockholders by agreeing to
the proposed merger for allegedly "grossly inadequate" consideration in light of
recent operating results of SFP, recent trading prices of SFP's common stock and
other alleged factors, by allegedly failing to take all necessary steps to
ensure that stockholders will receive the maximum value realizable for their
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<PAGE>
shares (including allegedly failing to actively pursue the acquisition of SFP by
other companies or conducting an adequate "market check") and by allegedly
failing to disclose to stockholders the full extent of the future earnings
potential of SFP, as well as the current value of its assets. The Miller and
Fielding cases further allege that the proposed merger is unfairly timed and
structured and, if consummated, would allegedly unfairly deprive the
stockholders of standing to pursue certain pending stockholder derivative
litigation. Plaintiffs also have alleged that BNI is responsible for aiding and
abetting the alleged breach of fiduciary duty committed by the SFP Board. The
actions seek certification of a class action on behalf of SFP's stockholders. In
addition, the actions seek injunctive relief against consummation of the Merger
and, in the event that the Merger is consummated, the rescission of the Merger,
an award of compensatory or rescissory damages and other damages, including
court costs and attorneys' fees, an accounting by defendants of all profits
realized by them as a result of the Merger and various other forms of relief.
On October 6, 1994, shortly after UPC issued a press release in which it
announced the UPC Proposal, plaintiffs in the four lawsuits described above
filed in the Court of Chancery of the State of Delaware a Consolidated Amended
Complaint (Miller v. Santa Fe Corporation, C.A. No. 13587). In their
Consolidated Amended Complaint, plaintiffs repeat the allegations contained in
their earlier lawsuits and further allege that, in light of the UPC Proposal,
SFP's directors have breached their fiduciary duties by failing to fully inform
themselves about and to adequately explore available alternatives to the Merger,
including the alternative of a merger transaction with UPC, and by failing to
fully inform themselves about the value of SFP. The Consolidated Amended
Complaint seeks the same relief sought in plaintiffs' earlier lawsuits and, in
addition, requests that SFP's directors be ordered to explore alternative
transactions and to negotiate in good faith with all interested persons,
including UPC.
Also on October 6, 1994, UPC filed in the Court of Chancery of the State of
Delaware a lawsuit against SFP, SFP's directors and BNI (Union Pacific
Corporation v. Santa Fe Pacific Corporation, C.A. No. 13778). In its Complaint,
UPC alleges that SFP's management purportedly rejected the UPC Proposal "out-of-
hand" without regard to the facts of the UPC Proposal, and that SFP's directors
have breached their fiduciary duties by purportedly refusing to negotiate with
UPC regarding the UPC Proposal, by refusing to terminate the Merger Agreement
and by failing to include in the Merger Agreement a provision allowing SFP to
terminate the Merger Agreement in order to enter into an agreement with UPC. UPC
seeks injunctive relief mandating SFP to negotiate with UPC regarding the UPC
Proposal, a declaration that UPC has not tortiously interfered with defendants'
contractual or other legal rights, an injunction against defendants from
bringing or maintaining any action against UPC alleging that UPC has tortiously
interfered with defendants' contractual or other legal rights, a declaration
that the Merger Agreement permits SFP to terminate the Merger Agreement in order
to accept the UPC Proposal or, in the alternative, that the Merger Agreement is
invalid and unenforceable for failing to include such a provision, and an award
of UPC's costs in bringing its lawsuits, including reasonable attorneys' fees.
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<PAGE>
Also, on October 6, 1994, five additional purported stockholder class action
suits relating to SFP's proposed participation in the Merger were filed in the
Court of Chancery of the State of Delaware (Weiss v. Santa Fe Pacific
Corporation, C.A. No. 13779; Lifshitz v. Krebs, C.A. No. 13780; Stein v. Santa
Fe Pacific Corporation, C.A. No. 13782; Lewis v. Santa Fe Pacific Corporation,
C.A. No. 13783; Abramson v. Lindig, C.A. No. 13784). On October 7, 1994, three
more purported stockholder class action suits relating to SFP's proposed
participation in the Merger were filed in the Court of Chancery of the State of
Delaware (Graulich v. Santa Fe Pacific Corporation, C.A. No. 13786; Anderson v.
Santa Fe Pacific Corporation, C.A. No. 13787; Green v. Santa Fe Pacific
Corporation, C.A. No. 13788). All of these lawsuits name as defendants SFP and
the individual members of the SFP Board of Directors; the Lifshitz case further
names BNI as a defendant. In general, these actions variously allege that, in
light of SFP's recent operating results and the UPC Proposal, SFP's directors
have breached their fiduciary duties to stockholders by purportedly not taking
the necessary steps to ensure that SFP's stockholders will receive "maximum
value" for their shares of SFP stock, including purportedly refusing to
negotiate with UPC or to "seriously consider" the UPC Proposal and failing to
announce any active auction or open bidding procedures. The actions generally
seek relief that is materially identical to the relief sought in the Miller
case, and in addition seek entry of an order requiring SFP's directors to
immediately undertake an evaluation of SFP's worth as a merger/acquisition
candidate and to establish a process designed to obtain the highest possible
price for SFP, including taking steps to "effectively expose" SFP to the
marketplace in an effort to create an "active auction" in SFP. The Weiss case
further seeks entry of an order enjoining SFP's directors from implementing any
poison pill or other device designed to thwart the UPC Proposal or any other
person's proposal to acquire SFP.
The Anderson lawsuit was subsequently withdrawn. On October 14, 1994, the
Chancery Court entered an order consolidating the remaining eleven purported
stockholder class action suits under the heading In Re Santa Fe Pacific
Corporation Shareholder Litigation, C.A. No. 13587.
Also, on October 14, 1994, plaintiffs in the consolidated case filed a
Consolidated and Amended Complaint, which supersedes the previously filed
stockholder complaints. The Consolidated and Amended Complaint generally repeats
the allegations of, and requests the same relief as, the plaintiffs' earlier
complaints and, in addition, alleges that SFP's directors have breached their
fiduciary duties by approving and recommending to SFP stockholders the Merger,
by failing to fully inform themselves about, or to provide information to,
possible alternative merger candidates such as UPC, and by issuing the Original
Joint Proxy Statement/Prospectus, which purportedly fails to disclose all
material information relevant to SFP stockholders' consideration of the
proposed Merger, including failure to disclose that SFP's directors purportedly
have an implied right to terminate the Merger Agreement as a result of the
allegedly superior UPC Proposal, failure to disclose the facts considered by
SFP's directors in allegedly determining that the UPC Proposal does not
represent a fair price, failure to disclose sufficient facts relating to, and
the relative
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<PAGE>
risks of obtaining, ICC approval of a BNI-SFP Merger and a UPC-SFP merger to
enable SFP stockholders to weigh and compare the likelihood of obtaining ICC
approval of those transactions, failure to disclose the substance of
negotiations in late June 1994 between BNI and SFP leading to the Merger
Agreement, failure to disclose advice provided to SFP's directors regarding the
background of negotiations between BNI and SFP that had occurred since 1993 and
the significance of that advice to the directors' approval of the Merger
Agreement, failure to disclose facts regarding the SFP directors' consideration
of a possible combination transaction with Kansas City Southern Industries, Inc.
("KCSI"), including the anticipated terms and potential value and benefits to
SFP of such a transaction and the reasons why SFP concluded that the BNI
transaction was superior and withdrew its bid submitted to KCSI in late June
1994, and failure to disclose that SFP did not provide any confidential
information to UPC in response to an October 11, 1994 letter from Drew Lewis,
UPC's Chairman and CEO, to Mr. Krebs. The Consolidated and Amended Complaint
seeks, in addition to the relief requested in the prior stockholder complaints,
an order requiring SFP to provide access to information concerning SFP or the
Merger to any bona fide bidder, including UPC.
On October 18, 1994, the Chancery Court entered an order denying two motions,
one filed by UPC and one filed by the stockholder plaintiffs seeking the
establishment of an expedited schedule that would have included a preliminary
injunction hearing prior to the scheduled November 18, 1994 meeting of SFP
stockholders. The Chancery Court concluded that an expedited schedule was
unnecessary because, if plaintiffs prevailed on their claims, it could
subsequently enter appropriate relief after SFP stockholder approval but before
consummation of the Merger.
On October 19, 1994, UPC filed an Amended and Supplemental Complaint. In
addition to repeating the allegations and requested relief of UPC's earlier
Complaint, the Amended and Supplemental Complaint adds James A. Shattuck as an
additional plaintiff, alleges that SFP has made purportedly false and misleading
statements in the Original Joint Proxy Statement/Prospectus and elsewhere
regarding the UPC Proposal and the Merger, including statements denying that
SFP's directors have the purported right to terminate the Merger Agreement in
order to enter into a merger agreement with UPC based upon the UPC Proposal and
denying that the Merger Agreement is allegedly void for failing to include such
a right, statements failing to disclose the purportedly preclusive effect of the
Merger Agreement on the SFP directors' consideration of other combination
proposals, including the UPC Proposal, statements allegedly suggesting that the
UPC Proposal does not represent a fair price, and statements allegedly
misrepresenting UPC's objectives in proposing a UPC-SFP merger and the
likelihood of obtaining ICC approval of such a merger. The Amended and
Supplemental Complaint seeks, in addition to the relief requested in UPC's
original Complaint, further declaratory and injunctive relief consisting of a
declaration that the Original Joint Proxy Statement/Prospectus is false and
misleading, an injunction preventing SFP from making any further allegedly
materially false and misleading statements regarding the UPC Proposal or the
Merger and an injunction against the November 18, 1994 SFP stockholder meeting.
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<PAGE>
On November 4, 1994, a purported stockholder class action suit relating to the
proposed BNI-SFP merger was filed in the Chancery Division of the Circuit Court
of Cook County of the State of Illinois (Rubin v. Santa Fe Pacific Corporation,
No. 94 CH 10022). The action names as defendants SFP and the individual members
of the SFP Board of Directors. The action alleges that SFP's directors breached
their fiduciary duties to shareholders by rejecting UPC's October 30, 1994
revised merger proposal, which incorporated a revised proposed exchange ratio of
.407 shares of UPC common stock for each share of SFP common stock, and that, as
a result, SFP's stockholders have been deprived of the increase in the market
value of their SFP common stock that allegedly would have occurred if SFP's
directors had accepted UPC's October 30, 1994 proposal. The action seeks
certification of a class action on behalf of SFP stockholders, an
injunction preventing SFP and the SFP directors from taking any further action
towards accepting the BNI-SFP merger, an award of unspecified general and
special damages, appointment of a trustee to supervise the requested relief,
establishment of a common fund on behalf of the class and an award of court
costs, reasonable attorneys' fees and any other relief deemed appropriate by the
Court.
The Company believes that all of these lawsuits are meritless and intends to
oppose them vigorously.
Reference is made to the action entitled David Rodriguez, derivatively on behalf
of Santa Fe Pacific Corporation v. John S. Reed, et. al. No. 92 CH 06618
reported in SFP's Annual Report on Form 10-K for the year ended December 31,
1993. The parties to the derivative action pending in the Circuit Court of Cook
County, Illinois, have entered into a Stipulation of Settlement which, if
approved by the Court, will result in the termination of that action. On October
17, 1994, the Court entered an Order giving preliminary approval to the proposed
settlement, approving notice of the proposed settlement to SFP stockholders,
setting December 7, 1994 as the date by which any written objections to the
settlement must be filed, and scheduling a fairness hearing with respect to the
settlement for December 14, 1994. In substance, the settlement, if approved by
the Court, will result in the payment to the Company of approximately
$11,000,000, provided by certain D&O insurance carriers, net of plaintiff's
attorney's fee award and expenses. The Stipulation of Settlement provides for an
award of fees and expenses for plaintiff's attorney of $2,710,000 and an
incentive award to plaintiff of $40,000.
SFP is a party to a number of other legal actions and claims, including various
governmental proceedings and private civil suits arising in the ordinary course
of business, including those related to environmental exposures and employee
injury claims. While the final outcome of these items cannot be predicted with
certainty, considering among other things, the meritorious legal defenses
available, it is the opinion of SFP management that none of these items, when
finally resolved, will have a material adverse effect on the annual results of
operations, financial position or liquidity of SFP, although an adverse
resolution of a number of these items in a single year could have a material
adverse effect on the results of operations for that year.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
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(a) See Index to Exhibits on page E-1 for a description of the exhibits filed as
part of this report.
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K dated August 3, 1994,
including Amendment No. 1 thereto on Form 8-K/A dated October 5, 1994,
amending SFP's restated financial information related to discontinued
operations.
Registrant filed a Current Report on Form 8-K dated October 5, 1994, which
included merger related press releases from SFP, BNI and UPC.
Registrant filed a Current Report of Form 8-K dated October 19, 1994, which
included SFP's third quarter 1994 earnings press release.
Registrant filed a Current Report on Form 8-K dated October 28, 1994,
related to pro-forma financial information on the proposed SFP-BNI merger
and certain other related information.
Registrant filed a Current Report on Form 8-K dated November 2, 1994,
related to SFP's Board of Directors rejection of UPC's revised, non-binding
proposal to acquire SFP through an exchange of stock, with a 0.407 exchange
ratio.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SANTA FE PACIFIC CORPORATION
(Registrant)
/s/ Thomas N. Hund
------------------------------------
Thomas N. Hund
Vice President & Controller
(On Behalf of the Registrant and as
Principal Accounting Officer)
Schaumburg, Illinois
November 14, 1994
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