1 of 16
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark
One)
(X) Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended March 31, 1995.
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission File No. 001-11045
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY
Delaware Corporation - I.R.S. No. 13-3526817
165 North Canal Street
One North Western Center
Chicago, Illinois 60606
Registrant's Telephone Number (312) 559-7000
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
Chicago and North Western Transportation Company has the following common
shares, par value $.01 per share, outstanding at April 20, 1995:
Common 44,537,821<PAGE>
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Statement
The following (a) condensed balance sheet as of December 31, 1994, which has
been derived from audited financial statements, and (b) unaudited, interim
financial statements included herein have been prepared by the Company
pursuant to the published rules and regulations of the Securities and Exchange
Commission and, in the case of interim financial statements, in the opinion of
management, reflect all adjustments (which adjustments consist only of normal
recurring items) necessary to present fairly the results of operations of the
Company. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's 1994 Annual Report on Form 10-K.<PAGE>
3
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars except for per share amounts
(Unaudited)
Three Months Ended
March 31,
1995 1994
Operating revenues $307.0 $273.9
Operating expenses 237.8 225.7
Operating income $ 69.2 $ 48.2
Other income (loss), net (3.1) 0.2
Interest expense 25.0 22.6
Income before income taxes $ 41.1 $ 25.8
Income taxes:
Currently payable $ 2.7 $ 0.3
Deferred 11.7 9.5
$ 14.4 $ 9.8
Net income $ 26.7 $ 16.0
Earnings per common share $ 0.58 $ 0.35
Shares used in earnings per share computation (thousands) 45,731 45,303
See accompanying notes to condensed consolidated financial statements.<PAGE>
4
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Millions of dollars
(Unaudited)
ASSETS
March 31, December 31,
1995 1994
Current assets:
Cash and temporary cash investments $ 106.5 $ 105.4
Accounts receivable, net 152.6 143.7
Materials and supplies, at average cost 36.9 27.6
Prepaid expenses and other 8.0 6.2
$ 304.0 $ 282.9
Property:
Road $2,066.1 $2,055.0
Equipment 150.3 148.5
Accumulated depreciation (353.5) (330.7)
$1,862.9 $1,872.8
Other assets $ 61.8 $ 62.9
Total assets $2,228.7 $2,218.6
See accompanying notes to condensed consolidated financial statements.<PAGE>
5
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Millions of dollars
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1995 1994
Current liabilities:
Accounts payable and accrued expenses $ 202.0 $ 212.1
Payroll and vacation pay 39.1 35.6
Interest 7.7 10.7
Taxes 24.8 19.9
Total, excluding long-term debt
due within one year $ 273.6 $ 278.3
Long-term debt due within one year 103.7 95.4
$ 377.3 $ 373.7
Casualties and environmental reserve 76.6 76.7
Other liabilities 62.2 68.6
Deferred income taxes 360.9 350.0
Long-term debt, excluding amounts due
within one year 1,007.3 1,033.7
Total liabilities $1,884.3 $1,902.7
Stockholders' equity:
Common stock, par value $.01 per share,
authorized 250,000,000 shares, issued
44,193,814 shares and outstanding
44,168,335 shares (of which 12,835,304
are non voting) at March 31, 1995 $ 0.7 $ 0.4
Capital surplus 544.7 543.2
Retained income (201.0) (227.7)
$ 344.4 $ 315.9
Total liabilities and stockholders' equity $2,228.7 $2,218.6
See accompanying notes to condensed consolidated financial statements.<PAGE>
6
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars
(Unaudited)
Three Months Ended
March 31,
1995 1994
Cash flow from operating activities:
Net income $ 26.7 $ 16.0
Items not affecting cash flow from operating activities:
Depreciation 20.2 18.5
Amortization of debt cost 1.8 1.7
Gain from sales of property, net (0.1) (0.4)
Deferred income taxes 11.7 9.5
Cash provided from operating activities
before changes in assets and liabilities $ 60.3 $ 45.3
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (8.9) 3.1
(Increase) in other current assets except cash (11.2) (12.5)
(Decrease) in accounts payable and accruals (4.7) -
Other, net (7.1) (13.0)
Net cash flow from operating activities $ 28.4 $ 22.9
Cash flow from financing activities:
Proceeds from issuance of common stock $ 0.9 $ 1.1
Payments on long-term debt (17.9) (24.9)
Prepayment of long-term debt (0.3) (5.4)
Net cash flow used for financing activities $(17.3) $(29.2)
Cash flow from investing activities:
Additions to property $(11.8) $(11.3)
Proceeds from property dispositions 1.5 1.5
Other, net 0.3 0.1
Net cash flow used for investing activities $(10.0) $ (9.7)
Increase (decrease) in cash & temporary cash investments $ 1.1 $(16.0)
Cash and temporary cash investments - beginning of period 105.4 70.9
- end of period $106.5 $ 54.9
See accompanying notes to condensed consolidated financial statements.<PAGE>
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) Change of control.
On March 9, 1995, the Company agreed to be acquired by UP Rail, Inc. ("UP
Rail"), a subsidiary of Union Pacific Corporation ("Parent"), in a
transaction in which UP Rail would acquire 100% of the Company's
outstanding shares of common stock, par value $.01 per share (the
"Shares") not already owned by the Parent, at $35 per share in cash,
subject to negotiation and execution of a mutually satisfactory definitive
merger agreement and approvals by the Parent's and the Company's
respective boards of directors.
On March 16, 1995, the respective boards of directors of the Company and
the Parent unanimously approved a definitive merger agreement (the "Merger
Agreement") and the Merger Agreement was executed.
On March 23, 1995, pursuant to the Merger Agreement, UP Rail initiated a
tender offer (the "Offer") to acquire the entire equity interest in the
Company. The Offer was consummated April 25, 1995, as a result of which
UP Rail owns approximately 99.5% of the Shares (including shares acquired
by UP Rail on conversion of Non-Voting Common Stock of the Company).
Trading of the Company's Common Stock on the New York Stock Exchange was
suspended April 25, 1995, and the Common Stock is in the process of being
delisted.
2) Other income (loss) consists of the following: Three Months Ended
March 31,
1995 1994
(millions of dollars)
Interest income $ 1.6 $ 0.6
Gains from sales of property and investments 0.1 0.7
Rents from property not used in operations 1.1 1.0
Merger expense (6.0) -
Unrealized loss on excess fuel hedges - (1.4)
Other, net 0.1 (0.7)
$(3.1) $ 0.2
3) Additional disclosures to Condensed Consolidated Statement of Cash Flows
(millions of dollars) are as follows:
The following cash payments were made in the periods shown:
1995 1994
Interest $26.1 $22.2
Income taxes - $ 0.4
The Company considers all short-term investments which have an original
maturity of less than ninety days as cash equivalents.<PAGE>
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
4) Contingent liabilities.
The Company's operations are subject to a variety of federal, state and
local environmental and pollution control statutes and regulations. The
Company has been named as a potentially responsible party ("PRP") in three
proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), and in five state
Superfund matters. The Company is also a defendant in one private CERCLA
cost recovery action. The current estimate of the total cost of
remediation for these proceedings to all PRPs aggregates approximately $82
million. In determining its reserves, the Company has assumed that other
PRPs will pay appropriate shares of remediation obligations, except when
the Company is aware other PRP's are incapable of doing so.
Additionally, the Company has environmental exposure from current and
former railroad operating properties, fueling facilities, leased
properties and pending litigation and enforcement actions. The Company's
environmental exposure is reevaluated periodically. At March 31, 1995,
the Company's total reserve for environmental liabilities was $27 million.<PAGE>
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 1995 Compared to First Quarter 1994
Operating Revenues
Net freight revenues were $274.9 million in 1995, an increase of $28.1
million, or 11.4%, compared with 1994. The total number of loads handled in
1995 was 673,036, an increase of 62,501 loads, or 10.2%, compared with 1994.
The balance of the operating revenues resulted from the Company's commuter and
other operations.
Freight Revenue Comparison by Business Group (millions of dollars)
Three Months Ended March 31,
Percent
Change
1995 1994 from 1994
Energy (coal):
WRPI $ 68.5 $ 59.4 15.3 %
Core railroad 35.6 31.6 12.7
Agricultural Commodities 55.2 44.5 24.0
Intermodal 31.6 28.7 10.1
Automotive, Steel and Chemicals 50.7 50.8 (0.2)
Consumer Products 33.3 31.8 4.7
Net freight revenues $274.9 $246.8 11.4
Commuter 25.9 20.6 25.7
Other 6.2 6.5 (4.6)
Total operating revenues $307.0 $273.9 12.1 %
Load Comparison by Business Group (loads in thousands)
Three Months Ended March 31,
Percent
Change
1995 1994 from 1994
Energy (coal):
WRPI 250.4 212.9 17.6 %
Core railroad 1/ 18.8 17.9 5.0
Agricultural Commodities 82.7 72.5 14.1
Intermodal 187.1 174.2 7.4
Automotive, Steel and Chemicals 87.6 86.5 1.3
Consumer Products 46.4 46.5 (0.2)
Total loads 673.0 610.5 10.2 %
1/ Excludes 86,500 and 73,400 loads in 1995 and 1994, respectively, which
originated on WRPI (and are treated as WRPI loads) and moved over the core
railroad to midwestern utilities.<PAGE>
10
Operating Revenues - (Cont'd.)
ENERGY (Coal)--Volume and net revenues increased compared to 1994 related to
coal originated in the southern Powder River Basin in Wyoming. WRPI volume
and revenue increases were due to new contracts and additional volume to
existing customers. Western coal and core railroad coal shipments increased
17.6% and 15.2%, respectively. WRPI revenue increases were less than volume
increases due to new and renewed contracts at rates lower than those in place
in 1994.
AGRICULTURAL COMMODITIES--Volume and net revenues increased due to a record
corn harvest in 1994. Shipments of raw grains and finished grain products
increased 17% and 26%, respectively.
INTERMODAL--Volume and net revenues increased due to increased traffic from
existing international steamship customers.
AUTOMOTIVE, STEEL AND CHEMICALS--Volume increased compared to 1994, primarily
due to a 6.4% increase in automobile shipments and a 26.3% increase in
metallic ore shipments. These increases were offset by the loss of an ore
contract. Net revenues decreased slightly due to the change in traffic mix.
CONSUMER PRODUCTS--Net revenues increased and volume decreased slightly due to
changes in traffic mix.
Operating Expenses
Operating expenses were $237.8 million in 1995, an increase of $12.1 million,
or 5.4%, compared with 1994 primarily due to increased labor, depreciation and
locomotive rent caused by traffic increases. The table below is a comparison
of operating expenses.
Operating Expenses (millions of dollars)
Percent change
1995 1994 from 1994
Compensation and benefits $113.2 $103.1 9.8 %
Diesel fuel 20.9 22.2 (5.9)
Material and purchased services 20.5 22.4 (8.5)
Hire of freight equipment 16.2 18.7 (13.4)
Other rents 22.1 18.3 20.8
Depreciation 20.2 18.6 8.6
Casualties 10.4 9.5 9.5
Other* 14.3 12.9 10.9
Total expenses $237.8 $225.7 5.4 %
*Other includes property taxes, utilities, vehicle operating costs, FRA and
railroad association fees, and other general expenses.<PAGE>
11
Operating Expenses - (Cont'd.)
1995 compensation and benefits expense increased due to new employees hired
for train and engine service. Payroll taxes and other fringe benefit costs
increased compared with 1994 due to increased payroll taxes related to new
employees and higher wages, an increase in the health and welfare insurance
rate, and increased profit sharing and management incentive compensation.
Diesel fuel expense in 1995 decreased due to a 7.6% decrease in the average
price per gallon and the effects of mild winter weather compared to 1994,
partially offset by a 2.1% net increase in consumption related to the increase
in traffic.
Material and purchased services decreased compared to 1994 primarily due to
reduced locomotive and freight car repair expenses, partially offset by
increased maintenance of way repair expenses.
Hire of freight equipment decreased due to increased earnings from new
equipment and favorable winter weather. Other rents increased due to new
locomotive leases.
Depreciation expense increased due to increased traffic levels on WRPI, where
track structure components are depreciated on the unit of production method,
and increases in the depreciation base due to property additions.
Casualty expense, which includes personal injury, environmental and insurance
expense, increased due to increased personal injury and loss and damage
expenses, partially offset by a reduced environmental accrual due to a change
in remediation required at a major site and State reimbursements.
Other expenses increased due to increased property tax, utility and relocation
expenses.
OTHER INCOME, NET
Other income (loss) decreased compared to 1994 due to $6.0 million of merger
expenses, partially offset by a $1.0 million increase in interest income. See
Note 2 to Condensed Consolidated Financial Statements for a summary of other
income, net.
INTEREST EXPENSE
Interest expense increased by $2.4 million compared to 1994 due to increased
interest rates, partially offset by lower debt levels.
INCOME TAXES
The income tax provision increased compared to 1994 due to the increase in
pretax income in 1995.<PAGE>
12
OTHER MATTERS
On April 25, 1995, UP Rail's tender offer was consummated, increasing its
ownership of the Company to approximately 99.5%. See Note 1 to Condensed
Consolidated Financial Statements.
UP Rail has stated it intends to continue to review the Company and its
assets, businesses, operations, properties, policies, corporate structure,
capitalization and management and consider if any changes would be desirable
in light of the circumstances then existing. Parent has stated that upon
consummation of the Merger, it intends to continue to review the business of
the Company and identify synergies and cost savings, including its freight
traffic arrangements with the Company.
The acquisition will be accounted for under the purchase method of accounting,
and assets and liabilities will be recorded at their fair market value. In
addition, accounting policies will be conformed, operations will be merged and
duplicate facilities and head count will be removed. As a result, future
earnings will differ from those recorded had there been no acquisition.
LIQUIDITY
At March 31, 1995, the Company's working capital totaled a negative $73.3
million, while cash and temporary cash investments totaled $106.5 million.
The Company has historically been able to operate with negative working
capital due to a higher turnover rate for receivables than accounts payable.
The Company has consolidated indebtedness that is substantial in relation to
its common stockholders' equity. As of March 31, 1995, the Company had long-
term indebtedness including current maturities of $1.1 billion and common
stockholders' equity of $344.4 million.
The Company's cash requirements for financing and investing activities through
the end of 1995 are comprised of interest and principal payments under its
outstanding indebtedness and capital expenditures. The Parent is in the
process of refinancing the Company's existing debt agreements.
The Company uses a program of financial derivatives or hedges to limit its
exposure to interest rate and fuel commodity market risks and to comply with
provisions of its debt agreements. The Company uses both swaps and caps in
its interest rate hedging program. Through the end of 1996, under $200
million of indebtedness is unhedged. The Parent is currently reviewing this
program.
<PAGE>
13
CAPITAL AND MAINTENANCE EXPENDITURES
The Company allocates funds for capital and maintenance expenditures based on
its capital needs indicated by its long-term planning and availability of
internally generated funds or suitable long-term financing.
Capital expenditures in the first quarter of 1995 were $11.8 million. A $144
million capital expenditure program is presently authorized for the Company,
subject to review by the Parent. The majority of the capital expenditures
program covers replacement of rail, ties, and other track material system-
wide, expansion of train handling capacity from the southern Powder River
Basin by WRPI, and construction of new facilities to serve shippers. The
Company plans to acquire equipment under operating leases with a cost to
lessors of $185 million in 1995, subject to review by the Parent.
<PAGE>
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 28, 1995, an amended class action complaint, amending two
of five previously filed purported class action suits (the "Amended Class
Action"), was filed in the Court of Chancery in Delaware (the "Court"). The
Amended Class action reiterated the claims which had been made in the earlier
suits which it amended, and also alleged, among other things, (i) that the
Blackstone Group L.P. ("Blackstone"), the investment bank retained by the
defendants to render a fairness opinion in connection with the Offer, is not
disinterested or independent and has a conflict of interest with regard to the
Offer, (ii) that the defendants breached or aided and abetted breaches of
their duties of good faith and loyalty by approving for themselves and members
of the Company's senior management lucrative compensation packages and other
financial benefits, (iii) that the defendants structured the transaction in
such a way as to prevent the Company's public stockholders from voting on the
Merger or exercising dissenters' rights, and (iv) that the defendants breached
their duties of candor and full disclosure by failing adequately to disclose,
among other things, the information described in this paragraph, the reasons
why the Company's Board failed to implement a stockholders' rights plan and
the reasons for alleged discrepancies and variations between valuation ranges
for the Shares as prepared by the financial advisors of Parent and the
Company, respectively.
On April 13, 1995, counsel for the Company, Parent and the
plaintiffs in the pending class action lawsuits entered into a memorandum of
understanding (the "Memorandum of Understanding") proposing to settle all of
the pending class action lawsuits relating to the Offer. Pursuant to the
Memorandum of Understanding, Parent and the Company agreed, among other
things, (i) to disseminate certain supplemental disclosures to the Company's
stockholders, (ii) to modify the Option Agreement (which was entered into in
connection with the Merger Agreement) to provide that the Purchaser may only
exercise its option thereunder to acquire additional Shares from the Company
(thereby permitting a short-form merger) if the Purchaser acquires more than
87.5% (previously 85%) but less than 90% of the Shares in the Offer, and (iii)
to extend the Expiration Date of the Offer until April 24, 1995. The actions
referred to in clauses (i) through (iii) have been taken. The Memorandum of
Understanding also provided that Parent and/or the Company pay plaintiffs'
counsel fees in an amount not to exceed $525,000, inclusive of expenses,
subject to approval of the Court. A stipulation of settlement, which would
settle the Amended Class Action, has been executed and submitted to the Court
for approval. A hearing has been set by the Court for June 20, 1995, to
determine the fairness of the settlement
There have been no material changes to previously reported
litigation.<PAGE>
15
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On March 10, 1995, the Company filed a report on Form 8-K
containing the text of a press release issued by the Company
dated March 10, 1995, announcing that the Union Pacific will
acquire 100 percent of CNW's common stock at $35 per share in
cash.
On March 17, 1995, the Company filed a report on Form 8-K
containing the text of a press release issued by the Company
and Union Pacific, dated March 17, 1995, announcing that they
have executed a definitive agreement reflecting the previously
announced transaction in which Union Pacific will acquire 100
percent of CNW's common stock at a price of $35 per share in
cash.
<PAGE>
16
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.
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY
By:
Date: May 15, 1995 /s/ R.J. Putz
R.J. PUTZ
Assistant Vice President- Controller<PAGE>
