<PAGE>
UNITED STATES
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 March 31, 1996
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 32-62756
SOUTHERN PACIFIC RAIL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-1092482
---------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of organization) identification no.)
Southern Pacific Building
One Market Plaza
San Francisco, CA 94105
Telephone Number (415) 541-1000
Indicate by checkmark 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.
Outstanding
Class at April 30, 1996
- - --------------------------------------- -------------------
Common stock, $.001 par value per share 156,154,639 shares
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(in millions)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... $ 51.1 $ 105.8
Accounts and notes receivable, net of
allowance for doubtful accounts........................ 116.8 104.1
Accounts receivable sales proceeds receivable........... 131.5 205.5
Materials and supplies at cost.......................... 80.9 76.0
Other notes receivable.................................. 7.1 7.7
Other current assets.................................... 54.1 58.7
-------- --------
Total current assets................................... 441.5 557.8
-------- --------
REAL ESTATE HELD FOR SALE................................. 343.1 341.9
-------- --------
PROPERTY, AT COST
Roadway and structures.................................. 2,624.4 2,584.2
Railroad equipment...................................... 1,556.1 1,557.3
Other property.......................................... 318.3 320.7
-------- --------
Total property........................................ 4,498.8 4,462.2
Less accumulated depreciation and amortization.......... 773.6 773.2
-------- --------
Property, net......................................... 3,725.2 3,689.0
-------- --------
OTHER ASSETS AND DEFERRED CHARGES
Notes receivable and other investments.................. 83.6 85.6
Other................................................... 89.6 75.1
-------- --------
Total other assets..................................... 173.2 160.7
-------- --------
Total assets......................................... $4,683.0 $4,749.4
======== ========
</TABLE>
(Continued)
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and wages payable............................ $ 137.1 $ 145.9
Accrued payables...................................... 174.4 181.2
Current portion of long-term debt..................... 56.7 58.9
Redeemable preference shares of a subsidiary.......... 2.0 2.0
Other current liabilities............................ 608.1 632.6
-------- --------
Total current liabilities........................... 978.3 1,020.6
-------- --------
LONG-TERM DEBT.......................................... 1,702.5 1,699.3
-------- --------
DEFERRED INCOME TAXES................................... 222.9 218.6
-------- --------
OTHER LIABILITIES....................................... 691.9 729.9
-------- --------
REDEEMABLE PREFERENCE SHARES OF A SUBSIDIARY............ 20.0 20.1
-------- --------
STOCKHOLDERS' EQUITY
Common stock......................................... 0.2 0.2
Additional paid-in capital........................... 1,122.2 1,121.8
Accumulated deficit.................................. (55.0) (61.1)
-------- --------
Total stockholders' equity.......................... 1,067.4 1,060.9
-------- --------
Total liabilities and stockholders' equity.......... $4,683.0 $4,749.4
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
----- ------
(in millions, except
per share amounts)
<S> <C> <C>
OPERATING REVENUES
Railroad.......................................... $ 763.4 $ 744.3
Other............................................. 22.1 22.5
------- -------
Total............................................ 785.5 766.8
------- -------
OPERATING EXPENSES
Railroad.......................................... 711.4 688.4
Other............................................. 20.9 21.7
------- -------
Total............................................ 732.3 710.1
------- -------
OPERATING INCOME.................................... 53.2 56.7
------- -------
OTHER INCOME (EXPENSE)
Gains from sales of property and real estate...... 15.2 13.9
Real estate and other rentals, net................ 4.6 3.9
Interest income................................... 2.5 3.7
Other expense, net................................ (20.9) (17.7)
------- -------
Total............................................ 1.4 3.8
------- -------
INTEREST EXPENSE.................................... 44.4 32.9
------- -------
INCOME BEFORE INCOME TAXES.......................... 10.2 27.6
------- -------
INCOME TAX EXPENSE
Current........................................... - 0.4
Deferred.......................................... 4.1 10.7
------- -------
Total............................................ 4.1 11.1
------- -------
NET INCOME.......................................... $ 6.1 $ 16.5
======= =======
INCOME APPLICABLE TO COMMON STOCKHOLDERS............ $ 6.1 $ 16.5
======= =======
EARNINGS PER SHARE.................................. $ 0.04 $ 0.11
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------ Additional
Number of Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ------ ---------- ----------- -----
(in millions)
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995....... 156 $ 0.2 $1,121.8 $ (61.1) $1,060.9
Net income.......................... - - - 6.1 6.1
Issuance of common stock............ - - 0.4 - 0.4
---- ----- -------- ------- --------
Balances at March 31, 1996.......... 156 $ 0.2 $1,122.2 $ (55.0) $1,067.4
==== ===== ======== ======= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------
1996 1995
-------- --------
(in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 6.1 $ 16.5
------- -------
Adjustments to net income:
Depreciation and amortization............................ 43.4 34.6
Deferred income taxes.................................... 4.1 10.7
Gains from sales of property and real estate............. (15.2) (13.9)
Other adjustments........................................ (31.0) (97.8)
------- -------
Total adjustments....................................... 1.3 (66.4)
------- -------
Net cash provided by (used for) operating activities..... 7.4 (49.9)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (69.2) (94.9)
Property sold and retired................................. 14.8 17.9
Decrease in short-term investments........................ - 65.0
Change in notes receivable and other investments, net..... (1.3) (3.7)
------- -------
Net cash used for investing activities................... (55.7) (15.7)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt and revolver repayment............................... (6.0) (9.8)
Redeemable preference shares repayment.................... (0.4) (0.4)
------- -------
Net cash used for financing activities................... (6.4) (10.2)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................... (54.7) (75.8)
CASH AND CASH EQUIVALENTS-BEGINNING OF THE PERIOD.......... 105.8 145.6
------- -------
CASH AND CASH EQUIVALENTS-END OF THE PERIOD................ $ 51.1 $ 69.8
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
(1) OWNERSHIP AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------
Southern Pacific Rail Corporation ("SPRC") is the parent company of
Southern Pacific Transportation Company ("SPT"), which includes St. Louis
Southwestern Railway Company ("SSW"), SPCSL Corp. ("SPCSL") and The Denver and
Rio Grande Western Railroad Company ("D&RGW"). SPRC together with its
subsidiaries is referred to as the Company. The consolidated financial
statements are prepared on the purchase accounting basis and include the
accounts of the Company and its subsidiaries on a consolidated basis. The
railroad subsidiaries report their financial position and results of operations
on the historical cost basis. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1995. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) necessary for a fair presentation of
interim period results have been included. However, these results are not
necessarily indicative of results for a full year.
(2) RECLASSIFICATIONS
-----------------
Certain of the prior period amounts have been reclassified to conform
to the March 31, 1996 consolidated condensed financial statement presentation.
(3) PROPOSED MERGER WITH UNION PACIFIC
----------------------------------
On August 3, 1995, the Board of Directors of SPRC approved an
agreement providing for the merger of SPRC and the Union Pacific Railroad
Company ("UPRR"), a wholly-owned subsidiary of Union Pacific Corporation ("UP").
Under the terms of the agreement, a subsidiary of UP acquired 25% of the common
stock of SPRC at a price of $25.00 per share pursuant to a tender offer. The
merger requires approval by the Surface Transportation Board ("STB") of the
Department of Transportation (successor to the Interstate Commerce Commission
("ICC")). Based upon the 255 day procedural schedule adopted by the ICC, the
earliest a written decision can be expected is August 1996. The shares
purchased in the tender offer are held in a voting trust pending a decision by
the STB. Following receipt of STB approval and the satisfaction of other
conditions, SPRC (and the UP subsidiary that purchased SPRC stock in the cash
tender offer) would be merged into UPRR. In the merger, each share of SPRC
stock would be converted, at the holder's election (subject to proration), into
the right to receive $25.00 in cash or 0.4065 shares of UP common stock. Of the
shares of SPRC common stock outstanding immediately prior to the merger (other
than the shares previously acquired by UP in the tender offer), 20% would be
acquired for cash and 80% would be acquired in exchange for shares of UP common
stock.
The merger agreement provides that prior to completion of the merger,
or termination of the merger agreement if that occurs before the merger is
completed, the business of the Company and its subsidiaries generally will be
conducted in the ordinary course of business consistent with past practice, or
pursuant to "customary actions". Customary actions are defined as actions in
the ordinary course of a person's business where the action is generally
recognized as being customary and prudent for other major enterprises in the
person's line of business. The merger agreement may be terminated by the Board
of Directors of either the Company or UP if the merger has not occurred
7
<PAGE>
on or prior to March 31, 1997. The agreement restricts the Company, with certain
exceptions, from amending its articles or bylaws, paying dividends, issuing
stock, redeeming or repurchasing shares of its stock, making compensation
changes, making loans, advances, capital contributions or investments (except
for railroad and real estate joint ventures and certain other transactions) and
engaging in transactions with affiliates. In addition, among other things, the
agreement restricts the Company from incurring debt other than pursuant to
arrangements existing on the date of the merger agreement (the Company's $450
million of bank credit facilities and replacements therefor and refinancings
thereof, and capital leases to finance the rebuilding of freight cars and
purchase of equipment under existing commitments), plus borrowings not to exceed
$25 million in the fiscal year ending December 31, 1996, and $12.5 million in
the fiscal quarter ending March 31, 1997.
On November 30, 1995, UPRR and SPRC filed an application for the
proposed merger with the ICC and the application process is ongoing. The
earliest closing of the transaction, if approved, would be September 1996.
On January 17, 1996 at a special meeting called to consider the
proposed merger, the stockholders of SPRC voted to proceed with the
transaction.
The Company incurred expenses of $13.8 million through March 31, 1996
associated with the proposed merger and, if the merger is completed, has
committed to continuity, severance and transaction expenses of up to an
additional $40 million.
(4) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------ ------
(in millions)
<S> <C> <C>
Cash payments:
Interest........................................ $ 47.6 $ 27.4
Income taxes.................................... (1.0) 1.0
Non-cash transactions:
Capital lease obligations for rail equipment.... 8.2 60.4
Issuance of common stock........................ 0.4 5.7
</TABLE>
(5) SPECIAL CHARGE
--------------
In June 1995, the Board of Directors approved plans aimed at reducing
future operating costs and increasing productivity which resulted in a $64.6
million pretax charge. Approximately $41 million of the charge is related to
severance payments to be made for approximately 582 employees (both management
and labor), approximately $4 million of the charge is related to costs
associated with terminating certain leased facilities, and approximately $20
million is for the expected loss associated with the sale, lease or abandonment
of 600 miles of light density rail lines. Through the first quarter of 1996,
severance payments totaling $3.6 million for 83 employees whose positions have
been terminated have been charged to the severance reserve. The Company
continues to review the timing of plans approved by the Board in June 1995. If
the proposed merger with UPRR were not approved, management expects that
implementation of plans approved by the Board would be accelerated.
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is subject to Federal, state and local environmental laws
and regulations and is currently participating in the investigation and
remediation of numerous sites. Where the
8
<PAGE>
remediation costs can be reasonably determined, and where such remediation is
probable, the Company has recorded a liability. It is possible that additional
losses will be incurred, but such amounts cannot be reasonably estimated. The
Company does not believe that disposition of environmental matters known to the
Company will have a material adverse effect on the Company's financial condition
or liquidity; however, there can be no assurance that the impact of these
matters on its results of operations for any given reporting period will not be
material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- - ---------------------
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
- - -------------------------------------------------------------------------------
The Company had net income of $6.1 million ($.04 per share) for the first
quarter of 1996 compared to net income of $16.5 million ($.11 per share) for the
first quarter of 1995. The Company had operating income of $53.2 million for the
first quarter of 1996 compared to $56.7 million for the 1995 quarter. For the
first quarter of 1996, railroad operating revenues increased 2.6% and railroad
operating expenses increased 3.3% over the 1995 period. The adverse net income
variance from the first quarter 1995 was caused primarily by increased
depreciation and interest expenses related to locomotive acquisitions completed
in 1995.
Operating Revenues. In the first quarter of 1996, railroad operating revenues
- - ------------------
increased $19.1 million, or 2.6%, compared to the first quarter of 1995.
Railroad freight operating revenues increased $26.2 million, or 3.7%, due to
stable or increased shipments of all commodities with the exception of coal
shipments which decreased 2.9% due primarily to a mine closure and temporary
downtime at two other mines. The improvement in railroad freight operating
revenues in 1996 is in part due to comparison to a weak performance as a result
of bad weather in the first quarter of 1995. Other railroad revenues (primarily
demurrage and incidental) decreased $7.1 million during the first quarter of
1996 compared to the 1995 quarter. For the first quarter of 1996, carloads
increased 4.5% and revenue ton-miles increased 8.6% compared to the same period
in 1995. The average net freight revenue per ton-mile for the first quarter of
1996 declined by 4.6% compared to the first quarter of 1995 due principally to
an increase in traffic volume for commodities that generate lower revenue per
ton-mile (e.g., iron ore and aggregates traffic).
The following table compares traffic volume (in carloads), gross freight
revenues (before contract allowances and adjustments) and gross freight revenue
per carload by commodity group for the three months ended March 31, 1996 and
1995.
9
<PAGE>
Carload and Gross Freight Revenue Comparison
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Gross Freight
Carloads Gross Freight Revenues Revenue Per Carload
------------------------- ------------------------ ------------------------
Commodity Group 1996 1995 % Change 1996 1995 % Change 1996 1995 % Change
- - --------------- ------------------------- ------------------------ ------------------------
(in thousands) (dollars in millions, except revenue per carload)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Intermodal........................ 177.1 172.8 2.5% $208.6 $205.1 1.7% $1,178 $1,187 (0.8)%
Chemical and petroleum products... 84.6 77.3 9.4 148.4 142.4 4.2 1,754 1,842 (4.8)
Coal.............................. 84.5 87.0 (2.9) 81.1 82.9 (2.2) 960 953 0.7
Food and agricultural products.... 57.2 57.0 0.4 102.7 96.8 6.1 1,795 1,698 5.7
Forest products................... 54.3 51.9 4.6 103.1 101.1 2.0 1,899 1,948 (2.5)
Metals and ores................... 49.5 49.1 0.8 73.2 71.7 2.1 1,479 1,460 1.3
Construction materials and
minerals......................... 49.5 41.0 20.7 46.2 40.3 14.6 933 983 (5.0)
Automotive........................ 23.0 18.8 22.3 52.8 44.4 18.9 2,292 2,356 (2.7)
------ ----- ------ ------
Total................... 579.7 554.9 4.5% $816.1 $784.7 4.0% $1,408 $1,414 (0.4)%
====== ===== ====== ======
</TABLE>
o Intermodal carloads and revenue increased for the first quarter of
1996 compared to the same period in 1995 due to increased container-on-
flatcar ("COFC") traffic, primarily from steamship customers. Trailer-
on-flatcar ("TOFC") carloads and revenue declined due to industry-wide
reduction in volumes, changes in customer distribution and shipping
patterns and increases in service competition from major competitors.
o Chemical and petroleum products carloads and revenues increased during
the first quarter of 1996 compared to the same period in 1995 due to
increased traffic in environmental wastes as well as reduced 1995
shipments attributable to severe weather during the first quarter of
1995, strong crude oil shipments compared to a 1995 quarter that
included a prolonged maintenance shutdown for a primary crude oil
customer and growth in the first quarter of 1996 in shipments of
plastics, liquified petroleum gas, soda ash and ethanol. Revenue per
carload decreased for the 1996 quarter from the 1995 quarter due
primarily to changes in the commodity and customer mix.
o Coal carloads and revenues decreased for the 1996 period due to a mine
closure and temporary downtime at two mines during 1996 as well as to
reduced shipments for certain customers that are drawing down large
stockpiles or had spot moves in 1995 that did not repeat. Revenue per
carload remained relatively stable between periods.
o Food and agricultural products carloads remained stable for the 1996
quarter compared to the 1995 quarter while revenue and revenue per
carload increased due to increased length of haul for grain traffic and
growth in higher revenue per car canned food shipments. Shipments of
sugar beets, temperature controlled traffic and grain products decreased
during the 1996 quarter compared to the same period in 1995.
o Forest products carloads and revenue increased during the first
quarter of 1996 due to increased shipments of paperboard, scrap paper
and wood chips attributable primarily to incremental volumes from
existing customers as well as to reduced 1995 carloads and revenue. The
weakness in the first quarter of 1995 was caused by severe weather and
flooding in California, a slowdown in construction markets and the
impact of a millworkers strike which ended in March
10
<PAGE>
1995. The revenue per carload decrease was due to changes in the
commodity mix and reduced length of haul for lumber stock, particle
board, scrap paper and wood pulp.
o Carloads, revenue and revenue per carload for metals and ores traffic
increased in the first quarter of 1996 compared to the first quarter of
1995 due primarily to increased shipments of higher than average revenue
per carload mini-mill traffic associated with strong construction demand
in California and increased pipe traffic.
o Construction materials and minerals carloads and revenues increased
for the 1996 quarter due to increased shipments of aggregates and
minerals. The growth in aggregates is caused by increased volume from
existing customers and comparison to a 1995 quarter that was limited by
severe weather and flooding in California while growth in minerals
shipments was due to better than average winter weather and increased
traffic volumes. The revenue per carload reduction was due to the lower
than average revenue per carload associated with aggregates traffic as
well as length of haul reductions for cement, non-hazardous waste and
minerals traffic.
o Automotive carloads and revenues increased during the 1996 quarter due
to new traffic and strength in the Mexico market. Revenue per carload
declined due to customer and market mix changes as well as to
competitive rate pressures.
Operating Expenses. Railroad operating expenses for the first quarter of 1996
- - ------------------
increased $23.0 million, or 3.3%, compared to the first quarter of 1995. The
following table sets forth a comparison of the Company's railroad operating
expenses during the three months ended March 31, 1996 and 1995.
Railroad Operating Expense Comparison
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995 % Change
------ ------ ----------
(in millions)
<S> <C> <C> <C>
Compensation and benefits............. $282.7 $269.7 4.8%
Fuel.................................. 64.8 62.1 4.4
Materials and supplies................ 29.5 47.4 (37.8)
Equipment rental...................... 79.5 76.4 4.1
Depreciation and amortization......... 43.4 34.6 25.3
Other................................. 211.5 198.2 6.7
------ ------
Total...................... $711.4 $688.4 3.3%
====== ======
</TABLE>
o Compensation and benefit costs increased $13.0 million, or 4.8%, for
the first quarter of 1996 compared to the first quarter of 1995. The
increased costs were due primarily to increased transportation labor as
revenue ton-miles were up 8.6% for the quarter, gross ton-miles
increased 7.8% and carloads increased 4.5% compared to the first quarter
of 1995. Train crew starts increased by 3.5% for the first quarter of
1996 compared to the 1995 quarter. In addition, the increase included an
adjustment in the first quarter of 1995 to reflect reduced costs
associated with non-agreement fringe benefits. Company employment
increased only 0.6% to a total of 18,792 at March 31, 1996 compared to
18,685 at the end of March 1995. Expressed as a percentage of operating
revenues, compensation and benefit expenses were 36.0% for the first
quarter of 1996 compared to 35.2% for the first quarter of 1995.
11
<PAGE>
o Fuel expenses increased $2.7 million, or 4.4%, for the first quarter
of 1996 compared to the same period in 1995. The increase was a result
of a 2.6% increase in the average price per gallon of fuel to $.57 per
gallon during the 1996 quarter compared to $.56 per gallon during the
1995 period combined with an increase in gallons consumed of 1.8%
attributable to the increase in traffic volume. The average price per
gallon of fuel and fuel expense for both periods includes handling, fuel
hedging costs paid or received under fuel hedging contracts and amounts
paid to the Company's suppliers. Included in the first quarter 1996 fuel
expense was $2.6 million received under fuel hedging contracts compared
to $2.5 million paid during the 1995 quarter. The Company's locomotive
fleet continues to become more fuel efficient as evidenced by a 5.7%
reduction in the average gallons consumed per gross ton-mile for the
first quarter of 1996 due to the recent acquisitions of new and
remanufactured locomotives completed during 1995.
o Materials and supplies expenses decreased $17.9 million, or 37.8%, for
the first quarter of 1996 compared to the first quarter of 1995 due to
reduced locomotive material expenses and running repairs. Locomotive
overhauls charged to expense decreased 24% for the 1996 quarter with 6
locomotives overhauled compared to 25 locomotives during the 1995
period. In addition, maintenance of way material expenses for signal
repairs decreased during the 1996 quarter as well as expenses related to
storm damage repairs. The Company is planning on overhauling fewer
locomotive units during 1996 compared to prior years due to the
completion, in 1995, of the locomotive acquisition program, fewer older
units remaining to be overhauled and increased use of the power-by-the-
mile maintenance program.
o Equipment rental costs increased $3.1 million, or 4.1%, for the first
quarter of 1996 compared to the first quarter of 1995. The increase was
primarily attributable to a $6.2 million increase in car hire associated
with increases in traffic volume and cycle times partially offset by a
$3.1 million reduction in locomotive lease expenses during the 1996
quarter.
o Depreciation and amortization expense increased $8.8 million, or
25.3%, for the first quarter of 1996 due to an increase in the
depreciable property base principally from significant equipment
acquisitions during the latter part of 1995.
o Other expenses increased $13.3 million, or 6.7%, for the first quarter
of 1996 compared to the first quarter of 1995. This category of expense
includes outside repairs and services, joint facility rent and
maintenance costs, casualty costs and property and other taxes. The
first quarter 1996 increase is due to $5.0 million in insurance
recoveries received during the 1995 period as partial settlement of
claims relating to the 1993 midwest flood, a $1.7 million increase in
casualty costs associated with derailments occurring during the first
quarter of 1996, a $2.0 million increase in joint facility costs
associated with the increase in traffic volume and the new Burlington
Northern Santa Fe Corporation ("BNSF") trackage rights agreements, and a
$4.3 million increase in locomotive power-by-the-mile costs resulting
from an increase in the number of locomotive units subject to that
maintenance program.
Other Income (Expense) and Interest Expense. Other income (expense)
- - -------------------------------------------
(non-operating) was a net income of $1.4 million for the first quarter of 1996
compared to $3.8 million for the same period in 1995. The reduced net income was
due primarily to $5.7 million in expense during 1996 associated with the
proposed UPRR/SPRC merger partially offset by a $2.3 million charge during the
1995 period associated with the repayment of the Company's $290 million Senior
Secured Notes, and a $1.3 million increase in gains on sales of property during
the 1996 quarter. Interest expense was $44.4 million for the first quarter of
1996 compared to $32.9 million for the first quarter of 1995, an increase
12
<PAGE>
of $11.5 million. The increase is due to the higher level of capitalized lease
obligations for new locomotives and freight cars outstanding during the first
quarter of 1996 combined with interest expense associated with the $150 million
term loan borrowed in September 1995.
Liquidity and Capital Resources
- - -------------------------------
The Company's business is capital intensive and requires on-going
substantial expenditures for, among other things, improvements to roadway,
structures and technology, acquisitions and repair of equipment, and maintenance
of the rail system. During the first quarter of 1996, and for more than a
decade before that, the Company's railroad operations did not produce sufficient
cash flows to meet its capital expenditure, debt service and other cash needs.
As a result, the Company relied on proceeds from transit corridor, real estate
and other asset sales, borrowings and other financing for these purposes. At
March 31, 1996, the Company had cash and cash equivalents of $51.1 million and
had $300 million available under its revolving credit facility.
At this time, the Company faces extraordinary capital investment
requirements in order to meet the challenges of its major competitors,
particularly as a result of the recent merger of Burlington Northern Railroad
Company ("BN") and The Atchison, Topeka & Santa Fe Railway Company ("ATSF") in
1995. The increasing service competition that has developed and will be
accelerating will require substantial additional capital expenditures for
equipment, track improvements and other new facilities and technology. The
Company estimates that it needs to expend approximately $500 million in capital
per year simply to maintain its existing plant and equipment and its current
service levels. In addition, the Company has identified capital expenditures of
more than $1 billion that it believes should be made in excess of normal capital
expenditures to maintain its current competitive position. The Company's two
major competitors have substantially stronger cash flow and financial
capabilities and their facilities and technology is more advanced than those of
the Company. The completion of the BN/ATSF merger and the integration of that
system occurred more quickly than the Company initially anticipated. The
combined BN/ATSF is a substantially stronger competitor than either railroad was
separately. The stronger financial condition and resources of the Company's
major competitors will allow them to make more investments designed to enhance
service, attract new customers, gain market share and achieve even more
efficient operations .
The Company anticipates that, if the proposed merger with UPRR were
not completed, cash flows generated by rail operations would continue to be
insufficient to meet all its cash needs including acquisition of equipment and
other necessary capital expenditures. Certain of the Company's debt agreements
contain quarterly financial covenants and restrictions based on minimum tangible
net worth, a maximum funded debt to net worth ratio and a minimum fixed charge
coverage ratio. As a result of not achieving certain ratios and covenants in
its $375 million Senior Notes at December 31, 1995, the Company is restricted in
incurring additional indebtedness, except for certain permitted categories of
debt, including $300 million available under its revolving bank credit facility.
Because continued compliance with the financial terms and covenants under its
bank credit facilities would require more gains than now contemplated from the
sales of properties in the first and second quarters of 1996, the Company and
its banks have amended those covenants through the second quarter of 1996 to
eliminate the fixed charge coverage test for these periods. This amendment was
conditioned upon the Company's proposed merger with UPRR not being terminated
or denied. If the merger were not consummated in the third quarter of 1996 and
the Company's earnings did not meet the reinstated fixed charge coverage test as
of the end of that quarter, the Company would be in default on both its revolver
and term loan unless it were able to obtain waivers or amendments to its loan
agreements. Management of the Company currently believes it will meet its
revised financial covenants in 1996, although the margin will be small. If
the Company were unable to meet these covenants, or obtain waivers or
amendments, substantially all of the Company's outstanding indebtedness could be
declared in default and payment thereon accelerated.
In order to satisfy its future cash flow requirements, as well as the
financial covenants in its bank credit facilities, the Company must improve its
operating results while maintaining its bank
13
<PAGE>
credit facilities for use as required. Management of the Company does not
believe that the Company should plan to continue to rely on real estate sales to
fund its operations. The timing of such sales is difficult to predict. The
supply of real estate that can be sold (especially readily salable real estate)
is being depleted. Public funding for transit corridor sales is more difficult
to obtain. Proceeds from sales of real estate and other properties totaled $14.8
million in the first quarter of 1996 and no large real estate sales are
anticipated during the remainder of the year. Management believes that under
current circumstances the Company cannot expect to obtain capital in the amounts
required to fund the capital expenditures described above that would be
necessary for the Company to compete effectively in all its present markets with
its present services. Therefore, if the proposed merger with UPRR were not
completed, management believes it would be necessary for the Company to develop
and implement a plan for a major reduction in its services and investments. See
"Certain Effects of Competition" below.
Operating Activities
--------------------
As shown in the Consolidated Condensed Statements of Cash Flows, cash
provided by operating activities was $7.4 million for the first quarter of 1996
compared to a use of cash of $49.9 million for the first quarter of 1995. The
change between periods was due primarily to the net effect of changes in income
offset by changes in accounts receivable and payable between periods based on
the timing of receipts and payments. The Company expects to fund its operations
(including scheduled interest payments, capital lease payments and severance
payments attributable to items provided for in the special charge) over the next
twelve months with cash from operations, cash on hand, property sales, capital
leases and borrowings under its bank credit facilities.
The Company had working capital deficits of $536.8 million and $402.0
million at March 31, 1996 and 1995, respectively. The increased deficit was due
primarily to reduced cash, cash equivalents and short-term investments on hand
at March 31, 1996 combined with an increase in current liabilities at March 31,
1996. The increased liability included a higher current portion of
restructuring reserves (including amounts associated with the special charge
taken in June 1995) and a higher interest payable balance due primarily to
accrued interest associated with the increased capital lease obligations
outstanding at March 31, 1996 compared to March 31, 1995. Working capital at
March 31, 1996 was $74.0 million less than December 31, 1995 primarily resulting
from lower cash and receivables.
Investing Activities
--------------------
Capital expenditures (exclusive of capital leases) for the first
quarter of 1996 were $69.2 million compared to $94.9 million for the same period
in 1995. The 1996 amount included approximately $64.5 million for roadway and
structures and $2.9 million for rebuilt locomotives. The 1995 amount included
approximately $63.9 million for roadway and structures, $8.0 million for rebuilt
locomotives and $5.8 million for improvements to a corporate office building in
Denver, Colorado. During the first quarter of 1996, the Company rebuilt 9
locomotives compared to 22 locomotives during the 1995 period. The Company
expects 1996 capital expenditures for railroad operations to be approximately
$337 million (exclusive of capital leases). The Company expects to fund 1996
capital expenditures with cash from operations, cash on hand, property sales,
capital leases and borrowing under its bank credit facilities.
The Company has been engaged in a program to expand and upgrade its
locomotive and freight car fleets principally through capitalized lease
financing. All locomotive acquisitions were completed in 1995 and there are no
commitments to purchase additional locomotives. During the first three months
of 1996, the Company received 331 reconditioned freight cars and incurred $8.2
million in capitalized lease obligations. All of the remaining 198
reconditioned freight cars to be financed under capital leases are expected to
be received by year end with a total capitalized lease obligation for the year
of approximately $13.9 million.
The Company received cash proceeds from sales and retirements of real
estate and other property totaling $14.8 million and $17.9 million for the first
quarter of 1996 and 1995, respectively.
14
<PAGE>
The Company plans on acquiring through operating leases, approximately
3,100 new and remanufactured freight cars during 1996 at an estimated annual
operating lease expense of $8.5 million in 1996 and approximately $14.6 million
annually thereafter. The Company has received 425 of these freight cars as of
March 31, 1996.
Financing Activities
--------------------
The Company repaid $6.0 million of debt during the first quarter of
1996.
Certain Effects of Competition
------------------------------
The Company faces extraordinary capital investment requirements in
order to meet the challenges of its major competitors, particularly as a result
of the BN/ATSF merger in 1995. The increasing service competition that has
developed and will be accelerating will require substantial additional capital
expenditures for equipment, track improvements and other new facilities and
technology. The Company estimates that it needs to expend approximately $500
million in capital per year simply to maintain its existing plant and equipment
and its current service levels. In addition, the Company has identified capital
expenditures of more than $1 billion that it believes should be made in excess
of normal capital expenditures to maintain its current competitive position. The
Company's two major competitors have substantially stronger cash flow and
financial capabilities and their facilities and technology are more advanced
than those of the Company. The completion of the BN/ATSF merger and the
integration of that system occurred more quickly than the Company initially
anticipated. The combined BN/ATSF is a substantially stronger competitor than
either railroad was separately. The stronger financial condition and resources
of the Company's major competitors will allow them to make more investments
designed to enhance service, attract new customers, gain market share and
achieve even more efficient operations. The Company faces substantially
increased service competition from the Company's major competitors relating to
transit time and consistency, areas in which the Company has historically lagged
certain of its competitors. This intense service competition, including new
single line service provided by the merged BN/ATSF, is expected to continue as
the BN/ATSF merger has created a much stronger competitor. BN/ATSF's ability to
offer expanded single line service that the Company cannot offer to its
customers will also negatively impact the Company. Pressure on the Company to
improve service and price more aggressively is expected to continue and is
expected to have an adverse impact on operating results because the Company does
not expect to be able to reduce costs as rapidly as it would have without the
increased service competition from the BN/ATSF or to expend capital equivalent
to its competitors and compete with equal service. After several years of
extraordinary capital expenditures to rebuild its locomotive fleet, the Company
will not be able to match the financial resources of BN/ATSF or UP going forward
to provide the facilities and other service enhancing investments necessary to
be fully competitive on a stand-alone basis. Although no specific plan has as
yet been prepared, management believes, if the proposed merger with UPRR were
not implemented, it would be necessary for the Company to develop and implement
a plan for a major reduction in its services and a reduction in capital
expenditures to a level sustainable out of cash flow from rail operations.
Management would expect to focus the Company's operations, pricing initiatives
and capital investments on markets and shippers where it has existing
competitive advantages and de-emphasize those markets where it faces rigorous
competition. Management expects that, over time, a significant portion of its
services would be eliminated or reduced and the number of employees would be
reduced. Examples of service reductions that would be considered are reductions
in midwestern and Texas intermodal operations, some transcontinental and west
coast intermodal business lines, closure of several smaller intermodal
terminals, a de-emphasis on operations across the Central Corridor and
rationalization of parallel main lines across east Texas.
Other
-----
On April 3, 1996, the Company paid UPRR $31.8 million as the final
payment under the settlement agreement previously entered into pertaining to the
compensation SSW would pay for trackage rights over UPRR lines between Kansas
City and St. Louis.
15
<PAGE>
In June 1995, the Board of Directors approved plans aimed at reducing
future operating costs and increasing productivity which resulted in a $64.6
million pretax charge. Approximately $41 million of the charge is related to
severance payments to be made for approximately 582 employees (both management
and labor), approximately $4 million of the charge is related to costs
associated with terminating certain leased facilities, and approximately $20
million is for the expected loss associated with the sale, lease or abandonment
of 600 miles of light density rail lines. Through the first quarter of 1996,
severance payments totaling $3.6 million for 83 employees whose positions have
been terminated have been charged to the severance reserve. The Company
continues to review the timing of plans approved by the Board in June 1995. If
the proposed merger with UPRR were not approved, management expects that
implementation of plans approved by the Board would be accelerated.
In 1995, the Financial Accounting Standards Board issued Statement No.
121, "Impairment of Long-Lived Assets", which was adopted by the Company
effective January 1, 1996 and had no financial statement impact. Future
business decisions could impact the financial statement results under this
accounting standard.
The Company is subject to Federal, state and local environmental laws
and regulations and is currently participating in the investigation and
remediation of numerous sites. Where the remediation costs can be reasonably
determined, and where such remediation is probable, the Company has recorded a
liability. It is possible that additional losses will be incurred, but such
amounts cannot be reasonably estimated. The Company does not believe that
disposition of environmental matters known to the Company will have a material
adverse effect on the Company's financial condition or liquidity; however, there
can be no assurance that the impact of these matters on its results of
operations for any given reporting period will not be material.
The Company had entered into fuel hedging agreements covering 46% of
its first quarter 1996 fuel needs at an average purchase price of $.485 per
gallon (excluding handling costs). Effective April 1, 1996, the Company has no
hedging agreements in place and accordingly will incur all the effects of
current fuel prices. Further fuel hedging activity may occur during 1996.
Cautionary Statement
--------------------
This report contains "forward looking statements" within the meaning of
the federal securities laws, including management's belief that the Company will
meet its revised financial covenants in 1996 and that known environmental
matters and other types of claims and litigation will not have a material
adverse effect on the Company's financial condition or liquidity, the Company's
expected 1996 capital expenditures and funding therefor, the Company's
expectations as to funding its operations over the next twelve months, and other
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those expressed in the statements. Important factors that could cause such
differences include but are not limited to the increasingly intense competition
within the Company's service territory (see "Certain Effects of Competition"
above), the Company's insufficient cash flow from operations and resulting
dependence on real estate sales, and other constraints on the Company's
liquidity and capital resources, as well as its substantial capital requirements
to improve its service and facilities (see "Liquidity and Capital Resources"
above), existing restrictions on the Company's borrowing capacity, the Company's
continuing exposure to environmental liabilities and other types of claims and
litigation, the impact of federal, state and local regulation of the Company's
business and the possibility for adverse changes in such governmental
regulation, the requirement for STB approval of the Company's proposed merger
with Union Pacific, natural events such as flooding and earthquakes and the
effects of adverse general economic conditions. These and other risks and
uncertainties affecting the Company are discussed in greater detail in other
filings by the Company with the Securities and Exchange Commission, including
but not limited to the Company's registration statement on Form S-1 initially
filed on June 4, 1994 (File No. 33-79950) and the joint proxy
statement/prospectus dated December 12, 1995.
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) During the quarter ended March 31, 1996, no reports on Form 8-K
were filed by the Company.
17
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SOUTHERN PACIFIC RAIL CORPORATION
Date: May 13, 1996 By: /s/ L.C. Yarberry
------------------------------
Vice President - Finance
(Principal Financial Officer)
18
<PAGE>
SOUTHERN PACIFIC RAIL CORPORATION
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
19
<PAGE>
Exhibit 11
SOUTHERN PACIFIC RAIL CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
------ ------
<S> <C> <C>
Average number of shares outstanding.......... 156,155 156,117
======== ========
Net income.................................... $ 6,111 $ 16,513
======== ========
Earnings per share............................ $ 0.04 $ 0.11
======== ========
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHERN
PACIFIC RAIL CORPORATION'S FORM 10-Q FOR THE FIRST QUARTER OF 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 257
<ALLOWANCES> (9)
<INVENTORY> 81
<CURRENT-ASSETS> 442
<PP&E> 4,499
<DEPRECIATION> 774
<TOTAL-ASSETS> 4,683
<CURRENT-LIABILITIES> 978
<BONDS> 1,703
20
0
<COMMON> 0
<OTHER-SE> 1,067
<TOTAL-LIABILITY-AND-EQUITY> 4,683
<SALES> 0
<TOTAL-REVENUES> 786
<CGS> 0
<TOTAL-COSTS> 732
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 10
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