-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, qkOK89wnDKdVhjDYQcAEMGKf3AsuxnDPajkEbWznGzpYEldxLbujSoGd0KNHYXba RGd+9wQJvWpPSPalzp877w== 0000859119-95-000020.txt : 19950613 0000859119-95-000020.hdr.sgml : 19950613 ACCESSION NUMBER: 0000859119-95-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950308 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS CENTRAL CORP CENTRAL INDEX KEY: 0000859119 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 133545405 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10720 FILM NUMBER: 95519247 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLZ DR STREET 2: 20TH FLOOR CITY: CHICAGO STATE: IL ZIP: 60611-5504 BUSINESS PHONE: 3127557500 MAIL ADDRESS: STREET 1: 455 NORTH CITYFRONT PLAZA DR STREET 2: 455 NORTH CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission file number 1-10720 Illinois Central Corporation (Exact name of registrant as specified in its charter) Delaware 13-3545405 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 755-7500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 2, 1995, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1,363 million. For purposes of the foregoing statement only, directors and executive officers of the registrant have been assumed to be affiliates. As of March 2, 1995, there were 42,330,191 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the Registrant's Proxy Statement for its 1995 Annual Meeting of Stockholders. ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES FORM 10-K Year Ended December 31, 1994 INDEX PART I 10-K Page Item 1. Business 3 Item 2. Properties 11 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 4A. Executive Officers of the Registrant 16 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27 PART III Item 10. Directors and Executive Officers of the Registrant 27 Item 11. Executive Compensation 27 Item 12. Security Ownership of Certain Beneficial Owners and Management 27 Item 13. Certain Relationships and Related Transactions 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28 SIGNATURES 29 PART I Item 1. Business Background Illinois Central Corporation (the "Company") was incorporated under the laws of Delaware on January 27, 1989. The Company, through its wholly-owned subsidiary, Illinois Central Railroad Company (the "Railroad"), traces its origin to 1851, when the Railroad was incorporated as the nation's first land grant railroad. Today, the Railroad operates 2,700 miles of main line track between Chicago and the Gulf of Mexico, primarily carrying chemicals, coal and paper north, with coal, grain and milled grain products moving south along its lines. The Railroad has been significantly downsized and restructured from its peak of nearly 10,000 miles of track operated in 13 states, rebuilding its main line and converting to a single-track main line with a centralized traffic control system and divesting major east-west segments. In addition to the Railroad, the Company's other direct subsidiary conducts railroad related financing operations. The principal executive office of the Company is located at 455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504 and its telephone number is (312) 755-7500. General - 1992 Four-Year Plan In late 1992, the Company announced a four-year plan designed to increase its revenues and lower its operating ratio and interest costs. With 1992 as its base, the plan focuses on taking advantage of the Company's leading operating ratio (operating expenses divided by operating revenues) among Class I railroads. The components of the plan are: - increase annual revenues by $100 million by the end of 1996 - reduce the operating ratio by one percentage point per year for a total of four (4) points below the 1992 base of 70.7% - reduce annual interest expense by $10 million To accomplish this plan management identified three sources of planned revenue growth -- economic expansion, new and expanded plants on line and market share growth. Economic expansion is the combination of industrial production improvement and freight rate increases. Market share growth is volume gained from competition, (i.e., other railroads, trucklines and barges) facilitated by being a low cost producer. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the significant progress in achieving these goals through 1994. Having completed two years of the four-year plan, management is developing a new five-year plan which uses 1994 as a base. The new plan covers the period 1995 through 1999 and features $200 million in revenue growth, a significantly lower operating ratio, and a stockholder-driven long-term equity enhancement program. Commodities and Customers The Railroad's customers are engaged in a wide variety of businesses and ship a number of different products that can be classified into commodity groups: chemicals, coal, grain, paper, grain mill and food products and other commodities. In 1994, two customers accounted for approximately 7% and 6%, respectively, of revenues (no other customer exceeded 5%) and the ten largest customers accounted for approximately 37% of revenues. In 1994, approximately 74% of the Railroad's freight traffic originated on its own lines, of which approximately 28% was forwarded to other carriers. Approximately 17% of the Railroad's freight traffic was received from other carriers for final delivery by the Railroad, and the balance of approximately 9% represented bridge or through traffic. In order to address more effectively the diversity of the Company's customer base and attain the four-year growth plan, the Railroad's marketing department was re-organized in 1993 along major commodity groups. The Railroad now focuses on these units - chemicals and bulk, grain and grain mill, forest products, coal and coke and metals, and intermodal. The formation of separate units enables a fully integrated sales and marketing effort. Specialization allows employees to anticipate and respond to customer needs more quickly, to attract customers who previously used trucks or barges for their service needs, and to establish business relationships with new shippers. These new units work with current and prospective customers to develop customized shipping solutions. Management believes that this commitment to improved customer service has enhanced relations with shippers. Further refinements to the new marketing organization in 1994 included the hiring of a new Vice President-Marketing and Sales with 33 years experience in the transportation industry and a new Assistant Vice President for the Chemicals unit. The formation of the Intermodal Business Unit underscores the Company's commitment to intermodal through long-term relationships with major participants in this strategic market. In each of the three years ended December 1994, the Railroad entered into joint operating agreements with trucklines and other railroads. By forming a separate business unit and entering into these agreements, the Railroad has fully integrated its intermodal hub operation with sales and marketing for enhanced control of this highly specialized and competitive service. Management anticipates that the result will be better service to customers and seamless transportation of goods for shippers and their customers. To effectively compete in the intermodal market the Railroad has acquired 900 trailers over the last two years, constructed its newest, state-of-the-art terminal, just south of Chicago at the intersections of major expressways and completed a major expansion at the Memphis facility. To address the needs of the bulk chemical and intermodal markets a bulk transfer facility (a storage track, easily accessible by truck, where carloads of plastic pellets and other dry products can be stored in bulk and transferred to truck for delivery) was opened in the Company's Chicago intermodal facility in 1994. The 11 acre bulk facility, which can be expanded if volume warrants, provides track capacity for 52 railcars and is designed to serve customers in a five-state region. This transfer facility concept may be expanded to other sites. The respective percentage contributions by principal commodity group to the Railroad's freight revenues and revenue ton miles during the past five years are set forth below: Contributions to Total Freight Revenues by Commodity Group Commodity Group 1994 1993 1992 1991 1990 Chemicals 24.8% 25.0% 24.3% 24.5% 25.3% Coal 15.2 12.8 15.3 15.0 15.3 Grain . . . . . . 10.2 14.0 12.2 11.7 10.7 Paper . . . . . . 12.2 12.4 12.1 11.2 10.7 Grain mill & food products 8.5 9.8 8.8 8.7 9.5 Intermodal 6.6 5.4 5.4 5.2 5.0 All other 22.5 20.6 21.9 23.7 23.5 Total . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% Contribution to Revenue Ton Miles by Commodity Group(1) Commodity Group 1994 1993 1992 1991 Chemicals 15.8% 15.9% 15.1% 16.0% Coal 24.0 15.1 18.2 17.0 Grain 20.0 27.9 27.3 27.7 Paper 9.8 9.6 9.0 8.4 Grain mill & food products 9.3 9.9 9.0 8.3 Intermodal 5.5 3.7 3.1 2.9 All other 15.6 17.9 18.3 19.7 Total 100.0% 100.0% 100.0% 100.0% (1) A new car tracking system was installed in late 1990. As a result pre-1991 ton mile data is not comparable, and therefore is not presented. The principal elements of these commodity groupings are as follows: Chemicals A wide variety of chemicals and related products such as chlorine, caustic soda, potash, soda ash, vinyl chloride monomer, carbon dioxide, synthetic resins, alcohols, glycols, styrene monomer, plastics, sulfuric acid, muriatic acid, anhydrous ammonia, phosphates, mixed fertilizer compounds and carbon blacks. Coal Bituminous and metallurgical coal. Grain Corn, wheat, soybeans, sorghum, barley and oats. Paper Pulpboard, fiberboard, woodpulp, printing paper, newsprint and scrap or waste paper. Grain Mill & Food Products Products obtained by processing grain and other farm products such as feed, soybean meal, corn syrup, flour and middlings, animal packinghouse by-products (tallow), canned food, corn oil, soybean oil, vegetable oils, malt liquors, sugar and molasses. Intermodal A wide variety of products shipped either in containers or trailers on specially designed cars. Other Pulpwood and chips, lumber and other wood products; sand, gravel and stone, coke and petroleum products, metallic ores and other bulk commodities; primary and scrap metals, machinery and metal products, appliances, automobiles and parts, transportation equipment and farm machinery; glass and clay products, ordnance and explosives, rubber and plastic products, and general commodities. Operating Statistics Set forth below is certain information relating to the Railroad's freight traffic during the past five years: 1994 1993 1992 1991 1990 Carloads (in thousands) 915 848 852 866 853 Freight train miles(in thousands)(2) 7,179 5,659 5,149 5,445 5,496 Revenue ton miles of freight traffic (in millions) (1)(3) 21,160 20,334 18,734 19,357 NM Revenue tons per carload 76.3 79.1 76.6 79.0 77.7 Average length of haul (in miles) 286 293 284 286 270 Gross freight revenue per ton mile (1)(4) $.027 $.027 $.029 $.028 NM Net freight ton miles per average route mile (in millions) (1) 7.9 7.5 6.8 7.0 NM Gallons per ton mile(5) .00248 .00251 .00269 .00276 .00292 Active locomotives 328 322 331 361 375 Track resurfacing (miles) 1,397 1,293 1,465 940 618 Percent resurfaced 33.0% 29.8% 32.0% 19.6% 12.7% Ties laid in replacement (including switch ties) 346,994 323,764 296,536 255,283 240,968 Slow order miles 275.79 152.32 135.42 194.62 149.74 1 A new car tracking system was installed in 1990. As a result pre-1991 ton mile data is not comparable, and therefore is not meaningful (NM). 2 Freight train miles equals the total number of miles traveled by the Railroad's trains in the movement of freight. 3 Revenue ton miles of freight traffic equals the product of the weight in tons of freight carried for hire and the distance in miles between origin and destination. 4 Revenue per ton mile equals net freight revenue divided by revenue ton miles of freight traffic. 5 Gallons per ton mile equals the amount of fuel required to move one ton of freight one mile. The following tables summarize operating expense-to-revenue ratios of the Company for each of the past five years, excluding the effect of the $8.9 million pretax special charge in 1992. The first table analyzes the various components of operating expenses based on the line items appearing on the income statements, whereas the second table is based on Interstate Commerce Commission ("ICC") functional groupings. Ratio 1994 1993 1992 1991 1990 Operating(1) 66.3% 68.2% 70.7% 73.5% 75.4% Labor and fringe benefits 33.1 33.7 35.0 35.8 37.3 Leases and car hire 8.2 11.9 12.9 14.0 14.8 Diesel fuel 5.3 5.4 5.5 6.0 5.9 Materials and supplies 6.5 6.5 6.0 5.7 4.8 Depreciation and amortization 4.6 4.2 4.0 3.8 4.0 Other 8.6 6.5 7.3 8.2 8.6 1994 1993 1992 1991 1990 Operating(1) 66.3% 68.2% 70.7% 73.5% 75.4% Transportation (2) 28.9 29.6 31.6 34.8 35.3 Maintenance of way(3) 7.7 7.2 7.0 6.4 7.1 Maintenance of equipment(4) 19.2 20.7 22.5 23.9 23.7 1 Operating ratio means the ratio of operating expenses before special charge over operating revenues. 2 Transportation ratio means the ratio of transportation expenses (such as expenses of operating, servicing, inspecting, weighing, assembling and switching trains) over operating revenues. 3 Maintenance of way ratio means the ratio of maintenance of way expenses (such as the expense of repairing, maintaining, leasing, depreciating and retiring right-of-way and trackage structures, buildings and facilities) over operating revenues. 4 Maintenance of equipment ratio means the ratio of maintenance of equipment expenses (such as the expense of repairing, maintaining, leasing, depreciating and retiring transportation and other operating equipment) over operating revenues. Employees; Labor Relations Railroad industry personnel are covered by the Railroad Retirement System instead of Social Security. Employer contribution rates under the Railroad Retirement System are currently more than double those in other industries, and may rise further because of the increasing proportion of retired employees receiving benefits relative to the shrinking number of working employees. Labor relations in the railroad industry are subject to extensive governmental regulation under the Railway Labor Act. Railroad industry personnel are also covered by the Federal Employer's Liability Act ("FELA") rather than by state no-fault workmen's compensation systems. FELA is a fault-based system, with compensation for injuries determined by individual negotiation or litigation. The Railroad is a party to several national collective bargaining agreements which, until 1994, establish the wages and benefits of its union workers -- 90% of all Railroad employees are represented by a union. These agreements became subject to renegotiation beginning November 1, 1994, when bargaining notices were filed; however, cost of living allowance provisions and other terms in each agreement continue until new agreements are reached. Despite being part of the national bargaining group, the Railroad has expressed a desire to negotiate separate distinct agreements with each of its unions on a local basis. To date, discussions with all eleven union organizations have been initiated. Three unions, representing 29% of the Railroad's represented workforce have ratified agreements which cover wages and work rule issues through 1999. During the term of the agreements wages will rise approximately 3%-4% per year on average. In reaching these agreements approximately $.8 million was paid in signing bonuses. It is too early to determine if separate agreements will be reached with the other crafts. The following table shows the average annual employment levels of the Railroad: 1994 1993 1992 1991 1990 Total employees 3,250 3,306 3,421 3,611 3,688 A significant portion of the decline from the 1992 level is the result of a separate agreement between the Railroad and the United Transportation Union, reached in November 1991. This agreement permits the Railroad to reduce the size of all crews on all trains operated. In accordance with this agreement, 158 crew members were severed at a cost of $9.6 million to date. The current crew size of approximately 2.74 is not expected to change dramatically. Management believes that over the next several years attrition and retirements would be the primary source of future declines in employment levels. Increases in employment levels, particularly in train operations, are possible in response to growth of business in accordance with the four year plan. Regulatory Matters; Freight Rates; Environmental Considerations The Railroad is subject to significant governmental regulation by the ICC and other federal, state and local regulatory authorities with respect to rates, service, safety and operations. The jurisdiction of the ICC encompasses, among other things, rates charged for certain transportation services, issuance of securities, assumption of certain liabilities by railroads, mergers or the acquisition of control of one carrier by another carrier and extension or abandonment of rail lines or services. Current congressional proposals to eliminate the ICC are still unclear as to what regulatory scheme might remain and thus the potential impact of the proposals on the Company are unknown. The Federal Railroad Administration, the Occupational Safety and Health Administration and certain state transportation agencies have jurisdiction over railroad safety matters. These agencies prescribe and enforce regulations concerning car and locomotive safety equipment, track safety standards, employee work conditions and other operating practices. The amount of Southern Illinois coal transported by the Railroad is expected to decline somewhat as the Clean Air Act is fully implemented. Much of the coal from mines in that area currently served by the Railroad will not meet the environmental standards of the Clean Air Act without blending with compliance coal or installation of air scrubbers at point of use. On the other hand, the Railroad expects to participate in additional movements of Western coal and Southern Illinois coal which does comply. Overall, management believes that implementation of the Clean Air Act is unlikely to have a material adverse effect on the results of the Company. The Company is and will continue to be subject to extensive regulation under environmental laws and regulations concerning, among other things, discharges into the environment and the handling, storage, transportation and disposal of waste and hazardous materials. Inherent in the operations and real estate activities of the Railroad and other railroads is the risk of environmental liabilities. See Item 2. "Properties - Environmental Conditions" for discussion of sites on which the Railroad currently or formerly conducted operations that are subject to governmental action in connection with environmental degradation. The EPA is expected to propose regulations limiting locomotive emissions which may significantly increase the purchase price or operating expense of locomotives. Additional expenditures by the Railroad may be required in order to comply with existing and future environmental and health and safety laws and regulations or to address contaminated sites which may be discovered. Competition The Railroad faces intense competition for freight traffic from motor, water, and pipeline carriers and from other railroads. Competition is generally based on the quality and reliability of the service provided and the rates charged. Declining fuel prices disproportionately benefit trucking operations over railroad operations. The trucking industry frequently is more cost and transit- time competitive than railroads, particularly for distances of less than 500 miles. While deregulation of freight rates under the Staggers Act has greatly increased the ability of railroads to compete with each other and alternate forms of transportation, changes in governmental regulations (particularly changes to the Staggers Act) could significantly affect the Company's competitive position. To a greater degree than other rail carriers the Railroad is vulnerable to barge competition because its main routes are parallel to the Mississippi River system. The use of barges for some commodities, particularly coal and grain, sometimes represents a lower cost mode of transportation. As a result, the Railroad's revenue per ton-mile has generally been lower than industry averages for these commodities. Barge competition and barge rates are affected by navigational interruptions from ice, floods and droughts. These interruptions cause widely fluctuating rates. The Railroad's ability to maintain its market share of the available freight has traditionally been affected by its response to the navigational conditions on the river. All of the Railroad's operations are conducted between points served by one or more competing carriers. The consolidation in recent years of major midwestern and eastern rail systems has resulted in strong competition in the service territory of the Railroad. To date, such consolidations have not had a material adverse impact on the Railroad's operation or financial results. Liens on Properties Most of the locomotives and rail cars owned by the Company's financing/leasing subsidiaries are subject to liens. See Note 9 of Notes to Consolidated Financial Statements. Liability Insurance The Company is self-insured for the first $5 million of each loss. The Company carries $295 million of liability insurance per occurrence, subject to an annual cap of $395 million in the aggregate for all losses. This coverage is considered by the Company's management to be adequate in light of the Company's safety record and claims experience. Item 2. Properties Physical Plant and Equipment System. As of December 31, 1994, the Railroad's total system consisted of approximately 4,600 miles of track comprised of 2,700 miles of main line, 200 miles of secondary main line and 1,700 miles of passing, yard and switching track. The Railroad owns all of the track except for 190 miles operated by agreements over track owned by other railroads. Track Structures. During the five years ended December 31, 1994, the Railroad has spent $348.7 million on track structure to maintain its rail lines, as follows ($ in millions): CAPITAL EXPENDITURES MAINTENANCE TOTAL 1994 $ 63.2 $ 29.1 $ 92.3 1993 50.3 25.1 75.4 1992 46.4 23.0 69.4 1991 36.3 20.7 57.0 1990 34.6 20.0 54.6 Total $230.8 $117.9 $348.7 These expenditures concentrated primarily on track roadway and bridge rehabilitation in 1994, 1993 and 1992. Approximately, 1,400 miles, 1,300 miles and 1,400 miles of road were resurfaced in 1994, 1993 and 1992, respectively. During 1994 and 1993, approximately $11.4 million was spent to complete the conversion of 198 miles of track, known as the Yazoo District, to a single track with centralized traffic control ("CTC"). Over the last three years, a total of $11.4 million was spent to construct new or expanded intermodal facilities in Chicago and Memphis. Expenditures in 1991 and 1990 benefited from the use of reclaimed rail, cross ties, ballast and other track materials from the second main line when the Railroad's double-track mainline was converted to a single-track mainline with CTC. Future capital expenditures for track structures are expected to average $52 million to $60 million annually. Fleet. The Railroad's fleet has undergone significant rationalization and upgrading from its peak in 1985 of 862 locomotives and 28,616 freight cars. Over the last two years older, less efficient locomotives were replaced with newer larger horsepower and more efficient equipment. In 1993, the Company implemented a lease conversion program to increase ownership of locomotives and freight cars to become less dependent on the leasing market as a source of equipment. The program resulted in 118 locomotives and 4,228 freight cars either being acquired outright or leased under more favorable lease terms by the Company. As a result of the new lease terms, $24.7 million of capital leases were recorded in 1994. Most of these leases contain fixed price options whereby the equipment can be acquired at or below fair market value. Since 1992, the Railroad acquired 4 SD-40-2 locomotives and also upgraded its highway trailer fleet with 900 newly built trailers. Of this amount, 800 replaced 880 older leased trailers and 100 were for expanded volume. The locomotives are leased to the Railroad for seven and one-half years. Approximately 1,800 of the cars acquired are leased to the Railroad as well. The remaining cars are leased to other non-affiliated railroads. When those leases expire, the Railroad has first right of refusal to lease the equipment. As these cars are leased to the Railroad other leased equipment will be returned to the independent, third-party lessors or short-term car hire agreements will be terminated. In 1995, the Company will replace 31 older smaller locomotives with 20 new SD-70's with an option to acquire an additional 20 SD-70's in 1996. The Railroad has repaired and reconditioned approximately 173 cars at a cost of $2.9 million. This equipment is being leased on a short- term basis to other carriers until the Railroad anticipates it will need the equipment for its expansion. The following is the overall fleet at December 31: TOTAL UNITS: 1994 1993 1992 1991 1990 Locomotives(1) 417 468 449 470 471 Freight cars 16,498 16,634 15,877 16,381 16,526 Work equipment 625 745 902 881 934 Highway trailers (2) 898 898 203 124 67 1 Approximately 89 locomotives need repair before they can be returned to service. This equipment is repaired if needed on an ongoing basis or sold. The Railroad sold 48, 23 and 66 surplus locomotives in 1994, 1993 and 1992, respectively. The active fleet is 328 as of December 31, 1994. 2 Excludes trailers being accumulated for return to lessors. The components of the fleet by subsidiary and in total for 1994 and in total for 1993 are shown below: Leasing Railroad Subsid- Long- iaries Owned Term 1994 1993 Description: Total (2) Lease(3) Total Total Total Locomotives: Multi-purpose 60 224 41 265 325 368 Switching - 50 42 92 92 100 Total 60 274 83 357 417 468 Freight Cars: Box (general service) 1,130 235 97 332 1,462 1,221 Box (special purpose) 386 2,560 155 2,715 3,101 3,510 Gondola - 935 427 1,362 1,362 1,094 Hopper (open top) 320 2,096 2,301 4,397 4,717 4,955 Hopper (covered) - 2,792 940 3,732 3,732 3,777 Flat - 251 529 780 780 851 Other - 1,191 153 1,344 1,344 1,226 Total 1,836 10,060 4,602 14,662 16,498 16,634 Work Equipment 617 8 625 625 745 Highway trailers(4) - 898 898 898 898 1 In addition, approximately 1,744 freight cars were being used by the Railroad under short-term car hire agreements. 2 Includes 65 locomotives and 1,762 freight cars under capital leases. 3 Excludes equipment listed under Leasing Subsidiaries. 4 Excludes trailers being accumulated for return to lessor. Environmental Conditions The Railroad faces potential environmental cleanup costs associated with approximately 20 contaminated sites and various fueling facilities for which a total of $13 million has been reserved as of December 31, 1994. The most significant of those sites are described below. Mobile, Alabama The Railroad owned property in Mobile prior to 1976 upon which a lessee conducted creosoting operations. The Alabama Department of Environmental Management has determined that the soil and groundwater are contaminated with creosote, pentachlorophenol and possibly dioxins. The Railroad has been participating in joint cleanup efforts with the current owner and the Railroad's lessee. See Item 3. "Legal Proceedings." Jackson, Tennessee A rail yard in Jackson, Tennessee, formerly owned by the Railroad has been placed on the federal and state "superfund" list as a result of the discovery of Trichloroethylene (TCE) in the adjacent municipal water well field. The Railroad formerly operated a shop facility at the site and TCE is a common component of solvents similar to those believed to have been used in the shop. See Item 3. "Legal Proceedings." McComb, Mississippi The Railroad is conducting a site assessment of a facility where car repairs were formerly performed to determine the nature and extent of contamination, primarily lead from removed paint, at the site. The study is being conducted under the supervision of the Mississippi Department of Environmental Quality. Kegley, Illinois Emergency response action has been taken by the Railroad at this scene of a 1994 derailment in which about 22,000 gallons of TCE were released. The spill has been contained by construction of an impervious wall extended into the bedrock and encircling the site. The Railroad has enrolled in Illinois' Pre- Notice Site Cleanup Program and is voluntarily remediating the site. The Railroad believes the shipper bears some responsibility for the release and has so notified it. East Hazel Crest, Illinois In 1994 the Railroad learned that an underground fuel line had leaked about 100,000 gallons of diesel fuel into the soil and groundwater. The Company has constructed a groundwater remediation system and enrolled the site in Illinois' Pre-Notice Site Cleanup Program. See Item 3. "Legal Proceedings." Fueling Facilities Fueling Facilities The Railroad has maintained fueling facilities at more than 20 locations at various times from the 1950's to date. Many of those sites are or may be contaminated with spilled fuel. Those stations currently in use are equipped with drip pans and treatment facilities and the Railroad has initiated a program of rebuilding all fuel lines above ground. Waste Oil Generation The Railroad has been identified as a PRP at three sites where waste oil was allegedly processed and disposed. In each instance, the Railroad is alleged to have generated some of the waste oil, and in each the Railroad believes any contribution it may have made to the site contamination is de minimis. Item 3. Legal Proceedings State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc., et al., S.D. Ala. No. 85-0642-C The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985 seeking damages for alleged pollution of land in Mobile, Alabama, stemming from creosoting operations over several decades. Defendants include the Railroad, which owned the land until 1976, Alabama Wood Treading Corporation, Inc., and Reilly Industries, Inc. ("RII"), which leased the land from the Railroad and conducted creosote operations on the site. In December 1976, the Railroad sold the premises to ASD. The complaint sought payment for the clean-up cost together with punitive and other damages. In 1986, ASD, RII and the Railroad agreed to form a joint technical committee to clean the site, sharing equally the cost of clean-up, and in October 1986 the court stayed further proceedings in the suit. Under the agreement the joint technical committee has spent approximately $6.8 million and has been authorized to expend up to a total of $6.9 million. The Railroad has contributed $2.3 million. Further clean-up activities are anticipated. Under the agreement, if any party disagrees with the amount determined by the joint technical committee to be expended or otherwise disagrees with any aspect of the clean-up, such party may decline further participation and recommence legal proceedings. However, amounts already contributed by any party will be credited against that party's eventual liability and may not be recovered from any other party. In the Matter of Illinois Central Railroad Company, et al., Tennessee Division of Superfund No. 94-0187 The Tennessee Department of Environmental and Conservation has issued a Remedial Order requiring cleanup by the Railroad and the current owners of a site in Jackson, Tennessee. The Railroad operated a rail yard and locomotive repair facility at the site. Trichloroethylene ("TCE") has been found in several municipal water wells near the site. TCE is a common component of solvents similar to those believed to have been used at the shop. In addition, concentrations of metals and organic chemicals have been identified on the surface of the site. The Railroad has commenced a remedial investigation and feasibility study of the site, and expects to cooperate with the agency and other Potentially Responsible Parties to conduct any necessary clean-up activities. People of the State of Illinois v. Illinois Central Railroad No. 95 CH842 (Circuit Court of Cook County, Illinois) On February 2, 1995, the State of Illinois filed a Complaint for Injunction and Civil Penalties against the Railroad relating to a release of diesel fuel from an underground pipeline at the Railroad's Markham Yard facility in East Hazel Crest, Illinois. The Complaint alleges that the Railroad violated State water pollution statutes by allowing diesel fuel to enter waters of the State and seeks an order compelling the Railroad to take necessary corrective actions at the site and to pay a civil penalty. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's security holders during fourth quarter. Item 4A. Executive Officers of the Registrant The executive officers of the Company are identified in the table below. Each executive officer of the Company currently holds an identical position with the Railroad. Executive officers of the Company and the Railroad serve at the pleasure of the respective Boards of Directors. Name Age Position(s) Gilbert H. Lamphere 42 Chairman of the Board of Directors E. Hunter Harrison 50 President and Chief Executive Officer, John D. McPherson 48 Senior Vice President - Operations Gerald F. Mohan 54 Senior Vice President - Marketing James M. Harrell 42 Vice President - Human Resources David C. Kelly 50 Vice President - Maintenance Ronald A. Lane 44 Vice President and General Counsel and Secretary Dale W. Phillips 40 Vice President and Chief Financial Officer Donald H. Skelton 51 Vice President - Marketing and Sales John V. Mulvaney 44 Controller Biographical Information The following sets forth the periods during which the executive officers of the Company and the Railroad have served as such and a brief account of the business experience of such persons during the past five years. Mr. Lamphere has been a director of the Corporation and the Railroad since 1989. He has been Chairman of the Board since 1993, and Chairman of the Executive Committee of the Board since 1990. Mr. Lamphere is Managing Director of the Fremont Group, a diversified investment company. He was Co-Chairman and Chief Executive Officer of The Noel Group, Inc. from 1991 until 1994 and was the Chairman and Chief Executive Officer of The Prospect Group, Inc. until 1994, for which he had served in various capacities since becoming a director in 1983. Mr. Lamphere also is a director of and Chairman of both Recognition International Inc. and Belding Heminway, Inc. He also serves as a director of Fremont and Prospect. Mr. Harrison was appointed President, Chief Executive Officer and a Director of the Company and the Railroad in February 1993. He joined the Company and the Railroad as Vice President and Chief Transportation Officer in 1989. In November 1991 he was appointed Senior Vice President - Transportation and was named Senior Vice President - Operations in July 1992. Mr. McPherson joined the Company and the Railroad in July 1993. He was named Senior Vice President - Operations in 1994. He also serves as a Director of the Railroad. Prior to joining the Company and the Railroad, he held various positions with the Atchison, Topeka and Santa Fe Railway Company from 1966 to 1993, most recently as Assistant Vice President - Safety. Mr. Mohan was appointed Senior Vice President - Marketing of the Railroad in 1986. In April 1993 he was elected a Director of the Railroad. He was appointed to his present position with the Company in December 1989. Mr. Harrell joined the Company and the Railroad in his current position in 1992. He served as Director of Labor Relations for The Atchison, Topeka and Santa Fe Railway Company from 1989 to 1992. Mr. Kelly joined the Company and the Railroad as Vice President and Chief Engineer in 1989. In January 1994, he was appointed Vice President - Maintenance. Mr. Lane joined the Company and the Railroad as Vice President and General Counsel and Secretary in 1990. In April 1993 he was elected a Director of the Railroad. He was previously employed by The Atchison, Topeka and Santa Fe Railway Company and Santa Fe Pacific Corporation serving as Assistant Vice President - Personnel and Labor Relations, 1987 to 1990. Mr. Phillips was appointed to his present position in the Company and the Railroad in April 1990. He joined the Railroad in 1988 serving as Controller from April 1989 to April 1990. In April 1993 he was elected a Director of the Railroad. Mr. Phillips also serves as a director of Rail Association Insurance, Ltd. Mr. Skelton joined the Company and the Railroad as Vice President Marketing and Sales in October 1994. He was previously employed by Mark VII Transportation and as an independent consulting specialist in international transportation. From 1987 to 1993 he was employed by the Atchison, Topeka and Santa Fe Railway Company holding various executive positions including Vice President Marketing and Sales and Vice President International/Domestic Customer Development. Mr. Mulvaney joined the Company and the Railroad as Controller in June 1990. He was previously employed by Navistar International Transportation Corp., serving as Director of Accounting, 1987 to 1990. No family relationship exists among the officers of the Company or the Railroad. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Common Stock is listed on the New York Stock Exchange, Inc. under the symbol "IC." The following table sets forth, for the periods indicated, (i) the high and low sale prices of the Common Stock as reported on the New York Stock Exchange Composite Tape and (ii) the per share amount of dividends paid. Stock Price Dividends High Low Per Share 1993 First Quarter $27.250 $23.625 $ .15 Second Quarter 30.125 25.375 .15 Third Quarter 32.750 26.625 .17 Fourth Quarter 36.000 29.250 .17 1994 First Quarter $38.625 $32.375 $ .21 Second Quarter 37.875 30.500 .21 Third Quarter 31.750 29.250 .21 Fourth Quarter 31.500 28.625 .21 1995 First Quarter (through March 2) $34.875 $30.750 $ .25 As of March 2, 1995, there were approximately 15,000 stockholders based on estimates of beneficial ownership. The closing price of the Common Stock as reported on the New York Stock Exchange Composite Tape on March 2, 1995 was $33.875 per share. Item 6. Selected Financial Data The following table sets forth selected historical consolidated financial data of the Company for the five years ended December 31, 1994, all derived from the consolidated financial statements of the Company which were audited by Arthur Andersen LLP. Arthur Andersen LLP has included an explanatory paragraph in its report on the consolidated financial statements and schedules for the three years ended December 31, 1994, to describe the Company's change in its methods of accounting for income taxes and for postretirement health care and postemployment benefits in 1992 and 1993, respectively. This summary should be read in conjunction with the consolidated financial statements included elsewhere in this Report and the schedules and notes thereto. SELECTED CONSOLIDATED FINANCIAL INFORMATION ($ in millions, except share data) Years Ended December 31, 1994 1993 1992 1991 1990 Income Statement Data: Revenues $593.9 $564.7 $547.4 $549.7 $544.2 Operating expenses before special charge 393.6 385.2 387.0 404.1 410.4 Special charge - - 8.9 - - Operating income 200.3 179.5 151.5 145.6 133.8 Other income, net 1.0 1.7 2.0 5.7 6.2 Interest expense, net (28.4) (33.1) (43.6) (55.1) (71.4) Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles 172.9 148.1 109.9 96.2 68.6 Provision for income taxes 59.0 56.4 37.4 30.8 22.4 Income before extraordinary item and cumulative effect of changes in accounting priciples 113.9 91.7 72.5 65.4 46.2 Extraordinary item, net - (23.4) - - - Cumulative effect of changes in accounting principles - (0.1) 23.4 - - Net income 113.9 68.2 95.9 65.4 46.2 Preferred stock dividends requirements - - - - 5.1 Income applicable to common stock $113.9 $68.2 $95.9 $65.4 $41.1 Income per share(1): Before extraordinary item and accounting changes $2.67 $2.14 $1.70 $1.64 $1.31 Extraordinary item - (0.55) - - - Accounting changes - - 0.55 - - Net income per share $2.67 $1.59 $2.25 $1.64 $1.31 Weighted average number of common shares outstanding (in thousands)(1) 42,726 42,680 42,600 39,830 31,460 Cash dividends declared per common share $0.88 $0.70 $0.50 - - Operating ratio (2) 66.3% 68.2% 70.7% 73.5% 75.4% Years Ended December 31, 1994 1993 1992 1991 1990 Balance Sheet Data: Total assets $1,308.7 $1,258.7 $1,206.1 $1,183.5 $1,152.0 Long-term debt 328.6 360.3 367.3 413.5 486.1 Stockholders' equity 454.1 377.4 338.8 260.3 128.4 Working capital (deficit) (65.4) (32.4) (2.9) (3.4) (44.9) 1. Amounts for the years 1991 and 1990 have been restated to give effect to a 3-for 2 stock split effective in February 1992. 2. Operating ratio is the ratio of operating expenses before special charge to operating revenue. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Four-Year Growth Plan With two years of the 1992 four-year growth plan completed, the Company has achieved two key goals and is on track in the third. Announced in the fall of 1992 the plan was to reduce interest expense by $10 million annually and lower the already lowest operating ratio in the industry to 66.7%, while raising total revenue $100 million. As of December 31, 1994, the Company's interest expense had declined from $44 million to $28 million well ahead of the planned $10 million reduction. The operating ratio for 1994 was 66.3%, approximately one-half percentage point lower than the four year goal. During the last two years revenues rose 3.1% and 5.2%, respectively, and at $594 million are 8.5% higher than 1992. This revenue growth was accomplished despite the impact of two major unplanned events in 1993. In May 1993, the United Mine Workers struck against several companies affecting six mines served by the Railroad. As a result, approximately 35,000 carloads of coal were lost. The strike was settled in December 1993, and full production resumed in January 1994. Partially offsetting the lost coal loads was a gain of approximately 15,000 carloads of grain and grain mill products. This traffic was diverted to the Railroad as a result of the flooding of the upper Mississippi River in July and August 1993. Additionally, over 500 trains from several other Class I railroads were detoured over the Railroad's system. The result was a significant temporary increase in traffic density over the Company's routes. Contributing to 1994's gain in revenue was a resurgence in chemical traffic and sharp growth in intermodal. Intermodal traffic increased 53% benefiting from strength across the board plus two partnerships with other carriers, one of which was in effect for only the last half of 1994. The tender offer for and retirement of $145 million 14-1/8% debentures of the Railroad, in the second quarter of 1993, was the most significant contributor in the achievement of the interest expense goal of the growth plan. Having completed two years of the four-year plan, management is developing a new five-year plan which uses 1994 as a base. The new plan covers the period 1995 through 1999 and features $200 million in revenue growth, a significantly lower operating ratio, and a stockholder-driven long-term equity enhancement program. Results of Operations The discussion below takes into account the financial condition and results of operations of the Company for the years presented in the consolidated financial statements. 1994 Compared to 1993 Revenues for 1994 increased from the prior year by $29.2 million or 5.2% to $593.9 million. The increase was a result of a 7.9% increase in carloadings partially offset by a 3.7% decrease in the average freight revenue per carload. In 1994, the Company experienced increased carloadings in intermodal (53.0%), coal (22.6%), chemicals (3.6%) and paper (2.2%) partially offset by decreased loadings in grain (12.5%) and grain mill products (10.3%). The increase in intermodal carloadings highlighted the Company's emphasis and commitment in this area. For the year, carloadings increased over 67,000 to approximately 915,000 carloads. Operating expenses for 1994 increased $8.4 million or 2.2%. Labor and fuel expenses increased reflecting the increased loadings experienced in 1994 over 1993. Depreciation expense was higher in 1994 because of the Company's shift to ownership of equipment from leasing. Other expenses, which include property and franchise taxes, casualty and environmental accruals, joint facilities, net and equipment related expenses, increased $14.0 million. Partially offsetting the increased expenses was a $18.4 million decrease in lease and car hire expense which resulted from the Company's shift from leasing to owning, more effective turnaround of cars and lower export grain. Operating income increased $20.8 million or 11.6% to $200.3 million for the reasons described above. Net interest expense for 1994 decreased 14.2% ($4.7 million) to $28.4 million compared to $33.1 million in 1993. The sales of accounts receivable under a revolving agreement allowed the Company to utilize existing assets to obtain funds rather than issuing additional debt. The expense associated with this transaction is accounted for as Other Income, Net, not Interest Expense and when coupled with paydowns of other existing debt produced the decrease in interest expense. Net income was further affected by two unusual transactions. The first was the terminated merger discussions with the Kansas City Southern Railroad Company which resulted in a $2.7 million pretax charge ($1.7 million after tax), and the second was a $5.0 million after tax gain on the favorable resolution of prior period tax issues. 1993 Compared to 1992 Revenues for 1993 increased from the prior year by $17.3 million or 3.1% to $564.7 million. The increase was a result of a 2.9% increase in average gross freight revenue per carload, resulting from an improved commodity mix and modest rate increases. The 1993 revenue increase was attributable in part to the gain in carloads when the upper Mississippi River flooding affected barge traffic and also disrupted rail operations of other carriers who diverted traffic to the Company's system. Additionally, chemical loads were up 6% and paper was up 3%. Intermodal was up 5%, reflecting the Company's commitment to increase this aspect of operation, as evidenced by the new Chicago- area intermodal facility and expansions in Memphis. These gains were offset by lost carloads of coal resulting from the United Mine Workers strike of certain coal producers. For the year, carloadings declined .5% (or 4,400 carloads) to 847,900 carloads. Operating expenses for 1993 decreased $1.8 million, or .5% as compared to 1992, excluding the special charge recorded in 1992. Labor expense decreased $1.1 million as a result of on-going cost control programs, including the reduction in train crews, and an overall improvement in efficiency. This decrease was accomplished despite the additional expense incurred because of the flood-related detours of other railroads' trains over the Railroad's track and a 3% wage increase which was effective July 1, 1993 for union employees. Fuel expense reflects the increased traffic in 1993 and 1992 coupled with a total of $1.5 million for increased fuel taxes resulting from the Omnibus Budget Reconciliation Act of 1993 and for the costs associated with fuel hedges. The more fuel efficient locomotives acquired over the last two years partially offset the rise in fuel costs. Materials and supplies increased $3.6 million primarily as a result of track material purchases. The surplus from the single track project was substantially depleted necessitating purchase of new materials. Operating income for 1993 increased 18.5% ($28.0 million) to $179.5 million compared to $151.5 million for 1992, as a result of increased revenues cited above and decreased expenses (including the 1992 special charge). Excluding the special charge, the increase in operating income was 11.9% ($19.1 million). Net interest expense decreased by 24.1% to $33.1 million compared to $43.6 million in 1992. The issuance of new notes at 6.75% to replace the 14-1/8% Senior Subordinated Debentures (the "Debentures") and lower interest rates on floating debt account for the reduced interest expense in 1993. The Debentures were retired via a tender offer which resulted in an extraordinary loss of $23.4 million, net of $12.6 million in tax benefits. The extraordinary loss covers the costs associated with the tender (i.e., premium on repurchase, the write-off of unamortized financing fees and debt discount and the costs associated with calling the untendered Debentures). In August 1993, the Omnibus Budget Reconciliation Act of 1993 became law and increased the maximum corporate federal income tax rate from 34% to 35%, retroactive to January 1, 1993. Liquidity and Capital Resources Operating Data: 1994 1993 1992 Cash flows provided by (used for): Operating activities $205.3 $124.3 $124.4 Investing activities (80.4) (89.0) (46.6) Financing activities (111.4) (59.2) (75.9) Net change in cash and temporary cash investments $ 13.5 $(23.9) $ 1.9 Cash from operating activities in 1994 and 1993 was primarily net income before depreciation, deferred taxes, extraordinary item and the cumulative effect of changes in accounting principles, and 1994 was also affected by the sales of accounts receivable. A significant source of cash in 1993 and 1992 ($6.3 million and $26.4 million, respectively) was the realization of settlement proceeds with numerous insurance carriers in connection with asbestos and hearing loss casualty claims. Most of the settlements were for prior claims but some cover future claims related to prior periods. As part of the settlements, the Railroad agreed to release the carriers from liability for future hearing loss claims. Only $.5 million was received in 1994. During 1994, additions to property of $90.1 million included approximately $44.7 million spent on track and bridge rehabilitation, approximately $13.8 million on communications and signal work (including the conversion to CTC on the Yazoo district), approximately $28.3 million on equipment purchases and betterments and approximately $3.0 million on expansion and rehabilitation of intermodal facilities, primarily Memphis. During 1993, additions to property of $90.7 million included approximately $36.6 million for track and bridge rehabilitation and approximately $31.4 million for the purchase of 21 locomotives and 1,522 freight cars. In 1994 and 1993 capital expenditures exceeded original estimates as several opportunities to acquire equipment were acted upon in accordance with the Company's strategy of owning more of its equipment. During 1992, additions to property of $50.8 million included approximately $46.4 million for track and bridge rehabilitation including approximately $5 million for the construction of a new intermodal facility in the Chicago area. Proceeds from the sales of excess materials generated by the single- track project ($4.1 million in 1992) partially offset the cost of property additions. Property retirements and removals unrelated to the single-track project generated proceeds of $8.2 million, $5.3 million and $3.5 million in 1994, 1993 and 1992, respectively. The Railroad anticipates that base capital expenditures for 1995 will be approximately $65 million and will concentrate on track maintenance and renewal of track structures such as bridges. In February 1995, the Railroad placed a $25.8 million order for 20 new SD70 locomotives to be delivered in the fourth quarter of 1995, to upgrade the locomotive fleet. If additional opportunities such as lease conversions or market-driven expansions occur in 1995, the total capital spending could be approximately $100 million to $110 million. These expenditures are expected to be met from current operations or other available sources. Since 1990, management has concentrated on reducing leverage, expanding funding sources, lowering funding costs and upgrading the debt ratings issued by the rating services. During 1994, several events continued this process. The Railroad's commercial paper program was expanded. A total of $100 million can be issued and outstanding under the program which is supported by a $150 million Revolver with the Railroad's bank lending group (see below). Standard & Poor's Corporation ("S&P"), Moody's Investor Services ("Moody's") and Fitch Investors Service ("Fitch") have rated the commercial paper A2, P3 and F2, respectively. At December 31, 1994, $15.0 million was outstanding. For the year the rates ranged from 3.365% to 6.25%. The Railroad views this program as a significant long-term funding source and intends to issue replacement notes as each existing issue matures. Therefore, commercial paper borrowings are classified as long-term. In the first quarter of 1994, the Railroad entered into a receivables purchase agreement to sell undivided percentage interests in certain of its accounts receivable, with recourse, to a financial institution. The agreement, which expires March 1997, allows for sales of accounts receivable up to a maximum of $50 million at any one time. The Railroad services the accounts receivable sold under the agreement. At December 31, 1994, $50 million in accounts receivable had been sold pursuant to the agreement. The Railroad retains the same exposure to credit loss as existed prior to the sale. Costs related to the agreement vary in correlation with changes in prevailing interest rates. These costs, which are included in Other Income, Net, were $2.2 million for the year ended December 31, 1994. In November 1994, the Railroad concluded negotiations with its bank lending group whereby the Railroad's $100 million Revolver was amended and restated to a $150 million Revolver expiring in 1999. Fees and interest rates are predicated on the Railroad's long-term credit ratings. Currently, the annual fee is 25 basis points and borrowings under this agreement are at LIBOR plus 50 basis points. This amended facility replaced the $100 million revolver due in 1996 and a $50 million 364-day facility due in October 1994. The new Revolver will be used primarily for backup for the Railroad's commercial paper program but can be used for general corporate purposes. The available amount is reduced by the outstanding amount of commercial paper borrowings and any letters of credit issued on behalf of the Railroad under the facility. No amounts have been drawn under the Revolver. At December 31, 1994, the $150 million was limited to $132.6 million because $15.0 million in commercial paper was outstanding and $2.4 million in letters of credit had been issued. Since April 1993, when a tender offer for the Railroad's $145 million 14-1/8% Senior Subordinated Debentures ("Debentures") was completed, the agreements with the bank groups and the $160 million senior secured notes ("Senior Notes") issued in 1991 have been unsecured. The Senior Notes are callable with a make-whole provision in April 1995. No decision has been made to prepay these notes. In 1994, in order to facilitate the stock repurchase program, the Company entered into a $50 million 364-day floating-rate revolving loan agreement which charges a 20 basis point annual fee, interest between LIBOR plus 62.5 basis points to LIBOR plus 100 basis points, expires in August 1995 and was not drawn upon during 1994. The Company's financing/leasing subsidiaries have approximately $31.0 million in long-term borrowing agreements which were used to acquire a total of 61 locomotives during 1993 and 1991 and 1,522 freight cars in 1993. The Company believes that its available cash, cash generated by its operations and cash available from the facilities described above will be sufficient to meet foreseeable liquidity requirements. Various borrowings of the Company's subsidiaries are governed by agreements which contain financial and operating covenants. All entities were in compliance with these covenant requirements at December 31, 1994, and management does not anticipate any difficulty in maintaining such compliance. In 1993, a $23.4 million extraordinary loss, net of $12.6 million in tax benefits, was incurred in connection with the Railroad's tender offer for the Debentures and the costs associated with calling the $10.3 million untendered portion. In connection with the tender offer for the Debentures, the Railroad issued $100 million of 6.75% non-callable, 10-year notes due 2003 (the "Notes") and irrevocably placed funds with a trustee to cover principal, a 6% premium and interest through the first call date of October 1, 1994, for the untendered Debentures. At December 31, 1994, the Railroad's public debt was rated Baa3 by Moody's and BBB by S&P. On March 2, 1995, Moody's raised their rating to Baa2 and raised the commercial paper program to P2. The Railroad has entered into various hedge agreements designed to mitigate significant changes in fuel prices. As a result, approximately 92% of the Railroad's short-term diesel fuel requirements through March 1995 and 46% through June 1995 are protected against significant price changes. See Note 7 of the Notes to Consolidated Financial Statements. The Company declared its twelfth consecutive quarterly cash dividend which was paid on January 6, 1995. The Board intends to continue a policy of quarterly dividends with a target of 33% of expected earnings, subject to existing conditions. Future dividends may be dependent on the Railroad's ability to pay cash dividends to the Company. Certain covenants of the Railroad's debt agreements restrict the level of dividends it may pay to the Company. At December 31, 1994, approximately $44.9 million of Railroad equity was free of such restrictions. The Company has paid approximately $6 million, $8 million and $10 million in 1994, 1993, and 1992, respectively, for severance, lump sum signing awards and other costs associated with the various agreements signed in 1994, 1992 and 1991. The Company anticipates that an additional $7 million will be required in 1995 related to all such agreements. These requirements are expected to be met from current operating activities or other available sources. As the Company continues to negotiate with its operating unions on a local level, agreements may be reached that require significant lump sum payments. It is too early to determine if separate agreements will be reached but management believes available funding sources will be sufficient to meet any required payments. Stock Repurchase Program In 1994, the Board of Directors adopted an ongoing plan to target approximately 75% to 150% of projected free cash flow after capital expenditures and dividends, subject to maintaining a target debt-to- capital ratio of not more than 45%, for the repurchase of Common Stock. The Board will review annually the appropriate levels of repurchases for the following year. For 1995, the Board authorized the purchase of $60 million of Common Stock. Such purchases under the program are to be funded by a special $60 million dividend from the Railroad which was declared in 1994 and will be paid as requested by the Company. At December 31, 1994, the Company had spent $.2 million to acquire 8,000 shares of Common Stock under the plan. Further purchases are dependent on market conditions, the economy, cash needs and alternative investment opportunities. Environmental Liabilities The Company's operations are subject to comprehensive environmental regulation by federal, state and local authorities. Compliance with such regulation requires the Company to modify its operations and expend substantial manpower and financial resources. Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("Superfund"), and similar state and federal laws, the Company is potentially liable for the cost of clean-up of various contaminated sites. The Company has been notified that it is a potentially responsible party at sites ranging from those with hundreds of potentially responsible parties to sites at which the Company is primarily responsible. The Company generally participates in the clean-up at sites where other substantial parties share responsibility through cost-sharing arrangements, but under Superfund and other similar laws the Company can be held jointly and severally liable for all environmental costs associated with such sites. The Company is aware of approximately 20 contaminated sites and various fueling facilities at which it is probably liable for some portion of the clean-up. The Company paid approximately $3.0 million in 1994 toward the investigation and remediation of those sites, and anticipates similar expenditures annually in the future. During 1994, the Company spent an additional $.6 million remediating environmental spills resulting from derailments and other operating activities. Furthermore, recent amendments to the Clean Air Act require the Environmental Protection Agency to promulgate regulations restricting the level of pollutants in locomotive emissions which could impose significant retrofitting requirements, operational inefficiencies or capital expenditures in the future. For all known sites of environmental contamination where Company loss or liability is probable, the Company has recorded an estimated liability at the time when a reasonable estimate of remediation cost and Company liability can first be determined. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Estimates of the Company`s potential financial exposure for environmental claims or incidents are necessarily imprecise because of the difficulty of determining in advance the nature and extent of contamination, the varying costs of alternative methods of remediation, the regulatory clean-up standards which will be applied, and the appropriate allocation of liability among multiple responsible parties. At December 31, 1994, the Company estimated the probable range of its estimated liability to be $13 million to $48 million, and in accordance with the provisions of SFAS No. 5 had a reserve of $13 million for environmental contingencies. This amount is not reduced for potential insurance recoveries or third- party contribution where the Company is primarily liable. The risk of incurring environmental liability in connection with both past and current activities is inherent in railroad operations. Decades-old railroad housekeeping practices were not always consistent with contemporary standards, historically the Company leased substantial amounts of property to industrial tenants, and the Railroad continues to haul hazardous materials which are subject to occasional accidental release. Because the ultimate cost of known contaminated sites cannot be definitively established and because additional contaminated sites yet unknown may be discovered or future operations may result in accidental releases, no assurance can be given that the Company will not incur material environmental liabilities in the future. However, based on its assessments of the facts and circumstances now known, management believes that it has recorded adequate reserves for known liabilities and does not expect future environmental charges or expenditures to have a material adverse effect on the Company`s financial position, results of operations, cash flow or liquidity. Recent Accounting Pronouncements In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"). SFAS No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. This statement applies to financial statements for fiscal years beginning after December 31, 1994, with earlier adoption encouraged. The Company is currently evaluating the impact, if any, this statement will have on its reported results when it is adopted in the first quarter of 1995. Item 8. Financial Statements and Supplementary Data See Index to Consolidated Financial Statements on page 31 of this Report. Item 9. Changes in and Disagreement with Accountants in Accounting Financial Disclosures NONE PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions. The information required by these items is incorporated by reference to the sections of the Company's definitive proxy statement for its 1995 Annual Meeting of Stockholders (which is expected to be filed with the Securities and Exchange Commission on or before March 16, 1995) entitled Nominees for Election as Class I Directors who would hold office until 1998, Class II Directors continuing in office until 1996, Class III Directors continuing in office until 1997, Committees of the Board of Directors, Compensation of Executive Officers and Directors, Ownership of Common Stock and Certain Transactions-Certain Transactions and General-Compliance with the Securities Exchange Act. However, the Compensation Committee Report and the Performance Graph are specifically not incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements: See Index to Consolidated Financial Statements on page 31 of this Report. 2. Financial Statement Schedules: See Index to Financial Statement Schedules on page F-26 of this Report. 3. Exhibits: See items marked with "*" on the Exhibit Index beginning on page E-1 of this Report. Items so marked identify management contracts or compensatory plans or arrangements as required by Item 14. (b) 1. Reports on Form 8-K: During the fourth quarter of 1994 the Registrant filed with the Securities and Exchange Commission the following reports on Form 8-K on the dates indicated to report the events described: NONE (c) Exhibits: The response to this portion of Item 14 is submitted as a separate section of this Report. See Exhibit Index beginning on page E-1. (d) Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this Report. 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, there unto duly authorized. ILLINOIS CENTRAL CORPORATION By: /s/ DALE W. PHILLIPS Dale W. Phillips Vice President and Chief Financial Officer Date: March 8, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated. /s/ GILBERT H. LAMPHERE Chairman of the March 8, 1995 Gilbert H. Lamphere Board and Director /s/ E. HUNTER HARRISON President and Chief March 8, 1995 E. Hunter Harrison Executive Officer (principal executive officer), Director /s/ DALE W. PHILLIPS Vice President March 8, 1995 Dale W. Phillips and Chief Financial Officer (principal financial officer) /s/ JOHN V. MULVANEY Controller March 8, 1995 John V. Mulvaney (principal accounting officer) Director Thomas A. Barron /s/ GEORGE D. GOULD Director March 8, 1995 George D. Gould /s/ WILLIAM B. JOHNSON Director March 8, 1995 William B. Johnson /s/ ALEXANDER P. LYNCH Director March 8, 1995 Alexander P. Lynch /s/ SAMUEL F. PRYOR, IV Director March 8, 1995 Samuel F. Pryor, IV /s/ F. JAY TAYLOR Director March 8, 1995 F. Jay Taylor /s/ JOHN V. TUNNEY Director March 8, 1995 John V. Tunney /s/ ALAN H. WASHKOWITZ Director March 8, 1995 Alan H. Washkowitz ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES F O R M 10-K FINANCIAL STATEMENTS SUBMITTED IN RESPONSE TO ITEM 8 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants F-1 Consolidated Statements of Income for the three years ended December 31, 1994 F-2 Consolidated Balance Sheets at December 31, 1994 and 1993 F-3 Consolidated Statements of Cash Flows for the three years ended December 31, 1994 F-4 Consolidated Statements of Stockholders' Equity and Retained Income for the three years ended December 31, 1994 F-5 Notes to Consolidated Financial Statements for the three years ended December 31, 1994 F-6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Illinois Central Corporation: We have audited the accompanying consolidated balance sheets of Illinois Central Corporation (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, cash flows and stockholders' equity and retained income for each of the three years in the period ended December 31, 1994. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Illinois Central Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 11 and 12 to the consolidated financial statements, effective January 1, 1992, and January 1, 1993, the Company changed its methods of accounting for income taxes and for postretirement health care and postemployment benefits, respectively. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statement schedules herein are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 17, 1995 F-1 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income ($ in millions, except share data) Years Ended December 31, 1994 1993 1992 Revenues $593.9 $564.7 $547.4 Operating expenses: Labor and fringe benefits 196.2 190.2 191.3 Leases and car hire 48.8 67.2 70.4 Diesel fuel 31.5 30.4 30.0 Materials and supplies 38.6 36.7 33.1 Depreciation & amortization 27.4 23.6 22.1 Other 51.1 37.1 40.1 Special charge - - 8.9 Operating expenses 393.6 385.2 395.9 Operating income 200.3 179.5 151.5 Other income, net 1.0 1.7 2.0 Interest expense, net (28.4) (33.1) (43.6) Income before income taxes, extraordinary item and cumulative effect of changes in accounting principles 172.9 148.1 109.9 Provision for income taxes 59.0 56.4 37.4 Income before extraordinary item and cumulative effect of changes in accounting principles 113.9 91.7 72.5 Extraordinary item, net - (23.4) - Cumulative effect of changes in accounting principles - (.1) 23.4 Net income $113.9 $68.2 $95.9 Income per share: Before extraordinary item and cumulative effect of changes in accounting principles $2.67 $2.14 $1.70 Extraordinary item, net - (.55) - Cumulative effect of changes in accounting principles - - .55 Net income per share $2.67 $1.59 $2.25 Weighted average number of shares of common stock and common stock equivalents outstanding 42,725,739 42,679,683 42,600,107 The following notes are an integral part of the consolidated financial statements. F-2 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets ($ in millions) ASSETS December 31, 1994 1993 Current assets: Cash and temporary cash investments $24.2 $10.7 Receivables, net of allowance for doubtful accounts of $2.1 in 1994 and $3.1 in 1993 33.9 80.3 Materials and supplies, at average cost 15.7 20.1 Assets held for disposition 9.1 9.1 Deferred income taxes - current 21.8 22.8 Other current assets 3.3 3.6 Total current assets 108.0 146.6 Investments 13.5 15.7 Properties: Transportation: Road and structures, including land 994.9 947.9 Equipment 165.6 118.1 Other, principally land 40.8 40.4 Total properties 1,201.3 1,106.4 Accumulated depreciation (30.0) (20.9) Net properties 1,171.3 1,085.5 Other assets 15.9 10.9 Total assets $1,308.7 $1,258.7 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $11.1 $24.3 Accounts payable 54.5 54.4 Dividends payable 10.7 9.0 Income taxes payable 0.9 1.5 Casualty and freight claims 24.9 24.7 Employee compensation and vacations 16.5 15.8 Taxes other than income taxes 16.2 14.0 Accrued redundancy reserves 6.8 6.8 Other accrued expenses 31.8 28.5 Total current liabilities 173.4 179.0 Long-term debt 328.6 360.3 Deferred income taxes 218.2 202.3 Other liabilities and reserves 134.4 139.7 Contingencies and commitments (Note 15) Stockholders' equity: Common stock, par value $.001, authorized 100,000,000 shares, 42,853,564 shares issued and 42,609,591 shares outstanding - - Additional paid-in capital 165.1 164.2 Retained income 293.0 216.5 Treasury stock (243,973 shares) (4.0) (3.3) Total stockholders' equity 454.1 377.4 Total liabilities and stockholders' equity $1,308.7 $1,258.7 The following notes are an integral part of the consolidated financial statements. F-3 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in millions) Years Ended December 31, 1994 1993 1992 Cash flows from operating activities : Net income $113.9 $68.2 $95.9 Reconciliation of net income to net cash provided by (used for) operating activities: Extraordinary item, net - 23.4 - Cumulative effect of changes in accounting principles - 0.1 (23.4) Depreciation and amortization 27.4 23.7 22.1 Deferred income taxes 17.4 31.9 21.4 Special charge - - 8.9 Equity in undistributed earnings of affiliates, net of dividends received (0.4) (0.3) 0.2 Net gains on sales of real estate (2.0) (0.8) (0.4) Cash changes in working capital 54.3 (0.8) (15.8) Changes in other assets (4.4) (1.4) 2.8 Changes in other liabilities and reserves (0.9) (19.7) 12.7 Net cash provided by operating activities 205.3 124.3 124.4 Cash flows from investing activities: Additions to properties (90.1) (90.7) (50.8) Proceeds from sales of real estate 3.8 1.5 1.3 Proceeds from single track sales - - 4.1 Proceeds from equipment sales 4.4 3.8 2.2 Proceeds from sales of investments 2.7 (0.4) 1.8 Other (1.2) (3.2) (5.2) Net cash (used for) investing activities (80.4) (89.0) (46.6) Cash flows from financing activities: Proceeds from issuance of debt 134.7 330.8 .9 Principal payments on debt (184.6) (401.1) (61.7) Net proceeds (payments) - Commercial Paper (23.1) 38.1 - Dividends paid (35.7) (27.1) (14.8) Proceeds from exercise of stock options and warrants - .5 .2 Purchase of subsidiary's common stock (2.7) (.4) (.5) Net cash (used for) financing activities (111.4) (59.2) (75.9) Changes in cash and temporary cash investments 13.5 (23.9) 1.9 Cash and temporary cash investments at beginning of year 10.7 34.6 32.7 Cash and temporary cash investments at end of year $24.2 $10.7 $34.6 Supplemental disclosure of cash flow information : Cash paid during the year for: Interest (net of amount capitalized) $30.2 $39.3 $45.3 Income taxes $42.7 $10.9 $15.9 The following notes are an integral part of the consolidated financial statements. F-4 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Retained Income Shares Equity ($ in millions) Total (000's) Additional Stock- Common Common Paid-In Retained Treasury holders' Stock Stock Capital Income Stock Equity Balance December 31, 1991 28,205 $ - $157.1 $103.2 $ - $260.3 Issuance of Common Stock: Stock split 3-for-2 14,102 - - - Exercise stock options 17 - .2 .2 Restricted stock awards 350 - 3.6 3.6 Dividends (21.2) (21.2) Net income 95.9 95.9 Balance December 31, 1992 42,674 - 160.9 177.9 - 338.8 Issuance of Common Stock: Exercise stock options 50 - .5 .5 Restricted stock awards 25 - 2.8 2.8 Stock repurchased / forfeited (134) (3.3) (3.3) Dividends (29.6) (29.6) Net income 68.2 68.2 Balance December 31, 1993 42,615 - 164.2 216.5 (3.3) 377.4 Issuance of Common Stock: Exercise stock options 1 - - - Restricted stock awards 15 - .9 .9 Stock repurchased / forfeited (21) (.7) (.7) Dividends (37.4) (37.4) Net income 113.9 113.9 Balance December 31, 1994 42,610 $ - $165.1 $293.0 $(4.0) $454.1 The following notes are an integral part of the consolidated financial statements. F-5 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statement 1. The Company Illinois Central Corporation, a holding company, (hereinafter, the "Company") was incorporated under the laws of Delaware. The Company was formed originally for the purpose of acquiring, through a wholly-owned subsidiary, the outstanding common stock of Illinois Central Transportation Company ("ICTC"). Following a tender offer and several mergers, the Illinois Central Railroad Company ("Railroad") is the surviving corporation and the successor to ICTC and now a wholly-owned subsidiary of the Company. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant investments in affiliated companies are accounted for by the equity method. Transactions between consolidated companies have been eliminated in the accompanying consolidated financial statements. Properties Depreciation is computed by the straight-line method and includes depreciation on properties under capital leases. The depreciation rates for the equipment owned by the Company's finance subsidiary are based on estimated useful life and anticipated salvage value. Lives used range from 18 to 20 years. At the Railroad, depreciation for track structure, other road property, and equipment is calculated using the composite method. In the case of routine retirements, removal cost less salvage recovery is charged to accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expense. The Interstate Commerce Commission ("ICC") approves the depreciation rates used by the Railroad. The approximate ranges of annual depreciation rates for major property classifications are as follows: Road properties . . . . . 1% - 8% Transportation equipment. 1% - 7% Revenues Revenues are recognized based on services performed and include estimated amounts relating to movements in progress for which the settlement process is not complete. Estimated revenue amounts for movements in progress are not significant. Income Taxes Effective January 1, 1992, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are accounted for on the asset and liability method by applying enacted statutory tax rates to differences ("temporary differences") between the financial statement carrying amounts and the tax bases of assets and liabilities. The resulting deferred tax assets and liabilities represent taxes to be collected or paid in the future when the related assets and liabilities are recovered and settled, respectively. See Note 12 for discussion of the 1992 impact of adopting SFAS No. 109. Cash and Temporary Cash Investments Cash in excess of operating requirements is invested in certain funds having original maturities of three months or less. These investments are stated at cost, which approximates market value. F-6 Income Per Share Income per common share of the Company is based on the weighted average number of shares of common stock and common stock equivalents outstanding for the period. Dilution, which could result if all outstanding common stock equivalents were exercised, is not significant. Futures, Options, Caps, Floors and Forward Contracts In March 1990, the FASB issued Statement of Financial Accounting Standards No. 105 "Disclosure of Information about Financial Instruments with Off Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk" ("SFAS 105"). Disclosures required by SFAS 105 are found in various notes where the financial instruments or related risks are discussed. See specifically Notes 7, 8, 9, 10 and 15. Derivatives The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. Specifically, the Company has entered into various diesel fuel commodity collar and swap agreements with the objective of mitigating significant changes in fuel prices. Premiums paid for the purchase of these agreements are amortized to fuel expense over the terms of the agreements. Unamortized premiums are included in Other Assets in the Consolidated Balance Sheets. Amounts receivable or payable under the collar and swap agreements are accrued as increases or decreases to Diesel Fuel Expense. See Note 7. Casualty Claims The Company accrues for injury and damage claims based on actuarially determined estimates of the ultimate costs associated with asserted claims and claims incurred but not reported. Estimated amounts expected to be settled within one year are classified as current liabilities in the accompanying Consolidated Balance Sheets. Employee Benefit Plans All employees of the Railroad are covered under the Railroad Retirement Act. In addition, management employees of the Railroad are covered under a defined contribution plan. Contribution costs of the plan are funded currently. Mr. E. L. Moyers, the Company's former Chairman, President and Chief Executive Officer ("Mr. Moyers") is covered by a supplemental plan which is discussed in Note 11. Effective January 1, 1993, the Company adopted both the Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106") and the Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112"). See Note 11 for discussion of the impact of SFAS No. 106 and SFAS No. 112. Reclassifications Certain items relating to prior years have been reclassified to conform to the presentation in the current year. 3. Stock Repurchase Program In 1994, the Board of Directors adopted an ongoing plan to target approximately 75% to 150% of projected free cash flow after capital expenditures and dividends, subject to maintaining a target debt-to- capital ratio of not more than 45%, for the repurchase of Common Stock. The Board will review annually the appropriate levels of repurchases for the following year. For 1995, the Board authorized the purchase of $60 million of Common Stock. Such purchases under the program are to be funded by a special $60 million dividend from the Railroad which was declared in 1994 and will be paid as requested by the Company. At December 31, 1994, the Company had spent $.2 million to acquire 8,000 shares of Common Stock under the plan. Further purchases are dependent on market conditions, the economy, cash needs and alternative investment opportunities. 4. Extraordinary Item and Refinancing The 1993 extraordinary loss resulted from the retirement of the Railroad's 14-1/8% Senior Subordinated Debentures (the "Debentures") and refinancing the Permanent Facility. The loss was $23.4 million, net of tax benefits of $12.6 million. The loss resulted from the premium paid, the write-off of unamortized financing fees and debt discount and costs associated with the calling of the $10.3 million of Debentures not tendered. The net proceeds of the 6.75% Notes (see Note 9), borrowings under the $180 million Revolving Credit Facility and other available cash were used to fund the retirement of the Debentures. 5. Other Income, Net Other Income, Net consisted of the following ($ in millions): Years Ended December 31, 1994 1993 1992 Rental income, net $ 3.3 $ 3.9 $ 3.8 Net gains on real estate sales 2.0 .8 .4 Net gain (loss) on disposal of rolling stock .2 (2.3) - Equity in undistributed earnings of affiliates .7 .5 .3 Receivable sales (see Note 10) (2.2) - - Terminated merger discussions with Kansas City Southern (2.7) - - Other, net (.3) (1.2) (2.5) Other Income, Net $ 1.0 $ 1.7 $ 2.0 6. Supplemental Cash Flow Information Cash changes in components of working capital, exclusive of Current Maturities of Long-Term Debt, included in the Consolidated Statements of Cash Flows were as follows ($ in millions): Years Ended December 31, 1994 1993 1992 Receivables, net $46.3 $ (3.9) $ 4.7 Materials and supplies 4.4 (1.4) (3.2) Other current assets .6 (1.5) .3 Accounts payable 2.8 1.1 (5.7) Income taxes payable (1.3) 13.6 .5 Accrued redundancy reserves - (2.6) (11.0) Other current liabilities 1.5 (6.1) (1.4) $54.3 $ (.8) $ (15.8) Included in changes in Other Liabilities and Reserves is approximately $6.3 million and $23.4 million for the years ended December 31, 1993 and 1992, respectively, reflecting the settlement of casualty claims with numerous insurance carriers. The Railroad entered into capital leases of $24.7 million covering 65 locomotives and 1,623 freight cars in 1994 and 200 freight cars in 1993 in the amount of $4.4 million. See Note 8 for a recap of the present value of the minimum lease payments. 7. Materials and Supplies Materials and Supplies, valued using the average cost method, consist of track material, switches, cars and locomotive parts and fuel. As of December 31, 1994, the Company was a party to four diesel fuel collar agreements under which the Company receives or makes monthly payments based on the monthly average near-by contract price for Heating Oil #2 traded on the New York Mercantile Exchange (the "Contract Price"), which was $.486 per gallon for December 1994. Under the agreements, the Company receives or makes monthly payments on notional amounts based on the excess of the Contract Price over $.60 per gallon or when the Contract Price is below an amount averaging approximately $.51, respectively. As of December 31, 1994, the agreements covered notional quantities amounting to 4,000,000 gallons through March 1995 and 2,000,000 gallons for the period April 1995 through June 1995, or approximately 92% and 46%, respectively, of the Company's monthly diesel fuel requirements. 8. Leases As of December 31, 1994, the Company leased 6,364 of its cars and 148 of its locomotives. These leases generally have original terms of 15 years and expire between 1995 and 2003. Under the terms of the majority of its leases, the Company has the right of first refusal to purchase, at the end of the lease term, certain cars and locomotives at or below fair market value. The Company also leases office and computer equipment, vehicles and office facilities. Net obligations under capital leases at December 31, 1994 and 1993, included in the Consolidated Balance Sheets are $27.9 million and $5.4 million, respectively. At December 31, 1994, minimum rental payments under capital and operating leases that have initial or remaining noncancellable terms in excess of one year were as follows ($ in millions): Capital Operating Leases Leases 1995 $11.2 $24.1 1996 13.9 20.9 1997 2.0 11.3 1998 1.5 6.7 1999 1.5 6.2 Thereafter 2.6 17.8 Total minimum lease payments $32.7 $87.0 Less: Imputed interest 4.8 Present value of minimum payments $27.9 Total rent expense applicable to noncancellable operating leases amounted to $38.1 million in 1994, $44.9 million in 1993 and $46.2 million for 1992. Most of the leases provide that the Company pay taxes, maintenance, insurance and certain other operating expenses. 9. Long-Term Debt and Interest Expense Long-Term Debt at December 31, consisted of the following ($ in millions): 1994 1993 Equipment obligations, due annually to 2000, 6.11% to 9.254% $ 31.0 $ 13.0 Debentures and other debt, due 1995 to 2056, 4.5% to 10.9% 10.5 10.8 Commercial Paper, at average interest rate 4.72% in 1994 and 3.57% in 1993 15.0 38.1 Bank Line, at average interest rate of 4.02% in 1994 and 3.49% in 1993 - 40.0 Notes, due 2003, 6.75% 100.0 100.0 Senior Notes, due 1998 to 2001, 10.02% and 10.4% 159.8 159.8 Capitalized leases (Note 8) 18.5 4.9 Unamortized (discount) (6.2) (6.3) Total Long-Term Debt $328.6 $360.3 At December 31, 1994, the aggregate annual maturities and sinking fund requirements for debt payments for 1995 through 2000 and thereafter are $11.1 million, $31.5 million, $7.4 million, $62.0 million, $65.6 million, $30.2 million and $131.9 million, respectively. The weighted- average interest rate for 1994 and 1993 on total debt excluding the effect of discounts, premiums and related amortization was 8.6% and 9.1%, respectively. In November 1993, the Railroad initiated a public commercial paper program. The commercial paper is rated A2 by S&P, P3 by Moody's and F2 by Fitch and is supported by a new $150 million Revolver with the Railroad's bank lending group due 1999. The Railroad pays an annual fee of 25 basis points on the Revolver and LIBOR plus 50 basis points for any borrowings. The Revolver replaced both a $50 million Bank Line which expired in October 1994 and the former $100 million revolver with the banks due 1996. The Railroad views commercial paper as a significant long- term funding source and intends to issue replacement notes as maturities occur. Therefore, the $15.0 million outstanding at December 31, 1994 has been classified as long-term. The Revolver will be used primarily as backup for the commercial paper but can be used for general corporate purposes. The available amount is reduced by the outstanding amount of commercial paper borrowings and any letters of credit issued on behalf of the Railroad under the facility. No amounts have been drawn under the Revolver. The $150 million was limited to $132.6 million because $15.0 million in commercial paper was outstanding and $2.4 million in letters of credit had been issued. The $100 million 6.75% Notes ("Notes") (issued at a slight discount 1.071%) pay interest semiannually in May and November and are covered by an Indenture. Of the $160 million Senior Notes ("Senior Notes"), $109.8 million bears interest at a rate of 10.02% and $50 million at 10.4%. Principal payments of $55 million, $54.8 million, $25 million and $25 million are due in 1998, 1999, 2000 and 2001, respectively. The Senior Notes are governed by a Note Purchase Agreement and are subject to prepayment beginning in April 1995. In 1994, in order to facilitate the stock repurchase program the Company entered into a $50 million 364-day floating-rate revolving loan agreement which charges a 20 basis point annual fee, interest between LIBOR plus 62.5 basis points to LIBOR plus 100 basis points, expires in August 1995 and was not drawn upon during 1994. The Company's financing/leasing subsidiaries have approximately $13.0 million in long- term borrowing agreements which were used to acquire a total of 61 locomotives during 1993 and 1991. Such borrowings are secured by equipment which is leased to the Railroad and mature in 1999 and 2000. Another subsidiary used a short-term bridge financing of $21.7 million to acquire 1,522 box cars in December 1993. In July 1994, the subsidiary refinanced this debt with a seven year floating rate revolving facility and term loan. Various borrowings of the Company's subsidiaries are governed by agreements which contain certain affirmative and negative covenants customary for facilities of this nature including restrictions on additional indebtedness, investments, guarantees, liens, distributions, sales and leasebacks, and sales of assets and capital stock. Some also require the Railroad to satisfy certain financial tests, including a leverage ratio, an earnings before interest and taxes to interest charges ratio, debt service coverage, and minimum consolidated tangible net worth requirements. Interest Expense, Net consisted of the following ($ in millions): Years Ended December 31, 1994 1993 1992 Interest expense $31.2 $35.2 $46.2 Less: Interest capitalized 1.4 .8 .6 Interest income 1.4 1.3 2.0 Interest Expense, Net $28.4 $33.1 $43.6 10. Sales of Accounts Receivable In 1994, the Railroad entered into a revolving agreement to sell undivided percentage interests in certain of its accounts receivable, with recourse, to a financial institution. The agreement, which expires March 1997, allows for sales of accounts receivable up to a maximum of $50 million at any one time. The Railroad services the accounts receivable sold under the agreement. At December 31, 1994, $50 million in accounts receivable had been sold pursuant to the agreement. The Railroad retains the same exposure to credit loss as existed prior to the sale. Costs related to the agreement vary in correlation with changes in prevailing interest rates. These costs, which are included in Other Income, Net, were $2.2 million for 1994. 11. Employee Benefit Plans Retirement Plans. All employees of the Railroad are covered under the Railroad Retirement Act. In addition, management employees of the Railroad are covered under a defined contribution plan. Contributions under the plan vest immediately. Expenses relating to the defined contribution plan were $.5 million, $.4 million and $.4 million for the years ended December 31, 1994, 1993 and 1992, respectively. Mr. Moyers is covered by a non-qualified, unfunded supplemental retirement benefit agreement which provides for a defined benefit payable annually, commencing upon death, permanent disability or retirement (with benefits arising from retirement commencing upon his attaining age 65 and compliance with certain non-competition agreements), in the amount of $250,000 per year for a maximum of 15 years. In accordance with the term of the agreement, no payments will be made while Mr. Moyers is employed by another Class I railroad. The present value of this agreement was included in the 1992 special charge. See Note 17. Postretirement Plans. In addition to the Company's defined contribution plan for management employees, the Company has three benefit plans which provide some postretirement benefits to most former full-time salaried employees and selected former union represented employees. The medical plan for salaried retirees is contributory, with retiree contributions adjusted annually if expected inflation rate exceeds 9.5%, and contains other cost sharing features such as deductibles and co- payments. The Company's contribution will be fixed at the 1999 year end rate for all subsequent years. Salaried retirees are covered by a life insurance plan which provides a nominal death benefit and is non- contributory. The medical plan for locomotive engineers who retired under a special early retirement program in 1987 provides non-contributory coverage until age 65. All benefits under this plan terminate in 1998. There are no plan assets and the Company funds these benefits as claims are paid. Postemployment Benefit Plans. The Company provides certain postemployment benefits such as long-term salary continuation and waiver of medical and life insurance co-payments while on long-term disability. SFAS No. 106 and SFAS No.112. As described in Note 2 effective January 1, 1993 the Company adopted SFAS No. 106 and SFAS No. 112. With respect to SFAS No. 106, the Company elected to immediately recognize the transition asset associated with adoption which resulted because the Company had previously recorded an amount under purchase accounting to reflect the estimated liability for such benefits as of the acquisition date of ICTC. SFAS No. 106 requires that future costs associated with providing postretirement benefits be recognized as expense over the employees' requisite service period. As a result of adopting these two standards, the Company recorded a decrease to net income of $84,000 (net of taxes of $46,000) as a cumulative effect of changes in accounting principles ($ in millions): Postretirement Benefits (SFAS No. 106): APBO at January 1, 1993: Medical $36.5 Life 2.3 Total APB 38.8 Liability previously recorded (40.3) Transition Asset 1.5 Postemployment Benefits Obligation at January 1, 1993 (SFAS 112) (1.6) Pre-tax Cumulative Effect of Changes in Accounting Principles (.1) Related tax benefit - Cumulative Effect of Changes in Accounting Principles $ (.1) Per Share Impact $ - In accordance with each standard, years prior to 1993 have not been restated. The adoption of these two standards had no significant effect on income before cumulative effect of changes in accounting principles as compared to the Company's prior pay-as-you-go method of accounting for such benefits. The accumulated postretirement benefit obligations ("APBO") of the postretirement plans were as follows ($ in millions): December 31, 1994 1993 Medical Life Total Total Accumulated postretirement benefit obligation: Retirees $15.7 $ 2.0 $17.7 $28.8 Fully eligible active plan participants .6 - .6 .7 Other active plan participants 3.3 - 3.3 4.7 Total APBO $19.6 $ 2.0 21.6 34.2 Unrecognized net gain 18.9 5.0 Accrued liability for post- retirement benefits $40.5 $39.2 The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7.25% at December 31, 1993. As a result of the rise in general interest rates in 1994 on high quality investment vehicles, the Company increased the weighted-average discount rate to 8.5% as of December 31, 1994. The change in rates resulted in approximately $2.2 million actuarial gain. The actuarial gain along with actual experience gains, primarily fewer claims and lower medical rate inflation, resulted in a total $18.9 million unrecognized net gain as of December 31, 1994. In accordance with SFAS No. 106, the excess gain is subject to $1.3 million annual amortization based on an amortization period of approximately 13 years. The components of the net periodic postretirement benefits cost were as follows ($ in millions): Years Ending December 31, 1994 1993 Service costs $ .2 $ .1 Interest costs 2.4 3.0 Net amortization of excess gain (.1) - Net periodic postretirement benefit costs $ 2.5 $ 3.1 The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (e.g., health care cost trend rate) for the medical plans is 13.0% for 1995 and is assumed to decrease gradually to 6.25% by 2001 and remain at that level thereafter. The health care cost trend rate assumption normally has a significant effect on the amounts reported; however, as discussed, the plan limits annual inflation for the Company's portion of such costs to 9.5% each year. Therefore, an increase in the assumed health care cost trend rates by one percentage point in each year would have no impact on the Company's accumulated postretirement benefit obligation for the medical plans as of December 31, 1994, or the aggregate of the service and interest cost components of net periodic postretirement benefit expense in future years. 12. Provision for Income Taxes Effective January 1, 1992, the Company adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). As a result, the Company recorded a $23.4 million ($.55 per share) reduction in its accrued net deferred income tax liability as of January 1, 1992. The gain recorded upon adoption could not be recognized previously in accordance with SFAS No. 96 which the Company had adopted in 1988. The Company elected to report this change as the cumulative effect of a change of accounting principle. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 became law and increased the maximum corporate federal income tax rate from 34% to 35% retroactive to January 1, 1993. This change required the Company to record additional deferred income tax expense of approximately $3.1 million in 1993 to reflect the new tax rate's impact on net deferred income tax liability as of January 1, 1993. In 1994, a $5.0 million tax benefit was recorded to reflect the favorable resolution of prior-period tax issues associated with the former parent of ICTC. The Provision for Income Taxes for continuing operations consisted of the following ($ in millions): Years Ended December 31, 1994 1993 1992 Current income tax: Federal $37.5 $23.6 $14.4 State 4.1 .9 1.6 Deferred income taxes 17.4 31.9 21.4 Provision for Income Taxes $59.0 $56.4 $37.4 The effective income tax rates for the years ended December 31, 1994, 1993 and 1992, were 34%, 38% and 34%, respectively. See Note 4 for the tax benefits associated with the 1993 extraordinary loss. The items which gave rise to differences between the income taxes provided for continuing operations in the Consolidated Statements of Income and the income taxes computed at the statutory rate are summarized below ($ in millions): Years Ended December 31, 1994 1993 1992 Expected tax expense computed at statutory rate $60.5 35% $51.8 35% $37.4 34% Dividends received exclusion (.9) - (.1) - (.1) - Impact of OBRA 1993 rate change - - 3.1 2 - - State income taxes, net of Federal tax effect 3.6 2 .6 - 1.0 1 Favorable resolution of prior period tax issues (5.0)(3) - - - - Other items, net .8 - 1.0 1 (.9) (1) Provision for Income Taxes $59.0 34% $56.4 38% $37.4 34% Temporary differences between book and tax income arise because the tax effects of transactions are recorded in the year in which they enter into the determination of taxable income. As a result, the book provisions for taxes differ from the actual taxes reported on the income tax returns. The net results of such differences are included in Deferred Income Taxes in the Consolidated Balance Sheets. At December 31, 1994, the Company, for tax or financial statement reporting purposes, had no Federal net operating loss carryovers. Deferred Income Taxes consisted of the following ($ in millions): December 31, 1994 1993 Deferred tax assets $ 71.6 $ 82.2 Less: Valuation allowance (1.8) (2.2) Deferred tax assets, net of valuation allowance 69.8 80.0 Deferred tax liabilities (266.2) (259.5) Deferred Income Taxes $(196.4) $(179.5) The valuation allowance is comprised of the portion of state tax net operating loss carryforwards expected to expire before they are utilized and non-deductible expenses incurred with the previous merger of wholly- owned subsidiaries. Major types of deferred tax assets are: reserves not yet deducted for tax purposes ($56.5 million) and safe harbor leases ($11.3 million). Major types of deferred tax liabilities are: accelerated depreciation ($222.0 million), land basis differences ($10.1 million) and debt marked to market ($2.0 million). The Company and its subsidiaries have a tax sharing agreement whereby each subsidiary's federal income tax and state income tax liabilities are determined on a separate company income tax basis as if it were not a member of the Company's consolidated group, with no benefit for prior net operating losses or credit carryovers from prior years. 13. Common Stock and Dividends The Company is authorized to issue 100,000,000 shares of Common Stock, par value $.001. At December 31, 1994, there were 42,609,591 shares of Common Stock outstanding. Each holder of Common Stock is entitled to one vote per share in the election of directors and on all matters submitted to a vote of stockholders. Subject to the rights and preferences of redeemable preferred stock, if any, each share of Common Stock is entitled to receive dividends as may be declared by the Board of Directors out of funds legally available and to share ratably in all assets available for distribution to stockholders upon dissolution or liquidation. No holder of Common Stock has any preemptive right to subscribe for any securities of the Company. No shares of preferred stock were outstanding at December 31, 1994 and 1993. On February 4, 1992, the Board of Directors authorized a three-for- two stock split on Common Stock. The split was in the form of a stock dividend and was paid on February 28, 1992. Fractional shares were settled for cash. A total of 14,132,058 shares were issued from authorized but unissued shares. In 1992, the Board of Directors initiated a policy of quarterly dividends on the Common Stock of the Company. Future dividends may be dependent on the ability of the Railroad to pay dividends to the Company. Certain covenants of the Railroad's debt restrict the level of dividends it may pay to the Company. In December 1994, the Railroad declared a special $60 million dividend payable in connection with the stock repurchase program. At December 31, 1994, an additional $44.9 million was free of covenant restrictions (see Note 3). The Company awarded 15,000 shares, 25,000 shares and 150,000 shares of restricted stock to eligible employees of the Railroad in 1994, 1993 and 1992, respectively. No cash payments are required by the individuals. Shares awarded under the plans may not be sold, transferred, or used as collateral by the holders until the shares awarded become free of the restrictions. Restrictions lapse over a four-year period. All shares still subject to restrictions will be forfeited and returned to the plan if the employee's relationship with the Railroad is terminated. A total of 100 shares and 13,500 shares were forfeited in 1994 and 1993, respectively. If the employee becomes disabled, or dies, or a change in control occurs during the vesting period, the restrictions lapse at that time. The compensation expense resulting from the award of restricted stock is valued at the closing market price of the Company's Common Stock on the date of the award, recorded as a reduction of Stockholders' Equity, and charged to expense evenly over the vesting period. Compensation expense was $.9 million, $.8 million and $.5 million in 1994, 1993 and 1992, respectively. In 1992, the Company awarded 200,000 shares to Mr. Moyers as well. Of this amount, 133,000 were vested upon his retirement in 1993. The remaining 67,000 were forfeited in 1993 when Mr. Moyers was employed by another Class I railroad. See Note 17. 14. Compensation and Stock Options Stock Purchase Plan. Under the Company's 1990 Stock Purchase Plan (the "Stock Plan"), 736,380 shares (post split) of Common Stock were made available from shares held by Prospect for sale to key employees and officers of the Company as determined by the Company's Board of Directors. Shares so awarded were sold at a price of $.10 per share (post split)(which was Prospect's approximate original per share cost for such stock as adjusted for the 3 for 2 stock split in February 1992). Shares awarded pursuant to the Stock Purchase Plan were restricted when issued. At December 31, 1994, all shares awarded have vested. The unawarded shares (63,270) and those repurchased in 1991 are now included in Treasury Stock. Long-Term Incentive Plan. Under the Company's 1990 Long-Term Incentive Plan (the "Long-Term Incentive Plan") shares of Common Stock are available for issuance upon the exercise of incentive options that may be awarded by the Compensation Committee to directors and selected salaried employees of the Company and its affiliates and to certain other individuals who possess the potential to contribute to the future success of the Company. At the 1993 Annual Meeting, the stockholders authorized an additional one million shares to be available for issuance under the Long-Term Incentive Plan. The Compensation Committee also has the authority under the Long-Term Incentive Plan to award stock appreciation rights, restricted stock and restricted stock units, dividend equivalents and other stock-based awards, and to determine the consideration to be paid by the participant for any awards, any limits on transfer of awards, and, within certain limits, other terms of awards. In the case of options (other than options granted to directors who are not full-time employees of the Company ("Outside Directors"), as described below) granted under the Long-Term Incentive Plan, the Committee has the power to determine the exercise price of the option (which cannot be less than 50% of the fair market value on the date of grant of the shares subject to the option), the term of the option, the time and method of exercise and whether the options are intended to qualify as "incentive stock options" pursuant to Section 422A of the Internal Revenue Code. The Compensation Committee awarded stock options to employees under the Long-Term Incentive Plan for the first time in 1993. Awards, all at fair market value, vest ratably over four years and expire 10 years from date of grant. Outside Directors also participate in the Long-Term Incentive Plan. On the date of each Annual Meeting, each Outside Director who serves immediately prior to such date and who will continue to serve after such date (whether as a result of such director's re-election or by reason of the continuation of such director's term) is granted an option to purchase 1,500 shares of Common Stock. Until the 1994 Annual Meeting of Stockholders, Outside Directors were granted an option to purchase 15,000 shares of Common Stock upon initial appointment or election. In addition, Outside Directors as of November 1990 were granted options to purchase an additional 10,000 shares, which grants were approved at the 1991 Annual Meeting of Stockholders. Options granted to Outside Directors entitle such persons to purchase Common Stock at the fair market value of such Common Stock on the date the option was granted. Options held by Outside Directors expire 10 years from the date of grant, or, if earlier, one year following termination of service as a director for any reason other than death or disability. Such options become exercisable in full six months after their date of grant. The following table summarizes the shares available for award under the Incentive Plan for the year ended December 31, 1994: Shares available for award at beginning of year 1,427,500 Options exercised (1,500) Restricted stock (15,000) (16,500) Subtotal 1,411,000 Shares of restricted stock forfeited 100 Change in options outstanding during year (27,000) Shares available for award at end of year 1,384,100 The following table summarizes changes in shares under option for the year ended December 31, 1994: Option Outside Price Range Directors Employees Total Per Share Outstanding options - - beginning of year 162,000 520,000 682,000 $ 8.000 to $31.250 Options - Granted 28,500 - 28,500 $34.250 to $37.750 - Exercised (1,500) - (1,500) $12.750 - Terminated - - - Change during the year 27,000 - 27,000 Outstanding options end of year 189,000 520,000 709,000 $8.000 to $37.750 The last date exercisable for options granted to Outside Directors is April 21, 2004, and November 23, 2003 for those granted to employees. In 1994, Outside Directors exercised 1,500 options at $12.75 per share when the market price was $37.25 per share. See Notes 13 and 17 for a discussion of the restricted stock issued under the Long-Term Incentive Plan. 15. Contingencies, Commitments and Concentration of Risks The Company has unconditionally guaranteed its finance subsidiary's $12.8 million obligations via a pledge of the stock of the finance subsidiary. The Company is self-insured for the first $5 million of each loss. The Company carries $295 million of liability insurance per occurrence, subject to an annual cap of $395 million in the aggregate for all losses. This coverage is considered by the Company's management to be adequate in light of the Company's safety record and claims experience. As of December 31, 1994, the Company had $2.4 million of letters of credit outstanding as collateral primarily for surety bonds executed on behalf of the Company. Such letters of credit expire in 1995 and are automatically renewable for one year. The letters of credit reduced the maximum amount that could be borrowed under the Revolver (see Note 9). The Company has guaranteed repayment of certain indebtedness of a jointly owned company aggregating $7.8 million. The Company's primary share is $1.0 million; the remainder is a primary obligation of other unrelated owner companies. The Company has agreed to acquire 20 new SD-70 locomotives for a total cost of $25.8 million with delivery expected in October 1995. There are various regulatory proceedings, claims and litigation pending against the Company. While the ultimate amount of liability that may result cannot be determined, in the opinion of the Company's management, based on present information, adequate provisions for liabilities have been recorded. See "Management's Discussion and Analysis - Liquidity and Capital Resources - Environmental Liabilities" for a discussion of environmental matters. 16. Disclosures about Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and temporary cash investments. The carrying amount approximates fair value because of the short maturity of those instruments. Certain Investments in Debt and Equity Securities. Effective January 1, 1994, the Company adopted the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investment in Debt and Equity Securities"("SFAS No. 115"). SFAS No. 115 expands the use of fair value accounting for certain investments in debt and equity securities but retains the use of the amortized cost method for investments in debt securities that the reporting enterprise has the positive intent and ability to hold to maturity. All of the investments are temporary and held for less than 90 days. They are included in the Consolidated Balance Sheet as part of Cash and Temporary Cash Investments. For the periods presented below, all investments were in U.S. Corporate demand notes. It is the intent of the Company to hold all debt securities to maturity, therefore, the following is provided in accordance with SFAS No. 115 ($ in millions): 12-31-94 1-1-94 Aggregate fair value $19.4 $5.6 Gross unrealized holding gains - - Gross unrealized holding losses - - Amortized cost 19.4 5.6 Investments. The Company has investments of $8.8 million in 1994 and $10.3 million in 1993 for which there are no quoted market prices. These investments are in joint railroad facilities, railroad terminal associations, switching railroads and other transportation companies. For these investments, the carrying amount is a reasonable estimate of fair value. The Company's remaining investments ($4.7 million in 1994 and $5.4 million in 1993) are accounted for by the equity method. Long-term debt. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Derivatives. The fair value of diesel fuel collar and swap agreements is the estimated amount that the Company would receive or pay to terminate the agreements as of year end, taking into account the current credit worthiness of the agreement counterparties. The estimated fair values of the Company's financial instruments at December 31, are as follows ($ in millions): 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value Cash and temporary cash investments $24.2 $24.8 $ 10.7 $ 10.7 Investments 8.8 8.8 10.3 10.3 Accounts payable (derivatives) (.1) (.4) (.5) (4.6) Debt (339.7)(341.2) (384.6) (406.0) 17. Special Charge In 1992, the Company recorded a pretax special charge of $8.9 million as part of operating expense. The special charge reduced Net Income by $5.9 million or $.13 per share. The special charge consisted of $7 million for various costs associated with the retirement of Mr. Moyers and the related organizational changes. The costs associated with Mr. Moyers' retirement include the present value of his pension, accelerated vesting of a portion of his restricted stock award and certain costs of a non-competition agreement. The remaining $1.9 million was for the disposition costs of railcars and a building and its adjacent land. 18. Selected Quarterly Financial Data - (Unaudited) ($ in millions, except share data): First Second Third Fourth 1994 Quarter Quarter Quarter Quarter(a) Revenues $147.5 $145.2 $146.7 $154.5 Operating income 50.6 45.2 45.9 58.6 Net income 27.7 24.8 25.9 35.5 Net income per share $ .65 $ .58 $ .61 $ .83 1993 Revenues $142.7 $132.1 $147.4 $142.5 Operating income 46.4 38.3 46.4 48.4 Income before extraordinary item and cumulative effect of changes in accounting principles 24.0 19.9 21.5 26.3 Net income (loss) 23.9 (3.5) 21.5 26.3 Income per share: Before extraordinary item and cumulative effect $ .56 $ .47 $ .50 $ .61 Extraordinary item - (.55) - - Cumulative effect - - - - Net income (loss) per share $ .56 $ (.08) $ .50 $ .61 1992 Revenues $138.7 $129.9 $131.4 $147.4 Operating income 42.6 36.7 36.5 35.7 Income before cumulative effect of change in accounting principle 21.1 16.9 17.6 16.9 Net income 44.5 16.9 17.6 16.9 Income per share: Before cumulative effect $.50 $.40 $ .41 $ .39 Cumulative effect .55 - - - Net income per share $ 1.05 $ .40 $ .41 $ .39 (a) Includes the special charge recorded in the fourth quarter of 1992, see Note 17. ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES F O R M 10-K FINANCIAL STATEMENT SCHEDULES SUBMITTED IN RESPONSE TO ITEM 14(a) ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES I N D E X T O FINANCIAL STATEMENT SCHEDULES SUBMITTED IN RESPONSE TO ITEM 14(a) Schedules for the three years ended December 31, 1994: I-Condensed financial information.. .F-27 II-Valuation and qualifying accounts .F-30 Pursuant to Rule 5.04 of General Rules of Regulation S-X, all other schedules are omitted because they are not required or because the required information is set forth in the financial statements or related notes thereto. ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Statements of Income ($ in millions, except share data) Years Ended December 31, 1994 1993 1992 Operating expenses $0.3 $0.2 $0.3 Operating (loss) (0.3) (0.2) (0.3) Other income (expense), net (3.7) (1.3) (1.6) Interest income (expense), net (0.1) - 0.4 (Loss) before taxes and earnings of subsidiaries (4.1) (1.5) (1.5) Earnings of subsidiaries 116.5 69.1 97.0 (Benefit) for income taxes (1.5) (0.6) (0.4) Net income $113.9 $68.2 $95.9 Income per share $2.67 $1.59 $2.25 Weighted average number of shares outstanding (thousands) 42,725.7 42,679.7 42,600.1 The Notes to Consolidated Financial Statements beginning on page F-6 are an integral part of this schedule. F-27 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Balance Sheets ($ in millions) December 31, 1994 1993 ASSETS Current assets: Cash and temporary cash investments $11.0 $1.3 Receivables 60.6 16.0 Other current assets 0.1 0.1 Total current assets 71.7 17.4 Investments in subsidiaries 404.6 375.1 Other assets 0.4 0.5 Total assets $476.7 $393.0 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $8.9 $6.3 Dividends payable 10.6 8.9 Income taxes payable 0.4 (1.9) Total current liabilities 19.9 13.3 Deferred income taxes 1.1 0.7 Other liabilities and reserves 1.6 1.6 Contingencies and commitments Stockholders' equity: Common stock, par value $.001 authorized 100,000,000 shares: 42,853,564 shares issued and 42,609,591 shares outstanding - - Additional paid-in capital 165.1 164.2 Retained income 293.0 216.5 Treasury stock (243,973 shares) (4.0) (3.3) Total stockholders' equity 454.1 377.4 Total liabilities and stockholders' equity $476.7 $393.0 The Notes to Consolidated Financial Statements beginning on page F-6 are an integral part of this schedule. F-28 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES SCHEDULE I -- CONDENSED FINANCIAL INFORMATION Illinois Central Corporation--Parent Company Condensed Statements of Cash Flows ($ in millions) Years Ended December 31, 1994 1993 1992 Cash flows from operating activities: Net income $113.9 $68.2 $95.9 Reconciliation of net income to net cash provided by (used for) operating activities: Deferred income taxes 0.4 0.3 0.3 Earnings of subsidiaries (116.5) (69.1) (97.0) Cash changes in working capital: Receivables 0.4 0.1 (0.4) Other current assets - (0.1) - Accounts payable 2.6 2.2 1.4 Income taxes payable 2.3 (0.7) (1.0) Taxes other than income taxes - (0.1) 0.1 Changes in other assets 0.1 (0.5) 0.1 Changes in other liabilities and reserves - 1.1 - Net cash provided by (used for) operating activities 3.2 1.4 (0.6) Cash flows from investing activities: Capital contribution to subsidiaries (0.3) (9.9) - Dividends received from subsidiaries 42.5 27.4 6.4 Net cash provided by investing activities 42.2 17.5 6.4 Cash flows from financing activities: Dividends paid (35.7) (27.1) (14.8) Proceeds from exercise of stock options and warrants - 0.5 0.2 Net cash (used for) financing activities (35.7) (26.6) (14.6) Changes in cash and temporary cash investments 9.7 (7.7) (8.8) Cash and temporary cash investments at beginning of period 1.3 9.0 17.8 Cash and temporary cash investments at end of period $11.0 $1.3 $9.0 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $- $- $- Income taxes $- $- $- The Notes to Consolidated Financial Statements beginning on page F-6 are an integral part of this schedule. F-29 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ($ in millions) Year Ended December 31, 1994 Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Redundancy and guarantee reserves $43.6 $1.8 $7.2 $38.2 Casualty and other reserves 62.3 16.9 17.5 61.7 Environmental 11.9 4.4 3.0 13.3 Bad debt reserve 3.1 1.9 2.9 2.1 Taxes 2.2 - 0.4 1.8 Total $123.1 $25.0 $31.0 $117.1 Year Ended December 31, 1993 Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Redundancy and guarantee reserves $51.6 $1.8 $9.8 $43.6 Casualty and other reserves 67.4 18.8 23.9 62.3 Environmental 9.9 2.9 0.9 11.9 Bad debt reserve 2.6 2.0 1.5 3.1 Taxes 3.3 - 1.1 2.2 Total $134.8 $25.5 $37.2 $123.1 Year Ended December 31, 1992 Balance At Additions Payments Balance Beginning Charged And At End Classification Of Year To Expense (Charges) Of Year Redundancy and guarantee reserves $61.3 $2.1 $11.8 $51.6 Casualty and other reserves 60.4 21.3 14.3 67.4 Environmental 10.1 2.3 2.5 9.9 Bad debt reserve 5.1 1.9 4.4 2.6 Taxes - 3.7 0.4 3.3 Total $136.9 $31.3 $33.4 $134.8 F-30 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES EXHIBIT INDEX Exhibit Sequential No. Description Page No. 3.1 Articles of Incorporation of Illinois Central Railroad Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Registration Statement of Illinois Central Railroad Company on Form S-1. (SEC File No. 33- 29269)) 3.2 By-Laws of Illinois Central Railroad Company, as amended. (Incorporated by reference to Exhibit 3.2 to the Registration Statement of Illinois Central Railroad Company on Form S-1. (SEC File No. 33-29269)) 3.3 Restated Articles of Incorporation of Illinois Central Corporation. (Incorporated by reference to Exhibit 3.1 to the Current Report of the Illinois Central Corporation on Form 8-K dated July 29, 1994. (SEC File No. 1-10720)) 3.4 By-Laws of Illinois Central Corporation, as amended. (Incorporated by reference to Exhibit 3.4 to the Registration Statement of Illinois Central Corporation and Illinois Central Railroad Company on Form S-1. (SEC File Nos. 33-36321 and 33-36321-01)) 3.5 Certificate of Retirement of Illinois Central Corporation (Incorporated by reference to Exhibit 3.3 to the Registration Statement of Illinois Central Corporation and Illinois Central Railroad Company on Form S-1, as amended. (SEC File No. 33-40696 and Post-Effective Amendments to Registration Statement Nos. 33-36321 and 33-36321-01)) 3.6 Certificate of Elimination of Illinois Central Corporation. (Incorporated by reference to Exhibit 3.2 to the Quarterly Report of the Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1991. (SEC File No. 1-10720)) * Used herein to identify management contracts or compensation plans or arrangements as required by Item 14 of Form 10-K. 4.1 Form of 14-1/8% Senior Subordinated Debenture Indenture dated as of September 15, 1989 (the "Senior Subordinated Debenture Indenture") between Illinois Central Railroad Company and United States Trust Company of New York, Trustee (including the form of 14-1/8% Senior Subordinated Debenture included as Exhibit A therein). (Incorporated by reference to Exhibit 4.1 to the Registration Statement of Illinois Central Railroad Company on Form S-1, as amended. (SEC File No. 33-29269)) 4.2 Restated Articles of Incorporation of Illinois Central Corporation (included in Exhibit 3.3) 4.3 Form of Pledge Agreement dated as of September 22, 1989, and amended and restated as of July 23, 1991, among Illinois Central Corporation and the Banks named therein that are or may become parties to the Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 22, 1989, and amended and restated as of July 23, 1991, among the Illinois Central Railroad Company and the Banks named therein and the Senior Note Purchasers that are parties to the Note Purchase Agreement dated as of July 23, 1991. (Incorporated by reference to Exhibit 4.4 to the Quarterly Report of Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1991. (SEC File No. 1-10720)) 4.4 Form of Note Purchase Agreement dated as of July 23, 1991, among Illinois Central Railroad Company, as issuer, and Illinois Central Corporation, as guarantor, for 10.02% Guaranteed Senior Secured Series A Notes due 1999 and for 10.4% Guaranteed Senior Secured Series B Notes due 2001 (including the Form of Series A Note and Series B Note included as Exhibits A-1 and A-2, respectively, therein). (Incorporated by reference to Exhibit 4.3 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended September 30, 1991. (SEC File No. 1- 7092)) 4.5 Form of the Loan and Security Agreement dated as of December 6, 1991, between IC Leasing Corporation I and Hitachi Credit America Corp. (including the Form of the Initial Funding Credit Note, the Form of the Refurbishing Credit Note, the Form of Assignment of Lease and Agreement, the Form of the Pledge Agreement between IC Financial Services Corporation and Hitachi Credit America Corp. and the Form of the Guaranty Agreement between Illinois Central Corporation and Hitachi Credit America Corp. included as Exhibits D, E, F, G and H, respectively, therein). (Incorporated by reference to Exhibit 4.9 to the Annual Report on Form 10-K for the year ended December 31, 1991, for the Illinois Central Corporation filed March 12, 1992. (SEC File No. 1-10720)) 4.6 Form of the Trust Agreement dated as of March 30, 1993, between IC Leasing Corporation II and Wilmington Trust Company. (Incorporated by reference to Exhibit 4.10 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720)) 4.7 Form of the Security Agreement and Mortgage dated as of March 30, 1993, between IC Leasing Trust II and UNUM Life Insurance Company of America (Including the Form of the Promissory Note between IC Leasing Trust II and UNUM Life Insurance Company of America included as Exhibit A, therein). (Incorporated by reference to Exhibit 4.11 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720)) 4.8 Assignment of Lease and Conveyance dated March 30, 1993, between IC Leasing Corporation II and IC Leasing Trust II. (Incorporated by reference to Exhibit 4.12 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720)) 4.9 Assignment of Lease and Conveyance dated March 30, 1993, between IC Leasing Trust II and UNUM Life Insurance Company of America. (Incorporated by reference to Exhibit 4.13 to the Current Report of Illinois Central Corporation on Form 8-K dated May 7, 1993. (SEC File No. 1-10720)) 4.10 Form of Commercial Paper Dealer Agreement between Illinois Central Railroad Company and Lehman Commercial Paper, Inc. dated as of November 19, 1993. (Incorporated by reference to Exhibit 4.10 to the Annual Report on Form 10-K for the year ended December 31, 1993 for Illinois Central Railroad Company filed March 16, 1994. (SEC File No. 1-7092)) 4.11 Form of Issuing and Paying Agency Agreement of the Illinois Central Railroad Company related to the Commercial Paper Program between Illinois Central Railroad Company and Bank America National Trust Company dated as of November 19, 1993, (including Exhibit A the Form of Certificated Commercial Paper Note included therein). (Incorporated by reference to Exhibit 4.11 to the Annual Report on Form 10-K for the year ended December 31, 1993 for Illinois Central Railroad Company filed March 16, 1994. (SEC File No. 1-7092)) 4.12 Form of Revolving Credit Agreement between Illinois Central Corporation and Bank of America National Trust and Saving Association Dated August 24, 1994. (Incorporated by reference to Exhibit 4.1 to the Quarterly Report of Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1994. (SEC File No. 1-10720)) 4.13 Form of Revolving Credit and Term Loan Agreement between IC Leasing III and the First National Bank of Boston dated as of July 5, 1994. (Incorporated by reference to Exhibit 4.2 to the Quarterly Report of Illinois Central Corporation on Form 10-Q for the three months ended September 30, 1994. (SEC File No. 1- 10720)) 4.14 Toronto Dominion Credit Agreement (Incorporated by reference to Exhibit 4.1 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended March 31, 1994. (SEC File No. 1- 7092)) 4.15 Form of Receivables Purchase Agreement dated as of March 29, 1994, between Illinois Central Railroad Company and Golden Gate Funding Corporation. (Incorporated by reference to Exhibit 4.2 to the Quarterly Report of the Illinois Central Railroad Company on Form 10-Q for the three months ended March 31, 1994. (SEC File No. 1-7092)) 4.16 Form of Railcar Management Agreement between Interrail and IC Leasing Corporation III dated December 3, 1993. (Incorporated by reference to Exhibit 4.1 to the Current Report of the Illinois Central Corporation on Form 8-K dated July 29, 1994. (SEC File No. 1-10720)) 4.17 Form of Note Purchase Agreement dated as of May 1, 1993 between Illinois Central Railroad Company and The First National Bank of Boston. (Incorporated by reference to Exhibit 4.1 to the Registration Statement of Illinois Central Railroad Company on Form S-3.(SEC File No. 33-61410)) 4.18 Form of Second Amended and Restated Revolving Credit Agreement dated as of April 2, 1993, amended and restated as of October 27, 1993 and further amended and restated as of November 1, 1994 among Illinois Central Railroad and the Banks named therein (Incorporated by reference to Exhibit 4.14 to the Annual Report of Illinois Central Railroad Company on Form 10-K for the year ended December 31, 1994. (SEC File No. 1-7092)) 4.19 Form of Lease Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Illinois Central Railroad Company. (Incorporated by refernce to Exhibit 4.10 to the Annual report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092)) 4.20 Form of Lease Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Waterloo Railway Company. (Incorporated by reference to Exhibit 4.11 to the Annual Report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092)) 4.21 Form of Option Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Illinois Central Railroad Company. (Incorporated by reference to Exhibit 4.12 to the Annual Report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092)) 4.22 Form of Option Agreement dated as of July 1, 1994, between IC Leasing Corporation III and Illinois Central Railroad Company. (Incorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K for the year ended December 31, 1994, for the Illinois Central Railroad Company. (SEC File No. 1-7092)) 10.1 * Form of supplemental retirement and savings plan. (Incorporated by reference to Exhibit 10C to the Registration Statement of Illinois Central Transportation Co. on Form 10 filed on October 7, 1988, as amended. (SEC File No. 1-10085)) 10.2 Form of indemnification agreement dated as of January 29, 1991, between Illinois Central Corporation and certain officers and directors. (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 1990, for the Illinois Central Corporation filed on April 1, 1991. (SEC File No. 1-10720)) 10.3 * Form of IC 1990 Stock Purchase Plan. (Incorporated by reference to Exhibit 10.6 to the Registration Statement of Illinois Central Corporation on Form 10 filed on January 5, 1990, as amended. (SEC File No. 1-10720)) 10.4 * Form of IC Long-Term Incentive Option Plan. (Incorporated by reference to Exhibit 10.17 to the Registration Statement of Illinois Central Corporation and Illinois Central Railroad Company on Form S-1. (SEC File Nos. 33-36321 and 33-36321-01)) 10.5 * Amendments No. 1 and No. 2 to the IC Long-Term Incentive Plan. (Incorporated by reference to the Proxy Statement of Illinois Central Corporation in connection with its 1992 Annual Meeting of Stockholders. (SEC File No. 1-10720)) 10.6 Railroad Locomotive Lease Agreement between IC Leasing Corporation I and Illinois Central Railroad Company dated as of September 5, 1991. (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 1991 for the Illinois Central Railroad Company filed March 12, 1992. (SEC File No. 1-7092)) 10.7 Railroad Locomotive Lease Agreement between IC Leasing Corporation II and Illinois Central Railroad Company dated as of January 14, 1993. (Incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 1992, for the Illinois Central Railroad Company filed March 5, 1993. (SEC File No. 1-7092)) 10.8 * Form of Consulting and Non-Competition Agreement between Illinois Central Corporation and Edward L. Moyers dated as of February 18, 1993. (Incorporated by reference to Exhibit 10.10 to Annual Report on Form 10- K for the year ended December 31, 1992, for the Illinois Central Corporation filed March 5, 1993. (SEC File No. 1-10720)) 10.9 * Form of the Note Agreement between the Illinois Central Corporation and Edward L. Moyers dated February 18, 1993. (Incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 1992, for the Illinois Central Corporation filed March 5, 1993. (SEC File No. 1-10720)) 10.10 * Form of a Supplemental Retirement Benefit Agreement dated as of August 20, 1992 between Illinois Central Corporation and Edward L. Moyers. (Incorporated by reference to Exhibit 10.3 to the Quarterly Report of the Illinois Central Corporation on Form 10-Q for the three month ended September 30, 1992. (SEC File No. 1- 10720)) 10.11 The Asset Sale Agreement between Allied Railcar Company and IC Leasing Corporation III dated December 3, 1993, (Incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 1993 for the Illinois Central Corporation field March 16, 1994, including the Bill of Sale Agreement and Assumption of Liabilities included as Exhibits C and D, respectively, therein). (SEC File No. 1-10720)) 10.12 The Purchase Agreement between IC Leasing Corporation III and The First National Bank of Maryland dated December 29, 1993. (Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the Illinois Central Corporation filed March 16, 1994. (SEC File No. 1-10720)) 10.13* Form of the Illinois Central Railroad Company Executive Performance Compensation Program (Incorporated by reference to Exhibit 10.1 to the report of the Illinois Central Railroad Company on Form 8-K dated as of July 29, 1994. (SEC File No. 1-7092)) 10.14* Form of the Illinois Central Railroad Company Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.2 to the report of the Illinois Central Railroad Company on Form 8-K dated as of July 29, 1994. (SEC File No. 1-7092)) 10.15* Form of the Illinois Central Railroad Company Executive Deferred Compensation Plan (Incorporated by reference to Exhibit 10.3 to the report of the Illinois Central Railroad Company on Form 8-K dated as of July 29,1994. (SEC File No. 1-7092)) 10.16* Form of Illinois Central Railroad Company Performance Compensation Program. (Incorporated by reference to Exhibit 10.4 to the report of the Illinois Central Railroad Company on Form 8-K dated as of July 29,1994. (SEC File No. 1-7092)) 10.17* Illinois Central Corporation Management Employee Discounted Stock Purchase Plan. (A) 11 Computation of Income Per CommonShare (Included at E-9) 21 Subsidiaries of Registrant (Included at E-10) 23 Consent of Arthur Andersen LLP (A) 27 Financial Data Schedule (A) (A) Included herein but not reproduced. EX-10 2 EXHIBIT 10.17 ILLINOIS CENTRAL CORPORATION MANAGEMENT EMPLOYEE DISCOUNTED STOCK PURCHASE PLAN WHEREAS, Illinois Central Corporation desires to establish an employee stock purchase plan providing the opportunity to purchase Common Stock of the Company at a discount to permanent, full time, salaried employees of the Company and its Subsidiaries; NOW THEREFORE, the Company establishes the Plan, effective May 1, 1994, the terms of which shall be as follows: 1. Purpose. The purpose of the Plan is to give Eligible Employees of the Company and its Subsidiaries an opportunity to acquire shares of its Common Stock at a discount, and to promote the best interests and enhance the long-term performance of the Company and its Subsidiaries. 2. Definitions. Wherever used herein, the following words and phrases shall have the meaning stated below unless a different meaning is plainly required by the context: (a) "Administrator" means the Company's agent for administering the Plan which is First Chicago Trust Company of New York, or such successor Administrator appointed by the Committee from time to time; (b) "Board" means the Board of Directors of the Company; (c) "Change In Control" of the Company shall be deemed to have occurred if (A) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a person shall be deemed to be the "beneficial owner" of all shares that any such person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants, options or otherwise, without regard to the sixty day period referred to in such Rule), directly or indirectly, of securities representing 25% or more of the combined voting power of the Company's then outstanding securities; provided, however, that the following acquisitions shall not constitute a Change in Control: (a) any acquisition directly from the Company, (ii) any acquisition by the Company or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company; or (b) at any time during any period of two consecutive years (not including any period prior to May 1, 1994) individuals who at the beginning of such period constituted the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 or Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board. (d) "Code" means the Internal Revenue Code of 1986, as amended; (e) "Committee" means either (i) the Compensation Committee of the Board to which the Board has delegated its powers with respect to the management, operation and administration of the Plan pursuant to Section 3 hereof; or (ii) the Benefits Administration Committee of the Company to which the Compensation Committee has delegated a portion of such powers pursuant to Section 3 hereof. (f) "Common Stock" means shares of the common stock of the Company, $.001 par value; (g) "Company" means Illinois Central Corporation, a Delaware corporation, or any successor corporation by merger, consolidation, purchase or otherwise, and any Subsidiaries, direct or indirect, of the Company; (h) "Compensation" means regular salary only paid to an Eligible Employee by the Company prior to deductions for income or employment taxes or any other withholdings; (i) "Earliest Retirement Age" means age 62. (j) "Eligible Employee" means each person who, on or after May 1, 1994, is employed by the Company on a permanent, full- time, salaried basis; provided however, that the term Eligible Employee shall not include any individual covered by a collective bargaining agreement between employee representatives and the Company; (k) "Election Form" means a form delivered by an Eligible Employee to the Committee with respect to participation in the Plan as set forth in Section 5. (l) "Fair Market Value" of the Common Stock as of a given Investment Date shall mean the price (or the weighted average price) at which the Common Stock is purchased or sold by the Administrator on the New York Stock Exchange (or other market in which the Common Stock is traded) with respect to such Investment Date. (m) "Investment Date" means the date or dates selected by the Administrator on which purchases or sales of Common Stock occur pursuant to an Investment Direction; (n) "Investment Direction" means a written instruction from a Participant to the Administrator to do one or more of the following financial transactions: (i) purchase shares of Common Stock, including a continuing direction to purchase shares with respect to future payroll deductions or lump sum payments; (ii) sell shares of Common Stock and distribute the net cash proceeds or to withdraw cash from the Participant's Plan Account; (iii) reinvest dividends on all or a designated number of shares of Common Stock; and (iv) distribute dividends on all or a designated number of shares of Common Stock. (o) "Participant" means an Eligible Employee who elects to participate in the Plan pursuant to Section 5 hereof; (p) "Plan Account" means the record of a Participant's full and fractional shares of Common Stock and cash held by the Administrator. A Participant's Plan Account and the shares of Common Stock held therein shall be fully vested in and nonforfeitable by the Participant. (q) "Purchase Price" means 85% of the Fair Market Value per share of Common Stock on an applicable Investment Date; (r) "Plan" means the Illinois Central Corporation Management Employee Discounted Stock Purchase Plan, as set forth herein, and as hereinafter may be amended from time to time; and (s) "Subsidiary" or "Subsidiaries" means a corporation or corporations of which stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote is owned by the Company or by any other Subsidiary or Subsidiaries; 3. Administration. (a) The Plan shall be administered by the Committee. No member of the Committee shall have been granted or awarded stock, restricted stock, stock options, stock appreciation rights, limited rights or any other derivative security of the Company or an affiliate thereof under this Plan, or any similar plan of the Company or an affiliate, during his tenure on the Committee or during the 12 month period prior to commencing service on the Committee, except as permitted in Rule 16b- 3(c)(2)(i)(A) through (D), or any successor provision, under the Securities Exchange Act of 1934. Members of the Committee shall be subject to any additional restrictions necessary to satisfy the requirements of disinterested administration of the Plan as set forth in Rule 16b-3 as it may be amended from time to time. A member of the Committee shall only be liable for any action or determination made in bad faith. (b) The Committee may delegate its duties, authorities and responsibilities under the Plan to the Benefits Administration Committee of the Company to the extent applicable to Eligible Employees and Participants who are not subject to Section 16 of the Securities Exchange Act of 1934 and to the extent of such delegation all references herein to the Committee shall be deemed references to the Benefits Administration Committee. (c) The action of the Committee shall be determined by the vote or other affirmative expression of a majority of its members. The members of the Committee shall serve without compensation for their services as such. (d) Unless otherwise specifically provided in the Plan, the Committee shall have full and complete authority, responsibility and control over the management, administration, and operation of the Plan, including, but not limited to, the authority and discretion to: (i) formulate, adopt, issue and apply procedures and rules, including such rules as may be necessary for transactions by Eligible Employees and Participants who are subject to Section 16 of the Securities Exchange Act of 1934, to satisfy the requirements of Rule 16b- 3 under such Act, and change, alter or amend such procedures and rules, as may be consistent with the terms of the Plan; (ii) exercise such discretion as may be required to construe and apply the provisions of the Plan, subject only to the terms and conditions of the Plan; (iii) determine the effective dates for various transactions; and (iv) take all necessary and proper acts as are required for the Committee to fulfill its duties and obligations under the Plan. (e) The Company shall supply to the Committee and the Administrator, within a reasonable time of its request, the names of all Eligible Employees, their age, the amount of Compensation paid to each Eligible Employee, and the names and dates of all Eligible Employees who incurred a termination of employment. The Company shall provide to the Committee and the Administrator, or its delegate, such other information as it shall from time to time need in the discharge of its duties. The Committee and the Administrator may rely conclusively on the information certified to it by the Company. (f) The decision of the Committee in matters within its jurisdiction shall be final, binding, and conclusive upon the Company and upon each Eligible Employee, Participant, spouse, beneficiary, the Administrator and every other person or party interested or concerned. (g) If an Eligible Employee decides to participate in the Plan, the Administrator will keep a continuous record of his participation and send him a statement of his account under the Plan for each calendar quarter in which a purchase or sale of Common Stock for his Plan Account takes place, as set forth in Section 17 below. The Administrator will hold and act as custodian of shares of Common Stock purchased under the Plan. Except as provided in Section 12, certificates for shares of Common Stock purchased under the Plan will not be issued to Participants. The number of shares of Common Stock credited to a Participant's Plan Account will be shown on his quarterly statement of account. However, pursuant to Section 12, certificates for any number of whole shares credited to a Participant's Plan Account will be issued to him upon his written request to the Administrator, upon his payment to the Administrator of a distribution fee in an amount from time to time determined by the Committee. Any remaining shares will continue to be credited to the Participant's Plan Account. (h) Shares of Common Stock purchased pursuant to the Plan shall be acquired by the Administrator on the open market. 4. Eligibility to Participate. Any individual who is or becomes an Eligible Employee (other than an individual on an authorized leave of absence) at any time on or after May 1, 1994 shall be eligible to become a Participant pursuant to Section 5. 5. Election to Participate. An Eligible Employee may elect to become a Participant in the Plan by completing an appropriate Election Form provided by the Committee and returned to the Committee at least 14 calendar days prior to the next scheduled A and/or B payroll period on which his participation is to commence. Such Election Form shall include (1) an election, if applicable, to reduce his Compensation by payroll deductions on each scheduled A and/or B payroll period as designated by the Participant by the amount set forth therein, (ii) an Investment Direction, and (iii) a designation of a beneficiary to receive the Common Stock and cash held in his Plan Account on the date of his death. An election made by a Participant to reduce his Compensation pursuant to his Election Form shall be cancelled if: (a) a Participant's wages are subject to a tax levy, until the levy is removed, and (b) a Participant's wages are subject to a wage assignment and/or garnishment to the extent there is insufficient remaining Compensation to deduct the entire amount specified in the Election Form. 6. Payroll Deductions. (a) If a Participant's Election Form authorizes payroll deductions, his employer shall withhold from his Compensation the amount authorized by him. The amount to be withheld from each paycheck shall be no less than $10.00 and no more than 15% of his Compensation for his last payroll period for which payment has been made (or if he is a new Eligible Employee with no previous Compensation, 15% of his anticipated Compensation). The amounts withheld from all Participants' paychecks will be pooled and forwarded to the Administrator and will be used by the Administrator to buy shares of Common Stock on the open market for the Plan Accounts of all such Participants on the next Investment Date selected by the Administrator or as soon thereafter as is reasonably practicable. (b) A Participant's payroll deduction authorizations on his Election Form shall become effective with respect to the next scheduled A and/or B payroll period applicable to him that is at least 14 calendar days after the date the Election Form is received by the Committee, and shall continue in effect until the earliest of the date (1) his election is changed in accordance with paragraph 6(c) or (d) hereof; (2) he ceases to be an Eligible Employee, or (3) his payroll deduction authorization is cancelled in accordance with Section 5 or paragraph 6(c) hereof. (c) A Participant may increase or decrease the amount of his payroll deductions (subject to the dollar and percentage limits stated in paragraph 6(a) above) by delivering to the Committee a new Election Form on which is specified the new amount of payroll deductions. The new Election Form shall become effective with respect to the next scheduled A and/or B payroll period applicable to him that is at least 14 calendar days after the date the new Election Form is received by the Committee. Any Election Form which has not been properly completed will be deemed not to have been received by the Committee. (d) A Participant desiring to cancel his existing payroll deduction authorization and reduce the amount thereof to zero must deliver to the Committee a new Election Form. Such new Election Form shall become effective with respect to the next scheduled A and/or B payroll period applicable to him that is at least 14 calendar days after the date the new Election Form is received by the Committee. Payroll deductions held by the Company with respect to an A and/or B payroll period payment date before such new Election Form becomes effective, or held by the Administrator pending investment, shall not be affected by such new Election Form. Any Participant who has improperly completed a new Election Form will be deemed not to have made such new election. A Participant who cancels his existing payroll deductions need not withdraw the shares of Common Stock in his Plan Account prior to the earlier of (i) the date he ceases to be employed by the Company, and (ii) the date of termination of the Plan. (e) If an individual ceases to be an Eligible Employee but continues to be employed by the Company, his payroll deduction authorization shall be cancelled and no further shares of Common Stock shall be purchased for his Plan Account while he continues in such status. Any cash then held in his Plan Account shall be paid to him as soon as practicable after such status commences, and any shares then in his Plan Account shall be retained until the first to occur of (i) a withdrawal pursuant to Section 12, (ii) the date of his termination of employment with the Company, and (iii) the date of termination of the Plan. An individual continuing employment in such status shall continue to be entitled to direct the sale of shares of Common Stock in his Plan Account pursuant to his Investment Direction and the procedures set forth in Section 10. (f) The Company will transfer funds withheld pursuant to payroll deduction authorizations to the Administrator once during each calendar month on or prior to the date or dates on which transactions from the most recent Investment Date are settled. No interest will be paid on payroll deduction amounts held by the Company pending transfer to the Administrator. 7. Lump Sum Payments. To the extent a Participant does not authorize payroll deductions on his Election Form, he shall deliver payment of the balance of the Purchase Price of the shares of Common Stock to be purchased for his Plan Account on any Investment Date in full, in cash or by personal check, to the Administrator prior to the date on which transactions from the applicable Investment Date are settled. Such payment, together with all payroll deductions accumulated for him hereunder and not previously expended or returned, will be used to purchase shares of Common Stock for his Plan Account with respect to the applicable Investment Date. 8. Maximum Purchase. A Participant may not authorize the purchase of Common Stock with respect to any Investment Date with a Purchase Price in excess of 15% of his Compensation earned from the Company and all Subsidiaries during the A and/or B payroll period applicable to him immediately preceding such Investment Date. In addition, the aggregate amount of payroll deductions made pursuant to Section 6, and lump sum payments made pursuant to Section 7, by or on behalf of a Participant, shall not exceed 15% of the Participant's Compensation for any calendar year. 9. Company Payments. On or prior to the date on which the transactions from an Investment Date are settled, the Company shall pay to the Administrator an amount equal to the 15% discount with respect to the Common Stock purchased for the Plan Accounts of Participants with respect to such Investment Date. 10. Purchase and Sale of Shares of Common Stock. (a) With respect to each Investment Date, (i) accumulated payroll deductions and lump sum amounts received from or on behalf of all Participants pursuant to Sections 6 and 7, and amounts received from the Company pursuant to Section 9, will be pooled and used by the Administrator to purchase shares of Common Stock on the open market for the Plan Accounts of the applicable Participants, and (ii) shares of Common Stock will be sold by the Administrator on the open market from the Plan Accounts of Participants who have delivered Investment Directions directing the sale of Common Stock, and the net proceeds of sale shall be credited to the Plan Accounts of the applicable Participants. Notwithstanding the foregoing, aggregate purchases and sales on any Investment Date may be offset by the Administrator, which shall then purchase or sell the net number of shares of Common Stock. (b) For any transaction to be processed as of an Investment Date, the Administrator must receive an Investment Direction from the applicable Participant at least two days prior to the Investment Date and such Investment Direction shall apply only to accumulated payroll deductions and lump sum amounts received from or on behalf of all Participants pursuant to Section 6 and 7, and shares of Common Stock held in Plan Accounts as of the Investment Date. Purchases and sales of Common Stock shall be posted to a Participant's Plan Account as of the date on which transactions for that Investment Date are settled, and shall be based upon the Fair Market Value of Common Stock as of such Investment Date as determined by the Administrator. (c) Any payroll deductions remaining after purchase of such maximum number of shares will be retained in the Plan Account of each applicable Participant and applied to the purchase of shares of Common Stock for him with respect to the next Investment Date. Any lump sum payments so remaining shall be returned to the applicable Participants. Each Participant's Plan Account will be credited with the shares (computed to three decimal places) of Common Stock purchased for him on each Investment Date, and with the net sale proceeds of the shares of Common Stock sold for him with respect to each Investment Date. The net proceeds of any such sale shall be distributed to a Participant from his Plan Account as soon as possible after the applicable Investment Date. The number of shares of Common Stock credited to each Participant's Plan Account will depend on the aggregate amount of his payroll deductions and lump sum payments and Company contributions, and the Fair Market Value of Common Stock determined on the applicable Investment Date. (d) Any direction to sell shares of Common Stock shall be subject to satisfaction of the conditions set forth in Section 13 to the extent applicable. 11. Fees and Expenses. Participants will incur no brokerage commissions or service charges for purchases or sales of Common Stock under the Plan. Certain administrative charges, as determined by the Committee, may be incurred by a Participant upon his withdrawal from the Plan, upon receipt of a distribution of certificates representing Common Stock pursuant to Section 3, or upon termination of the Plan. 12. Withdrawals. A Participant may cause the Administrator to make a withdrawal from his Plan Account as authorized pursuant to Section 3 above. The withdrawal shall come only from shares of Common Stock and cash posted to his Plan Account. There is no restriction on the number of times a Participant may withdraw from his Plan Account, nor is there a minimum amount for any type of withdrawal. The Administrator shall make distribution of shares of Common Stock to the Participant as soon as is administratively feasible after receiving a written withdrawal request, and shall make payment of cash in his Plan Account as soon as is administratively feasible after the date for settlement of transactions from the most recent Investment Date preceding the date of delivery of the withdrawal request. The Committee shall receive a copy of each withdrawal request from a Participant. The medium for payment for withdrawals is either cash or whole shares of Common Stock. If shares of Common Stock are to be distributed, the Participant must indicate in his withdrawal request in what name or names the certificates are to be issued. If no instructions are received, the certificates will be issued only in the name of the Participant. The form of payment for cash withdrawals shall be a single sum. A withdrawal request will not include (1) uninvested amounts held by the Company with respect to the Participant, or (2) uninvested cash dividends unless the Administrator receives the withdrawal request by the record date for cash dividend payments. Any withdrawal request shall be subject to satisfaction of the conditions set forth in Section 13 to the extent applicable. 13. Restriction on Shares. (a) Notwithstanding anything elsewhere contained in the Plan, a Participant may not direct a sale of, or withdraw, shares of Common Stock from his Plan Account prior to the expiration of the Restriction Period or Restriction Periods (hereinafter defined) applicable to such shares unless one of the following conditions is satisfied: 1. Prior to the date of any such sale or withdrawal, the Participant shall tender to the Company, in cash or by personal check, an amount equal to 15% of the Fair Market Value of such shares of Common Stock, determined as of the Investment Date on which such shares were purchased for his Plan Account; or 2. The Participant, in his Investment Direction delivered pursuant to Section 10, or his withdrawal request delivered pursuant to Section 12, directs the Administrator to transfer to the Company a number of shares of Common Stock held in his Plan Account, and subject to such Restriction Period or Periods, with a Fair Market Value determined on the date of the sale or withdrawal equal to 15% of the Fair Market Value of such shares of Common Stock, determined as of the Investment Date on which such shares were purchased for his Plan Account. (b) The Restriction Period applicable to any shares of Common Stock purchased pursuant to the Plan shall commence on the Investment Date with respect to which such shares are purchased, and shall expire on the first to occur of (i) the date 24 months from such Investment Date, (ii) the date on which the Participant retires from employment with the Company and its Subsidiaries on or after attaining the Earliest Retirement Age specified in Section 2(i), (iii) the date of his death, (iv) the date of his disability (as defined in the long term disability plan then maintained by the Company), and (v) the date of a Change In Control of the Company. (c) Except as otherwise provided in Section 20 below, any withdrawal or any attempted sale, transfer or other disposition, of shares of Common Stock within an applicable Restriction Period shall be invalid and of no effect until the date on which the provisions of clause 1 or clause 2 of paragraph (a) of this Section are satisfied by or with respect to the applicable Participant. 14. Termination of Employment. (a) A Participant shall cease to participate in the Plan upon his termination of employment with the Company and its Subsidiaries for any reason, including death, and no purchase or sale of shares of Common Stock shall be made hereunder for him as of any Investment Date following the date of such termination of employment. All cash held in his Plan Account, all of his payroll deductions and cash contributions not allocated to his Plan Account, and certificates representing all shares of Common Stock held in his Plan Account, as of the date of such termination of employment, shall be distributed or otherwise transferred to him (or to his beneficiary in the event of his death pursuant to Section 23) as soon as possible following the date of such termination of employment. (b) Notwithstanding the preceding provisions of this Section, no distribution of certificates representing shares of Common Stock held in a Participant's Plan Account shall be made pursuant to this Section prior to the expiration of the Restriction Period applicable to such shares until the requirements of clause 1 or clause 2 of paragraph (a) of Section 13 have been satisfied with respect to such shares. (c) Notwithstanding any other provisions of Sections 13 or 14, any shares of Common Stock purchased for a Participant under the Plan within 180 days prior to the date of his retirement on or after attaining the Earliest Retirement Age specified in Section 2(i), shall be deemed to be subject to a Restriction Period and shall not be sold or withdrawn from the Plan Account of the Participant following his termination of employment with the Company until the requirements of clause 1 or clause 2 of paragraph (a) of Section 13 have been satisfied with respect to such shares. 15. Dividends. (a) A Participant may direct the Administrator to reinvest cash dividends paid on whole shares of Common Stock held in his Plan Account into additional full or fractional shares of Common Stock, or to distribute such cash dividends directly to the Participant. To be effective with respect to the record date for a cash dividend payment, an election pursuant to the preceding sentence to reinvest or distribute such cash dividend must be received by the Administrator at least two days prior to such record date. Cash dividends will be distributed only with respect to the whole number of shares of Common Stock, or reinvested with respect to the full and fractional shares of Common Stock, as designated by the Participant respectively. If a Participant has not given a timely election pursuant to the preceding sentences of this paragraph, cash dividends shall be reinvested into additional full and fractional shares of Common Stock held in the Participant's Plan Account. (b) Non-cash dividends of Common Stock will be held in the Plan Account of the Participant. Non-cash dividends, other than of Common Stock, shall be sold and reinvested in Common Stock and held in the Plan Account of the Participant. 16. Withholding. Whenever the Company or the Administrator proposes or is required to allocate or transfer shares of Common Stock to the Plan Account of a Participant, or directly to a Participant, the Committee shall have the right to require the Participant to remit to the Company an amount sufficient to satisfy all federal, state and local withholding tax requirements, prior to the allocation of any shares of Common Stock to his Plan Account, or to the delivery to him of any certificate or certificates for such shares. If such certificates already have been delivered prior to the time a withholding obligation arises, the Committee shall have the right to require the Participant to remit to the Company an amount sufficient to satisfy all federal, state or local withholding tax requirements, and to withhold such other amounts payable to the Participant, as compensation or otherwise, as necessary. A Participant may elect to satisfy his tax withholding obligation incurred with respect to the Taxable Date of the purchase of shares of Common Stock for him hereunder by (a) directing the Committee to withhold a portion of the shares of Common Stock otherwise to be credited to his Plan Account or distributable to him, or (b) by transferring to the Company a number of shares of Common Stock previously acquired, such shares being valued at the Fair Market Value thereof on the Taxable Date. Notwithstanding any provisions of the Plan to the contrary, a Participant's election pursuant to the preceding sentence: (a) must be made on or prior to the Taxable Date with respect to the shares of Common Stock being purchased, (b) must be irrevocable, and (c) if the election is made by a Participant who is subject to the restrictions of Section 16(b) of the Securities Exchange Act of 1934, must be made in writing (i) within the 10 business days beginning on the third business day following the release of the Company's quarterly or annual summary of earnings and ending on the 12th business day following such day, or (ii) at least 6 months prior to the date that is 24 months from the Investment Date on which such shares of Common Stock were purchased for him. Taxable Date means the date a Participant recognizes income with respect to a purchase of shares of Common Stock under the Plan pursuant to the terms of the Code or any applicable state or local income tax law. 17. Statements. Each Participant will receive a statement of his Plan Account for each calendar quarter in which a purchase or sale of Common Stock for his Plan Account takes place. Participants will also receive the annual report for the Plan and communications sent to other shareholders of the Company, including the annual report of the Company and its notice of annual meeting of shareholders and proxy statement. Participants will receive such information as is necessary for reporting income realized by them under the Plan to the Internal Revenue Service. 18. Adjustment Provisions. The maximum number of shares of Common Stock available for purchase hereunder, the aggregate number of shares of Common Stock with respect to which an election to purchase is outstanding hereunder, and the Purchase Price per share of Common Stock, shall all be appropriately adjusted, as the Committee may determine, for any increase or decrease in the number of shares of issued Common Stock resulting from a subdivision or consolidation of shares, whether through reorganization, recapitalization, stock split-up, stock distribution or combination of shares, or the payment of a share dividend or other increase or decrease in the number of such shares of Common Stock outstanding effected without receipt of consideration by the Company. Adjustments pursuant to this Section shall be made according to the sole discretion of the Committee and its decision shall be binding and conclusive. 19. Transferability. Except as otherwise provided in Sections 12, 14, 20 and 25, the right to purchase shares of Common Stock pursuant to the terms of the Plan, and the cash and shares of Common Stock in a Participant's Plan Account, may not be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of (whether by operation of law or otherwise) by a Participant or any other person, and no such right to purchase shall be subject to execution, attachment or similar process. Except as otherwise provided in Sections 12, 14, 20 and 25, any attempt to sell, transfer, assign, pledge, hypothecate or otherwise dispose of, a right to purchase shares of Common Stock hereunder, and the cash and shares of Common Stock in a Participant's Plan Account, or any levy of attachment or similar process upon such right, cash or shares, shall be null and void and without effect. A right to purchase or sell shares of Common Stock hereunder may be exercised only by a Participant during his lifetime. 20. Dissolution, Merger and Consolidation. In the event of the dissolution or liquidation of the Company, or the merger or dissolution of the Company in which the Company is not the surviving corporation, all future rights to purchase shares of Common Stock pursuant to the terms of the Plan shall expire as of the effective date of such event, and all payroll deductions held for each Participant, and all shares of Common Stock purchased prior to the date of such event for each Participant and not previously distributed to him, shall be distributed to him at least 30 days prior to the effective date of such event. In such event, the restrictions set forth in Section 13 above shall cease to apply with respect to such event, and the Participant shall be entitled to transfer or otherwise dispose of his shares of Common Stock purchased hereunder pursuant to the terms of such event within the Restriction Period applicable to such shares of Common Stock. 21. Conditions Subsequent to Effective Date. The Plan has been adopted by the Board subject to approval by the holders of a majority of the outstanding shares of Common Stock of the Company within 12 months after the date of adoption of the Plan by the Board. The Plan shall be null and void and of no effect if the foregoing condition is not fulfilled. 22. Voting. The Administrator will vote any shares of Common Stock that it holds for a Participant's Plan Account in accordance with the Participant's written directions, provided they are received in a timely manner in accordance with the procedures developed for this purpose by the Administrator. The Administrator will not vote the shares of Common Stock in the Plan Account of a Participant from whom no voting directions are received. 23. Distribution of Plan Accounts on Death. (a) Each Participant shall complete a beneficiary designation form indicating the beneficiary who is to receive the assets in the Participant's Plan Account at the time of his death. The Participant may change such designation of beneficiary from time to time by filing a new beneficiary designation form with the Committee. No designation of beneficiary or change of beneficiary shall be effective until filed with the Committee. (b) Upon the death of a Participant, any assets then held in his Plan Account, plus his payroll deductions and cash contributions not allocated to his Plan Account, shall be distributed in a single sum of whole shares of Common Stock plus cash to his designated beneficiary. If the Participant dies and either (1) the Participant shall have failed to file a valid beneficiary designation form, or (2) all persons designated on the beneficiary designation form shall have predeceased the Participant, the Committee shall direct the Administrator to distribute the aforementioned assets in a single distribution of whole shares of Common Stock plus cash to his spouse, if then living, or if none, to the legal representatives of his estate. (c) On the death of a Participant, his Plan Account shall be maintained in the name of his beneficiary or beneficiaries designated by the Participant until distribution thereof pursuant to paragraph (b), and his Investment Direction regarding dividends shall apply to such beneficiary. (d) A distribution pursuant to this Section 23 shall not be subject to the restrictions set forth in Section 13(a). 24. Administrator. (a) The Administrator shall serve at the will of the Committee and the Committee may from time to time remove the Administrator with or without cause and shall appoint its successor. (b) The powers, duties and responsibilities of the Administrator shall be as stated in the Plan. All payroll deductions and payments by Participants and the Company shall be paid to the Administrator, and all Plan Accounts shall be maintained by the Administrator. Neither the Company nor any Subsidiary shall have any rights or claims of any nature in or to the assets of any Plan Account. (c) All fees and expenses of the Administrator agreed upon by the Company and the Administrator shall be paid by the Company to the Administrator. (d) The Administrator shall determine the appropriate number of Investment Dates for all funds received by it and for each Investment Direction; provided however, no Investment Date shall be required prior to the date funds have been posted to a Participant's Plan Account or withheld by the Company. 25. Amendment and Termination. (a) Amendments. (i) The Company, or the Committee as provided in subsection (ii) below, may amend, modify, change or revise the Plan by amendment at any time; provided, however, that no amendment shall: (A) change the minimum purchase price or make any other material change with respect to the terms and conditions of participation by officers or directors of the Company without stockholder approval consistent with applicable rules of the Securities and Exchange Commission. (B) increase the duties or liabilities of the Administrator or the Committee without its written consent; or (C) have the effect of vesting in the Company or any Subsidiary any interest in any funds, securities or other property. (ii) The Committee may amend, modify, change or revise the Plan by amendment if such amendment could have been adopted under paragraph (i) hereof and it does not materially increase the duties and obligations of the Company or any Subsidiary, with respect to the Plan. (b) Plan Termination. Although it is the expectation of the Company at the time of adoption of the Plan by the Board that it will continue the Plan indefinitely, the continuation of the Plan is not assumed as a contractual obligation of the Company or any Subsidiary and the Company reserves the right, in its sole discretion, to terminate the Plan at any time. Upon termination of the Plan, all Plan Accounts, and all assets not allocated to Plan Accounts, will be distributed as if each Participant had terminated employment and received a distribution pursuant to Section 14(a). 26. Miscellaneous Provisions. (a) Pledging of Common Stock. Shares of Common Stock credited to the Plan Account of a Participant may not be encumbered, pledged as collateral or otherwise hypothecated. A Participant who has an involuntary transfer imposed upon him with respect to shares of Common Stock in his Plan Account will be deemed to have elected to withdraw such shares. (b) Plan Does Not Affect Employment Rights. The Plan does not provide any employment rights to any Eligible Employee. The Company and its Subsidiaries expressly reserve the right to discharge an Eligible Employee at any time, with or without cause, without regard to the effect such discharge would have upon the Eligible Employee's interest in the Plan. (c) Deduction of Taxes from Amounts Payable. Subject to Section 16, the Administrator shall have the power and authority to deduct from the amount to be distributed to a Participant such amount as the Administrator deems proper to protect the Administrator against liability for the payment of death, succession, inheritance, income, or other taxes, and out of money so deducted, the Administrator may discharge any such liability and pay the amount remaining to the Participant, or the deceased Participant's beneficiary, as the case may be. (d) Source of Benefits. All benefits payable under the Plan shall be paid or provided for solely from Plan Accounts, and the Company and its Subsidiaries assume no liability or responsibility therefor. (e) Limitation on Liability. Neither the Company nor any Subsidiary, nor any agent or representative of the Company or any Subsidiary who is an employee, officer, or director of the Company or any Subsidiary, in any manner guarantees the assets of the Plan against loss or depreciation and none of them shall be liable (except for his own gross negligence or willful misconduct), for any act or failure to act, done or omitted in good faith, with respect to the Plan. The Company and its Subsidiaries, and the Committee shall have no responsibility for any act of or failure to act by the Administrator. (f) Indemnification of the Board and the Committee. In addition to such other rights or indemnification as they may have as members of the Board, or as members of the Committee, or as its delegate, the members of the Board and of the Committee and its delegate, shall be indemnified by the Company against (a) reasonable expenses (as such expenses are incurred), including attorneys fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding (or in connection with any appeal therein) to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, and (b) against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board or Committee member or delegate is liable for gross negligence or willful misconduct in the performance of his duties. The Company may elect, at its own expense, to handle and defend any such action, suit or proceeding. (g) Gender and Number. Except when the context indicates to the contrary, when used herein, masculine terms shall be deemed to include the feminine, and singular the plural. (h) Invalidity of Certain Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. (i) Headings. The headings of sections and paragraphs are included solely for convenience of reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. (j) Law Governing. The Plan shall be construed and enforced according to the laws of the State of Illinois. (k) Legal and Other Requirements. The Committee may postpone any stock purchase or sale under the Plan for such time as the Committee, in its sole discretion, may deem necessary in order to permit the Company (i) to effect, amend or maintain any necessary registration of the Plan or the shares of Common Stock available for purchase or sale under the Plan under the Securities Act of 1933, as amended, or the securities laws of any applicable jurisdiction, (ii) to permit any action to be taken in order to (A) list such shares of Common Stock on a stock exchange if shares of Common Stock are then listed on such exchange or (B) comply with restrictions or regulations incident to the maintenance of a public market for its shares of Common Stock, including any rules or regulations of any stock exchange on which the shares of Common Stock are listed, or (iii) to determine that such shares of Common Stock and the Plan are exempt from such registration or that no action of the kind referred to in (ii)(B) above needs to be taken; and the Company shall not be obligated by virtue of any provision of the Plan to purchase or sell shares of Common Stock in violation of the Securities Act of 1933, as amended, or the law of any government having jurisdiction thereof. (l) Section 16(b) Compliance and Bifurcation of the Plan. It is the intention of the Company that the Plan comply in all respects with Rule 16b- 3 under the Securities Exchange Act of 1934 and, if any Plan provision is later found not to be in compliance with such Rule, the provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Committee, in its sole discretion, may bifurcate this Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to Eligible Employees and Participants who are subject to Section 16 of the Securities Exchange Act of 1934, without so restricting, limiting or conditioning the Plan with respect to other Eligible Employees and Participants. (m) Rights as Shareholder. A Participant shall have all rights as a shareholder of the Company with respect to all shares of Common Stock purchased for his Plan Account pursuant to the terms of the Plan. (n) Leaves of Absence and Disability. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan with respect to any leave of absence taken by, or any disability of, a Participant. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether any such leave of absence shall constitute a termination of employment within the meaning of the Plan, and (ii) the impact, if any, of any such leave of absence on the right to purchase Common Stock under the Plan by any Participant who takes such leave of absence. (o) Notices. Every request, direction, revocation or notice authorized or required by the Plan shall be deemed to have been delivered to the Committee or the Company (i) on the date it is personally delivered to the General Counsel of the Company at the principal executive offices of the Company, or (ii) 3 business days after it is sent by registered or certified mail, postage prepaid, addressed to the General Counsel of the Company at such offices; and shall be deemed delivered to an Eligible Employee, Participant or beneficiary (1) on the date it is personally delivered to him, or (2) 3 business days after it is sent by registered or certified mail, postage prepaid, addressed to him at the last address shown for him on the records of the Company or any Subsidiary. EX-11 3 EXHIBIT 11 ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES COMPUTATION OF INCOME PER COMMON SHARE ($ in millions, except share data) Years Ended December 31, 1994 1993 1992 Income before extraordinary item and cumulative effect of changes in accounting principle $113.9 $91.7 $72.5 Extraordinary item, net - (23.4) - Cumulative effect of changes in accounting principles - (0.1) 23.4 Net income $113.9 $68.2 $95.9 Calculation of average number of shares outstanding: Primary: Weighted average number of common shares outstanding 42,597,044 42,560,082 42,508,910 Effect of shares issuable under stock options 128,695 119,601 91,197 42,725,739 42,679,683 42,600,107 Fully diluted: Weighted average number of common shares 42,597,044 42,560,082 42,508,910 outstanding Effect of shares issuable under stock options (1) 128,695 176,638 101,061 42,725,739 42,736,720 42,609,971 Income per common share: Primary: Before extraordinary item and cumulative effect of changes in accounting principles $2.67 $2.14 $1.70 Extraordinary item, net - (0.55) - Cumulative effect of changes in accounting principles - - 0.55 Net income $2.67 $1.59 $2.25 Fully diluted: Before extraordinary item and cumulative effect of changes in accounting principles $2.67 $2.14 $1.70 Extraordinary item, net - (0.55) - Cumulative effect of changes in accounting principles - - 0.55 Net income $2.67 $1.59 $2.25 (1) Such items are included in primary calculation. Additional shares represent difference between average price of Common Stock for the period and the end of period price. EX-21 4 Exhibit 21 ILLINOIS CENTRAL CORPORATION Subsidiaries of the Registrant as of December 31, 1994 Name Place of Incorporation Subsidiaries included in the financial statements, which are 100% owned: Illinois Central Railroad Company Delaware IC Financial Services Corporation Delaware Subsidiaries that are 100% owned by Illinois Central Railroad Company: Chicago Intermodal Company Delaware Kensington and Eastern Railroad Company Illinois Mississippi Valley Corporation Delaware Waterloo Railroad Company Delaware Subsidiaries that are 100% owned by IC Financial Services Corporation: IC Leasing Corporation I Nevada IC Leasing Corporation II Nevada IC Leasing Corporation III Nevada EX-23 5 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ILLINOIS CENTRAL CORPORATION As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 17, 1995, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994, into Illinois Central Corporation's previously filed Form S-8 Registration Statements File Nos. 33-41052, 33-51924 and 33-57757. ARTHUR ANDERSEN LLP Chicago, Illinois March 8, 1995 EX-27 6
5 1,000 YEAR DEC-31-1994 DEC-31-1994 24200 0 36000 2100 15700 108000 1201300 30000 1308700 173400 328600 0 0 0 454100 1308700 593900 593900 393600 393600 (1000) 0 28400 172900 59000 113900 0 0 0 113900 2.67 2.67
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