-----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, qdlFfJKlvPd7pTpDwZnrnJFGxvt4LW/eAPNgGS6PLsCVKdNGK8AhxGez8v629WLS QU63E8H0Tbt9gmhBpQwvDg== 0000897732-95-000005.txt : 199507120000897732-95-000005.hdr.sgml : 19950711 ACCESSION NUMBER: 0000897732-95-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONRAIL INC CENTRAL INDEX KEY: 0000897732 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 232728514 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12184 FILM NUMBER: 95523935 BUSINESS ADDRESS: STREET 1: TWO COMMERCE SQ STREET 2: P O BOX 41417 CITY: PHILADELPHIA STATE: PA ZIP: 19101-1417 BUSINESS PHONE: 2152094434 MAIL ADDRESS: STREET 1: P.O. BOX 41429 STREET 2: 2001 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19101-1429 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For Transition Period from _________________ to ____________________ Commission File No. 1-12184 CONRAIL INC. ------------ (Exact name of registrant as specified in its charter) Pennsylvania 23 2728514 - ---------------------------- --------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 2001 Market Street, Two Commerce Square Philadelphia, Pennsylvania 19101-1417 - -------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 209-4000 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Conrail Inc. New York Stock Exchange Common Stock (Par Value $1.00) Philadelphia Stock Exchange and Common Stock Purchase Rights --------------------------- - -------------------------------- 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. [X] Aggregate market value of voting stock held by non-affiliates of the Registrant (as of March 3, 1995): $4,220,212,356 Shares of Common Stock outstanding (as of March 3, 1995): 78,625,629 DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for Annual Meeting of Shareholders to be held on May 17, 1995 - Part III TABLE OF CONTENTS ----------------- Item Page ---- ---- Part I 1. Business...................................... 1 2. Properties.................................... 1 3. Legal Proceedings............................. 17 4. Submission of Matters to a Vote of Security Holders.................................... 24 Executive Officers of the Registrant........... 25 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 29 6. Selected Financial Data........................ 29 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 33 8. Financial Statements and Supplementary Data.... 41 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 67 Part III 10. Directors and Executive Officers of the Registrant.................................. 67 11. Executive Compensation......................... 67 12. Security Ownership of Certain Beneficial Owners and Management....................... 67 13. Certain Relationships and Related Transactions. 67 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 68 Power of Attorney............................................. 74 Signatures.................................................... 74 Exhibit Index................................................. 76 i PART I Item 1. Business. - ------ -------- and Item 2. Properties. - ------ ---------- GENERAL. Conrail Inc. was incorporated in Pennsylvania on February 12, 1993 and on July 1, 1993 became the holding company of Consolidated Rail Corporation. Consolidated Rail Corporation is Conrail Inc.'s only significant subsidiary and primary asset. Conrail Inc.'s common stock is listed on the New York and Philadelphia Stock Exchanges. Consolidated Rail Corporation is a Pennsylvania corporation incorporated on February 10, 1976 to acquire, pursuant to the Regional Rail Reorganization Act of 1973, the rail properties of many of the railroads in the northeast and midwest region of the United States which had gone bankrupt during the early 1970's, the largest of which was the Penn Central Transportation Company. Reports on Form 10-K for years prior to 1993 were filed by Consolidated Rail Corporation, and historic data presented herein and therein reflect the results of Consolidated Rail Corporation for those time periods. Unless otherwise indicated, references to Conrail prior to July 1, 1993 denote Consolidated Rail Corporation and its consolidated subsidiaries, and references to Conrail after July 1, 1993 denote Conrail Inc. and its consolidated subsidiaries. RAIL OPERATIONS. Conrail, through its wholly-owned subsidiary Consolidated Rail Corporation, provides freight transportation services within the northeast and midwest United States. Conrail interchanges freight with other United States and Canadian railroads for transport to destinations within and outside Conrail's service region. Conrail operates no significant line of business other than the freight railroad business and does not provide common carrier passenger or commuter train service. Conrail serves a heavily industrial region that is marked by dense population centers which constitute a substantial market for consumer durable and non-durable goods, and a market for raw materials used in manufacturing and by electric utilities. Conrail's traffic levels are substantially affected by its ability to compete with trucks, the economic strength of the industries and metropolitan areas that produce and consume the freight Conrail hauls, and the traffic generated by Conrail's connecting railroads. Conrail remains dependent on non-bulk traffic, which tends to generate higher revenues than bulk commodities, but also involves higher costs and is more vulnerable to truck competition. 1 The Service Group System. Beginning in 1994, Conrail reorganized its Marketing and Sales Department and certain segments of its Operating Department into four service groups: CORE Service, Intermodal Service, Unit Train Service and Automotive Service. Petrochemicals and waste products, food and agriculture products, metals and forest and manufactured products are handled by the CORE Service Group. The Intermodal Service Group handles intermodal trailers and containers. The Unit Train Service Group handles coal and ore traffic. The Automotive Service Group handles automotive parts and finished vehicles. Each of these groups controls the integrated planning, pricing and operating functions that will enable them to tailor services, develop products and make capital investments directed toward the special requirements of their respective customers. Revenues for the Service Groups for 1990 through 1994, together with total annual traffic volumes, are set forth in the following tables. 2 SERVICE GROUPS - REVENUES ($ in Millions)
Years ended December 31, ----------------------------------- 1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- CORE Service Group Revenues (1) $1,608 $1,537 $1,473 $1,451 $1,505 Percent of total 45.1% 46.6% 46.2% 46.7% 46.8% Intermodal Service Group Revenues 752 656 599 575 591 Percent of total 21.1% 19.9% 18.8% 18.5% 18.4% Unit Train Service Group Revenues 639 592 675 664 648 Percent of total 17.9% 18.0% 21.1% 21.3% 20.2% Automotive Service Group Revenues 565 512 444 419 471 Percent of total 15.9% 15.5% 13.9% 13.5% 14.6% Total line haul revenue $3,564 $3,297 $3,191 $3,109 $3,215 Miscellaneous revenue(2) 169 156 154 143 157 ----- ----- ----- ----- ----- Total freight revenue $3,733 $3,453 $3,345 $3,252 $3,372 ===== ===== ===== ===== ===== _________________ (1) Petrochemicals and Waste $ 603 $ 574 $ 543 $ 538 $ 556 Food and Agriculture 362 356 348 335 340 Forest and Mfg. Products 326 313 316 311 327 Metals 317 294 266 267 282 ----- ----- ----- ----- ----- Total CORE Srv. Grp. $1,608 $1,537 $1,473 $1,451 $1,505 ===== ===== ===== ===== ===== (2) Includes switching, demurrage and other miscellaneous revenues.
SERVICE GROUPS - VOLUME IN UNITS (FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS) (In Thousands)
Years ended December 31, ---------------------------------- 1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- CORE Service Group(1) 1,321 1,302 1,213 1,179 1,238 Intermodal Service Group 1,589 1,355 1,220 1,108 1,138 Unit Train Service Group 912 878 964 1,003 1,013 Automotive Service Group 396 360 319 289 321 ----- ----- ----- ----- ----- Total Volume 4,218 3,895 3,716 3,579 3,710 ===== ===== ===== ===== ===== __________________ (1) Petrochemicals and Waste 376 374 360 350 374 Food and Agriculture 289 295 284 272 276 Forest and Mfg. Products 318 309 290 289 295 Metals 338 324 279 268 293 ----- ----- ----- ----- ----- Total CORE Srv. Grp. 1,321 1,302 1,213 1,179 1,238 ===== ===== ===== ===== =====
3 CORE Service Group. ------------------ In 1994, revenues and volume for this service group increased 4.6% and 1.5%, respectively, over 1993. Petrochemicals and Waste: This commodity group consists of a wide variety of commodities, including agricultural and organic chemicals, plastic pellets, soda ash, construction minerals, petroleum products and waste. The majority of traffic is joint-line and the primary flows are between Louisiana and Texas, on the one hand, and Delaware, New Jersey, and Pennsylvania on the other. This commodity group's customer base and origin/destination pair mix are both large and diverse, with none occupying a dominant position in terms of Conrail's traffic volume or revenues. Conrail's traffic in this commodity group increased in 1992 and 1993, but was unchanged in 1994. Conrail's minerals traffic, which accounts for approximately 20% of the revenue and 30% of the volume of this group, declined approximately 10% on relatively stable revenues, as a result of the collapse of a major salt mine located on Conrail. Revenues increased 5.1%, mostly as the result of rate increases and a favorable traffic mix. Conrail's chemical traffic includes chlorine, smaller volumes of other hazardous chemicals and non-hazardous substances which, if spilled or released into the atmosphere, could be dangerous and could result in significant liability to Conrail. Under catastrophic circumstances, such liability could exceed Conrail's $250 million in insurance coverage for such accidents. It is impossible to eliminate the risk of such liability; however, Conrail has not experienced any significant liability as a result of an accident involving chlorine or any other such substance and has safety procedures designed to prevent the occurrence of such accidents, or limit their impact should they occur. Increasing regulation by federal, state and local governments of the transportation and handling of hazardous and non-hazardous substances and waste has increased the administrative burden and costs of transporting certain commodities in this group. Food and Agriculture: This commodity group includes fresh and processed food products moving primarily in boxcars, and grain and grain products moving in covered hopper and tank cars. In 1994, food and agriculture revenue increased 1.6%, despite decreased volume of 2.0%, primarily as the result of increased rates. Agricultural products, primarily grain and grain products, generated $255 million of the $362 million in revenue for this segment in 1994. Conrail's export grain traffic, which is highly variable and depends on the value of the U.S. 4 dollar and the size of domestic and international grain harvests, declined as Conrail's markets continued to shift toward domestic uses, rather than exports. In 1994, export grain traffic declined significantly (58% in volume and 65% in revenue) from 1993 levels, a year in which volume increased 60% over 1992. Forest and Manufactured Products: This commodity group includes paper and wood products moving in boxcars, certain lumber and related products moving on flatcars and general manufactured commodities moving in boxcars. These commodities generated approximately $326 million in revenue in 1994, a 4.2% increase on increased volume of 3.1% over 1993 levels. Metals: This commodity group includes metals, such as iron, steel and aluminum, and scrap metals. An increase in traffic volume in 1994 of 4.5% resulted in increased revenue of 7.9% over 1993 levels. These increases were due to gains in market share from trucks, increased rates and greater steel production resulting from increased North American vehicle production. Intermodal Service Group. ------------------------ Conrail continues to be one of the rail industry's leaders in handling intermodal traffic, with revenues and volume increasing 14.5% and 17.3%, respectively, in 1994 over 1993. Conrail handled over 1.5 million units of intermodal traffic in 1994. Conrail's intermodal traffic consists of three segments. The first segment is Conrail's premium service traffic which principally involves shipments for the U.S. Postal Service, United Parcel Service and less-than- truck-load companies. The four-year U.S. Postal Service contracts for over 1,000 origin-destination points will expire and be rebid in July 1995. The second segment is domestic traffic, which includes a variety of commodities and customers. The 27% growth in this segment in 1994 was attributable primarily to market share gains in Conrail's partnerships with major nationwide truckload carriers and RoadRailer traffic through Triple Crown Services Company, a joint venture with Norfolk Southern Corporation. International container traffic constitutes the third segment of Conrail's intermodal traffic. International container traffic chiefly involves goods produced in the Pacific Basin and shipped by rail from west coast ports to east coast markets. Conrail and its western railroad connections are able to participate in this traffic because they have established superior transit times compared with the all-water route through the Panama Canal. Conrail also participates in traffic moving 5 through Atlantic ports for import and export trade with European and Mediterranean markets. Conrail's Atlantic traffic increased 8% over 1993 levels. In 1994, Conrail increased its intermodal service reliability by eliminating intermodal service to certain interior points on its system. Conrail expects this service group to benefit in 1995 from the anticipated completion of clearance routes in Pennsylvania, thus furthering the conversion of intermodal container traffic to more cost-effective, double- stack service. Unit Train Service Group. ------------------------ In 1994, revenues for this service group increased by 7.9%, reflecting a 3.9% increase in traffic volume. Utility coal traffic, which makes up the majority of Conrail's coal business, increased 3% in 1994, with increased revenue of 7.6%. This 3% increase occurred despite service disruptions due to severe winter weather and attendant capacity problems in the first quarter of the year, which prevented utilities from fully replenishing stock piles depleted during the eight-month coal strike in 1993. Utility coal moves from mines located on and off Conrail's system to electric utilities located on Conrail. Annual traffic volumes fluctuate with the inventory practices of the electric utilities, their use of alternative sources of energy and the weather. In addition, the utilities in Conrail's service territory decreased their use of nuclear fuel from the near capacity levels of 1993. The federal acid rain legislation enacted in October 1990, which requires electric utilities to significantly limit sulfur dioxide emissions from their generating plants by burning lower sulfur coal or installing emissions control devices, has reduced demand for the higher sulfur coal from mines on Conrail's system, particularly in central Pennsylvania. Phase one of the regulations was effective January 1, 1995. However, the decline in the volume of coal from mines located on Conrail is being offset, in part, by an increase in Conrail's handling of lower sulfur coal from sources on Conrail lines formerly owned by The Monongahela Railway Company (now merged into Conrail) and from off-line sources to utilities located on Conrail's system. Metallurgical, industrial/cogeneration and export coal represent the three remaining segments of Conrail's coal traffic, with volumes essentially equal in each of these areas. Conrail's traffic volume and revenue from metallurgical coal decreased approximately 10% in 1994. Except for a slight increase in 1993, this business has declined in each year 6 since 1989, as the domestic steel industry continues to eliminate inefficient production capacity and as competition for the industry's remaining transportation requirements increases. Conrail's traffic volume and revenue for industrial/cogeneration coal increased 17% in 1994, primarily as the result of the initiation of service to a new cogeneration facility and increases in market share. Export coal traffic increased 28% from 1993, after having declined significantly in 1993 and 1992 from the record levels of 1991. The increase resulted in significant part from increased amounts of coal available for export with the end of the coal strike. This segment of Conrail's coal business faces continuing competition by exports from South Africa and the former Soviet republics. Conrail serves directly, or via short line switching carriers, many of the nation's largest active integrated steel production facilities. Although a significant portion of the active domestic steel industry is along the Cleveland-Chicago corridor on Conrail's system, the traditional domestic steel industry (using integrated steel production facilities) continues to eliminate inefficient production capacity, which in past years has adversely affected the volume of raw materials for steel production handled by Conrail, and could continue to do so. In 1994, coke and iron ore volumes declined 4% from 1993 levels. However, revenues increased slightly, 2%, as the result of selective rationalization of low margin traffic and price increases. Automotive Service Group. ------------------------ In 1994, Conrail's automotive parts and finished vehicles traffic continued to benefit from the strong domestic economy and the 10% increase in North American vehicle production over 1993. Reflecting increased domestic production, finished vehicles volume increased 14%, while automotive parts volume increased 5.0%. Revenues for the vehicles and parts segments increased, respectively, 11.6% and 8.7%. As a whole, both 1994 volume and revenues for this group increased 10% from 1993. In terms of revenues, General Motors and Ford were among Conrail's five largest customers in 1994; Chrysler was among Conrail's ten largest customers. This commodity group, especially the automotive parts segment, is subject to vigorous truck competition. The increase in automotive parts traffic primarily reflects the increase in production by domestic manufacturers and Conrail's gain in market share through the use of new products and logistics services, including the introduction in 1994 of a dedicated, just-in-time, auto-parts train network, designed to compete with 7 short-haul trucks. Conrail's vehicles traffic is subject to significant competition from other railroads. In 1994, Conrail's automotive parts and finished vehicles traffic continued to be favorably affected by the strength of the yen against the U.S. dollar, which created incentives for foreign-based domestic manufacturers to shift additional production to the United States and to export domestically produced vehicles. Although there has been only a slight impact to date, Conrail expects the enactment of the North American Free Trade Agreement to increase its automotive parts and vehicle traffic to and from Mexico. 8 Certain Statistics. The following tables provide various measurements relating to Conrail's rail operations from 1990 through 1994:
PRODUCTIVITY DATA Years ended December 31, ---------------------------------------- 1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- Operating ratio (1)....... 83.8% 82.9% 84.0% 108.0% 87.3% Compensation and benefits ratio.... 33.7% 35.6% 37.0% 37.9% 40.0% Employees (average)...... 24,833 25,406 25,380 25,852 27,787 Gross ton miles per freight employee hour worked (2)(3).... 4,135 3,805 3,746 3,717 3,513 Gross ton miles per freight train hour (thousands) (2)(3).... 113.0 119.0 122.1 120.0 112.1 Gross ton miles per locomotive in service (millions) (2)(3).... 104.8 102.4 107.1 107.6 103.4 Gross ton miles per gallon of fuel (2).......... 749 745 770 776 741 (1) The 1994 operating ratio (operating expenses as a percent of revenues) includes the effect of a one-time charge for a non-union employee retirement program and related costs. Without this charge, Conrail's operating ratio would have been 81.5%. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the Consolidated Financial Statements elsewhere in this Annual Report. Without the $719 million special charge in 1991, Conrail's operating ratio would have been 85.9%. (2) Excluding subsidiaries. (3) Locomotive weight not included.
QUALITY OF SERVICE DATA(1) Years ended December 31, --------------------------------------- 1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- Miles of track under slow order.... 49 62 73 90 158 Locomotive out of service ratio... 8.7% 8.3% 8.8% 7.8% 6.8% Freight cars requiring heavy repairs.. 4.9% 4.7% 4.0% 2.9% 2.6% Reportable train accidents (2).... 160 155 148 183 149 Cost of loss and damage incidents as a percent of revenue.... .48% .39% .39% .39% .37% (1) Excluding subsidiaries. (2) Reportable train accidents for 1992 have been restated to include 6 incidents that occurred in 1992, but were reported in 1993.
9 COMPETITION. Conrail's rail operations face significant competition from trucks, from other railroads, and from the availability of the same or substitute goods produced at points not served by Conrail. The trucking industry is especially competitive in Conrail's service area because, on average, freight in this region is moved shorter distances than in the West, and the cost characteristics of the railroad and trucking industries generally make trucks more competitive over shorter distances. Price and service competition from trucks, while present for all commodities, is especially evident in the movement of intermodal freight, auto parts, and finished steel. Competition from trucks has been increased by the passage of legislation removing certain barriers to entry into the trucking business and allowing the use of wider, longer, and heavier trailers and multiple trailer combinations. Larger trailers and multiple trailer combinations have substantially increased productivity in the trucking industry, and any future legislation permitting further increases in truck capacity could have a substantial adverse effect on the competitiveness of railroads. CSX Corporation and Norfolk Southern Corporation are Conrail's principal railroad competitors. Conrail is also subject to competition from smaller, regional railroads. The assets of the Delaware & Hudson Railway Company ("D&H"), a regional competitor of Conrail's, have been purchased by a subsidiary of CP Rail, a large Canadian railroad. CP Rail's use of D&H's former tracks, coupled with additional trackage rights it has obtained, has resulted in increased rail competition in Conrail's service area. The consummation of a merger or joint cooperation agreement between CP Rail and Canadian National Railroad could result in increased competition in certain portions of Conrail's service territory, depending upon the nature and terms of any such arrangement. Certain of Conrail's railroad competitors have become multi-modal transportation companies by purchasing previously independent water carriers or small shipment motor carriers, or both, and have thereby extended their operations into Conrail's service area. In addition, recent changes in rail products and technology have expanded the scope of rail service beyond the physical limitations of lines, which has resulted in increased railroad competition. An important influence on Conrail's competitive position is government regulation as currently administered by the Interstate Commerce Commission ("ICC"). Prior to 1980, regulation significantly inhibited the ability of railroads to respond to 10 changing transportation markets. The Staggers Rail Act of 1980 ("Staggers Act") substantially reduced the restrictions of regulation. In particular, railroads were given more opportunity to reduce costs and more freedom to adjust prices, which enabled them to compete more effectively and to adjust prices quickly to reflect competitive circumstances. Under the Staggers Act, the ICC also has deregulated a significant amount of railroad traffic, including intermodal and most boxcar traffic, finished vehicles and miscellaneous commodities moving in other types of equipment. The Staggers Act further enhanced railroads' competitive options by permitting the use of railroad-shipper contracts for traffic still regulated by the ICC, under which the parties can set the price, service standards and term for a special transportation movement. These contracts generally provide for prices lower than tariff rates and many do not guarantee that any given amount of freight will be shipped during their term. As of December 31, 1994, Conrail was a party to 3,563 such contracts for regulated traffic, which Conrail estimates accounted for 31% of its line-haul revenues in 1994. Although some contracts have a term longer than one year, most contracts are for one year or less. The majority of Conrail's multi-year contracts are subject to cost-related adjustments that provide for flat percentage increases. The cost-based provisions in certain of these contracts are tied to indices under the jurisdiction of the ICC. Action by the ICC to adjust these indices for productivity gains by the railroads has had an adverse impact on Conrail's ability to recover costs under such contracts, which accounted for less than 3% of Conrail's line haul revenues in 1994. For a discussion of regulation of the railroad industry, see "Government Regulation" and Item 3 - "Legal Proceedings - Conrail Withdrawal from RCAF Master Tariff." In the last few years, Congress has actively debated whether the ICC needs to be continued as an independent regulatory agency. It is widely anticipated that in 1995 legislation will be enacted either eliminating the ICC immediately or phasing it out over the next one to two years. Congress is also debating which, if any, of the ICC's functions should be retained and who should be given the authority to enforce them. While the outcome of this debate cannot be predicted with certainty, it seems highly likely that a significant amount of the current regulatory system will be repealed. Should any functions remain, they would likely be enforced at the Department of Transportation or, in the 11 case of mergers and related matters, at the Department of Justice. Conrail believes that the repeal of some or all of the regulatory provisions of the Interstate Commerce Act applicable to railroads would be likely to result in an increase in railroads' ability to compete effectively by providing additional opportunities for productivity gains and cost-cutting. PROPERTY. Conrail directly holds no real property. The only significant property holdings are those of Consolidated Rail Corporation. However, a subsidiary of Conrail owns an 81.25% interest in Concord Resources Group, Inc. ("Concord"), whose assets include property used for the treatment and storage of hazardous waste. In 1994, Conrail disposed of certain major assets of Concord and plans to dispose of Concord's remaining assets in 1995. See Note 10 to the Consolidated Financial Statements elsewhere in this Annual Report. As of December 31, 1994, Consolidated Rail Corporation (excluding its subsidiaries) maintained 18,951 miles of track including track for crossovers, turnouts, second main, other main, passing and switch track, on its 11,349 mile route system. Of total route miles, 9,453 are owned, 98 are leased or operated under contract and 1,798 are operated under trackage rights, including approximately 300 miles operated pursuant to an easement over Amtrak's Northeast Corridor. As of December 31, 1994, virtually all track over which at least 10 million gross tons moved annually (6,135 track miles) was heavy-weight rail of at least 127 pounds per yard, and approximately 99% of such track had continuous welded rail. Continuous welded rail reduces track maintenance costs and, in general, permits trains to travel at higher speeds. As of December 31, 1994, Conrail had 9,352 miles of continuous welded rail on track it maintained. As of December 31, 1994, all of the 5,647 track miles maintained for fast freight traffic had a maximum operating speed of 50 MPH or more, and 33% had a maximum operating speed of at least 70 MPH. As of December 31, 1994, approximately 96% of the track over which at least 10 million gross tons moved annually was governed by automatic signal systems. In all, as of December 31, 1994, 7,656 miles of track were controlled by automatic signal systems. As a result of the strategic planning process, certain under-utilized rail lines and other facilities were identified for disposal in order to avoid future capital costs and to 12 improve Conrail's return on assets. The expected losses upon disposition of such assets were included in the 1991 special charge. See Note 4 to the Selected Financial Data included elsewhere in this Annual Report. The service groups are involved in an ongoing process to identify additional assets not required to support Conrail's service. The following table indicates the number of locomotives and freight cars owned (or subject to capitalized leases) and includes 17,865 freight cars used by Conrail under operating leases. These total figures are as of December 31, 1994, and include stored or surplus units, but exclude subsidiaries, which have an immaterial number of locomotives and freight cars: 13
LOCOMOTIVES AND FREIGHT CARS Number of Units --------------------- Total Stored(1) ------ --------- LOCOMOTIVES........................ 2,147 32 ------ --- Road............................. 1,874 4 Switching........................ 273 28 Total Surplus(2) ------ ---------- FREIGHT CARS....................... 56,391 6,604 ------ ----- Box.............................. 8,748 1,541 Covered Hopper................... 4,768 324 Open Hopper...................... 14,766 1,855 Gondola.......................... 14,087 2,289 Coil Steel....................... 4,560 190 Multi-Level...................... 5,752 148 Flat and Other................... 3,710 257 - ----------- (1) Serviceable locomotives not required for current operations on December 31, 1994. The number of locomotives stored during 1994 fluctuated between 28 and 75 due to variations in traffic and fleet adjustments. (2) Freight cars which did not move during the seven days immediately preceding December 31, 1994 and which were available for loading. The number of surplus freight cars during 1994 fluctuated due to variations in traffic and fleet adjustments. On December 31, 1994, the average age of Conrail's road locomotives, not including stored-serviceable units, was 15.3 years. The average age of the total locomotive fleet was 16.7 years, and the average age of the total freight car fleet was 21 years.
CAPITAL EXPENDITURES. The following tables provide information concerning capital expenditures from 1990 through 1994: 14
CAPITAL EXPENDITURES (In Millions) Years ended December 31, ------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Track rehabilitation...... $221 $207 $275 $186 $194 Rolling stock and transportation equipment.. 139 314 57 127 89 Other(1).................. 148 129 159 85 98 ---- ---- ---- ---- ---- Total..................... $508 $650 $491 $398 $381 ==== ==== ==== ==== ==== Subsidiaries (included in Total).................... $ 3 $ 3 $ 12 $ 12 $ 5 (1) Includes communications and signals, bridges and tunnels, computers and telecommunications, and other improvements.
TRACK REHABILITATION
Years ended December 31, ------------------------------------- 1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- Track miles surfaced...... 2,749 3,154 3,671 3,247 3,228 Track miles of rail laid.. 207 201 312 78 72 Ties installed (millions). 1.1 1.0 1.4 1.2 1.2
EMPLOYEES AND LABOR. Including subsidiaries, Conrail's average number of employees for 1994 was 24,833. Consolidated Rail Corporation (excluding subsidiaries) averaged 24,012 employees in 1994, 86% of whom are represented by a total of 14 labor organizations and are covered by 23 separate collective bargaining agreements. Conrail is currently engaged in collective bargaining with the labor organizations representing its union employees, which commenced on November 1, 1994. The outcome of these negotiations cannot be predicted at this time. If the parties are unable to reach agreement through direct negotiation, either party may invoke the mediation services of the National Mediation Board; there is no time limit on the mediation process. If the Mediation Board eventually concludes that its efforts to resolve the dispute will not be successful, it will proffer binding arbitration. If either side refuses to arbitrate, there is a 30-day "cooling-off" period during which the Board may make a finding that the dispute threatens "substantially to interrupt interstate commerce to a 15 degree such as to deprive any section of the country of essential transportation service." Such finding is then presented to the President of the United States who has the option of appointing an Emergency Board to investigate the dispute. If the President does not appoint an Emergency Board, the parties are free to resort to self help at the conclusion of the above-mentioned cooling-off period. If the President does appoint an Emergency Board, it has 30 days to investigate the dispute and report its findings. The Emergency Board's findings are non-binding; although the parties must maintain the status quo for a period of 30 days following the Board's report, any party which rejects the Board's findings may thereafter resort to self help. In the event of a strike, Congress has the power to resolve the dispute by enacting legislation, including legislation imposing a labor contract in accordance with the findings of the Emergency Board. Under a decision by the United States Supreme Court on April 28, 1987, rail unions have the right, under the Railway Labor Act and other federal laws, to engage in secondary picketing against any railroad. As a result, a labor dispute between one railroad and a union can cause a strike to spread to any other railroad, or to all other railroads, whether or not the union has a collective bargaining agreement or a dispute with such other railroads. There is also the potential that railroads may be subject to secondary picketing in the event of a strike in the airline industry, which, like the railroad industry, is subject to the Railway Labor Act. Should Conrail or its subsidiaries be the subject of a strike or secondary picketing, Conrail's rail operations could be severely curtailed or stopped. GOVERNMENT REGULATION. Conrail is subject to environmental, safety, and other regulations generally applicable to all businesses, and its rail operations are also regulated by the ICC, the Federal Railroad Administration ("FRA"), state Departments of Transportation and some state and local regulatory agencies. The ICC has jurisdiction over, among other things, rates charged for certain traffic movements, service levels, freight car rents, and issuance or guarantee of railroad securities. It also has jurisdiction over the situations and terms under which one railroad may gain access to another railroad's traffic or facilities, extension or abandonment of rail lines, consolidation, merger, or acquisition of control of rail common carriers and of other carriers by rail common carriers, and labor protection provisions in connection with the foregoing. 16 Under the Staggers Act, federal regulation of rates and services has been reduced. The ICC has deregulated rates for intermodal traffic, most boxcar traffic and a series of miscellaneous commodities, including steel and automobiles. In addition, railroads are free to negotiate contracts with shippers setting rates, service standards and the terms for movements of other kinds of traffic. As a result, railroads have greater flexibility in adjusting rates and services to meet revenue needs and competitive conditions. Congress is currently reviewing whether the ICC will continue to regulate railroads and the nature and extent of that regulation. See "Competition." The FRA has jurisdiction over safety and railroad equipment standards. Conrail's rail operations are also subject to a variety of governmental laws and regulations relating to the protection of the environment. In addition to being involved as a potentially responsible party at numerous Superfund sites (see Item 3 - "Legal Proceedings"), Consolidated Rail Corporation is subject to increasing regulation of its transportation and handling of certain hazardous and non-hazardous commodities and waste which has resulted in additional administrative and operating costs. Also, in 1995, the United States Environmental Protection Agency must issue regulations applicable to new locomotive emissions. Locomotive engines (other than those defined as new or remanufactured) may be regulated by the states. Additional investments will likely be required to bring other than new locomotives into compliance, although the timing and amount of the investments will not be determinable until the legislation is adopted. Except as it relates to the 1991 special charge (see Item 6 - "Selected Financial Data" and Note 4 thereto included elsewhere in this Annual Report), compliance with existing laws and regulations relating to the protection of the environment has not had a material effect on Conrail's capital expenditures, earnings or competitive condition. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters," Note 4 to Selected Financial Data and Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report.) Item 3. Legal Proceedings. References to Conrail in "Item 3. Legal Proceedings" shall denote Consolidated Rail Corporation unless otherwise expressly noted. Occupational Disease Litigation. Conrail has been named as a defendant in lawsuits filed pursuant to the provisions of the Federal Employers' Liability Act ("FELA") by persons alleging (1) personal injury or death caused by exposure to asbestos in connection with railroad employment; (2) complete or partial loss of hearing caused by 17 exposure to excessive noise in the course of railroad employment; (3) repetitive motion injury in connection with railroad employment; and (4) personal injury or death caused by exposure to deleterious substances (mixed dusts, fumes, chemicals, etc.) As of December 31, 1994, Conrail was a defendant in 391 pending asbestosis suits, 853 pending hearing loss suits, 34 pending repetitive motion injury suits and 424 pending deleterious substance suits, and had notice of 963 potential asbestosis claims, 4,558 potential hearing loss claims, 2,354 potential repetitive motion injury claims and 47 deleterious substance claims. Conrail expects to be named as a defendant in a significant number of occupational disease cases in the future. Structure and Crossing Removal Disputes in Connection With Lines Abandoned Under NERSA. Conrail may be responsible, in whole or in part, for the costs of removal of several hundred overhead and underpass crossings located on railroad lines it has abandoned under the Northeast Rail Service Act of 1981 ("NERSA") (and, in some instances, responsible for the removal of the lines of railroad themselves as well as appurtenant structures). Conrail's liability for the removal of such lines, crossings and structures will be determined on a case-by-case basis. Some states have imposed upon Conrail the obligation to remove certain crossings. In 1989, an organization of interests that own property under and adjacent to Conrail's elevated West 30th Street rail line running along the west side of lower Manhattan filed a petition with the ICC seeking to force Conrail to abandon the line and finance its removal, which could have cost in excess of $30 million. In January 1992, the ICC voted to grant the petition, subject to the owners posting a bond indemnifying Conrail for demolition costs exceeding $7 million. The property owners refused to post the bond. The parties appealed to the U.S. Court of Appeals for the District of Columbia, which upheld the ICC's order, including the bond requirement. No appeal was taken. No abandonment certificate will be issued unless the property owners post a bond, which they have not done. Conrail Withdrawal from RCAF Master Tariff. The Rail Cost Adjustment Factor ("RCAF") is an index of rail costs issued by the ICC according to which railroads may adjust their regulated rates for inflation and cost increases free of regulatory interference. In March 1989, the ICC decided to offset the quarterly RCAF by the entirety of the average rail industry productivity gain. On January 1, 1990, Conrail ceased applying RCAF increases to its regulated rates, by ending its participation in the RCAF master tariff. Effective July 1, 1990, Conrail published a series of independent rate increases approximately equal to its increases in costs as reflected by 18 the RCAF. Conrail's action was contested, but was upheld by the ICC. Since July 1, 1990, Conrail has continued to make independent selective increases to its regulated rates. These regulated rates will continue to be subject to individual challenge to the extent the levels of the increases exceed those previously permitted pursuant to the RCAF and no other statutory provisions bar ICC jurisdiction. In January 1991, the ICC commenced a proceeding at the request of a shippers' organization to clarify the legal effect of Conrail's (and other railroads') withdrawal from the RCAF master tariff, including the shippers' assertion that railroads thereby lose protection from challenge for rates previously adjusted under these procedures. In April 1991, Conrail individually opposed and participated in the rail industry's opposition to the petition. The ICC has taken no action on the matter since that time. Engelhart v. Conrail. In connection with the Special Voluntary Retirement Program offered to certain employees in late 1989 and early 1990, Conrail used surplus funds in its overfunded Supplemental Pension Plan ("Plan") to fund certain aspects of that program. In December 1992, certain former Conrail employees brought suit in the U.S. District Court for the Eastern District of Pennsylvania challenging the use of surplus Plan funds (i) to pay administrative Plan expenses previously paid by Conrail, (ii) to fund the Special Voluntary Retirement Program, and (iii) to pay life insurance and medical insurance premiums of former employees as improper and unlawful, and alleging that employees who have made contributions to the Plan or its predecessor plans are entitled to share in the surplus assets of the Plan. In August 1993, the federal district court granted Conrail's Motion to Dismiss the majority of counts in the complaint, but declined to dismiss the issue of Conrail's use of Plan assets to pay administrative expenses of the Plan, which are estimated to be approximately $29 million as of December 31, 1994. However, Conrail believes that the use of surplus Plan assets for this purpose is lawful and proper. Conrail uses surplus Plan assets in a similar manner in connection with its 1994 early retirement program. Environmental Litigation. Conrail is subject to various federal, state and local laws and regulations regarding environmental matters. In certain instances, Conrail has received notices of violations of such laws and regulations and either has taken or plans to take appropriate steps to address the problems cited or to contest the allegations of violation. As of December 31, 1994, Conrail had received inquiries from governmental agencies or had been identified, together with other companies, as a potentially responsible party for cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 128 locations throughout the country. However, Conrail, through its own investigations and assessments, believes it may have 19 some potential responsibility at only 53 of these sites. The amounts Conrail has accrued with respect to the proceedings listed below are included in its $74 million accrual for estimated future environmental expenses. (See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters" and Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report.) The significant environmental proceedings, including Superfund sites, are discussed below. United States v. Southeastern Pennsylvania Transportation Authority ("SEPTA"), National Railroad Passenger Corporation ("Amtrak"), and Consolidated Rail Corporation. In March 1986, the United States Environmental Protection Agency ("EPA") filed an action in the United States District Court for the Eastern District of Pennsylvania for cost recovery, injunctive relief, and a declaratory judgment against Conrail, Southeastern Pennsylvania Transportation Authority ("SEPTA") and National Railroad Passenger Corp. ("Amtrak") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA" or "Superfund Law"), as amended. In 1990, the Pennsylvania Department of Environmental Resources ("PADER") intervened as a plaintiff. Suit is based on the release or threatened release at the Paoli Railroad Yard, Paoli, Chester County, Pennsylvania, of polychlorinated biphenyls ("PCBs"), a listed hazardous substance under CERCLA. Conrail is sued in its capacity as the operator of the rail yard from April 1, 1976 through December 31, 1982, under an agreement with SEPTA to provide commuter rail service. In March 1992, Penn Central brought suit before the Special Court arguing that the terms of the transfer of its properties to Conrail did not contemplate environmental liability for conditions existing at the time of the transfer. On August 23, 1994, the Special Court held that the reorganization did not prevent the government from pursuing its CERCLA claims against Penn Central. The Court also granted Conrail's Motion for Summary Judgment against Penn Central, finding that Conrail's liability for contamination to former Penn Central property was limited only to the period after April 1, 1976. Notwithstanding this finding, the Special Court declined to preclude federal courts from applying principles of joint and several liability and holding Conrail liable for pre-April 1, 1976 contamination in instances where contamination of the property was not divisible. Conrail also awaits the Special Court's decision in a related action in which Conrail seeks a declaration against the Reading Company similar to that granted with respect to Penn Central, as well as a declaration that Conrail is entitled to indemnification from SEPTA and/or the federal government for environmental liability resulting from 20 its statutorily mandated provision of commuter rail service. Oral argument in that matter was held October 24, 1994. Motions and cross-motions for summary judgment by the parties are pending. Pursuant to a series of partial preliminary consent decrees, defendants have performed a series of cleanup actions both on and off-site and have conducted a Remedial Investigation/Feasibility Study ("RI/FS"). As of December 31, 1994, the cost of the RI/FS and of the interim cleanup measures performed by the three defendants is approximately $9 million. Those costs have been shared equally among the three defendants but are subject to reallocation. All work done to date has been performed subject to a denial of liability and without waiving any defense to the governmental claim for cleanup costs or other relief. EPA has now requested that the parties submit a remediation plan that includes participation by Penn Central. Settlement negotiations with EPA continue. United States v. Conrail. The EPA has listed Conrail's Elkhart Yard in Indiana on the National Priorities List. The EPA contends that chemicals have migrated from the yard and contaminated drinking wells in the area. On February 14, 1990, the EPA filed a civil action against Conrail in the U.S. District Court for the Northern District of Indiana seeking recovery of approximately $345,000 for costs incurred in protecting the water supply. In addition, the EPA seeks a declaratory judgment against Conrail for all future costs incurred in responding to the release or threatened release of hazardous substances from the site. Conrail believes it is not the sole source and may not be a contributing source to the contamination alleged by the EPA. Conrail filed a third-party action joining Penn Central as a defendant, to which Penn Central responded by filing a declaratory judgment action in Special Court. As a result of the Special Court decision in August 1994, Conrail and Penn Central have negotiated an interim cost-sharing arrangement for costs in implementing the EPA's 1992 interim Record of Decision, which Conrail had undertaken alone. (See previous discussion regarding the Special Court under "United States v. SEPTA, et al"). EPA has recently issued a second Record of Decision in draft form that, if finalized, would require the parties to install a public water supply system for up to 700 additional homes. United States v. Conrail, et al. Conrail has been identified as the fifth largest generator of waste oil at the Berks Associates Superfund site in Douglasville, Pennsylvania. In addition, Conrail has become aware that it and its predecessor, Penn Central, owned a small 21 portion of land that was leased to the operator of the Berks site. As such, Conrail's liability could increase due to its questionable status as both an owner and a generator. In August 1991, the EPA issued an administrative order against Conrail and thirty-five other entities mandating the implementation of an approximately $2 million partial remedy and filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania for the recovery of approximately $8 million in costs incurred by the government. The parties have negotiated an administrative order with the EPA and have filed an answer to the civil action. A group of potentially responsible parties (including Conrail) undertook compliance with the administrative order. Conrail and the 35 other defendants have filed a third-party complaint against approximately 630 entities seeking contribution for the costs of the remedy and government costs. Conrail, along with other defendants, is negotiating a settlement with the EPA. On June 30, 1993, the EPA issued another administrative order against Conrail and 33 other entities, mandating the remediation of the southern portion of the site. The effective date of the order has been delayed in light of the negotiations. The most expensive aspect of the remediation of the site is the cleanup of Source Area 2, which the government estimates at between $45 and $55 million. This Source Area was closed prior to Conrail's incorporation, and therefore Conrail has maintained that it is not liable for the cost of remediating Source Area 2. In addition, PADER has filed with the court a complaint for the recovery of natural resource damages. United States v. Conrail, et al. Conrail is a potentially responsible party ("PRP"), along with more than 50 other parties, in the United Scrap Lead federal Superfund action in Troy, Ohio, where substantial quantities of batteries were disposed of over a period of several years. The EPA sued Conrail and nine other parties in August 1991 in the Southern District of Ohio for the recovery of approximately $2 million in past costs. Conrail and other PRP's have commissioned treatability studies. The court has imposed a stay to discuss whether this matter can be settled. EPA has selected a remedy for the site with an estimated cost of approximately $33 million, which the PRP's are challenging. Conrail estimates its share of the liability at 8%. Commonwealth of Massachusetts v. Conrail. On April 21, 1992, the Massachusetts Attorney General filed suit in Superior Court of Massachusetts alleging Conrail's violation of the Massachusetts Clean Air Act and its implementing regulations by allowing diesel engines to idle unnecessarily and/or in excess of thirty minutes. On May 4, 1992, the court entered a preliminary injunction, the terms of which are 22 substantially consistent with Conrail's existing idling policy. The Attorney General subsequently filed a complaint alleging Conrail's violation of the preliminary injunction. On February 2, 1993, the parties entered into a partial settlement agreement; however, the Attorney General has alleged that Conrail has failed to comply with certain provisions of the settlement. Conrail is negotiating the terms of a settlement with the Attorney General's office. United States v. Consolidated Rail Corporation, The Monongahela Railway Company, et al. On September 30, 1992, Region VIII of the EPA filed an administrative action for civil penalties against Conrail and its former wholly-owned subsidiary, The Monongahela Railway Company (now merged into Conrail), under the Toxic Substances Control Act for allegedly improper handling of a shipment of PCB contaminated soil. The other railroads in the movement and the shipper were served with similar complaints. Conrail entered into a de minimus settlement with EPA which was effective October 31, 1994. New York State Department of Environmental Conservation Order On Consent. On February 18, 1993, the New York State Department of Environmental Conservation ("NYSDEC") served Conrail with a draft Order on Consent requiring the payment of civil fines in connection with its inspection of Selkirk Yard. The order also seeks compensation for the hiring of three full-time NYSDEC employees to monitor Conrail's compliance at Selkirk and two other rail yards in New York. Conrail is negotiating the terms of the Order with NYSDEC. United States v. Consolidated Rail Corporation, et al. On March 17, 1994, the United States Department of Justice ("DOJ") served notice that it had filed a complaint in the Federal District Court for the Eastern District of Pennsylvania against Consolidated Rail Corporation and two other parties citing various violations of the Clean Air Act ("CAA") and the National Emission Standard for Hazardous Air Pollutants ("NESHAP") in connection with the alleged release of asbestos during the renovation of a grain storage facility. DOJ seeks civil penalties and injunctive relief against further violations of CAA and NESHAP. Conrail has initiated settlement discussions with DOJ, as a result of which the litigation has been stayed. New York State Department of Environmental Conservation Order on Consent. On November 3, 1994, NYSDEC served Conrail with an Order on Consent requiring the payment of civil fines in connection with the alleged discharge of waste water from DeWitt Yard in Onondaga County, New York into New York State waters. Conrail is negotiating the terms of the Order with NYSDEC. 23 In the matter of Consolidated Rail Corporation, Ashtabala, OH. On September 21, 1994, the EPA filed an Administrative Complaint against Conrail seeking civil penalties for certain alleged violations of its National Pollutants Discharge Emissions System permit. Conrail filed its answer on November 30, 1994, and is negotiating with the EPA to settle this matter. Conway Yard, Pittsburgh. In 1991, Conrail received Notices of Violation ("NOV") from the PADER alleging violations of the Clean Streams Act for discharges of oil into the Ohio River. In September 1993, PADER sent to Conrail a draft Consent Order and Agreement requiring a comprehensive site remediation for soil, ground water, surface waters and sediments at the Conway rail yard and requiring the payment of civil fines in connection with violations at the yard, including continuing ground water contamination. Conrail and PADER continue to negotiate the extent of the investigation and remediation to be undertaken at the yard and the amount of the fines. Beacon Park, Massachusetts. Massachusetts and federal officials are currently investigating an alleged unlawful discharge of oil by the Company into the Charles River. The investigation could result in the assessment of fines or other penalties against Conrail. Other. In addition to the above proceedings, Conrail has been named in various legal proceedings arising out of its activities as an employer and as an operator of a freight railroad, including personal injury actions brought by its employees under FELA, as well as administrative proceedings with and investigation by government agencies. In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly in certain matters described above in which substantial damages are or may be sought, Conrail cannot state what the eventual outcomes of such legal proceedings will be. Certain of these matters, if determined adversely to Conrail, could result in the imposition of substantial damage awards against, or increased costs to, Conrail that could have a material adverse effect on Conrail's results of operations and financial position. Conrail's management believes, however, based on current knowledge, that such legal proceedings will not have a material adverse effect on Conrail's financial position. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 1994. 24 Executive Officers of the Registrant. - ------------------------------------ Conrail's officers are elected annually by the Board of Directors at its first meeting held after the meeting of shareholders at which directors are elected, and they hold office until their successors are elected. There are no family relationships among the officers or directors, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, as of March 1, 1995, relating to the executive officers of Conrail and Consolidated Rail Corporation. An asterisk (*) indicates that such individual is an officer of Consolidated Rail Corporation only: Name, Age, Present Position Business Experience During Past 5 Years James A. Hagen, 62, Chairman of Retired effective March 16, 1995 the Board of Directors from the position of Chief Executive Officer. Served as Chairman, President and Chief Executive Officer between May 1989 and September 1994. David M. LeVan, 49, President Present position since March 16, and Chief Executive Officer 1995. Served as President and Chief Operating Officer between September 1994 and March 16, 1995. Served as Executive Vice President between November 1993 and September 1994. Served as Senior Vice President - Operations between July 1992 and November 1993. Served as Senior Vice President-Operating Systems and Strategy between November 1991 and June 1992. Served as Senior Vice President - Corporate Systems between November 1990 and November 1991. Served as Vice President - Corporate Strategy between September 1988 and November 1990. H. William Brown, 56, Senior Present position since April Vice President - Finance 1992. Served as Senior Vice and Administration President - Finance between April 1986 and April 1992. Ronald J. Conway, 51, Senior Vice Present position since November President - Operations 1994. Served as Vice President - Operations between September 1994 and November 1994. Served as Vice President - Transportation between July 1994 and September 1994. Served as Vice President - Intermodal Service Group between November 1993 and July 1994. Served as Assistant Vice President - 25 Petrochemicals and Minerals between April 1992 and November 1993. Served as General Manager - Philadelphia Division between 1989 and April 1992. Timothy P. Dwyer, 45, Senior Vice Present position since November President - Unit Train Service 1994. Served as Vice President - Group Unit Train Service Group between November 1993 and November 1994. Served as General Manager - Philadelphia Division between April 1992 and November 1993. Served as Assistant Vice President - Metals between 1989 and April 1992. Gordon H. Kuhn, 44, Senior Present position since November Vice President - Intermodal 1994. Served as Senior Vice Service Group President - CORE Service Group between November 1993 and November 1994. Served as Senior Vice President - Marketing and Sales between January 1990 and November 1993. Charles N. Marshall, 53, Senior Present position since January Vice President - Development 1990. Served as Senior Vice President - Marketing and Sales between March 1985 and January 1990. John P. Sammon, 44, Senior Vice Present position since November President - CORE Service Group 1994. Served as Vice President - Intermodal between July 1994 and November 1994. Served as Assistant Vice President- Intermodal between January 1988 and July 1994. George P. Turner, 53, Senior Vice Present position since November President - Automotive Service 1994. Served as Vice President - Group Automotive Service Group between November 1993 and November 1994. Served as Assistant Vice President - Automotive between April 1992 and November 1993. Served as Assistant Vice President - Petrochemicals and Minerals between March 1990 and April 1992. Served as Assistant Vice President - Sales between 1987 and March 1990. Bruce B. Wilson, 59, Senior Present position since April Vice President - Law 1987. Lucy L.S. Amerman, 42, Vice Present position since July 1994. President - Risk Management* Served as Assistant Vice President - Claims and Litigation between April 1994 and July 1994. Served as General Counsel - Litigation between March 1990 and March 1994. Held various positions in the Law Department prior to that time. 26 Dennis A. Arouca, 43, Vice Present position since May 1994. President - Labor Relations* Served as Partner in the law firm of Pepper Hamilton & Scheetz between February 1986 and May 1994. John T. Bielan, Jr., 47, Present position since March Vice President - Continuous 1992. Served as Assistant Vice Quality Improvement* President - Automotive between April 1989 and March 1992. Gerald T. Gates, 41, Vice Present position since November President - Transportation* 1994. Served as Vice President - Mechanical between November 1993 and November 1994. Served as Assistant Vice President - Operations Planning and Administration between July 1992 and November 1993. Served as General Manager - Indianapolis Division between September 1990 and July 1992. Served as Assistant General Manager - Albany Division between 1989 and September 1990. Donald W. Mattson, 52, Vice Present position since April President - Controller 1994. Served as Vice President - Treasurer between May 1993 and April 1994. Served as Vice President - Controller between August 1988 and May 1993. John A. McKelvey, 43, Vice Present position since April President - Materials and 1994. Served as Vice President - Purchasing* Controller between May 1993 and March 1994. Served as Vice President - Treasurer between 1988 and May 1993. William B. Newman, Jr., 44, Present position since 1981. Vice President and Washington Counsel* Frank H. Nichols, 48, Vice Present position since February President - Resource 1993. Served as Assistant Vice Development* President - Finance between November 1988 and February 1993. Timothy T. O'Toole, 39, Vice Present position since April President and Treasurer 1994. Served as Vice President and General Counsel between May 1989 and April 1994. Lester M. Passa, 41, Vice Present position since March 16, President - Logistics and 1995. Served as Assistant Vice Corporate Strategy* President - Strategic Planning between February 1993 and March 15, 1995. Served as Director - Intermodal Planning between October 1991 and 27 January 1993. Served as Senior Director - Customer Service between January 1990 and September 1991. Albert M. Polinsky, 48, Vice Present position since April President - Information Systems* 1994. Served as Assistant Vice President - Program Management between December 1993 and March 1994. Served as Assistant Vice President - Marketing Services between April 1992 and December 1993. Served as Director - Information Services between March 1990 and April 1992. Served as Director - Information Resources and Systems prior to that time. Richard S. Pyson, 53, Vice Present position since November President - Engineering* 1994. Served as Vice President between July 1994 and November 1994. Served as Vice President - Transportation between April 1992 and July 1994. Served as Vice President - Engineering between March 1991 and March 1992. Served as Assistant Vice President - Engineering and Maintenance between March 1990 and March 1991. John M. Samuels, 51, Vice Present position since November President - Mechanical* 1994. Served as Vice President - Engineering between April 1992 and November 1994. Served as Vice President - Continuous Quality Improvement between April 1990 and March 1992. Served as Assistant Vice President - Industrial Engineering between 1980 and April 1990. Allan Schimmel, 54, Vice Present position since November President - Administrative 1990. Served as Corporate Services and Corporate Secretary and Assistant to the Secretary Chairman between 1980 and November 1990. Gery M. Williams, Jr., 53, Vice Present position since January President - State and Local 1990. Affairs* 28 PART II Item 5. Market for Registrant's Common Equity - ------ ------------------------------------- and Related Stockholder Matters. ------------------------------- Conrail's common stock is listed for trading on the New York Stock Exchange and the Philadelphia Stock Exchange. The number of holders of record of Conrail common stock on March 3, 1995 was 19,698. For the high and low sales prices of Conrail's common stock on the New York Stock Exchange and the frequency and amount of cash dividends for 1994 and 1993, see Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report. Item 6. Selected Financial Data. - ------ ----------------------- The selected consolidated financial data included in the following tables have been derived from Conrail's Consolidated Financial Statements. The consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994 and the consolidated balance sheets as of December 31, 1994 and 1993 appear elsewhere in this Annual Report and have been audited by the Company's independent accountants, as indicated in their reports thereon. For purposes of the following selected consolidated financial data, references to Conrail reflect the consolidated entities of Consolidated Rail Corporation for periods prior to July 1, 1993 and Conrail Inc. for subsequent periods. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related notes and other financial information included elsewhere in this Annual Report. 29
Years ended December 31, ------------------------------------------- 1994 1993(2) 1992 1991 1990(5) ----- ------ ----- ----- ----- (In Millions Except Per Share Amounts) STATEMENT OF INCOME DATA: Revenues............................$3,733 $3,453 $3,345 $3,252 $3,372 Operating expenses (before one- time charge)........................ 3,043 2,862 2,811 2,794 2,945 One-time charge(1) and (4).......... 84 719 ----- ------ ----- ----- ----- Income (loss) from operations....... 606 591 534 (261) 427 Interest expense.................... (192) (185) (172) (181) (162) Loss on disposition of subsidiary(3) (80) Other income, net................... 118 114 98 107 121 ----- ------ ----- ----- ----- Income (loss) before income taxes and the cumulative effect of changes in accounting principles.... 532 440 460 (335) 386 Income taxes (benefits)............. 208 206 178 (128) 139 ----- ------ ----- ----- ----- Income (loss) before the cumulative effect of changes in accounting principles............... 324 234 282 (207) 247 Cumulative effect of changes in accounting principles............... (74) ----- ------ ----- ----- ----- Net income (loss)...................$ 324 $ 160 $ 282 $ (207) $ 247 ===== ====== ===== ===== ===== Income (loss) per common share before the cumulative effect of changes in accounting principles Primary............................. $3.90 $2.74 $3.28 $(2.70) $2.55 Fully diluted....................... 3.56 2.51 2.99 (2.70) 2.39 Cumulative effect of changes in accounting principles Primary............................. (.92) Fully diluted....................... (.81) Net income (loss) per common share (6) Primary............................. 3.90 1.82 3.28 (2.70) 2.55 Fully diluted....................... 3.56 1.70 2.99 (2.70) 2.39 Dividends per common share (6)...... 1.40 1.20 1.00 .85 .75
December 31, ------------------------------------------ 1994 1993 1992 1991 1990(5)
----- ----- ----- ----- ------- (In Millions) BALANCE SHEET DATA: Cash and cash equivalents and temporary cash investments.... $ 43 $ 38 $ 40 $ 135 $ 153 Working capital deficit......... (76) (13) (489) (286) (216) Total assets.................... 8,322 7,948 7,315 7,096 7,245 Other noncurrent liabilities (net of current maturities of debt)........................... 2,480 2,433 2,075 2,215 2,012 Deferred income taxes........... 1,203 1,081 644 429 454 Special income tax obligation... 513 575 569 627 796 Stockholders' equity............ 2,925 2,784 2,748 2,661 2,929
30 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA 1. In 1994, Conrail recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary early retirement program and related costs. The majority of the cost of the early retirement program will be paid from Conrail's overfunded pension plan. Without this one-time charge, net income would have been $375 million ($4.54 per share, primary and $4.13 per share, fully diluted). (See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 2. Conrail adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), effective January 1, 1993. As a result, in the first quarter of 1993, Conrail recorded cumulative after-tax charges of $22 million and $52 million, respectively. In addition, as a result of the increase in the federal corporate income tax rate from 34% to 35%, effective January 1, 1993, income tax expense includes $34 million of a retroactive nature, primarily for the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required under SFAS 109. (See Notes 1, 7 and 8 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 3. In 1993, Conrail committed to a plan for the disposition of its investment in Concord Resources Group, Inc. Pursuant to this plan, Conrail recorded an estimated loss of $80 million for the disposition of its investment, including $19 million for operating losses expected to be incurred during the phase-out period and disposition costs. Conrail also recorded estimated federal tax benefits of $30 million relating to the disposition. (See Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 4. In 1991, Conrail recorded in operating expenses a special charge totalling $719 million which was composed of $362 million for disposition of certain under-utilized rail lines and other facilities, $212 million for labor settlements primarily representing certain expected costs associated with a new labor agreement that reduced the size of train crews, $57 million for certain environmental clean up costs, and $88 million for legal matters including settlement of the 31 Amtrak-Conrail collision at Chase, Maryland in January 1987. The 1991 special charge reduced net income by $447 million, and without the special charge net income would have been $240 million ($2.73 and $2.48 per share, primary and fully diluted, respectively). 5. In 1990, Conrail completed a financial restructuring plan which included a Dutch auction tender offer, the establishment of an employee stock ownership plan for non-union employees ("Non-union ESOP") and a related open market common stock purchase program. Through the Dutch auction tender offer, Conrail purchased 44.64 million shares of its outstanding common stock at a price of $24.50 per share, or an aggregate of $1.094 billion. In March 1990, Conrail issued 9,979,562 shares of Series A ESOP Convertible Junior Preferred stock to the Non-union ESOP in exchange for a promissory note of $288 million. In connection with its restructuring, Conrail acquired 8,715,902 shares of its common stock in the open market for $200 million. The cost of the restructuring was financed with approximately $450 million of available funds, $50 million in short-term borrowings (commercial paper) and with proceeds from the sale of $250 million principal amount of 9 3/4% Notes due 2000 and $550 million principal amount of 9 3/4% Debentures due 2020. 6. Net income (loss) and dividends per common share include the effects of the common stock split which is described in Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report. The calculations of income (loss) per common share for 1994, 1993 and 1992 are shown in Exhibit 11, Part IV included elsewhere in this Annual Report. 32 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. ------------------------------------ Overview - -------- Conrail's net income for 1994 was $324 million, compared with $160 million for 1993 and $282 million for 1992. Results for 1994 include a one- time charge of $51 million (net of tax benefits of $33 million) relating to a non-union early retirement program and related costs recorded in the first quarter (see Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report). The 1993 results include one-time after- tax charges of $74 million for the adoption of required changes in accounting for income taxes and postretirement benefits other than pensions; the estimated net loss on the disposition of Concord Resources Group, Inc. ("Concord"), $50 million; and the one-time effects on deferred taxes of the increase in the federal tax rate, $34 million (see Notes 1, 7, 8 and 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). Absent the one-time charges, Conrail's net income for 1994 and 1993 would have been $375 million and $318 million, respectively. In the first quarter of 1994, Conrail's results were adversely affected by difficult operating conditions caused by severe winter weather and by greater than anticipated traffic volumes, the combination of which created a shortage of crews and locomotives. At the same time, Conrail reorganized its marketing department and certain of its operating functions into four service groups: Intermodal, Automotive, Unit Train and CORE. These factors in combination created service disruptions and increased operating expenses in the first quarter. Nevertheless, a strong economy throughout the year resulted in increases in both revenue and traffic volume for 1994 that were 8.1% and 8.3% higher, respectively, than in 1993. Despite increased traffic volume, Conrail's continued cost reduction and containment programs in the last three quarters enabled Conrail to limit the increase in its operating expenses (excluding the early retirement program charge) to 6.3% over 1993. In 1993, traffic volume and operating revenues increased 5.0% and 3.2%, respectively, compared with 1992, while operating expenses were up only 1.8%. For 1994, Conrail achieved its operating ratio goal of 81.5%, without the $84 million one-time charge for the early retirement program, and a return on funded assets of 9.8%, compared to its cost of capital of 11%. 33 1995 Outlook - ------------ Conrail expects the economy to grow throughout 1995, however, at a slower pace as the year progresses. Conrail's 1995 plans are based on assumptions of 2.4% growth in real gross domestic product and 3.4% growth in industrial production. Conrail's outlook for 1995 includes line haul revenue growth of 2.5% to 3.5%, and, in anticipation of this continued growth, Conrail will further increase its locomotive fleet and will hire additional train and engine employees, if necessary, to meet the demand for transportation services. A key Conrail goal for 1995 is to achieve an operating ratio of 79.5%. The service groups are making significant progress in improving how Conrail manages the resources needed to profitably serve its customers, and towards this end, the analyses to evaluate assets required to effectively and economically support their operations will continue in 1995. Results of Operations - --------------------- 1994 Compared with 1993 Net income for 1994 was $324 million ($3.90 per share, primary and $3.56 per share, fully diluted) compared with 1993 net income of $160 million ($1.82 per share, primary and $1.70 per share, fully diluted). Excluding the one-time charges (see "Overview"), Conrail's net income would have been $375 million ($4.54 per share, primary and $4.13 per share, fully diluted) for 1994 and $318 million ($3.78 per share, primary and $3.43 per share, fully diluted) for 1993. Operating revenues (primarily freight line haul revenues, but also including switching, demurrage and incidental revenues) increased $280 million, or 8.1%, from $3,453 million in 1993 to $3,733 million in 1994. An 8.3% increase in traffic volume in units (freight cars and intermodal trailers and containers) resulted in a $274 million increase in revenues that was partially offset by a slight decrease in average revenue per unit which reduced revenues by $8 million. The decrease in average revenue per unit was caused by an unfavorable traffic mix which reduced revenues by $46 million, substantially offset by increases in average rates which increased revenues by $38 million. Traffic volume increases were experienced by each of the four service groups: Intermodal, 17.3%; Automotive, 10.0%; Unit Train, 3.9%; and CORE, 1.5%. Within the CORE Service Group, Metals increased 4.5%, Forest and Manufactured Products increased 3.1%, Petrochemicals and Waste increased .5%, and Food and Agriculture decreased 2.0%. Switching, demurrage and incidental revenues increased $14 million. 34 Operating expenses increased $265 million, or 9.3%, from $2,862 million in 1993 to $3,127 million in 1994. The following table sets forth the operating expenses for the two years:
Increase (In Millions) 1994 1993 (Decrease) ------- ------- ----------- Compensation and benefits $1,260 $1,229 $ 31 Fuel 188 178 10 Material and supplies 203 194 9 Equipment rents 381 305 76 Depreciation and amortization 278 284 (6) Casualties and insurance 184 131 53 Other 549 541 8 Early retirement program 84 84 ----- ----- --- $3,127 $2,862 $265 ====== ====== ====
Compensation and benefits costs increased $31 million, or 2.5%, primarily due to increased wage rates which were partially offset by reduced fringe benefits costs and lower employment levels. Compensation and benefits as a percent of revenues was 33.7% in 1994 compared with 35.6% in 1993. The increase of $76 million, or 24.9%, in equipment rents reflects the effects of increased traffic volume and new operating leases, as well as the effects of crowded serving yards and train delays experienced primarily in the first half of 1994. Casualties and insurance costs increased $53 million, or 40.5%. While the number of injuries for the year was about the same as in 1993, the cost per claim to settle injuries has continued to escalate. The costs related to occupational claims and the number of those claims also increased. In the first quarter of 1994, Conrail incurred a one-time pre-tax charge of $84 million for the non-union voluntary early retirement program and related costs (see Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail's operating ratio was 83.8% for 1994, compared with 82.9% for 1993. Without the $84 million one-time charge for the early retirement program, the operating ratio for 1994 would have been 81.5%. 1993 Compared with 1992 Net income for 1993 was $160 million ($1.82 per share, primary and $1.70 per share, fully diluted) compared with 1992 net income of $282 35 million ($3.28 per share, primary and $2.99 per share, fully diluted). The decrease in net income is attributable primarily to the following unusual or one-time charges in 1993: one-time after tax charges of $74 million for adoption of required changes in accounting for income taxes and postretirement benefits other than pensions; the recording of the estimated net loss on the disposition of Concord, $50 million; and the one-time effects on deferred taxes of the increase in the 1993 federal corporate income tax rate, $34 million (see Notes 1, 7, 8 and 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). Absent these charges, Conrail's net income for 1993 would have been $318 million ($3.78 per share, primary and $3.43 per share, fully diluted). Operating revenues increased $108 million, or 3.2%, from $3,345 million in 1992 to $3,453 million in 1993. A 5.0% increase in traffic volume resulted in a $160 million increase in revenues that was partially offset by a 1.6% decrease in average revenue per unit which reduced revenues $54 million. The decline in average revenue per unit is attributable to decreases in average rates which reduced revenue by $62 million, partially offset by a favorable mix of traffic which increased revenues $8 million. Traffic volume increases were experienced by three of the four service groups: Intermodal, 11.1%; Automotive, 12.9%; and CORE, 7.3%. Traffic volume decreased for the Unit Train Service Group by 8.9%. Within the CORE Service Group, Metals increased 16.1%, Forest and Manufactured Products increased 6.6%, Petrochemicals and Waste increased 3.9%, and Food and Agriculture increased 3.9%. Switching, demurrage and incidental revenues increased $2 million. Operating expenses increased $51 million, or 1.8%, from $2,811 million in 1992 to $2,862 million in 1993. The following table sets forth the operating expenses for the two years:
Increase (In Millions) 1993 1992 (Decrease) ------ ------ ---------- Compensation and benefits $1,229 $1,237 $ (8) Fuel 178 173 5 Material and supplies 194 197 (3) Equipment rents 305 290 15 Depreciation and amortization 284 295 (11) Casualties and insurance 131 133 (2) Other 541 486 55 ----- ----- --- $2,862 $2,811 $ 51 ====== ====== ====
Compensation and benefits costs decreased $8 million, or 0.6%, with relatively stable employment levels. The decrease is attributable primarily to a decrease in payroll taxes, partially offset by increases 36 in fringe benefit costs and increased wage rates. Compensation and benefits as a percent of revenues was 35.6% in 1993 compared with 37.0% in 1992. The increase of $15 million, or 5.2%, in equipment rents reflects the effects of new operating leases for equipment and the increase in traffic volume, partially offset by improvement in equipment utilization. Depreciation and amortization expense decreased $11 million, or 3.7%, primarily due to lower depreciation rates for locomotives and freight cars as a result of a depreciation study required by the Interstate Commerce Commission. Other operating expenses increased $55 million, or 11.3%, primarily due to increases in property and corporate taxes, increases in write-downs of uncollectible accounts, and a reduction in 1992 due to reducing accruals related to the 1991 special charge with no corresponding reduction in 1993. Conrail's operating ratio was 82.9% for 1993 compared with 84.0% for 1992. Interest expense increased $13 million, or 7.6%, from $172 million in 1992 to $185 million in 1993 due to the net addition of long-term debt in 1993. The loss on disposition of subsidiary, $80 million, represents Conrail's estimated gross loss on the planned disposition of Concord (see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). Other income, net, increased $16 million, or 16.3%, from $98 million in 1992 to $114 million in 1993, principally due to higher gains from property sales and increased equity income as a result of higher net income of Conrail's affiliated companies. Liquidity and Capital Resources - ------------------------------- Conrail's cash and cash equivalents increased $5 million, from $38 million at December 31, 1993 to $43 million at December 31, 1994. Cash generated from operations, principally from its wholly-owned subsidiary, Consolidated Rail Corporation ("CRC"), and borrowings are Conrail's principal sources of liquidity and are used primarily for capital expenditures, debt service, and dividends. Operating activities provided cash of $697 million in 1994, compared with $504 million in 1993 and $496 million in 1992. Issuance of long-term debt provided cash of $114 37 of $114 million in 1994. The principal uses of cash in 1994 were for property and equipment acquisitions, $490 million, payment of long-term debt including capital lease and equipment obligations, $158 million, cash dividends on preferred and common stock, $127 million, and the repurchase of common stock, $94 million. A working capital (current assets less current liabilities) deficiency of $76 million existed at December 31, 1994, compared with $13 million at December 31, 1993. The increase in the deficiency during 1994 is principally due to increases in short-term borrowings, accounts payable and accrued and other current liabilities. Management believes that Conrail's financial position allows it sufficient access to credit sources on investment grade terms, and, if necessary, additional intermediate or long- term debt could be issued for working capital requirements. In July 1993, Conrail announced a third common stock repurchase program of up to $100 million. In December 1994, this program was complete at a total of 1,767,626 shares. On July 20, 1994, the Board of Directors authorized an additional $100 million stock repurchase program. At December 31, 1994, Conrail had acquired 175,500 shares for approximately $9 million under this program. During 1994, CRC issued an additional $214 million of commercial paper and repaid $181 million. Of the remaining $212 million outstanding at December 31, 1994, $100 million is classified as long-term debt since it is expected to be refinanced through subsequent issuances of commercial paper and is supported by the long-term portion of Conrail's $500 million revolving credit facility. At December 31, 1994, $342 million remains available to Conrail and CRC under a 1993 shelf registration statement whereby CRC can issue debt securities or Conrail can issue both convertible debt or equity securities. During the first half of 1994, CRC issued $65 million of Medium-Term Notes with interest rates ranging from 5.70% to 6.33% maturing over various periods through 1997. In July 1994, CRC issued $49 million of 1994 Equipment Trust Certificates, Series A, with interest rates ranging from 5.5% to 7.6%, maturing annually from 1995 to 2009. The certificates were used to finance approximately 85% of the total purchase price of 36 locomotives. In December 1994, CRC issued $30 million of 1994-A 8.45% Pass Through Trust Certificates due 2014 pursuant to the shelf registration statement to finance approximately 80% of the total equipment cost of 795 new hopper 38 cars and 57 rebuilt boxcars. These certificates are not direct obligations of CRC. Capital Expenditures - -------------------- Capital expenditures totalled $508 million, $650 million and $491 million in 1994, 1993 and 1992, respectively. Of these totals, Conrail directly financed $57 million in 1994, $232 million in 1993 and $13 million in 1992 through private third-party financing. In addition, the proceeds of notes and debentures sold in those years, $65 million, $329 million, and $80 million, respectively, were available to fund capital expenditures. Capital expenditures for 1995 are expected to be approximately $550 million. Inflation - --------- Generally accepted accounting principles require the use of historical costs in preparing financial statements. This approach does not consider the effects of inflation on the costs of replacing assets. The replacement cost of Conrail's property and equipment is substantially higher than its historical cost basis. Similarly, depreciation expense on a replacement cost basis would be substantially in excess of the amount recorded under generally accepted accounting principles. Environmental Matters - --------------------- Conrail's operations and property are subject to various federal, state and local laws regulating the environment. CRC is a party to numerous proceedings brought by regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. As of December 31, 1994, CRC had received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 128 locations throughout the country. However, based on currently available information, Conrail believes CRC may have some potential responsibility at only 53 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of the possible remediation alternatives, changing technology and the length of time over which these matters develop, it is not always possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. At December 31, 1994, Conrail had accrued $74 39 million for estimated future environmental expenses. Although Conrail's operating results and liquidity could be significantly affected in any quarterly or annual reporting period in which CRC was held principally liable in certain of these actions, Conrail believes the ultimate liability for these matters will not materially affect its financial condition. (See Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail spent $8 million in 1994 and $7 million in each of 1993 and 1992 for environmental remediation and anticipates spending in 1995 an amount comparable to that spent in each of the last three years. In addition, Conrail's capital expenditures for environmental control and abatement projects were approximately $5 million in 1994 and $2 million in 1993, and are anticipated to be approximately $9 million in 1995. Conrail has an Environmental Quality Department, the mission of which is to institute and promote compliance with environmentally sound operating practices and to monitor and assess the status of sites where liability under environmental laws may exist. Other Matters - ------------- During the third quarter of 1993, Conrail committed to a plan for disposition of its investment in Concord and recorded an estimated loss on the disposition of $80 million less estimated tax benefits of $30 million (see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). In July 1994, Conrail completed the sale of one of Concord's two waste disposal facilities, with no material financial statement impact. Negotiations for the sale of Concord's remaining waste disposal facility are currently in progress and are anticipated to be completed during 1995. Conrail expects that this proposed sale will not have a material financial statement effect upon completion. 40 Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS The Stockholders and Board of Directors Conrail Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) 1. and 2. present fairly, in all material respects, the financial position of Conrail Inc. and subsidiaries at December 31, 1994, and the results of their operations and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The consolidated financial statements of Conrail Inc. and subsidiaries for the years ended December 31, 1993 and 1992 were audited by other independent accountants whose report dated January 24, 1994 expressed an unqualified opinion on those statements. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods for accounting for income taxes and postretirement benefits other than pensions in 1993. Price Waterhouse LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 23, 1995 41 REPORT OF INDEPENDENT ACCOUNTANTS The Stockholders and Board of Directors Conrail Inc. We have audited the 1993 and 1992 consolidated financial statements and the financial statement schedule of Conrail Inc. and subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 consolidated financial position of Conrail Inc. and subsidiaries as of December 31, 1993, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods for accounting for income taxes and postretirement benefits other than pensions in 1993. COOPERS & LYBRAND 2400 Eleven Penn Center Philadelphia, Pennsylvania January 24, 1994 42 CONRAIL INC. CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ------------------------ ($ In Millions Except Per Share Data) 1994 1993 1992 ------ ------ ------ Revenues $3,733 $3,453 $3,345 ------ ------ ------ Operating expenses Way and structures 499 492 465 Equipment 815 703 692 Transportation 1,379 1,283 1,306 General and administrative 350 384 348 Early retirement program (Note 3) 84 ------ ------ ------ Total operating expenses 3,127 2,862 2,811 Income from operations 606 591 534 Interest expense (192) (185) (172) Loss on disposition of subsidiary (Note 10) (80) Other income, net (Note 11) 118 114 98 ------ ------ ------ Income before income taxes and the cumulative effect of changes in accounting principles 532 440 460 Income taxes (Note 7) 208 206 178 ------ ------ ------ Income before the cumulative effect of changes in accounting principles 324 234 282 Cumulative effect of changes in accounting principles (Notes 1, 7 and 8) (74) ------ ------ ------ Net income $ 324 $ 160 $ 282 ====== ====== ====== Income per common share (Notes 1 and 2) Before the cumulative effect of changes in accounting principles Primary $ 3.90 $ 2.74 $ 3.28 Fully diluted 3.56 2.51 2.99 Cumulative effect of changes in accounting principles Primary ( .92) Fully diluted ( .81) Net income per common share Primary $ 3.90 $ 1.82 $ 3.28 Fully diluted 3.56 1.70 2.99 Ratio of earnings to fixed charges (Note 1) 3.19x 2.98x 3.33x See accompanying notes.
43 CONRAIL INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------- ($ In Millions) 1994 1993 ASSETS ------ ------ Current assets Cash and cash equivalents $ 43 $ 38 Accounts receivable 646 644 Deferred tax assets (Note 7) 249 227 Material and supplies 164 132 Other current assets 23 21 ------ ------ Total current assets 1,125 1,062 Property and equipment, net (Note 4) 6,498 6,313 Other assets 699 573 ------ ------ Total assets $8,322 $7,948 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings 112 79 Current maturities of long-term debt (Note 6) 130 146 Accounts payable 119 62 Wages and employee benefits 169 185 Casualty reserves 103 93 Accrued and other current liabilities (Note 5) 568 510 ------ ------ Total current liabilities 1,201 1,075 Long-term debt (Note 6) 1,940 1,959 Casualty reserves 212 132 Deferred income taxes (Note 7) 1,203 1,081 Special income tax obligation (Note 7) 513 575 Other liabilities 328 342 ------ ------ Total liabilities 5,397 5,164 ------ ------ Commitments and contingencies (Note 12) Stockholders' equity (Notes 2 and 9) Preferred stock (no par value; 15,000,000 shares authorized; no shares issued) Series A ESOP convertible junior preferred stock (no par value; 10,000,000 shares authorized; 9,821,358 and 9,945,934 shares issued and outstanding, respectively) 283 286 Unearned ESOP compensation (243) (253) Common stock ($1 par value; 250,000,000 shares authorized; 80,409,598 and 79,658,734 shares issued, respectively; 78,620,434 and 79,574,989 shares outstanding, respectively) 80 80 Additional paid-in capital 1,848 1,819 Retained earnings 1,056 857 ------ ------ 3,024 2,789 Treasury stock, at cost (1,789,164 and 83,745 shares, respectively) (99) (5) ----- ----- Total stockholders' equity 2,925 2,784 ----- ----- Total liabilities and stockholders' equity $8,322 $7,948 ====== ====== See accompanying notes.
44 CONRAIL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Series A Unearned Additional Preferred ESOP Common Paid-In Retained Treasury ($ In Millions Except Per Share Data) Stock Compensation Stock Capital Earnings Stock --------- ------------ ------ ---------- -------- -------- Balance, January 1, 1992 $288 $(273) $ 41 $1,909 $ 715 $ (19) Amortization 10 Net income 282 Common dividends, $1.00 per share (Note 2) (81) Preferred dividends, $2.165 per share (Note 2) (21) Common stock split (Note 2) 42 (42) Common shares acquired (131) Exercise of stock options 12 Other (1) 9 8 ----- ----- ----- ------ ----- ----- Balance, December 31, 1992 287 (263) 83 1,888 903 (150) Amortization 10 Net income 160 Common dividends, $1.20 per share (96) Preferred dividends, $2.165 per share (21) Common shares acquired (64) Exercise of stock options 1 20 Common shares reclassified as unissued (4) (107) (98) 209 Other (1) 18 9 ----- ----- ----- ----- ----- ----- Balance, December 31, 1993 286 (253) (80) 1,819 857 (5) Amortization 10 Net income 324 Common dividends, $1.40 per share (111) Preferred dividends, $2.165 per share (21) Common shares acquired (94) Exercise of stock options 14 Other (3) 15 7 ----- ----- ----- ----- ----- ---- Balance, December 31, 1994 $283 $(243) $(80) $1,848 $1,056 $(99) ===== ===== ===== ===== ===== ==== See accompanying notes.
45 CONRAIL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------ ($ In Millions) 1994 1993 1992 ----- ----- ----- Cash flows from operating activities Net income $ 324 $ 160 $ 282 Adjustments to reconcile net income to net cash provided by operating activities: Early retirement program 84 Loss on disposition of subsidiary 80 Cumulative effect of accounting changes 74 Depreciation and amortization 278 284 295 Deferred income taxes 150 221 208 Special income tax obligation (62) (50) (58) Gains from sales of property (18) (20) (6) Pension credit (46) (43) (42) Changes in: Accounts receivable (2) (52) (5) Accounts and wages payable 41 (15) (153) Settlement of tax audit (51) Other (52) (84) (25) ----- ----- ----- Net cash provided by operating activities 697 504 496 ----- ----- ----- Cash flows from investing activities Property and equipment acquisitions (490) (566) (466) Proceeds from disposals of properties 32 23 25 Other (23) (45) (18) ----- ----- ----- Net cash used in investing activities (481) (588) (459) ----- ----- ----- Cash flows from financing activities Repurchase of common stock (94) (64) (131) Net proceeds from short-term borrowings 33 (48) 177 Payment of capital lease and equipment obligations (96) (109) (113) Proceeds from long-term debt 114 485 80 Payment of long-term debt (62) (86) (53) Dividends on common stock (111) (96) (81) Dividends on Series A preferred stock (16) (21) (21) Proceeds from stock options and other 21 21 12 ----- ----- ----- Net cash provided by (used in) financing activities (211) 82 (130) ----- ----- ----- Increase(decrease) in cash and cash equivalents 5 (2) (93) Cash and cash equivalents Beginning of year 38 40 133 ----- ----- ----- End of year $ 43 $ 38 $ 40 ===== ===== ===== See accompanying notes.
46 1. Summary of Significant Accounting Policies ------------------------------------------ Industry -------- Conrail Inc. ("Conrail") is a holding company of which the principal subsidiary is Consolidated Rail Corporation ("CRC"), a freight railroad which operates within the northeast and midwest United States and the Province of Quebec. Principles of Consolidation --------------------------- The consolidated financial statements include Conrail and majority- owned subsidiaries. Investments in 20% to 50% owned companies are accounted for by the equity method. Cash Equivalents ---------------- Cash equivalents consist of commercial paper, certificates of deposit and other liquid securities purchased with a maturity of three months or less, and are stated at cost which approximates market value. Material and Supplies --------------------- Material and supplies consist mainly of fuel oil and items for maintenance of property and equipment, and are valued at the lower of cost, principally weighted average, or market. Property and Equipment ---------------------- Property and equipment are recorded at cost. Depreciation is provided using the composite straight-line method. The cost (net of salvage) of depreciable property retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. Revenue Recognition ------------------- Revenue is recognized proportionally as a shipment moves on the Conrail system from origin to destination. 47 Earnings Per Share ------------------ Primary earnings per share are based on net income adjusted for the effects of preferred dividends net of income tax benefits, divided by the weighted average number of shares outstanding during the period, including the dilutive effect of stock options. Fully diluted earnings per share assume conversion of Series A ESOP Convertible Junior Preferred Stock ("ESOP Stock") into Conrail common stock. Net income amounts applicable to fully diluted earnings per share have been adjusted by the increase, net of income tax benefits, in ESOP- related expenses assuming conversion of all ESOP Stock to common stock. The weighted average number of shares of common stock outstanding (Note 2) during each of the most recent three years ended December 31, 1994 are as follows: 1994 1993 1992 ---------- ---------- ---------- Primary weighted average shares 79,674,781 80,646,495 81,743,648 Fully diluted weighted average shares 89,562,721 90,835,982 91,856,193 Ratio of Earnings to Fixed Charges ---------------------------------- Earnings used in computing the ratio of earnings to fixed charges represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. New Accounting Standards ------------------------ Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") (Note 8) and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (Note 7). As a result, the Company recorded cumulative after tax charges of $22 million and $52 million for SFAS 106 and SFAS 109, respectively. 2. Corporate Structure and Presentation ------------------------------------ In May 1993, the shareholders of CRC approved a plan for the adoption of a holding company structure. Under the plan, each share of CRC common stock that was issued and outstanding or held in the treasury 48 of CRC, and each share of CRC ESOP Stock, all of which were held by the Non-union Employee Stock Ownership Plan (the "Non-union ESOP"), were automatically converted on July 1, 1993, into one share of common stock and one share of ESOP Stock, respectively, of a newly created holding company, Conrail Inc. As a result, Conrail Inc. became the publicly held entity effective July 1, 1993. The change in corporate structure did not represent a change in the operations or financial position of the consolidated entity. On July 1, 1993, Conrail had the same consolidated operations, assets, liabilities and stockholders' equity as CRC had on June 30, 1993. In this report, references to the "Company" will denote the consolidated entities Consolidated Rail Corporation for periods prior to July 1, 1993 and Conrail Inc. for subsequent periods. In 1992, the Company's Board of Directors authorized a two-for-one common stock split which was effected in the form of a common stock dividend. An amount equal to the par value of the common shares issued was transferred from additional paid-in capital to the common stock account. In addition, a stock dividend on the ESOP Stock in the amount of one share of ESOP Stock for each share of ESOP Stock outstanding was also distributed. All references in the financial statements with regard to the number of shares, and related dividends and per share amounts for both common stock (including treasury shares) and ESOP Stock have been restated to reflect the stock split. Stock compensation and other plans that provide for the issuance of common stock, ESOP Stock, or an amount equivalent to their respective fair market values, have also been amended to reflect the stock split. 3. 1994 Early Retirement Program ----------------------------- During the first quarter of 1994, the Company recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary early retirement program and related costs. The majority of the cost of the early retirement program will be paid from the Company's overfunded pension plan. 49 4. Property and Equipment ----------------------
December 31, ----------------- 1994 1993 ------- ------- (In Millions) Roadway $ 6,764 $ 6,548 Equipment 1,171 1,102 Less: Accumulated depreciation (1,571) (1,522) Allowance for disposition (241) (256) ------- ------- 6,123 5,872 ------- ------- Capital leases (primarily equipment) 988 1,104 Accumulated amortization (613) (663) ------- ------- 375 441 ------- ------- $ 6,498 $ 6,313 ======= =======
Conrail acquired equipment and incurred related long-term debt under various capital leases of $8 million in 1994, $75 million in 1993 and $13 million in 1992. As part of a 1991 special charge, the Company recorded an allowance for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities. 5. Accrued and Other Current Liabilities -------------------------------------
December 31, ------------- 1994 1993 ---- ---- (In Millions) Freight settlements due others $ 55 $ 62 Equipment rents (primarily car hire) 76 79 Unearned freight revenue 74 79 Property and corporate taxes 78 85 Other 285 205 ---- ---- $568 $510 ==== ====
6. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1994, is composed of the following: 50
December 31, --------------- 1994 1993 ------ ------ (In Millions) Capital leases $ 488 $ 561 Medium-term notes payable, 6.31%, due 1995 to 1998 228 225 Notes payable, 9.75%, due 2000 250 250 Debentures payable, 7.88%, due 2043 250 250 Debentures payable, 9.75%, due 2020 544 544 Equipment and other obligations, 6.23% 210 175 Commercial paper, 4.35% 100 100 ------ ------ 2,070 2,105 Less current portion (130) (146) ------ ------ $1,940 $1,959 ====== ======
Using current market prices when available, or a valuation based on the yield to maturity of comparable debt instruments having similar characteristics, credit rating and maturity, the total fair value of the Company's long-term debt, including the current portion, but excluding capital leases, is $1,601 million and $1,782 million at December 31, 1994 and 1993, respectively, compared with carrying values of $1,582 million and $1,544 million at December 31, 1994 and 1993, respectively. The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Capital leases have been discounted at rates which average 7.69% and are collateralized by assets with a net book value of $375 million at December 31, 1994. 51 Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 1995 $ 98 $ 116 1996 97 120 1997 84 98 1998 78 93 1999 68 77 2000 - 2017 251 676 ---- ------ Total 676 $1,180 ====== Less interest portion (188) ---- Present value $488 ====
Operating lease rent expense was $ 118 million in 1994, $88 million in 1993 and $71 million in 1992. In June 1993, the Company and CRC filed a shelf registration statement on Form S-3 to enable CRC to issue up to $500 million in debt securities or the Company to issue up to $500 million in convertible debt or equity securities. The remaining balance under this shelf registration was $342 million at December 31, 1994. During 1994, CRC issued $65 million of Medium-Term Notes with interest rates ranging from 5.70% to 6.33%, maturing over various periods through 1997, pursuant to the registration statement on Form S-3. In July 1994, CRC issued $49 million of 1994 Equipment Trust Certificates, Series A, with interest rates ranging from 5.5% to 7.6%, maturing annually from 1995 to 2009. The certificates were used to finance approximately 85% of the total purchase price of 36 locomotives. Equipment and other obligations mature in 1995 through 2013 and are collateralized by assets with a net book value of $229 million at December 31, 1994. Maturities of long-term debt other than capital leases and commercial paper are $65 million in 1995, $108 million in 1996, $67 million in 1997, $43 million in 1998, $13 million in 1999 and $1,186 million in total from 2000 through 2043. In December 1994, CRC issued $30 million of 8.45% Pass Through Certificates, Series 1994-A due 2014. The certificates will be used 52 to finance equipment which CRC will use under an operating lease, and while such certificates are not direct obligations of, or guaranteed by CRC, the amounts paid under the lease will be sufficient to pay principal and interest on the certificates. CRC had $212 million of commercial paper outstanding at December 31, 1994. Of the total amount outstanding, $100 million is classified as long-term since it is expected to be refinanced through subsequent issuances of commercial paper and is supported by the long-term credit facility mentioned below. In April 1994, CRC entered into a $500 million uncollateralized bank credit agreement with a group of banks to replace the $300 million credit facility that would have expired in the first quarter of 1995. The new credit agreement, which is used for general corporate purposes and to support CRC's commercial paper program, provides for a $350 million revolving credit facility with a five year maturity and a $150 million revolving credit facility with a one year maturity. Both credit facilities require interest to be paid on amounts borrowed at rates based on various defined short-term rates and an annual maximum fee of .125% of the facility amounts. The agreement contains, among other conditions, restrictive covenants relating to a debt ratio and consolidated tangible net worth. Interest payments were $174 million in 1994, $164 million in 1993 and $162 million in 1992. 53 7. Income Taxes ------------ The provisions for income taxes are composed of the following:
1994 1993 1992 ---- ---- ---- (In Millions) Current Federal $104 $ 25 $ 21 State 16 10 7 ---- ---- ---- 120 35 28 ---- ---- ---- Deferred Federal 125 189 179 State 25 32 29 ---- ---- ---- 150 221 208 ---- ---- ---- Special income tax obligation Federal (53) (42) (50) State (9) (8) (8) ---- ---- ---- (62) (50) (58) ---- ---- ---- $208 $206 $178 ==== ==== ====
Effective January 1, 1993, the Company adopted the provisions of SFAS 109 which requires a liability approach for measuring deferred tax assets and liabilities based on differences between the financial statement and tax bases of assets and liabilities at each balance sheet date using enacted tax rates in effect when those differences are expected to reverse. As a result, the Company recorded a cumulative adjustment of $52 million. Prior years' financial statements were not restated. In conjunction with the public sale in 1987 of the 85% of the Company's common stock owned by the U.S. Government, federal legislation was enacted which resulted in a reduction of the tax basis of certain of the Company's assets, particularly property and equipment, thereby substantially decreasing tax depreciation deductions and increasing future federal income tax payments. Also, net operating loss and investment tax credit carryforwards were cancelled. As a result of the sale-related transactions, a special income tax obligation was recorded in 1987 based on an estimated effective federal and state income tax rate of 37.0%. As a result of the increase in the federal corporate income tax rate from 34% to 35% enacted August 10, 1993, and effective January 1, 1993, income tax expense for 1993 was increased by $38 million, of which $34 million related to the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase. 54 During 1993, the Company reached a settlement with the Internal Revenue Service ("IRS") related to the audit of the Company's consolidated federal income tax returns for the fiscal years 1987 through 1989. Under the settlement, the Company paid $51 million, including interest, all of which had been previously provided for in years prior to 1993. The Company's consolidated federal income tax returns for the fiscal years 1990 through 1992 are currently being examined by the IRS. Federal and state income tax payments were $80 million in 1994, $39 million in 1993 (excluding tax settlement) and $31 million in 1992. Significant components of the Company's special income tax obligation and deferred income tax liabilities and (assets) are as follows:
December 31, ----------------- 1994 1993 ------ ------- (In Millions) Current assets (primarily accounts receivable) $ (33) $ (23) Current liabilities (primarily accrued liabilities and casualty reserves) (175) (163) Tax benefits related to disposition of subsidiary (30) (30) Net operating loss carryforwards (11) (11) ------ ------ Current deferred tax asset, net $ (249) $ (227) ====== ====== Noncurrent liabilities: Property and equipment 1,923 1,875 Other long-term assets (primarily prepaid pension asset) 62 74 Miscellaneous 50 17 ------ ------ 2,035 1,966 ______ ______ Noncurrent assets: Nondeductible reserves and other liabilities (139) (125) Equipment obligations (12) (44) Tax benefit transfer receivable (38) (42) Alternative minimum tax credits (75) (77) Miscellaneous (55) (22) ------ ------ (319) (310) ------ ------ Special income tax obligation and deferred income tax liabilities, net $1,716 $1,656 ====== ======
55 The tax effects of each source of deferred income taxes and special income tax obligation for 1992 (disclosure for 1994 and 1993 is not required nor applicable under SFAS 109) are as follows: (In Millions) Deferred taxes Tax depreciation over book $ 84 Other property transactions 80 Casualty, wage and other accruals 78 Alternative minimum tax (40) Other 6 ---- $208 ==== Special income tax obligation Reduced tax basis depreciation (31) Other property transactions (27) ---- $(58) ==== As of December 31, 1994, the Company has approximately $75 million of alternative minimum tax credits available to offset future U.S. federal income taxes on an indefinite carryforward basis. Reconciliations of the U.S. statutory tax rates with the effective tax rates follow: 1994 1993 1992 ---- ---- ---- Statutory tax rate 35.0% 35.0% 34.0% State income taxes, net of federal benefit 3.9 5.1 3.9 Effect of federal tax increase on deferred taxes 7.7 Other .2 (1.0) .8 ---- ---- ---- Effective tax rate 39.1% 46.8% 38.7% ==== ==== ==== 8. Employee Benefits ----------------- Pension Plans ------------- The Company and certain subsidiaries maintain defined benefit pension plans which are noncontributory for all non-union employees and generally contributory for participating union employees. Benefits are based primarily on credited years of service and the level of compensation near retirement. Funding is based on the minimum amount required by the Employee Retirement Income Security Act of 1974. 56 Pension credits include the following components: 1994 1993 1992 ----- ----- -----
(In Millions) Service cost - benefits earned during the period $ 8 $ 8 $ 7 Interest cost on projected benefit obligation 48 46 45 Return on plan assets - actual (10) (124) (66) - deferred (77) 42 (13) Net amortization and deferral (15) (15) (15) ----- ----- ----- $ (46) $ (43) $ (42) ===== ===== =====
The funded status of the pension plans and the amounts reflected in the balance sheets are as follows: 1994 1993 ----- ------
Accumulated benefit obligation ($526 million and $532 million vested, respectively) $ 530 $ 537 ===== ====== Market value of plan assets 982 1,043 Projected benefit obligation (594) (632) Plan assets in excess of projected ----- ------ benefit obligation 388 411 Unrecognized prior service cost 44 43 Unrecognized transition net asset (139) (159) Unrecognized net gain (117) (101) ----- ------ Net prepaid pension cost $ 176 $ 194 ===== ======
The assumed weighted average discount rates used in 1994 and 1993 are 8.50% and 7.25%, respectively, and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation as of December 31, 1994 and 1993 is 6.0%. The expected long-term rate of return on plan assets (primarily equity securities) in 1994 and 1993 is 9.0%. Savings Plans ------------- The Company and certain subsidiaries provide 401(k) savings plans for union and non-union employees. Under the Non-union ESOP, 100% of employee contributions are matched in the form of ESOP Stock for the first 6% of a participating employee's base pay. There is no Company match provision under the union employee plan. Savings plan expense was $5 million in 1994 and 1993 and $4 million in 1992. In connection with the Non-union ESOP, the Company issued 9,979,562 of the authorized 10 million shares of its ESOP Stock to the Non- 57 union ESOP in exchange for a 20 year promissory note with interest at 9.55% from the Non-union ESOP in the principal amount of $288 million. In addition, unearned ESOP compensation of $288 million was recognized as a charge to stockholders' equity coincident with the Non-union ESOP's issuance of its $288 million promissory note to the Company. The debt of the Non-union ESOP was recorded by the Company and offset against the promissory note from the Non-union ESOP. Unearned ESOP compensation is charged to expense as shares of ESOP Stock are allocated to participants. The number of allocated ESOP shares outstanding at December 31, 1994 was approximately 1.5 million shares. An amount equivalent to the preferred dividends declared on the ESOP Stock partially offsets compensation and interest expense related to the Non-union ESOP. Effective October 1, 1994, the ESOP's promissory note to the Company was refinanced. As part of the refinancing, the interest rate was decreased to 8.0%, from the original 9.55%, and accrued interest of $21 million was capitalized as part of the principal balance of the promissory note. This refinancing will not have a material effect on the Company's financial statements. The Company is obligated to make dividend payments at a rate of 7.51% on the ESOP Stock and additional contributions in an aggregate amount sufficient to enable the Non-union ESOP to make the required interest and principal payments on its note to the Company. Interest expense incurred by the Non-union ESOP on its debt to the Company was $30 million in 1994, $29 million in 1993 and $28 million in 1992. Compensation expense related to the Non-union ESOP was $10 million in 1994 and 1993 and $9 million in 1992. Preferred dividends of $21 million were declared in 1994, of which $16 million were paid in 1994 and $5 million were paid in 1995. Preferred dividends declared and paid to the Non-union ESOP were $21 million in 1993 and 1992. The Company received debt service payments from the Non-union ESOP of $21 million in 1994, $26 million in 1993 and $21 million in 1992. Postretirement Benefits Other Than Pensions ------------------------------------------- The Company provides health and life insurance benefits to certain retired non-union employees. Certain non-union employees are eligible for retiree medical benefits, while substantially all non-union employees are eligible for retiree life insurance benefits. Generally, company-provided health care benefits terminate when individuals reach age 65. 58 Retiree life insurance plan assets consist of a retiree life insurance reserve held in the Company's group life insurance policy. There are no plan assets for the retiree health benefits plan. Effective January 1, 1993, the Company adopted SFAS 106, which requires that the cost of retiree benefits other than pensions be accrued during the period of employment rather than when benefits are paid. The Company elected the immediate recognition method allowed under the statement and accordingly recorded a cumulative, one-time charge of $22 million (net of tax benefits of $14 million). This accrual was in addition to the remaining balance of $21 million which had been accrued for postretirement health benefits for employees who participated in the Company's 1989 non-union voluntary retirement program. The following sets forth the plans' funded status reconciled with amounts reported in the Company's balance sheets:
1994 1993 ----------------- ----------------- Life Life Medical Insurance Medical Insurance Plan Plan Plan Plan ------- --------- ------- --------- (In Millions) Accumulated postretirement benefit obligation: Retirees $38 $15 $31 $16 Fully eligible active plan participants 3 1 9 1 Other active plan participants 1 4 2 6 --- --- --- --- Accumulated benefit obligation 42 20 42 23 Market value of plan assets (6) (6) --- --- --- --- Accumulated benefit obligation in excess of plan assets 42 14 42 17 Unrecognized gains and (losses) 1 3 (3) (2) --- --- --- --- Accrued benefit cost recognized in the Consolidated Balance Sheet $43 $17 $39 $15 === === === === Net periodic postretirement benefit cost, primarily interest cost $ 4 $ 1 $ 3 $ 1 === === === ===
An 11 percent rate of increase in per capita costs of covered health care benefits was assumed for 1995, gradually decreasing to 6 percent by the year 2008. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $5 million and would have an immaterial effect on the service cost and interest cost components of net periodic postretirement benefit cost for 1994. Discount rates of 8.5% and 7.0% were used to determine the accumulated postretirement benefit obligations for both the medical and life 59 insurance plans in 1994 and 1993, respectively. The assumed rate of compensation increase was 5.0% in both 1994 and 1993. Retiree medical benefits are funded by a combination of Company and retiree contributions. Retiree life insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. Prior to the adoption of SFAS 106, the cost of medical benefits provided by the Company as self-insurer was recognized as claims and administrative expenses were paid. The cost of retiree life insurance benefits was previously recognized as the annual insurance premium. The expense of providing both non-union retiree medical and life insurance benefits for 1992 was $5 million. 9. Capital Stock ------------- The Company is authorized to issue 25 million shares of preferred stock with no par value. The Board of Directors has the authority to divide the preferred stock into series and to determine the rights and preferencs of each. The Company cannot pay dividends on its common stock unless full cumulative dividends have been paid on its ESOP Stock, and no distributions can be made to the holders of common stock upon liquidation or dissolution of the Company unless the holders of the ESOP Stock have received a cash liquidation payment of $28.84375 per share, plus unpaid dividends up to the date of such payment. The ESOP Stock is convertible into an equivalent number of shares of common stock based on their respective market values at the date of conversion. The ESOP stock is entitled to one vote per share, voting together as a single class with common stock on all matters. In July 1993, the Company announced a third common stock repurchase program of up to $100 million. In December 1994, this program was completed at a total of 1,767,626 shares. On July 20, 1994, the Board of Directors authorized an additional $100 million stock repurchase program. At December 31, 1994, the Company had acquired 175,500 shares for approximately $9 million under this program. During 1993, the Company reclassified 4,787,579 shares of repurchased common stock (treasury stock) as authorized but unissued. 60 The activity and status of treasury stock follow: 1994 1993 1992 --------- ---------- --------- Shares, beginning of year 83,745 3,690,002 546,400 Acquired 1,705,419 1,181,322 3,143,602 Reclassified as authorized but unissued (4,787,579) --------- ---------- --------- Shares, end of year 1,789,164 83,745 3,690,002 ========= ========== ========= The Company's 1987 and 1991 Long-Term Incentive Plans authorize the granting to officers and key employees of up to 4 million and 3.2 million shares of common stock, respectively, through stock options, stock appreciation rights, and awards of restricted or performance shares. A stock option is exercisable for a specified term commencing after grant at a price not less than the fair market value of the stock on the date of grant. The vesting of awards made pursuant to these plans is contingent upon one or more of the following: continued employment, passage of time or financial and other performance goals. The Company has granted 283,664 shares of restricted stock under its incentive plans through December 31, 1994. 61 The activity and status of stock options under the incentive plans follow: Non-qualified Stock Options ---------------------------------
Option Price Shares Per Share Under Option ----------------- ------------ Balance, January 1, 1992 $14.000 - $36.595 2,165,680 Granted $42.625 - $45.125 1,383,600 Exercised $14.000 - $25.063 (674,652) Canceled $42.625 (3,750) --------- Balance, December 31, 1992 $14.000 - $45.125 2,870,878 Granted $49.375 - $60.500 73,027 Exercised $14.000 - $53.875 (928,822) Canceled $31.813 - $45.125 (48,762) --------- Balance, December 31, 1993 $14.000 - $60.500 1,966,321 Granted $52.188 - $66.938 23,988 Exercised $14.000 - $51.375 (507,450) Canceled $42.625 - $60.500 (118,904) --------- Balance, December 31, 1994 $14.000 - $66.938 1,363,955 ========= Exercisable, December 31, 1994 $14.000 - $53.875 740,974 ========= Available for future grants December 31, 1993 1,698,036 --------- December 31, 1994 1,678,293 ---------
In 1989, the Company declared a dividend of one common share purchase right (the "Right") on each outstanding share of common stock. The Rights are not exercisable or transferable apart from the common stock until the occurrence of certain events arising out of an actual or potential acquisition of 10% or more of the Company's common stock, and would at such time provide the holder with certain additional entitlements. If the Rights become exercisable, each Right will entitle stockholders to purchase one share of common stock at an exercise price of $105.00, as amended in 1994. At the Company's option, the Rights are redeemable prior to becoming exercisable at one-half cent ($.005) per Right. The Rights expire in July 1999 and do not have any voting privileges or rights to receive dividends. 62 10.Disposition of Subsidiary ------------------------- In 1993, the Company committed to a plan for the disposition of its investment in Concord Resources Group, Inc. ("Concord"). Pursuant to this plan, the Company recorded the estimated loss of $80 million in 1993 for the disposition of its investment, including $19 million for operating losses expected to be incurred during the phase-out period and disposition costs. The Company also recorded estimated federal tax benefits of $30 million relating to the disposition. 11.Other Income, Net ----------------- 1994 1993 1992 ---- ---- ---- (In Millions) Interest income $ 34 $ 39 $ 40 Rental income 53 56 60 Property sales 18 20 6 Other, net 13 (1) (8) ---- ---- ---- $118 $114 $ 98 ==== ==== ====
12.Commitments and Contingencies ----------------------------- Environmental ------------- The Company is subject to various federal, state and local laws and regulations regarding environmental matters. CRC is a party to various proceedings brought by both regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. At December 31, 1994, CRC has received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 128 locations. However, based on currently available information, the Company believes CRC may have some potential responsibility at only 53 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of possible remediation alternatives, the changing technology and the length of time over which these matters develop, it is often not possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. Although the Company's operating results and liquidity could be significantly affected in any quarterly or annual reporting period if CRC were held principally liable in certain of these actions, at December 31, 1994, the Company had accrued $74 million, an amount it believes is sufficient to cover the probable liability and remediation costs that 63 will be incurred at Superfund sites and other sites based on known information and using various estimating techniques. The Company believes the ultimate liability for these matters will not materially affect its consolidated financial condition. The Company spent $8 million in 1994 and $7 million in each of 1993 and 1992 for environmental remediation and anticipates spending in 1995, an amount comparable to that spent in each of the last three years. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $5 million in 1994 and $2 million in 1993, and are anticipated to be approximately $9 million in 1995. The Environmental Quality Department of the Company is charged with promoting the Company's compliance with laws and regulations affecting the environment and instituting environmentally sound operating practices. The department monitors the status of the sites where the Company is alleged to have liability and continually reviews the information available and assesses the adequacy of the recorded liability. Other ----- The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties, property damage and loss and damage. The Company has recorded liabilities on its balance sheet for amounts sufficient to cover the expected payments for such actions. At December 31, 1993, these liabilities are presented net of estimated insurance recoveries of approximately $80 million. At December 31, 1994, estimated insurance recoveries are included in "Other assets." Conrail may be contingently liable for approximately $88 million at December 31, 1994 under indemnification provisions related to sales of tax benefits. In October 1994, Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest, issued approximately $96 million of Equipment Trust Certificates to fund 100% of the purchase price of 60 new locomotives. While the principal and interest payments on the certificates will be fully guaranteed by CRC, through a sharing agreement with its partner, CRC's portion of the guarantee was reduced to approximately $80 million. 64 13.Condensed Quarterly Data (Unaudited) ------------------------------------ First Second Third Fourth ------------- ------------- ------------ ------------ 1994 1993 1994 1993 1994 1993 1994 1993 ---- ---- ---- ---- ---- ---- ---- ----
($ In Millions Except Per Share) Revenues $847 $816 $951 $873 $949 $854 $986 $910 Income (loss) from operations (32) 85 189 158 194 156 255 192 Income (loss) before the cumulative effect of changes in accounting principles (32) 46 101 85 106 (3) 149 106 Net income (loss) (32) (28) 101 85 106 (3) 149 106 Income per common share before the cumulative effect of changes in accounting principles: Primary (.45) .52 1.24 1.01 1.29 (.07) 1.84 1.27 Fully diluted (.45) .52 1.12 .92 1.17 (.07) 1.66 1.16 Net income (loss) per common share: Primary (.45) (.39) 1.24 1.01 1.29 (.07) 1.84 1.27 Fully diluted (.45) (.39) 1.12 .92 1.17 (.07) 1.66 1.16 Ratio of earnings to fixed charges - 2.25x 3.84x 3.65x 4.04x 2.02x 4.61x 3.86x Dividends per common share .325 .275 .325 .275 .375 .325 .375 .325 Market prices per common share (New York Stock Exchange) High 69 1/4 60 1/2 59 1/8 59 7/8 58 1/8 59 3/8 55 1/4 67 1/2 Low 56 1/2 47 1/2 50 3/8 50 48 3/8 49 48 1/8 57 1/8
During the first quarter of 1994, the Company recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary retirement program and related costs (Note 3). Without this one-time charge, the Company's net income per common share for the quarter would have been $.20, primary and $.19, fully diluted. After this one-time charge, earnings were insufficient by $56 million to cover fixed charges for the quarter. Effective January 1, 1993, the Company adopted SFAS 106 and SFAS 109, related to the accounting for postretirement benefits other than pensions and for income taxes, respectively. As a result, the Company recorded cumulative after tax charges totalling $74 million ($.91 per share, primary and fully diluted) in the first quarter of 1993 (Notes 1, 7 and 8). During the third quarter of 1993, the Company recorded an estimated loss for the disposition of its investment in its subsidiary, Concord (Note 10). As a result, net income for the quarter was reduced by $50 million. Also, as a result of the increase in the federal corporate 65 income tax rate enacted August 10, 1993 and effective January 1, 1993, income tax expense for the third quarter of 1993 includes a charge of $36 million, primarily related to the adjustment of deferred taxes and the special income tax obligation as required by SFAS 109 (Note 7). Without these two charges, net income per common share for the third quarter of 1993 would have been $1.00 on a primary basis and $.91 on a fully diluted basis. 66 Item 9. Changes in and Disagreements with Accountants - ------ --------------------------------------------- on Accounting and Financial Disclosure. -------------------------------------- Previously reported in Conrail's Current Report on Form 8-K, filed February 18, 1994. 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. --------------------- and Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- In accordance with General Instruction G(3), the information called for by Part III is incorporated herein by reference from Conrail's definitive Proxy Statement for the Conrail Annual Meeting of Shareholders to be held on May 17, 1995, which definitive Proxy Statement will be filed with the Commission pursuant to Regulation 14A. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I under "Executive Officers of the Registrant." 67 PART IV Item 14. Exhibits, Financial Statement - ------- ----------------------------- Schedules, and Reports on Form 8-K. ---------------------------------- (a) The following documents are filed as a part of this report: 1. Financial Statements: Page ---- Reports of Independent Accountants...................... 41 Consolidated Statements of Income for each of the three years in the period ended December 31, 1994.. 43 Consolidated Balance Sheets at December 31, 1994 and 1993 .......................................... 44 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1994..................... 45 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1994 ............................... 46 Notes to Consolidated Financial Statements.............. 47 2. Financial Statement Schedules: The following financial statement schedules should be read in connection with the financial statements listed in Item 14(a)1 above. Index to Financial Statement Schedules -------------------------------------- Page ---- Schedule I - Valuation and Qualifying Accounts... S-1 Schedules other than those listed above are omitted for reasons that they are not required, are not applicable, or the information is included in the financial statements or related notes. 68 3. Exhibits: Exhibit No. ---------- 2. Agreement and Plan of Merger among Consolidated Rail Corporation, Conrail Inc. and Conrail Subsidiary Corporation dated as of February 17, 1993, filed as Appendix A to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 3.1 Articles of Incorporation of the Registrant filed as Appendix B to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 3.2 Bylaws of the Registrant. 4.1 Articles of Incorporation of the Registrant filed as Appendix B to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 4.2 Form of Certificate of Common Stock, par value $1.00 per share, of the Registrant, filed as Exhibit 3.4(i)(c) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.3 Form of Certificate of Series A ESOP Convertible Junior Preferred Stock, no par value, of the Registrant filed as Exhibit 3.4(i)(d) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.4 Rights Agreement dated as of July 19, 1989, between Consolidated Rail Corporation and First Chicago Trust Company of New York, together with Form of Right Certificate and Summary of Rights to Purchase Common Shares as exhibits thereto, filed as Exhibit 1 to Consolidated Rail Corporation's Form 8-K dated July 31, 1989 and incorporated herein by reference. 4.5 Amendment to Rights Agreement dated as of March 21, 1990, filed as Exhibit 4.5 to Consolidated Rail Corporation's Report on Form 8-K dated March 27, 1990 and incorporated herein by reference. 69 4.6 Amendment, Assignment and Assumption Agreement, dated as of February 17, 1993, with respect to the Rights Agreement, filed as Exhibit 3.4(i)(g) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.7 Amendment to Rights Agreement dated as of October 19, 1994 filed as Exhibit 4.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. 4.8 Form of Indenture between Consolidated Rail Corporation and The First National Bank of Chicago, as Trustee, with respect to the issuance of up to $1.25 billion aggregate principal amount of Consolidated Rail Corporation's debt securities, filed as Exhibit 4 to Consolidated Rail Corporation's Registration Statement on Form S-3 (Registration No. 33- 34040) and incorporated herein by reference. In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of instruments of the Registrant and its subsidiaries with respect to the rights of holders of certain long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10.1 Second Amended and Restated Northeast Corridor Freight Operating Agreement dated October 1, 1986 between National Railroad Passenger Corporation and Consolidated Rail Corporation, filed as Exhibit 10.1 to Consolidated Rail Corporation's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.2 Letter agreements dated September 30, 1982 and July 19, 1986 between Consolidated Rail Corporation and The Penn Central Corporation, filed as Exhibit 10.5 to Consolidated Rail Corporation's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.3 Letter agreement dated March 16, 1988 between Consolidated Rail Corporation and Penn Central Corporation relating to hearing loss litigation, filed as Exhibit 19.1 to Consolidated Rail Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988 and incorporated herein by reference. 70 Management Compensation Plans and Contracts ------------------------------------------- 10.4 Consolidated Rail Corporation Annual Profit Incentive Plan for 1991, filed as Exhibit 10.6 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10.5 Consolidated Rail Corporation 1992 Annual Performance Achievement Reward Plan, filed as Exhibit 10.6 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.6 Consolidated Rail Corporation 1993 Annual Performance Achievement Reward Plan, filed as Exhibit 3.10(v) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 10.7 Consolidated Rail Corporation 1994 Annual Performance Achievement Reward Plan for Officers. 10.8 Retirement Plan for Non-employee Directors, as amended February 21, 1990, filed as Exhibit 10.10 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and included herein by reference. 10.9 Conrail 1987 Long-Term Incentive Plan, filed as Exhibit 4.4 to Consolidated Rail Corporation's Registration Statement on Form S-8 (Registration No. 33-19155) and incorporated herein by reference. 10.10 Conrail 1991 Long-Term Incentive Plan, filed as Exhibit 4.8 to Consolidated Rail Corporation's Registration Statement on Form S-8 (Registration No. 33-44140) and incorporated herein by reference. 10.11 Employment Agreement between James A. Hagen and Consolidated Rail Corporation, dated as of April 3, 1989, filed as Exhibit 10.11 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. 10.12 Agreement for Supplemental Employee Retirement Plan between James A. Hagen and Consolidated Rail Corporation, dated as 71 of January 17, 1990, filed as Exhibit 10.12 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. 10.13 Form of Continuation Agreement between Consolidated Rail Corporation and each of its officers other than James A. Hagen, dated as of January 15, 1990, filed as Exhibit 10.14 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. 11 Statement of earnings per share computations. 12 Computation of the ratio of earnings to fixed charges. 21 Subsidiaries of the Registrant, filed as Exhibit 21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 23.1 Consent of Independent Accountants. 23.2 Consent of Independent Accountants. 24 Each of the officers and directors signing this Annual Report on Form 10-K has signed a power of attorney, contained on page 74 hereof, with respect to amendments to this Annual Report. 27 Financial Data Schedule. (b) Reports on Form 8-K. Current Report on Form 8-K dated December 31, 1994, filed in connection with Consolidated Rail Corporation's issuance of $29,738,000 of 8.45% 1994-A Pass-Through Trust Certificates Due 2014 pursuant to its current Registration Statement on Form S-3 (No. 33- 64670). 72 (c) Exhibits. -------- The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by reference. (d) Financial Statement Schedules. ----------------------------- Financial statement schedules and separate financial statements specified by this Item are included in Item 14(a)2 or are otherwise omitted for reasons that they are not required or are not applicable. 73 POWER OF ATTORNEY ----------------- Each person whose signature appears below under "SIGNATURES" hereby authorizes H. William Brown and Bruce B. Wilson, or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints H. William Brown and Bruce B. Wilson, or either of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file any and all amendments to this report. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act 1934, Conrail Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONRAIL INC. Date: March 15, 1995 By /S/ James A. Hagen ------------------------ James A. Hagen Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 15th day of March, 1994, by the following persons on behalf of Conrail Inc. and in the capacities indicated. Signature Title /s/ James A. Hagen - --------------------------- Chairman and Chief Executive James A. Hagen Officer and Director (Principal Executive Officer) /s/ H. William Brown - --------------------------- Senior Vice President - Finance H. William Brown and Administration (Principal Financial Officer) /s/ Donald W. Mattson - --------------------------- Vice President - Controller Donald W. Mattson (Principal Accounting Officer) 74 /s/ H. Furlong Baldwin - --------------------------- Director H. Furlong Baldwin /s/ Claude S. Brinegar - --------------------------- Director Claude S. Brinegar - --------------------------- Director Daniel B. Burke /s/ Kathleen Foley Feldstein - ---------------------------- Director Kathleen Foley Feldstein /s/ Roger S. Hillas - --------------------------- Director Roger S. Hillas /s/ E. Bradley Jones - --------------------------- Director E. Bradley Jones /s/ David M. LeVan - --------------------------- Director David M. LeVan /s/ David B. Lewis - --------------------------- Director David B. Lewis /s/ John C. Marous - --------------------------- Director John C. Marous /s/ Raymond T. Schuler - --------------------------- Director Raymond T. Schuler - --------------------------- Director David H. Swanson 75 E-1 EXHIBIT INDEX Exhibit No. - ---------- 3.2 Bylaws of the Registrant 10.7 Consolidated Rail Corporation 1994 Annual Performance Achievement Reward Plan for Officers 11 Statement of earnings per share computations 12 Computation of the ratio of earnings to fixed charges 23.1 Consent of Independent Accountants 23.2 Consent of Independent Accountants 27 Financial Data Schedule Exhibits 2, 3.1, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13 and 21 are incorporated herein by reference. Powers of attorney with respect to amendments to this Annual Report are contained on page 74. EX-3 2 EXHIBIT 3.2 CONRAIL INC. AMENDED BY-LAWS Exhibit 3.2 CONRAIL INC. A PENNSYLVANIA CORPORATION AMENDED AND RESTATED BYLAWS ARTICLE I OFFICES Section 1.1. Registered Office. The registered office ----------------- of Conrail Inc. (the "Corporation") in the Commonwealth of Pennsylvania shall be at Two Commerce Square, 2001 Market Street, Philadelphia, Pennsylvania 19101 or at such other place as the Board of Directors of the Corporation (the "Board") may specify in a statement of change of registered office filed with the Department of State of the Commonwealth of Pennsylvania. Section 1.2. Other Offices. The Corporation may also ------------- have an office or offices at such other place or places either within or without the Commonwealth of Pennsylvania as the Board may from time to time determine or the business of the Corporation requires. ARTICLE II MEETINGS OF THE SHAREHOLDERS Section 2.1. Place. All meetings of the shareholders ----- shall be held at such places, either within or without the Commonwealth of Pennsylvania, as the Board may from time to time determine. Shareholders are not permitted to act without a meeting. Section 2.2. Annual Meeting. A meeting of the --------------- shareholders for the election of directors and the transaction of such other business as may be properly brought before the meeting shall be held on the third Wednesday in April in each calendar year or, if that be a legal holiday, on the first day thereafter that is not a legal holiday, or on such other date as the Board shall designate. If the annual meeting is not called and held within six months after the third Wednesday in April, or such other date as the Board has designated in any specific year, any shareholder may call a meeting of shareholders for the election of directors at any time after the expiration of the six-month period commencing on the third Wednesday in April, or such designated date, as the case may be. Elections of directors, whether at annual meetings or special meetings, need not be by written ballot, except upon demand by a shareholder entitled to vote at the election and before the voting begins. Section 2.3. Special meetings. Special meetings of ---------------- the shareholders, for any purpose or purposes, may be called at any time by the Chief Executive Officer of the Corporation or by the Board, upon written request delivered to the Secretary of the Corporation. In addition, an "interested shareholder" (as defined in Section 2553 of the Pennsylvania Business Corporation Law of 1988 as it may from time to time be amended (the "1988 BCL")) may, upon written request delivered to the Secretary of the Corporation, call a special meeting for the purposes of approving a business combination under either subsection (3) or (4) of Section 2555 of the 1988 BCL. Any request for a special meeting of shareholders shall state the general nature of the business to be transacted at the meeting. Upon receipt of any such request, it shall be the duty of the Secretary of the Corporation to give notice, in a manner consistent with Section 2.5 of these Bylaws, of a special meeting of the shareholders to be held at such time as the Secretary of the Corporation may fix, which time may not be, in the case of a special meeting of shareholders called pursuant to a statutory right, more than sixty (60) days after receipt by the Secretary of the Corporation of such request. If the Secretary of the Corporation shall neglect or refuse to fix the time of the meeting and give notice thereof, the person or persons calling the meeting may do so. -2- Section 2.4. Scope of Special Meetings. Business -------------------------- transacted at any special meeting shall be confined to the business stated in the notice. Section 2.5. Notice. Written notice of any meeting of ------ the shareholders, stating the place, the date and hour thereof and the matters to be voted on at such meeting, shall be give in a manner consistent with the applicable provisions of Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any successor act or regulation (the "Exchange Act"), by, or at the direction of, the Secretary of the Corporation or, in the absence of the Secretary of the Corporation, any Assistant Secretary of the Corporation, at least twenty (20) days before the date named for such meeting, to each shareholder entitled to vote thereat on the date fixed as a record date in accordance with Section 7.1 of these Bylaws, or if no record date be fixed, then of record thirty (30) days next preceding the date of the meeting, at such address as appears on the transfer books of the Corporation. Any notice of any meeting of shareholders shall state that, for purposes of any meeting that has been previously adjourned for one or more periods aggregating at least fifteen (15) days because of an absence of a quorum, the shareholders entitled to vote who attend such a meeting, although less than a quorum pursuant to Section 2.6 of these Bylaws, shall nevertheless constitute a quorum for the purposes of acting upon any matter set forth in the original notice of the meeting which was so adjourned. Section 2.6. Quorum. The shareholders present in ------ person or by proxy, entitled to cast a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting, shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the Corporation owned by it, directly or indirectly, and controlled by the Board of Directors, directly or indirectly, shall not be counted in determining the total number of outstanding shares for -3- quorum purposes. The shareholders present in person or by proxy at a duly organized meeting of shareholders can continue to conduct the business of the meeting until the adjournment thereof, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting of shareholders cannot be organized because a quorum has not attended, the shareholders present in person or by proxy may, except as otherwise provided by the 1988 BCL and subject to the provisions of Section 2.7 of these Bylaws, adjourn the meeting to such time and place as they may determine. Section 2.7. Adjournment. Any meeting of the ----------- shareholders, including one at which directors are to be elected, may be adjourned for such period as the shareholders present in person or by proxy and entitled to vote shall direct. Unless otherwise provided in a bylaw adopted by the shareholders, the shareholders entitled to vote present in person or by proxy, although less than a quorum pursuant to Section 2.6 of these Bylaws, shall nevertheless constitute a quorum for the purpose of (i) electing directors at a meeting called for the election of directors that has been previously adjourned for lack of a quorum, and (ii) acting, at a meeting that has been previously adjourned for one or more periods aggregating at least fifteen (15) days because of an absence of a quorum, upon any matter set forth in the original notice of the meeting that was adjourned, provided that such original notice shall have complied with the last sentence of Section 2.5 of these Bylaws. Other than as provided in the last sentence of Section 2.5 of these Bylaws, no notice of any adjourned meeting or the business to be conducted threat need be give other than an announcement at the meeting at which the adjournment is taken, unless the Board fixes a new record date for the adjourned meeting. At any adjourned meeting at which a quorum shall be present, any business may be transacted that might have been transacted at the meeting as originally noticed. -4- Section 2.8. Majority Vote. Any matter brought before ------------- a duly organized meeting of shareholders for a vote of the shareholders shall be decided by a majority of the votes cast at such meeting by the shareholders present in person or by proxy and entitled to vote thereon, unless the matter is one for which a different vote is required by express provision of (i) the 1988 BCL, (ii) the Amended and Restated Articles of Incorporation of the Corporation as they may from time to time be amended (the "Articles") or (iii) a bylaw adopted by the shareholders, in any of which cases such express provision shall govern and control the decision on such matter. Section 2.9. Voting Rights. Except as otherwise ------------- provided by statute or the Articles, at every meeting of the shareholders every shareholder entitled to vote shall have the right to one vote for each share having voting power standing in his name on the books of the Corporation. Section 2.10. Proxies. Every shareholder entitled to ------- vote at a meeting of the shareholders may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder, or by the shareholder's duly authorized attorney-in-fact, and filed with the Secretary of the Corporation. The presence of, or vote or other action at a meeting of shareholders by a proxy of, a shareholder shall constitute the presence of, or vote or action by the shareholder. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Corporation. No unrevoked proxy shall be valid after three (3) years from the date of its execution, unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is given to the Secretary of the Corporation. -5- Section 2.11. Voting Lists. The officer or agent ------------ having charge of the transfer books for securities of the Corporation shall either (i) make a complete list of the shareholders entitled to vote at each meeting of shareholders, arranged in alphabetical order, with the address of, and the number of shares of stock held by, each shareholder, which list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting, or (ii) otherwise make such information available at the meeting. Section 2.12. Judges of Election. In advance of any ------------------ meeting of the shareholders, the Board may appoint judges of election, who need not be shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of judges shall be one or three, as determined by the Board. No person who is a candidate for office shall act as a judge. The judges of election shall do all such acts as may be proper to conduct the election or vote with fairness to all shareholders, and shall make a written report of any matter determined by them and execute a certificate of any fact found by them, if requested by the presiding officer of the meeting or any shareholder of the proxy of any shareholder. If there be three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. Section 2.13. No Participation by Conference Call. No ----------------------------------- shareholder may participate in any meeting of shareholders by means of conference telephone or similar communications equipment. Section 2.14. Presiding Officer. At each meeting of ----------------- the shareholders, the Chairman of the Board, or, in his absence, his designee, or, in their absence, a presiding officer chosen by a majority of the votes cast by the shareholders present in person -6- or by proxy and entitled to vote at such meeting, shall act as presiding officer of the meeting and shall have plenary power in conducting the meeting with regard to setting an agenda, keeping order, limiting debate and prescribing such rules of the meeting as from time to time are useful and proper. The Secretary or an Assistant Secretary of the Corporation, or, in the absence of the Secretary and all Assistant Secretaries, a person whom the presiding officer of such meeting shall appoint, shall act as secretary of the meeting and keep the minutes thereof. -7- ARTICLE III DIRECTORS Section 3.1. Number of Directors and Classification of Board. ----------------------------------------------- The Board shall consist of thirteen members. Except as provided in Section 3.4 of these Bylaws in the case of vacancies, directors shall be elected by the shareholders. The directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, one of which shall consist of five members and two of which shall consist of four members each. Each class of directors shall serve for a term of three years, which terms shall commence in three consecutive years. At each annual meeting of the shareholders the successors to the class of directors whose term expires that year shall be elected to hold office for the term of three years and until his successor is elected and qualified or until his earlier death, resignation or removal, so that the term of office of one class of directors shall expire in each year. If at any meeting of shareholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. Section 3.2. Qualifications. Directors shall be -------------- natural persons of full age and need not be residents of the Commonwealth of Pennsylvania or security holders of the Corporation. Section 3.3. Nominations of Directors. Nominees for ------------------------ election to the Board shall be selected by the Board or a committee of the Board to which the Board has delegated the authority to make such selections pursuant to Section 3.12 of these Bylaws. The Board or such committee, as the case may be, will consider written recommendations from shareholders for nominees for election to the Board provided any such recommendation, together with (i) such information regarding each nominee as would be required to be included in a proxy statement filed pursuant to the Exchange Act, (ii) a description of all -8- arrangement or understandings among the recommending shareholder and each nominee and any other person with respect to such nomination, and (iii) the consent of each nominee to serve as a director of the Corporation if so elected, is received by the Secretary of the Corporation by, in the case of an annual meeting of shareholders, not later than the date specified in the most recent proxy statement of the Corporation as the date by which shareholder proposals for consideration at the next annual meeting of shareholders must be received, and, in the case of a special meeting of shareholders, not later than the tenth day after the giving of notice of such meeting. Only persons duly nominated for election to the Board in accordance with this Section 3.3 and persons with respect to whose nominations proxies have been solicited pursuant to a proxy statement filed pursuant to the Exchange Act shall be eligible for election to the Board. Section 3.4. Vacancies. Vacancies in the Board shall --------- be filled by a majority of the remaining members of the Board though less than a quorum, and each director so elected shall serve until the next selection of the class for which such director was chosen, and until a successor has been selected and qualified or until such director's earlier death, resignation or removal. If one or more directors resign from the Board effective at a future date, the directors then in office, including those who have so resigned, shall have the power to fill the vacancies by a majority vote, such vote to take effect when the resignations become effective. Section 3.5. Powers. The business and affairs of the ------ Corporation shall be managed under the direction of the Board which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles or by these Bylaws directed or required to be exercised and done by the shareholders. Section 3.6. Place of meetings. Meetings of the Board ----------------- may be held at such places within or without the Commonwealth of -9- Pennsylvania as, in the case of a regular meeting, the Board may from time to time designate, or, in the case of a special meeting, as may be designated in the notice calling the meeting. Section 3.7. First Meeting of Newly Elected Board. ------------------------------------- The first meeting of each newly elected Board shall be held as soon as practicable after the meeting of shareholders at which such directors were elected, and if held on the day and at the place where the annual meeting of the shareholders was held, no notice shall be required other than announcement at the annual meeting of shareholders. If such first meeting of the newly- elected Board is not so held, notice of such meeting shall be given in the same manner as set forth in Section 3.8 of these Bylaws with respect to notice of regular meetings of the Board. Section 3.8. Regular Meetings of the Board. Regular ----------------------------- meetings of the Board may be held at such times and places as shall be determined from time to time by resolution of at least a majority of the whole Board at a duly convened meeting, or by unanimous written consent. Notice of each regular meeting of the Board shall specify the date, place and hour of the meeting, as well as the general nature of the business to be conducted at the meeting, and shall be given to each director, to his or her address or telex, TWX, telecopier or telephone number as supplied by such director to the Corporation for the purpose of notice, at least twenty-four (24) hours before the meeting if given personally or by telephone, telex, TWX (with answer back received) or telecopier, at least forty-eight (48) hours before the meeting if given by telegram (with messenger service specified), express mail (postage prepaid) or courier service (charges prepaid), and at least five (5) days before the meeting if given by first class mail (postage prepaid). If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person, or, in the case of telex or TWX, when dispatched. -10- Section 3.9. Special Meetings of the Board. Special ----------------------------- meetings of the Board may be called by the Chief Executive Officer, and shall be called by the Chief Executive Officer or by the Secretary on the written request of two directors. Notice of the date, place and hour of each special meeting of the Board shall be given within the same time and in the same manner provided for notice of regular meetings in Section 3.8 of these Bylaws, and shall also specify the general nature of the business to be conducted at such meeting. Section 3.10. Quorum of the Board. At all meetings of ------------------- the Board the presence of a majority of the directors in office shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present at the meeting at which a quorum is present shall be the acts of the Board. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting. It shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken. Section 3.11. Organization. The Secretary, or in his ------------ absence, an Assistant Secretary of the Corporation, or in the absence of the Secretary and all Assistant Secretaries, a person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. Section 3.12. Committees of Directors. The Board may, ----------------------- by resolution adopted by a majority of the directors in office, establish one or more committees, each committee to consist of three or more of the directors, and may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. Any such committee, to the extent provided in such resolution or in these Bylaws, shall have and may exercise all of the powers and authority of the Board; provided that no such committee shall have any power or authority to (i) submit to the shareholders any -11- action requiring the approval of shareholders under the 1988 BCL, (ii) create or fill vacancies on the Board, (iii) adopt, amend or repeal Bylaws, (iv) amend or repeal any resolution of the Board that by its terms in amendable or repealable only by the Board, (v) act on any matter committed by these Bylaws or resolution of the Board to another committee of the Board, (vi) adopt a plan or an agreement of merger or consolidation, or (vii) amend the Articles or adopt a resolution proposing an amendment to the Articles. In the absence or disqualification of a member or alternate member or members of a committee, the member or members thereof present at any meeting of such committee and not disqualified from voting, whether or not a quorum is present, may unanimously appoint another director to act at the meeting in place of any absent or disqualified member. Minutes of all meetings of any committee of the Board shall be kept by the person designated by such committee to keep such minutes. Copies of such minutes and any writing setting forth an action taken by written consent without a meeting shall be distributed to each member of the Board promptly after such meeting is held or such action is taken. Each committee of the Board shall serve at the pleasure of the Board. Section 3.13. Audit Committee. The Board shall ---------------- designate an Audit Committee, consisting of three of more directors, each of whom shall be independent of management and free from any relationship that would interfere with the exercise of independent judgment as a committee member. It shall be the responsibility of the Audit Committee to evaluate for, and recommend to, the Board, as appropriate, the selection of the Corporation's independent auditors, the scope of the audits to be conducted, and the purpose and adequacy of reserves; to monitor and make recommendations in respect to the internal audit program; and to review significant accounting policies, including any major changes to those policies. -12- Section 3.14. Ethics Committee. The Board shall ---------------- designate an Ethics Committee, consisting of three or more members, each of whom shall be independent of management and free from any relationship that would interfere with the independent judgment as a committee member. It shall be the responsibility of the Ethics Committee to review, and recommend to the Board, as appropriate, matters relating to the business conduct of the corporation and its employees and other matters of public interest, including environmental quality, safety and equal employment. Section 3.15. Nominating Committee. The Board shall -------------------- designate a Nominating Committee consisting of three or more members, each of whom shall be independent of management and free from any relationship that would interfere with the independent judgment as a committee member. It shall be the responsibility of the Nominating Committee to recommend to the Board of Directors, without regard to sex, race, religion or national origin, individuals to be nominated for election to the Board of Directors, including the position of Chairman, President, and Chief Executive Officer; to periodically review Board procedures, making such recommendations to the Board as may be appropriate, and to provide for a process through which the performance of the Board of Directors and its members is reviewed and evaluated, reporting to the Board of Directors, as appropriate. Section 3.16. Compensation Committee. The Board shall ---------------------- designate a Compensation Committee, consisting of three or more members, each of whom shall be independent of management and free from any relationship that would interfere with the independent judgment as a committee member. It shall be the responsibility of the Compensation Committee to review matters relating to compensation policies and proposed significant changes in the structure of the organization and personnel and, as appropriate, make recommendations to the Board of Directors. Section 3.17. Finance Committee. The Board shall ----------------- designate a Finance Committee, consisting of five or more members. -13- It shall be the responsibility of the Finance Committee to review matters relating to the financial condition and performance of the Corporation, including the financial aspects of pension matters and, as appropriate, make recommendations to the Board of Directors, and to exercise, to the extent permitted by the law of Pennsylvania and the bylaws of the Corporation, the authority of the Board of Directors in the management of the business and the affairs of the Corporation on days other than those on which the Board of Directors meets and to report such actions to the Board of Directors. Section 3.18. Participation in Board Meetings by Telephone. -------------------------------------------- One or more directors may participate in a meeting of the Board or of a committee of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and all directors so participating shall be deemed present to the meeting. Section 3.19. Action by Written Consent of Directors. -------------------------------------- Any action which may be taken at a meeting of the Board or of the members of a committee of the Board may be taken without a meeting if, prior or subsequent to the action, a consent or consents in writing setting forth the action so taken shall be signed by all of the directors or the members of the committee, as the case may be, and filed with the Secretary of the Corporation. Section 3.20. Compensation of Directors. The Board of ------------------------- Directors may, by resolution, fix the compensation of directors for their services. A director may also serve the Corporation in any other capacity and receive compensation therefor. Section 3.21. Chairman of the Board. The Board shall --------------------- appoint a Chairman of the Board who shall, if present, preside at all meetings of the Board and at all meetings of the shareholders. -14- ARTICLE IV OFFICERS Section 4.1. Principal Officers. The principal ------------------- officers of the Corporation shall be chosen by the Board, and shall include a Chief Executive Officer, one or more Senior Vice Presidents, one or more Vice Presidents, a Secretary, and a Treasurer. The Board shall designate one officer (who need not be a principal officer but shall not be an assistant officer) to be the chief financial officer of the Corporation and another officer (who need not be a principal officer but shall not be an assistant officer) to be the chief accounting office of the Corporation. All officers shall be natural persons of full age. Any number of offices may be held by the same person. Section 4.2. Election of Principal Officers. The ------------------------------- Board, immediately after each annual meeting of the shareholders, shall elect the principal officers of the Corporation, each of whom shall hold office for a term of one year or such other term as the Board may provide, and until his successor has been elected and qualified or until his earlier death, resignation of removal. Each principal officer shall have such authority and perform such duties as the Board of Directors may from time to time determine. Section 4.3. Other Officers. The Corporation may have -------------- such other officers, assistant officers, agents and employees as the Board or the Chief Executive Officer may deem necessary, each of whom shall hold office for such period, have such authority and perform such duties as the Board or the Chief Executive Officer may from time to time determine. The Board may delegate to any principal officer the power to appoint or remove and set the compensation of any such other officers and any such agents or employees. Section 4.4. Compensation of Officers. Except as ------------------------ provided in Section 4.3 of these Bylaws, the salaries of all officers of the Corporation shall be fixed by the Board. Section 4.5. Removal of Officers. Any officer or ------------------- agent of the Corporation may be removed by the Board with or without cause, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Vacancies of -15- any office shall be filled by the Board. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4.6. Bonds. If required by the Board, any ----- officer shall give the Corporation a bond, in such sum and with such surety of sureties as may be satisfactory to the Board, for the faithful discharge of the duties of his or her office and for the restoration to the Corporation, in the case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. -16- ARTICLE V SHARE CERTIFICATES Section 5.1. Certificate for Shares. The certificates ---------------------- representing shares of the Corporation shall be numbered and registered in a share register as they are issued. The share register shall exhibit the names and addresses of all registered holders and the number and class of shares and the series, if any, held by each. The certificates shall state that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania, the name of the registered holder and the number and class of shares and the series, if any, represented thereby. If, under the Articles, the Corporation is authorized to issue shares of more than one class or series, each certificate shall set forth, or shall contain a statement that the Corporation will furnish to any shareholder upon request and without charge, a full or summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the Board to fix and determine such rights. Section 5.2. Execution. Every share certificate shall --------- be executed, by facsimile or otherwise, by or on behalf of the Corporation by the Chief Executive Officer or by any Senior Vice President or by the Secretary. In case any officer who has executed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, because of death, resignation or otherwise, before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the time of its issue. -17- ARTICLE VI SHARE TRANSFER Section 6.1. Transfer of Shares. Upon presentment to the ------------------ Corporation or its transfer agent of a share certificate duly endorsed by the appropriate person or accompanied by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate canceled and the transfer registered upon the books of the Corporation, unless the Corporation or its transfer agent has a duty to inquire as to adverse claims with respect to such transfer that has not been discharged or unless the Corporation or its transfer agent requests reasonable evidence of the rightfulness of the transfer and such evidence is not submitted. The Corporation shall have no duty to inquire into adverse claims with respect to transfers of its securities or the rightfulness thereof unless (a) the Corporation has received a written notification of an adverse claim at a time and in a manner that affords the Corporation a reasonable opportunity to act on it before the issuance of a new, reissued or re-registered share certificate and the notification identifies the claimant, the registered owner and the issue of which the share or shares are a part and provides an address for communications directed to the claimant; or (b) the Corporation has required and obtained, with respect to a fiduciary, a copy of a will, trust, indenture, articles of co-partnership, bylaws or other controlling instruments, for a purpose other than to obtain appropriate evidence of the appointment or incumbency of the fiduciary, and such documents indicate, upon reasonable inspection, the existence of an adverse claim. Section 6.2. Discharge of Duty of Inquiry. The -------------------------------- Corporation may discharge any duty of inquiry by any reasonable means, including notifying an adverse claimant by registered or certified mail at the address furnished by him or, if there is no such address, at the claimant's residence or regular place of business, that the security has been presented for registration of transfer by a named person, and that the transfer will be registered unless within thirty (30) days from the date of mailing the notification, either (a) an appropriate restraining order, -18- injunction or other process issues from a court of competent jurisdiction or (b) an indemnity bond, sufficient in the Corporation's judgment to protect the Corporation and any transfer agent, registrar or other agent of the Corporation involved from any loss that it or they may suffer by complying with the adverse claim, is filed with the Corporation. ARTICLE VII RECORD DATE; IDENTITY OF SHAREHOLDERS Section 7.1. Fixing Record Date. The Board may fix a ------------------ time, not more than ninety (90) days before the date of any meeting of the shareholders (other than an adjourned meeting) or the date set for any other purpose, including without limitation, the payment of any dividend or distribution, the allotment of rights, or any change or conversion or exchange of securities, as a record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of securities. Except as otherwise provided in Section 7.2 of these Bylaws, only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting or to receive payment of such dividend or distribution or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any securities on the books of the Corporation after any record date so fixed. When a determination of shareholders of record has been made as provided in this Section 7.1 for purposes of a meeting, the determination shall apply to any adjournment of such meeting unless the Board fixes a new record date for the adjourned meeting. Section 7.2. Certification of Nominee. The Board may ------------------------ adopt a procedure whereby a shareholder may certify in writing to the Secretary of the Corporation that all or a portion of the -19- shares registered in the name of the shareholder are held for the account of a specified person or persons. The Board, in adopting such procedure, may specify (i) the classification of shareholder who may certify, (ii) the purpose or purposes for which the certification may be made, (iii) the form of certification and the information to be contained therein, (iv) as to certifications with respect to a record date, the date after the record date by which the certification must be received by the Secretary of the Corporation, and (v) such other provisions with respect to the procedure as the Board deems necessary or desirable. Upon receipt by the Secretary of the Corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified instead of the person making the certification. ARTICLE VIII REGISTERED SHAREHOLDERS Section 8.1. Registered Shareholders. Before due ----------------------- presentment for transfer of any security, the Corporation shall treat the registered owner thereof as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, and shall not be bound to recognize any equitable or other claim or interest in such securities, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the Commonwealth of Pennsylvania or Section 7.2 of these Bylaws. -20- ARTICLE IX LOST CERTIFICATES Section 9.1. Lost Certificates. If the owner of a ----------------- share certificate claims that it has been lost, destroyed, or wrongfully taken, the Corporation shall issue a new certificate in place of the original certificate if the owner so requests before the Corporation has notice that the certificate has been acquired by a bona fide purchaser, and if the owner has filed with the Corporation an indemnity bond and an affidavit of the facts satisfactory to the Board or its designated agent, and has complied with such other reasonable requirements, if any, as the Board may deem appropriate. ARTICLE X DISTRIBUTIONS Section 10.1. Payment. Distributions upon the capital ------- stock of the Corporation, whether by dividend, purchase or redemption or other acquisition of its shares, together with stock dividends and stock splits, may be declared by the Board at any regular or special meeting of the Board, subject to the limitations set forth in Section 1551 of the 1988 BCL and may be paid in cash, in property, or in securities, including debt securities, of the Corporation except that stock dividends and stock splits may be paid only in the shares of the Corporation. Section 10.2. Reserves. Before the making of any -------- distributions with respect to the capital stock of the Corporation, there may be set aside out of any funds of the Corporation available for distributions such sum or sums as the Board from time to time, in its absolute discretion, deems proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board shall deem conducive to the interests of the Corporation, and the Board may abolish any such reserve in the manner in which it was created. -21- ARTICLE XI MISCELLANEOUS; LIABILITY AND INDEMNIFICATION Section 11.1. Checks and Notes. All checks or demands ---------------- for money and notes of the Corporation shall be signed by such officer or officers as the Board may from time to time designate. Section 11.2. Fiscal Year. The fiscal year of the ----------- Corporation shall be as determined by the Board. Section 11.3. Seal. The corporate seal shall have ---- inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Pennsylvania." Such seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. The affixation of the corporate seal shall not be necessary to the valid execution, assignment or endorsement of any instrument or other document by the Corporation. Section 11.4. Waiver of Notice. Whenever any notice is ---------------- required to be given by statute or by the Articles or by these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed the equivalent of the giving of such notice. The business to be transacted at the meeting shall be specified in the waiver of notice of such meeting. Attendance of any person entitled to notice, either in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where any person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 11.5. Continuing Applicability. The provisions ------------------------ of Sections 11.6, 11.7 and 11.8 of these Bylaws shall continue as to any person who has ceased to be a director, officer, other -22- employee or agent of the Corporation and shall inure to the benefit of the heirs and personal representatives of such person. Section 11.6. Director's Liability. A director of the -------------------- Corporation shall not be personally liable for monetary damages as such for any action taken, or any failure to take any action, unless (a) such director has breached or failed to perform the duties of his office under Section 8363 of Title 42 of Pennsylvania Consolidated Statutes, known as the Directors' Liability Act, and (b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness, or unless such liability is imposed pursuant to a criminal statute or for the payment of taxes. Section 11.7. Indemnification. The Corporation shall --------------- indemnify any director or officer and shall have the power by action of the Board of Directors to indemnify any employee or agent other than an officer of the Corporation with respect to any threatened, pending or completed action, suit or proceeding (including actions by or in right of the Corporation to procure a judgment in its favor) arising out of, or in connection with, any actual or alleged act or omission or the status of such indemnified person in his capacity as a director, officer, employee or agent of the Corporation or in his capacity as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, if requested to serve in such capacity by the Corporation, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred, unless the person's action or failure to act that gave rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Expenses incurred by any director or officer in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to be -23- indemnified by the Corporation. Expenses incurred by any employee or agent other than an officer in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon approval of the Board of Directors and receipt of an undertaking by or on behalf of such employee or agent to repay such amount if it shall ultimately be determined that such employee or agent is not entitled to be indemnified by the Corporation. The Corporation may purchase and maintain insurance or establish a separate fund for the purpose of satisfying its indemnification obligations. This Section 11.7 and Section 11.6 shall not apply to any actions filed prior to their adoption nor to any breach or failure of performance of duty by any director or officer occurring prior to their adoption. Section 11.8. Mandatory Indemnification. Without -------------------------- limiting the foregoing and applicable to any action filed at any time, with respect to any act, omission or circumstance, the Corporation shall indemnify any person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including actions by or in right of the Corporation to procure a judgment in its favor) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred, if such person has been successful on the merits or otherwise in any such action or upon a determination in the specific case that such indemnification is proper in the circumstances because he has met the applicable standard of conduct set forth in the 1988 BCL. The Corporation may purchase and maintain insurance for the purposes of indemnification on behalf of any or all persons to the full extent permitted under the 1988 BCL. -24- ARTICLE XII BYLAW AMENDMENTS Section 12.1. Amendments. These Bylaws may be altered, ---------- amended or repealed by a majority vote of the shareholders entitled to vote thereon at any regular or special meeting duly convened after notice to the shareholders of that purpose, or except for a bylaw on a subject expressly committed to the shareholders by the 1988 BCL, by a majority vote of the members of the Board at any regular or special meeting duly convened, subject always to the power of the shareholders to change such action by the directors. Any change in these Bylaws shall take effect when adopted, except as otherwise provided in the resolution effecting the change. -25- EX-10 3 EXH 10-7 1994 ANNUAL PERFORMANCE ACHIEVEMENT AWARD-OFFICERS EXHIBIT 10.7 ------------ CONSOLIDATED RAIL CORPORATION ANNUAL PERFORMANCE ACHIEVEMENT REWARD PLAN FOR 1994 FOR OFFICERS 1. Definitions ----------- When used in this document, the following terms shall have the meanings set forth below: Board means the Board of Directors of Conrail. ----- Conrail means the Consolidated Rail Corporation. ------- Operating Ratio means the percentage determined by --------------- dividing (a) operating expenses by (b) revenues, as shown on Conrail's consolidated financial statements. Participant means an officer of Conrail who participates ----------- in the Plan in accordance with Section 3. Plan means the Consolidated Rail Corporation Annual ---- Performance Achievement Reward Plan for 1994, as set forth in this document and as may be amended from time to time. Salary means the salary earned by a Participant in 1994 ------ from employment with Conrail. For purposes of this Plan, Salary shall include salary in the form of lump sum 1993 Selective Salary Increase payments received either in 1993 or 1994, salary earned pursuant to any holiday, vacation, or sick leave policy of Conrail, salary deferred pursuant to the Consolidated Rail Corporation Matched Savings Plan, and salary contributed pursuant to the Consolidated Rail Corporation Flexible Benefits Plan. Except as otherwise provided in the preceding sentence, Salary shall not include any amount payable pursuant to receipt of a Spot Award or a 1994 Selective Cash Award or to an employee benefit or incentive compensation plan. 2. Introduction ------------ The Board has approved the implementation of this Plan. The Board expects that the Plan will provide an incentive for enhanced individual and corporate performance and aid Conrail in attracting and retaining capable employees. 3. Eligibility ----------- Each officer of Conrail, who is employed during 1994, shall participate in the Plan. 4. Prerequisite for Award ---------------------- Anything in this Plan to the contrary notwithstanding, no award shall be payable under the Plan in the event actual operating income for 1994, as shown on Conrail's consolidated financial statements, is less than $520 million. 5. Amount of Award --------------- (a) Under the Plan, a Participant may earn an award equal to a percentage (or percentages) of his/her Salary. This award may consist of two parts, the Annual Performance Achievement Reward ("APAR") and the Annual Performance Achievement Reward Plus ("APAR Plus"). The percentage(s) shall depend upon the position held by the Participant and the performance of Conrail, measured by the relationship of (i) the Operating Ratio for 1994, as certified by Conrail's chief financial officer, after taking into account any amounts payable pursuant to the Plan that are not taken into account in the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan, to (ii) the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan. The percentage(s) shall be determined in accordance with one of three schedules. Conrail shall furnish each Participant with a copy of the schedule(s) of awards applicable to him/her. (b) A Participant's award shall be pro-rated, as provided in Section 8, in the event he/she participates in the Plan for less than all of 1994 or moves into a position cov- ered under a different schedule of awards. The Participant's award shall equal the sum of the partial awards computed by multiplying (i) the Salary earned by the Participant while covered under a schedule of awards, by (ii) the percentage of Salary determined in accordance with such schedule. (c) Anything to the contrary in this Section 5 not withstanding, a Participant's award may be reduced by up to 50 percent by Conrail's Chairman, President and Chief Executive Officer (or his delegate(s)) on the basis of individual or group performance. 6. Election to Defer Awards ------------------------ (a) Each Participant shall be entitled to elect irrevocably to defer, for a period of one, two, three, four, or five years, all or a portion of any APAR award payable to him/her pursuant to this Plan. The minimum deferral permitted is 10 percent and a deferral may be made in any percentage above this minimum. A Participant who so elects shall receive -2- his/her APAR award in the form of whole shares of Conrail Inc. restricted common stock, which shares shall be forfeited (except as otherwise provided in the Plan) in the event the Participant terminates employment with Conrail during the ap- plicable periods of deferral, as described in Section 7, and prior to the receipt of a certificate(s) for the shares. Such elections must be made no later than July 31, 1994, on forms provided by Conrail's Assistant Vice President-Compensation and Benefits for this purpose. (b) A Participant who elects to receive an APAR award in Conrail Inc. common stock shall be granted shares of such stock equal in value to the amount of his/her deferred award (the "Deferred Shares"), plus additional shares of such stock equal in value to 10 percent (10%) of his/her deferred award times the period of deferral selected, up to a maximum of fifty percent (50%) (the "Bonus Shares"). The number of shares so awarded shall be determined as of the date the non- deferred portions of awards are or would have been paid. (c) Deferred Shares and Bonus Shares shall be issued as restricted shares pursuant to the Consolidated Rail Corporation 1991 Long-Term Incentive Plan. Each such share shall entitle the Participant to the same dividend and voting rights as one share of Conrail Inc. common stock. (d) The APAR Plus award shall not be eligible for deferral. 7. Time and Form of Payments ------------------------- (a) In the case of a Participant who has made an election to defer, the certificates for the Participant's Deferred Shares and for the Participant's Bonus Shares, shall be paid or delivered to him/her, as soon as practicable after expiration of the deferral period chosen by the Participant. Any portion of an APAR award not deferred by a Participant shall be paid to him/her in cash during the first quarter of 1995. (b) In the case of a Participant who has made no election to defer, the Participant's award shall be paid to him/her in cash in a single installment during the first quarter of 1995. 8. Special Payment Rules --------------------- Anything in this Plan to the contrary notwithstanding, a Participant who is dismissed for cause prior to receipt of any portion of his/her award shall forfeit such portion of the award. A Participant who resigns from Conrail during 1994 shall receive a prorated portion of his/her APAR and APAR Plus awards. The amount of the prorated award shall be determined by applying a fraction to the Participant's salary determined up until his/her date of termination. The numerator of this fraction is the number of days of the year until the termination occurred and the denominator is 365, the number of days in the year. A Participant who resigns from Conrail after December 31, 1994, but before the date in the first quarter of 1995 on which payments are made under the Plan, shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his/her award, such election is void and the prorated or full award will be paid in cash in -3- the first quarter of 1995. If the Participant resigns during the deferral period the Participant forfeits both the Deferred and Bonus Shares. If a Participant who has elected to defer all or a portion of his/her APAR award in the form of Deferred and Bonus Shares retires with the right to an immediate pension under the Supplemental Pension Plan of Consolidated Rail Corpo- ration (the "Pension Plan") prior to receipt of any such shares, the restriction on such shares shall be lifted and the Participant shall receive all of the Deferred Shares representing the Participant's deferred APAR award. The matching or Bonus Shares shall be prorated on the basis of a fraction, the denominator of which shall be the number of days from the date of the award through the end of the elected deferral period and the numerator shall be the number of days from the date of the award through the last day of employment. This proration factor shall be multiplied by the number of Bonus Shares and the resulting number of Bonus Shares shall be distributed to the Participant. The balance of the Bonus Shares shall be forfeited on the last day of the Participant's employment. If during 1994, a Participant goes on a leave of absence, becomes disabled or dies, such Participant's award shall be prorated in the first quarter of 1995 on the basis of a fraction applied to the Participant's salary, the numerator of which is the number of days of the year until the event occurred and the denominator of which is 365, the number of days in the year. The amount of the award shall be paid in cash. A Participant who goes on a leave of absence after the end of 1994, but before payments under the Plan are made shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his or her APAR award, the election is void and the APAR award is payable in cash. A Participant who becomes disabled or dies after the end of 1994, but before payments under the Plan are made shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his/her APAR award, such award will be paid in cash to the Participant or his/her beneficiary(ies) or estate. If, after the APAR award is made in the first quarter of 1995, a Participant becomes disabled or dies, his/her Deferred and Bonus Shares shall be distributed in full to him/her or to his/her beneficiary(ies) or estate. If after the APAR award is made in the first quarter of 1995 a Participant goes on a leave of absence, his/her Deferred and Bonus shares shall be retained in the Plan and distributed at the end of the deferral period selected by the Participant. -4- 9. Withholding for Taxes --------------------- Payments pursuant to this Plan shall be reduced by amounts sufficient to satisfy any Federal, state, and/or local tax withholding requirements. With respect to payments in the form of stock, an amount of stock shall be withheld from the award that is sufficient to enable Conrail to satisfy any Federal, state, and/or local tax withholding requirements. 10. Designation of Beneficiary -------------------------- A Participant may designate a beneficiary(ies) to receive any payment pursuant to the Plan that has not been made prior to the Participant's death. Such designation must be submitted to Conrail's Assistant Vice President-Compensation and Benefits, on a form provided for this purpose. Such form is available upon request from the Administrator-APAR/APAR Plus, 18-B 2001 Market Street, Philadelphia, PA 19101-1418. In the absence of such a designation, a Participant's most recent designation of beneficiary(ies) pursuant to a prior annual performance achievement reward plan maintained by Conrail shall be treated as his/her designation for purposes of this Plan. 11. Duration, Amendment, and Termination of Plan -------------------------------------------- The Plan shall take effect on January 1, 1994. Conrail, by action of the Board, may amend or terminate the Plan at any time. In addition, Conrail's Chairman, President and Chief Executive Officer may amend the eligibility requirements and/or the schedules of awards under the Plan, in connection with a re-assessment of positions or changes in organization or staffing. The Plan shall terminate automatically as of January 1, 1995, unless terminated earlier by Conrail; provided, however, that such termination shall not preclude the subsequent payment of awards earned under the Plan. -5- EX-11 4 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- ($ In Millions Except Per Share)
Years Ended December 31, ------------------------ 1994 1993 1992 ---- ---- ---- Primary - ------- Income before the cumulative effect of changes in accounting principles (1) $324 $234 $282 Dividends declared on Series A ESOP convertible junior preferred stock (ESOP Stock), net of tax benefits (13) (13) (14) ---- ---- ---- 311 221 268 Charges relative to the cumulative effect of changes in accounting principles (1) (74) ---- ---- ---- Adjusted net income $311 $147 $268 ==== ==== ==== Fully Diluted - ------------- Income before the cumulative effect of changes in accounting principles (1) 324 234 282 Nondiscretionary adjustment (2) (5) (6) (7) ---- ---- ---- 319 228 275 Charges relative to the cumulative effect of changes in accounting principles (1) (74) ---- ---- ---- Adjusted net income $319 $154 $275 ==== ==== ====
Page 1 of 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- ($ In Millions Except Per Share)
Years ended December 31, ---------------------------------------- 1994 1993 1992 ------------- ------------ ----------- Weighted average number of shares (3) Primary Weighted average number of common shares outstanding 79,089,464 79,656,302 80,823,000 Effect of shares issuable under stock option plans 585,317 990,193 920,648 ---------- ---------- ---------- 79,674,781 80,646,495 81,743,648 ========== ========== ========== Fully diluted Weighted average number of common shares outstanding 79,089,464 79,656,302 80,823,000 ESOP Stock 9,887,940 9,954,311 9,966,200 Effect of shares issuable under stock option plans 585,317 1,225,369 1,066,993 ---------- ---------- ---------- 89,562,721 90,838,982 91,856,193 ========== ========== ========== Income per common share (3) Before the cumulative effect of changes in accounting principles Primary $3.90 $2.74 $3.28 Fully diluted 3.56 2.51 2.99 Cumulative effect of changes in accounting principles Primary (.92) Fully diluted (.81) Net income Primary $3.90 $1.82 $3.28 Fully diluted 3.56 1.70 2.99
Page 2 of 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- Notes: 1. The Company adopted Statement of Financial Accounting Standards No. 106 ("Employers'Accounting for Postretirement Benefits Other Than Pensions") and Statement of Financial Accounting Standards No. 109 ("Accounting for Income Taxes") effective January 1, 1993. As a result, the Company recorded cumulative after tax charges of $22 million and $52 million, respectively. 2. Represents the increase, net of income tax benefits, in ESOP-related expenses assuming conversion of all ESOP Stock to common stock. 3. The Company's Board of Directors authorized a two- for-one common stock split which was effected in the form of a stock dividend distributed on September 15, 1992. The Board of Directors also declared a stock dividend on the ESOP Stock in the amount of one share of ESOP Stock for each share of ESOP Stock outstanding as of August 31, 1992 and which was distributed on September 15, 1992. All references with regard to the number of shares for common stock, ESOP Stock, and shares issuable under stock option plans and per share amounts have been restated to reflect the stock splits. Page 3 of 3 EX-12 5 Exhibit 12 ---------- CONRAIL INC. ----------- COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES ----------------------------------------------------- ($ In Millions)
Quarters Ended Quarters Ended Quarters Ended Quarters Ended Years Ended March 31, June 30, September 30, December 31, December 31, -------------- -------------- -------------- -------------- ----------------- 1994(1) 1993 1994 1993 1994 1993 1994 1993 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings -------- Pre-tax income (loss) $(53) $ 73 $166 $137 $ 174 $ 58 $245 $172 $532 $440 $460 Add: Interest expense 47 44 48 46 48 48 49 47 192 185 172 Rental expense interest factor 9 7 9 5 7 5 17 12 42 29 26 Less equity in undistributed earnings of 20-50% owned companies (3) (9) (4) 2 (3) (4) (7) (3) (17) (14) 4 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings available for fixed charges $ - $115 $219 $190 $226 $107 $304 $228 $749 $640 $662 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Fixed Charges ------------- Interest expense 47 44 48 46 48 48 49 47 192 185 172 Rental expense interest factor 9 7 9 5 7 5 17 12 42 29 26 Capitalized interest 1 1 1 1 1 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Fixed charges $ 56 $ 51 $ 57 $ 52 $ 56 $ 53 $ 66 $ 59 $235 $215 $199 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges - 2.25x 3.84x 3.65x 4.04x 2.02x 4.61x 3.86x 3.19X 2.98x 3.33x ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Note: For the purpose of computing the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. (1) During the first quarter of 1994, the Company recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary retirement program and related costs. After this one-time charge, earnings were insufficient by $56 million to cover fixed charges for the quarter.
EX-23 6 Exhibit 23.1 ------------ Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 33-64670) and on Form S-8 (Nos. 33-19155, 33-44140 and 33-57717) of Conrail Inc. and subsidiaries of our report dated January 23, 1995 included in this Form 10-K. PRICE WATERHOUSE LLP 30 South Seventeenth Street Philadelphia, Pennsylvania 19103 March 27, 1995 EX-23 7 Exhibit 23.2 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Conrail Inc. and subsidiaries on Forms S-8 (File Nos. 33-19155, 33-44140 and 33-57717) and on Form S-3 (File No. 33-64670) of our report dated January 24, 1994 on our audits of the consolidated financial statements and financial statement schedule of Conrail Inc. and subsidiaries as of December 31, 1993 and for each of the two years in the period ended December 31, 1993, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P 2400 Eleven Penn Center Philadelphia, Pennsylvania March 27, 1995 EX-27 8 FINANCIAL DATA SCHEDULE
5 Exhibit 27 ---------- CONRAIL INC. ------------ FINANCIAL DATA SCHEDULE ----------------------- ($ In Millions Except Per Share) THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000,000 Dec-31-1994 Jan-01-1994 Dec-31-1994 12-MOS 43 0 646 0 164 1,125 6,498 0 8,322 1,201 1,940 0 283 80 2,562 8,322 0 3,733 0 3,127 0 0 192 532 208 324 0 0 0 324 3.90 3.56
EX-99 9 1994 CONSOLIDATED RAIL CORPORATION 10-K EXH 99 Schedule I CONRAIL INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, (In Millions)
Additions ------------------- Balance at Charged to Charged Balance Beginning Costs and to Other At End Description of Period Expenses Accounts Deductions of Period - ----------- ---------- ---------- -------- ---------- --------- (1) 1992 Casualty reserves Current $112 $ 2 (2) $110 Noncurrent 168 $122 $11 148 (3) 153 Allowance for disposition of property and equipment (4) 321 44 277 1993 Casualty reserves Current 110 17 (2) 93 Noncurrent 153 122 11 154 (3) 132 Allowance for disposition of property and equipment (4) 277 21 256 1994 Casualty reserves Current 93 (10) (2) 103 Noncurrent 132 172 12 104 (3) 212 Allowance for disposition of property and equipment (4) 256 15 241 (1) Charges to property accounts in connection with construction projects. (2) Includes net transfers from noncurrent. (3) Transfers to current. (4) Deductions of $27 million, $21 million and $15 million in 1992, 1993 and 1994, respectively, represent net losses on asset dispositions. The remaining $17 million deduction in 1992 represents a net reduction in disposition requirements as a result of the decision to retain certain rail lines. S-1
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