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
<PAGE>
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
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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
<PAGE>
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
<PAGE>
<TABLE>
SERVICE GROUPS - REVENUES ($ in Millions)
<CAPTION>
Years ended December 31,
-----------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<TABLE>
SERVICE GROUPS - VOLUME IN UNITS
(FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS)
(In Thousands)
<CAPTION>
Years ended December 31,
----------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
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
===== ===== ===== ===== =====
</TABLE>
3
<PAGE>
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
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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
<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
Certain Statistics. The following tables provide various measurements
relating to Conrail's rail operations from 1990 through 1994:
<TABLE>
<CAPTION>
PRODUCTIVITY DATA
Years ended December 31,
----------------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
QUALITY OF SERVICE DATA(1)
Years ended December 31,
---------------------------------------
1994 1993 1992 1991 1990
<S> ----- ----- ----- ----- -----
<C> <C> <C> <C> <C>
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%
<FN>
(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.
</FN>
</TABLE>
9
<PAGE>
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
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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
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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
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<PAGE>
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:
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<PAGE>
<TABLE>
<CAPTION>
LOCOMOTIVES AND FREIGHT CARS
Number of Units
---------------------
Total Stored(1)
------ ---------
<S> <C> <C>
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
- -----------
<FN>
(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.
</FN>
</TABLE>
CAPITAL EXPENDITURES. The following tables provide information
concerning capital expenditures from 1990 through 1994:
14
<PAGE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
(In Millions)
Years ended December 31,
------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
<FN>
(1) Includes communications and signals, bridges and tunnels, computers
and telecommunications, and other improvements.
</FN>
</TABLE>
<TABLE>
TRACK REHABILITATION
<CAPTION>
Years ended December 31,
-------------------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1994 1993(2) 1992 1991 1990(5)
----- ------ ----- ----- -----
(In Millions Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
December 31,
------------------------------------------
1994 1993 1992 1991 1990(5)
<CAPTION> ----- ----- ----- ----- -------
<S> (In Millions)
<C> <C> <C> <C> <C>
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
</TABLE>
30
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Increase
(In Millions) 1994 1993 (Decrease)
------- ------- -----------
<S> <C> <C> <C>
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
====== ====== ====
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Increase
(In Millions) 1993 1992 (Decrease)
------ ------ ----------
<S> <C> <C> <C>
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
====== ====== ====
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31,
------------------------
($ In Millions Except Per Share Data) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
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.
</TABLE>
43
<PAGE>
<TABLE>
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
---------------
($ In Millions) 1994 1993
ASSETS ------ ------
<S> <C> <C>
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 $7,948
====== ======
See accompanying notes.
</TABLE>
44
<PAGE>
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<CAPTION>
Series A Unearned Additional
Preferred ESOP Common Paid-In Retained Treasury
($ In Millions Except Per Share Data) Stock Compensation Stock Capital Earnings Stock
--------- ------------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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 $(99)
===== ===== ===== ===== ===== ====
See accompanying notes.
</TABLE>
45
<PAGE>
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
------------------------
($ In Millions) 1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
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.
</TABLE>
46
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
4. Property and Equipment
----------------------
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
------- -------
(In Millions)
<S> <C> <C>
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
======= =======
</TABLE>
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
-------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
---- ----
(In Millions)
<S> <C> <C>
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
==== ====
</TABLE>
6. Long-Term Debt
--------------
Long-term debt outstanding, including the weighted average interest
rates at December 31, 1994, is composed of the following:
50
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------
1994 1993
------ ------
(In Millions)
<S> <C> <C>
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
====== ======
</TABLE>
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
<PAGE>
Minimum commitments, exclusive of executory costs borne by the
Company, are:
<TABLE>
Capital Operating
Leases Leases
------- ---------
(In Millions)
<S> <C> <C>
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
====
</TABLE>
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
<PAGE>
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
<PAGE>
7. Income Taxes
------------
The provisions for income taxes are composed of the following:
<TABLE>
<CAPTION> 1994 1993 1992
---- ---- ----
(In Millions)
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION> December 31,
-----------------
1994 1993
------ -------
(In Millions)
<S> <C> <C>
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
====== ======
</TABLE>
55
<PAGE>
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
<PAGE>
Pension credits include the following components:
<TABLE>
1994 1993 1992
----- ----- -----
<CAPTION> (In Millions)
<S> <C> <C> <C>
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)
===== ===== =====
</TABLE>
The funded status of the pension plans and the amounts reflected in
the balance sheets are as follows:
<TABLE> 1994 1993
----- ------
<CAPTION (In Millions)
<S> <C> <C>
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
===== ======
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
Life Life
Medical Insurance Medical Insurance
Plan Plan Plan Plan
------- --------- ------- ---------
(In Millions)
<S> <C> <C> <C> <C>
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
=== === === ===
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
The activity and status of stock options under the incentive
plans follow:
<TABLE>
Non-qualified Stock Options
---------------------------------
<CAPTION>
Option Price Shares
Per Share Under Option
----------------- ------------
<S> <C> <C>
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
---------
</TABLE>
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
<PAGE>
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
-----------------
<TABLE>
1994 1993 1992
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Interest income $ 34 $ 39 $ 40
Rental income 53 56 60
Property sales 18 20 6
Other, net 13 (1) (8)
---- ---- ----
$118 $114 $ 98
==== ==== ====
</TABLE>
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
<PAGE>
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 $80 million.
64
<PAGE>
13.Condensed Quarterly Data (Unaudited)
------------------------------------
<TABLE>
First Second Third Fourth
------------- ------------- ------------ ------------
1994 1993 1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ---- ---- ----
<CAPTION> ($ In Millions Except Per Share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
/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
<PAGE>
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.
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
<PAGE>
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-
<PAGE>
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
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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.
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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.
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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
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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.
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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
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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
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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.
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<PAGE>
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
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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.
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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.
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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.
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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
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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.
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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.
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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,
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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
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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.
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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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
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.
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
<TABLE>
Exhibit 11
----------
CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
($ In Millions Except Per Share)
<CAPTION>
Years Ended December 31,
------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
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 $275
==== ==== ====
</TABLE>
Page 1 of 3
</PAGE>
Exhibit 11
<TABLE> ----------
CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
($ In Millions Except Per Share)
<CAPTION>
Years ended December 31,
----------------------------------------
1994 1993 1992
------------- ------------ -----------
<S> <C> <C> <C>
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
</TABLE>
Page 2 of 3
</PAGE>
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 $52 million,
respectively.
2. Represents the increase, net of income tax benefits,
in ESOP-related expenses assuming conversion of all
ESOP Stock to common stock.
3. The Company's Board of Directors authorized a two-
for-one common stock split which was effected in the
form of a stock dividend distributed on September 15,
1992. The Board of Directors also declared a stock
dividend on the ESOP Stock in the amount of one share
of ESOP Stock for each share of ESOP Stock
outstanding as of August 31, 1992 and which was
distributed on September 15, 1992. All references
with regard to the number of shares for common stock,
ESOP Stock, and shares issuable under stock option
plans and per share amounts have been restated to
reflect the stock splits.
Page 3 of 3
Exhibit 12
----------
<TABLE>
CONRAIL INC.
-----------
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
($ In Millions)
<CAPTION>
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
--------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
<FN>
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 $56 million to cover
fixed charges for the quarter.
</FN>
</TABLE>
Exhibit 23.1
------------
Consent of Independent Accountants
We hereby consent to the incorporation by reference in
the Registration Statements on Form S-3 (No. 33-64670)
and on Form S-8 (Nos. 33-19155, 33-44140 and 33-57717)
of Conrail Inc. and subsidiaries of our report dated
January 23, 1995 included in this Form 10-K.
PRICE WATERHOUSE LLP
30 South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 27, 1995
Exhibit 23.2
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Conrail Inc. and subsidiaries
on Forms S-8 (File Nos. 33-19155, 33-44140 and 33-57717)
and on Form S-3 (File No. 33-64670) of our report dated
January 24, 1994 on our audits of the consolidated
financial statements and financial statement schedule of
Conrail Inc. and subsidiaries as of December 31, 1993 and
for each of the two years in the period ended
December 31, 1993, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 27, 1995
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
Exhibit 27
----------
CONRAIL INC.
------------
FINANCIAL DATA SCHEDULE
-----------------------
($ 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.
<MULTIPLIER> 1,000,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-START> Jan-01-1994
<PERIOD-END> Dec-31-1994
<PERIOD-TYPE> 12-MOS
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 646
<ALLOWANCES> 0
<INVENTORY> 164
<CURRENT-ASSETS> 1,125
<PP&E> 6,498
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,322
<CURRENT-LIABILITIES> 1,201
<BONDS> 1,940
0
283
<COMMON> 80
<OTHER-SE> 2,562
<TOTAL-LIABILITY-AND-EQUITY> 8,322
<SALES> 0
<TOTAL-REVENUES> 3,733
<CGS> 0
<TOTAL-COSTS> 3,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 532
<INCOME-TAX> 208
<INCOME-CONTINUING> 324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324
<EPS-PRIMARY> 3.90
<EPS-DILUTED> 3.56
</TABLE>
Schedule I
<TABLE>
CONRAIL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(In Millions)
<CAPTION>
Additions
-------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(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
<FN>
(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
</FN>
</TABLE>
