-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J9wG1049jxQSJ1Dt9iQkSs81cmDV0JauRqcPXI4CbhQlrzuhT0XnsFNL9oYJJkgM 9NroDjpvJ/JJ6C2p26uTBQ== 0000950131-96-001403.txt : 19960402 0000950131-96-001403.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950131-96-001403 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURLINGTON NORTHERN SANTA FE CORP CENTRAL INDEX KEY: 0000934612 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 411804964 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11535 FILM NUMBER: 96543205 BUSINESS ADDRESS: STREET 1: 3800 CONTINENTAL PLZ STREET 2: 777 MAIN ST CITY: FT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173332000 MAIL ADDRESS: STREET 1: 3800 CONTINENTAL PLAZA STREET 2: 777 MAIN STREET CITY: FORT WORTH STATE: TX ZIP: 76102-5384 FORMER COMPANY: FORMER CONFORMED NAME: BURLINGTON NORTHERN SANTE FE CORP DATE OF NAME CHANGE: 19950913 FORMER COMPANY: FORMER CONFORMED NAME: BNSF CORP DATE OF NAME CHANGE: 19941223 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K [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, 1995 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-11535 ------------ BURLINGTON NORTHERN SANTA FE CORPORATION (Exact name of registrant as specified in its charter) Delaware 41-1804964 (State of Incorporation) (I.R.S. Employer Identification No.) 3800 Continental Plaza 777 Main Street Fort Worth, Texas 76102-5384 (Address of principal executive offices, including zip code) 817/333-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $0.01 par value New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange
------------ Securities registered pursuant to Section 12(g) of the Act: None 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 requirement 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] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $11.8 billion on February 29, 1996. For purposes of this calculation only, the registrant has excluded stock beneficially owned by directors and officers. By doing so, the registrant does not admit that such persons are affiliates within the meaning of Rule 405 under the Securities Act of 1933 or for any other purpose. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 147,503,141 shares outstanding as of January 31, 1996. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the documents from which parts thereof have been incorporated by reference and the part of the Form 10-K into which such information is incorporated: Annual Report to Shareholders for the fiscal year ended December 31, 1995... PARTS I, II, AND IV Proxy Statement dated March 5, 1996.... PART III
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PAGE ---- PART I Items 1 and 2. Business and Properties.................................... 1 Rail.................................................................. 2 Pipeline Investment................................................... 10 Item 3. Legal Proceedings................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders............... 16 EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................................................. 17 Item 6. Selected Financial Data........................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 18 Item 8. Financial Statements and Supplementary Data....................... 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................... 18 PART III Item 10. Directors and Executive Officers of the Registrant............... 18 Item 11. Executive Compensation........................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management... 18 Item 13. Certain Relationships and Related Transactions................... 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 19 SIGNATURES................................................................ S-1 CONSOLIDATED FINANCIAL STATEMENT SCHEDULE................................. F-1 EXHIBITS.................................................................. E-1
PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES Burlington Northern Santa Fe Corporation ("BNSF") was incorporated in the State of Delaware on December 16, 1994. On September 22, 1995, the stockholders of Burlington Northern Inc. ("BNI") and Santa Fe Pacific Corporation ("SFP") became the stockholders of BNSF pursuant to a business combination of the two companies which was approved at special meetings of their stockholders held on February 7, 1995. In connection with the combination, BNSF was formed to act as the parent holding company of BNI and SFP, both of which companies are now subsidiaries of BNSF. Through BNI and SFP, BNSF owns subsidiaries primarily engaged in the rail transportation business: Burlington Northern Railroad Company ("BNRR") and The Atchison, Topeka and Santa Fe Railway Company ("ATSF"). BN Leasing Corporation, a wholly-owned subsidiary of BNI, is in the business of acquiring railroad rolling stock and other equipment. BNSF also has an equity interest in Santa Fe Pacific Pipeline Partners, L.P., which operates a refined petroleum products pipeline system in six western and southwestern states. The business combination took place pursuant to the Agreement and Plan of Merger dated as of June 29, 1994 (as amended by amendments dated as of October 26, 1994, December 18, 1994, January 24, 1995, and September 19, 1995, the "Merger Agreement") which provided for BNI's acquisition of SFP. In accordance with the Merger Agreement, BNI and SFP conducted a joint tender offer in which SFP purchased 38 million shares and BNI purchased 25 million shares of SFP common stock at a price of $20 per share, the payment for which shares was made on February 21, 1995 (the "Tender Offer"). Between the Tender Offer and consummation of the business combination on September 22, 1995, SFP repurchased an additional approximate 3.6 million shares of SFP common stock, as permitted by the Merger Agreement. On September 22, 1995, pursuant to the Merger Agreement, (1) each outstanding share of BNI common stock (other than BNI common stock held by BNI as treasury stock or owned by SFP or BNI or any subsidiary of either of them) was converted into the right to receive one newly-issued share of BNSF common stock (par value $0.01 per share); (2) each outstanding share of SFP common stock (other than SFP common stock held by SFP as treasury stock or owned by SFP or BNI or any subsidiary of either of them) was converted into the right to receive 0.41143945 of a share of BNSF common stock; and (3) each outstanding share of BNI or SFP common stock then held as treasury stock or owned by BNI or SFP (other than shares of SFP common stock owned by BNI, which remain outstanding) was cancelled. The rights of a stockholder of BNSF were substantially identical to the rights of a stockholder of BNI, and the business combination had the same economic effect on the stockholders of SFP and BNI as would a direct merger of BNI and SFP. Reference is made to Note 2 to the consolidated financial statements on pages 26 through 28 of BNSF's 1995 Annual Report to Shareholders for additional information in connection with the business combination, Tender Offer, and related financing activities, which information is hereby incorporated by reference. On October 13, 1994, BNI, BNRR, SFP, and ATSF filed a railroad merger and control application with the Interstate Commerce Commission ("ICC"). On August 23, 1995, the ICC issued its written decision approving and authorizing BNI's acquisition of control of SFP and the business combination by which BNI and SFP became subsidiaries of BNSF, the resulting common control of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF operations, and the merger of BNRR and ATSF. Pursuant to the ICC's permissive authority, the business combination was effected on September 22, 1995. Each of BNI, SFP, BNRR, and ATSF are now direct or indirect wholly-owned subsidiaries of BNSF. At December 31, 1995, BNSF and its subsidiaries had approximately 45,500 employees. 1 RAIL The rail operations of BNSF's principal operating subsidiaries--BNRR and ATSF (collectively, "Rail")--comprise the largest railroad system in the United States with approximately 31,000 route miles at December 31, 1995. TRACK CONFIGURATION BNRR and ATSF operate railroad systems collectively comprising approximately 31,000 route miles of track (excluding, among other things, second main track), approximately 28,000 miles of which are owned route miles, including easements, through 27 states and two Canadian provinces. As of December 31, 1995, the total Rail system--including first, second, third and fourth main tracks, yard tracks, and sidings--consisted of approximately 48,500 operated miles of track, all of which were owned by or held under easement by Rail except for approximately 4,000 miles operated under trackage rights agreements with other parties. At December 31, 1995, approximately 28,000 miles of Rail's track consisted of 112-pound per yard or heavier rail, including approximately 18,300 track miles of 131-pound per yard or heavier rail. Substantially all rail laid under rail renewal programs is continuous welded rail. EQUIPMENT CONFIGURATION Rail owned or had under non-cancelable leases exceeding one year the following units of railroad rolling stock for the periods indicated (represents combined BNRR and ATSF amounts for all periods):
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ Diesel Locomotives...................................... 4,277 4,157 4,054 ====== ====== ====== Freight Cars: Box--general purpose................................... 3,202 3,527 4,126 Box--specially equipped................................ 8,987 8,973 8,485 Open Hopper............................................ 10,497 11,630 12,483 Covered Hopper......................................... 44,840 43,223 42,022 Gondola................................................ 11,467 10,665 9,889 Refrigerator........................................... 7,216 6,489 6,687 Autorack............................................... 3,600 3,567 3,578 Flat................................................... 6,178 5,921 5,598 Tank................................................... 505 552 605 Caboose................................................ 485 542 585 Other.................................................. 330 343 348 ------ ------ ------ Total Freight Cars.................................... 97,307 95,432 94,406 ====== ====== ====== Domestic Containers.................................... 16,230 16,793 15,310 Trailers............................................... 834 633 1,028 Domestic Chassis....................................... 5,274 7,365 7,047 Company Service Cars................................... 6,084 6,218 6,760 Commuter Passenger Cars................................ 141 141 141
In addition to the containers, trailers, and chassis shown above, Rail had under short-term leases 4,406 containers, 4,367 trailers, and 15,551 chassis, at December 31, 1995. In addition to the owned and leased locomotives identified above, BNRR operated 197 freight locomotives under power purchase agreements as of December 31, 1995. The average ages from date of manufacture or remanufacture of the locomotive and freight car fleets at December 31, 1995 were 15.5 years and 8.3 years for BNRR and ATSF locomotives, respectively, and 18.3 years and 18.2 years for BNRR and ATSF freight cars, respectively. These averages are not weighted to reflect the greater capacities of the newer equipment. 2 A summary of Rail's ratios of locomotives and freight cars on line awaiting or undergoing repairs to the total number of locomotives or freight cars in the fleet is as follows:
YEAR ENDED DECEMBER 31, -------------- 1995 1994 1993 ---- ---- ---- Locomotives BNRR......................................................... 6.5% 7.7% 7.7% ATSF......................................................... 6.8% 7.2% 7.6% Freight Cars BNRR......................................................... 2.7% 3.1% 3.3% ATSF......................................................... 4.3% 7.8% 7.8%
CAPITAL EXPENDITURES AND MAINTENANCE Capital expenditures of Rail for the periods indicated were as follows (represents combined BNRR and ATSF amounts for all periods):
YEAR ENDED DECEMBER 31, -------------------- (IN MILLIONS) 1995 1994 1993 ------ ------ ------ Ties................................................... $ 165 $ 161 $ 141 Rail/Other Track Material.............................. 313 305 246 Ballast................................................ 139 136 113 Facilities and Other Roadway........................... 429 432 355 Locomotives............................................ 196 224 133 Freight Cars........................................... 31 53 120 Other.................................................. 106 91 114 ------ ------ ------ Total Capital Expenditures......................... $1,379 $1,402 $1,222 ====== ====== ======
The above expenditures do not include equipment financed through operating leases, principally consisting of locomotives and rolling stock. In 1995, approximately $440 million of equipment acquisitions were financed through operating leases. BNSF expects combined 1996 capital expenditures for BNRR and ATSF to total approximately $1.7 billion, including capital expenditures for projects reimbursed by governmental agencies and other parties. Capital expenditures will include capital maintenance and expansion projects such as additional line capacity improvements at various locations, operations consolidations expansion projects, and intermodal facility improvements at Los Angeles and San Bernardino, California. General Electric Company ("GE") and the Electro-Motive Division of General Motors Corporation ("EMD") perform locomotive maintenance for each of BNRR and ATSF under various maintenance agreements and maintained approximately 600 locomotives for BNRR and 725 locomotives for ATSF as of December 31, 1995. Additionally, ATSF has a similar agreement with MK Rail Corporation ("MK") that provides for the overhaul and maintenance of 277 locomotives and will continue in effect as to each of the locomotives for a period of eight years following its overhaul. The agreements with GE, EMD, and MK call for the work to be done at each railroad's facilities with each railroad's respective employees. The majority of maintenance of way expenditures for track have been for rail and tie refurbishment and resurfacing. The extent of Rail's track maintenance program (representing combined BNRR and ATSF amounts for all periods) is depicted in the following chart:
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ Track miles of rail laid (1)............................ 945 1,010 967 Cross ties inserted (in thousands) (1).................. 2,974 2,879 3,090 Track resurfaced miles.................................. 11,088 11,055 10,526
- -------- (1)Includes both maintenance of existing route system and expansion projects. 3 BNSF anticipates that Rail's 1996 track maintenance of way program, together with expansion projects, will result in the installation of approximately 900 track miles of rail, the replacement of about 3.5 million cross ties, and the resurfacing of approximately 12,000 miles of track. OPERATING CONFIGURATION Rail operates facilities and equipment for maintenance of track, locomotives, and freight cars. It also owns or leases other equipment to support rail operations, such as highway trailers, containers and vehicles. Support facilities for rail operations include yards and terminals throughout its rail network, system locomotive shops that perform continuous locomotive servicing and maintenance, centralized network operations centers for train dispatching and network operations monitoring and management in Fort Worth, Texas, and Schaumburg, Illinois, computers, telecommunications equipment, signal systems, and other support systems. Transfer facilities for rail-to- rail as well as intermodal transfer of containers, trailers, and other freight traffic are maintained. These include 43 major intermodal hubs located across the system and nine intermodal hub centers off-line used in connection with haulage agreements with other railroads. BNRR and ATSF also own 30 automotive distribution facilities where automobiles are loaded or unloaded from multi- level rail cars, and serve eight port facilities. Hobart Yard near Los Angeles, California, Corwith Yard in Chicago, Illinois, and Chicago Hub Center in Cicero, Illinois are Rail's largest intermodal facilities in terms of volume, with approximately 658,000, 601,000, and 437,000 lifts, respectively, in 1995, and Argentine Yard in Kansas City, Kansas, Barstow Yard in Barstow, California, Northtown Yard in Minneapolis, Minnesota and Murray Yard in Kansas City, Missouri, are the largest freight car classification yards. Substantially all railroad property, real or personal, of BNRR is subject to liens securing mortgage bonds. Certain locomotives and rolling stock of BNRR and ATSF are subject to equipment obligations, as referred to in Note 12 to the consolidated financial statements on page 33 of BNSF's 1995 Annual Report to Shareholders, which information is hereby incorporated by reference. EMPLOYEES AND LABOR RELATIONS Productivity as measured by revenue ton miles per employee has risen steadily in the last three years, and compensation and benefits expense per revenue ton mile has declined, as shown in the table below (represents combined BNRR and ATSF operating statistics for all periods):
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ Thousand revenue ton miles/average number of employees. 8,715 7,887 7,305 Compensation and benefits expense/thousand revenue ton miles.................................................. $ 6.78 $ 7.27 $ 7.68
Labor unions represent approximately 87 percent of Rail's employees under collective bargaining agreements with 13 different labor organizations. In December 1994, BNRR reached an agreement with the Railroad Yardmasters Division of the United Transportation Union ("UTU") which is effective through 1999 with respect to wages, work rules and all other matters except health and welfare benefits. Health and welfare issues are being addressed at the national level and will apply to BNRR's approximately 250 yardmasters. Effective July 1, 1995, the yardmasters received a three percent base wage increase under the agreement. Labor agreements currently in effect for unions other than the yardmasters include provisions which prohibited the parties from serving notices to change wages, health and welfare benefits, work rules and working conditions prior to November 1, 1994. BNSF's railroad operating subsidiaries joined with other major railroads to negotiate these issues with the unions on a multi-employer basis on November 1, 1994. At that time, all unions were served proposals for productivity improvements as well as other changes. Thereafter, unions also served notices on the railroads which proposed increasing wages and benefits and restoring many of the restrictive work rules and practices that were modified or eliminated under the current agreements. One union is also challenging the railroads' right to negotiate on a multi-employer basis and the issue is 4 currently pending in federal district court in Washington, D.C. Under labor agreements currently in effect, a cost of living allowance of nine cents per hour went into effect on July 1, 1995 for most of the unionized work force. The cost of living allowance was dependent upon changes in the Consumer Price Index not to exceed three percent. In December 1995, BNRR's and ATSF's multi-employer bargaining representative, the National Carriers' Conference Committee ("NCCC"), reached a tentative agreement with the UTU, the largest single rail union, resolving wage, benefit and work rule issues through 1999. A similar agreement was reached in February 1996 with the Brotherhood of Locomotive Engineers ("BLE"). The UTU and BLE agreements are subject to membership ratification, which process should be completed by May 1996. At this time, the railroads and most of the other unions are proceeding in direct negotiations on the parties' proposals with many in mediation. The National Mediation Board has scheduled and held meetings with the parties. One or more of the unions could be released from mediation which would likely start a cooling-off period and possibly lead to the establishment of a Presidential Emergency Board before the parties could engage in self-help remedies. Although the ultimate outcome of the negotiations cannot be predicted, the potential exists for one or more work stoppages in the railroad industry during 1996 which may affect Rail. Existing labor agreements will remain in effect until new agreements are reached or until the Railway Labor Act's procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) have been exhausted. BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. With respect to the permissive authority granted in the ICC's August 23, 1995 written decision to consolidate BNRR and ATSF operations, agreements resolving operations consolidations issues with the BLE and UTU were finalized in February and March of 1996. Discussions with the Transportation Communications Union ("TCU") resulted in an agreement resolving all operations consolidations and other related issues covering BNRR's and ATSF's clerical employees. The TCU agreement will enable BNRR and ATSF to centralize most clerical functions. Operations consolidations negotiations are ongoing with the carman and yardmaster unions. Railroad industry personnel are covered by the Railroad Retirement System instead of Social Security. Rail's contributions under the Railroad Retirement System are approximately triple those in industries covered by Social Security. Railroad industry personnel are also covered by the Federal Employers' Liability Act ("FELA") rather than by state workers' compensation systems. FELA is a fault-based system, with compensation for injuries settled by negotiation and litigation, not subject to specific statutory limitations on the amount of recovery. By contrast, most other industries are covered under state administered no-fault plans with standard compensation schedules. Rail believes it has adequate reserves for its FELA claims. However, the future costs of FELA claims are uncertain and such costs could be significantly higher in the future. BUSINESS MIX In serving the Midwest, Pacific Northwest and the Western, Southwestern, and Southeastern regions of the country, BNRR and ATSF transport a broad range of commodities derived from manufacturing, agricultural, and natural resource industries. Accordingly, their financial performance is influenced by, among other things, general and industry economic conditions at the international, national, and regional levels. Major markets served directly by BNRR or ATSF include Albuquerque, Billings, Birmingham, Cheyenne, Chicago, Dallas, Denver, Des Moines, Duluth/Superior, Fargo/Moorhead, Fort Worth, Houston, 5 Kansas City, Lincoln, Los Angeles, Memphis, Mobile, Oklahoma City, Omaha, Pensacola, Phoenix, Portland, the San Francisco Bay area, St. Louis, St. Paul/Minneapolis, Seattle, Spokane, Springfield (Missouri), Tacoma, Tulsa, Wichita, Vancouver (British Columbia), Winnipeg (Manitoba), and the United States/Mexico crossings of El Paso and San Diego. Other major cities are served through Intermodal Market Extension ("IMX") terminals located at various off-line points. Major ports served include Galveston, Houston, Long Beach, Los Angeles, Mobile, Portland, Richmond (Oakland), San Diego, Seattle, Superior, Tacoma and Vancouver (British Columbia). In 1995, one quarter of combined BNRR and ATSF revenues were derived from Intermodal traffic and another quarter were derived from the transportation of Coal. About 15 percent of combined 1995 revenues reflected the transportation of Agricultural Commodities. The transportation of commodities in the areas serviced by Chemicals, Forest Products, Consumer and Food Products, Metals, Minerals and Ores, and Automotive accounted for the rest of 1995 combined revenues. Intermodal. The Intermodal freight business consists of the hauling of freight containers or truck trailers by combinations of water, rail, or motor carriers. The intermodal business is highly service-driven, and in many cases motor carriers and railroads jointly market intermodal service. The first such joint intermodal arrangement was Quantum, through which ATSF and J. B. Hunt Transport provide customers full service, customized door-to-door transportation (truck and rail), with a common communication system and integrated billing at a single rate. In 1994, major national Less-Than-Truckload ("LTL") carriers and the Teamsters union signed a new National Master Freight Agreement that allows the LTL carriers to shift up to 28 percent of their total line-haul miles to intermodal service. BNRR and ATSF are major beneficiaries of this service- sensitive traffic, and they provide transportation services to major LTL carriers Yellow Freight, Roadway Express, and Consolidated Freightways. Combined BNRR and ATSF intermodal results include revenue from four types of business: . Direct Marketing. Direct marketing efforts resulted in approximately 28 percent of total intermodal revenue. These center around traffic contracted from United Parcel Service and the United States Postal Service, just-in-time parts service for the automotive industry, and service for nationwide LTL carriers. . Truckload. Truckload traffic represented approximately 15 percent of total intermodal revenue. The joint service arrangement with J.B. Hunt referred to as Quantum represented the largest truckload component, while Schneider National was the next largest. . Intermodal Marketing Companies. Approximately 31 percent of total intermodal revenue was generated through intermodal marketing companies, primarily shipper agents and consolidators. . International. International business consists primarily of traffic from steamship companies and accounted for approximately 26 percent of intermodal revenues. Coal. Based on carloadings and tons hauled, BNRR is the largest transporter of western low-sulfur coal in the United States. Over 90 percent of BNRR's coal traffic originated in the Powder River Basin of Wyoming and Montana during the three years ended December 31, 1995. These coal shipments were destined for coal-fired electric generating stations located primarily in the North Central, South Central and Mountain regions of the United States with smaller quantities exported. BNRR also handles increasing amounts of low-sulfur coal from the Powder River Basin for delivery to markets in the eastern and southeastern portion of the United States. The low-sulfur coal from the Powder River Basin is abundant, inexpensive to mine and clean-burning. Because the Clean Air Act of 1990 requires power plants to reduce harmful emissions either by burning coal with a lower sulfur content or by installing expensive scrubbing units, opportunities for increased shipments of this low-sulfur coal still exist. 6 Coal shipments transported by ATSF originate principally in Wyoming, Colorado, and New Mexico on the lines of ATSF and other rail carriers. These shipments are moved to electrical generating stations and industrial plants in the Midwest and Southwest. Agricultural Commodities. Agricultural Commodities include barley, corn, wheat, soybeans, oils, feeds, flour and mill products, specialty grains, malts, and milo. Based on carloadings and tons hauled, BNRR is the largest rail transporter of grain in North America. BNRR's system is strategically located to serve the Midwest and Great Plains grain-producing regions where BNRR serves most major terminal, storage, feeding and food-processing locations. Additionally, BNRR has access to major export markets in the Pacific Northwest, western Great Lakes and Texas Gulf regions. ATSF also serves a large portion of the grain-producing regions of the nation. ATSF transports wheat and feed grains including corn to points in California, Kansas, New Mexico, Oklahoma, and Texas to be stored, milled, or fed to livestock. ATSF also moves export wheat and feed grains to Texas ports for shipment to foreign customers. Chemicals. The Chemicals business is comprised of fertilizer, petroleum and chemical commodities. Chemicals and plastics resins are transported for industrial and agricultural use. Industrial chemicals and plastics resins are used by the automotive, housing, and packaging industries, as well as for feedstocks for other chemical and plastic products. Forest Products. The primary commodities in Forest Products are lumber, plywood, oriented strand board, paper products, pulpmill feedstock, and wood pulp. Based on carloadings and tonnage hauled, BNRR is the largest rail transporter of forest products in the United States. Commodity origins are primarily from the Pacific Northwest, upper Midwest, and the Southeast for shipment mainly into domestic markets. Customers served include the construction, furniture, photography, publishing, newspaper, and industrial boxes industries. Consumer and Food Products. Beverages, canned goods, and perishables are the principal food commodities moved by BNRR and ATSF. Other consumer products handled include sugars and sweeteners, cotton, salt, rubber and tires, machinery, aircraft parts, military and miscellaneous boxcar shipments. Heavy machinery includes primary markets for aircraft, construction, farm and railroad equipment and secondary markets for used equipment. A truck- competitive transportation product in tank containers for customers shipping specialty chemicals and other liquids is also offered. Metals. The Metals business includes virtually all of the commodities included in or resulting from the production of steel. Taconite, an iron ore derivative produced in northern Minnesota, scrap steel, and coal coke are BNRR's primary input products, while finished steel products range from structural beams and steel coils to wire and nails. BNRR and ATSF haul both ferrous and non-ferrous products including recyclable metals. ATSF links the integrated steel mills in the East with fabricators in the West and Southwest. Service is also provided to various mini-mills in the Southwest that feed rebar, beams, and coiled rod to the construction industry. Various non-ferrous products such as copper, lead, and aluminum are transported for the beverage, automotive, and telecommunications industries. Minerals and Ores. Commodities in this group include clays, cements, aggregates, and other industrial ores and agricultural minerals. Both the oil and the construction industries are serviced. Agricultural minerals include sulphur which generally moves to the Gulf Coast and from there via vessels to Florida and overseas markets for use in making phosphatic fertilizers. Potash is transported to domestic markets and to export points for markets in Canada, Mexico, and overseas. Industrial ores include various mined and processed commodities such as cement and aggregates (sand and stone) that generally move to domestic markets for use in general construction and public work projects, such as highway projects. Borates and sodium compounds move to domestic points as well as to export markets primarily through West Coast ports. Lime and non- metallic ores most often move within domestic markets. 7 Automotive. The Automotive group is responsible for both assembled motor vehicles and shipments of vehicle parts to numerous destinations throughout the Midwest, Southwest, and West. Freight Statistics. The following tables set forth certain freight statistics relating to rail operations for the periods indicated (represents combined BNRR and ATSF statistics for all periods):
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 ------- ------- ------- Revenue ton-miles (millions)......................... 397,902 360,605 327,809 Freight revenue per thousand revenue ton-miles....... $20.11 $20.84 $21.22 Average haul per ton (miles)......................... 864 821 807
REVENUES
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ (IN MILLIONS) Intermodal............................................. $2,017 $1,943 $1,678 Coal................................................... 1,966 1,902 1,752 Agricultural Commodities............................... 1,245 938 918 Chemicals.............................................. 615 597 590 Forest Products........................................ 546 557 525 Consumer and Food Products............................. 467 471 452 Metals................................................. 390 349 338 Minerals and Ores...................................... 388 382 369 Automotive............................................. 369 376 334 ------ ------ ------ Total Freight Revenue.................................. 8,003 7,515 6,956 Other Revenue.......................................... 167 161 152 ------ ------ ------ Total Operating Revenues............................. $8,170 $7,676 $7,108 ====== ====== ======
CARS/UNITS
YEAR ENDED DECEMBER 31, ----------------- 1995 1994 1993 ----- ----- ----- (IN THOUSANDS) Intermodal................................................. 2,558 2,465 2,183 Coal....................................................... 1,880 1,847 1,679 Agricultural Commodities................................... 663 578 599 Chemicals.................................................. 374 362 353 Forest Products............................................ 345 357 348 Consumer and Food Products................................. 331 337 302 Metals..................................................... 397 370 357 Minerals and Ores.......................................... 308 315 305 Automotive................................................. 237 238 212 ----- ----- ----- Total Car/Units.......................................... 7,093 6,869 6,338 ===== ===== =====
8 AVERAGE REVENUE PER CAR/UNIT
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ Intermodal............................................. $ 789 $ 788 $ 769 Coal................................................... 1,046 1,030 1,043 Agricultural Commodities............................... 1,878 1,623 1,533 Chemicals.............................................. 1,644 1,649 1,671 Forest Products........................................ 1,583 1,560 1,509 Consumer and Food Products............................. 1,411 1,398 1,497 Metals................................................. 982 943 947 Minerals and Ores...................................... 1,260 1,213 1,210 Automotive............................................. 1,557 1,580 1,575 ------ ------ ------ Average Revenue Per Car/Unit........................... $1,128 $1,094 $1,098 ====== ====== ======
GOVERNMENT REGULATION AND LEGISLATION Rail operations are subject to the regulatory jurisdiction of the Surface Transportation Board of the United States Department of Transportation ("DOT"), the Federal Railroad Administration of DOT, the Occupational Safety and Health Administration ("OSHA"), and state regulatory agencies. The Surface Transportation Board, which is the successor to the ICC, has jurisdiction over certain rates, routes, services, extension, sale or abandonment of rail lines, and consolidation or merger with, or acquisition of control of, rail common carriers. DOT and OSHA have jurisdiction under several federal statutes over a number of safety and health aspects of rail operations. State agencies regulate some aspects of rail operations with respect to health and safety in areas not otherwise preempted by federal law. Rail operations of BNRR and ATSF, as well as those of their competitors, are subject to extensive federal, state and local environmental regulation. These laws cover discharges to waters, air emissions, toxic substances, and the generation, handling, storage, transportation, and disposal of waste and hazardous materials. This regulation has the effect of increasing the cost and liabilities associated with rail operations. Environmental risks are also inherent in rail operations which frequently involve transporting chemicals and other hazardous materials. BNRR and ATSF expect to become subject to future requirements regulating air emissions from diesel locomotives that may increase operating costs. The United States Environmental Protection Agency ("EPA") is expected to issue regulations nationally applicable to new locomotive engines in 1996. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt any locomotive emission standards. Many of BNRR's and ATSF's land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNRR and ATSF are now subject and will from time to time continue to be subject to environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, generally imposes joint and several liability for cleanup and enforcement costs, without regard to fault or the legality of the original conduct, on current and former owners and operators of a site. Accordingly, BNRR and ATSF may be responsible under CERCLA and other federal and state statutes for all or part of the costs to clean up sites at which certain substances may have been released by BNRR or ATSF, their current lessees, former owners or lessees of properties, or other third parties. For further discussion, reference is made to Note 13 to the consolidated financial statements on pages 34 and 35 of BNSF's 1995 Annual Report to Shareholders, which information is hereby incorporated by reference. 9 COMPETITION The business environment in which BNRR and ATSF operate remains highly competitive. Depending on the specific market, deregulated motor carriers, other railroads and river barges exert pressure on various price and service combinations. The presence of advanced, high service truck lines with expedited delivery, subsidized infrastructure and minimal empty mileage continues to affect the market for non-bulk, time sensitive freight. The potential expansion of longer combination vehicles could further encroach upon markets traditionally served by railroads. In order to remain competitive, BNRR, ATSF, and other railroads continue to develop and implement operating efficiencies to improve productivity. As railroads streamline, rationalize and otherwise enhance their franchises, competition among rail carriers intensifies. BNRR's and ATSF's primary rail competitors in the western region of the United States consist of CP Rail Systems ("CP"), Southern Pacific Transportation Company ("SP") and Union Pacific Railroad Company ("UP"), which now includes the former Chicago & North Western Transportation Company ("C&NW"). Numerous regional railroads and motor carriers also operate in parts of the same territories served by BNRR and ATSF. Coal, one of BNRR's primary commodities, has experienced significant pressure on rates due to competition from the joint effort of C&NW/UP and from BNRR's effort to penetrate new markets. An application for approval of the proposed merger of UP and SP is now pending before the Surface Transportation Board. Approval of that transaction would create an enhanced competitor to BNRR and ATSF. BNRR and ATSF have entered into a settlement agreement with UP and SP under which, if the UP/SP combination is approved as proposed, BNRR and ATSF would obtain overhead access, and in some instances local access, through trackage rights to over 3,500 route miles of the UP/SP system, and UP and SP would sell more than 300 miles of track to BNRR or ATSF. This would provide BNRR and ATSF access to additional shippers and would improve their route structures. A decision by the Surface Transportation Board on the UP/SP transaction is scheduled in 1996. PIPELINE INVESTMENT Santa Fe Pacific Pipelines, Inc. ("SFP Pipelines"), an indirect, wholly- owned subsidiary of BNSF, serves as the general partner of Santa Fe Pacific Pipeline Partners, L.P. (the "Partnership"), a Delaware master limited partnership formed in 1988 to acquire and operate the refined petroleum products pipeline business of SFP. SFP Pipelines owns a two percent interest as the Partnership's general partner and an approximate 42 percent interest as limited partner. As general partner, SFP Pipelines is entitled to receive two percent of all amounts available for distribution by the Partnership and also an additional incentive depending upon the level of cash distributions paid to holders of limited partner interests in the Partnership ("Partnership Units"). BNSF accounts for its interest in the Partnership on the equity basis. In September 1990, SFP Pipeline Holdings, Inc., an indirect, wholly-owned subsidiary of BNSF, issued $219 million principal amount of Variable Rate Exchangeable Debentures due 2010 (the "Holdings Debentures") at an eight percent discount. The Holdings Debentures are exchangeable under certain circumstances at the option of the holders upon the first to occur of certain specified events, or final maturity, for substantially all of the Partnership Units that are owned by SFP Pipelines. The interest payable with respect to the Holdings Debentures for a particular quarter is equal to the greater of (i) the distributions of cash from operations declared by the Partnership on the Partnership Units for which such Holdings Debentures are exchangeable and (ii) two percent of the weighted average unpaid balance of such Holdings Debentures outstanding during such quarter, provided that in no event shall the amount of interest paid on the Holdings Debentures exceed an average annual rate of 16 percent since their date of issuance. The Partnership is one of the largest independent pipeline common carriers of refined petroleum products in the United States, and the largest in the western United States, in terms of product deliveries, 10 barrel miles, and pipeline mileage, with approximately 3,300 miles of pipeline serving six states. The Partnership transports refined petroleum products, including gasoline, diesel fuel, and commercial and military jet fuel, primarily for major petroleum companies, independent refiners, the United States military, and marketers and distributors of such products. The Partnership also operates 14 truck loading terminals and provides pipeline service to 44 customer-owned terminals, three commercial airports, and 12 military bases. The Partnership shipped 354.3 million barrels in 1995, up from 349.8 million barrels in 1994. Substantially all of the Partnership's pipeline operations are common carrier operations that are subject to federal or state rate regulation. The Federal Energy Regulatory Commission (FERC) exercises economic regulatory jurisdiction over interstate shipments through the Partnership's system. For a description of certain FERC proceedings challenging certain of the Partnership's rates and seeking refunds and prospective rate reductions, see the section entitled "FERC Proceeding" under Item 3, Legal Proceedings, in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995, which section is hereby incorporated by reference. Intrastate shipments are subject to economic regulation by the California Public Utilities Commission. ITEM 3. LEGAL PROCEEDINGS Set forth below is a description of certain legal proceedings involving BNSF and its subsidiaries. WHEAT AND BARLEY TRANSPORTATION RATES In September 1980, a class action lawsuit was filed against BNRR in United States District Court for the District of Montana ("Montana District Court") challenging the reasonableness of BNRR export wheat and barley rates. The class consists of Montana grain producers and elevators. The plaintiffs sought a finding that BNRR single car export wheat and barley rates for shipments moving from Montana to the Pacific Northwest were unreasonably high and requested damages in the amount of $64 million. In March 1981, the Montana District Court referred the rate reasonableness issue to the ICC. Subsequently, the state of Montana filed a complaint at the ICC challenging BNRR's multiple car rates for Montana wheat and barley movements occurring after October 1, 1980. The ICC issued a series of decisions in this case from 1988 to 1991. Under these decisions, the ICC applied a revenue to variable cost test to the rates and determined that BNRR owed $9,685,918 in reparations plus interest. In its last decision, dated November 26, 1991, the ICC found BNRR's total reparations exposure to be $16,559,012 through July 1, 1991. The ICC also found that BNRR's current rates were below a reasonable maximum and vacated its earlier rate prescription order. BNRR appealed to the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") those portions of the ICC's decisions concerning the post-October 1, 1980 rate levels. BNRR's primary contention on appeal was that the ICC erred in using the revenue to variable cost rate standard to judge the rates instead of Constrained Market Pricing/Stand Alone Cost principles. The limited portions of decisions that cover pre-October 1, 1980 rates were appealed to the Montana District Court. On March 24, 1992, the Montana District Court dismissed plaintiffs' case as to all aspects other than those relating to pre-October 1, 1980 rates. On February 9, 1993, the D.C. Circuit served its decision regarding the appeal of the several ICC decisions in this case. The court held that the ICC did not adequately justify its use of the revenue to variable cost standard as BNRR had argued and remanded the case to the ICC for further administrative proceedings. On July 22, 1993, the ICC served an order in response to the D.C. Circuit's February 9, 1993 decision. In its order, the ICC stated it would use the Constrained Market Pricing/Stand Alone Cost principles in assessing the reasonableness of BNRR wheat and barley rates moving from Montana to Pacific Coast ports from 1978 forward. The ICC assigned the case to the Office of Hearings to develop a procedural schedule. 11 On October 28, 1994, plaintiffs filed their opening evidence arguing that the revenue received by BNRR exceeded the stand alone costs of transporting that traffic and that BNRR rates were unreasonably high. BNRR filed its evidence March 29, 1995, showing that the stand alone costs of transporting the traffic exceeded the revenue derived by BNRR on that traffic and that consequently, its rates were not unreasonably high. The parties filed briefs simultaneously on August 16, 1995, and the proceeding awaits decision by the Surface Transportation Board, successor to the ICC. COAL TRANSPORTATION CONTRACT LITIGATION On April 26, 1991, an action was filed against BNRR in the 102nd Judicial District Court for Bowie County, Texas, seeking a reduction of the transportation rates required to be paid under two contracts (Southwestern Electric Power Company v. Burlington Northern Railroad Company, No. D-102-CV- 91-0720). The plaintiff, Southwestern Electric Power Company ("SWEPCO"), was challenging the contract rates for transportation of coal to its electric generating facilities at Cason, Texas, and Flint Creek, Arkansas. SWEPCO contended that productivity gains achieved by BNRR constituted unusual economic conditions giving rise to a "gross inequity" because BNRR's costs of providing service have been reduced over the contracts' terms. On August 2, 1994, plaintiff amended its complaint to further allege that BNRR had been unjustly enriched by retaining differences between the rates actually charged and those that SWEPCO alleged should have been charged. SWEPCO sought both prospective rate relief and recovery of alleged past overcharges. BNRR's primary contention was that both parties anticipated productivity gains in the rail industry when negotiating the contracts and agreed that BNRR would retain most of its productivity gains. BNRR further contended that there was no agreement that transportation rates paid by SWEPCO would be based on BNRR's cost of providing service. On November 18, 1994, the jury rendered a verdict denying plaintiff's request for prospective rate relief and that plaintiff take nothing on its principal claims of "gross inequity." However, BNRR was assessed damages approximating $56 million relating to plaintiff's alternative claim of unjust enrichment. On January 20, 1995, the trial court rendered a judgment on the verdict in an amount approximating $74 million, which included attorneys' fees and interest. The judgment further awarded post-judgment interest at 10 percent per annum and issued declaratory orders pertaining to the two contracts. BNRR filed its notice of appeal in the case on February 17, 1995 and posted a bond staying enforcement of the judgment in the Court of Appeals for the Sixth Court of Appeals District of Texas, Texarkana, Texas (Burlington Northern Railroad Company v. Southwestern Electric Power Company, No. 06-95- 00024-CV). SWEPCO has filed a notice of cross appeal and the case is awaiting review. In the opinion of outside counsel, BNRR has a substantial likelihood of prevailing on appeal, although no assurances can be given due to the uncertainties inherent in litigation. ENVIRONMENTAL PROCEEDINGS By letter dated August 31, 1995, the Wisconsin Department of Justice, on behalf of the State of Wisconsin, notified BNRR of its intent to file a complaint by the end of September 1995 seeking penalties of $200 per day, a penalty assessment, and an environmental assessment for BNRR's alleged failure, for 964 days, to submit a remedial action plan for the Ashland Railyard, Ashland, Wisconsin, by May 7, 1993, as established by the Wisconsin Department of Natural Resources. BNRR undertook groundwater monitoring and removed and disposed of all former railroad structures on the property, but because of the existence of contamination from offsite and upgradient sources, did not believe that it would be prudent or technically reasonable to accomplish site remediation until all upgradient and contributing sources were properly considered. The property had been leased for many years to another railroad which operated the railyard facility. In State of Wisconsin v. Burlington Northern Railroad Company and Soo Line Railroad Company (Case No. 96 CV 007), BNRR settled this matter for $106,580 pursuant to a stipulation and order for judgment entered on January 22, 1996, by the Circuit Court for Ashland County, Wisconsin. This matter is now considered terminated. 12 On December 18, 1995, the State of Illinois filed a Complaint captioned People of the State of Illinois v. Burlington Northern Railroad Company, Beazer East, Inc. and Koppers Industries, Inc. (PCB No. 96-132) before the Illinois Pollution Control Board against BNRR, Beazer East, Inc. and Koppers Industries, Inc. alleging violations of the Illinois Environmental Protection Act with respect to a facility in Galesburg, Illinois. This facility is not operated by BNRR. The proceeding may result in monetary sanctions in excess of $100,000. BNRR and Beazer East, Inc. have made an offer to the State of Illinois to settle this matter. MERGER-RELATED LITIGATION Numerous complaints were filed arising out of the Agreement and Plan of Merger dated June 29, 1994, as amended, between BNI and SFP. On June 30, 1994, shortly after announcement of the proposed BNI-SFP merger ("Merger"), two purported stockholder class action suits were filed in the Court of Chancery of the State of Delaware (Miller v. Santa Fe Pacific Corporation, C.A. No. 13587; Cosentino v. Santa Fe Pacific Corporation, C.A. No. 13588). On July 1, 1994, two additional purported stockholder class action suits were filed in the Court of Chancery of the State of Delaware (Fielding v. Santa Fe Pacific Corporation, C.A. No. 13591; Wadsworth v. Santa Fe Pacific Corporation, C.A. No. 13597). The actions named as defendants SFP, the individual members of the SFP Board of Directors, and BNI. In general, the actions variously alleged that SFP's directors breached their fiduciary duties to the stockholders by agreeing to the proposed merger for allegedly "grossly inadequate" consideration in light of recent operating results of SFP, recent trading prices of SFP's common stock and other alleged factors, by allegedly failing to take all necessary steps to ensure that stockholders will receive the maximum value realizable for their shares (including allegedly failing to actively pursue the acquisition of SFP by other companies or conducting an adequate "market check"), and by allegedly failing to disclose to stockholders the full extent of the future earnings potential of SFP, as well as the current value of its assets. The Miller and Fielding cases further alleged that the proposed Merger was unfairly timed and structured and, if consummated, would allegedly unfairly deprive the stockholders of standing to pursue certain pending stockholder derivative litigation. Plaintiffs also alleged that BNI was responsible for aiding and abetting the alleged breach of fiduciary duty committed by the SFP Board. The actions sought certification of a class action on behalf of SFP's stockholders. In addition, the actions sought injunctive relief against consummation of the Merger and, in the event that the Merger was consummated, the rescission of the Merger, an award of compensatory or rescissory damages and other damages, including court costs and attorneys' fees, an accounting by defendants of all profits realized by them as a result of the Merger, and various other forms of relief. On October 6, 1994, shortly after Union Pacific Corporation ("UPC") issued a press release in which it announced a proposal for UPC to acquire SFP (the "UPC Proposal"), plaintiffs in the four lawsuits described above filed in the Court of Chancery of the State of Delaware a Consolidated Amended Complaint (Miller v. Santa Fe Pacific Corporation, C.A. No. 13587). In their Consolidated Amended Complaint, plaintiffs repeated the allegations contained in their earlier lawsuits and further alleged that, in light of the UPC Proposal, SFP's directors had breached their fiduciary duties by failing to fully inform themselves about and to adequately explore available alternatives to the merger with BNI, including the alternative of a merger transaction with UPC, and by failing to fully inform themselves about the value of SFP. The Consolidated Amended Complaint sought the same relief sought in plaintiffs' earlier lawsuits and, in addition, requested that SFP's directors be ordered to explore alternative transactions and to negotiate in good faith with all interested persons, including UPC. Also, on October 6, 1994, five additional purported stockholder class action suits relating to SFP's proposed participation in the Merger with BNI were filed in the Court of Chancery of the State of Delaware (Weiss v. Santa Fe Pacific Corporation, C.A. No. 13779; Lifshitz v. Krebs, C.A. No. 13780; Stein v. Santa Fe Pacific Corporation, C.A. No. 13782; Lewis v. Santa Fe Pacific Corporation, C.A. No. 13783; Abramson v. Lindig, C.A. No. 13784). On October 7, 1994, three more purported stockholder class action suits relating to SFP's proposed participation in the Merger with BNI were filed in the Court of Chancery of the State of Delaware (Graulich v. Santa Fe Pacific Corporation, C.A. No. 13786; Anderson v. Santa Fe Pacific 13 Corporation, C.A. No. 13787; Green v. Santa Fe Pacific Corporation, C.A. No. 13788). All of these lawsuits named as defendants SFP and the individual members of the SFP Board of Directors; the Lifshitz case further named BNI as a defendant. In general, these actions variously alleged that, in light of SFP's recent operating results and the UPC Proposal, SFP's directors breached their fiduciary duties to stockholders by purportedly not taking the necessary steps to ensure that SFP's stockholders would receive "maximum value" for their shares of SFP stock, including purportedly refusing to negotiate with UPC or to "seriously consider" the UPC Proposal and failing to announce any active auction or open bidding procedures. The actions generally sought relief that is materially identical to the relief sought in the Miller case, and in addition sought entry of an order requiring SFP's directors to immediately undertake an evaluation of SFP's worth as a merger/acquisition candidate and to establish a process designed to obtain the highest possible price for SFP, including taking steps to "effectively expose" SFP to the marketplace in an effort to create an "active auction" in SFP. The Weiss case further sought entry of an order enjoining SFP's directors from implementing any poison pill or other device designed to thwart the UPC Proposal or any other person's proposal to acquire SFP. The Anderson lawsuit was subsequently withdrawn. On October 14, 1994, the Chancery Court entered an order consolidating the remaining 11 purported stockholder class action suits under the heading In Re Santa Fe Pacific Corporation Shareholder Litigation, C.A. No. 13587 (the "Shareholder Litigation"). On October 26, 1994, BNI filed a Motion to Dismiss the Consolidated and Amended Complaint. On March 6, 1995, plaintiffs in the Shareholder Litigation filed a Revised Second Consolidated and Amended Complaint, which superseded their previously filed complaints. The Revised Second Consolidated and Amended Complaint generally repeated many of the same allegations, and requested relief similar to that requested in plaintiffs' earlier complaints. In addition, the Revised Second Consolidated and Amended Complaint alleged that SFP's directors breached their fiduciary duties: by proceeding with and completing the joint SFP-BNI Tender Offer; by approving and implementing the Shareholder Rights Plan, which purportedly resulted in a "premature ending" of the "bidding process" by allegedly deterring and defeating UPC's acquisition overtures, exempting BNI from its provisions, and "coercing" SFP stockholders to vote in favor of the Merger; by approving the termination fee and expense reimbursement provisions of the Merger Agreement by authorizing the stock repurchase provisions of the Merger Agreement, which allegedly were designed to "lock-up" the Merger by providing stockholders with an "illusory promise" that the Merger Agreement exchange ratio would increase, while reserving SFP's right not to repurchase such stock; and by purportedly failing to disclose all material facts necessary for SFP's stockholders to evaluate in an informed manner and vote on the Merger, including purportedly failing to fully disclose the risks that the ICC would not approve the Merger and purportedly failing to fully disclose SFP's intentions with respect to the repurchase of SFP stock, as permitted by the Merger Agreement, as well as whether there will be a fair opportunity for all SFP stockholders to "participate" in any SFP stock repurchases, and on what basis. As additional relief to that requested in the earlier complaints, plaintiffs requested injunctive and other relief: enjoining consummation of the Merger; ordering SFP, SFP's directors, and BNI to make unspecified supplemental disclosures to stockholders; requiring SFP to conduct a new vote on the Merger subsequent to such disclosures; enjoining SFP from improperly or discriminatorily implementing the Shareholder Rights Plan or any other "defensive" tactic; ordering SFP's directors to take all appropriate steps to enhance SFP's value and attractiveness as a merger or acquisition candidate, including "effectively exposing" SFP to the marketplace by means of an active auction on a "level playing field"; and declaring the termination fee and expense reimbursement provisions of the Merger Agreement invalid and unenforceable. On March 13, 1995, SFP and SFP's directors filed a motion to dismiss the Shareholder Litigation on the grounds that the Plaintiffs failed to state a cause of action upon which relief may be granted. BNI also filed a motion to dismiss the Revised Second Consolidated and Amended Complaint. On May 31, 1995, the Delaware Chancery Court rendered its decision granting the motion to dismiss that was filed by SFP and SFP's directors on March 13, 1995 and the motion to dismiss filed by BNI. The plaintiffs appealed the dismissal to the Delaware Supreme Court. 14 On November 22, 1995, the Delaware Supreme Court issued an opinion that affirmed in part and reversed in part the May 31, 1995 decision of the Delaware Chancery Court. The Delaware Supreme Court reversed the Chancery Court's dismissal of plaintiffs' claims that, in taking the alleged "defensive" actions identified in the Revised Second Consolidated and Amended Complaint, including approval and implementation of the Shareholder Rights Plan, SFP's directors violated their fiduciary duties to stockholders. The Delaware Supreme Court affirmed the Chancery Court's dismissal of all other claims asserted by plaintiffs in the litigation, including all claims against BNI. On December 11, 1995, the SFP defendants filed with the Delaware Chancery Court a motion for summary judgment against plaintiffs' remaining claims in the Shareholder Litigation, which motion is pending. On December 29, 1995, the SFP defendants filed their Answer to plaintiffs' Revised Second Consolidated and Amended Complaint. BNSF believes this lawsuit is meritless and continues to oppose it vigorously. ICC MERGER CASE On October 13, 1994, BNI, BNRR, SFP, and ATSF ("Applicants") filed a railroad merger and control application with the ICC, Finance Docket No. 32549, Burlington Northern Inc. and Burlington Northern Railroad Company-- Control and Merger--Santa Fe Pacific Corporation and The Atchison, Topeka and Santa Fe Railway Company. Applicants sought an order, pursuant to 49 U.S.C. (S)(S) 11343-11347 (1988), approving and authorizing BNI's acquisition of control of and merger with SFP, the resulting common control of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF operations, and the merger of BNRR and ATSF. The ICC approved the application in its written decision served August 23, 1995, which decision was effective as of September 22, 1995. Several petitions for reconsideration or to reopen the ICC's decision were filed by parties to the proceeding and all of these have been denied. Additionally, eight parties to the proceeding filed petitions for review of the ICC's approval decision with the United States Court of Appeals for the District of Columbia, which petitions are now pending before that court. Each of the petitions for reconsideration or to reopen and for review challenge various aspects of the ICC's decision, including the extent of conditions imposed on its approval. None of these petitions is expected to affect materially the benefits to be realized by the acquisition of common control of BNRR and ATSF by BNSF. CROW RESERVATION CROSSING ACCIDENT CASE At approximately 10:15 a.m. on November 22, 1993, there was an accident at a BNRR railroad crossing located within the boundaries of the Crow reservation in which three members of the Crow tribe were killed. The crossing, which is located on a rural gravel road just south of Lodge Grass, Montana, was protected by crossbucks and advance warning signs. A lawsuit was filed in the Crow Tribal Court (Estates of Red Wolf, Red Horse and Bull Tail v. Burlington Northern Railroad Company, Case No. 94-31) on behalf of the estates of the driver and the two passengers. One of the passenger cases was severed and has yet to go to trial. The other two cases proceeded to trial in January 1996 and, on February 6, 1996, a Crow Tribal Court jury rendered a verdict against BNRR for compensatory damages in the total amount of $250 million. BNRR has filed an appeal to the Crow Court of Appeals in and for the Crow Indian Reservation, where it will seek, among other things, to have the case dismissed on the basis that the Crow Tribal Court lacks subject matter jurisdiction over these claims. If the appellate court fails to grant relief to BNRR, BNRR will pursue its defenses in federal court. On February 26, 1996, the Federal District Court for the District of Montana entered an order enjoining any action by plaintiffs to enforce the judgment pending appeal through the tribal court and federal court systems. BNRR was required to post a $5 million bond with the federal court. 15 OTHER CLAIMS BNSF and its subsidiaries also are parties to a number of other legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. For a description of certain claims against SFP Pipelines and the Partnership, see the sections entitled "East Line Civil Litigation and FERC Proceeding," "East Line Civil Litigation," and "FERC Proceeding" under Item 3, Legal Proceedings, of the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995, which sections are hereby incorporated by reference. While the final outcome of these and other legal actions cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of BNSF management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. Reference is made to Note 6 to the consolidated financial statements on pages 29 and 30 of BNSF's 1995 Annual Report to Shareholders for information concerning certain pending administrative appeals between BNI and SFP and the Internal Revenue Service, which information is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted by BNSF to a vote of its securities holders during the fourth quarter of 1995. EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the names, ages, and positions of all executive officers of BNSF (excluding one executive officer who is also a director of BNSF) and their business experience during the past five years. Executive officers hold office until their successors are elected or appointed, or until their earlier death, resignation, or removal. JOHN Q. ANDERSON, 44 Senior Vice President-Coal, Metals and Minerals Business Group since February 1996. Prior to that, Senior Vice President-Coal Business Group since September 1995, Executive Vice President, Coal Business Group of BNRR since June 1994, and Executive Vice President, Marketing and Sales of BNRR since February 1990. DOUGLAS J. BABB, 43 Senior Vice President and Chief of Staff since September 1995. Prior to that, Vice President and General Counsel of BNRR from December 1986. JAMES B. DAGNON, 56 Senior Vice President-Employee Relations since September 1995. Prior to that, Executive Vice President, Employee Relations of BNI since January 1992, and Senior Vice President, Employee Relations of BNI since August 1991. THOMAS N. HUND, 42 Vice President and Controller since September 1995. Prior to that, Vice President and Controller of SFP since July 1990. 16 DONALD G. MCINNES, 55 Senior Vice President and Chief Operations Officer since September 1995. Prior to that, Senior Vice President and Chief Operating Officer of ATSF since January 1994, Senior Vice President-Intermodal Business Unit of ATSF since January 1992, and Vice President-Intermodal of ATSF since July 1989. JEFFREY R. MORELAND, 51 Senior Vice President-Law and General Counsel since September 1995. Prior to that, Vice President-Law and General Counsel of SFP from October 1994, and Vice President-Law and General Counsel of ATSF from June 1989. CHARLES L. SCHULTZ, 48 Senior Vice President-Intermodal and Automotive Business Unit since February 1996. Prior to that, Vice President-Intermodal from September 1995, Vice President-Intermodal of ATSF from January 1994, Vice President-Management Services of ATSF from June 1991, and Vice President-Information Services of ATSF from July 1989. DENIS E. SPRINGER, 50 Senior Vice President and Chief Financial Officer since September 1995. Prior to that, Senior Vice President and Chief Financial Officer of SFP from October 1993, Senior Vice President, Treasurer and Chief Financial Officer of SFP from January 1992, and Vice President, Treasurer and Chief Financial Officer of SFP from January 1991. GREGORY T. SWIENTON, 46 Senior Vice President-Consumer and Industrial Business Unit since February 1996. Prior to that, Senior Vice President-Industrial Business Unit from September 1995, Executive Vice President, Intermodal Business of BNRR from June 1994, and Executive Director-Europe and Africa (Brussels) of DHL Worldwide Express (international freight company) from January 1991. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information as to the principal markets on which the common stock of BNSF is traded, the high and low sales prices of such stock for the two years ending December 31, 1995 (or the common stock of BNI prior to September 22, 1995) and the frequency and amount of dividends declared on such stock during such period, is set forth below the heading "Quarterly Financial Data-Unaudited" on page 39 of BNSF's 1995 Annual Report to Shareholders and is hereby incorporated by reference. The approximate number of record holders of the common stock at January 31, 1996 was 85,000. ITEM 6. SELECTED FINANCIAL DATA There is disclosed on page 1 of BNSF's 1995 Annual Report to Shareholders selected financial data of BNSF for each of the last five fiscal years. Such data with respect to the following topics are incorporated by reference: Revenues; Operating income (loss); Income (loss) before extraordinary item and cumulative effect of change in accounting method; Accounting change/Extraordinary item; Net income (loss); Primary earnings (loss) per share; Fully diluted earnings (loss) per share; Dividends declared per common share; Total assets; Long-term debt, including current portion and commercial paper; and Redeemable preferred stock. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 13 through 20 of BNSF's 1995 Annual Report to Shareholders is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of BNSF and subsidiary companies, together with the report thereon of Coopers & Lybrand L.L.P. dated February 15, 1996, appearing on pages 21 through 39 of BNSF's 1995 Annual Report to Shareholders, are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of BNSF is provided on pages 2 through 5 of BNSF's proxy statement dated March 5, 1996, under the heading "Name, Age and Business Experience of Nominees for Director" and the information under that heading is hereby incorporated by reference. Information concerning the executive officers of BNSF (excluding one executive officer who is also a director of BNSF) is included in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION Information concerning the compensation of directors and executive officers of BNSF is provided on pages 6 through 7 under the heading "Directors' Compensation" and pages 26 through 33 under the heading "EXECUTIVE COMPENSATION AND OTHER INFORMATION" in BNSF's proxy statement dated March 5, 1996, and the information under those headings is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the ownership of BNSF equity securities by certain beneficial owners and management is provided on pages 8 through 10 under the headings "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT" of BNSF's proxy statement dated March 5, 1996, and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is provided on page 7 under the heading "Certain Relationships and Related Transactions" of BNSF's proxy statement dated March 5, 1996, and the information under that heading is hereby incorporated by reference. 18 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:
PAGE -------- 1. Consolidated Financial Statements: Report of Independent Accountants..................................... [21*] Consolidated Statements of Income for the three years ended December 31, 1995............................................................. [22*] Consolidated Balance Sheets at December 31, 1995 and 1994............. [23*] Consolidated Statements of Cash Flows for the three years ended December 31, 1995.................................................... [24*] Consolidated Statements of Changes In Stockholders' Equity for the three years ended December 31, 1995.................................. [25*] Notes to Consolidated Financial Statements............................ [26-39*]
- -------- (*Incorporated by reference from the indicated pages of BNSF's 1995 Annual Report to Shareholders.) 2. Consolidated Financial Statement Schedules for the three years ended December 31, 1995: Report of Independent Accountants......................................... F-1 Schedule II--Valuation and Qualifying Accounts............................ F-2
Schedules other than that listed above are omitted because they are not required or applicable, or the required information is included in the consolidated financial statements or related notes. 3. Exhibits: See Index to Exhibits on pages E-1-E-4 for a description of the exhibits filed as a part of this Report. (b) Reports on Form 8-K BNSF filed the following Reports on Form 8-K during the quarter ended December 31, 1995: Registrant filed Amendment No. 1 on Form 8-K/A dated November 13, 1995 to Current Report on Form 8-K (Date of earliest event reported: September 22, 1995) which included under Item 7.B., Financial Statements, Pro Forma Financial Information and Exhibits, unaudited pro forma financial information reflecting the business combination of BNI and SFP effective September 22, 1995. Registrant filed a Current Report on Form 8-K (Date of earliest event reported: November 21, 1995) which referenced under Item 5, Other Events, the establishment by the registrant on November 21, 1995 of two new credit facilities allowing borrowings of $2.5 billion and a commercial paper program. Registrant filed a Current Report on Form 8-K (Date of earliest event reported: November 30, 1995) which referenced under Item 5, Other Events, and incorporated by reference a pro forma computation of ratio of earnings to fixed charges for the nine months ended September 30, 1995 and the year ended December 31, 1994, to reflect the business combination of BNI and SFP effective September 22, 1995. 19 SIGNATURES BURLINGTON NORTHERN SANTA FE CORPORATION, PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. BURLINGTON NORTHERN SANTA FE CORPORATION /s/ Denis E. Springer By: _________________________________ Denis E. Springer Senior Vice President and Chief Financial Officer Dated: March 29, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF BURLINGTON NORTHERN SANTA FE CORPORATION AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE --------- ----- /s/ Robert D. Krebs President and Chief Executive Officer ___________________________________________ (Principal Executive Officer), and Robert D. Krebs Director /s/ Denis E. Springer Senior Vice President and Chief Financial ___________________________________________ Officer (Principal Financial Officer) Denis E. Springer /s/ Thomas N. Hund Vice President and Controller ___________________________________________ (Principal Accounting Officer) Thomas N. Hund Joseph F. Alibrandi* Director ___________________________________________ Joseph F. Alibrandi Jack S. Blanton* Director ___________________________________________ Jack S. Blanton John J. Burns, Jr.* Director ___________________________________________ John J. Burns, Jr. Daniel P. Davison* Chairman of the Board, Director ___________________________________________ Daniel P. Davison George Deukmejian* Director ___________________________________________ George Deukmejian
S-1
SIGNATURE TITLE --------- ----- Daniel J. Evans* Director ___________________________________________ Daniel J. Evans Bill M. Lindig* Director ___________________________________________ Bill M. Lindig Ben F. Love* Director ___________________________________________ Ben F. Love Roy S. Roberts* Director ___________________________________________ Roy S. Roberts Marc J. Shapiro* Director ___________________________________________ Marc J. Shapiro Arnold R. Weber* Director ___________________________________________ Arnold R. Weber Robert H. West* Director ___________________________________________ Robert H. West J. Steven Whisler* Director ___________________________________________ J. Steven Whisler Edward E. Whitacre, Jr.* Director ___________________________________________ Edward E. Whitacre, Jr. Ronald B. Woodard* Director ___________________________________________ Ronald B. Woodard Michael B. Yanney* Director ___________________________________________ Michael B. Yanney
/s/ Jeffrey R. Moreland *By _________________________________ Jeffrey R. Moreland Senior Vice President-Law and General Counsel Attorney in Fact Dated: March 29, 1996 S-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Burlington Northern Santa Fe Corporation and Subsidiaries Our report on the consolidated financial statements of Burlington Northern Santa Fe Corporation and Subsidiaries has been incorporated by reference in this Form 10-K from page 21 of the 1995 Annual Report to Shareholders of Burlington Northern Santa Fe Corporation. In connection with our audits of such consolidated financial statements, we have also audited the related financial statement schedule listed in the index of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Fort Worth, Texas February 15, 1996 F-1 SCHEDULE II BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F -------- --------- --------- -------- ---------- -------- BALANCE BALANCE ADDITION AT END AT ADDITIONS OF SFP OF BEGINNING CHARGED ACCRUAL DEDUCTIONS PERIOD DESCRIPTION OF PERIOD TO INCOME (1) (2) (3) ----------- --------- --------- -------- ---------- -------- December 31, 1995 Casualty and environmental reserves..................... $637 $164 $320 $205 $916 ==== ==== ==== ==== ==== December 31, 1994 Casualty and environmental reserves..................... $689 $183 $-- $235 $637 ==== ==== ==== ==== ==== December 31, 1993 Casualty and environmental reserves..................... $713 $227 $-- $251 $689 ==== ==== ==== ==== ====
- -------- (1) Represents SFP's recorded liability at date of Merger (2) Principally represents cash payments (3) Classified in the consolidated balance sheet as follows:
1995 1994 1993 ---- ---- ---- Casualty and environmental reserves (current liabilities). $290 $221 $263 Casualty and environmental reserves (noncurrent liabilities)............................................. 626 416 426 ---- ---- ---- $916 $637 $689 ==== ==== ====
F-2 BURLINGTON NORTHERN SANTA FE CORPORATION INDEX OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 Agreement and Plan of Merger dated as of June 29, 1994 between Burlington Northern Inc. and Santa Fe Pacific Corporation as amended by Amendments 1 and 2 thereto, together with Amendments 3 and 4 thereto. Schedules have been omitted. Schedules will be furnished supplementally to the Securities and Exchange Commission upon request. Incorporated by reference to Exhibit 2.1 to BNSF's Report on Form 8-K (Date of earliest event reported: September 22, 1995). 3.1 Amended and Restated Certificate of Incorporation of BNSF (amended as of September 11, 1995). Incorporated by reference to Exhibit 3.1 to BNSF's Report on Form 10-Q for the quarter ended September 30, 1995. 3.2 By-Laws of BNSF (amended as of January 18, 1996). 4.1 Five-Year Revolving Credit Agreement dated as of November 21, 1995, between Burlington Northern Santa Fe Corporation and Chemical Securities Inc. and J.P. Morgan Securities as Co-arrangers and a consortium of lenders. Incorporated by reference to Exhibit 4.1 to BNSF's Current Report on Form 8-K (Date of earliest event reported: November 21, 1995). 4.2 364-Day Revolving Credit Agreement dated as of November 21, 1995, between Burlington Northern Santa Fe Corporation and Chemical Securities Inc. and J.P. Morgan Securities Inc. and a consortium of lenders. Incorporated by reference to Exhibit 4.2 to BNSF's Current Report on Form 8-K (Date of earliest event reported: November 21, 1995). BNSF is not filing any other instruments evidencing indebtedness because the total amount of securities authorized under any single such instrument does not exceed 10% of BNSF's total assets. BNSF will furnish copies of any material instruments upon request of the Securities and Exchange Commission. 10.1* Burlington Northern Santa Fe Corporation 1982 Stock Option Incentive Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62841). 10.2* Burlington Northern Santa Fe Corporation 1987 Stock Option Incentive Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62833). 10.3* Burlington Northern Santa Fe Corporation Incentive Compensation Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62835). 10.4* Burlington Northern Inc. Senior Executive Survivor Benefit Plan as of April 1, 1986. Incorporated by reference to Amendment No. 1 to BNI's Report on Form 10-K for the fiscal year ended December 31, 1987. 10.5* Burlington Northern Inc. Deferred Compensation Plan as amended effective January 1, 1991. 10.6* Burlington Northern Inc. Performance Share Unit Plan (1981) as of January 1, 1988. Incorporated by reference to Amendment No. 1 to BNI's Report on Form 10-K for the fiscal year ended December 31, 1987. 10.7* Burlington Northern Inc. 1987 Performance Share Unit Plan as of January 1, 1988. Incorporated by reference to Amendment No. 1 to BNI's Report on Form 10-K for the fiscal year ended December 31, 1987. 10.8* Burlington Northern Inc. Supplemental Benefits Plan (as amended and restated effective September 21, 1995).
- -------- *Management contract or compensatory plan or arrangement. E-1
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.9* 1989 Burlington Northern Inc. Restricted Stock Incentive Plan. Incorporated by reference to BNI's Report on Form 10-K for the fiscal year ended December 31, 1990. 10.10* Burlington Northern Santa Fe Corporation 1990 Directors Stock Option Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62825). 10.11* Burlington Northern Santa Fe Incentive Bonus Stock Program. 10.12* Burlington Northern Santa Fe Corporation 1992 Stock Option Incentive Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62839). 10.13* Burlington Northern Santa Fe Corporation 1993 Employee Stock Purchase Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-62827). 10.14* Employment Agreement dated as of December 20, 1988 by and between Burlington Northern Inc. and Gerald Grinstein. Incorporated by reference to Amendment No. 1 to BNI's Report on Form 10-K for the fiscal year ended December 31, 1988. 10.15* Employment Agreement dated as of April 27, 1992 by and between Burlington Northern Inc. and Gerald Grinstein. Incorporated by reference to Burlington Northern Inc.'s Report on Form 10-K for the fiscal year ended December 31, 1992. 10.16* Employment Agreement dated as of August 21, 1991 by and between Burlington Northern Inc. and David C. Anderson. Incorporated by reference to Burlington Northern Inc.'s Report on Form 10-K for the fiscal year ended December 31, 1991. 10.17* Employment Agreement dated as of April 18, 1994 by and between Burlington Northern Railroad Company and Ronald A. Rittenmeyer. Incorporated by reference to Exhibit 10.24 to Burlington Northern Inc.'s Report on Form 10-K for the year ended December 31, 1994. 10.18* Employment Agreement by and between Burlington Northern Inc. and Gregory T. Swienton. Incorporated by reference to Exhibit 10.23 to BNI's Report on Form 10-K for the fiscal year ended December 31, 1994. 10.19* Employment Separation Agreement between Burlington Northern Inc. and Gerald Grinstein dated as of December 15, 1995 and Consulting Agreement. 10.20* Burlington Northern Inc. Nonqualified 401(k) Restoration Plan. 10.21* Burlington Northern Inc. Form of Severance Agreement and amendments through September 18, 1995 (applicable to 25 persons as of March 28, 1996). 10.22* Burlington Northern Inc. Director's Charitable Award Program. 10.23* Burlington Northern Santa Fe Salary Exchange Option Program. 10.24* Santa Fe Pacific Corporation Supplemental Retirement Plan ("Supplemental Plan"). Incorporated by reference to Exhibit 10(d) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1984. Supplemental Plan as amended October 1, 1989, and Amendment to Supplemental Plan dated February 27, 1990, are incorporated by reference to Exhibit 10(d) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1989. Amendment to Supplemental Plan dated March 22, 1994, and effective January 1, 1994.
- -------- *Management contract or compensatory plan or arrangement. E-2
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.25* SFP Form of Severance Agreement dated November 2, 1987 (applicable to 23 persons as of March 25, 1996), as adopted in May 1987 and amended in October 1987. Incorporated by reference to Exhibit 10(j) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1987. Amendment to Form of Severance Agreement dated July 24, 1990 is incorporated by reference to SFP's Report on Form 10-Q for the Quarter ended June 30, 1990. Amendment to Form of Severance Agreement adopted January 25, 1994 is incorporated by reference to Exhibit 10.1 to SFP's Report on Form 10-Q for the quarter ended June 30, 1994. Amendment to Form of Severance Agreement dated March 28, 1995 is incorporated by reference to Exhibit 10.5 to SFP's Report on Form 10-K for the fiscal year ended December 31, 1994. 10.26* SFP Supplemental Deferred Compensation Plan. Incorporated by reference to Exhibit 10(l) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1987. 10.27* Burlington Northern Santa Fe Directors' Retirement Plan. 10.28* Benefits Protection Trust Agreement dated as of January 22, 1996 by and between BNSF and Bankers Trust Company. 10.29* Retirement Benefit Agreement dated February 26, 1992 between SFP and R. D. Krebs. Incorporated by reference to SFP's Report on Form 10-K for the fiscal year ended December 31, 1991. 10.30* Amended and Restated Trust Agreement dated as of April 1, 1994 by and between SFP and The Bank of New York. 10.31* Trust Agreement dated as of July 26, 1994 by and between SFP and The Bank of New York. 10.32* The Atchison, Topeka and Santa Fe Railway Company Incentive Compensation Plan. Incorporated by reference to Exhibit 10(n) to SFP's Report on Form 10-K for the fiscal year ended December 31, 1991. 10.33* Burlington Northern Santa Fe Long Term Incentive Stock Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-63247). 10.34* Santa Fe Pacific Corporation Supplemental Retirement and Savings Plan. Incorporated by reference to Exhibit 10(s) to SFP's Report on Form 10- K for the fiscal year ended December 31, 1993. 10.35* Burlington Northern Santa Fe Incentive Stock Compensation Plan. Incorporated by reference to BNSF's Registration Statement on Form S-8 (File No. 33-63253). 10.36* Burlington Northern Santa Fe Non-Employee Directors' Stock Plan. Incorporated by reference to Appendix A to BNSF's Proxy Statement dated March 5, 1996. 10.37* Burlington Northern Santa Fe 1996 Stock Incentive Plan. Incorporated by reference to Appendix B to BNSF's Proxy Statement dated March 5, 1996. 10.38* Burlington Northern Santa Fe Deferred Compensation Plan for Directors. 11 Computation of Earnings Per Common Share 12 Computation of Ratio of Earnings to Fixed Charges 13 1995 Annual Report to Shareholders of BNSF (Consolidated Financial Highlights on page 1, and pages 13-39, only.)
- -------- *Management contract or compensatory plan or arrangement. E-3
EXHIBIT NUMBER DESCRIPTION ------- ----------- 18 Letter Regarding Change in Accounting Principles 21 Subsidiaries of BNSF. 23 Consent of Coopers & Lybrand L.L.P. 24 Powers of Attorney. 27 Financial Data Schedule 99 Santa Fe Pacific Pipeline Partners, L.P. Report on Form 10-K for the fiscal year ended December 31, 1995 (sections in Item 3, Legal Proceedings, under the headings "East Line Litigation and FERC Proceeding," "FERC Proceeding," and "East Line Civil Litigation," only).
E-4 EX-3.2 2 BY-LAWS OF BURLINGTON NORTHERN SANTA FE CORP. EXHIBIT 3.2 BY-LAWS OF BURLINGTON NORTHERN SANTA FE CORPORATION
TABLE OF CONTENTS ARTICLE I. OFFICES.................................................................. 1 SECTION 1. Registered Office and Agent................................. 1 SECTION 2. Other Offices............................................... 1 ARTICLE II. MEETINGS OF STOCKHOLDERS................................................. 1 SECTION 1. Annual Meetings............................................. 1 SECTION 2. Special Meetings............................................ 1 SECTION 3. Place of Meetings........................................... 1 SECTION 4. Notice of Meetings.......................................... 1 SECTION 5. Quorum...................................................... 2 SECTION 6. Organization................................................ 2 SECTION 7. Voting...................................................... 2 SECTION 8. Inspectors.................................................. 3 SECTION 9. List of Stockholders........................................ 3 SECTION 10. Business at Meetings of Stockholders....................... 3 SECTION 11. No Stockholder Action by Consent........................... 4 ARTICLE III. BOARD OF DIRECTORS....................................................... 4 SECTION 1. Number, Qualification and Term of Office.................... 4 SECTION 2. Vacancies................................................... 4 SECTION 3. Resignations................................................ 4 SECTION 4. Removals.................................................... 4 SECTION 5. Place of Meetings; Books and Records........................ 4 SECTION 6. Annual Meeting of the Board................................. 4 SECTION 7. Regular Meetings............................................ 5 SECTION 8. Special Meetings............................................ 5 SECTION 9. Quorum and Manner of Acting................................. 5 SECTION 10. Chairman of the Board...................................... 5 SECTION 11. Organization............................................... 5 SECTION 12. Consent of Directors in Lieu of Meeting.................... 5 SECTION 13. Telephonic Meetings........................................ 5 SECTION 14. Compensation............................................... 6 ARTICLE IV. COMMITTEES OF THE BOARD OF DIRECTORS..................................... 6 SECTION 1. Executive Committee......................................... 6 SECTION 2. Audit Committee............................................. 6 SECTION 3. Compensation Committee...................................... 7 SECTION 4. Directors and Corporate Governance Committee................ 8 SECTION 5. Committee Chairman, Books and Records....................... 8 SECTION 6. Alternates.................................................. 8
i SECTION 7. Other Committees............................................ 8 SECTION 8. Quorum and Manner of Acting................................. 8 ARTICLE V. OFFICERS................................................................. 9 SECTION 1. Number...................................................... 9 SECTION 2. Election, Term of Office and Qualifications................. 9 SECTION 3. Resignations................................................ 9 SECTION 4. Removals.................................................... 9 SECTION 5. Vacancies................................................... 9 SECTION 6. Compensation of Officers.................................... 9 SECTION 7. President and Chief Executive Officer....................... 10 SECTION 8. Vice President and Chief Financial Officer.................. 10 SECTION 9. Vice President-Law.......................................... 10 SECTION 10. Secretary.................................................. 10 SECTION 11. Treasurer.................................................. 10 SECTION 12. Absence or Disability of Officers.......................... 11 ARTICLE VI. STOCK CERTIFICATES AND TRANSFER THEREOF.................................. 11 SECTION 1. Stock Certificates.......................................... 11 SECTION 2. Transfer of Stock........................................... 11 SECTION 3. Transfer Agent and Registrar................................ 11 SECTION 4. Additional Regulations...................................... 11 SECTION 5. Lost, Destroyed or Mutilated Certificates................... 12 SECTION 6. Record Date................................................. 12 ARTICLE VII. DIVIDENDS, SURPLUS, ETC.................................................. 12 ARTICLE VIII. SEAL..................................................................... 12 ARTICLE IX. FISCAL YEAR.............................................................. 12 ARTICLE X. INDEMNIFICATION.......................................................... 12 SECTION 1. Right to Indemnification.................................... 12 SECTION 2. Right of Indemnitee to Bring Suit........................... 13 SECTION 3. Nonexclusivity of Rights.................................... 13 SECTION 4. Insurance, Contracts and Funding............................ 13 SECTION 5. Definition of Director and Officer.......................... 14 SECTION 6. Indemnification of Employees and Agents of the Corporation.. 14 ARTICLE XI. CHECKS, DRAFTS, BANK ACCOUNTS, ETC....................................... 14 SECTION 1. Checks, Drafts, Etc.; Loans................................. 14 SECTION 2. Deposits.................................................... 14
ii ARTICLE XII. NOMINATIONS OF DIRECTOR CANDIDATES....................................... 14 SECTION 1. General..................................................... 14 SECTION 2. Nominations by Board of Directors........................... 14 SECTION 3. Nominations by Stockholders................................. 14 SECTION 4. Substitute Nominees......................................... 15 SECTION 5. Void Nominations............................................ 15 ARTICLE XIII. AMENDMENTS............................................................... 15
iii BY-LAWS OF BURLINGTON NORTHERN SANTA FE CORPORATION ARTICLE I. OFFICES SECTION 1. Registered Office and Agent. The registered office of the corporation is located at 1209 Orange Street in the City of Wilmington, County of New Castle, State of Delaware 19801, and the name of its registered agent at such address is The Corporation Trust Company. SECTION 2. Other Offices. The corporation may have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II. MEETINGS OF STOCKHOLDERS SECTION 1. Annual Meetings. A meeting of the stockholders for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting shall be held annually at 10 A.M. on the third Thursday of April, or at such other time on such other day as shall be fixed by resolution of the Board of Directors. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. SECTION 2. Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time by a majority of the Board of Directors, by the Chairman of the Board, or by the President and shall be called by the Secretary at the request of the holders of not less than fifty-one percent of all issued and outstanding shares of the corporation entitled to vote at the meeting. SECTION 3. Place of Meetings. The annual meeting of the stockholders of the corporation shall be held at the general offices of the corporation in the City of Ft. Worth, State of Texas, or at such other place in the United States as may be stated in the notice of the meeting. All other meetings of the stockholders shall be held at such places within or without the State of Delaware as shall be stated in the notice of the meeting. SECTION 4. Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice shall be given when deposited in the United States mails, postage prepaid, directed to such stockholder at his address as it appears in the stock ledger of the corporation. Each such notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 1 When a meeting is adjourned to another time and place, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is given. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 5. Quorum. At any meeting of the stockholders the holders of record of a majority of the total number of outstanding shares of stock of the corporation entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for all purposes, provided that at any meeting at which the holders of any series of class of stock shall be entitled, voting as a class, to elect Directors, the holders of record of a majority of the total number of outstanding shares of such series or class, present in person or represented by proxy, shall constitute a quorum for the purpose of such election. In the absence of a quorum at any meeting, the holders of a majority of the shares of stock entitled to vote at the meeting, present in person or represented by proxy at the meeting, may adjourn the meeting, from time to time, until the holders of the number of shares requisite to constitute a quorum shall be present in person or represented at the meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally convened. SECTION 6. Organization. At each meeting of the stockholders, the Chairman of the Board, or if he so designates or is absent, the President, shall act as Chairman of the meeting. In the absence of both the Chairman of the Board and the President, such person as shall have been designated by the Board of Directors, or in the absence of such designation a person elected by the holders of a majority in number of shares of stock present in person or represented by proxy and entitled to vote at the meeting, shall act as Chairman of the meeting. The Secretary or, in his absence, an Assistant Secretary or, in the absence of the Secretary and all of the Assistant Secretaries, any person appointed by the Chairman of the meeting shall act as Secretary of the meeting. SECTION 7. Voting. Unless otherwise provided in the Certificate of Incorporation or a resolution of the Board of Directors creating a series of stock, at each meeting of the stockholders, each holder of shares of any series or class of stock entitled to vote at such meeting shall be entitled to one vote for each share of stock having voting power in respect of each matter upon which a vote is to be taken, standing in his name on the stock ledger of the corporation on the record date fixed as provided in these By-Laws for determining the stockholders entitled to vote at such meeting or, if no record date be fixed, at the close of business on the day next preceding the day on which notice of the meeting is given. Shares of its own capital stock belonging to the corporation, or to another corporation if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the corporation, shall neither be entitled to vote nor counted for quorum purposes. At all meetings of stockholders for the election of Directors the voting shall be by ballot, and the persons having the greatest number of votes shall be deemed and declared elected. All other elections and questions submitted to a vote of the stockholders shall, unless otherwise provided by law or the Certificate of Incorporation, be decided by the affirmative vote of the majority of shares which are present in person or represented by proxy at the meeting and entitled to vote on the subject matter. 2 SECTION 8. Inspectors. Prior to each meeting of stockholders, the Board of Directors shall appoint two Inspectors who are not directors, candidates for directors or officers of the corporation, who shall receive and determine the validity of proxies and the qualifications of voters, and receive, inspect, count and report to the meeting in writing the votes cast on all matters submitted to a vote at such meeting. In case of failure of the Board of Directors to make such appointments or in case of failure of any Inspector so appointed to act, the Chairman of the Board shall make such appointment or fill such vacancies. Each Inspector, immediately before entering upon his duties, shall subscribe to an oath or affirmation faithfully to execute the duties of Inspector at such meeting with strict impartiality and according to the best of his ability. SECTION 9. List of Stockholders. The Secretary or other officer or agent having charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares of each class and series registered in the name of each such stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. Such list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section, or the books of the corporation, or to vote in person or by proxy at any such meeting. SECTION 10. Business at Meetings of Stockholders. To be properly brought before the meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 10 of Article II, provided, however, that nothing in this Section 10 of Article II shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 10 of Article II, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 3 SECTION 11. No Stockholder Action by Consent. Any action by stockholders of the corporation shall be taken at a meeting of stockholders and no action may be taken by written consent of stockholders entitled to vote upon such action. ARTICLE III. BOARD OF DIRECTORS SECTION 1. Number, Qualification and Term of Office. The business, property and affairs of the corporation shall be managed by a Board consisting of not less than three or more than twenty-one Directors. The Board of Directors shall from time to time by a vote of a majority of the Directors then in office fix within the maximum and minimum limits the number of Directors to constitute the Board. At each annual meeting of stockholders a Board of Directors shall be elected by the stockholders for a term of one year. Each Director shall serve until his successor is elected and shall qualify. SECTION 2. Vacancies. Vacancies in the Board of Directors and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director, at any regular or special meeting of the Board of Directors. SECTION 3. Resignations. Any Director may resign at any time upon written notice to the Secretary of the corporation. Such resignation shall take effect on the date of receipt of such notice or at any later date specified therein; and the acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make it effective. When one or more Directors shall resign effective at a future date, a majority of the Directors then in office, including those who have resigned, shall have power to fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective. SECTION 4. Removals. Any Director may be removed, with cause, at any special meeting of the stockholders called for that purpose, by the affirmative vote of the holders of a majority in number of shares of the corporation entitled to vote for the election of Directors, and the vacancy in the Board caused by any such removal may be filled by the stockholders at such a meeting. SECTION 5. Place of Meetings; Books and Records. The Board of Directors may hold its meetings, and have an office or offices, at such place or places within or without the State of Delaware as the Board from time to time may determine. The Board of Directors, subject to the provisions of applicable law, may authorize the books and records of the corporation, and offices or agencies for the issue, transfer and registration of the capital stock of the corporation, to be kept at such place or places outside of the State of Delaware as, from time to time, may be designated by the Board of Directors. SECTION 6. Annual Meeting of the Board. The first meeting of each newly elected Board of Directors, to be known as the Annual Meeting of the Board, for the purpose of electing officers, designating committees and the transaction of such other business as may come before the Board, shall be held as soon as practicable after the adjournment of the annual meeting of stockholders, and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held due to the absence of a quorum, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors or as shall be specified in a written waiver signed by all of the newly elected Directors. 4 SECTION 7. Regular Meetings. The Board of Directors shall, by resolution, provide for regular meetings of the Board at such times and at such places as it deems desirable. Notice of regular meetings need not be given. SECTION 8. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Secretary on the written request of three Directors on such notice as the person or persons calling the meeting shall deem appropriate in the circumstances. Notice of each such special meeting shall be mailed to each Director or delivered to him by telephone, telegraph or any other means of electronic communication, in each case addressed to his residence or usual place of business, or delivered to him in person or given to him orally. The notice of meeting shall state the time and place of the meeting but need not state the purpose thereof. Attendance of a Director at any meeting shall constitute a waiver of notice of such meeting except when a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. SECTION 9. Quorum and Manner of Acting. Except as otherwise provided by statute, the Certificate of Incorporation or these By-Laws, the presence of a majority of the total number of Directors shall constitute a quorum for the transaction of business at any regular or special meeting of the Board of Directors, and the act of a majority of the Directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the Directors present may adjourn the meeting, from time to time, until a quorum is present. Notice of any such adjourned meeting need not be given. SECTION 10. Chairman of the Board. A Chairman of the Board shall be elected by the Board of Directors from among its members for a prescribed term and may, or may not be, at the discretion of the Board of Directors, an employee or an officer of the corporation. If the Chairman is neither an employee nor an officer of the corporation he may be designated "non-executive." The Chairman of the Board shall perform such duties as shall be prescribed by the Board of Directors and, when present, shall preside at all meetings of the stockholders and the Board of Directors. In the absence or disability of the Chairman of the Board, the Board of Directors shall designate a member of the Board to serve as Chairman of the Board and such designated Board Member shall have the powers and perform the duties of the office; provided, however, that if the Chairman of the Board shall so designate or shall be absent from a meeting of stockholders, the President shall preside at such meeting of stockholders. SECTION 11. Organization. At every meeting of the Board of Directors, the Chairman of the Board or, in his absence the President or, if both of these individuals are absent, a Chairman chosen by a majority of the Directors present shall act as Chairman of the meeting. The Secretary or, in his absence, an Assistant Secretary or, in the absence of the Secretary and all the Assistant Secretaries, any person appointed by the Chairman of the meeting shall act as Secretary of the meeting. SECTION 12. Consent of Directors in Lieu of Meeting. Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee designated by the Board, may be taken without a meeting if all members of the Board or committee consent thereto in writing, and such written consent is filed with the minutes of the proceedings of the Board or committee. SECTION 13. Telephonic Meetings. Members of the Board of Directors, or any committee designated by the Board, may participate in a 5 meeting of the Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting. SECTION 14. Compensation. Each Director who is not a full-time salaried officer of the corporation or any of its wholly owned subsidiaries, when authorized by resolution of the Board of Directors may receive as a Director a stated salary or an annual retainer and in addition may be allowed a fixed fee and his reasonable expenses for attendance at each regular or special meeting of the Board or any Committee thereof. ARTICLE IV. COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. Executive Committee. The Board of Directors may, in its discretion, designate annually an Executive Committee consisting of not less than five Directors as it may from time to time determine. The Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it, but the Committee shall have no power or authority to amend the Certificate of Incorporation (except that the Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopt an agreement of merger or consolidation, recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, amend the By-Laws of the corporation, elect officers or fill vacancies on the Board of Directors or any Committee of the Board, declare a dividend, authorize the issuance of stock, or such other powers as the Board may from time to time eliminate. Without limiting the generality of the foregoing, the Committee shall monitor, review, appraise and recommend to the Board of Directors appropriate action with respect to the corporation's capital structure, its source of funds and its financial position; review and recommend appropriate delegations of authority to management on expenditures and other financial commitments; review terms and conditions of financing plans; and develop and recommend dividend policies and recommend to the Board specific dividend payments. SECTION 2. Audit Committee. The Board of Directors shall designate annually an Audit Committee consisting of not less than three Directors as it may from time to time determine, none of whom shall be an officer of the corporation, to assist the Board in fulfilling its responsibilities with respect to overseeing the accounting, auditing and financial reporting practices and the internal control policies and procedures of the corporation. Specifically, the Audit Committee is authorized and directed on behalf of the Board to: (a) Review with the independent accountants the corporation's financial statements, basic accounting and financial policies and practices, competency of control personnel, standard and special tests used in verifying the corporation's statements of account and in determining the soundness of the corporation's financial condition and report to the Board the results of such reviews. (b) Review the policies and practices pertaining to publication of quarterly and annual statements to assure consistency with audited results and the implementing of policies and practices recommended by the independent accountants. (c) Ensure that suitable independent audits are made of the operations and results of subsidiary corporations and affiliates. 6 (d) Review and approve the audit program to be conducted by the corporation's internal auditors and the results of completed audits. (e) Review the nature of, and fees charged for, all audit and non- audit services performed by the corporation's independent auditing firm. (f) Retain at its discretion independent auditors and legal counsel, at the expense of the corporation, to assist the Committee in performing the responsibilities delegated to it in this By-Law and conduct any additional reviews, discussions or investigations which in its discretion would be of assistance in fulfilling its responsibilities under this By- Law. (g) Monitor compliance with the corporation's code of business conduct, and such other duties, functions and powers as the Board may from time to time prescribe. SECTION 3. Compensation Committee. The Board of Directors may, in its discretion, designate annually a Compensation Committee, consisting of not less than five Directors as it may from time to time determine. The Committee shall review, report and make recommendations to the Board of Directors on the following matters: (a) The compensation of the Chairman of the Board, the compensation of the President following the Chairman of the Board's recommendation as to the compensation of the President, and the compensation of all senior officers of the corporation and its principal operating subsidiaries reporting directly to the President following an annual review of management's recommendations for such senior officers. If circumstances involving such senior officers require a salary adjustment between such reviews, a recommendation may be made directly to the Board of Directors by the President without the necessity of a meeting of the Compensation Committee. (b) Management recommendations for individual stock options to be granted under existing stock option plans to key executives of the corporation and its subsidiary companies. (c) The performance of the trustee of the corporation's pension trust fund and any proposed change in the investment policy of the trustee with respect to such fund. (d) Any proposed stock option plans, stock purchase plans, retirement plans and any other plans, systems and practices of the corporation relating to the compensation of any employees of the corporation and any proposed plans of any subsidiary company involving the issuance or purchase of capital stock of the corporation. (e) The evaluation of the performance of the officers of the corporation and, together with management, the selection and recommendation to the Board of Directors of appropriate individuals for election, appointment and promotion as officers of the corporation to ensure the continuity of able, capable management. (f) Such other matters as the Board may from time to time prescribe. SECTION 4. Directors and Corporate Governance Committee. The Board of Directors may, in its discretion, designate annually a Directors and Corporate Governance Committee, consisting of not less than five Directors as it may from time to time determine. The Committee shall review, report and make recommendations to the Board of Directors on the following matters: (a) The size and composition of the Board of Directors and nominees for Directors, the evaluation of the performance of the Board of Directors of the corporation, and the recommendation to the Board of Directors of compensation and benefits for Directors. (b) Such other matters as the Board may from time to time prescribe. 7 SECTION 5. Committee Chairman, Books and Records. Unless designated by the Board of Director,each Committee shall elect a Chairman to serve for such term as it may determine. Each committee shall fix its own rules of procedure and shall meet at such times and places and upon such call or notice as shall be provided by such rules. It shall keep a record of its acts and proceedings, and all action of the Committee shall be reported to the Board of Directors at the next meeting of the Board. SECTION 6. Alternates. Alternate members of the Committees prescribed by this Article IV may be designated by the Board of Directors from among the Directors to serve as occasion may require. Whenever a quorum cannot be secured for any meeting of any such Committees from among the regular members thereof and designated alternates, the member or members of such Committee present at such meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of such absent or disqualified member. Alternate members of such Committees shall receive a reimbursement for expenses and compensation at the same rate as regular members of such Committees. SECTION 7. Other Committees. The Board of Directors may designate such other Committees, each to consist of two or more Directors, as it may from time to time determine, and each such Committee shall serve for such term and shall have and may exercise, during intervals between meetings of the Board of Directors, such duties, functions and powers as the Board of Directors may from time to time prescribe. SECTION 8. Quorum and Manner of Acting. At each meeting of any Committee the presence of a majority of the members of such Committee, whether regular or alternate, shall be necessary to constitute a quorum for the transaction of business, and if a quorum is present the concurrence of a majority of those present shall be necessary for the taking of any action; provided, however, that no action may be taken by the Executive Committee when two or more officers of the corporation are present as members at a meeting of either such Committee unless such action shall be concurred in by the vote of a majority of the members of such Committee who are not officers of the corporation. 9 ARTICLE V. OFFICERS SECTION 1. Number. The officers of the corporation shall be a President, a Vice President and Chief Financial Officer, a Vice President-Law, a Secretary, and a Treasurer, each of which officers shall be elected by the Board of Directors, and such other officers as the Board of Directors may determine, in its discretion, to elect. Any number of offices may be held by the same person. Any officer may hold such additional title descriptions or qualifiers such as "Chief Executive Officer", "Chief Operating Officer", "Senior Vice President", "Executive Vice President" or "Assistant Secretary" or such other title as the Board of Directors shall determine. SECTION 2. Election, Term of Office and Qualifications. The officers of the corporation shall be elected annually by the Board of Directors. Each officer elected by the Board of Directors shall hold office until his successor shall have been duly elected and qualified, or until he shall have died, resigned or been removed in the manner hereinafter provided. SECTION 3. Resignations. Any officer may resign at any time upon written notice to the Secretary of the corporation. Such resignation shall take effect at the date of its receipt, or at any later date specified therein; and the acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make it effective. SECTION 4. Removals. Any officer elected or appointed by the Board of Directors may be removed, with or without cause, by the Board of Directors at a regular meeting or special meeting of the Board. Any officer or agent appointed by any officer or committee may be removed, either with or without cause, by such appointing officer or committee. SECTION 5. Vacancies. Any vacancy occurring in any office of the corporation shall be filled for the unexpired portion of the term in the same manner as prescribed in these By- Laws for regular election or appointment to such office. SECTION 6. Compensation of Officers. The compensation of all officers elected by the Board of Directors shall be approved or authorized by the Board of Directors or by the President when so authorized by the Board of Directors or these By-Laws. 9 SECTION 7. President and Chief Executive Officer. The President shall be the chief executive officer of the corporation and shall have, subject to the control of the Board of Directors, the general executive responsibility for the management and direction of the business and affairs of the corporation, and the general supervision of its officers, employees and agents. He shall have the power to appoint any and all officers, employees and agents of the corporation not required by these By-Laws to be elected by the Board of Directors or not otherwise elected by the Board of Directors in its discretion. He shall have the power to accept the resignation of or to discharge any and all officers, employees and agents of the corporation not elected by the Board of Directors. He shall sign all papers and documents to which his signature may be necessary or appropriate and shall have such other powers and duties as shall devolve upon the chief executive officer of a corporation, and such further powers and duties as may be prescribed for him by the Board of Directors. SECTION 8. Vice President and Chief Financial Officer. The Vice President and Chief Financial Officer shall have responsibility for development and administration of the corporation's financial plans and all financial arrangements, its insurance programs, its cash deposits and short-term investments, its accounting policies, and its federal and state tax returns. Such officer shall also be responsible for the corporation's internal control procedures and for its relationship with the financial community. SECTION 9. Vice President-Law. The Vice President-Law shall be the chief legal advisor of the corporation and shall have charge of the management of the legal affairs and litigation of the corporation. SECTION 10. Secretary. The Secretary shall record the proceedings of the meetings of the stockholders and directors, in one or more books kept for that purpose; see that all notices are duly given in accordance with the provisions of the By-Laws or as required by law; have charge of the corporate records and of the seal of the corporation; affix the seal of the corporation or a facsimile thereof, or cause it to be affixed, to all certificates for shares prior to the issue thereof and to all documents the execution of which on behalf of the corporation under its seal is duly authorized by the Board of Directors or otherwise in accordance with the provisions of the By-Laws; keep a register of the post office address of each stockholder, director or member, sign with the Chairman of the Board or President certificates for shares of stock of the corporation, the issuance of which shall have been duly authorized by resolution of the Board of Directors; have general charge of the stock transfer books of the corporation; and in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board, the President or the Vice President-Law. SECTION 11. Treasurer. The Treasurer shall have the responsibility for the custody and safekeeping of all funds of the corporation and shall have charge of their collection, receipt and disbursement; shall receive and have authority to sign receipts for all monies paid to the corporation and shall deposit the same in the name and to the credit of the corporation in such banks or depositories as the Board of Directors shall approve; shall endorse for collection on behalf of the corporation all checks, drafts, notes and other obligations payable to the corporation; shall sign or countersign all notes, endorsements, guaranties and acceptances made on behalf of the corporation when and as directed by the Board of Directors; shall give bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors may require; shall have the responsibility for the custody and safekeeping of all securities of the corporation; and in general shall have such other powers and perform such other duties as are incident to the office of Treasurer and as from time to time may be prescribed by the Board of Directors or delegated by the President or the Vice President and Chief Financial Officer. 10 SECTION 12. Absence or Disability of Officers. In the absence or disability of the Chairman of the Board or the President, the Board of Directors may designate, by resolution, individuals to perform the duties of those absent or disabled. The Board of Directors may also delegate this power to a committee or to a senior corporate officer. ARTICLE VI. STOCK CERTIFICATES AND TRANSFER THEREOF SECTION 1. Stock Certificates. Except as otherwise permitted by law, the Certificate of Incorporation or resolution or resolutions of the Board of Directors, every holder of stock in the corporation shall be entitled to have a certificate, signed by or in the name of the corporation by the Chairman of the Board, the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares, and the class and series thereof, owned by him in the corporation. Any and all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 2. Transfer of Stock. Transfer of shares of the capital stock of the corporation shall be made only on the books of the corporation by the holder thereof, or by his attorney thereunto duty authorized, and on surrender of the certificate or certificates for such shares. A person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof as regards the corporation, and the corporation shall not, except as expressly required by statute, be bound to recognize any equitable or other claim to, or interest in, such shares on the part of any other person whether or not it shall have express or other notice thereof. SECTION 3. Transfer Agent and Registrar. The corporation shall at all times maintain a transfer office or agency in the Borough of Manhattan, The City of New York, in charge of a transfer agent designated by the Board of Directors (who shall have custody, subject to the direction of the Secretary, of the original stock ledger and stock records of the corporation), where the shares of the capital stock of the corporation of each class shall be transferable, and also a registry office in the Borough of Manhattan, The City of New York, other than its transfer office or agency in said city, in charge of a registrar designated by the Board of Directors, where its stock of each class shall be registered. The corporation may, in addition to the said offices, if and whenever the Board of Directors shall so determine, maintain in such place or places as the Board shall determine, one or more additional transfer offices or agencies, each in charge of a transfer agent designated by the Board, where the shares of capital stock of the corporation of any class or classes shall be transferable, and also one or more additional registry offices, each in charge of a registrar designated by the Board of Directors, where such shares of stock of any class or classes shall be registered. Except as otherwise provided by resolution of the Board of Directors in respect of temporary certificates, no certificates for shares of capital stock of the corporation shall be valid unless countersigned by a transfer agent and registered by a registrant authorized as aforesaid. SECTION 4. Additional Regulations. The Board of Directors may make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. 11 SECTION 5. Lost, Destroyed or Mutilated Certificates. The Board of Directors may provide for the issuance of new certificates of stock to replace certificates of stock lost, stolen, mutilated or destroyed, or alleged to be lost, stolen, mutilated or destroyed, upon such terms and in accordance with such procedures as the Board of Directors shall deem proper and prescribe. SECTION 6. Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VII. DIVIDENDS, SURPLUS, ETC. Except as otherwise provided by statute or the Certificate of Incorporation, the Board of Directors may declare dividends upon the shares of its capital stock either (1) out of its surplus, or (2) in case there shall be no surplus, out of its net profits for the fiscal year, whenever, and in such amounts as, in its opinion, the condition of the affairs of the corporation shall render it advisable. Dividends may be paid in cash, in property or in shares of the capital stock of the corporation. ARTICLE VIII. SEAL The corporate seal shall have the name of the corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX. FISCAL YEAR The fiscal year of the corporation shall begin on the first day of January of each year. ARTICLE X. INDEMNIFICATION SECTION 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the full extent authorized by the Delaware General Corporation Law, as the same exists or may 12 hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), or by other applicable law as then in effect, against all expense, liability and loss (including attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators, provided, however, that except as provided in Section 2 of this Article with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee while a director or officer, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined that such indemnitee is not entitled to be indemnified under this Section 1, or otherwise. SECTION 2. Right of Indemnitee to Bring Suit. If a claim under Section 1 of this Article is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the indemnitee shall be entitled to be paid also the expense of prosecuting such suit. The indemnitee shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses where the required undertaking, if any is required, has been tendered to the Corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the indemnitee is not so entitled. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the indemnitee is not entitled to indemnification shall be a defense to the suit or create a presumption that the indemnitee is not so entitled. SECTION 3. Nonexclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 4. Insurance, Contracts and Funding. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. The Corporation may enter into contracts with any indemnitee in furtherance of the provisions of this Article and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. 13 SECTION 5. Definition of Director and Officer. Any person who is or was serving as a director of a wholly owned subsidiary of the Corporation shall be deemed, for purposes of this Article only, to be a director or officer of the Corporation entitled to indemnification under this Article. SECTION 6. Indemnification of Employees and Agents of the Corporation. The Corporation may, by action of its Board of Directors from time to time, grant rights to indemnification and advancement of expenses to employees and agents of the Corporation with the same scope and effects as the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. ARTICLE XI. CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. Checks, Drafts, Etc.; Loans. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall, from time to time, be determined by resolution of the Board of Directors. No loans shall be contracted on behalf of the corporation unless authorized by the Board of Directors. Such authority may be general or confined to specific circumstances. SECTION 2. Deposits. All funds of the Corporation shall be deposited, from time to time, to the Credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select, or as may be selected by any officer or officers, agent or agents of the corporation to whom such power may, from time to time, be delegated by the Board of Directors; and for the purpose of such deposit, the Chairman, the President, any Vice President, the Treasurer or any Assistant Treasurer, the Secretary or any Assistant Secretary or any other officer or agent to whom such power may be delegated by the Board of Directors, may endorse, assign and deliver checks, drafts and other order for the payment of money which are payable to the order of the corporation. ARTICLE XII. NOMINATIONS OF DIRECTOR CANDIDATES SECTION 1. General. Nomination of candidates for election as directors of the corporation at any meeting of stockholders called for election of directors (an "Election Meeting") may be made by the Board of Directors or by any stockholder entitled to vote at such Election Meeting. SECTION 2. Nominations by Board of Directors. Nominations made by the Board of Directors shall be made at a meeting of the Board of Directors, or by written consent of directors in lieu of a meeting, not less than 30 days prior to the date of the Election Meeting. At the request of the Secretary of the corporation each proposed nominee shall provide the corporation with such information concerning himself as is required, under the rules of the Securities and Exchange Commission, to be included in the corporation's proxy statement soliciting proxies for his election as a director. SECTION 3. Nominations by Stockholders. Not less than 50 days nor more than 75 days prior to the date of the Election Meeting any stockholder who intends to make a nomination at the Election Meeting shall deliver a notice to the Secretary of the corporation setting forth (a) as to each nominee whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the nominee, (ii) the principal occupation or employment of the nominee, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the nominee and (iv) any other 14 information concerning the nominee that would be required, under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such nominee; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the Election Meeting is given or made to stockholders, notice by the stockholder to be timely must be so delivered not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such notice shall include a signed consent to serve as a director of the corporation, if elected, of each such nominee. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. SECTION 4. Substitute Nominees. In the event that a person is validly designated as a nominee in accordance with Section 2 or Section 3 of this Article XII and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee. SECTION 5. Void Nominations. If the Chairman of the Election Meeting determines that a nomination was not made in accordance with the foregoing procedures, such nomination shall be void. ARTICLE XIII. AMENDMENTS These By-Laws may be altered or repealed and new By-Laws may be made by the affirmative vote, at any meeting of the Board, of a majority of the whole Board of Directors, subject to the rights of the stockholders of the Corporation to amend or repeal By-Laws made or amended by the Board of Directors by the affirmative vote of the holders of record of a majority in number of shares of the outstanding stock of the Corporation present or represented at any meeting of the stockholders and entitled to vote thereon, provided that notice of the proposed action be included in the notice of such meeting. 15 EX-10.5 3 DEFERRED COMPENSATION PLAN Exhibit 10.5 BURLINGTON NORTHERN INC. DEFERRED COMPENSATION PLAN As amended Effective January 1, 1991 Originally Effective July 1, 1985 BURLINGTON NORTHERN INC. DEFERRED COMPENSATION PLAN -------------------------- SECTION 1 PURPOSE ------- 1.1 Purpose. The purpose of this Plan is to permit the executives of Burlington Northern Inc. (the "Company") and its subsidiaries to defer all or some part of their base salary, in order for the Company to attract and retain exceptional executives. SECTION 2 ADMINISTRATION -------------- 2.1 Management Committee. The Plan shall be administered by a management committee (the "Management Committee") consisting of the Chief Executive Officer and such other senior officers as he or she shall designate. Subject to the Compensation and Nominating Committee of the Company's Board of Directors (the "Board"), the Management Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it, select eligible Particiants, and take all other actions necessary for its administration, which actions shall be final and binding upon all Participants. No member of the Management Committee shall vote on any matter that pertains solely to himself or herself. SECTION 3 PARTICIPANTS ------------ 3.1 Participants. The management Committee shall determine and designate the executives of the Company and its subsidiaries who are eligible to defer base salary under the Plan (the "Participants"). Participants, in general, will be limited to those executives who because of their management or staff positions have the principal responsibility for the management, direction and success of the Company as a whole or a particular business unit thereof. Directors of the Company who are full-time executives of the Company shall be eligible to participate in the Plan. SECTION 4 DEFERRALS --------- 4.1 Deferred Payment. Before January 1 of any year (or, with respect to individuals who first become Participants during a year, on or before the date on which they become Participants) each Participant may elect to have the payment of all or a portion of his or her base salary for the year beginning January 1 (or, if later, so much of the year as commences on the day following the date on which the individual becomes a Participant) deferred until the earliest to occur of his or her retirement, death, permanent disability, resignation or termination of employment with the Company. (Solely for calendar year 1985, the election shall be valid and effective as of July 1, 1985, the effective date of this Plan, if it is made on or before July 12, 1985). The election shall be irrevocable and shall be made on a form prescribed by the Management Committee. The election shall apply only to that calendar year or partial year. If a Participant has not made an election, the base salary paid to him or her for the year shall be paid in accordance with the Company's normal payroll practices. 4.2 Special Deferrals. The Management Committee may, in its discretion, approve deferred payments (called "Special Deferrals") as follows. Before January 1 of any year (or, with respect to individuals who first become Participants during a year, on or before the date on which they become Participants) each Participant may elect to have the payment of all or a portion of his or her base salary for the year beginning January 1 (or, if later, so much of the year as commences on the day following the date on which the individual becomes a Participant) deferred until the earliest to occur of the date specified by the Management Committee, or the Participant's retirement, death, permanent disability, resignation or termination of employment with the Company. The election shall be irrevocable and shall be made on a form prescribed by the Management Committee. The election shall apply only to base salary earned during that calendar year or partial year. If a Participant has not made an election for a Special Deferral, the base salary paid to him or her for that year shall be paid in accordance with Section 4.1. 4.3 Memorandum Account. The Company shall establish a ledger account (the "Memorandum Account") for each Participant who has elected to defer the payment of his or her base salary, for the purpose of reflecting the Company's obligation to pay the deferred base salary as provided in Section 4.5. A separate Memorandum Account shall be established for each Special Deferral for each Participant. Interest shall accrue on the deferred base salary to the date of distribution, and shall be credited to the Memorandum Account at the end of each calendar quarter or such other periods as may be determined by the Management Committee. The Management Committee shall determine the rate of interest periodically and in so doing may take into account the earnings, losses, appreciation or depreciation attributable to any discretionary investments made pursuant to Section 4.4. 4.4 Discretionary Investment by Company. The deferred base salary to be paid to the Participants is an unfunded obligation of the Company. The Management Committee may annually direct that an amount equal to the deferred base salary for that year shall be invested by the Company as the Management Committee, in its sole discretion, shall determine. The Management Committee -3- may in its sole discretion determine that all or some portion of an amount equal to the deferred base salary shall be paid into one or more grantor trusts to be established by the Company of which its shall be the beneficiary, and to the assets of which it shall become entitled as and to the extent that Participants receive benefits under this Plan. The Management Committee may designate an investment advisor to direct investments and reinvestments of the funds, including investment of any grantor trusts hereunder. 4.5 Payment of Deferred Base Salary. Within sixty (60) days following the earliest to occur of the retirement, death, permanent disability, resignation, termination of employment or, if relevant, Special Deferral Payment date of a Participant who has elected to defer base salary for any year, the Participant (or his or her Beneficiary in the case of his or her death) shall irrevocably elect to have the balance of his or her Memorandum Account, plus interest (at a rate determined by the Management Committee pursuant to Section 4.3) on the outstanding account balance to the date of distribution paid to him or her as follows: (a) in a lump sum cash payment; or (b) in periodic, annual installments of a period of two (2) to then (10) years. Payments shall commence or be made in January of the year following the Participant's retirement, death, permanent disability, resignation, termination of employment, or Special Deferral payment date (or within a reasonable time thereafter); provided that with respect to a Participant who retires on January 1, the Management Committee, in its sole discretion, may direct that payment shall commence or be made on the December 31 preceding the retirement date, on the January 31 following the retirement date or in January of the year following retirement, and provided further that the Management Committee, in its sole discretion, may direct payments to commence in the year of a Participant's retirement, death, resignation, termination, permanent disability or Special Deferral payment date. 4.6 Acceleration of Payment of Memorandum Account. The Management Committee, in its sole discretion, may accelerate the payment of the unpaid balance of a Participant's Memorandum Account upon its determination that the Participant (or his Beneficiary in the case of his death) has incurred a severe and unexpected financial hardship. Such accelerated payment shall not exceed the amount necessary to relieve such hardship. The Management Committee in making its determination may consider such factors and require such information as it deems appropriate. -4- SECTION 5 GENERAL PROVISIONS ------------------ 5.1 Unfunded Obligation. The amounts to be paid to Participants pursuant to this Plan are unfunded obligations of the Company. The Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments including trust investments which the Company may make to fulfill this obligation shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or memorandum accounts shall not create or constitute a trust or a fiduciary relationship between the Management Committee or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan. 5.2 Base Salary. The term "base salary" shall mean the Participant's base salary being paid for the year or partial year, exclusive of bonuses or other forms of cash incentive compensation for the year. 5.3 Beneficiary. The term "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. The designation shall be on a form provided by the Management Committee, executed by the Participant, and delivered to the Committee. A Participant may change his beneficiary designation at any time. If no beneficiary is designated, the designation is ineffective, or in the event the Beneficiary dies before the balance of the Memorandum Account is paid, the balance shall be paid to the Participant's spouse, or if there is no surviving spouse, to his or her lineal descendants, pro rata, or if there is no surviving spouse or lineal descendants, to the Participant's estate (unless the Management Committee for a given year has designated investment in an annuity, in which case the payment options selected by the Participant with respect thereto shall govern). 5.4 Permanent Disability. A Participant shall be deemed to have become disabled for purposes of this Plan if the Management Committee finds, upon the basis of medical evidence satisfactory to it, that the Participant is totally disabled, whether due to physical or mental condition, so as to be prevented from engaging in further employment by the Company or any of its subsidiaries and that such disability will be permanent and continuous during the remainder of his or her life. -5- 5.5 Incapacity of Participant or Beneficiary. If the Management Committee finds that any Participant or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefore shall ave been made by a duly appointed legal representative) at the discretion of the Committee, may be paid to the spouse, child, parent or brother or sister of such Participant or Beneficiary or to any person whom the Committee has determined has incurred expense for such Participant or Beneficiary. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan. 5.6 Nonassignment. The right of a Participant or Beneficiary to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution or other legal process. 5.7 No Right to Continued Employment. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a subsidiary, nor interfere in any way with the right of the Company or a subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. 5.8 Withholding Taxes. Appropriate payroll taxes shall be withheld from cash payments made to Participants pursuant to this Plan. 5.9 Termination and Amendment. The Compensation and Nominating Committee may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Committee may reinstate any or all of its provisions. The Management Committee may amend the Plan provided that it may not suspend or terminate the Plan, substantially increase the administrative cost of the Plan or the obligations of the Company, or expand the classification of employees who are eligible to participate in the Plan. No amendment, suspension or termination may impair the right of a Participant or his designated Beneficiary to receive the deferred compensation benefit accrued prior to the later of the date of adoption or the effective date of such amendment, suspension or termination. 5.10 Applicable Law. The Plan shall be construed and governed in accordance with the laws of the State of Texas. -6- EX-10.8 4 SUPPLEMENTAL BENEFITS PLAN EXHIBIT 10.8 BURLINGTON NORTHERN INC. SUPPLEMENTAL BENEFITS PLAN As Amended and Restated Effective September 21, 1995 BURLINGTON NORTHERN INC. SUPPLEMENTAL BENEFITS PLAN Table of Contents -----------------
Page ---- SECTION 1 - PURPOSE................................................... 1 SECTION 2 - ADMINISTRATION............................................ 1 SECTION 3 - PARTICIPANTS.............................................. 1 SECTION 4 - BENEFITS.................................................. 2 SECTION 5 - GENERAL PROVISIONS........................................ 3
BURLINGTON NORTHERN INC. SUPPLEMENTAL BENEFITS PLAN -------------------------- SECTION 1 PURPOSE ------- 1.1 Purpose. The purpose of the Supplemental Benefits Plan (the "Plan") is to attract and retain officers and key salaried employees of outstanding competence in the employ of Burlington Northern Inc. (the "Company") and its subsidiaries by providing supplemental pension benefits to Participants: (a) based upon deferred base salary and/or deferred bonuses accrued under the Company's Deferred Compensation and Incentive Compensation Plans or other similar plans maintained by the Company's subsidiaries or such additional deferred compensation plans as may be designated by the Company from time to time (collectively the "Deferred Compensation Plans"), and/or (b) which are in excess of the maximum pension benefits permitted under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986, as amended (collectively the "ERISA or Code Limitations"). SECTION 2 ADMINISTRATION -------------- 2.1 Management Committee. This Plan shall be administered by a management committee (the "Management Committee") consisting of the Chief Executive Officer and such other senior officers as he or she shall designate. Subject to the Compensation and Nominating Committee of the Company's Board of Directors (the "Board"), the Management Committee shall, and shall have the discretion to, interpret and construe Plan terms; prescribe, amend and rescind rules relating to it; select eligible Participants; and take all other action necessary for its administration, which actions shall be final and binding upon all Participants. SECTION 3 PARTICIPANTS ------------ 3.1 Participants. The Management Committee shall determine and designate the officers and key salaried employees of the Company and its subsidiaries who are eligible to 1 receive payments under the Plan (the "Participants"). Participants, in general, will be those officers and key salaried employees who have elected to defer all or a portion of their base salary and/or incentive bonuses under the Deferred Compensation Plans and/or who are entitled to pension benefits in excess of the maximum benefits permitted under the ERISA or Code Limitations. SECTION 4 BENEFITS -------- 4.1 Supplemental Pension Benefits. Upon the retirement of a Participant, the Company shall pay to such Participant (or his or her surviving spouse in the case of his or her death) supplemental pension benefits, which when combined with the amounts he or she is entitled to receive under the Burlington Northern Inc. Pension Plan plus any amounts he or she is entitled to receive under any pension plans maintained by subsidiaries of the Company (collectively the "Pension Plan"), shall equal the retirement or surviving spouse pension benefits which would have been payable to the Participant or his or her surviving spouse had the Pension Plan's formula been applied (a) without regard to the limitations on annual benefit amounts under Code section 415 (including, but not limited to, the effect on early retirement benefits and combined plan limits under such Code section), (b) by including in the Participant's compensation any deferred base salary and any deferred bonuses accrued for the Participant's account under the Deferred Compensation Plans during the period for which the Pension Plan benefits are computed, (c) by taking into account compensation under the Pension Plan which is in excess of the Code section 401(a)(17) limits for any year so considered, and (d) by taking into account service granted to the Participant and any benefit formula adjustments required by an employment contract which is identified on Appendix 1 hereto and which shall be incorporated by reference herein where the terms of any such contract would so apply. 4.2 Election of Method of Payment. Before the retirement of a Participant, such Participant may elect that supplemental pension benefits payable to him or her under the Plan be paid to him or her either: (a) in a lump sum cash payment; or (b) in monthly installments to be paid according to the same method of payment and at the same time during the month as benefits are paid under the Pension Plan; subject to approval of the Management Committee. The election shall be irrevocable and shall be made on a form prescribed by the Management Committee. If a Participant has not made an election prior to retirement, payment shall be made to him or her in accordance with subsection (b) of this Section 4.2. 2 4.3 Payment of Supplemental Pension Benefits. Upon the retirement of a Participant (or his or her death if his or her surviving spouse is entitled to surviving spouse benefits under the Pension Plan), the Company shall pay to such Participant (or his or her surviving spouse in the case of such Participant's death if the spouse is entitled to surviving spouse benefits under the Pension Plan) the amount determined under Section 4.1, payable in accordance with Section 4.2. Payment of supplemental pension benefits attributable to a Participant's employment with Burlington Northern Railroad Company shall be made in the year in which the Participant retires or dies. The Management Committee, in its sole discretion, may direct that payment of supplemental pension benefits commence or be made in the month in which a Participant retires or dies or in January of the following year. Notwithstanding the foregoing, the Management Committee may also direct that payment with respect to any Participant who retires on January 1 may commence or be made on the December 31 preceding the retirement date. 4.4 Acceleration of Payment of Supplemental Pension Benefits. The Management Committee, in its sole discretion, may accelerate the payment of the unpaid supplemental pension benefits upon the Participant's retirement (or his or her death if his or her surviving spouse is entitled to surviving spouse benefits under the Pension Plan) or upon its determination that the Participant (or his or her surviving spouse in the case of his or her death if such spouse is entitled to surviving spouse benefits under the Pension Plan) has incurred a severe financial hardship. The Management Committee, in making its determination, may consider such factors and require such information as it deems appropriate. 4.5 Present Value of Lump Sum or Accelerated Payments. In the event that a Participant elects a lump sum payment under Section 4.2(a) of this Plan or the Management Committee accelerates payment under Section 4.4 of this Plan, the supplemental pension benefit to be paid to such Participant shall be commuted to its present value to be determined using the Pension Benefit Guaranty Corporation's immediate annuity rate in effect on January 1 of the year in which the supplemental pension benefit is paid. Payment of the amount so determined shall be in full satisfaction of any and all benefits owing under this Plan. SECTION 5 GENERAL PROVISIONS ------------------ 5.1 Unfunded Obligation. The supplemental pension benefits to be paid to Participants and/or their surviving spouses pursuant to this Plan are unfunded obligations of the Company. The Company is not required to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to these obligations. Title to and beneficial ownership of any investments including trust investments which the Company may make to fulfill these obligations shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or memorandum accounts shall not create or constitute a trust or a fiduciary relationship between the Management Committee or the 3 Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her surviving spouse or his or her creditors in any assets of the Company whatsoever. The Participants and their surviving spouses shall have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan. 5.2 Discretionary Investment by Company. The Management Committee, after consulting with the actuary employed by the Company in conjunction with the Pension Plan, may from time to time direct the investment by the Company of an amount sufficient to meet all or such portion of the supplemental pension benefits to be paid under this Plan as the Management Committee, in its sole discretion, shall determine. The Management Committee may in its sole discretion determine that all or some portion of the amount to be invested shall be paid into one or more grantor trusts to be established by the Company, of which it shall be the beneficiary, and to the assets of which it shall become entitled as and to the extent that Participants (or their surviving spouses in the case of their deaths) receive benefits under this Plan. The Management Committee may designate an investment advisor to direct investments and reinvestments of the funds, including investments of any grantor trusts hereunder. 5.3 Definitions. The following terms for purposes of this Plan shall have the following meanings: (a) The terms "base salary" and "deferred bonus" shall have the meanings set forth in the respective Deferred Compensation Plans; (b) The term "surviving spouse" shall mean the person to whom surviving spouse benefits are to be paid pursuant to the terms of the Pension Plan. 5.4 Incapacity of Participant or Surviving Spouse. If the Management Committee finds that any Participant or surviving spouse to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefore shall have been made by a duly appointed legal representative) at the discretion of the Management Committee may be paid to the spouse, child, parent or brother or sister of such Participant or surviving spouse or to any person whom the Management Committee has determined has incurred expense for such Participant or surviving spouse. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan to the extent of such payment. 5.5 Nonassignment. The right of a Participant or his or her surviving spouse to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor, to the maximum extent permitted by law, shall such right or other interests be subject to attachment, garnishment, execution or other legal process. 5.6 No Right to Continued Employment. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a 4 subsidiary, nor interfere in any way with the right of the Company or a subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. To the maximum extent permitted by law, employment with the Company or a subsidiary is employment at will. 5.7 Withholding Taxes. The Company shall have the right, at the time of a Participant's taxation, to make adequate provision for any federal, state, local or foreign taxes which it believes are or may be required by law to be withheld with respect to such an award or benefit under the Plan ("Tax Liability"), to ensure the payment of any such Tax Liability. The Company may provide for the payment of any Tax Liability by any of the following means or a combination of such means, as determined by the Management Committee in its sole and absolute discretion in the particular case: (i) by requiring the Participant to tender a cash payment to the Company, (ii) by withholding from the Participant's cash compensation, or (iii) by any other method deemed appropriate by the Management Committee. 5.8 Termination and Amendment. The Compensation and Nominating Committee of the Board may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Committee may reinstate any or all of its provisions. The Management Committee may amend the Plan provided that it may not suspend or terminate the Plan, substantially increase the administrative cost of the Plan or increase the obligations of the Company, or expand the classification of employees who are eligible to participate in the Plan. No amendment, suspension or termination may, however, impair the right of a Participant or his or her surviving spouse to receive the supplemental pension benefits accrued prior to the effective date of such amendment, suspension or termination. 5.9 Construction. To the extent that the Plan provides benefits which would be provided under the Pension Plan but for the limitations imposed by Code sections 401 and 415, the Plan is intended to be an "excess benefit plan" within the meaning of ERISA. To the extent that the Program provides other benefits, it is intended to be "an unfunded deferred compensation plan for a select group of management or highly compensated employees" within the meaning of ERISA. Each provision of the Plan shall be administered, interpreted and construed to carry out such intention, and any provision that cannot be so administered, interpreted and construed, shall, to that extent, be disregarded. 5.10 Application Law. The Plan shall be construed and governed in accordance with the laws of the state of Texas. 5 EX-10.11 5 INCENTIVE BONUS STOCK PROGRAM Exhibit 10.11 BURLINGTON NORTHERN SANTA FE INCENTIVE BONUS STOCK PROGRAM 1. AUTHORITY TO ADOPT. This program (the "Program") has been adopted by the Compensation Committee (the "Committee") of the Board of Directors of Burlington Northern Santa Fe Corporation (the "Company") pursuant to its authority to promulgate rules for the administration and operation of the Burlington Northern Santa Fe 1996 Stock Incentive Plan (the "Plan") for Restricted Stock grants; 2. PURPOSE. The purpose of this Program is to enable the Committee and its designated representatives to implement Restricted Stock grants (an "Exchange Grant") in exchange for a key employee electing to exchange receipt of cash compensation and other forms of compensation designated by the Committee ("Elective Compensation"). 3. ELIGIBILITY. The Committee shall designate key employees or classes of eligible employees (the "Eligible Participants") who shall be eligible to receive an Exchange Grant in exchange for foregoing Elective Compensation. 4. AMOUNT OF ELECTIVE COMPENSATION. Unless the Committee shall designate another amount of Elective Compensation as to any Eligible Participant, each Eligible Participant may elect to exchange all or any portions of the following element of compensation for an Exchange Grant: 100% of such Eligible Participant's annual incentive payment payable in the following calendar year, based upon the annual incentive compensation plan established for such Eligible Participant. 5. METHOD OF ELECTION. Unless the Committee shall designate another time or times for making an election to forego receiving Elective Compensation, an Eligible Participant who wishes to receive an Exchange Grant (an "Electing Participant") must deliver to the Senior Vice President - Employee Relations, a written irrevocable election in a form acceptable to the Senior Vice President - Law of Burlington Northern Santa Fe Corporation specifying the amount of Elective Compensation the Electing Participant wishes to forego (the "Cancelled Incentive Payment"), not later than the date established by the Committee from time to time or July 1 of the fiscal year in which the Eligible Participant earns the annual incentive. Notwithstanding the foregoing, any officer of the Company subject to Section 16(b) of the Securities Exchange Act of 1934, must make such election not less than six months before the scheduled grant date. 6. DATE OF GRANT. Unless otherwise determined by the Committee, the Exchange Grant will be issued once a year on or about January 31 following the year in which the Elective Compensation is earned. 7. VALUATION. For purposes of determining the number of shares subject to an Exchange Grant, the following valuation rules shall apply. (1) The Cancelled Incentive Payment otherwise payable in cash will be valued at its dollar equivalent; and (2) The Restricted Stock award shall be equal to the number of shares determined by dividing 150% of the Cancelled Incentive Payment by the Fair Market Value of Company stock, determined under the Plan on the date of grant. 8. VESTING. The Exchange Grant shall be subject to restrictions for a period of three years from the date of grant, provided however, the Committee may establish performance objectives for each grant to permit the restrictions to lapse over a shorter period, but in no event shall restrictions lapse in less than one year. Notwithstanding the foregoing, the Committee retains discretion to amend or modify these performance objectives at any time. 9. COMMITTEE DISCRETION. Notwithstanding anything else contained herein to the contrary, the Committee shall have the right prior to the grant date, to override an election in whole or in part. If the Committee overrides an election in whole or in part, the Company shall reinstate the amount of the Cancelled Incentive Payment related thereto. 10. UNVESTED RESTRICTED STOCK. a) In the event that a participant with an Exchange Grant resigns or is terminated for Cause, the full amount of the Exchange Grant shall be forfeited. b) In the event that a participant with an Exchange Grant dies, all restrictions shall lapse and the full amount of the Exchange Grant shall be vested. c) In the event that a participant with an Exchange Grant terminates due to disability, or is involuntarily terminated by the Company other than for Cause, the Committee agrees to permit a participant to elect to receive (i) a proration of the outstanding award as set forth in the Plan or (ii) to surrender the Exchange Grant in exchange for the amount of the cash award previously foregone and the award of Restricted Stock will terminate as if never granted. In the event of retirement, as defined in the Burlington Northern Santa Fe 1996 Stock Incentive Plan, the Committee may in its discretion permit a participant to receive (i) a proration of the outstanding award as set forth in the Plan or (ii) to surrender the Exchange Grant in exchange for the amount of the cash award previously foregone and the award of Restricted Stock will terminate as if never granted. d) The Change in Control provisions set forth in the Plan shall apply to all grants of Restricted Stock issued pursuant to these Exchange Procedures or may be modified by the Committee in its sole discretion prior to the date of an Exchange Grant. e) The Committee may in its sole discretion, and based upon special circumstances, award a participant who forfeits an Exchange Grant with a cash award equal to the Cancelled Incentive Payment. The cash award may be subject to such special conditions as the Committee may deem appropriate. 11. GRANT TERMS. The grant shall be issued from authorized, but unissued shares or from treasury shares. 12. AMENDMENTS. This procedure may be amended at any time and from time to time by resolution of the Committee. EX-10.19 6 SEPARATION AGREEMENT EXHIBIT 10.19 SEPARATION AGREEMENT -------------------- Burlington Northern Inc. ("Company") and Gerald Grinstein ("Employee") hereby enter into this Employment Separation Agreement ("Agreement") in accordance with the terms and conditions, and for the consideration, described below: 1. Employee will remain on the payroll of the Company through December 30, 1995, at which time Employee's employment relationship with the Company will be terminated. 2. Employee shall not be entitled to participation in any benefit plans, except as specified in this Agreement and his Consulting Agreement. The Company will provide Employee the following benefits: (a) Employee will be paid for his earned and accrued, but unused, 1995 and 1996 vacation. (b) Employee will be paid a lump sum separation payment of One Million, Five Hundred Thousand Dollars ($1,500,000) on December 30, 1995. Employee agrees that this payment is in lieu of any bonus for which he would have been eligible. (c) Employee shall have the right to request and receive a one-time cash payment at any time during a three-year period, commencing December 30, 1995, in an amount equal to 59,800 times a sum which is equal to the difference between $59.375 and the closing price of Burlington Northern Santa Fe Corporation's common stock on the date the request for payment is made by Employee. (d) Company will provide Employee with home sale benefits (except for Loss on Sale) described in Section 3 and relocation of household goods benefits as described in Section 8 of the Company's Exempt Employee Relocation Guide in effect on September 21, 1995. The right to the benefits described in this paragraph must be exercised by Employee prior to December 30, 1996, at which time these benefits expire. In consideration of the foregoing, Employee hereby releases Company from any and all causes of action or claims arising out of or pertaining to his employment by Company, including, but not limited to, causes of action or claims based upon (1) merger protection imposed by the Interstate Commerce Commission (ICC) on its decisions approving the Northern Lines (331 I.C.C. 228) or Frisco (360 I.C.C. 788) mergers or any other merger governed by the ICC; (2) any federal, state or municipal law related to employment discrimination, including the Age Discrimination in Employment Act, 29 U.S.C. (S)621 et seq., and the Americans with Disabilities Act; (3) any seniority of employment rights under any collective bargaining agreement; and (4) Gerald Grinstein Page 2 Employee understands that the execution of this Agreement will not deprive him of any existing vested benefits under the Company's Pension Plan, Thrift and Profit Sharing Plan, Restricted Stock Incentive Plan, Stock Option Incentive Plan, or Deferred Compensation Plan. Employee agrees not to disclose or to discuss with any person (except as permitted in the next sentence) the substance of this Agreement. The preceding sentence shall not be applicable to disclosure and/or discussion with representatives of the Internal Revenue Service, with immediate family members and with professionals from whom legal and/or financial advice is sought, provided they are instructed to keep the information confidential. Any breach of this requirement will subject Employee to forfeiture of any benefits payable hereunder. Employee understands that he has the right to revoke within seven days after signing this Agreement. To do so, Employee understands that he must deliver the revocation by mail, postmarked within the seven day period, properly addressed to the Executive Vice President Employee Relations of the Company and sent certified mail, return receipt requested. After the revocation period has elapsed and Employee has not revoked, Employee understands this Agreement is irrevocable and binding upon his heirs, executors, administrators, legal representatives, successors and assigns. It is mutually agreed that this Agreement shall be subject to interpretation pursuant to the laws and statutes of the state of Texas, which is the situs of the Company's headquarters. Employee acknowledges that, prior to signing this Agreement he has been advised to review his legal rights with a counsel of his choice and has either done so or knowingly waived his right to do so. Employee also acknowledges that he has been given 21 days to review this Agreement. Employee has signed this Agreement without duress or coercion of any type and has done so voluntarily and with understanding of the terms of this Agreement. Any dispute over this Agreement shall be handled by arbitration under the Company's dispute resolution procedures. /s/ Gerald Grinstein 12/15/95 - -------------------- -------------- Gerald Grinstein Date APPROVED: By Order of the Burlington Northern Inc. Board of Directors on September 22, 1995 /s/ James B. Dagnon - ------------------------------------------- James B. Dagnon Executive Vice President Employee Relations Burlington Northern Inc. CONSULTING AGREEMENT dated as of September 1995 (the "Agreement") by and between Burlington Northern Inc., a Delaware corporation (the "Company"), and Gerald Grinstein ("Consultant"). WHEREAS, the Consultant has served as the Chairman and Chief Executive Officer of the Company since July 1991, and has served in similar capacities at the Company's major subsidiary, Burlington Northern Railroad Company ("BNRR") and prior to 1991, has served in other senior executive positions at the Company and BNRR; WHEREAS, the Company has announced a Plan of Merger with Santa Fe Pacific Corporation, which is expected to become effective on September 22, 1995 (the "Merger"); WHEREAS, Consultant is expected to serve the Company after the Merger as Chairman until January 1, 1996, as of which date he has announced his intention to retire; WHEREAS, in connection with the transition to the Company's new merged operations and management team, the Company's management desires that it be able to call upon the experience and knowledge of Consultant for consultation services and advice; and WHEREAS Consultant is willing to render such services to the Company on the terms and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Agreement. Consultant shall be retained by the Company for a period of three years commencing on January 1, 1996, which period may be extended or renewed by mutual agreement in writing of the parties hereto. The initial period and any extensions or renewals thereof shall constitute the "Consulting Term". 2. Position and Responsibilities. Consultant agrees to make himself available to the Chief Executive Officer and the Board of Directors (including any committee thereof) of the Company to consult with them and to render such advice and services as may be reasonably required by such individuals; provided that in no event shall Consultant be required to consult for more than 90 days in any 12- month period during the Consulting Term. During the Consulting Term, consultant shall report directly to the Chief Executive Officer or the Board of Directors (or the applicable committee thereof) of the Company. 3. Compensation. The Company shall pay Consultant a retainer (the "Retainer") of $375,000 per year, which amount shall be reduced to $262,000 on January 1, 1997 and shall be further reduced to $150,000 on January 1, 1998. The Retainer shall be payable in equal monthly installments during the Consulting Term. Consultant shall be entitled to the full Retainer regardless of the amount and frequency of consulting services actually rendered by him, subject to his continued compliance with Sections 2 and 8 of this Agreement. 4. Expenses and Other Facilities. (a) Subject to Consultant's continued compliance with his obligations under Sections 2 and 8 of this Agreement, (i) Consultant shall be reimbursed in accordance with the policies of the Company for necessary and reasonable business expenses incurred by Consultant in connection with the performance of his duties hereunder; and (ii) Consultant shall be furnished with an office and secretary for his use, with available facilities comparable to those to which he has access on the date of this Agreement. (b) In consideration of his agreement to perform consulting services under this Agreement, Consultant shall be furnished, at the Company's expense, with financial planning services for the period beginning January 1, 1996 and ending December 31, 1996. 5. Additional Amounts. In regard to a loan from the Company to Consultant which 2 is currently outstanding, the Company agrees that as of January 1, 1997 and on January 1 of each of the two succeeding years, subject to Consultant's continued compliance with his obligations under Sections 2 and 8 of this Agreement, the Company will forgive a portion of the amount of such loan which is outstanding on any such date, which portion shall be a fraction the numerator of which shall be 1 and the denominator of which shall be 3 in 1997, 2 in 1998, and 1 in 1999. In the event that Consultant breaches any of his obligations under Section 2 or Section 8 of this Agreement, the then outstanding balance of the loan shall thereupon immediately become due and payable. 6. Termination. (a) This Agreement and Consultant's retention hereunder may be terminated at any time by either the Company or Consultant upon thirty (30) days prior written notice to the other. In the event of such a termination by the Company, other than termination for death, "Disability" or "Cause", as such terms are hereinafter defined, or in the event of a termination by Consultant for breach of this Agreement by the Company, Consultant shall be entitled to receive the Retainer for the remainder of the Consulting Term in accordance with Section 3. In addition, upon any such termination, Consultant shall be entitled to any amounts owing to him under Section 4, and immediate forgiveness in full of the outstanding balance of the loan referred to in Section 5. (b) For purposes of this Agreement, "Cause" shall mean (i) Consultant's willful and continued failure to substantially perform his duties hereunder (other than as a result of Disability, as hereinafter defined, or as a result of breach of this Agreement by the Company, (ii) Consultant's intentional dishonesty in the performance of his duties hereunder or (iii) an act or acts on Consultant's part constituting a felony under the laws of the United States or any state 3 thereof. (c) In the event of the termination of this Agreement as a result of Consultant's death, or as a result of his inability to perform his obligations hereunder due to physical or mental illness ("Disability"), the outstanding balance of the loan referred to in Section 5 shall thereupon immediately be forgiven in full. The existence of Disability shall be determined by a qualified physician selected by the Company and reasonably acceptable to Consultant. 7. Status; Taxes. (a) During the Consulting Term, Consultant shall not be an employee of the Company and shall not be entitled to participate in any employee benefit plans or other benefits or conditions of employment available to the employees of the Company, except to the extent that he may be receiving benefits under any such plan as a result of his status as a former employee or retiree of the Company or BNRR. Consultant shall have no authority to act as an agent of the Company, except on authority specifically so delegated, and he shall not represent to the contrary to any person. Consultant shall only consult, render advice and perform such tasks as Consultant determines are necessary to achieve the results specified by the Company. He shall not direct the work of any employee of the Company, or make any management decisions, or undertake to commit the Company to any course of action in relation to third persons. Although the Company may specify the results to be achieved by Consultant and may control and direct him in that regard, the Company shall not control or direct Consultant as to the details or means by which such results are accomplished. (b) It is intended that the fees paid hereunder as shall constitute revenues to Consultant. To the extent consistent with applicable law, the Company will not withhold any amounts 4 therefrom as federal income tax withholding from wages or as employee contributions under the Federal Insurance Contributions Act or any other state or federal laws. Consultant shall be solely responsible for the withholding and/or payment of any federal, state or local income or payroll taxes. 8. Covenants. (a) During the Consulting Term, Consultant shall not directly or indirectly be or remain employed or retained by, or render any services to, any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise which is operating a Class I railroad in the United States, which employment or retention is in a capacity similar to that in which he has been employed by the Company or to that in which he is retained hereby or which services are similar to those he provided to the Company as Chairman and Chief Executive Officer or to those he is obligated to provide hereunder. (b) During and after the Consulting Term, Consultant shall not disclose or use for Consultant's own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company; provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Consultant's breach of this covenant. 5 (c) From and after the date hereof, Consultant shall not take any action or engage in any conduct which is inconsistent with or injurious to the interests of the Company, BNRR or any of their respective affiliates. 9. Specific Performance. Consultant acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Section 3 would be inadequate and, in recognition of this fact, Consultant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 10. Fees and Expenses. The Company agrees, in the event of a dispute between Consultant and the Company with respect to any of Consultant's rights under this Agreement, to reimburse Consultant for any and all reasonable legal fees and related expenses incurred by Consultant in connection with enforcing such rights if Consultant is successful as to at least part of the disputed claim by reason of arbitration, litigation or settlement. 11. Miscellaneous. (a) Governing law; No Liability of Consultant. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. Consultant shall not be subject to liability for breach of this Agreement by reason of his termination of his retention hereunder. (b) Entire Agreement; Amendments. This Agreement contains the entire understanding of the parties with respect to the retention of Consultant by the Company. There 6 are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. (e) Assignment. This Agreement shall not be assignable by Consultant and shall be assignable by the Company only with the consent of Consultant; provided that no such assignment by the Company shall relieve the Company of any liability hereunder, whether accrued before or after such assignment. (f) Arbitration. Any dispute between the parties to this Agreement arising from or relating to the terms of this Agreement or the retention of Consultant by the Company shall be submitted to arbitration in Fort Worth, Texas under the auspices of the American Arbitration Association. (g) Successors; Binding Agreement. (i) Except in the instance in which this Agreement will become binding upon a 7 successor to the Company by operation of law, the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or the assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Except in the instance in which this Agreement will become binding upon a successor by operation of law, failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Consultant to compensation from the Company in the same amount and on the same terms as consultant would be entitled hereunder if such succession had not occurred. (ii) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors and assigns. If Consultant should die while any amount would still be payable to Consultant hereunder if Consultant had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Consultant or, if there is no such designee, to the estate of Consultant; provided, however, that in accordance with Section 6(c), the loan referred to in Section 5 shall be forgiven in full upon Consultant's death. (h) Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement (and, in the case of notices to the Company, directed to the attention of the 8 Chief Executive Officer of the Company); or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (i) Counterparts; Effectiveness. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. /s/ Gerald Grinstein -------------------- Gerald Grinstein Address 500 Alta Dr. Fort Worth, Texas 76107 BURLINGTON NORTHERN INC. By: /s/ James B. Dagnon ------------------- Title: Executive Vice President Employee Relations 3800 Continental Plaza 777 Main Street Fort Worth, Texas 76102-5384 9 EX-10.20 7 NONQUALIFIED 401(K) RESTORATION PLAN Exhibit 10.20 BURLINGTON NORTHERN INC. NONQUALIFIED 401(k) RESTORATION PLAN Effective January 1, 1994 BURLINGTON NORTHERN INC. NONQUALIFIED 404(k) RESTORATION PLAN ------------------------------------ Section 1 PURPOSE ------- 1.1 Purpose. The purpose of this Plan is to restore to the executives of Burlington Northern Inc. (the "Company") and its subsidiaries certain matching contributions disallowed under the Burlington Northern Inc. Thrift and Profit Sharing Plan I, as amended and restated effective January 1, 1989 (the "Thrift and Profit Sharing Plan"), because of the limitations on qualified retirement plans imposed by the Internal Revenue Code of 1986, as amended (the "Code"). This Plan is intended to be an unfunded arrangement maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974. Section 2 ADMINISTRATION -------------- 2.1 Management Committee. The Plan shall be administered by a management committee (the "Management Committee") consisting of the Chief Executive Officer and such other senior officers as he or she shall designate. Subject to the Compensation and Nominating Committee of the Company's Board of Directors (the -3- "Board"), the Management Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it, select eligible Participants, and take all other actions necessary for its administration, which actions shall be final and binding upon all Participants. No member of the Management Committee shall vote on any matter that pertains solely to himself or herself. SECTION 3 PARTICIPANTS ------------ 3.1 Participants. The Management Committee shall determine and designate the executives of the Company and its subsidiaries who are eligible to receive restoration contributions under the Plan (the "Participants"). Participants, in general, will be limited to those executives who are eligible to participate in the Thrift and Profit Sharing Plan. Directors of the Company who are full-time executives of the Company shall be eligible to participate in the Plan. SECTION 4 CONTRIBUTIONS AND PAYMENTS -------------------------- 4.1 Restoration Contributions. (a) Subject to Subsection 4.1(c), the Company shall -4- credit minimum restoration contributions in the amount specified below on behalf of each Participant as frequently and for such periods as minimum matching contributions are made on behalf of participants in the Thrift and Profit Sharing Plan. Any conditions imposed upon the making of minimum matching contributions under the Thrift and Profit Sharing Plan shall also be imposed upon the crediting of minimum restoration contributions under this Plan. Such minimum restoration contributions shall be equal to 2.1 percent (or, if the Thrift and Profit Sharing Plan is subsequently amended in a manner that acts to increase, reduce, or otherwise modify the applicable matching or limitation percentages for minimum matching contributions, a percentage equal to the product of the applicable matching and limitation percentages, as modified) of the Participant's compensation (as defined and limited in Section 5.2) for the period for which the minimum restoration contribution is made. (b) Subject to Subsection 4.1(c), the Company may also credit additional contributions after the end of any Plan Year (as that term is defined in the Thrift and Profit Sharing Plan) in an amount equal to 1.2 percent or 2.4 percent (or, if the Thrift and Profit Sharing Plan is subsequently amended in a manner that acts to increase, reduce, or otherwise modify the applicable matching or limitation percentages for additional matching contributions, the percentages equal to the products of the applicable matching and limitation percentages, as modified) of the Participant's compensation (as defined and limited in Section 5.2) -5- for the Plan Year. Any standards or conditions imposed upon the making of additional matching contributions under the Thrift and Profit Sharing Plan shall also be imposed upon the crediting of additional restoration contributions under this Plan. (c) Notwithstanding Subsections 4.1(a) and 4.1(b), restoration contributions may be credited only if and to the extent that the Company and its Affiliates have current or accumulated profits, as determined in accordance with the Company's accounting records. 4.2 Memorandum Account. The Company shall establish a ledger account (the "Memorandum Account") for each Participant, for the purpose of reflecting the Company's obligation to pay restoration contributions as provided in Section 4.4. (a) The minimum restoration contributions described in Subsection 4.1(a) shall be credited to the Memorandum Account of each Participant on whose behalf they are made as of the same dates that minimum matching contributions are credited to the accounts of participants in the Thrift and Profit Sharing Plan. The additional restoration contributions described in Subsection 4.1(b) shall be credited to the Memorandum Account of each Participant on whose behalf they are made as of the same dates that additional matching contributions are credited to the accounts of participants in the Thrift and Profit Sharing Plan. (b) Interest shall accrue on the restoration contributions to the date of distribution, and shall be credited to a Participant's Memorandum Account at the end of each calendar quarter or such other periods as may be determined by the -6- Management Committee. The Management Committee shall determine the rate of interest periodically. 4.3 Discretionary Investment by Company. The restoration contributions to be paid to the Participants are an unfunded obligation of the Company. The Management Committee may annually direct that an amount equal to the restoration contributions for that year shall be invested by the Company as the Management Committee, in its sole discretion, shall determine. The Management Committee may in its sole discretion determine that all or some portion of an amount equal to the restoration contributions shall be paid into a grantor trust established by the Company of which it is the beneficiary, and the assets of which it shall become entitled as and to the extent that Participants receive benefits under this Plan. The Management Committee may designate an investment advisor to direct investments and reinvestment of the funds, including investment of any grantor trusts hereunder. 4.4 Payment of Memorandum Account. Within sixty (60) days following the earliest to occur of the retirement, death, permanent disability, resignation, or termination of employment of a Participant, the Participant (or his or her Beneficiary in the case of his or her death) shall irrevocably elect to have the balance of his or her Memorandum Account, plus interest (at a rate determined by the Management Committee pursuant to Section 4.2) on the outstanding account balance to the date of distribution paid to him or her as follows: (a) in a lump sum cash payment; or -7- (b) in periodic, annual installments over a period of two (2) or ten (10) years. Payments shall commence or be made in January of the year following the Participant's retirement, death, permanent disability, resignation, or termination of employment, provided that with respect to a Participant who retires on January 1, the Management Committee, in its sole discretion, may direct that payment shall commence or be made on the December 31 preceding the retirement date, on the January 31 following the retirement date or in January of the year following retirement; and provided further that the Management Committee, in its sole discretion, may direct payments to commence in the year of a Participant's retirement, death, resignation, termination, or permanent disability. 4.5 Acceleration of Payment of Memorandum Account. The Management Committee, in its sole discretion, may accelerate the payment of the unpaid balance of a Participant's Memorandum Account upon its determination that the Participant (or his Beneficiary in the case of his death) has incurred a severe and unexpected financial hardship. Such accelerated payment shall not exceed the amount necessary to relieve such hardship. The Management Committee in making its determination may consider such factors and require such information as it deems appropriate. SECTION 5 GENERAL PROVISIONS ------------------ -8- 5.1 Unfunded Obligation. The amounts to be paid to Participants pursuant to this Plan are unfunded obligations of the Company. The Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments including trust investments which the Company may make to fulfill this obligation shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or memorandum accounts shall not create or constitute a trust or a fiduciary relationship between the Management Committee or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan. 5.2 Compensation. (a) The term "compensation" means the sum of the amounts described in Paragraphs (1) and (2) below: (1) The Participant's compensation (as that term is defined in the Thrift and Profit Sharing Plan); provided, however, that no amount shall be taken into account under this Paragraph (1) until the period in which the Participant's Compensation for the Plan Year exceeds $150,000 (or such larger amount as may be permitted for any Plan Year under Code section -9- 401(a)(17)) (the "401(a)(17) Limit"), and then only to the extent the Participant's Compensation for the Plan Year exceeds the 401(a)(17) Limit. Once taken into account during a period for purposes of determining minimum restoration contributions under Subsection 4.1(a), an amount shall not thereafter be taken into account under this Paragraph (1) for purposes of determining minimum restoration contributions in succeeding periods. (2) Any amounts provided to a Participant by the Company, whether salary, bonuses, or other incentive pay, the current receipt of which, at the election of the Participant, is deferred to a succeeding Plan Year under a nonqualified deferred compensation arrangement maintained by the Company; provided, however, that no such amounts shall again be taken into account under Subsection 5.2(a) in any succeeding Plan Year. (b) Bonuses or other incentive pay that are paid or payable to a Participant during a Plan Year with respect to a Participant's performance (or the Company's performance) for a preceding Plan Year shall not be taken into account under Subsection 5.2(a) for the Plan Year in which paid or payable, but instead shall be taken into account under Subsection 5.2(a) as of the last day of the preceding Plan Year to which such bonuses or other incentive pay relate. 5.3 Beneficiary. The term "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. The designation shall be on a form provided by the Management -10- Committee, executed by the Participant, and delivered to the Committee. A Participant may change his beneficiary designation at any time. If no beneficiary is designated, the designation is ineffective, or in the event the Beneficiary dies before the balance of the Memorandum Account is paid, the balance shall be paid to the Participant's spouse, or if there is no surviving spouse, to his or her lineal descendants, pro rata, or if there is no surviving spouse or lineal descendants, to the Participant's estate (unless the Management Committee for a given year has designated investment in an annuity, in which case the payment options selected by the Participant with respect thereto shall govern). 5.4 Permanent Disability. For purposes of the Plan, a permanent disability shall mean a disability which would qualify a Participant to receive benefits under the Burlington Northern Inc. Long Term Disability Plan (after satisfying the elimination period thereunder) as now or hereafter in effect. 5.5 Incapacity of Participant or Beneficiary. If the Management Committee finds that any Participant or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefore shall have been made by a duly appointed legal representative) at the discretion of the Committee, may be paid to the spouse, child, parent or brother or sister of such Participant or Beneficiary or to any person whom the Committee has determined has incurred -11- expense for such Participant or Beneficiary. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan. 5.6 Nonassignment. The right of a Participant or Beneficiary to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution or other legal process. 5.7 No Right to Continued Employment. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company or a subsidiary, nor interfere in any way with the right of the Company or a subsidiary to terminate the employment of such Participant at any time without assigning any reason therefor. 5.8 Withholding Taxes. Appropriate payroll taxes shall be withheld from cash payments made to Participants pursuant to this Plan and, as necessary, from restoration contributions by the Company that otherwise would have been credited to Participants' Memorandum Accounts under the Plan. 5.9 Termination and Amendment. The Compensation and Nominating Committee may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Committee may reinstate any or all of its provisions. The Management Committee may amend the Plan provided that it may not suspend or terminate the Plan, substantially increase the administrative cost of the Plan or the -12- obligations of the Company, or expand the classification of employees who are eligible to participate in the Plan. No amendment, suspension or termination may impair the right of a Participant or his designated Beneficiary to receive the restoration contributions credited prior to the later of the date of adoption or the effective date of such amendment, suspension or termination. 5.10 Applicable Law. The Plan shall be construed and governed in accordance with the laws of the State of Texas. EX-10.21 8 LETTER OF JAMES B. DAGNON RE:CHANGE IN CONTROL EXHIBIT 10.21 [LOGO] BURLINGTON NORTHERN INC. 3000 Continental Plaza JAMES B. DAGNON 777 Main Street Executive Vice President P.O. Box 961030 Employee Relations Fort Worth, Texas 76161-0030 August 18, 1995 [NAME]
Dear : With reference to the Letter Agreement between you and Burlington Northern Inc. (the "Company") regarding Change in Control, as amended, the Company has decided to offer you the enclosed amendment which gives you the option of receiving all or a portion of your benefit payments under the Letter Agreement in annual installments over a number of years instead of in a single, lump sum payment. Any installment payments would be made pursuant to the terms of the Burlington Northern Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"), and would accrue interest at the rate provided under the Deferred Compensation Plan (presently Moody's Corporate Bond interest rate) until distributed. OF COURSE, THESE PROVISIONS WOULD TAKE EFFECT ONLY IN THE EVENT THAT YOU WOULD OTHERWISE BE ELIGIBLE TO RECEIVE BENEFITS UNDER THE EXISTING TERMS OF THE LETTER AGREEMENT AND THIS IS NOT ANY FORM OF NOTIFICATION THAT YOU ARE BEING TERMINATED FROM THE EMPLOYMENT OF THE COMPANY. This deferral option gives you the opportunity of saving through the investment of before-tax dollars and the resulting accumulation of earnings on a pre-tax basis. When you defer your benefit payments, you pay no current federal or state income taxes on the deferred amounts; however, applicable Railroad Retirement taxes (including the 1.45% Medicare tax) are due at the time of deferral. Under present tax law, you will owe income taxes on the deferred amounts plus interest credits when the money is later paid out to you. All payments from the Deferred Compensation Plan are taxed as ordinary income in the year received. As with any tax matters, you are advised to consult with your personal advisor prior to signing the enclosed amendment. PLEASE NOTE THE ATTACHED DOCUMENT MUST BE SIGNED AND RETURNED TO ALAN SPEAKER IN THE ENVELOPE PROVIDED BY AUGUST 28, 1995. FAILURE TO MEET THIS CRITICAL TIME REQUIREMENT MAY ADVERSELY AFFECT ANY INCOME TAX BENEFIT DERIVED FROM YOUR ELECTION TO DEFER THE BENEFIT PAYMENTS. Sincerely, James B. Dagnon Enclosure [LOGO] BURLINGTON NORTHERN RAILROAD 3800 Continental Plaza 777 Main Street Fort Worth, Texas 76102-5384 (Date) (Name and Address) Dear (Name): Burlington Northern Inc. (the "Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including you, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a Change in Control of the Company (as defined in Section 3). 1. Definitions. Unless the context shall otherwise require, capitalized terms used herein shall have the following meanings (such definitions to be equally applicable to both the singular and the plural forms of the terms used): "Agreement" shall mean this letter agreement. "Base Amount" shall have the meaning attributed to that term in section 280G of the Code. "Base Compensation" shall mean the maximum amount that the Company pays you as wages from time to time including, without limitation, the target bonus payable to you under the Company's current Incentive Compensation Plan, as if the Company attains a performance rating of "I", or such other maximum target bonus as may hereafter be implemented. "Basic Contribution" shall have the meaning attributed to that term in the Burlington Northern Inc. Thrift and Profit Sharing Plan, as amended from time to time, or any successor plan. "Board" shall mean the Board of Directors of the Company. "Cause" shall have the meaning attributed to that term in Section 4(iii) of the Agreement. "Change in Control" shall have the meaning attributed to that term in Section 3 of the Agreement. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Shares" shall mean shares of common stock of the Company. 2 "Company" shall mean Burlington Northern Inc. or its subsidiary, the Burlington Northern Railroad Company. "Contract Payments" shall mean any payment or benefit received or to be received by you pursuant to the terms of this Agreement. "Cost" shall mean the amount paid by the Company for certain benefits immediately prior to a Change in Control of the Company, as adjusted as of January 1 of each calendar year thereafter to an amount equal to the product of the Index Multiplier for such calendar year times the amount paid by the Company for certain benefits as so adjusted for the preceding calendar year. "Date of Termination" shall have the meaning attributed to that term in Section 4 (vi) of the Agreement. "Excess Parachute Payments" shall mean those Parachute Payments which when added to other Parachute Payments under this or any other agreement or plan would be equal to or greater than that amount which would subject Parachute Payments to the excise tax imposed by Section 4999 of the Code. "Exchange Act" shall mean the Securities Exchange Act of 1934. "Good Reason" shall have the meaning attributed to that term in Section 4 (iv) of the Agreement. "Index" shall mean the Seasonally Adjusted Consumer Price Index for All Urban Consumers as presently issued monthly by the Council of Economic Advisers for the Joint Economic Committee of Congress in a publication entitled "Economic Indicators" published by the Government Printing Office, or, if said historical index is no longer available or is converted to a different standard reference base or is otherwise revised, 3 such historical index as the Company may reasonably select that measures all goods and services in the economy adjusted for real price change. "Index Multiplier" shall mean, for any calendar year, the algebraic sum of (a) the Inflation Factor for the calendar year immediately preceding such calendar year and (b) 1.0. "Inflation Factor" shall mean, for any calendar year (the "test year"), the quotient obtained by dividing (a) the Index for the test year minus the Index for the calendar year immediately preceding the test year by (b) the Index for the calendar year immediately preceding the test year. "Long Term Disability Plan" shall mean the Burlington Northern Inc. Long Term Disability Plan, as amended from time to time, or any successor plan. "Matching Contribution" shall have the meaning attributed to that term in the Burlington Northern Inc. Thrift and Profit Sharing Plan, as amended from time to time, or any successor plan. "Memorandum Account" shall have the meaning attributed to that term in the Burlington Northern Inc. Deferred Compensation Plan or Burlington Northern Inc. Incentive Compensation Plan or both as applicable, including such plans as amended from time to time or any successor plans. "Normal Retirement Date" shall have the meaning attributed to that term in the Pension Plan, as amended from time to time, or any successor plan. "Notice of Termination" shall mean a written notice pursuant to which the Company notifies you of its or you notify the Company of your intent to terminate your employment and that (a) indicates the specific termination provision in this Agreement relied upon, (b) sets forth in reasonable detail the facts and circumstances claimed to 4 provide a basis for termination of your employment under the provision so indicated and (c) designates a Date of Termination. "Options" shall mean any options to purchase Company securities granted to you under the 1987 Burlington Northern Inc. Stock Option Incentive Plan, as amended from time to time, or any predecessor or successor plan, including, without limitation, the 1977, 1982 and 1992 Burlington Northern Inc. Stock Option Incentive Plans. "Parachute Payment" shall have the meaning attributed to that term in Section 280G of the Code. "Pension Plan" shall mean the Burlington Northern Inc. Pension Plan, as amended from time to time, or any successor plan. "Permanent Disability" shall mean such disability as would qualify you to receive benefits under the Long Term Disability Plan, after satisfying the elimination period therein. "Person" shall have the meaning attributed to that term in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that it shall not include the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company. "Subsidiary" shall mean an entity that is a corporation (or other form of business association that is treated as a corporation for tax purposes) of which shares (or other ownership interest) having more than 50 percent of the voting power are owned or controlled, directly or indirectly, by the Company so as to qualify as a "subsidiary corporation" (within the meaning of Code section 425 (f)). 5 "Total Payments" shall mean the sum of Contract Payments and any other payment or benefit received or receivable by you in connection with a Change in Control of the Company or the termination of your employment under any other plan, arrangement or agreement with the Company. 2. Term of Agreement. This Agreement shall commence on (Date), (the "Commencement Date") and shall terminate on the third anniversary of the Commencement Date; provided, however, that the Agreement shall continue in effect for successive terms of one (1) year each, each term beginning on the anniversary of the Commencement Date, unless written notice of termination is provided to you by the Company at least ninety (90) days prior to the expiration of any such one (1) year term; provided, further, that the Agreement shall no longer be subject to termination by the Company following a Change in Control. In no event, however, shall the term of this Agreement extend beyond the date on which you are otherwise subject to mandatory retirement, if applicable, pursuant to the Pension Plan or applicable state or federal law. 3. Change in Control. No benefits shall be payable hereunder unless there shall have been a Change in Control of the Company, as set forth below. For purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred: (i) if any person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in you, or a group of Persons which includes either you or the President of the Company and at least 25 percent of the individuals covered by agreements substantially identical to this Agreement prior to the Change in Control, acquiring, directly or 6 indirectly, 20 percent or more of the combined voting power of the Company's voting securities. (ii) if, during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who had entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (iii) if the stockholders of the Company approve a merger or consolidation, a sale or disposition of all or substantially all of the Company's assets or a plan of liquidation or dissolution of the Company. 4. Termination Following Change in Control. (i) General. If any of the events described constituting a Change in Control of the Company shall have occurred, you shall be entitled by the benefits provided in Section 5 (iii) upon the subsequent termination of your employment within two (2) years after the Change in Control, unless such termination is (a) because of your death or Permanent Disability, (b) by the Company for Cause or as a result of your mandatory retirement, if applicable, pursuant to Section 2, or (c) by you other than for Good Reason. If your employment with the Company is terminated for any reason, and subsequently a Change in Control of the Company shall have occurred, you shall not be entitled to any benefits hereunder. 7 (ii) Permanent Disability. You may be terminated by the Company for Permanent Disability. Notwithstanding any provision of this Agreement, your rights, if any, under the Long Term Disability Plan shall not be affected by this Agreement. (iii) Cause. You may be terminated by the Company for Cause where Cause shall mean (a) the willful and continued gross failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to injury or disease or any such actual or anticipated failure after the issuance of a Notice of Termination by you for Good Reason) which failure continues for a period of at least thirty (30) days after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (b) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than two- thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in this Subsection and specifying the particulars thereof in detail. (iv) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, Good Reason shall mean, without your express written consent, the occurrence after a Change in Control of the Company of any of the following circumstances unless, in the case of paragraphs (a), (b), (d), (e), 8 (f), (g), or (h), such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (a) the assignment to you of any duties inconsistent with and inferior to the position in the Company that you held immediately prior to the Change in Control of the Company, or a significant adverse alteration in the nature or status of your responsibilities or the conditions of your employment from those in effect immediately prior to such Change in Control; (b) a reduction by the Company in your Base Compensation; (c) the relocation of the Company's principal executive offices to a location outside the Fort Worth, Texas Metropolitan Area (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control of the Company) or the Company's requiring you to be based anywhere other than the Company's principal executive offices or where you are located immediately prior to such Change in Control, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations, or as agreed to by you and the Company; (d) the failure by the Company to pay to you any portion of your current compensation or to pay to you any deferred compensation under any deferred compensation program of the Company or any other benefits or additional amounts of compensation under any plan within thirty (30) days of the date such compensation is due; (e) the failure by the Company to continue in effect any compensation plan in which you participate immediately prior to the Change in Control of the Company that is material to your total compensation, including but not limited to the Company's 1987 Stock Option Incentive Plan, the 1989 Burlington Northern Inc. 9 Restricted Stock Incentive Plan, the 1989 Burlington Northern Inc. Restricted Stock Award Plan for Management Employees, Pension Plan, Supplemental Benefits Plan, Incentive Compensation Plan, Deferred Compensation Plan, Thrift and Profit Sharing Plan, or any substitute plans adopted prior to the Change in Control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants as existed at the time of the Change in Control of the Company; (f) the failure by the Company to continue to provide you with benefits at a Cost to the Company substantially similar to the Cost of those enjoyed by you under any of the Company's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the Change in Control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled in accordance with the Company's normal vacation policy in effect at the time of the Change in Control of the Company; provided, however, that the Company may modify such benefits to the extent that it is required to do so by applicable law, including, without limitation, the Employee Retirement Income Security Act of 1974, as amended, the Code, and other Federal or state employment, tax, or benefit laws, regulations, interpretations, ordinances, judgments, decrees, injunctions, writs, decisions and orders of any Governmental Authority; 10 (g) the failure of the Company to obtain a satisfactory agreement from any successor or purchaser of a Subsidiary to assume and agree to perform this Agreement, as contemplated in Section 6 hereof; (h) any purported termination of your employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (v) hereof (and, if applicable, the requirements of Subsection (iii) hereof), which purported termination shall not be effective for purposes of this Agreement; or (i) any material breach by the Company of any provision of this Agreement. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity to perform your duties as a result of injury or disease, to the extent your employment has not already been terminated pursuant to Section 4 (ii). Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (v) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7. (vi) Date of Termination. Etc. Date of Termination shall mean (a) if your employment is terminated for Permanent Disability, the date specified in the Notice of Termination, but in no event less than thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), or (b) if your employment is terminated pursuant to Subsection (iii) or (iv) hereof or for any other reason (other than Disability), the date specified in the Notice of Termination (which in the case of a termination for Cause shall not be less than thirty (30) days from the date such Notice of Termination is given and in the case of a termination for Good Reason shall not be less than fifteen 11 (15) nor more than sixty (60) days from the date such Notice of Termination is given); provided, however, that if within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party in writing that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected; provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given or immediately prior to the Change in Control of the Company, whichever is greater (including, but not limited to, Base Compensation) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement, and shall not be offset against or reduce any other amounts due under this Agreement and shall not be reduced by any compensation earned by you as the result of employment by another employer. 5. Compensation Upon Termination Following a Change in Control of the Company, you shall be entitled to the following benefits upon termination of your employment, provided that such termination occurs during the term of this Agreement and within two (2) years following a Change in Control: 12 (i) No supplemental benefits shall be payable under this agreement if your employment is terminated by reason of your Permanent Disability or death. Instead, your benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs; provided, however, the Company will provide you the benefits you would otherwise be entitled to under the Long Term Disability Plan as if you had not been terminated under this Agreement pursuant to Section 4 (ii), until this Agreement is terminated pursuant to Section 2. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full Base Compensation through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or benefit plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment by the Company shall be terminated within two (2) years following a Change in Control by you for Good Reason or by the Company other than for Cause or Permanent Disability, then you shall be entitled to the benefits provided below: (a) the Company (1) shall pay to you, no later than the fifth (5th) day following the Date of Termination, your full Base Compensation through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due and (2) shall pay to you, when due, all amounts credited to your Memorandum Account under the Burlington Northern Inc. Deferred Compensation Plan or the Burlington Northern Inc. Incentive Compensation Plan or any other similar plan or arrangement, in accordance with the provisions of such plans as in existence prior to the Change in Control. 13 (b) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you, no later than the thirtieth (30th) day following the Date of Termination, a lump sum severance payment equal to three (3) times your Base Compensation as in effect as of the Date of Termination or immediately prior to the Change in Control of the Company, whichever is greater; provided, however, that in no event shall such amount exceed the amount of Base Compensation, on an undiscounted basis, which you would have received had you remained in the employ of the Company until the date on which you are otherwise subject to mandatory retirement, if applicable, pursuant to the Pension Plan or applicable state or federal law; (c) in addition to the benefits to which you are otherwise entitled under the Pension Plan and the Burlington Northern Inc. Supplemental Benefits Plan or any successor plans in effect on the Date of Termination, you shall be entitled to an amount equal to the difference between (1) the benefits that would be payable under those plans at Normal Retirement Age had you remained in the employ of the Company until the earlier of three (3) years beyond your Date of Termination or until your mandatory retirement date, assuming an increase in compensation, as defined in the Pension Plan, of 8 percent per year (taking into account for purposes of the Pension Plan only those amounts permitted under Code section 401 (a) (17)), and (2) the benefits payable under the terms of those plans at Normal Retirement Age, based upon the termination of your employment on the Date of Termination; (d) you shall be entitled to receive a payment in the amount of the Company contributions you would have received under the Burlington Northern Inc. Thrift and Profit Sharing Plan had you remained in the employ of the Company until the earlier of three (3) years beyond your Date of Termination or until your mandatory retirement date, and made the maximum Basic Contribution and received the maximum Matching Contribution permitted under such plan during that period, based upon a level of compensation, as defined in the Thrift and Profit Sharing 14 Plan, which is assumed to increase at a rate of 8 percent per year (taking into account only those amounts permitted under Code section 401 (a) (17)); (e) the Company's obligation under Subparagraphs (c) and (d) shall be satisfied by paying to you, no later than the thirtieth (30th) day following the Date of Termination, (1) a lump sum amount, in cash, equal to the present value of the amounts described in Subparagraphs (c) and (d) using a discount rate no greater than the rate that may be used to determine lump sums under the Supplemental Benefits Plan plus (2) an amount sufficient to gross you up for the federal income taxes attributable to such amount based upon the maximum marginal rate in effect at that time; (f) for an eighteen (18) month period after such termination, the Company shall arrange to provide you at the Company's expense with life, survivor benefit, disability, accident and group health insurance coverage and benefits at a Cost to the Company substantially similar to the Cost of those benefits which you were receiving immediately prior to the Notice of Termination. Coverage and benefits otherwise receivable by you pursuant to this paragraph (f) shall be reduced to the extent comparable coverage and benefits are actually received by you during the eighteen (18) month period following your termination, and any such coverage or benefits actually received by you shall be reported to the Company. The provision of continued benefits under this paragraph shall not deprive you of any independent statutory right you may have to continue benefits coverage under Code Section 4980B; (g) the Company shall pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or 15 proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder); and (h) the Company shall transfer to you all right, title or other ownership interest it may have in any automobile that the Company has provided to you for your personal use in connection with your work for the Company as of the Date of Termination. (iv) If the amounts required to be paid pursuant to Section 5 (iii) cannot be finally determined on or before the date when payment is due, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274 (b) (2) (B) of the Code) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the thirtieth (30th) day after demand by the Company (together with interest at the rate provided in Section 1274 (b) (2) (B) of the Code). (v) Except as provided in Subsection (iii) (f) hereof, you shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise. (vi) If your Total Payments would be subject to the excise tax imposed by Section 4999 of the Code (or any successor statutory provision) or any interest or penalties with respect to such excise tax (such excise tax, together with any such 16 interest and penalties, are collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you or withholding by the Company by such Excise Tax, including any Excise Tax imposed upon the Gross-Up Payment, you shall be in the same after-tax position under this Agreement that you would have been in if Code Section 4999 (or any successor provision) did not apply. (a) All determinations required to be made under this Subsection (vi), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Company on the date of Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and to you within 15 business days of the date of termination, if applicable, or such earlier time as is requested by the Company. If the Accounting Firm determines that a Gross-Up Payment is required, the Company shall increase the benefits payable to you under the Agreement by the amount of such Gross- Up Payment and shall withhold from your Contract Payment an amount sufficient to satisfy the Excise Tax. If the Accounting Firm determines that no Gross-Up Payment is payable, it shall furnish you with an option that you have substantial authority not to report any Excise Tax for federal tax purposes. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Subsection (vi) (b) or fails to contest an IRS claim of Underpayment, and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, including any Excise Tax that will be imposed 17 upon the Underpayment, and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (b) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment in addition to any payment previously made in accordance with Subsection (vi) (a). Such notification shall be given as soon as practicable but no later than ten business days after you know of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the thirty-day period following the date on which you give such notice to the Company (or such shorter period ending on the date five days before any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim; (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (3) cooperate with the Company in good faith in order to effectively contest such claim; and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Subsection (iv) (b), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole 18 option, either direct you to pay the tax claimed and sue for a refund, or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (c) If, after payment of any Gross-Up Payment by the Company pursuant to this Subsection (vi), you become entitled to receive any refund with respect to such amounts, you shall (subject to the Company's complying with the requirements of Subsection (vi) (b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). 6. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. In addition, in the event that one or more Subsidiaries (or part thereof) are sold, divested, or otherwise disposed of by the 19 Company subsequent to a Change in Control, the Company shall require such purchaser or acquirer, as a condition precedent to such purchase or acquisition, to assume and agree to perform the Company's obligations, if any, under the Agreement, with respect to the employees of such Subsidiaries, in the same manner and to the same extent that the Company would be required to perform if no such acquisition or purchase had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms to which you would be entitled hereunder if you terminate your employment for Good Reason following a Change in Control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (ii) This Agreement shall inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder had you continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. Notices. All communications and notices under this Agreement shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, postage prepaid, by registered or certified mail, return receipt requested, or by Express Mail, return receipt requested, or received by telex, telefacsimile or other wire transmission (with request for assurance of receipt in a manner customary for communications of such respective type) to the appropriate following addresses: If to the Company: Executive Vice President-Employee Relations Burlington Northern Inc. 20 3000 Continental Plaza 777 Main Street P.O. Box 961030 Fort Worth, Texas 76161-0030 FAX Number: (817) 333-3011 Subject: Executive Severance Agreement If to you, at the address listed on the first page of this agreement; or at such address as either party may designate by notice to the other party hereto in accordance with this Section. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. THIS AGREEMENT WAS NEGOTIATED AND EXECUTED IN THE STATE OF TEXAS AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. All references to sections of the exchange act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law, including withholding required pursuant to Code Section 4999. The obligations of the Company under Section 5 shall survive the expiration of the term of this Agreement. 9. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 21 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Employment Status. Prior to a Change in Control of the Company, this Agreement imposes no obligations on the Company to retain you as an employee, to maintain or change the status of your employment as an employee or to pay you any benefits in the event that your employment with the Company is terminated. Following a Change in Control, this Agreement imposes no obligations on the Company to retain you as an employee or to maintain or change the status of your employment as an employee. However, in the event of your termination following a Change in Control, this Agreement will govern the Contract Payments to which you are entitled, if any, by reason of your termination. 12. Choice of Forum. To the extent permitted by law, any legal suit, action, or proceeding arising out of or relating to this Agreement may be instituted in any state or federal court of competent jurisdiction located in the State of Texas, in addition to any other appropriate forum. 13. Amendment. The Agreement may be amended in any respect by resolution adopted by two-thirds of the Board; provided, however, that no such amendment of the Agreement may be made if such amendment would adversely affect any right you have under the Agreement prior to the later of (a) the date of adoption of any such amendment or (b) the effective date of any such amendment; provided, further, that the Agreement shall no longer be subject to amendment, change, substitution, deletion or revocation in any respect whatsoever following a Change in Control. 14. Termination Upon Mandatory Retirement. The Company and you acknowledge that the purpose of this Agreement is to provide income to replace the employment income that you would otherwise receive if your employment were not 22 terminated and that such replaced employment income would have been terminated upon your mandatory retirement, if applicable, in any event and have been replaced by retirement income. Accordingly, the terms of this Agreement and the benefits payable hereunder shall not extend beyond your mandatory retirement date, if applicable, pursuant to the Pension Plan, or to the extent permitted by law. You acknowledge that this Agreement entitled you to payments and benefits which you would not otherwise have received and, in consideration thereof, you waive any claim that might arise out of or relate to the subject matter of this Agreement pursuant to employment discrimination laws, including without limitation the Age Discrimination in Employment Act; provided, however, that nothing contained herein shall affect your right to challenge any action of the Company, to the extent that you are terminated prior to a Change in Control. 15. General Release and Covenant Not to Sue. You agree that as a condition of receiving benefits under this Agreement, you shall execute the attached General Release and Covenant Not to Sue within thirty (30) days following your Date of Termination. 16. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or otherwise, express or implied, by any officer, employee or representative of any party hereto, and any prior agreement, promise, covenant, arrangement, communication, representation or warranty of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute the Agreement between you and the Company on this subject. Very truly yours, 23 Burlington Northern Inc. By: ______________________________ Edmund W. Burke, Executive Vice President Law Agreed to this ______ day of ____________________, 1995. ______________________________ (Executive) 24 GENERAL RELEASE AND COVENANT NOT TO SUE For and in consideration of the terms of the Agreement between Burlington Northern Inc. and [NAME] dated [DATE], ("Agreement"), the undersigned does hereby fully waive, release, remit and forever discharge Burlington Northern Inc. and any and all of its parents, divisions, subsidiaries, officers, directors, stockholders, agents, advisors and employees from any and all claims, demands or causes of action, including any claims for merger protection benefits pursuant to the Interstate Commerce Commission decision in the Northern Lines or Frisco merger proceedings, claims arising under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. (S) 2000 (e), et seq., the Civil Rights Act of 1866, 42 U.S.C. (S) 1981, the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. (S) 621, et seq., the Federal Employers' Liability Act, and any other federal, state or local law, order, regulation, common law, contract or collective bargaining agreement, which relates to my employment or cessation of employment by Burlington Northern Inc.; provided, however, that the undersigned does not waive enforcement of rights to any benefits provided or extended pursuant to the terms of the Agreement. The undersigned specifically waives all claims, whether past or present, known or unknown, and whether or not in litigation, which I, or acting on my behalf, my heirs, successors, executors, administrators or assigns, may have based on any action, omission or event occurring prior to this date. Included in this Release are any and all claims for future damages allegedly arising from the alleged continuation of the effects of any past action, omission or event. 2 This General Release and Covenant Not to Sue is executed willingly and voluntarily, for adequate consideration, and after having the opportunity to consult with counsel. This General Release and Convenant Not to Sue is irrevocable and binding upon the undersigned. [NAME] - ------------------- ----------------------- Date Name ------------------------- Signature 3 [LOGO OF BURLINGTON NORTHERN INC.] 3000 Continental Plaza JAMES B. DAGNON 777 Main Street Executive Vice President P.O. Box 961030 Employee Relations Fort Worth, Texas 76161-0030 August 18, 1995 [NAME]
Dear : With reference to the Letter Agreement between you and Burlington Northern Inc. (the "Company") regarding Change in Control, as amended, the Company has decided to offer you the option of receiving all or a portion of your benefit payments under the Letter Agreement in annual installments over a number of years instead of in a single, lump sum payment. Any installment payments would be made pursuant to the terms of the Burlington Northern Inc. Deferred Compensation Plan (the "Deferred Compensation Plan"), and would accrue interest at the rate provided under the Deferred Compensation Plan until distributed. Of course, these provisions would take effect only in the event that you would otherwise be eligible to receive benefits under the existing terms of the Letter Agreement. Pursuant to the Amendment set forth below, benefits under the Letter Agreement that may be paid in installments include the severance payment equal to three (3) times your Base Compensation, as described under Section 5(iii)(b) of the Letter Agreement, and the differential benefits attributable to various qualified and nonqualified retirement plans maintained by the Company, as described under Section 5(iii)(c-e) of the Letter Agreement. Under the existing terms of the Letter Agreement, you would ordinarily receive all of these amounts in a lump sum no later than the thirtieth (30th) day following your Date of Termination. In order to receive all or a portion of the above-described benefits in annual installment payments, you must agree to the Amendment as set forth below. Please indicate in the blanks provided below, the percentage of benefits (i.e., 1 to 100 percent) that you would like to receive in the form of installment payments, as well as the number of years (to a maximum of 10 years) over which you would like to receive installment payments. Your elections will apply to both your severance payment amount under Section 5(iii)(b) of the Letter Agreement, and the differential benefits attributable to various qualified and nonqualified retirement plans maintained by t he Company, as described under Section 5(iii)(c-e) of the Letter Agreement. The remaining benefits, if any, will be paid in the form of a lump sum payment no later than the thirtieth (30th) day following your Date of Termination. Please note that by executing this Amendment, you will irrevocably waive the [NAME] August 18, 1995 Page 2 right to receive the percentage of benefits designated as installment payments in the form of a lump sum payment. This also means that the Company will be unable to accelerate the payment of such benefits if you later change your mind, unless you incur a severe and unexpected financial hardship. Capitalized terms used and not otherwise defined herein shall have the same meanings as in the Letter Agreement. 1. Section 5(iii)(b) of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 5(iii)(b) of the Letter Agreement: (b) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you an amount equal to three (3) times your Base Compensation as in effect as of the Date of Termination or immediately prior to the Change in Control of the Company, whichever is greater; provided, however, that in no event shall such amount exceed the amount of Base Compensation, on an undiscounted basis, which you would have received had you remained in the employ of the Company until the date on which you are otherwise subject to mandatory retirement, if applicable, pursuant to the Pension Plan or applicable state or federal law. The severance pay amount provided under preceding sentence of this Subparagraph (b) shall be paid in the following manner: (1) __________ percent of the severance pay amount shall be paid in equal annual installments under the Deferred Compensation Plan over a period of ______ years (and in no event more than ten (10) years) at the rate of interest provided under the Deferred Compensation Plan, with the first such payment commencing in January of the year following the Date of Termination; and (2) the balance of the severance pay amount shall be paid in the form of a lump sum payment, no later than the thirtieth (30) day following the Date of Termination. The Company, in its sole discretion, may accelerate the payment of unpaid amounts under this Subparagraph (b) upon its determination that you have incurred a severe and unexpected financial hardship; provided, however, that such accelerated payment shall not exceed the amount necessary to relieve such hardship; 2. Section 5(iii)(e) of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 5(iii)(e) of the Letter Agreement: (e) the Company's obligations under Subparagraphs (c) and (d) shall be satisfied by paying to you an amount equal to (1) the present value (as of the Date of Termination) of the amounts described in Subparagraphs (c) and (d) using a discount rate no greater than the rate that may be used to determine lump sums under the Supplemental Benefits Plan plus (2) an amount sufficient to gross you up for the federal income taxes attributable to such amount based upon the maximum marginal rate in effect at that time. The amount provided under preceding sentence of this Subparagraph (e) shall be paid in the form of annual installments or a lump sum payment, or a combination of both, in the same manner , the same percentage will be paid in the form of installment payments over the same number of years at the same interest rate) as the [NAME] August 18, 1995 Page 3 severance pay amount provided above under Subparagraph (b). The Company, in its sole discretion may accelerate the payment of unpaid amounts under this Subparagraph (e) upon its determination that you have incurred a severe and unexpected financial hardship; provided, however, that such accelerated payment shall not exceed the amount necessary to relieve such hardship; 3. Section 5(iv) of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 5(iv) of the Letter Agreement: (iv) If an amount required to be paid pursuant to Section 5(iii) in the form of a lump sum payment can not be finally determined on or before the date when payment is due, the Company shall pay to you on such date an estimate, as determined in good faith by the Company, of the minimum amount of such payment and shall pay the remainder of such payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the thirtieth (30th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 4. THIS AMENDMENT WAS NEGOTIATED AND EXECUTED IN THE STATE OF TEXAS AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 5. This Amendment may be executed in several counterparts, each of which shall be deemed to be original but all of which together will constitute one and the same instrument. Please sign below to indicate your acceptance or declination of the terms of this Amendment. Regardless of whether you accept or decline the terms of this Amendment, this document must be signed and returned to the Company no later than August 28, 1995. Sincerely, James B. Dagnon [NAME] August 18, 1995 Page 4 I have read this Amendment on this _____ day of ______________, 1995, and I hereby agree to its terms. - ------------------------------- [NAME] I have read this Amendment on this _____ day of _______________, 1995, and I hereby decline to agree to its terms, leaving in place the single lump sum payment method as provided under the Letter Agreement, as amended. - ------------------------------- [NAME] [LOGO] BURLINGTON NORTHERN RAILROAD 3000 Continental Plaza 777 Main Street P.O. Box 961030 Fort Worth, Texas 76161-0030 May 1, 1995
Dear : With reference to the Letter Agreement and related Amendment between you and Burlington Northern Inc. (the "Company") regarding Change in Control, the Company has recently entered into the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 29, 1994, between the Company and Santa Fe Pacific Corporation ("SFP"), pursuant to which the Company has agreed to merge with SFP (the "Merger") in accordance with the terms set forth therein. Stockholders of both companies approved the merger on February 7, 1995; however, consummation of the Merger is subject to regulatory approval, which is not expected for several months. The Company believes that, as a result of the particular facts surrounding the Merger and the stockholder and regulatory approvals it requires, and in order to provide an incentive to you to remain in the Company's employ during the period that the Merger is pending regulatory approval, it is in the interests of both parties to the above-mentioned Change in Control Letter Agreement (the "Letter Agreement") and related Amendment ("Amendment No. 1") to amend such Letter Agreement and Amendment No. 1 as set forth below. Capitalized terms used and not otherwise defined herein shall have the same meanings as in the Letter Agreement and Amendment No. 1. 1. For purposes of the Letter Agreement, the term "Matching Contribution" shall have the meaning attributed to that term in the Burlington Northern Inc. Thrift and Profit Sharing Plan and the Burlington Northern Inc. Nonqualified 401(k) Restoration Plan, as amended from time to time, or any successor plan. 2. Section 5(iii)(d) of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 5(iii)(d) of the Letter Agreement: You shall be entitled to receive a payment in the amount of the Company contributions you would have received under the Burlington Northern Inc. Thrift and Profit Sharing Plan and the Burlington Northern Inc. Nonqualified 401(k) Restoration Plan had you remained in the employ of the Company until the earlier of three (3) years beyond your Date of Termination or until your mandatory retirement date, and made the maximum Basic Contribution and received the maximum Matching Contribution permitted under such plans during that period, May 1, 1995 Page 2 based upon your Base Compensation, which is assumed to increase at a rate of eight percent per year in the second and third years. 3. Section 3 of Amendment No. 1 is deleted and the following paragraph shall be substituted for Section 3 of Amendment No. 1: In the event that your employment is terminated within the period specified in Section 2 of Amendment No. 1 and under circumstances entitling you to receive the benefits provided for in Section 5(iii) of the Letter Agreement, all outstanding awards granted under the Company's 1992 Burlington Northern Inc. Stock Option Incentive Plan, the 1989 Burlington Northern Inc. Restricted Stock Award Plan for Management Employees, the 1989 Burlington Northern Inc. Restricted Stock Incentive Plan, the 1995 Burlington Northern Inc. Restricted Stock Incentive Plan, and all successor plans, after the date hereof shall immediately become vested or exercisable in full, and the Restriction Period, as defined in any such Plan, relating to any such award shall thereupon terminate. 4. Except as and to the extent amended hereby, the provisions of the Letter Agreement and Amendment No. 1 and the terms of any award referred to in Section 3 of this Amendment shall remain in full force and effect. 5. THIS AMENDMENT WAS NEGOTIATED AND EXECUTED IN THE STATE OF TEXAS AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 6. This Amendment ("Amendment No. 2") may be executed in several counterparts, each of which shall be deemed to be original but all of which together will constitute one and the same instrument. Please sign below to indicate your acceptance of the terms of this Amendment. Very truly yours, Agreed and Accepted BURLINGTON NORTHERN INC. By: ------------------------- ----------------------------- James B. Dagnon Executive Vice President Employee Relations ------------------------------ Date [LOGO] BURLINGTON NORTHERN RAILROAD 3000 Continental Plaza 777 Main Street JAMES B. DAGNON P.O. Box 961030 Executive Vice President Fort Worth, Texas 76161-0030 Employee Relations Telephone: (817) 333-3055 May 1, 1995
Dear : Upon shareholder approval of the new 1995 Burlington Northern Inc. Restricted Stock Incentive Plan on April 20, 1995, the company decided to amend its Change in Control Letter Agreement and related Amendment to include a provision for the vesting of restricted stock issued under the new plan. We also decided that this would be an appropriate time to amend the Change in Control Letter Agreement to clarify that contributions made under the Burlington Northern Inc. 401(k) Restoration Plan are included with the Thrift and Profit Sharing contributions when calculating Change in Control payments. Therefore, attached is a second amendment ("Amendment No. 2") pertaining to your Change in Control Letter Agreement. Please read the letter carefully, then sign both copies and return one to Alan Speaker in the envelope provided. If you have any questions, you may contact Alan at (817) 333-3023. Sincerely, James B. Dagnon Attachment [LOGO] BURLINGTON NORTHERN RAILROAD 3000 Continental Plaza 777 Main Street P.O. Box 961030 Fort Worth, Texas 76161-0030 August 1, 1995 (Name and Address) Dear (Name): With reference to the Letter Agreement between you and Burlington Northern Inc. (the "Company") regarding Change in Control, the Company has recently entered into the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 29, 1994, between the Company and Santa Fe Pacific Corporation ("SFP"), pursuant to which the Company has agreed to merge with SFP (the "Merger") in accordance with the terms set forth therein. Stockholders of both companies approved the merger on February 7, 1995; however, consummation of the Merger is subject to regulatory approval, which is not expected for several months. The Company believes that, as a result of the particular facts surrounding the Merger and the stockholder and regulatory approvals it requires, and in order to provide an incentive to you to remain in the Company's employ during the period that the Merger is pending regulatory approval, it is in the interests of both parties to the above-mentioned Change in Control Letter Agreement (the "Letter Agreement") to amend such Agreement as set forth below. Capitalized terms used and not otherwise defined herein shall have the same meanings as in the Letter Agreement. 1. A Change in Control, for purposes of the Letter Agreement, occurred on February 7, 1995, when the Company's stockholders approved the Merger. This event shall be the only event relating to the Merger that will constitute a Change in Control, for purposes of the Letter Agreement. 2. For purposes of Sections 4(i) and 5 of the Letter Agreement, the period during which your termination of employment will entitle you to the benefits provided in Section 5(iii) began on February 7, 1995, and shall expire on the latest of (a) the second anniversary of the Effective Time of the Merger as defined by the Merger Agreement (or if the Company determines that it will not consummate the Merger, the date of that determination), or (b) the date on which the Interstate Commerce Commission determines that it will not approve the Merger. Termination of your employment (i) as a result of your death or Permanent Disability, (ii) by the Company for Cause or as a result of mandatory retirement, if applicable, and (iii) by you other than for Good Reason, shall not be affected by this Amendment. Ms. Beverly A. Edwards-Adams August 1, 1995 Page 2 3. For purposes of the Letter Agreement, the term "Matching Contribution" shall have the meaning attributed to that term in the Burlington Northern Inc. Thrift and Profit Sharing Plan and the Burlington Northern Inc. Nonqualified 401(k) Restoration Plan, as amended from time to time, or any successor plan. 4. Section 5(iii)(d) of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 5(iii)(d) of the Letter Agreement: You shall be entitled to receive a payment in the amount of the Company contributions you would have received under the Burlington Northern Inc. Thrift and Profit Sharing Plan and the Burlington Northern Inc. Nonqualified 401(k) Restoration Plan had you remained in the employ of the Company until the earlier of three (3) years beyond your Date of Termination or until your mandatory retirement date, and made the maximum Basic Contribution and received the maximum Matching Contribution permitted under such plans during that period, based upon your Base Compensation, which is assumed to increase at a rate of eight percent per year in the second and third years. 5. In the event that your employment is terminated within the period specified in paragraph 2 above and under circumstances entitling you to receive the benefits provided for in Section 5(iii) of the Letter Agreement, all outstanding awards granted under the Company's 1992 Burlington Northern Inc. Stock Option Incentive Plan, the 1989 Burlington Northern Inc. Restricted Stock Award Plan for Management Employees, the 1989 Burlington Northern Inc. Restricted Stock Incentive Plan, the 1995 Burlington Northern Inc. Restricted Stock Incentive Plan, and all other successor plans, after the date hereof shall immediately become vested or exercisable in full, and the Restriction Period, as defined in any such Plan, relating to any such award shall thereupon terminate. 6. Section 12 of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 12 of the Letter Agreement: Any disputes relating to or arising out of the Letter Agreement including any amendments shall be resolved in arbitration pursuant to Burlington Northern Railroad Company's dispute resolution procedures. 7. Except as and to the extent amended hereby, the provisions of the Letter Agreement and the terms of any award referred to in Section 3 of this Amendment shall remain in full force and effect. 8. THIS AMENDMENT WAS NEGOTIATED AND EXECUTED IN THE STATE OF TEXAS AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCEPT PARAGRAPH 6 RELATING TO ARBITRATION, WHICH IS GOVERNED BY THE FEDERAL ARBITRATION ACT. Ms. Beverly A. Edwards-Adams August 1, 1995 Page 3 9. This Amendment may be executed in several counterparts, each of which shall be deemed to be original but all of which together will constitute one and the same instrument. Please sign below to indicate your acceptance of the terms of this Amendment. Very truly yours, Agreed and Accepted BURLINGTON NORTHERN INC. By: ----------------------- ---------------------- James B. Dagnon (Name) Executive Vice President Employee Relations ------------------------------ Date [LOGO] BURLINGTON NORTHERN RAILROAD 3000 Continental Plaza 777 Main Street Fort Worth, Texas 76102-5384 September 30, 1994 [NAME]
Dear : With reference to the Letter Agreement between you and Burlington Northern Inc. (the "Company") regarding Change in Control, the Company has recently entered into the Agreement and Plan of Merger (the "Merger Agreement") dated as of June 29, 1994, between the Company and Santa Fe Pacific Corporation ("SFP"), pursuant to which the Company has agreed to merge with SFP (the "Merger") in accordance with the terms set forth therein. The Company expects to call for special vote of stockholders to approve the Merger later this year; however, consummation of the Merger is subject to regulatory approval, which is not expected in the near future. The Company believes that, as a result of the particular facts surrounding the Merger and the stockholder and regulatory approvals it requires, and in order to provide an incentive to you to remain in the Company's employ during the period that the Merger is pending regulatory approval, it is in the interests of both parties to the above-mentioned Change in Control Letter Agreement (the "Letter Agreement") to amend such Agreement as set forth below. Capitalized terms used and not otherwise defined herein shall have the same meanings as in the Letter Agreement. 1. A Change in Control, for purposes of the Letter Agreement, shall occur on the date that the Company's stockholders approve the Merger. This event shall be the only event relating to the Merger that will constitute a Change in Control, for purposes of the Letter Agreement. 2. For purposes of Sections 4(i) and 5 of the Letter Agreement, the period during which your termination of employment will entitle you to the benefits provided in Section 5(iii) shall begin on the date of the stockholder vote approving the Merger and shall expire on the latest of (a) the second anniversary of the Effective Time of the Merger as defined by the Merger Agreement (or if the Company determines that it will not consummate the Merger, the date of that determination), or (b) the date on which the Interstate Commerce Commission determines that it will not approve the Merger. Termination of your employment (i) as a result of your death or Permanent Disability, (ii) by the Company for Cause or as a result of mandatory retirement, if applicable, and (iii) by you other than for Good Reason, shall not be affected by this Amendment. September 30, 1994 Page 2 3. In the event that your employment is terminated within the period specified in paragraph 2 above and under circumstances entitling you to receive the benefits provided for in Section 5(iii) of the Letter Agreement, all outstanding awards granted under the Company's 1992 Burlington Northern Inc. Stock Option Incentive Plan, the 1989 Burlington Northern Inc. Restricted Stock Award Plan for Management Employees, the 1989 Burlington Northern Inc. Restricted Stock Incentive Plan, after the date hereof shall immediately become vested or exercisable in full, and the Restriction Period, as defined in any such Plan, relating to any such award shall thereupon terminate. 4. Section 12 of the Letter Agreement is deleted and the following paragraph shall be substituted for Section 12 of the Letter Agreement: Any disputes relating to or arising out of the Letter Agreement including any amendments shall be resolved in arbitration pursuant to Burlington Northern Railroad Company's dispute resolution procedures. 5. Except as and to the extent amended hereby, the provisions of the Letter Agreement and the terms of any award referred to in Section 3 of this Amendment shall remain in full force and effect. 6. THIS AMENDMENT WAS NEGOTIATED AND EXECUTED IN THE STATE OF TEXAS AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCEPT PARAGRAPH 4 RELATING TO ARBITRATION, WHICH IS GOVERNED BY THE FEDERAL ARBITRATION ACT. 7. This Amendment may be executed in several counterparts, each of which shall be deemed to be original but all of which together will constitute one and the same instrument. Please sign below to indicate your acceptance of the terms of this Amendment. Very truly yours, Agreed and Accepted BURLINGTON NORTHERN INC. By: ---------------------------- ------------------------------- James B. Dagnon Executive Executive Vice President ------------------------------- Employee Relations Date EX-10.22 9 DIRECTOR'S CHARITABLE AWARD PROGRAM Exhibit 10.22 BURLINGTON NORTHERN INC. DIRECTOR'S CHARITABLE AWARD PROGRAM 1. PURPOSE OF THE PROGRAM The Burlington Northern Inc. Director's Charitable Award Program (the "Program") allows each eligible Director of Burlington Northern Inc. (the "Company") to recommend that the Company make a $1,000,000 corporate donation to an eligible tax-exempt educational institution(s) (the "Donee(s)") selected by the Director, with the donation to be made in the Director's name, in five equal consecutive annual installments of $200,000, with the first installment to be made as soon as is practicable after the Director's death. The purpose of the Program is to acknowledge the service of the Company's Directors, recognize the interest of the Company and its Directors in supporting worthy educational institutions, and enhance the Company's Director benefit program so that the Company is able to continue to attract and retain Directors of the highest caliber. 2. ELIGIBILITY All persons serving as Directors of the Company as of April 20, 1995, or after, shall be eligible to participate in the Program upon the date of their third anniversary of service as a Director of the Company. Prior service on the board of directors of a company that is merged with or acquired by the Company or its subsidiary will be credited to a Director for purposes of meeting the three year service eligibility period. Eligibility shall at all times be subject to forfeiture as provided in Section 6 of this Program. 3. RECOMMENDATION OF DONATION When a Director becomes eligible to participate in the Program, he or she shall make a written recommendation to the Company, on a form approved by the Company for this purpose, designating the Donee(s) which he or she intends to be the recipients(s) of the Company donation to be made on his or her behalf. The number of Donees recommended by a Director shall be limited to a maximum of five. A Director may revise or revoke any such recommendation prior to his or her death by signing a new recommendation form and submitting it to the Company. 4. AMOUNT AND TIMING OF DONATION Each eligible Director may recommend one educational institution to receive a Company donation of $1,000,000, or up to five such institutions to receive donations aggregating $1,000,000. The donation will be made by the Company in five equal consecutive annual installments of $200,000, with the first installment to be made as soon as is practicable after the Director's death. If a Director recommends more than one institution to receive a donation, each will receive a prorated portion of each annual installment. Alternatively, each annual installment payment will be divided among the recommended institutions in the same proportions as the total donation amount has been allocated among the institutions by the Director. However, a Director may instruct the Company to allocate the installment payments in a different manner. 5. DONEES In order to be eligible to receive a donation, a recommended educational institution must qualify as a tax-exempt organization under Internal Revenue Code Section 501(c)(3), and must be reviewed and approved by the Compensation and Nominating Committee of the Board (the "Committee"). A recommendation will be approved only if the Committee, in its sole discretion, determines that the goals and purposes of the institution are consistent with the business purposes and charitable philosophy of the Company. 6. FORFEITURE No donation will me made on a Director's behalf after he or she terminates Board service, unless such termination of service is as a result of death, disability, retirement, or such other circumstances as seemed appropriate by the Committee. Provided, however, that with respect to a Director who is or was a full-time employee of the Company and has resigned from the Board coincident with retirement from full-time employment, a donation will me made if such Director retires from or has already retired from the Company at the normal retirement date determined under the retirement or pension plan of the Company or under the terms of the Director's employment agreement with the Company. 7. FUNDING AND PROGRAM ASSETS The Company will fund the Program in a manner it deems appropriate in its sole discretion. Neither the Directors nor their recommended Donee(s) shall have any rights or interests in any contributions or any other assets of the Company by virtue of this Program. Nothing contained in the Program shall create, or be deemed to create, a trust, actual or constructive, for the benefit of a Director or any Donee recommended by a Director to receive a donation, or shall give, or be deemed to give, any Director or recommended Donee any interest in any assets of the Program or the Company. 8. AMENDMENT OR TERMINATION The Board of Directors of the Company may, at any time and for any reason, amend, suspend, or terminate the Program, provided, that any such change shall in no way diminish or impair a donation on behalf of any Director who has become eligible to participate in the Program as of the date of the change. Neither a participating Director nor any recommended institution acquires any legal right to any donation by virtue of the recommendation. 9. ADMINISTRATION The Program shall be administered by the Committee. The Committee shall have plenary authority in its discretion, but subject to the provisions of the Program, to prescribe, amend, interpret, apply, and rescind rules, regulations, and procedures relating to the Program. In administering the Program, the Committee may delegate any function, as it deems appropriate, to a committee consisting of the Chairman of the Company, and the Company, and the Company's Executive Vice President of Employee Relations or Vice President of Human Resources. The determinations of the Committee on the foregoing matters shall be conclusive and binding on all interested parties. 10. CHANGE IN CONTROL In the event of a "Change in Control," unless prior to the "Change in Control" the Board of Directors provides otherwise, (a) the Program may not be amended or terminated with respect to a participating former or then serving Director, and (b) the Company will immediately: (1) designate the recommended educational institutions as beneficiaries in connection with the Program; (ii) provide all necessary funds to make the designated donations; and (iii) place the funds into a trust administered by an independent trustee. For the purpose of the Program, "Change in Control" will be defined as the term is defined in the Burlington Northern Inc. Change in Control Agreement, as amended. The proposed merger of the Company and Santa Fe Pacific Corporation, if consummated, will not qualify as a "Change in Control" under the terms of this Program. 11. GOVERNING LAW The Program shall be construed and enforced according to the laws of the state of Texas, and all provisions thereof shall be administered according to the laws of said state. 12. EFFECTIVE DATE The effective date of the Program shall be April 20, 1995. EX-10.23 10 SALARY EXCHANGE OPTION PROGRAM Exhibit 10.23 BURLINGTON NORTHERN SANTA FE SALARY EXCHANGE OPTION PROGRAM 1. AUTHORITY TO ADOPT. This program (the "Program") has been adopted by the Compensation Committee (the "Committee") of the Board of Directors of Burlington Northern Santa Fe Corporation (the "Company") pursuant to its authority to promulgate rules for the administration and operation of the Burlington Northern Santa Fe 1996 Stock Incentive Plan (the "Plan") for non-qualified stock option grants. This Program is effective February 1, 1996. 2. PURPOSE. The purpose of this Program is to enable the Committee and its designated representatives to grant stock option awards ("Exchange Option Grants") to key employees in exchange for the employees' elective reduction of compensation otherwise payable to them, including cash compensation and other forms of compensation designated by the Committee ("Elective Compensation"). 3. ELIGIBILITY. The Committee shall designate key employees or classes of eligible employees (the "Eligible Participants") who shall be eligible to receive an Exchange Option Grant in exchange for foregoing Elective Compensation. 4. AMOUNT OF ELECTIVE COMPENSATION. Unless the Committee shall designate another amount of Elective Compensation as to any Eligible Participant, each Eligible Participant may elect to exchange all or any portions of the following element of compensation for an Exchange Grant: Up to 25% of such Eligible Participant's annual base salary for a calendar year up to three consecutive calendar years, to be deducted ratably with a minimum election of $5,000 for any calendar year . 5. METHOD OF ELECTION. Unless the Committee shall designate another time or times for making an election to forego receiving Elective Compensation and subject to Section 7 herein, an Eligible Participant who wishes to receive an Exchange Option Grant (an "Electing Participant") must deliver to the Senior Vice President - Employee Relations, a written irrevocable election in a form acceptable to the Senior Vice President - Law of Burlington Northern Santa Fe Corporation specifying the amount of Elective Compensation the Electing Participant wishes to forego (the "Cancelled Compensation"), not later than the date established by the Committee from time to time or December 31 of the year prior to the year in which the compensation is earned; provided that in the first program year, an election shall be made by February 1, 1996 and deductions shall be ratably made throughout the calendar year. Notwithstanding the foregoing, and except in the initial Program year, any officer of the Company subject to Section 16(b) of the Securities Exchange Act of 1934, must make such election not less than six months before the scheduled grant date. 1 6. DATE OF GRANT. Unless otherwise determined by the Committee, the Exchange Grant will be issued January 1 of the year in which the Cancelled Compensation is to be earned; provided that in the initial Program year, such grant shall occur on February 1. 7. TERMS OF GRANT. Each Exchange Option Grant shall be granted at the Fair Market Value as defined in the Burlington Northern Santa Fe 1996 Stock Incentive Plan on the date of grant in an amount equal to 150 option shares for each $1,000 of Cancelled Compensation. Such Exchange Option Grants shall become exercisable one year from the date of grant; provided that in the event of an election to forego compensation for multiple years, such Exchange Option Grant shall become exercisable ratably over the number of years for which an election is made beginning one year from date of grant based upon the Cancelled Compensation for each year divided by the total amount of Cancelled Compensation. Such options shall have a term of ten years and shall be subject to the terms and conditions of the Burlington Northern Santa Fe 1996 Stock Incentive Plan. In the event a participant wishes to terminate an election, he or she may do so in respect to Elective Compensation for all future calendar years covered by such election, and such portion of the Exchange Option Grant related to such compensation shall be immediately forfeited. Notwithstanding the foregoing, any officer of the Company subject to Section 16(b) of the Securities Exchange Act of 1934, must give notice of a termination of participation not less than six months before the beginning of the next calendar year. 8. RELOADS. Reload options are hereby granted to senior executives and to individuals in Salary Band 36 and above in respect to Exchange Option Grants, subject to the terms and conditions of the Plan, in respect to options granted under current or predecessor plans of the Company or its affiliates; provided a) that only two reloads on each option grant is permitted; b) that reloads are only available to current and actively employed individuals at the time of exercise of the Exchange Option Grant; and c) that reload rights are transferable to the same extent as option rights. 9. COMMITTEE DISCRETION. Notwithstanding anything else contained herein to the contrary, the Committee shall have the right, prior to the grant date, to override an election in whole or in part. If the Committee overrides an election in whole or in part, the Company shall reinstate the amount of the Cancelled Compensation related thereto. 10. UNVESTED STOCK OPTIONS. a) In the event that a participant with an Exchange Option Grant resigns or is terminated for Cause, the full amount of the Exchange Option Grant shall be forfeited. b) In the event that a participant with an Exchange Option Grant dies, all restrictions shall lapse and the full amount of the Exchange Option Grant shall be exercisable. 2 c) In the event that a participant with an Exchange Option Grant terminates due to Disability, Retirement or is involuntarily terminated by the Company other than for Cause, any portion of the outstanding award that is not exercisable shall be forfeited and the balance of the award shall remain exercisable in accordance with the terms and limitations of the Plan. d) The Change in Control provisions set forth in the Plan shall apply to all grants of stock options issued pursuant to this Program or as such Change in Control provisions may be modified by the Committee in its sole discretion prior to the date of an Exchange Option Grant, but in no event shall these Exchange Option Grants be available under any Change in Control agreement that has become effective prior to the date of a grant hereunder. 11. GRANT TERMS. The grant shall be issued from authorized, but unissued shares or from treasury shares. 12. AMENDMENTS. This Program may be amended or terminated at any time and from time to time by resolution of the Committee. 3 EX-10.27 11 DIRECTORS' RETIREMENT PLAN Exhibit 10.27 BURLINGTON NORTHERN SANTA FE CORPORATION DIRECTORS' RETIREMENT PLAN 1. PURPOSE ------- The purpose of this Burlington Northern Santa Fe Corporation Directors' Retirement Plan (the "Plan") is to promote the interests of Burlington Northern Santa Fe Corporation (the "Company") and its shareholders by strengthening its ability to attract and retain outstanding individuals to serve as members of the Board of Directors of the Company by providing such individuals with retirement benefits following termination of their services as members of such Board. 2. EFFECTIVE DATE -------------- The Plan shall be effective January 1, 1996 (the "Effective Date"). The provisions of the Plan in effect on the date when an individual terminates services as a member of the Board of Directors of the Company shall govern the rights and benefits of such individual under the Plan. 3. ELIGIBILITY ----------- Each individual who is a member of the Board of Directors of the Company on the Effective Date or becomes a member of such Board at any time thereafter shall be eligible for the benefits provided for under this Plan, provided that at the time when such individual terminates service as a member of such Board, he or she is not an employee of the Company in the period immediately preceding retirement and has served as a member of such Board for a period of at least ten consecutive years; or has attained the mandatory retirement age for 1 directors; or is a director who is designated by the Compensation and Benefits Committee of the Board of Directors to be eligible for the benefits provided for under this Plan upon retirement from the Board. For purposes of determining whether or not an individual has served as a member of the Board of Directors of the Company for a period of at least ten consecutive years, service as a member of the Board of Directors of Burlington Northern, Inc. or Santa Fe Pacific Corporation or their predecessor companies shall be taken into account. 4. AMOUNT OF RETIREMENT PENSION ---------------------------- Each individual who satisfies the eligibility requirements set forth in Section 3 at the time when the individual terminates service as a member of the Board of Directors of the Company shall be entitled to receive an annual retirement pension in the amount of the annual retainer for services as a Board member in effect at the time of termination of service, exclusive of any fees or other amounts payable for attendance at the meetings of such Board or for service on any committee thereof. 5. FORM AND COMMENCEMENT OF RETIREMENT PENSION ------------------------------------------- The retirement pension to which an individual is entitled under Section 4 shall be paid to such individual in quarterly installments if such individual is alive at the time for payment. The first installment shall be paid to such individual on the first day of the calendar quarter immediately following the date on which such individual terminates service as a member of the Board of Directors of the Company. Subsequent installments shall be paid to such individual on the first day of each succeeding quarter. 6. BENEFITS IN THE EVENT OF DEATH ------------------------------ In the event of the death of a retired Director who is receiving benefits under this 2 Plan, all benefit payments will terminate. 7. SOURCE OF BENEFITS ------------------ All benefits payable under the Plan shall be paid solely from the general assets of the Company. The liabilities of the Company pursuant to the Plan to any individual who has served as a member of the Board of Directors of the Company shall be those of a debtor only pursuant to such contractual obligations as are created by the Plan, and no such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance or any property of the Company. 8. ADMINISTRATION -------------- The Plan shall be administered by the Senior Vice President of Employee Relations of the Company or his successor. Subject to the express provisions of the Plan and under the supervision of the Board of Directors, the Senior Vice President of Employee may make all determinations necessary or advisable for administering the Plan. 9. GOVERNING LAW ------------- All questions pertaining to the construction, regulation, validity and effect of the Plan shall be determined in accordance with the laws of the State of Texas. 10. AMENDMENT, SUSPENSION OR TERMINATION ------------------------------------ The Board of Directors of the Company may at any time and from time to time, and retroactively if deemed to be necessary or appropriate, amend, suspend or terminate in whole or in part any or all of the provisions of the Plan, except that no such amendment, suspension or termination shall adversely affect the rights and benefits under the provisions of the Plan in effect immediately prior to such action which an individual who has terminated his 3 service as a member of such Board is entitled under the Plan; and provided, further, that if a change in control of the Company as defined in the Company's Stock Incentive Plan shall have occurred during the period of this Plan, this Plan shall continue in effect for a period of not less than 24 months beyond the month in which such change in control of the Company occurred. 4 EX-10.28 12 BENEFITS PROTECTION TRUST AGREEMENT EXHIBIT 10.28 BENEFITS PROTECTION TRUST AGREEMENT ----------------------------------- THIS AGREEMENT (the "Agreement"), made as of the 22nd day of January, 1996, by and between BURLINGTON NORTHERN SANTA FE CORPORATION, a corporation organized and existing under the laws of the State of Delaware, and BANKERS TRUST COMPANY, a New York banking corporation (hereinafter referred to as the "Trustee"). W I T N E S S E T H ------------------- WHEREAS, the Company (as hereinafter defined) or an Affiliate (as hereinafter defined) thereof has adopted the plans, programs, and policies and has entered into the contracts listed on Schedule 1 (hereinafter referred to either specifically by name or collectively as the "Plans") and may adopt or enter into other such plans which will be listed from time to time on Schedule 1 and may, from time to time, amend, modify or terminate any such Plan in accordance with its terms or to comply with any changes in the law and to increase the number of participants in any such Plan; and WHEREAS, the Company desires to establish a Benefits Protection Trust (hereinafter referred to as this "Trust") in order to ensure that Participants (as hereinafter defined) and their beneficiaries will receive the benefits which the Company and its Affiliates are obligated to provide for them or which they reasonably anticipate receiving pursuant to the Plans; and WHEREAS, the Trustee is not a party to the Plans; and WHEREAS, the aforesaid obligations of the Company are not funded or otherwise secured and the Company has agreed to take steps to assure that the future payment of amounts under such Plans will not be improperly withheld in the event that a "Change of Control" (as 3 hereinafter defined) of the Company should occur; and WHEREAS, for purposes of assuring that such payments will not be improperly withheld, the Company desires to: (a) deposit with the Trustee, subject to the claims of the Company's existing or future general creditors, amounts of cash and/or marketable securities for the payment of the fees and expenses of the Trustee in pursuing claims of the Participants and their beneficiaries against the Company for such payments and/or in requiring the Company to deposit sufficient cash and/or marketable securities in the Trust to pay benefits under the Plans; and (b) retain the right to deposit with the Trustee, subject to the same conditions, further amounts of cash and/or marketable securities for the payment of amounts under such Plans as they may become due and payable; and WHEREAS, in the event that the Trustee resigns in accordance with Section 16.1 or 16.2 hereof, the Company shall have the exclusive right and power to appoint, in its sole discretion, a successor trustee in accordance with such sections , and if no such successor trustee becomes trustee under this Agreement within the applicable time period prescribed in Section 16.1 or 16.2, as applicable, the Company intends for all funds held in the Benefit Account (as hereinafter defined), after payment of all fees, expenses and indemnities due to or incurred by the Trustee under this Agreement, to be immediately paid in the form of lump-sums (or, in the discretion of the Trustee, distributions of annuity contracts of insurance companies of equivalent values to any such lump- sum payments) to Participants and their beneficiaries in accordance with Section 16.1 or 16.2, as applicable. NOW, THEREFORE, the Company and the Trustee agree as follows: ARTICLE 1: DEFINITIONS. - ------------------------ 4 1.1 "Affiliate" shall mean any corporation, partnership or other entity, the majority interest in which is held by the Company directly or through one or more intermediaries. 1.2 The "Board" shall mean the Board of Directors of Burlington Northern Santa Fe Corporation. 1.3 "Change of Control" shall mean the occurrence of any of the following: (a) any person (as such term is used in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) being or becoming the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, (b) the first purchase by any person (as such term is used in subsection (a) of this Section 1.3) of the Company's Common Stock pursuant to a tender or exchange offer to acquire such number of shares of the Company's Common Stock as would result in such person holding twenty percent (20%) or more of the combined voting power of the Company's then outstanding Common Stock (other than a tender or exchange offer made by the Company or an Affiliate), (c) the approval by the Company's stockholders of a merger or consolidation, a sale or disposition of all or substantially all of the Company's assets or a plan of liquidation or dissolution of the Company, or (d) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company ceasing for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved by a vote of at least two thirds of 5 the directors then still in office who were directors at the beginning of the period. (e) notwithstanding (a) through (d), the business combination of Burlington Northern Inc. and Santa Fe Pacific Corporation, which was effective September 22, 1995, does not constitute a Change of Control. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur if the Company either merges or consolidates with or into another company or sells or disposes of all or substantially all of its assets to another company, if such merger, consolidation, sale or disposition is in connection with a corporate restructuring wherein the stockholders of the Company immediately before such merger, consolidation, sale or disposition own, directly or indirectly, immediately following such merger, consolidation, sale or disposition at least eighty percent (80%) of the combined voting power of all outstanding classes of securities of the company resulting from such merger or consolidation, or to which the Company sells or disposes of its assets, in substantially the same proportion as their ownership in the Company immediately before such merger, consolidation, sale or disposition. Further notwithstanding the foregoing, an event will not be treated as a Change of Control for purposes of this Agreement if the Board so determines by an affirmative vote of at least two thirds of its incumbent members immediately prior to the occurrence of such event, and the Company shall provide prompt notice of such determination to the Trustee. In addition, notwithstanding any provision herein to the contrary, a Change of Control shall not be deemed to occur where the acquirer is, directly or indirectly, a Class I railroad or a holding company of a Class I railroad ("Merger Transaction"), or any events or 6 transactions that form a part of, or are in furtherance of the Merger Transaction (including, without limitation, any announcement of the Merger Transaction or the execution of any agreement in furtherance of the Merger Transaction) for the purposes of this Trust, unless the Board so determines by an affirmative vote of at least two thirds of its incumbent members immediately prior to the occurrence of such event, and the Company shall provide prompt notice of such determination to the Trustee. 1.4 "Company" shall mean Burlington Northern Santa Fe Corporation, its successors, and assigns. 1.5 "Equitable Share" shall mean the interest of any Plan in the assets of the Trust. 1.6 "Investment Manager" shall mean a bank, an insurance company or an investment adviser registered under the Investment Advisers Act of 1940, appointed pursuant to Article VI hereto to manage all or a portion of the assets of the Trust. 1.7 "Participants" shall mean active and former directors and employees of the Company and/or of its Affiliates. 1.8 "Responsible Employer" shall mean, in connection with a particular Plan, an entity (either the Company or an Affiliate) that is obligated to provide benefits to directors or employees pursuant to that Plan, either through contributions to the Trust or otherwise. 1.9 "Threatened Change of Control" shall mean either of the following events: (a) A person described in Section 1.3 of this Article 1, (1) initiates a tender offer to acquire such number of shares as would result in such person holding twenty percent (20%) or more of the voting power of the Company's outstanding common shares; or 7 (2) solicits proxies for votes to elect members of the Board at a shareholders' meeting of the Company; provided, however, that, an event will not be treated as a Threatened Change of Control for purposes of this Agreement if the Board so determines by an affirmative vote of at least two thirds of its incumbent members immediately prior to the occurrence of such event, and the Company shall provide prompt notice of such determination to the Trustee, or (b) The Company notifies the Trustee in writing that such a Threatened Change of Control exists. 1.10 "Threatened Change of Control Period" shall mean the period beginning on the date a Threatened Change of Control commences and ending on the earliest of: (a) The date when a person described in Section 1.3 of this Article 1, (1) shall have abandoned the tender offer, or (2) shall not have elected a member of the Board as the case may be, or (3) shall own less than five percent (5%) of the voting power of the Company's outstanding common shares; or (b) If the Threatened Change of Control Period has commenced by reason of a written notification by the Company as provided in Section 1.9(b) of this Article 1, the earlier of (1) the expiration of six (6) months after the Trustee has received such notification, if a Threatened Change of Control described in Section 1.9(a) has not occurred within such 6-month period, and (2) the date the Company shall have notified the Trustee in writing that the Threatened Change of Control has terminated; or (c) The date a Change of Control occurs. 8 ARTICLE 2. CREATION OF TRUST. - ---------------------------- 2.1 The Company hereby establishes with the Trustee and the Trustee hereby accepts a trust consisting of two accounts established by the Trustee for purposes of accounting for funds delivered to the Trustee by the Company. One such account shall be known as the "Trustee Expense Account," and shall be used exclusively to pay the fees, expenses and indemnities due or incurred by the Trustee in accordance with the terms of this Agreement. The other such account shall be known as the "Benefit Account," and shall be used to make payments under the Plans. The Benefit Account shall be divided into a separate Equitable Share for each Plan which is funded by the Company in accordance with Section 4.1 of Article 4. If a single Plan has more than one Responsible Employer, then a separate Equitable Share shall be created for each such Responsible Employer. The Trustee, for investment purposes only, may commingle all Trust assets and treat them as a single fund, but the records of the Trustee at all times shall show the percentages of the Trust allocable to each of the several Equitable Shares, as well as the percentage of each Equitable Share that is attributable to contributions by each Responsible Employer. 2.2 The Company and the Trustee agree that the Trust created herein shall be revocable by the Company as to any assets held in the Trustee Expense Account at any time before a Change of Control, but shall not be revocable by the Company or by any successor thereto as to assets held in the Benefit Account at any time, or as to any amounts held under the Trust at any time after a Change of Control. The principal of the Trust, and any earnings thereon, shall be used exclusively for the uses and purposes of Participants and their beneficiaries and general creditors of each Responsible Employer, as herein set forth. 9 Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Agreement shall be mere unsecured contractual rights of Participants and their beneficiaries against the appropriate Responsible Employer. Any assets held by the Trust will be subject to the claims of the general creditors of the Responsible Employers under federal and state law in the event that any such Responsible Employer becomes insolvent, as defined in Section 18.2(a). The Trust established hereunder is intended to be a grantor trust within the meaning of Section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), and all interest and other income earned on the investment of the Trust shall for such purposes be the property of, and taxable to, the Company. All taxes on or with respect to the Trust shall be payable by the Company from its separate funds, provided, however, that to the extent that the Company does not timely make any such payments, such taxes shall be paid from the Trustee Expense Account, and if the Trustee Expense Account is insufficient then from the Benefit Account. 2.3 The Company may amend any existing Plans upon prior written notice thereof to the Trustee, provided, however, that the Company may not amend any Plans in such a manner that would materially increase the administrative duties of the Trustee under this Agreement without the Trustee's express prior written consent thereto. The Company may add plans, other than plans intended to be qualified under Section 401(a) of the Code, under the Trust upon prior written notice thereof to the Trustee and by amending Schedule 1; provided, however, that the Company may not add any such plan under the Trust without the Trustee's express prior written consent to such addition. The Company shall furnish to the Trustee copies of all Plans, and the Trustee shall have no duties or obligations whatsoever under this Agreement 10 with respect to any Plan of which the Trustee has not received a copy from the Company. If the Company amends any existing Plans or adds plans, it shall send to the Trustee a copy of any such amendments or plans, and the Trustee shall have no duties or obligations whatsoever under this Agreement with respect to any amendment to a Plan or new plans of which the Trustee has not received a copy from the Company. ARTICLE 3: TRUSTEE EXPENSE ACCOUNT. - ------------------------------------ 3.1 Concurrently with the execution of this Trust, the Company will deliver to the Trustee, to be held in trust hereunder and credited to the Trustee Expense Account, the sum of five hundred thousand dollars ($500,000) in cash, to be administered and disposed of by the Trustee as provided herein. 3.2 Upon the Trustee's obtaining actual knowledge of the existence of a Threatened Change of Control or a Change of Control, the Trustee shall require the Company to deliver the additional amount of one million five hundred thousand dollars ($1,500,000) in cash to the Trust, to be credited to the Trustee Expense Account. The Trustee shall make written demand for any such additional amount, and the Company will comply with such demand within 15 days of its receipt thereof. In the event the Company fails to provide the Trustee with such additional amount within 15 days of the receipt by the Company of such written demand, the Trustee shall have the right to resign immediately as Trustee, and immediately upon such resignation shall have no further duties hereunder. The Trustee will have no duty to find or secure the appointment of a successor trustee upon its resignation pursuant to this Section, nor shall its resignation or the termination of any further duties be contingent upon the appointment and 11 qualification of a successor trustee. If the Threatened Change of Control Period terminates and no Change of Control has occurred, the Company may withdraw any portion of the one million five hundred thousand dollars ($1,500,000) deposited upon the demand of the Trustee, together with any income actually earned thereon and reduced by any losses attributable thereto. 3.3 At any time, the Company shall have the unlimited right to add to the Trustee Expense Account additional amounts of cash and/or marketable securities. Such amounts (together with the income attributable thereto) which are over and above the aggregate amounts of $500,000 and $2,000,000 described in Sections 3.1 and 3.2 respectively may be withdrawn by the Company at any time prior to a Change of Control, but not after. ARTICLE 4: BENEFIT ACCOUNT - --------------------------- 4.1 The Company may elect at any time to deliver cash and/or marketable securities reasonably acceptable to the Trustee to be credited to the Benefit Account. Any such delivery shall be accepted by the Trustee only if it is accompanied by a designation of the Plan or Plans under the provisions of which such funds are to be disbursed, the Responsible Employer whose obligations are being funded, and if more than one Plan or the obligations of more than one Responsible Employer are being funded, the amount being allocated in respect of each Plan and each Responsible Employer. Such delivery shall be credited to the Equitable Share or Equitable Shares of the Plan or Plans in respect of which funds are being provided within the Benefit Account. 4.2 After a Change of Control has occurred, if the Trustee determines that amounts held under the Trust allocated to the Equitable Share(s) of one or more Plans are insufficient to pay all benefits payable (whether currently or on a deferred basis) under such Plan or Plans, the Trustee shall make a written demand on the Responsible Employer or Responsible Employers 12 to provide funds in an amount determined by the Trustee sufficient to pay all benefits payable (whether currently or on a deferred basis) under such Plan or Plans. If, after a Change of Control, the Trustee shall determine that benefits under one or more Plans which are not payable from assets of an Equitable Share under the Trust are not being paid to Participants and beneficiaries in the proper amounts and in a timely manner, the Trustee may in its discretion demand in writing that the Responsible Employer or Responsible Employers deliver to the Trustee assets sufficient to pay all benefits payable (whether currently or on a deferred basis) under such Plan or Plans. The Responsible Employer or Responsible Employers shall transfer such funds within 30 days from the time the written demand is mailed. ARTICLE 5: PAYMENTS FROM THE TRUST. - ----------------------------------- 5.1 The Company shall, from time to time, furnish the Trustee with such written information regarding the Participants and beneficiaries under the Plans (including updated mailing addresses) and the amount and/or method of determination of benefits under the Plans (hereinafter referred to as "Participant Data") as the Company deems relevant or as the Trustee shall request in writing. The Company shall, after a Change of Control, furnish the Trustee with such Participant Data and other information as the Trustee may from time to time request within thirty (30) days of such request. The Company will, from time to time, but not less frequently than annually, update Participant Data with respect to all Plans. 5.2 Prior to a Change of Control, the Trustee, at the direction of the Company, shall make payments to Participants and beneficiaries or to any disbursing agent designated by the Company in such manner and in such amounts as the Company shall direct, to the extent funds are available in the Equitable Share(s) of the applicable Plan or Plans. After a Change of Control and notwithstanding any other provisions of this Agreement, the Trustee shall, without direction from the Company, to the extent funds are available in the corresponding Equitable Share(s) of such Plan or Plans, make payments to any disbursing agent previously retained by the Company for such purpose or, in the Trustee's sole discretion, directly to Plan Participants 13 and beneficiaries in such manner and in such amounts as the Trustee shall determine they are entitled to be paid under the Plans based on the most recent Participant Data furnished to the Trustee by the Company and any supplemental information furnished to the Trustee by a Participant or beneficiary upon which the Trustee may reasonably rely in making such determination and based upon the terms of the Plans, including any amendments thereto, as in effect on the date of such Change of Control to the extent that copies of such Plans and amendments were received by the Trustee prior to the date of such Change of Control. 5.3 After a Change of Control, in the event the Internal Revenue Service issues a notice of deficiency to any Participant and/or beneficiary of a Plan stating that such Participant and/or beneficiary is subject to any tax by reason of any undistributed interest in the Trust, the Trustee, upon presentation of a copy of such determination and written direction from the Participant and/or beneficiary, shall distribute to such Participant and/or beneficiary the amount included in such Participant's or beneficiary's taxable gross income by reason of any interest in the Trust, which amount shall be stated in such written direction. The Trustee shall not be liable in any way for any payment made pursuant to any such written direction, including, without limitation, for any such inclusion of such amount in any Participant's or beneficiary's taxable gross income. Any benefit to which such Participant and/or beneficiary subsequently becomes entitled shall be offset by the actuarial equivalent of the amount previously distributed pursuant to the preceding provisions of this Section 5.3. 5.4 Payments to Participants and beneficiaries pursuant to Sections 5.2 and 5.3 of this Article 5 shall be made by the Trustee to the extent that funds in the relevant Equitable Share(s) are sufficient to allow such payments. In any month in which the Trustee determines that the 14 Equitable Share of one or more Plans in the Benefit Account does not have sufficient funds to provide for the current payment of all amounts otherwise payable to Participants and beneficiaries in such month under a Plan or Plans, the amount otherwise currently payable to each such Participant or beneficiary under such Plan or Plans during such month shall be reduced by a fraction, the numerator of which is the amount of funds then available in the Equitable Share(s) of such Plan or Plans and the denominator of which is the total of the benefits paid prior to such reduction during such month to all Participants and beneficiaries under such Plan or Plans. In the event that the Trustee shall at any time determine that all liabilities to Participants and beneficiaries, whether present or deferred, fixed or contingent, under any Plan or Plans have been satisfied in full, and at such time there are assets remaining in the Equitable Share or Equitable Shares allocated to such Plan or Plans, the Trustee shall allocate such remaining assets among the Equitable Shares of any or all of the remaining Plans in such manner as the Trustee deems appropriate, taking into account the liabilities outstanding under each such other Plan and the funding level of each such other Equitable Share. In any event, the Trustee shall have no duty to make any benefit payment out of the assets of the Trust to any Participant or beneficiary in excess of the aggregate benefits to which such Participant or beneficiary is entitled under any Plan or Plans. ARTICLE 6: MANAGEMENT OF TRUST ASSETS. - --------------------------------------- 6.1 Prior to a Change of Control, the Trust assets shall be held, invested and reinvested by the Trustee as designated by the written direction of the Company or of any Investment Manager appointed by the Company to manage all or a portion of the assets of the Trust, with respect to those assets as to which the Company has notified the Trustee that such 15 Investment Manager has been granted investment authority. The Trustee shall not be under any duty, or have any right, to question any such directions of the Company or any Investment Manager or to review any securities or other property held pursuant to such direction, or to make any suggestions to the Company or any Investment Manager in connection therewith; and the Trustee shall as promptly as practicable comply with any directions given by the Company hereunder or such Investment Manager. In exercising the powers of the Company under this Section 6.1 of Article 6 the Company shall act by its Corporate Treasurer or his written designees, each of whom is fully authorized to exercise such powers. The Trustee may, and shall, follow the written directions signed by said Corporate Treasurer or such designees. 6.2 In the absence of written direction of the Company, the Trustee shall invest the assets as if a Change of Control had occurred as provided in Section 6.3 of this Article 6 and Article 9. 6.3 After a Change of Control, the Trustee shall have exclusive authority and discretion to manage and control the Trust assets and may employ Investment Managers including affiliates of the Trustee to manage the investment of the Trust assets. Pursuant to such authority and discretion, the Trustee may exercise, from time to time and at any time, the power: (a) To invest and reinvest the assets of the Trust, without distinction between principal and income, in shares of stock (whether common or preferred) or other evidences of ownership; shares of any registered investment company or mutual fund for which an Investment Manager or any affiliate of an Investment Manager or the Trustee or any affiliate of the Trustee, provides, for compensation, custodial, advisory, or other services; bonds; debentures; notes or 16 other evidences of indebtedness, unsecured or secured by mortgages on real or personal property wherever situated (including any part interest in a bond and mortgage or note and mortgage whether insured or uninsured) and other property, including without limitation shares in any collective investment fund maintained by the Trustee, or part interest in property, real or personal, foreign or domestic, and in order to reduce the rate of interest rate fluctuations, contracts, as either buyer or seller, for the future delivery of United States Treasury securities and comparable Federal Government-backed securities; provided, however, that no portion of the assets of the Trust may be directly invested in common or preferred stock, or evidences of indebtedness, of the Company or any entity controlled, controlling, or under common control with the Company; (b) To sell, convey, redeem, exchange, grant options for the purchase or exchange of, or otherwise dispose of, any real or personal property, at public or private sale, for cash or upon credit, with or without security, without obligation on the part of any person dealing with the Trustee to see to the application of the proceeds of or to inquire into the validity, expediency or propriety of any such disposition; (c) To exercise, personally or by general or limited proxy, the right to vote any shares of stock, bonds or other securities held in the Trust; to delegate discretionary voting power to trustees of a voting trust for any period of time; and to exercise, personally or by power of attorney, any other rights appurtenant to any securities or other property of the Trust; (d) To join in or oppose any reorganization, recapitalization, consolidation, merger or liquidation, or any plan therefor, or any lease, mortgage or sale of the property of any organization the securities of which are held in the Trust; to pay from the assets of the Trust 17 any assessments, charges or compensation specified in any plan of reorganization, recapitalization, consolidation, merger or liquidation; to deposit any property with any committee or depositary; and to retain any property allotted to the Trust in any reorganization, recapitalization, consolidation, merger or liquidation; (e) To exercise or sell any conversion or subscription or other rights appurtenant to any stock, security or other property held in the Trust; (f) To borrow from any lender (including the Trustee in its individual capacity) money, in any amount and upon any reasonable terms and conditions, for purposes of this Agreement, and to pledge or mortgage any property held in the Trust to secure the repayment of any such loan; (g) To compromise, settle or arbitrate any claim, debt, or obligation of or against the Trust; to enforce or abstain from enforcing any right, claim, debt or obligation (subject to the provisions of Section 9.3 of Article 9); and to abandon any property determined by it to be worthless; (h) To make loans of securities held in the Trust to registered brokers and dealers upon such terms and conditions as are permitted by applicable law and regulations, and in each instance to permit the securities so lent to be registered in the name of the borrower or a nominee of the borrower, provided that in each instance the loan is adequately secured and neither the borrower nor any affiliate of the borrower has discretionary authority or control with respect to the assets of the Trust involved in the transaction or renders investment advice with respect to those assets; (i) To invest and reinvest any property in the Trust in any other form or type 18 of investment not specifically mentioned in this section; and (j) To open and maintain any bank account or accounts, in the name of the Trustee in any bank or banks, including, if the Trustee is a bank, the Trustee's own banking department. ARTICLE 7: ADMINISTRATIVE POWERS. - ---------------------------------- The Trustee shall have and in its sole and absolute discretion may exercise from time to time and at any time the following administrative powers and authority with respect to the Trust: 7.1 To hold property of the Trust in its own name or in the name of a nominee or nominees, without disclosure of the trust, or in bearer form so that it will pass by delivery, but no such holding shall relieve the Trustee of its responsibility for the safe custody and disposition of the Trust in accordance with the provisions of this Agreement; the Trustee's books and records shall at all times show that such property is part of the Trust; and the Trustee shall be absolutely liable for any loss occasioned by the acts of its nominee or nominees with respect to securities registered in the name of the nominee or nominees; 7.2 To organize and incorporate under the laws of any state it may deem advisable one or more corporations (and to acquire an interest in any such corporation that it may have organized and incorporated) for the purpose of acquiring and holding title to any property, interests or rights that the Trustee is authorized to acquire under Article 6 hereof; 7.3 To employ in the management of the Trust suitable agents, without liability for any loss occasioned by any such agents selected by the Trustee with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and 19 with like aims; 7.4 To make, execute and deliver, as Trustee, any deeds, conveyances, leases, mortgages, contracts, waivers or other instruments in writing that the Trustee may deem necessary or desirable in the exercise of its powers under this Agreement; and 7.5 To do all other acts that the Trustee may deem necessary or proper to carry out any of the powers set forth in this Agreement or otherwise in the best interests of the Trust. 7.6 Notwithstanding any powers granted to the Trustee pursuant to this Agreement or applicable law, the Trustee shall not have any power that could give the Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. ARTICLE 8: INSURANCE AND ANNUITY CONTRACTS. - -------------------------------------------- 8.1 The Trustee, upon written direction of the Company prior to a Change of Control, shall pay from the Benefit Account such sums to such insurance company or companies as the Company may direct for the purpose of procuring participating or nonparticipating insurance and/or annuity contracts for the Plans (hereinafter referred to as "Contracts"). The Company shall prepare. or cause to be prepared in such form as it shall prescribe, the application for any Contract to be applied for. The Trustee shall receive and hold in the Trust, subject to the provisions hereinafter set forth in this Article 8, all Contracts so obtained. 8.2 The Trustee shall be the complete and absolute owner of Contracts held in the Trust and, upon written direction of the Company prior to a Change of Control, shall have power, without the consent of any other person, to exercise any and all of the rights, options or privileges that belong to the absolute owner of any Contract held in the Trust or that are granted 20 by the terms of any such Contract or by the terms of this Agreement. Prior to a Change of Control, the Trustee shall have no discretion with respect to the exercise of any of the foregoing powers or to take any other action permitted by any Contract held in the Trust, but shall exercise such powers or take such action only upon the written direction of the Company and the Trustee shall have no duty to exercise any of such powers or to take any such action unless and until it shall have received such direction. After a Change of Control, the Trustee shall exercise, without directions from the Company, any and all of the rights, options or privileges that belong to the absolute owner of any Contract held in the Trust or that are granted by the terms of any such Contract or by the terms of this Agreement. The Trustee, upon the written direction of the Company prior to a Change of Control, shall deliver any Contract held in the Trust to such person or persons as may be specified in the direction. 8.3 The Trustee shall hold in the Trust the proceeds of any sale, assignment or surrender of any Contract held in the Trust and any and all dividends and other payments of any kind received in respect of any Contract held in the Trust. 8.4 Upon the written direction of the Company prior to a Change of Control, the Trustee shall pay from the Benefit Account premiums, assessments, dues, charges and interest, if any, upon any Contract held in the Trust. The Trustee shall have no duty to make any such payment unless and until it shall have received such direction. After a Change of Control, the Trustee shall pay from the Benefit Account premiums, assessments, dues, charges and interest, if any, upon any Contract held in the Trust, without direction from the Company. 8.5 No insurance company that may issue any Contract or Contracts held in the Trust shall be deemed to be a party to this Agreement for any purpose, or to be responsible in any 21 way for the validity of this Agreement or to have any liability under this Agreement other than as stated in each Contract that it may issue. Any insurance company may deal with the Trustee as sole owner of any Contract issued by it and held in the Trust, without inquiry as to the authority of the Trustee to act, and may accept and rely upon any written notice, instruction, direction, certificate or other communication from the Trustee believed by it to be genuine and to be signed by an officer of the Trustee and shall incur no liability or responsibility for so doing. Any sums paid out by any insurance company under any of the terms of a Contract issued by it and held in the Trust either to the Trustee, or, in accordance with the direction of the Trustee, to any other person or persons designated as payees in such Contract shall be a full and complete discharge of the liability to pay such sums, and the insurance company shall have no obligation to look to the disposition of any sums so paid. No insurance company shall be required to look into the terms of this Agreement, to question any action of the Trustee or to see that any action of the Trustee is authorized by the terms of this Agreement. 8.6 Anything contained herein to the contrary notwithstanding, neither the Company nor the Trustee shall be liable for the refusal of any insurance company to issue or change any Contract or Contracts or to take any other action requested by the Trustee; nor for the form, genuineness, validity, sufficiency or effect of any Contract or Contracts held in the Trust; nor for the act of any person or persons that may render any such Contract or Contracts null and void; nor for the failure of any insurance company to pay the proceeds and avails of any such Contract or Contracts as and when the same shall become due and payable; nor for any delay in payment resulting from any provision contained in any such Contract or Contracts; nor for the fact that for any reason whatsoever (other than their own negligence or willful misconduct) 22 any Contract or Contracts shall lapse or otherwise become uncollectible. ARTICLE 9: TRUSTEE'S POWERS AFTER CHANGE OF CONTROL. - ---------------------------------------------------- 9.1 After a Change of Control, the Trustee shall exercise for the sole benefit of the Plan Participants and their beneficiaries any of the powers set forth in Section 5.2 of Article 5, Section 6.3 of Article 6 and Sections 8.2 through 8.6 of Article 8 without direction from the Company including the power to negotiate for and purchase Contracts the rates of return and maturity dates of which may reasonably be expected to yield assets of the Trust sufficient to discharge any or all of the obligations of the Company and its Affiliates under the Plans. After the occurrence of a Change of Control, the Trustee shall have the power to settle all Trust liabilities with respect to any or all Plan Participants and beneficiaries with respect to any periodic payment obligation by the purchase and distribution of an annuity contract of an insurance company providing for such periodic payment. 9.2 Within thirty (30) days after a Change of Control, the Company shall notify all Participants and beneficiaries who are entitled to receive benefits under the Plans in writing (1) with respect to each Plan for which benefits are payable from assets of an Equitable Share under the Trust, that the Trustee shall continue to pay such benefits from the assets of such Equitable Share after the Change of Control and (2) with respect to any Plan for which benefits are not payable from assets of an Equitable Share under the Trust, that the Trustee is available to aid the Participants and beneficiaries entitled to benefits under such Plan in pursuing any claims they may have against the Company or an Affiliate under the terms of such Plan. The Company shall 23 provide such notice by using the same method as required by the Department of Labor pursuant to 29 C.F.R. 5 2520.104b-l(b)(1) as now in effect without regard to subsequent amendments. If the Company fails to do so, to the extent that the Trustee has actual knowledge of any such failure, the Trustee shall send such notice by certified mail return receipt requested to all unnotified Participants and/or the beneficiaries described above to their last address provided to the Trustee by the Company prior to a Change of Control. Alternatively, the Trustee may, at its option, provide such notification by placing an advertisement in one newspaper of general circulation in each of the ten locations in which the largest number of employees of the Company and its Affiliates are located as communicated by the Company to the Trustee prior to a Change of Control. 9.3 (a) If, after a Change of Control, a Participant or beneficiary notifies the Trustee that a Responsible Employer (or insurance company, contract administrator or any other party acting on the Responsible Employer's behalf, if applicable) has refused to pay a claim under any Plan the benefits under which are not payable from assets of an Equitable Share under the Trust, then, unless the Trustee shall determine that the claim has no basis in law and fact, the Trustee: (1) will promptly attempt to negotiate with the Responsible Employer to obtain payment, settlement, or other disposition of the claim, subject to the consent of the Participant or beneficiary. (2) will, if negotiations fail within ninety (90) days to result in a payment, settlement or other disposition agreeable to the Participant or beneficiary (hereinafter referred 24 to as the "Plaintiff"), upon the receipt of written authorization from the Participant or beneficiary in substantially the form attached as Exhibit A hereto, institute and maintain legal proceedings (hereinafter referred to as the "Litigation") against the Responsible Employer or other appropriate person or entity to recover on the claim on behalf of the Plaintiff; and (3) may, subject to the consent of the Plaintiff, settle or discontinue the Litigation. (b) The Trustee shall direct the course of the Litigation and shall keep the Plaintiff informed of the progress of the Litigation as the Trustee deems appropriate, but no less frequently than quarterly. If, during the Litigation, (1) the Plaintiff directs in writing that the Litigation on behalf of the Plaintiff be settled or discontinued, the Trustee shall take all appropriate action to follow such direction, provided that the written direction specifies the terms and conditions of the settlement or discontinuance, and further provided that the Plaintiff, if requested by the Trustee, shall execute and deliver to the Trustee a document in a form acceptable to the Trustee releasing and holding harmless the Trustee from any liability resulting from the Trustee's following such direction; (2) the Plaintiff refuses to consent to the settlement or other disposition of the Litigation on terms recommended in writing by the Trustee or does not agree with the Trustee's conduct of the litigation, the Trustee may proceed in its sole and absolute discretion, to take such action as it deems appropriate in the Litigation, including entering into settlement or discontinuance of the Litigation, provided that the Trustee shall first afford the Plaintiff at least fourteen (14) days' advance notice of any decision to settle or otherwise discontinue the Litigation; further provided, however, that the Trustee shall not be authorized to proceed in the Litigation on behalf of the Plaintiff after (i) the Plaintiff shall have revoked in writing the authorization of the Trustee to proceed on his behalf (in substantially the form attached as Exhibit B hereto) and shall have delivered such writing to the Trustee and (ii) the Plaintiff shall 25 have appointed his own counsel, whose fees and expenses are to be paid by the Plaintiff and who shall appear in the Litigation on behalf of the Plaintiff in lieu of counsel retained by the Trustee. Thereafter, the Trustee shall have no obligation to proceed further on behalf of such Plaintiff or to pay from the Trustee Expense Account any costs or expenses incurred in the Litigation after the date of the delivery of such writing. (c) The Trustee is empowered to utilize, at the expense of the Trust, and to charge the Trustee Expense Account, counsel and other appropriate experts, including nationally recognized pension or benefit consultants, actuaries and accountants, which shall be identified in writing by the Company to the Trustee as and when the services of any such counsel or experts are to be utilized by the Trustee, but, in any event, prior to the occurrence of a Threatened Change of Control, to aid the Trustee in making any determination under this Article 9 and in determining whether to pursue or settle any Litigation. The Trustee shall be fully protected, without any independent duty of investigation, in reliance upon any assumptions or actuarial or other determinations rendered by any pension or benefit consulting or actuarial firm retained pursuant to this Section 9.3(c). The Trustee shall have the discretion to determine the form and nature that any Litigation against the Company, or other appropriate person or entity, shall take, and the procedural rules and laws applicable to such Litigation shall supersede any inconsistent provision in this Agreement. 9.4 After a Change of Control, the Trustee shall bill the Company directly, on a monthly basis, for all fees and expenses described in Section 10.2. The Trustee may commence legal action against the Company to recover any amount not paid within 30 days of the billing date, and shall be obligated to commence such an action if the Company's failure to pay causes a reduction in the assets of the Trustee Expense Account below two million dollars ($2,000,000). 9.5 After a Change of Control, the Trustee shall be obligated to commence legal action to compel a Responsible Employer to provide funds to pay benefits under all Plans if the Trustee has issued a demand pursuant to Section 4.2 of Article 4 and the Responsible Employer has failed to transfer the demanded funds in a timely fashion under Section 4.2 of Article 4. 9.6 After a Change of Control, the Trustee shall appoint a nationally recognized pension 26 or benefit consulting or actuarial firm, which shall be identified in writing by the Company to the Trustee prior to the occurrence of a Threatened Change of Control, to determine any assumptions and make any actuarial or other determinations necessary or appropriate to any determinations required to be made by the Trustee under this Agreement, including, without limitation, under Sections 4.2, 5.2, 5.3, 5.4 and 9.3 hereof, and the Trustee shall be fully protected in acting under this Agreement in reliance upon any such assumptions or determinations rendered by such firm without any duty by the Trustee to make any determination or investigation of its own with respect thereto. Moreover, after a Change of Control, in making any determination under this Agreement, the Trustee shall be fully protected in reliance upon Participant Data (as defined in Section 5.1 hereof) furnished to the Trustee by the Company and any supplemental information furnished to the Trustee by a Participant or beneficiary, as provided under Section 5.2 hereof, and upon the terms of the Plans, including any amendments thereto, as in effect on the date of such Change of Control to the extent that copies of such Plans and amendments were received by the Trustee prior to the date of such Change of Control. ARTICLE 10: TAXES, EXPENSES AND COMPENSATION OF TRUSTEE. - --------------------------------------------------------- 10.1 The Company shall pay any Federal, state, local or other taxes imposed or levied with respect to the assets and/or income of the Trust or any part thereof under existing or future laws, and the Company, in its discretion, or the Trustee, in its discretion, may contest the validity or amount of any tax, assessment, claim or demand respecting the Trust or any part thereof. The Trustee shall deduct any taxes required to be withheld with respect to any payments made pursuant to the Trust. 27 10.2 The Trustee shall be reimbursed on a monthly basis, or on such other basis as the Trustee deems reasonable, for the fees and expenses set forth in Schedule 2 attached hereto and its reasonable expenses, including but not limited to the retention of legal counsel (including but not limited to legal counsel and other professionals retained by the Trustee pursuant to this Agreement and to legal counsel retained to represent the Trustee in any action brought by the Company or any Participant against the Trustee), accountants and actuaries and such other professionals as the Trustee determines are necessary or appropriate to enable it to perform its services as Trustee. 10.3 Notwithstanding the foregoing provisions of this Article 10, to the extent that the Company does not timely pay or reimburse any amounts payable or reimbursable by the Company pursuant to this Article 10, such amounts shall be paid or reimbursed from the Trustee Expense Account, and if the Trustee Expense Account is insufficient, then from the Benefit Account. ARTICLE 11: GENERAL DUTIES OF TRUSTEE. - --------------------------------------- 11.1 Subject to Article 17 hereof, the Trustee shall discharge its duties under this Agreement solely in the interest of the Participants in the Plans and their beneficiaries and (1) for the exclusive purpose of providing benefits to such Participants and their beneficiaries and defraying reasonable expenses of administering the Trust; and (2) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 11.2 (a) The Trustee is not responsible for ascertaining whether a Threatened Change 28 of Control has occurred or whether a Threatened Change of Control Period exists. The Company will notify the Trustee of the commencement and/or termination of a Threatened Change of Control Period. (b) The Trustee is responsible for ascertaining whether a Change of Control has occurred, and in so-ascertaining, the Trustee shall rely solely upon publicly available information and any other information actually received by the Trustee from the Company. Among the ways the Trustee may use to determine whether a Change of Control has occurred is to read The Wall Street Journal and The New York Times on a daily basis. 11.3 The Trustee may consult with counsel, who may be counsel for the Company prior to a Change of Control or for the Trustee in its individual capacity, and shall not be deemed imprudent by reason of its taking or refraining from taking any action in accordance with the opinion of counsel. 11.4 The Company may designate in writing, prior to a Change of Control, counsel to be retained by the Trustee after a Change of Control to enforce the rights of Participants and beneficiaries to benefits under the Plans. If the designated counsel declines to provide representation, or if the Trustee so elects for any reason or no reason, the Trustee may dismiss the designated law firm and engage another qualified law firm for this purpose; however, the law firm so engaged may not be the same law firm which represents the Trustee with respect to its responsibilities as Trustee under this Agreement. The Company may not dismiss or engage such counsel or cause the Trustee to engage or dismiss such counsel after a Change of Control. 29 ARTICLE 12: INDEMNIFICATION. - ----------------------------- 12.1 The Company agrees to indemnify and hold the Trustee harmless from and against any liability that the Trustee may incur arising out of the Trustee's execution of this Agreement (including attorneys' fees and expenses), unless arising from the Trustee's own gross negligence, willful misconduct, or willful breach of the provisions of its obligations under this Agreement. The Trustee shall not be required to give any bond or any other security for the faithful performance of its duties under this Agreement, except as required by law. 12.2 Any amount payable to the Trustee under this Agreement and not previously paid by the Company shall be paid by the Company promptly upon written demand therefor by the Trustee or, if the Company fails to make payment within 15 days after such written demand, from the Trustee Expense Account, and if the Trustee Expense Account is insufficient then from the Benefit Account. In the event that payment is made hereunder to the Trustee from the assets of the Trust, the Trustee shall promptly notify the Company in writing of the amount of such payment. The Company agrees that, upon receipt of such notice, it will deliver to the Trustee to be held in the Trust an amount in cash (or in marketable securities or in some combination thereof) equal to any payments made from the Trust to the Trustee pursuant to this Article 12. The failure of the Company to transfer any such amount shall not in any way impair the Trustee's right to indemnification, reimbursement and payment pursuant to this Article 12. The provisions of this Article 12 shall survive the termination of this Trust Agreement. ARTICLE 13: NO DUTY TO ADVANCE FUNDS. - -------------------------------------- Nothing contained in this Agreement shall require the Trustee to risk or expend its own funds in the performance of the duties as the trustee hereunder. In the acceptance and 30 performance of its duties hereunder, the Trustee acts solely as trustee and not in its individual capacity, and all persons, other than the Company, having any claim against the Trustee related to this Agreement or the actions or agreements of the Trustee contemplated hereby shall look solely to the assets of the Trust for the payment or satisfaction thereof except to the extent that the Trustee has engaged in willful misconduct or gross negligence, or the Trustee has willfully breached its obligations under this Agreement. Without limiting the foregoing, the Trustee shall not be liable in its individual capacity for the payment of the fees and expenses of counsel and other professionals retained by the Trustee in accordance with this Agreement. ARTICLE 14: ACCOUNTS. - ---------------------- 14.1 (a) The Trustee shall keep accurate and detailed accounts of all its receipts, investments and disbursements under this Agreement on a calendar year basis. Such person or persons as the Company shall designate shall be allowed to inspect the books of account relating to the Trust upon request at any reasonable time during the business hours of the Trustee. (b) Within 120 days after (1) the close of each calendar year, (2) the date of the Trustee's resignation or removal as provided in Article 16 hereof or (3) the date of termination of the Trust as provided in Article 17 hereof, the Trustee shall transmit to the Company, and certify the accuracy of, a written statement of the assets and liabilities of the Trust, showing the current value of each asset at that date, and a written account of all the Trustee's transactions relating to the Trust during the period from the last previous accounting to the close of that year. (c) Unless the Company shall have filed with the Trustee written exceptions or objections to any such statement and account, within 120 days after receipt thereof, the 31 Company shall be deemed to have approved such statement and account; and in such case or upon the written approval by the Company of any such statement and account, the Trustee shall be forever released and discharged with respect to all matters and things contained in such statement and account as though it had been settled by decree of a court of competent jurisdiction in an action or proceeding to which the Company and all persons having any beneficial interest in the Trust were parties. 14.2 The Trustee shall determine the fair market value of the Trust, the Benefit Account, the Trustee Expense Account and each Equitable Share as of each December 31, or more frequently (but not more often than monthly) if it so desires. If there is a diminution in value of the Trustee Expense Account below (1) five hundred thousand dollars ($500,000) prior to the commencement or after the end of a Threatened Change of Control Period, or (2) two million dollars ($2,000,000) during a Threatened Change of Control Period or upon the occurrence of a Change of Control, but only if the Trustee has demanded one million five hundred thousand dollars ($1,500,000) pursuant to Section 3.2 of Article 3 hereof, the Company shall provide the Trustee with sufficient funds to make up for any such diminution in value within 15 days after written demand by the Trustee for such payment. At any time other than a Threatened Change of Control Period or after a Change of Control, if the Company fails to comply with the Trustee's written demand within 15 days to provide the Trustee with sufficient funds to make up for any diminution in value below five hundred thousand dollars ($500,000) in the Trustee Expense Account, the Trustee may resign as Trustee upon one hundred twenty (120) days' 32 written notice in accordance with Section 16.1 of Article 16 hereof. In the event that the Trustee Expense Account falls below two million dollars ($2,000,000) during a Threatened Change of Control Period or on or after the occurrence of a Change of Control, and the Company fails to comply with the Trustee's written demand to make up for any such diminution in value below $2,000,000 within 15 days of receipt of such written demand, the Trustee has the right to resign immediately as trustee under this Agreement, and immediately upon such resignation shall have no further duties hereunder. The Trustee will have no duty to find or secure the appointment of a successor trustee upon its resignation pursuant to this Section, nor shall its resignation or the termination of any further duties be contingent upon the appointment and qualification of a successor trustee. 14.3 Nothing contained in this Agreement or in the Plans shall deprive the Trustee of the right to have a judicial settlement of its accounts. In any proceeding for a judicial settlement of the Trustee's accounts or for instructions in connection with the Trust, the only other necessary party thereto in addition to the Trustee shall be the Company. If the Trustee so elects, it may bring in as a party or parties defendant any other person or persons. No person interested in the Trust, other than the Company, shall have a right to compel an accounting, judicial or otherwise, by the Trustee, and each such person shall be bound by all accountings by the Trustee to the Company, as herein provided, as if the account had been settled by decree of a court of competent jurisdiction in an action or proceeding to which such person was a party. ARTICLE 15: ADMINISTRATION OF THE PLANS; COMMUNICATIONS. - --------------------------------------------------------- 15.1 The Company shall administer the Plans as provided therein and subject to Section 5.2 of Article 5, Section 6.3 of Article 6, and of Article 9 hereof, and, subject to any other delegation by the Company and express written assumption by the Trustee of the duties of administering the Plans, the Trustee shall not be responsible in any respect for administering the 33 Plans. The Trustee shall not be responsible for the adequacy of the Trust to meet and discharge all payments and liabilities under the Plans. The Trustee shall be fully protected in relying upon any written notice, instruction, direction or other communication signed by an officer of the Company designated pursuant to this Agreement. The Company, from time to time, shall furnish the Trustee with the names and specimen signatures of the designated officers of the Company and shall promptly notify the Trustee of the termination of office of any designated officer of the Company and the appointment of a successor thereto. Until notified to the contrary, the Trustee shall be fully protected in relying upon the most recent list of the designated officers of the Company furnished to it by the Company. 15.2 Any action required by any provision of this Agreement to be taken by the Board shall be evidenced by a resolution of such Board certified to the Trustee by the Secretary or an Assistant Secretary of the Company under its corporate seal, and the Trustee shall be fully protected in relying upon any resolution so certified to it. Unless other evidence with respect thereto has been specifically prescribed in this Agreement, any other action of the Company under any provision of this Agreement, including any approval of or exceptions to the Trustee's accounts, shall be evidenced by a certificate signed by an officer of the Company, and the Trustee shall be fully protected in relying upon such certificate. The Trustee may accept a certificate signed by an officer of the Company as proof of any fact or matter that it deems necessary or desirable to have established in the administration of the Trust (unless other evidence of such fact or matter is expressly prescribed herein), and the Trustee shall be fully protected in relying upon the statements in the certificate. 15.3 The Trustee shall be entitled conclusively to rely upon any written notice, 34 instruction, direction, certificate or other communication believed by it to be genuine and to be signed by the proper person or persons. 15.4 All notices to the Trustee hereunder shall be in writing and, until written notice is given to the contrary, shall be sent to the Trustee at its office at 909 Fannin Street, Houston, Texas 77010, Attention: Pamela P. Beattie, Vice President, Telecopy (713) 759-6769; communications to the Company shall be sent to it at its office at 3000 Continental Plaza, 777 Main Street, Fort Worth, Texas 76102, Attention: James B. Dagnon, Senior Vice President- Employee Relations, Telecopy (817) 333-3280, with a copy to Dennis J. Cech, Assistant Vice President-Compensation and Benefits. ARTICLE 16: RESIGNATION OR REMOVAL OF TRUSTEE. - ----------------------------------------------- 16.1 The Trustee may resign at any time, other than during a Threatened Change of Control Period or after a Change of Control, upon one hundred twenty (120) days' written notice to the Company or such shorter period as is acceptable to the Company (hereinafter referred to as the "Resignation Period") and immediately after the Resignation Period shall have no further duties hereunder. The Trustee will have no duty to find or secure the appointment of a successor trustee upon its resignation pursuant to this Section, nor shall the Trustee have any liability to any person in connection with the appointment, or failure to secure the appointment, of any such successor trustee, nor shall its resignation or its termination of any further duties be contingent upon the appointment and qualification of a successor trustee. Promptly after receipt of such notice, the Company shall appoint a successor trustee, such trustee to become trustee under this Agreement upon its acceptance of this Trust; provided that, if upon the 35 expiration of the Resignation Period, no successor trustee has become trustee under this Agreement in accordance with this Section 16.1, the Trustee shall immediately (A) pay to itself all fees, expenses and indemnities due to or incurred by the Trustee hereunder, in accordance with Article 10 (including any amounts due or payable with respect to the firm appointed pursuant to the following clause (B)), and (B) satisfy all vested benefit obligations to Participants or their beneficiaries under the Plans by single payments in the form of lump-sums to such Participants or beneficiaries or, in the discretion of the Trustee, in lieu of any or all such lump-sum payments, by distributions of annuity contracts purchased from insurance companies having values equivalent to any such lump-sum payments, the amounts of such payments determined (based on the most recent Participant Data furnished to the Trustee by the Company) by a nationally recognized pension or benefit consulting or actuarial firm appointed by the Trustee for this purpose (and the Trustee shall be fully protected without further liability under this Agreement in making distributions from the Trust in reliance upon such determinations); provided that if the Equitable Share of any Plan in the Benefit Account does not have sufficient funds to provide for satisfaction in full of all such vested benefit obligations otherwise payable in accordance with the preceding clause to Participants and beneficiaries under such Plan, then each such amount otherwise payable to each such Participant or beneficiary shall be reduced on a proportionate basis. 16.2 During a Threatened Change of Control Period or after a Change of Control, the Trustee may resign only under one of the following circumstances: (a) A final decision of a court of competent jurisdiction removing the Trustee by reason of such court's determination of the existence of a conflict of interest which prevents 36 the Trustee from properly performing its duties hereunder. The Trustee agrees to use its best efforts to avoid any such conflict. For the purpose of this Agreement, the decision of a court shall not be deemed to be final unless the decision is not appealable, or no appeal has been taken from the decision and the time for an appeal has expired. Notwithstanding the foregoing provisions of this subsection (a), such resignation shall not be effective until the Trustee or the Company has obtained the agreement of a bank to act as successor trustee which bank (1) is among the 100 largest banks in the United States, as measured by deposits, and (2) has a rating of "B/C" or greater based upon the most current rating from Keefe, Bruyett & Woods ("KB&W") or its successor, or if KB&W or its successor should cease to publish ratings, then a short-term debt rating from Moody's of "P-1," or greater, or from Standard and Poor's of "A-1." In any event, the Trustee shall continue to be custodian of the Trust until the new trustee is in place, and the Trustee shall be entitled to expenses and fees through the later of the effective date of its resignation as Trustee or the end of its custodianship of the Trust assets. (b) The Trustee has exhausted all of its legal remedies and has been unsuccessful in such litigation to require the Company to remit to the Trustee such amounts as are billed pursuant to Section 9.4 of Article 9 hereof and the assets of the Trust have been exhausted. In such event, the Trustee shall have the right to resign immediately as Trustee, and immediately upon such resignation shall have no further duties hereunder. The Trustee will have no duty to find or secure the appointment of a successor trustee upon its resignation pursuant to this sub-section, nor shall its resignation or the termination of any further duties be contingent upon the appointment and qualification of a successor trustee. (c) The Trustee has made a good faith determination that all liabilities to Participants and beneficiaries under the Plans, whether 37 present or deferred, fixed or contingent, have been satisfied in full. (d) Notwithstanding the foregoing provisions of this Section 16.2, in addition, the Trustee may resign under the circumstances described in Sections 3.2 and 14.2 hereof. Immediately upon the resignation of the Trustee under the circumstances described in either Section 3.2 or 14.2 hereof, the Company shall have the sole right and power to select and appoint a successor trustee hereunder, and, if so appointed, such successor trustee shall become trustee under this Agreement upon its acceptance of this Trust; provided that, if no such successor trustee has become trustee under this Agreement in accordance with the preceding clause of this subsection (d) of this Section 16.2 within sixty (60) days following such resignation of the Trustee, the Trustee shall immediately upon the expiration of such sixty-day period (A) pay to itself all fees, expenses and indemnities due to or incurred by the Trustee hereunder, in accordance with Article 10 (including any amounts due or payable with respect to the firm appointed pursuant to the following clause (B)) and (B) satisfy all vested benefit obligations to Participants or their beneficiaries under the Plans by single payment in the form of lump-sums to such Participants or beneficiaries or, in the discretion of the Trustee, in lieu of any or all such lump-sum payments, by distributions of annuity contracts purchased from insurance companies having values equivalent to any such lump-sum payments, the amounts of such payments determined (based on the most recent Participant Data furnished to the Trustee by the Company) by a nationally recognized pension or benefit consulting or actuarial firm appointed by the Trustee for this purpose (and the Trustee shall be fully protected without further liability under this Agreement in making distributions from the Trust in reliance upon such determinations); provided that if the Equitable Share of any Plan in the Benefit Account 38 does not have sufficient funds to provide for satisfaction in full of all such vested benefit obligations otherwise payable in accordance with the preceding clause to Participants and beneficiaries under such Plan, then each such amount otherwise payable to each such Participant or beneficiary shall be reduced on a proportionate basis. In the event of the Trustee's resignation in accordance with the preceding sentence, the Trustee shall have no duty to find or secure the appointment of a successor trustee, nor shall the Trustee have any liability to any person in connection with the appointment, or failure to secure the appointment of any such successor trustee, and following such resignation by the Trustee, the Trustee shall have no further duties or obligations under this Agreement, except that, prior to the earlier to occur of (i) the date that a successor trustee appointed by the Company becomes trustee under this Agreement and (ii) sixty (60) days following the date of such resignation by the Trustee, the Trustee's sole duty with respect to this Agreement shall be to preserve the principal of the assets held in the Benefit Account and the Trustee Expense Account as of the date of such resignation by the Trustee until the distribution or payment thereof in accordance with the preceding sentence. 16.3 Prior to a Change of Control, the Company may remove the Trustee upon 30 days written notice to the Trustee, or upon shorter notice if acceptable to the Trustee. Such removal shall become effective, however only upon the occurrence of all of the following events: (a) The appointment by the Company of a successor trustee; and (b) The acceptance of the Trust by the successor trustee; and (c) The delivery of the Trust assets to the successor trustee. 39 16.4 Each successor trustee shall have the powers and duties conferred upon the Trustee in this Agreement, and the term "Trustee" as used in this Agreement shall be deemed to include any successor trustee. Upon designation or appointment of a successor trustee, the Trustee shall transfer and deliver the assets of the Trust to the successor trustee, reserving such reasonable sums as the Trustee shall deem necessary to defray its expenses in settling its accounts, to pay any of its compensation due and unpaid and to discharge any obligation of the Trust for which the Trustee may be liable. If the sums so reserved are not sufficient for these purposes, the Trustee shall be entitled to recover the amount of any deficiency from either the Company or the successor trustee, or both. When the Trust shall have been transferred and delivered to the successor trustee and the accounts of the Trustee have been settled as provided in Article 14 hereof, the Trustee shall be released and discharged from all further accountability or liability for the Trust and shall not be responsible in any way for the further disposition of the Trust or any part thereof. 16.5 Notwithstanding anything to the contrary, in the event it resigns or is removed, the Trustee shall have a right to have its accounts settled as provided in Article 14 hereof. ARTICLE 17: AMENDMENT OF AGREEMENT; TERMINATION OF TRUST; TERMINATION WITH - --------------------------------------------------------------------------- RESPECT TO AN AFFILIATE AND TRANSFER TO SUCCESSOR TRUSTEE. ---------------------------------------------------------- 17.1 The Company expressly reserves the right at any time to amend in writing or terminate this Agreement and the Trust created thereby to any extent that it may deem advisable; provided, 40 however, that (1) subsequent to a Change of Control, no such amendment or termination may result, directly or indirectly, in the return of any assets of the Benefit Account to the Company prior to the satisfaction of all liabilities under the Plans to Plan Participants and beneficiaries, (2) no amendment may be made unless the Company, in its reasonable judgment, believes that such amendment would have no material adverse effect on the amount of benefits payable under the Trust to Participants or their beneficiaries or that such amendment is necessary to avoid a greater adverse impact on the Participants or their beneficiaries, and (3) no amendment or termination may be made after the date on which a Change of Control occurs which would (i) permit the Company to withdraw any assets from the Trustee Expense Account, (ii) directly or indirectly reduce or restrict the Trustee's rights and duties under this Agreement, or (iii) permit the Company to remove the Trustee following the date on which a Change of Control occurs. No amendment shall be made without the Trustee's consent thereto in writing if, and to the extent that, the effect of such amendment is to increase the Trustee's responsibilities hereunder, and/or reduce the Trustee's rights hereunder in any way, including, without limitation, the Trustee's rights hereunder to require the Company to deliver the additional amount of $1,500,000 upon the occurrence of a Threatened Change of Control or a Change of Control, and/or affect in any way the Trustee's right to resign under this Agreement. Such proposed amendment shall be delivered to the Trustee as a written instrument of amendment, duly executed and acknowledged by the Company. The Company also shall deliver to the Trustee a copy of any modifications or amendments to the Plans. Subject to Section 17.2 hereof, the Trustee's consent shall not be required for the termination of the Trustee Expense Account or its removal as Trustee. 41 17.2 In the event the Company terminates the Trustee Expense Account, prior to the occurrence of a Change of Control, the Trustee shall reserve such sums it deems necessary to pay its fees and expenses, and shall distribute all remaining assets of the Trustee Expense Account in accordance with the written directions of the Company and the Trustee shall provide the Company with a final written account in accordance with Article 14 hereof. The Company shall have no right to terminate the Trustee Expense Account during a Threatened Change of Control Period or upon or after the occurrence of a Change of Control. 17.3 This Trust shall be terminated upon the final payment of all amounts payable to all of the Participants and beneficiaries pursuant to the Plans, and the payments of all amounts due to the Trustee and all costs and expenses chargeable to the Trust. Upon termination of this Trust, the Trustee shall have a right to have its account settled as provided in Article 14 hereof. Promptly upon termination of this Trust, and after payment of all fees, expenses and indemnities due to or incurred by the Trustee hereunder, any remaining portion of the assets of the Trust shall be paid to the Company. 17.4 In the event that, whether before or after a Change of Control, the Company shall dispose of substantially all its interest in an Affiliate which is a participating employer under one or more Plans, the Trustee shall, upon instruction by the Company, transfer to a substantially similar irrevocable grantor trust designated by such Affiliate or its successor a portion of the assets of the Benefit Account equal to the portion, if any, of each Equitable Share allocable to benefits payable in respect of the employees of such Affiliate. In the case of any instruction received by the Trustee pursuant to this Section 17.4 prior to a Change of Control, the Trustee may conclusively rely on the Company's determination as to the portion of the assets of the 42 Benefit Account allocable to the benefits payable in respect of employees of such Affiliate under the Plans. After the date on which a Change of Control occurs, the Trustee shall not make any transfer pursuant to this Section 17.4 except pursuant to a determination by a nationally recognized pension or benefit consulting or actuarial firm appointed by the Trustee as to the portion of the Benefit Account allocable to benefits payable in respect of employees of the former Affiliate, which determination the Trustee in its good faith judgment determines to have been made on an independent good faith basis and on the basis of all pertinent Participant Data furnished to the Trustee by the Company before the occurrence of a Change of Control. Upon the making of any transfer in accordance with this Section 17.4, the Trustee shall be released and discharged from any and all obligations with respect to such transferred assets and with respect to any benefits payable in respect of the employees of the former Affiliate. 17.5 The Trust shall be terminated upon resignation of the Trustee under subsection (b) of Section 16.2 and final payment of all amounts payable under Section 16.1 and subsection (d) of Section 16.2. ARTICLE 18: PROHIBITION OF DIVERSION. - -------------------------------------- 18.1 Except as provided in Sections 2.2, 3.2, 3.3, 17.1, and 18.2 at no time prior to the satisfaction of all liabilities with respect to Participants and their beneficiaries under this Trust shall any part of the corpus and/or income of the Trust be used for, or diverted to, purposes other than for the exclusive benefit of such Participants and their beneficiaries and, except as provided in Section 17.3, the assets of the Trust shall never inure to the benefit of the Company and shall be held for the exclusive purposes of providing benefits to Participants in the Plans and their beneficiaries and defraying reasonable expenses of administering the Plans 43 and of the Trustee and/or performing any of the Trustee's duties under this Agreement. 18.2 (a) Notwithstanding any provision of this Agreement to the contrary, the Trustee shall cease payment of benefits to Participants and beneficiaries with respect to any Responsible Employer that is "insolvent," as defined below. The assets of the Trust shall at all times, as provided for in Section 2.2 and as set forth below, be subject to claims of the general creditors of each Responsible Employer under federal and state laws. For purposes of this Agreement, a Responsible Employer shall be considered "insolvent" if such Responsible Employer is subject to a pending proceeding as a debtor under the Bankruptcy Code of the United States or bankruptcy laws of any state, or if such Responsible Employer is unable to pay its debts as they become due. (b) Any time the Trustee has actual knowledge, or has determined that a Responsible Employer is insolvent, the Trustee shall deliver, to satisfy the claims of the insolvent Responsible Employer's general creditors as a court of competent jurisdiction may direct, that portion of any undistributed principal and income in the Trust attributable to the insolvent Responsible Employer's contributions to the Trust. The Board of Directors and the Chief Executive Officer of the Responsible Employer shall have the duty, respectively, to inform the Trustee, in writing, of the insolvency of such Responsible Employer. (c) Unless the Trustee has actual knowledge of the insolvency of a Responsible Employer , or has received notice of the insolvency of a Responsible Employer, as provided in subsection (d) of this Section 18.2, the Trustee shall have no duty to inquire whether any Responsible Employer is insolvent. The Trustee may in all events rely on such evidence concerning the insolvency of a Responsible Employer as may be furnished to the Trustee and 44 that provides the Trustee with a reasonable basis for making a determination concerning the solvency of the Responsible Employer. (d) If a Responsible Employer, or a person claiming to be a creditor of a Responsible Employer, alleges in writing to the Trustee that a Responsible Employer has become insolvent, the Trustee shall determine, within thirty (30) days after the receipt of such notice, whether such Responsible Employer is insolvent and, pending such determination, the Trustee shall, only with respect to those benefit payments that are made under a Plan of the Responsible Employer alleged to be insolvent, discontinue payments of amounts on behalf of Participants and beneficiaries, and shall hold that portion of the assets of the Trust attributable to the alleged insolvent Responsible Employer's contributions to the Trust for the benefit of such Responsible Employer's general creditors. From the date of discontinuance of such payments until the Trustee receives an order from a court of competent jurisdiction directing the disposition of the held assets in the Trust, the provisions of Article 10 governing the payment of Trust expenses or taxes shall not be suspended. (e) The Trustee shall resume the payments discontinued under subsection (d) that are payable on behalf of Participants and beneficiaries in accordance with Section 5.2 and/or 5.3 of this Agreement only after the Trustee has determined that the Responsible Employer alleged to be insolvent is not insolvent (or is no longer insolvent, if the Trustee initially determined such entity was insolvent). Upon resumption of such payments, the first payment following such discontinuance shall include the aggregate amount of all payments from the assets of the Trust which would have been made to the Participant or beneficiary during the period of discontinuance, less the aggregate amount of payments made to the Participant or beneficiary 45 by the Responsible Employer in lieu of payments from the Trust during any such period of discontinuance. ARTICLE 19: PROHIBITION OF ASSIGNMENT OF INTEREST. - --------------------------------------------------- No interest, right or claim in or to any part of the Trust or any payment therefrom shall be assignable, transferable or subject to sale, mortgage, pledge, hypothecation, commutation, anticipation, garnishment, attachment, execution or levy of any kind, and the Trustee shall not recognize any attempt to assign, transfer, sell, mortgage, pledge, hypothecate, commute or anticipate the same, except to the extent required by law. ARTICLE 20: MISCELLANEOUS. - --------------------------- 20.1 This Agreement shall be interpreted, construed and enforced, and the Trust hereby created shall be administered, in accordance with the laws of the United States and of the state of New York. Nothing in this Agreement shall be construed to subject the Trust created hereunder to the Employee Retirement Income Security Act of 1974, as amended. 20.2 The Company shall, at any time and from time to time, upon the reasonable request of the Trustee, execute and deliver such further instruments and do such further acts as may be necessary or proper to effectuate the purpose of this Agreement. 20.3 The titles to Articles of this Agreement are placed herein for convenience of reference only, and the Agreement is not to be construed by reference thereto. 20.4 This Agreement shall bind and inure to the benefit of the successors and assigns of the Company and the Trustee, respectively and the Plans. 20.5 This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute but one instrument, 46 which may be sufficiently evidenced by any counterpart. 20.6 If any provision of this Agreement is determined to be invalid or unenforceable the remaining provisions shall not for that reason alone also be determined to be invalid or unenforceable. 20.7 Each Participant and his beneficiary is an intended beneficiary under this Trust, and shall be entitled to enforce all terms and provisions hereof with the same force and effect as if such person had been a party hereto, provided that, no action taken by any Participant or beneficiary by virtue of this Section 20.7 shall in any way affect any rights or duties of the Trustee under this Agreement. 47 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. BURLINGTON NORTHERN SANTA FE CORPORATION By: ----------------------------- ATTEST: - ----------------------------- Secretary BANKERS TRUST COMPANY By: ----------------------------- ATTEST: - ----------------------------- 48 STATE OF SS.: COUNTY OF On this ___ day of _____________, 1996, before me personally came ____________________, to me known, who, being duly sworn, did depose and say that (s)he resides at _______________________________________________________, and that (s)he is ____________________________ of __________________________, one of the corporations described in and which executed the foregoing instrument; that (s)he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that (s)he signed his/her name thereto by like order. ----------------------------- Notary Public, State of STATE OF SS.: COUNTY OF 49 On this ___ day of _____________, 1996, before me personally came ____________________, to me known, who, being duly sworn, did depose and say that (s)he resides at _______________________________________________________, and that (s)he is ____________________________ of __________________________, one of the corporations described in and which executed the foregoing instrument; that (s)he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that (s)he signed his/her name thereto by like order. ----------------------------- Notary Public, State of Schedule 1 THE PLANS The following Corporation plans and agreements (collectively referred to as the "Plans") are subject to this Trust: Burlington Northern Inc. Deferred Compensation Plan Burlington Northern Inc. Deferred Compensation Plan for Directors Burlington Northern Inc. Incentive Compensation Plan Burlington Northern Inc. Performance Share Unit Plan (1981) Burlington Northern Inc. 1987 Performance Share Unit Plan Burlington Northern Inc. Retirement Income Plan for Directors Burlington Northern Inc. Senior Executive Survivor Benefits Plan Burlington Northern Inc. Supplemental Benefits Plan 50 Schedule 2 Fee Schedule A. Trust Set-up and document review: One-time set up fee of $300.00 B. Annual fee: Comprised of Base Fee and Fee Based on Asset Market Value Base fee: $300.00 per investment fund Fee based on asset market value: .4% of first $500,000 of asset value .125% of next $4,500,000 of asset value .075% of next $15,000.000 of asset value .05% of balance over $20,000,000 C. Plan Recordkeeping Monthly allocation of income, contributions and distributions in each Plan and the Trustee Expense Account. Preparation of IRS form 1041 and K-1: $2,200 per year. 51 D. Non-Trustee Managed Investment Accounts Short Term Cash Management Fee: If Trustee invests available cash, a fee of .2% of the fair market value of assets managed by Trustee will be charged. Security Transactions: $25 excluding short term investment fund investments. E. Termination Prorated annual fee plus fee based on time and expense, $300 minimum. F. Fees for additional services as mutually agreed to by the Trustee and the Company. 52 EXHIBIT A Authorization Pursuant to Article 9.3 of Burlington Northern Santa Fe Corporation Benefits Protection Trust ------------------------------------------------------------------ TO: BANKERS TRUST COMPANY This is to authorize BANKERS TRUST COMPANY as Trustee of the Burlington Northern Santa Fe Corporation Benefits Protection Trust (the "Trust") to institute and maintain legal proceedings against the Company (as defined in the Trust) or other appropriate person or entity to assert the following claim(s) on my behalf: (nature of claim]. The Trustee shall have the powers and be subject to the procedures set forth in Article 9 of the Trust (a copy of which I have already received and reviewed). Any proceedings by the Trustee under this authorization may be initiated in my name as a plaintiff (or as a member of a class) or in the name of the Trustee, or both. as the Trustee determines is necessary or appropriate at the time proceedings are commenced. ----------------------------- Participant 53 EXHIBIT B Revocation of Authorization Under Article 9.3 of Burlington Northern Santa Fe Corporation Benefits Protection Trust ------------------------------------------------------------------ TO: BANKERS TRUST COMPANY This is to notify you that I revoke any prior authorization I have given to you as Trustee of the Burlington Northern Santa Fe Corporation Benefits Protection Trust (the "Trust") to maintain legal proceedings against the Company (as defined in the Trust), or otherwise to assert the following claim(s) on my behalf: (nature of claim(s)]. I understand that this Revocation of Authorization is conditioned upon, and shall not be effective until, the appointment by me of my own counsel and the appearance of that counsel in any legal proceeding on my behalf in lieu of counsel retained by the Trustee. I understand further that, upon the occurrence of these conditions, the Trustee shall have no obligation to proceed further on my behalf, or to pay any costs or expenses incurred after the delivery of this Revocation of Authorization. ----------------------------- Participant 54 EX-10.30 13 AMENDED & RESTATED TRUST AGREEMENT Exhibit 10.30 AMENDED AND RESTATED TRUST AGREEMENT ------------------------------------ AMENDED AND RESTATED TRUST AGREEMENT (the "Trust"), effective as of April 1, 1994, by and between Santa Fe Pacific Corporation, a Delaware corporation (the "Corporation"), and The Bank of New York, a New York banking corporation (the "Trustee"). WHEREAS, the Corporation is or may become obligated under certain benefit plans and agreements to make payments to certain of its present and former employees, non-employee directors, and their designated beneficiaries under such plans and agreements (the "Executives"); and WHEREAS, the aforesaid obligations of the Corporation are not funded within the meaning of The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or otherwise secured and the Corporation has agreed to assure that the future payment of amounts under such plans, policies, and agreements will be funded as provided herein and will not be improperly withheld in the event that a "Change in Control" of the Corporation (as defined herein) should occur; and WHEREAS, pursuant to a trust agreement (the "Trust Agreement") dated July 6, 1987 between the Corporation and Harris Trust & Savings Bank (the "Predecessor Trustee"), the Corporation established a trust to aid it in meeting such aforesaid obligations; and WHEREAS, the Corporation desires The Bank of New York to succeed the Predecessor Trustee pursuant to Section 5.02 of the Trust Agreement and The Bank of New York agrees to succeed the Predecessor Trustee as Trustee pursuant to the terms of the Trust Agreement as amended and restated as set forth herein (which such amended and restated Trust Agreement shall be referred to as the "Agreement"); and WHEREAS, for purposes of assuring that the payments of such obligation will not be improperly withheld, the Corporation deposited with the Predecessor Trustee, and shall as soon as practicable transfer to the Trustee, subject only to the claims of the Corporation's existing or future creditors, amounts of cash or marketable securities or insurance policy contracts as provided for in this Agreement to fund such payments as they may become due and payable; and WHEREAS, the plans subject to this Trust were established to provide benefits in excess of the benefits provided under the Corporation's qualified retirement plan or to provide compensation or deferred compensation to a select group of management or highly compensated employees and to directors and therefore are not believed or intended to be subject to Title I of ERISA (other than certain reporting and disclosure duties); NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the parties hereto agree as follows: ARTICLE I THE PLANS --------- SECTION 1.01 Plans. The following Corporation plans (collectively referred to as the "Plans") are subject to this Trust: (a) The Santa Fe Pacific Corporation Supplemental Retirement Plan, which provides for supplemental retirement benefits for certain Executives (the "Supplemental Retirement Plan"). (b) The Santa Fe Pacific Corporation Non-Employee Directors' Deferred Compensation Plan (the "Non-Employee Directors' Deferred Compensation Plan"). (c) The Santa Fe Industries, Inc. Deferred Compensation Plan for Executive Incentive Compensation Plan Participants (the "Deferred Compensation Plan"). (d) The Santa Fe Pacific Supplemental Deferred Compensation Plan. (e) Supplemental Retirement Agreement between Santa Fe Pacific Corporation and Mr. Bernard Goldman ("Goldman Agreement"). (f) Agreement between Santa Fe Pacific Corporation and Mr. John J. Schmidt ("Schmidt Agreement"). (g) The Santa Fe Pacific Corporation Directors' Retirement Policy. (h) Retirement Benefit Agreement between John P. DesBarres and Santa Fe Pacific Corporation dated April 11, 1988 ("DesBarres Agreement"). (i) Retirement Benefit Agreement between Robert D. Krebs and Santa Fe Pacific Corporation, dated February 26, 1992 ("Krebs Agreement"). The Corporation shall continue to be liable to the Executives to make all payments required under the terms of the Plans to the extent such payments have not been made pursuant to this Trust. Distributions made from the Trust to Executives in respect of the Plans pursuant to Section 4.02 hereof shall, to the extent of such distributions, satisfy the Corporation's obligation to pay benefits to such Executive under the Plans. ARTICLE II TRUST AND THE TRUST CORPUS -------------------------- SECTION 2.01 Delivery of Funds. (a) Concurrently with the execution of this Trust or as soon thereafter as practicable, the Corporation or the Predecessor Trustee shall deliver to the Trustee to be held in trust hereunder the sum of one thousand dollars ($1,000) in cash and such other assets acceptable to the Trustee which shall be administered and disposed of by the Trustee as provided herein. (b) Not later than seven (7) days after the occurrence of a Potential Change in Control of the Corporation (as defined in Article III hereof), the Corporation to the extent not previously funded, shall deliver to the Trustee to be held in trust hereunder an additional amount of cash (or marketable securities having a fair market value equal to such amount, or some combination thereof) representing the sum of the amounts, determined as provided below, which will be sufficient to fund the Corporation's obligations to pay the Executives' benefits under the Plans, plus other such amounts as may be necessary for expenses and other costs of maintaining the Trust (collectively, the "Required Funding Amount"). The trustee shall vote all marketable securities delivered pursuant to this Section 2.01(b) as directed by the Corporation. (c) In the event of a Potential Change in Control of the Corporation, the Corporation shall, at six-month intervals commencing from the date of such Potential Change in Control, unless the Trust Corpus shall theretofor have been released pursuant to Article IV hereof, recalculate the Required Funding Amount as of the end of the month immediately preceding such six-month interval date treating the Potential Change in Control as having occurred at the end of such month. If the amount so calculated exceeds the fair market value of the assets then held in trust, the Corporation shall promptly (and in no event later than (7) seven days from the date of such six-month interval date) pay to the Trustee an amount in cash (or marketable securities or any combination thereof) equal to such excess. If the Required Funding Amount so calculated is less than the fair market value of the assets held in trust, the Trustee, upon receipt of a written request from the Corporation, shall distribute to the Corporation such difference in cash; provided, however, that this sentence shall not apply after the occurrence of a Change in Control. (d) The Required Funding Amount shall be determined with respect to each of the Plans as follows: (i) Under the Supplemental Retirement Plan, in the case of Executives receiving benefits on the date of the Potential Change in Control, an amount equal to the present value, as calculated by the actuary hired by the Corporation prior to a Change in Control or the Trustee after a Change in Control, of future payments due, and in the case of all other participating Executives, the amount equal to the present value as calculated by the same actuary, that would become due at such Executives' requirement dates under the Santa Fe Pacific Corporation Retirement Plan (the "Retirement Plan"), using the actuarial life expectancies used under the Requirement Plan. (ii) Under the Non-Employee Directors' Deferred Compensation Plan, the Deferred Compensation plan, the Santa Fe Pacific Corporation Supplemental Deferred Compensation Plan, the Krebs Agreement, the Goldman Agreement, the DesBarres Agreement and under the Schmidt Agreement, the amounts deferred under such Plans and Agreements, and the earnings thereon. (iii) Under the Santa Fe Pacific Corporation Directors' Retirement Policy, an amount equal to the present value, as calculated by the actuary hired by the Corporation prior to a Change in Control or the Trustee after a Change in control, of future payments due or may become due at such Executive's retirement date. (e) The payment by the Corporation to the Trustee pursuant to Sections 2.01(b) and (c) hereof shall be accompanied by a schedule of the individual Executives for whose amounts such payment is being made, which schedule shall set forth the amounts delivered to the Trustee in request to each such Executive in respect of the Plans and a schedule of amounts delivered to the Trustee attributable to each Plan. SECTION 2.02 Trust Corpus. (a) As used herein, the term "Trust Corpus" shall mean the amounts delivered to the Trustee as described in Section 2.01(a) hereof plus all amounts delivered thereafter pursuant to Sections 2.01(b) and (c) hereof (and less such amounts distributed from the Trust pursuant to Sections 2.01(c), 4.01, 4.02 and 4.03 hereof or otherwise pursuant to the terms hereof), in whatever form held or invested as provided herein. The Trust Corpus shall be held, invested and reinvested by the Trustee in cash or marketable securities, shares of the Corporation's Common Stock, and life insurance policy contracts described in Section 2.02(b) hereof which shall be accepted as a contribution to the Trust from the Corporation or otherwise purchased, retained or sold by the Trustee only in accordance with the written direction of the Corporation, the Trustee shall use its good faith efforts to invest or reinvest from time to time all or such part of the Trust Corpus as it believes prudent under the circumstances (taking into account, among other things, anticipated cash requirements for the payment of benefits under the Plans) in either one or more of the following investments: (i) investments in direct obligations of the United States of America or agencies of the United States of America or obligations unconditionally and fully guaranteed as to principal and interest by the United States of America, in each case maturing within one (1) year or less from the date of acquisition; or (ii) investments in negotiable certificates of deposit (in each case maturing within one (1) year or less from the date of acquisition) issued by a commercial bank organized and existing under the laws of the United States of America or any state thereof having a combined capital and surplus of at least one billion dollars ($1,000,000,000); provided that if investments in either one or both of (1) and (ii) above do not offer the short term liquidity necessary to meet the timing needs for return of excess Required Funding amounts, reimbursement of amounts paid to Executives out of corporate assets, or cash requirements for payments of benefits under the Plans to Executives, then the Trustee in accordance with guidelines as approved by the Corporation may invest in repurchase agreements or units of short-term collective investment fund established and operated by the Trustee in its fiduciary capacity; and provided further, however, that the Trustee shall not be liable for any failure to maximize the income earned on that portion of the Trust Corpus as is from time to time invested or reinvested as set forth above, nor for any loss of income due to liquidation of any investment which the Trustee, in its sole discretion, believes necessary to make payments or to reimburse expenses under the terms of this Trust; (b) Notwithstanding Section 2.02(a) hereof, the Trustee shall, at the written direction of the Corporation, accept as a contribution to the Trust from the Corporation or otherwise purchase, retain or sell those individual cash value insurance policy contracts specified by the Corporation which are on the lives of one or more of the Executives from mutual or stock life insurance companies organized and existing under the laws of the United States of America or any state thereof, and holding a rating of not less than "A" as designated by A. M. Best Insurance Rating Service. The Trust shall be the owner of and beneficiary under such insurance policy contract. The issuer of such insurance policy contract is authorized to make payments to the Trustee, to act solely on the instructions of Trustee, and in every respect to deal solely on the instructions of Trustee as the absolute owner of such insurance policy contract. (i) Notwithstanding anything in this Agreement to the contrary, insurance policy contracts held in the Trust shall be dealt with in accordance with the provisions of this Section 2.02(b). (1) The premiums on each insurance policy contract held in the Trust as may be due from time to time shall be paid from the general assets of the Corporation or shall be paid by the Trustee from the Trust Corpus upon the written direction of the Corporation to the Trustee. When the Corporation directs the Trustee to pay insurance policy contracts from the Trust Corpus, it shall simultaneously indicate to the Trustee the specific assets to be used and/or liquidated to pay the insurance policy contract premiums. The Trustee shall exercise its powers with respect to an insurance policy contract in accordance with the instructions of the Corporation. The Trustee will deliver a copy of any premium notice which it receives from the issuer of an insurance policy contract to the Corporation as soon as practicable after the receipt thereof. (2) In the event that the Trustee actually receives written notice that an insurance policy contract lapses for any reason and notwithstanding any provisions herein to the contrary, the Trustee shall surrender such insurance policy contract to the issuer thereto in exchange for its cash surrender value. Any amounts received by the Trustee upon the surrender of an insurance policy contract shall become a part of the unallocated Trust. (3) To the extent permitted by law, neither the Corporation nor the Trustee shall be liable for the refusal of any insurance company to issue, modify or convey any such insurance policy contract, to take any other action required by the Corporation or the Trustee, as the case may be, nor be liable for the form, genuineness, validity, sufficiency or effect of any such insurance policy contract, nor for the act of any person or persons that may render such contract null and void; nor for the failure of any issuer of any insurance policy contract to pay the proceeds and avails of such insurance policy contract as and when the same shall become due and payable; nor for any delay in payment resulting from any provision contained in any such insurance policy contract; nor for the fact that for any reason whatsoever any such insurance policy contract shall lapse or otherwise be uncollectible (including, without limitation, as a result of the failure of the Corporation to pay any premium when due). The Corporation hereby agrees to indemnify the Trustee and hold it harmless from and against any claim or liability which may be asserted against the Trustee by reason of its acting on any direction from the Corporation pursuant to this Section 2.02(b) or failing to act in the absence of any such direction with respect to any such insurance policy contract or the acquisition of any insurance policy contract or exercise or nonexercise of any right or option thereunder. (c) The Corporation represents to the Trustee that the Trust is intended to be a grantor trust within the meaning of Section 671 of the Internal Revenue Code of 1986, as thereafter amended (the "Code"), and the Trust Corpus to be treated as an asset of the Corporation pursuant to Sections 671 through 679 of the Code and except as hereinafter provided, all interest and other income earned on the investment of the Trust Corpus shall be the property of the Corporation and shall not constitute a part of the Trust Corpus. The interest and other income earned in any calendar year shall be paid over to the Corporation by the Trustee as promptly as practicable after the first recalculation date under Section 2.01(c) hereof occurring after the end of each calendar year except that interest, dividends, income, surrender or death proceeds arising from life insurance policy contracts shall remain in the Trust and not be paid to the Corporation except for the purposes of benefit payments to Executives under the Plans, as long as benefit payments remaining to be paid to any Executive. The amount of such interest or other income so payable to the Corporation shall be reduced by the amount required to be delivered by the Corporation to the Trustee under Section 2.01(c) and only the excess, if any, shall be paid to the Corporation. (d) All losses of income or principal in respect of, and expenses (including, as provided in Section 5.01(g) hereof, any expenses of the Trustee) charged against,t he Trust Corpus shall be for the account of the Corporation and the Corporation shall be obligated to promptly reimburse the Trust Corpus for any loss in principal amount of, or expenses charged against, the Trust Corpus except to the extent that such amounts have been applied to reduce amounts payable to the Corporation pursuant to Section 2.01(c) or 2.02(b) hereof. ARTICLE III CHANGE IN CONTROL ----------------- SECTION 3.01 Definition of Potential Change in Control. For purposes of this Trust, a Potential Change in Control of the Corporation shall have occurred if (i) the Corporation or any successor or assign thereof enters into an agreement, the consummation of which would result in the occurrence of a Change in Control of the Corporation; (ii) any person (including the Corporation) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of the Corporation; (iii) any person (other than the Corporation) becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 9.5% or more of the combined voting power of the Corporation's then outstanding securities; or (iv) the Board adopts a resolution to the effect that, for purposes of this Trust, a Potential Change in Control of the Corporation has occurred. SECTION 3.02 Definition of Change in Control. For purposes of this Trust, a Change in Control of the Corporation shall be deemed to have occurred if (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Corporation, any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or any corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), director or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at lease two-thirds (2/3) of the directors at the beginning of the period or whose election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at lease a majority thereof; (iii) The stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than (a) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereof continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Corporation (or such surviving entity) outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the corporation (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation adopt a plan of complete liquidation of the Corporation or approve an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. For purposes of this clause (4), the term "the sale or disposition by the Corporation of all or substantially all of the Corporation's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Corporation or of any direct or indirect subsidiary of the Corporation (including the stock of any direct or indirect subsidiary of the Corporation) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Corporation determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of the Corporation (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Corporation" shall be the aggregate market value of the Corporation's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Corporation's other outstanding equity securities. The aggregate market value of the Corporation's common stock shall be determined by multiplying the number of shares of the Corporation's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price for the Corporation's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of the Corporation shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the Corporation's common stock or by such other method as the Board of Directors of the Corporation shall determine is appropriate. Section 13.03 Merger Transaction. Notwithstanding any other provision of this Trust to be contrary, in no event shall the Change in Control of a Class I railroad where the acquirer is, directly or indirectly, a Class I railroad or a holding company of a Class I railroad ("Merger Transaction"), or any events or transactions that form a part of, or are in furtherance of, the Merger Transaction (including, without limitation, any announcement of the Merger Transaction or the execution of any agreement in furtherance of the Merger Transaction) be treated as a "Change in Control" or "Potential Change in Control" for the purposes of this Trust. [Remainder of page intentionally left blank.] ARTICLE IV RELEASE OF THE TRUST CORPUS --------------------------- SECTION 4.01 Delivery to the Corporation. (a) In the event the Corporation delivers the Required Funding Amount to the Trustee upon a Potential Change in Control, unless the Corporation elects otherwise, such amount shall be returned to the Corporation six (6) months after delivery to the Trustee unless the Trustee is notified by the Corporation that a Change in Control shall have occurred during such six (6) month period; provided however, no assets which are invested under Section 2.02(b) shall be returned to the Corporation. Such six (6) month period shall begin again in the event of any subsequent Potential Change in Control occurring during such initial period. Notwithstanding the above, no Change in Control or Potential Change in Control shall be deemed to have occurred for purposes of this Agreement unless and until the Trustee receives actual notice from the Corporation or a Reliable Source, as defined in Section 7.06 hereof. The Corporation shall notify the Trustee of the occurrence of a Change in Control or Potential Change in Control. The Trustee may rely on such notices of such a change or potential change for all purposes under this Agreement. (b) In the event that the Corporation delivers the Required Funding Amount to the Trustee upon a Potential Change of Control but continues to pay benefits under the Plans to Executives prior to a Change in Control, then notwithstanding the provisions of Sections 4.02(a) and 6.01, the Corporation, by its authorized representative, may direct the Trustee to reimburse it for benefits under the Plans paid to Executives from Corporate assets. SECTION 4.02 Deliveries to Participants. The Trustee shall hold the Trust Corpus in its possession under the provisions of this Agreement until authorized to deliver the Trust Corpus or any specified portion thereof as follows: (a) The Corporation shall deliver to the Trustee, contemporaneously with the delivery of the Required Funding Amount to the Trustee pursuant to Section 2.01(b) hereof, a schedule (the "Payment Schedule") indicating the amounts payable in respect of each Executive, or providing a formula or instructions acceptable to the Trustee for determining the amounts so payable (and, after a Change in Control, the Trustee may hire an actuary who shall be paid from the Trust Corpus to determine such amount), the form in which such amounts are to be paid (as provided for or available under the Plans) and the time of commencement for payment of such amounts. Notwithstanding the above, prior to a Change in Control, the Corporation shall hire an actuary who shall be paid from the Trust Corpus to determine the amount of benefits payable in respect of each executive. The Payment Schedule shall include instructions as to the amount of any interest or other income accruing under the Plans, and such instructions may be revised from time to time to the extent so provided under the plans. A modified Payment Schedule shall be delivered by the Corporation to the Trustee at each time that additional amounts are required to be paid by the Corporation to the Trustee (or refunded to the Corporation) under Section 2.01(b) hereof and upon the occurrence of any event, such as early retirement of an Executive, requiring a modification of the Payment Schedule. whenever the Corporation is required to deliver to the Trustee a Payment Schedule or a modified Payment Schedule, the Corporation shall also deliver at the same time to each Executive the respective portion of the payment Schedule or modified Payment Schedule that sets forth the amount payable to that Executive. Except as otherwise provided herein, the Trustee shall make payments to the Executives in accordance with such Payment Schedule. (b) In the event of the occurrence of a Change in Control, if an Executive reasonably believes that the Payment Schedule, as modified, does not properly reflect the amount payable to such Executive or the time or form of payment from the Trust Corpus in respect of the Plans, such Executive shall be entitled to deliver to the Trustee, in a form acceptable to it, written notice (the "Executive's Notice") setting forth payment instructions for the amount the Executive believes is due under the relevant terms of the Plans. The executive shall also deliver a copy of the Executive's Notice to the Corporation within three (3) business days of the delivery to the Trustee. Unless the Trustee receives written objection from the Corporation within ten (10) business days after receipt by the Trustee of such notice, the Trustee shall make the payment that has not already commenced or adjust the payment that has already commenced in accordance with the payment instructions set forth in the Executive's Notice. (c) The Trustee shall withhold from any payment due to an Executive hereunder the amount required by law to be so withheld under federal, state and local wage withholding requirements or otherwise, and shall pay over to the Corporation the amounts so withheld. As the Trustee's withholding agent, the Corporation on a timely basis, shall pay over to the appropriate government authority the amounts withheld. The Corporation shall also timely report to the appropriate government authority the amounts os paid and withheld. The Trustee and the Corporation shall jointly file a Department of Treasury Form 2678 confirming such agency appointment. The Trustee may rely conclusively on instructions from the Corporation as to any required withholding and shall be fully protected under Section 5.01(g) hereof in relying upon such instructions. (d) Except as otherwise provided herein, in the event of any final determination by the Internal Revenue Service or a court of competent jurisdiction, which determination is not appealable or the time for appeal or protest of which has expired, or the receipt by the Trustee of a substantially unqualified opinion of tax counsel selected by the Trustee, which determination determines, of which opinion opines, that the amounts held in the Trust are taxable to the Executive for Federal income tax purposes, the Trustee shall, on receipt of the Trustee of such opinion or notice of such determination, pay to each Executive the portion of the Trust Corpus includible in such Executive's federal gross income. SECTION 4.03 Deliveries to Creditors of the Corporation. It is the intent of the parties hereto that the Trust Corpus is and shall remain at all times subject to the claim of the general directors of the Corporation. Accordingly, the Corporation shall not create a security interest in the Trust Corpus in favor of the Executives or any creditor. If the Trustee receives the notice provided for in Section 4.05 hereof, or otherwise receives actual notice that the Corporation is insolvent or bankrupt as defined in Section 4.05 hereof, the Trustee shall make no further distributions of the Trust Corpus to any of the Executives but shall deliver the entire amount of the Trust Corpus only as a court of competent jurisdiction, or duly appointed receiver or other person authorized to act by such a court, may direct to make the Trust Corpus available to satisfy the claims of the Corporation's general creditors. The Trustee shall resume distribution of Trust Corpus to the Executives under the terms hereof, upon no less than thirty (30) days' advance notice to the Corporation, in the case of an adjudication of bankruptcy or insolvency pursuant to Section 4l05(i) hereof, upon its receipt of actual notice from a court of competent jurisdiction that the Corporation was not or no longer is bankrupt or insolvent and, in the case of an adjudication of insolvency pursuant to Section 4.05 (ii) hereof, upon receipt of a certified statement from the then regularly employed independent accountants for the Corporation that the Corporation was not or no longer is insolvent. Such notice shall be conclusive and binding upon the Corporation, the Executives, and all other parties. SECTION 4.04 Delivery to Successor Trustee. Notwithstanding any provision herein to the contrary, the corporation may transfer assets held under this Agreement for Executives employed by affiliated companies to a successor trust in which the affiliated company participates for the benefit of such Executive, to the extent of such affiliated companies' contributions to this Trust. SECTION 4.05 Notification of Bankruptcy or Insolvency. The Corporation, through its Board of Directors and Chief Executive Officer, shall advise the Trustee promptly in writing of the Corporation's bankruptcy or insolvency. The Corporation shall be deemed to be bankrupt or insolvent if the Trustee receives such notice from the Corporation or actual notice from a nationally recognized credit reporting agency or a Reliable Source of the occurrence of any of the following: (i) The Corporation shall make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver, liquidator, sequestrator, or any trustee for it or a substantial part of its assets, or shall commence any case under any bankruptcy, reorganization, arrangement, readjustment or debt, dissolution, or liquidation law or statute of any jurisdiction (federal or state), whether now or hereafter in effect; or if there shall have been filed any such petition or application, or any such case shall have been commenced against it, in which na order for relief is entered or which remains undismissed; or the Corporation by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or case or order for relief or to the appointment of a custodian, receiver or any trustee for it or any substantial part of any of its property, or shall suffer any such custodianship, receivership, or trusteeship to continue undischarged; or (ii) The Corporation shall generally not pay its debts as such debts become due or shall cease to pay its debts in the ordinary course of business. ARTICLE V TRUSTEE ------- SECTION 5.01. Trustee. (a) The duties and responsibilities of the Trustee shall be limited to those expressly set forth in this Trust, and no implied covenants or obligations shall be read into this Trust against the Trustee. The Trustee will be under no liability of obligation to anyone with respect to any failure on the part of the Corporation or an Executive to perform any of their respective obligations under the Plan. Nothing in this Agreement shall be construed as requiring the Trustee to make any payment in excess of the amounts held in the Trust Fund at the time of such payment or otherwise to risk its own funds. (b) If, pursuant to Section 3.02 hereof or otherwise, all or any part of the Trust Corpus is at any time attached, garnished, or levied upon by any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by a court affecting such property or any part thereof, then and in any of such events the Trustee shall rely upon and comply with any such order, writ, judgment or decree, and it shall not be liable to the Corporation (or any of its subsidiaries) or any Executive by reason or such compliance even though such order, writ, judgment or decree subsequently may be reversed, modified, annulled, set aside or vacated. (c) The Trustee shall maintain such books, records and accounts as may be necessary for the proper administration of the Trust Corpus, including without limitation, as provided in Section 2.01 hereof, and shall render to the Corporation, on or prior to each March 1 following the date of this Trust until the termination of this Trust (and on the date of such termination), an accounting with respect to the Trust Corpus as of the end of the then most recent calendar year (and as of the date of such termination). The Trustee shall not maintain individual bookkeeping accounts for Executives. Unless the Corporation or any Executive shall have filed with the Trustee written exceptions or objections to any such statement and account within one hundred eighty (180) days after receipt thereof, the Corporation or the Executive shall be deemed to have approved such statement and account, and in such case the Trustee shall be forever released and discharged with respect to all matters and things reported in such statement and account as though it had been settled by a decree of a court of competent jurisdiction in an action or proceeding to which the Corporation and the Executive. (d) The Trustee shall not be liable for any act taken or omitted to be taken hereunder if taken or omitted to be taken by it in good faith. The Trustee shall also be fully protected in relying upon any notice given hereunder which it in good faith believes to be genuine and executed and delivered in accordance with this Trust. (e) The Trustee may consult with legal counsel to be selected by it, and the Trustee shall not be liable for any action taken or suffered by it in accordance with the advise of such counsel. (f) The Trustee shall be reimbursed by the Corporation for its reasonable expenses incurred in connection with the performance of its duties hereunder and shall be paid fees for the performance of such duties as set forth in Schedule "A" and pursuant to paragraph (g) of this Section 5.01. (g) The Corporation agrees to indemnify and hold harmless the Trustee from and against any and all damages, losses, claims or expenses as incurred (including expenses of investigation and fees and disbursements of counsel to the Trustee and any taxes imposed on the Trust Corpus or income of the Trust) arising out of or in connection with the performance by the Trustee of its duties hereunder. Any amount payable to the Trustee under paragraph (f) of this Section 5.01 or this paragraph (g) and not previously paid by the Corporation pursuant to Section 2.02(c) hereof shall be paid by the Corporation promptly upon demand therefor by the Trustee or, if the Trustee so chooses in its sole discretion, from the Trust Corpus. In the event that payment is made hereunder to the Trustee from the Trust Corpus, the Trustee shall promptly notify the Corporation in writing of the amount of such payment. The Corporation agrees that, upon receipt of such notice, it will deliver to the Trustee to be held in the Trust an amount in cash (or in marketable securities or in some combinations thereof) equal to any payments made from the Trust Corpus to the Trustee pursuant to paragraph (f) of this Section 5.01 or this paragraph (g). The failure of the Corporation to transfer any such amount shall not in any way impair the Trustee's right to indemnification, reimbursement and payment pursuant to paragraph (f) of this Section 5.01 or this paragraph (g). SECTION 5.02 Successor Trustee. The Trustee may resign and be discharged from its duties hereunder at any time by giving notice in writing of such resignation to the Corporation and each Executive specifying a date (not less than thirty (30) days after the giving of such notice) when such resignation shall take effect. Promptly after such notice, the Corporation (or, if a Change in Control shall previously have occurred, the Corporation and Executives having at least sixty-five percent (65%) of all amounts then held in the Trust credited to their accounts), shall appoint a successor trustee, such trustee to become Trustee hereunder upon the resignation date specified in such notice. If the Corporation and such Executives are unable to so agree upon a successor trustee within thirty (30) days after such notice, the Trustee shall be entitled, at the expense of the Corporation, to petition a United States District Court or any of the courts of the State of New York having jurisdiction to appoint its successor. The Trustee shall continue to serve until its successor accepts the Trust and receives delivery of the Trust Corpus. The Corporation (or, if a Change in Control shall previously have occurred, the Corporation and Executives having at lease sixty-five percent (65%) of all amounts then held in the Trust credited to their accounts) may at any time substitute a new trustee by giving fifteen (15) days notice thereof to the Trustee then acting. In the event of such removal or resignation, the Trustee shall duly file with the Corporation and, on and after a Change in Control, the Executives a written statement or statement of accounts and proceedings as provided in Section 5.01(c) hereof for the period since the last previous annual accounting of the Trust, and if written objection to such account are not filed as provided in Section 5.01(c) hereof, the Trustee shall to the maximum extent permitted by applicable law be forever released and discharged from all liability and accountability with respect to the propriety of its acts and transactions shown in such account. The Trustee shall have the right to retain such amounts provided in Section 5.01(f) and (g) from the Trust Corpus before delivery to a successor Trustee. The Trustee and any successor thereto appointed hereunder shall be a commercial bank which is not an affiliate of the Corporation, but which is a national banking association or established under the laws of one of the states of the United States, and which has equity in excess of one hundred million dollars ($100,000,000). ARTICLE VI TERMINATION, AMENDMENT AND WAIVER --------------------------------- SECTION 6.01 Termination. This Trust shall be terminated upon the earliest to occur of the following events: (i) the exhaustion of the Trust Corpus; or (ii) the final payment of all amounts payable to all of the Executives pursuant to the Plans. Promptly upon termination of this Trust, any remaining portion of the Trust Corpus shall be paid to the Corporation. SECTION 6.02. Amendment and Waiver. Prior to the occurrence of a Change in Control, this Trust can be amended by an instrument in writing signed by the parties hereto. After the occurrence of a Change in Control, this Trust may not be amended by an instrument in writing signed by the parties hereto together with the written consent of Executives having at least sixty-five percent (65%) of all amounts then held in the Trust credited to their accounts. The parties hereto, together with the consent of Executives having at least sixty-five percent (65%) of all amounts then held in the Trust credited to their accounts, may at any time waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto or an Executive to any such waiver shall be valid if set forth in an instrument in writing signed on behalf of such party or Executive. Notwithstanding the foregoing, any such amendment or waiver may be made by written agreement of the parties hereto without obtaining the consent of the Executives if such amendment or waiver does not adversely affect the rights of the Executives hereunder. No such amendment or waiver relating to this Trust may be made with respect to a particular Executive unless such Executive has agreed in writing to such amendment or waiver. ARTICLE VII GENERAL PROVISIONS ------------------ SECTION 7.01 Further Assurances. The Corporation shall, at any time and from time to time, upon the reasonable request of the Trustee, execute and deliver such further instruments and do such further acts as may be necessary or proper to effectuate the purposes of this Trust. SECTION 7.02 Certain Provisions Relating to this Trust. (a) This Trust set forth the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, arrangements and understandings relating thereto. This Trust shall be binding upon and inure to the benefit of the parties and their respective successors and legal representatives. (b) This Trust shall be governed by and construed in accordance with the laws of the State of New York, other than and without reference to any provisions of such laws regarding choice of laws or conflict of laws. (c) In the event that any provision of this Trust or the application thereof to any person or circumstances shall be determined by a court of proper jurisdiction to be invalid or unenforceable to any extent, the remainder of this Trust, or the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each provision of this Trust shall be valid and enforced to the fullest extent permitted by law. SECTION 7.03 Arbitration. Any dispute between the Executives and the Corporation or the Trustee as to the interpretation or application of the provisions of this Trust and amounts payable hereunder shall be determined exclusively by binding arbitration in New York, New York in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. All fees and expenses of such arbitration shall be paid by the Trustee and considered an expense of the Trust under Section 5.01 (g). SECTION 7.04 Notices. Any notice, report, demand or waiver required or permitted hereunder shall be in writing and shall be given personally or by prepaid registered or certified mail, return receipt requested, addressed as follows: If to the Corporation: Santa Fe Pacific Corporation 224 South Michigan Avenue Chicago, Illinois 60604 Attention: Marsha K. Morgan, Secretary If to the Trustee: The Bank of New York Worldwide Master Trust/Master Custody Division One Wall Street, 12th Floor New York, New York 10286 Attention: Division Head If to an Executive, to the address of such Executive as listed next to his name on Schedule "B" hereto. A notice shall be deemed received upon the date of delivery if given personally or, if given by mail, upon the receipt thereof. SECTION 7.05 Trust Beneficiaries. Each Executive is an intended beneficiary under this Trust, and after a Change in Control shall be entitled to enforce all terms and provisions hereof with the same force and effect as if such person had been a party hereto. Prior to a Change in Control only the Corporation and the Trustee shall be entitled to enforce the terms and provisions hereof. SECTION 7.06 Reliable Source. For purposes of this Agreement, a "Reliable Source" shall mean (i) a report filed with the Securities and Exchange Commission, or (ii) a public statement issued by the Corporation, or a periodical of general and national circulation including, without limitation, The New York Times or The Wall Street Journal. IN WITNESS WHEREOF, the parties have executed this Trust effective as of the date first written above. SANTA FE PACIFIC CORPORATION By: ------------------------------- Name: Title: THE BANK OF NEW YORK By: ------------------------------- Name: Title: STATE OF ILLINOIS ) : ss.: COUNTY OF COOK ) On the 19th day of May, 1994, before me personally came Denis E. Springer, to me know, who, being by me duly sworn, did depose and say that he resides at 1700 East Golf Road, Schaumburg, that he is Sr. Vice President & CFO of SANTA FE PACIFIC CORPORATION, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the By-laws of said corporation, and that he signed his name thereto by like order. ------------------------------ STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 29th day of June, 1994, before me personally came John V. Stenerson, to me know, who, being by me duly sworn, did depose and say that he resides at One Wall Street, that he is a Vice President of THE BANK OF NEW YORK, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ------------------------------ EX-10.31 14 TRUST AGREEMENT EXHIBIT 10.31 TRUST AGREEMENT --------------- TRUST AGREEMENT made and entered into as of the __________ day of _______________, 199 _____, by and between Santa Fe Pacific Corporation, a corporation organized under the laws of the State of Delaware hereinafter referred to as the ("Company") and THE BANK OF NEW YORK, a New York banking corporation (hereinafter referred to as the "Trustee"). WHEREAS, the Company has established the Santa Fe Pacific Supplemental Retirement and Savings Plan (as from time to time amended, the "Plan") as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees from time to time participating in the Plan; and WHEREAS, under the Plan, the Company is required to pay Benefits to the Participants or their Beneficiaries; and WHEREAS, the Company intends from time to time to contribute cash (or other property reasonably acceptable to the Trustee), which cash or property will, as and when received by the Trustee, constitute a trust fund to aid the Company in meeting its obligations to make payments of Benefits to Participants and Beneficiaries under the Plan and to assure that such obligations are met after a Change in Control; and WHEREAS, the establishment of this Trust shall not affect the Company's continuing obligation to make payments to Participants and Beneficiaries under the Plan except that the Company's liability thereunder shall be offset by actual payments made on its behalf by the Trustee hereunder; and WHEREAS, the Company intends that the Trust Fund shall be held by the Trustee and invested, reinvested and distributed all in accordance with the provisions of this Trust Agreement; and WHEREAS, the Plan provides, and the Company intends, that the assets of the Trust Fund shall be and remain subject to the claims of the Company's creditors as herein provided and that the plan not be deemed funded solely by virtue of the existence of this Trust; and WHEREAS, the Trust is intended to be a "grantor trust" with the result that the corpus and income of the Trust are treated as assets and income of the Company pursuant to Sections 671 through 679 of the Code; and WHEREAS, the Company intends that the Plan not be deemed funded within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), despite the existence of this Trust; and WHEREAS, the Trust shall initially be revocable but shall become irrevocable upon the occurrence of a Change in Control. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee declare and agree as follows: 1. DEFINITIONS; ESTABLISHMENT OF TRUST 1.1. Definitions. Whenever used in this Trust Agreement, unless otherwise provided or the context otherwise requires. (a) "Account" shall mean the account established in the Trust Fund with respect to a Participant in accordance with Section 3.1 hereof. (b) "Administrator" shall mean the individual, individuals or committee appointed by the Board of Directors of the Company to control and manage the operation and administration of the plan. (c) "Affiliate" shall mean any person, corporation or other entity which the Company shall have advised the Trustee in writing is a subsidiary or affiliate of the Company or its successor which owns 20% or more of the voting securities of the Company. (d) "Authorized Officer" shall mean the Chairman, President, and Vice President, the Secretary or the Treasurer of the Company or any other person or persons as may be designated by any such officer. (e) "Beneficiary" shall mean the beneficiary of a Participant as set forth on the Payment Schedule or as thereafter changed in accordance with this Trust Agreement and which is in effect on the date of the Participant's death. If no designated beneficiary survives the Participant or if no Beneficiary is designated as provided herein, the legal representative of the Participant's estate shall be the Beneficiary. If a designated beneficiary survives the Participant but dies before payment in full of Benefits from the Trust has been made, the legal representative of such beneficiary's estate shall become the Beneficiary. References to a Participant in this Trust Agreement in connection with payments hereunder shall also refer to such Participant's Beneficiary unless the context clearly requires otherwise. (f) "Benefits" shall mean the payments required to be made to a Participant or his Beneficiary pursuant to a Payment Schedule. (g) "Change in Control" shall have the meaning assigned to such term by Section 6.2 hereof. (h) "Code" shall mean the Internal Revenue Code of 1986 as from time to time amended. (i) "Company" shall mean Santa Fe Pacific Corporation or its successors. (j) "Final Determination" shall mean (i) an assessment of tax by the Internal Revenue Service addressed to the Participant of his Beneficiary which is not timely appealed to the courts; (ii) a final determination by the United States Tax Court or any other Federal Court, the time for an appeal thereof having expired or been waived; or (iii) an opinion by the Company's counsel, addressed to the Company and the Trustee and in form and substance satisfactory to the Trustee, to the effect that amounts held in the Trust are subject to Federal income tax tot he Participant or his Beneficiary prior to payment. Notwithstanding the foregoing, no Final Determination shall be deemed to have occurred until the Trustee has actually received a copy of the assessment, court order or opinion which forms the basis thereof and such other documents as it may reasonably request. (k) "Incumbency Certificate" shall mean a certificate of the Secretary of any Assistant Secretary of the Company identifying the Administrator (or every meager thereof if the Administrator consists of more than one person) and each Authorized Officer, which certificate shall include the name, title and specimen signature of each such person and any changes thereto. (l) "Insolvent" with respect to the Company means that (i) the Company is unable to pay its debts generally as they come due and/or (ii) the Company is subject to a pending proceedings as a debtor under the Federal Bankruptcy Code or any successor statute. (m) "Investment Guideline" shall mean the Investment Guidelines in effect pursuant to Section 2.2. (n) "Participant" shall mean at the time of determination, an employee of the Company participating in the Plan with respect to whom a Payment Schedule is then in effect and for whom an Account is then in existence. (o) "Payment Schedule" shall mean, collectively, the list of Participants in the form of Exhibit A and the schedule of Benefits payable from the Trust Fund to such Participants in the form of Exhibit A-1 or any amendment or substitution thereof as may be provided to the Trustee by the Company prior to a Change in Control in accordance with Section 4.5 of this Trust Agreement. (p) "Plan Year" shall mean the fiscal year ending on the last day of the calendar year. (q) "Potential Change in Control" shall exist during any period in which any of the following circumstances described in items (i), (ii), (iii) or (iv), below, exist (provided, however, that a Potential Change in Control shall cease to exist not later than the occurrence of a Change in Control): (i) The Company or any successor or assign thereof enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; provided that a Potential Change in Control described in this item (i) shall cease to exist upon the expiration or other termination of all such agreements. (ii) Any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; provided that a Potential Change in Control described in this item (ii) shall cease to exist upon the withdrawal of such intention, or upon a reasonable determination by the directors that there is no reasonable chance that such actions would be consummated. (iii) Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (other than the Company or The Atchison, Topeka and Santa Fe Railway Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or The Atchison, Topeka and Santa Fe Railway Company, or any corporation, owned, directly or indirectly, by the stockholders of the Company or The Atchison, Topeka and Santa Fe Railway Company in substantially the same proportions as their ownership of stock of the Company or The Atchison, Topeka and Santa Fe Railway company) is the beneficiary owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities. However, a Potential Change in Control shall not be deemed to exist by reason of ownership of securities of the Company by any person, to the extent that such securities of the Company are acquired pursuant to a reorganization, recapitalization, spin-off or other similar transactions (including a series of prearranged related transactions) to the extent that immediately after such transaction or transactions, such securities are directly or indirectly owned in substantially the same proportions as the proportions of ownership of the company's securities immediately prior to the transaction or transactions. (iv) The Board adopts a resolution to the effect that, for purposes of this Trust, a Potential Change in Control exists; provided that a Potential Change in Control described in this item (iv) shall cease to exist upon a reasonable determination by the Board that the reasons that gave rise to the resolution providing for the existence of a Potential Change in Control have expired or no longer exist. Notwithstanding the foregoing definition, no Potential Change in Control shall be deemed to have occurred for purposes of this Trust Agreement unless and until the Trustee has actual knowledge from a Reliable Source, not including a Participant, of such Potential Change in Control. (r) "Reliable Source" shall mean (i) a report filed with the Securities and Exchange Commission, (ii) a public statement issued by the Company, or a periodical of general circulation, including, but not limited to, The New York Times or The Wall Street Journal, or (iii) a certificate of the Company signed by the Chief Executive Officer or by the Chairman of the Board of Directors. (s) "Termination" shall mean a Participant's termination of employment with the Company or its affiliates. (t) "Termination Affidavit" shall mean an affidavit of a Participant in the form annexed hereto as Exhibit C. (u) "Trust" shall mean the Trust established under this Trust Agreement. (v) "Trust Agreement" shall mean this trust agreement as from time to time amended. (w) "Trust Fund" shall mean the trust fund held from time to time by the Trustee hereunder consisting of all contributions received by the Trustee together with the investments and reinvestments made therewith and all net profits and earnings thereon less all payments and charges therefrom. 1.2. Establishment and Title of the Trust. The Company hereby established with the Trustee a trust to be known as the "SFP Trust", consisting of such sums of money (and other property reasonably acceptable to the Trustee) as from time to time shall be paid or delivered to the Trustee. The Trustee acknowledges the receipt of $1,000.00 (the property listed on Schedule A) representing the initial contribution to the Trust. The Trust Fund shall be held by the trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. The Company shall at all times have the power to reacquire the Trust Fund by substituting readily marketable securities of equivalent value, net of any costs of disposition (other than securities issued by the Company or any Affiliate), and such other property shall, following such substitution, constitute the Trust Fund. 1.3. Acceptable by the Trustee. The Trustee accepts the Trust established hereunder on the terms and conditions set forth herein and agrees to perform the duties imposed on it by this Trust Agreement. 1.4. Incumbency Certificates. The Secretary or any Assistant Secretary of the Company, pursuant to authorization of the Board of Directors of the Company, will promptly deliver an Incumbency Certificate to the Trustee with respect to the Administrator (or every member thereof if the Administrator consists of more than one person) and each Authorized Officer and any changes thereto. The Trustee shall be entitled to rely on the identity of the Administrator and any Authorized Officer until it receives written notice tot he contrary. 1.5. Effective Date. This Trust Agreement shall be effective as of the date and year first above-written provided that the Trustee shall have received an opinion of counsel to the Company. 2. INVESTMENT AND ADMINISTRATION OF THE TRUST FUND 2.1 Powers and Duties of the Trustee. In addition to every power and discretion conferred upon the Trustee by any other provision of this Trust Agreement, the Trustee will have the following express powers with respect tot he Trust Fund: (a) Subject tot he Investment Guidelines set forth in Section 2.2 hereof, to make investments and reinvestments of the assets of the Trust Fund, without distinction between principal and income; and in making and holding investments, the Trustee will not be restricted to those investments which are authorized by the law of the State of New York for the investment of trust funds, provided, however, that no investment shall be made in any securities or other obligations of the Company or of any Affiliate. The Trustee is further authorized and empowered to invest and reinvest all or any part of such assets through the medium of any common, collective or commingled trust fund or pool maintained by it as the same may have heretofore been or may hereafter be established or amended. (b) To retain, to exchange for any other property, to sell in any manner and at any time, any property, and to grant options to sell any such property, without regard to restrictions and without the approval of any court. (c) To vote personally or by proxy and to delegate power and discretion to such proxy. (d) To exercise subscription, conversion and other rights and options, and to make payments from the Trust Fund in connection therewith. (e) To take any action and to abstain from taking any action with respect to any reorganization, consolidation, merger, dissolution, recapitalization, refinancing and any other plan or change affecting any property, and in connection therewith, to delegate its discretionary powers and to pay assessments, subscriptions and other charges from the Trust Fund. (f) In any manner, and to any extent, to waive, modify, reduce, compromise, release, settle and extend the time of payment of any claim of whatsoever nature in favor of or against the Trustee or all or any part of the Trust Fund and to commence or defend suits or other legal proceedings in connection therewith. (g) To make executory contracts and to grant options for any purposed, and to make such contracts and options binding on the Trust and enforceable against any property of the Trust Fund. (h) Upon any terms, to borrow money from any person (including, to the extent permitted by applicable law, the Trustee in its individual capacity) and to pledge assets of the Trust Fund as security for repayment. (i) To retain in cash without any obligation to earn any income (pending investment, reinvestment or payment of benefits) any reasonable portion of the Trust Fund and to deposit cash in any depository selected by the Trustee including the banking department of any bank acting as Trustee. (j) To hold assets in time or demand deposits (including deposits with the Trustee in its individual capacity which pay a reasonable rate of interest). (k) To employ agents, experts and counsel, to delegate discretionary powers to, and rely upon information and advice furnished by, such agents, experts and counsel and to pay their reasonable fees and disbursements. (l) From time to time to register any property in the name of its nominee or in its own name, or to hold it unregistered or in such form that title shall pass by delivery or to cause the name to be deposited in a depository or clearing corporation or system established to settle transfers of securities and to cause such securities to be merged and held in bulk by the nominee of such depository or clearing corporation or system. (m) The Trustee shall, at the written direction of the Company, accept as a contribution to the Trust from the Company or otherwise purchase, retain or sell those individual cash value insurance policy contracts specified by the Company which are on the lives of one or more of the Executives from mutual or stock life insurance companies organized and existing under the laws of the United States of America or any state thereof, and holding a rating of not less than "A" as designated by A. M. Best Insurance Rating Service. The Trust shall be the owner of and beneficiary under such insurance policy contract. The issuer of each such insurance policy contract is authorized to make payments to Trustee, to act solely on the instructions of Trustee, and in every respect to deal solely on the instructions of Trustee as the absolute owner of such insurance policy contract. (i) Notwithstanding anything in this Agreement to the contrary, insurance policy contracts held in the Trust shall be dealt with in accordance with the provisions of this Section 2.1(m). (1) The premiums on each insurance policy contract held in the Trust as may be due from time to time shall be paid from the general assets of the Company or shall be paid by the Trustee from the Trust Corpus upon the written direction of the Corporation to the Trustee. When the Company directs the Trustee to pay insurance policy contracts from the Trust Corpus, it shall simultaneously indicate to the Trustee the specific assets to be used and/or liquidated to pay the insurance policy contract premiums. The Trustee shall exercise its powers with respect to an insurance policy contract in accordance with the instructions of the Company. The Trustee will deliver a copy of any premium notice which is receives from the insurer of an insurance policy contract to the Company as soon as practicable after the receipt thereof. (2) In the event that the Trustee actually receives written notice that an insurance policy contract lapses for any reason and notwithstanding any provisions herein to the contrary, the Trustee shall surrender such insurance policy contract to the issuer thereto in exchange for its cash surrender value. Any amounts received by the Trustee upon the surrender of an insurance policy contract shall become a part of the unallocated Trust. (3) To the extent permitted by law, neither the Company nor the Trustee shall be liable for the refusal of any insurance company to issue, modify or convey any such insurance policy contract, to take any other action requested by the Company or the Trustee, as the case may be, nor be liable for the form, genuineness, validity, sufficiency or effect of any such insurance policy contract, nor for the act of any person or persons that may render such contract null and void; nor for the failure of any issuer of any insurance policy contract to pay the proceeds and avails of such insurance policy contract as and when the same shall become due and payable; nor for any delay in payment resulting from any provision contained in nay such insurance policy contract; nor for the fact that for any reason whatsoever any such insurance policy contract shall lapse or otherwise be uncollectible (including, without limitation, as a result of the failure of the company to pay any premium when due). The Company hereby agrees to indemnify the Trustee and hold it harmless from and against any claim or liability which may be asserted against the Trustee by reason of its acting on any direction from the Company pursuant to this Section 2.1(m) or failing to act in the absence of any such direction with respect to any such insurance policy contract or the acquisition of any insurance policy contract or exercise or nonexercise of any right or option thereunder. 2.2. Investment Guidelines. (a) Establishment of Investment Guidelines Prior to a Change in Control. For periods prior to the occurrence of a Change in Control, the Company shall establish Investment Guidelines from time to time, to provide guidance to the Trustee with respect to the investment, retention, disposition and reinvestment of the assets of the Trust Fund. In establishing the Investment Guidelines, the Company shall exercise such discretion with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Company may from time to time amend the Investment Guidelines then in effect or substitute new Investment Guidelines. The Investment Guidelines, and any amendments thereto, shall be in writing, shall be signed by an Authorized Officer of the Company, and shall be filed with the Trustee. (b) Compliance with Investment Guidelines. Prior to the occurrence of a Change in Control, and subject to the provisions of Section 2.2(c), in exercising its powers under Section 2.1 hereof, the Trustee shall invest and reinvest the Trust Fund in accordance with the Investment Guidelines delivered to the Trustee in writing by the Company. Until the Trustee receives new Investment Guidelines, the Trustee may rely and shall be fully protected in relying on the last Investment Guidelines it has received. (c) Investment Guidelines On and After Change in Control, and Absence of Effective Investment Guidelines. On and after the occurrence of a Change in Control, and prior to a Change in Control if the Company has not delivered Investment Guidelines to the Trustee or there are no such Investment Guidelines then in effect, in exercising its powers under Section 2.1 hereof, the Trustee shall invest the Trust Fund in a manner that is consistent with the overall objective of preservation of capital, and shall invest and reinvest the Trust Fund in short-term investments,including, without limitation, obligations issued or guaranteed by the United States of America or any agency thereof, proportionate interests in any such obligations held by any bank or trust company organized under the laws of the United States of America or any state thereof as a custodian, commercial paper rated A-1 by Standard & Poors Corporation or P-1 by Moddy's Investment Services, Master Notes of corporations with commercial a per ratings of A-1 or P-1, time or savings deposits and certificates of deposit. (d) Exercise of Trustee's Duties. Subject to the foregoing provisions of this Section 2, and the provisions of the applicable Investment Guidelines (if any), the Trustee shall discharge its duties hereunder with the same amount of reasonable care as it uses with respect to its own funds and pursuant to the standard of care applicable under New York law to a Trustee in a like capacity familiar with the conduct of like enterprise. 3. ACCOUNTS: CONTRIBUTIONS 3.1. Establishment of Accounts. The Trustee shall create in the Trust Fund a separate Account for each Participant for whom a contribution has been made in accordance with the Payment Schedule provided to the Trustee. All contributions received by the Trustee and all other receipts of the Trustee, whether by way of dividends, interest or otherwise for the account of the Trust Fund, may be commingled, held, invested and, with all disbursements therefrom, accounted for by the Trustee as a single fund. However, if the Trust acquires any policy of insurance on the life of a Participant, such policy, so long as it is held by the Trust, and at the direction of the Company shall be allocated to an Account maintained in the name of the Participant. The Trust Fund shall be revalued by the Trustee as of the last business day of each calendar quarter at current market values, as determined by the Trustee. Net income and net investment gains and losses (including gains and losses on the amounts contributed pursuant to Section 3.2(b)) shall be allocated by the Trustee proportionately among Participants' Accounts as of the end of each calendar quarter based on the value of Participants' Accounts as of the last business day of the preceding calendar quarter. The Trustee shall maintain a record of the value of each Participant's Account based solely on the aggregate value of the Trust Fund, the information provided by the Company as to its contributions with respect to each Participant's Account and any payments therefrom. 3.2. Contributions by the Company. (a) The Trustee shall receive from the Company such amounts in cash (and other property reasonably acceptable to the Trustee) as the Company may from time to time determine. The Trustee shall be under no obligation to collect any such contribution. All responsibility for the determination of the amount, timing and type of payments made to the Trustee, or otherwise establishing a funding policy consistent with the objectives of the Plan shall be on the Company or its designee. The Company will certify to the Trustee in writing with respect to each such contribution the amount of the contribution being made with respect to each participant's Account and the Trustee shall allocate the contribution among such Accounts accordingly. (b) In addition to contributions made to the Trust pursuant to Section 3.2(a), the Company may from time to time deliver the Trustee such other amounts as may be considered necessary or appropriate to provide for the payment of expenses of the Trust. 3.3. Contribution Schedule. Following the occurrence of a Change in Control, contributions under the Plan shall be due from the Company in accordance with the following schedule: (a) Contributions to fund Participant deferrals under the Plan shall be due not more than 10 days after the last day of the payroll period with respect to which such Participant deferrals apply. (b) Contributions to fund Employer matching contributions under the Plan shall be due not more than 10 days after the last of the calendar month with respect to which the matching Contributions are made. (c) Reimbursement of fees and expenses from the Company (including, without limitation, fees and expenses that are incurred by Participants and Beneficiaries and that are to be reimbursed by the Trustee in accordance with Section 4.10) shall be due not more than 15 days after the date a statement for such fees is submitted to the Company in accordance with this Section 3. (d) Notwithstanding the foregoing provisions of this Section 3.3, in no event shall contributions described in this Section 3.3 become due and payable prior to the 10th day following the date of the Change in Control. 3.4. Letter of Credit. To the extent provided by the written direction of the Company, the Trustee shall obtain, for the benefit of the Trust, one or more letters of credit chosen and negotiated by the Company (or other similar arrangements, with any one or more letters of credit or other similar arrangements referred to collectively in this Trust Agreement as a "Letter of Credit") with respect to contributions that may otherwise be due from the Company under the foregoing provisions of this Section 3, subject to the following: (a) The cost of establishing and maintaining the Letter of Credit shall be paid from the Trust Fund to the extent that such cost is not satisfied through payments by the Company or otherwise. (b) Although the Company and not the Trustee shall exercise all rights under the Letter of Credit prior to a Change in Control, the rights under the Letter of Credit shall inure to the benefit of the Trust, provided that the Company shall be relieved of its obligation to contribute to the Trust under this Section 3 to the extent that the obligation to make such contributions is in fact satisfied pursuant to the Letter of Credit; and further provided that the Letter of Credit and all proceeds of any sale, assignment or surrender thereof shall be held by the Trustee in and shall be treated as part of the Trust Fund and shall be subject to the claims of creditors to the extent provided in Section 6.3. (c) The Participants may take such action as may be necessary to compel payment under the terms of the Letter of Credit. Participants shall be entitled to reimbursement for such actions as set forth in Section 4.10. (d) The Trustee shall only acquire such specific Letter or Letters of Credit only to the extent directed by the Company, and nothing in this Section 3.4 shall be construed to require the Company to issue any such direction. The form of such Letter of Credit shall be as prescribed by the Company. Prior to a Change in Control, the Trustee shall only execute such rights under a Letter of Credit as directed in writing by the Company. (e) The acquisition and maintenance of a Letter of Credit in accordance with this Section 3.4 shall be treated as a use of Trust Assets that is permitted under this Agreement. 4. PAYMENT OF BENEFITS 4.1. Payments Prior to a Change in Control. Prior to a Change in Control, solely out of the Trust Fund and with no obligation otherwise to make any payment, the Trustee shall make such payments as shall be directed by the Company in writing. Such directions shall specify the Accounts to be charged in connection therewith. The Trustee may rely and shall be fully protected in relying on such directions. 4.2. Payments On and After Change in Control. (a) On and after the occurrence of a Change in Control in the event of a Participant's Termination, such Participant shall provide the Trustee with a Termination Affidavit. If the Participant is deceased, the Termination Affidavit shall be provided by the Beneficiary is the legal representative of the estate of a Beneficiary who shall also supply the Trustee with a certified copy of the death certificate of the Participant (and, where the Beneficiary who survives the Participant but dies before all benefits have been paid, a certified copy of the death certificate of such Beneficiary), an inheritance tax waiver and such other documents as the Trustee may require (including, without limitation, certified copies of letters testamentary). Promptly upon receipt thereof, the Trustee shall mail a copy of the Termination Affidavit to the Company. The Trustee, solely out of the Trust Fund and with no obligation otherwise to make any payment, shall, as soon as administratively practicable and in conformity with the instructions set forth in the Payment Schedule, make payments to such Participant or Beneficiary at the times and in the manner set forth in the Payment Schedule last received by the Trustee with respect to such Participant or Beneficiary and consistent with the information set forth in the Termination Affidavit. Except as otherwise provided in Section 4.10, the amount payable to a Participant or Beneficiary may not exceed the balance credited to such participant's Account. The Trustee may rely and shall be fully protected in relying on the contents of a Termination Affidavit and all documentation and other information provided to it by the Company or the Administrator for all purposes under this Trust Agreement as if the Plan were deemed funded and the Company and the Administrator were :named fiduciaries" as such term is defined in ERISA. (b) Payments to Participants shall be made in the order of the receipt of Termination Affidavits. In the event that the Trustee receives more than one Termination Affidavit on the same day and the Trust Fund is not sufficient to make all of the payments otherwise required as a result of the receipt of such Termination Affidavits, the Trustee, after the payment of all of its unpaid compensation and expenses, shall distribute the balance of the Trust Fund to the Participants who have submitted such Termination Affidavits on a pro rate basis. 4.3. Payments in the Event of a Final Determination. Notwithstanding anything contained in Section 4 of this Trust Agreement to the contrary, if any time (i) a Final Determination is made that the income of the Trust Fund is taxable to the Trust as a entity and not to the Company, or (ii) if a tax, as a result of a Final Determination, is payable by one or more Participants in respect of any interest in the Trust Fund prior to payment of such interest to such Participant or Participants, then (a) in case of the occurrence of the event described in clause (i), the Trust shall terminate and the assets thereof shall be paid to the Company, (b) in the event of the occurrence of the event described in clause (ii), the Trustee, solely out of the Trust Funds and with no obligation otherwise to make any payment, shall pay to the affected Participant and charge his Account accordingly the amount of the tax so payable, and (c) in the event of the occurrence of the events described in both clauses (i) and (ii), the Trustee shall first pay to the affected Participant or Participants the amount of tax so payable, and then the Trust shall terminate and the remaining assets thereof shall be paid to the Company. Notwithstanding any other provision of this Trust Agreement, if any amounts held in the Trust are found in a Final Determination to have been includible in gross income of a Participant prior to payment of such amounts from the Trust, the Trustee shall, as soon as practicable, pay such amounts to such Participant and charge his Account accordingly. For purposes of this Section 4.3, the Trustee shall be entitled to rely on an affidavit from a Participant (substantially in the form annexed hereto as Exhibit D) to the effect that a Final Determination described in clause (ii) above has occurred. 4.4. Rules Governing Payments. The Trustee shall not make any payments to Participants or Beneficiaries from the Trust Fund except as provided in Sections 4.1, 4.2 or 4.3 even though the Trustee may be informed from another source that payments are due under the Plan. The Trustee shall have no duty to determine the propriety or amount of such payments or the rights of any person in the Trust Fund. Any amount paid under Section 4.1, 4.2 or 4.3 shall be charged against such Participant's Account and no payment with respect to a Participant's Account shall be made in excess of the amount then credited to such participant's Account. The Administrator or the Company shall provide the Trustee with sufficient information to enable it to so charge a Participant's Account. The Company shall on a timely basis provide the Trustee with written instructions for the reporting and withholding of any federal, state and local taxes that may be required to be reported and withheld with respect to any amount paid under Section 4.1, 4.2 or 4.3, and the Trustee shall comply with such written instructions and shall pay any taxes withheld to the appropriate taxing authorities. The Trustee may rely conclusively (and shall be fully protected in such reliance) on the written instructions of the Company as to all tax reporting and withholding requirements. 4.5. Payment Schedules. (a) Upon the execution of this Trust Agreement, the Company shall deliver to the Trustee a list of current Participants substantially in the form of Exhibit A and the initial Payment Schedules substantially in the form of Exhibit A-1; with the portion of the schedule, as applied to the benefits of each Participant, being delivered to such Participant not later than 60 days after the establishment of the Trust. (b) As of the last day of each calendar year (beginning with calendar year 1994), the Company shall prepare an updated Payment schedule, which shall reflect benefit accruals under the Plan for all Participants through such date. The updated Payment Schedule reflecting benefit accruals as of the last day of any calendar year shall be delivered to the Trustee not later than the 60th day following the end of such calendar year; with the portion of the updated schedule, as applied to the benefits of each Participant, being delivered to such Participant not later than such 60th day. (c) With respect to Payment Schedules reflecting benefits as of a date either before or after a Change in Control, a Participant (or, in the event of the Participant's death or disability, the Participant's Beneficiary) may in accordance with the terms of the Plan file a protest with respect to the determination of such Participant's benefits. The Participant shall file such protest with the administrator of the Plan and, after the occurrence of a Change in Control, the Participant shall file a copy of the protest with the Trustee. (d) A Participant (and the Beneficiaries of such Participant) shall be eligible for reimbursement for fees and expenses incurred in connection with the protest of the Payment Schedule as applied to the Participant to the extent provided in accordance with Section 4.10. (e) Subject to the following provisions of this paragraph (e), the Trustee may rely and shall be fully protected in relying on the contents of a Payment Schedule for all purposes under this Trust Agreement without inquiry until it received an amendment thereto or a new Payment Schedule in substitution thereof to the extent permitted hereunder. 4.6. Designation of Beneficiaries. Amounts payable to the Participant's Beneficiary following the Participant's death shall be paid in accordance with the terms of the Plan. The Trustee may rely and shall be fully protected in relying on the Company's certification as to the identity of any Participant's Beneficiary. The Trustee will not make any distribution to a Beneficiary unless and until receipt of such certification. 4.7. Company's Continuing Obligations. Notwithstanding any provision of this Trust Agreement to the Contrary, the Company shall remain obligated to pay the Benefits under the Plan. To the extent the amount in a Participant's Account is not sufficient to pay any Benefit when due, the Company shall pay such deficiency directly to the Participant (or, after the Participant's death, the Participant's Beneficiary). Nothing in this Trust Agreement shall relieve the Company of its liabilities to pay the Benefits except to the extent such liabilities are met by the application of Trust Fund assets. 4.8. Excess Amounts. To the extent there remains an amount credited to a Participant's Account after his Benefits have been paid in full, such exceed shall be reallocated as of the end of that calendar quarter to the remaining Accounts of all other Participants who then have an Account in the Trust Fund in proportion of their respective Accounting balances. After all of the Benefits have been paid in full, the Trust shall terminate and, after the payment of any unpaid expenses, the assets of the Trust fund (if any) shall be transferred to the Company. 4.9. Company's Intent. It is the intention of the Company to have each Account established hereunder treated as a separate account designed to satisfy the Company;s legal liability under the applicable Agreement in respect of the Participant for whom such Account has been established, and to have the balance, if any, in each such Account revert to the Company after all of the Company's legal liabilities with respect to Benefits under all of the Plan have been met. The Company, therefore, agrees that all income, deductions and credits of each such Account belong to it as owner for income tax purposes and will be included on the Company's income tax returns. 4.10. Reimbursement of Participants and Beneficiaries. The Trustee upon written notification from either the Compensation and Benefits Committee of the Board or Employee Benefits Committee as set forth herein, shall reimburse the Participants and Beneficiaries for reasonable fees and expenses (including, without limitation, reasonable attorney fees) incurred in connection with a collection of contested benefits under the Plan to the extent that the expenses are incurred in connection with amounts payable after a Change in Control upon obtaining the approval of the Compensation and Benefits Committee of the Board of Directors of the Company as constituted immediately prior to the Change in Control; provided, if that group fails to take action, upon the approval of the Employee Benefits Committee of the SFP Supplemental Retirement and Savings Plan as constituted immediately prior to the Change in Control; provided further, however, that to the extent that (a) more than one Participant or Beneficiary assets a claim against the Company with respect to benefits; (b) the fees and expenses are reimbursable under this Section 4.10; and (c) the fees and expenses attributable to such claims are related and could be consolidated without a material loss of protection to any Participant, then Company may require such consolidation. 5. CONCERNING THE TRUSTEE 5.1. Notice to the Trustee. The Trustee may rely on the authenticity, truth and accuracy of, and will be fully protected in acting upon: (a) any notice, direction, certification, approval or other writing of the Company, if evidenced by an instrument signed in the name of the Company by an Authorized Officer; and (b) any copy of a resolution of the Board of Directors for the Company, if certified by the Secretary or an Assistant Secretary of the Company under its corporate seal; or (c) any notice, direction, certification, approval or other writing, oral or other transmitted form of instruction received by the Trustee and believed by it to be genuine and to be sent by or on behalf of the Administrator. (d) any notice, direction, certification, approval or other writing of the Compensation and Benefits Committee of the Board or Employee Benefits Committee. 5.2. Expenses of the Trust Fund. (a) The Trustee is authorized to pay out of the Trust Fund: (i) all brokerage fees and transfer tax expenses and other expenses incurred in connection with the sale or purchase of investment; (ii) all real and personal property taxes, income taxes and other taxes of any kind at any time levied or assessed under any present or future law upon, of with respect to, the Trust Fund or any property included in the Trust Fund; (iii) the Trustee's compensation and expenses as provided in Section 5.3 hereof; and (iv) all other expenses of administering the Trust, unless promptly paid to the Trustee by the Company. To the extent charged against the Trust Fund, all expenses described in this Section 5.2 shall be charged proportionately against, and paid from, all Accounts in existence at the time of such payment. (b) In addition to its obligations under paragraph (a) next above, for periods after a Change in Control, the Company shall be obligated to pay all expenses (if any) incurred by the Trustee in connection with the operation of the Plan to the extent that the expenses are incurred pursuant to the terms of this Trust Agreement. For periods after a Change in Control, the Trustee shall submit a statement reflecting expenses owed to the Trustee by the Company not less frequently than quarterly. To the extent that the Trustee incurs such expenses attributable to goods and services provided by persons not affiliated with the Trustee, then the Trustee shall take reasonable steps to assure that a statement for such expenses is submitted to the Company not more than 180 days after the date such expenses are incurred. As soon as practicable after the occurrence of a Change in Control, the Trustee shall submit a statement reflecting outstanding expenses incurred prior the Change in Control. (c) The Trustee shall be reimbursed by the Company for payments made to Participants and Beneficiaries under Section 4.10; provided that to the extent that the Company fails to reimburse the Trustee in accordance with this Section 5.2, the Trustee may charge such amounts against the Trust Fund. However, such charge against the Trust Fund with respect to any fees and expenses shall not relieve the Company of its obligations to reimburse the Trustee for such fees and expenses under this Section 5.2. 5.3. Compensation of the Trustee. The Company will pay to the Trustee such compensation for its services as set forth in Exhibit B as from time to time amended by the Company and the Trustee and will reimburse the Trustee for all expenses (including reasonable attorney's fees) incurred by the Trustee in the administration of the Trust. If not promptly paid on request, the Trustee may charge such fees and expenses to and pay the same from the Trust Fund. In such event, such fees and expenses shall be charged pro rate to the Accounts in existence on the date of such payment. The compensation and expenses of the Trustee shall constitute a lien on the Trust Fund. 5.4. Protection of the Trustee. The Company shall pay and shall protect, indemnify and save harmless the Trustee and its officers, employees and agents from and against any and all losses, liabilities (including liabilities for penalties), actions, suites, judgments, demands, damages, costs and expenses (including without limitation, attorneys' fees and expenses) of any nature arising from or relating to any action or any failure to act by the Trustee, its officers, employees and agents or the transactions contemplated by this Trust Agreement, including but not limited to, any claim made by a Participant or his beneficiary with respect to payments made or to be made by the Trustee, any claim made by the Company or its successor, whether pursuant to a sale of assets, merger, consolidation, liquidation or otherwise, that this Trust Agreement is invalid or ultra vires, except to the extent that any such loss, liability, action, suite, judgment, demand, damage, cost or expense has been determined by a final judgment of a count of competent jurisdiction to be solely the result of the gross negligence or wilful misconduct of the Trustee, its officers, employees or agents. To the extent that the Company has not fulfilled its obligations under the foregoing provisions of this Section, the Trustee shall be reimbursed out of the assets of the Trust Fund or may set up reasonable reserves for the payment of such obligations. The Trustee assumes no obligation or responsibility with respect to any action required by this Trust Agreement on the part of the Company or the Administrator. 5.5. Duties of the Trustee. (a) The Trustee will be under no duties except such duties as are specifically set forth as such in this Trust Agreement, and no implied covenant or obligation will be read into this Trust Agreement against the Trustee. The Trustee will not be liable for any action or failure to act except if such action or failure to act constitutes gross negligence or wilful misconduct. The Trustee will not be compelled to take any action toward the execution or enforcement of the Trust or to prosecute or deed any suit in respect thereof, unless indemnified to its satisfaction against loss, cost, liability and expense; and the Trustee will be under no liability or obligation to anyone with respect to any failure on the part of the Company, the Administrator or a Participant to perform any of their respective obligations under the Plan. Nothing in this Trust Agreement shall be construed as requiring the Trustee to make any payment in excess of the amounts held in the Trust Fund at the item of such payment or otherwise to risk its own funds. 5.6. Settlement of Accounts of the Trustee. The Trustee shall keep or cause to be kept accurate and detailed amounts of all investments, receipts, disbursements and other transactions hereunder. Such accounts shall be open to inspection and audit at all reasonable times during normal business hours by any person designated by the Company or the Administrator. At the request of the Company, the Trustee shall furnish to the Company such other information which it possesses and which the Company reasonably requires for the administration of the Plan. At least annually after the end of each Plan Year, the Trustee shall file with the Company and the Administrator a written account, listing the investments of the Trust Fund and any uninvested cash balance thereof, and setting forth all receipts, disbursements, payments, and other transactions respecting the Trust Fund not included in any such previous account. Any account, when approved by the Company and the Administrator, will be binding and conclusive on the Company, the Administrator and all Participants, and the Trustee will thereby be released and discharged from any liability or accountability to the Company, the Administrator and all Participants with respect to all matters set forth therein. Omission by the Company or the Administrator to object in writing to any specific items in any such account within sixty (60) days after its delivery will constitute approval of the account by the Company and the Administrator. No other accounts or reports shall be required to be given to the Company, the Administrator or a Participant except as stated herein or except as otherwise agreed to in writing by the Trustee. The Trustee shall not be required to file, and no Participant or Beneficiary shall have right to compel, an accounting, judicial or otherwise, by the Trustee. 5.7. Right to Judicial Settlement. Nothing contained in this Trust Agreement shall be construed as depriving the Trustee of the right to have a judicial settlement of its accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary parties thereof in addition to the Trustee shall be the Company, in the case of a proceeding commenced prior to a Change in Control, or the Company and the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect (or, in the case of a deceased Participant still entitled to Benefits from the Trust Fund, this Beneficiary), in the case of a proceeding commenced on or after a Change in Control. 5.8. Resignation or Removal of the Trustee. (a) The Trustee may at any time resign and may at any time be removed by the Company upon sixty (60) days' notice in writing; provided, however, that following a Change in Control, the Company shall have the right to remove the Trustee only with the written consent of two-thirds of the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. (b) For purposes of this Trust Agreement, if a vote or the approval of the Participants is required, determination of the Participants eligible to vote shall be made as of the time of the vote, or as of a date not more than 30 days prior to the vote, but excluding any Participants who then have no earned benefits under the Plan. For purposes of such vote, each Participant shall have one vote. If any Participant is deceased, his Beneficiary shall vote for the Participant, provided that the votes of all beneficiaries with respect to any deceased Participant shall together count for but one vote. If a Participant is incapacitated so that he is unable to vote in a timely manner, his guardian or person responsible for his care shall vote for the Participant. 5.9. Appointment of Successor Trustee. In the event of the resignation of removal of the Trustee, or in any other event in which the Trustee ceases to act, a successor trustee may be appointed by the Company by instrument in writing delivered to and accepted by the successor trustee; provided, however, that following a Change in Control, the designation of a successor trustee shall be approved in writing by two- thirds of the Participants for whom Accounts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. Notice of such appointment and approval, if applicable, will be given by the Company to the retiring trustee, and the successor trustee will deliver to the retiring trustee an instrument in writing accepting such appointment. Notwithstanding the foregoing, if not appointment and approval, if applicable, of a successor trustee is made by the Company within a reasonable time after such a resignation, removal or other event, any court of competent jurisdiction may appoint a successor trustee after such notice, if any, solely to the Company and the retiring trustee, as such court may deem suitable and property. In the event of such resignation, removal or other event, the retiring trustee or its successors and assigns shall file with the Company a final account to which the provisions of Section 5.6 hereof relating to annual account shall apply. In the event of the appointment of a successor trustee, such successor trustee will succeed to all the right, title and estate of, and will be, the Trustee; and the retiring trustee will after the settlement of its final account and the receipt of any compensation or expenses due it, deliver the Trust Fund to the successor trustee together with all such instruments of transfer, conveyance, assignment and further assurance as the successor trustee may reasonably require. The retiring trustee will retain a lien upon the Trust Fund to secure all amounts due the retiring trustee pursuant to the provisions of this Trust Agreement. 5.10. Merger or Consolidation of the Trustee. Any corporation continuing as the result of any merger or resulting from any consolidation to which merger or consolidation the Trustee is a party, or any corporation to which substantially all the business and assets of the Trustee may be transferred, will be deemed automatically to be continuing as the Trustee. 6. ENFORCEMENT; CHANGE IN CONTROL; CREDITORS 6.1. Enforcement of Trust Agreement and Legal Proceedings. The Company shall have the right to enforce any provision of this Trust Agreement, and on or after a Change in Control, any Participant (or if such participant is deceased, his Beneficiary) shall have the right as a beneficiary of the Trust to enforce any provision of this Trust Agreement that affects the right, title and interest of such Participant in the Trust. Except as otherwise provided in Sections 5.6 and 5.7 hereof, in any action or proceeding affecting the Trust, the only necessary parties shall be the Company, the Trustee and the Participants with respect to whom Accounts are then in existence in the Trust Fund and, except as otherwise required by applicable law, no other person shall be entitled to any notice or service of process. Any judgment entered in such an action or proceeding shall, to the maximum extent permitted by applicable law, be binding and conclusive on all persons having or claiming to have any interest in the Trust. 6.2. Change in Control. For purposes of this Trust, a Change in Control of the Company shall be deemed to have occurred if the circumstances in paragraph (a), paragraph (b), paragraph (c) or paragraph (d) occur: (a) any "person," as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or The Atchison, Topeka and Santa Fe Railway Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or The Atchison, Topeka and Santa Fe Railway Company, or any corporation owned, directly or indirectly, by the stockholders of the Company or the Atchison, Topeka and Santa Fe Railway Company in substantially the same proportions as their ownership of stock of the Company or The Atchison, Topeka and Santa Fe Railway Company), is or become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or The Atchison, Topeka and Santa Fe Railway Company representing 25% or more of the combined voting power of the Company's or The Atchison, Topeka and Santa Fe Railway Company's then outstanding securities; (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the person who has entered into an agreement with the Company to effect a transaction described in clause (a), (b) or (c) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whole election or nomination for election was previously so approved (hereinafter referred to as "Continuing Directors"), cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company or The Atchison, Topeka and Santa Fe Railway Company approve a merger or consolidation of the Company or The Atchison, Topeka, Santa Fe Railway Company with any other corporation, other than (a) a merger or consolidation which would result in the voting securities of the Company or The Atchison, Topeka and Santa Fe Railway Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or The Atchison, Topeka and Santa Fe Railway Company (or such surviving entity) outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company or The Atchison, Topeka and Santa Fe Railway Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's or The Atchison, Topeka and Santa Fe Railway Company's then outstanding securities; or (d) the stockholders of the Company or The Atchison, Topeka and the Santa Fe Railway Company approve a plan of complete liquidation of the Company or The Atchison, Topeka and Santa Fe Railway Company or an agreement for the sale or disposition by the Company or The Atchison, Topeka and Santa Fe Railway Company of all or substantially all of the Company's or The Atchison, Topeka and Santa Fe Railway Company's assets. For purposes of this clause (d), the term "the sale or disposition by the Company or The Atchison, Topeka and Santa Fe Railway Company of all or substantially all of the Company's or The Atchison, Topeka and Santa Fe Railway Company's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or The Atchison, Topeka and Santa Fe Railway Company or of any direct or indirect subsidiary of the Company or The Atchison, Topeka and Santa Fe Railway Company (including the stock of any direct or indirect subsidiary of the Company or The Atchison, Topeka and Santa Fe Railway Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of the Company or The Atchison, Topeka and Santa Fe Railway Company determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company (as hereinafter defined). For purposes of the preceding sentence, the fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company (as hereinafter defined). For purposes of the preceding sentence, the "fair market value of the Company or The Atchison, Topeka and Santa Fe Railway Company" shall be the aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's other outstanding equity securities. The aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock shall be determined by multiplying the number of shares of the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price for the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of The Atchison, Topeka and Santa Fe Railway Company or any other equity securities of the Company shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the Company's or The Atchison, Topeka and Santa Fe Railway Company's common stock (in the event such common stock is not publicly traded) or by such other method as the Board of Directors of the Company or The Atchison, Topeka and Santa Fe Railway Company shall determine is appropriate. (e) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any one or more transactions contemplated by a certain agreement known as the Agreement and Plan of Merger dated as of June 29, 1994 between Burlington Northern Inc. and Santa Fe Pacific Corporation (referred to as the "Merger Transactions"), or any events or transactions that form a part of, or are in furtherance of, the Merger Transactions, or the execution of any agreement in furtherance of the Merger Transactions, be treated as a "Change in Control" or a "Potential Change in Control" for purposes of this Agreement. (f) Notwithstanding the foregoing definition, no Change in Control shall be deemed to have occurred for purposes of this Trust Agreement unless and until the Trustee has actual knowledge from a Reliable Source, not including a Participant, of such Change in Control. 6.3 Insolvency of the Company. (a) If at any time (i) the Company or a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, (ii) the Trustee is served with any order, process or paper from which it appears that an allegation to the effect that the Company is Insolvent has been made in a judicial proceeding or (iii) the Trustee has actual knowledge of a current report or statement from a nationally recognized credit reporting agency or from a Reliable Source to the effect that the Company is Insolvent, the Trustee shall discontinue payment of benefits under this Trust Agreement, shall hold the Trust Fund for the benefit of the Company's creditors, and shall resume payment of Benefits under this Trust Agreement in accordance with Section 4 hereof only upon receipt of an order of a court of competent jurisdiction requiring such payment or if the Trustee has actual knowledge of a current report or statement from a nationally recognized credit reporting agency or other Reliable Source (other than a Reliable Source described in clause (iii) of the definition thereof) to the effect that the Company is not Insolvent; provided, however, that in the event that payment of Benefits was discontinued by reason of a court order or injunction, the Trustee shall resume payment of Benefits only upon receipt of an order of a court of competent jurisdiction requiring such payment. The Company and its Chief Executive Officer shall be obligated to give the Trustee prompt written notice in the event that the Company becomes Insolvent. The Trustee shall not be liable to anyone in the event Benefits are discontinued pursuant to this Section 6.3. (b) If the Trustee discontinue payment of Benefits pursuant to Section 6.3(a) and subsequently resumes such payment, the first payment to the Participant for his Account following such discontinuance shall include an aggregate amount equal to the difference between the payments which would have been made to such Participant under this Trust Agreement but for Section 6.2(a) and the aggregate payments actually made to such Participant by the Company (as certified to the Trustee by the Participant in writing) during any such period of discontinuance, plus interest on such amount at a rate equivalent to the net rate of return earned by the Trust Fund during the period of such discontinuance. (c) In the event that at any time any amount is paid from the Trust Fund to creditors of the Company, the Company shall upon demand by the Trustee deposit into the Trust Fund a sum equal to the amount paid by the Trust Fund to such creditors. The Trustee shall be under no obligation to collect any such deposit. 7. AMENDMENT, REVOCATION AND TERMINATION 7.1. Amendment. (a) Prior to the occurrence of a Change in Control, the Company may from time to time amend in writing, in whole or in part, any or all of the provisions of this trust Agreement with the written consent of the Trustee but without the consent of any Participant; except that the Trust Agreement may not be amended in accordance with this paragraph (a) during a Potential Change in Control. (b) At any time upon or after the occurrence of a Change in Control, and during a Potential Change in Control, the Company may from time to time amend in writing, in whole or in part, any or all of the provisions of this Trust Agreement with the written consent of the Trustee and two-thirds of the Participants for whom Accosts are held as part of the Trust Fund and to whom additional Benefits are payable pursuant to a Payment Schedule then in effect. In addition, the Trust Agreement may be amended by the Company at any time with the written consent of the Trustee, but only to the extent such amendment is required by law or is necessary or desirable to prevent adverse tax consequences to Participants. In the event that the Company proposes to adopt an amendment to the Trust Agreement pursuant to the preceding sentence, the Company shall provide the Trustee with an opinion of counsel reasonably acceptable to the Trustee and in form and substance satisfactory to the Trustee to the effect that such amendment is required by law or is necessary or desirable to prevent adverse tax consequences to Participants. The Trustee may rely and shall be fully protected in relying on such opinion without inquiry. 7.2. Revocability. (a) Prior to a Change in Control, the Trust shall be revocable by the Company, all or any part of the trust Fund shall be recoverable by the Company (with or without revocation of the Trust), and the Participants shall have no right to any part of the Trust Fund. However, during a Potential Change in Control, the trust may not be revoked in accordance with this paragraph (a); provided that during a Potential Change in Control (and prior to a Change in Control), all or any part of the trust Fund shall be recoverable by the Company. (b) Upon a Change in Control, the Trust shall become irrevocable, and shall be held for the exclusive purpose of providing the Benefits to Participants and their beneficiaries and defraying expenses of the Trust in accordance with the provisions of this Trust Agreement. Once the Trust has become irrevocable in accordance with this paragraph (b), no part of the income or corpus of the Trust Fund shall be recoverable by the Company. (c) During a Potential Change in Control, the Trust shall not revocable. The Trust may be revoked after a Potential Change in Control ceases. However, the Trust may not be revoked if the Potential Change in Control and, in such circumstances, the Trust shall be subject to paragraph (b) next above. (d) Notwithstanding anything in this Trust Agreement to the contrary, the Trust Fund shall at all times be subject to the claims of creditors of the Company as provided in Section 6.3 of this Trust Agreement. 7.3 Termination. (a) Prior to a Change in Control, the Company may revoke and terminate the Trust at any time, in its sole discretion, without the approval of any Participant, upon notice in writing to the trustee. As soon as practicable following the Trustee's receipt of such notice, the Trustee shall settle its final accounts in accordance with Section 5.6 hereof and, after the receipt of any unpaid fees and expenses, shall distribute the balance of the Trust Fund as directed by the Company. (b) Following a Change in Control the Trust shall terminate after the Trustee shall have made all payments required by Section 4, and, after the Trustee's final accounts have been settled in accordance with Section 5.6 hereof and after the receipt of any unpaid fees and expenses, the Trustee shall distribute the balance of the Trust Fund as directed by the Company. 8. MISCELLANEOUS PROVISIONS 8.1. Successors. This Trust Agreement shall be binding upon and inure to the benefit of the Company and the Trustee and their respective successors and assigns. 8.2. Nonalienation. Except insofar as applicable law may otherwise require, (a) no amount payable to or in respect of any Participant at any time under the Trust shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any such amount, whether presently or thereafter payable, shall be void; and (b) the Trust Fund shall in no manner be liable for or subject to the debts or liabilities of any Participant. 8.3. Communications. (a) Communications to the Company shall be addressed to the Company at 1700 E. Golf Road, Schaumburg, Illinois 60173, Attn: Carol Beerbaum, provided, however, that upon the Company's written request, such communications shall be sent to such other address as the Company may specify. (b) Communications to the Trustee shall be addressed to it at One Wall Street, New York, New York 10286, Attn: Division Head, Master Trust/Custody Division; provided, however, that upon the Trustee's written request, such communications shall be sent to such other address as the Trustee may specify. (c) No communication shall be binding on the Trustee until it is received by officer the Trustee having primary responsibility for this Trust, and no communication shall be binding on the Company until it is received by the Company, 8.4. Headings. Titles to the Sections of this Trust Agreement are included for convenience only and shall not control the meaning or interpretation of any provision of this Trust Agreement. 8.5. Third Parties. A third party dealing with the Trustee shall not be required to make inquiry as to the authority of the Trustee to take any action nor be under any obligation to follow the proper application by the Trustee of the proceeds of sale of any property sold by the Trustee or to inquire into the validity or propriety of any act of the Trustee. 8.6. Governing Law. This Trust Agreement and the Trust established hereunder shall be governed by and construed, enforced, and administered in accordance with the internal laws of the State of New York without regard to principles of conflicts of laws and the Trustee shall be liable to account only in the courts of that state. 8.7. Counterparts. This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed to be the original although the others shall not be produced. IN WITNESS WHEREOF, This Trust Agreement has been duly executed by the parties hereto a of the day and year first above written. SANTA FE PACIFIC CORPORATION By: ------------------------------- Attest - ------------------------- THE BANK OF NEW YORK, as TRUSTEE By: ------------------------------- EX-10.38 15 DEFERRED COMPENSATION PLAN - DIRECTORS Exhibit 10.38 BURLINGTON NORTHERN SANTA FE CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ---------------------------------------- ARTICLE 1 PURPOSE ------- 1.01 The purpose of this Deferred Compensation Plan (Plan) is to attract and retain highly qualified individuals to serve as members of the Company's Board of Directors. ARTICLE II ADMINISTRATION -------------- 2.01 The Plan shall be administered by the Compensation Committee (Committee) of the Board of Directors. The Committee shall interpret the Plan, prescribe, amend and rescind rules relating to it from time to time as it deems proper and in the best interests of the Company, and to take any other action necessary for the administration of the Plan. Any decision or interpretation adopted by the Committee shall be final and conclusive and shall be binding upon all participants. ARTICLE III PARTICIPATION ------------- 3.01 Participation in this Plan is voluntary. Each director of the Company may elect to participate in the Plan by written notice to the Company upon his election to the Board of Directors. 3.02 The election, which shall be irrevocable, shall remain in effect for one year which shall begin on the day of the annual stockholder's meeting and shall terminate the day before the succeeding annual stockholder's meeting. The last day of a calendar quarter shall be used to calculate and credit interest and to make compensation payments due under the Plan. 3.03 The election by a director who is elected to the Board at other than an annual stockholders' meeting shall remain in effect until the next annual stockholders' meeting. ARTICLE IV COMPENSATION ------------ 4.01 Each Participant may elect to have all or a specified percentage of his Compensation deferred until he ceases to be a director. 4.02 "Compensation" shall mean the annual retainer and meeting fees of Board and Board Committee meetings. 4.03 The Company shall establish a memorandum account for each Participant who has elected to defer a portion of his Compensation for any year and shall credit such account for the Compensation due at the end of each quarter. 4.04 Interest shall be credited to each memorandum account at the end of each quarter or such other periods as may be determined by the Committee. The interest rate to be credited shall be the Prime Rate as published in the Wall Street Journal at the end of each quarter. 4.05 Distribution of a Participants' memorandum account shall be as follows: (a) In five equal annual installments in January of each year following the year in which the Participant ceases to be a director; (b) If approved by the Committee, in some other number of equal annual installments, not to exceed ten, commencing in January of the year following the year in which the Participant ceases to be a director; (c) If approved by the Committee, in a lump sum on a date within the ten year period following the year in which the Participant ceases to be a director. 4.06 Interest shall accrue on the outstanding memorandum account balance to the date of distribution. 4.07 If a Participant dies or becomes permanently disabled prior to payment of all amounts due under the Plan, the balance of the amount due shall be payable to the Participant or his estate, at the discretion of the Committee, in a lump sum as soon as is practicable or in some number of equal annual installments, not to exceed ten, commencing in January of the year following the year in which the Participant died or became permanently disabled. 4.08 The Committee shall distribute periodic earnings reports to the Participants under the Plan. ARTICLE V GENERAL PROVISIONS ------------------ 5.01 The deferred compensation to be paid to the Participants pursuant to this Plan is an unfunded obligation of the Company. Nothing herein contained shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any funds invested or reinvested, including the income or profits therefrom, which the Company may make to fulfill its obligations under this Plan shall at all times remain in the Company. A Participant's right to receive the payment of any deferred compensation may not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 5.02 The Board of Directors may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Board may reinstate any or all of its provisions. EX-11 16 COMPUTATIONS OF EARNINGS PER COMMON SHARE EXHIBIT 11 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------- Net income - ---------- Primary: Net income........................... $ 92 $ 416 $ 296 Convertible and mandatory redeemable preferred stock dividends..................... (21) (22) (22) ------ ----- ----- Net income available for common shareholders........................ $ 71 $ 394 $ 274 ====== ===== ===== Fully diluted: Net income........................... $ 71 $ 416 $ 296 ====== ===== ===== Weighted average number of shares - --------------------------------- Primary: Average common shares outstanding.... 104.4 89.1 88.6 Common share equivalents resulting from assumed exercise of stock options............................. 2.3 1.1 1.1 ------ ----- ----- 106.7 90.2 89.7 ====== ===== ===== Fully diluted (1): Average common shares outstanding.... 106.7 89.1 88.6 Common share equivalents resulting from assumed conversion of convertible preferred stock......... - 7.4 7.4 Common share equivalents resulting from assumed exercise of stock options assuming full dilution...... - 1.0 1.2 ------ ----- ----- 106.7 97.5 97.2 ====== ===== ===== Earnings per common share - ------------------------- Primary................................ $ .67 $4.37 $3.06 Fully diluted.......................... .67 4.27 3.04
Primary earnings per common share are computed by dividing net income, after deduction of preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding. Fully diluted earnings per common share are computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents are computed using the treasury stock method. An average market price is used to determine the number of common share equivalents for primary earnings per common share. The higher of the average or end-of-period market price is used to determine common share equivalents for fully diluted earnings per common share. In addition, the if-converted method is used for convertible preferred stock when computing fully diluted earnings per common share. The average number of common shares used for earnings per share calculations through December 31, 1995 reflect the effect of common shares issued in connection with the merger with Santa Fe Pacific Corporation (SFP) as outstanding for the period from September 22, 1995 through December 31, 1995. Future calculations will therefore reflect a significant increase in the number of outstanding common shares. Earnings per common share may not compute due to the level of rounding in this exhibit. (1) For the year ended December 31, 1995, the computation of fully diluted earnings per share was antidilutive; therefore, the amounts reported for primary and fully diluted earnings per share are the same. EX-12 17 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN MILLIONS, EXCEPT RATIO AMOUNTS)
Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------- Earnings: Pre-tax income........................ $334 $695 $521 Add: Interest and fixed charges, excluding capitalized interest..... 220 155 145 Portion of rent under long-term operating leases representative of an interest factor.............. 129 98 92 Amortization of capitalized interest........................... 1 - - Less: Undistributed equity in earnings of investments accounted for under the equity method............. 27 4 3 ---- ---- ---- Total Earnings Available for Fixed Charges........................ $657 $944 $755 ==== ==== ==== Fixed Charges: Interest and Fixed Charges............ $227 $157 $145 Portion of rent under long-term operating leases representative of an interest factor................ 129 98 92 ---- ---- ---- Total Fixed Charges................... $356 $255 $237 ==== ==== ==== Ratio of Earnings to Fixed Charges...... 1.85x (1) 3.70x 3.19x
(1) Earnings for the year ended December 31, 1995, include merger, severance and asset charges of $735 million. Excluding these costs, the ratio would have been 3.91x. EX-13 18 ANNUAL REPORT
CONSOLIDATED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------------ Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) The selected financial data shown below include BNI results for each of the five years ended December 31, 1995 and SFP results from September 22, 1995 to December 31, 1995. - ------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------ For the Year Revenues $ 6,183 $ 4,995 $ 4,699 $ 4,630 $ 4,559 Operating income (loss)/(1)/ 526 853 661 597 (239) Income (loss) before extraordinary item and cumulative effect of change in accounting method 198 426 296 299 (306) Accounting change/Extraordinary item/(2)//(3)//(4)//(5)/ (106) (10) -- (21) (14) Net income (loss) $ 92 $ 416 $ 296 $ 278 $ (320) Earnings (loss) available for common stockholders $ 71 $ 394 $ 274 $ 275 $ (321) Primary earnings (loss) per share: Before extraordinary item and change in accounting method $ 1.66 $ 4.48 $ 3.06 $ 3.35 $ (3.96) Accounting change/Extraordinary item (.99) (.11) -- (.24) (.18) Primary earnings (loss) per share $ .67 $ 4.37 $ 3.06 $ 3.11 $ (4.14) Average shares (in thousands) 106,730 90,187 89,672 88,617 77,462 Fully diluted earnings (loss) per share: Before extraordinary item and change in accounting method $ 1.66 $ 4.38 $ 3.04 $ 3.34 $ (3.96) Accounting change/Extraordinary item (.99) (.11) -- (.24) (.18) Fully diluted earnings (loss) per share $ .67 $ 4.27 $ 3.04 $ 3.10 $ (4.14) Average shares (in thousands) 106,730 97,528 97,189 89,492 77,462 Dividends declared per common share $ 1.20 $ 1.20 $ 1.20 $ 1.20 $ 1.20 - ------------------------------------------------------------------------------------------------------------------------ At year end Total assets $ 18,269 $ 7,592 $ 7,045 $ 6,563 $ 6,324 Long-term debt, including current portion and commercial paper 4,233 1,819 1,737 1,567 1,982 Redeemable preferred stock -- -- -- 9 11 Stockholders' equity 5,037 2,237 1,919 1,728 1,202 - ------------------------------------------------------------------------------------------------------------------------ Other Total capital expenditures $ 1,042 $ 753 $ 676 $ 487 $ 509 Depreciation and amortization 520 362 352 338 347 Operating ratio/(6)/ 80% 83% 86% 87% 90% Total debt to total capital, excluding redeemable preferred stock 46% 45% 48% 48% 62% - ------------------------------------------------------------------------------------------------------------------------ (1) 1995 includes $735 million before taxes related to merger, severance and asset charges as discussed in Note 3 of the financial statements. 1991 includes pre-tax charge of $708 million related to: (i) costs for reducing surplus crew positions and a management separation pay program, (ii) increases in estimated personal injury costs and (iii) increases in estimated environmental clean-up costs. (2) 1995 includes the cumulative effect of the change in accounting method for locomotive overhauls which decreased net income by $100 million, or $.94 per common share. Additionally, 1995 includes an extraordinary loss on retirement of debt of $6 million (after tax), or $.05 per common share. (3) 1994 includes the cumulative effect of the implementation of the accounting standard for postemployment benefits. (4) 1992 includes the cumulative effect of the change in accounting method for revenue recognition and the cumulative effect of the implementation of the accounting standard for postretirement benefits. (5) 1991 includes extraordinary loss on retirement of debt. (6) 1995 and 1991 operating ratios exclude the pre-tax charges discussed in note (1) above. P A G E 1
BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- FINANCIAL CONTENTS 13 Management's Discussion and Analysis 21 Report of Management 21 Report of Independent Accountants 22 Consolidated Statements of Income 23 Consolidated Balance Sheets 24 Consolidated Statements of Cash Flows 25 Consolidated Statements of Changes in Stockholders' Equity 26 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis relates to the financial condition and results of operations of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively BNSF or Company). The principal subsidiaries are Burlington Northern Inc. (BNI), Burlington Northern Railroad Company (BNRR), Santa Fe Pacific Corporation (SFP) and The Atchison, Topeka and Santa Fe Railway Company (ATSF). Acquisition of SFP On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as amended on October 26, 1994, December 18, 1994, January 24, 1995 and September 19, 1995, the Merger Agreement) pursuant to which SFP would merge with BNI in the manner set forth below (the Merger). Stockholders of BNI and SFP approved the Merger Agreement at special stockholders' meetings held on February 7, 1995. On August 23, 1995, the Interstate Commerce Commission (ICC) issued a written decision approving the Merger and on September 22, 1995 the Merger was consummated. As discussed in Note 2, the business combination with SFP was accounted for by the purchase method. Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced tender offers (together, the Tender Offer) to acquire 25 million and 38 million shares of SFP common stock, respectively, at $20 per share in cash. During the first quarter of 1995, SFP borrowed $1.0 billion under a credit facility of which $760 million of the proceeds were used to purchase the 38 million shares pursuant to the Tender Offer. In addition, BNI borrowed $500 million under a credit facility of which the proceeds were used to finance BNI's purchase of SFP common stock in the Tender Offer. The Tender Offer was completed on February 21, 1995. Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to consummate the Merger through the use of one of two possible structures: (i) a merger of SFP with and into BNI or (ii) the Holding Company Structure described below. To ensure that the transaction contemplated by the Merger Agreement qualified as a tax-free transaction for federal income tax purposes, the parties utilized the Holding Company Structure. Under the Holding Company Structure, BNSF created two subsidiaries. One subsidiary merged with and into BNI, and the other subsidiary merged with and into SFP. Each holder of one share of BNI common stock received one share of BNSF common stock and each holder of one share of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common stock, which reflects the effects of the repurchase program discussed below. The rights of each stockholder of BNSF are substantially identical to the rights of a stockholder of BNI, and the Holding Company Structure has the same economic effect with respect to the stockholders of BNI and SFP as would a direct merger of BNI and SFP. In the Merger Agreement, the exchange ratio of BNSF common shares for each share of outstanding SFP common stock upon consummation of the Merger was set at not less than 0.40 shares to not more than 0.4347 shares, with repurchases of SFP common stock by SFP increasing the exchange ratio pro rata. SFP repurchased approximately 3.6 million shares which, along with the effect of SFP stock options exercised, resulted in the final exchange ratio of 0.41143945 shares. Results of operations The results of operations discussed below include BNI results for the years ended December 31, 1995, 1994 and 1993 and SFP results from September 22, 1995 through December 31, 1995. Year ended December 31, 1995 compared with year ended December 31, 1994 BNSF recorded net income for 1995 of $92 million ($.67 per common share, primary and fully diluted) compared with net income of $416 million ($4.37 per common share, primary, and $4.27 per common share, fully diluted) for 1994. Results for 1995 were reduced by $735 million of merger, severance and asset charges (see Note 3: Merger, severance and asset charges). The corresponding reduction in net income was approximately $453 million, or $4.24 per common share. Results for 1995 were further reduced by $100 million (after tax), or $.94 per common share, for the cumulative effect of an accounting change for locomotive overhauls and $6 million (after tax), or $.05 per common share, for an extraordinary loss on early retirement of debt. Results for 1994 were reduced by $10 million (after tax), or $.11 per common share, for the cumulative effect of an accounting change for postemployment benefits. Excluding the above items, net income for 1995 would have been $651 million compared to $426 million in 1994. P A G E 13 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- Revenue table The following table presents BNSF's revenue information by commodity for the years ended December 31, 1995, 1994 and 1993 and includes certain reclassifications of prior year information to conform to current year presentation. SFP results are included only for the period of September 22, 1995 to December 31, 1995.
- ----------------------------------------------------------------------------------------------------------------------------------- Revenue Revenue Per Revenues Ton Miles (RTM) Thousand RTM 1995 1994 1993 1995 1994 1993 1995 1994 1993 -------------------------------------------------------------------------------------------------- (IN MILLIONS) (IN MILLIONS) - ----------------------------------------------------------------------------------------------------------------------------------- Coal $1,815 $1,669 $1,532 153,169 136,164 117,654 $11.85 $12.26 $13.02 Intermodal 1,118 745 701 38,516 24,671 22,718 29.03 30.20 30.86 Agricultural Commodities 1,101 759 710 55,356 33,922 33,945 19.89 22.37 20.92 Forest Products 459 440 419 19,828 19,495 18,329 23.15 22.57 22.86 Chemicals/Plastics 402 310 315 15,127 11,695 11,862 26.57 26.51 26.56 Food 347 304 291 12,332 10,341 9,711 28.14 29.40 29.97 Metals 308 253 248 13,804 11,503 11,233 22.31 21.99 22.08 Minerals and Ores 285 244 230 12,147 10,752 10,136 23.46 22.69 22.69 Automotive 210 152 141 3,158 2,031 1,751 66.50 74.84 80.53 Other 138 119 112 - - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Total $6,183 $4,995 $4,699 323,437 260,574 237,339 $18.69 $18.71 $19.33 - ---------------------------------==================================================================================================
Revenues Total revenues for 1995 were $6,183 million compared with revenues of $4,995 million for 1994. The $1,188 million increase reflects $802 million of SFP revenues for the period of September 22, 1995 to December 31, 1995. Excluding SFP, revenues increased by $386 million or 8 percent primarily due to improved Coal and Agricultural Commodities revenues. Coal revenues improved $146 million during 1995 due to higher traffic levels caused primarily by new business, favorable weather conditions early in the year and increased demand for low-sulfur coal from the Powder River Basin as well as the addition of $58 million of SFP revenues in 1995. Revenue per thousand revenue ton miles declined as a result of continuing competitive pricing pressures and a change in traffic mix. Agricultural Commodities revenues during 1995 were $342 million greater than 1994. The increase was principally caused by improvements in corn and soybean revenues of $259 million and $41 million, respectively. Corn and soybean revenues benefited from increased crop production as well as higher traffic volumes to the Pacific Northwest due to stronger export demand during 1995. Barley and wheat revenues declined primarily due to weaker export demand when compared with the strong demand in 1994. Additionally, Agricultural Commodities revenues included $59 million of SFP revenues during 1995. The shift in commodities to lower yielding corn and soybeans from higher yielding wheat led to the aggregate decrease in revenue per thousand revenue ton miles. Intermodal revenues increased $373 million when compared with 1994, almost exclusively due to the inclusion of SFP revenues in 1995. Metals revenues increased $55 million due to increased taconite, aluminum and steel products revenues as well as the addition of $28 million of SFP revenues in 1995. Current year revenues for Forest Products increased $19 million and Chemicals/Plastics revenues increased $92 million when compared to 1994. The increase in Forest Product revenues was due to the addition of $32 million of SFP revenues and was partially offset by lower traffic levels for lumber. The addition of $80 million of SFP revenues along with strong petroleum products demand contributed to the increase in Chemicals/Plastics revenues. Revenue increases in all other commodity groups are principally due to the inclusion of SFP revenues from September 22, 1995. Expenses As discussed in Note 3: Merger, severance and asset charges, the Company recorded $735 million for merger, severance and asset charges in 1995. The principal components of the charge were $287 million related to BNSF's plan to centralize the majority of its union clerical functions and $254 million related to salaried employee costs for severance, pension and other employee benefits and costs for employee relocations during the period. Additionally, $105 million was recorded for planned branch line dispositions, while the remaining $89 million included obligations for vacating leased facilities and the write-off of duplicate and excess assets. Additional accruals of $138 million were recorded through purchase accounting related to former SFP employees and assets. When its plans are completed, BNSF expects to have eliminated approximately 3,000 positions and disposed of approximately 4,000 miles of low density track. Total annual savings related to these plans, when fully implemented, are expected to exceed $250 million. Insignificant savings were recognized in 1995 due to timing of severances. A significant portion of the savings will be recognized in 1996 and the full benefit of savings are anticipated to be realized by the end of 1998, when the plan is fully implemented. Also, as described in Note 3, costs related to union employee relocation as well as P A G E 14 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- certain costs for separation and severances were not included in the charge; therefore, these costs will be recorded as future operating expenses. Both the timing and magnitude of any future expense is currently unknown. Total operating expenses for 1995, including $664 million of SFP operating expenses and $735 million of merger, severance and asset charges, were $5,657 million compared with expenses of $4,142 million for 1994. Excluding the merger, severance and asset charges the operating ratio for 1995 was 80 percent, an improvement of three percentage points over the operating ratio of 83 percent for 1994. Effective January 1, 1995, BNSF changed its method of accounting for periodic major locomotive overhauls. Under the new method, overhauls on owned units are capitalized and depreciated ratably until the next anticipated overhaul. In addition, estimated costs for overhauls on leased units are accrued on a straight-line basis over the life of the leases. BNSF previously expensed locomotive overhauls when the costs were incurred. The cumulative effect of this change for years prior to 1995 was a reduction in net income of $100 million (after tax) while the effect of this change for the year ended December 31, 1995 was to reduce net income by $25 million (after tax). Compensation and benefits expenses of $2,065 million were $286 million above 1994 and included $233 million of SFP compensation and benefits expense. The remaining $53 million of the increase was due to higher traffic levels, a wage increase for union represented employees effective July 1994, an increase in health and welfare costs for union employees due primarily to an increase in insurance premium rates, and increased incentive compensation expense. These increases were partially offset by operating efficiencies. Purchased services expenses increased $54 million for 1995 compared with 1994, principally reflecting the addition of SFP expenses. Equipment rents expenses were $111 million higher than 1994 due to the inclusion of $70 million of SFP equipment rents expense in 1995 as well as a $46 million increase in lease rental expense as a result of a larger fleet of leased freight cars and an increase in the leasing of locomotives to meet power requirements in 1995. Depreciation and amortization expense for 1995 was $158 million higher than 1994 primarily due to the inclusion of $86 million of SFP depreciation and amortization expense for 1995. Additionally, the increase reflects $30 million attributable to the 1995 effect of a change in accounting for locomotive overhauls. The remainder of the increase was due to capital additions which increased the Company's asset base. Fuel expenses for 1995 were $111 million higher compared with 1994 primarily due to the addition of $74 million of SFP expenses along with a $29 million increase in consumption resulting from higher traffic volumes in 1995. An increase in the average price paid per gallon of 1.2 cents in 1995 contributed to the remainder of the increase. Materials expenses for 1995 decreased $5 million compared with 1994. A $39 million reduction was attributable to the change in accounting for locomotive overhauls in 1995 primarily offset by $35 million of SFP expenses. Other operating expenses were $65 million higher in 1995 as compared with 1994. The increase reflects the inclusion of SFP expenses of $60 million and $65 million of expenses associated with the change in accounting for locomotive overhauls, partially offset by a decrease in personal injury expenses. Interest expense increased $65 million compared with 1994, principally due to the addition of $26 million of SFP expense in 1995 as well as interest on the $500 million unsecured debt incurred in 1995 to finance BNI's investment in SFP. Other income (expense), net was $31 million favorable in 1995 as compared with 1994. This increase was due to BNI's equity in earnings of SFP of $16 million from February 21, 1995, the date of BNI's initial investment in SFP, to September 22, 1995, the date of merger consummation. Additionally, other income includes income from SFP's 44 percent equity investment in Santa Fe Pacific Pipeline Partners, L.P. The remainder of the increase in other income was due to interest income on the settlement of a tax refund and lower fees on the sale of accounts receivable in 1995. In December 1995, BNSF defeased BNI's 9% debentures due 2016, by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance resulted in an extraordinary charge of $6 million (after tax), principally reflecting the call premium on the debt. Year ended December 31, 1994 compared with year ended December 31, 1993 BNSF had net income of $416 million ($4.37 per common share, primary, and $4.27 per common share, fully diluted) for the year ended December 31, 1994 compared with net income of $296 million ($3.06 per common share, primary, and $3.04 per common share, fully diluted) for 1993. Results for 1994 included the cumulative effect of the implementation of Statement of Financial Accounting Standards (SFAS) No. 112 "Employers' Accounting for Postemployment Benefits" which decreased 1994 net income by $10 million, or $.11 per common share. Results for 1993 included the effects of severe flooding in the Midwest, most notably in the third quarter. Net income for 1993 also included the retroactive effects of the Omnibus Budget Reconciliation Act of 1993 (the Act), which was passed into law during August 1993. The Act increased the corporate federal income tax rate by 1 percent, effective January 1, 1993, which reduced BNSF's net income by $28 million, or $.31 per common share, to adjust the January 1, 1993 deferred tax liability. P A G E 15 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- Revenues Total revenues for 1994 were $4,995 million compared with revenues of $4,699 million for 1993. The $296 million increase was primarily attributable to improvements in Coal, Agricultural Commodities and Intermodal revenues. Coal revenues improved $137 million during 1994 as a result of increased traffic. This increase was primarily caused by a rise in the demand for electricity as well as the need for utilities to replenish coal stockpiles during the first half of 1994, which were partially depleted during the 1993 summer flooding. Partially offsetting the increase in 1994 traffic was a decline in revenue per thousand revenue ton miles. These lower yields were largely due to the transportation in 1994 of greater volumes above contractual minimum tonnage requirements on which customers received lower rates. Continuing competitive pricing pressures in contract renegotiations also contributed to lower yields. Intermodal revenues increased $44 million during 1994 when compared with 1993. Intermodal-international revenues accounted for the majority of the increase with a $37 million improvement over 1993 caused by both new business and growth in existing business. The traffic increases more than offset BNSF's withdrawal from the Texas market in April 1994. Revenues from the transportation of Agricultural Commodities during 1994 were $49 million higher than 1993. This increase was principally caused by a $31 million improvement in barley revenues, as well as higher wheat, feeds and oilseeds revenues. Barley revenues benefited from strong domestic and export demand caused by favorable market conditions during 1994. Higher wheat revenues resulted from an increase in yield, which is a product of commodity mix, price and length of haul. Feeds and oilseeds revenues grew because of increased domestic feed demand. Partially offsetting these increases was a decrease in corn revenues largely attributable to reduced crop production and lower export demand. Forest Products revenues for 1994 increased $21 million compared with 1993 primarily due to increased housing starts during the year, while Food revenues for 1994 were $13 million higher than 1993 as a result of increased export demand. Minerals and Ores revenues rose $14 million over 1993 as a result of stronger clays and aggregates traffic caused by increases in both domestic and export demands, and Automotive revenues were $11 million higher than 1993 as a result of increased volume in automotive-international traffic. Expenses Total operating expenses for 1994 were $4,142 million compared with $4,038 million for 1993. The operating ratio improved three percentage points to 83 percent from 86 percent. Compensation and benefits expenses for 1994 were $70 million greater than for 1993. Higher traffic volumes during 1994 as well as wage increases for union represented employees caused an increase in excess of $50 million to wages and related payroll taxes. Also contributing to the increase in compensation and benefits expenses were increased salaries and a higher pension expense, due to a reduction in the discount rate (driven by lower market interest rates) used in determining the net pension cost. Purchased services expenses increased $15 million compared with 1993. Higher intermodal-related costs, due to increased volumes, and higher third party locomotive maintenance and repair costs were the most significant contributing factors to this increase. Equipment rents expenses were $34 million higher in 1994. This increase was primarily attributable to higher lease expenses due to a larger fleet of leased rail cars as well as leasing locomotives to meet power requirements. Also contributing to the increase were payments for failure to achieve service commitments in the first half of 1994 under various transportation agreements. These increases were partially offset by decreased car hire expenses in 1994 compared with 1993, due to the adverse effects of the Midwest flooding in 1993. Depreciation and amortization expense for 1994 was $10 million higher than 1993, due to an increase in the asset base and higher traffic levels. Fuel expenses were $7 million higher during 1994 as compared with 1993. The average price paid for diesel fuel decreased 3.1 cents per gallon in 1994 despite the 4.3 cents per gallon increase in the federal fuel tax, effective October 1, 1993. These price savings were more than offset by a $30 million increase in expense due to higher traffic volumes. Materials expenses were $5 million higher during 1994 as compared with 1993. Track and locomotive repair materials costs increased due to higher maintenance levels and a larger fleet size in 1994. Partially offsetting these increases were greater scrap sales due to the higher maintenance levels and a reduction in expenditures for safety and protective equipment deployed in 1993. Other operating expenses were $37 million less when compared with 1993. A $46 million decrease in personal injury expenses and the absence in 1994 of costs associated with the 1993 third quarter floods were partially offset by increases in derailment-related expenses and property taxes. Interest expense for the year increased $10 million compared with 1993, primarily due to a higher average outstanding debt balance in 1994. Other income (expense), net was $8 million lower in 1994 compared with 1993. This resulted primarily from losses related to international ventures. P A G E 16 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- The effective tax rate was 38.7 percent for 1994 compared with 43.2 percent for 1993. The higher effective tax rate for 1993 resulted from the increase in tax rates pursuant to the Act and the related impact on the deferred tax liability at January 1, 1993. Capital resources and liquidity Cash from operations Cash generated from operations is BNSF's principal source of liquidity and is primarily used for dividends and capital expenditures. To the extent cash outflows exceed cash provided by operations, BNSF would generally fund the excess through the issuance of debt or financing through capital or operating leases. Operating activities provided cash of $1,416 million in 1995, compared with $808 million in 1994 and $578 million in 1993. The increase in cash from operations in 1995 was attributable primarily to a $421 million increase in net earnings excluding net noncash charges. An increase of $263 million from working capital activities, including additional cash from the collection of accounts receivable and favorable activity in accounts payable and other current liabilities also contributed to the increase. The above were partially offset by cash used in 1995 to pay employee merger and separation costs. The increase in cash from operations in 1994 over 1993 was primarily attributable to increased net income and a $68 million decrease in labor-related payments. BNSF's cash outflows from investing and financing activities principally relate to dividends and capital expenditures. Additionally, in 1995 the Company had expenditures of $500 million related to the Tender Offer. Other capital resources BNSF maintains a program for the issuance, from time to time, of commercial paper. These borrowings are supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing available borrowings under these agreements. The bank revolving credit agreements allow borrowings of up to $1.0 billion on a short-term basis and $1.5 billion on a long-term basis. Annual facility fees are currently .08 percent and .125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowings are based upon LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, money market rates as offered by the lenders, or an alternate base rate. The commitment of the banks to make loans are currently scheduled to expire on November 19, 1996 and November 21, 2000, respectively. At December 31, 1995, borrowings against the long-term revolving credit agreement were $85 million and the maturity value of commercial paper outstanding was $996 million, leaving a total of $419 million of the long- term revolving credit agreement available and $1.0 billion of the short-term revolving credit agreement available. The maturity value of commercial paper outstanding at December 31, 1994 was $91 million. In December 1995, BNSF issued $300 million of 6 3/8% Notes due December 15, 2005 and $350 million of 7% Debentures due December 15, 2025 under a registration statement filed by BNSF on November 22, 1995 covering the issuance, from time to time, of up to $1 billion aggregate principal amount of debt securities. The net proceeds from the sale of the notes and debentures were primarily used for general corporate purposes, including but not limited to the repayment of commercial paper and short-term bank loans having an average interest rate of approximately 6 percent. During the course of 1995, the Company entered into various interest rate swap agreements with a principal amount of $500 million, for the purpose of establishing rates in anticipation of debt issuances under a shelf registration statement (see Note 10: Debt). In conjunction with the fourth quarter 1995 issuance of 10 year 6 3/8% notes and 30 year 7% debentures, the Company closed out the swap transactions which resulted in losses of $13 million and $15 million, respectively. The losses were deferred and will be recognized over the term of the borrowings. Additionally, in December 1995, BNSF defeased BNI's 9% debentures due 2016, by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance of debt resulted in an extraordinary charge of $6 million, net of applicable income tax benefits of $3 million, principally reflecting the call premium on the debt. Capital expenditures and resources A breakdown of cash capital expenditures is set forth in the following table (in millions):
- ------------------------------------------------------------------------------- Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Road, roadway structures and real estate $ 706 $ 544 $ 459 Equipment 184 154 217 - ------------------------------------------------------------------------------- Total capital expenditures $ 890 $ 698 $ 676 - -------------------------------------------------------------------------------
The above capital expenditures exclude $136 million and $50 million of equipment acquired under cross-border capital lease arrangements in 1995 and 1994, respectively. Capital roadway expenditures in 1995 increased when compared with 1994 as a result of extensive capacity expansion projects, primarily located in the Powder River Basin as well as the inclusion of $115 million of SFP capital expenditures from September 22, 1995 through December 31, 1995. Capital roadway expenditures for 1994 increased compared with 1993 primarily due to spending related to strategic initiatives for transportation network management and extensive roadway improvements. Capital equipment expenditures for 1995 also increased when compared with 1994 due to the inclusion of $34 million of SFP capital expenditures. Capital equipment expenditures for P A G E 17 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------ 1994 declined when compared to 1993 primarily as a result of acquiring more equipment through operating leases rather than through purchases. Capital expenditures in 1996 are expected to approximate $1.7 billion, including noncash capital expenditures of approximately $200 million primarily for either directly financed or leased equipment acquisitions, and reimbursed projects. BNSF has a commitment to acquire 149 locomotives during 1996 and 1997. Nineteen locomotives were financed in February 1996 through a capital lease. The remaining commitment will be financed from one or a combination of sources including cash from operations, capital or operating leases, debt issuances and other miscellaneous sources. The decision on the method used to finance equipment depends upon current market conditions and other factors and will be based upon the most appropriate alternative available at such time. In both 1995 and 1994, BNSF financed new equipment through long-term capital and operating leases. During 1993, equipment was financed through debt issuance and long-term operating leases. Inflation Because of the capital intensive nature of BNSF's businesses and because depreciation is based on historical costs, the full effect of inflation is not reflected in operating expenses. An assumption that all operating assets were replaced at current price levels would result in depreciation charges substantially greater than historically reported amounts. Dividends Common stock dividends declared were $1.20 per common share annually for 1995, 1994 and 1993. Dividends paid on common and preferred stock during 1995 and 1994 were $129 million and during 1993 were $125 million. On January 18, 1996, the BNSF board of directors declared a dividend of 30 cents per share upon its outstanding shares of Common Stock, $.01 par value, payable April 1, 1996, to stockholders of record on March 11, 1996. Capital structure BNSF's ratio of total debt to total capital was 46 percent at the end of 1995 compared with 45 and 48 percent at the end of 1994 and 1993, respectively. Other matters Casualty and environmental Personal injury claims, including work-related injuries to employees, are a significant expense for the railroad industry. Employees of BNSF are compensated for work-related injuries according to the provisions of the Federal Employers' Liability Act (FELA). FELA's system of requiring finding of fault, coupled with unscheduled awards and reliance on the jury system, resulted in significant increases in expense in past years. For several years prior to 1992, the trend of significant increases in BNSF's personal injury expense reflected the combined effects of increasing frequency of claims, rising medical expenses, legal judgments and settlements. To improve worker safety and counter increasing costs, BNSF implemented a number of programs to reduce the number of personal injury claims and the dollar amount of claim settlements. The total amount of personal injury expenses were $143 million, $170 million and $216 million in 1995, 1994 and 1993, respectively, including SFP expenses from only September 22, 1995 through December 31, 1995. BNSF is also working with others, through the Association of American Railroads, to seek changes in legislation to provide a more equitable program for injury compensation in the railroad industry. BNSF's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF's land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental clean-up and enforcement actions. In particular, the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 30 Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF generally participates in the clean-up of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on relative volumetric contribution of material, the amount of time the site was owned or operated, and/or the portion of the total site owned or operated by each PRP. P A G E 1 8 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- Environmental costs include initial site surveys and environmental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. Liabilities for environmental clean-up costs are initially recorded when BNSF's liability for environmental clean-up is both probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. BNSF conducts an ongoing environmental contingency analysis, which considers a combination of factors including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and the ability of other PRPs to pay for clean-up, and historical trend analyses. BNSF is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 320 sites, including the Superfund sites, at which it is being asked to participate in the study or clean-up, or both, of alleged environmental contamination. BNSF paid approximately $31 million, $21 million and $27 million during 1995, 1994 and 1993, respectively relating to mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. BNSF has accruals of approximately $235 million for remediation and restoration of all known sites, including $225 million pertaining to mandated sites, of which approximately $60 million relates to the Superfund sites. BNSF anticipates that the majority of the accrued costs at December 31, 1995 will be paid over the next five years. No individual site is considered to be material. Recoveries received from third parties, net of legal costs incurred, were approximately $31 million during the year ended December 31, 1995 and were not significant in prior years. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF's total clean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other PRPs' participation in clean-up efforts, developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, future charges to income for environmental liabilities could have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, expenditures associated with such liabilities are typically paid out over a long period; therefore, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. BNSF expects it will become subject to future requirements regulating air emissions from diesel locomotives that may increase its operating costs. Regulations applicable to new locomotive engines are expected to be issued by the Environmental Protection Agency soon. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt locomotive emission standards that may differ from federal standards. Other claims and litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. Labor Rail union employees represent approximately 87 percent of BNSF's workforce. In December 1994, BNRR reached an agreement with the Railroad Yardmasters Division of the United Transportation Union (UTU) which is effective through 1999 with respect to wages, work rules and all other matters except health and welfare benefits. Health and welfare issues are being addressed at the national level and will apply to BNRR's approximately 250 yardmasters. Effective July 1, 1995, the yardmasters received a 3 percent base wage increase under the agreement. Labor agreements currently in effect for unions other than the yardmasters include provisions which prohibited the parties from serving notices to change wages, benefits, rules and working conditions prior to November 1, 1994. BNSF's railroad operating subsidiaries joined with the other railroads to negotiate with the unions on a multi-employer basis on November 1, 1994. At that time, all unions were served proposals for productivity improvements as well as other changes. P A G E 19 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- Thereafter, unions also served notices on the railroads which proposed increasing wages and benefits and restoring many of the restrictive work rules and practices that were modified or eliminated under the current agreements. A number of the unions are also challenging the railroads' right to negotiate on a multi-employer basis and the issue is currently pending in federal district court in Washington, D.C. In December 1995, BNSF's multi-employer bargaining representative, the National Carriers' Conference Committee (NCCC), reached a tentative agreement with the UTU resolving wage, benefit and work rule issues through 1999. The agreement is subject to ratification, the results of which should be known in March 1996. At this time, the railroads and most of the other unions are proceeding in direct negotiations on the parties' proposals with many in mediation. The National Mediation Board has scheduled and held meetings with the parties. The ultimate outcome of the negotiations cannot be predicted. Under labor agreements currently in effect for most of the unionized work force, a cost of living allowance of 9 cents per hour went into effect on July 1, 1995. The cost of living allowance was dependent upon changes in the Consumer Price Index not to exceed 3 percent. Tentative agreements resolving merger-related issues were reached with the Brotherhood of Locomotive Engineers and UTU in December 1995. These agreements are subject to ratification, the results of which should be known in March 1996. Merger implementing negotiations are ongoing with the carman and yardmaster unions. Discussions with the Transportation Communications Union resulted in an agreement resolving all merger-related and other issues covering railroads' clerical employees. BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. Hedging Activities Fuel BNSF has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities. Additionally, this program includes exchange-traded petroleum futures contracts and various commodity swap and collar transactions which are accounted for as hedges. Any gains or losses associated with changes in market value of these hedges are deferred and recognized as a component of fuel expense in the period in which the hedged fuel is purchased and used. To the extent BNSF hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. As of December 31, 1995, BNSF had entered into forward purchases for approximately 69 million gallons at an average price of approximately 49 cents per gallon. In addition, BNSF held petroleum futures contracts representing approximately 60 million gallons at an average price of approximately 48 cents per gallon. These contracts have expiration dates ranging from January 1996 to October 1996. The above prices do not include taxes, fuel handling costs, certain transportation costs and, except for forward contracts, any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. BNSF's current fuel hedging program covers approximately 12 percent of estimated 1996 fuel purchases. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. Hedge positions are also closely monitored to ensure that they will not exceed actual fuel requirements. Unrealized gains or losses from BNSF's fuel hedging transactions were not material at December 31, 1995 and 1994. BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. Interest rate From time to time, the Company enters into interest rate transactions for the purpose of establishing rates on anticipated debt transactions or fixing interest rates on floating rate debt. As of December 31, 1995, no interest rate hedging transactions were outstanding, although in February 1996, the Company entered into interest rate transactions to fix interest rates on floating rate debt with a total principal amount of $225 million. The transactions call for the payment of fixed rates of 4.8 percent and receipt of a floating rate based on commercial paper rates over a period of 12 to 18 months. Recent accounting pronouncements In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company believes that it will continue to use Accounting Principle Board Opinion No. 25 to measure and recognize employee stock-based transactions and will provide required additional disclosures commencing in 1996. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which establishes the accounting and reporting requirements for recognizing and measuring impairment of long-lived assets to be either held and used or held for disposal. BNSF is currently evaluating the financial impact of adopting this standard, however, the impact is not anticipated to be significant. P A G E 20 REPORT OF MANAGEMENT - ------------------------------------------------------------------------------- To the Stockholders of Burlington Northern Santa Fe Corporation The accompanying consolidated financial statements of Burlington Northern Santa Fe Corporation and subsidiary companies were prepared by management, who are responsible for their integrity and objectivity. They were prepared in accordance with generally accepted accounting principles and properly include amounts that are based on management's best judgments and estimates. Other financial information included in this annual report is consistent with that in the consolidated financial statements. The Company maintains a system of internal accounting controls, supported by adequate documentation, to provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Limitations exist in any system of internal accounting controls based upon the recognition that the cost of the system should not exceed the benefits derived. The Company believes its system of internal accounting controls, augmented by its internal auditing function, appropriately balances the cost/benefit relationship. Independent accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the consolidated financial statements. The Board of Directors pursues its responsibility for the Company's financial statements through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. The Audit Committee meets regularly with the independent accountants, management and internal auditors. The independent accountants and the Company's internal auditors have direct access to the Audit Committee, with and without the presence of management representatives, to discuss the scope and results of their work and their comments on the adequacy of internal accounting controls and the quality of financial reporting. /s/ ROBERT D. KREBS Robert D. Krebs President and Chief Executive Officer /s/ DENIS E. SPRINGER Denis E. Springer Senior Vice President and Chief Financial Officer /s/ THOMAS N. HUND Thomas N. Hund Vice President and Controller REPORT OF INDEPENDENT ACCOUNTANTS - ------------------------------------------------------------------------------- To the Stockholders and Board of Directors of Burlington Northern Santa Fe Corporation and Subsidiaries We have audited the consolidated balance sheets of Burlington Northern Santa Fe Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Burlington Northern Santa Fe Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for periodic major locomotive overhauls in 1995 and for postemployment benefits and investments in debt and equity securities in 1994. /s/ COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. Fort Worth, Texas February 15, 1996 P A G E 21
CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------------ Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data) - ------------------------------------------------------------------------------------------------------------ Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Revenues $ 6,183 $ 4,995 $ 4,699 Operating expenses: Compensation and benefits 2,065 1,779 1,709 Purchased services 526 472 457 Equipment rents 540 429 395 Depreciation and amortization 520 362 352 Fuel 480 369 362 Materials 300 305 300 Other 491 426 463 Merger, severance and asset charges 735 - - - ------------------------------------------------------------------------------------------------------------ Total operating expenses 5,657 4,142 4,038 - ------------------------------------------------------------------------------------------------------------ Operating income 526 853 661 Interest expense 220 155 145 Other income (expense), net 28 (3) 5 - ------------------------------------------------------------------------------------------------------------ Income before income taxes 334 695 521 Income tax expense 136 269 225 - ------------------------------------------------------------------------------------------------------------ Income before extraordinary item and cumulative effect of change in accounting method 198 426 296 Extraordinary item, loss on early retirement of debt, net of tax (6) - - - ------------------------------------------------------------------------------------------------------------ Income before cumulative effect of change in accounting method 192 426 296 Cumulative effect of change in accounting method, net of tax (100) (10) - - ------------------------------------------------------------------------------------------------------------ Net income $ 92 $ 416 $ 296 - --------------------------------------------------------------------------================================== Primary earnings per common share: Income before extraordinary item and change in accounting method $ 1.66 $ 4.48 $ 3.06 Extraordinary item (.05) - - Change in accounting method (.94) (.11) - - ------------------------------------------------------------------------------------------------------------ Primary earnings per common share $ .67 $ 4.37 $ 3.06 - --------------------------------------------------------------------------================================== Average shares (in thousands) 106,730 90,187 89,672 - ------------------------------------------------------------------------------------------------------------ Fully diluted earnings per common share: Income before extraordinary item and change in accounting method $ 1.66 $ 4.38 $ 3.04 Extraordinary item (.05) - - Change in accounting method (.94) (.11) - - ------------------------------------------------------------------------------------------------------------ Fully diluted earnings per common share $ .67 $ 4.27 $ 3.04 - --------------------------------------------------------------------------================================== Average shares (in thousands) 106,730 97,528 97,189 - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. P A G E 2 2
CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------------- Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) - ---------------------------------------------------------------------------------------------------- December 31, 1995 1994 - ---------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 50 $ 27 Accounts receivable, net 620 697 Materials and supplies 220 100 Current portion of deferred income taxes 320 156 Other current assets 54 32 - ---------------------------------------------------------------------------------------------------- Total current assets 1,264 1,012 Property and equipment, net 16,001 6,311 Other assets 1,004 269 - ---------------------------------------------------------------------------------------------------- Total assets $18,269 $7,592 - ------------------------------------------------------------------------------------================ Liabilities and Stockholders' Equity Current liabilities: Accounts payable and other current liabilities $ 2,289 $1,325 Long-term debt and commercial paper due within one year 80 122 - ---------------------------------------------------------------------------------------------------- Total current liabilities 2,369 1,447 Long-term debt and commercial paper 4,153 1,697 Deferred income taxes 4,233 1,456 Casualty and environmental reserves 626 416 Employee merger and separation costs 530 - Other liabilities 1,321 339 - ---------------------------------------------------------------------------------------------------- Total liabilities 13,232 5,355 - ---------------------------------------------------------------------------------------------------- Commitments and contingencies (see Note 12 and 13) - ---------------------------------------------------------------------------------------------------- Stockholders' equity: Convertible preferred stock and additional paid-in capital, $.01 par value; 25,000,000 shares authorized; 6,900,000 shares issued; 0 shares and 6,900,000 shares outstanding, respectively -- 337 Common stock, $.01 par value, 300,000,000 shares authorized; 149,649,930 shares and 89,329,259 shares issued, respectively 1 1 Additional paid-in capital 4,606 1,443 Retained earnings 459 485 Treasury stock, at cost, 44,713 shares and 105,438 shares, respectively (3) (5) Other (26) (24) - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 5,037 2,237 - ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $18,269 $7,592 - ------------------------------------------------------------------------------------================
See accompanying notes to consolidated financial statements. P A G E 23
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------- Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions) - --------------------------------------------------------------------------------------- Year ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------- Operating Activities Net income $ 92 $ 416 $ 296 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting method 100 10 - Depreciation and amortization 520 362 352 Deferred income taxes (112) 126 156 Merger, severance and asset charges 735 - - Employee merger and separation costs paid (118) - - Other, net 51 9 (117) Changes in current assets and liabilities, excluding SFP assets/liabilities acquired: Accounts receivable, net 63 (108) (116) Materials and supplies (42) (13) 6 Other current assets (5) (5) (4) Accounts payable and other current liabilities 132 11 5 - --------------------------------------------------------------------------------------- Net cash provided by operating activities 1,416 808 578 - --------------------------------------------------------------------------------------- Investing Activities Purchase of SFP, net of cash acquired (488) (18) - Cash used for capital expenditures (890) (698) (676) Other, net 12 16 17 - --------------------------------------------------------------------------------------- Net cash used for investing activities (1,366) (700) (659) - --------------------------------------------------------------------------------------- Financing Activities Net increase in commercial paper 895 64 26 Proceeds from issuance of long-term debt 1,294 310 224 Payments on long-term debt (2,071) (346) (88) Dividends paid (129) (129) (125) Other, net (16) 3 4 - --------------------------------------------------------------------------------------- Net cash flow provided by (used for) financing activities (27) (98) 41 - --------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 23 10 (40) Cash and cash equivalents: Beginning of year 27 17 57 - --------------------------------------------------------------------------------------- End of year $ 50 $ 27 $ 17 - ----------------------------------------------------------------======================= Supplemental Cash Flow Information Interest paid, net of amounts capitalized $ 228 $ 149 $ 144 Income taxes paid, net of refunds 250 128 70 Assets financed through capital lease obligations 140 50 - Noncash consideration for purchase of SFP: Net assets acquired $ 3,319 Cash paid (532) Cash acquired 26 - --------------------------------------------------------------------------------------- Noncash consideration $ 2,813 - ----------------------------------------------------------------=======----------------
See accompanying notes to consolidated financial statements. P A G E 2 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- Burlington Northern Santa Fe Corporation and Subsidiaries (Shares in thousands. Dollars in millions, except per share data.) - ---------------------------------------------------------------------------------------------------------------------------------- Convertible Other Preferred Common ------------------------ Stock and Stock and Unearned Additional Additional Compensation, Minimum Outstanding Paid-in Paid-in Retained Treasury Restricted Pension Common Shares Capital Capital Earnings Stock Stock Liability Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 88,024 $ 337 $1,386 $ 30 $(2) $(19) $ (4) $1,728 Net income 296 296 Dividends: Common stock, $1.20 per share (106) (106) Convertible preferred stock, $3.125 per share (22) (22) Adjustments associated with unearned compensation, restricted stock 232 12 (2) (4) 6 Exercise of stock options and related tax benefit 500 20 20 Equity adjustment from minimum pension liability (6) (6) Other 40 3 3 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 88,796 337 1,421 198 (4) (23) (10) 1,919 Net income 416 416 Dividends: Common stock, $1.20 per share (107) (107) Convertible preferred stock, $3.125 per share (22) (22) Adjustments associated with unearned compensation, restricted stock 178 12 (1) 11 Exercise of stock options and related tax benefit 184 8 8 Equity adjustment from minimum pension liability 9 9 Other 66 3 3 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 89,224 337 1,444 485 (5) (23) (1) 2,237 Net income 92 92 Purchase of SFP: Common stock issued 52,004 2,652 2,652 Value of outstanding SFP stock options 119 119 Conversion and redemption of convertible preferred stock for common stock 7,313 (337) 335 (2) Dividends: Common stock, $1.20 per share (123) (123) Convertible preferred stock, $3.125 per share (21) (21) Adjustments associated with unearned compensation, restricted stock 243 13 2 16 31 Exercise of stock options and related tax benefit 778 39 (3) 36 Equity adjustment from minimum pension liability (18) (18) Cost to equity investment adjustment 26 26 Other 43 5 3 8 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 149,605 $ - $4,607 $ 459 $(3) $ (7) $(19) $5,037 - --------------------------------------============================================================================================
See accompanying notes to consolidated financial statements. P A G E 2 5 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BURLINGTON NORTHERN SANTA FE CORPORATION AND SUBSIDIARIES 1 Accounting policies Principles of consolidation The consolidated financial statements include the accounts of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively BNSF or Company). BNSF was incorporated in Delaware on December 16, 1994, for the purpose of effecting a business combination between Burlington Northern Inc. (BNI) and Santa Fe Pacific Corporation (SFP). The accompanying BNSF consolidated statements of income and cash flows for the years ended December 31, 1995, 1994 and 1993 reflect BNI's historical results and cash flows for such periods and SFP's results and cash flows from September 22, 1995 (the date of its acquisition by BNI) through December 31, 1995. The accompanying BNSF consolidated balance sheet at December 31, 1994 reflects only BNI historical amounts while the BNSF consolidated balance sheet at December 31, 1995 also includes the fair value adjustments of SFP's assets and liabilities resulting from applying purchase accounting. The principal subsidiaries of BNSF are BNI, Burlington Northern Railroad (BNRR), SFP and The Atchison, Topeka and Santa Fe Railway Company (ATSF). All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Reclassifications Certain comparative prior year amounts in the consolidated financial statements and notes have been reclassified to conform with the current year presentation. Cash and cash equivalents All short-term investments with original maturities of less than 90 days are considered cash equivalents. Cash equivalents are stated at cost, which approximates market value. Materials and supplies Materials and supplies consist mainly of diesel fuel, repair parts for equipment and other railroad property and are valued at the lower of average cost or market. Property and equipment Property and equipment are depreciated and amortized on a straight-line basis over their estimated useful lives. Upon normal sale or retirement of depreciable railroad property, cost less net salvage is generally charged to accumulated depreciation and no gain or loss is recognized. Significant premature retirements are recorded as gains or losses at the time of their occurrence. Expenditures which significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. Property and equipment are stated at cost including property values of SFP, which were adjusted in applying purchase accounting. The weighted average annual depreciation rate in effect at December 31, 1995 was 3.7 percent for track structure, 4.8 percent for equipment and 2.5 percent for other road properties. Revenue recognition Transportation revenues are recognized based upon the proportion of service provided. Earnings per common share Primary earnings per common share are computed by dividing net income, after deduction of preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding. Fully diluted earnings per common share are computed by dividing net income by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents are computed using the treasury stock method. An average market price is used to determine the number of common share equivalents for primary earnings per common share. The higher of the average or end-of-period market price is used to determine common share equivalents for fully diluted earnings per common share. In addition, the if-converted method is used for convertible preferred stock when computing fully diluted earnings per common share. For the year ended December 31, 1995, the computation of fully diluted earnings per share was antidilutive; therefore, the amounts reported for primary and fully diluted earnings per share are the same. The average number of common shares used for earnings per share calculations through December 31, 1995 reflect the effect of common shares issued in connection with the merger with SFP as outstanding for the period from September 22, 1995 through December 31, 1995. Future calculations will therefore reflect a significant increase in the number of outstanding common shares. 2 Acquisition of SFP On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as amended on October 26, 1994, December 18, 1994, January 24, 1995 and September 19, 1995, the Merger Agreement) pursuant to which SFP would merge with BNI in the manner set forth below (the Merger). Stockholders of BNI and SFP approved the Merger Agreement P A G E 2 6 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- at special stockholders' meetings held on February 7, 1995. On August 23, 1995, the Interstate Commerce Commission issued a written decision approving the Merger and on September 22, 1995 the Merger was consummated. Pursuant to the Merger Agreement, on December 23, 1994, BNI and SFP commenced tender offers (together, the Tender Offer) to acquire 25 million and 38 million shares of SFP common stock, respectively, at $20 per share in cash. During the first quarter of 1995, SFP borrowed $1.0 billion under a credit facility of which $760 million of the proceeds were used to purchase the 38 million shares pursuant to the Tender Offer. In addition, BNI borrowed $500 million under a credit facility of which the proceeds were used to finance BNI's purchase of SFP common stock in the Tender Offer. The Tender Offer was completed on February 21, 1995. Prior to consummation of the Merger, BNI accounted for the $500 million investment in SFP under the cost method. Upon consummation of the Merger, BNI's equity in earnings of SFP prior to the Merger of $16 million was recorded as other income. Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to consummate the Merger through the use of one of two possible structures: (i) a merger of SFP with and into BNI or (ii) the Holding Company Structure described below. To ensure that the transaction contemplated by the Merger Agreement qualified as a tax-free transaction for federal income tax purposes, the parties utilized the Holding Company Structure. Under the Holding Company Structure, BNSF created two subsidiaries. One subsidiary merged with and into BNI, and the other subsidiary merged with and into SFP. Each holder of one share of BNI common stock received one share of BNSF common stock and each holder of one share of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer and the SFP common stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common stock, which reflects the effects of the repurchase program discussed below. The rights of each stockholder of BNSF are substantially identical to the rights of a stockholder of BNI, and the Holding Company Structure has the same economic effect with respect to the stockholders of BNI and SFP as would a direct merger of BNI and SFP. In the Merger Agreement, the exchange ratio of BNSF common shares for each share of outstanding SFP common stock upon consummation of the Merger was set at not less than 0.40 shares to not more than 0.4347 shares, with repurchases of SFP common stock by SFP increasing the exchange ratio pro rata. SFP repurchased approximately 3.6 million shares which, along with the effect of SFP stock options exercised, resulted in the final exchange ratio of 0.41143945 shares. The business combination with SFP was accounted for by the purchase method. As such, the accompanying consolidated financial statements include assets, liabilities and financial results of SFP after Merger consummation. The following summarizes the purchase price (dollars in millions, except per share data, and shares in thousands):
- --------------------------------------------------------------------- BNI investment in SFP $ 516 Shares of SFP common stock outstanding at September 22, 1995 151,396 Less SFP shares held by BNI (25,000) -------- Remaining SFP shares outstanding 126,396 Exchange Ratio .4114 -------- Shares of BNSF common stock issued 52,000 Per share value of BNSF common stock $ 51 -------- Total value of BNSF common stock issued 2,652 Value of outstanding SFP stock options 119 BNI direct acquisition costs 32 - --------------------------------------------------------------------- Purchase price $3,319 - ---------------------------------------------------------------======
The purchase price was calculated based on an estimated fair value of BNSF common stock of $51 per share. The fair value was determined from the average of the daily closing prices of BNI common stock for the five trading days immediately preceding and the five trading days immediately following approval of the Merger by BNI and SFP shareholders which occurred on February 7, 1995. The effects of the acquisition on the consolidated balance sheet, including the fair value adjustments, were as follows (dollars in millions):
- ---------------------------------------------------------------------- Property and equipment, net $ 9,409 Other assets 886 Deferred income taxes (2,936) Long-term debt (2,034) Other liabilities (2,006) - ---------------------------------------------------------------------- Net assets acquired $ 3,319 - ---------------------------------------------------------------=======
The purchase price allocation included $138 million for anticipated nonrecurring costs and expenses for severance and relocation of prior SFP employees and the planned disposition of excess SFP office space and other SFP assets. The consolidated pro forma results presented below were prepared as if the Merger had occurred on January 1, 1994 and include the historical results of BNI and SFP, excluding the after tax effect of $309 million for merger-related charges recorded by BNI in 1995. Additionally, the consolidated pro forma results for both periods include the estimated effects of purchase accounting adjustments and the Tender Offer. Pro forma adjustments reflecting anticipated merger benefits are not included. This unaudited consolidated pro forma information is not necessarily indicative of the results of operations that might have occurred had the Merger actually taken place on P A G E 27 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- the date indicated, or of future results of operations of the combined entities (dollars in millions, except per share data): - ------------------------------------------------------
Year ended December 31, 1995 1994 - ---------------------------------------------------- Revenues $8,170 $7,676 Operating expenses 6,844 6,484 Income before extraordinary items 605 536 Net income(1) 499 549 Primary earnings per share: Income before extraordinary items $ 4.00 $ 3.63 Net income 3.27 3.72 Fully diluted earnings per share: Income before extraordinary items $ 3.94 $ 3.59 Net income 3.25 3.67
(1) Pro forma results for 1995 include approximately $230 million (pre-tax) related to the merger, severance and asset charge which are not considered directly attributable to the Merger. Additionally, 1995 pro forma net income includes the $100 million cumulative effect for the change in accounting for locomotive overhauls for years prior to 1995 and a $25 million reduction for the effect of the change on 1995. Also, 1995 pro forma net income includes the $6 million extraordinary charge for retirement of debt. Pro forma 1994 net income includes a $10 million reduction for a change in accounting. - ------------------------------------------------------ 3 Merger, severance and asset charges Included in the Statement of Income for 1995 are operating expenses of $735 million related to merger, severance and asset costs. Significant components included in these costs are described below. Employee-related costs of $287 million were recorded related to BNSF's plan to centralize the majority of its union clerical functions which was approved in 1995. This plan includes the reduction of approximately 1,600 employees which, among other things, requires installation of common information systems. The Company and the union have entered into an implementation agreement which allows the Company to abolish the positions and provides separation benefits to impacted employees. It will take several years to fully implement this plan due to the geographical complexity of the new combined rail system, and the time required to develop and install common systems. Most of the position reductions are expected to occur during 1996 and 1997, and the entire plan is expected to be completed by the end of 1998. No comparable costs were accrued in applying purchase accounting, as ATSF's operations had previously been centralized. Also, no provision for clerical relocations was included in the 1995 expense as employees have yet to commit to relocate. As such, these costs, as well as any separation and severance costs above those provided, will be recorded as operating expenses of future periods. Both the timing and magnitude of any such future expense is presently unknown. Costs of $254 million were recorded for salaried employees and reflect severance, pension and other employee benefits, and costs for employee relocations incurred during the period. Severance, pension and other employee benefit costs of $231 million reflect the elimination of approximately 1,000 former BNI employees. Most of these positions were eliminated in the third and fourth quarters of 1995; remaining positions will be eliminated in 1996. Additional components of salaried employee costs include special termination benefits to be received under the Company's retirement plan and expenses related to restricted stock which vested upon approval of the Merger. Relocation expenses of $23 million reflect costs incurred in 1995 for relocating approximately 300 former BNI employees. Costs of $105 million are included for branch line dispositions reflecting the write-off of the net book value of the lines at the anticipated disposal date, less estimated net proceeds. Approximately 75 line segments covering 3,300 miles of former BNI lines are included. Remaining costs of $89 million include obligations at leased facilities which are expected to be vacated and the write- off of duplicate and excess assets including computer hardware and software and certain facilities. Additional accruals of $138 million were recorded through purchase accounting related to former SFP employees and assets. Approximately $105 million of these costs related to termination of approximately 500 salaried employees for severance payments and special termination benefits to be received under the Company's retirement and health and welfare plans. Salaried employee costs also include amounts to relocate approximately 500 former SFP employees. The remaining $33 million of costs relate to the sale or abandonment of 500 miles of branch lines, rents on vacated leased facilities and the write-off of excess assets. Current and long-term employee merger and separation liabilities totaling $745 million are included in the consolidated balance sheet and represent employee- related components of the above costs, as well as remaining liabilities for actions taken by ATSF in prior periods. The majority of these prior ATSF costs are associated with deferred benefits payable upon separation or retirement to certain active conductors and trainmen, incurred in connection with an agreement which, among other things, reduced crew sizes. Additionally, certain locomotive engineers are eligible for a deferred benefit payable upon separation or retirement, associated with an agreement reached in 1990 with ATSF which allowed for more flexible work rules. At December 31, 1995, approximately $215 million of the above is included within current liabilities for anticipated costs to be paid in 1996. The remaining costs are anticipated to be paid over the next five years, except for certain costs related to conductors, trainmen and locomotive engineers of ATSF will be paid upon the employees separation or retirement. P A G E 28 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- 4 Accounting changes Effective January 1, 1995, BNSF changed its method of accounting for periodic major locomotive overhauls. Under the new method, costs of owned locomotives relating to components requiring major overhaul are depreciated, on a straight- line basis, to the first major overhaul date. The remaining cost of the owned locomotive is depreciated, on a straight-line basis, over the estimated economic life of the locomotive. The cost of overhauls on owned units are then capitalized when incurred and depreciated, on a straight-line basis, until the next anticipated overhaul. In addition, estimated costs for major overhauls on leased units are accrued on a straight-line basis over the life of the leases. BNSF previously expensed locomotive overhauls when the costs were incurred. BNSF believes that this change is preferable because it improves the matching of expenses incurred to revenues earned. The cumulative effect of this change on years prior to 1995 was a reduction in net income of $100 million (net of a $63 million income tax benefit) or $.94 per share (primary and fully diluted). The effect of this change for the year ended December 31, 1995, was to reduce income before extraordinary item and cumulative effect of change in accounting method by $25 million or $.23 per share (primary and fully diluted). The pro forma effect of this change on 1994 and 1993 would have been to reduce net income to $390 million or $4.08 per share (primary) and $275 million or $2.82 per share (primary), respectively. Effective January 1, 1994, BNSF adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect, net of $7 million income tax benefit, of this change in accounting attributable to years prior to 1994, at the time of adoption, was to decrease 1994 net income by $10 million, or $.11 per common share. In 1994, BNSF adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of this standard had no effect on net income and no material effect on stockholders' equity. 5 Other income (expense), net Other income (expense), net includes the following (in millions):
- ------------------------------------------------------------------- Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------- BNI's equity in earnings of SFP prior to consummation of the Merger $ 16 $ - $ - Gain on property dispositions 12 15 17 Equity in earnings of pipeline partnership 9 - - Interest income 8 3 6 Accounts receivable sale fees (4) (9) (9) Miscellaneous, net (13) (12) (9) - ------------------------------------------------------------------- Total $ 28 $ (3) $ 5 - ----------------------------------------------=====================
6 Income taxes Income tax expense, excluding the cumulative effect of change in accounting method and extraordinary item, was as follows (in millions):
- ------------------------------------------------------------------ Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------ Current: Federal $ 216 $ 124 $ 61 State 32 19 8 - ------------------------------------------------------------------ 248 143 69 - ------------------------------------------------------------------ Deferred: Federal (101) 109 136 State (11) 17 20 - ------------------------------------------------------------------ (112) 126 156 - ------------------------------------------------------------------ Total $ 136 $ 269 $225 - ----------------------------------------------====================
Reconciliation of the federal statutory income tax rate to the effective tax rate, excluding the cumulative effect of change in accounting method and extraordinary item, was as follows:
- ------------------------------------------------------------------ Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------ Federal statutory income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 4.0 3.4 3.4 Effect of 1 percent federal tax rate increase on deferred tax balances at January 1, 1993 - - 5.0 Other, net 1.7 0.3 (.2) - ------------------------------------------------------------------ Effective tax rate 40.7% 38.7% 43.2% - -----------------------------------------------===================
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was signed into law. The Act increased the corporate federal income tax rate by 1 percent, effective January 1, 1993. BNSF recorded $28 million to income tax expense representing the impact of the 1 percent increase on BNSF's beginning of the year deferred income tax liability. The components of deferred tax assets and liabilities were as follows (in millions):
- ------------------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------------------ Deferred tax liabilities: Depreciation and amortization $(5,076) $(1,785) Other (249) (106) - ------------------------------------------------------------------ Total deferred tax liabilities (5,325) (1,891) - ------------------------------------------------------------------ Deferred tax assets: Casualty and environmental reserves 360 255 Employee merger and separation costs 359 - Non-expiring AMT credit carryforwards 124 - Postretirement benefits 88 - Pensions 69 49 Other 412 287 - ------------------------------------------------------------------ Total deferred tax assets 1,412 591 - ------------------------------------------------------------------ Net deferred tax liability $(3,913) $(1,300) - -------------------------------------------------================= Noncurrent deferred income tax liability $(4,233) $(1,456) Current deferred income tax asset 320 156 - ------------------------------------------------------------------ Net deferred tax liability $(3,913) $(1,300) - -------------------------------------------------=================
P A G E 2 9 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- In 1995 and 1993, tax benefits of $11 million and $4 million, respectively, related to the adjustment to recognize the minimum pension liability was allocated directly to stockholders' equity. In 1994, tax expense of $6 million related to the adjustment to reduce the minimum pension liability was allocated directly to stockholders' equity. BNSF will file its first federal consolidated income tax return for 1995. BNI's and SFP's federal income tax returns have been examined through 1991 and 1990, respectively. All years prior to 1986 are closed for BNI and SFP. Issues relating to the years 1986-1991 are being contested through various stages of administrative appeal. In addition, BNSF and its subsidiaries have various state income tax returns in the process of examination, administrative appeal or litigation. Management believes that adequate provision has been made for any adjustment that might be assessed for open years through 1995. 7 Accounts receivable, net A special purpose subsidiary of ATSF has sold, with limited recourse, variable rate certificates which mature in December 1999 evidencing undivided interests in an accounts receivable master trust. The master trust's assets include an ownership interest in a revolving portfolio of ATSF's accounts receivable which are used to support the certificates. At December 31, 1995, $240 million of certificates sold were outstanding and were supported by receivables in the master trust of $308 million. A maximum of $300 million of certificates can be sold if the master trust balance is increased by receivables which are eligible for sale. ATSF has retained the collection responsibility with respect to the accounts receivable held in trust. ATSF is exposed to credit loss related to collection of accounts receivable to the extent that the amount of receivables in the master trust exceeds the amount of certificates sold. BNRR's agreement to sell accounts receivable with limited recourse expired in December 1994. Costs related to such agreements vary on a monthly basis and are generally related to certain interest rates. Costs related to accounts receivable sales, which are included in Other income (expense), net were $4 million in 1995 and $9 million in both 1994 and 1993. BNSF maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable, including accounts receivable sold. Allowances for doubtful accounts of $50 million and $20 million have been recorded at December 31, 1995 and 1994, respectively. 8 Property and equipment, net Property and equipment, net was as follows (in millions):
- ------------------------------------------------------------- December 31, 1995 1994 - ------------------------------------------------------------- Road, roadway structures and real estate $15,951 $ 7,875 Equipment 4,383 2,304 - ------------------------------------------------------------- Total cost 20,334 10,179 Less accumulated depreciation and amortization (4,333) (3,868) - ------------------------------------------------------------- Property and equipment, net $16,001 $ 6,311 - --------------------------------------------=================
The consolidated balance sheets at December 31, 1995 and 1994 included $200 million and $77 million, respectively, for property and equipment under capital leases. The related depreciation was included in depreciation expense. Accumulated depreciation for property and equipment under capital leases was $46 million and $34 million at December 31, 1995 and 1994, respectively. Capitalized software development costs are generally amortized over a five- to seven-year estimated useful life using the straight-line method. Amortization expense was $9 million for the year ended December 31, 1995, $2 million for the year ended December 31, 1994 and no amortization was recorded for the year ended December 31, 1993. Unamortized capitalized software costs were $69 million and $20 million as of December 31, 1995 and 1994, respectively. 9 Accounts payable and other current liabilities Accounts payable and other current liabilities consisted of the following (in millions):
- ------------------------------------------------------ December 31, 1995 1994 - ------------------------------------------------------ Accounts and wages payable $ 519 $ 264 Casualty and environmental reserves 290 221 Employee merger and separation costs 215 - Taxes other than income taxes 143 118 Accrued vacations 141 89 Other 981 633 - ------------------------------------------------------ Total $2,289 $1,325 - ----------------------------------------==============
P A G E 3 0 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- 10 Debt Debt outstanding was as follows (in millions):
- ----------------------------------------------------------------- December 31, 1995 1994 - ----------------------------------------------------------------- BNSF: 6 3/8% notes, due 2005 $ 300 $ - 7% debentures, due 2025 350 - Credit facility borrowings, 6.0% (variable) 85 - Commercial paper, 6.0% (variable) 761 - BNI: 8 3/4% debentures, due 2022 200 200 7 1/2% debentures, due 2023 150 150 7% notes, due 2002 150 150 7.40% notes, due 1999 150 150 9% debentures - 156 Equipment obligations, weighted average rate of 7.20% and 7.08%, respectively, due serially to 2013 200 194 BNRR: Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due 2006 to 2045 321 321 Capitalized lease obligations, weighted average rate of 6.59% and 8.01%, respectively, expiring 1996 to 2008 150 46 Equipment and other obligations, weighted average rate of 8.44% and 9.30%, respectively, due serially to 2009 74 91 General mortgage bonds, 3 1/8% and 2 5/8%, due 2000 and 2010, respectively 62 62 Prior lien railway and land grant bonds, 4%, due 1997 57 57 General lien railway and land grant bonds, 3%, due 2047 35 35 First mortgage bonds, series A, 4%, due 1997 20 22 Other 9 158 Commercial paper, 6.1% (variable) 224 90 SFP/ATSF: Equipment obligations, weighted average rate of 8.43%, due serially to 2009 427 - Pipeline exchangeable debentures, 10.4% (variable), due 2010 219 - Senior notes, 8 3/8% and 8 5/8%, due 2001 and 2004, respectively 200 - Mortgage notes, 10.325%, due 1996 to 2014 32 - Capitalized lease obligations 4 - Unamortized purchase accounting adjustment 114 - Unamortized discount (61) (63) - ----------------------------------------------------------------- Total 4,233 1,819 Less: Current portion of long-term debt and commercial paper (80) (122) - ----------------------------------------------------------------- Long-term debt $4,153 $1,697 - --------------------------------------------------===============
BNSF maintains a program for the issuance, from time to time, of commercial paper. These borrowings are supported by bank revolving credit agreements. Outstanding commercial paper balances are considered as reducing available borrowings under these agreements. The bank revolving credit agreements allow borrowings of up to $1.0 billion on a short-term basis and $1.5 billion on a long-term basis. Annual facility fees are currently .08 percent and .125 percent, respectively, and are subject to change based upon changes in BNSF's senior unsecured debt ratings. Borrowings are based upon LIBOR plus a spread based upon BNSF's senior unsecured debt ratings, money market rates offered at the option of the lenders, or an alternate base rate. The commitments of the lenders to make loans are currently scheduled to expire on November 19, 1996 and November 21, 2000, respectively. At December 31, 1995, borrowings against the long-term revolving credit agreement were $85 million and the maturity value of commercial paper outstanding was $996 million, leaving a total of $419 million of the long-term revolving credit agreement available and $1.0 billion of the short-term revolving credit agreement available. The maturity value of commercial paper outstanding at December 31, 1994 was $91 million. The financial covenants of the bank revolving credit agreements require that BNSF's consolidated tangible net worth, as defined in the agreements, be at least $4.5 billion, and that its debt, as defined in the agreements, cannot exceed 55 percent of its consolidated total capital. In December 1995, BNSF issued $300 million of 6 3/8% Notes due December 15, 2005 and $350 million of 7% Debentures due December 15, 2025 under a registration statement filed by BNSF on November 22, 1995 covering the issuance, from time to time, of up to $1 billion aggregate principal amount of debt securities. The net proceeds from the sale of the notes and debentures were primarily used for general corporate purposes, including but not limited to the repayment of commercial paper and short-term bank loans having an average interest rate of approximately 6 percent. During the course of 1995, the Company entered into various interest rate swap agreements with a principal amount of $500 million, for the purpose of establishing rates in anticipation of debt issuances under a shelf registration statement. The swaps were anticipated to hedge $250 million of 10 year debt and $250 million of 30 year debt. The swaps relating to the 10 year issuance called for the payment of a fixed interest rate of 6.6 percent which was based upon 10 year treasury notes, and the receipt of a variable interest rate. The swaps relating to the 30 year issuance called for the payment of a fixed interest rate of 6.8 percent which was based upon 30 year treasury bonds, and the receipt of a variable interest rate. In conjunction with the fourth quarter 1995 issuance of 10 P A G E 3 1 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- year 6 3/8% notes and 30 year 7% debentures, the Company closed out the swap transactions which resulted in losses of $13 million and $15 million, respectively. The losses were deferred and will be recognized over the term of the borrowings. Additionally, in December 1995, BNSF defeased its 9% debentures by placing $166 million of U.S. government securities into an irrevocable trust for the purpose of repaying the debentures in April 1996. The defeasance of debt resulted in an extraordinary charge of $6 million, net of applicable income tax benefits of $3 million, principally reflecting the call premium on the debt. In 1995, BNRR completed cross-border leveraged leases of equipment for a total amount of $136 million which were recorded as capital lease obligations. These transactions included the issuance of $108 million of equipment secured debt at a weighted average yield of 6.39 percent and the receipt of an up front cash benefit. The up front benefit reduces the effective interest rate on the debt to 5.76 percent. In November 1994, BNRR entered into a $150 million three year term loan facility agreement with a group of commercial banks and used the proceeds to redeem $150 million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 10%, Series J, due November 1, 1997. In November 1995, this debt was repaid through the issuance of commercial paper by BNRR. In May 1994, BNI issued $150 million of 7.4% notes due May 15, 1999 and used the proceeds to retire $150 million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 8 7/8%, Series I, due May 30, 1994. Aggregate long-term debt scheduled maturities are $80 million, $149 million, $75 million, $215 million and $1,168 million for 1996 through 2000, respectively. Substantially all BNRR properties and certain other assets are pledged as collateral to or are otherwise restricted under the various BNRR long-term debt agreements. Equipment obligations are secured by the underlying equipment. In addition, a subsidiary of SFP is contingently liable as general partner for $355 million of long-term debt held by Santa Fe Pacific Pipeline Partners, L.P. (Pipeline Partnership). The SFP subsidiary holds a 44 percent interest in the Pipeline Partnership which it accounts for under the equity method. The pipeline exchangeable debentures are exchangeable for BNSF's limited partnership interest in the Pipeline Partnership. 11 Disclosures about fair value of financial instruments The estimated fair values of BNSF's financial instruments at December 31, 1995 and 1994 and the methods and assumptions used to estimate the fair value of each class of financial instruments held by BNSF, were as follows: Cash and cash equivalents The carrying amount approximated fair value because of the short maturity of these instruments. Marketable securities Marketable securities, which are used to fund liabilities of certain employee benefit plans, consist of corporate bonds (47 percent of carrying amount) and United States government or agency issues (53 percent of carrying amount) and are classified as available for sale. The carrying value of available for sale securities is adjusted for changes in fair value and any unrealized gains or losses are recorded as a component of stockholders' equity. At December 31, 1995, the unrealized gains and losses were immaterial. Realized gains or losses from the sales of marketable securities were also immaterial for 1995. The fair value for these securities was based on market. Accrued interest payable The carrying amount approximated fair value as the majority of interest payments are made semiannually. Long-term debt and commercial paper The fair value of BNSF's long-term debt was primarily based on quoted market prices for the same or similar issues, or on the current rates that would be offered to BNSF for debt of the same remaining maturities. The carrying amount of commercial paper approximated fair value because of the short maturity of these instruments. The carrying amount and estimated fair values of BNSF's financial instruments were as follows (in millions):
- --------------------------------------------------------------- December 31, 1995 1994 - --------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------- Assets: Cash and cash equivalents $ 50 $ 50 $ 27 $ 27 Marketable securities 20 20 20 20 Liabilities: Accrued interest payable 71 71 45 45 Long-term debt and commercial paper 4,233 4,412 1,819 1,742 - ---------------------------------------------------------------
BNSF also holds investments in, and has advances to, several unconsolidated transportation affiliates. It was not practicable to estimate the fair value of these financial instruments, which were carried at their original cost of $45 million and $16 million in the December 31, 1995 and 1994 consolidated balance sheets. P A G E 3 2 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- 12 Hedging activities, leases and other commitments Hedging activities Fuel BNSF has a program to hedge against fluctuations in the price of its diesel fuel purchases. This program includes forward purchases for delivery at fueling facilities. Additionally, this program includes exchange-traded petroleum futures contracts and various commodity swap and collar transactions which are accounted for as hedges. Any gains or losses associated with changes in market value of these hedges are deferred and recognized as a component of fuel expense in the period in which the hedged fuel is purchased and used. To the extent BNSF hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. As of December 31, 1995, BNSF had entered into forward purchases for approximately 69 million gallons at an average price of approximately 49 cents per gallon. In addition, BNSF held petroleum futures contracts representing approximately 60 million gallons at an average price of approximately 48 cents per gallon. These contracts have expiration dates ranging from January, 1996 to October, 1996. The above prices do not include taxes, fuel handling costs, certain transportation costs and, except for forward contracts, any differences which may occur from time to time between the prices of commodities hedged and the purchase price of BNSF's diesel fuel. BNSF's current fuel hedging program covers approximately 12 percent of estimated 1996 fuel purchases. The current and future fuel delivery prices are monitored continuously and hedge positions are adjusted accordingly. Hedge positions are also closely monitored to ensure that they will not exceed actual fuel requirements in any period. Unrealized gains or losses from BNSF's fuel hedging transactions were not material at December 31, 1995 and 1994. BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. Interest rate From time to time, the Company enters into various interest rate hedging transactions for the purpose of managing exposure to fluctuations in interest rates and establishing rates in anticipation of future debt issuances. During 1995, the Company closed out interest rate swap transactions in conjunction with the issuance of debt (see Note 10: Debt). No contracts were outstanding at December 31, 1995. Leases BNSF has substantial lease commitments for locomotives, freight cars, trailers, office buildings and other property. Most of these leases provide the option to purchase the equipment at fair market value at the end of the lease. However, some provide fixed price purchase options. Future minimum lease payments (which reflect leases having non-cancelable lease terms in excess of one year) as of December 31, 1995 are summarized as follows (in millions):
- ------------------------------------------------------------- Capital Operating Year ended December 31 Leases Leases - ------------------------------------------------------------- 1996 $ 22 $ 274 1997 22 263 1998 22 220 1999 20 185 2000 19 159 Thereafter 112 1,425 - ------------------------------------------------------------- Total 217 $2,526 - -------------------------------------------------------====== Less amount representing interest 63 - -------------------------------------------------- Present value of minimum lease payments $154 - ----------------------------------------------====
Lease rental expense for all operating leases was $303 million, $229 million and $194 million for the years ended December 31, 1995, 1994 and 1993, respectively. Contingent rentals and sublease rentals were not significant. Other commitments BNSF has entered into commitments to acquire 149 locomotives during 1996 and 1997. In addition, BNSF has two power purchase agreements, expiring in 1998 and 2001, that currently involve 197 locomotives. Payments required by the agreements are based upon usage, subject to specified take-or-pay minimums. The rates specified in the two agreements are renegotiable every two years. BNSF's 1996 minimum commitment obligation is $51 million. Based on projected locomotive power requirements, BNSF's payments in 1996 are expected to be in excess of the minimum. Payments under the agreements totaled $49 million, $47 million and $53 million in 1995, 1994 and 1993, respectively. In 1990, BNI entered into a letter of credit for the benefit of a vendor. This letter of credit is a performance guarantee for up to $15 million for locomotive overhauls. In connection with the closing of the sale of rail lines in southern California in 1992 and 1993, BNSF has entered into various shared use agreements with the agencies, which require BNSF to pay the agencies approximately $6 million annually to maintain track structure and facilities. Additionally, BNSF recorded a $50 million liability in 1993 for an obligation retained by BNSF, which under certain conditions requires a repurchase of a portion of the properties sold. P A G E 3 3 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- BNRR and ATSF are each parties to service interruption insurance agreements under which on a combined basis they would be required to pay premiums of up to a maximum of approximately $106 million in the event of work stoppages on other railroads related to ongoing national bargaining. BNRR and ATSF are also entitled to receive payments under certain conditions if a work stoppage occurs on either property. 13 Environmental and other contingencies Environmental BNSF's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF's operating procedures include practices to protect the environment from the environmental risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF's land holdings are and have been used for industrial or transportation related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental cleanup and enforcement actions. In particular, the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as similar state laws generally impose joint and several liability for clean-up and enforcement costs without regard to fault or the legality of the original conduct on current and former owners and operators of a site. BNSF has been notified that it is a potentially responsible party (PRP) for study and clean-up costs at approximately 30 Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF generally participates in the clean-up of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on relative volumetric contribution of material, the amount of time the site was owned or operated, and/or the portion of the total site owned or operated by each PRP. Environmental costs include initial site surveys and environmental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. Liabilities for environmental clean-up costs are initially recorded when BNSF's liability for environmental clean-up is both probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. BNSF conducts an ongoing environmental contingency analysis, which considers a combination of factors including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and the ability of other PRPs to pay for clean-up, and historical trend analyses. BNSF is involved in a number of administrative and judicial proceedings and other mandatory clean-up efforts at approximately 320 sites, including the Superfund sites, at which it is being asked to participate in the study and/or clean-up of the environmental contamination. BNSF paid approximately $31 million, $21 million and $27 million during 1995, 1994 and 1993, respectively relating to mandatory clean-up efforts, including amounts expended under federal and state voluntary clean-up programs. BNSF has accruals of approximately $235 million for remediation and restoration of all known sites, including $225 million pertaining to mandated sites, of which approximately $60 million relates to the Superfund sites. BNSF anticipates that the majority of the accrued costs at December 31, 1995 will be paid over the next five years. No individual site is considered to be material. Recoveries received from third parties, net of legal costs incurred, were approximately $31 million during the year ended December 31, 1995 and were not significant in prior years. Liabilities recorded for environmental costs represent BNSF's best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the liability. Although recorded liabilities include BNSF's best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF's total clean-up costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other PRPs' participation in clean-up efforts, developments in ongoing environmental analyses related to sites determined to be contaminated, and developments in environmental surveys and studies of potentially contaminated sites. As a result, future charges to income for environmental liabilities could have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, expenditures associated with such liabilities are typically paid out over a long period; therefore, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF's consolidated financial position or liquidity. P A G E 3 4 BURLINGTON NORTHERN SANTA FE - ------------------------------------------------------------------------------- BNSF expects it will become subject to future requirements regulating air emissions from diesel locomotives that may increase its operating costs. Regulations applicable to new locomotive engines are expected to be issued by the Environmental Protection Agency soon. It is anticipated that these regulations will be effective for locomotive engines installed after 1999. Under some interpretations of federal law, older locomotive engines may be regulated by states based on standards and procedures which the State of California ultimately adopts. At this time it is unknown whether California will adopt locomotive emission standards that may differ from federal standards. Other claims and litigation BNSF and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters and personal injury claims. While the final outcome of these items cannot be predicted with certainty, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the annual results of operations, financial position or liquidity of BNSF, although an adverse resolution of a number of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 14 Retirement plans BNSF has noncontributory defined benefit pension plans through its subsidiaries, BNI and SFP, covering substantially all non-union employees. BNI and SFP also have nonqualified defined benefit plans for certain officers and other employees. The benefits under BNSF's plans are based on years of credited service and the highest five-year average compensation levels. BNSF's funding policy is to contribute annually not less than the regulatory minimum, and not more than the maximum amount deductible for income tax purposes. Components of the net pension cost for BNI's plans were as follows (in millions):
- -------------------------------------------------------------------------- Year ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------- Service cost, benefits earned during the period $ 9 $ 12 $ 9 Interest cost on projected benefit obligation 54 50 50 Actual return on plan assets (93) (25) (57) Net amortization and deferred amounts 57 (1) 24 Curtailment costs 10 - - Cost of special termination benefits 32 - - - -------------------------------------------------------------------------- Net pension cost $ 69 $ 36 $ 26 - --------------------------------------------------========================
The following table shows the reconciliation of BNI's funded status of the plans with amounts recorded in the consolidated balance sheets (in millions):
- --------------------------------------------------------------------------- December 31, 1995 1994 - --------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(641) $(481) - ------------------------------------------------------------=============== Accumulated benefit obligation $(696) $(553) - ------------------------------------------------------------=============== Projected benefit obligation $(758) $(628) Plan assets at fair value, primarily marketable equity and debt securities 534 467 - --------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (224) (161) Unrecognized net loss 93 41 Unrecognized prior service cost 2 5 Unamortized net transition obligation 20 29 Adjustment required to recognize minimum liability (53) (12) - --------------------------------------------------------------------------- Accrued pension liability $(162) $ (98) - ------------------------------------------------------------===============
BNI uses a December 31 measurement date. The assumptions used in accounting for BNI's plans were as follows:
- --------------------------------------------------------------------------- December 31, 1995 1994 1993 - --------------------------------------------------------------------------- Discount rate 7.0% 9.0% 7.0% Rate of increase in compensation levels 4.0% 5.5% 5.5% Expected long-term rate of return on plan assets 9.5% 9.5% 9.5% - ---------------------------------------------------------------------------
Components of net pension income for SFP's plans from September 22, 1995 through December 31, 1995 were as follows (in millions):
- --------------------------------------------------------------------------- Service cost, benefits earned during the period $ 2 Interest cost on projected benefit obligation 11 Actual return on plan assets (21) Net amortization and deferred amounts 4 - -------------------------------------------------------------------------- Net pension income $ (4) - ----------------------------------------------------------------------====
The following table shows the reconciliation of SFP's funded status of the plans with amounts recorded in the consolidated balance sheet at December 31, 1995 (in millions):
- ----------------------------------------------------------------------------------- Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets - ----------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(547) $ (7) - ------------------------------------------------------------======================= Accumulated benefit obligation $(575) $ (8) - ------------------------------------------------------------======================= Projected benefit obligation $(614) $(11) Plan assets at fair value, primarily common stock, and U.S. and corporate bonds 718 - - ----------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 104 (11) Unrecognized net loss - 3 - ----------------------------------------------------------------------------------- Prepaid (accrued) pension asset (liability) $ 104 $ (8) - ------------------------------------------------------------=======================
P A G E 35 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- SFP uses a September 30 measurement date. The assumptions used in accounting for SFP's plans for 1995 were as follows: - --------------------------------------------------------------- Discount rate 7.5 % Rate of increase in compensation levels 4.0 % Expected long-term rate of return on plan assets 9.75% - --------------------------------------------------------------- BNSF sponsors 401(k) thrift and profit sharing plans through its subsidiaries, BNI and SFP, which cover substantially all non-union employees and certain union employees. BNI matches 35 percent of the first 6 percent of non-union employees' contributions, which is subject to certain percentage limits of the employees' earnings, at the end of each quarter. Depending on BNI's performance, an additional matching contribution of 20 to 40 percent can be made following the end of the year. SFP matches 100 percent of the first 4 percent of non-union employees' contributions and 25 percent of the first 4 percent of union employees' contributions. BNSF's expense was $13 million, $8 million and $6 million in 1995, 1994 and 1993, respectively. 15 Other postemployment benefit plans BNI provides life insurance benefits to eligible non-union employees. The life insurance plan is noncontributory and covers retirees only. Components of BNI's postretirement benefit cost were $1 million in each of three years ended December 31, 1995, 1994 and 1993, respectively. BNI's policy is to fund benefits payable under the life insurance plan as they come due. The following table presents the status of BNI's life insurance plan and the accrued postretirement benefit cost reflected in the consolidated balance sheets (in millions). BNI uses a December 31 measurement date.
- -------------------------------------------------------------- December 31, 1995 1994 - -------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $14 $11 Fully eligible active participants 1 1 Other active participants 2 2 - -------------------------------------------------------------- 17 14 Unrecognized net gain 1 4 - -------------------------------------------------------------- Accrued postretirement benefit cost $18 $18 - ----------------------------------------------------==========
The discount rate used in determining the benefit obligation was 7 percent at December 31, 1995 and 9 percent at December 31, 1994. Salaried employees of SFP who have rendered 10 years of service after attaining age 45 are eligible for both medical benefits and life insurance coverage during retirement. The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. Retiree contributions are adjusted annually. The plan also contains fixed deductibles, coinsurance and out-of-pocket limitations. The life insurance plan is noncontributory and covers retirees only. Components of the SFP's postretirement benefit cost from September 22, 1995 to December 31, 1995 relating to its medical and life insurance plans were as follows (in millions):
- ------------------------------------------------------------------- Life Insurance Medical Plan Plan - ------------------------------------------------------------------- Service cost $- $ 1 Interest cost 1 3 Net amortization and deferred amounts - (2) - ------------------------------------------------------------------- Net postretirement benefit cost $1 $ 2 - -----------------------------------------------------==============
SFP's policy is to fund benefits payable under the medical and life insurance plans as they come due. The following table shows the reconciliation of the plans' obligations to amounts accrued at December 31, 1995 (in millions). SFP uses a September 30 measurement date.
- ------------------------------------------------------------------- Life Insurance Medical Plan Plan - ------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $45 $130 Fully eligible active participants - 15 Other active participants 4 40 - ------------------------------------------------------------------- 49 185 Unrecognized net loss (2) (8) - ------------------------------------------------------------------- Accrued postretirement benefit cost $47 $177 - ----------------------------------------------------===============
For 1995, the assumed health care cost trend rate for managed care medical costs is 11 percent and is assumed to decrease gradually to 5 percent by 2006 and remain constant thereafter. For medical costs not in managed care, the assumed health care cost trend rate is 13 percent and is assumed to decrease gradually to 5 percent by 2006 and remain constant thereafter. Increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation for the medical plan by $16 million and the combined service and interest components of net periodic postretirement benefit cost recognized in 1995 by $2 million. For 1995, the weighted-average discount rate assumed in determining the accumulated postretirement benefit obligation was 7.5 percent and the assumed weighted-average salary increase was 4.0 percent. Other Plans Under collective bargaining agreements, BNSF participates in multiemployer benefit plans which provide certain postretirement health care and life insurance benefits for eligible union employees. Insurance premiums paid attributable to retirees, which are generally expensed as incurred, were $11 million in 1995 and $10 million in both 1994 and 1993. P A G E 3 6 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- 16 Preferred capital stock 6 1/4% Cumulative Convertible Preferred Stock, Series A, $.01 Par Value, authorized 25,000,000 shares--6,900,000 shares issued In November 1992, BNI issued 6,900,000 shares of 6 1/4% Cumulative Convertible Preferred Stock, Series A, No Par Value. The convertible preferred stock was not redeemable prior to December 26, 1995. On September 22, 1995, the outstanding BNI shares were converted to 6,878,607 shares of BNSF 6 1/4% Cumulative Convertible Preferred Stock, $.01 par value. On October 19, 1995, the BNSF board of directors voted to redeem BNSF's 6 1/4% Cumulative Convertible Preferred Stock, Series A, $.01 par value, effective December 26, 1995, at the redemption price of $52.1875 per share and declared a dividend which, when paid, was 74.65 cents per share (representing the normal quarterly dividend of 78.125 cents per share pro rated up to the effective redemption date) to holders of record on December 7, 1995. The dividend was paid on January 2, 1996. The majority of the holders of this preferred stock elected to convert their shares into BNSF common stock as BNSF's common stock price was significantly higher than the redemption price. As such, the cash payment for shares redeemed was not significant. Class A Preferred Stock, $.01 Par Value, Authorized 50,000,000 shares--Unissued At December 31, 1995, BNSF had available for issuance 50,000,000 shares of Class A Preferred Stock, $.01 Par Value. The Board of Directors has the authority to issue such stock in one or more series, to fix the number of shares and to fix the designations and the powers. 17 Common stock and additional paid-in capital BNSF is authorized to issue 300,000,000 shares of Common Stock, $.01 Par Value. At December 31, 1995, there were 149,605,217 shares of common stock outstanding. Each holder of common stock is entitled to one vote per share in the election of directors and on all matters submitted to a vote of stockholders. Subject to the rights and preferences of any future issuance of preferred stock, each share of common stock is entitled to receive dividends as may be declared by the Board of Directors out of funds legally available and to share ratably in all assets available for distribution to stockholders upon dissolution or liquidation. No holder of common stock has any preemptive right to subscribe for any securities of BNSF. Pursuant to the terms of the Merger Agreement, on September 22, 1995, BNSF issued 141,866,851 shares of common stock, $.01 par value, of which 89,862,751 shares were exchanged for the outstanding shares of BNI common stock and 52,004,100 were exchanged for the outstanding shares of SFP common stock, excluding the SFP common stock acquired by BNI in the Tender Offer. 18 Stock options, other incentive plans and other stockholders' equity Stock options Under BNSF's stock option plans, options may be granted to officers and salaried employees at fair market value on the date of grant. Approximately 4.3 million shares were available for future grant at December 31, 1995. All options expire within 10 years after the date of grant.
Activity in stock option plans was as follows: - --------------------------------------------------------------------------- Exercise Price Options per Share - --------------------------------------------------------------------------- Balance at December 31, 1992 3,251,324 $10.32 to $44.24 Granted 947,125 55.56 to 55.94 Exercised (508,476) 10.32 to 44.24 Cancelled (54,882) 22.50 to 55.94 - ------------------------------------------------- Balance at December 31, 1993 3,635,091 12.49 to 55.94 Granted 752,690 53.69 to 55.94 Exercised (184,088) 12.49 to 55.94 Cancelled (83,962) 20.48 to 55.94 - ------------------------------------------------- Balance at December 31, 1994 4,119,731 15.26 to 55.94 Granted 1,026,414 52.00 to 82.25 Conversion of SFP stock options 5,342,024 7.36 to 73.88 Exercised (821,769) 7.36 to 59.38 Cancelled (67,747) 12.69 to 59.38 - ------------------------------------------------- Balance at December 31, 1995 9,598,653 7.36 to 82.25 Exercisable at December 31: 1995 7,465,135 $ 7.36 to $59.38 1994 2,950,427 15.26 to 55.94 1993 2,153,170 12.49 to 44.24 - ---------------------------------------------------------------------------
Shares issued upon exercise of options may be issued from treasury shares or from authorized but unissued shares. All stock options outstanding at February 7, 1995 became exercisable upon approval of the Merger by BNI and SFP stockholders. P A G E 3 7 BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------- Other incentive plans BNI and SFP have various other incentive plans, in addition to stock options, which are administered separately on behalf of employees from each of the combined companies. BNI has restricted stock award plans under which up to 1,700,000 common shares may be awarded to eligible employees and directors. No cash payment is required by the individual. Shares awarded under the plan may not be sold, transferred or used as collateral by the holder until the shares awarded become free of the restrictions, generally by one-third on the third, fourth and fifth anniversaries of the date of grant. All shares still subject to restrictions are generally forfeited and returned to the plan if the employee or director's relationship is terminated. If the employee or director retires, becomes disabled or dies, the restrictions will lapse at that time. Restricted stock awards under these plans, net of forfeitures, were 243,631, 177,670 and 232,354 shares in 1995, 1994 and 1993, respectively. A total of 141,621, 780,694 and 870,525 restricted common shares were outstanding at December 31, 1995, 1994 and 1993, respectively. As a result of the Merger, outstanding restricted shares became fully vested in February 1995 resulting in $24 million operating expense reflected in merger, severance and asset charges. Compensation expense for 1994 and 1993 was not significant. Additionally, BNI adopted an employee stock purchase plan in 1992, effective in 1993, as a means to encourage employee ownership of BNSF common stock. A total of 500,000 shares of common stock were authorized for distribution under this plan. The plan allows eligible BNSF employees to use the proceeds of incentive compensation awards to purchase shares of BNSF common stock at a discount from the market price and may require that the shares purchased be held for a specific time period. The difference between the market price and the employees' purchase price is recorded as additional compensation expense. During the years ended December 31, 1995, 1994 and 1993, 39,421, 31,832 and 34,629 shares were purchased under this plan. The related compensation expense was not significant. BNI also has a stock award plan which provides for grants of shares of BNSF's common stock to full-time employees, excluding officers, based upon performance. A total of 100,000 shares of common stock has been authorized for these awards. During the years ended December 31, 1995, 1994 and 1993, 2,965, 3,900 and 5,540 shares were awarded under this plan. The related compensation expense was not significant. Under the SFP Long Term Incentive Stock Plan (Long Term Plan), 67,632 restricted shares of BNSF common stock resulted from the conversion of existing SFP restricted shares upon consummation of the Merger. No new grants were awarded and forfeitures of 1,254 shares occurred during the period from September 22, 1995 to December 31, 1995. The restrictions on these shares generally lapse upon attaining certain corporate performance objectives, completing a required vesting period. A total of 64,477 restricted common shares were outstanding at December 31, 1995. Other stockholders' equity As a result of the Merger, certain investments in third parties held by both BNI and SFP, which were previously recorded on the cost method, were converted to the equity method due to BNSF's combined ownership position and ability to exercise significant influence. As such, $26 million, which is net of deferred taxes of $17 million, was recorded as an increase to retained earnings to reflect BNI's undistributed equity in earnings since initial investment. SFP's investments were adjusted to fair value upon the application of purchase accounting. P A G E 3 8
BURLINGTON NORTHERN SANTA FE - -------------------------------------------------------------------------------------------------------------------------- 19 Quarterly financial data - unaudited (Dollars in millions, except per share data) Fourth Third Second First 1995 Revenues $ 2,092 $ 1,460 $ 1,284 $ 1,347 Operating income (loss)/(1)(3)/ (175) 254 242 205 Income (loss) before extraordinary item and cumulative effect of change in accounting method (160) 133 124 101 Extraordinary item, loss on early retirement of debt, net of tax/(2)/ (6) -- -- -- Cumulative effect of change in accounting method, net of tax/(3)/ -- -- -- (100) - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (166) $ 133 $ 124 $ 1 - -------------------------------------------------------------------------------------------------------------------------- Primary earnings (loss) per common share:/(4)/ Income (loss) before extraordinary item and change in accounting method $ (1.15) $ 1.32 $ 1.31 $ 1.05 Extraordinary item (0.04) -- -- -- Change in accounting method -- -- -- (1.11) - -------------------------------------------------------------------------------------------------------------------------- Primary earnings (loss) per common share $ (1.19) $ 1.32 $ 1.31 $ (0.06) - -------------------------------------------------------------------------------------------------------------------------- Fully diluted earnings (loss) per common share:/(4)/ Income (loss) before extraordinary item and change in accounting method $ (1.15) $ 1.28 $ 1.26 $ 1.05 Extraordinary item (0.04) -- -- -- Change in accounting method -- -- -- (1.11) - -------------------------------------------------------------------------------------------------------------------------- Fully diluted earnings (loss) per common share $ (1.19) $ 1.28 $ 1.26 $ (0.06) - -------------------------------------------------------------------------------------------------------------------------- Dividends declared per common share $ .30 $ .30 $ .30 $ .30 Common stock price: High $83 7/8 $76 1/4 $63 5/8 $60 1/8 Low 71 1/4 62 5/8 56 1/8 47 1/2 - -------------------------------------------------------------------------------------------------------------------------- 1994 Revenues $ 1,344 $ 1,249 $ 1,192 $ 1,210 Operating income 264 229 178 182 Income before cumulative effect of change in accounting method 142 115 82 87 Cumulative effect of change in accounting method, net of tax/(5)/ -- -- -- (10) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 142 $ 115 $ 82 $ 77 - -------------------------------------------------------------------------------------------------------------------------- Primary earnings (loss) per common share: Income before change in accounting method $ 1.51 $ 1.22 $ .85 $ .90 Change in accounting method -- -- -- (.11) - -------------------------------------------------------------------------------------------------------------------------- Primary earnings per common share $ 1.51 $ 1.22 $ .85 $ .79 - -------------------------------------------------------------------------------------------------------------------------- Fully diluted earnings (loss) per common share: Income before change in accounting method $ 1.46 $ 1.18 $ .84 $ .90 Change in accounting method -- -- -- (.11) - -------------------------------------------------------------------------------------------------------------------------- Fully diluted earnings per common share $ 1.46 $ 1.18 $ .84 $ .79 - -------------------------------------------------------------------------------------------------------------------------- Dividends declared per common share $ .30 $ .30 $ .30 $ .30 Common stock price: High $51 5/8 $53 5/8 $60 1/8 $66 Low 46 5/8 48 1/4 52 1/2 56 3/4 - --------------------------------------------------------------------------------------------------------------------------
(1) Results include pre-tax charges of $587 million, $106 million, $10 million and $32 million for the fourth, third, second and first quarters of 1995, respectively related to merger, severance and asset charges as discussed in Note 3. (2) Results for the fourth quarter include the loss on defeasance of BNI 9% debentures of $6 million, net of $3 million income tax benefit, or $.04 per share, treated as an extraordinary item. (3) Effective January 1, 1995, BNSF changed its accounting for locomotive overhauls. The cumulative effect of this change attributable to years prior to 1995 was to decrease net income by $100 million, or $1.11 per share. Additionally, first, second and third quarter results were restated for the impact of the change on 1995 by reducing operating income, net income and both primary and fully diluted per share amounts as follows: first quarter--$12 million, $7 million and $.09; second quarter--$9 million, $6 million and $.06; and third quarter--$11 million, $6 million and $.06, respectively. (4) Fully diluted earnings per share are antidilutive for the first and fourth quarters of 1995; therefore, the amounts reported for primary and fully diluted earnings per share are the same. Amounts may not total to the annual earnings per share because each quarter and the year are calculated separately based on average outstanding shares and common share equivalents during that period. (5) Effective January 1, 1994, BNSF adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of this change attributable to years prior to 1994, was to decrease net income by $10 million, or $.11 per common share. P A G E 39 EX-18 19 LETTER FROM COOPERS & LYBRAND Exhibit 18 February 15, 1996 Mr. Denis E. Springer Senior Vice President and Chief Financial Officer Burlington Northern Santa Fe Corporation 1700 East Golf Road Schaumburg, Illinois 60173-5860 Dear Mr. Springer: We are providing this letter to you for inclusion as an exhibit to the Burlington Northern Santa Fe Company (the Company) Form 10-K filing pursuant to Item 601(18) of Regulation S-K. We have read management's justification for the change in accounting from the expensing of locomotive overhaul costs as incurred to the capitalization/accrual of such costs and depreciating/amortizing them over their estimated period of future benefit as contained in the Company's Report on Form 10-K for the year ended December 31, 1995. Based on our reading of the data and discussions with Company officials of the business judgment relating to the change, we believe management's justification to be reasonable. Accordingly, in reliance on management's determination as regards elements of business judgment, we concur that the newly adopted accounting principle described above is preferable in the Company's circumstances to the method previously applied. Very truly yours, COOPERS & LYBRAND L.L.P. EX-21 20 SUBSIDIARIES OF BURLINGTON NORTHERN INC. Exhibit 21 BURLINGTON NORTHERN SANTA FE CORPORATION ---------------------------------------- BURLINGTON NORTHERN INC. ------------------------ SANTA FE PACIFIC CORPORATION ---------------------------- SUBSIDIARIES OF BURLINGTON NORTHERN INC. ----------------------------------------
BN LEASING CORPORATION (DE) 100% - ---------------------- BURLINGTON NORTHERN INTERNATIONAL SERVICES, INC. (DE) 100% - ------------------------------------------------ BURLINGTON NORTHERN - MEXICO INC. (DE) 100% - --------------------------------- BURLINGTON NORTHERN RAILROAD COMPANY (DE) 100% - ------------------------------------ THE BELT RAILWAY COMPANY OF CHICAGO (IL) 8.3% BURLINGTON NORTHERN DOCK CORPORATION (DE) 100% BURLINGTON NORTHERN (MANITOBA) LIMITED (MANITOBA) 100% BURLINGTON NORTHERN RAILROAD HOLDINGS, INC. (DE) 100% BURLINGTON NORTHERN WORLDWIDE, INC. (DE) 100% CAMAS PRAIRIE RAILROAD COMPANY (OR) 50% ELECTRO NORTHERN, INC. (DE) 100% HOUSTON BELT & TERMINAL RAILWAY COMPANY (TX) 24% IOWA TRANSFER RAILWAY COMPANY (IA) 25% KANSAS CITY TERMINAL RAILWAY COMPANY (MO) 16.67% LONGVIEW SWITCHING COMPANY (WA) 50% M T PROPERTIES, INC. (MN) 37.8% NORTHERN RADIO LIMITED (BRITISH COLUMBIA) 100% PADUCAH & ILLINOIS RAILROAD COMPANY (KY) 33.3% PORTLAND TERMINAL RAILROAD COMPANY (OR) 40% TERMINAL RAILROAD ASSOCIATION OF ST. LOUIS (MO) 14.3% TTX COMPANY (DE) 6.2% WESTERN FRUIT EXPRESS COMPANY (DE) 100% THE WICHITA UNION TERMINAL RAILWAY COMPANY (KS) 33% WINONA BRIDGE RAILWAY COMPANY (MN) 100% BURLINGTON NORTHERN RELOCATION SERVICES INC. (TX) 100% - -------------------------------------------- INB CORP. (NV) 100% - --------- M-R HOLDINGS ACQUISITION COMPANY (DE) 100% - -------------------------------- MIDWEST/NORTHWEST PROPERTIES INC. (DE) 100% - ---------------------------------
SUBSIDIARIES OF SANTA FE PACIFIC CORPORATION --------------------------------------------
PINE CANYON LAND COMPANY (DE) 100% - ------------------------ SANTA FE PACIFIC INSURANCE COMPANY (VT) 100% - ----------------------------------- THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY (DE) 100% - ------------------------------------------------- ALAMEDA BELT LINE (CA) 50% AUBREY WATER COMPANY (DE) 100% THE BELT RAILWAY COMPANY OF CHICAGO (IL) 8.33% CENTRAL CALIFORNIA TRACTION COMPANY (CA) 33.3% THE DODGE CITY AND CIMARRON VALLEY RAILWAY COMPANY (KS) 100% THE GULF AND INTER-STATE RAILWAY COMPANY OF TEXAS (TX) 100% HOUSTON BELT & TERMINAL RAILWAY COMPANY (TX) 25% KANSAS CITY TERMINAL RAILWAY COMPANY (MO) 8.33% LOS ANGELES JUNCTION RAILWAY COMPANY (CA) 100% THE OAKLAND TERMINAL RAILWAY (CA) 50% OKLAHOMA CITY JUNCTION RAILWAY COMPANY (OK) 100% RIO GRANDE, EL PASO AND SANTA FE RAILROAD COMPANY (TX) 100% ST. JOSEPH TERMINAL RAILROAD COMPANY (MO) 50% SANTA FE FORWARDING COMPANY (DE) 100% SANTA FE RAIL EQUIPMENT COMPANY (DE) 100% SANTA FE RECEIVABLES CORPORATION (DE) 100% SANTA FE TERMINAL SERVICES, INC. (DE) 100% STAR LAKE RAILROAD COMPANY (DE) 100% SUNSET RAILWAY COMPANY (CA) 50% TEXAS CITY TERMINAL RAILWAY COMPANY (TX) 33.3% TTX COMPANY (DE) 10.9% THE WICHITA UNION TERMINAL RAILWAY COMPANY (KS) 33.3% CONSTELLATION 130, INC. (CA) 100% - ----------------------- LIMITED PARTNERSHIP MANAGEMENT,INC. (DE) 100% - ----------------------------------- SANTA FE PACIFIC RAILROAD COMPANY (ACT OF CONGRESS) 100% - --------------------------------- SFP PIPELINE HOLDINGS, INC. (DE) 100% - --------------------------- SANTA FE PACIFIC PIPELINES, INC. (DE) 100% SUNSET COMMUNICATIONS COMPANY (DE) 100% - ----------------------------- WALKER-KURTH LUMBER COMPANY (TX) 100% - --------------------------- THE ZIA COMPANY (DE) 100% - ---------------
EX-23 21 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Burlington Northern Santa Fe Corporation on Form S-8 (File Nos. 33-62823, 33-62825, 33-62827, 33-62829, 33-62831, 33-62833, 33-62835, 33-62837, 33-62839, 33-62841, 33-62943, 33-63247, 33-63249, 33-63253, 33-63255) and Form S-3 (File No. 33-64209) of our reports dated February 15, 1996, on our audits of the consolidated financial statements and financial statement schedule of Burlington Northern Santa Fe Corporation as of December 31, 1995, 1994 and 1993, which reports are included in or incorporated by reference in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Fort Worth, Texas March 29, 1996 EX-24 22 POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY WHEREAS, BURLINGTON NORTHERN SANTA FE CORPORATION, a Delaware corporation (the "Company"), will file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995; and WHEREAS, the undersigned serve the Company in the capacity indicated; NOW, THEREFORE the undersigned hereby constitutes and appoints DENIS E. SPRINGER and JEFFREY R. MORELAND, his attorney with full power to act for him in his name, place and stead, to sign his name in the capacity set forth below, to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1995, and to any and all amendments to such Annual Report on Form 10-K, and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been executed by the undersigned this 22nd day of March, 1996. /s/ Joseph F. Alibrandi /s/ Jack S. Blanton - --------------------------------- -------------------------------- Joseph F. Alibrandi, Director Jack S. Blanton, Director /s/ John J. Burns, Jr. /s/ Daniel P. Davison - --------------------------------- -------------------------------- John J. Burns, Jr., Director Daniel P. Davison Chairman of the Board, Director /s/ George Deukmejian /s/ Daniel J. Evans - --------------------------------- -------------------------------- George Deukmejian, Director Daniel J. Evans, Director /s/ Robert D. Krebs /s/ Bill M. Lindig - --------------------------------- -------------------------------- Robert D. Krebs, President and Bill M. Lindig, Director Chief Executive Officer, and Director /s/ Ben F. Love /s/ Roy S. Roberts - --------------------------------- -------------------------------- Ben F. Love, Director Roy S. Roberts, Director /s/ Marc J. Shapiro /s/ Arnold R. Weber - --------------------------------- -------------------------------- Marc J. Shapiro, Director Arnold R. Weber, Director /s/ Robert H. West /s/ J. Steven Whisler - --------------------------------- -------------------------------- Robert H. West, Director J. Steven Whisler, Director /s/ Edward E. Whitacre, Jr. /s/ Ronald B. Woodard - --------------------------------- -------------------------------- Edward E. Whitacre, Jr., Director Ronald B. Woodard, Director /s/ Michael B. Yanney - --------------------------------- Michael B. Yanney, Director EX-27 23 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Burlington Northern Santa Fe Corporation's Consolidated Financial Statements and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 50 0 670 50 220 1,264 20,334 4,333 18,269 2,369 4,153 1 0 0 5,036 18,269 0 6,183 0 5,657 0 0 220 334 136 198 0 (6) (100) 92 .67 .67
EX-99 24 LEGAL PROCEEDINGS EXHIBIT 99 ITEM 3. LEGAL PROCEEDINGS. EAST LINE CIVIL LITIGATION AND FERC PROCEEDING In August 1992, two East Line refiners, Navajo Refining Company ("Navajo") and El Paso Refinery, L.P. ("El Paso"), filed separate, though similar, civil lawsuits (the "East Line Civil Litigation") against the Partnership arising from the Partnership's alleged failure to provide additional pipeline capacity to Phoenix and Tucson, Arizona from El Paso, Texas. The Navajo action also sought an injunction to prohibit the Partnership from reversing the direction of flow (from westbound to eastbound) of its six-inch diameter pipeline between Phoenix and Tucson. In addition, El Paso filed a protest/complaint with the FERC in September 1992 seeking to block the reversal of the six-inch pipeline and challenging the Partnership's proration policy as well as the Partnership's existing East Line rates (the "FERC Proceeding"). EAST LINE CIVIL LITIGATION The civil actions brought by Navajo and El Paso (El Paso Refining, Inc., and El Paso Refinery, L.P. v. Santa Fe Pacific Pipelines, Inc. and Santa Fe Pacific Pipeline Partners, L.P., No. 92-9144, County Court No. 5, El Paso County, filed August 1992) were filed in New Mexico and Texas, respectively, seeking actual, punitive and consequential damages arising from the Partnership's alleged failure to provide additional pipeline capacity to Phoenix and Tucson from El Paso. Generally, the lawsuits allege that the refiners proceeded with significant refinery expansions under the belief that the Partnership would provide additional pipeline capacity to transport their product into Arizona, and that they were damaged by their inability to ship additional volumes into that highly competitive market. This belief of Navajo and El Paso was purportedly based on alleged oral representations made by General Partner personnel and from language contained in a January 1989 settlement agreement with Navajo, relating to a 1985 FERC rate case. On July 28, 1993, the Partnership reached a settlement with Navajo whereby Navajo agreed to dismiss its pending civil litigation in New Mexico and to withdraw any challenge to the direction of flow of the six-inch pipeline, including any such challenge in the FERC proceeding. The Partnership agreed to make certain cash payments to Navajo over three years and to undertake and complete an additional pipeline capacity expansion between El Paso and Phoenix if certain events related to volume levels and proration of pipeline capacity should occur within five years of the date of the agreement. El Paso's August 1992 civil action, as amended, claims unspecified actual damages, which appear to include the $190 million cost of its refinery expansion, plus punitive and consequential damages. In addition, on October 4, 1995, El Paso's general partner, El Paso Refining, Inc. ("EPRI"), filed a Second Amended Petition seeking unspecified damages arising from alleged unfulfilled representations of Partnership management with respect to future East Line capacity, alleging that such representations had been relied upon in negotiating the terms by which EPRI exchanged its refinery assets for ownership interests in El Paso in 1989. In October 1992, El Paso filed a petition for reorganization under Chapter 11 of the federal bankruptcy laws and halted refinery operations. In November 1993, the El Paso bankruptcy was converted from a Chapter 11 to a Chapter 7 proceeding. During 1994, the bankruptcy trustee for El Paso retained legal counsel for purposes of pursuing this litigation. Initial rounds of written discovery and witness depositions were conducted by both parties in late-1994 and in 1995, and discovery will continue in 1996. To date, there have been no hearings before the court and there is no pre-trial schedule. Management anticipates that this matter will not come to trial prior to mid-1997. The Partnership believes that the allegations of El Paso and EPRI are without merit and intends to vigorously defend itself in this action. FERC PROCEEDING At various points following El Paso's September 1992 filing, other customers of the Partnership, including Chevron U.S.A. Products Company ("Chevron"), Navajo, ARCO Products Company ("ARCO"), Texaco Refining and Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a partnership formed by El Paso's long-term secured creditors that purchased El Paso's refinery in May 1993), Mobil Oil Corporation and Tosco Corporation, have filed separate complaints challenging, and/or motions to intervene in proceedings initiated by others challenging, the Partnership's rates on its East and West Lines and, in certain cases, also claiming that a gathering enhancement charge at the Partnership's Watson, California pump station is in violation of the Interstate Commerce Act. In subsequent procedural rulings, the FERC has consolidated these challenges and ruled that they must proceed as a complaint proceeding, with the burden of proof being placed on the complaining parties, who must show that the Partnership's rates and practices at issue violate the requirements of the Interstate Commerce Act. In December 1995, Texaco filed a new complaint concerning charges associated with the use of the Partnership's Watson, California gathering enhancement facilities and of certain lines upstream of its Watson station origin point, and ARCO filed a similar complaint on January 16, 1996. Texaco and ARCO have asked that these complaints not be consolidated with the other proceedings described above. The Partnership has denied the allegations in these complaints. In June 1994, the complainants filed their cases-in-chief with the FERC, seeking reparations for shipments between 1990 and 1993 aggregating in the range of $15 million to $20 million, as well as tariff rate reductions of between 40% and 50% for future shipments. In August 1994, the FERC Staff submitted its case-in-chief in the FERC proceeding, employing rate-making methodologies similar in several respects to those presented by the complainants. In subsequent filings, the complainants revised their requested relief to seek reparations for shipments between 1990 and 1994 aggregating approximately $35 million, as well as rate reductions of between 30% and 40% for shipments in 1995 and thereafter. Both the FERC Staff and several of the complainants argued, among other things, against the Partnership's entitlement to an income tax allowance in its cost of service. They also utilized the Partnership's capital structure at the time of its formation in December 1988, or a hypothetical capital structure, for the purpose of establishing the Partnership's 1985 starting rate base under FERC Opinion 154-B. In addition, the FERC Staff and the complainants would generally exclude most or all of the Partnership's civil and regulatory litigation expense from its cost of service calculations. Each of these positions is adverse to the Partnership's position regarding its existing rate structure. On June 15, 1995, the FERC issued a decision in an unrelated rate proceeding involving Lakehead Pipe Line Company, Limited Partnership ("Lakehead"), ruling that Lakehead, which is also a publicly traded partnership engaged in oil pipeline transportation, may not include an income tax allowance in its cost of service with respect to partnership income that is attributable to limited partnership interests held by individuals. In July 1995, Lakehead requested rehearing of the decision by the FERC, and that request is currently pending. Should this ruling be upheld and applied in the Partnership's rate proceeding, the Partnership believes it would currently allow the Partnership to include a substantial portion of the Partnership's income tax allowance in its cost of service, rather than the full entitlement that was reflected in the Partnership's case-in-chief and subsequent testimony in its FERC proceeding. Management intends to vigorously defend its entitlement to a full income tax allowance in its cost of service. Successive rounds of testimony have been filed by the respective parties, including the Partnership, regarding the above summarized issues and other matters relevant to the appropriateness of the Partnership's tariffs and rates. Among other things, certain of the parties submitted revised cases based on the Partnership's 1994 costs and revenues. The Partnership's surrebuttal presentation responded to those cases, defending the Partnership's current rates based on 1994 data, with certain normalizing adjustments including a significant adjustment to reflect an extensive pipe reconditioning program that was begun in 1994. The present procedural schedule calls for hearings before the FERC Administrative Law Judge to commence in April 1996, with an initial decision not expected before late 1996 or early 1997. The Energy Policy Act of 1992 ("EPACT") established as "just and reasonable" existing oil pipeline rates that were in effect without challenge for 365 days prior to the bill's enactment in October 1992, with an exception being allowed for parties, such as Navajo, that were prohibited from filing challenges during that period due to the terms of settlement agreements. In October 1993, with respect to Chevron's complaint, the FERC ruled that the Partnership's West Line rates are deemed "just and reasonable" under EPACT (i.e., are "grandfathered") and may only be challenged upon a showing of a substantial change in the economic circumstances which were a basis for the rate ("changed circumstances"). In December 1994, ARCO, Texaco and Chevron filed testimony in which they sought to demonstrate the required "changed circumstances" in order to challenge the Partnership's West Line rates, citing such factors as increased West Line volumes. On April 20, 1995, the United States Court of Appeals for the District of Columbia Circuit dismissed petitions for review of the FERC's grandfathering rulings that had been filed by ARCO and Texaco, on the ground that those rulings are not yet final orders and, therefore, are not yet subject to judicial review. The Partnership believes that its rates and practices are lawful under FERC precedent and will continue its vigorous defense of that position. However, because of the complexity of the issues involved and the nature of FERC rate- making methodology, which is subject to interpretation and leaves certain issues for determination on a case-by-case basis, it is possible that the rates at issue in the FERC proceeding will not ultimately be upheld. If the FERC were to reach adverse decisions on the issues in the proceeding which result in significant reparations being paid and a significant reduction in the Partnership's current tariffs, such adverse outcome could have a material adverse effect on the Partnership's results of operations, financial condition and ability to maintain its quarterly cash distribution at the current level. -----END PRIVACY-ENHANCED MESSAGE-----