-----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, TEDUY/oplAix2BU2Nj9QkDN59ka8YDKnpVE4CqbtXaOLVDQLyDm03qxfA39PAIeF XubPLX+QWgSQIFYNNTpKbg== 0000277948-99-000002.txt : 19990317 0000277948-99-000002.hdr.sgml : 19990317 ACCESSION NUMBER: 0000277948-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981225 FILED AS OF DATE: 19990303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSX CORP CENTRAL INDEX KEY: 0000277948 STANDARD INDUSTRIAL CLASSIFICATION: 4011 IRS NUMBER: 621051971 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-63273 FILM NUMBER: 99556539 BUSINESS ADDRESS: STREET 1: ONE JAMES CNTR STREET 2: 901 E CARY ST CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8047821400 10-K405 1 UNITED STATES 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 For the fiscal year ended December 25, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-8022 CSX CORPORATION (Exact name of registrant as specified in its charter) Virginia 62-1051971 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 901 East Cary Street, Richmond, Virginia 23219-4031 (Address of principal executive offices) (Zip Code) (804) 782-1400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered ------------------ ------------------------------------ Common Stock, $1 Par Value New York 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 requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. ( ) On January 22, 1999, the aggregate market value of the Registrant's voting stock held by non-affiliates was approximately $9 billion (based on the New York Stock Exchange closing price on such date). On January 22, 1999, there were 217,040,908 shares of Common Stock outstanding. Portion of Form 10-K into which Documents Incorporated by Reference Documents are Incorporated ----------------------------------- -------------------------- 1. Portions of the Registrant's Annual Report to Part I, II & IV Shareholders for the fiscal year ended December 25, 1998 ("Annual Report") 2. Portions of the Registrant's Definitive Proxy Part III Statement to be filed with respect to its annual meeting of shareholders scheduled to be held on April 27, 1999 ("Proxy Statement") -1- PART I Item 1. Business In response to this Item, the information set forth on page 1 under the caption "Financial Highlights", page 7 under the caption "CSX Transportation", page 9 under the caption "CSX Intermodal", page 11 under the caption "Sea-Land", page 13 under the caption "Customized Transportation" and pages 19-29 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Annual Report is incorporated herein by reference. Item 2. Properties In response to this Item, the information set forth on pages 19-29 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", page 34 under the caption "Properties" and page 39 under the caption "Note 8. Properties." of the Annual Report is incorporated herein by reference. Item 3. Legal Proceedings In response to this Item, the information set forth on pages 27-28 under the captions "Litigation" and "Environmental Management", page 45 under the caption "New Orleans Tank Car Fire" and page 46 under the captions "Environmental" and "Other Legal Proceedings" of the Annual Report is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders in the fourth quarter of 1998. Executive Officers of the Registrant Executive officers of CSX Corporation are elected by the CSX Board of Directors and hold office until the next annual election of officers. Officers of CSX business units are elected annually by the respective Boards of Directors of the business units. There are no family relationships or any arrangement or understanding between any officer and any other person pursuant to which such officer was selected. Name and Age Business Experience During Past 5 Years - - -------------------------------------------------------------------------------- John W. Snow, 59 Chairman, President and Chief Executive Officer of CSX since February 1991. Mark G. Aron, 56 Executive Vice President-Law and Public Affairs of CSX since April 1995. Prior to April 1995, Mr. Aron served as CSX Senior Vice President- Law and Public Affairs. Paul R. Goodwin, 56 Executive Vice President-Finance and Chief Financial Officer of CSX since April 1995. Prior to April 1995, Mr. Goodwin served as an officer of CSXT as Executive Vice President- Finance & Administration from February 1995 to April 1995, and prior thereto as Senior Vice President-Finance. -2- Andrew B. Fogarty, 54 Senior Vice President-Corporate Services of CSX since September 1997. Prior to September 1997, Mr. Fogarty served as Senior Vice President- Finance and Planning, Sea-Land, from June 1996 to August 1997; as CSX Vice President-Audit and Advisory Services from March 1995 to June 1996; and prior thereto as CSX Vice President- Executive Department. Jesse R. Mohorovic, 56 Group Vice President-Corporate Communications and Investor Relations since April 1998. Prior to April 1998, Mr. Mohorovic served as CSX Vice President-Corporate Relations from February 1995 to April 1998; as Vice President- Corporate Communications, CSXT, from April 1994 to February 1995; and prior thereto as Vice President-Corporate Communications, Sea-Land. James L. Ross, 60 Vice President and Controller of CSX since April 1996. Prior to April 1996, Mr. Ross served as CSX Vice President-Special Projects from October 1995 to April 1996, and prior thereto as Audit Partner with Ernst & Young LLP. Gregory R. Weber, 53 Vice President and Treasurer of CSX since April 1996. Prior to April 1996, Mr. Weber served as CSX Vice President, Controller and Treasurer, from May 1994 to April 1996, and prior thereto as Vice President and Controller. Alvin R. (Pete) Carpenter, 57 President and Chief Executive Officer of CSXT since January 1992. Ronald J. Conway, 54 Executive Vice President-Operations of CSXT since June 1998. Prior to June 1998, Mr. Conway served as Senior Vice President-Operations of Conrail Inc. Michael J. Ward, 48 Executive Vice President-Coal & Merger Planning of CSXT since October 1998. Prior to October 1998, Mr. Ward served as an officer of CSXT as Executive Vice President-Finance and Chief Financial Officer from June 1996 to October 1998; as Senior Vice President-Finance from April 1995 to May 1996; and prior thereto as General Manager-C&O Business Unit. John P. Clancey, 54 President and Chief Executive Officer of Sea-Land since August 1991. Robert J. Grassi, 52 Senior Vice President-Finance and Planning of Sea-Land since August 1997. Prior to August 1997, Mr. Grassi served as Sea-Land Senior Vice President-Atlantic, AME Services from June 1996 to August 1997, and prior thereto as Senior Vice President -Finance and Planning. Richard E. Murphy, 54 Senior Vice President-Pacific Division of Sea-Land since August 1998. Prior to August 1998, Mr. Murphy served as Sea- -3- Land Senior Vice President-Corporate Marketing from June 1996 to August 1998; Vice President-Atlantic-AME from 1995 to June 1996; and prior thereto as Senior Vice President- Pacific Services. Charles G. Raymond, 55 Senior Vice President and Chief Transportation Officer of Sea-Land since May 1995. Prior to May 1995, Mr. Raymond served as Sea-Land Senior Vice President-Operations and Inland Transportation. Lester M. Passa, 44 President and CEO of CSX Intermodal since November 1997. Prior to November 1997, Mr. Passa served as CSXT Vice President-Commercial Integration from July 1997 to November 1997, and prior thereto as an officer of Conrail Inc. as Senior Vice President-Automotive Service Group from February 1997 to July 1997, as Vice President-Logistics & Corporate Strategy from March 1995 to February 1997, and prior thereto as Assistant Vice President-Corporate Strategy. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters In response to this Item, the information set forth on pages 51-52 of the Annual Report is incorporated herein by reference. Item 6. Selected Financial Data In response to this Item, the information set forth on page 1 of the Annual Report under the caption "Financial Highlights" is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In response to this Item, the information set forth on pages 19-29 of the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. Item 7A.Quantitative and Qualitative Disclosures about Market Risk In response to this Item, the information set forth on page 25 of the Annual Report under the caption "Market Risk" is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data In response to this Item, the information set forth on pages 30-49 and page 52 under the caption "Quarterly Financial Data" of the Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -4- PART III Item 10.Directors and Executive Officers of the Registrant In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement, except for the information regarding the executive officers of the Registrant which is included in Part I of this report under the caption "Executive Officers of the Registrant." Item 11.Executive Compensation In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement. Item 12.Security Ownership of Certain Beneficial Owners and Management In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement. Item 13.Certain Relationships and Related Transactions In accordance with Instruction G(3) of Form 10-K, the information required by this Item is incorporated herein by reference to the Proxy Statement. PART IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements The following consolidated financial statements and independent auditor's report, which appear on pages 30-49 of the Annual Report, are incorporated herein by reference: Consolidated Statement of Earnings for the Fiscal Years Ended Dec. 25, 1998, Dec. 26, 1997 and Dec. 27, 1996 Consolidated Statement of Cash Flows for the Fiscal Years Ended Dec. 25, 1998, Dec. 26, 1997 and Dec. 27, 1996 Consolidated Statement of Financial Position at Dec. 25, 1998 and Dec. 26, 1997 Consolidated Statement of Changes in Shareholders' Equity for the Fiscal Years Ended Dec. 25, 1998, Dec. 26, 1997 and Dec. 27, 1996 Notes to Consolidated Financial Statements for the Fiscal Years Ended Dec. 25, 1998, Dec. 26, 1997 and Dec. 27, 1996 Report of Independent Auditors -5- (2) Financial Statement Schedules The information required by Schedule II is included in Note 9 to the consolidated financial statements. All other financial statement schedules are not applicable. (3) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference as Exhibit 3 to the Registrant's Annual Report on Form 10-K dated February 15, 1991) 3.2* Bylaws of the Registrant, as amended 4.1(a) Indenture, dated August 1, 1990, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to the Registrant's Form SE dated September 7, 1990) 4.1(b) First Supplemental Indenture, dated as of June 15, 1991, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4(c) to the Registrant's Form SE, dated May 28, 1992, filed with the Commission) 4.1(c) Second Supplemental Indenture, dated as of May 6, 1997, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-28523) filed with the Commission on June 5, 1997) 4.1(d) Third Supplemental Indenture, dated as of April 22, 1998, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Commission on May 12, 1998) Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments that define the rights of holders of the Registrant's long-term debt securities, where the long-term debt securities authorized under each such instrument do not exceed 10% of the Registrant's total assets, have been omitted and will be furnished to the Commission upon request. 10.1 CSX Stock Plan for Directors, as amended (incorporated herein by reference to Appendix A to the Definitive Proxy Statement dated March 18, 1997)** 10.2 Corporate Director Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.3 CSX Directors' Charitable Gift Plan, as amended (incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K dated March 4, 1994)** 10.4 CSX Directors' Matching Gift Plan, as amended (incorporated herein by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K dated March 14, 1997)** 10.5 Form of Agreement with J. W. Snow, A. R. Carpenter, P. R. Goodwin and G. L. Nichols (incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 3, 1995)** 10.6 Form of Amendment to Agreement with A. R. Carpenter, P. R. Goodwin and G. L. Nichols (incorporated herein by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K dated March 14, 1997)** 10.7 Form of Retention Agreement with A. R. Carpenter (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K dated February 28, 1992)** -6- 10.8 Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K dated March 4, 1994)** 10.9 Amendment to Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K dated March 14, 1997)** 10.10 Amendment to Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.11 Agreement with G. L. Nichols (incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.12* Form of Stock Option Agreement** 10.13* CSX Market Value Cash Plan** 10.14* Stock Purchase and Loan Plan, as amended** 10.15* 1987 Long-Term Performance Stock Plan, as amended** 10.16 1985 Deferred Compensation Program for Executives of CSX Corporation and Affiliated Companies, as amended (incorporated herein by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.17* Supplementary Savings Plan and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies, as amended** 10.18 Special Retirement Plan of CSX Corporation and Affiliated Companies, as amended (incorporated herein by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.19 Supplemental Retirement Plan of CSX Corporation and Affiliated Companies, as amended (incorporated herein by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.20 1994 Senior Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K dated March 3, 1995)** 10.21 Amended and Restated Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 4, 1997) 10.22 Transaction Agreement (incorporated herein by reference to Exhibit 10 to the Registrant's Current Report on Form 8-K filed with the Commission on July 8, 1997) 12* Computation of Ratio of Earnings to Fixed Charges 13* Annual Report to Shareholders*** 21* Subsidiaries of the Registrant 23.1* Consent of Ernst & Young LLP 23.2* Consent of PricewaterhouseCoopers LLP 24* Powers of Attorney 27* Financial Data Schedule 99.1* Audited Consolidated Financial Statements and Schedule of Conrail Inc. for the Years Ended Dec. 31, 1998, 1997 and 1996 * Filed herewith ** Management Contract or Compensatory Plan or Arrangement ***Except for those portions of the Annual Report which are expressly incorporated by reference in this Form 10-K, the Annual Report is furnished for the information of the Securities and Exchange Commission only and is not to be deemed "filed" as part of this Form 10-K. -7- (b) Reports on Form 8-K 1. A report was filed on October 2, 1998, reporting Item 5, Other Events - authorization of issuance and sale of up to $750 million of Medium-Term Notes, Series C; plus Item 7, Financial Statements and Exhibits - exhibits required to be filed by Item 601 of Regulation S-K with respect to the Series C Medium-Term Notes. 2. A report was filed on October 27, 1998, reporting Item 5, Other Events - public offering of $400 million of 6.25% Notes Due 2008; plus Item 7, Financial Statements and Exhibits - exhibits required to be filed by Item 601 of Regulation S-K with respect to the 6.25% Notes. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CSX CORPORATION (Registrant) By: /s/JAMES L. ROSS ------------------------------- James L. Ross Vice President and Controller (Principal Accounting Officer) Dated: March 3, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 3, 1999. Signature Title - - --------------------------- ------------------------------------ /s/ JOHN W. SNOW* Chairman of the Board, President, - - ----------------- John W. Snow Chief Executive Officer and Director (Principal Executive Officer) /s/ PAUL R. GOODWIN* Executive Vice President-Finance and - - ------------------- Paul R. Goodwin Chief Financial Officer (Principal Financial Officer) /s/ ELIZABETH E. BAILEY* Director - - ----------------------- Elizabeth E. Bailey /s/ H. FURLONG BALDWIN* Director - - ---------------------- H. Furlong Baldwin /s/ CLAUDE S. BRINEGAR* Director - - ---------------------- Claude S. Brinegar -8- /s/ ROBERT L. BURRUS, JR.* Director - - ------------------------- Robert L. Burrus, Jr. /s/ BRUCE C. GOTTWALD* Director - - --------------------- Bruce C. Gottwald /s/ JOHN R. HALL* Director - - ---------------- John R. Hall /s/ E. BRADLEY JONES* Director - - -------------------- E. Bradley Jones /s/ ROBERT D. KUNISCH* Director - - --------------------- Robert D. Kunisch /s/ JAMES W. MCGLOTHLIN* Director - - ----------------------- James W. McGlothlin /s/ SOUTHWOOD J. MORCOTT* Director - - ------------------------ Southwood J. Morcott /s/ CHARLES E. RICE* Director - - ------------------- Charles E. Rice /s/ WILLIAM C. RICHARDSON* Director - - ------------------------- William C. Richardson /s/ FRANK S. ROYAL, M.D.* Director - - ------------------------ Frank S. Royal, M.D. *By: /s/ PETER J. SHUDTZ - - ------------------------ Peter J. Shudtz Attorney-in-Fact -9- Index to Exhibits Description 3.1 Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference as Exhibit 3 to the Registrant's Annual Report on Form 10-K dated February 15, 1991) 3.2* Bylaws of the Registrant, as amended 4.1(a) Indenture, dated August 1, 1990, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to the Registrant's Form SE dated September 7, 1990) 4.1(b) First Supplemental Indenture, dated as of June 15, 1991, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4(c) to the Registrant's Form SE, dated May 28, 1992, filed with the Commission) 4.1(c) Second Supplemental Indenture, dated as of May 6, 1997, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-28523) filed with the Commission on June 5, 1997) 4.1(d) Third Supplemental Indenture, dated as of April 22, 1998, between the Registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Commission on May 12, 1998) Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments that define the rights of holders of the Registrant's long-term debt securities, where the long-term debt securities authorized under each such instrument do not exceed 10% of the Registrant's total assets, have been omitted and will be furnished to the Commission upon request. 10.1 CSX Stock Plan for Directors, as amended (incorporated herein by reference to Appendix A to the Definitive Proxy Statement dated March 18, 1997)** 10.2 Corporate Director Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.3 CSX Directors' Charitable Gift Plan, as amended (incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K dated March 4, 1994)** 10.4 CSX Directors' Matching Gift Plan, as amended (incorporated herein by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K dated March 14, 1997)** 10.5 Form of Agreement with J. W. Snow, A. R. Carpenter, P. R. Goodwin and G. L. Nichols (incorporated herein by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 3, 1995)** 10.6 Form of Amendment to Agreement with A. R. Carpenter, P. R. Goodwin and G. L. Nichols (incorporated herein by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K dated March 14, 1997)** 10.7 Form of Retention Agreement with A. R. Carpenter (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K dated February 28, 1992)** 10.8 Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K dated March 4, 1994)** 10.9 Amendment to Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K dated March 14, 1997)** 10.10 Amendment to Agreement with J. W. Snow (incorporated herein by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.11 Agreement with G. L. Nichols (incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.12* Form of Stock Option Agreement** 10.13* CSX Market Value Cash Plan** 10.14* Stock Purchase and Loan Plan, as amended** 10.15* 1987 Long-Term Performance Stock Plan, as amended** 10.16 1985 Deferred Compensation Program for Executives of CSX Corporation and Affiliated Companies, as amended (incorporated herein by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.17* Supplementary Savings Plan and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies, as amended** 10.18 Special Retirement Plan of CSX Corporation and Affiliated Companies, as amended (incorporated herein by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.19 Supplemental Retirement Plan of CSX Corporation and Affiliated Companies, as amended (incorporated herein by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K dated February 18, 1998)** 10.20 1994 Senior Management Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K dated March 3, 1995)** 10.21 Amended and Restated Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 4, 1997) 10.22 Transaction Agreement (incorporated herein by reference to Exhibit 10 to the Registrant's Current Report on Form 8-K filed with the Commission on July 8, 1997) 12* Computation of Ratio of Earnings to Fixed Charges 13* Annual Report to Shareholders*** 21* Subsidiaries of the Registrant 23.1* Consent of Ernst & Young LLP 23.2* Consent of PricewaterhouseCoopers LLP 24* Powers of Attorney 27* Financial Data Schedule 99.1* Audited Consolidated Financial Statements and Schedule of Conrail Inc. for the Years Ended Dec. 31, 1998, 1997 and 1996 * Filed herewith ** Management Contract or Compensatory Plan or Arrangement ***Except for those portions of the Annual Report which are expressly incorporated by reference in this Form 10-K, the Annual Report is furnished for the information of the Securities and Exchange Commission only and is not to be deemed "filed" as part of this Form 10-K. -10- EX-3.(II) 2 Exhibit 3.2 BYLAWS OF CSX CORPORATION (Amended as of October 6, 1998) -------------------- ARTICLE I Shareholders' Meeting SECTION 1.Annual Meeting. The annual meeting of the shareholders of -------------- the Corporation shall be held on such date in March, April, May or June as the Board of Directors (hereinafter sometimes the "Board") may designate, either within or without the Commonwealth of Virginia. SECTION 2.Special Meetings. Special meetings of the shareholders may ---------------- be called from time to time by the Board of Directors or the Chairman of the Board. Special meetings shall be held solely for the purposes specified in the notice of meeting. SECTION 3.Time and Place. The time and place of each meeting of the -------------- shareholders shall be stated in the notice of the meeting. SECTION 4.Quorum. The holders of a majority of the votes entitled to ------ be cast on any matter shall constitute a quorum as to that matter at any meeting of the shareholders. Less than a quorum may adjourn the meeting to a fixed time and place, no further notice of any adjourned meeting being required. Unless otherwise provided in the Articles of Incorporation of the Corporation, each shareholder shall be entitled to one vote in person or by proxy for each share entitled to vote then outstanding and registered in his name on the books of the Corporation. SECTION 5.Notice of Meeting and Record Date. Except as otherwise ---------------------------------- required by the laws of the Commonwealth of Virginia, notice shall be delivered by the Corporation not less than 10 days nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the shareholder at the shareholder's address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Notice of meetings may be waived in accordance with law. Any previously scheduled meeting of the shareholders may be postponed, by resolution of the Board of Directors at any time prior to the time previously scheduled for such meeting of shareholders. The Board of Directors may fix in advance a date to determine shareholders entitled to notice or to vote at any meeting of shareholders, to receive any dividend, or for any other purpose, such date to be not more than 70 days before the meeting or action requiring a determination of shareholders. SECTION 6.Conduct of Meeting. The Chairman of the Board shall -------------------- preside over all meetings of the shareholders. If he is not present, or if there is none in office, the President shall preside. If the Chairman of the Board and the President are not present, a Vice President shall preside, or, if none be present, a Chairman shall be elected by the meeting. The Corporate Secretary shall act as secretary of the meeting, if he or she is present. If he or she is not present, the Chairman shall appoint a secretary of the - 1 - meeting. The chairman of the meeting shall appoint one or more inspectors of election who shall determine the qualification of voters, the validity of proxies, and the results of ballots. The chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is a quorum, and may determine the date, time and place that a meeting so adjourned is to reconvene. The chairman of the meeting shall prescribe rules of procedure for the meeting and shall determine the time reasonably allotted to each speaker at the meeting. SECTION 7.Notice of Shareholder Business. At an annual meeting of ------------------------------- the shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who complies with the notice procedures set forth in this Section 7. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Corporate Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days before the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) 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, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 7. 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 and in accordance with the provisions of this Section 7, 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. ARTICLE II Board of Directors SECTION 1.Number and Election. The Board of Directors shall be --------------------- elected at the annual meeting of the shareholders or at any special meeting held in lieu thereof. The number of Directors shall be fourteen. This number may be increased or decreased at any time by amendment of these Bylaws, but shall never be a number less than four. Subject to the last two sentences of this Section 2 of this Article II, no person shall be eligible for election as a Director, nor shall any Director be eligible for reelection, if he or she shall have reached the age of 70 years at the time of such election or reelection, except that the Board, in its sole discretion, may waive such ineligibility for a period not to exceed one year. Directors who are or have been employees of CSX or its affiliates, including current or former Chief Executive Officers, shall retire from the Board immediately upon leaving active service, or reaching age 65, whichever occurs first. In the case of a candidate for election as a Director who was a director of Conrail Inc. on May 23, 1997, the restrictions on eligibility for election and reelection as a Director as a result of age shall not apply for two years following their initial election to the Board. The Board, in its sole discretion, may extend such eligibility for a period not to exceed one year. - 2 - SECTION 2.Notice of Shareholder Nominees. Only persons who are --------------------------------- nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 2. Nominations by shareholders shall be made pursuant to timely notice in writing to the Corporate Secretary. To be timely, a shareholder's notice shall be received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a Director shall furnish to the Corporate Secretary the information required to be set forth in the shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in these Bylaws. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3.Quorum. A majority of the Directors shall constitute a ------ quorum. Less than a quorum may adjourn the meeting to a fixed time and place, no further notice of any adjourned meeting being required. SECTION 4.Removal and Vacancies. The shareholders at any meeting --------------------- called for such purpose, by a vote of the holders of a majority of all the shares of capital stock at the time outstanding and having voting power, may remove any Director and fill any vacancy. Vacancies arising among the Directors, including a vacancy resulting from an increase by the Board of Directors in the number of directors, so long as the increase so created is not more than 30 percent of the number of Directors then authorized to serve on the Board, may be filled by the remaining Directors, though less than a quorum of the Board, unless sooner filled by the shareholders. SECTION 5.Meetings and Notices. Regular meetings of the Board of --------------------- Directors shall be held on such dates, at such places and at such times as the Board of Directors may from time to time designate. Special meetings of the Board of Directors may be held at any place and at any time upon the call of the Chairman of the Board or of any three members of the Board of Directors. Notice of any meetings shall be given by mailing or delivering such notice to each Director at the Director's residence or business address or by telephone, telegraph, or facsimile. Any such notice shall state the time and place of the meeting. Meetings may be held without notice if all of the Directors are present or those not present waive notice before or after the meeting. Any action required to be taken at a meeting of the Board may be taken without a meeting if a consent in writing setting forth the action to be taken, shall be signed by all the Directors in counterpart or otherwise and filed with the Corporate Secretary. Such consent shall have the same force and effect as a unanimous vote. Any action required to be taken at a meeting of the Board may - 3 - be taken by means of a conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. ARTICLE III Executive Committee SECTION 1.Designation; Chairman. The Board of Directors may ---------------------- designate an Executive Committee. The Chairman of the Board of Directors shall be the Chairman of the Executive Committee. SECTION 2.Authority and quorum. The Executive Committee shall have -------------------- and may exercise all the authority of the Board of Directors, except as may be prohibited by Section 13.1-689 of the Code of Virginia, as it may from time to time be amended. A majority of the Committee shall constitute a quorum for the transaction of business, and the affirmative vote of the majority of those present shall be necessary for any action by the Committee. The Committee shall cause to be kept a full and accurate record of its proceedings at each meeting and report the same at the next meeting of the Board. In the absence of the Chairman of the Committee, an acting chairman shall be designated by the Committee to preside at such meeting. SECTION 3.Meetings and Notices. Meetings of the Committee may be --------------------- called at any time by the Chairman of the Board or by a majority of the members of the Committee and shall be held at such time and place as shall be stated in the notice of the meeting. Notice of any meeting of the Committee shall be given by delivering or mailing such notice to each member at his or her residence or business address or by telephone, telegraph, or facsimile to him or her not less than 24 hours before the meeting. Any such notice shall state the time and place of the meeting. Meetings may be held without notice if all of the members of the Committee are present or those not present waive notice before or after the meeting. Action may be taken by the Executive Committee without a meeting or at a meeting established by means of conference telephone or similar communications equipment in the manner provided by Section 5 of Article II. SECTION 4.Removal. Members of the Committee may be removed as ------- members thereof and replaced at any regular or special meeting of the Board of Directors. ARTICLE IV Committees of the Board (other than the Executive Committee) The Board of Directors may establish such other committees as it deems appropriate, each committee consisting of at least two directors whose designation and terms of office shall be by resolution of the Board. Meetings of a committee may be called at any time by the Chairman of the Board or the Chairman of such committee. Notice of any meeting shall be given by delivering or mailing such notice to each committee member at the member's residence or business address or by telephone, telegraph, or facsimile to the member not less than 24 hours before the meeting. Any such notice shall state the time and place of the meeting. Meetings may be held without notice if all of the members of the committee are present or those not present waive notice before or after the meeting. Action may be taken by a committee - 4 - without a meeting or at a meeting established by means of conference telephone or similar communications equipment in the manner provided by Section 5 of Article II. ARTICLE V Officers SECTION 1.Elected Officers. The elected officers of the Corporation ---------------- shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a Corporate Secretary, a Treasurer, and such other officers (including, without limitation, a Chief Financial Officer and a Chief Legal Officer) as the Board of Directors from time to time may deem proper. The Chairman of the Board shall be chosen from among the directors. All officers elected by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article V. Such officers shall also have such powers and duties as from time to time may be conferred by the Board or by any committee thereof or the Chairman of the Board. The Board may from time to time elect, or the Chairman of the Board may appoint, such other officers (including, without limitation, one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents, as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these Bylaws or as may be prescribed by the Board or such committee or by the Chairman of the Board, as the case may be. Any person may be elected to more than one office. SECTION 2.Election and Term of Office. The elected officers of the --------------------------- Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after the annual meeting of the shareholders. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, but any officer may be removed from office at any time by the Board of Directors or, except in the case of any officer or agent elected by the Board, by the Chairman of the Board. Such removal shall be without prejudice to the contractual rights, if any, of the person so removed. SECTION 3.Chairman of the Board. The Chairman of the Board shall ---------------------- preside at all meetings of the shareholders and of the Board of Directors and shall be the Chief Executive Officer of the Corporation. The Chairman of the Board shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to his office which may be required by law and all such other duties as are properly required of him by the Board of Directors. He shall make reports to the Board of Directors and the shareholders, and shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. SECTION 4.President. The President shall act in a general executive --------- capacity and shall assist the Chairman of the Board in the administration and operation of the Corporation's business and general supervision of its policies and affairs. The President shall, in the absence of or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of shareholders and of the Board. SECTION 5.Vice Presidents. Each Vice President shall have such ---------------- powers and shall perform such duties as shall be assigned to him or her by the Chairman of the Board with the approval of the Board. SECTION 6.Treasurer. The Treasurer shall exercise general --------- supervision over the receipt, custody and disbursement of corporate funds. He shall have such further powers and duties and shall be - 5 - subject to such directions as may be granted or imposed upon him from time to time by the Board of Directors, the Chairman of the Board, or the Chief Financial Officer. SECTION 7.Corporate Secretary. The Corporate Secretary shall attend ------------------- all meetings of the shareholders, the Board of Directors, and the Executive Committee and record their proceedings, unless a temporary secretary be appointed. He shall give due notice as required of all meetings of the shareholders, Directors, and Executive Committee. He shall keep or cause to be kept at a place or places required by law a record of the shareholders of the Corporation, giving the names and addresses of all shareholders and the number, class, and series of the shares held by each. He shall be custodian of the seal of the Corporation, and of all records, contracts, leases, and other papers and documents of the Corporation, unless otherwise directed by the Board of Directors, and shall perform such other duties as may be assigned to him by the Board of Directors or the Chairman of the Board. In case of the Secretary's absence or incapacity, the Chairman of the Board shall designate an Assistant Secretary or other appropriate officer to perform the duties of the Secretary. SECTION 8.Removal. Any officer elected, or agent appointed, by the ------- Board of Directors may be removed by the Board of Directors whenever, in their judgment, the best interests of the Corporation would be served thereby. Any officer or agent appointed by the Chairman of the Board may be removed by him whenever, in his judgment, the best interests of the Corporation would be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his successor, his death, his resignation or his removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan. SECTION 9.Vacancies. A newly created elected office and a vacancy in --------- any elected office because of death, resignation, or removal may be filled by the Board of Directors or the Chairman of the Board for the unexpired portion of the term. Any vacancy in an office appointed by the Chairman of the Board because of death, resignation, or removal may be filled by the Chairman of the Board. ARTICLE VI Depositaries The money and negotiable instruments of the Corporation shall be kept in such bank or banks as the Chief Financial Officer or Treasurer shall from time to time direct or approve. All checks and other instruments for the disbursement of funds shall be executed manually or by facsimile by such officers or agents of the Corporation as may be authorized by the Board of Directors. ARTICLE VII Seal The seal of the Corporation, of which there may be any number of counterparts, shall be circular in form and shall have inscribed thereon the name of the Corporation, the year of its organization and the words, "Corporate Seal Virginia." The Board may also authorize to be used, as the seal of the Corporation, any facsimile thereof. - 6 - ARTICLE VIII Fiscal Year The fiscal year of the Corporation shall begin immediately after midnight of the last Friday of December, and shall end at midnight on the last Friday of December of each calendar year. ARTICLE IX Amendments to Bylaws These Bylaws may be amended or repealed at any regular or special meeting of the Board of Directors by the vote of a majority of the Directors present. They may also be repealed or changed, and new Bylaws made, by the Shareholders, provided notice of the proposal to take such action shall have been given in the notice of the meeting. * * * * * * * * * * Richmond, VA April 28, 1998 - 7 - EX-10.12 3 Exhibit 10.12 STOCK OPTION AGREEMENT UNDER CSX 1987 LONG-TERM PERFORMANCE STOCK PLAN ----------------------------------------------- * * * * APRIL 1998 GRANT * * * * THIS AGREEMENT is made and entered into as of April 28, 1998, by and between CSX Corporation ("CSX"), a Virginia corporation, and NAME (the ---- "Optionee"). WHEREAS, CSX has adopted the 1987 Long-Term Performance Stock Plan (the "Plan"), a copy of which is attached as Appendix A and made a part hereof, to enable officers and key employees of CSX and its subsidiaries who are responsible for contributing to the financial success and growth of CSX to acquire stock ownership in CSX, thus providing them with a more direct and proprietary interest in CSX; and WHEREAS, pursuant to said Plan and subject to your execution of this Agreement, a grant was made, effective April 28, 1998, to Optionee of options to purchase shares of common stock of CSX. NOW, THEREFORE, the parties mutually agree as follows: 1. CSX grants, and Optionee accepts, Total non-qualified stock options ("Options"), each to purchase a share of CSX common stock at $52.6563 per share (the "Option Price") under terms and conditions set forth in the Plan and exercisable as hereinafter described. a. Number Options shall become exercisable at such time ------ as the daily average price on the New York Stock Exchange of CSX common stock shall equal or exceed $62.6563 for ten consecutive business days; b. Number Options shall become exercisable at such time ------ as the daily average price on the New York Stock Exchange of CSX common stock shall equal or exceed $77.6563 for ten consecutive business days; c. Number Options shall become exercisable at such time ------ as the daily average price on the New York Stock Exchange of CSX common stock shall equal or exceed $97.6563 for ten consecutive business days. The restrictions imposed by the foregoing Subsections a, b and c of this Section 1 may be satisfied at any time after the date of this Agreement, but shall, in any event, lapse and be of no further effect on April 27, 2007, or as otherwise set forth in the Plan. Notwithstanding the foregoing, Options shall not be exercisable prior to April 28, 1999, or after April 27, 2008. Options may be exercised simultaneously or at different times. 2. Notice of an exercise of Options shall be given by Optionee in writing to the Corporate Secretary of CSX stating the number of shares with respect to which the Options are exercised. As provided in Section 8 (Non-Qualified Stock Options) of the Plan, the full purchase price of the shares being purchased through exercise of Options shall be tendered at the time of and shall accompany such notice. Further, as provided in Section 24 (Withholding Tax) of the Plan, withholding taxes for Federal, state or local jurisdictions must be paid to CSX at the time payment is made for shares purchased through exercise of Options. 3. If Optionee has been notified by CSX that he or she is an "officer", within the meaning of Regulation 16a-1(f) of the Securities and Exchange Commission (17 C.F.R. 240.16a-1(f)) (hereinafter called "statutory insider"), Optionee shall comply with all laws and regulations applicable to such statutory insiders. Whether or not Optionee is subject to such restrictions, Optionee will abide by all applicable federal securities laws in connection with this Option and any shares of Common Stock that may be received under the Plan. 4. By acceptance of this Agreement, Optionee agrees to be bound by such requirements as the Company shall adopt from time to time regarding or related to exercise of options and sale or other disposition of any CSX stock. Optionee further agrees to provide such information as CSX may request regarding securities which are issued by CSX and which Optionee owns (whether directly or beneficially, and regardless of whether held by Optionee in Optionee's name, in a brokerage account, in an Individual Retirement Account, or in a program in which Optionee participates that has been established for employees of CSX or its affiliates or otherwise), or which Optionee has sold or otherwise transferred. 5. The Optionee further agrees to be bound by such requirements as CSX shall adopt from time to time relating to stock retention, including, without limitation, the CSX Corporation Stock Ownership Policy for Executives. If Optionee terminates employment with CSX or any of its subsidiaries, whether voluntarily or involuntarily or by death or permanent disability, the restrictions contained in this paragraph shall not apply, and exercise of this Option shall be governed by applicable law and the applicable provisions of the Plan relating to the exercise of this Option and termination of employment. 6. The Options are accepted subject to all of the terms and provisions of the Plan and of this Agreement. To the extent there may be any conflict between the Plan or this Agreement, the Plan shall control. Optionee represents that he/she has read and is familiar with the terms and provisions of the Plan. All interpretations or decisions by the Committee referred to in Section 4 (Administration) of the Plan on any questions under the Plan or this Agreement shall be binding, conclusive and final. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of April 28, 1998. OPTIONEE CSX CORPORATION - - -------- --------------- - - -------------------- By: -------------------------- Signature Chairman of the Board, President and Chief Executive Officer EX-10.13 4 Exhibit 10.13 CSX MARKET VALUE CASH PLAN 1. Purpose The CSX Market Value Cash Plan (the "Plan") is established to compensate employees of the Company or a Subsidiary who, by virtue of their responsibilities or positions, are most likely to have the opportunity to enhance long-term performance of the Company and shareholder value. The Company believes that compensation programs tied to the value of the Company's common stock stimulate the efforts of those employees upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business and will further the identification of those employees' interests with those of the Company's shareholders. 2. Definitions Unless the context clearly indicates to the contrary, the singular shall include the plural and the masculine shall include the feminine. As used in the Plan, the following terms have the indicated meanings: (a) "Agreement" means a Special Award Agreement made by and between the Company and a Participant pursuant to the Plan. (b) "Business Day" means, if relevant to a determination of the value of Company Stock, a day on which shares of Company Stock are or could be traded on the New York Stock Exchange. (c) "Cash Value Amount" means an amount payable to a Participant upon the Company Stock achieving or being deemed to have achieved a Market Price Threshold pursuant to Paragraphs 3(b) or 4(d) of the Plan. (d) "Cause" means a Participant's: (i) act or acts of personal dishonesty intended to result in substantial personal enrichment at the expense of the Company or a Subsidiary; (ii) repeated violations of the Participant's responsibilities which are demonstrably willful and deliberate and which are not remedied in a reasonable period of time after receipt of written notice from the Company or a Subsidiary; or (iii) conviction of a felony involving moral turpitude. (e) "Change of Control" means any of the following: (i) Stock Acquisition. The acquisition, by any individual, ----------------- entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subparagraph (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company;(B) any acquisition by the Company;(C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subparagraph (iii) of this Paragraph 2(e); or (ii) Board Composition. Individuals who, as of the effective ------------------ date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to that date whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the shareholders of the --------------------- Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Surface Transportation Board or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal subsidiary or all or substantially all of the assets of the Company or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined 2 voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (iv) Regulated Business Combination. Approval by the ---------------------------------- shareholders of the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subparagraph (iii) of this Paragraph 2(e); or (v) Liquidation or Dissolution. Approval by the shareholders -------------------------- of the Company of a complete liquidation or dissolution of the Company or its principal subsidiary. (f) "Committee" means the Compensation Committee of the Board of Directors of the Company. (g) "Company" means CSX Corporation. (h) "Company Stock" means the common stock of the Company and rights, options or warrants for the purchase of securities of the Company which may be issued with shares of common stock pursuant and subject to plans or agreements adopted or entered into from time to time by the Company. (i) "Deferral Election" shall have the meaning set forth in Paragraph 3(d). (j) "Disability" means the inability to perform the services for which a Participant was employed as a result of a physical or mental impediment entitling the Participant to begin receiving benefits under the CSX Salary Continuation and Long-Term Disability Plan. (k) "IRC" means the Internal Revenue Code of 1986 as amended. (l) "Market Price" means the average of the high and the low price of a share of Company Stock on the New York Stock Exchange (or the average of the bid and asked prices if there were no sales) on any Business Day as reported in The Wall Street Journal. (m) "Market Price Threshold" shall have the meaning set forth in Paragraph 3(b). (n) "Payment Date" shall have the meaning set forth in Paragraph 3(c). (o) "Purchase Loan" means an extension of credit to a Participant by the Company to purchase shares of Company Stock, evidenced by a Stock Purchase Pledge and Loan Agreement made by and between the Participant and the Company pursuant to the CSX Corporation Stock Purchase and Loan Plan. 3 (p) "Retirement" means termination of employment (for reasons other than Cause) (i) at or after age 65, or (ii) after age 55 with at least 10 years of service with the Company and/or a Subsidiary. (q) "Subsidiary" means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Company. (r) "Supplementary Savings Plan" means the Supplementary Savings and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies, as amended from time to time. (s) "Table" means the table of Market Price Thresholds and corresponding Cash Value Amounts as set forth in an Agreement for the purpose of determining the value of a Unit. (t) "Unit" means an interest in the Plan that may be granted to a Participant pursuant to Paragraph 3(a). 3. Units; Cash Value Amount (a) The Company may, in an Agreement made pursuant to this CSX Market Value Cash Plan and subject to the approval of the Committee, grant Units to a Participant. (b) If at any time after the Effective Date of an Agreement and prior to January 1, 2003, the Market Price of the Company Stock equals or exceeds one of the amounts specified as a Market Price Threshold in the Table (a "Market Price Threshold") for a period of fifteen (15) consecutive Business Days, the Market Price Threshold will be achieved and, with respect to each such Market Price Threshold, the corresponding Cash Value Amount specified in the Table for each Unit held by the Participant shall be payable to the Participant. Once a Market Price Threshold has been achieved or deemed to have been achieved during the term of an Agreement with respect to a Participant, it shall not again be achieved or deemed to be achieved during such term of the Agreement with respect to such Participant. (c) Unless a valid Deferral Election has been made as provided for in Paragraph 3(d), Cash Value Amounts will be paid to the Participant as soon as practicable following the month in which the corresponding Market Price Threshold is achieved (the "Payment Date"). (d) If a Participant is eligible to participate in the Supplementary Savings Plan, with respect to a specified calendar year, the Participant may elect in writing, on forms provided by the Committee, to defer payment of any Cash Value Amounts which would otherwise become payable as a result of any Market Price Threshold which is achieved (or is deemed to be achieved under Paragraph 4(d)) in such calendar year (the "Deferral Election"). Deferral Elections must be filed with the Committee prior to the beginning of the calendar year to which they relate and will be irrevocable as of the first day of the calendar year to which they relate. Cash Value Amounts shall be deferred pursuant to the Supplementary Savings Plan, shall be credited on the Payment Date to an account therein, and shall be payable at the time and in the manner provided for under the Supplementary Savings Plan; provided, however, that except in the case of death, Disability or Change of Control as defined in the Plan, the Participant may not begin receiving distributions from his account prior to January 1, 2005. Nothing in the Plan or 4 an Agreement shall grant a Participant any right to participate in the Supplementary Savings Plan. 4. Termination of Employment; Change of Control If, after the Effective Date of an Agreement and prior to January 1, 2003, a Participant's employment terminates for any reason, or a Change of Control occurs, the following provisions shall apply notwithstanding any other terms in the Agreement to the contrary: (a) Death, Disability or Retirement. If the Participant's termination of ------------------------------- employment results from his death, Disability or Retirement, the Participant shall cease to accrue benefits under Paragraphs 3(b) and 4(d) of the Plan on the date which is the earlier of three (3) years following said termination of employment or December 31, 2002. (b) Voluntary or Involuntary Termination. If the Participant's ---------------------------------------- termination of employment is either voluntary or involuntary, the Participant shall cease to accrue benefits under Paragraphs 3(b) and 4(d) of the Plan immediately upon said termination of employment. (c) Divisive Transaction. If the Participant's employer ceases to be a -------------------- Subsidiary or if there is a sale of substantially all of the assets of a Subsidiary which is the Participant's employer, the Participant shall cease to accrue benefits under Paragraphs 3(b) and 4(d) of the Plan immediately upon the closing of such divisive transaction. The foregoing shall apply whether or not the Participant continues in the employ of such Subsidiary but shall not apply should the Participant continue in the employ of the Company or another Subsidiary not part of the divisive transaction. (d) Change of Control. If, after the Effective Date of an Agreement and ----------------- prior to January 1, 2003, a Change of Control occurs, for purposes of Paragraph 3(b) all Market Price Thresholds shall be deemed to have been achieved; the Payment Date shall be a date, as determined by the Committee, not later than ninety (90) days following said Change of Control, unless a valid Deferral Election has been made as provided for in Paragraph 3(d), in which case, with respect to those Cash Value Amounts subject to such Deferral Election, the Payment Date shall be a date not later than seven (7) days following said Change of Control; and the Participant shall cease to accrue benefits under Paragraphs 3(b) and 4(d) of the Plan immediately after the later of the applicable Payment Dates. (e) Certain Terms of Agreements. Notwithstanding any provision of the ---------------------------- Plan to the contrary, in the discretion of the Committee, an Agreement may provide, to the extent deemed appropriate by the Committee to eliminate or reduce the applicability or impact of Sections 280G and/or 4999 of the IRC, for a reduction of any benefit under the Plan. 5. Miscellaneous (a) Administration of the Plan. The Committee shall be responsible for --------------------------- administering the Plan and shall have the power to construe and interpret the Plan. The Committee may appoint such agents, who need not be members of the Committee and who may be employees of the Company or a Subsidiary, as it may deem necessary for the effective performance of its duties, and may delegate to such agents such powers and duties as the Committee may deem appropriate 5 and that are not inconsistent with the intent of the Plan. A decision of the Committee shall be final and conclusive on all persons, except to the extent otherwise provided by law. (b) Term of the Plan. The Plan became effective on October 7, 1998. ---------------- Unless extended, amended or terminated by action of the Committee as provided for in subparagraph (c) below, the Plan shall remain in effect until December 31, 2002, and shall terminate on that date. No new Units shall be granted after the termination date; provided, however, that Agreements entered into before termination of the Plan shall remain in effect in accordance with their terms. (c) Termination and Modification. The Plan may be extended, amended or ---------------------------- terminated at any time by action of the Committee. An extension, amendment or termination of the Plan shall not, without consent of the affected Participant, adversely impact a Participant's rights under an Agreement previously made pursuant to the Plan. (d) Notices. All notices, requests and other communications required or ------- permitted to be given under the Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid as follows: (i) if to the Company, at its principal business address to the attention of the Corporate Secretary; (ii) if to any Participant, at the last address of the Participant known to the sender at the time the notice or communication is sent. (e) No Contract for Employment. The existence of the Plan does not ----------------------------- constitute a contract for continued employment between a Participant and the Company or its Subsidiaries. (f) Unsecured Creditor; Non-Alienation. The rights of a Participant ------------------- under the Plan and Agreement shall be solely those of an unsecured creditor of the Company and the Company's promise to pay benefits under an Agreement entered into pursuant to the Plan shall be an unfunded promise. A Participant's right to benefits under the Plan and an Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by the Participant's creditors. (g) Governing Law. The terms of the Plan shall be governed by and -------------- construed in accordance with the laws of the Commonwealth of Virginia. 6 EX-10.14 5 Exhibit 10.14 CSX CORPORATION Stock Purchase and Loan Plan As Amended and Restated February 14, 1996, as Amended through October 6, 1998 1. Purpose The CSX Corporation 1991 Stock Purchase and Loan Plan (the "1991 Plan") was established to encourage and increase the ownership of the common stock of CSX Corporation (the "Company") by those employees of the Company or a Subsidiary who, by virtue of their responsibilities or positions, were most likely to have the opportunity to enhance long-term performance of the Company and shareholder value. The Company continues to believe that ownership of the Company's common stock stimulates the efforts of those employees upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business and will further the identification of those employees' interests with those of the Company's shareholders. Unless the 1991 Plan is extended or replaced, these benefits will generally end July 31, 1996. Management believes it is in the best interests of the Company's shareholders to extend the 1991 Plan in order to continue the original objective of assuring that significant amounts of the Company's common stock are held by employees whose interests are identified with those of the Company's non-employee shareholders. Accordingly, the 1991 Plan is amended and restated as of February 14, 1996 (the "Plan"), to maintain and expand this objective. Notwithstanding anything contained in this amended and restated Plan, the provisions of the 1991 Plan in effect prior to the amendment and restatement reflected herein shall continue to apply with respect to Company Stock acquired pursuant to a Purchase Award under the 1991 Plan as to which a Participant is not granted or does not exercise an Exchange Award. 2. Definitions and Construction Unless the content clearly indicates to the contrary, in reading this Plan, the singular shall include plural and the masculine shall include the feminine. As used in the Plan, the following terms have the indicated meanings: (a) "Applied Dividends" means, as provided in Section 6(e), dividends paid on pledged Company Stock used to reduce Interest. (b) "Board" means the Company's Board of Directors. (c) "Business Day" means, if relevant to a determination of the value of Company Stock, a day on which shares of Company Stock are or could be traded on the New York Stock Exchange. (d) "Cause" means a Participant's: (i) act or acts of personal dishonesty intended to result in substantial personal enrichment at the expense of the Company or a Subsidiary; (ii) repeated violations of the Participant's responsibilities which are demonstrably willful and deliberate and which are not remedied in a reasonable period of time after receipt of written notice from the Company or a Subsidiary; or (iii) conviction of a felony involving moral turpitude. (e) "Change of Control" means any of the following: (i) Stock Acquisition. The acquisition, by any ------------------ individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(e); or (ii) Board Composition. Individuals who, as of the ------------------ date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the --------------------- shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal Subsidiary that is not subject, as a matter of law or contract, to approval by the Surface Transportation Board or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities 2 immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal Subsidiary or all or substantially all of the assets of the Company or its principal Subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the Board of Directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (iv) Regulated Business Combination. Approval by the shareholders of the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(e); or (v) Liquidation or Dissolution. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company or its principal Subsidiary. (f) "Commitment Date" means a date fixed by the Committee which shall be the first day of the Commitment Period. (g) "Commitment Period" means a period of twenty (20) Business Days beginning with the Commitment Date during which a Participant who has been granted a Purchase Award must purchase all or part of the underlying Company Stock. 3 (h) "Committee" means the Committee of the Board appointed to administer the Plan as provided in Section 10. (i) "Company" means CSX Corporation. (j) "Company Stock" means the common stock of the Company and rights, options or warrants for the purchase of securities of the Company which may be issued with shares of common stock pursuant, and subject to, plans or agreements adopted or entered into from time to time by the Company. (k) "Disability" means the inability to perform the services for which a Participant was employed as a result of a physical or mental impediment entitling the Participant to begin receiving benefits under the CSX Salary Continuation and Long-Term Disability Plan. (l) "Equity" means, as of any date, the Exchange Award Purchase Price of a share of Company Stock less the applicable portion of the unpaid balance and accrued interest of a Purchase Loan to which such share of Company Stock is subject. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Exchange Award" means a Purchase Award granted pursuant to Section 4 to a Participant who received a Purchase Award under the 1991 Plan. (o) "Exchange Award Down Payment" means a dollar amount computed by taking a percentage, to be determined by the Committee, of the Exchange Award Purchase Price of the Company's common stock on the Commitment Date multiplied by the number of shares in the Exchange Award; provided, however, such percentage shall not be less than 10% nor more than 25%. (p) "Insider" means any person subject to Section 16(b) of the Exchange Act. (q) "Interest" means an amount calculated using the Applicable Federal Rate, as determined for purposes of Section 1274(d) of the IRC. (r) "Interest Spread" means, at the time of determination, Interest accrued on a Purchase Loan reduced by Applied Dividends. (s) "IRC" means the Internal Revenue Code of 1986, as amended. (t) "Market Price" means the average of the high and the low price of a share of Company Stock on the New York Stock Exchange (or the average of the bid and asked prices if there were no sales), on any Business Day as reported in The Wall Street Journal. (u) "Participant" means an employee of the Company or a Subsidiary who is designated by the Committee, in its sole discretion, as eligible for and who receives a Purchase Award. 4 (v) "Purchase Award" means a right to purchase a specified number of shares of Company Stock with Purchase Loan rights. (w) "Purchase Loan" means an extension of credit to a Participant by the Company evidenced by a non-recourse promissory note for (i) in the case of a new Purchase Loan, 90% or 95% of the Purchase Price of the Company Stock awarded to the Participant under the Plan, or (ii) in the case of a Purchase Loan made pursuant to an exchange of Company Stock pursuant to Section 4, the Purchase Price of the Company Stock awarded to the Participant under an Exchange Award, less his Exchange Award Down Payment, and in either case, bearing Interest, and secured by a pledge of all of the shares of Company Stock purchased by the Participant. (x) "Purchase Note" means a promissory note evidencing the Purchase Loan for the balance of the Purchase Price without recourse rights against the maker and with other terms and conditions established by the Committee consistent with the Plan. (y) "Purchase Note Repayment Amount" means the then unpaid balance of the Purchase Note, accrued and unpaid interest, applicable federal and state payroll and withholding taxes on income recognized on the transaction, and any brokerage fees, collection fees and costs associated with the Purchase Loan. (z) "Purchase Price" or "Exchange Award Purchase Price" means, with respect to a share of Company Stock, the average of the Market Price for the five (5) consecutive Business Days immediately preceding the Commitment Date. (aa) "Retirement" means the termination of employment (for reasons other than Cause) (i) at or after age 65, or (ii) after age 55 with at least 10 years of service with the Company and/or a Subsidiary. (ab) "Subsidiary" means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Company. 3. Company Stock There shall be an aggregate of 9,000,000 shares of Company Stock reserved for issuance under the Plan, subject to Section 9 of the Plan (concerning changes in the capital structure of the Company). Shares that have been awarded under the Plan but not issued, or shares that have been issued but are returned to the Company in conformity with the Plan (including shares of Company Stock retained, canceled or repurchased by the Company in conjunction with the payment of a Purchase Loan or withholding taxes), may again be awarded under the Plan. 4. Exchange of Shares To encourage, extend and expand the continued ownership of Company Stock, Participants in the 1991 Plan whose Purchase Loans mature July 31, 1996, without regard to the one-year extension provided for under Section 6(b), may be given a one-time irrevocable election to exchange all, or a portion to be determined by the Committee, of any shares purchased under the 1991 Plan for an enhanced Purchase Award under the Plan (an "Exchange Award"). To the extent such shares are exchanged they shall 5 constitute the "Exchanged Shares." Exchange Awards shall be issued for not more than the number of shares of common stock determined by dividing the excess of the Exchange Award Purchase Price, as of the Commitment Date of the Exchange Award, of the number of shares relating to a Purchase Loan issued pursuant to the 1991 Plan over the outstanding amount due on the Purchase Loan on such date by 25% of the Exchange Award Purchase Price of the Company's common stock on such date. In the case of a Participant who exercises an Exchange Award, his 1991 Purchase Notes shall be canceled. 5. Stock Purchase Awards On or as soon as practicable after a Commitment Date, the Committee shall give notice to each Participant (or to the class of Participants) eligible for an award stating (i) the number of shares of Company Stock covered by each such Purchase Award or a formula for determining the number of shares of Company Stock covered by each such Purchase Award, and (ii) the price, other terms and conditions, if any, pertaining to each such Purchase Award and Purchase Loan that must be satisfied by a Participant in order to exercise the Purchase Award. A Participant shall exercise a Purchase Award and Purchase Loan rights by delivering to the Company during the Commitment Period (i) a notice stating the amount of his down payment (which shall be 5% or 10% of the Purchase Price or his Exchange Award Down Payment in the case of an Exchange Award) and his intention to deliver a Purchase Note for the balance of the Purchase Price, and (ii) where applicable, the down payment (which shall be deemed paid in the case of an Exchange Award) and a Purchase Note. The grant of a Purchase Award and Purchase Loan to a Participant shall not obligate the Company or a Subsidiary of the Company to pay the Participant any particular amount of remuneration, to continue the employment of a Participant after the grant or to make further grants to a Participant at any time thereafter. 6. Purchase Loans The Company shall, subject to paragraph (a) below, upon the Committee's recommendation, extend a Purchase Loan to a Participant upon exercise of a Purchase Award subject to the following terms and conditions: (a) The original principal amount of a new Purchase Loan shall be the difference between the Participant's down payment (which shall be 5% or 10% of the Purchase Price) and the Purchase Price. In the case of an Exchange Award, the Purchase Loan shall be the difference between the Participant's Exchange Award Down Payment and the Exchange Award Purchase Price. The down payment for a new Purchase Loan shall be in cash, or, if authorized by the Committee (i) by delivery of shares of Company Stock having a Market Price equal to the required down payment on date of transfer to the Company, or (ii) by delivery to the Company of a promissory note with terms and conditions fixed by the Committee and with full recourse rights against the maker. The Exchange Award Down Payment shall be deemed to have been paid by the Equity in a Participant's Exchanged Shares subject to a Purchase Loan under the 1991 Plan. (b) The Purchase Loan shall be due and payable as provided in the provisions of the Purchase Note executed by the Participant. The term of the Purchase Note shall not exceed a period 6 of five (5) years; provided, however, the Participant, in his discretion, may extend the Purchase Note for one (1) year; provided, further, that the Committee, may, in its discretion, extend a Purchase Note for up to two (2) years, in which event the Purchase Note may be prepaid at the election of the Participant at any time within such extension period subject to the same rules and conditions as if it had been paid at maturity. In no event may the Purchase Note term, including extensions, exceed seven (7) years. (c) Purchase Notes shall be in the form approved by the Committee and shall contain such terms and conditions, not inconsistent with the Plan, as the Committee shall determine in its sole discretion; provided, that each Purchase Note shall be subject to the terms of the Plan. (d) A Participant shall effect a pledge of all shares of Company Stock acquired by the Participant upon the exercise of the Purchase Award by delivering to the Company (i) the certificate or certificates for the acquired shares of Company Stock, accompanied by a duly executed stock power in blank, and (ii) a properly executed stock pledge agreement in the form approved by the Committee. (e) Dividends paid on shares of Company Stock pledged as security for a Purchase Loan shall be first treated as Applied Dividends and then applied to repay the Purchase Note. At the discretion of the Committee, the Company shall also pay (i) dividend equivalents on the number of shares purchased pursuant to a Purchase Note equal to the number of shares representing the Participant's Equity in the Exchanged Shares, and (ii) only after all interest and Purchase Price reductions are realized under Section 6(g), dividend equivalents on the number of shares purchased pursuant to a Purchase Note in excess of the number of shares in (i), above, if any. (f) Within ten (10) Business Days after the maturity date of a Purchase Loan, or on the date or dates, if installments are elected pursuant to Section 7(c), as of which a Participant elects to prepay a Purchase Loan and Purchase Note in accordance with Section 7, the Participant shall repay in full the Purchase Note Repayment Amount or the portion related to an installment under Section 7(c). Payment may be made by (1) a personal check or money order payable to CSX Corporation; (2) a tender by the employee (in accordance with procedures established by the Company) of shares of the Company's common stock having a Fair Market Value on the date of tender equaling the Purchase Note Repayment Amount or such installment portion; (3) the delivery of irrevocable instructions to a broker to promptly deliver to the Company either sale proceeds of shares sold to pay the Purchase Note Repayment Amount or such installment portion or the amount loaned by the broker to pay such amount; or (4) any combination of (1), (2) and (3). If, pursuant to procedures established by the Company for compliance with applicable securities laws, the Company believes that the sale of Company Stock on the open market to repay a Purchase Note would violate any provision of applicable securities laws or cause a Participant to incur a liability under Section 16(b) of the Exchange Act, the maturity date may be extended by the Committee until the first day the purchase by the sale of the pledged shares on the open market can be made without violating such securities laws or the Participant incurring liability under Section 16(b). If, pursuant to procedures established by the Company for compliance with applicable tax laws, the Company believes that the repayment of a Purchase Note or the sale of pledged shares of Company Stock on the open market to repay a Purchase Note would cause any portion of a Participant's compensation under the Plan to be nondeductible under Section 162(m) of the IRC, the maturity date may be extended by 7 the Committee until the first day the repayment of a Purchase Note or the sale of pledged shares of Company Stock on the open market to repay a Purchase Note can be made without such compensation being non-deductible under Section 162(m) of the IRC, but in no event shall such extension of the maturity date be for a period greater than one (1) year. (g) In the absence of any contrary contractual agreement with a Participant, the Purchase Price of one half of the pledged shares of Company Stock shall be adjusted as follows if at any time after the first anniversary date of a Purchase Note the Market Price of Company Stock equals or exceeds the Purchase Price of the Participant's Company Stock by the amount specified below for a period of ten (10) consecutive Business Days: Stock Price Purchase Price Reductions Purchase Price + 20% 10% Purchase Price + 30% 20% Purchase Price + 40% 30% Purchase Price + 50% 40% Purchase Price + 60% 50% Purchase Price + 70% 60% Purchase Price + 80% 70% Purchase Price + 90% 80% Purchase Price + 100% 100% The principal amount of a Participant's Purchase Loan and Purchase Note, plus accrued and unpaid Interest, as well as any accrued and unpaid Interest on a down payment loan referenced in Section 6(a) shall be adjusted pursuant to Section 2.5 of the Stock Purchase Pledge and Loan Agreement. The amount of such adjustment to the principal amount of a Participant's Purchase Loan and Purchase Note shall equal the amount of the Purchase Price adjustment provided above. The provisions of this Section and any applicable adjustments to Interest and a Purchase Note shall be applied at the time of repayment of a Purchase Note. Decreases in the Market Price of Company Stock subsequent to the completion of a measuring period shall be disregarded for purposes of the adjustments authorized by this Section. (h) In the event of a change in capital structure involving any of the pledged shares of Company Stock, as provided in Section 9, such newly acquired shares shall be pledged to the Company as substitute or additional security. (i) Notwithstanding anything in this Section 6 to the contrary, the Company shall not be required to make a Purchase Loan to a Participant if making such Purchase Loan will (i) cause the Company to violate any covenant or other similar provision in any indenture, loan agreement, or other agreement, or (ii) violate any applicable federal, state or local law. (j) Upon issuance by the Company of Company Stock purchased pursuant to a Purchase Award, the affected Participant shall be deemed a shareholder of the Company and (subject to the terms of the Plan, the Purchase Loan, the Purchase Note and related documents) shall be entitled to dividend and voting rights with respect to the Company Stock purchased. 8 7. Termination of Employment; Change of Control; Prepayment of Purchase Loan If before a Purchase Note is repaid a Participant's employment terminates for any reason, or he is no longer employed by a continuing Subsidiary, or a Change of Control occurs, the following provisions shall apply notwithstanding any terms in the Purchase Note to the contrary: (a) Death or Disability. If a Participant's termination of ---------------------- employment results from death or Disability, the affected Participant (or the Participant's estate or personal representative) may either (i) continue to hold the Purchase Note and participate in the Plan for three years (or, if earlier, until the maturity date of the Purchase Loan, as extended by either the Participant or the Committee, pursuant to Section 6(b)), or (ii) within ninety (90) days of said termination of employment (A) elect to prepay the Purchase Note, or (B) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (ii)(A), the Purchase Note shall become due and payable on the prepayment date elected by the Participant. If an election to prepay the Purchase Note is effective prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is effective on or after the first anniversary of its execution, Section 6(g) shall apply. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii)(B), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). (b) Involuntary Termination With Consent of Company. If a ------------------------------------------------ Participant's employer terminates his employment for reasons other than Cause, the affected Participant may, within ninety (90) days of said termination of employment (i) elect to prepay the Purchase Note, or (ii) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (i), the Purchase Note shall become due and payable on the prepayment date elected by the Participant. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). If the Participant's termination of employment is prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is on or after the first anniversary of the execution of the Purchase Note, Section 6(g) shall apply. (c) Retirement. If a Participant's termination of employment ---------- results from his Retirement, the affected Participant may either (i) continue to hold the Purchase Note and participate in the Plan for three (3) years (or, if earlier, until the maturity date of the Purchase Loan, as 9 extended by either the Participant, or the Committee, pursuant to Section 6(b)), (ii) prepay the Purchase Note within ninety (90) days of said termination of employment, or (iii) repay the Purchase Note in no more than three (3) installments, due over the remaining term of the Purchase Note, including extensions. If an election to prepay the Purchase Note under (ii) or (iii) above is effective prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is effective on or after the first anniversary of its execution, Section 6(g) shall apply. (d) Voluntary Termination with Consent of Company or Involuntary ----------------------------------------------------------------- Termination. If the Participant's termination of employment is ----------- voluntary and with the consent of the Company, or, if his employer terminates his employment for reasons other than Cause and the Company does not consent to the Participant's termination being treated under Section 7(b), the maturity date of the Purchase Note shall be accelerated without further action of the Committee or the Company and shall be required to be prepaid within ninety (90) days of said termination of employment. If a Participant's termination of employment is prior to the first anniversary of the execution of the Purchase Note, Section 6(g) shall not apply; if it is on or after the first anniversary of the execution of the Purchase Note, Section 6(g) shall apply. (e) Termination for Cause or Voluntary Termination Without Consent ---------------------------------------------------------------- of Company. If the Participant's termination of employment is ---------- involuntary for Cause or a voluntary termination without the consent of the Company, Section 6(g) shall not apply and the Participant agrees to rescind the Exchange Award or the Purchase Award, as the case may be. In such case the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to the excess (if any) of the lesser of: (i) the Market Price on the date of termination of employment; or (ii) an amount equal to his Exchange Award Down Payment, as adjusted by Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a); less the Purchase Note Repayment Amount. (f) Divisive Transaction. If the Participant's employer ceases to be -------------------- a Subsidiary or if there is a sale of substantially all of the assets of the Subsidiary, the affected Participant may, within ninety (90) days of the closing of such divisive transaction (i) elect to prepay the Purchase Note, or (ii) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (i), the Purchase Note shall become due and payable on the prepayment date elected by the Participant. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). Section 6(g) shall apply to all Participants affected by a divisive transaction. The foregoing shall apply whether or not 10 the participant continues in the employ of the Subsidiary but shall not apply should the Participant continue in the employ of the Company or another Subsidiary not part of the divisive transaction. (g) Change of Control. If a Change of Control occurs, Sections 7(a) ----------------- through (f) shall no longer be applicable, the Interest and Purchase Price Reductions under Section 6(g) shall be applied as if the Stock Price had increased by 100% and the Participant may either (i) continue to hold the Purchase Note and participate in the Plan until the maturity date of the Purchase Note, including any extensions, or (ii) within ninety (90) days of said Change of Control and, if applicable, within ninety (90) days of a final Agency action in a Regulated Business Combination under Section 2(e) (iv), (A) elect to prepay the Purchase Note, or (B) elect to rescind the Exchange Award or the Purchase Award, as the case may be. If the Participant elects to prepay the Purchase Note under (ii)(A), the Purchase Note shall become due and payable on the prepayment date elected by the Participant, and the provisions of Section 6(g) shall apply. If the Participant elects to rescind the Exchange Award or the Purchase Award under (ii)(B), the shares of Company Stock acquired by the Participant upon the exercise of the Exchange Award or Purchase Award shall be transferred to the Company, the Purchase Note shall be canceled, the Participant shall have no further rights under the Plan, and the Company shall have no further obligations to the Participant, except that the Company shall pay to or with respect to the Participant, in consideration for the cancellation of the Participant's rights under the Exchange Award or Purchase Award, an amount equal to his Exchange Award Down Payment, as adjusted under Section 7(h), or, if applicable, the Purchase Award down payment paid to the Company pursuant to Section 6(a). (h) Adjustment of Exchange Award Down Payment. Solely for purposes ------------------------------------------ of determining the amount available to a Participant under this Section 7, a Participant's Exchange Award Down Payment shall be adjusted as follows: the dollar amount of the Exchange Award Down Payment computed as of the date of the Exchange of Shares pursuant to Section 4 shall be divided by the Market Price on the date of such Exchange of Shares, to arrive at a number of equivalent shares. On the Purchase Loan maturity date or prepayment date applicable under this Section 7, the number of equivalent shares determined in the preceding sentence will be multiplied by the Market Price on such date to arrive at the Participant's Exchange Award Down Payment as adjusted. (i) Certain Terms of Purchase Awards or Exchange Awards. Notwithstanding any provision of this Plan to the contrary, in the discretion of the Committee, a Purchase Award and/or Exchange Award may provide, to the extent deemed appropriate by the Committee to eliminate or reduce the applicability or impact of Sections 280G and/or 4999 of the IRC, for: (i) the cancellation of shares and/or a reduction or increase in the amount of a Purchase Note, (ii) a limitation of the reduction of the Purchase Price pursuant to Section 7(g) above, (iii) the elimination of any acceleration of a Purchase Note or right to prepay such Note, or (iv) a reduction or limitation of any other benefit under this Plan or otherwise to a Participant. 8. Non-transferability of Purchase Awards Except as provided in Section 7(a), neither right of Participation nor Purchase Awards are assignable or transferable. 11 9. Change in Capital Structure If the number of outstanding shares of Company Stock is increased or decreased as a result of a subdivision or consolidation of shares, the payment of a stock dividend, stock split, or any other change in capitalization effected without receipt of consideration by the Company (including, but not limited to, the creation or issuance to the shareholders generally of rights, options or warrants for the purchase of common or preferred stock of the Company), or if a spin-off transaction occurs, then the number and kind of shares of stock or securities of the Company to be subject to the Plan, the maximum number of shares or securities which may be delivered under the Plan, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding and conclusive on all persons. If there is a Change of Control, the Committee may take such actions, not inconsistent with the Plan, with respect to outstanding unexercised Purchase Awards as the Committee deems appropriate. Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee's determination shall be conclusive and binding on all persons for all purposes. 10. Administration of the Plan The Plan shall be administered by the Committee, consisting of not less than three Directors of the Company appointed by the Board. Subject to paragraph (d) below, the Committee shall be the Compensation Committee of the Board or such subcommittee appointed by the Compensation Committee consisting of not fewer than two non-employee directors. The Committee shall at all times consist of outside directors within the meaning of Section 162(m) of the IRC. The Committee shall have general authority to impose any limitation or condition upon a Purchase Award the Committee deems appropriate to achieve the objectives of the Purchase Award and the Plan, and in addition, and without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority: (a) The Committee shall have the power and complete discretion to determine (i) which employees of the Company or a Subsidiary shall be Participants, (ii) which Participants shall receive a Purchase Award with Purchase Loan rights, (iii) the number of shares of Company Stock to be covered by each Purchase Award, (iv) the Market Price of Company Stock, (v) the time or times when a Purchase Award shall be granted, (vi) whether a Disability exists, (vii) the manner in which payment will be made upon the exercise of a Purchase Award, (viii) the number of shares of Company Stock required to be pledged at any given time, and to make appropriate adjustments and (ix) any additional requirements relating to Purchase Awards that the Committee deems appropriate. (b) The Committee may adopt rules and regulations for carrying out the Plan and for the sale or other disposition of Company Stock acquired pursuant to the Plan. The interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. (c) A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be 12 taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting. (d) The Board may from time to time appoint or remove members and fill vacancies, however caused, in the Committee. Insofar as it is necessary to satisfy the requirements of Section 16(b) of the Exchange Act and Rule 16b-3 thereunder, no member of the Committee shall be eligible to participate in the Plan or in any other plan of the Company or a Subsidiary that entitles participants to acquire stock, stock options or stock appreciation rights of the Company or a Subsidiary, and no person shall become a member of the Committee if, within the preceding one-year period, the person shall have been eligible to participate in such a plan. (e) Down payment loans under the 1991 Plan shall be extended on a full recourse basis for up to seven (7) years in the case of any Participant who receives and exercises an Exchange Award. To the extent that a Purchase Note is extended, accelerated or prepaid under the terms of the Plan, said extension, acceleration or prepayment shall also apply to the down payment loan. 11. Effective Date of the Plan The 1991 Plan became effective as of December 12, 1990. This amendment and restatement of the 1991 Plan shall be effective as of February 14, 1996, and shall be submitted to the shareholders of the Company for approval. Until (i) the Plan has been approved by the Company's shareholders, (ii) the Company Stock issuable under the Plan has been registered with the Securities and Exchange Commission, (iii) the Company Stock is accepted for listing on the New York Stock Exchange, and (iv) the requirements of any applicable state securities laws have been met, no Purchase Award shall be granted or Purchase Loan authorized by the Committee. 12. Termination, Modification If not sooner amended or terminated by the Board, this Plan shall terminate at the close of business on February 13, 2006. No Purchase Awards shall be made under this Plan after termination. The Board may terminate the Plan or may amend the Plan in such respects as it shall deem advisable; provided, however, that, if necessary to satisfy the requirements of Section 16(b) of the Exchange Act, the New York Stock Exchange or applicable state law, the shareholders of the Company must approve any amendment that would (i) materially increase the benefits accruing to Participants under the Plan, (ii) materially increase the number of shares of Company Stock that may be issued under the Plan, or (iii) materially modify the Plan's eligibility requirements. A termination or amendment of the Plan shall not, without the consent of the affected Participant, adversely impact a Participant's rights under a Purchase Award previously granted to him. 13. Notice All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (i) if to the Company--at its principal business address to the attention of the 13 Secretary; (ii) if to any Participant--at the last address of the Participant known to the sender at the time the notice or other communication is sent. 14. Governing Law The terms of this Plan shall be governed by the laws of the Commonwealth of Virginia. 14 EX-10.15 6 Exhibit 10.15 CSX CORPORATION 1987 Long-Term Performance Stock Plan As Amended and Restated Effective April 25, 1996 (As Amended through December 9, 1998) 1. Purpose. The purpose of the CSX Corporation Long-Term Performance Stock Plan (the "Plan") is to attract and retain outstanding individuals as officers and key employees of CSX Corporation and its subsidiaries, to furnish motivation for the achievement of long-term performance objectives by providing such persons opportunities to acquire ownership of common shares of the Company, monetary payments based on the value of such shares or the financial performance of the Company, or both, on terms as herein provided. It is intended that the Incentives provided under this Plan will be treated as qualified performance-based compensation within the meaning of Section 162(m) of the Code. 2. Definitions. Whenever the following words are capitalized and used in the Plan, they shall have the respective meanings set forth below, unless a different meaning is expressly provided. Unless the context clearly indicates to the contrary, in reading this document the singular shall include the plural and the masculine shall include the feminine. a. "Beneficiary": The term Beneficiary shall mean the person designated by the Participant, on a form provided by the Company, to exercise the Participant's rights in accordance with Section 14 of the Plan in the event of his death. b. "Benefits Trust Committee": The term Benefits Trust Committee means the committee established pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust. c. "Board of Directors": The term Board of Directors or Board means the Board of Directors of CSX Corporation. d. "Cause": The term Cause means (i) an act or acts of personal dishonesty of a Participant intended to result in substantial personal enrichment of the Participant at the expense of the Company or any of its subsidiaries, (ii) violation of the management responsibilities by the Participant which is demonstrably willful and deliberate on the Participant's part and which is not remedied in a reasonable period of time after receipt of written notice from the Company or a subsidiary, or (iii) the conviction of the Participant of a felony involving moral turpitude. e. "Change in Control": The term Change in Control is defined in Section 22. f. "Code": The term Code means the Internal Revenue Code of 1986, as amended. g. "Committee": The term Committee means the Compensation Committee of the Board of Directors. h. "Company": The term Company means CSX Corporation. i. "Completed Month": The term Completed Month shall mean a period beginning on the monthly anniversary date of a grant of an Incentive and ending on the day before the next monthly anniversary. j. "Covered Employee": The term Covered Employee shall mean the chief executive officer of the Company or any other individual who is among the four (4) highest compensated officers or who is otherwise a "covered employee" within the meaning of Section 162(m) of the Code, as determined by the Committee. k. "Disability": The term Disability means long-term disability as determined under the Company's Salary Continuance and Long-Term Disability Plan. l. "Divisive Transaction": The term Divisive Transaction means a transaction in which the Participant's employer ceases to be a Subsidiary or there is a sale of substantially all of the assets of the Subsidiary. m. "Exchange Act": The term Exchange Act means the Securities Exchange Act of 1934, as amended. n. "Exercisability Requirements": The term Exercisability Requirements used with respect to any grant of options means such restrictions or conditions on the exercise of such options that the Committee may, in its discretion, add to the one-year holding requirement contained in Sections 7 and 8. o. "Fair Market Value": The term Fair Market Value shall be deemed to be the mean between the highest and lowest quoted selling prices of the stock per share as reported under New York Stock Exchange-Composite Transactions on the day of reference to any event to which the term is pertinent, or, if there is no sale that day, on the last previous day on which any such sale occurred. p. "Functional Group": The term Functional Group means a group of employees, identified by the Compensation Committee, in its sole discretion, to be subject to a common set of Performance Objectives. q. "Incentive": The term Incentive means any incentive under the Plan described in Section 6. r. "Objective Standard": The term Objective Standard means a formula or standard by which a third party, having knowledge of the relevant performance results, could calculate the amount to be paid to a Participant. Such formula or standard shall specify the individual employees or class of employees to which it applies, and shall preclude discretion to increase the amount payable that would otherwise be due upon attainment of the objective. s. "Participant": The term Participant means an individual designated by the Committee as a Participant pursuant to Section 5. t. "Performance Objective": The term Performance Objective shall mean a performance objective established in writing by the Committee within ninety (90) days of the -2- commencement of the Performance Period to which the Performance Objective relates and at a time when the outcome of such objective is substantially uncertain. Each Performance Objective shall be established in such a way that a third party having knowledge of the relevant facts could determine whether the objective is met. A Performance Objective may be based on one or more business criteria that apply to the individual Participant, a business unit or the Company as a whole, and shall state, in terms of an Objective Standard, the method of computing the amount payable to the Participant if the Performance Objective is attained. With respect to Incentives granted to Covered Employees, the material terms of the Performance Objective shall be disclosed to, and must be subsequently approved by, a vote of the shareholders of the Company, consistent with the requirements of Section 162(m) of the Code and the regulations thereunder. The Performance Objectives for any Performance Period shall be based on one or more of the following measures, as determined by the Committee in writing within ninety (90) days of the commencement of the Performance Period: 1. The achievement by the Company or business unit of specific levels of Return on Invested Capital ("ROIC"). ROIC for the Company or business unit means its results of operations divided by its capital. 2. The generation by the Company or business unit of free cash flow. 3. The creation by the Company or business unit of specific levels of Economic Value Added ("EVA"). EVA for the Company or business unit means its ROIC less its cost of capital multiplied by its capital. 4. The creation by the Company of specific levels of Total Shareholder Return ("TSR"). TSR for the Company means total return to shareholders as measured by stock price appreciation plus dividends. u. "Performance Period": The term Performance Period means a fixed period of time, established by the Committee, during which a Participant performs service for the Company and during which Performance Objectives may be achieved. v. "Plan": The term Plan means this CSX Corporation 1987 Long-Term Performance Stock Plan as amended or restated from time to time. w. "Retirement": The term Retirement, for Incentives granted prior to January 1, 1999, means termination of employment with immediate commencement of retirement benefits under the Company's defined benefit pension plan. For Incentives granted after December 31, 1998, the term Retirement means a termination of employment after age 55 with eligibility to begin immediately receiving retirement benefits under the Company's defined benefit pension plan. x. "Separation From Employment": The term Separation From Employment means an employee's separation from employment with the Company or a Subsidiary as a result of Retirement, death, Disability, or termination of employment (voluntarily or involuntarily). A Participant in receipt of periodic severance payments shall be considered separated from employment on the day preceding the day such severance payments commenced. y. "Subsidiary": The term Subsidiary means, with respect to any corporation, or corporation more than 50% of whose voting shares are owned directly or indirectly by the Company. -3- z. "Trust": The term Trust means the CSX Corporation and Affiliated Companies Executives' Stock Trust or such other trust or trusts which substantially conforms to the terms of the Internal Revenue Service model trust as described in Revenue Procedure 92-64, 1992-2 C.B. 422. 3. Number of Shares. Subject to the provisions of Section 19 of this Plan, the maximum number of shares which may be issued pursuant to the Incentives shall be 21,000,000 shares of the Company's common stock, par value $1.00 per share. The maximum number of such shares that may be issued pursuant to any type of Incentive shall be 17,500,000 shares. The remaining 3,500,000 shares may be issued only pursuant to grants of Incentive Stock Options, Non-Qualified Stock Options, and Stock Appreciation Rights. Such shares shall be authorized and unissued shares of the Company's common stock. Subject to the provisions of Section 19, if any Incentive granted under the Plan shall terminate or expire for any reason without having been exercised in full, the unissued shares subject thereto shall again be available for the purposes of the Plan. Similarly, shares which have been issued, but which the Company retains or which the Participant tenders to the Company in satisfaction of income and payroll tax withholding obligations or in satisfaction of the exercise price of any option shall remain authorized and shall again be available for the purposes of the Plan, provided, however, that any such previously issued shares shall not be the subject of any grant under the Plan to any officer of the Company who, at the time of such grant, is subject to the short-swing trading provisions of Section 16 of the Exchange Act. 4. Administration. a. Prior to a Change of Control, the Plan shall be administered by the Committee. The Committee shall consist of three or more members of the Board of Directors. No member of the Committee shall be eligible to receive any Incentives under the Plan while a member of the Committee. A majority of the Committee shall constitute a quorum. The Committee shall recommend to the Board individuals to receive Incentives, including the type and amount thereof, unless the Board shall have delegated to the Committee the authority and power to select persons to whom Incentives may be granted, to establish the type and amount thereof, and to make such grants. Subject to the express provisions of the Plan, the Committee shall have authority to construe any agreements entered into with any person in respect of any Incentive or Incentives, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of any such agreements and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement under the Plan in the manner and to the extent it shall deem expedient to carry it into effect, and it shall be the sole and final judge of such expedience. Any determination of the Committee under the Plan may be made without notice of meeting of the Committee by a writing signed by a majority of the Committee members. The determinations of the Committee on the matters referred to in this Section 4 shall be conclusive. b. Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Committee as the Plan Administrator. Additionally, following a Change of Control, any and all final benefit determinations for Participants, their beneficiaries, heirs and assigns and decisions regarding benefit claims under this Plan shall rest with the Benefits Trust Committee or its delegate in its sole judgment and absolute discretion. -4- 5. Eligibility and Participation. Incentives may be granted only to officers and key employees of the Company and of its Subsidiaries at the time of such grant as the Committee in its sole discretion may designate from time to time to receive an Incentive or Incentives. An officer or key employee who is so designated shall become a Participant. A director of the Company or of a Subsidiary who is not also an officer or employee of the Company or of such Subsidiary will not be eligible to receive an Incentive. The Committee's designation of an individual to receive an Incentive at any time shall not require the Committee to designate such person to receive an Incentive at any other time. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Incentives, including without limitation (a) the financial condition of the Company, (b) anticipated financial results for the current or future years, including return on invested capital, (c) the contribution by the Participant to the profitability and development of the Company through achievement of established strategic objectives, and (d) other compensation provided to Participants. 6. Incentives. Incentives may be granted in any one or a combination of (a) Incentive Stock Options; (b) Non-Qualified Stock Options; (c) Stock Appreciation Rights; (d) Performance Shares; (e) Performance Units; (f) Restricted Stock; and (g) Incentive Compensation Program Shares, all as described below and pursuant to the terms set forth in Sections 3 and 7-12 hereof. With respect to Items (a)-(c), the maximum number of shares of common stock of the Company with respect to which these Incentives may be granted in any Plan Year to any Participant will be 750,000. With respect to Items (d)-(f), the maximum number of shares of common stock of the Company with respect to which these Incentives may be granted during any Plan Year to any Participant will be 150,000. 7. Incentive Stock Options. Incentive Stock Options (ISOs) will consist of options to purchase shares of the Company's common stock at purchase prices not less than 100 percent of the Fair Market Value of such common stock on the date of grant. ISOs will be exercisable upon the date or dates specified in an option agreement entered into with a Participant but not earlier than one year after the date of grant of the options and not later than 10 years after the date of grant of the options; provided, however, that whether or not the one-year holding requirement is satisfied, any Exercisability Requirements must be satisfied. For options granted after December 31, 1986, the aggregate Fair Market Value, determined at the date of grant, of shares for which ISOs are exercisable for the first time by a Participant during any calendar year shall not exceed $100,000. Notwithstanding the provisions of Section 5 of this Plan, no individual will be eligible for or granted an ISO if that individual owns stock of the Company possessing more than 10 percent of the total combined voting power of all classes of the stock of the Company or its Subsidiaries. Any Participant who is an option holder may exercise his option to purchase stock in whole or in part upon the date or dates specified in the option agreement offered to him. In no case may an option be exercised for a fraction of a share. Except as set forth in this Section 7, Section 12 and in Sections 14 through 16, no option holder may exercise an option unless at the time of exercise he has been in the continuous employ of the Company or one of its Subsidiaries since the grant of such option. An option holder under this Plan shall have no rights as a shareholder with respect to any shares subject to such option until such shares have been issued. -5- For purposes of this Section 7, written notice of exercise must be received by the Corporate Secretary of the Company not less than one year nor more than 10 years after the option is granted. Such notice must state the number of shares being exercised and must be accompanied by payment of the full purchase price of such shares. Payment for the shares for which an option is exercised may be made by (1) a personal check or money order payable to CSX Corporation; (2) a tender by the employee (in accordance with procedures established by the Company) of shares of the Company's common stock having a Fair Market Value on the date of tender equaling the purchase price of the shares for which the option is being exercised; or (3) any combination of (1) and (2). 8. Non-Qualified Stock Options. NQSOs will be exercisable upon the date or dates specified in an option agreement entered into with a Participant but not earlier than one year after the date of grant of the options and not later than 10 years after the date of grant of the options (15 years if the NQSO grant was a 15-year grant); provided, however, that whether or not the one-year holding requirement is satisfied, any Exercisability Requirements must be satisfied. Any Participant may exercise an option to purchase stock upon the date or dates specified in the option agreement offered to him. In no case may an option be exercised for a fraction of a share. Except as set forth in this Section 7, Section 12 and in Sections 14 through 16, no option holder may exercise an option unless at the time of exercise he has been in the continuous employ of the Company or one of its Subsidiaries since the grant of his option. An option holder under this Plan shall have no rights as a shareholder with respect to any shares subject to such option until such shares have been issued. For purposes of this Section 8, written notice of exercise must be received by the Corporate Secretary of the Company, not earlier than one year nor later than 10 years after the option is granted; provided, however, effective for grants of options after December 31, 1998, the term of the option may be 15 years instead of 10 years. Such notice must state the number of shares being exercised and must be accompanied by payment of the full purchase price of such shares. Payment for the shares for which an option is exercised may be made by (1) a personal check or money order payable to CSX Corporation; (2) a tender by the employee (in accordance with procedures established by the Company) of shares of the Company's common stock having a Fair Market Value on the date of tender equaling the purchase price of the shares for which the option is being exercised; (3) the delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to the Company either sale proceeds of shares sold to pay the purchase price or the amount loaned by the broker to pay the purchase price; or (4) any combination of (1), (2) and (3). Non-Qualified Stock Options (NQSOs) will consist of options to purchase shares of the Company's common stock at purchase prices not less than 100 percent of the Fair Market Value of such common stock on the date of grant; provided, further, effective for grants of options after December 31, 1998, the term of the option may be 15 years instead of 10 years. 9. Stock Appreciation Rights. Any option granted under the Plan may include a stock appreciation right (SAR) by which the participant may surrender to the Company all or a portion of the option to the extent exercisable at the time of surrender and receive in exchange a payment equal to the excess of the Fair Market Value of the shares covered by the option portion surrendered over the aggregate option price of such shares. Such payment shall be made in shares of Company common stock, in cash, or partly in shares and partly in cash, as the Committee in its sole discretion shall determine, but in no event shall the number of shares of common -6- stock delivered upon a surrender exceed the number the option holder could then purchase upon exercise of the option. Such rights may be granted by the Committee concurrently with the option or thereafter by amendment upon such terms and conditions as the Committee may determine. The Committee may also grant, in addition to, or in lieu of options to purchase stock, SARs which will entitle the Participant to receive a payment upon surrender of that right, or portion of that right in accordance with the provisions of the Plan, equaling the difference between the Fair Market Value of a stated number of shares of Company common stock on the date of the grant and the Fair Market Value of a comparable number of shares of Company common stock on the day of surrender, adjusted for stock dividends declared between the time of the grant of the SAR and its surrender. The Committee shall have the right to limit the amount of appreciation with respect to any or all of the SARs granted. Payment made upon the exercise of the SARs may be in cash or shares of Company common stock, or partly in shares and partly in cash, as the Committee in its sole discretion shall determine. For purposes of this Section 9, written notice must be received by the Corporate Secretary of the Company not earlier than one year nor later than 10 years after the SAR is granted. Such notice must state the number of SARs being surrendered and the method of settlement desired within the guidelines established from time to time by the Committee. The SAR holder will receive settlement based on the Fair Market Value on the day the written request is received by the Corporate Secretary of the Company. In certain situations as determined by the Committee, for purposes of this Section 9, written notice must be received by the Corporate Secretary of the Company between the third and twelfth business days after the public release of the Company's quarterly earnings report, or between such other, different period as may hereinafter be established by the Securities and Exchange Commission. For such settlements, a Participant subject to a restricted exercise period shall receive settlement based on the highest Fair Market Value during the period described in the foregoing sentence. The Committee may not grant an SAR or other rights under this Section 9 in connection with an incentive stock option if such grant would cause the option or the Plan not to qualify under Section 422 of the Code or if it is prohibited by such section or Treasury regulations issued thereunder. Any grant of an SAR or other rights which would disqualify either the option as an ISO or the Plan, or which is prohibited by Section 422 of the Code or Treasury regulations issued thereunder, is and will be considered as void and vesting no rights in the grantee. It is a condition for eligibility for the benefits of the option and of the Plan that the Participant agree that in the event an SAR or other right granted should be determined to be void as provided by the foregoing, the Participant has no right or cause of action against the Company. 10. Performance Unit Awards and Performance Share Awards. The Committee may grant Performance Unit Awards (PUAs) and Performance Share Awards (PSAs) under which payment shall be made in shares of the Company's common stock, in cash, or partly in shares and partly in cash, as the Committee in its sole discretion shall determine. PUAs and PSAs may be awarded to individual Participants or to a Functional Group. Awards to a Functional Group shall be subject to distribution by the Chief Executive Officer of the Company, or by his designees, to individuals within such group. At the time of the grant, the Committee shall establish in writing and communicate to Participants, and to members of a Functional Group who can be identified, Performance Objectives to be achieved during the Performance Period. Awards of PUAs and PSAs may be determined by the average level of attainment of Performance Objectives over multiple Performance Periods. Prior to the payment of PUAs and PSAs, the Committee shall determine the extent to which Performance Objectives have been attained during the Performance Period or Performance Periods in order -7- to determine the level of payment to be made, if any, and shall record such results in the minutes of the meeting of the Committee. In no instance will payment be made if the Performance Objectives are not attained. Payment, if any, shall be made in a lump sum or in installments, in cash or shares of Company common stock, as determined by the Committee, commencing as promptly as feasible following the end of the Performance Period, except that (a) payments to be made in cash may be deferred subject to such terms and conditions as may be prescribed by the Company, and (b) payments to be made in Company common stock may be deferred pursuant to an election filed on forms prescribed and provided by and filed with the Company. A Participant may elect annually to defer to a date certain, or the occurrence of an event, as provided in the form, the receipt of all or any part of shares of Company common stock he may subsequently become entitled to receive. On forms provided by and filed with the Company, the Participant shall also specify whether, when the deferral period expires or when the restrictions below lapse, payment will be in a lump sum or installments over a period not exceeding twenty (20) years. The Committee shall prescribe the time periods during which the election must be filed in order to be effective. Elections to defer, once effective, are irrevocable. Changes regarding the date of payment, the period over which payments are to be made and the method of payment are subject to substantial penalties. However, a One-Time Change of Distribution Election may be made to change the timing or the form of payment without penalty. Any such election which changes a distribution election on "termination of employment" or "the earlier of termination or a specified age" shall be void in the event the Participant's employment terminates within twelve (12) months following the date of the election. If a Participant has made an effective election to defer the payment of shares of common stock, the Company shall, within a reasonable period of time after the deferral election is made, transfer shares of common stock or other assets equal in value to the number of shares as to which payment is deferred to the Trust to secure the Company's obligation to pay shares of common stock to the Participant in the future. However, in any event, the Company shall make any previously deferred payment of shares to the Participant upon: a. the death of the Participant; b. the Disability of the Participant; c. the Participant's termination of employment with the Company or a subsidiary of the Company, subject to the Participant's deferral election; d. A Divisive Transaction, subject to the Participant's deferral election; or e. a Change in Control. If a former Participant who has not received distribution of his entire deferred payment under this Section is reemployed and again becomes a Participant in the Plan, he may suspend payment of any remaining amounts deferred, by notifying the Company in writing, and make a new deferral election, without penalty, with respect to those amounts and new amounts deferred so long as such change does not accelerate the timing of any payment to the Participant; provided, however, distributions shall continue if the commencement of distribution was because the Participant chose a specific age for the commencement of benefits and that age has been attained. Notwithstanding a Participant's election to defer the payment of shares of common stock pursuant to this Section 10, the Company shall make cash payments to Participants following each common stock dividend payment date equal to the dividends payable on the number of shares of Company common stock credited to the Participant's account as of the dividend record date (including shares for which an election to defer has been made and any reinvested dividends thereon). A Participant may elect to defer receipt of the cash payments pursuant to election forms prescribed and provided by and filed with the Company. Such -8- deferred cash payments shall be credited to the Participant's account and reinvested in shares of Company common stock as of the dividend payment date. An election to defer, once effective, shall be irrevocable for the calendar year, and shall continue in effect with respect to subsequent calendar years until changed by a timely filed new election. Any dividends paid on shares of Company common stock held in the Trust shall be paid to the Trust and shall be reinvested in shares of Company common stock, or other assets equal in value, to secure the Company's obligation to pay shares of common stock to Participants in the future. 11. Restricted Stock. A Restricted Stock Award (RSA) shall entitle the Participant, subject to his continued employment during the restriction period determined by the Committee and his complete satisfaction of any other conditions, restrictions and limitations imposed in accordance with the Plan, to the unconditional ownership of the shares of the Company's common stock covered by the grant without payment therefore. The Committee may grant RSAs at any time or from time to time to a Participant selected by the Committee in its sole discretion. The Committee shall establish at the time of grant of each RSA a Performance Period and Performance Objectives to be achieved during the Performance Period. At the time of grant, the Performance Period and Performance Objectives shall be set forth either in agreements or in guidelines communicated to the Participant in such form consistent with this Plan as the Committee shall approve from time to time. Following the conclusion of each Performance Period and prior to payment, the Committee shall determine the extent to which Performance Objectives have been attained or a degree of achievement between maximum and minimum Performance Objectives during the Performance Period in order to determine the level of payment to be made, if any, and shall record such results in the minutes of the meeting of the Committee. In no instance will payment be made if the Performance Objectives are not attained. At the time that an RSA is granted, the Committee shall establish in the written agreement a restriction period applicable to all shares covered by such grant. Subject to the provisions of the next following paragraph, the Participant shall have all of the rights of a stockholder of record with respect to the shares covered by the grant to receive dividends or other distributions in respect of such shares (provided, however, that any shares of stock of the Company distributed with respect to such shares shall be subject to all of the restrictions applicable to such shares) and to vote such shares on all matters submitted to the stockholders of the Company, but such shares shall not be sold, exchanged, pledged, hypothecated or otherwise disposed of at any time prior to the expiration of the restriction period, including by operation of law, and any purported disposition, including by operation of law, shall result in automatic forfeiture of any such shares. Except as hereinafter provided, if, during the restriction period applicable to such grant, a Separation From Employment of a Participant occurs for any reason other than death, Disability or Retirement, all shares covered by such grant shall be forfeited to the Company automatically. If the Participant's Separation From Employment is because of Retirement or death, or in the event of Disability, the Participant or his successor in interest shall be entitled to unconditional ownership of a fraction of the total number of shares covered by such grant of which the numerator is the number of whole calendar months in the period commencing with the first whole calendar month following the date of grant and ending with the whole calendar month including the date of death, Disability or Retirement, and of which -9- the denominator is the number of whole calendar months in the applicable restriction period. Any fractional shares shall be disregarded. The Committee may, at the time of granting any RSA, impose such other conditions, restrictions or limitations upon the rights of the Participants during the restriction period or upon the Participant's right to acquire unconditional ownership of shares as the Committee may, in its discretion, determine and set forth in the written agreement. At the time of grant of an RSA, the Company shall cause to be issued and registered in the name of the Participant a stock certificate representing the full number of shares covered thereby, which certificate shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such grant, and the grantee shall execute and deliver to the Company a stock power endorsed in blank covering such shares. Such stock certificate and stock power shall be held by the Company or its designee until the expiration of the restriction period, at which time the same shall be delivered to the Participant or his designee if all of the conditions and restrictions of the grant have been satisfied, or until the forfeiture of such shares, at which time the same shall be cancelled and the shares shall be returned to the status of unissued shares. 12. Incentive Compensation Program Shares. A Participant who receives base compensation in excess of a dollar level to be determined by the Committee and who is eligible to receive an award under the Company's Incentive Compensation Program ("ICP") may elect, by filing the prescribed election form with the Company in accordance with rules established by the Committee, to receive all or part of his annual ICP award in shares of the Company's common stock, rather than cash; provided, however, the Participant must agree that his receipt of the stock will be deferred until his retirement or termination of employment, with a minimum deferral period of three (3) years. Elections to defer are irrevocable. A Participant who makes such election shall, at the time that the stock is deferred, receive an additional award of stock equal to a percentage, established by the Committee from time to time, of the amount that he elected to have deferred, but not to exceed 25% (the "Stock Premium"). The Participant's election to defer shall also apply to the Stock Premium. If a Participant made an effective election to defer the payment of shares of common stock and receive the Stock Premium, the Company shall, within a reasonable period of time after the deferral election is made, transfer shares of common stock or other assets equal in value to the number of shares as to which payment is deferred to the Trust to secure the Company's obligation to pay shares of common stock to the Participant in the future. However, in any event, the Company shall make any previously deferred payment of shares to the Participant upon: a. the death of the Participant; b. the Disability of the Participant; c. the Participant's termination of employment with the Company or a subsidiary of the Company, subject to the Participant's deferral election and the three (3) year deferral requirement; d. a Divisive Transaction, subject to the Participant's deferral election; or e. a Change in Control. Notwithstanding any provisions of this Plan to the contrary, upon the occurrence of a Divisive Transaction, the three (3) year holding requirement of the stock premium for deferred ICP shares shall be deemed satisfied. -10- Notwithstanding a Participant's election to defer the payment of shares of common stock pursuant to this Section 12, the Company shall make cash payments to Participants following each common stock dividend payment date equal to the dividends payable on the number of shares of Company common stock credited to the Participant's account as of the dividend record date (including shares for which an election to defer has been made and any reinvested dividends thereon). A Participant may elect to defer receipt of the cash payments pursuant to election forms prescribed and provided by and filed with the Company. Such deferred cash payments shall be credited to the Participant's account and reinvested in shares of Company common stock as of the dividend payment date. An election to defer, once effective, shall be irrevocable for the calendar year, and shall continue in effect with respect to subsequent calendar years until changed by a timely filed new election. 13. Contributions to the Trust. a. The Company shall make contributions to the Trust to secure a source of future payments with respect to Participant's deferral elections pursuant to Sections 10 and 12. The Trustee shall be responsible only for contributions actually received by it hereunder and the Trustee shall have no duty or responsibility with respect to the timing, amounts and sufficiency of the contributions made or to be made by the Company hereunder. b. The Company may make contributions to the Trust in Common Stock. c. A separate bookkeeping account (an "Account") shall be established by the Trustee for each Participant covered by the Trust pursuant to the Plan, as directed in writing by the Company. A Participant may have more than one Account. Each account is intended to represent the amount of a Participant's deferred and unpaid benefit under the related provisions of the Plan. The value of a Participant's Account at any time will equal the fair market value of the number of shares of Common Stock owed to a Participant under the affected provisions of this Plan at such time. The number of shares owed at any time will equal the number of shares of Common Stock which were originally deferred by the Participant (including any applicable Stock Premium), plus, the number of Common Stock Shares which would have been acquired if dividends subsequently declared by the Company had been paid with respect to such shares and reinvested in Common Stock. "Account" may also mean individual sub-accounts which have been or may be established under this Plan from time to time. d. Within sixty days following the close of each calendar year, or more frequently or at such other time as may be required by the Trust Agreement, the Trustee shall provide the Company and each Participant with a written statement of the Account of each Participant. 14. Separation From Employment and Divisive Transactions. If the Participant's Separation From Employment is because of Disability or death, the right of the Participant or his successor in interest to exercise an ISO, NQSO or SAR shall terminate not later than five years after the date of such Disability or death, but in no event later than 10 years from the date of grant (15 years if the NQSO grant was a 15-year grant); provided, however, that if such Participant is eligible to retire with the ability to begin immediately receiving retirement benefits under the Company's pension plan, his or his successor in interest's right to exercise any ISOs, NQSOs or SARs shall be determined as if his Separation From Employment was because of Retirement. If the Participant's Separation From Employment is because of his Retirement, the right of the Participant or his successor in interest to exercise an ISO, NQSO or SAR shall terminate not later than 10 years from the date of grant (15 years if the NQSO grant was a 15-year grant). -11- Unless the Committee deems it necessary in individual cases (except with respect to Covered Employees) to extend a Participant's exercise period, if a Participant's Separation From Employment is for any reason other than Retirement, Disability or death, the right of the Participant to exercise an ISO, NQSO or SAR shall terminate not later than one year from the date of Separation From Employment, but in no event later than 10 years after the date of grant (15 years if the NQSO grant was a 15-year grant). For any ISO, NQSO or SAR granted after December 31, 1998, the Participant must exercise within 30 days instead of one year. At the time of his Separation From Employment for any reason other than Cause, a Participant shall vest in a portion of any Incentives granted under Sections 7 (ISOs), 8 (NQSOs) or 9 (SARs) that he has held for less than one year from the date of the grant. The portion of such Incentives in which the Participants shall vest shall be determined by multiplying all shares subject to such Incentives by a fraction, the numerator of which shall be the number of Completed Months of employment following the date of grant and the denominator of which shall be twelve. A Participant who vests in any Incentives under the preceding paragraph may not exercise such Incentives prior to the satisfaction of the one-year holding requirement and the Exercisability Requirements pertaining to such Incentives. Any Incentives vested under the preceding paragraph must be exercised within one year from the date of the Participant's Separation From Employment. If the Participant's employer is a Subsidiary involved in a Divisive Transaction or if the Participant's employment is terminated with the consent of the Company (as a result of a business transaction or a reduction in force or any other circumstances approved by the Committee), the right of the Participant or his successor in interest to exercise an ISO, NQSO or SAR shall terminate not less than three years after the date of the closing of such Divisive Transaction or after the date the Participant's employment is terminated with the consent of the Company, but in no event later than 10 years from the date of grant (15 years if the NQSO grant was a 15-year grant); provided, however, that if such Participant is eligible to retire with the ability to begin immediately receiving retirement benefits under the Company's pension plan, his or his successor in interest's right to exercise any ISO, NQSO' or SAR' shall be determined as if he had retired. Notwithstanding anything to the contrary in this paragraph, a Participant may not exercise such Incentives prior to satisfaction of the one year holding requirement and the Exercisability Requirements pertaining to such Incentives. As to PUAs or PSAs, in the event of a Participant's Separation from Employment because of his Retirement, Disability or death prior to the end of the applicable Performance Period, or if the Participant's employer is a Subsidiary involved in a Divisive Transaction prior to the end of the applicable Performance Period, payment, if any, to the extent earned under the applicable Performance Objectives and awarded by the Committee, shall be payable at the end of the Performance Period in proportion to the active service of the Participant during the Performance Period, as determined by the Committee. If the Separation From Employment prior to the end of the Performance Period is for any other reason, the Participant's participation in Section 10 of the Plan shall immediately terminate, his agreement shall become void and the PUA or PSA shall be canceled. Notwithstanding anything to the contrary in this Plan, if a Participant or former Participant (a) becomes the owner, director or employee of a competitor of the Company or its subsidiaries, (b) has his employment terminated by the Company or one of its subsidiaries on account of actions by the Participant which are detrimental to the interests of the Company or its subsidiaries, or (c) engages in conduct subsequent to the termination of his employment with the Company or its subsidiaries which the Committee determines to be detrimental to the interests of the Company or its subsidiaries then the Committee may, in its sole discretion, pay the Participant or former Participant a single sum payment equal to the amount of his -12- unpaid benefits which were awarded and deferred under Sections 10 or 12 of the Plan; provided, however, if the deferral has been for less than three (3) years under Section 12, the Participant shall not be eligible to receive the Stock Premium. The single sum payment shall be made as soon as practicable following the date the Participant or former Participant becomes an owner, director or employee of a competitor, his termination of employment or the Committee's determination of detrimental conduct, as the case may be, and shall be in lieu of all other benefits which may be payable to the Participant or former Participant under this Plan. Effective for Incentives granted after December 31, 1998, notwithstanding anything to the contrary in this Plan, if a Participant or former Participant (a) becomes associated with, recruits or solicits customers or other employees of the Company or its Subsidiaries for, is employed by, renders services to, or owns any interest in (other than any nonsubstantial interest, as determined by the Committee) any business that is in competition with the Company or one of its subsidiaries, (b) has his employment terminated by the Company or one of its subsidiaries for Cause or on account of actions, by the Participant which are detrimental to the interests of the Company or its subsidiaries, or (c) engages in, or has engaged in, conduct at the time of or subsequent to the termination of his employment with the Company or its subsidiaries which the Committee determines to be detrimental to the interests of the Company or its subsidiaries then the Committee may, in its sole discretion, except following a Change of Control, cancel all outstanding Incentives of the Participant, including immediately terminating any Options held by the Participant, regardless of whether then exercisable. 15. Incentives Non-assignable and Non-transferable. Any Incentive granted under this Plan shall be non-assignable and non-transferable other than as provided in Section 16 and shall be exercisable (including any action of surrender and exercise of rights under Section 9) during the Participant's lifetime only by the Participant who is the holder of the Incentive or by his guardian or legal representative. 16. Death of Option Holder. In the event of the death of a Participant who is an Incentive holder under the Plan while employed by the Company or one of its subsidiaries or prior to exercise of all rights under an Incentive, the Incentive theretofore granted may be exercised (including any action of surrender and exercise of rights under Section 9) by the Participant's Beneficiary or, if no Beneficiary is designated, by the executor or executrix of the Participant's estate or by the person or persons to whom rights under the Incentive shall pass by will or the laws of descent and distribution in accordance with the provisions of the Plan and of the option and to the same extent as though the Participant were then living. 17. No Right to Continued Employment. Notwithstanding any other provisions of this Plan to the contrary, it is a condition for eligibility for any benefit or right under this Plan that each individual agrees that his or her designation as a Participant and any grant made under the Plan may be rescinded and determined to be void and forfeited entirely in the absolute and sole discretion of the Committee in the event that such individual is discharged for Cause. Incentives granted under the Plan shall not be affected by any change of employment so long as the Incentive holder has not suffered a Separation From Employment. A leave of absence granted by the Company or one of its subsidiaries shall not constitute Separation From Employment unless so determined by the Committee. Nothing in the Plan or in any Incentive granted pursuant to the Plan shall confer on any -13- individual any right to continue in the employ of the Company or one of its subsidiaries or interfere in any way with the right of the Company or such subsidiary to terminate employment at any time. 18. Funding Method. To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 19. Adjustment of Shares. a. In the event of any change (through recapitalization, merger, consolidation, stock dividend, split-up, combination or exchanges of shares or otherwise) in the character or amount of the Company's common stock prior to exercise of any Incentive granted under this Plan, the Incentives, to the extent not exercised, shall entitle the Participant who is the holder to such number and kind of securities as he would have been entitled to had he actually owned the stock subject to the Incentives at the time of the occurrence of such change. If any such event should occur, prior to exercise of an Incentive granted hereunder, which shall increase or decrease the amount of common stock outstanding and which the Committee, in its sole discretion, shall determine equitably requires an adjustment in the number of shares which the Incentive holder should be permitted to acquire, such adjustment as the Committee shall determine may be made, and when so made shall be effective and binding for all purposes of the Plan. b. Incentives may also be granted having terms and provisions which vary from those specified in the Plan provided that any Incentives granted pursuant to this paragraph are granted in substitution for, or in connection with the assumption of, then existing Incentives granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary corporation is a party. c. The obligations of the Company or any of its affiliated corporations and the benefit due any Participant, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto under the CSX Corporation and Affiliated Companies Executives' Stock Trust or any similar trust or trusts or other vehicle. d. Notwithstanding the preceding, following a Change of Control, the authority to delay payment of a Participant's benefits rests solely with the Benefits Trust Committee 20. Loans to Option Holders. The Committee may adopt programs and procedures pursuant to which the Company may lend money to any Participant who is an Incentive holder for the purpose of assisting the Participant to acquire or carry shares of common stock issued upon the exercise of Incentives granted under the Plan. 21. Termination and Amendment of Plan. a. Unless the Plan shall have been previously terminated as hereinafter provided, the Plan shall terminate on April 27, 2000, and no Incentives under it shall be granted thereafter. The Board of Directors, without further approval of the company's shareholders, may at any time prior to that date terminate the Plan, and thereafter no further Incentives may be granted under the Plan. However, Incentives previously granted thereunder may continue to be exercised in accordance with the terms thereof. -14- Following a Change of Control, all amendments to this Plan are subject to the approval of the Benefits Trust Committee. b. Prior to a Change of Control, the Board of Directors, without further approval of the shareholders, may, on the recommendation of the Compensation Committee of the Board, amend the Plan from time to time in such respects as the Board may deem advisable; provided, however, that no amendment shall become effective without prior approval of the shareholders which would: (i) increase (except in accordance with Section 19) the maximum number of shares for which Incentives may be granted under the Plan; (ii) reduce (except in accordance with Section 19) the Incentive price below the Fair Market Value of the Company's common stock on the date of grant of the Incentive; (iii) extend the term of the Plan beyond April 27, 2000; (iv) change the standards of eligibility prescribed by Section 5; or (v) increase the maximum awards identified in Sections 7, 8, 9, 10 and 11. Following a Change of Control, all amendments to this Plan are subject to the approval of the Benefits Trust Committee. c. No termination or amendment of the Plan may, without the consent of a Participant who is a holder of an Incentive then existing, terminate his or her Incentive or materially and adversely affect his or her rights under the Incentive. 22. Change in Control. a. Notwithstanding any provision of this Plan to the contrary, upon the occurrence of a Change in Control as set forth in subsection b., below: (i) all stock options then outstanding under this Plan shall become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable; (ii) all SARs which have been outstanding for at least six months shall become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable; (iii) all terms and conditions of RSAs then outstanding shall be deemed satisfied as of the date of the Change in Control; (iv) all PUAs and PSAs then outstanding shall be deemed to have been fully earned and to be immediately payable in cash as of the date of the Change of Control, however, Participants may defer those case payments, as stock, into the Trust, consistent with the deferral provisions of Section 10; and (v) the three (3) year holding requirement of the Stock Premium for deferred ICP shall be deemed satisfied. b. A "Change in Control" shall mean any of the following: (i) Stock Acquisition. The acquisition, by any individual, entity or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock"), or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 22(b); or -15- (ii) Board Composition. Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (iii) Business Combination. Approval by the shareholders of the Company of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency")(a "Business Combination"), in each case, unless, following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or its principal subsidiary or all or substantially all of the assets of the Company or its principal subsidiary either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or -16- (iv) Regulated Business Combination. Approval by the shareholders of the Company of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (A), (B) and (C) of subsection (iii) of this Section 22(b); or (v) Liquidation or Dissolution. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company or its principal subsidiary. c. Each Participant who has elected to defer the payment of PSAs pursuant to Section 10 or an ICP award pursuant to Section 12, may elect in a time and manner determined by the Committee, but in no event later than December 31, 1996 or the occurrence of a Change in Control, if earlier, to have amounts and benefits currently deferred, and to be deferred, under the Plan determined and payable under the terms of the Plan as if a Change in Control had not occurred. New Participants in the Plan may elect in a time and manner determined by the Committee, but in no event later than ninety (90) days after becoming a Participant, to have amounts and benefits currently deferred, and to be deferred, under the Plan determined and payable under the terms of the Plan as if a Change in Control had not occurred. A Participant who has made an election, as set forth in the two preceding sentences, may at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change in Control shall be invalid. d. Upon a Change of Control, the Company or Subsidiary shall, as soon as possible, but in no event more than seven (7) days following the Change of Control make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Participant or beneficiary of this Plan the benefits to which Participants of this Plan or their beneficiaries would be entitled based on elections under Sections 10 and 12 (including any applicable Stock Premium), and for which the Company is liable pursuant to the terms of this Plan as of the date on which the Change of Control occurred. The amount of the Company's irrevocable contributions shall be based on the actuarial valuation and accounting for the most recent calendar year or more recent period for the Plan, as approved by the independent actuary engaged by the Company prior to the Change of Control and approved by the Benefits Trust Committee if selected or changed following a Change of Control (the "Actuary"), and shall include an amount deemed necessary to pay estimated administrative expenses for the following five (5) years. The Benefits Trust Committee shall cause such actuarial valuations or accountings to be updated, using Participant data supplied to the Actuary by the Company, through a date no earlier than the date of the initial contribution and shall notify the Company of the amount of additional contributions required as soon as practicable. 23. Compliance with Regulatory Authorities. Any shares purchased or distributed pursuant to any Incentives granted under this Plan must be held for investment and not with a view to the distribution or resale thereof. Each person who shall exercise an Incentive granted under this Plan may be required to give satisfactory assurances to such effect to the Company as a condition to the issuance to him or to her of shares pursuant to such exercise; provided, however, that the Company may waive such condition if it shall determine that such resale or distribution may be otherwise lawfully made without registration under the Securities Act of 1933, or if satisfactory arrangements for such registration are made. Each Incentive granted under this Plan is further subject to the condition that if at any time the Board shall in its sole discretion determine that the listing, registration or qualification of the shares covered by such Incentive upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of or in connection with the granting of such Incentives or the purchase or transfer of shares thereunder, the delivery of any or all shares of stock pursuant to exercise of the Incentive may be withheld -17- unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 24. Withholding Tax. Whenever the Company proposes or is required to issue or transfer shares of common stock under the Plan, a Participant shall remit to the Company an amount sufficient to satisfy any federal, state or local income and payroll tax withholding liability prior to the delivery of any certificate or certificates for such shares. Alternatively, to the extent permitted by applicable laws, such federal, state or local income and payroll tax withholding liability may be satisfied prior to the delivery of any certificate or certificates for the shares by an adjustment, equal in value to such liability, in the number of shares to be transferred to the Participant. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local income and payroll tax withholding liability. 25. Non-Uniform Determinations. Determinations by the Committee under the Plan, including, without limitation, determinations of the persons to receive Incentives and the form, amount and timing of such Incentives, and the terms and provisions of such Incentives and the agreements evidencing the same need not be uniform, and may be made by the Committee selectively among persons who receive, or are eligible to receive, Incentives under the Plan, whether or not such persons are similarly situated. Without amending the Plan, Incentives may be granted to eligible employees who are foreign nationals or who are employed outside the United States or both, on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to further the purposes of the Plan. Such different terms and conditions may be reflected in Addenda to the Plan. 26. Construction. The Plan shall be governed by the laws of the Commonwealth of Virginia. -18- EX-10.17 7 Exhibit 10.17 SUPPLEMENTARY SAVINGS AND INCENTIVE AWARD DEFERRAL PLAN FOR ELIGIBLE EXECUTIVES OF CSX CORPORATION AND AFFILIATED COMPANIES As Amended and Restated January 1, 1995 (As Amended through December 9, 1998) TABLE OF CONTENTS Page ARTICLE 1. DEFINITIONS..................................................... 1 1.1 Account...................................................... 1 1.2 Administrator................................................ 1 1.3 Affiliated Company........................................... 1 1.4 Award........................................................ 1 1.5 Award Deferral Agreement..................................... 1 1.6 Benefits Trust Committee..................................... 2 1.7 Board of Directors........................................... 2 1.8 Change of Control............................................ 2 1.9 Code......................................................... 3 1.10 Committee.................................................... 3 1.11 Compensation................................................. 3 1.12 Corporation.................................................. 3 1.13 Deferral Agreement........................................... 3 1.14 Distribution Option(s)....................................... 4 1.15 Divisive Transaction......................................... 4 1.16 Effective Date............................................... 4 1.17 Eligible Executive........................................... 4 1.18 Independent Accountant....................................... 4 1.19 Matching Credits............................................. 4 1.20 Member....................................................... 4 1.21 MICP......................................................... 4 1.22 Participating Company........................................ 4 1.23 Plan......................................................... 5 1.24 Salary Deferrals............................................. 5 1.25 Salary Deferral Agreement.................................... 5 1.26 Salary Deferral Percentage................................... 5 1.27 SMICP........................................................ 5 1.28 Subsidiary................................................... 5 1.29 Tax Savings Thrift Plan...................................... 5 1.30 Trust........................................................ 5 1.31 Valuation Date............................................... 5 ARTICLE 2. MEMBERSHIP AND DEFERRAL AGREEMENTS.............................. 5 2.1 In General................................................... 5 2.2 Modification of Initial Deferral Agreement................... 6 2.3 Termination of Membership; Re-employment..................... 6 2.4 Change in Status............................................. 7 2.5 Membership Following a Change in Control..................... 7 ARTICLE 3. AWARD DEFERRAL PROGRAM.......................................... 7 3.1 Filing Requirements.......................................... 7 3.2 Amount of Deferral........................................... 8 3.3 Crediting to Account......................................... 8 -i- ARTICLE 4. SALARY DEFERRAL PROGRAM......................................... 9 4.1 Filing Requirements.......................................... 9 4.2 Salary Deferral Agreement.................................... 9 4.3 Amount of Salary Deferrals................................... 9 4.4 Changing Salary Deferrals.................................... 10 4.5 Certain Additional Credits................................... 10 ARTICLE 5. MAINTENANCE OF ACCOUNTS......................................... 11 5.1 Adjustment of Account........................................ 11 5.2 Investment Performance Elections............................. 12 5.3 Changing Investment Elections................................ 12 5.4 Vesting of Account........................................... 12 5.5 Individual Accounts.......................................... 13 5.6 Action Following a Change of Control..........................13 ARTICLE 6. PAYMENT OF BENEFITS............................................. 13 6.1 Commencement of Payment...................................... 13 6.2 Method of Payment............................................ 15 6.3 Applicability................................................ 16 6.4 Hardship Withdrawal.......................................... 16 6.5 Designation of Beneficiary................................... 16 6.6 Special Distribution Rules................................... 17 6.7 Status of Account Pending Distribution....................... 17 6.8 Installments and Withdrawals Pro-Rata........................ 17 6.9 Change of Control............................................ 18 ARTICLE 7. AMENDMENT OR TERMINATION........................................ 19 7.1 Right to Terminate........................................... 19 7.2 Right to Amend............................................... 19 7.3 Uniform Action............................................... 20 ARTICLE 8. GENERAL PROVISIONS.............................................. 20 8.1 No Funding................................................... 20 8.2 Obligation....................................................20 8.3 No Contract of Employment.................................... 20 8.4 Withholding Taxes............................................ 20 8.5 Nonalienation................................................ 20 8.6 Administration............................................... 20 8.7 Construction................................................. 21 ARTICLE 9. POST-SECONDARY EDUCATION SUB-ACCOUNTS........................... 21 9.1 Post-Secondary Education Sub-accounts........................ 21 9.2 Distribution of Post-Secondary Education Sub-accounts........ 22 9.3 Construction................................................. 23 -ii- INTRODUCTION ------------ This Supplementary Savings and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies (the "Plan") was adopted October 1, 1987 and has been subsequently amended from time to time. This restatement of the Plan is effective January 1, 1995. This Plan is generally intended to provide certain executives eligible to participate in the Tax Savings Thrift Plan for Employees of CSX Corporation and Affiliated Companies (the "Savings Plan") with an opportunity to defer a portion of their salary, and/or award(s) under the Management Incentive Compensation Program ("MICP") and/or the Senior Management Incentive Compensation Program ("SMICP") until their retirement or other termination of employment and to restore employer matching contributions lost under the Savings Plan because of the application of Sections 401(a)(17), 401(k), 401(m) and 415 of the Internal Revenue Code of 1986, as amended. Commencing with respect to MICP awards paid and salary earned after 1990, eligible executives may, if they so elect, designate all or a portion of such deferrals to be used for payment of education expenses for one or more members of their families. The Plan is unfunded and is maintained by CSX Corporation and Affiliated Companies primarily for the purpose of providing deferred compensation for a select group of management or highly-compensated employees. The Plan as restated effective January 1, 1995 (and amended through December 31, 1997) reads as hereinafter set forth. ARTICLE I. DEFINITIONS ---------------------- 1.1 "Account" means the bookkeeping account maintained for each Member to record his Salary Deferrals, Matching Credits and the amount of Awards he has elected to defer, as adjusted pursuant to Article 5. The Account shall consist of the "Education Sub-accounts", if any, established pursuant to Article 9 and all amounts not in those accounts shall be allocated to one or more "Retirement Sub-accounts". The Administrator may establish a maximum number of "Retirement Sub-accounts" which a Member may have at any time. In addition to any Retirement Sub-accounts established by the Administrator, an additional Retirement Sub-account known as the Cash Plan Retirement Sub-account shall be established for deferrals of payments from the CSX Market Value Cash Plan. The Administrator also may establish such other sub-accounts within a Member's Account as it deems necessary to implement the provisions of the Plan. 1.2 "Administrator" means the Corporation. The duties of the Administrator shall be performed by a person or persons designated by the Chief Executive Officer of the Corporation to perform such duties. 1.3 "Affiliated Company" means the Corporation and any company or corporation directly or indirectly controlled by the Corporation. 1.4 "Award" means for any year (i) the amount awarded to an employee of an Affiliated Company for that year (including any special incentive award) and, in the absence of an Award Deferral Agreement with respect to such amount, payable in the succeeding year under the MICP and/or SMICP or other incentive award otherwise payable in cash as determined by the Committee; and (ii) the amount paid from the CSX Market Value Cash Plan with respect to such year and, in the absence of an Award Deferral Agreement with respect to such amount and with respect to such year, payable in cash under the CSX Market Value Cash Plan. 1.5 "Award Deferral Agreement" means a Deferral Agreement filed in accordance with the award deferral program described in Article 3. -1- 1.6 "Benefits Trust Committee" means the committee created pursuant to the CSX Corporation and Affiliated Companies Benefits Assurance Trust Agreement. 1.7 "Board of Directors" or "Board" means the Board of Directors of the Corporation. 1.8 "Change of Control" means any of the following: (a) Stock Acquisition. The acquisition, by any individual, entity ----------------- or group [within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock"), or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation; (ii) any acquisition by the Corporation; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.8; or (b) Board Composition. Individuals who, as of the date hereof, ------------------ constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) Business Combination. Approval by the shareholders of the --------------------- Corporation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Corporation or its principal subsidiary that is not subject, as a matter of law or contract, to approval by the Interstate Commerce Commission or any successor agency or regulatory body having jurisdiction over such transactions (the "Agency") (a "Business Combination"), in each case, unless, following such Business Combination: (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or its principal subsidiary or all or substantially all of the assets of the Corporation or its principal subsidiary either directly or -2- through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be; (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) Regulated Business Combination. Approval by the shareholders ------------------------------ of the Corporation of a Business Combination that is subject, as a matter of law or contract, to approval by the Agency (a "Regulated Business Combination") unless such Business Combination complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.8; or (e) Liquidation or Dissolution. Approval by the shareholders of -------------------------- the Corporation of a complete liquidation or dissolution of the Corporation or its principal subsidiary. 1.9 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.10 "Committee" means the Compensation Committee of the Board of Directors of CSX Corporation. 1.11 "Compensation" means the "Base Compensation" of an Eligible Executive as defined in the Tax Savings Thrift Plan, determined prior to: (a) any Salary Deferrals under Article 4; and (b) any limit on compensation imposed by Section 401(a)(17) of the Code. 1.12 "Corporation" means CSX Corporation, a Virginia corporation, and any successor thereto by merger, purchase or otherwise. 1.13 "Deferral Agreement" means either an Award Deferral Agreement or a Salary Deferral Agreement, or both if the context so requires. A Deferral Agreement shall be a completed agreement between an Eligible Executive and a Participating Company of which he is an employee under which the Eligible Executive agrees to defer an Award or make Salary Deferrals under the Plan, as the case may be. The Deferral Agreement shall be on a form prescribed by the Administrator and shall include any amendments, attachments or appendices. 1.14 "Distribution Option(s)" means, with respect to each sub-account under the Plan, the election by the Member of (i) the event triggering the commencement of distribution, and (ii) the form of payment. Distribution Option elections are made on the initial Deferral Agreement with respect to any sub-account. -3- 1.15 "Divisive Transaction" means a transaction in which the Eligible Executive's employer ceases to be a Subsidiary or there is a sale of substantially all of the assets of the Subsidiary. 1.16 "Effective Date" means October 1, 1987 or with respect to the Eligible Executives of a company which adopts the Plan, it means the date such company becomes a Participating Company. 1.17 "Eligible Executive" means an employee of a Participating Company, provided that: (a) prior to January 1, 1995, for purposes of the award deferral described in Article 3, such employee is employed by a Participating Company in salary grades 21 through 40 inclusive, as of December 30 of the calendar year in question; or (b) on and after January 1, 1995, for purposes of the award deferral program described in Article 3, such employee: (i) is employed by a Participating Company and is receiving Compensation of one hundred thousand dollars ($100,000) or more per year; or (ii) retired from the Participating Companies or terminated employment with the Participating Companies on account of disability, as determined by the Administrator, and was receiving Compensation of one hundred thousand dollars ($100,000) or more per year at the time of such retirement or termination; or (c) prior to January 1, 1995, for purposes of the salary deferral program described in Article 4, such employee is eligible for membership in the Tax Savings Thrift Plan and is employed in salary grades 21 through 40 inclusive; or (d) on and after January 1, 1995 for purposes of the salary deferral program described in Article 4, such employee is eligible for membership in the Tax Savings Thrift Plan and is receiving Compensation of one hundred thousand dollars ($100,000) or more per year; or (e) the Chief Executive Officer of the Corporation or his designee may designate any other employee or former employee of an Affiliated Company as an Eligible Executive; provided, however, only those employees or former employees considered to be a select group of management or highly compensated may be designated as Eligible Executives under this Plan. Notwithstanding the preceding, following a Change of Control, such designations are subject to the approval of the Benefits Trust Committee. 1.18 "Independent Accountant" means the independent accountants engaged by the Corporation and, if selected or changed following a Change of Control, approved by the Benefits Trust Committee. 1.19 "Matching Credits" means amounts credited to the Account of a Member pursuant to Section 4.5. 1.20 "Member" means, except as otherwise provided in Article 2, each Eligible Executive who has executed an initial Deferral Agreement as described in Section 2.1. 1.21 "MICP" means the Participating Companies' Management Incentive Compensation Program. 1.22 "Participating Company" means the Corporation and any company or corporation directly or indirectly controlled by the Corporation, which the Committee designates as eligible to participate in the Plan in accordance with Section 8.6(e). -4- 1.23 "Plan" means this Supplementary Savings and Incentive Award Deferral Plan for Eligible Executives of CSX Corporation and Affiliated Companies, as amended from time to time. 1.24 "Salary Deferrals" means the amounts credited to a Member's Account under Section 4.3. 1.25 "Salary Deferral Agreement" means a Deferral Agreement filed in accordance with the salary deferral program described in Article 4. 1.26 "Salary Deferral Percentage" means a percentage of an Eligible Executive's Base Compensation elected in a Salary Deferral Agreement, pursuant to Section 4.1 hereof, and shall be an integral percentage not in excess of fifty (50%) percent. 1.27 "SMICP" means the Participating Companies' Senior Management Incentive Compensation Program. 1.28 "Subsidiary" means a corporation more than 50% of the voting shares of which are owned directly or indirectly by the Corporation. 1.29 "Tax Savings Thrift Plan" means the Tax Savings Thrift Plan for Employees of CSX Corporation and Affiliated Companies, as amended from time to time. 1.30 "Trust" means the CSX Corporation and Affiliated Companies Benefits Assurance Trust. 1.31 "Valuation Date" means the last business day of each calendar month following the Effective Date. ARTICLE 2. MEMBERSHIP AND DEFERRAL AGREEMENTS --------------------------------------------- 2.1 In General: (a) An Eligible Executive shall become a Member as of the date he files his initial Deferral Agreement with the Administrator. However, such Deferral Agreement shall be effective for purposes of deferring an Award or making Salary Deferrals only as provided in Articles 3 and 4. (b) A Deferral Agreement shall be in writing and properly completed upon a form approved by the Administrator, which shall be the sole judge of the proper completion thereof. Except as provided in Section 4.1(d), such Agreement shall provide for the deferral of an Award or for Salary Deferrals, shall specify the Distribution Options, and may include such other provisions as the Administrator deems appropriate. A Deferral Agreement shall not be revoked or modified with respect to the allocation of prior deferrals except pursuant to the establishment of an Education Sub-account as provided in Article 9. Distribution Options elected may not be modified or revoked except as provided in Section 6.1 or 6.2. (c) As a condition of membership, the Administrator may require such other information as it deems appropriate. -5- 2.2 Modification of Initial Deferral Agreement: (a) A Member may elect to change, modify or revoke a Deferral Agreement as follows: (i) A Member may change the amount of Award he elects to defer on an Award Deferral Agreement prior to the Agreement's effective date as provided in Article 3. (ii) A Member may change the rate of his Salary Deferrals, or suspend his Salary Deferrals on account of severe financial hardship, as provided in Article 4. (iii) A Member may change the event entitling him to distribution, as designated on his election of Distribution Options, as provided in Section 6.1(c)(i). (iv) A Member may change the event entitling him to distribution as designated on his election of Distribution Options, subject to the five percent (5%) penalty described in Section 6.1(c)(ii). (v) A Member may change the form of payment, as designated on his election of Distribution Options, as provided in Section 6.2(c)(i). (vi) A Member may change the form of payment as designated on his election of Distribution Options, subject to the five percent (5%) penalty described in Section 6.2(c)(ii). (b) Notwithstanding any provision in Section 2.2(a) to the contrary, the establishment of an Education Sub-account with respect to future Salary Deferrals and Awards as provided in Article 9 shall not be deemed a change for the purposes of Section 2.2(a). 2.3 Termination of Membership; Re-employment: (a) Membership shall cease, subject to Section 2.4, upon a Member's termination of employment; provided that if a former Eligible Executive is receiving severance payments under a Participating Company's severance pay program or is eligible to defer an Award under Article 3, he shall not be deemed to have terminated employment until the later of the date the severance payments cease or the date the Award would have been paid. Membership shall be continued during a leave of absence approved by the Participating Companies. (b) Upon re-employment as an Eligible Executive, a former Member may become a Member again as follows: (i) in the case of a former Member who prior to re-employment received the balance in his Account, by executing a Deferral Agreement under Section 2.1 as though for all purposes of the Plan the Affiliated Companies had never employed the former Member; (ii) in the case of a former Member who prior to re-employment did not receive the balance in his Account, by executing a Deferral Agreement -6- under Section 2.1; provided his Distribution Options and beneficiary designation shall remain in effect. (c) If a former Member is reemployed as an Eligible Executive and becomes a Member again pursuant to (b)(ii): (i) upon notice to the Administrator by the Participant, distributions from a Retirement Sub-account shall cease if the commencement of distribution was because of the Member's termination of employment (including retirement); (ii) distributions from a Retirement Sub-account shall continue if the commencement of distribution was because the Member chose a specific age for the commencement of benefits and that age has been attained. Except for distributions which must continue pursuant to (c)(ii), a reemployed Member may change Distribution Option elections with respect to his Retirement Sub-accounts without penalty so long as such change does not accelerate the timing of any payment to the Member. : 2.4 Change in Status (a) In the event that a Member ceases to be an Eligible Executive with respect to Salary Deferrals but continues to be employed by an Affiliated Company, his Salary Deferrals and Matching Credits shall thereupon be suspended until such time as he shall once again become an Eligible Executive. All other provisions of his Salary Deferral Agreement shall remain in force and he shall continue to be a Member of the Plan. (b) In the event that a Member ceases to be an Eligible Executive with respect to the deferral of Awards hereunder but continues to be employed by an Affiliated Company, he shall continue to be a Member of the Plan but shall not be eligible to defer any portion of any future Awards until such time as he shall once again become an Eligible Executive. 2.5 Membership Following a Change of Control: Following a Change of Control, any membership determinations or discretionary actions pursuant to this Article 2 shall be subject to the approval of the Benefits Trust Committee. ARTICLE 3. AWARD DEFERRAL PROGRAM --------------------------------- 3.1 Filing Requirements: (a) With respect to an Award identified in Section 1.4(i), at such time as the Administrator may prescribe prior to the close of business on December 30 in any calendar year, an Eligible Executive may elect to defer all or a portion of his Award, if any, for that year. Such Award is determined and paid in the following calendar year. Such election shall be made by filing an Award Deferral Agreement with the Administrator on or before the close of business on December 30 of the calendar year for which the Award is made. In the event that December 30 does not fall on a weekday, such filing must be made by the close of business on the last prior business day. (b) With respect to an Award identified in Section 1.4(i), notwithstanding Section 3.1(a), an individual who becomes an Eligible Executive after the calendar year for which an Award is made, but prior to the first day of the month in which such Award is determined including required action by the Board, may elect to defer all or a portion of that Award in accordance with this Section 3.1(b). Such election shall be made by filing an Award Deferral Agreement during the 30 day or shorter period beginning on the date the individual becomes an -7- Eligible Executive and ending no later than the last day of the month preceding the month in which the Award is determined. (c) With respect to an Award identified in Section 1.4(i), an Eligible Executive's election to defer all or a portion of his Award shall be effective on the last day that such deferral may be elected under Section 3.1(a) or 3.1(b) and shall be effective only for the Award in question. An Eligible Executive may revoke or change his election to defer all or a portion of his Award at any time prior to the date the election becomes effective, as described in the preceding sentence. Any such revocation or change shall be made in a form and manner determined by the Administrator. (d) With respect to an Award identified in Section 1.4(ii), at such time and in accordance with such rules as the Administrator may prescribe prior to the close of business on December 30 in any calendar year, an Eligible Executive may elect to defer all or a portion of any such Award. Awards identified in Section 1.4(ii) may not be deferred into Education Sub-accounts. (e) An Eligible Executive shall not be entitled to defer an Award on or after attaining the age, if any, which he has designated under Section 6.1(c) or 6.1(d) for the purpose of commencing distribution of his Account (or, if applicable, his Retirement Sub-account). In the event a Member establishes an Education Sub-account pursuant to Article 9, he shall not be entitled to defer all or any portion of an Award into such a Sub-account after attaining the age which he has designated for the purpose of commencing distribution from that Sub-account. (f) An Eligible Executive shall not be entitled to defer an Award if he is eligible to defer his award under another nonqualified program of deferred compensation maintained by an Affiliated Company. 3.2 Amount of Deferral: (a) With respect to an Award identified in Section 1.4(i), prior to a Change of Control, in its sole discretion, the Committee may establish such maximum limit on the amount of Award an Eligible Executive may defer for a calendar year as the Committee deems appropriate. Such maximum limit shall appear on the Eligible Executive's Award Deferral Agreement for the year. Following a Change of Control, the Committee's decision is subject to the final approval of the Benefits Trust Committee. (b) With respect to an Award identified in Section 1.4(i), the minimum amount which an Eligible Executive may defer in any year shall be the lesser of $5,000 or the maximum amount determined under Section 3.2(a) above. If an Eligible Executive elects to defer less than this amount, his election shall not be effective. (c) With respect to an Award identified in Section 1.4(ii), there shall be no minimum nor maximum amount of deferral allowed. 3.3 Crediting to Account: (a) The amount of Award which an Eligible Executive has elected to defer for a calendar year shall be credited to his Account as of the Valuation Date coincident with or next following the date the Award would have been paid to the Eligible Executive. -8- (b) An additional credit shall be made to the Account as of the Valuation Date described in Section 3.3(a) above, determined as if the amount of Award deferred had earned the same rate of return as the CSX Cash Pool Earnings Rate from the date the Award would have been paid until the Valuation Date it is credited to the Eligible Executive's Account. In lieu of the CSX Corporation Cash Pool Earnings Rate, the Committee may designate, prior to a Change of Control, from time to time, such other indices of investment performance or investment funds as the measure of investment performance under this Section 3.3(b). Following a Change of Control, the Committee's decision is subject to final approval of the Benefits Trust Committee. ARTICLE 4. SALARY DEFERRAL PROGRAM ---------------------------------- 4.1 Filing Requirements: (a) An individual who is an Eligible Executive immediately prior to the Effective Date may file a Salary Deferral Agreement with the Administrator, within such period prior to the Effective Date and in such manner as the Administrator may prescribe. (b) An individual who becomes an Eligible Executive on or after the Effective Date may file a Salary Deferral Agreement with the Administrator during the calendar month he becomes an Eligible Executive, in such manner as the Administrator may prescribe. (c) An Eligible Executive who fails to file a Salary Deferral Agreement with the Administrator as provided in Sections 4.1(a) and 4.1(b) may file a Salary Deferral Agreement in any subsequent month of December. (d) An Eligible Executive who has not otherwise filed a Deferral Agreement shall file a Salary Deferral Agreement under Sections 4.1(a) or 4.1(b), whichever applies, in order to receive the Matching Credits described in Section 4.5, provided that such agreement need not provide for Salary Deferrals. 4.2 Salary Deferral Agreement: An Eligible Executive's Salary Deferral Agreement shall authorize a reduction in his base pay with respect to his Salary Deferrals under the Plan. The Agreement shall be effective for payroll periods beginning on or after the later of: (a) the Effective Date; or (b) the first day of the month following the date the Salary Deferral Agreement is filed with the Administrator in accordance with Section 4.1. Paychecks applicable to said payroll periods shall be reduced accordingly. 4.3 Amount of Salary Deferrals: (a) On each Valuation Date following the effective date of an Eligible Executive's Salary Deferral Agreement, his Sub-accounts shall be credited with an amount of Salary Deferral, if any, for the payroll period ending thereon, as he elects in his Salary Deferral Agreement. Such Salary Deferral for any payroll period shall be determined as the sum of his Basic Salary Deferral for such payroll period determined under subparagraph (i) and his Additional Salary Deferral for such month, determined under subparagraph (ii) as follows: (i) An Eligible Executive's Basic Salary Deferral shall be determined by multiplying his Compensation for a payroll period by the excess of his -9- Salary Deferral Percentage over the percentage determined in subparagraph (ii) below (ii) An Eligible Executive's Additional Salary Deferral shall be determined by multiplying his Compensation for a payroll period by a percentage determined as (A) the excess of his Salary Deferral Percentage over 15%, divided by (B) .85. provided, however, that no Basic Salary Deferral shall be made under this Plan for any payroll period unless the Eligible Executive is prevented from making elective deferrals under the Tax Savings Thrift Plan for such payroll period as a result of Section 402(g) and/or 401(k)(3) of the Code, and provided further that, for the payroll period in which such Basic Salary Deferral is first made, it shall be limited to the excess of the amount otherwise determined for such payroll period under Section 4.3(a)(i) over the Eligible Executive's elective deferrals under the Tax Savings Thrift Plan for such payroll period. If applicable, Additional Salary Deferrals shall be made for each payroll period of the year to which the Salary Deferral Agreement applies, without regard to whether the Eligible Executive makes elective deferrals under the Tax Savings Thrift Plan and without regard to any Basic Salary Deferrals under this Plan. (b) An Eligible Executive shall not be entitled to make Salary Deferrals on or after attaining the age, if any, which he has designated under Section 6.1(c) or 6.1(d) for the purpose of commencing distribution of his Account (or, if applicable, his Retirement Sub-account). In the event a Member establishes an Education Sub-account pursuant to Article 9, he shall not be entitled to make Salary Deferrals into such Sub-account after attaining the age which he has designated for the purpose of commencing distribution from that Sub-account. 4.4 Changing Salary Deferrals: (a) An Eligible Executive's election on his Salary Deferral Agreement of the rate at which he authorizes Salary Deferrals under the Plan shall remain in effect in subsequent calendar years unless he files with the Administrator an amendment to his Salary Deferral Agreement modifying or revoking such election. The amendment shall be filed by December 30 and shall be effective for payroll periods beginning on or after the following January 1. (b) Notwithstanding Section 4.4(a), an Eligible Executive may, in the event of a severe financial hardship, request a suspension of his Salary Deferrals under the Plan. The request shall be made at a time and in a manner determined by the Administrator, and shall be effective as of such date as the Administrator prescribes. The Administrator shall apply standards, to the extent applicable, identical to those described in Section 6.3 in making its determination. The Eligible Executive may apply to the Administrator to resume his Salary Deferrals with respect to payroll periods beginning on or after the January 1 following the date of suspension, at a time and in a manner determined by the Administrator; provided, that the Administrator shall approve such resumption only if the Administrator determines that the Eligible Executive is no longer incurring such hardship. Notwithstanding the preceding, following a Change of Control, such action by the Administrator is subject to approval by the Benefits Trust Committee. 4.5 Certain Additional Credits: On each Valuation Date, there shall be credited Matching Credits to the Retirement Sub-account(s) of an Eligible Executive determined as follows: -10- (a) For payroll periods prior to the inception of Basic Salary Deferrals hereunder, the greater of (b)(i) or (ii) (b) For payroll periods during which Basic Salary Deferrals are effective, the greater of (i) or (iii), minus (iv), where (i) is the employer matching contributions the Eligible Executive would have received under the Tax Savings Thrift Plan if the provisions of Sections 401(k)(3), 401(m)(9) and 415 of the Code had not applied to the Tax Savings Thrift Plan; and (ii) is an amount determined as 3% of the Eligible Executive's additional Salary Deferrals; and (iii) is the employer matching contributions the Eligible Executive would have received under the Tax Savings Thrift Plan if his deferrals under this Plan had been contributed to the Tax Savings Thrift Plan (in addition to those amounts actually contributed to that Plan), based on "Compensation" as defined in this Plan and as if the provisions of Sections 401(a)(17), 401(k)(3), 401(m)(2), 401(m)(9) and 415 of the Code had not applied to the Tax Savings Thrift Plan; and (iv) is the employer matching contributions made on his behalf for the applicable period to the Tax Savings Thrift Plan. No Matching Credits shall be credited to a Member's Education Sub-account. ARTICLE 5. MAINTENANCE OF ACCOUNTS ---------------------------------- 5.1 Adjustment of Account: (a) As of each Valuation Date each Account (and, if applicable, each Sub-account) shall be credited or debited with the amount of earnings or losses with which such Sub-account would have been credited or debited, assuming it had been invested in one or more investment funds, or earned the rate of return of one or more indices of investment performance, designated by the Administrator and, if applicable, elected by the Member or former Member, for purposes of measuring the investment performance of his Sub-accounts. (b) The Administrator shall designate at least one investment fund or index of investment performance and may designate other investment funds or investment indices to be used to measure the investment performance of Accounts. The designation of any such investment funds or indices shall not require the Affiliated Companies to invest or earmark their general assets in any specific manner. The Administrator may change the designation of investment funds or indices from time to time, in its sole discretion, and any such change shall not be deemed to be an amendment affecting Members' or former Members' rights under Section 7.2. -11- (c) For purposes of Section 5.1(a), the portion of a Member's Retirement Sub-accounts attributable to Matching Credits shall be credited or debited with earnings or losses based upon the performance of "Fund E" (CSX Stock Fund) under the Tax Savings Thrift Plan. (d) As of February 1, 1989, there shall be credited to the Account of each Eligible Executive who participated in the Supplemental Benefit Plan of Sea-Land Corporation and Affiliated Companies the amount of deferred compensation under that plan as of January 31, 1989 attributable to amounts credited under that plan for the purpose of restoring contributions to a defined contribution plan which were limited by Section 415 of the Code. Such amounts shall be treated as Salary Deferrals under the Plan, and unless transferred pursuant to Section 5.3(a), shall earn the same rate of return as the CSX Cash Pool Earnings Rate. 5.2 Investment Performance Elections: (a) In the event the Administrator designates more than one investment fund or index of investment performance under Section 5.1, each Member and, if applicable, former Member, shall file an initial investment election with the Administrator with respect to the investment of his Salary Deferrals within such time period and on such form as the Administrator may prescribe. The election shall designate the investment fund or funds or index or indices of investment performance which shall be used to measure the investment performance of the Member's Salary Deferrals. The election shall be effective as of the beginning of the payroll period next following the date the election is filed. The election shall be in increments of 1%. (b) In the event the Administrator designates more than one investment fund or index under Section 5.1, each Member shall file an initial investment election each calendar year in which he defers an Award with respect to the amount deferred. The election shall be made within such time period and on such form as the Administrator prescribes and shall be in increments of 1% of the amount deferred. The election shall be effective on the Valuation Date on which the amount determined is credited to the Member's Account. (c) A Member may not elect separate investment funds or indices of investment performance with respect to each Sub-account. 5.3 Changing Investment Elections: (a) A Member may change his election in Section 5.2(a) with respect to his future Salary Deferrals, no more than once each calendar quarter, by filing an appropriate written notice with the Administrator. The notice shall be effective as of the beginning of the first payroll period following the date the notice is filed with the Administrator. (b) A Member or, if applicable, former Member may reallocate the current balance of his Retirement and/or Education Sub-accounts, thereby changing the investment fund or funds or index or indices of investment performance used to measure the future investment performance of his existing Account balance, by filing an appropriate written notice with the Administrator. Each Retirement or Education Sub-account may be reallocated separately. The election shall be effective as of the last business day of the calendar quarter following the month in which the notice is filed. No election under this Section 5.3(b) shall apply to the portion of a Member's Account attributable to Matching Credits. 5.4 Vesting of Account: Each Member shall be fully vested in his Account. -12- 5.5 Individual Accounts: The Administrator shall maintain, or cause to be maintained, records showing the individual balances of each Account and each Sub-account. At least once a year, each Member and, if applicable, former Member shall be furnished with a statement setting forth the value of his Account and his Sub-accounts. 5.6 Action Following a Change of Control: Following a Change of Control, any action taken by the Administrator pursuant to this Article 5 is subject to the approval of the Benefits Trust Committee. ARTICLE 6. PAYMENT OF BENEFITS ------------------------------ 6.1 Commencement of Payment: (a) The distribution of the Member's or former Member's Account shall commence, pursuant to Section 6.2, on or after the occurrence of (i), (ii), (iii) or (iv) below, as designated by the Member as a Distribution Option election: (i) the Member's termination of employment with the Affiliated Companies, (ii) attainment of a designated age not earlier than age 59-1/2 (on or after January 1, 1995 age 50) nor later than age 70-1/2, (iii) the earlier of (i) or (ii) above, or (iv) the later of (i) or (ii) above. In the event a Member elects either (ii) or (iii) above, he may not elect an age less than three years subsequent to his current age. If a Member elects to defer an Award identified in Section 1.4(ii) (a payment from the CSX Market Value Cash Plan), such deferral must extend the commencement of distribution beyond December 31, 2004. A Member or former Member shall not change his Distribution Option election of the designation of the event which entitles him to distribution of his Account, except as provided in Section 6.1(c) below; provided, however, no change in Distribution Option election shall be allowed if it results in changing the deferral of commencement of distribution of an Award identified in Section 1.4(ii) to a time before January 1, 2005. For purposes of this Plan and particularly this Section 6.1(a), if the Member's employer is involved in a Divisive Transaction, the Member will not be considered to have terminated his employment with an Affiliated Company until his employment with his employer terminates. (b) Effective January 1, 1995, a Member or former Member shall, pursuant to Section 6.9, be eligible to make a Distribution Option election of the designation of the event which entitles him to distribution of his Account in the event of a Change of Control. (c) A Member or former Member may change his Distribution Option election of the designation of the events which entitle him to distribution of his Account under Section 6.1(a) and Section 6.1(b), as follows: (i) A Member or former Member may make a request in writing to the Administrator to defer the Member's designated distribution event under -13- Section 6.1(a). The requests must be filed with the Administrator at least one year prior to when distribution would commence based on the current designation. The deferral requests must specify a distribution event described in Section 6.1(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the date that is one year after the request is filed with the Administrator. If the Member's current distribution event will occur upon his termination of employment and the Member's employment terminates within one year after the deferral request is made, the deferral request shall not be effective. A deferral request under this Section 6.1(c)(i) shall not result in a forfeiture of the Member's or former Member's Account. (ii) Notwithstanding Section 6.1(c)(i), a Member or former Member may change his designated distribution event under Section 6.1(a) or 6.1(b), no more frequently than once in any calendar year, by filing with the Administrator an amendment to his Distribution Option election on or before December 30 (or the last preceding business day if December 30 is not a weekday). The change shall be limited to those events entitling a Member to a distribution that are described in Section 6.1(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the last Valuation Date of the calendar year in which the change is filed. Unless the election complies with the requirements of Section 6.1(c)(i), or unless the provisions of Section 6.1(e) apply, an election under this Section 6.1(c)(ii) shall result in the forfeiture of five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. If the Member or former Member changes the form in which his Account is to be distributed under Section 6.2(c)(ii) at the same time as he changes his designated distribution event under this Section 6.1(c)(ii), the combined forfeitures will be five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. (d) Notwithstanding anything in this Section 6.1 or Article 9 to the contrary, a Member's Account shall be distributed upon his death. (e) A Member may not change the designation of the event which entitles him to distribution of one or more Education Sub-accounts, except that a Member may transfer the entire amount in any Education Sub-account to one or more other Education Sub-accounts and one or more of his Retirement Sub-accounts, or any combination thereof, subject to a possible forfeiture of five percent (5%) of the Sub-account so transferred, as provided in Article 9. (f) Notwithstanding the foregoing, prior to a Change of Control, the Corporation may delay payment of a benefit under this Plan to any Member who is determined to be among the top five most highly paid executives for the year the benefit under this Plan would otherwise be paid; provided, however, if a Member's payment is delayed, the benefit to which he is entitled will not decrease after the date it would otherwise be distributed. -14- (g) Notwithstanding the preceding, following a Change of Control, the authority to delay payment of a Member's or former Member's Account rests solely with the Benefits Trust Committee. 6.2 Method of Payment: (a) A Member's or former Member's Retirement Sub-account(s) shall be distributed to him, or in the event of his death to his Beneficiary, in a cash single sum payment as soon as administratively practicable following the January 1 coincident with or next following the date the Member incurs the Distribution Option elected under Section 6.1 or his date of death, as the case may be. Matching Credits earned in respect to periods following the date of such distributable event shall be paid directly to the Member in cash as soon as practical. Notwithstanding the foregoing, a Member or former Member may make a Distribution Option election to receive distribution of his Account in semi-annual installments over a period not to exceed twenty (20) years. Installments shall be determined as of each June 30 and December 31 and shall be paid as soon as administratively practicable thereafter. Installments shall commence as of the July 1 or January 1 coincident with or next following the date the Member incurs the distributable event elected as a Distribution Option under Section 6.1, or as soon as administratively practicable thereafter. The amount of each installment shall equal the balance in the Account as of the Valuation Date of determination, divided by the number of remaining installments (including the installment being determined). The Distribution Option election shall be irrevocable except as provided in Section 6.2(c) below. If a Member or former Member dies before payment of the entire balance of his Account, the remaining balance shall be paid in a single sum to his Beneficiary as soon as administratively practicable following the January 1 coincident with or next following his date of death. (b) Effective January 1, 1995, a Member or former Member shall, pursuant to Section 6.9, be eligible to make a separate Distribution Option election of the form of payment of his Account in the event of a Change of Control. (c) Notwithstanding Section 6.2(a) and Section 6.2(b), a Member or former Member may change the Distribution Option election of the form in which his Account is distributed, as follows: (i) A Member or former Member may make a one-time request to the Administrator to change the form in which his Account is to be distributed under Section 6.2(a). A Member or former Member may also make a one-time request to change the form in which his Account is to be distributed under Section 6.2(b). The request must be filed in writing with the Administrator at least one year prior to when distribution would commence based on the current designation. The requests must specify a form of distribution described in Section 6.2(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the date that is one year after the request is filed with the Administrator. If the Member's distribution event will occur upon his termination of employment and the Member's employment terminates within one year after the request is filed, the request shall not be effective. A request under this Section 6.2(c)(i) shall not result in a forfeiture of the Member's or former Member's Account. -15- (ii) Notwithstanding Section 6.2(c)(i), a Member or former Member may change the form in which his Account is to be distributed under Section 6.2(a) or 6.2(b), no more frequently than once in any calendar year, by filing with the Administrator an amendment to his Distribution Option election on or before December 30 (or the last preceding business day if December 30 is not a weekday). The change shall be limited to those forms of distribution described in Section 6.2(a), shall be subject to approval of the Administrator and, if approved, shall be effective as of the last Valuation Date of the calendar year in which it is filed. Unless the election complies with the requirements for a one-time request under Section 6.2(c)(i), or unless the provisions of Section 6.2(d) apply, an election under this Section 6.2(c)(ii) shall result in the forfeiture of five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. If the Member or former Member changes his designated distribution event under this Section 6.2(c)(ii) at the same time as he changes the form in which his Account is to be distributed under Section 6.1(c) (ii), the combined forfeiture will be five percent (5%) of the Member's or former Member's Account, determined as of the Valuation Date upon which the election is effective. (d) In the event the Member's Account consists of one or more Retirement Sub-accounts and one or more Education Sub-accounts, the provisions of this Section 6.2 shall apply exclusively to the Member's Retirement Sub-accounts. A Member may not change the form in which his Education Sub-accounts are distributed, except that a Member may transfer the entire amount in any Education Sub-account to one or more other Education Sub-accounts and one or more Retirement Sub-accounts, or any combination thereof, subject to a possible forfeiture of five percent (5%) of the Sub-account so transferred, as provided in Article 9. 6.3 Applicability: In the event the Member's Account consists of one or more Retirement Sub-accounts and one or more Education Sub-accounts, the provisions of Sections 6.1(a) and 6.1(c) and 6.2 shall apply exclusively to the Member's Retirement Sub-accounts. 6.4 Account Adjustment: The obligations of the Corporation or any of its affiliated corporations and the benefits due any Member, former Member, surviving spouse or beneficiary hereunder shall be reduced by any amount received in regard thereto under the Benefits Assurance Trust or any similar trust or other vehicle. 6.5 Hardship Withdrawal: (a) While employed by the Participating Companies, a Member or former Member may, in the event of a severe financial hardship, request a withdrawal from his Account. The request shall be made in a time and manner determined by the Administrator, shall not be for a greater amount than the amount required to meet the financial hardship, and shall be subject to approval by the Administrator. (b) For purposes of this Section 6.5 financial hardship shall include: -16- (i) education of a dependent child where the Member or former Member shows that without the withdrawal under this Section the education would be unavailable to the child; (ii) illness of the Member or former Member or his dependents, resulting in severe financial hardship to the Member or former Member; (iii) the loss of the Member's or former Member's home or its contents, to the extent not reimbursable by insurance or otherwise, if such loss results in a severe financial hardship to the Member or former Member; (iv) any other extraordinary circumstances of the Member or former Member approved by the Administrator if such circumstances would result in a present or impending critical financial need which the Member or former Member is unable to satisfy with funds reasonably available from other sources. (c) Notwithstanding the preceding, following a Change of Control, any decisions or determinations by the Administrator under this Section 6.5 shall be subject to the approval of the Benefits Trust Committee. 6.6 Designation of Beneficiary: A Member or former Member may, at a time and in a manner determined by the Administrator, designate a beneficiary and one or more contingent beneficiaries (which may include the Member's or former Member's estate) to receive any benefits which may be payable under this Plan upon his death. If the Member or former Member do not designate a beneficiary or contingent beneficiary, or if the beneficiary and the contingent beneficiaries do not survive the Member or former Member, such benefits shall be paid to the Member's or former Member's estate. A Member or former Member may revoke or change any designation made under this Section 6.6 in a time and manner determined by the Administrator. 6.7 Special Distribution Rules: Notwithstanding anything to the contrary in this Plan, if (a) a Member or former Member becomes the owner, director or employee of a competitor of the Affiliated Companies, (b) his employment is terminated by an Affiliated Company on account of actions by the Member which are detrimental to the interests of the Affiliated Company, or (c) he engages in conduct subsequent to the termination of his employment with the Affiliated Companies which the Administrator determines to be detrimental to the interests of an Affiliated Company, then the Administrator may, in its sole discretion, pay the Member or former Member a single sum payment equal to the balance in his Account. The single sum payment shall be made as soon as practicable following the date the Member or former Member becomes an owner, director or employee of a competitor, his termination of employment or the Administrator's determination of detrimental conduct, as the case may be, and shall be in lieu of all other benefits which may be payable to the Member or former Member under this Plan. 6.8 Status of Account Pending Distribution: Pending distribution, a former Member's Account (and, if applicable, a former Member's Sub-accounts) shall continue to be credited with earnings and losses as provided in Section 5.1. The former Member shall be entitled to change his investment elections under Section 5.3 or apply for Hardship withdrawals under Section 6.5 to the same extent as if he were a Member of the Plan. In the event of the death of a Member or former Member, his Sub-accounts shall be credited with earnings and losses as if the Sub-accounts had earned the same rate of return as the CSX Corporation Cash Pool Earnings Rate or, in the sole discretion of the Administrator, the rate of return of such other index of investment performance or investment fund which may be designated by the -17- Administrator as a measure for investment performance of Members' or former Members' Accounts (and, if applicable, their Sub-accounts), commencing with the Valuation Date coincident with or next following the Member's or former Member's date of death. 6.9 Installments and Withdrawals Pro-Rata: In the event of an installment payment or hardship withdrawal, such payment or withdrawal shall be made on a pro-rata basis from the portions of the Member's or former Member's existing Account balance which are subject to different measures of investment performance. In the event of a hardship withdrawal, the withdrawal shall be made on a pro-rata basis from all of the Member's or former Member's Sub-accounts. 6.10 Change of Control: (a) If a Change of Control has occurred, the Corporation and Participating Companies shall contribute to the Trust within 7 days of such Change of Control, a lump sum payment equal to the greater of (i) the aggregate value of the amount each Member or former Member would be eligible to receive (determined under (b) below) as of the latest Valuation Date coinciding with or preceding the date of Change of Control or (ii) the amount determined under Section 1(h) of the Trust attributable to liabilities relating to the Plan to the extent such amounts are not already in the Trust. The aggregate value of the amount of the lump sum to be contributed to the Trust pursuant to this Section 6.10 shall be determined by the Independent Accountants after consultation with the entity then maintaining the Plan's records, and shall be projected, if necessary, to such Valuation Date from the last valuation of Members' or former Members' Accounts for which information is readily available. Thereafter, the Independent Accountants shall annually determine as of a Valuation Date for each Member or former Member not receiving a lump sum payment pursuant to subsection (b) below the value of each Member or former Member's Accounts. To the extent that the value of the assets held in the Trust relating to this Plan do not equal the aggregate amount described in the preceding sentence, at the time of the valuation, as determined by the Independent Accountants, the Corporation and Participating Companies shall make a lump sum contribution to the Trust equal to the difference. (b) In the event a Change of Control has occurred, the trustee of the Trust shall, within 45 days of such Change of Control, pay to each Member or former Member not making an election under (c) below, a lump sum payment equal to the value of the Member's or former Member's Accounts (determined under Article 5) as of the Valuation Date coinciding with or next preceding the date of such Change of Control. The amount of each Member's or former Member's lump sum payment shall be determined by the Independent Accountants after consultation with the entity then maintaining the Plan's records, and shall be projected, if necessary, to such Valuation Date from the last valuation of Member's or former Member's Accounts for which information is readily available. (c) Each Member or former Member may elect in a time and manner determined by the Administrator, but in no event later than December 31, 1996, or the occurrence of a Change of Control, if earlier, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. New Members of the Plan may elect in a time and manner determined by the Administrator, but in no event later than 90 days after becoming a Member, to have amounts and benefits determined and payable under the terms of the Plan as if a Change of Control had not occurred. A Member or former Member who has made an election, as set forth in the two preceding sentences, may, at any time and from time to time, change that election; provided, however, a change of election that is made within one year of a Change of Control shall be invalid. -18- (d) Notwithstanding anything in the Plan to the contrary, each Member or former Member who has made an election under (c) above may elect within 90 days following a Change of Control, in a time and manner determined by the Benefits Trust Committee, to receive a lump sum payment calculated under the provisions of (b) above determined as of the Valuation Date next preceding such payment, except that such calculated amount shall be reduced by 5% and such reduction shall be irrevocably forfeited by the Member or former Member. Furthermore, as a result of such election, the Member or former Member shall no longer be eligible to participate or otherwise benefit from the Plan. Payments under this subsection (d) shall be made not later than 7 days following receipt by the Corporation of a Member's or former Member's election. The Benefits Trust Committee shall, no later than 7 days after a Change of Control has occurred, give written notification to each Member or former Member eligible to make an election under this subsection (d), that a Change of Control has occurred and informing such Member or former Member of the availability of the election. ARTICLE 7. AMENDMENT OR TERMINATION ----------------------------------- 7.1 Right to Terminate: (a) Prior to a Change of Control, the Board may, in its sole discretion, terminate this Plan and the related Deferral Agreements at any time. Following a Change of Control, this Plan may not be terminated without the approval of the Benefits Trust Committee. (b) Prior to a Change of Control, the Committee may terminate an Affiliated Company's participation as a Participating Company in this Plan for any reason at any time. Following a Change of Control, an Affiliated Company may not be terminated from participation as a Participating Company without the consent of the Benefits Trust Committee. (c) Prior to a Change of Control, an Affiliated Company's board of directors may terminate that Affiliated Company's participation as a Participating Company for any reason at any time. Following a Change of Control, an Affiliated Company's participation as a Participating Company may not be terminated without the consent of the Benefits Trust Committee. (d) In the event the Plan and related Deferral Agreements are terminated, each Member, former Member and Beneficiary shall receive a single sum payment equal to the balance in his Account. The single sum payment shall be made as soon as practicable following the date the Plan is terminated and shall be in lieu of any other benefit which may be payable to the Member, former Member or Beneficiary under this Plan. 7.2 Right to Amend: Prior to a Change of Control, the Board may, in its sole discretion, amend this Plan and the related Deferral Agreements on 30 days prior notice to the Members and, where applicable, former Members. Following a Change of Control, all amendments to this Plan are subject to the approval of the Benefits Trust Committee. If any amendment to this Plan or to the Deferral Agreements shall adversely affect the rights of a Member or former Member, such individual must consent in writing to such amendment prior to its effective date. If such individual does not consent to the amendment, the Plan and related Deferral Agreements shall be deemed to be terminated with respect to such individual and he shall receive a single sum payment of his Account as soon thereafter as is practicable. Notwithstanding the foregoing, the Administrator's change in any investment funds or investment index under Section 5.1(b) or -19- the restriction of future deferrals under the salary deferral program or award deferral program shall not be deemed toadversely affect any Member's or former Member's rights. 7.3 Uniform Action: Notwithstanding anything in the Plan to the contrary, any action to amend or terminate the Plan or the Deferral Agreements must be taken in a uniform and nondiscriminatory manner. Notwithstanding the preceding, any such action taken by the Administrator following a Change of Control is subject to the approval of the Benefits Trust Committee. ARTICLE 8. GENERAL PROVISIONS ----------------------------- 8.1 No Funding: Nothing contained in this Plan or in a Deferral Agreement shall cause this Plan to be a funded retirement plan. Neither the Member, former Member, his beneficiary, contingent beneficiaries, heirs or personal representatives shall have any right, title or interest in or to any funds of the Trust or the Affiliated Companies on account of this Plan or on account of having completed a Deferral Agreement. The assets held in the Trust shall be subject to the claims of creditors of the Corporation, and the Trust's assets shall be used to discharge said claims in the event of the Corporation's insolvency. Each Member or former Member shall have the status of a general unsecured creditor of the Affiliated Companies and this Plan constitutes a mere promise by the Affiliated Companies to make benefit payments in the future. 8.2 Obligation: To the extent reflected by resolutions of the applicable boards of directors, obligations for benefits under this Plan shall be joint and several. 8.3 No Contract of Employment: The existence of this Plan or of a Deferral Agreement does not constitute a contract for continued employment between an Eligible Executive or a Member and an Affiliated Company. The Affiliated Companies reserve the right to modify an Eligible Executive's or Member's remuneration and to terminate an Eligible Executive or a Member for any reason and at any time, notwithstanding the existence of this Plan or of a Deferral Agreement. 8.4 Withholding Taxes: All payments under this Plan shall be net of an amount sufficient to satisfy any federal, state or local withholding and payroll tax requirements. 8.5 Nonalienation: The right to receive any benefit under this Plan may not be transferred, assigned, pledged or encumbered by a Member, former Member, beneficiary or contingent beneficiary in any manner and any attempt to do so shall be void. No such benefit shall be subject to garnishment, attachment or other legal or equitable process without the prior written consent of the Affiliated Companies. Notwithstanding the preceding, following a Change of Control, the Administrator shall not implement such action without the consent of the Benefits Trust Committee. 8.6 Administration: (a) Prior to a Change of Control, the Administrator of the Plan shall be responsible for the general administration of the Plan, claims review, and for carrying out its provisions. Administration of the Plan shall be carried out consistent with the terms and conditions of the Plan. (b) Following a Change of Control, the Benefits Trust Committee may remove and/or replace the Administrator. -20- (c) The Administrator shall have sole and absolute discretion to interpret the Plan, determine eligibility for and benefits due hereunder. Decisions of the Administrator regarding benefits under the Plan shall at all times be binding and conclusive on Members, their beneficiaries, heirs and assigns. Notwithstanding the preceding, following a Change of Control, final benefit determinations for Members, their beneficiaries, heirs and assigns and decisions regarding benefit claims under the Plan shall rest with the Benefits Trust Committee or its delegate in its sole and absolute discretion. (d) Prior to paying any benefit under this Plan, the Administrator may require the Member or former Member, beneficiary or contingent beneficiary to provide such information or material as the Administrator, in its sole discretion, shall deem necessary for it to make any determination it may be required to make under this Plan. The Administrator may withhold payment of any benefit under this Plan until it receives all such information and material and is reasonably satisfied of its correctness and genuineness. The Administrator shall provide adequate notice in writing to any Member, former Member, beneficiary or contingent beneficiary whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial. A reasonable opportunity shall be afforded to any such Member, former Member, beneficiary or contingent beneficiary for a full and fair review by the Administrator of its decision denying the claim. The Administrator's decision on any such review shall be final and binding on the Member, former Member, beneficiary or contingent beneficiary and all other interested persons. All acts and decisions of the Administrator shall be final and binding upon all Members, former Members, beneficiaries, contingent beneficiaries and employees of the Affiliated Companies. Notwithstanding the preceding, following a Change of Control, any and all decisions by the Administrator are subject to the approval of the Benefits Trust Committee. (e) Prior to a Change of Control, the Committee in its sole discretion and upon such terms as it may prescribe, may permit any company or corporation directly or indirectly controlled by the Corporation to participate in the Plan. After a Change of Control, such permission must be approved by the Benefits Trust Committee. 8.7 Construction: (a) The Plan is intended to constitute an unfunded deferred compensation arrangement for a select group of management or highly compensated employees and all rights hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia to the extent not preempted by federal law. (b) The masculine pronoun means the feminine wherever appropriate. (c) The captions inserted herein are inserted as a matter of convenience and shall not affect the construction of the Plan. ARTICLE 9. EDUCATION SUB-ACCOUNTS --------------------------------- 9.1 Education Sub-accounts: (a) Notwithstanding any provision of this Plan to the contrary, with respect to amounts deferred under Salary Deferral Agreements and Award Deferral Agreements effective on or after -21- December 31, 1990, a Member may direct the Administrator to establish a separate sub-account in the name of one or more of: (i) each of the Member's children, (ii) each of the Member's brothers, sisters, their spouses, the Member's spouse, or (iii) each of the foregoing's lineal descendants, for the payment of their expenses directly or indirectly arising from enrollment in a college, university, another post-secondary institution of higher learning or a secondary educational institution. Each sub-account established pursuant to this Section 9.1(a) shall be referred to as an "Education Sub-account." (b) The Member may instruct the Administrator to allocate all or a portion of any amount deferred under an Award Deferral Agreement in respect to an Award granted after December 31, 1990 to one or more of the Education Sub-accounts established pursuant to Section 9.1(a). (c) A Member may instruct the Administrator to allocate all or any portion of the amount he defers for periods commencing after December 31, 1990 pursuant to his Salary Deferral Agreement to one or more of the Education Sub-accounts established pursuant to Section 9.1(a). (d) Any elections pursuant to Sections 9.1(a) and 9.1(b) shall be made in whole percentages. (e) No Matching Credits shall be allocated to any Education Sub-account. 9.2 Distribution of Education Sub-accounts: (a) Amounts allocated to one or more of a Member's Education Sub-accounts shall be distributed to the Member upon the attainment of the certain age of the Member, specifically designated by the Member for this purpose with regard to that Sub-account. (b) A Member or former Member may transfer the entire amount but not less than that amount in any Education Sub-account to one or more other Education Sub-accounts, a Retirement Sub-account, or any combination thereof, by filing the appropriate form or forms with the Administrator not later than the last business day of the calendar year preceding the calendar year in which distribution of that Education Sub-account was to begin; provided, however, if such transfer accelerates the timing of the payment to the Member, there shall be a forfeiture of five percent (5%) of the Member's or former Member's Sub-account so transferred, determined as of the Valuation Date upon which the transfer is effective. In no event may a Member transfer all or any portion of the amount in a Retirement Sub-account to his Education Sub-accounts. Except as provided in this Section 9.2(b) or 9.2(c) below, a Member or former Member may not change the time or form of distribution of his Education Sub-accounts. (c) In the event that the individual for whom an Education Sub-account is established dies while funds remain in that Sub-account, a Member or former Member may transfer without penalty the entire amount but not less than that amount in that Sub-account in accordance with the provisions of (i) or (ii) below: -22- (i) to one or more existing Education Sub-accounts and/or a new Education Sub-account established in accordance with the provisions of Section 9.1 hereof; or (ii) to a Retirement Sub-account. If a Member or former Member elects to transfer funds in accordance with (ii) and he has not previously established a Retirement Sub-account, such a Sub-account shall be established automatically and the Member or former Member promptly thereafter will be required to execute an amendment to his Deferral Agreement which shall specify the option under Section 6.1(a) which will entitle him to distribution of the Retirement Sub-account and the form of distribution under Section 6.2(a). (d) A Member's or former Member's Education Sub-accounts shall be distributed to him, or in the event of his death to his Beneficiary, in a cash single sum payment as soon as administratively practicable following the January 1 coincident with or next following the date the Member incurs the distributable event or events elected under Section 9.2(a) or his date of death, as the case may be. Notwithstanding the foregoing, a Member or former Member may elect to receive distribution of one or more of his Education Sub-accounts in semi-annual installments over a period not to exceed six (6) years. Installments shall be determined as of each June 30 and December 31 and shall be paid as soon as administratively practicable thereafter. Installments shall commence as of the June 30 or December 31 coincident with or next following the date the Member incurs the distributable event elected under Section 9.2(a) with regard to a Sub-account, or as soon as administratively practicable thereafter. The amount of each installment shall equal the balance in the applicable Education Sub-account as of the Valuation Date of determination, divided by the number of remaining installments (including the installment being determined). If a Member or former Member dies before payment of the entire balance of all of his Education Sub-accounts, the remaining balance or balances, as the case may be, shall be paid in a single sum to his Beneficiary as soon as administratively practicable following the January 1 coincident with or next following his date of death. 9.3 Construction: To the extent any provision in this Article 9 is inconsistent with any other provision of this Plan, the provisions in Article 9 shall govern. -23- EX-12 8 Exhibit 12 CSX Corporation Ratio of Earnings to Fixed Charges (Millions of Dollars)
For the Fiscal Years Ended ----------------------------------------------------------------------- Dec. 25, Dec. 26, Dec. 27, Dec. 29, Dec. 30, 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- EARNINGS: Earnings Before Income Taxes $773 $1,183 $1,316 $974 $1,006 Interest Expense 506 451 249 270 281 Amortization of Debt Discount 1 4 2 2 3 Interest Portion of Fixed Rent 183 197 189 184 206 Undistributed (Earnings) Loss of Affiliates Accounted for Using the Equity Method (238) (150) (6) 3 10 Minority Interest 35 41 42 32 21 ----------- ----------- ----------- ----------- ----------- Earnings, as Adjusted $1,260 $1,726 $1,792 $1,465 $1,527 =========== =========== =========== =========== =========== FIXED CHARGES: Interest Expense 506 451 249 270 281 Capitalized Interest 9 3 5 6 9 Amortization of Debt Discount 1 4 2 2 3 Interest Portion of Fixed Rent 183 197 189 184 206 ----------- ----------- ----------- ----------- ----------- Fixed Charges $699 $655 $445 $462 $499 =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges 1.8 x 2.6 x 4.0 x 3.2 x 3.1 x =========== =========== =========== =========== ===========
EX-13 9 Exhibit 13 Financial Highlights
(Millions of Dollars, Except Per Share Amounts)1998(a)(b) 1997(b) 1996 1995(c) 1994(d) - - ----------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Operating Revenue $ 9,898 $ 10,621 $ 10,536 $ 10,304 $ 9,409 Operating Expense 8,768 9,038 9,014 8,921 8,227 Restructuring Charge (Credit)(e) (30) -- -- 257 -- -------------------------------------------------------- Total Operating Expense 8,738 9,038 9,014 9,178 8,227 -------------------------------------------------------- Operating Income $ 1,160 $ 1,583 $ 1,522 $ 1,126 $ 1,182 -------------------------------------------------------- Net Earnings $ 537 $ 799 $ 855 $ 618 $ 652 - - ----------------------------------------------------------------------------------------------------- PER COMMON SHARE Net Earnings(f) $ 2.55 $ 3.80 $ 4.10 $ 2.99 $ 3.17 Net Earnings, Assuming Dilution(f) $ 2.51 $ 3.72 $ 4.03 $ 2.95 $ 3.12 Cash Dividends $ 1.20 $ 1.08 $ 1.04 $ .92 $ .88 Market Price -- High $ 60.75 $ 62.44 $ 53.13 $ 46.13 $ 46.19 -- Low $ 36.50 $ 41.25 $ 42.25 $ 34.63 $ 31.57 - - ----------------------------------------------------------------------------------------------------- PERCENTAGE CHANGE FROM PRIOR YEAR Operating Revenue (6.8)% .8% 2.3% 9.5% 7.3% Operating Expense (3.3)% .3% (1.8)% 11.6% 4.3% Operating Expense, Excluding Restructuring Charge (Credit) (3.0)% .3% 1.0% 8.4% 5.6% Cash Dividends Per Common Share 11.1% 3.8% 13.0% 4.5% 11.4% - - ----------------------------------------------------------------------------------------------------- SUMMARY OF FINANCIAL POSITION Cash, Cash Equivalents and Short-term Investments $ 533 $ 690 $ 682 $ 660 $ 535 Working Capital Deficit $ (616) $ (532) $ (685) $(1,056) $ (840) Total Assets $20,427 $19,957 $16,965 $14,282 $13,724 Long-term Debt $ 6,432 $ 6,416 $ 4,331 $ 2,222 $ 2,618 Shareholders' Equity $ 5,880 $ 5,766 $ 4,995 $ 4,242 $ 3,731 Book Value Per Common Share $ 27.08 $ 26.41 $ 23.04 $ 20.15 $ 17.81 - - ----------------------------------------------------------------------------------------------------- EMPLOYEE COUNT(g) Rail 28,358 27,864 28,559 29,537 29,729 Other 17,789 19,047 18,755 18,428 17,974 -------------------------------------------------------- Total 46,147 46,911 47,314 47,965 47,703 - - -----------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements (a)In 1998, the company recognized a net investment gain of $154 million, $90 million after tax, 42 cents per share, primarily from the conveyance of the company's barge subsidiary, American Commercial Lines LLC (ACL), to a joint venture. CSXholds a 32 percent common interest in the joint venture and has accounted for its investment in barge activities under the equity method of accounting retroactive to the beginning of fiscal year 1998. For fiscal years prior to 1998, ACL was accounted for as a consolidated subsidiary. CSX's operating revenue and expense for those periods included barge operations. (b)Net earnings for 1998 and 1997 include the effects of the company's 42% investment in Conrail Inc. (Conrail). The company has recognized income from its proportionate share of Conrail's net income under the equity method of accounting, as well as the effect of the purchase price allocation on items such as depreciation of property and equipment, and acquisition and transition expenses. The combined effect of these items and net interest on debt issued to acquire the Conrail investment reduced the company's net earnings by $162 million, 76 cents per share, in 1998 and $97 million, 45 cents per share, in 1997. (c)In 1995, the company recognized a net investment gain of $77 million, $51 million after tax, 25 cents per share, on the issuance of an equity interest in a Sea-Land terminal and related operations in Asia and the write-down of various investments. (d)In 1994, the state of Florida elected to satisfy its remaining unfunded obligation issued in 1988 to consummate the purchase of 80 miles of track and right of way. The transaction resulted in an accelerated pretax gain of $69 million and increased net earnings by $42 million, 20 cents per share. (e)In 1995, the company recorded a $257 million pretax charge to recognize the estimated costs of initiatives to revise, restructure and consolidate specific operations and administrative functions at its rail and container-shipping units. The 1995 restructuring charge reduced net earnings by $160 million, 76 cents per share. In 1998, the company recorded a $30 million pretax credit to reverse certain separation and labor protection reserves established at its rail unit as part of the 1995 restructuring charge. Under a new telecommunications contract signed in July 1998, certain work-force reductions are no longer anticipated, and the associated costs will not be incurred. The 1998 restructuring credit increased net earnings by $19 million, 9 cents per share. (f)Earnings per share for all prior periods presented have been restated to reflect clarification of the treatment of certain stock-based compensation plan shares under FASB Statement No. 128. (g)Employee counts based on annual averages. 1 Chairman's Message - - ------------------ 1998 WAS A YEAR OF SIGNIFICANT ACCOMPLISHMENTS IN BUILDING OUR FUTURE, BUT FINANCIAL RESULTS WERE CLEARLY NOT SATISFACTORY. EARNINGS WERE DOWN SHARPLY, AND OUR STOCK PRICE FARED POORLY IN A STRONG YEAR FOR THE STOCK MARKET. FORTUNATELY, THIS REFLECTS TRANSIENT CONDITIONS, A TEMPORARY SITUATION RATHER THAN A PERMANENT STATE OF AFFAIRS. 1999 SHOULD BE A MUCH BETTER YEAR FOR THE COMPANY AND OUR SHAREHOLDERS. As we look back on 1998, it is important to recognize the larger set of issues the company was managing and the context in which the year played out. While earnings are always important to us, our number one priority was preparing for the successful integration of our part of Conrail, scheduled to take place this June. I am confident we have done this work very well. As a result, the new company we are building will not only have a successful launch but will take us to levels of performance that otherwise would have been unobtainable. 1998 was the year to get ready for the Conrail integration and build a new company. Realizing the huge stakes associated with our transaction - quite literally the future of railroading in the United States - we have gone to extraordinary, costly lengths over the past 18 months to ensure that our merger will be a great success from day one. With the unhappy experience of the western rail mergers weighing upon us, and with many shippers concerned about service in that part of the country clamoring for reregulation, any other approach would have been shortsighted. This intensive planning and preparation with all of the resources it entailed - hiring and training, accelerating locomotive purchases, building connections, expanding yards and terminals, double tracking our main route between Chicago and Cleveland - was critical. But it also caused a short-term but significant bulge in our costs. This came at a time when we were experiencing extremely weak demand for export coal, an important source of rail profits; a major strike at one of our largest customers, General Motors; and lackluster performance in a number of our important commodities such as chemicals and metals. With Sea-Land also struggling to cope with tough industry fundamentals and near-chaotic Asian economic conditions, earnings for 1998 dropped to $2.51 per share compared with $3.72 per share a year earlier. We have a talented management team at the railroad, but they are a limited resource. With attention focused heavily on the merger rather than the usual concerns, performance took a turn for the worse. Indeed, getting ready took a heavy toll. However, all the hard work, preparation and attention to detail that the merger involved will enable us to move forward with the integration successfully. I have no doubt that we will regain earnings momentum at the railroad now that the merger planning and preparation is largely behind us. We are prepared to take full advantage of the outstanding opportunities before us. CSX Transportation Inc. President Pete Carpenter has brought on board a cadre of senior managers from Conrail who know the organization, operating characteristics of the property and customer requirements. Led by Ron Conway, executive vice president and chief operating officer of the combined railroad, these executives joined a capable and dedicated CSXT group bolstered by the return of Aden Adams, heading merchandise marketing and sales. Paul Goodwin, chief financial officer, has streamlined our financial organization and is working directly with railroad senior management to maximize results. 2 At the board level, we are benefiting from the experience and insights of former Conrail Directors H. Furlong Baldwin, Claude S. Brinegar and E. Bradley Jones. And very importantly, we have forged a "New Compact" with our labor unions that promises profound changes in working relationships, tying safety to performance on a uniquely cooperative and collaborative basis. A major event of the past year was the unanimous decision in July by the Surface Transportation Board approving the Conrail transaction, following the longest and most thorough regulatory review of a railroad merger in history. Even though our merger is pro-competitive, the agency conducted extensive hearings so that all interested parties - shippers, labor, members of Congress, state and local officials, environmental groups and others - could participate fully. The staunch support for the transaction from several fronts, notably the strong voices of the legislative leadership, labor and more than 2,300 shippers, was convincing. There are clear public and economic benefits from bringing two strong competitors - CSX and Norfolk Southern - into the densely populated and commercially robust Northeast. The review process at times was highly charged. Much publicized problems with the Union Pacific-Southern Pacific merger and related rail congestion in the West were major issues during the hearings. We met repeatedly with trade groups, individual shippers, legislators, mayors and others to review the benefits of the transaction and provide assurances about safety, service and environmental issues. The understandings reached and mutually constructive solutions worked out over many months of negotiations were supported by the STB and help to assure the long-term success of the transaction. AS WE COMBINE THE 4,500 MILES OF CONRAIL TRACK WITH OUR EXTENSIVE SOUTHEASTERN AND MIDWESTERN NETWORK, WE WILL CREATE IMPORTANT NEW MARKET OPPORTUNITIES, STRENGTHEN OUR COMPETITIVE POSITION AND ACCELERATE GROWTH. [PHOTO] For the first time, the populous markets of New York City, Buffalo, Boston, Philadelphia and eastern Canada will be tied directly to fast growing metropolitan centers such as Atlanta, Orlando, Miami, Memphis, Charlotte and New Orleans with our direct, single-carrier service. Movements between these and other market combinations now require time-consuming and costly handoffs with Conrail at congested interchange points. Joining our railroads will eliminate these delays, which have caused shippers to turn overwhelmingly to trucks. We will be competing aggressively for significant portions of intercity truck traffic that can move on our "new" railroad just as efficiently, less expensively and on a much safer, more environmentally sound basis. 3 [PHOTO] Importantly, the Conrail transaction positions CSX as an intermodal powerhouse. We now have the fastest and most efficient rail service between New York and the Midwest. The well-engineered "water level" route, paralleling the eastern Great Lakes shore line and connecting the New York metropolitan area to Cleveland, Chicago and the West, provides quality service for high-volume, time-sensitive shippers moving parcels, retail merchandise and international freight. Intermodal is, by far, the fastest growing rail market segment. In 1998, we invested more than $260 million to completely rebuild this route and create a state-of-the-art terminal in Chicago, the most important intermodal gateway in North America. Conrail synergies will begin to accrue following the June 1999 "Split Date." We are projecting $410 million of benefits annually, with approximately two-thirds derived from identified cost reductions and the balance from increased market penetration. These sustainable gains will come on stream gradually as carefully studied operational and marketing initiatives take hold. The full value of these synergies should be captured by 2001. SEA-LAND HAD AN EXTREMELY DIFFICULT YEAR. TO REALIZE OUR FULL POTENTIAL, WE NEED HIGHER RETURNS FROM THIS BUSINESS IN 1999. For the past few years, global container-shipping fundamentals have been problematic, with vessel over-capacity driving down rates despite generally strong growth in world trade. The stunning economic dislocations in Asia, as well as the much-publicized problems in Russia and Brazil in 1998, further disrupted ocean trade and undermined Sea-Land's ability to deal with lower rates through cost savings. There are encouraging signs that the industry may be at the bottom of the trough. Current conditions are creating strong pressures on major carriers to consolidate, discipline capital and price services more intelligently. Sea-Land will continue to manage expenses with great care and is in a good position to compete effectively as maritime deregulation takes place in the United States this year. Our other businesses are performing well. Customized Transportation Inc. continues to be a bright spot. Tightly managed and having an outstanding reputation for highly specialized, proprietary logistics and supply-chain management services, Customized Transportation moved successfully into new markets and achieved ambitious financial goals. The Greenbrier continues to set the standard for excellence in the resort industry. In 1998, we conveyed American Commercial Lines LLC , our inland barge unit, to a private consortium, generating net cash proceeds of $628 million. CSX has a 32 percent common interest in this joint venture. Completion of this transaction strengthened our balance sheet and allows us to focus more closely on the major tasks ahead of us. 4 CSX PERFORMANCE SHOULD IMPROVE MARKEDLY IN 1999. APPROXIMATELY 90 PERCENT OF CAPITAL SPENDING WILL BE RAIL-ORIENTED, WHERE RETURNS ARE HIGHEST AND MOST ASSURED. MANAGEMENT FOCUS WILL BE CENTERED ON CONRAIL INTEGRATION EFFORTS, REGAINING CORE EARNINGS MOMENTUM AND YEAR 2000 PREPARATIONS. ENHANCING SHAREHOLDER VALUE IS THE OVERRIDING GOAL. We begin 1999 with enormous confidence in our future. The network of rail lines, yards, terminals, facilities and information systems we have put in place are world class and second to none. We have merged the best of CSX and Conrail and have a superb management team in place. With this "new" railroad, we are a clear step above where we ever could have been without the merger. Planning and preparations have been done well, and the year will go down as one of historic importance for the company. With Conrail we are entering a new era for the company and for railroading in the East. We have expectations exceeding anything we could have imagined heretofore. We will have the ability to approach the marketplace on entirely new terms with expanded, fundamentally better service offerings, which we are confident will be well-received by the shipping public. The "new" railroad we are building should account for more than 60 percent and 80 percent of CSX total revenues and earnings, respectively, in 1999. Capital outlays will peak this year with nearly $1.4 billion invested in locomotives, rail cars, track, yards, signals, intermodal and information systems to further upgrade our combined network. We are intent on generating consistently higher levels of core earnings. We are dedicated to the fundamental goal of operating the safest, most efficient railroad in the United States. Service improvement initiatives, network realignments, better equipment utilization, broader market reach and renewed focus on day-to-day costs should start taking the operating ratio down toward our long-term goal of 70 percent. Sea-Land results also should improve in 1999. Rates are the major determinant, and new deregulation in U.S. trade--authorizing confidential contracts with our customers--will benefit carriers offering global service and value-added performance. CSX's outlook is dependent, in large measure, on the health of the U.S. economy. Our plans assume some slowdown from 1998's rapid rate of growth, but we do not foresee this to be a major obstacle. As we approach the end of the century, Year 2000 is also a significant issue for our technologically supported businesses. Preparations have been comprehensive, and most of the remedial work has been completed. Benchmark tests indicate an orderly changeover. As we move from the transition year of 1998, we enter a new era with conviction about the strength of the company and its prospects. Much work is behind us; more important work remains to be done. Special thanks are due to our more than 46,000 employees for their ongoing efforts, and I want to take this opportunity to welcome the dedicated people from Conrail now joining us. The support of our employees, shareholders, customers, and the communities we serve is needed, highly valued and much appreciated. /s/John W. Snow John W. Snow Chairman and Chief Executive Officer 5 [PHOTO] NOTHING IS MORE IMPORTANT THAN THE WELL-BEING OF OUR EMPLOYEES. WE AIM TO OPERATE THE SAFEST RAILROAD IN THE WORLD, AND ARE WORKING WITH LABOR UNIONS AND GOVERNMENT AGENCIES TO ACCOMPLISH THIS. IN 1998, CSXT AND OUR MAJOR UNIONS INTRODUCED A UNIQUE "NEW COMPACT" TO TRANSFORM THE CULTURE OF OUR COMPANY AND USHER IN AN ERA OF UNDERSTANDING AND COOPERATION. THIS BREAKTHROUGH, STRONGLY SUPPORTED BY FEDERAL RAILROAD ADMINISTRATOR JOLENE MOLITORIS, DISCARDS THE ADVERSARIAL, PUNITIVE DISCIPLINARY SYSTEM PREVAILING FOR DECADES IN AMERICAN RAILROADING AND REPLACES IT WITH A COLLABORATIVE APPROACH THAT RECOGNIZES THE DIGNITY OF EACH INDIVIDUAL AND HIS OR HER ROLE IN OUR SUCCESS. JOINT COMMITTEES SET SAFETY POLICIES AND REVIEW RULE INFRACTIONS. BEHAVIORS ARE STUDIED, AND COUNSELING IS PROVIDED WHERE NECESSARY. THE PROGRAM IS OFF TO AN ENCOURAGING START. OUR OVERRIDING GOAL IN 1999 IS TO RANK BEST IN SAFETY BY SHARPLY REDUCING ALL CATEGORIES OF INJURIES, ACCIDENTS AND EQUIPMENT DAMAGE. CSX Transportation Inc. - - ----------------------- [PHOTO] THE CSX TRANSPORTATION (CSXT) RAIL NETWORK IS THE LARGEST IN THE EASTERN HALF OF THE UNITED STATES. INCLUDING CONRAIL OPERATIONS, CSXT COVERS 23,000 ROUTE MILES AND INCLUDES 144 TERMINALS. OUR FLEET OF 3,600 LOCOMOTIVES IS IN EXCELLENT CONDITION, AND OUR 113,000 RAIL CARS SERVE THE SPECIFIC REQUIREMENTS OF MORE THAN 10,000 CUSTOMERS. EACH DAY APPROXIMATELY 1,700 TRAINS - MORE THAN ONE PER MINUTE - ARE ASSEMBLED AND DISPATCHED TO THEIR DESTINATIONS. WE ARE ESPECIALLY PROUD OF THE SKILLS AND PROFESSIONALISM OF OUR MORE THAN 28,000 EMPLOYEES, WHO WORK LONG HOURS UNDER OFTEN DIFFICULT CONDITIONS AND ARE DEDICATED TO BUILDING THE SAFEST AND MOST EFFICIENT RAILROAD IN AMERICA. 1998 was a transition year for CSX Transportation. Our focus was on planning for the seamless, efficient integration of Conrail operations, slated to take place in June 1999. The scope of this effort was comprehensive as scores of teams from all areas - operations, sales and marketing, information technology, as well as headquarters staff - devoted tens of thousands of man hours to determine how to best combine the two systems. Capital outlays, train scheduling, market demand patterns, asset utilization, track requirements, mechanical and repair shop logistics, human resources, labor contracts, environmental considerations, information technology and work order systems processing have all been reviewed, and much work has been completed. We are looking forward to operating our new railroad and realizing the substantial benefits of this transaction. Rail earnings were down in 1998, after years of continued improvement. Revenues and carloads were lower and expenses were higher, with the latter due in part to the cost and burdens of integration planning efforts. Regaining railroad core earnings momentum is a top priority. Winning more business is largely a function of service capability and quality. CSXT sales and marketing goals are linked tightly to operating plan initiatives to leverage benefits. Customers want a competitive price but demand on-time reliability and access to the right equipment at the right time and at the right place. Achieving 1999 objectives hinges on our ability to meet or exceed customer expectations. Revenues will be up substantially in 1999, largely reflecting the addition of Conrail and growth in most commodity markets. A network redesign is underway to simplify the service delivery process by increasing the velocity of our railroad. "Rightsizing" the operating plan means better utilization of our locomotives, rail cars, crews and track capacity; i.e. fewer stops, longer hauls, less congestion at bottlenecks, priority dispatching and fewer crew starts. These efforts, combined with the start-up of our Local Area Management initiative, which is empowering field managers to make decisions at the customer level, should generate substantial transportation savings in 1999. For many years, CSXT has had considerable success managing costs through the efforts of dedicated Performance Improvement Teams. In the mechanical area, substantial cost savings for materials, locomotive maintenance and related labor are earmarked. The engineering department will realize further savings with more efficient track maintenance and facility improvements. Support groups also will pare their budgets this year. 7 [PHOTO] FUNDAMENTAL TO THE QUALITY AND POTENTIAL OF INTERMODAL OPERATIONS IS ON-TIME PERFORMANCE OVER THE CSX TRANSPORTATION NETWORK, WHICH AVERAGED NEARLY 90 PERCENT FOR THE YEAR. HIGH PERFORMANCE IS A "MUST HAVE" FOR THE PARCEL, TRUCKLOAD AND LESS-THAN-TRUCKLOAD SEGMENTS - ALL MAJOR CUSTOMERS OF CSXI. CSX Intermodal Inc. - - ------------------- [PHOTO] INTERMODAL SERVICE - WHERE TRAILERS AND CONTAINERS ARE PLACED ON RAIL CARS FOR LONGER HAULS - IS THE RAIL INDUSTRY'S FASTEST GROWING SECTOR. THE CONRAIL TRANSACTION POSITIONS US EXTREMELY WELL IN THIS KEY MARKET, AND SIGNIFICANT INVESTMENTS WERE MADE IN 1998 TO STRENGTHEN THE COMPANY AND PREPARE FOR GROWTH. WE EXPECT INTERMODAL VOLUME AND REVENUE TO CLIMB SIGNIFICANTLY OVER THE NEXT SEVERAL YEARS. In 1998, CSX Intermodal Inc. (CSXI) neared completion of a $130 million terminal expansion program including new facilities in Chicago, Philadelphia, Cleveland and Atlanta. At key markets in the Midwest, Northeast and South, CSXI now has significantly more terminal capacity than any other intermodal provider. These outlays, complemented by the completion of the railroad's $220 million project to rebuild and improve its superb water level route, create a state-of-the-art "superhighway" between Chicago, New York and New England. The Conrail transaction also affords outstanding growth opportunities in major north/south markets. Single-line service into the Northeast will add substantial volume on CSXT rail lines that parallel the I-95 and I-85 corridors, and operating efficiencies will increase movements on the I-75 corridor to the Midwest. The overwhelming portion of this business now moves on trucks. We will provide a lower-cost, more environmentally favorable intermodal alternative. Financial results were off in this transition year. Severe congestion in the western rail network was costly, seriously curtailing transcontinental movements. This situation is now much improved. Enhanced service offerings and partnerships with key customers should produce stronger results in 1999. [PHOTO] [PHOTO] U.S.-INTERNATIONAL SHIPPING WILL BE DEREGULATED THIS YEAR, ELIMINATING THE REQUIREMENT TO POST TARIFFS AND ENABLING SHIPPERS AND CARRIERS TO ENTER INTO CONFIDENTIAL CONTRACTS. SEA-LAND HAS WORKED FOR SEVERAL YEARS TO CONVINCE CONGRESS THAT FREE MARKET PRINCIPLES SHOULD PREVAIL IN THE SHIPPING INDUSTRY AS IN OTHER BUSINESSES. LEGISLATION AUTHORIZING DEREGULATION WAS PASSED IN OCTOBER 1998 AND BECOMES EFFECTIVE IN MAY 1999. UNFETTERED COMPETITION FOR CARGO WILL BENEFIT LOW-COST, HIGH-VALUE SERVICE CARRIERS SUCH AS SEA-LAND AND ENHANCE OUR COUNTRY'S COMPETITIVE POSITION IN WORLD MARKETS. Sea-Land Service Inc. - - --------------------- [PHOTO] OPERATING A FLEET OF 94 VESSELS AND OVER 220,000 CONTAINERS, SEA-LAND IS BY FAR THE LARGEST U.S.-BASED OCEAN CARRIER AND A LEADER IN THIS GLOBAL INDUSTRY. AN IMPORTANT FACTOR IN VIRTUALLY ALL INTERNATIONAL TRADE LANES, THE COMPANY ALSO HAS A STRONG PRESENCE IN DOMESTIC BUSINESS TO AND FROM THE CONTINENTAL UNITED STATES AND ALASKA, HAWAII AND PUERTO RICO. Sea-Land's highly efficient network of terminals throughout the United States, Asia, Europe, Latin America and the Middle East, leading information systems, keen customer focus and logistics support services meet the challenging requirements of major customers moving cargo worldwide. Profits have declined over the past two years, but Sea-Land's sustained ability to lower costs and operate flexibly have mitigated the impact of extremely difficult economic conditions and weak market fundamentals. For several years, vessel over-capacity has been a constraining factor on ocean-shipping rates. With demand for container shipping growing as production of consumer goods has shifted to emerging nations, foreign carriers have been building a new generation of fast, massive ships. The high rate of delivery of these vessels in 1997 and 1998 has overshadowed demand growth, and rates have been under considerable pressure. The 1998 meltdown of key Asian economies and recession in Japan exacerbated this situation. Weak Asian currencies made goods from the region highly attractive to consumers in the United States and Europe. But while ships have been full leaving Asia, there has been a severe fall-off in cargo for the return trip. Accordingly, our ships have been carrying a high proportion of empty containers back to Asia for loading. In normal times, containers would be carrying commodities and high-rated refrigerated foodstuffs, positioned for customers in Asia and reloaded for the voyage back. Since costs for carrying a full or empty container are roughly equal, the trade imbalance severely affected 1998 operating earnings. The near collapse of the Russian economy and damage to facilities in Puerto Rico and Latin America caused by hurricanes late in the year also hurt Sea-Land's results. We believe shipbuilding has slowed and capacity will start coming back into line with cargo demand. In the meantime, Sea-Land remains focused on lowering costs across the board. A long-standing alliance with Maersk, the large, high-quality Danish shipping company, continues to benefit both companies through vessel-sharing and terminal tradeoffs. Sea-Land also is moving some data processing and shipment management functions to offshore locations, increasing efficiency and reducing expenses. Major carriers serving Asian trades hard hit by prevailing conditions have given shippers notice that rates for shipments from Asia will increase markedly in 1999 to help cover round-trip costs outlined above. We are mindful, however, that the global economic outlook remains uncertain. While there are some indications that Asia is on the mend, Brazil and Latin America now have problems and Russia remains a major question mark. A healthy U.S. economy and continuing strength in Europe should bolster the trade outlook. 11 [PHOTO] CONSISTENTLY DELIVERING INNOVATIVE LOGISTICS SOLUTIONS IS THE KEY TO CTI'S SUCCESS. BY COMBINING EMPLOYEE EXPERTISE AND PROCESS REDESIGN WITH STATE-OF-THE-ART TECHNOLOGY, CTI HAS BECOME AN INVALUABLE PARTNER FOR COMPAQ COMPUTER AT THEIR PRIMARY MANUFACTURING OPERATION IN HOUSTON, TEXAS. Customized Transportation Inc. - - ------------------------------ [PHOTO] NOW A $400 MILLION COMPANY, CUSTOMIZED TRANSPORTATION (CTI) REMAINS ONE OF THE NATION'S LEADING THIRD-PARTY LOGISTICS PROVIDERS, OFFERING INVENTORY MANAGEMENT, WAREHOUSING, ASSEMBLY AND JUST-IN-TIME DELIVERY SERVICES. CTI'S REPUTATION IS BUILT ON ITS ABILITY TO EFFECTIVELY MANAGE CRITICAL LOGISTICS PROCESSES FOR SERVICE-SENSITIVE CLIENTS IN THE MANUFACTURING, AUTOMOTIVE, ELECTRONICS, HEAVY MACHINERY, TIRE, CHEMICAL, RAIL AND CONSUMER DURABLE INDUSTRIES. CTI again achieved its performance goals in 1998, recording 21 percent higher earnings on revenue gains of 5 percent. These results reflect its commitment to excellence working in 129 locations and serving many of the best-known names in worldwide business. CTI has implemented proprietary, sophisticated logistics software systems for managing high volume parts flows, assembly processes and distribution activities. Last year, the company handled 102.2 million transactions at a 99.9867 percent accuracy rate. CTI continues to broaden its reach and penetrate new markets. Since 1993, CTI's revenue generated from general industry customers has grown from 20 to 37 percent. CTI also enhanced its position within its traditional automotive franchise in 1998. CTI shares its expertise with CSX Transportation and other CSX business units, providing transportation and logistics management support services to reduce costs. Since 1994, revenues have more than doubled and earnings have nearly tripled. This business is not capital intensive, fueled largely by the expertise of its people and systems employed. CTI has consistently generated positive cash flows for CSX and should have another fine year in 1999. 13 Public Policy - - ------------- CSX PLAYS AN ACTIVE ROLE IN PUBLIC POLICY DEBATES THAT AFFECT THE INTERESTS OF OUR COMPANY, CUSTOMERS, EMPLOYEES AND SHAREHOLDERS. OUR OBJECTIVE IS TO PROTECT AND ENHANCE OUR ABILITY TO PROVIDE SAFE, RELIABLE AND EFFICIENT TRANSPORTATION SERVICE AND SUPERIOR SHAREHOLDER VALUE. REREGULATION: The most important public policy issue affecting U.S. railroads and their customers this year almost certainly will be the debate over reregulating the rail industry. Reregulation threatens to erode the dramatic improvements railroads have achieved in service, safety, productivity and profitability over the past two decades. Prior to passage of the Staggers Rail Act of 1980, which freed the U.S. rail industry from outdated economic regulation, railroads were among the most tightly regulated - and least profitable industries in the United States. By the late 1970s, the rail industry was on the verge of collapse, plagued by frequent accidents, loss of market share to trucking, and pathetic returns on investment. Deregulation reversed the rail industry's downward spiral by mandating that competition and market forces determine rail prices. Revitalized railroads unleashed a wave of innovations, productivity gains and new service offerings that improved safety, reduced costs and attracted new business. The resulting improvement in profitability stimulated massive new investment that produced still more innovations and productivity gains. Today, rail deregulation is almost universally credited with producing an American rail renaissance that is the envy of the world. Since 1980, U.S. rail productivity has nearly tripled, inflation-adjusted freight rates have fallen by more than half, and employee injuries and illnesses have dropped by two-thirds. Despite the success of deregulation, the regulatory balance Congress struck with the Staggers Act is under attack by some shippers who want the federal government to intervene in commercial relationships between railroads and customers. Proponents of reregulation want the federal government to force railroads to allow other carriers to operate over their privately owned tracks without fair compensation. Far from creating free market competition, this so-called "open access" would have to be administered by a government agency and would result in burdensome regulatory proceedings. Other proposals would undermine the Staggers Act by gutting its key provisions, making almost all prices subject to challenge before a regulatory agency. With each scenario, the fundamental question is whether rail customers are better off relying on the political arena or the free market to provide the service they require at fair prices. History and economic analysis demonstrate that increased government intervention in the marketplace does not provide customers with better service over the long term. Rather, it is more likely to lead to deteriorating service and a weakened infrastructure. Working closely with shippers, rail labor unions, environmental and highway safety groups and members of Congress, CSX will fight to preserve the benefits of deregulation. Reregulating the rail industry would have severe consequences for jobs, safety, highway congestion and efficient freight transportation. We cannot afford to allow special interests to jeopardize the indisputable progress that deregulation has produced for all Americans who rely on railroads for reliable, safe and environmentally responsible freight transportation. RAIL SAFETY: Congress is reviewing the Federal Rail Safety Act this year. One issue is whether and how the Federal Railroad Administration (FRA) should intervene in areas such as worker fatigue, which rail labor and management are cooperatively addressing. CSX favors cooperative approaches that promise to craft a variety of remedies rather than a one-size-fits-all, government-mandated solution. CSX also supports a shift from government mandates to performance standards, which are increasingly used in the private sector and government. Under this approach, the FRA would set stringent safety standards without dictating how railroads should achieve these goals. PASSENGER SERVICE: With the Conrail acquisition, CSX will have more passenger operations on its rail network. We intend to cooperate fully with passenger lines to ensure service for their customers. We will do so with the understanding that safety remains our top priority, along with maintaining efficient freight rail services. In addition, we must not be forced to subsidize passenger operations. America deserves both world-class freight and passenger service. 14 MARITIME REFORM: The maritime industry achieved a milestone with passage of the Ocean Shipping Reform Act of 1998, which set in motion competitive forces that will reshape the container-shipping business. This historic legislation, which takes effect May 1, 1999, revamps a 1984 law governing international container shipping to and from U.S. ports, abolishes government tariff filing requirements and allows confidential contracting between shippers and carriers. Deregulation is extremely important both to Sea-Land and to its customers. Allowing shippers to enter into confidential service contracts will foster flexible and creative approaches to meeting customer requirements. These reforms will give shippers and carriers important new incentives to work together to design tailored transportation solutions that achieve both parties' requirements. GLOBAL CLIMATE CHANGE: Whether global warming is actually occurring and what might be the cause is a matter of debate. There is no doubt, however, that actions to force a reduction of carbon dioxide and other gases produced by industrial activity would punish many CSX customers and harm the U.S. economy. CSX supports safeguarding the environment, but we oppose extreme reactions to unproven beliefs that would serve to hamper our nation's economic growth while allowing developing countries to continue growing without restraint. CSX favors a more reasonable response to limiting greenhouse gas without undermining economic growth. FUEL TAX EQUITY: CSX and other U.S. railroads are seeking to repeal an unfair tax on diesel fuel. Railroads and trucks pay 4.3 cents in taxes for every gallon of diesel they consume. While the railroads' tax is earmarked for reducing the federal budget deficit, the tax paid by trucks goes into the Highway Trust Fund to support highway improvement. Thus railroads, which invest billions of dollars each year to maintain their track structure, also must pay a fuel tax to support deficit reduction, while the same tax paid by the railroads' major competitors goes to improving the publicly funded highway system on which they operate. Fairness dictates that a more equitable approach must be found. TORT REFORM: CSX is an active supporter of efforts to restore rationality to our civil justice system through tort reform. Laws define unacceptable conduct and set penalties to be imposed for those who disregard the rule of law. Punitive damages, however, distort the rule of law by imposing huge damages for ill-defined actions. There is something inherently unfair about a system that allows outrageous punitive awards that bear little or no relationship to the damages plaintiffs seek to recover. Such a system rewards lawyers who inflame jurors and persuade them to act on emotion rather than facts. COMMUNITY RELATIONS: Through its business operations and employees, CSX lends a helping hand to communities around the world. CSX supports a multitude of philanthropic activities developed and/or sponsored by corporate headquarters and the operating units. Many of the company's initiatives focus on education and children. In 1998, CSX launched an innovative environmental scholarship program through a partnership with the National Audubon Society and United Negro College Fund. The $1.5 million program provides two-year scholarships and paid internships at CSXT and NAS for exceptional students attending historically black colleges and universities. CSX also partnered with the mayor of New Orleans and the New Orleans Parks Department to provide a summer recreational program for New Orleans' youth. CSXT participates in more than 300 initiatives - such as Success Express, Take Stock in Children and the Wonderland Express to help improve the quality of life in communities where the railroad operates. With Success Express, CSXT continued its commitment to Jacksonville's historically black Edward Waters College by helping to generate enrollments. The Take Stock in Children program offers mentoring and scholarship support for disadvantaged youth. The railroad also is a major contributor to the Wonderland Express, a model railroad exhibit that supports the Ronald McDonald House. When CSX Intermodal completed its 59th Street terminal in October, it hosted an opening festival for 3,000 neighborhood residents. More importantly, the facility will be run in large measure by local hires. Sea-Land's assistance extends well beyond its corporate headquarters. In addition to supporting a variety of cultural organizations in Charlotte, the company regularly contributes to the United Way, Boy Scouts, arts and education and local colleges. In 1998, Sea-Land created a partnership with Communities in Schools to mentor local students on careers in shipping. Continuing a long tradition of supporting relief efforts around the world, Sea-Land also provided hundreds of free shipments of supplies to Central America and the Dominican Republic to assist areas devastated by hurricanes. 15 Safety and Environmental Policy - - ------------------------------- WE TAKE SERIOUSLY OUR RESPONSIBILITY TO PROTECT THE HEALTH AND WELL BEING OF OUR EMPLOYEES AND THE COMMUNITIES IN WHICH WE OPERATE. WE ARE PROUD OF OUR PROGRESS, BUT WE WILL NOT BE SATISFIED UNTIL WE REACH OUR GOAL OF ZERO ACCIDENTS AND INJURIES AND THE BEST ENVIRONMENTAL RECORD IN THE INDUSTRY. CSX Transportation's safety program is built on a solid foundation of carefully designed policies, sound operating practices, frequent and comprehensive training, exhaustive monitoring and continuous refinement. Essential to the success of CSXT's safety effort, however, is the active support of rail labor in designing and managing the safety process. Since 1989, CSXT's train accident rate has fallen 39 percent, the number of highway-rail accidents has been reduced by half, and the employee injury rate has declined 73 percent. Some slippage was experienced in key safety measures in 1998, but steps were taken during the year to reinvigorate the safety process under the operating department's new leadership. Importantly, in 1998 we entered into a "New Compact" with our labor unions addressing safety from a much more progressive, mutually constructive standpoint. We're confident that this unique initiative and our comprehensive planning for the Conrail integration will allow for a safe transition to the new CSXT and accelerate the pace of safety improvement. At Sea-Land, rigorous safety programs are in place aboard every vessel and at every terminal, port and facility. Increased safety awareness, better training and effective sharing of best practices among ships and terminals have yielded greatly improved safety results. Since 1993, the shipboard incident rate has fallen by 71 percent, while the incident rate at terminals has dropped 37 percent over the same period. Each CSX company that handles hazardous materials has plans and training programs to ensure the highest standards of safety and environmental compliance. The volume of hazardous material carloads handled by CSXT has increased 22 percent over the past decade, while the number of derailments involving the release of a hazardous material has decreased 70 percent. In 1998, CSXT handled more than 340,000 loads of hazardous materials, yet there were only nine derailments in which hazardous materials were released. Sea-Land has achieved similar success in hazmat handling: out of more than 100,000 hazmat loads handled in 1998, there were only six incidents involving a release of any kind. ENVIRONMENTAL STEWARDSHIP ALSO IS A TOP PRIORITY FOR CSX COMPANIES. AT CSXT, A COMPREHENSIVE ENVIRONMENTAL EFFORT INCLUDES EMPLOYEE AWARENESS PROGRAMS, ENVIRONMENTAL TRAINING SESSIONS, RAIL TERMINAL COMPLIANCE, AUDITING AND REPORTING PROCEDURES. CSXT has made giant strides improving its environmental compliance record, reducing spills and wastewater permit violations by 97 percent since 1991. CSXT recycles enormous quantities of steel and other metals from old locomotives, freight cars and rail track. The railroad also recycles about 500,000 pounds of batteries, 400 tons of aluminum cans and office paper, and 1.2 million wooden crossties each year. Sea-Land also follows strict procedures to comply with environmental laws and regulations. Oily bilge water is never discharged at sea, and wastes are incinerated or retained on board for proper disposal ashore. Regular shipboard emergency drills are designed to contain and clean up any accidental spills of hazardous materials before they enter the sea. At Sea-Land terminals, waste oil is recycled, containments are built around fuel storage tanks and stations, and storm water runoff is carefully controlled to avoid any contaminants reaching public sewage systems. Along with increased cooperation and coordination with customers and government agencies, excellence in environmental and safety performance will continue to be an integral part of all our business activities. 16 Financial Information Financial Policy 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Consolidated Statement of Earnings 30 Consolidated Statement of Cash Flows 31 Consolidated Statement of Financial Position 32 Consolidated Statement of Changes in Shareholders' Equity 33 Notes to Consolidated Financial Statements 34 Report of Ernst & Young LLP, Independent Auditors 49 17 FINANCIAL POLICY CSX'S FINANCIAL PRINCIPLES The management of CSX Corporation reports the company's financial condition and results of operations in an accurate, timely and conservative manner in order to give shareholders the information they need to make investment decisions about the company. In this section of our annual report, financial information is presented to assist you in understanding the sources of earnings, the financial resources of the company and the contributions of the major business units. Our key objective is to increase shareholder value by improving the return on invested capital and maximizing free cash flow. To achieve these goals, managers utilize the following guidelines in conducting the financial activities of the company: Capital -- CSX business units are expected to earn returns in excess of the CSX cost of capital. Business units that do not earn a return above the CSX cost of capital and do not generate an adequate level of free cash flow over an appropriate period of time will be evaluated for sale or other disposition. Taxes -- CSX will pursue all available opportunities to pay the lowest federal, state and foreign taxes, consistent with applicable laws and regulations and the company's obligation to carry a fair share of the cost of government. CSX also works through the legislative process for lower tax rates. Debt Rating -- The company will strive to maintain its investment grade debt ratings, which allow cost-effective access to financial markets. The company will manage its business operations in a manner consistent with meeting this objective, insuring adequate cash to service its debt and fixed charges. Derivative Financial Instruments -- From time to time the company may employ derivative financial instruments as part of its risk management program. The objective is to manage specific risks and exposures, not to trade such instruments for profit or loss. Dividends -- The cash dividend is reviewed regularly in the context of inflation and competitive dividend yields. The dividend may be increased periodically if cash flow projections and reinvestment opportunities show the higher payout level will best benefit shareholders. CSX cannot always guarantee that its goals will be met, despite its best efforts. For example, revenue and operating expenses are affected by the state of the economy and the industries the company serves. In addition, changes in regulatory policy can drastically change the cost and feasibility of certain operations. Factors such as these, along with the uncertainty involved in predicting future events, should be borne in mind when reading company projections or forward-looking statements in this report. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements of CSX have been prepared by management, which is responsible for their content and accuracy. The statements present the results of operations, cash flows and financial position of the company in conformity with generally accepted accounting principles and, accordingly, include amounts based on management's judgments and estimates. CSX and its subsidiaries maintain internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized by management and are recorded in conformity with generally accepted accounting principles. Controls include accounting tests, written policies and procedures and a code of corporate conduct routinely communicated to all employees. An internal audit staff monitors compliance with and the effectiveness of established policies and procedures. The Audit Committee of the board of directors, composed solely of outside directors, meets periodically with management, internal auditors and the independent auditors to review audit findings, adherence to corporate policies and other financial matters. The firm of Ernst & Young LLP, independent auditors, has been engaged to audit and report on the company's consolidated financial statements. Its audit was conducted in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent deemed necessary for the purpose of its report, which appears on page 49. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All references to earnings per share assume dilution) DESCRIPTION OF BUSINESS CSX Corporation, headquartered in Richmond, Va., is a leading provider of multimodal freight transportation and contract logistics services around the world. CSX's unique combination of rail, container-shipping, intermodal and logistics services offers shippers global reach unmatched by any other freight transportation company. The company's goal, advanced at each of its business units, is to provide efficient, competitive transportation and related services for customers and to deliver superior value to CSX shareholders. CSX TRANSPORTATION INC. CSXT is a major eastern railroad, providing rail freight transportation over a network of more than 18,000 route miles in 20 states, the District of Columbia and Ontario, Canada. Headquartered in Jacksonville, Fla., CSXT accounted for 50% of CSX's operating revenue and 89% of operating income in 1998. In 1999, CSXT's rail system will expand significantly with the integration of Conrail lines in the Northeast, brought about by the joint CSX/Norfolk Southern acquisition of Conrail that was approved by federal regulators in 1998. After integration, CSXT will operate in every major market east of the Mississippi River with a network comprised of over 23,000 route miles in 23 states and Canada, plus additional rail service in certain geographic areas that Conrail will operate for the joint benefit of CSX and Norfolk Southern. SEA-LAND SERVICE INC. Sea-Land is the largest U.S.-based ocean carrier and a leader in the global shipping industry. The carrier operates a fleet of 94 container ships and 220,739 containers in U.S. and foreign trade and serves 120 ports. In addition, Sea-Land operates 30 marine terminal facilities across its global network. Headquartered in Charlotte, N.C., Sea-Land accounted for 40% of CSX's operating revenue and 11% of operating income in 1998. CSX INTERMODAL INC. CSXI provides transcontinental intermodal transportation services and operates a network of dedicated intermodal facilities across North America. Every week, CSXI runs more than 300 dedicated trains between its 34 terminals. CSXI accounted for 7% of CSX's operating revenue and 3% of operating income in 1998. Its headquarters are located in Jacksonville, Fla. CSXI's intermodal network will expand to 49 terminals in 1999 as a result of the integration of Conrail operations. CUSTOMIZED TRANSPORTATION INC. CTI is one of the nation's leading third-party logistics providers, offering inventory management, distribution, warehousing, assembly and just-in-time delivery services. Headquartered in Jacksonville, Fla., CTI is the fastest-growing unit of CSX. CTI accounted for 4% of CSX's operating revenue and 2% of operating income in 1998. NON-TRANSPORTATION Resort holdings include the Mobil Five-Star and AAA Five-Diamond hotel, The Greenbrier in White Sulphur Springs, W.Va., and the Grand Teton Lodge Company in Moran, Wyo. CSX Real Property Inc. is responsible for sales, leasing and development of CSX-owned properties. CSX holds a majority interest in Yukon Pacific Corporation, which is promoting construction of the Trans-Alaska Gas System to transport Alaska's North Slope natural gas to Valdez for export to Asian markets. 19 RESULTS OF OPERATIONS CONSOLIDATED RESULTS
Net Earnings (Millions of Dollars, Except Per Share Amounts*) 1998 1997 1996 - - --------------------------------------------------------------------------------------------------------- Per Per Per Description (all after tax) Amount Share Amount Share Amount Share - - --------------------------------------------------------------------------------------------------------- Net Earnings as Reported $537 $2.51 $799 $3.72 $855 $4.03 Effect of Conrail Investment 162 .76 97 .45 -- -- Net Investment Gain (90) (.42) -- -- -- -- Restructuring Credit (19) (.09) -- -- -- -- - - --------------------------------------------------------------------------------------------------------- Net Earnings as Adjusted $590 $2.76 $896 $4.17 $855 $4.03 - - ---------------------------------------------------------------------------------------------------------
* Prior-period amounts have been restated to reflect clarification of the treatment of certain stock-based compensation plan shares under FASB Statement No. 128, "Earnings per Share." 1998 VS. 1997 Net earnings for 1998 totaled $537 million, $2.51 per share, compared with $799 million, $3.72 per share in 1997. The 1998 results include a net investment gain of $154 million, $90 million after tax, 42 cents per share, primarily from the conveyance of the company's barge subsidiary, American Commercial Lines LLC (ACL), to a joint venture. Also included in the 1998 results is a one-time restructuring credit of $30 million, $19 million after tax, or 9 cents per share to reverse a previous charge for separation and labor protection costs. Financial results for both 1998 and 1997 include significant items associated with the company's investment in Conrail. Under the equity method of accounting, CSX recognizes earnings from its 42% share of Conrail's net income and expense arising from the allocation of the joint CSX/Norfolk Southern purchase price to Conrail's depreciable property and other assets and liabilities. CSX also is incurring interest on the debt issued to acquire the Conrail investment, as well as various acquisition and transition expenses. On a combined basis, these items reduced the company's net earnings by $162 million, 76 cents per share, in 1998 and $97 million, 45 cents per share, in 1997. Excluding the effects of the Conrail investment and non-recurring items, net earnings would have been $590 million, $2.76 per share, in 1998 and $896 million, $4.17 per share in 1997.
Operating Results (Millions of Dollars) 1998 -------------------------------------------------- Container Inter- Contract Elim./ Rail Shipping modal Logistics Other Total - - -------------------------------------------------------------------------------- Operating Revenue $4,956 $3,916 $648 $408 $(30) $9,898 ------------------------------------------------- Operating Expense Labor and Fringe Benefits 1,974 959 50 157 -- 3,140 Materials, Supplies and Other 1,057 1,285 117 54 -- 2,513 Building and Equipment Rent 382 596 81 43 -- 1,102 Inland Transportation (159) 734 348 103 (30) 996 Depreciation 450 130 18 11 -- 609 Fuel 251 141 1 11 -- 404 Miscellaneous(b) -- (62) -- -- 66 4 Restructuring Credit (30) -- -- -- -- (30) ------------------------------------------------- Total Expense 3,925 3,783 615 379 36 8,738 ------------------------------------------------- Operating Income $1,031 $ 133 $ 33 $ 29 $(66) $1,160 ------------------------------------------------- Operating Income as Adjusted(c)$1,001 $ 133 $ 33 $ 29 $(66) $1,130 ------------------------------------------------- Operating Ratio(c) 79.8% 96.6% 94.9% 92.8% ------------------------------------------------- Average Employment 28,358 8,690 786 3,399 ------------------------------------------------- Property Additions $1,212 $ 54 $ 99 $ 17 - - --------------------------------------------------------------------------------
Operating Results (Millions of Dollars) 1997 ------------------------------------------------- Container Inter- Contract Elim./ Rail Shipping modal Logistics Other Total - - -------------------------------------------------------------------------------- Operating Revenue $4,989 $3,991 $669 $389 $583 $10,621 ------------------------------------------------- Operating Expense Labor and Fringe Benefits 1,963 903 56 153 151 3,226 Materials, Supplies and Other 878 1,191 119 61 262 2,511 Building and Equipment Rent 349 600 77 45 40 1,111 Inland Transportation (158) 757 356 83 (35) 1,003 Depreciation 429 128 14 10 39 620 Fuel 299 197 1 13 57 567 Miscellaneous(b) -- (63) -- -- 63 -- Restructuring Credit -- -- -- -- -- -- ------------------------------------------------- Total Expense 3,760 3,713 623 365 577 9,038 ------------------------------------------------- Operating Income $1,229 $ 278 $ 46 $ 24 $ 6 $ 1,583 ------------------------------------------------- Operating Income as Adjusted(c)$1,229 $ 278 $ 46 $ 24 $ 6 $ 1,583 ------------------------------------------------- Operating Ratio(c) 75.4% 93.0% 93.1% 93.8% ------------------------------------------------- Average Employment 27,864 9,105 800 2,334 ------------------------------------------------- Property Additions $ 712 $ 251 $ 32 $ 13 - - --------------------------------------------------------------------------------
Operating Results (Millions of Dollars) 1996 ------------------------------------------------- Container Inter- Contract Elim./ Rail Shipping modal Logistics Other Total - - -------------------------------------------------------------------------------- Operating Revenue $4,909 $4,051 $660 $316 $600 $10,536 ------------------------------------------------- Operating Expense Labor and Fringe Benefits 1,933 900 63 124 138 3,158 Materials, Supplies and Other 919 1,190 109 49 242 2,509 Building and Equipment Rent 365 630 73 40 35 1,143 Inland Transportation (160) 750 364 64 (22) 996 Depreciation 416 135 15 9 36 611 Fuel 309 192 1 13 59 574 Miscellaneous(b) -- (64) -- -- 87 23 Restructuring Credit -- -- -- -- -- -- ------------------------------------------------- Total Expense 3,782 3,733 625 299 575 9,014 ------------------------------------------------- Operating Income $1,127 $ 318 $ 35 $ 17 $ 25 $1,522 ------------------------------------------------- Operating Income as Adjusted(c)$1,127 $ 318 $ 35 $ 17 $ 25 $1,522 ------------------------------------------------- Operating Ratio(c) 77.0% 92.2% 94.7% 94.5% ------------------------------------------------- Average Employment 28,559 8,982 1,090 2,120 -------------------------------------------------- Property Additions $ 764 $ 307 $ 24 $ 15 - - --------------------------------------------------------------------------------
(a)On June 30, 1998, CSX conveyed its wholly owned barge subsidiary to a joint venture in which it holds a 32% common ownership interest. Due to the reduction in ownership percentage, CSX has accounted for its investment in the barge company under the equity method retroactive to the beginning of the fiscal year. For periods prior to fiscal year 1998, the barge company was accounted for as a consolidated subsidiary and its results appear in the Eliminations/Other category for 1997 and 1996. (b)A portion of intercompany interest income received from the CSX parent company has been reclassified as a reduction of Miscellaneous expense by the container-shipping unit. This amount was $62 million, $63 million and $64 million in 1998, 1997 and 1996, respectively, and the corresponding charge is included in Eliminations/Other. (c) Excludes restructuring credit. 20 Consolidated operating revenue totaled $9.9 billion, a decrease of $723 million, or 7%, from 1997. A significant portion of the revenue decline, $618 million, is attributable to the conveyance of the company's barge unit to a joint venture in the third quarter of 1998 and the resulting exclusion of barge activity from 1998 operating income. Due to a reduction in the company's ownership interest to 32% of the new venture, CSX accounted for its investment in the venture under the equity method retroactive to the beginning of the fiscal year. For periods prior to fiscal 1998, ACL was accounted for as a consolidated subsidiary. Fixed Charge Coverage [GRAPH] '94 '95* '96 '97 '98* 3.1x 3.2x 4.0x 2.6x 1.8x *Excluding the restructuring charge in 1995 and the restructuring credit in 1998, fixed charge coverage for 1995 and 1998 would have been 3.7x and 1.8x, respectively. Operating revenue was down from the prior year at the rail, container-shipping, and intermodal business units. The rail unit, CSX Transportation (CSXT), suffered primarily from weak demand for export coal. Sea-Land's revenues were negatively impacted by the Asian economic crisis, while the intermodal unit struggled with congestion on the western rail network. CSX's operating expenses totaled $8.74 billion for 1998, down $300 million from the prior year; however, $549 million of the decline represents barge unit expenses not included in operations in 1998. Other favorable items include the $30 million restructuring credit recorded by the rail unit, lower fuel costs that benefited the company $106 million on a consolidated basis, and lower stock compensation expense resulting from the company's lower stock price. Higher operating expenses associated with changes in traffic mix at the rail unit and inbound/outbound cargo imbalances in major trade lanes at the container-shipping unit offset these favorable variances. Other income increased to $119 million from 1997's $51 million. Contributing to the increase was the $154 million net investment gain, partially offset by higher Conrail transition expenses. Earnings per share for all prior periods have been restated to reflect clarification of the treatment of certain stock-based compensation plan shares under FASB Statement No. 128, "Earnings per Share." Earnings per share were revised to $3.72 from $3.62 for 1997, and to $4.03 from $3.96 for 1996. 1997 VS. 1996 CSX produced net earnings of $799 million, $3.72 per share, for the fiscal year ended Dec. 26, 1997, compared with $855 million, $4.03 per share in 1996. The 1997 results included the impact on earnings of the company's investment in Conrail. The combined effect of interest on Conrail-related debt, equity in Conrail's net earnings, purchase price amortization, and acquisition and transition Average Return on Assets (Percent) [GRAPH] '94 '95* '96 '97 '98* 4.8 4.4 5.9 4.3 2.7 *Excluding the restructuring charge in 1995 and the restructuring credit in 1998, return on assets in 1995 and 1998 would have been 5.6% and 2.6%, respectively. Average Return on Equity (Percent) [GRAPH] '94 '95* '96 '97 '98* 18.6 15.5 18.9 15.2 9.2 *Excluding the restructuring charge in 1995 and the restructuring credit in 1998, return on equity in 1995 and 1998 would have been 19.1% and 8.9%, respectively. 21 expenses reduced CSX's net earnings for 1997 by $97 million, 45 cents per share. Net earnings for 1996 were not affected significantly by the Conrail transaction since CSX did not acquire an investment in Conrail until late in the year. Consolidated operating revenue for 1997 was $10.62 billion, a 1% increase over 1996. CSXT contributed $80 million of the additional revenue, largely resulting from strength in its automotive business unit, chemicals and most other merchandise groups. CTI posted operating revenue of $389 million, an increase of $73 million, or 23%, over 1996, as the contract logistics unit continued its rapid growth. Despite generating significant volume increases, Sea-Land's revenue decreased $60 million from 1996 due to continued rate weakness across all major trade lanes. Consolidated operating income for 1997 was $1.58 billion, an increase of $61 million, or 4%, over 1996. Operating expenses remained relatively flat, allowing much of the revenue increase to flow to the bottom line. Other income increased $8 million over 1996, largely due to an increase in net income from CSX's investment in Conrail, partially offset by miscellaneous expenses. BUSINESS SEGMENT RESULTS RAIL RESULTS
Rail Traffic by Commodity Carloads Revenue (Thousands) (Millions of Dollars) ----------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------- Automobiles 412 387 367 $ 533 $ 543 $ 520 Chemicals 444 435 409 731 747 721 Minerals 455 445 430 398 394 381 Food & Consumer 142 149 134 156 163 148 Agricultural Products 277 269 261 360 347 343 Metals 318 316 277 318 314 290 Forest Products 457 471 466 493 499 499 Phosphates & Fertilizer 539 506 511 302 292 279 Coal 1,651 1,714 1,711 1,498 1,560 1,584 ----------------------------------------------------------------------- Total 4,695 4,692 4,566 4,789 4,859 4,765 -------------------------------- Other Revenue 167 130 144 ------------------------------ Total Operating Revenue $4,956 $4,989 $4,909 - - -----------------------------------------------------------------------------------------------------
1998 VS. 1997 CSXT produced operating income of $1.03 billion in 1998, down 16% from 1997. Operating revenue was down slightly from the prior year, to $4.96 billion. While merchandise revenue saw modest gains on increased traffic, coal revenue declined $62 million on 4% fewer carloads. The decline in coal revenue was attributable to the strong U.S. dollar and competition from foreign coal producers, which softened the demand for export coal. CSXT experienced growth in several merchandise commodity groups during 1998. Agricultural product moves were up 3% due to strong demand for Midwest grain in the Southeast. Continued strength in the Southeast's construction industry was primarily responsible for the 2% increase in minerals carloads over 1997, while strong demand from U.S. steel mills in the early part of the year drove an increase of 1% in metals traffic over 1997. Phosphates and fertilizer shipments were up 7% due to continued strong export demand and strong demand from U.S. and Canadian agricultural firms. The railroad's automotive revenue was down 2% from the prior year, due in part to the estimated loss of $13 million in revenue caused by the work stoppages at two of General Motors' Flint, Mich., plants. Operating expenses were up 4% from 1997 to $3.93 billion, reflecting the impact of a shift in mix to lower margin cargo, increases in certain casualty and litigation reserves, and Year 2000 preparations. Labor and fringe benefits expense increased slightly due to wage increases and additional employee training and certification, partially offset by lower stock compensation expense. The higher casualty and litigation accruals and Year 2000 costs drove materials, supplies and other expense up 20% over the prior year. Fuel expense was $48 million lower than 1997, reflecting an 11 cent decrease in the average price per gallon, while fuel consumption remained level with the prior year. Included in 1998 operating expenses is a $30 million restructuring credit recorded by CSXT in the third quarter. This one-time credit reflected the reversal of separation and labor protection reserves established as part of a 1995 restructuring charge to cover a planned reduction in the unit's telecommunications work force. Under a new telecommunications contract signed in July 1998, those work-force reductions are no longer anticipated, and the related costs will not be incurred. Rail Operating Revenue (Millions of Dollars) [GRAPH] '94 '95 '96 '97 '98* $4,625 $4,819 $4,909 $4,989 $4,956 Rail Operating Expense (Millions of Dollars) [GRAPH] '94 '95* '96 '97 '98* $3,696 $3,951 $3,782 $3,760 $3,925 *Restructuring charge in 1995 was $196 million. Restructuring credit in 1998 was $30 million. 22 1997 VS. 1996 Driven by strength in merchandise traffic, CSXT achieved a record $1.23 billion in operating income in 1997, a 9% increase over 1996. Gains in carloads for most merchandise commodities allowed CSXT to generate operating revenue of $4.99 billion, an increase of 2% over 1996. This growth was largely attributable to targeted marketing efforts and stronger general demand, particularly in the automotive and chemicals commodity groups. Total merchandise traffic increased 4% over 1996, to 2.97 million carloads. Demand for automobiles and light trucks remained strong in 1997, resulting in a 5% increase in carloads and a 4% increase in revenue over 1996. Chemical traffic, up 6%, benefited from steady demand for plastics, as well as the success of the railroad's efforts to target truck traffic. Shipments of coal were level with 1996 at 1.71 million carloads, although coal revenue decreased slightly to $1.56 billion. The 1997 results were adversely affected by mild temperatures across the eastern United States during the year, as well as weak demand for U.S.-export coal due to the strong dollar. Operating expenses totaled $3.76 billion, down slightly from 1996's $3.78 billion total. Most expense categories experienced reductions from 1996 as the railroad continued to emphasize cost reduction. CONTAINER-SHIPPING RESULTS
Container-shipping Traffic by Trade Lane Loads Revenue (Thousands) Revenue Per Box (Millions of Dollars) ------------------------------------------------------------------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------- Pacific 615 720 726 $2,234 $2,132 $2,268 $1,362 $1,524 $1,633 Atlantic 374 364 327 2,156 2,318 2,578 800 836 826 Americas 313 283 229 2,057 2,086 2,243 618 569 502 Asia/Middle East/Europe 276 289 259 2,043 2,025 2,207 554 576 567 Terminal Services and Other -- -- -- -- -- -- 582 486 523 - - --------------------------------------------------------------------------------------------------------- 1,578 1,656 1,541 $2,147 $2,146 $2,319 $3,916 $3,991 $4,051 - - ---------------------------------------------------------------------------------------------------------
1998 VS. 1997 Sea-Land produced operating income of $133 million in 1998, down 52% from 1997, reflecting the negative impact of Asia's economic crisis on the container-shipping business. Operating revenue totaled $3.92 billion, a 2% decline from 1997. Asia's economic conditions caused tremendous imbalances in cargo shipments, as exports from Asian countries increased while import traffic declined. These imbalances are evidenced by a 3% increase in eastbound Pacific loads (Asia to North America), vs. a 17% decline in westbound Pacific loads. In addition, the Asia/Middle East/Europe Division experienced a 1% increase in westbound loads (Asia to Europe), vs. a 20% decline in eastbound loads. Compounding the impact, Sea-Land's cargo mix shifted to a higher level of lower-rated freight as imports of higher-rated discretionary goods to Asia declined. Terminal services and other revenue increased 20% from 1997's level as a result of higher volumes in Asia. Operating expenses increased 2% in 1998, to $3.78 billion. Although Sea-Land moved fewer revenue loads compared with 1997, the company actually handled more containers as a result of the increased export volume from Asia. The higher container volume drove increases of 6% in labor and fringe benefits and 8% in materials, supplies and other expense over 1997 levels. Fuel expense decreased $56 million from 1997, benefiting from a 12 cent per gallon average price reduction on a 1% increase in fuel consumption during the year. 1997 VS. 1996 Sea-Land generated $278 million in operating income in 1997, a 13% decline from 1996. Operating revenue decreased 1.5% to $3.99 billion in 1997, as lower rates offset increases in volume. In 1997, the average revenue per container fell 8% due to overcapacity in the major trade lanes. Volume in 1997 increased more than 7% to 1.65 million loads, driven by continued global trade growth and market-share gains in virtually all trade lanes. Sea-Land's Pacific Division experienced a 7% decline in revenue, as industry overcapacity led to rate erosion in both eastbound and westbound traffic. Terminal services and other revenue decreased 7% from 1996, as terminal services to several customers were discontinued as a result of Sea-Land's global alliance with Maersk. Operating revenue in the Americas Division increased 13%, to $569 million, as a 25% increase in volume more than offset a 7% decline in rates. Operating expenses decreased $20 million, to $3.71 billion, in 1997, with most expense categories remaining relatively flat year over year. Rent expense declined $30 million, driven by reductions in equipment rent resulting from the Maersk alliance. Container-shipping Operating Revenue (Millions of Dollars) [GRAPH] '94 '95 '96 '97 '98 $3,492 $4,008 $4,051 $3,991 $3,916 23 INTERMODAL RESULTS 1998 VS. 1997 CSX Intermodal produced $33 million of operating income in 1998, down 28% from 1997. The decline was largely attributable to loss of business caused by service disruptions on the western rail network. Although container and trailer volumes were 1% above 1997, operating revenue decreased 3%, to $648 million, as the average length-of-haul declined. Both domestic and international freight revenue decreased from 1997 as a result of the western rail service difficulties. Revenue from other sources declined 29% as truck operations were ceased at 13 terminals in early 1998 in connection with a restructuring of the trucking service network. Intermodal Operating Revenue (Millions of Dollars) [GRAPH] '94 '95 '96 '97 '98 $674 $694 $660 $669 $648 The intermodal unit reported operating expense of $615 million in 1998, down 1% from 1997. Labor and fringe benefits declined 11% from 1997, reflecting lower stock compensation expense and a decrease in average employee levels during the year. Other expense categories were generally comparable to the prior year. 1997 VS. 1996 Intermodal operating income totaled $46 million, up $11 million, or 31%, from 1996. Revenue increased $9 million, to $669 million, while volume increased 5%, to 1.03 million trailers and containers moved. Domestic revenue for 1997 was down 1% from 1996, as a 4% increase in volume was more than offset by rate pressures and changes in traffic mix. Revenue from international freight movements increased 10%, as the addition of new customers during 1997 added 7% in volume. Operating expenses for 1997 totaled $623 million, slightly below the 1996 level. The intermodal unit was able to keep expenses down, despite the increase in volume, by implementing productivity initiatives related to equipment management and terminal-trucking operations. CONTRACT LOGISTICS RESULTS 1998 VS. 1997 Customized Transportation Inc. (CTI) continued its impressive growth pace in 1998, turning in record operating income of $29 million, a 21% increase over 1997. Operating revenue was up 5% from 1997, to $408 million, driven by gains in the warehousing and managed transportation businesses. The General Motors work stoppages mentioned in the Rail Results section also hurt the contract logistics unit in 1998. CTI lost an estimated $18 million in revenue for the year as a result of the strike. Operating expenses increased 4%, in line with the revenue growth experienced during the year. Contract Logistics Operating Revenue (millions of Dollars) [GRAPH] '94 '95 '96 '97 '98 $182 $240 $316 $389 $408 1997 VS. 1996 Operating income for 1997 totaled $24 million, 40% above 1996. Revenue rose 23% to $389 million, led by growth in the warehousing and managed transportation business lines. Operating expenses increased 22%, comparable to the revenue growth turned in by the unit. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Cash provided by operations for 1998 totaled $1.0 billion, down 36% from 1997 due principally to the decline in operating income. Cash provided by operations totaled $1.6 billion and $1.4 billion in 1997 and 1996, respectively. INVESTING ACTIVITIES Cash used by investing activities in 1998 totaled $870 million, vs. $3.3 billion in 1997 and $3.0 billion in 1996. The lower use of funds in 1998 primarily relates to funds expended in 1997 ($2.2 billion) and 1996 ($1.9 billion) to acquire the company's investment in Conrail. In addition, CSX received $628 million of net proceeds from the conveyance of ACL to a joint venture in the third quarter of 1998. Cash Provided by Operations (Millions of Dollars) [GRAPH] '94 '95 '96 '97 '98 $1,326 $1,567 $1,440 $1,558 $1,000 Property additions totaled $1.5 billion in 1998, compared with $1.1 billion in 1997 and $1.2 billion in 1996. The increase in 1998 is primarily due to spending at the rail and intermodal units to prepare for the Conrail integration. Significant projects related to Conrail included investments in technology and a major upgrade to the B&O line between Chicago and Cleveland. Expenditures for Conrail-related projects totaled $342 million in 1998 and $119 million in 1997. 24 CSXT's capital spending for its current rail system increased by more than $350 million over 1997. The railroad's expenditures were mainly for track, signals and 91 alternating-current locomotives. Sea-Land's property additions totaled $54 million, a significant decrease over prior-year levels, reflecting the completion of the unit's fleet enhancement program in 1997. Capital spending at the container-shipping unit in 1998 related primarily to systems initiatives, including its shipment management project. Capital additions at the company's intermodal unit more than tripled from 1997 to $99 million. Most of this increase was attributable to spending for Conrail-related projects, including a new intermodal terminal in Chicago. CSXI also completed the expansion of its Atlanta terminal during 1998. Property Additions by Segment (Millions of Dollars) [GRAPH] Rail Container Shipping Intermodal Contract Logistics Other $1,212 $54 $99 $17 $97 Property Additions (Millions of Dollars) [GRAPH] '94 '95 '96 '97 '98 $875 $1,156 $1,223 $1,125 $1,479 Total capital investments for the coming fiscal year, including additional capital spending to integrate the CSX and Conrail systems and accelerated locomotive purchases, are expected to remain at a level comparable to 1998. FINANCING ACTIVITIES Net cash used by financing activities totaled $276 million in 1998. Financing activities provided net cash of $1.7 billion in 1997 and $1.6 billion in 1996, reflecting the issuance of debt to finance the Conrail acquisition. In 1998, CSX issued approximately $1 billion of fixed rate debt under the company's shelf registrations, principally to refinance commercial paper borrowings classified as long-term debt in the company's statement of financial position. The placement of this fixed rate debt allowed the company to take advantage of a favorable interest rate environment to reduce the overall floating-rate exposure in its debt portfolio. In 1997 and 1996, CSX issued over $4.5 billion in long-term debt primarily to finance the Conrail transaction. Including commercial paper refinancings, CSX repaid $1.1 billion of long-term debt in 1998, vs. $398 million in 1997 and $486 million in 1996. Long-term debt at Dec. 25, 1998, totaled $6.4 billion, approximately the same level as year-end 1997. The ratio of debt to total capitalization at the end of 1998 remained level with 1997, at 52%. Cash dividends paid per common share were $1.20 for 1998, compared with $1.08 in 1997 and $1.04 in 1996. Total cash dividends of $262 million, $235 million and $223 million were paid in 1998, 1997 and 1996, respectively. In January 1999, CSX completed the registration of approximately $800 million of securities for public issuance. The company may use the shelf registration to issue debt in 1999. Borrowings will be used for general corporate purposes, which may include capital expenditures, working capital, implementation of work-force reductions, improvements in productivity and other cost reduction initiatives, and refinancing of existing debt. MARKET RISK CSX does not currently use derivative financial instruments, although the company may from time to time employ them as part of its risk management program. If used, the objective is to manage specific risks and exposures, not to trade such instruments for profit or loss. CSX manages its overall exposure to fluctuations in interest rates by adjusting the proportion of fixed and floating rate debt instruments within its debt portfolio over time. At Dec. 25, 1998, CSX had approximately $1.2 billion of floating rate debt outstanding in the form of commercial paper. A 1% increase in interest rates would increase annual interest expense by approximately $12 million. While the company's container-shipping unit does business in a number of foreign countries, a substantial portion of its revenue and expenses are transacted in U.S. dollars. For this reason, CSX does not believe its foreign currency market risk is significant. JOINT ACQUISITION OF CONRAIL CSX/NORFOLK SOUTHERN AGREEMENT In April 1997, CSX and Norfolk Southern entered into an agreement providing for their joint acquisition of Conrail and the allocation of its routes and other assets. Under the terms of the agreement, the companies acquired all outstanding shares of Conrail not already owned by them for $115 cash per share during the second quarter of 1997. CSX and Norfolk Southern each possess 50% of the voting and management rights of a jointly owned acquisition company. Non-voting equity is divided between the parties to achieve overall economic allocations of 42% for CSX and 58% for Norfolk Southern. CSX and Norfolk Southern filed an application for control of Conrail with the Surface Transportation Board (STB) in June 1997. On July 23, 1998, following an extensive review, the STB issued a written decision approving the application with limited conditions. The decision permitted CSX and Norfolk Southern to exercise joint control over Conrail on Aug. 22, 1998. At that time, the voting trust holding the Conrail shares was dissolved, and a new Conrail board of directors was elected. 25 The total cost of acquiring the outstanding shares of Conrail under the joint CSX/Norfolk Southern agreement was approximately $9.8 billion. Pursuant to the agreement, CSX has paid 42%, or approximately $4.1 billion, and Norfolk Southern has paid 58%, or approximately $5.7 billion, of such cost. FINANCING ARRANGEMENTS CSX initially financed its portion of the Conrail acquisition through a combination of fixed rate notes and commercial paper. The fixed rate notes, issued through a $2.5 billion multitranche offering in May 1997, have maturities ranging from 2002 to 2032 and interest rates ranging from 6.95% to 8.30%. Through mid-1998, commercial paper borrowings supported by a bank credit facility were used to finance approximately $1.7 billion of CSX's investment in Conrail. From May through December 1998, the company replaced approximately $1 billion of the commercial paper borrowings with fixed rate debt. Maturities on the new debt range from 2001 to 2028, and interest rates range from 5.85% to 6.80%. The company currently has approximately $800 million of capacity available under a shelf registration and may replace additional commercial paper borrowings with longer term debt. INTEGRATION PLANNING CSX and Norfolk Southern currently expect to implement integrated operations with Conrail on June 1, 1999. On that date, the parties will begin operating specified portions of the Conrail routes and other assets pursuant to various operating agreements. Certain Conrail assets will be operated for the joint benefit of CSX and Norfolk Southern. CSX is actively planning for the smooth integration of Conrail operations into its rail system. Plans involve all facets of combining the two systems, including: safety; customer service; train scheduling, switching and routing; equipment utilization and track programs; commuter and passenger rail operations; marketing; technology; labor agreements; and administration. Related capital improvements to certain routes and facilities on the CSX rail system also have been initiated and are substantially complete. Preparations leading up to the June 1, 1999 implementation date will be concentrated on the completion and testing of technology systems and finalization of labor agreements. LABOR AGREEMENTS CSX has finalized the implementing agreement process with all but three of the organizations that represent Conrail's unionized work force. The implementing agreement with the Brotherhood of Locomotive Engineers has been negotiated and will be voted on by the membership during the first quarter of 1999. The implementing agreement with the Brotherhood of Maintenance of Way Employees has been imposed by an arbitrator, but the organization has appealed to the STB. The implementing agreement with the Transport Workers of America was arbitrated in late January 1999, and a decision is expected by the end of the first quarter. FINANCIAL EFFECTS Until the integration of rail operations takes place, Conrail will continue to operate as a Class I railroad, and CSX's earnings will include 42% of Conrail's net income, reported under the equity method of accounting, and its share of the expense arising from the allocation of the joint purchase price to Conrail's underlying assets and liabilities. CSX will continue to incur interest expense on the debt issued to acquire the Conrail investment. Transition expenses are expected to continue into 1999, but will decline rapidly once integration is achieved. Capital spending related to the integration of CSX and Conrail operations also will continue into 1999. Upon integration, CSX expects to begin realizing revenue benefits from freight traffic that currently moves on other modes of transportation, principally trucks. CSX also expects to begin realizing cost savings from the elimination of duplicate positions and facilities, as well as other efficiencies created by combining its allocated portion of the Conrail system with its existing rail operations. As CSX and Norfolk Southern move to integrate the Conrail operations, as expected, they will compete for traffic located in markets formerly served solely by Conrail. The company expects that as a result of this process of entering new markets, there may be changes in the historic rate and traffic patterns, including some rate reductions and traffic volume shifts. The process will be driven by market conditions, and the company presently cannot assess the impact of these transition effects on either the timing or realization of the projected benefits of the Conrail transaction. CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY Conrail reported net income of $267 million in 1998, compared with $7 million in 1997. Both years included charges related to the acquisition and control of Conrail by CSXand Norfolk Southern that affect the comparability of earnings. These charges are discussed below. Conrail's operating revenues totaled $3.86 billion, an increase of $98 million, or 3%, over 1997, principally due to a 4% increase in traffic volume. All market groups except automotive posted increases for the year. Operating expenses at Conrail totaled $3.35 billion for 1998, a decrease of $95 million, or 3% from the prior year. The 1998 operating expenses included a charge of $170 million, $105 million after tax, for severance benefits covering non-union employees and other charges and reserves totaling $132 million, $82 million after tax. Operating expenses in 1997 included a $221 million charge associated with the termination of Conrail's Employee Stock Ownership Plan, which had no related income tax effect, as well as a charge of $173 million, $142 million after tax, for stock compensation and executive severance costs related to the change in ownership. In addition, Conrail's operating expenses reflect transition-related expenses of $149 million in 1998 and $114 million in 1997. The transition expenses in 1998 26 principally consisted of technology integration costs and employee stay bonuses. In 1997, these costs consisted principally of investment banking, legal and consulting fees and employee stay bonuses. Excluding the effects of the acquisition and transition-related costs, operating expenses increased 3%, principally reflecting the 4% increase in traffic volume and higher casualty and other claims expenses, partially offset by lower fuel costs. Conrail's cash provided by operations decreased $157 million, or 18%, in 1998, principally due to higher incentive compensation payments and transition-related expenses. Cash generated from operations was the principal source of liquidity and was primarily used for capital expenditures and debt repayments. Capital expenditures totaled $550 million in 1998, and included $214 million for track program work and $198 million of equipment acquisitions. Debt repayments in 1998 were $119 million. Conrail had a working capital deficit of $202 million at Dec. 31, 1998, compared with a deficit of $254 million at Dec. 31, 1997. The deficit at year-end 1998 includes $234 million of employee-related liabilities, such as severance and stay bonus accruals, which are expected to be funded using assets from an employee benefits trust and Conrail's overfunded pension plan. During 1998, Conrail terminated its status as a registrant with the Securities and Exchange Commission; therefore, it no longer has the ability to issue publicly traded securities. Conrail also terminated its $440 million bank credit facility, which was used for general corporate purposes and to support its now-terminated commercial paper program. Conrail is expected to have sufficient cash flow to meet its ongoing obligations both before and after the integration of rail operations with CSX and Norfolk Southern. OTHER MATTERS CONVEYANCE OF BARGE UNIT On June 30, 1998, CSX conveyed its barge unit, ACL, to a venture formed with Vectura Group Inc. (Vectura). CSX received cash proceeds of $695 million from the transaction, $67 million of which were used to repay certain outstanding debt and other obligations of ACL and to pay expenses of the transaction. As part of the transaction, NMI Holdings LLC, a wholly owned barge subsidiary of Vectura, was combined with ACL. CSX has a 32% common interest in the new venture. Operating results for 1998 include a net investment gain of $154 million, $90 million after tax, 42 cents per share, primarily from the ACL transaction. LITIGATION In September 1997, a state court jury in New Orleans, La., returned a $2.5 billion punitive damages award against CSXT. The award was made in a class action lawsuit against a group of nine companies based on personal injuries alleged to have arisen from a 1987 fire. The fire was caused by a leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour evacuation of a New Orleans neighborhood. In the same case, the court awarded a group of 20 plaintiffs compensatory damages of approximately $2 million against the defendants, including CSXT, to which the jury assigned 15% of the responsibility for the incident. CSXT's liability under that compensatory damages award is not material, and adequate provision was made for the award in a prior year. In October 1997, the Louisiana Supreme Court set aside the punitive damages judgment, ruling the judgment should not have been entered until all liability issues were resolved. In February 1999, the Louisiana Supreme Court issued a further decision, authorizing and instructing the trial court to enter individual punitive damages judgments in favor of the 20 plaintiffs who had received awards of compensatory damages, in amounts representing an appropriate share of the jury's award. While the trial court has not yet taken action under this decision, the amounts of such punitive damages judgments, if any, are not expected to be material. CSX believes that this February 1999 decision will expedite the process of full appellate review of the 1997 trial. The claims of 20 additional plaintiffs for compensatory damages are scheduled to be tried beginning in March 1999. CSXT is pursuing an aggressive legal strategy. Management believes that any adverse outcome will not be material to CSX's overall results of operations or financial position, although it could be material to results of operations in a particular quarterly accounting period. ENVIRONMENTAL MANAGEMENT CSX generates and transports hazardous and nonhazardous waste in its current and former operations, and is subject to federal, state and local environmental laws and regulations. The company has identified 248 sites at which it is or may be liable for remediation costs associated with alleged contamination or for alleged violations of environmental requirements. Approximately 113 of these sites are or may be subject to remedial action under the federal Superfund statute or similar state statutes. Certain federal legislation imposes joint and several liability for the remediation of identified sites. Consequently, CSX's ultimate environmental liability may include costs relating to other parties, in addition to costs relating to its own activities at each site. A liability of $75 million has been accrued for future costs at all sites where the company's obligation is probable and where such costs can be reasonably estimated. However, the ultimate cost could be higher or lower than the amounts currently provided. The liability includes future costs for remediation and restoration of sites, as well as for ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates were based on information available for each site, financial viability of other potentially responsible parties (PRPs), and existing technology, laws and regulations. CSX believes it has made adequate provision for its ultimate share of costs at sites subject to joint and several liability. However, the ultimate liability for remediation is difficult to determine with certainty because of the number of PRPs involved, site-specific cost-sharing arrangements with other PRPs, the degree of contamination by various wastes, the scarcity and quality of data related to many of the sites, and/or the speculative nature of remediation costs. The majority of the year-end 1998 environmental liability is expected to be paid out over the next five to seven years, funded by cash generated from operations. 27 Total expenditures associated with protecting the environment and remedial environmental cleanup and monitoring efforts amounted to $34 million in 1998, compared with $36 million in 1997 and $44 million in 1996. During 1999, the company expects to incur remedial environmental expenditures in the range of $30 million to $40 million. Future environmental obligations are not expected to have a material impact on the results of operations or financial position of the company. YEAR 2000 PLANNING STATE OF YEAR 2000 READINESS In 1996, CSX and its subsidiaries began a comprehensive initiative to address the potential exposure associated with the functioning of its information technology systems and non-information technology systems with respect to dates in the year 2000 and beyond. The company is following a standard Year 2000 readiness model, consisting of the following phases: Awareness - General education about the Year 2000 problem. Inventory - Cataloging of all systems and business relationships that may be impacted by a Year 2000 date rollover. Assessment - Estimating the degree of severity of the Year 2000 problem for cataloged items. Remediation - Repair, replacement, or retirement of non-Year 2000 compliant systems. Validation - Testing to confirm the compliance of Year 2000 remediated systems. CSX's readiness efforts are focused first and foremost on the continued safe operation of its rail and other transportation systems, encompassing employee safety and the safety of the general public and the environments in which the company operates. Maintaining service continuity both to customers and with vendors before, during, and after the millennium change also is a priority. CSX also is focusing efforts to ensure that, after the safety and service continuity issues are addressed, a Year 2000 issue does not disrupt its revenue. Overall, the CSX Year 2000 initiative is currently proceeding on schedule, and planned completion of all key areas is expected by mid-1999. The company's Year 2000 readiness efforts are organized in five areas, which have the following status:
Effort Estimated Completion Current Phase - - ----------------------------------------------------------------------------------------------------- Core Information Systems Third Quarter 1999 Remediation and Validation Distributed Information Technology Third Quarter 1999 Assessment and Remediation Electronic Commerce Second Quarter 1999 Remediation and Validation Non-information Technology (embedded) Systems Third Quarter 1999 Inventory and Assessment Trading Partners Fourth Quarter 1999 Inventory and Assessment - - -----------------------------------------------------------------------------------------------------
As part of its Year 2000 initiative, CSX is in communication with its significant suppliers, large customers and financial institutions to assess their Year 2000 readiness and expects to conduct interface tests with its external trading partners in 1999 upon completion of internal testing of remediated applications. CSX also is participating in interface tests with other Class I railroads to ensure that electronic data interchanges can be processed in a Year 2000 format. The industry effort has been coordinated by the Association of American Railroads since 1997 and is scheduled for completion by the second quarter of 1999. YEAR 2000 COSTS The company has incurred total costs of $43 million to date related to Year 2000 compliance, which represents approximately 52% of the estimated expenditures for the entire Year 2000 initiative. CSX estimates that over the life of the project, Year 2000 costs will comprise approximately 10% of its total information technology budget. The cost of the Year 2000 initiative is being expensed as incurred and funded by cash generated from operations. Projections of the remaining cost and completion date for the Year 2000 initiative are based on management's current estimates, which are derived utilizing numerous assumptions of future events including the continued availability of certain resources, and are inherently uncertain. No major projects have been delayed as a result of Year 2000 readiness efforts, and CSX is currently assessing its Year 2000 progress with the assistance of outside consultants. In connection with the integration of Conrail, CSX and Norfolk Southern are jointly addressing the Year 2000 compliance of Conrail's core information technology applications and non-information technology embedded systems. Certain of Conrail's operations systems are being made Year 2000 compliant as a contingency in the event that there are delays in the integration or Conrail continues to operate such systems after the integration is completed. Conrail's estimated cost for its Year 2000 initiative is approximately $16 million. There are a number of other major information technology projects currently under development or deployment, some of which replaced legacy systems that may or may not have been Year 2000 compliant. These projects were required to increase CSX's operational capacity as a direct result of the integration of Conrail. These projects are not included in the Year 2000 costs outlined above. 28 RISKS CSX believes its Year 2000 planning efforts are adequate to address all major risks. However, if some or all of the company's remediated or replaced internal computer systems fail the testing phase, or if any software applications or embedded systems critical to the company's operations are overlooked in the assessment and remediation phases, particularly if the result is a systemwide failure, there could be a material adverse effect on the company's results of operations, liquidity and financial condition. CONTINGENCY PLANS Contingency planning is an established and ongoing effort within CSX to address many types of potential operating disruptions, including Year 2000 issues. For example, detailed emergency operating plans already exist for unanticipated outages of electricity, telecommunications, and other essential services. Detailed Year 2000 contingency plans are expected to be complete by June 1999. CSX is creating contingency plans to address the consequences of each of the primary failure scenarios outlined below. For each of the three primary types of most reasonably likely worst-case scenarios, CSX anticipates that detailed contingency measures will include the following: Systemwide failures -- In the event of complete or nearly complete loss of key assets or services throughout the entire CSX system, CSX will conduct and maintain a safe and orderly shutdown of all operations that depend on those systems. Geographically isolated failures -- In the event of complete or nearly complete loss of key assets or services throughout a region, CSX will conduct and maintain a safe and orderly shutdown of all affected operations within that region. Movable asset failures -- In the event of a Year 2000 failure of a transportation asset, such as a ship or locomotive, CSX will remove the asset from service and scale its operations accordingly. This is essentially the same process currently used for non-Year 2000 failures. OUTLOOK FOR 1999 CSX is faced with a unique set of challenges as 1999 begins. The primary focus will remain the integration of CSX and Conrail operations, working closely with Norfolk Southern to ensure a smooth start-up in June. Transition planning continues with labor agreements being finalized and technology systems being implemented and tested. All indicators point to modest growth for the domestic economy. The outlook for recovery of the rest of the world economies is uncertain. Trade imbalances between Asia and Europe and Asia and the United States are expected to continue to depress container-shipping earnings. The rail unit's export coal business is at an all time low as the new year begins, with no sign of a recovery in 1999. Each of CSX's major transportation units expects to surpass 1998 performance despite the significant existing challenges. The company's employees are intensely focused on operating the core businesses in the safest, most efficient and effective manner. Stringent cost controls, improvements in asset productivity, and superior service reliability will be key to accomplishing this goal and enhancing shareholder value. In the first quarter of 1999, CSX expects to record a non-cash charge for the cumulative effect of adopting the American Institute of Certified Public Accountants' Statement of Position (SOP) No. 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." SOP No. 97-3 requires companies to accrue assessments related to workers' compensation second injury funds and is principally applicable to CSX with respect to certain assessments incurred by the company's container-shipping unit. CSX estimates the total charge will be less than $50 million after tax. FORWARD-LOOKING STATEMENTS Estimates and forecasts in Management's Discussion and Analysis and in other sections of this Annual Report, are based on many assumptions about complex economic and operating factors with respect to industry performance, general business and economic conditions and other matters that cannot be predicted accurately and that are subject to contingencies over which the company has no control. Such forward-looking statements are subject to uncertainties and other factors that may cause actual results to differ materially from the views, beliefs, and projections expressed in such statements. The words "believe," "expect," "anticipate," "project," and similar expressions signify forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of the company. Any such statement speaks only as of the date the statement was made. The company undertakes no obligation to update or revise any forward-looking statement. Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (i) cost savings expected from the integration of Conrail may not be fully realized or realized within the time frame anticipated, (ii) revenues following the integration of Conrail may be lower than expected, (iii) costs or difficulties related to the integration of Conrail may be greater than expected, (iv) general economic or business conditions, either nationally or internationally, including the continuing Asian financial decline, an increase in fuel prices, a tightening of the labor market or changes in demands of organized labor resulting in higher wages, or increased benefits or other costs or disruption of operations may adversely affect the businesses of the company, (v) legislative or regulatory changes, including possible enactment of initiatives to reregulate the rail industry, may adversely affect the businesses of the company, (vi) changes may occur in the securities markets, and (vii) disruptions of the operations of the company or any other governmental or private entity may occur as a result of technology issues related to the Year 2000. 29
CONSOLIDATED STATEMENT OF EARNINGS (Millions of Dollars, Except Per Share Amounts) Fiscal Years Ended ------------------------------------------ Dec. 25, 1998 Dec. 26, 1997 Dec. 27, 1996 - - ----------------------------------------------------------------------------------------------------------- OPERATING INCOME Operating Revenue $ 9,898 $ 10,621 $ 10,536 Operating Expense 8,738 9,038 9,014 ------------------------------------------ Operating Income 1,160 1,583 1,522 OTHER INCOME AND EXPENSE Other Income 119 51 43 Interest Expense 506 451 249 ------------------------------------------ EARNINGS Earnings Before Income Taxes 773 1,183 1,316 Income Tax Expense 236 384 461 ------------------------------------------ Net Earnings $ 537 $ 799 $ 855 - - ----------------------------------------------------------------------------------------------------------- PER COMMON SHARE Earnings Per Share $ 2.55 $ 3.80 $ 4.10 Earnings Per Share, Assuming Dilution $ 2.51 $ 3.72 $ 4.03 Average Common Shares Outstanding (Thousands) 210,860 209,979 208,550 Average Common Shares Outstanding, Assuming Dilution (Thousands) 214,196 214,445 212,336 Cash Dividends Paid Per Common Share $ 1.20 $ 1.08 $ 1.04 - - -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 30
CONSOLIDATED STATEMENT OF CASH FLOWS (Millions of Dollars) Fiscal Years Ended ----------------------------------------- Dec. 25, 1998 Dec. 26, 1997 Dec. 27,1996 - - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Earnings $ 537 $ 799 $ 855 Adjustments to Reconcile Net Earnings to Net Cash Provided Depreciation 630 646 620 Deferred Income Taxes 296 190 166 Net Investment Gain (154) -- -- Equity in Conrail Earnings - Net (141) (102) -- Other Operating Activities (78) (28) (76) Changes in Operating Assets and Liabilities Accounts Receivable 19 (99) (67) Other Current Assets (82) (2) (65) Accounts Payable 55 39 84 Other Current Liabilities (82) 115 (77) ----------------------------------------- Net Cash Provided by Operating Activities 1,000 1,558 1,440 - - ---------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Property Additions (1,479) (1,125) (1,223) Net Proceeds from Conveyance of Barge Subsidiary 628 -- -- Proceeds from Property Dispositions 14 51 84 Investment in Conrail (13) (2,163) (1,965) Short-term Investments - Net 6 (119) 21 Other Investing Activities (26) 8 96 ----------------------------------------- Net Cash Used by Investing Activities (870) (3,348) (2,987) - - ----------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Short-term Debt - Net 61 (209) 187 Long-term Debt Issued 1,153 2,530 2,118 Long-term Debt Repaid (1,132) (398) (486) Cash Dividends Paid (262) (235) (223) Common Stock Reacquired (103) (11) -- Other Financing Activities 7 (4) (1) ----------------------------------------- Net Cash Provided (Used) by Financing Activities (276) 1,673 1,595 - - ----------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (146) (117) 48 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and Cash Equivalents at Beginning of Period 251 368 320 ----------------------------------------- Cash and Cash Equivalents at End of Period 105 251 368 Short-term Investments at End of Period 428 439 314 ----------------------------------------- Cash, Cash Equivalents and Short-term Investments at End of Period $ 533 $ 690 $ 682 - - ----------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest Paid - Net of Amounts Capitalized $ 498 $ 423 $ 265 Income Taxes Paid $ 154 $ 141 $ 381 - - -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 31
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Millions of Dollars) Dec. 25, 1998 Dec. 26, 1997 - - ---------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash, Cash Equivalents and Short-term Investments $ 533 $ 690 Accounts Receivable 898 987 Materials and Supplies 225 227 Deferred Income Taxes 128 134 Other Current Assets 200 137 ------------------------ Total Current Assets 1,984 2,175 ------------------------ Properties 18,678 18,270 Accumulated Depreciation (6,033) (5,864) ------------------------ Properties - Net 12,645 12,406 ------------------------ Investment in Conrail 4,798 4,244 Affiliates and Other Companies 448 394 Other Long-term Assets 552 738 ------------------------ Total Assets $20,427 $19,957 - - ---------------------------------------------------------------------------------------------------------- LIABILITIES Current Liabilities Accounts Payable $ 1,216 $ 1,179 Labor and Fringe Benefits Payable 462 477 Casualty, Environmental and Other Reserves 283 298 Current Maturities of Long-term Debt 100 229 Short-term Debt 187 126 Other Current Liabilities 352 398 ------------------------ Total Current Liabilities 2,600 2,707 Casualty, Environmental and Other Reserves 645 711 Long-term Debt 6,432 6,416 Deferred Income Taxes 3,173 2,939 Other Long-term Liabilities 1,697 1,418 ------------------------ Total Liabilities 14,547 14,191 - - ---------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common Stock, $1 Par Value 217 218 Other Capital 1,489 1,552 Retained Earnings 4,294 4,019 Accumulated Other Comprehensive Loss (120) (23) ------------------------ Total Shareholders' Equity 5,880 5,766 ------------------------ Total Liabilities and Shareholders' Equity $20,427 $19,957 - - ----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 32
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Millions of Dollars) Common Shares Accumulated Other Outstanding Common Other Retained Comprehensive (Thousands) Stock Capital Earnings Loss Total - - ------------------------------------------------------------------------------------------------------------ Balance Dec. 29, 1995 210,495 $210 $1,319 $2,823 $(110) $4,242 Comprehensive Earnings: Net Earnings -- -- -- 855 -- 855 Minimum Pension Liability Adjustment, Net of $1 Income Taxes -- -- -- -- 2 2 Other - Net -- -- -- -- (2) (2) ------ Comprehensive Earnings 855 ------ Dividends -- -- -- (223) -- (223) Common Stock Issued - Net 6,390 7 114 -- -- 121 - - ------------------------------------------------------------------------------------------------------------ Balance Dec. 27, 1996 216,885 217 1,433 3,455 (110) 4,995 Comprehensive Earnings: Net Earnings -- -- -- 799 -- 799 Minimum Pension Liability Adjustment, Net of $45 Income Taxes -- -- -- -- 87 87 ------ Comprehensive Earnings 886 ------ Dividends -- -- -- (235) -- (235) Common Stock Issued (Repurchased)-Net 1,425 1 119 -- -- 120 - - ------------------------------------------------------------------------------------------------------------- Balance Dec. 26, 1997 218,310 218 1,552 4,019 (23) 5,766 Comprehensive Earnings: Net Earnings -- -- -- 537 -- 537 Minimum Pension Liability Adjustment, Net of $54 Income Taxes -- -- -- -- (94) (94) Other - Net -- -- -- -- (3) (3) ------ Comprehensive Earnings 440 ------ Dividends -- -- -- (262) -- (262) Common Stock Issued (Repurchased)-Net (1,191) (1) (63) -- -- (64) - - ------------------------------------------------------------------------------------------------------------- Balance Dec. 25, 1998 217,119 $217 $1,489 $4,294 $(120) $5,880 - - -------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 33 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES. NATURE OF OPERATIONS CSX Corporation (CSX) is a global freight transportation company with principal business units providing rail, container-shipping, intermodal and contract logistics services. Rail transportation services are provided principally throughout the eastern United States and account for approximately half of the company's operating revenue, with coal, bulk products and manufactured products each contributing a relatively equal share of rail revenue. Coal shipments primarily supply domestic utility and export markets. Container-shipping services are provided in the United States and more than 80 countries and territories throughout the world and account for more than one-third of the company's operating revenue. Intermodal and contract logistics services are provided principally within the United States and together account for the company's remaining operating revenue. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include CSX and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in companies that are not majority-owned are carried at either cost or equity, depending on the extent of control. FISCAL YEAR The company's fiscal reporting period ends on the last Friday in December. The financial statements presented are for the fiscal periods ended Dec. 25, 1998, Dec. 26, 1997, and Dec. 27, 1996. Each fiscal year consists of four 13-week quarters. EARNINGS PER SHARE References to earnings per share in the Notes to Consolidated Financial Statements assume dilution. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash in excess of current operating requirements is invested in various short-term instruments carried at cost that approximates market value. Those short-term investments having a maturity of three months or less at the date of acquisition are classified as cash equivalents. MATERIALS AND SUPPLIES Materials and supplies consist primarily of fuel and items for maintenance of property and equipment, and are carried at average cost. PROPERTIES All properties are stated at cost, less an allowance for accumulated depreciation. Main-line track on the rail system is depreciated on a group basis using a unit-of-production method. All other property and equipment is depreciated on a straight-line basis over estimated useful lives of three to 50 years. Regulations enforced by the Surface Transportation Board (STB) of the U.S. Department of Transportation require periodic formal studies of ultimate service lives for all railroad assets. Resulting service life estimates are subject to review and approval by the STB. For retirements or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation and no gain or loss is recognized. For retirements or disposals of depreciable assets of non-rail businesses, and for all dispositions of land, gains or losses are recognized at the time of disposal. Expenditures that significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. Properties and other long-lived assets are reviewed for impairment whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets. Where impairment is indicated, the assets are evaluated for sale or other disposition, and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value. REVENUE AND EXPENSE RECOGNITION Surface transportation (rail and intermodal) revenue and expense are recognized proportionately as freight moves from origin to destination. Marine transportation (container-shipping) revenue and a corresponding accrual for the estimated cost to complete delivery are recorded when cargo first sails from its port of origin. ENVIRONMENTAL COSTS Environmental costs are charged to expense when they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. Liabilities are recorded when CSX's responsibility for environmental remedial efforts is deemed probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the company's commitment to a formal plan of action. STOCK-BASED COMPENSATION The company records expense for stock-based compensation in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Disclosures required with respect to the alternative fair value measurement and recognition methods prescribed by Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation," are presented in Note 13 - Stock Plans. PRIOR-YEAR DATA Certain prior-year data have been reclassified to conform to the 1998 presentation. 34 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates in reporting the amounts of certain revenues and expenses for each fiscal year and certain assets and liabilities at the end of each fiscal year. Actual results may differ from those estimates. COMPREHENSIVE EARNINGS CSX reports comprehensive earnings (loss) in accordance with FASB Statement No. 130, "Reporting Comprehensive Income," in the Consolidated Statement of Changes in Shareholders' Equity. Accumulated other comprehensive loss at Dec. 25, 1998 and Dec. 26, 1997, consists of minimum pension liability adjustments ($114 million and $20 million, respectively) and foreign currency translation adjustments and other ($6 million and $3 million, respectively). ACCOUNTING PRONOUNCEMENTS The FASB has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," that requires companies to record derivatives on the statement of financial position, measured at fair value. The statement also sets forth new accounting rules for gains or losses resulting from changes in the values of derivatives. While CSX does not currently use derivative financial instruments, and its historical use of such instruments has not been material, the company plans to adopt this statement in the first quarter of 2000 to the extent it may apply at that time. The company would not expect the adoption of Statement No. 133 to have a material impact on its financial statements. CSX plans to adopt the American Institute of Certified Public Accountants' Statement of Position (SOP) No. 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," in the first quarter of 1999. SOP No. 97-3 requires companies to accrue assessments related to workers' compensation second injury funds and is principally applicable to CSX with respect to certain assessments incurred by the company's container-shipping unit. Upon adoption, CSX will record a non-cash charge for the cumulative effect of the change in accounting principle, which the company estimates will be less than $50 million after tax. NOTE 2. JOINT ACQUISITION OF CONRAIL. BACKGROUND In May 1997, CSX and Norfolk Southern Corporation (Norfolk Southern) completed the acquisition of Conrail Inc. (Conrail) through a jointly owned entity pursuant to an agreement dated April 8, 1997. Under the terms of the agreement, CSX contributed approximately $4.1 billion, in the form of cash and Conrail shares previously acquired, for a 42% economic interest in Conrail. Norfolk Southern contributed approximately $5.7 billion, also in the form of cash and Conrail shares previously acquired, for a 58% economic interest in Conrail. CSX and Norfolk Southern each have a 50% voting interest in Conrail through the jointly owned entity. The Conrail shares acquired by the jointly owned entity were initially held in a voting trust pending approval of the transaction by the Surface Transportation Board (STB). On June 23, 1997, CSX and Norfolk Southern filed a joint railroad control application with the STB outlining the terms of their agreement, their respective operating plans, and the benefits expected from combining the respective rail systems. On July 23, 1998, following an extensive review, the STB issued a written decision approving the application with limited conditions. The decision permitted CSX and Norfolk Southern to exercise joint control over Conrail on Aug. 22, 1998. At that time, the voting trust was dissolved and a new Conrail board of directors was elected. Certain steps necessary to integrate the operations of the Conrail rail system with those of CSX and Norfolk Southern, such as the arrangement of labor implementing agreements, could not commence until the Aug. 22, 1998 control date. Those steps and other planning activities are expected to be completed by June 1, 1999, at which time the integration of rail operations will take place. Upon integration, CSX and Norfolk Southern will separately operate designated routes, facilities, and equipment pursuant to various operating agreements with Conrail and its subsidiaries. Certain other Conrail assets will be operated by Conrail for the benefit of CSX and Norfolk Southern, or jointly by the two owners. Substantially all of Conrail's customer freight contracts will be assumed by either CSX or Norfolk Southern. The majority of Conrail's operations work force will be employed by CSX or Norfolk Southern, although certain operations personnel, as well as certain management and administrative employees, will remain at Conrail to oversee its ongoing business activities. As a result of the acquisition, a number of positions will be eliminated and certain duplicate facilities will be closed. ACQUISITION ACCOUNTING BY THE JOINTLY OWNED ENTITY AND CSX The jointly owned entity has accounted for the acquisition of Conrail as a purchase business combination effective as of the August 1998 control date. At that time, its investment in Conrail was approximately $10.2 billion, consisting of the original $9.8 billion purchase price plus equity in Conrail's earnings, net of purchase price amortization, since the May 1997 acquisition date. This amount has been allocated to reflect the fair values of Conrail's assets and liabilities as follows (in millions): Current Assets $ 911 Property and Equipment, Net 17,505 Other Assets 1,217 Current Liabilities (1,279) Long-term Debt (1,879) Deferred Income Taxes (5,585) Other Liabilities (690) ---------- Total $10,200 - - -------------------------------------------------------------------------------- 35 NOTE 2. JOINT ACQUISITION OF CONRAIL (CONTINUED). The jointly owned entity's purchase price allocation included a provision of $280 million for the cost to Conrail of separating non-union employees whose positions are being eliminated as a result of the acquisition. CSX has separately recorded liabilities totaling approximately $400 million to provide for other acquisition-related obligations it will be required to fund, including separation and relocation costs for Conrail union employees, relocation costs for Conrail non-union employees, and costs associated with the closure of certain Conrail facilities. CSX has increased its investment in Conrail on the statement of financial position as a result of recording these separate obligations. Any costs that may be incurred in separating or relocating CSX employees or closing facilities at CSX will be charged to operating expense when definitive plans are established and communicated. Under STB restrictions, CSX and Norfolk Southern did not have complete access to Conrail's properties and records and also were prevented from negotiating labor implementing agreements prior to the August 1998 control date. As a result, the amounts recorded by the jointly owned entity and by CSX for separation costs and other acquisition-related obligations are preliminary and subject to refinement as CSX and Norfolk Southern finalize and implement their integration plans. Any such adjustments are not expected to have a material effect on CSX's operating results or financial position. CONRAIL FINANCIAL INFORMATION Summary financial information for Conrail for its fiscal years ended Dec. 31, 1998, 1997 and 1996 is as follows:
Years Ended Dec. 31, ---------------------------------- 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------- Income Statement Information: Revenues $3,863 $3,765 $3,714 Income from Operations 515 322 601 Net Income 267 7 342 - - -----------------------------------------------------------------------------------------------------
Dec. 31, ------------------------ 1998 1997 - - ------------------------------------------------------------------------------------------- Balance Sheet Information: Current Assets $1,005 $ 954 Property and Equipment and Other Assets 7,895 7,530 Total Assets 8,900 8,484 Current Liabilities 1,207 1,208 Long-term Debt 1,609 1,732 Total Liabilities 5,244 5,319 Stockholders' Equity 3,656 3,165 - - -------------------------------------------------------------------------------------------
Conrail's operating results for the year ended Dec. 31, 1998, include certain charges the jointly owned entity is required to record as part of the purchase transaction. The charges, which totaled $187 million on an after-tax basis, were excluded in determining the equity in Conrail's net income recorded by CSX. These amounts primarily reflected the accrual of separation costs for non-union employees below the executive level whose positions will be eliminated as a result of the acquisition. Excluding these charges, Conrail's net income totaled $454 million for the year ended Dec. 31, 1998. Conrail's operating results for the year ended Dec. 31, 1997, also included certain charges that the jointly owned entity is required to record as part of the purchase transaction. The charges, which totaled $363 million on an after-tax basis, reflected the accrual of separation costs for Conrail executives, as well as the vesting of benefits under certain stock compensation plans and the termination of Conrail's Employee Stock Ownership Plan. Excluding these charges, Conrail's net income totaled $370 million for the year ended Dec. 31, 1997. CSX'S ACCOUNTING FOR THE INVESTMENT IN CONRAIL CSX is using the equity method of accounting for its investment in Conrail through the jointly owned entity. Under the equity method, the company recognizes income from its proportionate share of Conrail's net income, as well as the effect of the purchase price allocation on items such as depreciation of property and equipment. Equity in Conrail's net income, the effect of the purchase price allocation, and acquisition and transition expenses incurred prior to the integration of rail operations are reported as net income (loss) from investment in Conrail and are included in other income (expense) in the consolidated statement of earnings. On a combined basis, these items and interest on debt issued to acquire the Conrail investment reduced CSX's net earnings by $162 million, 76 cents per share, and $97 million, 45 cents per share, for the fiscal years ended Dec. 25, 1998, and Dec. 26, 1997, respectively. As previously outlined, CSX and Norfolk Southern completed the joint acquisition of Conrail in May 1997. At that time, CSX's economic interest in Conrail increased to 42% from approximately 20%. Had CSX held its 42% interest in Conrail from the beginning of the fiscal year, its net earnings for the year ended Dec. 26, 1997, would have been reduced by $28 million to $771 million, $3.60 per share, reflecting additional amounts for equity in Conrail's net income, purchase price amortization, and interest on the acquisition debt. 36 NOTE 3. CONVEYANCE OF BARGE SUBSIDIARY. On June 30, 1998, CSX conveyed its wholly-owned barge subsidiary, American Commercial Lines LLC (ACL), to a venture formed with Vectura Group Inc. (Vectura). As part of the transaction, NMI Holdings LLC, a wholly-owned barge subsidiary of Vectura, was combined with ACL. CSX received cash proceeds of $695 million from the transaction, $67 million of which were used to repay certain outstanding debt and other obligations of ACL and to pay expenses of the transaction. Operating results for the year ended Dec. 25, 1998, include a net investment gain of $154 million, $90 million after tax, 42 cents per share, primarily from the ACL transaction. CSX has a 32% common ownership in the new venture. Due to the reduction in its ownership interest, CSX has accounted for its investment in the venture under the equity method for the period ended Dec. 25, 1998, retroactive to the beginning of the fiscal year. For periods prior to fiscal year 1998, ACL was accounted for as a consolidated subsidiary. NOTE 4. OPERATING EXPENSE.
1998 1997 1996 - - ----------------------------------------------------------------------------------------------------- Labor and Fringe Benefits $3,140 $3,226 $3,158 Materials, Supplies and Other 2,517 2,511 2,532 Building and Equipment Rent 1,102 1,111 1,143 Inland Transportation 996 1,003 996 Depreciation 609 620 611 Fuel 404 567 574 Restructuring Credit (30) -- -- ----------------------------------- Total $8,738 $9,038 $9,014 ----------------------------------- Selling, General and Administrative Expense Included in Above Items $1,165 $1,106 $1,210 - - ------------------------------------------------------------------------------------------------------
Note 5. Other Income.
1998 1997 1996 - - ------------------------------------------------------------------------------------------------------ Interest Income $ 52 $53 $48 Income from Real Estate and Resort Operations(a) 47 71 62 Net Investment Gain (Loss)(b) 154 -- (4) Net Losses from Accounts Receivable Sold (30) (29) (30) Minority Interest (35) (41) (42) Net Income (Loss) from Investment in Conrail (39) 34 8 Equity Earnings of Other Affiliates 27 6 6 Foreign Currency Gain (Loss) (16) (1) 5 Miscellaneous (41) (42) (10) ----------------------------------- Total $119 $51 $43 - - ------------------------------------------------------------------------------------------------------
(a) Gross revenue from real estate and resort operations was $194 million, $206 million and $186 million in 1998, 1997 and 1996, respectively. (b) The $154 million net investment gain recognized in 1998 was primarily attributable to the conveyance of the company's barge subsidiary to a joint venture (see Note 3). NOTE 6. INCOME TAXES. Earnings from domestic and foreign operations and related income tax expense are as follows:
1998 1997 1996 - - ----------------------------------------------------------------------------------------------------- Earnings Before Income Taxes: -- Domestic $564 $ 987 $1,158 -- Foreign 209 196 158 -------------------------------- Total Earnings Before Income Taxes $773 $1,183 $1,316 - - ----------------------------------------------------------------------------------------------------- Income Tax Expense (Benefit): Current -- Federal $(93) $ 143 $ 250 -- Foreign 38 35 30 -- State (5) 16 15 -------------------------------- Total Current (60) 194 295 -------------------------------- Deferred -- Federal 260 168 166 -- Foreign 2 1 -- -- State 34 21 -- -------------------------------- Total Deferred 296 190 166 -------------------------------- Total Income Tax Expense $236 $ 384 $ 461 - - -----------------------------------------------------------------------------------------------------
37 NOTE 6. INCOME TAXES (CONTINUED).
Income tax expense reconciled to the tax computed at statutory rates is as follows: 1998 1997 1996 - - --------------------------------------------------------------------------------------------------------- Tax at Statutory Rates $271 35% $414 35% $461 35% State Income Taxes 19 2 24 2 10 1 Equity in Conrail Net Income (49) (6) (30) (2) -- -- Prior Years' Income Taxes (11) (1) (12) (1) (27) (2) Other Items 6 1 (12) (1) 17 1 ------------------------------------------------------------------ Income Tax Expense $236 31% $384 33% $461 35% - - ---------------------------------------------------------------------------------------------------------
The significant components of deferred tax assets and liabilities include: Dec. 25, 1998 Dec. 26, 1997 - - ----------------------------------------------------------------------------------------------------------- Deferred Tax Assets: Productivity/Restructuring Charges $ 139 $ 162 Employee Benefit Plans 406 334 Deferred Gains and Related Rents 29 119 Other 498 370 ----------------------------- Total 1,072 985 ----------------------------- Deferred Tax Liabilities: Accelerated Depreciation 3,334 3,173 Other 783 618 ----------------------------- Total 4,117 3,791 - - ----------------------------------------------------------------------------------------------------------- Net Deferred Tax Liabilities $3,045 $2,806 - - -----------------------------------------------------------------------------------------------------------
In addition to the annual provision for deferred income tax expense, the change in the year-end net deferred income tax liability balances included the income tax effect of the changes in the minimum pension liability in 1998 and 1997. The company has not recorded domestic deferred or additional foreign income taxes applicable to undistributed earnings of foreign subsidiaries that are considered to be indefinitely reinvested. Such earnings amounted to $205 million and $290 million at Dec. 25, 1998, and Dec. 26, 1997, respectively. These amounts may become taxable upon their remittance as dividends or upon the sale or liquidation of these foreign subsidiaries. It is not practicable to determine the amount of net additional income tax that may be payable if such earnings were repatriated. The company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. Examinations of the federal income tax returns of CSX have been completed through 1990. Returns for 1991 through 1996 are currently under examination. Management believes adequate provision has been made for any adjustments that might be assessed. NOTE 7. ACCOUNTS RECEIVABLE. The company sells revolving interests in its rail accounts receivable to public investors through a securitization program and to a financial institution through commercial paper conduit programs. The accounts receivable are sold, without recourse, to a wholly-owned, special-purpose subsidiary, which then transfers the receivables, with recourse, to a master trust. The securitization and conduit programs are accounted for as sales in accordance with FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Receivables sold under these arrangements are excluded from accounts receivable in the consolidated statement of financial position. In June 1998, the company replaced an expiring securitization program with a new program and reduced the amount of receivables sold under the conduit programs. At Dec. 25, 1998, the agreements provide for the sale of up to $350 million in receivables through the securitization program and $50 million through the conduit programs. At Dec. 25, 1998, the company had sold $347 million of accounts receivable; $300 million through the securitization program and $47 million through the conduit programs. At Dec. 26, 1997, $372 million of accounts receivable were sold; $200 million through the securitization program and $172 million through the conduit programs. The certificates issued under the 1998 securitization program bear interest at 6% annually and mature in June 2003. Receivables sold under the conduit program require yield payments based on prevailing commercial paper rates plus incremental fees. The company's retained interests in the receivables were $482 million at Dec. 25, 1998, and $429 million at Dec. 26, 1997, and are included in accounts receivable. Losses recognized on the sale of accounts receivable totaled $30 million, $29 million, and $30 million in 1998, 1997 and 1996, respectively. The company has retained the responsibility for servicing accounts receivable transferred to the master trust. The average servicing period is approximately one month. No servicing asset or liability has been recorded since the fees the company receives for servicing the receivables approximate the related costs. 38 The company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable, including receivables transferred to the master trust. Allowances for doubtful accounts of $92 million and $97 million have been applied as a reduction of accounts receivable at Dec. 25, 1998, and Dec. 26, 1997, respectively. NOTE 8. PROPERTIES.
Dec. 25, 1998 Dec. 26, 1997 - - ------------------------------------------------------------------------------------------------------- Accumulated Accumulated Cost Depreciation Net Cost Depreciation Net - - ------------------------------------------------------------------------------------------------------- Rail: Road $10,202 $2,745 $ 7,457 $ 9,603 $2,658 $ 6,945 Equipment 4,762 1,806 2,956 4,400 1,580 2,820 ---------------------------------------------------------------------------- Total Rail 14,964 4,551 10,413 14,003 4,238 9,765 Container-shipping 2,662 1,204 1,458 2,673 1,111 1,562 Other 1,052 278 774 1,594 515 1,079 --------------------------------------------------------------------------- Total $18,678 $6,033 $12,645 $18,270 $5,864 $12,406 - - -------------------------------------------------------------------------------------------------------
NOTE 9. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES. Activity related to casualty, environmental and other reserves is as follows:
Casualty and Environmental Separation Other Reserves(a)(b) Reserves(a) Liabilities(a)(c) Total - - -------------------------------------------------------------------------------------------------------- Balance Dec. 29, 1995 $570 $137 $404 $1,111 Charged to Expense and Other Additions 254 16 -- 270 Payments and Other Reductions (290) (36) (34) (360) - - -------------------------------------------------------------------------------------------------------- Balance Dec. 27, 1996 534 117 370 1,021 Charged to Expense and Other Additions 277 12 -- 289 Payments and Other Reductions (249) (30) (22) (301) - - ------------------------------------------------------------------------------------------------------- Balance Dec. 26, 1997 562 99 348 1,009 Charged to Expense and Other Additions 309 3 -- 312 Restructuring Credit -- -- (30) (30) Payments and Other Reductions (318) (27) (18) (363) - - ------------------------------------------------------------------------------------------------------- Balance Dec. 25, 1998 $553 $ 75 $300 $ 928 - - -------------------------------------------------------------------------------------------------------
(a)Balances include current portions of casualty and other, environmental and separation reserves, respectively, of $244 million, $20 million and $19 million at Dec. 25, 1998; $245 million, $20 million and $33 million at Dec. 26, 1997; and $234 million, $20 million and $52 million at Dec. 27, 1996. (b)Casualty reserves are estimated based upon the first reporting of an accident or personal injury to an employee. Liabilities for accidents are based upon field reports and liabilities for personal injuries are based upon the type and severity of the injury and the use of current trends and historical data. (c)Separation liabilities include $285 million at Dec. 25, 1998, $300 million at Dec. 26, 1997, and $318 million at Dec. 27, 1996, related to productivity charges recorded in 1991 and 1992 to provide for the estimated costs of implementing work-force reductions, improvements in productivity and other cost reductions at the company's major transportation units. The remaining liabilities are expected to be paid out over the next 15 to 20 years. During 1998, CSXT recorded a restructuring credit of $30 million, reflecting the reversal of certain separation and labor protection reserves established as part of a 1995 restructuring charge. These reserves were associated with planned work-force reductions that are no longer anticipated as a result of a new telecommunications contract CSXT entered into in July 1998. NOTE 10. DEBT AND CREDIT AGREEMENTS.
Average Interest Rates Types and Maturity Dates at Dec. 25, 1998 Dec. 25, 1998 Dec. 26, 1997 - - ----------------------------------------------------------------------------------------------------- Commercial Paper 5.82% $1,000 $2,000 Notes (1999-2032) 7.50% 4,560 3,624 Equipment Obligations (1999-2013) 7.12% 770 784 Mortgage Bonds (1999-2003) 3.27% 72 75 Other Obligations, including Capital Leases (1999-2021) 7.20% 130 162 ------------------------------------------- Total 7.15% 6,532 6,645 ------------------------------------------- Less Debt Due Within One Year 100 229 ---------------------- Total Long-term Debt $6,432 $6,416 - - -----------------------------------------------------------------------------------------------------
39 NOTE 10. DEBT AND CREDIT AGREEMENTS (CONTINUED). CSX maintains a $2.5 billion bank credit agreement to provide financing for a portion of the Conrail acquisition and for general working capital needs. Under the agreement, the company may borrow directly from the participating banks or utilize the credit facility to support the issuance of commercial paper. Direct borrowings from the participating banks can be obtained, at the company's option, under a competitive bid process among the banks or under a revolving credit arrangement with interest either at LIBOR plus a margin determined by the company's credit rating or at an alternate base rate, as defined in the agreement. The company pays annual fees to the participating banks that may range from .06% to .15% of the total commitment, depending upon its credit rating. The credit agreement, which expires in November 2001, also includes certain covenants and restrictions, such as limitations on debt as a percentage of total capitalization and restrictions on the disposition of certain assets. At Dec. 25, 1998, CSX had commercial paper borrowings supported by the credit facility of $1.187 billion, of which $1 billion was classified as long-term debt based on the company's ability and intent to maintain this debt outstanding for more than one year. At Dec. 26, 1997, the company had commercial paper borrowings of $2.126 billion, of which $2 billion was classified as long-term debt. Commercial paper classified as short-term debt totaled $187 million at a weighted-average interest rate of 5.82% at Dec. 25, 1998, and $126 million at a weighted-average interest rate of 5.76% at Dec. 26, 1997. CSX issued other long-term debt during 1997 and 1998. In 1997, $2.5 billion of notes were issued to provide financing for a portion of the Conrail acquisition. The notes were issued in multiple tranches with maturities ranging from 2002 to 2032 and interest rates ranging from 6.95% to 8.30%. In 1998, the company issued approximately $1 billion of fixed rate notes, principally to refinance commercial paper borrowings incurred to complete the Conrail acquisition. The notes have maturities ranging from 2001 to 2028 and interest rates ranging from 5.85% to 6.80%. In addition to these financings, the company had customary borrowing and repayment activity in connection with the acquisition of equipment. Subsequent to Dec. 25, 1998, CSX completed a shelf registration statement with the Securities and Exchange Commission that provides for the issuance of up to $800 million in debt securities and warrants. The company may also offer common stock, preferred stock, depositary shares, or warrants for common or preferred stock under the shelf registration. Excluding long-term commercial paper, the company has long-term debt maturities for 1999 through 2003 aggregating $100 million, $333 million, $131 million, $555 million and $295 million, respectively. Certain of CSX's rail unit properties are pledged as security for various rail-related long-term debt issues. NOTE 11. COMMON AND PREFERRED STOCK. The company has a single class of common stock, $1 par value, of which 300 million shares are authorized. Each share is entitled to one vote in all matters requiring a vote. At Dec. 25, 1998, common shares issued and outstanding totaled 217,119,265. The company also has total authorized preferred stock of 25 million shares, of which 250,000 shares of Series A have been reserved for issuance, and 3 million shares of Series B have been reserved for issuance under the Shareholder Rights Plan discussed below. All preferred shares rank senior to common shares both as to dividends and liquidation preference. No preferred shares were outstanding at Dec. 25, 1998. On May 29, 1998, the board of directors adopted a Shareholder Rights Plan. Pursuant to the Plan, each outstanding share of common stock also evidences one preferred share purchase right ("right"). Each right entitles shareholders of record to purchase from the company, until the earlier of June 8, 2008, or the redemption of the rights, one one-hundredth of a share of Series B preferred stock at an exercise price of $180, subject to certain adjustments or, under certain circumstances, to obtain additional shares of common stock in exchange for the rights. The rights are not exercisable or transferable apart from the related common shares until the earlier of 10 business days following the public announcement that a person or affiliated group has acquired 20% or more of the company's outstanding common stock; or 10 days following the commencement or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the ownership by a person or group of 15% or more of the outstanding common stock. The board of directors may redeem the rights at a price of one cent per right at any time prior to the acquisition by a person or group of 20% or more of the outstanding common stock. 40 NOTE 12. EARNINGS PER SHARE. In accordance with FASB Statement No. 128, "Earnings per Share," the following table sets forth the computation of earnings per share and earnings per share, assuming dilution.
1998 1997 1996 - - ------------------------------------------------------------------------------------------------------------------------ Numerator: Net Earnings $ 537 $ 799 $ 855 Denominator (thousands): Average Common Shares Outstanding 210,860 209,979 208,550 Effect of Potentially Dilutive Common Shares, Principally Employee Stock Plans 3,336 4,466 3,786 --------------------------------- Average Common Shares Outstanding, Assuming Dilution 214,196 214,445 212,336 --------------------------------- Earnings Per Share $2.55 $3.80 $4.10 --------------------------------- Earnings Per Share, Assuming Dilution $2.51 $3.72 $4.03 - - ------------------------------------------------------------------------------------------------------------------------
Certain potentially dilutive securities outstanding at Dec. 25, 1998, Dec. 26, 1997, and Dec. 27, 1996, were not included in the computation of earnings per share, assuming dilution, since their exercise prices were greater than the average market price of the common shares during the period and, accordingly, their effect is antidilutive. These shares totaled 9.60 million at a weighted-average exercise price of $48.84 per share for 1998, 1.96 million at $57.00 per share for 1997, and 1.98 million at $51.44 for 1996. Earnings per share for all prior periods presented have been restated to reflect clarification of the treatment of certain stock-based compensation plan shares under FASB Statement No. 128. Earnings per share were revised to $3.80 from $3.67 for 1997, and to $4.10 from $4.00 for 1996. On a diluted basis, 1997 earnings per share were revised to $3.72 from $3.62; the 1996 figure was revised to $4.03 per share from $3.96. NOTE 13. STOCK PLANS. The company maintains several stock plans designed to encourage ownership of its stock and provide incentives for employees to contribute to its success. Expense for stock-based compensation under these plans is based on the intrinsic value accounted for under the principles of APB Opinion No. 25 and related Interpretations. Due to the company's lower stock price in 1998, a net credit of $4 million was recognized for stock-based compensation. The company recognized compensation expense of $66 million and $36 million in 1997 and 1996, respectively. Had compensation expense been determined based upon fair values at the date of grant, consistent with the methods of FASB Statement No. 123, the company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 - - --------------------------------------------------------------------------------------------------------------------------- Net Earnings -- As Reported $ 537 $ 799 $ 855 -- Pro Forma $ 481 $ 791 $ 832 Earnings Per Share -- As Reported $2.55 $3.80 $4.10 -- Pro Forma $2.28 $3.77 $3.99 Earnings Per Share, Assuming Dilution -- As Reported $2.51 $3.72 $4.03 -- Pro Forma $2.24 $3.69 $3.92 - - ---------------------------------------------------------------------------------------------------------------------------
The pro forma fair value method of accounting was applied only to stock-based awards granted after Dec. 30, 1994. Because all stock-based compensation expense for 1998, 1997 and 1996 was not restated and because stock-based awards granted may vary from year to year, the resulting pro forma compensation cost may not be representative of that to be expected in future years. STOCK PURCHASE AND LOAN PLAN The Stock Purchase and Loan Plan provides for the purchase of common stock and related rights by eligible officers and key employees of the company and entitles them to obtain loans with respect to the shares purchased. The Plan is intended to further the long-term stability and financial success of the company by providing a method for eligible employees to increase significantly their ownership of common stock. A total of 9 million shares are reserved for issuance under the Plan. In consideration for shares purchased, participants have provided down payments of not less than 5% nor more than 25% of the purchase price in the form of cash, recourse notes or equity earned in the Plan. The remaining purchase price is in the form of non-recourse loans secured by the shares issued. At Dec. 25, 1998, and Dec. 26, 1997, loans outstanding totaled $275 million and $277 million, respectively, at weighted-average interest rates of 6.6% for both years. All non-recourse loans under the Plan are subject to certain adjustments after a vesting period based upon targeted increases in the market price of CSX common stock. At Dec. 25, 1998, and Dec. 26, 1997, certain of the market price thresholds had been met, resulting in forgiveness of interest (net of dividends applied to interest) plus a portion of the principal balances of the notes. 41 NOTE 13. STOCK PLANS (CONTINUED). At Dec. 25, 1998, there were 155 participants in the Plan. Transactions involving the Plan are as follows:
Shares (000's) Average Price(a) - - -------------------------------------------------------------------------------------------------------- Outstanding at Dec. 27, 1996 8,111 $46.26 Issued 138 $59.43 Exchanged, Canceled or Withdrawn (581) $22.48 ------------------------- Outstanding at Dec. 26, 1997 7,668 $45.74 Exchanged, Canceled or Withdrawn (503) $45.13 ------------------------- Outstanding at Dec. 25, 1998 7,165 $45.75 - - --------------------------------------------------------------------------------------------------------
(a) Represents average cost to participants, net of cumulative note forgiveness. There were no additional shares issued under the Stock Purchase and Loan Plan in 1998. The weighted-average fair value benefit to participants for a share issued under the Plan in 1997 was $19.82. This value was estimated as of the respective grant dates using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6.1%; dividend yield of 2.2%; volatility factor of 22.2%; and expected life of six years. 1987 LONG-TERM PERFORMANCE STOCK PLAN The CSX Corporation 1987 Long-term Performance Stock Plan provides for awards in the form of stock options, Stock Appreciation Rights (SARs), Performance Share Awards (PSAs) and Incentive Compensation Program shares (ICPs) to eligible officers and employees. Awards granted under the Plan are determined by the board of directors based on the financial performance of the company. At Dec. 25, 1998, there were 524 current or former employees with outstanding grants under the Plan. A total of 21,736,794 shares were reserved for issuance, of which 3,702,641 were available for new grants (428,638 at Dec. 26, 1997). The remaining shares are assigned to outstanding stock options, SARs and PSAs. The majority of stock options have been granted with 10-year terms and vest at the end of one year of continued employment. The exercise price for options granted equals the market price of the underlying stock on the date of grant. A summary of the company's stock option activity and related information for the fiscal years ended Dec. 25, 1998, Dec. 26, 1997, and Dec. 27, 1996, follows:
1998 1997 1996 ----------------------------- --------------------------- -------------------------- Shares Weighted-average Shares Weighted-average Shares Weighted-average (000s) Exercise Price (000s) Exercise Price (000s) Exercise Price - - ---------------------------------------------------------------- ---------------------------- -------------------------- Outstanding at Beginning of Year 16,171 $40.49 13,102 $35.82 11,881 $32.76 Granted 2,674 $48.43 4,182 $51.44 1,978 $51.43 Exchanged, Canceled or Expired (1,505) $52.82 (31) $49.89 (42) $27.69 Exercised (1,052) $23.80 (1,082) $26.08 (715) $42.08 - - ---------------------------------------------------------------- ---------------------------- -------------------------- Outstanding at End of Year 16,288 $41.73 16,171 $40.49 13,102 $35.82 - - ---------------------------------------------------------------- ---------------------------- -------------------------- Exercisable at End of Year 10,447 $36.96 9,911 $34.08 10,139 $31.90 - - ---------------------------------------------------------------- ---------------------------- -------------------------- Fair Value of Options Granted $11.22 $12.25 $13.78 - - ---------------------------------------------------------------------------------------------- --------------------------
On Dec. 14, 1998, 1,297,595 stock options granted in April 1998 at an exercise price of $52.66 per share were exchanged for 1,038,076 new options at an exercise price of $41.78 per share. The following table summarizes information about stock options outstanding at Dec. 25, 1998:
Options Outstanding Options Exercisable -------------------------------------------------------------------------------------------- Number Weighted-average Number Outstanding Remaining Weighted-average Exercisable Weighted-average (000s) Contractual Life Exercise Price (000s) Exercise Price - - -------------------------------------------------------------------------- ---------------------------------- $15 to $20 1,366 1.8 $18.53 1,366 $18.53 $30 to $39 4,714 4.4 $35.54 4,714 $35.54 $40 to $49 6,171 7.5 $43.50 3,738 $43.06 $50 to $57 4,037 8.1 $54.09 629 $51.43 ---------------------------------------------------- ---------------------------------- Total 16,288 6.3 $41.73 10,447 $36.96 - - ------------------------------------------------------------------------------------------------------------------
The fair value of options granted in 1998, 1997 and 1996 was estimated as of the dates of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free interest rates of 5.2%, 6.5% and 6.3%; volatility factors of 23%, 21% and 22%; dividend yields of 2.4%, 2.2% and 2.4%; and expected lives of 5 years, 4.8 years and 6 years. 42 The value of PSAs is contingent on the achievement of performance goals and completion of certain continuing employment requirements over a three-year period. Each PSA earned will equal the fair market value of one share of CSX common stock on the date of payment. At Dec. 25, 1998, there were 1,540,400 shares reserved for outstanding PSAs. In 1998, 1997 and 1996, respectively, 518,500, 126,600, and 110,600 PSAs were granted to employees. The weighted-average fair value of those shares was $52.00 for 1998, $44.88 for 1997 and $44.44 for 1996. At Dec. 25, 1998, there were 186,140 SARs outstanding with a weighted-average exercise price of $16.79. In 1998, 1997 and 1996, respectively, 77,556, 171,377 and 69,494 SARs were exercised at weighted-average exercise prices of $15.58, $14.94 and $15.68. There were no grants of SARs in 1998, 1997 or 1996. 1990 STOCK AWARD PLAN Under the 1990 Stock Award Plan, all officers and employees of the company are eligible to receive shares of CSX common stock as an incentive award and certain key employees are eligible to receive them as a deferral award. All awards of common stock are issued based on terms and conditions approved by the company's board of directors. At Dec. 25, 1998, there were 1,291,720 shares reserved for issuance under this Plan, of which 1,187,920 were available for new grants. There were no shares granted under the Plan in 1998. In 1997 and 1996, respectively, 433,500 shares and 633,587 shares were granted under the Plan. The weighted-average fair value of those shares was $44.69 for 1997 and $45.63 for 1996. STOCK PURCHASE AND DIVIDEND REINVESTMENT PLANS The 1991 Employees Stock Purchase and Dividend Reinvestment Plan provides a method and incentive for eligible employees to purchase shares of the company's common stock at market value by payroll deductions. To encourage stock ownership, employees receive a 17.65% matching payment on their contributions in the form of additional stock purchased by the company. Each matching payment of stock is subject to a two-year holding period. Sales of stock prior to the completion of the holding period result in forfeiture of the matching stock purchase. Officers and key employees who qualify for the Stock Purchase and Loan Plan are not eligible to participate in this Plan. At Dec. 25, 1998, there were 611,477 shares of common stock available for purchase under this Plan. Employees purchased 37,403 shares in 1998; 35,593 shares in 1997 and 40,985 shares in 1996 under the plan at weighted-average market prices of $46.63, $51.94 and $47.39 for 1998, 1997 and 1996, respectively. The company also maintains the Employees Stock Purchase and Dividend Reinvestment Plan and the Shareholders Dividend Reinvestment Plan, adopted in 1981, under which all employees and shareholders may purchase CSX common stock at the average of daily high and low sale prices for the five trading days ending on the day of purchase. To encourage stock ownership, employees receive a 5% discount on all purchases under this program. At Dec. 25, 1998, there were 4,650,023 shares reserved for issuance under these Plans. STOCK PLAN FOR DIRECTORS The Stock Plan for Directors, approved by the shareholders in 1992, governs in part the manner in which directors' fees and retainers are paid. A minimum of 40% of the retainers must be paid in common stock of the company. In addition, each director may elect to receive up to 100% of the remaining retainer and fees in the form of common stock of the company. In 1997, shareholders approved amendments to the Plan that would permit additional awards of stock or stock options. In 1998, 13,000 stock options were granted with an exercise price of $41.25. The Plan permits each director to elect to transfer stock into a trust that will hold the shares until the participant's death, disability, retirement as a director, other cessation of services as a director, or change in control of the company. At Dec. 25, 1998, there were 916,141 shares of common stock reserved for issuance under this Plan. NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair values of the company's financial instruments are estimated by reference to quoted prices from market sources and financial institutions, as well as other valuation techniques. Long-term debt is the only financial instrument of the company with a fair value significantly different from its carrying amount. At Dec. 25, 1998, the fair value of long-term debt, including current maturities, was $6.96 billion, compared with a carrying amount of $6.53 billion. At Dec. 26, 1997, the fair value of long-term debt, including current maturities, was $7.03 billion, compared with a carrying amount of $6.64 billion. The fair value of long-term debt has been estimated using discounted cash flow analysis based upon the company's current incremental borrowing rates for similar types of financing arrangements. NOTE 15. EMPLOYEE BENEFIT PLANS. The company sponsors defined benefit pension plans, principally for salaried personnel. The plans provide eligible employees with retirement benefits based principally on years of service and compensation rates near retirement. Plan assets consist primarily of common stocks, corporate bonds and cash and cash equivalents. In addition to the defined benefit pension plans, the company sponsors three plans that provide medical and life insurance benefits to most full-time salaried employees upon their retirement. The postretirement medical plans are contributory, with retiree contributions adjusted annually. The life insurance plan is non-contributory. The company's current policy is to fund the cost of the postretirement medical and life insurance benefits on a pay-as-you-go basis, as in prior years. 43 NOTE 15. EMPLOYEE BENEFIT PLANS (CONTINUED). The company has adopted FASB Statement No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," which was issued in February 1998. The following information was prepared in accordance with the new standard. The company uses a plan year of Oct. 1 through Sept. 30 to value its pension and postretirement plans on an actuarial basis.
Pension Benefits Postretirement Benefits -------------------------------------------------- 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Plan Year $1,470 $1,371 $ 345 $ 351 Service Cost 39 40 8 10 Interest Cost 98 98 21 25 Plan Participants' Contributions -- -- 4 4 Conveyance of Barge Subsidiary (85) -- (18) -- Actuarial (Gain) Loss 187 54 (12) (13) Benefits Paid (94) (93) (33) (32) ---------------------------------------------- Benefit Obligation at End of Plan Year 1,615 1,470 315 345 CHANGE IN PLAN ASSETS Fair Value of Plan Assets at Beginning of Plan Year 1,371 1,110 -- -- Actual Return on Plan Assets 54 276 -- -- Conveyance of Barge Subsidiary (96) -- -- -- Employer Contributions 38 78 29 28 Plan Participants' Contributions -- -- 4 4 Benefits Paid (94) (93) (33) (32) ---------------------------------------------- Fair Value of Plan Assets at End of Plan Year 1,273 1,371 -- -- FUNDED STATUS (342) (99) (315) (345) Unrecognized Actuarial Loss 352 124 26 31 Unrecognized Prior Service Cost 11 -- (3) (8) Unrecognized Transition Obligation 1 13 -- -- Fourth Quarter Activity: Employer Contributions to Pension Plans 2 2 -- -- Net Postretirement Benefits Paid -- -- 8 7 ---------------------------------------------- Net Amount Recognized in Statement of Financial Position $ 24 $ 40 $ (284) $ (315) - - ----------------------------------------------------------------------------------------------------------- Amount Recognized in Statement of Financial Position Consists of: Prepaid Benefit Cost $ 7 $ 117 $ -- $ -- Accrued Benefit Liability (173) (119) (284) (315) Intangible Asset 11 11 -- -- Accumulated Other Comprehensive Loss 179 31 -- -- ----------------------------------------------- Net Amount Recognized in Statement of Financial Position $ 24 $ 40 $ (284) $ (315) - - ----------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS: Discount Rate 6.5% 7.5% 6.5% 7.5% Rate of Compensation Increase 5.0% 5.0% 5.0% 5.0% Expected Return on Plan Assets 9.5% 9.5% n/a n/a - - -----------------------------------------------------------------------------------------------------------
The net postretirement benefit obligation was determined using the assumption that the health care cost trend rate for medical plans was 9.0% for 1998-1999, decreasing gradually to 5.5% by 2005 and remaining at that level thereafter. A 1% change in the assumed health care cost trend rate would have the following effects:
1% 1% Increase Decrease ------------------------- Effect on postretirement benefits service and interest cost $ 2 $ (2) Effect on postretirement benefit obligation 19 (17) - - ----------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits --------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service Cost $ 39 $ 40 $ 37 $ 8 $ 10 $ 9 Interest Cost 98 98 93 21 25 25 Expected Return on Plan Assets (101) (96) (91) -- -- -- Amortization of Transition Obligation 6 5 5 -- -- -- Amortization of Prior Service Cost 1 -- -- (4) (7) (7) Recognized Net Actuarial (Gain) Loss 12 13 15 (1) 2 3 - - -------------------------------------------------------------------------------------------------------- Net Periodic Benefit Cost $ 55 $ 60 $ 59 $ 24 $ 30 $ 30 - - --------------------------------------------------------------------------------------------------------
44 The conveyance of CSX's barge subsidiary to a joint venture during 1998 reduced the company's pension and postretirement benefit obligations and related pension plan assets. During 1998, CSX recorded an increase in the minimum pension liability of $148 million. The change in the minimum liability did not affect net earnings, but is a component of accumulated other comprehensive loss on an after-tax basis. The higher minimum liability resulted from lower interest rates in 1998, which reduced the discount applied to pension obligations, and from the broad decline in U.S. stock prices during the third quarter. OTHER PLANS The company maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements. Expense associated with these plans was $20 million, $23 million and $23 million for 1998, 1997 and 1996, respectively. Under collective bargaining agreements, the company participates in a number of union-sponsored, multiemployer benefit plans. Payments to these plans are made as part of aggregate assessments generally based on number of employees covered, hours worked, tonnage moved or a combination thereof. Total contributions of $235 million, $238 million and $224 million were made to these plans in 1998, 1997 and 1996, respectively. NOTE 16. COMMITMENTS AND CONTINGENCIES. LEASE COMMITMENTS The company leases equipment under agreements with terms up to 21 years. Non-cancelable, long-term leases generally include options to purchase at fair value and to extend the terms. At Dec. 25, 1998, minimum building and equipment rentals under non-cancelable operating leases totaled approximately $407 million for 1999, $355 million for 2000, $372 million for 2001, $299 million for 2002, $290 million for 2003 and $1.7 billion thereafter. Rent expense on operating leases, including net daily rental charges on railroad operating equipment of $258 million, $239 million and $245 million in 1998, 1997 and 1996, respectively, amounted to $1.1 billion in 1998 and $1.2 billion in 1997 and 1996. PURCHASE COMMITMENTS CSXT entered into various agreements from 1993 to 1998 to purchase 590 locomotives. These large orders cover normal locomotive replacement needs for 1994 through 1999 and introduced alternating current traction technology to the locomotive fleet. CSXT has taken delivery of 50 direct current and 392 alternating-current locomotives through Dec. 25, 1998. The remaining 148 alternating-current units are scheduled to be delivered in 1999. CONTINGENT LIABILITIES Guarantees The company and its subsidiaries are contingently liable individually and jointly with others as guarantors of long-term debt and obligations principally relating to leased equipment, joint ventures and joint facilities. These contingent obligations were not material to the company's results of operations and financial position at Dec. 25, 1998. NEW ORLEANS TANK CAR FIRE In September 1997, a state court jury in New Orleans, La., returned a $2.5 billion punitive damages award against CSXT. The award was made in a class-action lawsuit against a group of nine companies based on personal injuries alleged to have arisen from a 1987 fire. The fire was caused by a leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour evacuation of a New Orleans neighborhood. In the same case, the court awarded a group of 20 plaintiffs compensatory damages of approximately $2 million against the defendants, including CSXT, to which the jury assigned 15% of the responsibility for the incident. CSXT's liability under that compensatory damages award is not material and adequate provision was made for the award in a prior year. In October 1997, the Louisiana Supreme Court set aside the punitive damages judgment, ruling the judgment should not have been entered until all liability issues were resolved. In February 1999, the Louisiana Supreme Court issued a further decision, authorizing and instructing the trial court to enter individual punitive damages judgments in favor of the 20 plaintiffs who had received awards of compensatory damages, in amounts representing an appropriate share of the jury's award. While the trial court has not yet taken action under this decision, the amounts of such punitive damages judgments, if any, are not expected to be material. CSX believes that this February 1999 decision will expedite the process of full appellate review of the 1997 trial. The claims of 20 additional plaintiffs for compensatory damages are scheduled to be tried beginning in March 1999. CSXT is pursuing an aggressive legal strategy. Management believes that any adverse outcome will not be material to CSX's or CSXT's overall results of operations or financial position, although it could be material to results of operations in a particular quarterly accounting period. SELF-INSURANCE Although the company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damage, reasonable levels of risk are retained on a self-insurance basis. A portion of the insurance coverage, $25 million limit above $100 million per occurrence from rail and certain other operations, is provided by a company partially owned by CSX. 45 NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED). CONTINGENT LIABILITIES (CONTINUED) Environmental CSXT is a party to various proceedings involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party (PRP) at 113 environmentally impaired sites that are or may be subject to remedial action under the Federal Superfund statute (Superfund) or similar state statutes. A number of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal. Such proceedings arising under Superfund or similar state statutes can involve numerous other waste generators and disposal companies and seek to allocate or recover costs associated with site investigation and cleanup, which could be substantial. CSXT is involved in a number of administrative and judicial proceedings and other clean-up efforts at 248 sites, including the sites addressed under the Federal Superfund statute or similar state statutes, where it is participating in the study and/or clean-up of alleged environmental contamination. The assessment of the required response and remedial costs associated with most sites is extremely complex. Cost estimates are based on information available for each site, financial viability of other PRPs, where available, and existing technology, laws and regulations. CSXT's best estimates of the allocation method and percentage of liability when other PRPs are involved are based on assessments by consultants, agreements among PRPs, or determinations by the U.S. Environmental Protection Agency or other regulatory agencies. At least once each quarter, CSXT reviews its role, if any, with respect to each such location, giving consideration to the nature of CSXT's alleged connection to the location (i.e., generator, owner or operator), the extent of CSXT's alleged connection (i.e., volume of waste sent to the location and other relevant factors), the accuracy and strength of evidence connecting CSXT to the location, and the number, connection and financial position of other named and unnamed PRPs at the location. The ultimate liability for remediation can be difficult to determine with certainty because of the number and creditworthiness of PRPs involved. Through the assessment process, CSXT monitors the creditworthiness of such PRPs in determining ultimate liability. Based upon such reviews and updates of the sites with which it is involved, CSXT has recorded, and reviews at least quarterly for adequacy, reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at Dec. 25, 1998, and Dec. 26, 1997, were $75 million and $99 million, respectively. These recorded liabilities, which are undiscounted, include amounts representing CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The liability has been accrued for future costs for all sites where the company's obligation is probable and where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. The majority of the Dec. 25, 1998, environmental liability is expected to be paid out over the next five to seven years, funded by cash generated from operations. The company does not currently possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, latent conditions at any given location could result in exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the company believes that its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters will not materially affect its overall results of operations and financial condition. Other Legal Proceedings A number of legal actions are pending against CSX and certain subsidiaries in which claims are made in substantial amounts. While the ultimate results of environmental investigations, lawsuits and claims involving the company cannot be predicted with certainty, management does not currently expect that resolution of these matters will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the company. NOTE 17. BUSINESS SEGMENTS. The company operates in four business segments: Rail, Container Shipping, Intermodal and Contract Logistics. The rail segment provides rail freight transportation over a network of more than 18,000 route miles in 20 states in the East, Midwest and South. The container-shipping segment provides global transportation services via a fleet of 94 container ships and more than 220,000 containers. The intermodal segment provides transcontinental intermodal transportation services and operates a network of dedicated intermodal facilities across North America. The contract logistics segment provides customized logistics solutions, including inventory management, distribution, warehousing, assembly and just-in-time delivery. The company's segments are strategic business units that offer different services and are managed separately based on the differences in these services. The company evaluates performance and allocates resources based on several factors, of which the primary financial measure is business segment operating income, defined as income from operations, excluding the effects of non-recurring charges and gains. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). Intersegment sales and transfers are generally accounted for as if the sales or transfers were to third parties, that is, at current market prices. 46 Business segment information for fiscal years 1998, 1997 and 1996 is as follows: Fiscal year ended Dec. 25, 1998
Container Contract Rail Shipping Intermodal Logistics Other Totals - - --------------------------------------------------------------------------------------------------------- Revenue from External Customers $4,956 $3,916 $618 $408 -- $9,898 Intersegment Revenue -- -- 30 -- -- 30 Operating Income 1,031 133 33 29 -- 1,226 Assets 11,897 2,453 217 144 -- 14,711 Depreciation Expense 450 130 18 11 -- 609 Property Additions 1,212 54 99 17 -- 1,382 - - ---------------------------------------------------------------------------------------------------------
Fiscal year ended Dec. 26, 1997 Container Contract Rail Shipping Intermodal Logistics Other(a) Totals - - --------------------------------------------------------------------------------------------------------- Revenue from External Customers $4,989 $3,991 $634 $389 $618 $10,621 Intersegment Revenue -- -- 35 -- -- 35 Operating Income 1,229 278 46 24 69 1,646 Assets 11,403 2,576 218 129 626 14,952 Depreciation Expense 429 128 14 10 39 620 Property Additions 712 251 32 13 52 1,060 - - ---------------------------------------------------------------------------------------------------------
Fiscal year ended Dec. 27, 1996
Container Contract Rail Shipping Intermodal Logistics Other(a) Totals - - --------------------------------------------------------------------------------------------------------- Revenue from External Customers $4,909 $4,051 $638 $316 $622 $10,536 Intersegment Revenue -- -- 22 -- -- 22 Operating Income 1,127 318 35 17 112 1,609 Assets 10,800 2,545 211 122 667 14,345 Depreciation Expense 416 135 15 9 36 611 Property Additions 764 307 24 15 91 1,201 - - ---------------------------------------------------------------------------------------------------------
(a) Other includes the company's barge operations, which were conveyed to a joint venture in 1998 and are no longer a consolidated activity (see Note 3). A reconciliation of the totals reported for the business segments to the applicable line items in the consolidated financial statements is as follows:
1998 1997 1996 - - -------------------------------------------------------------------------------------------------------- Revenue: Revenue from External Customers for Business Segments $ 9,898 $10,621 $10,536 Intersegment Revenue for Business Segments 30 35 22 Elimination of Intersegment Revenue (30) (35) (22) --------------------------------------- Total Consolidated Revenue $ 9,898 $10,621 $10,536 - - -------------------------------------------------------------------------------------------------------- Operating Income: Operating Income for Business Segments $ 1,226 $ 1,646 $ 1,609 Reclassification of Intercompany Interest Income (62) (63) (64) Unallocated Corporate Expenses (4) -- (23) -------------------------------------- Total Consolidated Operating Income $ 1,160 $ 1,583 $ 1,522 - - -------------------------------------------------------------------------------------------------------- Assets: Assets for Business Segments $14,711 $14,952 $14,345 Investment in Conrail 4,798 4,244 1,965 Elimination of Intercompany Receivables (36) (33) (32) Non-segment Assets(b) 954 794 687 -------------------------------------- Total Consolidated Assets $20,427 $19,957 $16,965 - - -------------------------------------------------------------------------------------------------------- Depreciation Expense: Depreciation Expense for Business Segments $ 609 $ 620 $ 611 Non-segment Depreciation(b) 21 26 9 -------------------------------------- Total Consolidated Depreciation Expense $ 630 $ 646 $ 620 - - -------------------------------------------------------------------------------------------------------- Property Additions: Property Additions for Business Segments $ 1,382 $ 1,060 $ 1,201 Non-segment Property Additions(b) 97 65 22 -------------------------------------- Total Consolidated Property Additions $ 1,479 $ 1,125 $ 1,223 - - --------------------------------------------------------------------------------------------------------
(b)Non-segment assets include corporate cash and cash equivalents and assets of non-transportation businesses. Non-segment depreciation and property additions are primarily attributable to non-transportation businesses. Principal non-transportation businesses include real estate and resort operations and information technology subsidiaries serving multiple segments. 47 NOTE 17. BUSINESS SEGMENTS (CONTINUED). Included in the consolidated financial statements are the following amounts related to geographic locations:
1998 1997 1996 - - ------------------------------------------------------------------------------------------------------- Revenues:(c) United States $7,594 $ 8,272 $ 8,161 Asia 1,239 1,188 1,252 Europe 668 721 719 Other 397 440 404 ------------------------------------ Total Consolidated Revenues $9,898 $10,621 $10,536 - - -------------------------------------------------------------------------------------------------------
(c)Revenues are attributed to geographic locations based on port of origin for container-shipping operations and the location of the service provided for all other operations. More than 95% of the company's long-lived assets are located in the United States. The company does not have a single external customer that represents 10% or more of its consolidated revenue. NOTE 18. SUMMARIZED FINANCIAL DATA - SEA-LAND SERVICE INC. During 1997, Sea-Land entered into agreements to sell and lease back by charter three new U.S.-built, U.S.-flag, D-7 class container ships. CSXhas guaranteed the obligations of Sea-Land pursuant to the related charters which, along with the container ships, serve as collateral for debt securities registered with the Securities and Exchange Commission (SEC). In accordance with SEC disclosure requirements, summarized financial information for Sea-Land and its consolidated subsidiaries is as follows:
Summary of Operations 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------- Operating Revenue $3,916 $3,991 $4,051 Operating Expense -- Public 3,708 3,634 3,648 -- Affiliated(a) 113 109 122 ----------------------------------- Operating Income $ 95 $ 248 $ 281 ----------------------------------- Net (Loss) Earnings $ (70) $ 56 $ 84 - - -----------------------------------------------------------------------------------------------------
Dec. 25, Dec. 26, Summary of Financial Position 1998 1997 - - ----------------------------------------------------------------------------------------------------- Current Assets -- Public $ 597 $ 652 -- Affiliated(a) 3 4 Other Assets -- Public 1,785 1,880 -- Affiliated (a) 67 40 Current Liabilities -- Public 607 626 -- Affiliated (a) 92 37 Other Liabilities -- Public 616 687 -- Affiliated (a) 627 576 Shareholder's Equity 510 650 - - -----------------------------------------------------------------------------------------------------
(a)Amounts represent activity with CSX affiliated companies. Operating expense includes certain intercompany amounts which are eliminated for business segment reporting. SL Alaska Trade Company (SLATCO) is a special purpose, unconsolidated subsidiary of Sea-Land with trust-related assets of $117 million securing $106 million of debt maturing on Oct. 1, 2005. The assets of SLATCO are not available to creditors of Sea-Land or its subsidiaries, nor are the SLATCO notes guaranteed by Sea-Land or any of its subsidiaries. 48 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF CSX CORPORATION We have audited the accompanying consolidated statements of financial position of CSX Corporation and subsidiaries as of December 25, 1998 and December 26, 1997, and the related consolidated statements of earnings, cash flows, and changes in shareholders' equity for each of the three fiscal years in the period ended December 25, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our 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 CSX Corporation and subsidiaries at December 25, 1998 and December 26, 1997, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 25, 1998, in conformity with generally accepted accounting principles. /s/ERNST & YOUNG LLP Richmond, Virginia February 26, 1999 49 BOARD OF DIRECTORS AND OFFICERS BOARD OF DIRECTORS Elizabeth E. Bailey(1,2,5) John C. Hower Professor of Public Policy and Management, The Wharton School, University of Pennsylvania, Philadelphia, Pa. H. Furlong Baldwin(2) Chairman, President & CEO Mercantile Bankshares Corporation, Baltimore, Md. Claude S. Brinegar(5) Retired Chief Financial Officer and Vice Chairman Unocal Corp., Stanford, Calif. Robert L. Burrus Jr.(4,5) Partner and Chairman McGuire, Woods, Battle & Boothe LLP, Richmond, Va. Bruce C. Gottwald(1,3,4) Chairman and CEO Ethyl Corporation, Richmond, Va. John R. Hall(3,5) Chairman of Arch Coal Inc. and Retired Chairman and CEO Ashland Inc., Ashland, Ky. E. Bradley Jones(4) Consultant Former Chairman and CEO LTV Steel Company, Pepper Pike, Ohio Robert D. Kunisch(3,5) Vice Chairman Cendant Corporation, Boca Grande, Fla. James W. McGlothlin(2,4) Chairman and CEO The United Company, Bristol, Va. Southwood J. Morcott(2,4) Chairman of the Board Dana Corporation, Toledo, Ohio Charles E. Rice(1,3) Vice Chairman Corporate Development Bank of America, Jacksonville, Fla. William C. Richardson(1,5) President and CEO W.K. Kellogg Foundation, Battle Creek, Mich. Frank S. Royal, M.D.(2,3) Physician and Health Care Authority, Richmond, Va. John W. Snow(1) Chairman, President and CEO CSX Corporation, Richmond, Va. Key to committees of the board 1 - Executive, 2 - Audit, 3 - Compensation, 4 - Pension, 5 - Nominating and Organization CORPORATE OFFICERS John W. Snow* Chairman, President and CEO Mark G. Aron* Executive Vice President-Law and Public Affairs Paul R. Goodwin* Executive Vice President-Finance and Chief Financial Officer Andrew B. Fogarty* Senior Vice President-Corporate Services Thomas E. Hoppin Senior Vice President-Executive Department Jesse R. Mohorovic* Group Vice President-Corporate Communications and Investor Relations Anita P. Beier Vice President-Financial Planning Ellen M. Fitzsimmons General Counsel-Corporate Arnold I. Havens Vice President-Federal Affairs Craig R. MacQueen Vice President-Corporate Communications William F. Miller Vice President-Audit and Advisory Services James P. Peter Vice President-Taxes James L. Ross* Vice President and Controller Alan A. Rudnick Vice President-General Counsel and Corporate Secretary Michael J. Ruehling Vice President-State Relations James A. Searle Jr. Vice President-Administration Peter J. Shudtz Vice President-Law and General Counsel Gregory R. Weber* Vice President and Treasurer UNIT OFFICERS CSX TRANSPORTATION INC. Alvin R. (Pete) Carpenter* President and CEO Ronald J. Conway* Executive Vice President-Operations Michael J. Ward* Executive Vice President-Coal & Merger Planning Aden C. Adams Senior Vice President-Merchandise Sales and Marketing P. Michael Giftos Senior Vice President and General Counsel Frank H. Nichols Senior Vice President-Employee Relations SEA-LAND SERVICE INC. John P. Clancey* President and CEO Robert J. Grassi* Senior Vice President-Finance and Planning Richard E. Murphy* Senior Vice President-Pacific Services Charles G. Raymond* Senior Vice President and Chief Transportation Officer CSX INTERMODAL INC. Lester M. Passa* President and CEO CSX TECHNOLOGY INC. Charles J. O. Wodehouse President CUSTOMIZED TRANSPORTATION INC. David G. Kulik President and CEO THE GREENBRIER Ted J. Kleisner President and Managing Director YUKON PACIFIC CORPORATION Jeff B. Lowenfels President and CEO * Executive officers of the corporation. 50 SHAREHOLDER INFORMATION SHAREHOLDER SERVICES Shareholders with questions about their accounts should contact the transfer agent at the address or telephone number shown below. General questions about CSX or information contained in company publications should be directed to corporate communications at the address or telephone number shown below. Security analysts, portfolio managers or other investment community representatives should contact investor relations at the address or telephone number shown below. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Harris Trust Company P. O. Box A3504 Chicago, IL 60690-3504 (800) 521-5571 (312) 461-4061, in Illinois e-mail: webshare@harrisbank.com CSXDirectInvestsm Harris Trust Dividend Reinvestment Department P. O. Box A3309 Chicago, IL 60690-3309 (800) 521-5571 www.csx.com/aboutus/shareholder/directinvest SHAREHOLDER RELATIONS Karen L. Kennedy Administrator-Shareholder Services CSX Corporation P. O. Box 85629 Richmond, VA 23285-5629 (804) 782-1465 e-mail: Karen_Kennedy@csx.com CORPORATE COMMUNICATIONS Elisabeth Gabrynowicz Director-Corporate Communications CSX Corporation P. O. Box 85629 Richmond, VA 23285-5629 (804) 782-6775 e-mail: Elisabeth_Gabrynowicz@csx.com INVESTOR RELATIONS Joseph C. Wilkinson Director-Investor Relations CSX Corporation P.O. Box 85629 Richmond, VA 23285-5629 (804) 782-1553 e-mail: Joseph_Wilkinson@csx.com DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT CSX provides dividend reinvestment and stock purchase plans for employees, shareholders and potential shareholders as a convenient method of acquiring CSX shares through direct purchase, dividend reinvestment and optional cash payments. CSXDirectInvestSM permits the purchase and sale of shares directly though Harris Trust, our transfer agent. Through this plan, no service charges or brokerage commissions apply to share purchases, and sales can be made with minimal charges and commissions. Initial investment for a non-shareholder is $500 plus a $10 one-time enrollment fee. You do not need to own shares of CSX stock to enroll in this plan. Other benefits include the ability to: Reinvest dividends automatically in CSX common stock without payment of any brokerage commissions or service charges, or you may receive dividend payments on some or all of your shares. Make optional cash investments with as little as $50 per month, or up to $10,000 per month, without any charges or commissions. Make gifts of CSX shares to others through the plan, and present them with a gift memento if desired. To obtain a prospectus or other information regarding CSXDirectInvestSM, please call or write the Harris Trust Dividend Reinvestment Department at the phone number or address above. Or, if you prefer, please visit our web site at www.csx.com. STOCK HELD IN BROKERAGE ACCOUNTS When a broker holds your stock, it is usually registered in the broker's name, or "street name." We do not know the identity of shareholders holding stock in this manner. We know only that a broker holds a certain number of shares that may be for any number of customers. If your stock is in a street-name account, you are not eligible to participate in CSXDirectInvestSM (see above). You will receive dividend payments, annual reports and proxy materials through your broker. Please notify your broker, not Harris Trust, if you wish to eliminate unwanted, duplicate mailings. LOST OR STOLEN STOCK CERTIFICATES If your stock certificates are lost, stolen or in some way destroyed, notify Harris Trust in writing immediately. MULTIPLE DIVIDEND CHECKS AND DUPLICATE MAILINGS Some shareholders hold their stock on CSX records in similar but different names (e.g. John A. Smith and J.A. Smith). When this occurs, we are required to create separate accounts for each name. Although the mailing addresses are the same, we are required to mail separate dividend checks to each account. CONSOLIDATING ACCOUNTS If you want to consolidate separate accounts into one account, contact Harris Trust for the necessary forms and instructions. When accounts are consolidated, it may be necessary to reissue the stock certificates. Dividends CSX pays quarterly dividends on its common stock on or about the 15th of March, June, September and December, when declared by the board of directors, to shareholders of record approximately three weeks earlier. CSX offers direct deposit of dividends to shareholders that request it. If you are interested, please contact Harris Trust at the address or phone number shown above. REPLACING DIVIDEND CHECKS If you do not receive your dividend check within 10 business days after the payment date or if your check is lost or destroyed, notify Harris Trust so payment can be stopped and a replacement check issued. 51 CORPORATE INFORMATION HEADQUARTERS One James Center 901 East Cary Street Richmond, VA 23219-4031 (804) 782-1400 (http://www.csx.com) MARKET INFORMATION CSX's common stock is listed on the New York, London and Swiss stock exchanges and trades with unlisted privileges on the Midwest, Boston, Cincinnati, Pacific and Philadelphia stock exchanges. The official trading symbol is "CSX." DESCRIPTION OF COMMON AND PREFERRED STOCKS A total of 300 million shares of common stock are authorized, of which 217,119,265 shares were outstanding as of Dec. 25, 1998. Each share is entitled to one vote in all matters requiring a vote of shareholders. There are no pre-emptive rights. At Dec. 25, 1998, there were 51,949 registered common stock shareholders. A total of 25 million shares of preferred stock are authorized. Series A consists of 250,000 shares of $7 Cumulative Convertible Preferred Stock. All outstanding shares of Series A Preferred Stock were redeemed as of July 31, 1992. Series B consists of 3 million shares of Junior Participating Preferred Stock, none of which has been issued. These shares will become issuable only when the rights distributed to holders of common stock under the Shareholder Rights Plan adopted by CSX on May 29, 1998, become exercisable. ANNUAL SHAREHOLDER MEETING 10 a.m., Tuesday, April 27, 1999 The Greenbrier White Sulphur Springs, W.Va. SHAREHOLDER HOUSE PARTIES AT THE GREENBRIER Throughout the year, The Greenbrier offers Shareholder House Parties featuring discounted rates and special activities. Shareholder House Parties in 1999 are scheduled for: Easter - March 31 - April 4 Annual Meeting - April 25-28 Memorial Day - May 28 - June 1 For information on shareholder parties, contact Maryann Sanford, Reservations Department, The Greenbrier, 300 W. Main Street, White Sulphur Springs, WV 24986, or phone toll-free (800) 624-6070 or e-mail to The_Greenbrier@greenbrier.com. Again in 1999, The Greenbrier is pleased to extend to all shareholders a 10 percent discount on their Modified American Plan rates, applicable to one visit per year. Reservations will be accepted on a space-available basis. This offer does not apply during CSX House Parties, when rates are already discounted, or if a shareholder is attending a conference being held at The Greenbrier. QUARTERLY FINANCIAL DATA (UNAUDITED) Year 1998 - - ------------------------------------------------------- Quarter 1st 2nd 3rd 4th - - ------------------------------------------------------- Operating Revenue(a) $2,463 $2,492 $2,432 $2,511 Operating Income(a) $ 278 $ 336 $ 270 $ 276 Net Earnings $ 91 $ 151 $ 187 $ 108 Earnings Per Share(b) $ 0.43 $ 0.71 $ 0.89 $ 0.52 Earnings Per Share, Assuming Dilution(b) $ 0.42 $ 0.70 $ 0.88 $ 0.51 Dividends Per Share $ 0.30 $ 0.30 $ 0.30 $ 0.30 Market Price High $60.31 $60.75 $46.94 $46.81 Low $49.25 $44.88 $36.50 $37.63 - - ------------------------------------------------------- Year 1997 - - ------------------------------------------------------- Quarter 1st 2nd 3rd 4th - - ------------------------------------------------------- Operating Revenue $2,567 $2,678 $2,649 $2,727 Operating Income $ 324 $ 433 $ 384 $ 442 Net Earnings $ 151 $ 227 $ 206 $ 215 Earnings Per Share $ 0.72 $ 1.08 $ 0.98 $ 1.02 Earnings Per Share, Assuming Dilution $ 0.71 $ 1.06 $ 0.96 $ 0.99 Dividends Per Share $ 0.26 $ 0.26 $ 0.26 $ 0.30 Market Price High $52.00 $56.13 $62.44 $60.75 Low $41.25 $44.13 $53.94 $50.25 - - ------------------------------------------------------- (a)On June 30, 1998, CSX conveyed its wholly owned subsidiary, American Commercial Lines LLC, to a joint venture in which CSX now holds a 32% common interest. Due to the reduction in its ownership interest, CSX has accounted for its investment in the venture under the equity method for the period ended Dec. 25, 1998, retroactive to the beginning of the fiscal year. Operating revenue and operating income for the first and second quarters of 1998 have been restated to reflect this change. (b)Earnings per share for the first and second quarters of 1998 and for each quarter in 1997 have been restated to reflect clarification of the treatment of certain stock-based compensation plan shares under FASB Statement No. 128. SHARES OUTSTANDING AS OF JAN. 22, 1999: 217,040,908 COMMON STOCK SHAREHOLDERS AS OF JAN. 22, 1999: 51,787 FORM 10-K A copy of the company's annual report to the Securities and Exchange Commission (Form 10-K) will be furnished without charge to any shareholder upon written request to Shareholder Relations, CSX Corporation, P.O.Box 85269, Richmond, Va. 23285-5629. The Form 10-K also is available on the company's web site at www.csx.com. 52 EX-21 10 Subsidiaries of the Registrant Exhibit 21 As of December 25, 1998, the Registrant was the beneficial owner of 100% of the common stock of the following significant subsidiaries: CSX Transportation Inc. (a Virginia corporation), Sea-Land Service Inc. (a Delaware corporation), CSX Rail Holding Corporation (a Delaware corporation) and CSX Brown Corporation (a Delaware corporation). As of December 25, 1998, the other subsidiaries included in the Registrant's consolidated financial statements, and all other subsidiaries considered in the aggregate as a single subsidiary, did not constitute a significant subsidiary. EX-23.1 11 Consent of Ernst & Young LLP, Independent Auditors Exhibit 23.1 We consent to the incorporation by reference in this Annual Report (Form 10-K) of CSX Corporation and subsidiaries (CSX) of our report dated February 26, 1999, included in the 1998 Annual Report to Shareholders of CSX. We also consent to the incorporation by reference in each Form S-3 Registration Statement or Post-Effective Amendment (Registration Nos. 33-2083, 33-2084, 33-35920, 33-41236, 33-48841, 333-53191, and 333-68885), in each Form S-8 Registration Statement (Registration Nos. 33-16230, 33-25537, 33-29136, 33-37449, 33-41498, 33-41499, 33-41735, 33-41736, 33-49767, 33-57029, and 333-09213), and in each Form S-4 Registration Statement (Registration Nos. 333-19523 and 333-28523) of our report dated February 26, 1999, with respect to the consolidated financial statements of CSX incorporated by reference in this Annual Report (Form 10-K) for the fiscal year ended December 25, 1998. /s/ ERNST & YOUNG LLP Richmond, Virginia February 26, 1999 EX-23.2 12 Exhibit 23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-2083, 33-2084, 33-41236, 33-48841, 33-35920, 333-53191, and 333-68885), in the Prospectuses constituting part of the Registration Statements on Form S-4 (Nos. 333-19523 and 333-28523), and in the Registration Statements on Form S-8 (Nos. 33-16230, 33-25537, 33-29136, 33-37449, 33-41498, 33-41499, 33-41735, 33-41736, 33-49767, 33-57029, and 333-09213) of CSX Corporation of our report dated January 19, 1999 on the consolidated financial statements of Conrail Inc. and subsidiaries for the year ended December 31, 1998, which appears in the Annual Report on Form 10-K of CSX Corporation for the fiscal year ended December 25, 1998. PRICEWATERHOUSECOOPERS LLP Philadelphia, PA March 3, 1999 EX-24 13 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and directors of CSX CORPORATION, a Virginia Corporation, which is to file with the Securities and Exchange Commission, Washington, D. C., a Form 10-K (Annual Report), hereby constitutes and appoints Paul R. Goodwin and Peter J. Shudtz his true and lawful attorneys-in-fact and agents, for him and in his name, place and stead to sign said Form 10-K, and any and all amendments thereto, with power where appropriate to affix the corporate seal of CSX Corporation thereto and to attest said seal, and to file said Form 10-K, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 10th day of February, 1999. /s/ ELIZABETH E. BAILEY /s/ JAMES W. MCGLOTHLIN - - ----------------------- ----------------------- Elizabeth E. Bailey James W. McGlothlin /s/ H. FURLONG BALDWIN /s/ SOUTHWOOD J. MORCOTT - - ---------------------- ------------------------ H. Furlong Baldwin Southwood J. Morcott /s/ CLAUDE S. BRINEGAR /s/ CHARLES E. RICE - - ---------------------- ------------------- Claude S. Brinegar Charles E. Rice /s/ ROBERT L. BURRUS, JR. /s/ WILLIAM C. RICHARDSON - - ------------------------- ------------------------- Robert L. Burrus, Jr. William C. Richardson /s/ BRUCE C. GOTTWALD /s/ FRANK S. ROYAL - - --------------------- ------------------ Bruce C. Gottwald Frank S. Royal /s/ JOHN R. HALL /s/ JOHN W. SNOW - - ---------------- ---------------- John R. Hall John W. Snow /s/ E. BRADLEY JONES /s/ PAUL R. GOODWIN - - -------------------- ------------------- E. Bradley Jones Paul R. Goodwin /s/ ROBERT D. KUNISCH /s/ JAMES L. ROSS - - --------------------- ----------------- Robert D. Kunisch James L. Ross EX-27 14
5 1,000,000 YEAR DEC-25-1998 DEC-25-1998 533 0 898 92 225 1,984 18,678 6,033 20,427 2,600 6,432 0 0 217 5,663 20,427 0 9,898 0 8,738 0 0 506 773 236 537 0 0 0 537 2.55 2.51
EX-99.1 15 Exhibit 99.1 REPORT OF INDEPENDENT ACCOUNTANTS The Stockholders and Board of Directors Conrail Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Conrail Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audits of the consolidated financial statements of Conrail Inc. and subsidiaries also included an audit of the Financial Statement Schedule, Schedule II - Valuation and Qualifying Accounts. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 19, 1999 - 1 - CONRAIL INC. CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, ------------------------- ($ In Millions Except Per Share Data) 1998 1997 1996 ------ ------ ------ Revenues $3,863 $3,765 $3,714 ------ ------ ------ Operating expenses Way and structures 467 458 462 Equipment 776 776 803 Transportation 1,342 1,388 1,385 General and administrative (Note 3) 444 313 312 Transition and acquisition-related compensation costs (Note 3) 251 222 Transition and merger costs (Note 3) 68 65 16 ESOP termination charge (Note 3) 221 Voluntary separation programs (Note 10) 135 ------ ------ ------ Total operating expenses 3,348 3,443 3,113 ------ ------ ------ Income from operations 515 322 601 Interest expense (153) (170) (182) Other income, net (Note 11) 72 83 112 ------ ------ ------ Income before income taxes 434 235 531 Income taxes (Note 7) 167 228 189 ------ ------ ------ Net income $ 267 $ 7 $ 342 ====== ====== ====== Net income per common share (Note 1) Basic $ - $ - $4.29 Diluted - - 3.91 Ratio of earnings to fixed charges (Note 1) 3.11x 1.98x 3.19x
See accompanying notes. - 2 - CONRAIL INC. CONSOLIDATED BALANCE SHEETS
December 31, ------------ ($ In Millions) 1998 1997 ------ ------ ASSETS Current assets Cash and cash equivalents $ 138 $ 97 Accounts receivable 580 623 Deferred tax assets (Note 7) 182 115 Material and supplies 92 104 Other current assets 13 15 ------ ------ Total current assets 1,005 954 Property and equipment, net (Note 4) 7,151 6,830 Other assets 744 700 ------ ------ Total assets $8,900 $8,484 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt (Note 6) 113 112 Accounts payable 130 113 Wages and employee benefits 403 366 Casualty reserves 139 141 Accrued and other current liabilities (Note 5) 422 476 ------ ------ Total current liabilities 1,207 1,208 Long-term debt (Note 6) 1,609 1,732 Casualty reserves 215 198 Deferred income taxes (Note 7) 1,564 1,453 Special income tax obligation (Note 7) 223 283 Other liabilities 426 445 ------ ------ Total liabilities 5,244 5,319 ------ ------ Commitments and contingencies (Note 12) Stockholders' equity (Notes 2, 3 and 9) Common stock ($1 par value; 100 and 250,000,000 shares authorized, respectively; 100 and 6,320,349 shares issued, respectively; 100 shares outstanding) - 6 Additional paid-in capital 2,291 3,006 Unearned ESOP compensation (75) (155) Employee benefits trust (144) (274) Retained earnings 1,584 1,324 ------ ------ 3,656 3,907 Treasury stock, at cost - (742) ------ ------ Total stockholders' equity 3,656 3,165 ------ ------ Total liabilities and stockholders' equity $8,900 $8,484 ====== ======
See accompanying notes. - 3 - CONRAIL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Unearned Additional Employee Preferred ESOP Common Paid-in Benefits Retained Treasury ($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock --------- ------------ ------- ---------- -------- --------- -------- Balance, January 1, 1996 $ 282 $(233) $ 85 $2,187 $ (329) $1,176 $(191) Amortization 11 Net income 342 Common dividends, $1.80 per share (146) Preferred dividends, $2.165 per share (20) Common shares acquired (156) Exercise of stock options 29 53 Employee benefits trust transactions, net 128 (116) Effects of voluntary separation programs (8) 8 Effects of CSX tender offer (63) 3 60 Other 5 ----- ----- ---- ------ ------ ------ ---- Balance, December 31, 1996 211 (222) 88 2,404 (384) 1,357 (347) Amortization 2 Net income 7 Common dividends, $.475 per share (40) Preferred dividends, $.541 per share (3) Exercise of stock options 2 11 Employee benefits trust transactions, net (5) 9 Effects of Conrail acquisition, net (Notes 2 and 3) (209) (82) 594 90 (393) Allocation of unearned ESOP compensation 65 Other (2) 11 3 (2) ----- ----- ---- ------ ----- ------ ---- Balance, December 31, 1997 - (155) 6 3,006 (274) 1,324 (742) Net income 267 Common dividends (7) Employee benefits trust transactions, net 21 (21) Payments as a result of Conrail acquisition (Notes 3 and 9) 151 Allocation of unearned ESOP compensation 80 Common shares reclassified as unissued (Note 9) (6) (736) 742 ----- ----- ---- ------ ------ ------ ---- Balance, December 31, 1998 $ - $ (75) $ - $2,291 $ (144) $1,584 $ - ===== ===== ==== ====== ====== ====== ====
See accompanying notes. - 4 - CONRAIL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------ ($ In Millions) 1998 1997 1996 ----- ----- ----- Cash flows from operating activities Net income $ 267 $ 7 $ 342 Adjustments to reconcile net income to net cash provided by operating activities: Transition and acquisition-related charges (Note 3) 302 Transition and acquisition-related compensation costs 66 159 ESOP termination charge 221 Voluntary separation programs 135 Depreciation and amortization 310 293 283 Deferred income taxes 30 152 183 Special income tax obligation (60) (63) (94) Gains from sales of property (21) (23) (24) Pension credit (63) (61) (46) Changes in (net of effect of transition, acquisition and merger-related items): Accounts receivable 33 7 (16) Accounts and wages payable (33) 42 (18) Deferred tax assets (67) 178 40 Settlement of tax audit - 6 (39) Other (37) (34) (77) ----- ----- ----- Net cash provided by operating activities 727 884 669 ----- ----- ----- Cash flows from investing activities Property and equipment acquisitions (537) (439) (387) Proceeds from disposals of properties 19 25 34 Other (32) (31) (46) ----- ----- ----- Net cash used in investing activities (550) (445) (399) ----- ----- ----- Cash flows from financing activities Payment of long-term debt (119) (238) (184) Payment of debt consent fees (10) Repurchase of common stock (156) Net proceeds from (repayments of) short-term borrowings (99) 10 Proceeds from long-term debt 26 Loans from and redemptions of insurance policies 95 Dividends on common stock (7) (40) (146) Dividends on Series A preferred stock (3) (25) Proceeds from stock options and other 8 67 ----- ----- ----- Net cash used in financing activities (136) (372) (313) ----- ----- ----- Increase(decrease) in cash and cash equivalents 41 67 (43) Cash and cash equivalents Beginning of year 97 30 73 ----- ----- ----- End of year $ 138 $ 97 $ 30 ===== ===== =====
See accompanying notes. - 5 - CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ Industry -------- Conrail Inc. ("Conrail") is a holding company of which the principal subsidiary is Consolidated Rail Corporation ("CRC"), a freight railroad which operates within the northeast and midwest United States and the Province of Quebec. Conrail has been acquired by CSX Corporation ("CSX") and Norfolk Southern Corporation ("NSC"). The operations of CRC will substantially change after NSC and CSX begin operating the Conrail properties under operating agreements (the "Closing Date") (Notes 2 and 3). Principles of Consolidation --------------------------- The consolidated financial statements include Conrail and majority- owned subsidiaries. Investments in 20% to 50% owned companies are accounted for by the equity method. Cash Equivalents ---------------- Cash equivalents consist of commercial paper, certificates of deposit and other liquid securities purchased with a maturity of three months or less, and are stated at cost which approximates market value. Material and Supplies --------------------- Material and supplies consist mainly of fuel oil and items for maintenance of property and equipment, and are valued at the lower of cost, principally weighted average, or market. Property and Equipment ---------------------- Property and equipment are recorded at cost. Depreciation is provided using the composite straight-line method. The cost (net of salvage) of depreciable property retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. Asset Impairment ---------------- Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Expected future cash flows from the use and disposition of long-lived assets are compared to the current carrying amounts to determine the potential impairment loss. Revenue Recognition ------------------- Revenue is recognized proportionally as a shipment moves on the Conrail system from origin to destination. Earnings Per Share ------------------ Earnings per share are not presented for 1998 and 1997 as a result of the joint acquisition of the Company's common stock by NSC and CSX - 6 - which was completed on May 23, 1997 (Notes 2 and 3). Following that acquisition, the Company's common stock was delisted from the New York Stock Exchange ("NYSE") and deregistered with the Securities and Exchange Commission ("SEC"). The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" (SFAS 128) to be effective for periods ending after December 15, 1997. SFAS 128 requires all prior-period earnings per share data presented to be restated to conform with the provisions of this pronouncement. SFAS 128 replaces primary earnings per share with the presentation of basic earnings per share and fully diluted earnings per share with diluted earnings per share. The earnings per share amounts resulting from the application of SFAS 128 were not materially different than those previously presented by the Company for 1996. For 1996, basic earnings per share were based on net income adjusted for the effects of preferred dividends net of income tax benefits, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assumed conversion of the previously outstanding Series A ESOP Convertible Junior Preferred Stock ("ESOP Stock") to Conrail common stock and the dilutive effects of stock options. Net income amounts applicable to diluted earnings per share were adjusted by the increase, net of income tax benefits, in ESOP-related expenses assuming conversion of all ESOP Stock to common stock. Shares in the Conrail Employee Benefits Trust were not considered outstanding for computing earnings per share. The weighted average number of shares of common stock outstanding during the year ended December 31, 1996 were as follows: 1996 ---------- Basic weighted average shares 76,903,665 Diluted weighted average shares 87,022,413 Ratio of Earnings to Fixed Charges ---------------------------------- Earnings used in computing the ratio of earnings to fixed charges represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. New Accounting Standards ------------------------ During 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits" ("SFAS 132") which revises and standardizes disclosures previously required by other - 7 - pronouncements related to these two types of employee benefit programs. SFAS 132 is effective during 1998 and therefore the Company has incorporated the disclosure requirements of this pronouncement into its employee benefits disclosures (Note 8). The Company had no material items required to be disclosed by SFAS 130, "Reporting Comprehensive Income", which also became effective during 1998. Also, in 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for all fiscal quarters for all fiscal years beginning after June 15, 1999. The Company has determined that adoption of SFAS 133 will not have a material impact on its consolidated financial position, results of operations or cash flows. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Acquisition of Conrail Inc. -------------------------- On May 23, 1997, the CSX-NSC joint tender offer for the remaining outstanding shares of Conrail's common and ESOP Stock was concluded, and on June 2, 1997, Conrail became the surviving corporation in a merger with Green Merger Corp. and remained the only subsidiary of Green Acquisition Corp., an entity jointly-owned by CSX and NSC. As a result, the remaining outstanding capital stock of Conrail was acquired by NSC and CSX. Simultaneous with the merger, Conrail's common stock was delisted from the NYSE and, through the filing of a Form 15, deregistered with the SEC. The Conrail stock acquired by NSC and CSX was held in a voting trust pending approval of the joint acquisition by the Surface Transportation Board ("STB"). On June 8, 1998, the STB approved the application of CSX and NSC to control Conrail. On July 23, 1998, the STB issued a written opinion that permitted those companies to exercise operating control of Conrail beginning August 22, 1998. NSC and CSX will not formally begin to exercise operating control until Closing Date, which is expected to occur on June 1, 1999. Subsequent to the Closing Date, the majority of CRC's routes and assets will be segregated into separate subsidiaries of CRC, and NSC and CSX will operate their respective portions under operating arrangements requiring payments which represent the fair market rental values of the assets being operated. Other CRC routes and assets will be operated by CRC for the benefit of NSC and CSX. After the Closing Date, the Company's major sources of revenue will be operating income and lease rentals from NSC and CSX instead of - 8 - freight line haul revenues. The nature of the Company's operating expenses will also reflect this change in operations. Therefore, the Company's future operating results will be significantly different than those currently reported. In the course of normal business, the Company currently interchanges freight with both NSC and CSX for transport to destinations both within and outside of Conrail's service region. The Company shares ownership interests with either one or both railroads in various transportation- related entities, all of which are immaterial to the Company's operating results and financial position. 3. Transition, Acquisition and Merger-Related Costs ------------------------------------------------ In connection with its joint acquisition by NSC and CSX, the Company has incurred pre-tax transition, acquisition and merger-related costs totaling $68 million ($42 million after income taxes) and $65 million ($41 million after income taxes) during 1998 and 1997, respectively. Merger costs of $16 million ($10 million after income taxes) were incurred during 1996 related to the previously proposed merger of Conrail with CSX. In 1997 and 1996, these amounts primarily included costs for investment banking, legal and consulting services related to the acquisition of Conrail, and in 1998, included costs to facilitate the integration of the Company's activities into those of CSX and NSC. During the third quarter of 1998, the Company recorded charges totaling $302 million ($187 million after income taxes), primarily for separation benefits of $170 million covering certain non-union employees, included in "transition and acquisition-related compensation costs", and $132 million of other costs, such as the effects of changing to an actuarial method of valuing certain components of the Company's casualty reserves, included in "general and administrative" expenses. The charge for non-union separation benefits represents termination payments to be made to approximately 1,300 non-union employees whose non-executive positions will be eliminated as a result of the joint acquisition of Conrail. It is anticipated that most of these termination payments will be made in the form of supplemental retirement benefits from the Company's overfunded pension plan. During 1998 and 1997, the Company recorded charges totaling $66 million ($41 million after income taxes) and $49 million ($31 million after income taxes), respectively, representing amounts to be paid to certain non-union employees as incentive to continue their employment with the Company through August 22, 1998, the effective date of the - 9 - STB approval of the joint acquisition of Conrail ("Control Date"), and the subsequent transition period. At December 31, 1998, the remaining liability for these incentive payments, included in "wages and employee benefits" in the balance sheet, is $31 million, however, such liability is being funded from the Conrail employee benefits trust ("EBT") and therefore does not require use of the Company's cash. The Company has also recorded $15 million ($9 million after income taxes) for payments made to certain middle management employees as provided in the amended merger agreement. During 1997, the Company recorded a charge of $221 million (no related income tax effect) for the termination of its Non-union Employee Stock Ownership Plan ("ESOP") as a result of the repayment of the ESOP note payable of $291 million and related accrued interest to the Company. The Company recorded a long-term liability of $221 million related to the ESOP termination charge, which is not expected to require future use of the Company's cash for settlement. Such liability, the balance of which is $75 million at December 31, 1998, is being reduced as the cash proceeds, held by the ESOP as a result of selling its ESOP Stock in the joint tender offer, are allocated to eligible ESOP participants. During 1997, the Company recorded a charge of $110 million ($103 million after income taxes) in connection with employment "change in control" agreements with certain executives, which became operative as a result of the joint acquisition of Conrail. A portion of the benefits under these agreements, $68 million, has been paid in 1998 from the EBT. Also, as a result of the joint acquisition of Conrail, all outstanding performance shares and all outstanding unvested stock options, restricted shares and phantom shares vested during 1997. The Company paid all of the amounts due employees under these arrangements and recorded a $63 million charge ($39 million after income taxes). 4. Property and Equipment ---------------------- December 31, ------------------ 1998 1997 ------- ------- (In Millions) Roadway $ 7,255 $ 7,167 Equipment 1,593 1,398 Less: Accumulated depreciation (2,029) (2,128) ------- ------- 6,819 6,437 ------- ------- Capital leases (primarily equipment) 793 869 Accumulated amortization (461) (476) ------- ------- 332 393 ------- ------- $ 7,151 $ 6,830 ======= ======= - 10 - Conrail acquired equipment and incurred related long-term debt under various capital leases of $79 million in 1997 and $82 million in 1996. In 1995 and 1991, the Company recorded allowances for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities. However, subsequent to Control Date, NSC and CSX determined that all such assets will initially continue to be used in operations. Therefore, amounts related to these allowances have been reclassified to accumulated depreciation. 5. Accrued and Other Current Liabilities ------------------------------------- December 31, ---------------- 1998 1997 ---- ---- (In Millions) Freight settlements due others $ 42 $ 43 Equipment rents (primarily car hire) 78 74 Unearned freight revenue 59 77 Property and corporate taxes 33 55 Other 210 227 ---- ---- $422 $476 ==== ==== 6. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1998, is composed of the following: December 31, ------------ 1998 1997 ------ ------ (In Millions) Capital leases $ 391 $ 465 Medium-term notes payable, 6.27%, due 1999 30 60 Notes payable, 9.75%, due 2000 250 250 Debentures payable, 7.88%, due 2043 250 250 Debentures payable, 9.75%, due 2020 544 544 Equipment and other obligations, 6.79% 257 275 ------ ------ 1,722 1,844 Less current portion (113) (112) ------ ------ $1,609 $1,732 ====== ====== Using current market prices when available, or a valuation based on the yield to maturity of comparable debt instruments having similar characteristics, credit rating and maturity, the total fair value of the Company's long-term debt, including the current portion, but excluding capital leases, is $1,637 million and $1,607 million at December 31, 1998 and 1997, respectively, compared with carrying values of $1,331 million and $1,379 million at December 31, 1998 and 1997, respectively. The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Capital leases - 11 - have been discounted at rates ranging from 3.09% to 14.26% and are collateralized by assets with a net book value of $332 million at December 31, 1998. Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 1999 $ 92 $111 2000 76 85 2001 60 76 2002 57 72 2003 52 70 2004 - 2018 194 417 ----- ---- Total 531 $831 ==== Less interest portion (140) ----- Present value $ 391 ===== Operating lease rent expense was $121 million in 1998, $122 million in 1997 and $127 million in 1996. Equipment and other obligations mature in 1999 through 2043 and are collateralized by assets with a net book value of $249 million at December 31, 1998. Maturities of long-term debt other than capital leases are $48 million in 1999, $268 million in 2000, $19 million in 2001, $18 million in 2002, $18 million in 2003 and $960 million in total from 2004 through 2043. The shelf registration established in 1993, which enabled CRC to issue up to $500 million in debt securities or the Company to issue up to $500 million in convertible debt and equity securities, is no longer available as a financing source at December 31, 1998. CRC and the Company have each filed a Form 15 with the SEC, terminating their status as SEC registrants and their ability to issue any securities under a shelf registration. Effective December 31, 1998, at the request of NSC and CSX, CRC terminated its $440 million uncollateralized bank credit agreement with a group of banks which was used for general corporate purposes and to support CRC's commercial paper program, which is no longer in effect. Interest payments were $153 million in 1998, $163 million in 1997 and $170 million in 1996. - 12 - 7. Income Taxes ------------ The provisions for income taxes are composed of the following: 1998 1997 1996 ---- ---- ---- (In Millions) Current Federal $173 $122 $ 90 State 24 17 10 ---- ---- ---- 197 139 100 ---- ---- ---- Deferred Federal 24 115 151 State 6 37 32 ---- ---- ---- 30 152 183 ---- ---- ---- Special income tax obligation Federal (51) (54) (80) State (9) (9) (14) ---- ---- ---- (60) (63) (94) ---- ---- ---- $167 $228 $189 ==== ==== ==== In conjunction with the public sale in 1987 of the 85% of the Company's common stock then owned by the U.S. Government, federal legislation was enacted which resulted in a reduction of the tax basis of certain of the Company's assets, particularly property and equipment, thereby substantially decreasing tax depreciation deductions and increasing future federal income tax payments. Also, net operating loss and investment tax credit carryforwards were canceled. As a result of the sale-related transactions, a special income tax obligation was recorded in 1987 based on the estimated effective federal and state income tax rates at that time. The nondeductibility of the ESOP termination charge and certain transition and acquisition-related compensation costs for federal and state income tax purposes, has resulted in a significant difference between the Company's statutory and effective tax rates for 1997 (Note 3). A tax law was enacted during the third quarter of 1997 by a state in which CRC operates which changed the Company's method of computing taxes and resulted in a tax rate increase. Income tax expense for 1997 was increased by $22 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required by SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). - 13 - Reconciliations of the U.S. statutory tax rates with the effective tax rates are as follows: 1998 1997 1996 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.2 3.2 3.4 ESOP termination charge 36.3 Nondeductible transition and acquisition-related compensation costs 14.9 Effect of state tax increase on deferred taxes 9.3 Other .3 (1.7) (2.8) ---- ---- ---- Effective tax rate 38.5% 97.0% 35.6% ==== ==== ==== In 1996, the Company reached a settlement with the Internal Revenue Service ("IRS") related to the audit of the Company's consolidated federal income tax returns for the fiscal years 1990 through 1992. The Company made a payment of $39 million pending resolution of the final interest determination related to the settlement, of which $6 million was refunded to the Company in 1997. The Company's consolidated federal income tax returns for fiscal years 1993 through 1995 are currently being examined by the IRS. Federal and state income tax payments were $196 million in 1998, $120 million in 1997 and $145 million in 1996 (excluding tax settlement). Significant components of the Company's special income tax obligation and deferred income tax liabilities (assets) are as follows: December 31, ----------------- 1998 1997 ------ ------ (In Millions) Current assets $ (22) $ (10) Current liabilities (152) (97) Miscellaneous (8) (8) ------ ------ Current deferred tax asset, net $ (182) $ (115) ====== ====== Noncurrent liabilities: Property and equipment 1,839 1,877 Other long-term assets (primarily prepaid pension asset) 106 90 Miscellaneous 117 130 ------ ------ 2,062 2,097 ------ ------ Noncurrent assets: Nondeductible reserves and other liabilities (239) (200) Tax benefit transfer receivable (36) (36) Miscellaneous - (125) ------ ------ (275) (361) ------ ------ Special income tax obligation and deferred income tax liabilities, net $1,787 $1,736 ====== ====== - 14 - 8. Employee and Postretirement Benefits ------------------------------------ Postretirement Benefits ----------------------- The Company and its subsidiaries sponsor several qualified and nonqualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 1998, and a statement of the funded status as of December 31 of both years: Other Postretirement Pension Benefits Benefits ----------------- -------------------- (In Millions) 1998 1997 1998 1997 ------ ------ ---- ---- Change in benefit obligation Net benefit obligation at beginning of year $699 $734 $ 57 $ 64 Service cost 13 8 - - Interest cost 52 50 4 4 Plan amendments 59 - - - Actuarial (gains)losses 65 (11) 1 (6) Gross benefits paid (64) (82) (6) (5) ---- ---- ---- ---- Net benefit obligation at end of year $824 $699 $ 56 $ 57 Change in plan assets Fair value of plan assets at beginning of year $1,308 $1,187 $10 $10 Actual return on plan assets 211 205 - 1 Gross benefit payments (78) (84) (1) (1) ------ ------ --- --- Fair value of plan assets at end of year $1,441 $1,308 $ 9 $10 Funded status at end of year $ 617 $ 609 $(47) $(47) Unrecognized transition asset (54) (72) - - Unrecognized prior service cost 88 33 - - Unrecognized actuarial (gains)losses (373) (343) - (7) ----- ----- ---- ---- Net amount recognized at year end $ 278 $ 227 $(47) $(54) ===== ===== ==== ==== - 15 - The following amounts have been recognized in the balance sheets as of December 31: Other Postretirement Pension Benefits Benefits ---------------- -------------------- (In Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Prepaid pension cost $278 $227 - - Accrued benefit cost - - $(47) $(54) All of the Company's plans for postretirement benefits other than pensions have no plan assets except for the retiree life insurance plan which has $9 million of assets. The aggregate benefit obligation for the postretirement plans other than pensions is $56 million and $57 million at December 31 1998 and 1997, respectively. The assumptions used in the measurement of the Company's benefit obligation are as follows: Other Postretirement Pension Benefits Benefits ---------------- -------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Discount rate 6.50% 7.00% 6.50% 7.00% Expected return on plan assets 9.00% 9.00% 8.00% 8.00% Rate of compensation increase 5.00% 6.00% 5.00% 6.00% The Company's pension plan was amended during 1998 to include certain enhanced benefits for qualifying Conrail employees. The effect of the amendment was to increase the Conrail plan's projected benefit obligation by $59 million. The Company's pension plan was also amended during 1998 to allow for payment of non-union supplemental retirement benefits to the extent consistent with applicable Internal Revenue Service Tax Code provisions. Both of these liabilities are accrued in "wages and employee benefits" in the balance sheet (Note 3). A 7% annual rate of increase in the per capital cost of covered health care benefits was assumed for 1999, gradually decreasing to 6% by the year 2007. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect of a one percentage point increase and (decrease) in the assumed health care cost trend rate on accumulated postretirement benefit obligation is $2 million and $(2) million, respectively, and would have an immaterial effect on the net periodic postretirement benefit cost for 1998. - 16 - The components of the Company's net periodic benefit cost for the plans are as follows: Other Postretirement Pension Benefits Benefits ---------------- -------------------- (In Millions) 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Service cost $ 13 $ 8 $ 9 $- $- $- Interest cost 52 50 51 4 4 5 Expected return on assets (109) (98) (91) (1) (1) (1) Amortization of: Transition asset (18) (18) (18) - - - Prior service cost 4 3 4 - - - Actuarial gain (5) (6) (1) (1) (1) - ---- ---- ---- -- -- -- $(63) $(61) $(46) $2 $2 $4 ==== ==== ==== == == == Savings Plans ------------- The Company and certain subsidiaries provide 401(k) savings plans for union and non-union employees. However, in connection with the close of the CSX-NSC joint tender offer for Conrail, the Company's Non-union ESOP was terminated with the repayment of the ESOP note payable of $291 million and related accrued interest in the second quarter of 1997, resulting in a charge of $221 million (no related income tax effect) (Notes 2 and 3). Under the Non-union ESOP, 100% of employee contributions were matched in the form of ESOP Stock for the first 6% of a participating employee's base pay. There is no Company match provision under the union employee plan except for three unions which negotiated a Company match as part of their contract provisions. Savings plan expense was $1 million in 1997 and $4 million in 1996. In connection with the formation of the Non-union ESOP in 1990, the Company issued 9,979,562 of the authorized 10 million shares of its ESOP Stock to the Non-union ESOP in exchange for a 20 year promissory note from the Non-union ESOP in the principal amount of approximately $290 million. In addition, unearned ESOP compensation in the same amount was recognized as a charge to stockholders' equity coincident with the Non-union ESOP's issuance of its promissory note to the Company. The debt of the Non-union ESOP was recorded by the Company and offset against the promissory note from the Non-union ESOP. The Company received debt service payments from the Non-union ESOP of $11 million in 1997 and $40 million in 1996. Prior to the close of the joint tender offer (Notes 2 and 3), unearned ESOP compensation was charged to expense as shares of ESOP Stock were allocated to participants. An amount equivalent to the preferred dividends declared on the ESOP Stock had partially offset compensation and interest expense related to the Non-union ESOP through the close of the joint tender offer. Interest expense incurred by the Non-union ESOP on its debt to the Company was $9 million in 1997 and $24 million in 1996. Compensation - 17 - expense related to the Non-union ESOP was $2 million in 1997 and $11 million in 1996. Prior to its acquisition, the Company made dividend payments at a rate of 7.51% on the ESOP Stock and additional contributions in an aggregate amount sufficient to enable the Non-union ESOP to make the required interest and principal payments on its note to the Company. Preferred dividends declared were $3 million in 1997 and $20 million in 1996. Preferred dividend payments of $3 million and $25 million were made in 1997 and 1996, respectively. 9. Capital Stock ------------- Employee Benefits Trust ----------------------- In 1995, the Company issued approximately 4.7 million shares of its common stock to the Conrail Employee Benefits Trust (the "Trust") in exchange for a promissory note of $250 million at an interest rate of 6.9%. As a result of the joint tender offer (Notes 2 and 3) for the Company's common stock, the Trust repaid $90 million of the promissory loan with a portion of the proceeds it received from the sale of the common stock it held. The Trust currently funds, and is expected to continue to fund, the payment of employee benefits with the remaining proceeds it currently holds. The Trust was intended to fund certain employee benefits and other forms of compensation over its fifteen-year term. The amount representing unearned employee benefits is recorded as a deduction from stockholders' equity and is reduced as benefits and compensation, including future transition and acquisition-related compensation, are paid from the Trust. Before the close of the joint tender offer for the Company's common stock, the shares owned by the Trust were valued at the closing market price as of the end of each reporting period, with corresponding changes in the balance of the Trust reflected in additional paid-in capital. Currently, interest earned on the proceeds received from the joint tender offer increases both the Trust balance and additional paid-in capital. Shares held by the Trust were not considered outstanding for earnings per share computations until released by the Trust, but did have voting and dividend rights. Treasury Stock -------------- As a result of the acquisition of Conrail, the Company's common stock repurchase program was terminated in the fourth quarter of 1996. The activity for 1997 is related to the repurchase of common stock in connection with the repayment of $90 million of the Trust promissory loan described above. The remaining shares of treasury stock at December 31, 1997, were recorded as canceled and retired during 1998. - 18 - The activity and status of treasury stock follow: 1998 1997 1996 ---------- --------- --------- Shares, beginning of year 6,320,249 5,523,455 3,297,717 Acquired 2,225,738 Effects of Conrail acquisition (6,320,249) 796,794 ---------- --------- --------- Shares, end of year - 6,320,249 5,523,455 ========== ========= ========= Stock Plans ----------- The Company has applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for the Conrail plans. Accordingly, no compensation cost was recognized for the Conrail fixed stock option plans prior to Conrail's acquisition. However, in connection with the acquisition of Conrail, all outstanding performance shares and all outstanding unvested stock options, restricted shares and phantom shares vested during 1997. The Company paid all of the amounts due under these arrangements and recorded a $63 million charge ($39 million after income taxes) for the related compensation expense (Notes 2 and 3). The Company's 1987 and 1991 Long-Term Incentive Plans authorized the granting to officers and other key employees of up to 4 million and 6.6 million shares of common stock, respectively, through stock options, stock appreciation rights, phantom stock and awards of restricted or performance shares. A stock option was exercisable for a specified term commencing after grant at a price not less than the fair market value of the stock on the date of grant. The vesting of awards made pursuant to these plans was contingent upon one or more of the following: continued employment, passage of time or financial and other performance goals. The activity and status of stock options under the incentive plans follow: Non-qualified Stock Options ----------------------------------- Option Price Shares Per Share Under Option ------------------ ------------ Balance, January 1, 1996 $14.000 - $ 68.563 1,556,212 Granted $68.563 - $ 96.063 551,038 Exercised $14.000 - $ 73.250 (1,268,085) Canceled $42.625 - $ 70.031 (3,984) ------------ Balance, December 31, 1996 $14.000 - $ 96.063 835,181 Granted $42.625 - $104.438 416,190 Exercised $14.000 - $104.438 (267,294) Canceled $42.625 - $ 50.688 (6,625) Purchased due to Conrail acquisition $14.000 - $104.438 (977,452) ------------ Balance, December 31, 1997 - ============ Available for future grants December 31, 1998 and 1997 - ============ - 19 - The weighted average exercise prices of options granted during 1996 was $70.130 per share. The weighted average exercise price of options exercised during 1996 was $48.32 per share. Pro forma disclosures of net income and earnings per share as if the Company had adopted the cost recognition requirements under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) in 1996 are presented below ($ in millions except per share data): 1996 ----- Net income as reported $ 342 Net income pro forma 335 Basic earnings per share $4.29 Basic earnings per share pro forma 4.20 Diluted earnings per share $3.91 Diluted earnings per share pro forma 3.82 The fair value of each option granted during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (1) dividend yield of 2.43%, (2) expected volatility of 25.25%, (3) risk-free interest rate of 5.51%, and (4) expected life of 4 years. The weighted average fair value of options granted during 1996 was $16.00 per share. Prior to its acquisition, the Company had granted phantom shares and restricted stock under its non-union employee bonus plans to eligible employees who elected to defer all or a portion of their annual bonus in a given year. The number of shares granted depended on the length of the deferral period. Grants were made at the market price of the Company's common stock at the date of grant. The Company had granted 148,749 shares and 337,329 shares of phantom and restricted stock, respectively, under its non-union employee bonus plans through its acquisition date of May 23, 1997. The Company had also granted 201,945 performance shares under its 1991 Long-Term Incentive Plan through its acquisition date. Compensation expense related to these plans was $2 million in 1996. The weighted-average fair value for the phantom shares and restricted stock granted during 1996 was $68.02 per share. As a result of its acquisition, the Company paid all of the amounts due to employees under stock-related compensation arrangements during 1997 (Note 3). - 20 - 10.Voluntary Separation Programs ----------------------------- During 1996, the Company recorded a charge of $135 million (before tax benefits of $52 million) consisting of $102 million in termination benefits to be paid to non-union employees participating in the voluntary retirement and separation programs ("voluntary separation programs") and losses of $33 million on non-cancelable leases for office space no longer required as a result of the reduction in the Company's workforce. Over 840 applications were accepted from eligible employees under the voluntary separation programs. Approximately $90 million in benefits are being paid from the Company's overfunded pension plan. 11.Other Income, Net ----------------- 1998 1997 1996 ---- ---- ---- (In Millions) Interest income $ 7 $13 $ 29 Rental income 42 41 50 Property sales 21 23 23 Other, net 2 6 10 --- --- ---- $72 $83 $112 === === ==== 12.Commitments and Contingencies ----------------------------- Environmental ------------- The Company is subject to various federal, state and local laws and regulations regarding environmental matters. CRC is a party to various proceedings brought by both regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. At December 31, 1998, CRC has received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 138 locations. However, based on currently available information, the Company believes CRC may have some potential responsibility at only 45 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of possible remediation alternatives, the changing technology and the length of time over which these matters develop, it is often not possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. Although the Company's operating results and liquidity could be significantly affected in any quarterly or annual reporting period if CRC were held principally liable in certain of these actions, at December 31, 1998, the Company had accrued $81 million, an amount it believes is sufficient to cover the probable liability and remediation - 21 - costs that will be incurred at Superfund sites and other sites based on known information and using various estimating techniques. The Company believes the ultimate liability for these matters will not materially affect its consolidated financial condition. The Company spent $10 million in 1998, $9 million in 1997 and $11 million in 1996 for environmental remediation and related costs. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $8 million in 1998, $7 million in 1997 and $6 million in 1996. The Environmental Quality Department is charged with promoting the Company's compliance with laws and regulations affecting the environment and instituting environmentally sound operating practices. The department monitors the status of the sites where the Company is alleged to have liability and continually reviews the information available and assesses the adequacy of the recorded liability. Other ----- The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties, property damage and damage to lading. The Company has recorded liabilities for amounts sufficient to cover the expected payments for such actions. CRC had an average of 19,808 employees in 1998, approximately 88% of whom are represented by 14 different labor organizations and are covered by 21 separate collective bargaining agreements. The Company was not engaged in any collective bargaining at December 31, 1998. CRC currently guarantees the principal and interest payments in the amount of $42 million on Equipment Trust Certificates for Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest. The Company has taken actions to resolve anticipated year 2000 issues related to certain of its computer systems. Conrail believes that all of its year 2000 issues will be resolved either by the certain actions taken by the Company or by the integration of its systems with those of CSX and NSC on or following the Closing Date. The Company believes that failure to integrate its systems with those of CSX and NSC could result in a material financial risk and serious disruption in its operations. The Company has developed contingency plans related to the year 2000 in the event the integration does not occur. While it is not possible, at this time, to quantify the overall cost of implementing such contingency plans, the Company believes that it would be material to its results of operations during the implementation period. - 22 - 13.Condensed Quarterly Data (Unaudited) ----------------------------------- First Second Third Fourth -------------- ------------ ----------- ----------- 1998 1997 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- ---- ---- ($ In Millions Except Per Share) Revenues $927 $906 $ 983 $937 $976 $944 $977 $978 Income (loss) from operations 160 116 206 (231) (82) 218 231 219 Net income (loss) 85 61 115 (273) (65) 101 132 118 Net income (loss) per common share: Basic - .74 - - - - - - Diluted - .70 - - - - - - Ratio of earnings to fixed charges 3.44x 2.52x 4.53x - - 4.82x 6.02x 4.76x Dividends per common share - .475 - - - - - - Market prices per common share (New York Stock Exchange) High - 113 1/4 - - - - - - Low - 98 1/2 - - - - - -
Due to the acquisition of Conrail (Notes 2 and 3), per share data are not presented for periods subsequent to the first quarter of 1997. The Company recorded pre-tax transition and acquisition-related costs of $29 million ($18 million after income taxes), $43 million ($27 million after income taxes), $215 million ($133 million after income taxes) and $32 million ($19 million after income taxes) during the first, second, third and fourth quarters of 1998, respectively. During the third quarter of 1998, the Company recorded charges totaling $302 million ($187 million after income taxes), primarily for separation benefits of $170 million covering certain non-union employees, included in the third quarter of 1998 transition and acquisition-related costs, and $132 million of other costs included in general and administrative expense (Note 3). After the transition and acquisition-related costs were recognized during the third quarter of 1998, earnings available for fixed charges were inadequate by $109 million. The Company recorded pre-tax transition, acquisition and merger- related costs of $22 million ($14 million after income taxes), $440 million ($390 million after income taxes), $23 million ($16 million after income taxes) and $23 million ($15 million after income taxes) during the first, second, third and fourth quarters of 1997, respectively. A $221 million ESOP termination charge (no income tax effect) is included in the second quarter of 1997 transition, acquisition and merger-related costs (Note 3). After the transition, acquisition and merger-related costs were recognized during the second quarter of 1997, earnings available for fixed charges were inadequate by $259 million. - 23 - A tax law was enacted during the third quarter of 1997 by a state in which the Company operates which changed the Company's method of computing taxes and resulted in a tax rate increase. Income tax expense for the third quarter was increased by $22 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required by SFAS 109 (Note 7). - 24 - Schedule II CONRAIL INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, (In Millions)
Additions --------- Balance at Charged to Charged Balance Beginning Costs and to Other At End Description of Period Expenses Accounts Deductions of Period - - ----------- ---------- ---------- -------- ---------- --------- (1) 1996 Casualty reserves Current............... $110 $(31) (2) $141 Noncurrent............ 217 $165 $11 203 (3) 190 Allowance for disposition of property and equipment (4)........... 439 31 408 1997 Casualty reserves Current............... 141 1 1 (2) 141 Noncurrent............ 190 127 14 133 (3) 198 Allowance for disposition of property and equipment (4)........... 408 16 392 1998 Casualty reserves Current............... 141 17 19 (2) 139 Noncurrent............ 198 140 11 134 (3) 215 Allowance for disposition of property and equipment (4)(5).......... 392 392 -
(1) Includes charges to property accounts in connection with construction projects and the recording of receivables from third parties. (2) Includes net transfers from noncurrent. (3) Includes net transfers to current. (4) Deductions of $31 million, $16 million and $25 million in 1996, 1997 and 1998, respectively, represent net losses on asset dispositions. (5) At December 31, 1998, the Company reclassified the remaining balance of $367 million from the allowance for disposition to accumulated depreciation since subsequent to Control Date, Norfolk Southern Corporation and CSX Corporation determined that all assets included in the reserve will initially continue to be used in operations. -----END PRIVACY-ENHANCED MESSAGE-----