-----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, KYdEJhcrMz9y4PFaLydgTQtFKHucht0iujY2vlQZscLbagHUBBuV58ZDilX+fpoS 6f8SB47DJKJxbxj7dKPDXw== 0000810765-98-000002.txt : 19980327 0000810765-98-000002.hdr.sgml : 19980327 ACCESSION NUMBER: 0000810765-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSOLIDATED RAIL CORP /PA/ CENTRAL INDEX KEY: 0000810765 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 231989084 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09064 FILM NUMBER: 98574234 BUSINESS ADDRESS: STREET 1: TWO COMMERCE SQ CITY: PHILADELPHIA STATE: PA ZIP: 19101-1417 BUSINESS PHONE: 2159774000 MAIL ADDRESS: STREET 1: PO BOX 41429, 2001 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19101-1429 10-K 1 CONRAIL INC BODY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ----------------- 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 No. 1-9064 CONSOLIDATED RAIL CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23 1989084 - -------------------------------- --------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 2001 Market Street, Two Commerce Square Philadelphia, Pennsylvania 19101-1417 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 209-4000 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of the Registrant (as of March 3, 1998): $0. Shares of Common Stock Outstanding (as of March 15, 1998): 100 Shares, all of which are held by the parent of the Registrant DOCUMENTS INCORPORATED BY REFERENCE: NONE TABLE OF CONTENTS ----------------- Item Page ---- ---- Part I 1. Business....................................... 1 2. Properties..................................... 1 3. Legal Proceedings.............................. 15 4. Submission of Matters to a Vote of Security Holders..................................... 21 Executive Officers of the Registrant........... 21 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 26 6. Selected Financial Data........................ 26 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 30 8. Financial Statements and Supplementary Data.... 38 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 61 Part III 10. Directors and Executive Officers of the Registrant.................................. 62 11. Executive Compensation......................... 65 12. Security Ownership of Certain Beneficial Owners and Management....................... 73 13. Certain Relationships and Related Transactions. 73 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 74 Power of Attorney............................................. 77 Signatures.................................................... 77 Exhibit Index................................................. 79 i PART I Item 1. Business. - ------ -------- and Item 2. Properties. - ------ ---------- GENERAL. Consolidated Rail Corporation ("Conrail" or "the ------- Company") is a Pennsylvania corporation incorporated on February 10, 1976 to acquire, pursuant to the Regional Rail Reorganization Act of 1973, the rail properties of many of the railroads in the northeast and midwest region of the United States which had gone bankrupt during the early 1970's, the largest of which was the Penn Central Transportation Company ("Penn Central"). On July 1, 1993, Conrail became the wholly-owned subsidiary of Conrail Inc., a holding company. Conrail is Conrail Inc.'s only significant subsidiary and primary asset. Reports on Form 10-K for years prior to 1993 were filed by Consolidated Rail Corporation, and historic data presented therein reflect the results of Consolidated Rail Corporation for those time periods. From 1993 through 1996, Reports on Form 10-K were filed by both Conrail Inc. and Conrail. With the delisting of its publicly- listed equity securities pursuant to a Form 15 filed in June, 1997, Conrail Inc. ceased filing reports under the Securities and Exchange Act of 1934, as amended. MERGER OF CONRAIL INC. On October 14, 1996, Conrail Inc., CSX --------------------- Corporation ("CSX") and a subsidiary of CSX entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement"), pursuant to which Conrail Inc. was to be merged with a subsidiary of CSX in a merger-of-equals transaction. On October 24, 1996, Norfolk Southern Corporation ("NSC") commenced an unsolicited tender offer for all outstanding Conrail Inc. voting stock at $100 per share in cash. NSC subsequently increased its offer to $115 per share in cash. On November 20, 1996, CSX concluded its first tender offer and purchased approximately 19.9% of Conrail Inc.'s outstanding shares for $110 per share. On February 4, 1997, NSC purchased approximately 8.2 million shares pursuant to a tender offer for up to 9.9% of the outstanding shares for $115 per share. On March 7, 1997, Conrail Inc. and CSX entered into a Third Amendment (the "Third Amendment") to the Merger Agreement, pursuant to which the price per share was increased from $110 to $115, and the number of shares to be purchased in the tender offer was increased to all outstanding shares. The Third Amendment also permitted CSX to conduct negotiations with other railroads, including NSC, relating to competitive issues raised by the CSX transactions, and to enter into any resulting agreement. On April 8, 1997, Conrail Inc. and CSX entered into the Fourth Amendment (the "Fourth Amendment"), which facilitated CSX and NSC entering into an agreement with respect to their joint acquisition of Conrail Inc. as contemplated by the Third Amendment to the Merger Agreement. The terms of the CSX-NSC Agreement are embodied in a letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter Agreement") and the Transaction Agreement dated as of June 10, 1997 among Conrail Inc., CSX and NSC. The CSX/NSC Letter Agreement provided, among other things, (i) for the termination of the NSC's outstanding offer to purchase Conrail Inc. shares and the dismissal of litigation between CSX and NSC, (ii) that Conrail Inc. would, after the effective time of its merger into a wholly-owned subsidiary of CSX, become a direct or indirect jointly- owned subsidiary of CSX and NSC, (iii) that CSX and NSC would jointly acquire, for $115 in cash, all Conrail Inc. shares not already owned by CSX and NSC through a tender offer that closed on May 23, 1997 and subsequent merger, and (iv) that Conrail Inc. would continue to be managed by its existing Board of Directors until the requisite approval of the Surface Transportation Board is obtained, at which time CSX and NSC will be separately allocated certain of Conrail Inc.'s railroad assets and will jointly operate certain other railroad activities of Conrail Inc. On May 23, 1997, the CSX-NSC joint tender offer for the remaining outstanding shares of Conrail Inc.'s common and ESOP stock was concluded. On June 2, 1997, Conrail Inc. became the surviving corporation in a merger with Green Acquisition Corp., a jointly-owned, indirect subsidiary of CSX and NSC, as a result of which the remaining outstanding capital stock of Conrail Inc. was acquired by NSC and CSX. Conrail remains a wholly-owned subsidiary of Conrail Inc. Simultaneous with the merger, Conrail Inc.'s common stock was delisted from the New York Stock Exchange and, through the filing of a Form 15, deregistered with the Securities and Exchange Commission. The Conrail Inc. stock acquired by NSC and CSX is being held in a voting trust pending approval of the joint acquisition by the Surface Transportation Board, which is expected to occur in mid-1998. RAIL OPERATIONS. Conrail provides freight transportation --------------- services within the northeast and midwest United States. Conrail interchanges freight with other United States and Canadian railroads for transport to destinations within and outside Conrail's service region. Conrail operates no significant line of business other than the freight railroad business and does not provide common carrier passenger or commuter train service. 2 Conrail serves a heavily industrial region that is marked by dense population centers which constitute a substantial market for consumer durable and non-durable goods, and a market for raw materials used in manufacturing and by electric utilities. Conrail's traffic levels and, as a result, its financial performance are substantially affected by its ability to compete with trucks and other railroads, the economic strength of the industries and metropolitan areas that produce and consume the freight Conrail hauls and the traffic generated by Conrail's connecting railroads. Conrail remains dependent on non-bulk traffic, which tends to generate higher revenues than bulk commodities, but also involves higher costs and is more vulnerable to truck competition. The Service Group System Since 1994, Conrail's marketing, sales and related operations functions have been organized into four service groups: CORE Service, Intermodal Service, Unit Train Service and Automotive Service. Petrochemicals and minerals, food and agriculture products, forest and manufactured products, and metals are handled by the CORE Service Group. The Intermodal Service Group handles intermodal trailers and containers. The Unit Train Service Group handles coal and ore traffic. The Automotive Service Group handles automotive parts and finished vehicles. Each of these groups controls the integrated planning, pricing and operating functions that will enable them to tailor services, develop products and make capital investments directed toward the special requirements of their respective customers. 3 Revenues for the Service Groups for 1993 through 1997, together with total annual traffic volumes, are set forth in the following tables. Service Groups - Revenues ($ in Millions) Years ended December 31, ----------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- CORE Service Group(1) Revenues(2) $1,546 $1,542 $1,557 $1,587 $1,514 Percent of total 43.3% 43.9% 44.5% 44.5% 45.9% Intermodal Service Group Revenues(2) 819 747 701 742 647 Percent of total 23.0% 21.3% 20.0% 20.8% 19.6% Unit Train Service Group Revenues(2) 654 666 659 631 583 Percent of total 18.3% 19.0% 18.8% 17.7% 17.7% Automotive Service Group Revenues(2) 568 543 549 558 505 Percent of total 15.9% 15.5% 15.7% 15.7% 15.3% Total Unassigned Revenue(2) (20) 11 36 46 48 (.5%) 0.3% 1.0% 1.3% 1.5% Total line haul revenue $3,567 $3,509 $3,502 $3,564 $3,297 Miscellaneous revenue(3) 167 175 166 152 141 ------ ------ ------ ------ ------ Total freight revenue $3,734 $3,684 $3,668 $3,716 $3,438 - --------------------------- (1)Petrochemicals and Minerals $ 588 $ 582 $ 584 $ 603 $ 565 Food and Agriculture 336 335 353 361 351 Forest and Mfg. Products 308 318 329 326 308 Metals 314 307 291 297 290 ------ ------ ------ ------ ------ Total CORE Srv. Grp. $1,546 $1,542 $1,557 $1,587 $1,514 ====== ====== ====== ====== ====== (2)Revenues for the years 1993 and 1994 have been reclassified to exclude unassigned revenue from Service Group totals to provide more accurate comparisons to the current period. (3) Includes switching, demurrage and other miscellaneous revenues.
4 SERVICE GROUPS - VOLUME IN UNITS (FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS) (IN THOUSANDS) Years ended December 31, ----------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- CORE Service Group(1) 1,255 1,235 1,254 1,321 1,302 Intermodal Service Group 1,760 1,584 1,473 1,589 1,355 Unit Train Service Group 839 862 862 912 878 Automotive Service Group 422 392 399 396 360 ----- ----- ----- ----- ----- Total Volume 4,276 4,073 3,988 4,218 3,895 ===== ===== ===== ===== ===== - ------------------------ (1)Petrochemicals and Minerals 364 350 358 376 374 Food and Agriculture 262 257 265 289 295 Forest and Mfg. Products 289 290 306 318 309 Metals 340 338 325 338 324 ----- ----- ----- ----- ----- Total CORE Srv. Grp. 1,255 1,235 1,254 1,321 1,302 ===== ===== ===== ===== =====
CORE Service Group ------------------ In 1997, revenues and volume for this service group increased 0.3% and 1.7%, respectively, from 1996. CORE's Metals business unit led the group, with revenue growth of 1.9% from the prior year. The Petrochemicals and Minerals and Food and Agricultural units also increased revenue slightly over 1996. The Forest and Manufactured unit was down in revenue compared to 1996 (2.8%). Petrochemicals and Minerals: This commodity group consists of a --------------------------- wide variety of commodities, including agricultural and organic chemicals, plastic pellets, soda ash, construction minerals, petroleum products and waste. The majority of traffic is joint line and the primary flows are between Louisiana and Texas, (as originating sources), and Delaware, New Jersey, and Pennsylvania (as destination points). This commodity group's customer base and origin/destination pair mix are both large and diverse, with none occupying a dominant position in terms of Conrail's traffic volume or revenues. Conrail's traffic in this commodity group grew 4.0% in 1997 over 1996, with revenue up 1.0%. Revenues from minerals, petroleum products and waste all grew over 1997, while chemical revenue declined slightly due to plant closures and shifts in traffic to short-haul moves. The largest component of this business is chemical traffic, accounting for approximately 44% of the revenue and 39% of the volume in 1997. This traffic includes chlorine, smaller volumes of other hazardous chemicals and non-hazardous substances which, if spilled or released into the atmosphere, could be dangerous and could result in 5 significant liability to Conrail. Under catastrophic circumstances, such liability could exceed Conrail's $300 million in insurance coverage for such accidents. It is impossible to eliminate the risk of such liability; however, Conrail has not experienced any significant liability as a result of an accident involving chlorine or any other such substance. Furthermore, Conrail has safety procedures designed to prevent the occurrence of such accidents, or limit their impact should they occur, and works in concert with chemical manufacturers to reduce the risks in transporting these commodities, subscribing to the policies and procedures defined under Responsible Care partnerships. Conrail has been a Responsible Care partner since 1996, and Conrail is on schedule in implementing its five-year Responsible Care plan. Increasing regulation by federal, state and local governments of the transportation and handling of hazardous and non-hazardous substances and waste has increased the administrative burden and cost of transporting certain commodities in this group. Food and Agriculture: This commodity group includes fresh and -------------------- processed food products moving primarily in boxcars, grain, grain products and agricultural chemicals moving in covered hopper and tank cars. Conrail's revenue increased by 0.4% and units increased by 1.8% in 1997 from 1996 levels. Traffic in the food segment grew slightly in spite of lower canned goods traffic, while agriculture units grew by 3.4%, due to strong demand for agricultural chemicals, as well as a strong harvest. Forest and Manufactured Products: This commodity group includes -------------------------------- paper and wood products moving in boxcars, certain lumber and related products moving on flatcars, and general manufactured commodities moving in boxcars. These commodities generated $308 million in revenue in 1997, an overall decline of 2.8% from 1996. The forest products segment of this business (paper and wood products) accounted for 89% of the revenue in 1997. The manufactured products segment suffered a 17% decline in revenue in 1997 compared to 1996, as the result of closing distribution centers and declines in the handling of certain manufactured products. Metals: This commodity group includes scrap ferrous products and ------ semi-finished, finished and sheet steel. In 1997, units increased 0.5%, revenue per unit rose 1.4% and revenues grew 1.9% over 1996. Additional fleet capacity from new cars and improved freight car utilization contributed to the year-over-year growth. Intermodal Service Group ------------------------ Conrail continues to be one of the rail industry's leaders in handling intermodal traffic. Volume and revenue increased 11.1% and 9.6%, respectively, in 1997 from 1996. Conrail handled 1.76 million units of intermodal traffic in 1997. 6 Conrail's intermodal traffic consists of three segments. The first segment is Conrail's parcel/package traffic, which principally involves shipments for the United Parcel Service, U.S. Postal Service and less-than-truck-local companies. Revenue in this segment increased by 8.3% in 1997. The second segment is domestic traffic, which includes a variety of commodities and customers. Revenue in this segment increased by 9.4% in 1997. Traffic from major truckload companies continued to increase, as did traffic from intermodal marketing companies (or third party freight consolidators and brokers). International container traffic constitutes the third segment of Conrail's intermodal traffic. International container traffic chiefly involves goods produced in the Pacific Basin and shipped by rail from west coast ports to east coast markets. Conrail and its western railroad connections are able to participate in this traffic because they have established superior transit time compared with the all- water route through the Panama Canal. Conrail also participates in traffic moving through Atlantic ports for import and export trade with European and Mediterranean markets. Revenue from Conrail's international intermodal traffic increased 11.3% in 1997. In 1997, Conrail's major intermodal terminal improvements included expansion at Harrisburg and Chicago 47th Street and extensive paving at Pittsburgh and North Bergen. Also in 1997, Conrail added 1,200 containers to the EMP container program, a joint venture with NSC and Union Pacific railroads. Unit Train Service Group ------------------------ The Unit Train Service Group consists of coal, coke, iron ore and aggregates. The 1997 volume and revenue for this group fell below 1996 figures by 2.7% and 1.7%, respectively. A major cause for this reduction was an 18% decline in coke and iron ore volume, due mainly to a prolonged strike at Wheeling-Pittsburgh Steel. Utility coal, which makes up over 70% of Conrail's coal business, increased in volume and revenue by approximately 5% and 9%, respectively, over 1996 levels. Conrail moves utility coal from local and off-line mines to electric utility generating stations. The utility industry continues to deregulate, which will affect the competitive nature of the utility generating stations currently served by Conrail. Annual coal traffic volumes to these electric generating stations fluctuate with a utility's coal inventory policy, the weather and the competitive position of the station. Export, industrial and metallurgical coals represent the remaining segments of Conrail's coal traffic. Export coal traffic volume and revenue decreased in 1997 by approximately 6% and 31%, respectively. This decrease was the result of weaker demand for U.S. coal by European utilities, resulting from the increased price competition from South American and South African sources. The 7 industrial coal figures remained unchanged from the 1996 levels. The metallurgical coal volumes increased slightly, while revenue decreased by 18%, changes due in large part to an increase in shorter haul business in this segment. Automotive Service Group ------------------------ Despite the closing of General Motor's Tarrytown Assembly Plant, Conrail's Automotive Service Group revenue increased 4.6% in 1997. Revenue for the finished vehicles segment increased 5.9%, and revenue for the autoparts segment increased 2.6% over 1996 levels. Additional market share, combined with a 4% increase in North American light vehicle production, positively affected 1997 revenues. The autoparts segment increased as a result of capturing new traffic lanes, and finished vehicles traffic increased as the result of gaining additional business from domestic and foreign-based domestic manufacturers. 8 Certain Statistics. The following tables provide various ------------------ measurements relating to Conrail's rail operations from 1993 through 1997: PRODUCTIVITY DATA Years ended December 31, ------------------------------------- 1997 1996 1995 1994 1993 Operating ratio (1)................... 91.5% 83.8% 87.6% 83.8% 82.8% Compensation and benefits ratio....... 32.8% 32.7% 34.0% 33.9% 35.7% Employees (average)................... 20,675 21,280 23,510 24,833 25,406 Gross ton miles per freight employee hour worked (2)(3)................. 5,133 4,634 4,352 4,135 3,805 Gross ton miles per freight train hour (thousands) (2)(3)............ 119.1 113.4 118.7 113.0 119.0 Gross ton miles per locomotive in service (millions) (2)(3)........... 119.1 114.2 110.1 104.8 102.4 Gross ton miles per gallon of fuel (2) 795 790 774 749 745
(1) The Company's operating ratio for 1997 (operating expenses as a percentage of revenues) includes the effects of a $221 million ESOP termination charge, and $287 million in merger-related expenses, without which the operating ratio would have been 77.9%. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the Consolidated Financial Statements elsewhere in this Annual Report. The 1996 operating ratio includes the effect of a one- time $135 million charge for non-union voluntary separation programs and related losses on certain non-cancelable leases, and $16 million in merger-related expenses. Without these charges, Conrail's operating ratio would have been 79.7%. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3 and 11 to the Consolidated Financial Statements elsewhere in this Annual Report. Without the $283 million special charge in 1995, Conrail's operating ratio would have been 79.9%. See Note 12 to the Consolidated Financial Statements elsewhere in this Annual Report. Without an $84 million special charge in 1994, Conrail's operating ratio would have been 81.5%. (2) Consolidated Rail Corporation without subsidiaries. (3) Locomotive weight not included. QUALITY OF SERVICE DATA(1) Years ended December 31, ------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Miles of track under slow order....... 9 12 43 49 62 Locomotive out of service ratio....... 7.0% 9.4% 9.1% 8.7% 8.3% Freight cars requiring heavy repairs.. 5.6% 5.6% 5.6% 4.9% 4.7% Reportable train accidents ........... 168 180 141 160 155 Cost of loss and damage incidents as a percent of revenue............ .48% .52% .47% .48% .39%
(1) Consolidated Rail Corporation without subsidiaries. 9 COMPETITION. Conrail's rail services face significant ----------- competition from trucks, from other railroads, and from the availability of the same or substitute goods produced at points not served by Conrail. The trucking industry is especially competitive in Conrail's service area because, among other reasons, freight in this region is moved shorter distances than in the West, and the cost characteristics of the railroad and trucking industries generally make trucks more competitive over shorter distances. Price and service competition from trucks, while present for all commodities, is especially evident in the movement of intermodal freight, auto parts, and finished steel. Competition from trucks has been increased by the passage of legislation removing certain barriers to entry into the trucking business and allowing the use of wider, longer, and heavier trailers and multiple trailer combinations. Larger trailers and multiple trailer combinations have substantially increased productivity in the trucking industry, and any future legislation permitting further increases in truck capacity could have a substantial adverse effect on the competitiveness of railroads. Conrail is also subject to competition from other railroads. In most of Conrail's service territory, one or more other railroads can serve customers directly. Elsewhere, the ability to provide joint service with the many short lines whose operations have proliferated throughout the East, and/or in partnership with trucks (for pick-up, delivery, and draying services) allows rail competitors whose tracks do not reach given customers or points to constrain Conrail prices and to compete effectively for movement of the freight. In addition, recent changes in the nature of rail service offerings and in technology have expanded the scope of rail service beyond the physical limitations of lines, which has resulted in increased railroad competition. An important influence on Conrail's competitive position is regulation by the Federal government. Prior to 1980, regulation significantly inhibited the ability of railroads to respond to increasing customer demands, overall logistics needs, and changing transportation markets. The Staggers Rail Act of 1980 ("Staggers Act") substantially reduced the restrictions of regulation. In particular, railroads were given more opportunity to reduce costs and more freedom to adjust prices and service offerings, which enabled them to compete more effectively. Under the Staggers Act, the former Interstate Commerce Commission ("ICC") deregulated a significant amount of railroad traffic, including intermodal and most boxcar traffic, finished vehicles and numerous other commodities moving in other types of equipment. The Staggers Act further enhanced railroads' competitive options by permitting the use of railroad-shipper contracts for traffic still regulated, under which the parties can negotiate customer-specific prices, service standards and terms. These contracts generally provide prices lower than tariff rates and many do not guarantee that any given amount of freight will be shipped during their term. As of 10 December 31, 1997, Conrail was a party to 3,403 such contracts for regulated traffic, which Conrail estimates accounted for 26% of its line-haul revenues in 1997. Although some contracts have a term longer than one year, most contracts are for one year or less. The majority of Conrail's multi-year contracts are subject to cost-related adjustments that provide for flat percentage increases. The cost- based provisions in certain of these contracts are tied to indices formerly under the jurisdiction of the ICC. Action to adjust these indices for productivity gains by the railroads has had an adverse impact on Conrail's ability to recover costs under such contracts, which accounted for less than 1% of Conrail's line haul revenues in 1997. Effective January 1, 1996, pursuant to the ICC Termination Act of 1995, the authority of the ICC to regulate railroads was transferred to the Department of Transportation ("DOT") to be administered by the Surface Transportation Board. The prior regulatory scheme remains substantially intact, with the following significant changes: (1) access to freight railroad tracks by rail operators (both freight and passenger) operating on behalf of local governmental authorities has been eased; (2) some types of abandonments may take appreciably longer; (3) tariffs and most contracts will no longer be filed (other mechanisms are required for advising customers of rates and rate changes); (4) minimum rate levels will no longer be regulated; and (5) DOT will not regulate railroad issuances of securities or assumptions of debt. Other changes will require development of new regulations and/or of a body of precedent before their impact can be fully assessed. PROPERTY. As of December 31, 1997, Conrail (excluding its -------- subsidiaries) maintained 17,016 miles of track including track for crossovers, turnouts, second main, other main, passing and switch track, on its 10,801 mile route system. Of total route miles, 8,479 are owned, 191 are leased or operated under contract and 2,131 are operated under trackage rights, including approximately 300 miles operated pursuant to an easement over Amtrak's Northeast Corridor. As of December 31, 1997, virtually all track over which at least 10 million gross tons moved annually (6,008 track miles) was heavy-weight rail of at least 127 pounds per yard, and 100% of such track had continuous welded rail. Continuous welded rail reduces track maintenance costs and, in general, permits trains to travel at higher speeds. As of December 31, 1997, Conrail had 8,702 miles of continuous welded rail on track it maintained. As of December 31, 1997, 83% of the 3,878 track miles maintained for fast freight traffic had a maximum operating speed of 50 MPH or more, and 70% had a maximum operating speed of at least 60 MPH. As of December 31, 1997, approximately 96% of the track over which at least 10 million gross tons moved annually was governed by automatic signal systems. In all, as of December 31, 1997, 7,598 miles of track were controlled by automatic signal systems. 11 Until the acquisition of Conrail Inc. by CSX and NSC, Conrail was engaged in an ongoing process to identify certain under-utilized rail lines and other underperforming assets to avoid future capital costs and to improve its return on assets. Conrail recorded a $283 million charge in 1995 to cover the expected losses upon disposition of approximately 1,800 miles of lines and other assets not required to support Conrail's service. See Note 12 to the Consolidated Financial Statements elsewhere in this Annual Report. The following table indicates the number of locomotives and freight cars owned (or subject to capitalized leases) and includes 22,618 freight cars used by Conrail under operating leases. These total figures are as of December 31, 1997, and include stored or surplus units, but exclude subsidiaries which have an immaterial number of locomotives and freight cars: LOCOMOTIVES AND FREIGHT CARS Number of Units --------------- Total Stored(1) ----- --------- LOCOMOTIVES........................ 1,967 16 ------ -- Road............................. 1,831 8 Switching........................ 136 8 Total Surplus(2) ----- ---------- FREIGHT CARS....................... 45,690 3,486 ------ ----- Box.............................. 7,703 709 Covered Hopper................... 2,816 65 Open Hopper...................... 10,934 2,517 Gondola.......................... 4,408 68 Coil Steel....................... 11,387 0 Multi-Level...................... 7,043 36 Flat and Other................... 1,399 91
- ----------- (1) Serviceable locomotives not required for current operations on December 31, 1997. (2) Freight cars which did not move during the seven days immediately preceding December 31, 1997 and which were available for loading. The number of surplus freight cars during 1997 fluctuated due to variations in traffic and fleet adjustments. On December 31, 1997, the average age of Conrail's road locomotives, not including stored-serviceable units, was 12.1 years. The average age of the total locomotive fleet was 16.4 years, and the average age of the total freight car fleet was 22 years. CAPITAL EXPENDITURES. The following tables provide information -------------------- concerning capital expenditures from 1993 through 1997: 12 CAPITAL EXPENDITURES (In Millions) Years ended December 31, --------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Track rehabilitation...... $169 $203 $206 $221 $207 Rolling stock and transportation equipment.. 222 139 170 139 314 Other(1).................. 135 136 118 148 129 --- --- --- --- --- Total..................... $526 $478 $494 $508 $650 ==== ==== ==== ==== ==== Subsidiaries of Consolidated Rail Corporation (included in Total).................... $ 9 $ 5 $ 4 $ 3 $ 3
(1) Includes communications and signals, bridges and tunnels, computers and telecommunications, and other improvements. TRACK REHABILITATION Years ended December 31, ---------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Track miles surfaced...... 3,702 4,685 3,162 2,749 3,154 Track miles of rail laid.. 151 241 255 207 201 Ties installed (millions). 0.7 0.9 1.1 1.1 1.0
EMPLOYEES AND LABOR. Conrail (excluding subsidiaries) averaged ------------------- 19,802 employees in 1997, 86% of whom are represented by a total of 14 labor organizations and are covered by 21 separate collective bargaining agreements. Conrail has concluded collective bargaining agreements with all of the organizations representing its agreement employees. These agreements contain moratorium clauses providing that they may not be reopened prior to January 1, 2000 or later. However, a single issue remains outstanding with one of the above-mentioned organizations, the Transportation Communications International Union, representing approximately 1,950 Conrail employees. The parties are currently in mediation under the auspices of the National Mediation Board (NMB). If the NMB eventually concludes that its efforts to resolve the dispute will not be successful, it will proffer binding arbitration. If either side refuses to arbitrate, there is a 30-day "cooling-off" period during which the NMB may make a finding that the dispute threatens "substantially to interrupt interstate commerce to a degree 13 such as to deprive any section of the country of essential transportation service." Such finding is then presented to the President of the United States who has the option of appointing an Emergency Board to investigate the dispute. If the President does not appoint an Emergency Board, the parties are free to resort to self help at the conclusion of the above-mentioned cooling-off period. If the President does appoint an Emergency Board, the Board has 30 days to investigate the dispute and report its findings. The Emergency Board's findings are non-binding. Although the parties must maintain the status quo for a period of 30 days following the issuance of the Board's report, any party which rejects the Board's findings may thereafter resort to self help. In the event of a strike, Congress has the power to resolve the dispute by enacting legislation, including legislation imposing a labor contract in accordance with the findings of the Emergency Board. Under a decision by the United States Supreme Court on April 28, 1987, rail unions have the right, under the Railway Labor Act and other federal laws, to engage in secondary picketing against any railroad. As a result, a labor dispute between one railroad and a union can cause a strike to spread to any other railroad, or to all other railroads, whether or not the union has a collective bargaining agreement or a dispute with such other railroads. There is also the potential that railroads may be subject to secondary picketing in the event of a strike in the airline industry, which, like the railroad industry, is subject to the Railway Labor Act. Should Conrail or its subsidiaries be the subject of a strike or secondary picketing, Conrail's rail operations could be stopped or severely curtailed. GOVERNMENT REGULATION. Conrail is subject to environmental, --------------------- safety, and other regulations generally applicable to all businesses, and its rail operations are also regulated by the DOT, the Federal Railroad Administration ("FRA"), state Departments of Transportation and some state and local regulatory agencies. The DOT has jurisdiction over, among other things, rates charged for certain traffic movements, service levels and freight car rents. It also has jurisdiction over the situations and terms under which one railroad may gain access to another railroad's traffic or facilities, extension or abandonment of rail lines, consolidation, merger, or acquisition of control of rail common carriers and of other carriers by rail common carriers, and labor protection provisions in connection with the foregoing. 14 Under the Staggers Act, federal regulation of rates and services was reduced. The regulatory scheme, now administered by the Surface Transportation Board, continues the ICC's prior deregulation of rates for intermodal traffic, most boxcar traffic and a series of miscellaneous commodities, including steel and automobiles. In addition, railroads are free to negotiate contracts with shippers setting rates, service standards and the terms for movements of other kinds of traffic. As a result, railroads have greater flexibility in adjusting rates and services to meet revenue needs and competitive conditions. For further discussion of the abolition of the ICC and the effect of the transfer of its regulatory authority to DOT, see "Competition." The FRA has jurisdiction over safety and railroad equipment standards. Conrail's rail operations are also subject to a variety of governmental laws and regulations relating to the protection of the environment. In addition to being involved as a potentially responsible party at numerous Superfund sites (see Item 3 - "Legal Proceedings"), Conrail is subject to increasing regulation of its transportation and handling of certain hazardous and non-hazardous commodities and waste which has resulted in additional administrative and operating costs. Also, on February 11, 1997, the United States Environmental Protection Agency published in the Federal Register Proposed Rule "Emission Standards for Locomotives and Locomotive Engines". According to the Proposed Rule, locomotive engines (other than those defined as new or remanufactured) may be regulated by the states. Additional investments will likely be required to bring other than new locomotives into compliance, although the timing and amount of the investments will not be determinable until the Rule is adopted. On December 17, 1997, the EPA signed the Final Rules, which have not yet been published and are not substantially different than the proposed Rules. Compliance with existing laws and regulations relating to the protection of the environment has not had a material effect on Conrail's capital expenditures, earnings or competitive condition. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters," and Note 14 to the Consolidated Financial Statements included elsewhere in this Annual Report.) Item 3. Legal Proceedings. - ------ ----------------- Occupational Disease Litigation. Conrail has been named as a ------------------------------- defendant in lawsuits filed pursuant to the provisions of the Federal Employers' Liability Act ("FELA") by persons alleging (1) personal injury or death caused by exposure to asbestos in connection with 15 railroad employment (2) complete or partial loss of hearing caused by exposure to excessive noise in the course of railroad employment; (3) repetitive motion injury in connection with railroad employment; and (4) personal injury or death caused by exposure to deleterious substances (mixed dusts, fumes, chemicals, etc.) As of December 31, 1997, Conrail was a defendant in 524 pending asbestos suits, 971 pending hearing loss suits, 2,857 repetitive motion injury suits and 215 pending deleterious substance suits, and had notice of 1,183 potential asbestosis claims, 1,265 potential hearing loss claims, 587 potential repetitive motion injury claims and 24 deleterious substance claims. Conrail expects to be named as a defendant in a significant number of occupational disease cases in the future. Punitive Damage Awards in Ohio Crossing Accident Cases. Conrail ------------------------------------------------------ has received adverse jury verdicts in three separate crossing accident cases in Ohio: Garrett and Gollihue v. Consolidated Rail Corp.; Wightman v. Consolidated Rail Corp.; and Moore, et al. v. Consolidated Rail Corp. In each case, the jury awarded substantial punitive damages in connection with property damage resulting from the accidents. Collectively, the total punitive damage awards total approximately $30 million, based on property damage that totals less than $5,000. In Wightman v. Conrail, the judge reduced the punitive damages award to $15 million, Conrail's appeal to the intermediate Appellate Court was unsuccessful, and an appeal is pending with the Ohio Supreme Court. Conrail has settled the Moore and Garrett cases. Structure and Crossing Removal Disputes in Connection With Lines ---------------------------------------------------------------- Abandoned Under Northeast Rail Service Act("NERSA"). Conrail may be - --------------------------------------------------- responsible, in whole or in part, for the costs of removal of several hundred overhead and underpass crossings located on railroad lines it has abandoned under NERSA (and, in some instances, responsible for the removal of the lines of railroad themselves as well as appurtenant structures). Conrail's liability for the removal of such lines, crossings and structures will be determined on a case-by-case basis, and is dependent upon the circumstances under which each was constructed, the nature of Conrail's property interest with respect to such structures, the existence of contracts pertaining to such crossings and structures, and applicable federal and state law. Some states have imposed upon Conrail the obligation to remove certain crossings. 16 Englehart v. Conrail. In connection with the Special Voluntary -------------------- Retirement Program offered to certain employees in late 1989 and early 1990, Conrail used surplus funds in its over-funded Supplemental Pension Plan ("Plan") to fund certain aspects of that program. In December 1992, certain former Conrail employees brought suit challenging the use of surplus Plan funds (a) to pay administrative Plan expenses previously paid by Conrail, (b) to fund the Special Voluntary Retirement Program, and (c) to pay life insurance and medical insurance premiums of former employees as improper and unlawful, and alleging that employees who have made contributions to the Plan or its predecessor plans are entitled to share in the surplus assets of the Plan. In August 1993, the court granted Conrail's Motion to Dismiss the majority of the counts in the complaint, but refused to dismiss the issue of Conrail's use of Plan assets to pay administrative expenses of the Plan. On September 16, 1996, the Judge granted Conrail's motion for summary judgment on all of the claims, except for one individual participant claim. The Third Circuit Court of Appeals affirmed the District Court's decision on August 6, 1997, and plaintiffs' writ of certiorori to the U.S. Supreme Court has been denied. New York Cross Harbor Railroad Terminal Corporation v. ------------------------------------------------------ Consolidated Rail Corporation. On June 5, 1997, plaintiff filed a - ----------------------------- complaint, now amended, against Conrail in the United States District Court for the Eastern District of New York seeking a total of $1.4 billion in compensatory, punitive and treble damages under Section 2 of the Sherman Antitrust Act. Plaintiff alleges that Conrail engaged in anticompetitive and other unlawful acts harming plaintiff's rail car float operation in New York Harbor between Brooklyn, NY and Conrail's Greenville Yard in Jersey City, NJ. Conrail believes plaintiff's legal claims to be without merit. Bennett, et al. vs. Conrail Matched Savings Plan, Kelly, et al. --------------------------------------------------------------- vs. Conrail Matched Savings Plan, Gale, et al. vs. Conrail Matched - ------------------------------------------------------------------ Savings Plan, and Bunnion, et al. vs. Conrail Matched Savings Plan. - ------------------------------------------------------------------ In August 1997, four putative class action lawsuits were filed in the United States District Court for the Eastern District of Pennsylvania by former Conrail non-agreement employees alleging various violations of ERISA in connection with the Company's announced plans to distribute surplus Employee Stock Ownership Plan assets. In addition, the Bunnion complaint alleges that Conrail unlawfully discriminated on the basis of age and coerced employees in connection with Conrail's 1997 Voluntary Separation Program and that former employees who returned to Conrail as independent contractors are being denied the benefits of full employment. By order dated October 30, 1997, the District Court granted Conrail's Motion to Dismiss the Bennett, Kelly and Gale complaints, which order plaintiffs have appealed. The judge substantially denied the Motion to Dismiss the Bunnion complaint, and discovery is proceeding in that matter. 17 Environmental Litigation. Conrail is subject to various federal, ------------------------ state and local laws and regulations regarding environmental matters. In certain instances, Conrail has received notices of violations of such laws and regulations and either has taken or plans to take appropriate steps to address the problems cited or to contest the allegations of violation. As of December 31, 1997, Conrail had received inquiries from governmental agencies or had been identified, together with other companies, as a potentially responsible party for cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 135 locations throughout the country. However, Conrail, through its own investigations and assessments, believes it may have some potential responsibility at only 60 of these sites. The amounts Conrail has accrued with respect to the proceedings listed below are included in its $48 million accrual for estimated future environmental expenses. (See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters" and Note 14 to the Consolidated Financial Statements included elsewhere in this Annual Report.) The significant environmental proceedings, including Superfund sites, are discussed below. United States v. Southeastern Pennsylvania Transportation --------------------------------------------------------- Authority ("SEPTA"), National Railroad Passenger Corporation - ------------------------------------------------------------ ("Amtrak"), and Consolidated Rail Corporation. In March 1986, the - --------------------------------------------- United States Environmental Protection Agency ("EPA") filed an action in the United States District Court for the Eastern District of Pennsylvania for cost recovery, injunctive relief, and a declaratory judgment against the Company, Southeastern Pennsylvania Transportation Authority ("SEPTA") and National Railroad Passenger Corp. ("Amtrak") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA" or "Superfund Law"), as amended. In 1990, the Pennsylvania Department of Environmental Resources intervened as a plaintiff. Suit is based on the release or threatened release at the Paoli Railroad Yard, Paoli, Chester County, Pennsylvania, of polychlorinated biphenyls ("PCBs"), a listed hazardous substance under CERCLA. Pursuant to a series of partial preliminary consent decrees, defendants have performed a series of cleanup actions both on and off- site and have conducted a Remedial Investigation/Feasibility Study ("RI/FS"). Those costs have been shared equally among the three defendants but are subject to reallocation. The estimated cost of the Company's portion of a remedy proposed by the parties was included in the 1991 special charge and subsequent adjustments to accruals. EPA and the railroad parties have entered into a settlement agreement regarding EPA's claim for past costs, as well as federal and state natural resource damages. As part of the settlement, Amtrak, SEPTA and Conrail have committed to perform the on- site remedy for the rail yard. Penn Central, which was joined as a defendant, has filed comments with the federal court challenging the 18 basis of the railroads' agreement with the government to perform only the on-site remedy. United States v. Conrail. The EPA has listed Conrail's Elkhart ------------------------ Yard on the National Priorities List. The EPA contends that chemicals have migrated from the yard and contaminated drinking wells in the area. On February 14, 1990, EPA filed a civil action against Conrail in the U.S. District Court for the Northern District of Indiana seeking recovery of approximately $345,000 for costs incurred in protecting the water supply. In addition, EPA seeks a declaratory judgment against Conrail for all future costs incurred in responding to the release or threatened release of hazardous substances from the site. Conrail believes it is not the sole source and may not be a contributing source to the contamination alleged by EPA. Conrail filed a third-party action joining Penn Central as a defendant. Conrail and Penn Central have negotiated a cost sharing arrangement for the cost of implementing the EPA's 1992 interim record of decision, which is substantially complete. On May 15, 1995 EPA issued an Administrative Order to Conrail and Penn Central requiring the extension of public water hook-up to an additional 700 - 1,000 residences and businesses in the site area. Conrail and Penn Central have agreed that each company would comply with the Order. The cost for providing public water to the remaining residences is estimated to be in excess of $6 million, which will be apportioned between Penn Central and Conrail according to the cost sharing arrangement that has been negotiated. Conrail and Penn Central have negotiated a settlement with the EPA of the matter and are in the process of performing tests that will determine the nature of any off-site remedy that is required. United States v. Consolidated Rail Corp., et al (Berks Superfund ---------------------------------------------------------------- Site). Conrail has been identified as the fifth largest generator of - ----- waste oil at the Berks Associates Superfund site in Douglasville, Pennsylvania. In addition, Conrail has become aware that it and its predecessor, Penn Central, owned a small portion of land that was leased to the operator of the Berks site. As such, Conrail's liability could increase due to its questionable status as both an owner and a generator. In August 1991, the EPA issued an administrative order against Conrail and thirty-five other entities mandating the implementation of an approximately $2 million partial remedy and filed a complaint in the U.S. District Court for the recovery of approximately $8 million in costs incurred by the government. The parties have negotiated an administrative order with the EPA and have filed an answer to the civil action. A group of potentially responsible parties (including Conrail) undertook compliance with the administrative order. Conrail and the 35 other defendants have filed a third-party complaint against approximately 630 entities seeking contribution for the costs of the remedy and government costs. Conrail, along with other defendants, is negotiating a settlement with the EPA. On June 30, 1993, the EPA issued another administrative order against Conrail and 33 other entities, mandating the remediation of the southern portion of the 19 site. The EPA has requested a feasibility study for the implementation of a less expensive remedy for the southern portion of the site, which remedy would range from approximately $10 to $12 million. Conrail's share of such a remedy has not yet been determined. In addition, the Pennsylvania Department of Environmental Resources ("PADER") has filed a complaint for the recovery of natural resource damages. United Scrap Lead - Troy, OH. Conrail is a potentially ---------------------------- responsible party, along with more than 50 other parties, in the United Scrap Lead federal Superfund action in Troy, Ohio, where substantial quantities of batteries were disposed of over a period of several years. EPA sued Conrail and nine other parties in August 1991 for the recovery of approximately $2,000,000 in past costs. Conrail and other PRP's have commissioned treatability studies. The parties are negotiating over the nature of the remediation to be undertaken at the site. EPA has selected a preferred alternative with an estimated total cost of $33 million, which the PRP group is challenging. Conrail's share of any remedial cost is not expected to be material. Commonwealth of Massachusetts v. Conrail (Locomotive Emission). -------------------------------------------------------------- On April 21, 1992, the Massachusetts Attorney General filed suit in state court alleging Conrail's violation of the Massachusetts Clean Air Act by allowing diesel engines to idle unnecessarily and/or in excess of thirty (30) minutes. On May 4, 1992, the court entered a preliminary injunction, the terms of which are substantially those embodied in Conrail's existing idling policy. The Attorney General has filed a complaint alleging Conrail's violation of the preliminary injunction. On February 2, 1993, the parties entered into a partial settlement agreement; however, the Attorney General has alleged that Conrail has failed to comply with certain provisions of the settlement. Conrail continues to attempt to settle the matter with the Attorney General's office. New York State Department of Environmental Conservation Order On ---------------------------------------------------------------- Consent (Selkirk Yard). On July 31, 1996, the New York State - ---------------------- Department of Environmental Conservation (NYSDEC) served Conrail with a revised draft Order on Consent requiring the payment of a penalty of $250,000 in connection with its inspection of Selkirk Yard. A revised Order was received by Conrail on August 6, 1996, requiring the payment of fines in connection with the 1991 inspection, and mandates assessment and remediation of the facility. Conrail is negotiating the terms of the order with NYSDEC. New York State Department of Environmental Conservation Order on ---------------------------------------------------------------- Consent (DeWitt Yard). On November 3, 1994, NYSDEC served Conrail - --------------------- with a Consent Order in connection with the alleged discharge of waste water from DeWitt Yard, Onondaga County, New York into New York state waters. On June 17, 1996, a revised Consent Order was issued to Conrail which added American Financial Group (Penn Central Corp.) as a named responsible party for the payment of penalties and preparation 20 of a Site Assessment and Remediation Plan. Conrail and American Financial Group are negotiating the terms of the Order with NYSDEC. Conway Yard, Pittsburgh. In 1991, Conrail received Notices of ------------------------ Violation ("NOV") from the PADER alleging violations of the Clean Streams Act for discharges of oil into the Ohio River. In September 1993, the PADER sent to Conrail a draft Consent Order and Agreement requiring a comprehensive site remediation for soil, ground water, surface waters and sediments at the Conway Railyard and requiring the payment of civil fines in connection with violations at the yard. Conrail and PADER continue to negotiate the extent of the investigation and remediation to be undertaken at the yard. Hollidaysburg Environmental Investigation. On June 23, 1997, the ----------------------------------------- Pennsylvania Attorney General's office executed a search warrant at Conrail's Hollidaysburg Reclamation Plant near Altoona, PA searching for evidence of alleged illegal solid waste disposal. Since that time, the Pennsylvania Department of Environmental Protection has ordered the Company to address conditions discovered at the site and has initiated inspections at numerous other Conrail facilities in Pennsylvania. The Company is complying with the terms of the order and is cooperating with and awaiting the results of these inspections. Other. In addition to the above proceedings, Conrail has been ----- named in various legal proceedings arising out of its activities as an employer and as an operator of a freight railroad, including personal injury actions brought by its employees under FELA, as well as administrative proceedings with and investigation by government agencies. In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly in certain matters described above in which substantial damages are or may be sought, Conrail cannot state what the eventual outcomes of such legal proceedings will be. Certain of these matters, if determined adversely to Conrail, could result in the imposition of substantial damage awards against, or increased costs to, Conrail that could have a material adverse effect on Conrail's results of operations and financial position. Conrail's management believes, however, based on current knowledge, that such legal proceedings will not have a material adverse effect on Conrail's financial position. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 1997. Executive Officers of the Registrant. - ------------------------------------ Conrail's officers are elected annually by the Board of Directors at its first meeting held after the meeting of shareholders at which 21 directors are elected, and they hold office until their successors are elected. There are no family relationships among the officers or directors, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, as of March 15, 1998, relating to the executive officers of Conrail. Name, Age, Present Position Business Experience During Past 5 - --------------------------- --------------------------------- Years ----- David M. LeVan, 52, Chairman, Present position since May 1996. President and Chief Executive Served as President and Chief Officer Executive Officer between March 1995 and May 1996. Served as President and Chief Operating Officer between September 1994 and March 1995. Served as Executive Vice President between November 1993 and September 1994. Served as Senior Vice President - Operations between July 1992 and November 1993. Cynthia A. Archer, 44, Senior Present position since May 1995. Vice President - Intermodal Served as General Manager - Service Group Transportation and Customer Service of the Harrisburg Division between February 1994 and May 1995. Served as Assistant Vice President - Food and Agriculture between September 1993 and January 1994. Served as Director - Intermodal Business Development between September 1991 and August 1993. Ronald J. Conway, 54, Senior Present position since November Vice President - Operations 1994. Served as Vice President - Operations between September 1994 and November 1994. Served as Vice President - Transportation between July 1994 and September 1994. Served as Vice President - Intermodal Service Group between November 1993 and July 1994. Served as Assistant Vice President - Petrochemicals and Minerals between April 1992 and November 1993. 22 Timothy P. Dwyer, 48, Senior Present position since July 1997. Vice President - Unit Train Served as Senior Vice President - Service Group and Automotive Unit Train Service Group between Service Group November 1994 and July 1997. Served as Vice President - Unit Train Service Group between November 1993 and November 1994. Served as General Manager - Philadelphia Division between April 1992 and November 1993. John A. McKelvey, 46, Senior Present position since February Vice President - Finance 1997. Served as Vice President- Service Delivery between January 1996 and February 1997. Served as Vice President - Materials and Purchasing between April 1994 and January 1996. Served as Vice President - Controller between May 1993 and March 1994. Served as Vice President - Treasurer between 1988 and May 1993. Frank H. Nichols, 51, Senior Present position since May 1995. Vice President - Served as Vice President - Human Organizational Performance Resources between February 1993 and May 1995. Served as Assistant Vice President - Finance between November 1988 and February 1993. Timothy T. O'Toole, 42, Senior Present position since February Vice President - Law and 1997. Served as Senior Vice Government Affairs President-Finance between April 1996 and February 1997. Served as Vice President and Treasurer between April 1994 and April 1996. Served as Vice President and General Counsel between May 1989 and April 1994. John P. Sammon, 47, Senior Vice Present position since November President - CORE Service 1994. Served as Vice President - Group Intermodal between July 1994 and November 1994. Served as Assistant Vice President - Intermodal between January 1988 and July 1994. 23 George P. Turner, 56, Senior Present position since February Vice President - Merger 1997. Served as Senior Vice Transition President-Automotive Service Group between November 1994 and February 1997. Served as Vice President - Automotive Service Group between November 1993 and November 1994. Served as Assistant Vice President - Automotive between April 1992 and November 1993. Lucy S.L. Amerman, 47, Vice Present position since July 1994. President - Risk Management Served as Assistant Vice President - Claims and Litigation between April 1994 and July 1994. Served as General Counsel - Litigation between March 1990 and March 1994. Dennis A. Arouca, 46, Vice Present position since May 1994. President - Labor Relations Served as Partner in the law firm of Pepper Hamilton & Scheetz between February 1986 and May 1994. Craig R. MacQueen, 45, Vice Present position since June 1995. President - Corporate Served as Assistant Vice President - Communications Public Affairs between September 1992 and June 1995. Donald W. Mattson, 55, Vice Present position since April 1994. President - Controller Served as Vice President - Treasurer between May 1993 and April 1994. Served as Vice President - Controller between August 1988 and May 1993. 24 Thomas J. McFadden, 43, Present position since May 1996. Treasurer Served as Assistant Treasurer - Investor Relations and Finance between June 1994 and May 1996. Served as Director - Project Financing between July 1990 and June 1994. James D. McGeehan, 49, Present position since May 1996. Corporate Secretary Served as Assistant Corporate Secretary between December 1980 and May 1996. William B. Newman, Jr., 47, Present position since 1981. Vice President and Washington Counsel Albert M. Polinsky, 51, Vice Present position since April 1994. President - Information Served as Assistant Vice President - Systems Program Management between December 1993 and March 1994. Served as Assistant Vice President - Marketing Services between April 1992 and December 1993. Gary M. Spiegel, 47, Vice Present position since February President - Service Delivery 1997. Served as Assistant-Vice President - Train Operations between August 1994 and February 1997. Served as General Manager- Transportation and Customer Service between April 1992 and August 1994. 25 PART II Item 5. Market for Registrant's Common Equity - ------ ------------------------------------- and Related Stockholder Matters. ------------------------------- Not Applicable. Item 6. Selected Financial Data. - ------ ----------------------- The selected consolidated financial data included in the following tables have been derived from Consolidated Rail Corporation's Consolidated Financial Statements. The consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997 and the consolidated balance sheets as of December 31, 1997 and 1996 appear elsewhere in this Annual Report and have been audited by the Company's independent accountants, as indicated in their report thereon. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related notes and other financial information included elsewhere in this Annual Report. 26 Years ended December 31, ------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Millions)
STATEMENT OF INCOME DATA: Revenues $3,734 $3,684 $3,668 $3,716 $3,438 Operating expenses (before one-time charges) 2,908 2,935 2,930 3,029 2,845 One-time charges (1),(2),(3) and (4) 508 151 283 84 ------ ------ ------ ------ ------ Income from operations 318 598 455 603 593 Interest expense (165) (174) (185) (178) (177) Reserve of intercompany receivables (5) (89) Other income, net 83 92 111 101 114 ------ ------ ------ ------ ------ Income before income taxes and the cumulative effect of changes in accounting principles 236 516 381 526 441 Income taxes (1), (3) and (5) 230 181 125 207 207 ------ ------ ------ ------ ------ Income before the cumulative effect of changes in accounting principles 6 335 256 319 234 Cumulative effect of changes in accounting principles (5) (70) ------ ------ ------ ------ ------ Net income $ 6 $ 335 $ 256 $ 319 $ 164 ====== ====== ====== ====== ======
Years ended December 31, ------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Millions)
BALANCE SHEET DATA: Cash, cash equivalents and temporary cash investments $ 87 $ 17 $ 58 $ 31 $ 26 Working capital (deficit) (298) (23) 14 (76) (29) Total assets 8,464 8,353 8,387 8,283 7,910 Other noncurrent liabilities (net of current maturities of debt) 2,441 2,373 2,440 2,480 2,434 Deferred income taxes 1,462 1,484 1,401 1,212 1,084 Special income tax obligation 283 346 440 513 575 Stockholder's equity 3,021 3,035 2,929 2,893 2,743
27 NOTES TO SELECTED FINANCIAL DATA 1. As a result of the acquisition of Conrail Inc. ("Conrail"), the Company's parent, by CSX Corporation and Norfolk Southern Corporation in the second quarter of 1997, the Company recorded in operating expenses costs totaling $65 million ($41 million after income taxes) during 1997, composed primarily of fees for investment banking, legal and consulting services. In addition, included in 1997 operating expenses is a charge of $221 million (no related income tax effect) for the termination of the Company's Non-union Employee Stock Ownership Plan. Also in 1997, the Company recorded compensation costs in connection with the acquisition of Conrail which included: a charge of $110 million ($103 million after income taxes) in connection with employment agreements with certain executives, which became operative upon a change in control as defined in such agreements; $49 million ($31 million after income taxes) representing a portion of an amount to be paid to certain non- union employees as an incentive to continue their employment with the Company through the effective date of the requisite Surface Transportation Board approval of the Conrail acquisition and subsequent transition period; and $63 million ($39 million after income taxes) for payments to satisfy all outstanding performance shares, unvested stock options, restricted shares and phantom shares of Conrail which vested during 1997 as a result of the Conrail acquisition. (See Notes 2 and 3 to the Consolidated Financial Statements included elsewhere in this Annual Report.) Also, in 1997, a tax law was enacted by a state in which the Company operates which changed the Company's method of computing taxes and resulted in an increase in a state income tax rate which increased income tax expense by $22 million, representing the effect of an adjustment of deferred income taxes and the special income tax obligation for the rate increase as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). (See Note 8 to the Consolidated Financial Statements included elsewhere in this Annual Report.) Without the above items, net income for 1997 would have been $463 million. 2. Included in 1996 operating expenses is a charge of $135 million ($83 million after income taxes) 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. Approximately $90 million in benefits are being paid from the Company's overfunded pension plan. Also included in 1996 operating expenses are costs of $16 million ($10 million after income taxes) incurred by the Company as a result of the previously proposed Conrail merger with CSX Corporation. Without these items, net income for 1996 would have been $428 28 million. (See Notes 11 and 3, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report.) 3. Included in 1995 operating expenses is an asset disposition charge of $283 million, which reduced net income by $175 million. The asset disposition charge resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically supported current and expected operations. The Company identified and planned to sell 1,800 miles of rail lines that were expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value. Currently, the asset disposition program is under review as a result of the Conrail acquisition. Also, as a result of a decrease in a state income tax rate enacted during 1995, income tax expense was reduced by $21 million representing the effect of an adjustment of deferred income taxes and the special income tax obligation for the rate decrease as required by SFAS 109. Without these items, net income for 1995 would have been $410 million. (See Notes 12 and 8, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report.) 4. In 1994, the Company recorded a charge of $84 million ($51 million after income taxes) for a non-union employee voluntary early retirement program and related costs. The majority of the cost of the early retirement program is being paid from the Company's overfunded pension plan. Without this one-time charge, net income would have been $370 million. 5. The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and SFAS 109 effective January 1, 1993. As a result, in 1993, the Company recorded cumulative after-tax charges of $22 million and $48 million, respectively. In addition, as a result of the increase in the federal corporate income tax rate from 34% to 35%, effective January 1, 1993, income tax expense included $34 million of a retroactive nature, primarily for the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required under SFAS 109. Also, in 1993, the Company recorded a reserve of $89 million ($58 million after income taxes) relating to uncollectible advances made to Concord Resources Group, Inc., a former wholly-owned subsidiary of Conrail. Without the above items, net income for 1993 would have been $326 million. 29 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. ----------------------------------- Overview - -------- Consolidated Rail Corporation's ("CRC" or the "Company") net income for 1997 was $6 million, compared with $335 million for 1996 and $256 million for 1995. Results for 1997 include an ESOP termination charge of $221 million (no related income tax effect), merger-related compensation costs of $222 million ($173 million after income taxes) and merger costs of $65 million ($41 million after income taxes) resulting from the acquisition of the Company's parent, Conrail Inc. ("Conrail"). Also included in the 1997 results is a $22 million increase in income tax expense related to a change in a state income tax rate enacted during the year (see Notes 2, 3 and 8 to the Consolidated Financial Statements included elsewhere in this Annual Report). Without these items, CRC's net income for 1997 would have been $463 million. Results for 1996 include a one-time charge of $135 million ($83 million after income taxes) related to voluntary separation programs and related costs and merger-related expenses of $16 million ($10 million after income taxes) (see Notes 11 and 3, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report). Without these charges, net income for 1996 would have been $428 million. The results for 1995 include the effects of a $283 million asset disposition charge ($175 million after income taxes) and the recognition of a $21 million reduction in income taxes related to a decrease in a state tax rate (see Notes 12 and 8, respectively, to the Consolidated Financial Statements included elsewhere in this Annual Report). Absent these one-time items, net income for 1995 would have been $410 million. The 1997 results were favorably affected by traffic volume (freight cars and intermodal trailers and containers) and revenue increases of 5.0% and 1.4%, respectively, compared with 1996. However, CRC's continued emphasis on cost control and productivity improvement was the primary contributor to Conrail exceeding its 1997 operating ratio (operating expenses as a percent of revenues, excluding one-time charges) goal of 78.5%. Excluding merger-related costs and the voluntary separation programs charge in 1996, CRC's operating ratio was 77.9% for 1997 compared with 79.7% in 1996. In 1996, traffic volume and operating revenues increased 2.1% and 0.4%, respectively, compared with 1995, while operating expenses, excluding one-time charges, increased 0.2%. 30 Acquisition of Conrail Inc. - -------------------------- On April 8, 1997, the Company's parent, Conrail, and CSX Corporation ("CSX") entered into the Fourth Amendment (the "Fourth Amendment") to the Agreement and Plan of Merger (as amended through the Fourth Amendment, the "Merger Agreement") which facilitated CSX and Norfolk Southern Corporation ("NSC") entering into an agreement with respect to their joint acquisition of Conrail as contemplated by the Third Amendment to the Merger Agreement, dated as of March 7, 1997. The terms of the CSX-NSC Agreement are embodied in a letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter Agreement") and the Transaction Agreement dated as of June 10, 1997 among Conrail, CSX and NSC. The CSX/NSC Letter Agreement provided, among other things, (i) for the termination of the NSC's outstanding offer to purchase Conrail shares and the dismissal of litigation between CSX and NSC, (ii) that Conrail would, after the effective time of its merger into a wholly-owned subsidiary of CSX, become a direct or indirect jointly- owned subsidiary of CSX and NSC, (iii) that CSX and NSC would jointly acquire, for $115 in cash, all Conrail shares not already owned by CSX and NSC through a tender offer that closed on May 23, 1997 and subsequent merger, and (iv) that Conrail would continue to be managed by its existing Board of Directors until the requisite approval of the Surface Transportation Board ("STB") is obtained, at which time CSX and NSC will be separately allocated certain of the Company's railroad assets and will jointly operate certain other railroad operations of Conrail. On May 23, 1997, the CSX-NSC joint tender offer for the remaining outstanding shares of Conrail's common and ESOP stock was concluded. On June 2, 1997, Conrail became the surviving corporation in a merger with Green Acquisition Corp., a jointly-owned, indirect subsidiary of CSX and NSC, as a result of which the remaining outstanding capital stock of Conrail was acquired by NSC and CSX. The Company remains a wholly-owned subsidiary of Conrail. Simultaneous with the merger, Conrail's common stock was delisted from the New York Stock Exchange and, through the filing of a Form 15, deregistered with the Securities and Exchange Commission. The Conrail stock acquired by NSC and CSX is being held in a voting trust pending approval of the joint acquisition by the STB, which is expected to occur in the third quarter of 1998. 1998 Outlook - ------------ CRC expects the economy to grow at a slower pace in 1998 as compared with the growth rate experienced in 1997. CRC's 1998 plans are based on assumptions of 2.3% growth in real gross domestic product and 2.8% growth in industrial production. Primarily as a result of a slower growing economy, lower expected auto production in 1998 and the potentially adverse effects of the Conrail acquisition on the Company's ability to obtain new customers and retain current customers, CRC's outlook for 1998 includes the same level of line haul revenue as that achieved in 1997. The 1998 operating ratio goal for Conrail is 79.0%. 31 Results of Operations - --------------------- 1997 Compared with 1996 Net income for 1997 was $6 million compared with $335 million for 1996. Excluding the unusual items (see "Overview") in both years, net income would have been $463 million in 1997 and $428 million in 1996. Operating revenues (primarily freight line haul revenues, but also including switching, demurrage and incidental revenue) increased $50 million, or 1.4%, to $3,734 million in 1997 from $3,684 million in 1996. A 5.0% increase in traffic volume in units resulted in a $174 million increase in revenues. A decrease in average rates reduced revenues by $50 million, and an unfavorable traffic mix coupled with other miscellaneous factors reduced revenues by $65 million. Traffic volume increases for the service groups were as follows: Intermodal, 11.1%; Automotive, 7.7%; and CORE, 1.7%. Unit Train showed a volume decline of 2.7%. Within the CORE Service Group, traffic improvements were experienced by each of the commodity groups except for Forest and Manufactured Products, which had flat volume. The volume increases for the other commodity groups were as follows: Petrochemicals, 4.0%; Food and Agriculture, 1.8%; and Metals, .5%. Other revenues decreased by $9 million. Operating expenses increased $330 million, or 10.7%, to $3,416 million in 1997, from $3,086 million in 1996. The following table sets forth the operating expenses for the two years: ($ In Millions) Increase
Compensation and benefits $1,223 $1,204 $ 19 Fuel 198 202 (4) Material and supplies 176 175 1 Equipment rents 368 382 (14) Depreciation and amortization 293 282 11 Casualties and insurance 145 179 (34) Other 505 511 (6) ESOP termination charge 221 221 Merger-related compensation 222 222 Merger costs 65 16 49 Voluntary separation programs 135 (135) ------ ------ ----- $3,416 $3,086 $ 330 ====== ====== =====
Compensation and benefits increased $19 million, or 1.6%, primarily as a result of increased wage rates that became effective during the third quarter of 1997 and increases in other employee-related costs, including incentive compensation. These increases were partially offset by reductions in employment levels and less weather-related overtime costs occurring during the first quarter of 1997 as compared with the same period of 1996. Compensation and benefits as a percent of revenues was 32.8% in 1997 as compared with 32.7% in 1996. 32 Casualties and insurance costs decreased $34 million, or 19.0%, primarily due to reductions in the number and costs of employee injuries. CRC recorded an ESOP termination charge of $221 million in 1997; pre- tax merger-related costs totaling $287 million and $16 million in 1997 and 1996, respectively, (see Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report) and a one-time pre-tax charge of $135 million in 1996 for the voluntary separation programs and related costs (see Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report). The Company's operating ratio was 91.5% for 1997 compared with 83.8% for 1996. Without the ESOP termination charge, the merger-related costs and the voluntary separation programs charge, the operating ratio would have been 77.9% for 1997 and 79.7% for 1996. The significant difference between the effective tax rates for 1997 as compared with 1996 results from the nondeductibility for income tax purposes of the ESOP termination charge and certain merger- related compensation costs, as well as the aforementioned $22 million increase in income tax expense related to an increase in a state income tax rate enacted during the third quarter of 1997 (see Note 8 to the Consolidated Financial Statements included elsewhere in this Annual Report). 1996 Compared with 1995 Net income for 1996 was $335 million, compared with $256 million for 1995. Excluding the unusual items (see "Overview") in both years, net income would have been $428 million in 1996 and $410 million in 1995. Operating revenues increased $16 million, or 0.4%, to $3,684 million in 1996 from $3,668 million in 1995. A 2.1% increase in traffic volume resulted in a $74 million increase in revenues. Average revenue per unit decreased revenues by $42 million due to an unfavorable traffic mix. A traffic volume increase of 7.6% was experienced by the Intermodal Service Group while traffic volume for the Unit Train Service Group remained unchanged. The Automotive and CORE Service Groups experienced traffic volume declines of 1.7% and 1.6%, respectively. Within the CORE Service Group, traffic volume declines were experienced by three of the four commodity groups: Forest and Manufactured Products, 5.3%; Food and Agriculture, 2.8%; and Petrochemicals, 2.5%. Metals experienced a traffic increase of 4.0%. 33 Operating expenses decreased $127 million, or 4.0%, from $3,213 million in 1995 to $3,086 million in 1996. The following table sets forth the operating expenses for the two years: ($ In Millions) Increase
1996 1995 (Decrease) ------ ------ --------- Compensation and benefits $1,204 $1,247 $ (43) Fuel 202 168 34 Material and supplies 175 167 8 Equipment rents 382 355 27 Depreciation and amortization 282 293 (11) Casualties and insurance 179 178 1 Other 511 522 (11) Merger costs 16 16 Voluntary separation programs 135 135 Asset disposition charge 283 (283) ------ ------ ----- $3,086 $3,213 $(127) ====== ====== =====
Compensation and benefits decreased $43 million, or 3.4%, as a result of reductions in employment levels and other employee-related costs. These decreases were partially offset by increased wage rates due to new labor agreements, increased train crew costs and overtime caused by adverse weather conditions experienced during the first quarter of 1996. Compensation and benefits as a percent of revenues was 32.7% in 1996 as compared with 34.0% in 1995. Fuel costs increased $34 million, or 20.2%, due mostly to higher fuel prices. Equipment rents increased $27 million, or 7.6%, primarily as a result of declines in equipment utilization and increased car hire rates. In 1996, the Company recorded a one-time pre-tax charge of $135 million for the voluntary separation programs and related costs and $16 million in merger-related costs; and in 1995, an asset disposition charge of $283 million (see Notes 11, 3 and 12 to the Consolidated Financial Statements included elsewhere in this Annual Report). The Company's operating ratio was 83.8% for 1996, compared with 87.6% for 1995. Without the one-time charges recorded in 1996 and 1995 and the merger-related costs of $16 million incurred in 1996, the operating ratios would have been 79.7% and 79.9%, respectively. Other income decreased $19 million, or 17.1%, from $111 million in 1995 to $92 million in 1996, primarily due to decreases in rental income and lesser gains from sales of property. The Company's effective income tax rate for 1996 was 35.1% compared with 32.8% for 1995. The lower effective rate in 1995 was primarily caused by a $21 million reduction in income taxes as a result of a decrease in state income taxes (see Note 8 to the Consolidated Financial Statements included elsewhere in this Annual Report). 34 Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents increased $70 million in 1997, from $17 million at December 31, 1996 to $87 million at December 31, 1997. Cash generated from operations has been the Company's principal source of liquidity and is used primarily for capital expenditures, debt service and dividends. In 1997, operating activities provided cash of $871 million compared with $657 million in 1996 and $724 million in 1995. The principal uses of cash were for: property and equipment acquisitions, $439 million; payment of long-term debt, $238 million; net repayment of short-term borrowings, $99 million; and cash dividends on common stock, $27 million. A working capital (current assets less current liabilities) deficiency of $298 million existed at December 31, 1997 as compared with a $23 million deficit at December 31, 1996. Management believes that the Company's financial position allows it sufficient access to credit sources on investment grade terms. The Company has recorded a $159 million short-term liability for merger-related compensation costs and a $221 million long-term liability for the ESOP termination charge, neither of which is expected to require the future use of the Company's cash for settlement (see Note 3 the Consolidated Financial Statements included elsewhere in this Annual Report). During 1997, CRC issued $119 million of commercial paper and repaid $218 million, which included $100 million of commercial paper previously classified as long-term debt. At December 31, 1997, no commercial paper remained outstanding. At December 31, 1997, $312 million remains available to Conrail and CRC under a 1993 shelf registration statement whereby CRC can issue debt securities and Conrail can issue both convertible debt and equity securities. Restrictions arising from Conrail's acquisition may prevent further use of the remaining amount available. During 1997, CRC reduced its $500 million uncollaterized credit facility by $60 million to $440 million. In addition, the annual maximum fee has also been reduced from .125% to .110% of the facility amounts. In January 1997, the Company assumed $31 million of Equipment Trust Certificates, at an interest rate of 8.31%, due 2012, to finance the lease buyout of 20 locomotives from Locomotive Management Services, a general partnership of which the Company holds a fifty percent interest. Capital Expenditures - -------------------- Capital expenditures totaled $526 million, $478 million and $494 million in 1997, 1996 and 1995, respectively. Of these totals, CRC directly financed $79 million in 1997, $108 million in 1996 and $126 million in 1995. 35 Capital expenditures for 1998 are expected to be approximately $550 million. Inflation - --------- Generally accepted accounting principles require the use of historical costs in preparing financial statements. This approach does not consider the effects of inflation on the costs of replacing assets. The replacement cost of CRC's property and equipment is substantially higher than its historical cost basis. Similarly, depreciation expense on a replacement cost basis would be substantially in excess of the amount recorded under generally accepted accounting principles. Environmental Matters - --------------------- The Company is subject to various federal, state and local laws and regulations regarding environmental matters. The Company 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, 1997, the Company 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 135 locations. However, based on currently available information, the Company believes that it may have some potential responsibility at only 60 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 the Company'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 it were held principally liable in certain of these actions, at December 31, 1997, the Company had accrued $48 million, an amount it believes is sufficient to cover the probable liability and remediation 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 $9 million in 1997, $11 million in 1996 and $14 million in 1995 for environmental remediation and related costs and anticipates spending an amount comparable to that spent in 1997 during 1998. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $7 million in 1997 and $6 million in 1996 and 1995, and are anticipated to be approximately $11 million in 1998. 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 36 the Company is alleged to have liability and continually reviews the information available and assesses the adequacy of the recorded liability. Other Matters - ------------- The Company, currently, has not taken actions to resolve anticipated year 2000 issues related to its computer systems since it believes that such issues will be resolved in connection with the proposed integration of its systems with those of CSX and NSC following the requisite STB approval of the Conrail acquisition. In the event that the STB does not approve the sale of Conrail, the Company is developing a contingency plan to enable it to continue to operate into the year 2000 and beyond. While it is not possible, at this time, to quantify the overall cost of implementing this contingency plan, the Company believes that it would be material to its results of operations during the implementation period. In addition, were the STB to disapprove the sale of Conrail, the Company believes that failure to develop and implement such a plan could result in a material financial risk and serious disruption in its operations. Forward-Looking Statements - -------------------------- Except for the historical information contained herein, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that cannot be predicted accurately, that may be beyond the Company's control and that may cause actual results to differ. Certain of these risks and uncertainties include, but are not limited to, the effect of economic conditions, competition, regulation and weather on Conrail's operations, customers, service and prices, the effect of the Conrail acquisition and the pending regulatory approval of such acquisition on the Company's operations and business and other factors discussed elsewhere in this report and, from time to time, in other reports filed with the Securities and Exchange Commission. The forward-looking statements embodied in this report speak only as of the date of its filing, and the Company disclaims any obligation or undertaking to disseminate updates or revisions to such statements to reflect changes in management's expectations or any changes in events, conditions or circumstances on which such statements are based. 37 Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- Report Of Independent Accountants The Stockholder and Board of Directors of Consolidated Rail Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)1. and 2. present fairly, in all material respects, the financial position of Consolidated Rail Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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. Price Waterhouse LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 19, 1998 38 CONSOLIDATED RAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, --------------------------- ($ In Millions) 1997 1996 1995
------ ------ ------ Revenues $3,734 $3,684 $3,668 ------ ------ ------ Operating expenses Way and structures 458 463 486 Equipment 776 803 767 Transportation 1,365 1,361 1,311 General and administrative 309 308 366 ESOP termination charge (Note 3) 221 Merger-related compensation costs (Note 3) 222 Merger costs (Note 3) 65 16 Voluntary separation programs (Note 11) 135 Asset disposition charge (Note 12) 283 ------ ------ ------ Total operating expenses 3,416 3,086 3,213 ------ ------ ------ Income from operations 318 598 455 Interest expense (165) (174) (185) Other income, net (Note 13) 83 92 111 ------ ------ ------ Income before income taxes 236 516 381 Income taxes (Note 8) 230 181 125 ------ ------ ------ Net income $ 6 $ 335 $ 256 ====== ====== ====== Ratio of earnings to fixed charges (Note 1) 2.02x 3.20x 2.52x
See accompanying notes. 39 CONSOLIDATED RAIL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, ---------------- ($ In Millions) 1997 1996
------ ------ ASSETS Current assets Cash and cash equivalents $ 87 $ 17 Accounts receivable 649 629 Deferred tax assets (Note 8) 107 285 Material and supplies 104 139 Other current assets 12 22 ------ ------ Total current assets 959 1,092 Property and equipment, net (Note 5) 6,829 6,590 Other assets 676 671 ------ ------ Total assets $8,464 $8,353 ====== ====== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Short-term borrowings - 99 Current maturities of long-term debt (Note 7) 112 130 Accounts payable 161 160 Wages and employee benefits 366 143 Casualty reserves 139 138 Accrued and other current liabilities (Note 6) 479 445 ------ ------ Total current liabilities 1,257 1,115 Long-term debt (Note 7) 1,732 1,876 Casualty reserves 198 190 Deferred income taxes (Note 8) 1,462 1,484 Special income tax obligation (Note 8) 283 346 Other liabilities 511 307 ------ ------ Total liabilities 5,443 5,318 ------ ------ Commitments and contingencies (Note 14) Stockholder's equity (Notes 2, 3 and 10) Preferred stock (no par value; 25,000,000 shares authorized; 1 share issued) Common stock ($1 par value; 250,000,000 shares authorized; 100 shares issued and outstanding) Additional paid-in capital 1,864 2,151 Note receivable from ESOP - (294) Retained earnings 1,157 1,178 ------ ------ Total stockholder's equity 3,021 3,035 ------ ------ Total liabilities and stockholder's equity $8,464 $8,353 ====== ======
See accompanying notes. 40 CONSOLIDATED RAIL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY Additional Note Preferred Common Paid-in Receivable Retained ($ In Millions) Stock Stock Capital From ESOP Earnings
-------- -------- ---------- ---------- -------- Balance, January 1, 1995 $ - $ - $2,128 $(312) $1,077 Net income 256 Common dividends (Note 4) (229) Other 2 7 ----- ----- ------ ----- ------ Balance, December 31, 1995 - - 2,130 (305) 1,104 Net income 335 Common dividends (Note 4) (261) Other 21 11 ----- ----- ------ ----- ------ Balance, December 31, 1996 - - 2,151 (294) 1,178 Net income 6 Common dividends (Note 4) (27) Effects of Conrail acquisition (Notes 3 and 4) (294) 294 Other 7 ----- ----- ------ ----- ------ Balance, December 31, 1997 $ - $ - $1,864 $ - $1,157 ===== ===== ====== ===== ======
See accompanying notes. 41 CONSOLIDATED RAIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ------------------------ ($ In Millions) 1997 1996 1995
----- ----- ----- Cash flows from operating activities Net income $ 6 $ 335 $ 256 Adjustments to reconcile net income to net cash provided by operating activities: ESOP termination charge 221 Merger-related compensation costs 159 Voluntary separation programs 135 Asset disposition charge 283 Depreciation and amortization 293 282 293 Deferred income taxes 158 180 108 Special income tax obligation (63) (94) (73) Gains from sales of property (23) (24) (27) Pension credit (61) (46) (43) Changes in: Accounts receivable (20) (5) 26 Accounts and wages payable 65 (5) 17 Deferred tax assets 178 40 (84) Settlement of tax audit 6 (39) Other (48) (102) (32) ----- ----- ----- Net cash provided by operating activities 871 657 724 ----- ----- ----- Cash flows from investing activities Property and equipment acquisitions (439) (387) (415) Proceeds from disposals of properties 25 34 37 Other (31) (46) (45) ----- ----- ----- Net cash used in investing activities (445) (399) (423) ----- ----- ----- Cash flows from financing activities Net proceeds from (repayments of) short-term borrowings (99) 10 (23) Proceeds from long-term debt 26 85 Payment of long-term debt (238) (184) (133) Loans from and redemptions of insurance policies 95 Dividends on common stock (27) (261) (229) Other 8 15 26 ----- ----- ----- Net cash used in financing activities (356) (299) (274) ----- ----- ----- Increase(decrease) in cash and cash equivalents 70 (41) 27 Cash and cash equivalents Beginning of year 17 58 31 ----- ----- ----- End of year $ 87 $ 17 $ 58 ===== ===== =====
See accompanying notes. 42 CONSOLIDATED RAIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ Industry -------- Consolidated Rail Corporation (the "Company"), a wholly-owned subsidiary of Conrail Inc.("Conrail"), operates a freight railroad system 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"), however, the transaction is pending the approval of the Surface Transportation Board ("STB") (Notes 2 and 3). Principles of Consolidation --------------------------- The consolidated financial statements include the Company 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 Company's system from origin to destination. 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 43 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 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company has determined that adoption of these statements will not impact its consolidated financial position, results of operations or cash flows. Both pronouncements are effective for fiscal years beginning after December 15, 1997. 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. Reclassification of Prior-Year Data ----------------------------------- Certain amounts have been reclassified in the consolidated financial statements to conform to the current year presentation. 2. Acquisition of Conrail Inc. -------------------------- On April 8, 1997, the Company's parent, Conrail, and CSX entered into the Fourth Amendment (the "Fourth Amendment") to the Agreement and Plan of Merger (as amended through the Fourth Amendment, the "Merger Agreement") which facilitated CSX and NSC entering into an agreement with respect to their joint acquisition of Conrail as contemplated by the Third Amendment to the Merger Agreement, dated as of March 7, 1997. The terms of the CSX-NSC Agreement are embodied in a letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter Agreement") and the Transaction Agreement dated as of June 10, 1997 among Conrail, CSX and NSC. The CSX/NSC Letter Agreement provided, among other things, (i) for the termination of the NSC's outstanding offer to purchase Conrail shares and the dismissal of litigation between CSX and NSC, (ii) that Conrail would, after the effective time of its merger into a wholly-owned subsidiary of CSX, become a direct or indirect jointly-owned subsidiary of CSX and NSC, (iii) that CSX and NSC would jointly acquire, for $115 in cash, all Conrail shares not already owned by CSX and NSC through a tender offer that closed on May 23, 1997 and subsequent merger, and (iv) that Conrail would continue to be managed by its existing Board of Directors until the requisite approval of the STB is obtained, at which time CSX and NSC will be separately 44 allocated certain of Conrail's railroad assets and will jointly operate certain other railroad activities of Conrail. On May 23, 1997, the CSX-NSC joint tender offer for the remaining outstanding shares of Conrail's common and ESOP stock was concluded. On June 2, 1997, Conrail became the surviving corporation in a merger with Green Acquisition Corp., a jointly- owned, indirect subsidiary of CSX and NSC, as a result of which the remaining outstanding capital stock of Conrail was acquired by NSC and CSX. The Company remains a wholly-owned subsidiary of Conrail. Simultaneous with the merger, Conrail's common stock was delisted from the New York Stock Exchange and, through the filing of a Form 15, deregistered with the Securities and Exchange Commission. The Conrail stock acquired by NSC and CSX is being held in a voting trust pending approval of the joint acquisition by the STB, which is expected to occur in the third quarter of 1998. In the course of normal business, the Company interchanges freight with both NSC and CSX for transport to destinations both within and outside of CRC'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. Merger-Related Costs -------------------- In connection with the joint acquisition of Conrail by NSC and CSX, the Company has incurred pre-tax merger-related costs totaling $65 million ($41 million after income taxes) during 1997. Merger costs of $16 million ($10 million after income taxes) were incurred during 1996 related to the previously proposed merger of Conrail with CSX. Merger costs incurred during both years are composed primarily of fees for investment banking, legal and consulting services. In the second quarter of 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 had 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. During the second quarter of 1997, the Company recorded a charge of $110 million ($103 million after income taxes) in connection with employment agreements with certain executives, which became operative upon a change in control as defined in such agreements. The agreement with CSX permits Conrail to enter into new agreements with executives to pay some or all of these benefits upon the earlier of the STB's approval or disapproval of the transaction or May 31, 1998, if the executives are employed on that date. Severance benefits to be paid to other Company employees will be determined and accrued when the employees adversely affected by the transaction are identified, 45 which is expected to occur near the time of the STB decision. During 1997, the Company recorded cumulative charges totaling $49 million ($31 million after income taxes) representing a portion of an amount to be paid to certain non-union employees as an incentive to continue their employment with the Company through the effective date of the requisite STB approval of the transaction and subsequent transition period. The total amount of these incentive payments is expected to be approximately $125 million and will continue to be accrued ratably through the fourth quarter of 1998. The Company has recorded a short-term liability of $159 million included in "wages and employee benefits" on the 1997 balance sheet related to the above- mentioned merger-related compensation costs through December 31, 1997, however, such liability is not expected to require future use of the Company's cash for settlement as funding is expected from other sources, including Conrail's Employee Benefits Trust. Also, as a result of the acquisition of Conrail, all outstanding Conrail performance shares and all outstanding unvested stock options, restricted shares and phantom shares of Conrail vested during the second quarter of 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. Related Party Transactions -------------------------- The Company engages in various transactions with Conrail. The Company funds the cash requirements of Conrail primarily through cash dividends, which totaled $27 million, $261 million and $229 million in 1997, 1996 and 1995, respectively. The Company's dividend payment to its parent in 1997 decreased due to Conrail's reduced cash requirements related to the discontinuance of its dividend payments and stock repurchase program. The Company was obligated to pay a management fee to Conrail equal to the amount of preferred dividends declared by Conrail in connection with the Non-union ESOP, which ceased with the repayment of the ESOP note payable (Note 3). Management fees totaled $4 million in 1997, $20 million in 1996 and $21 million in 1995, and are recorded in "Other income, net" on the consolidated statements of income (Note 13). Advances between the two companies accrue interest at the Federal Reserve Bank's 30-day average interest rate. The resulting interest income and interest expense on advances to and from Conrail were immaterial to the Company's financial statements. 46 A summary of the Company's transactions with Conrail are as follows: December 31, -------------- 1997 1996 ---- ---- (In Millions) Short-term receivable $ 34 $ 8 Short-term payable 48 28 Long-term payable (Note 3) 221 -
5. Property and Equipment ---------------------- December 31, ---------------- 1997 1996 ------ ------ (In Millions) Roadway $ 7,166 $ 7,021 Equipment 1,396 1,229 Less: Accumulated depreciation (1,734) (1,652) Allowance for disposition (392) (408) ------- ------- 6,436 6,190 ------- ------- Capital leases (primarily equipment) 869 908 Accumulated amortization (476) (508) ------- ------- 393 400 ------- ------- $6,829 $ 6,590 ======= =======
The Company acquired equipment and incurred related long-term debt under various capital leases of $79 million in 1997, $82 million in 1996 and $71 million in 1995. In 1995 (Note 12) and 1991, the Company recorded allowances for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities. 6. Accrued and Other Current Liabilities ------------------------------------- December 31, -------------- 1997 1996 ---- ---- (In Millions) Freight settlements due others $ 40 $ 44 Equipment rents (primarily car hire) 74 74 Unearned freight revenue 77 79 Property and corporate taxes 53 47 Other 235 201 ---- ---- $479 $445 ==== ====
47 7. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1997, is composed of the following: December 31, ------------------ 1997 1996 ------ ------ (In Millions) Capital leases $ 465 $ 491 Medium-term notes payable, 7.50%, due 1998 to 1999 60 109 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, 6.66% 275 262 Commercial paper - 100 ------ ------ 1,844 2,006 Less current portion (112) (130) ------ ------ $1,732 $1,876 ====== ======
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 $1,607 million and $1,685 million at December 31, 1997 and 1996, respectively, compared with carrying values of $1,379 million and $1,515 million at December 31, 1997 and 1996, respectively. The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Capital leases have been discounted at rates ranging from 3.09% to 14.26% and are collateralized by assets with a net book value of $393 million at December 31, 1997. Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 1998 $ 107 $119 1999 99 94 2000 76 83 2001 60 74 2002 57 68 2003 - 2017 239 476 ----- ---- Total 638 $914 ==== Less interest portion (173) ----- Present value $ 465 =====
48 Operating lease rent expense was $122 million in 1997, $127 million in 1996 and $130 million in 1995. In June 1993, the Company and Conrail filed a shelf registration statement on Form S-3 to enable the Company to issue up to $500 million in debt securities or Conrail to issue up to $500 million in convertible debt and equity securities. The remaining balance under this shelf registration was $312 million at December 31, 1997, although restrictions arising from Conrail's acquisition may prevent its use. In January 1997, the Company assumed $31 million of Equipment Trust Certificates, at an interest rate of 8.31%, due 2012, to finance the lease buyout of 20 locomotives from Locomotive Management Services, a general partnership of which the Company holds a fifty percent interest. Equipment and other obligations mature in 1998 through 2043 and are collateralized by assets with a net book value of $266 million at December 31, 1997. Maturities of long-term debt other than capital leases are $48 million in 1998, $48 million in 1999, $268 million in 2000, $19 million in 2001, $18 million in 2002 and $978 million in total from 2003 through 2043. During 1997, the Company repaid all of its commercial paper, and no commercial paper remains outstanding at December 31, 1997. The Company maintains a $440 million uncollateralized bank credit agreement with a group of banks which is used for general corporate purposes and to support its commercial paper program. The agreement matures in 2000 and requires interest to be paid on amounts borrowed at rates based on various defined short-term rates and an annual maximum fee of .110% of the facility amounts. The agreement contains, among other conditions, restrictive covenants relating to a debt ratio and consolidated tangible net worth. During 1997, the Company had no borrowings under this agreement. Interest payments were $163 million in 1997, $170 million in 1996 and $177 million in 1995. 49 8. Income Taxes ------------ The provisions for income taxes are composed of the following: 1997 1996 1995 ---- ---- ----- (In Millions) Current Federal $118 $ 87 $ 75 State 17 8 15 ---- ---- ---- 135 95 90 ---- ---- ---- Deferred Federal 120 149 111 State 38 31 (3) ---- ---- ---- 158 180 108 ---- ---- ---- Special income tax obligation Federal (54) (80) (61) State (9) (14) (12) ---- ---- ---- (63) (94) (73) ---- ---- ---- $230 $181 $125 ==== ==== ====
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 an estimated effective federal and state income tax rate of 37.0%. The nondeductibility of the ESOP termination charge and certain merger-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 the Company 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"). As a result of a decrease in a state income tax rate enacted during 1995, income tax expense for that year was reduced by $21 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate decrease as required by SFAS 109. 50 Reconciliations of the U.S. statutory tax rates with the effective tax rates are as follows: 1997 1996 1995 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.2 3.3 3.5 ESOP termination charge 36.3 Nondeductible merger-related compensation costs 14.9 Effect of state tax increase (decrease) on deferred taxes 9.3 (5.5) Other (1.2) (3.2) (.2) ---- ---- ---- Effective tax rate 97.5% 35.1% 32.8% ==== ==== ====
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 $120 million in 1997, $145 million in 1996 (excluding tax settlement) and $109 million in 1995. Significant components of the Company's special income tax obligation and deferred income tax liabilities (assets) are as follows: December 31, ----------------- 1997 1996 ------ ------ (In Millions) Current assets $ (10) $ (9) Current liabilities (97) (245) Miscellaneous - (31) ------ ------ Current deferred tax asset, net $ (107) $ (285) ====== ====== Noncurrent liabilities: Property and equipment 1,877 1,939 Other long-term assets (primarily prepaid pension asset) 90 92 Miscellaneous 130 98 ------ ------ 2,097 2,129 ------ ------ Noncurrent assets: Nondeductible reserves and other liabilities (200) (174) Tax benefit transfer receivable (36) (36) Miscellaneous (116) (89) ------ ------ (352) (299) ------ ------ Special income tax obligation and deferred income tax liabilities, net $1,745 $1,830 ====== ======
51 9. Employee Benefits ----------------- Pension Plans ------------- The Company and certain subsidiaries maintain defined benefit pension plans which are noncontributory for all non-union employees and generally contributory for participating union employees. Benefits are based primarily on credited years of service and the level of compensation near retirement. Funding is based on the minimum amount required by the Employee Retirement Income Security Act of 1974. Pension credits include the following components: 1997 1996 1995 ----- ---- ---- (In Millions) Service cost - benefits earned during the period $ 8 $ 9 $ 8 Interest cost on projected benefit obligation 50 51 51 Return on plan assets - actual (197) (138) (254) - deferred 99 47 167 Net amortization and deferral (21) (15) (15) ----- ---- ---- $ (61) $(46) $(43) ===== ==== ====
The funded status of the pension plans and the amounts reflected in the balance sheets are as follows: 1997 1996 ------ ----- (In Millions) Accumulated benefit obligation ($605 million and $655 million vested, respectively) $ 610 $ 661 ====== ====== Market value of plan assets 1,308 1,187 Projected benefit obligation (699) (734) ------ ------ Plan assets in excess of projected benefit obligation 609 453 Unrecognized prior service cost 33 36 Unrecognized transition net asset (72) (90) Unrecognized net gain (343) (231) ------ ------ Net prepaid pension cost $ 227 $ 168 ====== ======
The assumed weighted average discount rates used in 1997 and 1996 are 7.0% and 7.5%, respectively and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation as of December 31, 1997 and 1996 is 6.0%. The expected long-term rate of return on plan assets (primarily equity securities) in 1997 and 1996 is 9.0%. 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 52 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 Company's 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 new contract provisions. Savings plan expense was $1 million in 1997 and $4 million in 1996 and 1995. In connection with the formation of the Non-union ESOP in 1990, the Company issued 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 conjunction with the formation of the holding company in 1993, each share of the Company's preferred stock, all of which were held by the Non-union ESOP, was automatically converted into one share of preferred stock of Conrail and the promissory note receivable from the Non-union ESOP plus the accrued interest of $21 million were reclassified by the Company to the stockholder's equity section of its balance sheet. The Company received debt service payments from the Non-union ESOP of $11 million in 1997, $40 million in 1996 and $31 million in 1995. Prior to the close of the joint tender offer (Notes 2 and 3) unearned ESOP compensation was charged to the Company by Conrail 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 expense of the Company and interest expense of Conrail related to the Non-union ESOP through the close of the joint tender offer. Compensation expense related to the Non-union ESOP was $2 million in 1997, $11 million in 1996 and $10 million in 1995. Prior to its acquisition, Conrail made dividend payments at a rate of 7.51% on the ESOP stock, and the Company made additional contributions in an aggregate amount sufficient to enable the Non- union ESOP to make the required interest and principal payments on its note. Postretirement Benefits Other Than Pensions ------------------------------------------- The Company provides health and life insurance benefits to certain retired non-union employees. Certain non-union employees are eligible for retiree medical benefits, while substantially all non-union employees are eligible for retiree life insurance benefits. Generally, company-provided health care benefits terminate when individuals reach age 65. Retiree life insurance plan assets consist of a retiree life insurance reserve held in the Company's group life insurance policy. There are no plan assets for the retiree health benefits plan. 53 The following sets forth the plans' funded status reconciled with amounts reported in the Company's balance sheets: 1997 1996 ----------------- ----------------- Life Life Medical Insurance Medical Insurance Plan Plan Plan Plan (In Millions) Accumulated postretirement benefit obligation: Retirees $28 $20 $44 $20 Fully eligible active plan participants 1 1 Other active plan participants 5 3 --- --- --- --- Accumulated benefit obligation 29 25 45 23 Market value of plan assets (10) (10) --- --- --- --- Accumulated benefit obligation in excess of plan assets 29 15 45 13 Unrecognized gains and (losses) 9 1 (1) 2 Accrued benefit cost recognized in the Consolidated Balance --- --- --- --- Sheet $38 $16 $44 $15 === === === === Net periodic postretirement benefit cost, primarily interest cost $ 1 $ 1 $ 3 $ 1 === === === ===
An 8 percent rate of increase in per capita costs of covered health care benefits was assumed for 1998, gradually decreasing to 6 percent by the year 2007. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $2 million and would have an immaterial effect on the net periodic postretirement benefit cost for 1997. Discount rates of 7.0% and 7.5% were used to determine the accumulated postretirement benefit obligations for both the medical and life insurance plans in 1997 and 1996, respectively. The assumed rate of compensation increase was 6% in both 1997 1996. Retiree medical benefits are funded by a combination of Company and retiree contributions. Retiree life insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. 10. Capital Stock ------------- The Company is authorized to issue 25 million shares of preferred stock with no par value. The Board of Directors has the authority to divide the preferred stock into series and to determine the rights and preferences of each. 54 Subsequent to July 1, 1993, the Company had 100 shares of common stock outstanding, all held by Conrail. All of the Company's long-term incentive plans were amended in 1993 to reflect the use of Conrail's common stock. The Company has applied APB 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 the second quarter of 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. Conrail's 1987 and 1991 Long-Term Incentive Plans authorized the granting to officers and 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, 1995 $14.000 - $ 66.938 1,363,955 Granted $50.688 - $ 68.563 516,757 Exercised $14.000 - $ 53.875 (200,940) Canceled $42.625 - $ 53.875 (123,560) ------------ Balance, December 31, 1995 $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, 1996 3,969,317 ============ December 31, 1997 - ============
55 The weighted average exercise prices of options granted during 1996 and 1995 were $70.130 per share and $51.204 per share, respectively. The weighted average exercise prices of options exercised during 1996 and 1995 were $48.32 per share and $31.16 per share, respectively. Pro forma disclosure of net income as if the Company had adopted the cost recognition requirements under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) in 1996 and 1995 is presented below ($ in millions): 1996 1995 ----- ----- Net income as reported $335 $256 Net income pro forma 328 254
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 and 1995 was $16.00 per share and $13.12 per share, respectively. Prior to its acquisition, Conrail 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 Conrail's common stock at the date of grant. Conrail 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. Conrail 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 and $3 million in 1995. The weighted- average fair value for the phantom shares and restricted stock granted during 1996 and 1995 was $68.02 per share and $52.88 per share, respectively. As a result of the Conrail acquisition, the Company paid all of the amounts due to employees under stock- related compensation arrangements during the second quarter of 1997 (Note 3). 11. 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 56 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. 12. Asset Disposition Charge ------------------------ Included in 1995 operating expenses is an asset disposition charge of $283 million, which reduced net income by $175 million. The asset disposition charge resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically supported current and expected operations. The Company identified and planned to sell 1,800 miles of rail lines that were expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition were written down to estimated net realizable value (See Note 1 "Asset Impairment"). Currently, the asset disposition program is under review as a result of the Conrail acquisition (Note 2). 13. Other Income, Net ----------------- 1997 1996 1995 ---- ---- ---- (In Millions) Interest income $14 $ 30 $ 33 Rental income 41 50 57 Property sales 23 23 27 Management fee (4) (20) (21) Other, net 9 9 15 ---- ---- ---- $83 $ 92 $111 ==== ==== ====
14. Commitments and Contingencies ----------------------------- Environmental ------------- The Company is subject to various federal, state and local laws and regulations regarding environmental matters. The Company 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, 1997, the Company 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 135 locations. However, based on currently available information, the Company believes that it may have some potential responsibility at only 60 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 the Company's liability for the costs associated with the assessment and remediation of contaminated sites. 57 Although the Company's operating results and liquidity could be significantly affected in any quarterly or annual reporting period if it were held principally liable in certain of these actions, at December 31, 1997, the Company had accrued $48 million, an amount it believes is sufficient to cover the probable liability and remediation 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 $9 million in 1997, $11 million in 1996 and $14 million in 1995 for environmental remediation and related costs and anticipates spending an amount comparable to that spent in 1997 during 1998. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $7 million in 1997 and $6 million in 1996 and 1995, and are anticipated to be approximately $11 million in 1998. 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 on its balance sheet for amounts sufficient to cover the expected payments for such actions. The Company may be contingently liable for approximately $50 million at December 31, 1997 under indemnification provisions related to sales of tax benefits. The Company had an average of 19,802 employees in 1997, approximately 86% 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, 1997. The Company currently guarantees the principal and interest payments in the amount of $48 million on Equipment Trust Certificates for Locomotive Management Services, a general partnership of which the Company holds a fifty percent interest. 58 The Company has received an adverse jury verdict related to a railroad crossing accident in Ohio that includes a significant punitive damage award that approximates $15 million. The Company believes the punitive damage award in this case is improper and that it has meritorious defenses, which it is pursuing on appeal. The Company, currently, has not taken actions to resolve anticipated year 2000 issues related to its computer systems since it believes that such issues will be resolved in connection with the proposed integration of its systems with those of CSX and NSC following the requisite STB approval of the Conrail acquisition. In the event that the STB does not approve the sale of Conrail, the Company is developing a contingency plan to enable it to continue to operate into the year 2000 and beyond. While it is not possible, at this time, to quantify the overall cost of implementing this contingency plan, the Company believes that it would be material to its results of operations during the implementation period. In addition, were the STB to disapprove the sale of Conrail, the Company believes that failure to develop and implement such a plan could result in a material financial risk and serious disruption in its operations. 15. Condensed Quarterly Data (Unaudited) ----------------------------------- First Second Third Fourth ------------- ------------ ----------- ------------ 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ($ In Millions) Revenues $898 $884 $ 931 $943 $935 $923 $ 970 $934 Income (loss) from operations 115 68 (232) 54 217 234 218 242 Net income (loss) 60 29 (274) 23 101 137 119 146 Ratio of earnings to fixed charges 2.57x 1.73x - 1.54x 4.78x 4.76x 4.78x 4.98x
The Company recorded pre-tax 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 merger-related costs (Note 3). After the merger-related costs were recognized during the second quarter of 1997, earnings available for fixed charges were inadequate by $257 million. 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 8). 59 During the second quarter of 1996, the Company recorded a one- time charge of $135 million for the non-union employee voluntary early retirement and separation programs and related costs, which reduced net income by $83 million (Note 11). During the fourth quarter of 1996, the Company recorded merger-related costs of $16 million ($10 million after income taxes) (Note 3). 60 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 61 PART III Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I under "Executive Officers of the Registrant." DIRECTORS Name, Business Experience Prior Service As and Other Directorships Conrail Director ----------------------- ---------------- H. Furlong Baldwin Since 1988 Chairman and Chief Executive Officer of Mercantile Bankshares Corporation since prior to January 1993. Director, Mercantile Bankshares Corporation, Baltimore Gas & Electric Company, GRC International, Inc. and USF&G Corporation. Age 66. Claude S. Brinegar Since 1990 Vice Chairman of Unocal Corp., a high technology earth resources company, from August 1989 to June 1995. Retired from Unocal Corp. in May 1992, where he held the position of Executive Vice President - Administration and Planning, since 1989. Director, Maxicare Health Plans, Inc. Age 71. Daniel B. Burke 1981 to 1986 and Chairman and Owner, Portland, Maine since 1987 Baseball Inc., 1994 to present. Retired in February 1994 from Capital Cities/ABC, Inc. where he held the positions of President and Chief Executive Officer since June 1990. Director, Rohm and Haas Co., Morgan Stanley Dean Witter, Darden Restaurants and the Washington Post Company. Age 69. Kathleen Foley Feldstein Since 1993 President of Economics Studies, Inc., a private consulting firm, since prior to January 1, 1991. Director, Bank America Corporation, Digital Equipment Corporation, John Hancock Mutual Life Insurance Company and Ionics Corporation. Age 57. 62 Name, Business Experience Prior Service As and Other Directorships Conrail Director ----------------------- ---------------- Roger S. Hillas Since 1981 Retired in January 1993 from Meritor Savings Bank where he held the positions of Chairman and Chief Executive Officer between July 1988 and December 1992. Director, P.H. Glatfelter Company, Toll Bros., Inc., The Bon-Ton Stores, Inc. Age 70. E. Bradley Jones Since 1987 Retired in December 1984 from LTV Steel Company where he held the positions of Chairman and Chief Executive Officer and Group Vice President of LTV Corporation. Director, TRW, Inc., Birmingham Steel Corporation and RPM, Inc.; Trustee, Fidelity Group of Funds. Age 70. David M. LeVan Chairman, President and Chief Executive Since 1994 Officer of Conrail since May 1996. Served as President and Chief Executive Officer between March 1995 and May 1996. President and Chief Operating Officer of Conrail between September 1994 and March 1995. Executive Vice President between November 1993 and September 1994. Senior Vice President - Operations between July 1992 and November 1993. Age 52. David B. Lewis Since 1989 Chairman of Lewis & Munday, P.C., a law firm, since prior to January 1991. Director, LG&E Energy Corp., Comerica Bank, TRW, Inc. and M.A. Hanna Company. Lewis & Munday provided legal services to Conrail in 1997. Age 53. John C. Marous Since 1991 Retired in July 1990 from Westinghouse Electric Corporation where he held the position of Chairman and Chief Executive Officer between January 1988 and July 1990. Director, Mellon Bank, N.A. Age 72. 63 Name, Business Experience Prior Service As and Other Directorships Conrail Director ----------------------- ---------------- Gail J. McGovern Since 1996 Executive Vice President, Consumer Markets of AT&T since January 1997. Executive Vice President, Business Markets of AT&T between November 1995 and January 1997. Vice President, Business Services of AT&T between April 1994 and November 1995. Vice President, Strategy of AT&T between August 1993 and April 1994. Vice President, 800 Service of AT&T between January 1992 and August 1993. Age 46. Raymond T. Schuler Since 1981 Retired in September 1990 from the Business Council of New York State, Inc., where he held the positions of Vice Chairman, President and Chief Executive Officer. Director, Oneida, Ltd. and Shawmut-Fleet Bank. Age 68. David H. Swanson Since 1989 Chairman, President and Chief Executive Officer of Explorer Nutrition & Fiber Group, an agri-business company, between January 1993 and December 1995, and from September 1997 to present. President and Chief Executive Officer of Countrymark, Inc., a farm supply and marketing company, from December 1995 to September 1997. Chairman, President and Chief Executive Officer of Central Soya Company, Inc., between 1986 and January 1994. Director, Fiduciary Trust International. Age 55. 64 Item 11. Executive Compensation. - ------- ---------------------- COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Directors' Compensation. Directors who are not officers of Conrail receive an annual fee of $35,000 and a fee of $1,000 for each Board and Board committee meeting they attend. Each such director who is a chairman of a Board Committee receives an additional annual fee of $5,000. Directors who are officers of Conrail are not paid any fees for service on the Board or on any Board Committees. Conrail maintains a Retirement Plan for Non-Employee Directors that provides each director who is not an employee or former employee of Conrail with a retirement benefit equal to the product of (1) one-twelfth of his or her annual retainer fee from Conrail in effect at the time the director ceases to serve as a member of the Board and (2) the number of full months, up to 120, he or she served on the Board. Benefits are payable in cash, from Conrail's general assets, in equal monthly installments over the ten-year period beginning with the month following the later of (1) the month in which the director ceases to serve on the Board or (2) the month in which the director attains age 65. Notwithstanding the foregoing, (1) the benefits of directors who cease to serve on the Board on account of disability commence with the month following the month in which the director ceases to serve on the Board, and (2) after a director's death, his or her benefits shall be paid to the director's designated beneficiary, or in the absence of a written designation, to the director's estate, in a lump sum, as soon as practicable following the director's death. Benefits are forfeited in the event the director, before he or she attains age 65, is removed from the Board for cause or voluntarily resigns from the Board, unless the resignation is approved by the Board on account of a conflict between the interests of the director and the interests of Conrail. Conrail also maintains a Board of Directors Charitable Contributions Program pursuant to which Conrail has purchased life insurance policies of $1 million on the life of each director. Upon the death of an individual director, Conrail will donate $1 million in five annual installments of $200,000 each to one or more qualifying educational or charitable organizations designated by the director, and will be reimbursed by the life insurance proceeds. Individual directors derive no financial benefit from the program; all charitable deductions accrue solely to Conrail. In 1997, a donation of $200,000 was made under the program on behalf of the late Ann F. Friedlaender. 65 Compensation of Executive Officers. The following table provides certain summary information concerning compensation awarded to, earned by or paid in 1997 to Conrail's Chairman, President and Chief Executive Officer, David M. LeVan, and each of the four other most highly compensated executive officers of Conrail (determined as of the end of the last fiscal year (December 31, 1997) and hereafter referred to as the "named executive officers") for all services rendered in all capacities to Conrail and its subsidiaries during the fiscal years ended December 31, 1995, 1996 and 1997. SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards ----------------------- ----------------------------- (a) (b) (c) (d) (f) (g) (i) Restricted Securities Name and Stock Underlying All Other Principal Salary Bonus Award(s) Options/SARS Compensation Position Year ($) ($) ($) (#) ($)(1) - ------------ ---- ------ ----- ---------- ------------ ------------ D. M. LeVan 1997 714,609 1,606,500 1,245,350(2) 29,000 123,173 Chairman, President 1996 594,522 0 0 33,000 89,423 & CEO 1995 514,519 24,759 509,976(3) 30,746 9,000 R. J. Conway 1997 270,999 370,138 304,762(2) 5,000 123,173 Sr. Vice President- 1996 257,031 0 0 9,000 89,423 Operations 1995 223,889 101,367 27,425(3) 9,000 9,000 J. P. Sammon 1997 222,590 304,042 304,762(2) 5,000 123,173 Sr. Vice President- 1996 217,720 0 0 9,000 89,423 CORE Service Group 1995 198,334 90,104 27,425(3) 9,000 9,000 C. A. Archer 1997 213,944 290,822 293,475(2) 5,000 123,173 Sr. Vice President- 1996 193,260 0 0 9,000 89,423 Intermodal Service 1995 172,319 7,806 96,012(3) 7,873 8,860 Group T. T. O'Toole 1997 211,623 284,213 238,843(2) 5,000 123,173 Sr. Vice President- 1996 187,426 0 0 8,123 89,423 Law & Government 1995 188,529 33,642 50,707(3) 3,750 6,919 Affairs
(1) These amounts represent Conrail's contribution through a 401(k) plan during 1997, 1996 and 1995, and amounts in 1996 and 1997 include allocations resulting from termination of the Employee Stock Ownership Plan in connection with the acquisition of Conrail Inc. 66 (2) This figure represents the value of shares of Conrail Common Stock awarded April 1, 1997 ($112.875) in settlement of performance shares granted on January 1, 1995, January 1, 1996 and February 19, 1997. As of December 31, 1997, the named executive officers held no restricted shares of Conrail Common Stock. (3) This figure represents the following: (i) full market value as of the January 31, 1996 grant date of restricted shares of Conrail Inc. Common Stock awarded to the named executive officer as a result of a 1995 bonus deferral, and is composed of the amount of the 1995 bonus which such officer elected to defer ($277,546, $26,171 and $60,013 for Messrs. LeVan and O'Toole and Ms. Archer, respectively, plus a matching contribution by Conrail in the amount of 50% for Messrs. LeVan and O'Toole and 20% for Ms. Archer; and (ii) the value of shares of Conrail Inc. Common Stock awarded on January 22, 1996 in settlement of performance shares granted on January 1, 1995 based on Conrail's having met certain predetermined financial performance goals (computed at a fair market value of $68.5625). The number of shares of restricted stock was determined by the fair market value of Conrail Inc. Common Stock on January 31, 1996 ($70.3125). 67 The following table contains information concerning the grant of stock options made to the named executive officers during the fiscal year ended December 31, 1997. Option/SAR Grants in Last Fiscal Year Individual Grant Grant Date Value (a) (b) (c) (d) (e) (f) - --------------------------------------------------------------------------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Grant Date Options/SARs Employees in Base Price Present Value Name Granted (#) Fiscal Year ($/sh) Expiration Date ($) D. M. LeVan 29,000(1) 10% $104.4375 February 19, 2007 (2) R.J. Conway 5,000(1) 1.2% $104.4375 February 19, 2007 (2) J.P. Sammon 5,000(1) 1.2% $104.4375 February 19, 2007 (2) C.A. Archer 5,000(1) 1.2% $104.4375 February 19, 2007 (2) T.T. O'Toole 5,000(1) 1.2% $104.4375 February 19, 2007 (2)
(1) Exerciseable as of April, 1997. (2) In June 1997, Conrail Inc.'s Common Stock was delisted and ceased to be publicly traded. At such time, all outstanding unexercised employee stock options were cashed out at $115 per share, in connection with Conrail Inc.'s acquisition. See Notes 2 and 3 to Consolidated Financial Statements elsewhere in this Annual Report. 68 The following table provides information concerning gains from stock options realized during the fiscal year ended December 31, 1997, by each of the named executive officers and the value of unexercised stock options held by each such officer as of December 31, 1997. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($) Shares Acquired Exercisable/ Exercisable/ Name On Exercise (#)(1) Value Realized ($) Unexercisable Unexercisable - ---- ------------------- ------------------ ------------- ------------- D. M. LeVan 127,896 6,178,136 E 0 E 0 U 0 U 0 R. J. Conway 32,375 1,714,859 E 0 E 0 U 0 U 0 J. P. Sammon 23,125 1,069,578 E 0 E 0 U 0 U 0 C. A. Archer 18,028 854,261 E 0 E 0 U 0 U 0 T. T. O'Toole 31,173 1,747,957 E 0 E 0 U 0 U 0 (1) In June 1997, all outstanding unexercised employee stock options were cashed out at $115 per share, in connection with Conrail Inc.'s acquisition. See Notes 2 and 3 to Consolidated Financial Statements elsewhere in this Annual Report.
69 Long-Term Incentive Plans ---Awards in Last Fiscal Year Estimated Future Payouts under Non-Stock Price-Based Plans --------------------------------- (a) (b) (c) (d) (e) (f) Performance Number of or Other Shares, Units Period Until or Other Maturation Name Rights (#)(1) or Payout Threshold (#) Target (#) Maximum(#) - ---- ------------- --------- ------------- ---------- ---------- D. M. LeVan 3,900 February 1999 3,900 3,900 3,900 R. J. Conway 700 February 1999 700 700 700 J. P. Sammon 700 February 1999 700 700 700 C. A. Archer 700 February 1999 700 700 700 T. T. O'Toole 700 February 1999 700 700 700
(1) Represents performance shares granted to the named executive officers in February 1997, all of which were settled on April 1, 1997 at $112.875, in connection with Conrail Inc.'s acquisition. See Notes 2 and 3 to the Consolidated Financial Statements elsewhere in this Annual Report. 70 Pension Plan Table and Related Disclosure The following table shows estimated annual retirement benefits payable under the Conrail Supplemental Pension Plan. Years of Service - ---------------------------------------------------------------------------------- Remuneration 15 YRS 20 YRS 25 YRS 30 YRS 35 YRS $ 125,000 $ 20,928 $ 27,905 $ 34,881 $ 41,857 $ 48,833 150,000 26,178 34,905 43,631 52,357 61,083 175,000 31,428 41,905 52,381 62,857 73,333 200,000 36,678 48,905 61,131 73,357 85,583 225,000 41,928 55,905 69,881 83,857 97,833 250,000 47,178 62,905 78,631 94,357 110,083 300,000 57,678 76,905 96,131 115,357 134,583 400,000 78,678 104,905 131,631 157,357 183,583 450,000 89,178 118,905 148,631 178,357 208,083 500,000 99,678 132,905 166,131 199,357 232,583 600,000 120,678 160,905 201,131 241,357 281,583 700,000 141,678 188,905 236,131 283,357 330,583 750,000 152,178 202,905 253,631 304,357 355,083 1,250,000 257,178 342,905 428,631 514,357 600,083 1,500,000 309,678 412,905 516,131 619,357 722,583
Messrs. LeVan, Conway, Sammon, Ms. Archer and Mr. O'Toole have 19, 28, 18, 17 and 17 years of credited service, respectively. Compensation covered by the Pension Plan consists of an employee's wages for federal income tax purposes (see column (c) to the Summary Compensation Table plus any bonus paid in 1997; column (d) reflects bonuses earned in the stated year, but not paid in such year), excluding reimbursements, fringe benefits, gains from the exercise of employee stock options, and contributions to deferred compensation plans other than employee deferrals under Conrail's Matched Savings Plan. In 1997, the covered compensation of Messrs. LeVan, Conway, Sammon, Ms. Archer and Mr. O'Toole was $1,843,865, $387,801, $235,038, $323,171 and $367,980, respectively. The table above shows estimated annual retirement benefits, after application of the Pension Plan's railroad retirement offset, payable to participants as a straight life annuity under the Pension Plan upon normal retirement at age 65 based upon final average compensation and years of Conrail service. The table does not reflect statutory limits on benefits under tax-qualified plans. Under its Merger Agreement between Conrail Inc. and CSX, the Conrail pension plan may be amended to provide benefits to eligible Conrail non-union employees under the CSX pension formula. The specific terms of that amendment have not been finalized. At normal retirement age of 65, the CSX formula will not produce benefits materially different from those set forth above. 71 Employment Agreements and Termination of Employment and Change in Control Arrangements To ensure that Conrail would have the continued dedicated service of certain executives notwithstanding the possibility, threat or occurrence of changes in control, in 1995, Conrail entered into severance agreements with its officers and certain key employees, including the officers named in the Summary Compensation Table ("Change of Control Contracts"). The agreements generally provide that if the executive is Terminated other than for Cause within three years after a Change in Control, or within two years of regulatory approval of such Change in Control, each as defined in the agreement, such executive is entitled to receive severance benefits. Such benefits would be equal to a lump sum payment equal to all previously accrued cash compensation, three times the sum of the then-current base salary and highest annual bonus earned within the previous three calendar years, together with certain other payments and benefits, including continuation of employee welfare benefits and an additional payment to compensate the executive for certain excise taxes imposed upon payments under such agreements. In addition, such Termination would result in the acceleration of vesting or lapse of restricted periods on previously granted stock-based incentive awards. In connection with the acquisition of Conrail Inc., CSX and NS have agreed to pay to Mr. LeVan, in lieu of any stay bonus and severance or termination benefits, a lump sum equal to the economic value of the employment agreement (as reasonably determined by the parties in good faith) which CSX and Mr. LeVan had entered into in connection with the Conrail-CSX merger as originally proposed. Under the terms of the Merger Agreement between CSX and Conrail Inc., Company executives (other than Mr. LeVan) will be entitled to compensation equal to that provided for in the Change of Control Contracts if their employment is terminated under certain specified circumstances or if they remain employed until May 31, 1998. CSX Corporation has agreed to honor all obligations under employment agreements and employee benefit plans, programs and policies and arrangements of Conrail in accordance with the terms of the Merger Agreement and to provide benefits to those employees of Conrail transferred to CSX or another entity. Severance or supplemental retirement benefits will be provided to non-union employees (other than executive level employees) who are terminated within three years following the regulatory approval of the merger, equal to between six months and 24 months of salary (depending upon an employee's service). Medical coverage will also be continued for these employees for specified periods. A stay bonus program has also been established that provides a lump sum cash payment to non-union employees who remain employed until regulatory approval of the merger with additional payments made to those employees who remain employed for up to six months thereafter. 72 Item 12. Security Ownership of Certain Beneficial - ------- ---------------------------------------- Owners and Management. --------------------- Outstanding Shares. One hundred percent (100%) of Conrail's common stock is held by Conrail Inc. As of the close of business on March 15, 1998, there were issued and outstanding 100 shares of Conrail Inc. Common Stock. To Conrail's knowledge, the only persons (or "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) who, as of March 15, 1998, owned beneficially more than 5% of any class of Conrail Inc.'s voting securities are listed in the following table. Name and Address Amount and Nature of Percent Title of Class of Beneficial Owner Beneficial Ownership of Class - -------------- ------------------- -------------------- -------- Conrail Inc. Deposit Guaranty National Bank 100 100% Common 333 Texas Street Stock Shreveport, LA 71101
1. Held in trust on behalf of Norfolk Southern Corporation (58%) and CSX Corporation (42%). These shares represent 100% of Conrail Inc.'s total voting securities. Ownership by Management of Equity Securities. As a result of the acquisition of 100% of Conrail Inc.'s Common Stock by CSX and NSC, Conrail management and directors hold no Conrail Inc. equity securities. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE - ------------------------------------------------------- Section 16(a) of the Exchange Act and the rules and regulations promulgated thereunder require that certain officers, directors and 10% beneficial owners of Conrail Common Stock file with the Securities and Exchange Commission, within specified time periods, reports concerning transactions in Conrail Inc. securities. Based on its review of the filed forms or written representations that, in certain instances, no filing is required, Conrail believes that all Section 16(a) filing requirements during 1997 were complied with. and Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- None except as disclosed in Item 10. 73 PART IV Item 14. Exhibits, Financial Statement - ------- ----------------------------- Schedules, and Reports on Form 8-K. ---------------------------------- (a) The following documents are filed as a part of this report: 1. Financial Statements: Page ---- Report of Independent Accountants...................... 38 Consolidated Statements of Income for each of the three years in the period ended December 31, 1997. 39 Consolidated Balance Sheets at December 31, 1997 and 1996 ......................................... 40 Consolidated Statements of Stockholder's Equity for each of the three years in the period ended December 31, 1997.................... 41 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 .............................. 42 Notes to Consolidated Financial Statements............. 43 2. Financial Statement Schedules: The following financial statement schedules should be read in connection with the financial statements listed in Item 14(a)1 above. Index to Financial Statement Schedules -------------------------------------- Page ---- Schedule II Valuation and Qualifying Accounts....... S-1 Schedules other than those listed above are omitted for reasons that they are not required, are not applicable, or the information is included in the financial statements or related notes. 74 3. Exhibits: Exhibit No. 2 Agreement and Plan of Merger among Consolidated Rail Corporation, Conrail Inc. and Conrail Subsidiary Corporation, dated as of February 17, 1993, filed as Appendix A to the Proxy Statement of the Registrant, dated April 16, 1993 and incorporated herein by reference. 3.1 Amended and Restated Articles of Incorporation of the Registrant filed as Exhibit 3.1 to the Registrant's Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the Registrant's Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 3.3 Amendment to Bylaws of the Registrant, as of March 15, 1995, filed as Exhibit 3.3 to the Registrant's Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 4.1 Form of Certificate of Common Stock, par value $1.00 per share, of the Registrant, filed as Exhibit 4.7 to the Registrant's Registration Statement on Form S-8 (No. 33- 19155) and incorporated herein by reference. 4.2 Form of Indenture between the Registrant and The First National Bank of Chicago, as Trustee, with respect to the issuance of up to $1.25 billion aggregate principal amount of the Registrant's debt securities, filed as Exhibit 4 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-34040) and incorporated herein by reference. In accordance with Item 601(b)(4)(iii) of Regulation S- K, copies of instruments of the Registrant with respect to the rights of holders of certain long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10.1 Second Amended and Restated Northeast Corridor Freight Operating Agreement dated October 1, 1986 between National Railroad Passenger Corporation and Consolidated Rail Corporation, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.2 Letter agreements dated September 30, 1982 and July 19, 1986 between Consolidated Rail Corporation and The Penn Central Corporation, filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 75 (Registration No. 33-11995) and incorporated herein by reference. 10.3 Letter agreement dated March 16, 1988 between Consolidated Rail Corporation and Penn Central Corporation relating to hearing loss litigation, filed as Exhibit 19.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988 and incorporated herein by reference. Management Compensation Plans and Contracts ------------------------------------------- 10.4 Consolidated Rail Corporation 1997 Annual Performance Achievement Reward Plan. 10.5 Retirement Plan for Non-employee Directors, as amended February 21, 1990, filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and included herein by reference. 10.6 Amendment to Retirement Plan for Non-employee Directors, dated as of May 21, 1997. 12 Computation of the ratio of earnings to fixed charges. 23 Consent of Independent Accountants. 24 Each of the officers and directors signing this Annual Report on Form 10-K has signed a power of attorney, contained on page 77 hereof, with respect to amendments to this Annual Report. 27 Financial Data Schedule. (b) Reports on Form 8-K. ------------------- None. (c) Exhibits. -------- The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by reference. (d) Financial Statement Schedules. ----------------------------- Financial statement schedules and separate financial state ments specified by this Item are included in Item 14(a)2 or are otherwise omitted for reasons that they are not required or are not applicable. 76 POWER OF ATTORNEY ----------------- Each person whose signature appears below under "SIGNATURES" hereby authorizes Timothy T. O'Toole and John A. McKelvey, or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints Timothy T. O'Toole and John A. McKelvey, or either of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file any and all amendments to this report. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act 1934, Consolidated Rail Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSOLIDATED RAIL CORPORATION Date: March 18, 1998 By /s/ David M. LeVan ---------------------------- David M. LeVan Chairman, President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 18th day of March, 1998, by the following persons on behalf of Consolidated Rail Corporation and in the capacities indicated. Signature Title /s/ David M. LeVan Chairman, President and Chief - ----------------------------- Executive Officer and Director David M. LeVan (Principal Executive Officer) /s/ John A. McKelvey Senior Vice President-Finance - ----------------------------- (Principal Financial Officer) John A. McKelvey /s/ Donald W. Mattson Vice President-Controller - ----------------------------- (Principal Accounting Officer) Donald W. Mattson 77 /s/ H. Furlong Baldwin Director - ----------------------------- H. Furlong Baldwin /s/ Claude S. Brinegar Director - ----------------------------- Claude S. Brinegar Director - ----------------------------- Daniel B. Burke /s/ Kathleen Foley Feldstein Director - ----------------------------- Kathleen Foley Feldstein /s/ Roger S. Hillas Director - ----------------------------- Roger S. Hillas /s/ E. Bradley Jones Director - ----------------------------- E. Bradley Jones /s/ David B. Lewis Director - ----------------------------- David B. Lewis /s/ John C. Marous Director - ----------------------------- John C. Marous /s/ Gail J. McGovern Director - ----------------------------- Gail J. McGovern Director - ----------------------------- Raymond T. Schuler Director - ----------------------------- David H. Swanson 78 E-1 EXHIBIT INDEX Exhibit No. 10.4 Consolidated Rail Corporation 1997 Annual Performance Achievement Reward Plan for Officers 10.6 Amendment to Retirement Plan for Non-employee Directors 12 Computation of the ratio of earnings to fixed charges 23 Consent of Independent Accountants 27 Financial Data Schedule Exhibits 2, 3.1, 3.2, 3.3, 4.1, 4.2, 10.1, 10.2, 10.3, and 10.5 are incorporated herein by reference. Powers of attorney with respect to amendments to this Annual Report are contained on page 77. 79 EX-10 2 EXHIBIT 10.4 Exhibit 10.4 CONSOLIDATED RAIL CORPORATION ANNUAL PERFORMANCE ACHIEVEMENT REWARD PLAN (APAR) FOR 1997 1. Definitions When used in this document, the following terms shall have the meanings set forth below: Board means the Board of Director's of Conrail. Conrail means the Consolidated Rail Corporation. The Company means Conrail Inc. Operating Ratio means the percentage determined by dividing (a) operating expenses by (b) revenues, as shown on Conrail's consolidated financial statements. Cost of Risk Ratio means the percentage determined by dividing (a) the sum of the cost of risk elements (as designated by the Risk Management Department) by (b) Conrail's railroad operating revenues. Participant means an employee of Conrail who participates in the Plan in accordance with Section 3. Plan means the Consolidated Rail Corporation Annual Performance Achievement Reward Plan for 1997, as set forth in this document and as may be amended from time to time. Salary means the salary earned by a Participant in 1997 from employment with Conrail. For purposes of this Plan, Salary shall include salary earned pursuant to any holiday, vacation, or sick leave policy of Conrail, salary deferred pursuant to the Consolidated Rail Corporation Matched Savings Plan, and salary contributed to the Consolidated Rail Corporation Flexible Benefits Plan. Except as otherwise provided in the preceding sentence, Salary shall not include any amount payable pursuant to receipt of a Spot Award or a 1996 Selective Cash Award paid in 1997 or to an employee benefit or incentive compensation plan. 2. Introduction The Board has approved the implementation of this Plan. The Board expects that the Plan will provide an incentive for enhanced individual and corporate performance and aid Conrail in attracting and retaining capable employees. 3. Eligibility Each non-agreement employee, and each agreement employee whose collective bargaining agreement provides for coverage by non-agreement compensation program(s), who is employed by Conrail during 1997 shall participate in the Plan. 4. Prerequisite for Award Anything in this Plan to the contrary notwithstanding, no award shall be payable under the Plan in the event actual operating income for 1997, as shown on Conrail's consolidated financial statements, is less than $660 million. 5. Amount of Award (a) Under the Plan, a Participant may earn an award equal to a percentage (or percentages) of his/her Salary. This award is the Annual Performance Achievement Reward (APAR). The APAR percentage(s) shall depend upon the position held by the Participant and/or the performance of Conrail, measured by the relationship of (i) the Operating Ratio for 1997, to (ii) the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan and the relationship of the (iii) Cost of Risk Ratio for 1997 to (iv) the cost of Risk Ratio goal set by the Board (or its delegate) for purposes of the Plan, both as certified by Conrail's chief financial officer, after taking into account any amounts payable pursuant to the Plan that are not taken into account in the Operating Ratio goal set by the Board (or its delegates) for purposes of the Plan. The percentage(s) shall be determined in accordance with one or more of twelve schedules. (b) A Participant's award shall be pro-rated, as provided in Section 7, in the event he/she participates in the Plan for less than all of 1997 or moves into a position covered under a different schedule of awards. The Participant's award shall equal the sum of the partial awards computed by multiplying (i) the Salary earned by the Participant while covered under a schedule of awards by (ii) the percentage of Salary determined in accordance with such schedule. (c) Anything to the contrary in this Section 5 notwithstanding, a Participant's award may be reduced by up to 50 percent by Conrail's Chairman, President and Chief Executive Officer (or his delegate(s)) on the basis of individual or group performance. 6. Time and Form of Payments The Participant's award shall be paid to him/her in cash in a single installment during the first quarter of 1998. 7. Special Payment Rules Anything in this Plan to the contrary notwithstanding, a Participant who is dismissed for cause prior to receipt of any portion of his/her award shall forfeit such portion of the award. A Participant who resigns from Conrail during 1997 shall receive a prorated portion of his/her APAR award. The amount of the prorated award shall be determined by applying a fraction to Participant's Salary determined up until his/her date of termination. The numerator of this fraction is the number of days of the year until the termination occurred and the denominator is 365, the number of days in the year. A Participant who resigns from Conrail after December 31, 1997, but before the date in the first quarter of 1998 on which payments are made under the Plan, shall receive a full APAR award. If during 1997 a Participant is force reduced, moves from a non-agreement position to an agreement position not covered by a non-agreement compensation program(s), or goes on leave of absence after the end of 1997, but before payments under the Plan are made, shall receive a full APAR award. A Participant who becomes disabled or dies after the end of 1997, but before payments under the Plan are made, shall receive a full APAR award. Conrail shall furnish each Participant with a copy of the schedule(s) of awards applicable to him/her. 8. Withholding Taxes Payments pursuant to this Plan shall be reduced by amounts sufficient to satisfy any Federal (including railroad retirement), state, and/or local tax withholding requirements. 9. Designation of Beneficiary A Participant may designate a beneficiary(ies) to receive any payment pursuant to the Plan that has not been made prior to the Participant's death. Such designation must be submitted to Conrail's Assistant Vice President-Compensation and Benefits on a form provided for this purpose. Such form is available, upon request, from the Administrator-APAR, 18-B 2001 Market Street, Philadelphia, PA 19101-1418. In the absence of such a designation, a Participant's most recent designation of beneficiary(ies) pursuant to a prior annual performance achievement reward plan maintained by Conrail shall be treated as his/her designation for purposes of this Plan. 10. Duration, Amendment, and Treatment of Plan The Plan shall take effect on January 1, 1997. Conrail by action of the Board, may amend or terminate the Plan at any time. In addition, Conrail's Chairman, President and Chief Executive Officer may amend the eligibility requirements and/or the schedules of awards under the Plan, in connection with a re-assessment of positions or changes in organization or staffing. The Plan shall terminate automatically as of January 1, 1998, unless terminated earlier by Conrail; provided however, that such termination shall not preclude the subsequent payment of awards earned under the Plan. EX-10 3 EXHIBIT 10.6 Exhibit 10.6 FIRST AMENDMENT TO CONSOLIDATED RAIL CORPORATION RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS This is the FIRST AMENDMENT dated as of May 22, 1997, to the Consolidated Rail Corporation Retirement Plan for Non-Employee Directors (the "Plan") dated May 18, 1988. W I T N E S S E T H: WHEREAS, Conrail Inc. (the "Company") has agreed to be acquired by CSX Corporation ("CSX") and Norfolk Southern Corporation ("NS") in accordance with the Agreement and Plan of Merger dated as of October 14, 1996, by and among Conrail Inc., Green Acquisition Corp. and CSX Corporation as amended through April 8, 1997 (the "Merger Agreement"), and WHEREAS, the continued service of the directors of the Company is important to the Company, CSX and NS during the transition period associated with the contemplated acquisition. NOW, THEREFORE, in accordance with the power reserved to it in Section 11 of the Plan, the Company hereby amends the Plan effective June 1, 1997 by: 1. Adding the following to the second sentence of Section 4: ; provided that Outside Directors who are removed from the Board after June 1, 1997 and before December 31, 1998 shall receive credit for the number of months from the date of their removal to December 31, 1998. 2. Deleting the first clause of Section 5(a) and substituting the following therefor: Except as provided in paragraphs (b) or (c), 3. Adding the following new paragraph (c) to Section 5: (c) Notwithstanding anything to the contrary, an Outside Director may, on or before December 31, 1997, irrevocably elect to receive a lump sum payment of the actuarial equivalent value of the benefit otherwise payable under paragraph (a), above. The discount rate employed to determine such value shall be the interest rate used to calculate lump sum distributions under the Conrail Inc. Supplemental Retirement Plan for April 1997. The benefit determined under this paragraph (c) shall be paid to the Outside Director as soon as reasonably feasible after the month in which he or she ceases to serve as a member of the Board. 4. Deleting Section 6 and substituting the following therefor: An Outside Director shall forfeit the right to any and all benefits under the Plan in the event, prior to his or her attainment of age sixty-five, the Outside Director is removed from the Board for cause. 5. Deleting the first two sentences of Section 10 and substituting the following therefor: The Plan shall be administered in accordance with the terms of the Conrail Inc. Stock Employee Compensation Trust. IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed as of the date first written above. CONRAIL INC., by /s/Frank H. Nichols ---------------------- Frank H. Nichols Senior Vice President Organizational Performance - 2 - EX-12 4 Exhibit 12 ---------- CONSOLIDATED RAIL CORPORATION ----------------------------- COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES -------------------------------------------------------- ($ In Millions) Quarters Ended Quarters Ended Quarters Ended Quarters Ended Years Ended March 31, June 30, September 30, December 31, December 31, -------------- -------------- -------------- -------------- ---------------- 1997 1996 1997(1) 1996 1997 1996 1997 1996 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings - -------- Pre-tax income (loss) $ 96 $ 47 $(250) $ 34 $198 $212 $192 $223 $236 $516 $381 Add: Interest expense 42 44 42 44 41 43 40 43 165 174 185 Rental expense interest factor 16 15 11 13 10 12 10 11 47 51 53 Less equity in undistributed earnings of 20-50% owned companies (5) (4) (7) (3) (5) (5) (3) (8) (20) (20) (19) ---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- Earnings available for fixed charges $149 $102 $(204) $ 88 $244 $262 $239 $269 $428 $721 $600 ==== ==== ===== ==== ==== ==== ==== ==== ==== ==== ==== Fixed Charges - ------------- Interest expense 42 44 42 44 41 43 40 43 165 174 185 Rental expense interest factor 16 15 11 13 10 12 10 11 47 51 53 ---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- Fixed charges $ 58 $ 59 $ 53 $ 57 $ 51 $ 55 $ 50 $ 54 $212 $225 $238 ==== ==== ===== ==== ==== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges 2.57x 1.73x - 1.54x 4.78x 4.76x 4.78x 4.98x 2.02x 3.20x 2.52x ==== ==== ===== ==== ==== ==== ==== ==== ==== ==== ==== Note: For the purpose of computing the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. (1) After the merger-related costs recognized in the second quarter of 1997, earnings available for fixed charges were inadequate by $257 million to cover fixed charges for the quarter.
EX-23 5 Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-34040 and 33-64670) of Consolidated Rail Corporation and subsidiaries of our report dated January 19, 1998, included in this Form 10-K. PRICE WATERHOUSE LLP Philadelphia, PA March 26, 1998 EX-27 6
5 Exhibit 27 ---------- CONSOLIDATED RAIL CORPORATION FINANCIAL DATA SCHEDULE ($ In Millions)
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 1,000,000 DEC-31-1997 JAN-01-1997 DEC-31-1997 12-MOS 87 0 649 0 104 959 6,829 0 8,464 1,257 1,732 0 0 0 3,021 8,464 0 3,734 0 3,416 0 0 165 236 230 6 0 0 0 6 0 0
EX-99 7 SCHEDULE II Schedule II CONSOLIDATED RAIL CORPORATION 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) 1995 Casualty reserves Current............... $103 $ (4) (2) $107 Noncurrent............ 212 $174 $ 14 183 (3) 217 Allowance for disposition of property and equipment (4)(5)........ 241 261 63 439 1996 Casualty reserves Current............... 107 (31) (2) 138 Noncurrent............ 217 168 11 206 (3) 190 Allowance for disposition of property and equipment (4) .......... 439 31 408 1997 Casualty reserves Current............... 138 1 139 Noncurrent............ 190 127 14 133 (3) 198 Allowance for disposition of property and equipment (4)............ 408 16 392 (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 $63 million, $31 million and $16 million in 1995, 1996 and 1997, respectively, represent net losses on asset dispositions. (5) In 1995, the Company recorded an asset disposition charge, which resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and planned to sell 1,800 miles of rail lines that were expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value. (See Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report.)
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