FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 26, 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 Number 1-8022
CSX CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 62-1051971
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 East Cary Street, Richmond, Virginia 23219-4031
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(Address of principal executive offices) (Zip Code)
(804) 782-1400
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of September 26, 1997: 218,194,507 shares.
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CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1997
INDEX
Page Number
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PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended September 26, 1997 and September 27, 1996 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended September 26, 1997 and September 27, 1996 4
3. Consolidated Statement of Financial Position-
At September 26, 1997 and December 27, 1996 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signature 20
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CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)
Quarters Ended Nine Months Ended
----------------------- ---------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
----------------------- ---------------------
Operating Revenue $ 2,649 $ 2,647 $ 7,894 $ 7,833
Operating Expense 2,265 2,255 6,753 6,737
------- ------- ------- -------
Operating Income 384 392 $ 1,141 $ 1,096
Other Income (Expense) 41 8 52 19
Interest Expense 125 57 320 188
------- ------- ------- -------
Earnings before Income Taxes 300 343 873 927
Income Tax Expense 94 121 289 325
------- ------- ------- -------
Net Earnings $ 206 $ 222 $ 584 $ 602
======= ======= ======= =======
Earnings Per Share $ .95 $ 1.04 $ 2.69 $ 2.83
======= ======= ======= =======
Average Common Shares
Outstanding (Thousands) 218,015 214,859 217,642 212,501
======= ======= ======= =======
Common Shares Outstanding
(Thousands) 218,195 216,611 218,195 216,611
======= ======= ======= =======
Cash Dividends Paid Per
Common Share $ .26 $ .26 $ .78 $ .78
======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
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CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
(Unaudited)
Nine Months Ended
-------------------------
Sept. 26, Sept. 27,
1997 1996
------------ ------------
OPERATING ACTIVITIES
Net Earnings $ 584 $ 602
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation and Amortization 509 461
Deferred Income Taxes 120 92
Productivity/Restructuring Charge Payments (37) (67)
Other Operating Activities (94) 17
Changes in Operating Assets and
Liabilities
Accounts Receivable (71) (112)
Other Current Assets (43) (23)
Accounts Payable (26) (32)
Other Current Liabilities 77 (81)
-------- --------
Net Cash Provided by Operating Activities 1,019 857
-------- --------
INVESTING ACTIVITIES
Property Additions (686) (876)
Proceeds from Property Dispositions 36 49
Investment in Conrail (2,163) --
Short-Term Investments - Net (71) (9)
Purchases of Long-Term Marketable Securities (50) (26)
Proceeds from Sales of Long-Term Marketable
Securities 38 117
Other Investing Activities (30) 20
-------- --------
Net Cash Used by Investing Activities (2,926) (725)
-------- --------
FINANCING ACTIVITIES
Short-Term Debt - Net (485) 128
Long-Term Debt Issued 2,454 117
Long-Term Debt Repaid (86) (372)
Cash Dividends Paid (170) (167)
Other Financing Activities -- 12
-------- --------
Net Cash Provided (Used) by Financing
Activities 1,713 (282)
-------- --------
Net Decrease in Cash and Cash Equivalents (194) (150)
CASH, CASH EQUIVALENTS AND SHORT-
TERM INVESTMENTS
Cash and Cash Equivalents at Beginning
of Period 368 320
-------- --------
Cash and Cash Equivalents at End of Period 174 170
Short-Term Investments at End of Period 385 345
-------- --------
Cash, Cash Equivalents and Short-Term
Investments at End of Period $ 559 $ 515
======== ========
See accompanying Notes to Consolidated Financial Statements.
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CSX CORPORATION AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
(Unaudited)
Sept. 26, Dec 27,
1997 1996
----------- -----------
ASSETS
Current Assets
Cash, Cash Equivalents and Short-Term $ 559 $ 682
Investments
Accounts Receivable 963 894
Materials and Supplies 242 229
Deferred Income Taxes 144 139
Other Current Assets 163 128
-------- --------
Total Current Assets 2,071 2,072
Properties-Net 12,098 11,906
Investment in Conrail 4,216 1,965
Affiliates and Other Companies 379 345
Other Long-Term Assets 764 677
-------- --------
Total Assets $19,528 $16,965
======== ========
LIABILITIES
Current Liabilities
Accounts Payable $ 1,107 $ 1,189
Labor and Fringe Benefits Payable 475 499
Casualty, Environmental and Other Reserves 296 306
Current Maturities of Long-Term Debt 138 101
Short-Term Debt 150 335
Other Current Liabilities 403 327
-------- --------
Total Current Liabilities 2,569 2,757
Casualty, Environmental and Other Reserves 716 715
Long-Term Debt 6,443 4,331
Deferred Income Taxes 2,846 2,720
Other Long-Term Liabilities 1,474 1,447
-------- --------
Total Liabilities 14,048 11,970
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, $1 Par Value 218 217
Other Capital 1,503 1,433
Retained Earnings 3,866 3,452
Minimum Pension Liability (107) (107)
-------- --------
Total Shareholders' Equity 5,480 4,995
-------- --------
Total Liabilities and
Shareholders' Equity $19,528 $16,965
======== ========
See accompanying Notes to Consolidated Financial Statements.
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the company's
financial position at September 26, 1997 and December 27, 1996, the results of
its operations for the quarters and nine months ended September 26, 1997 and
September 27, 1996, and its cash flows for the nine months ended September 26,
1997 and September 27, 1996, such adjustments being of a normal recurring
nature.
Earnings per share are based on the weighted average of common shares
outstanding for the quarters and nine months ended September 26, 1997 and
September 27, 1996. Dilution for these periods, which could result if all
outstanding common stock equivalents were exercised, is not significant.
While the company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in the company's latest Annual Report and Form 10-K.
Certain prior-year data have been reclassified to conform to the 1997
presentation.
NOTE 2. FISCAL REPORTING PERIODS
The company's fiscal year is composed of 52 weeks ending on the last
Friday in December. The financial statements presented are for the 13-week
quarters and 39-week periods ended September 26, 1997 and September 27, 1996,
and the fiscal year ended December 27, 1996.
NOTE 3. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued several
accounting pronouncements which the company will be required to adopt in future
fiscal reporting periods.
FASB Statement No. 128 "Earnings per Share" establishes new guidelines for
the calculation of and disclosures regarding earnings per share. The company
will adopt the provisions of Statement No. 128 during the fourth quarter of 1997
and at that time will be required to present basic and diluted earnings per
share and to restate all prior periods. The calculation of basic earnings per
share is expected to be comparable to simple earnings per share which is
currently presented by the company in accordance with Opinion No. 15 of the
Accounting Principles Board. Diluted earnings per share is not expected to
differ materially from basic earnings per share.
The company will adopt FASB Statement No. 129 "Disclosure of Information
About Capital Structure" during the fourth quarter of 1997. The company does not
expect that adoption of the disclosure requirements of this pronouncement will
have a material impact on its financial statements.
FASB Statement No. 130 "Reporting Comprehensive Income," which the company
will adopt during the first quarter of 1998, establishes standards for reporting
and display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders.
With the exception of net earnings, such changes are generally not significant
to the company; and the adoption of Statement No. 130, including the required
comparative presentation for prior periods, is not expected to have a material
impact on its financial statements.
FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" requires that a publicly-held company report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The Statement also
requires additional disclosures with respect to products and services,
geographic
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
areas of operation, and major customers. The company operates diversified
freight transportation businesses and has historically provided detailed
operating segment and other information in its communications to shareholders;
however, such information has not typically been presented in the consolidated
financial statements and related notes. The company expects to adopt Statement
No. 131 in the first quarter of 1998.
NOTE 4. JOINT ACQUISITION OF CONRAIL INC.
During the second quarter of 1997, the company and Norfolk Southern
Corporation (Norfolk Southern) completed the acquisition of Conrail Inc.
(Conrail) through a jointly owned entity pursuant to their agreement dated April
8, 1997. Completion of the acquisition was achieved through a joint tender offer
and subsequent merger in which all outstanding Conrail shares not already owned
by the company and Norfolk Southern were acquired for cash, or were converted
into the right to receive cash, of $115 per share. Under the agreement, the
company contributed approximately $4.1 billion, in the form of cash and Conrail
shares previously acquired, for a 42 percent investment in Conrail. Norfolk
Southern contributed approximately $5.7 billion, also in the form of cash and
Conrail shares previously acquired, for a 58 percent investment in Conrail. The
Conrail shares acquired by the company and Norfolk Southern have been placed in
a voting trust pending approval of the transaction by the Surface Transportation
Board (STB).
To obtain funds for its cash obligations under the joint tender offer and
the subsequent merger, the company issued $2.5 billion principal amount of fixed
rate debentures through a private offering in May 1997. The debentures were
issued in multiple tranches with maturities ranging from 2002 to 2032 and
interest rates ranging from 6.95% to 8.30%. The company completed an offer in
October 1997 to exchange the privately-placed debentures for new freely
tradeable debentures with substantially identical terms.
In June 1997, the company and Norfolk Southern completed supplemental
agreements governing the legal structure of the transaction and operations of
the Conrail rail system subsequent to STB approval. The terms of these
agreements, the operating plans of the respective companies, and the benefits
expected to result from combining the respective rail systems are incorporated
in a joint railroad control application which was filed with the STB on June 23,
1997. The STB has announced a 350-day review period for the application. A
favorable decision by the STB would permit the company and Norfolk Southern to
exercise control over Conrail by mid-1998.
Upon completion of the joint tender offer and subsequent merger, the
company's ownership interest in Conrail increased from approximately 19.9% to
42%, requiring a change from the cost method to the equity method of accounting
for the investment. The change in accounting method included adjustments
retroactive to the date of the company's initial investment in Conrail in
November 1996. The net amount of these retroactive adjustments applicable to
fiscal year 1996 was not material. The company will continue to use the equity
method of accounting as long as the Conrail shares are held in the voting trust.
Under this method, the company recognizes income from its proportionate share of
Conrail's net income and expense for amortization of its purchase price in
excess of its proportionate share of Conrail's net book value. For the quarter
and nine months ended September 26, 1997, equity in Conrail's net income totaled
$42 million and $94 million, respectively, and amortization of the excess
purchase price totaled $12 million and $29 million, respectively.
Summary financial information for Conrail for its fiscal periods ended
September 30, 1997 and 1996, and at December 31, 1996, is as follows:
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
Quarters Ended Nine Months
September 30, Ended September 30,
----------------- ------------------
1997 1996 1997 1996
-------- -------- -------- -------
Income Statement Information:
Revenues $ 944 $ 933 $ 2,787 $ 2,771
Income (Loss) from Operations 218 235 103 358
Net Income (Loss) 101 138 (111) 195
As Of
-----------------------------------
September 30, December 31,
1997 1996
----------------- ---------------
Balance Sheet Information:
Current Assets $1,117 $1,117
Property and Equipment and Other Assets 7,486 7,285
Total Assets 8,603 8,402
Current Liabilities 1,231 1,092
Long-Term Debt 1,767 1,876
Total Liabilities 5,557 5,295
Stockholders' Equity 3,046 3,107
Conrail's operating results for the second quarter of 1997 included
certain acquisition-related charges that the acquiring companies are required to
record as liabilities established in connection with a purchase business
combination under generally accepted accounting principles. These charges
reflect obligations for separation-related compensation to certain Conrail
executives and include vesting of benefits under certain stock compensation
plans and the termination of Conrail's Employee Stock Ownership Plan. The
charges, which totaled $363 million on an after-tax basis, were excluded from
the net income of Conrail in determining the proportionate share of such income
recorded by the company. Excluding these separation-related charges, Conrail's
net income would have been $252 million for the nine months ended September 30,
1997.
Conrail's 1997 operating results also include certain other one-time
expenses. After-tax acquisition-related costs of $15 million and $57 million
were incurred for the quarter and nine months ended September 30, 1997. In
addition, a cumulative income tax expense adjustment of $22 million was recorded
during the quarter ended September 30, 1997 to increase deferred income taxes as
a result of a change in a state tax rate. These expenses were included in the
net income of Conrail in determining the proportionate share of such income
recorded by the company.
The company is amortizing the difference between its purchase price for
the investment in Conrail and its proportionate share of Conrail's net assets. A
substantial portion of the excess purchase price is expected to be allocated to
reflect the fair value of Conrail's property and equipment. The company has
based its provision for amortization of the excess purchase price on preliminary
estimates of the fair values of such property and equipment and estimates of
their remaining useful lives, as well as estimates of the fair values of other
assets and liabilities of Conrail.
The combined effect of equity earnings, excess purchase price
amortization, net interest on debt issued to acquire the Conrail investment, and
other expenses related to the transaction reduced the company's net earnings by
$24 million, 11 cents per share, and $58 million, 27 cents per share, for the
quarter and nine months ended September 26, 1997, respectively. The company's
method of accounting for the investment in Conrail subsequent to the STB
decision and dissolution of the voting trust will depend on the final terms of
the ownership arrangement between the company and Norfolk Southern approved by
the STB.
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 5. ACCOUNTS RECEIVABLE
The company has sold, directly and through Trade Receivables
Participation Certificates (Certificates), ownership interests in designated
pools of accounts receivable originated by CSX Transportation Inc. (CSXT),
its rail unit.
During 1993, $200 million of Certificates were issued at 5.05%, due
September 1998. The Certificates represent undivided interests in a master trust
holding an ownership interest in a revolving pool of rail freight accounts
receivable. At September 26, 1997 and December 27, 1996, the Certificates were
collateralized by $253 million and $248 million, respectively, of accounts
receivable held in the master trust.
In addition, the company has a revolving agreement with a financial
institution to sell with recourse on a monthly basis an undivided percentage
ownership interest in designated pools of freight and other accounts receivable.
The agreement provides for the sale of up to $200 million in accounts receivable
and expires in September 1998.
The company has retained the responsibility for servicing and collecting
accounts receivable held in trust or sold. At September 26, 1997 and December
27, 1996, accounts receivable have been reduced by $372 million, representing
Certificates and accounts receivable sold. The net losses associated with sales
of Certificates and receivables were $7 million for the quarters ended September
26, 1997 and September 27, 1996, and $22 million for nine month periods ended
September 26, 1997 and September 27, 1996.
The company adopted FASB Statement No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" during the
first quarter of 1997. Adoption of the pronouncement, which established new
guidelines for accounting and disclosure related to transfers of trade accounts
receivable and other financial assets, did not have a material impact on the
company's financial statements.
NOTE 6. OPERATING EXPENSE
Quarters Ended Nine Months Ended
------------------------ ------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
----------- ----------- ------------ -----------
Labor and Fringe Benefits $ 816 $ 788 $ 2,413 $ 2,379
Materials, Supplies and Other 634 638 1,867 1,881
Building and Equipment Rent 275 282 834 858
Inland Transportation 254 262 749 743
Depreciation 157 149 470 456
Fuel 129 128 420 405
Miscellaneous -- 8 -- 15
-------- -------- --------- --------
Total $ 2,265 $ 2,255 $ 6,753 $ 6,737
======== ======== ========= ========
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
NOTE 7. OTHER INCOME (EXPENSE)
Quarters Ended Nine Months Ended
----------------- -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
------- ------- ------- -------
Interest Income $ 12 $ 9 $ 42 $ 33
Income from Real Estate and Resort
Operations(1) 38 19 41 42
Net Losses from Accounts Receivable (7) (7) (22) (22)
Sold
Minority Interest (11) (11) (31) (29)
Income from Investment in Conrail - 21 -- 39 --
Net
Equity Earnings of Other Affiliates 1 2 4 4
Miscellaneous (13) (4) (21) (9)
------- ------- ------- -------
Total $ 41 $ 8 $ 52 $ 19
======= ======= ======= =======
(1) Gross revenue from real estate and resort operations was $80 million and
$142 million for the quarter and nine months ended September 26, 1997,
respectively, and $58 million and $137 million for the quarter and nine
months ended September 27, 1996, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
In September 1997, a state court jury in New Orleans, Louisiana returned a
$2.5 billion punitive damages award against CSXT. The award was made in a class
action lawsuit against a group of nine companies based on personal injuries
alleged to have arisen from a 1987 fire. The fire was caused by a leaking
chemical tank car parked on CSXT tracks and resulted in the evacuation of a New
Orleans neighborhood. The facts of the case indicate that the damages awarded
are extremely high, and CSXT has excellent grounds for appeal. CSXT is pursuing
an aggressive strategy on all legal fronts and believes that the punitive
damages award will be set aside or reduced so substantially that it will not
have any material long-term financial impact on the company or CSXT. At this
time, it is not possible to estimate the ultimate impact, if any, from the
punitive damages award, and no charge to earnings has been recorded. In the same
case, the court awarded a group of 20 plaintiffs compensatory damages of
approximately $2 million against the defendants, including CSXT, to which the
jury assigned 15% of the responsibility for the incident. CSXT's liability under
that compensatory damages award is not material, and adequate provision was made
for the award in a prior year.
The company has been advised that activities of a former subsidiary that
administered student loans are under investigation. The subsidiary was sold in
1992. The investigation is to determine whether, and to what extent, damages
should be asserted against the company for government insurance payments made on
uncollected loans as a result of alleged processing deficiencies or errors
before the sale. While the amount of potential damages is not yet reasonably
estimable, based upon information currently available to the company, it is
believed any adverse outcome will not be material to the company's results of
operations or financial position.
Although the company obtains substantial amounts of commercial insurance
for potential losses for third-party liability and property damage, reasonable
levels of risk are retained on a self-insurance basis. A portion of the
insurance coverage, $25 million limit above $100 million per occurrence from
rail and certain other operations, is provided by a company partially owned by
CSX.
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party (PRP) at approximately 119 environmentally
impaired sites that are or may be subject to remedial action under
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CSX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars, Except Per Share Amounts)
the Federal Superfund statute (Superfund) or similar state statutes. A number of
these proceedings are based on allegations that CSXT, or its railroad
predecessors, sent hazardous substances to the facilities in question for
disposal. Such proceedings arising under Superfund or similar state statutes can
involve numerous other waste generators and disposal companies and seek to
allocate or recover costs associated with site investigation and cleanup, which
could be substantial.
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at approximately 262 sites, including the sites
addressed under the Federal Superfund statute or similar state statutes, where
it is participating in the study and/or clean-up of alleged environmental
contamination. The assessment of the required response and remedial costs
associated with most sites is extremely complex. Cost estimates are based on
information available for each site, financial viability of other PRPs, where
available, and existing technology, laws and regulations. CSXT's best estimates
of the allocation method and percentage of liability when other PRPs are
involved are based on assessments by consultants, agreements among PRPs, or
determinations by the U.S. Environmental Protection Agency or other regulatory
agencies.
At least once each quarter, CSXT reviews its role, if any, with respect to
each such location, giving consideration to the nature of CSXT's alleged
connection to the location (e.g., generator, owner or operator), the extent of
CSXT's alleged connection (e.g., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental costs
at September 26, 1997, and December 27, 1996, were $108 million and $117
million, respectively. These recorded liabilities include amounts representing
CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The
liability has been accrued for future costs for all sites where the company's
obligation is probable and where such costs can be reasonably estimated. The
liability includes future costs for remediation and restoration of sites as well
as any significant ongoing monitoring costs, but excludes any anticipated
insurance recoveries. The majority of the September 26, 1997 environmental
liability is expected to be paid out over the next five to seven years, funded
by cash generated from operations.
The company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent conditions
at any given location could result in exposure, the amount and materiality of
which cannot presently be reliably estimated. Based upon information currently
available, however, the company believes that its environmental reserves are
adequate to accomplish remedial actions to comply with present laws and
regulations, and that the ultimate liability for these matters will not
materially affect its overall results of operations and financial condition.
A number of other legal actions are pending against CSX and certain
subsidiaries in which claims are made in substantial amounts. While the ultimate
results of environmental investigations, lawsuits and claims involving the
company cannot be predicted with certainty, management does not currently expect
that resolution of these matters will have a material adverse effect on the
consolidated financial position, results of operations and cash flows of the
company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Third Quarter 1997 Compared with 1996
- -------------------------------------
The company reported net earnings for the quarter ended September 26, 1997
of $206 million, 95 cents per share, versus net earnings of $222 million, $1.04
per share for the same period in 1996. The 1997 results reflect increased costs
associated with the company's investment in Conrail partially offset by its
equity in Conrail's earnings. Excluding the Conrail impact, earnings for the
quarter would have been $230 million, $1.06 per share.
Operating income was $384 million, down $8 million from the third quarter
of 1996. Operating revenue of $2.6 billion remained level with the 1996 period.
Operating expense remained relatively flat compared to prior year, except at the
barge unit, where lock maintenance caused operating delays that negatively
impacted operating expense.
Rail Unit Results
- -----------------
The company's rail unit achieved third-quarter operating income of $282
million, vs. $277 million in the 1996 period. The results reflect a modest
increase in traffic, coupled with the unit's continued emphasis on cost control
and productivity improvements.
Operating revenue rose $4 million to $1.22 billion, while total traffic
increased 2 percent. Operating expense basically remained level at $933 million.
The rail unit lowered its operating ratio to 76.8 percent, from last year's
third quarter 77.1 percent.
Although total coal volume remained level at 41.3 million tons, coal
revenue decreased 3 percent, reflecting an 8 percent decrease in export coal.
Total merchandise carloads for the third quarter rose 4 percent over 1996,
while revenue rose 3 percent. The food and consumer, agricultural products and
metals commodities each experienced double-digit percentage gains. Chemicals and
minerals rose 5 percent and 6 percent, respectively. Driving the increases were
market-share gains from truckers and continued modest growth in the U.S.
economy.
RAIL OPERATING INCOME
(Millions of Dollars)
-----------------------------------------------------------
Quarters Ended Nine Months Ended
-------------------- --------------------
Sept. 26, Sept. 27, Percent Sept. 26, Sept. 27, Percent
1997 1996 Change 1997 1996 Change
--------- -------- ------- --------- -------- -------
Operating Revenue
Merchandise $ 794 $ 772 3 % $ 2,461 $ 2,374 4 %
Coal 390 404 (3)% 1,161 1,178 (1)%
Other 31 35 (11)% 93 109 (15)%
--------- -------- --------- --------
Total 1,215 1,211 -- % 3,715 3,661 1 %
Operating Expense 933 934 -- % 2,811 2,836 -- %
--------- -------- --------- --------
Operating Income $ 282 $ 277 2 % $ 904 $ 825 10 %
========= ======== ========= ========
Operating Ratio 76.8% 77.1% 75.7% 77.5%
========= ======== ========= ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, Continued
Container-Shipping Unit Results
- -------------------------------
The container-shipping unit continued to feel the effects of rate
pressures across all major trade lanes but was able to offset much of the rate
decline through cost control and productivity improvements. Operating income
totaled $82 million, vs. $95 million in the third quarter of 1996.
Third-quarter revenue of $1 billion remained level with the 1996 period
despite an 8 percent decline in rates. Volume increased 9 percent, but operating
expense decreased 1 percent from the 1996 period, due to the unit's ongoing
drive to take out costs and improve productivity.
Other Unit Results
- ------------------
At the company's barge unit, rate pressures and operating delays caused by
lock maintenance drove third quarter operating income down 40 percent, to $18
million. Revenue rose 1 percent, to $166 million, while expense rose 10 percent,
to $148 million. Contributing to the increase in expense were start-up costs
associated with South American operations, the operating delays caused by lock
maintenance, and increased barge construction.
The company's intermodal unit boosted its third quarter operating income
by more than a third, to $12 million, reflecting continued success following its
network redesign. Third-quarter revenue increased 8 percent over the 1996
period, to $174 million.
The contract logistics unit continued its steady growth in the third
quarter, with operating revenue increasing by 13 percent, to $94 million.
Operating income rose by nearly a third, to $6 million.
First Nine Months 1997 Compared with 1996
For the first nine months of the year, earnings for the company totaled
$584 million, $2.69 per share, compared to $602 million, $2.83 per share for the
prior year period. These decreases primarily result from increased costs
associated with the company's investment in Conrail, partially offset by its
equity in Conrail's earnings. Exclusive of the Conrail impact, the company would
have reported earnings for the nine months ended September 26, 1997 of $642
million, $2.96 per share.
Operating income for the first nine months of 1997 was $1.14 billion, up
$45 million over the same period in 1996. These results reflect the continued
success of the company's ongoing cost-control efforts.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments totaled $559 million at
September 26, 1997, a decrease of $123 million since December 27, 1996.
Exclusive of activities related to the company's investment in Conrail, the
primary source of cash and cash equivalents was normal transportation
operations, and the primary uses of cash were property additions, repayment of
short-term debt and dividend payments.
During the second quarter the company received approximately $2.48 billion
of proceeds, net of discounts to initial purchasers, from multiple tranches of
fixed-rate debentures issued principally to provide a portion of the financing
for the Conrail transaction. The debentures have maturities ranging from 2002 to
2032 and interest rates ranging from 6.95% to 8.30%. The remaining financing for
the transaction is in the form of commercial paper borrowings supported by a
bank credit agreement. During the quarter ended September 26, 1997, the company
determined that the amount of
- 13 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
commercial paper likely to be outstanding for more than one year was
approximately $2.0 billion, a reduction from $2.3 billion from the prior quarter
end. Accordingly, $300 million of long-term commercial paper was reclassified to
short-term debt. Subsequent to the reclassification, short-term debt was reduced
by approximately $160 million through the use of cash generated from operations
and from reducing the company's level of short-term investments.
The company's working capital deficit at September 26, 1997 was $498
million, a $187 million decrease during the first nine months of the year. A
working capital deficit is not unusual for the company and does not indicate a
lack of liquidity. The company continues to maintain adequate current assets to
satisfy current liabilities when they are due and has sufficient liquidity and
financial resources to manage its day-to-day cash needs.
FINANCIAL DATA
(Millions of Dollars)
------------------------
September 26, December 27,
1997 1996
------------ ------------
Cash, Cash Equivalents and
Short-Term Investments $ 559 $ 682
Commercial Paper Outstanding -
Short-Term $ 150 $ 335
Commercial Paper Outstanding -
Long-Term $2,000 $2,300
Working Capital (Deficit) $ (498) $ (685)
Current Ratio 0.8 0.8
Debt Ratio 54% 46%
Ratio of Earnings to Fixed Charges 2.8x 4.0x
OUTLOOK
CSX anticipates overall favorable results for the year at its operating
units compared to 1996. Consistent with the first nine months of the year, the
company's rail unit will drive the favorable results. The company will closely
monitor the effects of the rail operating problems in the western United States
to minimize their effect on its operations. The company anticipates continued
rate pressure at the container-shipping and barge units in the fourth quarter
and will focus on customer service, safety and cost control throughout its units
in order to enhance core earning power and increase shareholder value.
Continuing the trend of the first nine months, the rail unit expects to
deliver strong fourth quarter results, including an improved operating ratio.
Strong merchandise traffic is expected to offset continued weakness in export
coal volume.
At the container-shipping unit, management will focus on increasing volume
and taking out costs to help mitigate the continuing difficult rate environment.
While grain rates have adversely affected the barge unit through the first
nine months, the company is expecting to see these rates improve with the strong
U.S. crop, however, not at levels reached in prior years. The intermodal unit
forecasts overall improvement compared to prior year levels, attributable to the
network redesign it implemented in 1996. With increased demand for its services,
the contract logistics unit anticipates its double-digit growth to continue into
the fourth quarter.
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
JOINT CSX/NORFOLK SOUTHERN ACQUISITION OF CONRAIL
CSX/Norfolk Southern Agreement
- ------------------------------
On April 8, 1997, the company and Norfolk Southern entered into an
agreement providing for their joint acquisition of Conrail and the division of
its routes and other assets. Conrail is a holding company of which the principal
subsidiary is Consolidated Rail Corporation, a Class I freight railroad that
operates approximately 10,500 route miles in the Northeast and Midwest of the
United States and the Province of Quebec, Canada, and which possesses superior
access to certain major northeast markets, including the New York and Boston
metropolitan areas. Norfolk Southern owns an eastern Class I freight railroad,
Norfolk Southern Railway Company.
Under the CSX/Norfolk Southern agreement, the company and Norfolk Southern
acquired all outstanding shares of Conrail not already owned by them for cash,
or for the right to receive cash, of $115 per share through a jointly-owned
acquisition entity during the second quarter of 1997. The company and Norfolk
Southern each possess 50% of the voting and management rights of the acquisition
entity, and non-voting equity is apportioned between the parties to achieve
overall economic allocations of 42% for CSX and 58% for Norfolk Southern.
Following approval by the STB as described below, Conrail's assets will be
segregated within Conrail, and the company and Norfolk Southern will each
benefit from the operation of a specified portion of the Conrail routes and
other assets through the use of various operating arrangements, and certain
Conrail assets will be operated for the joint benefit of the company and Norfolk
Southern.
Acquisition of most of the Conrail shares was effected under a tender
offer, initiated by the company in December 1996 and amended in April 1997 to
include Norfolk Southern as a co-bidder (the joint tender offer), which closed
in May 1997. Shortly thereafter, Conrail was merged with a wholly-owned
subsidiary of the acquisition entity and all remaining Conrail shares not
tendered were converted into the right to receive $115 in cash per share. The
aggregate cost of the joint tender offer, the merger and the shares of Conrail
already acquired by the company and Norfolk Southern was approximately $9.8
billion. Pursuant to the CSX/Norfolk Southern agreement, the company has paid
42%, or approximately $4.1 billion, and Norfolk Southern has paid 58%, or
approximately $5.7 billion, of such cost. These totals include approximately $2
billion spent by the company and $1 billion spent by Norfolk Southern to acquire
approximately 30%, in the aggregate, of Conrail's shares prior to the joint
tender offer. Including its capitalized transaction costs, the company's
aggregate purchase price was approximately $4.2 billion.
Conrail shares purchased in the joint tender offer and merger, together
with all Conrail shares previously purchased by the company and Norfolk
Southern, have been deposited into a voting trust pending STB approval of the
joint acquisition, control and division of Conrail by the company and Norfolk
Southern. Furthermore, by entering into the CSX/Norfolk Southern agreement, the
company is obligated under Pennsylvania antitakeover laws to purchase any
Conrail shares "put" to the company in accordance with the procedures of such
laws for at least $115 per share in cash.
Joint CSX/Norfolk Southern STB Application
- ------------------------------------------
The exercise of control over Conrail by the company and Norfolk Southern
remains subject to a number of conditions and approvals, including approval by
the STB, which has the authority to modify contract terms and impose additional
conditions, including with respect to divestitures, grants of trackage rights
and other terms of continuing operations. On June 23, 1997, the company and
Norfolk Southern filed a joint application with the STB for control and division
of Conrail and for various other matters required to be approved by the STB. The
joint STB application addresses traffic flows, operations and related matters;
outlines the capital investments each company plans to make in new connections
and facilities and to increase capacity on critical routes; and details
operating savings and other public benefits resulting from the transaction. The
application also contains certain historical and pro forma financial information
required by the STB. The STB has issued a scheduling
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
order that provides for issuance of a final STB decision no later than June 8,
1998. No assurance can be given with respect to the receipt of STB approval or
the modifications or conditions that may be imposed in connection therewith. A
favorable decision by the STB would permit the company and Norfolk Southern to
exercise control over Conrail by mid-1998. The joint STB application is a public
document, available for review in its entirety at the office of the STB, located
at 1925 K Street, NW, Washington, D.C. 20423-0001.
Proposed Division of Conrail Routes
- -----------------------------------
Until the date the company and Norfolk Southern are permitted by the STB
to assume control over Conrail (the Control Date), Conrail will continue to be
managed by its current Board of Directors and management. After the Control
Date, Conrail will segregate its assets primarily into two groups to facilitate
their separate operation pursuant to leasing, operating, partnership and other
similar arrangements. The remaining assets and liabilities of Conrail, including
joint facilities, will be shared by the company and Norfolk Southern according
to their respective 42% and 58% economic allocations. In arriving at the
proposed division of Conrail and these percentages, the acquiring companies
negotiated with a view toward producing the best fits with their existing
systems and optimizing service to their respective customers.
The acquisition by the company of the Conrail shares and the right to use
the assets allocated to or shared by the company pursuant to the CSX/Norfolk
Southern agreement and the liabilities allocated to or shared by it pursuant to
that agreement are hereinafter referred to as the "Transaction." Many of the
terms of the Transaction are detailed in further definitive agreements which
were entered into by the company, Norfolk Southern, Conrail, and certain
affiliates of the respective companies prior to filing of the STB application.
In addition to the joint STB application, further information regarding
the Transaction is contained in the following documents: (1) the company's
Tender Offer Statement on Schedule 14D-1, together with exhibits thereto,
initially filed with the Securities and Exchange Commission (the Commission) on
December 6, 1996, as amended; (2) the company's Form 8-K filed with the
Commission on June 4, 1997 to report completion of the joint tender offer and
subsequent merger, to report the amendment and restatement of its credit
agreement with bank lenders, and to present certain historical financial
statements and pro forma financial statements giving effect to the Transaction;
(3) the company's Form S-4 originally filed with the Commission on June 5, 1997
and subsequently amended on August 11, 1997 relating to an offer to exchange
$2.5 billion in privately-placed debentures for newly-issued publicly tradeable
debentures having substantially identical terms; (4) the company's Form 8-K
filed with the Commission on July 8, 1997 to report the filing of the STB
application and provide as an exhibit the definitive Transaction Agreement
entered into by the company, Norfolk Southern, Conrail, and certain affiliates
of the respective companies; and (5) the company's Form 8-K filed with the
Commission on August 8, 1997 to update certain historical financial statements
and pro forma financial statements giving effect to the Transaction.
Financing Arrangements
- ----------------------
The company's total cash obligation to complete the purchase of Conrail
shares under the Transaction was approximately $4.2 billion. The company
originally arranged a $4.8 billion bank credit facility in November 1996 to
provide financing for the Conrail acquisition and to meet general working
capital needs. The facility was amended in May 1997 and the lenders' commitments
were reduced to $2.5 billion, reflecting the issuance of the debentures which
provided a portion of the company's financing for the Transaction. Currently,
the facility is used as support for commercial paper issuance.
The $2.5 billion principal amount of debentures, issued through a
multi-tranche private offering in May 1997, have maturities ranging from 2002 to
2032 and interest rates ranging from 6.95%
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
to 8.30%. In October 1997, the company completed an exchange of the outstanding
debentures for newly-issued freely tradeable debentures with substantially
identical terms.
The company expects its long-term debt levels (including the company's
portion of Conrail debt) to peak in late 1998 or early 1999 at approximately
$6.8 billion, with related interest charges (including interest payments on the
company's portion of Conrail debt) to peak at approximately $520 million.
Payments to Conrail under operating or similar arrangements and through capital
contributions to the jointly-owned acquisition entity will be sufficient to pay
obligations on Conrail's outstanding debt instruments in accordance with their
terms. The agreement between the company and Norfolk Southern provides that such
debt will be shared ratably according to their respective 42% and 58%
percentages.
Broadest Geographic Network in Eastern United States
- ----------------------------------------------------
The Transaction will significantly enhance the company's position as a
leading global transportation company. The company will remain the largest
railroad in the eastern United States and become the third largest railroad in
the nation, measured in terms of route miles and ton-miles. The company, as a
result of the Transaction, will be adding approximately 3,500 route miles, or
19%, to its rail network, and sharing with Norfolk Southern approximately 1,200
additional route miles. The company will have approximately 22,000 route miles
in 22 states, the District of Columbia, and the Provinces of Ontario and Quebec,
Canada, and will provide direct access to virtually every major metropolitan
area east of the Mississippi River and to eleven of the largest east coast and
gulf ports.
Enhanced Operating Efficiencies and Revenue Growth
- --------------------------------------------------
Management expects the integration of Conrail operations resulting from
the Transaction to add approximately $1.7 billion, or 16%, to the company's
annual revenue beginning in the first twelve months following operational
consolidation. Management believes that the Transaction will also result in
growth of the company's rail revenue base through expansion of single-line
service and the company's ability to compete more effectively on certain routes
along which large quantities of goods are now transported by truck. Single-line
service is preferred by shippers over joint-line service because of lower
transaction costs, reduced delays, less damage from interchange operations and
single-carrier accountability. The addition of Conrail lines to the company's
rail network also is expected to improve operational efficiency through better
asset utilization. Optimization of train sizes, increased length of haul,
improved backhauls, shorter routes to many destinations and fewer empty
movements are all expected to produce cost reductions for the combined rail
network. Other significant savings are expected to be achieved through the
realization of economies of scale, rationalization of administrative and other
overhead expenses and consolidation of duplicative facilities.
Integration Planning
- --------------------
The company is actively planning for the smooth integration of Conrail
operations into the CSX rail system after the Control Date. Key initiatives
involve all facets of combining the two systems, including safety; customer
service; train scheduling, switching, and routing; equipment utilization and
track programs; commuter and passenger rail; marketing; technology; labor
agreements; and administration. Related capital improvements to certain routes
and facilities on the CSX rail system have also been initiated. It is
anticipated that operational integration will take place upon completion of
labor agreements with Conrail's contract workforce, currently expected to be in
late 1998 or early 1999.
Financial Effects
- -----------------
The company expects that the benefits from the Transaction will begin to
build from the date of operational integration and should be largely realized
within a three-year period thereafter. Operational integration is expected to
occur in late 1998 or early 1999; therefore, for the purposes of
- 17 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
the following discussion, Year 1, Year 2 and Year 3 roughly correspond to 1999,
2000, and 2001, respectively. Based on joint efforts of the company and Conrail
to identify potential cost savings, management currently estimates that the
Transaction will lead to quantifiable pretax benefits from increased traffic and
cost efficiencies (excluding certain one-time expenses associated with system
integration) of approximately $178 million, $305 million and $410 million
annually in Years 1, 2 and 3, respectively, compared to the separate operation
of the company and its share of Conrail. The benefits include estimated
incremental operating income of $58 million, $108 million and $146 million
expected through increased traffic in Years 1, 2 and 3, respectively. The
remaining pretax benefits will be in the form of operating cost savings, with
$120 million, $197 million and $264 million (exclusive of the one-time
integration costs) expected to be realized in Years 1, 2 and 3, respectively.
Management estimates that the company will, in Years 1, 2 and 3, incur one-time
transitional capital expenditures in connection with the integration of
operations. Those expenditures are expected to be $322 million through the end
of Year 1, $114 million in Year 2, and $52 million in Year 3.
The benefits outlined above are addressed in more detail in the joint STB
application and were developed and refined through the efforts of various
integration project teams. These teams, with assistance from Conrail personnel
and various outside consultants, completed revised estimates of integration
benefits in mid-June 1997 in conjunction with the development of a formal
operating plan included in the STB application.
Including transaction costs, the overall purchase price paid by the
company exceeded the historical book value of its proportionate share of
Conrail's net assets by approximately $2.9 billion. A substantial portion of the
excess purchase price is expected to be allocated to reflect the fair value of
Conrail's property and equipment. The company has based its provision for
amortization of the excess purchase price on preliminary estimates of the fair
values of such property and equipment and estimates of their remaining useful
lives, as well as estimates of the fair values of other assets and liabilities
of Conrail.
Because of the time required to obtain necessary regulatory and other
approvals, the company does not expected integrated operations to have a
significant effect on operating and financial results prior to late fiscal 1998
or fiscal 1999. The primary impact of the proposed Transaction on net earnings
prior to the integration of operations will be the after-tax effect of the
company's share of Conrail's net earnings, reported under the equity method of
accounting, less amortization of the excess purchase price and interest on debt
incurred to acquire the Conrail investment. Net cash flow prior to operational
integration is expected to be reduced by interest payments on the acquisition
debt. At September 26, 1997, the average interest rate on debt incurred to
acquire Conrail shares was approximately 6.8%. The degree of negative impact on
net earnings and net cash flow during the remainder of 1997 and 1998 will depend
primarily on the net earnings reported by Conrail and the average interest rate
and timing of interest payments on the related debt.
The above estimates and forecasts are based upon numerous estimates and
assumptions about complex economic and operating factors with respect to
industry performance, general business and economic conditions and other matters
that cannot be predicted accurately and that are subject to contingencies over
which the company has no control. Such forward looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the company to differ
materially from any future results, performance or achievements expressed or
implied by such forward looking statements. Certain of those risks,
uncertainties and other important factors that could cause actual results to
differ materially include: (a) future economic conditions in the markets in
which the company and Conrail operate; (b) financial market conditions; (c)
inflation rates; (d) changing competition; (e) changes in the economic
regulatory climate in the United States railroad industry; (f) the ability to
eliminate duplicative administrative functions; and (g) adverse changes in
applicable laws, regulations or rules governing environmental, tax or accounting
matters. These forward looking statements speak only as of the date of this
filing. The company disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward looking statement contained herein to
reflect any change in the
- 18 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OTHER MATTERS
New Orleans Jury Verdict
- ------------------------
In September 1997, a state court jury in New Orleans, Louisiana returned a
$2.5 billion punitive damages award against CSXT. The award was made in a class
action lawsuit against a group of nine companies based on personal injuries
alleged to have arisen from a 1987 fire. The fire was caused by a leaking
chemical tank car parked on CSXT tracks and resulted in the 36-hour evacuation
of a New Orleans neighborhood.
The facts of the case indicate that the damages awarded are extremely high
and CSXT has excellent grounds for appeal. A National Transportation Safety
Board (NTSB) investigation concluded that the probable cause of the incident was
improper installation, maintenance and closing of a gasket at the bottom of the
tank car. CSXT did not manufacture the tank car, did not install the gasket, did
not load the tank car, and did not transport the car. As a common carrier, CSXT
had a legal obligation to accept the car, which had been certified by its owner
as safe for carriage of the chemical and inspected by the rail carrier that left
the car on CSXT's track. The fire started approximately six hours after the car
was placed on CSXT's track, and federal safety laws did not require inspection
by CSXT until 48 hours after placement. Although the NTSB issued recommendations
to other parties involved in the incident to prevent similar occurrences and to
minimize their effects, no such recommendations were made with respect to CSXT.
Many residents were inconvenienced by the evacuation, and some were treated for
exposure to the chemical and the fire, though the size of the class of persons
claiming injury is in dispute. Ultimately, no one suffered serious injury, no
lives were lost, no significant property damage occurred, and no jobs were lost.
CSXT is pursuing an aggressive strategy on all legal fronts and believes
that the punitive damages award will be set aside or reduced so substantially
that it will not have any material long-term financial impact on the company or
CSXT. To protect its right to appeal the verdict, CSXT may be required to
provide a surety bond or other form of security for all or part of the punitive
damages award. Management is taking appropriate steps to arrange such security
in the event it is ultimately required by the court. At this time, it is not
possible to estimate the ultimate impact, if any, from the punitive damages
award, and no charge to earnings has been recorded.
In the same case, the court awarded a group of 20 plaintiffs compensatory
damages of approximately $2 million against the defendants, including CSXT, to
which the jury assigned 15% of the responsibility for the incident. CSXT's
liability under that compensatory damages award is not material, and adequate
provision was made for the award in a prior year.
Federal Railroad Administration/Rail Labor/CSXT Joint Review on Safety
- ----------------------------------------------------------------------
On October 16, 1997, the Federal Railroad Administration (FRA) issued a
report on a joint review on safety on the CSXT rail system. The review was
undertaken as a cooperative effort with CSXT and rail labor, and was conducted
between July and September 1997. CSXT and its labor representatives, in
cooperation with the FRA, are actively addressing the issues cited in the report
and have already initiated numerous actions to ensure that all issues are fully
resolved. CSXT has demonstrated an improving safety record over time and, in
recent years, has been among the safest Class I freight railroads in the nation.
The cooperative effort with rail labor and the FRA reaffirms the commitment to
safety by all parties involved and helps ensure that safety will remain the top
priority as CSXT plans the integration of Conrail lines into its system.
- 19 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data Schedule
(b) Reports on Form 8-K
1. A report was filed on July 8, 1997, reporting Item 5, Other
Events - the filing of formal application with the Surface
Transportation Board for control of Conrail by the company and
Norfolk Southern; plus Item 7, Financial Statements and Exhibits
- (1) Transaction Agreement, dated June 10, 1997, among the
company, Norfolk Southern, Conrail, and certain affiliates of
each, providing definitive terms of the arrangements between the
parties subsequent to the date the company and Norfolk Southern
are permitted to exercise control over Conrail; and (2) a joint
press release by the company and Norfolk Southern.
2. A report was filed on August 8, 1997, reporting Item 7, Financial
Information and Exhibits - (1) unaudited condensed consolidated
financial statements of Conrail for the six months ended June 30,
1997; and (2) pro forma condensed consolidated financial
statements of the company as of and for the six months ended June
27, 1997 and the fiscal year ended December 27, 1996, adjusted to
reflect its acquisition of an interest in Conrail.
3. A report was filed on September 9, 1997, reporting Item 5, Other
Events - issuance of press release by the company on September 8,
1997 related to New Orleans jury award; and Item 7, Financial
Information and Exhibits - Press Release issued by the company on
September 8, 1997.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)
By: /s/JAMES L. ROSS
----------------
James L. Ross
Vice President and Controller
(Principal Accounting Officer)
Dated: October 29, 1997
- 20 -
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