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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 1-7092
Illinois Central Railroad Company
(Exact name of registrant as specified in its charter)
Illinois 36-2728842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504
-------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(312) 755-7500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class so registered: each class is registered:
Illinois Central Railroad Company New York Stock Exchange
6-3/4% Notes,
due May 15, 2003
Gulf, Mobile and Ohio Railroad Company New York Stock Exchange
5% Income Debentures,
Series A, due December 1, 2056
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 ....
As of March 27, 1997, there were 100 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF ILLINOIS CENTRAL
CORPORATION (SEC FILE NO. 1-10720) AND MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION J(1)(a) and (b) of form 10-K AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
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ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
FORM 10-K
Year Ended December 31, 1997
INDEX
PART I 10-K Page
Item 1. Business................................................. 3
Item 2. Properties............................................... 10
Item 3. Legal Proceedings........................................ 14
Item 4. Submission of Matters to a Vote of Security Holders (A) 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 16
Item 6. Selected Financial Data (A).............................. 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 17
Item 8. Financial Statements and Supplementary Data.............. 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant (A)... 28
Item 11. Executive Compensation (A)............................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management (A)........................................... 28
Item 13. Certain Relationships and Related Transactions (A)....... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 28
SIGNATURES............................................................. 29
(A) Omitted or amended as the registrant is a wholly-owned subsidiary of
Illinois Central Corporation and meets the conditions set forth in
General Instruction J(1)(a) and (b) of Form 10-K and is, therefore,
filing this Form with the reduced disclosure format.
<PAGE>
PART I
Item 1. Business
Background
Illinois Central Railroad Company ("ICR") traces its origin to 1851, when
ICR was incorporated as the nation's first land grant railroad. ICR currently
operates 2,600 miles of main line track between Chicago and the Gulf of Mexico,
primarily transporting chemicals, coal, paper, grain and milled grain, and
intermodal trailers and containers. ICR is a wholly-owned subsidiary and a
principal asset of Illinois Central Corporation (the "Corporation").
The principal executive office of ICR is located at 455 North Cityfront
Plaza Drive, Chicago, Illinois 60611-5504 and its telephone number is (312)
755-7500.
Railroad Commodities and Customers
ICR's customers are engaged in a wide variety of businesses and ship a
number of different products that can be classified into seven primary commodity
groupings:
-- organic, inorganic, agricultural and other chemicals
-- grain, milled grain such as corn syrup and soybean meal, and other
agricultural/food products
-- paper, lumber, and other forest products -- coal -- intermodal,
comprising a wide variety of primarily consumer products shipped in
containers or truck trailers on specially designed cars -- metals,
metal products such as coiled steel, and scrap metal
-- bulk commodities such as sand, stone, coke, and ores
In 1997, one customer accounted for approximately 7% of revenues (only
one other customer exceeded 5%) and the ten largest customers accounted for
approximately 35% of revenues.
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Contributions to Total Revenues by Commodity Group
The respective percentage contributions by principal commodity group to
ICR's revenues during the past five years are set forth below:
Contributions to Total Revenues by Commodity Group
Commodity
Group 1997 1996 1995 1994 1993
--------- ---- ---- ---- ---- ----
Chemicals....................... 26.7% 27.6% 25.2 % 24.8% 24.7%
Grain, mill & food products..... 17.4 18.9 21.9 18.7 23.2
Paper....& forest products...... 16.9 12.6 16.9 18.1 18.6
Coal............................ 12.2 14.1 12.9 15.2 12.7
Intermodal...................... 8.6 8.7 7.3 6.6 4.8
All other....................... 18.2 18.1 15.8 16.6 16.0
---- ------ ----- ----- -----
Total........................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
In 1997, approximately 64% of ICR's freight traffic originated on its
own lines, of which approximately 20% was forwarded to other carriers.
Approximately 20% of ICR's freight was received from other carriers for final
delivery by ICR, and the balance of approximately 16% represented bridge or
through traffic.
Terminal Operations
ICR currently has facilities or terminal operations which contribute to
revenues and enhance the flow of rail traffic. Most of these facilities have
been developed since 1994. Following are descriptions of two ICR terminals.
In 1996, ICR constructed a 75-acre intermodal terminal for the
exclusive use of the Canadian National Railway (CN). The facility has an annual
capacity of 250,000 intermodal "lifts." An intermodal "lift" is the placement of
a container or truck trailer on or off a railcar. ICR owns the facility and
operates it on CN's behalf. ICR is compensated through fees paid for each lift.
In 1994, ICR constructed a transload facility in Harvey, Illinois. This
facility stores primarily railcars of plastic pellets. These pellets are
subsequently loaded into tanker trucks ("transloaded") for distribution to
smaller, non-rail-served manufacturers. ICR spent $1.0 million to double the
capacity of this terminal in 1997.
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Operating Statistics
Set forth below is certain information relating to ICR's freight
traffic during the past five years.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Carloads (in thousands) 1,039 927 957 915 848
Freight train miles
(in thousands)1............. 8,078 7,950 7,758 7,179 5,659
Revenue ton miles of freight
traffic (in millions)2 3.... 22,156 22,511 23,773 20,582 20,080
Revenue tons per carload 67.6 71.7 74.7 76.3 79.1
Average length of haul
(in miles).................. 307 309 328 286 293
Gross freight revenue per
ton mile3 4................. $.026 $.026 $ .026 $ .028 $ .028
Net freight ton miles per
average route mile
(in millions)............... 8.4 8.2 9.0 7.6 7.4
Gallons per ton mile5......... .00235 .00236 .00234 .00248 .00251
Active locomotives............ 324 331 333 328 322
Track resurfacing (miles) 1,235 1,360 1,360 1,397 1,293
Percent resurfaced............ 31.0% 33.7% 32.2% 33.0% 29.8%
Ties laid in replacement
(including switch ties)..... 329,413 425,999 408,760 346,994 323,764
Slow order miles.............. 58.78 100.00 209.76 275.79 152.32
1 Freight train miles equals the total number of miles traveled by all trains
in the movement of freight.
2 Revenue ton miles of freight traffic equals the product of the weight in
tons of freight carried for hire and the distance in miles between origin
and destination.
3 Prior years have been restated to eliminate non-revenue ton miles.
4 Revenue per ton mile equals gross freight revenue divided by revenue ton
miles of freight traffic.
5 Gallons per ton mile equals the amount of fuel required to move one ton of
freight one mile.
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The following table summarizes operating expense-to-revenue ratios of ICR
for each of the past five years. The table analyzes the various components of
operating expenses based on the line items appearing on the income statements.
The ratio is generally used within the railroad industry as a measure of
operating efficiency; ICR has had the lowest (best) ratio among major railroads
in the U.S.
and Canada in each of the last eight years.
Ratio 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Operating1...................... 63.4% 64.4% 65.6% 67.7% 68.6%
Labor and fringe benefits....... 29.8 29.5 30.2 30.9 31.2
Leases and car hire............. 8.2 9.2 9.1 10.0 12.5
Diesel fuel..................... 5.4 5.6 5.1 5.3 5.4
Materials and supplies.......... 5.3 5.1 5.4 6.0 6.2
Depreciation and amortization... 5.3 5.0 4.8 4.2 4.0
Casualty, insurance and losses.. 2.5 1.8 2.7 4.0 3.8
Other taxes..................... 3.2 2.7 2.8 2.9 2.9
Other........................... 3.7 5.5 5.5 4.4 2.6
1 Operating ratio means the ratio of operating expenses before special charge
over operating revenues.
Employees; Labor Relations
Labor relations in the railroad industry are subject to extensive
governmental regulation under the Railway Labor Act. Employees in the railroad
industry are covered by the Railroad Retirement System instead of Social
Security. Employer contribution rates under the Railroad Retirement System are
currently more than double those in other industries and may rise further as the
proportion of retired employees receiving benefits increases relative to the
number of working employees. Also, railroad employees are covered by the Federal
Employer's Liability Act ("FELA") rather than by state no-fault workmen's
compensation systems. FELA is a fault-based system, with compensation for
injuries determined by individual negotiation or litigation.
Approximately 90% of all employees are represented by one of eleven
unions. The general approach to labor negotiations by Class I railroads is to
bargain on a collective national basis. For several years now, one of ICR's
guiding principles is that local -- rather than national, industry-wide --
negotiations will result in labor agreements that better address both employees'
concerns and preferences and ICR's actual operating environment. Therefore,
beginning in late 1994, ICR began negotiating separate distinct agreements with
each of its eleven unions. To date, all of ICR's eleven bargaining units have
ratified local agreements that resolve wage and work-rule issues through 1999
for shop crafts and through the for engineers and trainmen.
There are risks associated with negotiating locally. Presidents and
Congress have repeatedly demonstrated they will step in to avoid national
strikes, while a local dispute may not generate federal intervention, making an
extended work stoppage potentially more likely. ICR's management believes the
potential mutual benefits of local bargaining outweigh the risk.
<PAGE>
The following table shows the average annual employment levels for the last five
years:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total Employees 3,295 3,238 3,268 3,250 3,306
Management believes that over the next several years attrition and
retirements will be the primary source of declines in employment levels.
Increases in employment levels, particularly in train operations, are possible
in response to growth of business.
Regulatory Matters; Freight Rates; Environmental Considerations
ICR is subject to significant governmental regulation by the Surface
Transportation Board ("STB") and other federal, state and local regulatory
authorities with respect to rates, service, safety and operations.
The jurisdiction of the STB encompasses, among other things, rates
charged for certain transportation services, assumption of certain liabilities
by railroads, mergers or the acquisition of control of one carrier by another
carrier and extension or abandonment of rail lines or services.
The Federal Railroad Administration, the Occupational Safety and Health
Administration and certain state transportation agencies have jurisdiction over
railroad safety matters. These agencies prescribe and enforce regulations
concerning car and locomotive safety equipment, track safety standards, employee
work conditions and other operating practices.
ICR currently transports Southern Illinois coal which will not meet the
environmental standards of Phase II of the Clean Air Act unless blended with
lower-sulfur coal or users of the coal install air scrubbers. As a result, this
source of traffic may decline in advance of or consistent with Phase II
implementation in the year 2000. On the other hand, ICR is participating in
movements of Western coal (lower-sulfur) and certain Southern Illinois coal
which is being blended with low-sulfur Eastern coal to comply with Phase II. ICR
anticipates these sources of traffic may increase. Overall, management believes
that implementation of Phase II of the Clean Air Act is unlikely to have a
material adverse effect on the results of ICR.
Currently, the utility industry is undergoing deregulation creating
enormous pressures for change, innovation, and cost control. In the face of
increased competition caused by deregulation, utilities are attempting to reduce
costs, including rail transportation costs. Methods being investigated include
"power wheeling", "coal-by-wire", and for those utilities served by a single
railroad, re-regulation of rail rates. Some analysts have suggested that utility
deregulation may significantly reduce rail revenues through a shift in the
pattern of coal movements forcing lower rail rates. At this point, there are too
many variables to know if utility deregulation will have a neutral, modestly
positive or modestly negative effect on ICR in the long-term. However,
management believes that ICR will not be materially, adversely affected because
it already provides its utility customers highly competitive rates and service
as determined through competitive bids against other railroads and river
options.
Inherent in the operations and real estate activities of railroads is
the risk of environmental liabilities. ICR is subject to extensive regulation
under environmental laws and regulations concerning, among other things,
discharges into the environment and the handling, storage, transportation and
disposal of waste and hazardous materials. See Item 2. "Properties -
Environmental Conditions" for discussion of sites on which ICR currently or
formerly conducted operations that are subject to governmental action in
connection with environmental degradation.
Railroad's Results Influenced by Economic Conditions
In any given year, ICR, like other railroads, is susceptible to changes
in the economic conditions of the industries and geographic areas that produce
and consume the freight it transports. Many of the goods and commodities carried
by ICR's experience cyclicality in demand. The operations of ICR can be expected
to reflect this cyclicality because of the significant fixed costs inherent in
railroad operations. ICR's revenues are affected by prevailing economic
conditions and should an economic slowdown or recession occur in the United
States or other key markets, the volume of rail shipments carried is likely to
be reduced.
Competition
ICR faces intense competition for freight traffic from trucks, river
barges, pipeline carriers, and other railroads. Competition is generally based
on the rates charged and the quality and reliability of the service provided. At
December 31, 1997, there were 9 railroads in the United States classified by
revenues as Class I railroads. ICR is sixth in revenues and has the best
operating ratio.
To a greater degree than other rail carriers, ICR is vulnerable to
barge competition because its main routes are parallel to the Mississippi River
system. The use of barges for some commodities, particularly coal and grain,
often represents a lower cost mode of transportation. Barge competition and
barge rates are affected by navigational interruptions from ice, floods and
droughts which can cause widely fluctuating barge rates. ICR's ability to
maintain its market share of the available freight has traditionally been
affected by the navigational conditions on the river. As a result, ICR's revenue
per ton-mile has generally been lower than industry averages for these
commodities.
Most of ICR's operations are conducted between points served by one or
more competing carriers. The consolidation in recent years of major rail systems
has resulted in strong competition in the service territory of ICR. The
mega-carriers could use their size and pricing power to block shippers' access
to efficient gateways and routing options that are currently and have been
historically available. Mergers have not had a material adverse impact on the
results or financial condition of ICR. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations Significant
Developments - Canadian National Tender Offer."
Adverse Factors Effecting Fuel Prices
Fuel expense represents an appreciable portion of ICR's annual
operating expenses. ICR currently has hedging programs in place through June
1998, to mitigate the effects of fuel price changes on its operating margins and
overall profitability. ICR has entered into several collar agreements to
mitigate the risk of fuel price volatility. ICR also monitors its hedging
positions and credit ratings of its counter parties and does not anticipate
losses due to counterparty nonperformance.
<PAGE>
Liens on Properties
ICR's equipment is not subject to liens.
Liability Insurance
ICR is self-insured for the first $5 million of each loss. ICR has
available $245 million of liability insurance per occurrence, subject to an
annual cap of $385 million in the aggregate for all losses. This coverage is
considered by ICR's management to be adequate in light of ICR's safety record
and claims experience.
Item 2. Properties
Physical Plant and Equipment
System. As of December 31, 1997, ICR's total system consisted of
approximately 4,500 miles of track comprised of 2,600 miles of main line, 200
miles of secondary main line and 1,700 miles of passing, yard and switching
track. ICR owns all of the track except for 190 miles owned by other railroads.
ICR operates over this track by separate agreements.
Track and Structures. The following amounts have been spent during the
five years ended December 31, 1997, on track and structure to construct and
maintain rail lines and related signal equipment, and other facilities ($ in
millions):
Capital
Expenditures Maintenance Total
1997.......................... $91.1 $16.7 $107.8
1996.......................... 91.2 23.7 114.9
1995.......................... 66.9 33.5 100.4
1994.......................... 63.2 29.1 92.3
1993.......................... 50.3 25.1 75.4
---- ---- ----
Total.............. 362.7 128.1 490.8
These expenditures have concentrated primarily on the routine
maintenance of the track roadway and bridges. Approximately 1,200, 1,400 and
1,400 miles of roadway ballast was resurfaced in 1997, 1996 and 1995,
respectively. In 1996, a total of $20.1 million was spent to construct an
intermodal terminal facility for the Canadian National Railway ("CN Terminal").
Other large projects include a total of $11.4 million to complete the conversion
of 198 miles of track, known as the Yazoo District, to a single track with
centralized traffic control in 1993 and 1994 and a total of $11.4 million to
construct new or expanded intermodal facilities in Chicago and Memphis in 1992
and 1994.
Locomotives and Freight Cars. ICR's fleet has undergone significant
rationalization and modernization since 1985 when locomotives and cars were at
their peak of 862 and 28,616, respectively. Over the last four years leases of
61 used SD-40-2's and 20 new SD-70's have enabled ICR to replace older, lower
horsepower and less efficient locomotives. (The 20 SD-70's replaced 31 older,
smaller locomotives.)
<PAGE>
Locomotive modernization and acquisition were part of a change in
operational philosophy concerning equipment which resulted in adoption of an
equipment ownership program in 1993. The program included lease conversions
whereby equipment was acquired outright or leased under more favorable lease
terms by ICR. Through 1996, lease conversions involved 118 locomotives and 4,228
freight cars. As a result of the new lease terms, $4.3 million, $7.1 million and
$24.7 million of capital leases were recorded in 1997, 1995 and 1994,
respectively. Most of these leases contain fixed price options whereby the
equipment can be acquired at or below fair market value at some point during the
lease term.
Approximately 1,840 of the cars leased by ICR are leased from a
separate subsidiary of the Corporation. The equipment program also included a
significant upgrade of the highway trailer fleet used in intermodal service. In
1992, the entire fleet of old leased trailers, approximately 880, was replaced
with 800 brand new trailers. Expanding intermodal volume necessitated the
addition of another 100 trailers in 1994.
During 1994 ICR repaired and reconditioned approximately 173 cars at a
cost of $2.9 million. This equipment is being leased on a short-term basis to
other carriers until ICR anticipates it will need the equipment.
In 1996, ICR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. In 1997 and 1996, approximately 800
cars, operated under short-term car hire arrangements and various leases, were
returned and replaced with 900 new high capacity hoppers which are being leased
under an operating lease from an unrelated third party.
The following is the overall fleet at December 31:
Total Units: 1997 1996 1995 1994 1993
- ------------ ---- ---- ---- ---- ----
Locomotives1......... 365 391 397 417 468
Freight cars......... 15,375 15,838 15,872 16,498 16,634
Work equipment....... 641 655 654 625 745
Highway trailers..... 888 889 898 898 898
1 Approximately 21 locomotives need repair before they can be returned to
service. This equipment is either repaired, if needed on an ongoing basis,
or sold. ICR sold 30, 6, 40, 48 and 23 surplus locomotives in 1997, 1996,
1995, 1994 and 1993, respectively. The active fleet was 324 as of December
31, 1997. Also, 15 locomotives are being subleased and 5 will be returned to
active service after repainting.
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The components of the fleet by subsidiary and in total for 1997 and in total
for 1996 are shown below:
Long-Term 1997 1996
Description1 Owned 2 Lease Total Total
- ------------ ------ ------ ----- -----
Locomotives:
Multipurpose 221 79 300 309
Switching 65 - 65 82
----- ---- ---- ----
Total 286 79 365 391
===== ==== ==== ====
Freight Cars:
Box (general service) 216 1,214 1,430 1,444
Box (special purpose) 2,269 627 2,896 2,907
Gondola 939 678 1,617 1,555
Hopper (open top) 1,748 1,990 3,738 4,115
Hopper (covered) 2,698 1,914 4,612 3,945
Flat 213 366 579 596
Other 630 634 1,264 1,276
----- ----- ----- -------
Total 8,713 7,423 16,136 15,838
===== ===== ====== ======
Work Equipment 641 641 655
===== ====== ======
Highway trailers 888 888 889
===== ====== ======
1 In addition, approximately 1,531 freight cars were being used by ICR under
short-term car hire agreements.
2 Includes 53 locomotives and 761 freight cars under capital leases.
Environmental Conditions
ICR faces potential environmental cleanup costs associated with
approximately 22 contaminated sites and various fueling facilities for which a
total of $9.1 million has been reserved as of December 31, 1997. The most
significant of those sites are described below.
Mobile, Alabama
ICR owned property in Mobile prior to 1976 upon which a lessee
conducted creosoting operations. The Alabama Department of Environmental
Management has determined that the soil and groundwater are contaminated with
creosote, pentachlorophenol and possibly dioxins. ICR has been participating in
joint clean-up efforts with the current owner and ICR's former lessee. See Item
3. "Legal Proceedings."
Jackson, Tennessee
A rail yard in Jackson, Tennessee, formerly owned by ICR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethane (TCE) in the adjacent municipal water well field. ICR formerly
operated a shop facility at the site and TCE is a common component of solvents
similar to those believed to have been used in the shop. ICR believes it has
demonstrated that the TCE did not come from its operation, or from this site.
See Item 3. "Legal Proceedings."
<PAGE>
McComb, Mississippi
ICR has conducted a site assessment of a facility where car repairs
were formerly performed to determine the nature and extent of contamination,
primarily lead from removed paint, at the site. Currently, ICR is preparing a
remediation plan under the supervision of the Mississippi Bureau of Pollution
Control. Estimates of remaining clean-up costs range between $2.7 million and
$8.0 million.
Kegley, Illinois
Emergency response action has been taken by ICR at this scene of a 1994
derailment in which about 22,000 gallons of TCE were released. The spill has
been contained by construction of an impervious wall extended into the bedrock
and encircling the site. ICR has enrolled in Illinois' Pre- Notice Site Cleanup
Program and is voluntarily remediating the site. Estimates of remaining clean-up
costs range between $1.4 million and $7.0 million.
East Hazel Crest, Illinois
In 1994, ICR learned that an underground fuel line had leaked about
100,000 gallons of diesel fuel into the soil and groundwater. ICR has replaced
the fuel tank and piping, has constructed a groundwater remediation system and
has enrolled the site in Illinois' Pre-Notice Site Clean-up Program.
See Item 3. "Legal Proceedings."
Fueling Facilities
ICR has maintained fueling facilities at more than 20 locations at
various times from the 1950's to date. Many of those sites are or may be
contaminated with spilled fuel. Those stations currently in use are equipped
with drip pans and treatment facilities and ICR has initiated a program of
rebuilding all fuel lines above ground.
Waste Oil Generation
ICR has been identified as a Potentially Responsible Party ("PRP") at a
site where waste oil was allegedly processed and disposed. ICR is alleged to
have generated some of the waste oil. ICR believes any contribution it may have
made to the site contamination is de minimis. See Item 3. "Legal Proceedings."
<PAGE>
Item 3. Legal Proceedings
GATX Tank Car Explosion September 9, 1987 at New Orleans (Civil District Court,
Parish of Orleans, Louisiana No. 87-16374)
ICR is one of several defendants in a New Orleans class action in which
a jury has returned a verdict against the ICR for $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment for technical reasons and remanded the case to the trial court for
further proceedings. The Company believes the plaintiff's claims have no basis
and intends to continue to challenge them vigorously.
State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc., et al.,
S.D. Ala. No. 85-0642-C
The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985
seeking damages for alleged pollution of land in Mobile, Alabama, stemming from
creosoting operations over several decades. Defendants include ICR, which owned
the land until 1976, Alabama Wood Treating Corporation, Inc., and Reilly
Industries, Inc. ("RII"), which leased the land from ICR and conducted creosote
operations on the site. In December 1976, ICR sold the premises to ASD. The
complaint sought payment for the clean-up cost together with punitive and other
damages.
In 1986, ASD, RII and ICR agreed to form a joint technical committee to
clean the site, sharing equally the cost of clean-up, and in October 1986 the
court stayed further proceedings in the suit. Under the agreement the joint
technical committee has spent approximately $6.8 million and has been authorized
to expend up to a total of $6.9 million. ICR has contributed $2.3 million.
Further clean-up activities are anticipated, the cost of which could range from
$1.8 million to $5.6 million depending upon the clean-up standards and
remediation methods ultimately required and utilized.
ASD terminated the Joint Tech Agreement on August 27, 1997 and has
threatened to reinstate the 1985 litigation - ICR expects its share of remaining
clean-up cost to range between $0.6 million and $1.8 million.
In the Matter of Illinois Central Railroad Company, et al., Tennessee Division
of Superfund No. 94-0187
The Tennessee Department of Environment and Conservation, on June 6,
1994, issued a Remedial Order requiring clean-up by ICR and the current owners
of a site in Jackson, Tennessee. ICR operated a rail yard and locomotive repair
facility at the site. Trichloroethane ("TCE") has been found in several
municipal water wells near the site. TCE is a common component of solvents
similar to those believed to have been used at the shop. In addition,
concentrations of metals and organic chemicals have been identified on the
surface of the site. A remedial investigation study has been completed which
indicates the TCE in the water wells came from an adjacent municipal dump and
not from operations on this site. Exclusive of ground-water clean-up, ICR
estimates total clean- up costs between $1.0 million and $7.6 million and
expects another PRP to share in the expense.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See Index page of this report for explanation.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
All of the outstanding common stock of the ICR (100 shares) is owned by
the Corporation and therefore is not traded on any market. Certain covenants of
ICR's Revolver, while not specifically restricting dividends, do require the ICR
to maintain minimum levels of tangible net worth. While not anticipated, such
restrictions could limit the amount of dividends paid by the ICR to the
Corporation. ICR paid cash dividends to the Corporation of $62.9 million in
1997, $103.2 million in 1996 and $107.7 million in 1995. At December 31, 1997,
approximately $32.0 million of ICR equity was free of such restriction. In
January and March 1998, ICR declared and paid a dividend of $19.0 million and
$15.6 million, respectively to the Corporation.
Item 6. Selected Financial Data
Intentionally omitted. See Index page of this Report for explanation.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Significant Developments
Canadian National Tender Offer
On February 10, 1998, the Corporation and Canadian National Railway
Company ("CN") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a
wholly owned subsidiary of CN, commenced a tender offer (the "Offer") to
purchase approximately 75% of the outstanding shares of the Corporation's Common
Stock (the "Shares") at a price of $39.00 per share. Following completion of the
Offer and subject to satisfaction of customary conditions, the Purchaser will be
merged with and into the Corporation (the "Merger") and each Share not purchased
in the Offer will be converted into the right to receive an amount of CN common
stock equal to the fraction obtained by dividing (1) $39.00 by (2) the average
closing price of the CN common stock (the "Average Closing Price") over the 20
day trading period ending two trading days prior to the effective time of the
Merger; provided that if such Average Closing Price is less than $43.00, then
the Average Closing Price will be deemed to be $43.00 and if such Average
Closing Price is greater than $64.50, then the Average Closing Price will be
deemed to be $64.50. Pursuant to the Merger Agreement, if less than 75% of the
shares are tendered, the Shares outstanding prior to the Merger will be
converted into the right to receive a prorated amount of stock and cash in order
to ensure that the overall aggregate consideration consists of 75% cash and 25%
stock.
Simultaneously with the purchase of shares pursuant to the Offer, the
shares purchased will be deposited in an independent, irrevocable voting trust
while CN and the Corporation await review of the transaction by the STB.
Pursuant to the Merger Agreement, subject to consultations with the
Corporation and after giving good faith consideration to the views of the
Corporation, CN shall have final authority over the development, presentation
and conduct of the STB case, including over decisions as to whether to agree to
or acquiesce in conditions. The Corporation shall take no regulatory or legal
action in connection with the STB without CN's consent. The STB could impose
conditions or restrictions as it relates to CN's acquisition of control of the
Corporation. If the STB does not approve CN's acquisition of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
have the obligation to sell all the Corporation common shares held by the voting
trust. Neither the acquisition of the Corporation shares pursuant to the tender
offer nor the merger will be subject to STB approval of the combination.
The Corporation's Board of Directors has unanimously approved the
Merger Agreement and the transactions contemplated and recommended that
stockholders accept the Offer and tender their shares. See Item 3. "Legal
Proceedings" for actions related to the Offer and Merger Agreement.
The Offer was successfully concluded on March 13, 1998 when the
Purchaser received tenders for more than 75% of outstanding shares.
Under change in control provisions of various compensation plans,
including Incentive 2000 Plan and Employment Security Agreements, the
Corporation will be required to make payments to certain employees under certain
conditions. The change in control payment under Incentive 2000 Plan is
approximately $11 million. The amount that may be paid under Employment Security
Agreements, if any, is not determinable at the time of filing.
<PAGE>
With the change in control the Employee Stock Purchase Plan and the
Management Employee Discounted Stock Purchase Plan were terminated.
Results of Operations
1997 Compared to 1996
The discussion below takes into account the financial condition and results of
operations of ICR for the years presented in the consolidated financial
statements. Total revenues for 1997 increased from the prior year by $5.3
million, or 0.9%, to $622.5 million. Modest decreases in the number of
carloadings of 0.1% and average freight revenue per carload of 0.7%, were offset
by increases in other revenues including switching and terminal services.
Strength in chemical traffic which began in the latter part of 1996
continued as expected into 1997. Strength was across the board among most
chemicals, and rail rates were strong. Chemical loadings and revenues benefitted
from a service agreement with the Burlington Northern Santa Fe Railroad
("BNSF"). Management believes that the future annual benefit of the agreement
will grow although it is taking longer than expected for BNSF to penetrate the
Union Pacific/Southern Pacific ("UPSP") markets to which it gained access
through the UPSP merger case.
Export demand for U.S. grains remained weak throughout 1997. Very
strong demand for grain in 1996, coupled with meager supply particularly of
corn, resulted in abnormally high prices paid for grain in 1996 which in turn
stimulated abnormally high plantings of grains by other countries. Consequently,
while the 1996 harvests of corn and soybeans in Illinois were good, export
demand for U.S. grains was abnormally low (including wheat for which ICR is a
residual carrier) as global buyers turned to other countries' bumper crops and
lower prices. In January 1997, management lowered its grain expectations and
cautioned that weak export grain markets were likely to curtail ICR's 1997
revenue growth.
Paper and forest products are economically sensitive commodities that
respond to industrial production, housing starts and other basic economic
indicators. Fiber and pulpboard were depressed all year as that industry found
its capacity outstripping demand following the addition of significant new
capacity in 1995/96. However, according to major manufacturers, capacity was
brought into balance with demand in the summer, leading to a stronger second
half of the year. Additionally, a plant conversion by a major ICR shipper from
short-log to long-log input took several months longer than their original
expectations, resulting in less rail service than planned.
Coal performed as expected. However, a mid-year mine fire of a major
coal producer/shipper on ICR's line and, separately, severe rail congestion in
the western U.S., which disrupted the movement of coal, resulted in ICR losing
about 18,000 loads of coal it might otherwise have carried.
Underlying demand for coal remains strong.
Base intermodal business, particularly trailer business, was very
strong throughout the year. However, a major intermodal customer UPSP,
discontinued some of their business with ICR in September. There was also some
negative impact from an approximate two-week strike against another major
intermodal customer.
As expected, metals traffic of this commodity group fell short of 1996
all-time record year which mirrored exceptional strength in the steel industry
and included some large non-recurring spot moves. Also, as expected, a major
shipper took its plant down for several months in order to effectively double
<PAGE>
its productive capacity, which resulted in near-term loss of business for ICR
but sets the stage for future growth with this customer. Birmingham Steel
completed construction of its new mill in Memphis in the fourth quarter of 1997
and began to take inbound product.
Bulk commodities are primarily stone and other construction materials
and are closely tied to state highway projects. This smaller commodity group
fluctuates with the timing of projects as well as the availability of freight
cars for this lower-margin business.
Operating expenses overall decreased $3.1 million or .8% in 1997.
Increased labor and fringe costs reflect contract increases and additional
management labor due to management services agreement with another subsidiary of
the Corporation partially offset by operational efficiencies. Leases and car
hire decreased $5.6 million or 9.9% in 1997 reflecting a return to more normal
operating levels and lower export grain movements. Fuel expense decreased
reflecting the decrease in usage (.4%) and by the lower cost (3.0%).
Depreciation and amortization expense was 6.8% higher due to increased capital
spending in 1996 and 1997 compared to 1995. Materials and supplies were 6.4%
higher in 1997 reflecting higher prices and increased maintenance costs for
locomotives and freight cars. Casualty expense increased 36.8% compared to 1996.
In 1996, casualty expense was lower than expected due to the write-down of
casualty reserves as a result of ICR's improving safety performance. The
increase in other taxes was primarily due to increased property tax assessments.
Other expense reflects the recovery of prior period expenses in relation to
costs related to a derailment.
Operating income for 1997 increased $8.4 million or 3.8% to $227.9
million for the reasons cited above.
Other income (expense), net, in 1997 includes a $3.3 million pre-tax
gain related to the grant of a permanent easement for the marketing of outdoor
advertising on ICR rights-of-way. On October 3, 1996, ICR sold its investments
in an industry-captive insurance company, RAIL, which resulted in a one-time
gain, recorded as other income (expense), net, of approximately $7.0 million.
Net interest expense of $28.2 million for 1997 increased 6.4% compared
to $26.5 million in 1996 caused by higher debt levels year to year.
Provision for income taxes of $70.1 million for 1997 included a $4.1
million benefit from the donation of property.
<PAGE>
1996 Compared to 1995
The discussion below takes into account the financial condition and
results of operations of ICR for the years presented in the consolidated
financial statements.
Total revenues for 1996 decreased from the prior year by $28.1
million or 4.4% to $617.2 million, following a 3.1% decrease in the number of
carloadings coupled with a 1.5% decrease in the average freight revenue per
carload.
Grain and grain mill accounted for 17% of ICR's carloads and 27% of
ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were down 17%,
31% and 22% respectively. Grain was clearly the primary cause of the 1996
revenue shortfall. The comparisons were particularly difficult against a record
grain carloading year in 1995. Illinois' 1995 corn and soybean harvest was
abnormally small so that by the third quarter 1996 grain elevators were
essentially depleted and the new harvest was still weeks away. Rail rates were
higher on average this year versus last; demand for grain was strong; the
product just was not available to move. The smaller crop also affected grain
mill since domestic processors were forced to cut back on their usual
production.
Coal accounted for 22% of ICR's carloads and 24% of ton-miles in
1996. Against 1995, carloads, ton-miles and revenues were down 6%, up 6% and
flat, respectively. A large coal contract for 25,000 carloads was not renewed in
July 1995 as a large customer wanted more aggressive pricing and went elsewhere.
Thus, loads in the first half of 1996 compared with 1995 were significantly
depressed. However, for a second year in a row, coal margins, and the return on
the assets involved, improved.
Chemicals accounted for 15% of ICR's carloads and 17% of ton-miles in
1996. Compared with 1995, ton-miles were down 2% while carloads and revenues
were flat. Rail rates, under pressure in the earlier months of the year, firmed
in the second half. The softness observed in the economy, especially in the
first two quarters, was reflected in the building of chemicals manufacturers'
inventories and softness in our customers' pricing. Our customers' markets
firmed in the latter half of the year so that ICR came in essentially flat in
both chemical loads and revenues.
Paper and Forest Products were 15% of 1996 carloads and 14% of
ton-miles. Total carloads were down 6% while ton-miles and revenues were down 3%
versus 1995. Rail rates held up reasonably well throughout the year. Paper and
forest products are economically sensitive commodities that respond to
industrial production, housing starts and other basic economic indicators. Fiber
and pulpboard were depressed all year with slight improvements only recently.
Bulk Commodities contributed 6% of carloads and ton-miles in 1996.
This represents carload and revenue growth of approximately 4% while ton-miles
were down slightly from the 1995 level. Bulk commodities are primarily stone and
other construction materials and are closely tied to state highway projects.
This smaller commodity group fluctuates with the timing of projects as well as
the availability of freight cars for this lower-margin business.
Metals accounted for 4% of ICR's carloads and 5% of ton-miles in
1996. For 1996, versus 1995, carloads, ton-miles and revenues were up 9%, 21%
and 11%, respectively. The steel industry had another strong year, and ICR set
another record for metals loads and revenues.
Finally, Intermodal accounted for 21% of ICR's loads and 7% of
ton-miles. Versus 1995, carloads were up 10%, with ton-miles and revenues up 9%.
These results were achieved in an industry that saw trailer rate weakness
earlier in the year and some weakness in automotive parts traffic later in the
year.
Operating expenses overall decreased $25.7 million or 6.1% in 1996.
Labor and fringe costs include the wage increases of 3% negotiated with nine of
the ICR's unions. The decline in this category is primarily the result of lower
traffic levels, particularly grain, and the elimination of the high overtime
caused by the congestion experienced in 1995. Leases and car hire also benefited
from the elimination of congestion to return to more normal operating levels. In
1995, favorable one-time adjustments on several capital leases were recorded.
Fuel expense reflects the increase in cost per gallon (13.8%) partially offset
by decreased usage (9.4%). The decrease in casualty, insurance and losses
reflects the emphasis on safety and improved claims experience. Other expenses
reflect the one-time reversal of non-revenue related accruals to actual ($2.5
million) and favorable performance payments in joint facilities that congestion
in 1995 prevented us from receiving ($.7 million).
Operating income for 1996 decreased by $2.4 million or 1.1% to $219.5
million for the reasons cited above.
On October 3, 1996, ICR sold its investments in an industry-captive
insurance company, RAIL, Inc., which resulted in a one-time gain, recorded as
Other Income, Net, of approximately $7 million.
Net interest expense of $26.5 million for 1996 increased .8% compared
to $26.3 million in 1995. The 1996 expense includes $3.6 million from increased
borrowings to support the $109.9 million transferred from ICR in June 1996 in
connection with the Corporation's acquisition of CCP Holdings, Inc. ("CCPH").
Overall in 1996, average borrowings have been greater than 1995 and interest
rates have been lower.
Liquidity and Capital Resources
Operating Data ($ in millions):
1997 1996 1995
---- ---- ----
Cash flows provided by (used for):
Operating activities............... $184.3 $165.0 $168.2
Investing activities................ (117.0) (226.1) (122.8)
Financing activities................ (85.4) 104.4 (54.6)
-------- ------ -------
Net change in cash and temporary
cash investments................... $(18.1) $ 43.3 $ (9.2)
======= ====== ========
Cash from operating activities in 1997, 1996 and 1995 was primarily net
income before depreciation, deferred taxes and extraordinary item.
Investing Data
<PAGE>
Additions to property were as follows ($ in millions):
1997 1996 1995
---- ---- ----
Communications and signals.. $ 10.1 $ 12.1 $ 10.7
Equipment/rolling stock..... 19.9 27.7 30.3
Track and bridges........... 65.7 53.9 47.0
Other....................... 15.2 25.2 9.6
-------- -------- -------
Total... ....... $110.9 $118.9 $97.6
====== ====== =====
Expenditures for CN Terminal were $2.0 million included in other for
1997 and $3.3 million and $16.8 million included in track and bridges, and
other, respectively, in 1996. In 1996 and 1995 capital expenditures exceeded
original estimates as several opportunities to acquire equipment were acted upon
in accordance with ICR's strategy of owning more of its equipment. Property
retirements and removals generated proceeds of $4.9 million, $6.0 million, and
$5.4 million in 1997, 1996 and 1995, respectively.
ICR anticipates that capital expenditures for 1998 will be
approximately $88.6 million. Replacement expenditures of $79.3 million will
concentrate on track maintenance, bridges and freight car upgrades. Productivity
and expansion expenditures will total $9.3 million. These expenditures are
expected to be met from current operations or other available sources.
Financing Activities
For the three years ended December 31, 1997, ICR has paid $273.9
million in dividends to the Corporation ($62.9 million in 1997, $103.3 million
in 1996 and $107.7 million in 1995). Included in the 1996 dividends to the
Corporation is the March 1996 transfer by ICR of its ownership in the Chicago
Intermodal Company ("CIC") via a dividend of CIC stock. The book value of the
CIC investment was $5.7 million.
ICR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The program is supported by the $250
million ICR Revolver (see below).
At December 31, 1997, Standard & Poor's Corporation ("S&P"), Moody's Investor
Services ("Moody's") and Fitch Investors Service ("Fitch") have rated the
commercial paper A2, P2 and F2, respectively. At December 31, 1997, no amounts
were outstanding. The average interest rate on commercial paper outstanding for
the year ended December 31, 1997, was 5.68% with a range of 5.68% to 5.69%.
ICR's public debt is rated BBB by S&P and Baa2 by Moody's. Each of S&P, Moody's
and Fitch have placed ICR's debt on credit watch negative as a result of the
recently announced merger of the Corporation and Canadian National Railway. (See
Item 7. "Managements Discussion and Analysis of financial conditions and Results
of Operations - Significant Developments-Canadian National Tender Offer")
In 1994, ICR entered into a revolving agreement to sell undivided
percentage interests in certain of its accounts receivable, with recourse, to a
financial institution. This agreement was terminated on January 8, 1998. At
December 31, 1997, $45 million had been sold pursuant to the agreement. Costs
related to the agreement fluctuated with changes in prevailing interest rates.
These costs, which are included in other income (expense), net, were $3.0
million, $2.9 million and $3.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.
ICR has a $250 million revolver ("ICR Revolver") with its bank lending
group which expires in 2001. Fees and borrowing spreads are predicated on ICR's
long-term credit ratings. Currently, the annual facility fee is 15 basis points
and borrowings under this agreement are at Eurodollar offered rate plus 22.5
basis points. The Revolver is used primarily for backup for ICR's commercial
paper program but can be used for general corporate purposes. The available
amount is reduced by the outstanding amount of commercial paper borrowings and
any letters of credit issued on behalf of ICR under the facility. At December
31, 1997, there were no borrowings or letters of credit issued under the ICR
Revolver.
Certain covenants of ICR's debt agreements require specific levels of
tangible net worth but not a specific dividend restriction. At December 31,
1997, ICR exceeded it's tangible net worth covenants by $32.0 million. ICR was
in compliance with all covenants at December 31, 1997, and does not contemplate
any difficulty maintaining such compliance.
Throughout 1996 and 1995, ICR was active in the public debt market,
issuing bonds and medium-term notes ("MTN's"). In December 1996, ICR issued $125
million aggregate amount of 100- year 7.7% debentures, due September 15, 2096.
These bonds may not be redeemed until 2026 and then only at a premium which
declines to par in 2056. In 1995, $100 million 7.75% non-callable 10- year notes
due May 2005 ("2005 Notes") were issued. (See below.) A total of $230 million in
MTN's were issued over the two years as follows ($ in millions):
Principal Year
Amount Coupon Issued Matures
$20 6.27% 1995 1998
30 6.83 1995 2000
50 6.98 1996 2007
50 7.12 1996 2001
30 6.85 1996 1999
50 6.72 1996 2001
ICR has a shelf registration from 1996 which can be used to issue an
additional $70 million in MTN's or other debt until 2000. Currently, there are
no plans to issue additional debt but replacing maturing MTN's, capital
investments and other ventures could necessitate use.
In 1995, ICR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The monies used to
fund the prepayment were provided by commercial paper, the net proceeds of the
2005 Notes and $40 million from existing lines of credit. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
line of credit borrowings were replaced with the proceeds of MTN's.
The Company believes that its available cash, cash generated by its
operations and cash available from the facilities described above will be
sufficient to meet foreseeable liquidity requirements. Additionally, the Company
believes it has access to the public debt market if needed.
Year 2000 Conversion
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Many of ICR's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, ICR determined that it will be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. ICR presently believes that
with modifications to existing software and conversions to new software, the
Year 2000 Issue can be mitigated. However, if such modifications and conversions
are not made, or are delayed, the Year 2000 Issue could have a material impact
on the operations of ICR.
ICR has initiated formal communications with all of its suppliers and
large customers to determine the extent to which ICR is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. There can be no
guarantee that the systems of other companies on which the ICR's systems rely
will be converted on a timely basis, or that a failure to convert by another
company, or a conversion that is incompatible with ICR's systems, would not have
material adverse effect on ICR.
In October 1997, ICR entered into an agreement to replace approximately
40 percent of its non- Year 2000 compliant programs with new software and will
utilize both internal and external resources to replace and test the software
for Year 2000 modifications. ICR began converting its remaining computer systems
with internal resources in 1997. ICR expects to spend approximately $8.5 million
to $10.0 million from 1997 through 1999 to modify and replace its computer
systems. Of the total project cost, approximately $3.0 million is attributable
to the purchase of new software. ICR plans to complete conversion of non-Year
2000 compliant programs during 1998. However, user acceptance testing will
continue into 1999. Installation of new software programs should be completed
during the first quarter of 1999. The total cost of the project is being funded
through operating cash flows. Maintenance or modification costs will be expensed
as incurred, while the costs of new software will be capitalized and amortized
over the software's useful life. Accordingly, ICR does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations. The amount of spending in 1997 was
approximately $2.3 million.
The costs of the project and the date on which ICR plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Miscellaneous
ICR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. As a result, approximately 50% of
ICR's short-term diesel fuel requirements through June 1998 are protected
against significant price changes.
ICR has paid approximately $3 million in 1996 and $6 million in each of
1995 and 1994 for severance, lump sum signing awards and other costs associated
with various labor agreements. Under the terms of local bargaining agreements,
wages will rise 3%-4% per year.
In October 1996, the Brotherhood of Maintenance of Way Employees
membership ratified a new agreement which settles wage and work rules through
1999. In February and May 1997, the United Transportation Union ("UTU") and
Brotherhood of Locomotive Engineers, respectively, ratified new agreements which
settle wage and work rule issues through 2000. The agreements are similar to the
nationally negotiated agreements in effect with other Class I carriers. The main
distinction is timing of the various lump sum payouts and scheduled wage
increases.
Environmental Liabilities
ICR's operations are subject to comprehensive environmental regulation
by federal, state and local authorities. Compliance with such regulation
requires the Corporation to modify its operations and expend substantial
manpower and financial resources.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("Superfund"), and similar state and federal laws, ICR
is potentially liable for the cost of clean-up of various contaminated sites.
ICR generally participates in the clean-up at sites where other substantial
parties share responsibility through cost-sharing arrangements, but under
Superfund and other similar laws ICR can be held jointly and severally liable
for all environmental costs associated with such sites.
ICR is aware of approximately 22 contaminated sites at which it is
probably liable for some portion of any required clean-up. Of these, 14 involve
contamination primarily by diesel fuel which can be remediated without material
cost. Five other sites are expected to require more than $1 million in clean-up
costs. At three of these sites other parties are expected to contribute the
majority of the costs incurred. ICR paid approximately $.6 million toward the
investigation and remediation at all sites in 1997, and anticipates similar
expenditures annually.
For all known sites of environmental contamination where ICR loss or
liability is probable, ICR has recorded an estimated liability at the time when
a reasonable estimate of remediation cost and ICR liability can first be
determined. Adjustments to initial estimates are recorded as necessary based
upon additional information developed in subsequent periods. Estimates of ICR`s
potential financial exposure for environmental claims or incidents are
necessarily imprecise because of the difficulty of determining in advance the
nature and extent of contamination, the varying costs of alternative methods of
remediation, the regulatory clean-up standards which will be applied, and the
appropriate allocation of liability among multiple responsible parties. At
December 31, 1997, ICR estimated the probable range of its liability to be $9.1
million to $45 million, and in accordance with the provisions of SFAS No. 5 had
a reserve of $9.1 million for environmental contingencies. This amount is not
reduced for potential insurance recoveries or third-party contributions.
The risk of incurring environmental liability in connection with both
past and current activities is inherent in railroad operations. Decades-old
railroad housekeeping practices were not always consistent with contemporary
standards, historically ICR leased substantial amounts of property to industrial
tenants, and ICR continues to haul hazardous materials which are subject to
occasional accidental release. Because the ultimate cost of known contaminated
sites cannot be definitively established and because additional contaminated
sites yet unknown may be discovered or future operations may result in
accidental releases, no assurance can be given that ICR will not incur material
environmental liabilities in the future. However, based on its assessments of
the facts and circumstances now known, management believes that it has recorded
adequate reserves for known liabilities and does not expect future environmental
charges or expenditures, based on these known facts and circumstances, to have a
material adverse effect on ICR`s financial position, results of operations, cash
flow or liquidity.
Litigation
ICR is one of several defendants in a New Orleans class action in which
a jury has returned a verdict against the ICR for $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment for technical reasons and remanded the case to the trial court for
further proceedings. (See Part I. Item 3 - Legal Proceedings). ICR believes the
verdict has no basis and intends to continue to challenge it vigorously.
While the final outcome of this proceeding cannot be determined, in the
opinion of management, based on present information, the ultimate resolution of
this case will not have a material adverse effect on the ICR's financial
position, results of operations, cash flow or liquidity.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". The new statement is effective for fiscal
years beginning after December 15, 1997. When adopted, SFAS No. 130 will require
restatement of prior years' statements to report any applicable comprehensive
income.
In June 1997, the FASB released SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The new statement is
effective for fiscal years beginning after December 15, 1997. When adopted, SFAS
No. 131 will require presentation of any applicable segment information for each
year that is reported.
In February 1998, the FASB released SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The new statement
is effective for fiscal years beginning after December 15, 1997. When adopted,
SFAS No. 132 will require restatement of disclosures for each year that is
reported.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page 30 of this Report.
Item 9. Changes in and Disagreement with Accountants in Accounting
Financial Disclosures
NONE
<PAGE>
PART III
Items 10, 11, 12 and 13
Intentionally omitted. See the Index page of this Report for
explanation.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements on page 30 of this
Report.
2. Financial Statement Schedules:
See Index to Financial Statement Schedules on page F-26 of this
Report.
3. Exhibits:
See items marked with "*" on the Exhibit Index beginning on page E-1
of this Report. Items so marked identify management contracts or
compensatory plans or arrangements as required by Item 14.
(b) 1. Reports on Form 8-K:
None
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Exhibit Index beginning on page E-1.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this Report.
<PAGE>
SIGNATURES
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, there unto duly authorized.
ILLINOIS CENTRAL RAILROAD COMPANY
By: /s/ JOHN V. MULVANEY
John V. Mulvaney
Vice President and Chief Financial Officer
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title(s) Date
/s/ GEORGE D. GOULD Chairman of the Board and Director March 27, 1998
- -----------------------
George D. Gould
/s/ JOHN D. MCPHERSON President and Chief Executive Officer March 27, 1998
- -----------------------
John D. McPherson (principal executive officer), Director
/s/ JOHN V. MULVANEY Vice President March 27, 1998
- ----------------------- and Chief Financial Officer
John V. Mulvaney (principal financial officer), Director
/s/ DOUGLAS A. KOMAN Controller March 27, 1998
- ----------------------- (principal accounting officer)
Douglas A. Koman
/s/ RONALD A. LANE Director March 27, 1998
- -----------------------
Ronald A. Lane
/s/ DONALD H. SKELTON Director March 27, 1998
- -----------------------
Donald H. Skelton
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENTS
SUBMITTED IN RESPONSE TO ITEM 8
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.......................... F-1
Consolidated Statements of Income for the three years ended
December 31, 1997............................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996......... F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997............................................... F-4
Consolidated Statements of Stockholder's Equity and Retained
Income for the three years ended December 31, 1997.............. F-5
Notes to Consolidated Financial Statements for the three years
ended December 31, 1997......................................... F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Illinois Central Railroad Company:
We have audited the accompanying consolidated balance sheets of
Illinois Central Railroad Company (a Delaware corporation) and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
income, cash flows and stockholder's equity and retained income for each of the
three years in the period ended December 31, 1997. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Illinois Central
Railroad Company and subsidiaries as of 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
Financial Statement Schedules herein is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 19, 1998
(except with respect to
the matter discussed in
Note 2, as to which the
date is February 10, 1998)
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
Years Ended December 31,
1997 1996 1995
Revenues $622.5 $ 617.2 $ 645.3
Operating expenses:
Labor and fringe benefits 185.6 181.9 194.8
Leases and car hire 51.1 56.7 58.8
Diesel fuel 33.3 34.6 33.2
Materials and supplies 33.2 31.2 35.0
Depreciation and amortization 33.1 31.0 30.9
Casualty, insurance and losses 15.6 11.4 17.4
Other taxes 19.6 16.9 18.2
Other 23.1 34.0 35.1
Operating expenses 394.6 397.7 423.4
Operating income 227.9 219.5 221.9
Other income, net 6.6 9.9 2.7
Interest expense, net (28.2) (26.5) (26.3)
Income before income taxes and
extraordinary item 206.3 202.9 198.3
Provision for income taxes 70.1 76.3 67.1
Income before extraordinary item 136.2 126.6 131.2
Extraordinary item, net - - (11.4)
Net income $136.2 $ 126.6 $ 119.8
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
December 31, December 31,
ASSETS 1997 1996
Current assets:
Cash and temporary cash investment $ 28.2 $ 46.3
Receivables, net of allowance for
doubtful accounts
of $.9 in 1997 and $1.3 in 1996 100.6 84.4
Loans to affiliates 4.9 14.9
Materials and supplies, at average cost 15.3 17.3
Deferred income taxes - current 17.5 18.1
Other current assets 5.0 7.8
Total current assets 171.5 188.8
Investments 12.1 11.7
Loans to affiliates 160.9 138.2
Properties:
Transportation:
Road and structures, including land 1,193.7 1,118.0
Equipment 173.7 165.2
Other, principally land 41.3 41.5
Total properties 1,408.7 1,324.7
Accumulated depreciation (45.8) (38.4)
Net properties 1,362.9 1,286.3
Other assets 23.6 20.9
Total assets $1,731.0 $1,645.9
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 22.7 $ 2.8
Accounts payable 53.1 56.3
Dividends payable - -
Income taxes payable - 1.2
Casualty and freight claims 12.7 20.9
Employee compensation and vacations 19.1 18.4
Taxes other than income taxes 16.4 15.4
Accrued redundancy reserves 3.9 4.3
Other accrued expenses 80.1 72.6
Total current liabilities 208.0 191.9
Long-term debt 552.4 590.3
Deferred income taxes 302.9 263.5
Other liabilities and reserves 111.7 117.5
Contingencies and commitments (Note 13)
<PAGE>
Stockholder's equity:
Common stock authorized, issued
and outstanding
100 shares, $1 par value - -
Additional paid-in capital 129.6 129.6
Retained income 426.4 353.1
Total stockholder's equity 556.0 482.7
Total liabilities and stock-
holder's equity $ 1,731.0 $ 1,645.9
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of
Cash Flows
($ in millions)
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities :
Net income $ 136.2 $ 126.6 $ 119.8
Reconciliation of net income to net cash
provided by (used for) operating activities :
Extraordinary item, net - - 11.4
Depreciation and amortization 33.1 31.0 30.9
Deferred income taxes 39.9 31.5 24.5
Equity in undistributed earnings of
affiliates,
net of dividends received (0.9) (0.5) (0.8)
Net gains on sales of real estate (0.6) (1.6) (0.1)
Cash changes in working capital (15.1) (9.0) (8.3)
Changes in other assets (2.8) (6.4) (2.0)
Changes in other liabilities and
reserves (5.5) (6.6) (7.2)
Net cash provided by operating
activities 184.3 165.0 168.2
Cash flows from investing activities :
Additions to properties (110.9) (118.9) (97.6)
Proceeds from sales of real estate 2.4 3.0 2.5
Proceeds from equipment sales 2.5 3.0 2.9
Proceeds from sales of investments 0.6 2.3 0.7
Loans to affiliates (12.7) (114.5) (26.9)
Other 1.1 (1.0) (4.4)
Net cash (used for) investing
activities (117.0) (226.1) (122.8)
Cash flows from financing activities :
Proceeds from issuance of debt 0.9 255.0 250.0
Principal payments on debt (3.4) (9.6) (238.7)
Net proceeds (payments) - Commercial Paper (20.0) (37.0) 42.0
Dividends paid (62.9) (103.3) (107.7)
Purchase of subsidiary's common stock - (0.7) (0.2)
Net cash provided by (used for)
financing activities (85.4) 104.4 (54.6)
Changes in cash and temporary cash investments (18.1) 43.3 (9.2)
Cash and temporary cash investments at
beginning of year 46.3 3.0 12.2
Cash and temporary cash investments at end
of year $ 28.2 $ 46.3 $ 3.0
Supplemental disclosure of cash flow information : Cash paid during the year
for:
Interest (net of amount capitalized) $ 38.1 $ 28.5 $ 30.8
Income taxes $ 32.5 $ 53.2 $ 31.0
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity and Retained Income
Shares Equity ($ in millions)
Total
Additional Stock-
Common Common Paid-in Retained holder's
Share Stock Capital Income Equity
Balance December 31, 1994 100 $ - $ 129.1 $ 263.3 $ 392.4
Capital contribution 0.5 0.5
Dividends (47.7) (47.7)
Net income 119.8 119.8
Balance December 31, 1995 100 - 129.6 335.4 465.0
Dividends (108.9) (108.9)
Net income 126.6 126.6
Balance December 31, 1996 100 - 129.6 353.1 482.7
Dividends (62.9) (62.9)
Net income 136.2 136.2
Balance December 31, 1997 100 $ - $ 129.6 $ 426.4 $ 556.0
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ICR
Illinois Central Corporation (the "Corporation"), a holding company,
was incorporated under the laws of Delaware. The Corporation, through its
wholly-owned subsidiaries, including the Illinois Central Railroad Company
("ICR"), is principally engaged in the rail freight transportation business. ICR
operates 2,600 miles of main line track between Chicago and the Gulf of Mexico,
primarily transporting chemicals, grain and milled grain, coal, paper and
intermodal commodities.
2. Subsequent Event
On February 10, 1998, the Corporation and Canadian National Railway
Company ("CN") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a
wholly owned subsidiary of CN, commenced a tender offer (the "Offer") to
purchase approximately 75% of the outstanding shares of the Corporation's Common
Stock (the "Shares") at a price of $39.00 per share. Following completion of the
Offer and subject to satisfaction of customary conditions, the Purchaser will be
merged with and into the Corporation (the "Merger") and each Share not purchased
in the Offer will be converted into the right to receive an amount of CN common
stock equal to the fraction obtained by dividing (1) $39.00 by (2) the average
closing price of the CN common stock (the "Average Closing Price") over the 20
day trading period ending two trading days prior to the effective time of the
Merger; provided that if such Average Closing Price is less than $43.00, then
the Average Closing Price will be deemed to be $43.00 and if such Average
Closing Price is greater than $64.50, then the Average Closing Price will be
deemed to be $64.50. Pursuant to the Merger Agreement, if less than 75% of the
shares are tendered, the Shares outstanding prior to the Merger will be
converted into the right to receive a prorated amount of stock and cash in order
to ensure that the overall aggregate consideration consists of 75% cash and 25%
stock.
Simultaneously with the purchase of shares pursuant to the Offer, the
shares purchased will be deposited in an independent, irrevocable voting trust
while CN and the Corporation await review of the transaction by the STB.
Pursuant to the Merger Agreement, subject to consultations with the
Corporation and after giving good faith consideration to the views of the
Corporation, CN shall have final authority over the development, presentation
and conduct of the STB case, including over decisions as to whether to agree to
or acquiesce in conditions. The Corporation shall take no regulatory or legal
action in connection with the STB without CN's consent. The STB could impose
conditions or restrictions as it relates to CN's acquisition of control of the
Corporation. If the STB does not approve CN's acquisition of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
have the obligation to sell all the Corporation common shares held by the voting
trust. Neither the acquisition of the Corporation shares pursuant to the tender
offer nor the merger will be subject to STB approval of the combination.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Corporation's Board of Directors has unanimously approved the
Merger Agreement and the transactions contemplated and recommended that
stockholders accept the Offer and tender their shares.
The Offer was successfully concluded on March 13, 1998 when the
Purchaser received tenders for in excess of 75% of outstanding shares.
Under change in control provisions of various compensation plans,
including Incentive 2000 Plan and Employment Security Agreements, the
Corporation will be required to make payments to certain employees under certain
conditions. The change in control payment under Incentive 2000 Plan is
approximately $11 million. The amount that may be paid under Employment Security
Agreements, if any, is not determinable at the time of filing.
With the change in control the Employee Stock Purchase Plan and the
Management Employee Discounted Stock Purchase Plan were terminated.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the ICR
and its subsidiaries. Significant investments in affiliated companies are
accounted for by the equity method. Transactions between consolidated companies
have been eliminated in the accompanying consolidated financial statements.
Properties
Depreciation is computed by the straight-line method and includes
depreciation on properties under capital leases. ICR uses the composite method
of depreciation for track structure, other road property, and equipment. In the
case of routine retirements, removal costs less salvage recovery are charged to
accumulated depreciation. Expenditures for maintenance and repairs are charged
to operating expense.
The approximate ranges of annual depreciation rates for major property
classifications railroads are as follows:
Road properties............................. 1%-8%
Transportation equipment.................... 2%-5%
ICR's rates were approved by the predecessor of the Surface
Transportation Board ("STB"), an independent agency of the Department of
Transportation.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenues
Revenues are recognized based on services performed and include
estimated amounts relating to movements in progress for which the settlement
process is not complete. Estimated revenue amounts for movements in progress are
not significant.
Income Taxes
Deferred income taxes are accounted for on the asset and liability
method by applying enacted statutory tax rates to differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. The resulting deferred tax liabilities and assets represent taxes
to be paid or collected in the future when the related assets and liabilities
are recovered and settled, respectively.
Cash and Temporary Cash Investments
Cash in excess of operating requirements is invested in certain funds
having original maturities of three months or less. These investments are stated
at cost, which approximates market value.
Income Per Share
Income per share has been omitted as ICR is a wholly-owned subsidiary
of IC.
Derivative Financial Instruments
ICR has only limited involvement with derivative financial instruments
and does not use them for trading purposes. ICR has entered into various diesel
fuel collar agreements with the objective of mitigating significant fluctuations
in fuel prices. Premiums paid for the purchase of these agreements are amortized
to fuel expense over the terms of the agreements. Unamortized premiums are
included in Other Assets in the Consolidated Balance Sheets. Amounts receivable
or payable under the collar agreements are accrued as increases or decreases to
Diesel Fuel Expense. See Note 7.
Casualty Claims
ICR accrues for injury and damage claims based on actuarially
determined estimates of the ultimate costs associated with asserted claims and
claims incurred but not reported.
Stock-Based Compensation
ICR has elected to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), for disclosure purposes only. ICR accounts for
compensation under its Long-Term Incentive Plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." See Note 14.
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.
Reclassifications
Certain items relating to prior years have been reclassified to conform
to the presentation in the current year.
4. Extraordinary Item
In 1995, ICR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
loss resulted from the premium paid, the write-off of unamortized financing fees
and costs associated with the prepayment. See Note 9.
5. Other Income (Expense), Net
Other income (expense), net consisted of the following ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Rental income, net............................... $2.5 $2.3 $3.5
Net gains (losses) on sales of real estate...... .6 1.6 (.1)
Equity in undistributed
earnings of affiliates........................ 1.6 .8 .9
Sales of accounts receivable (see Note 10)..... (3.0) (2.9) (3.2)
Grant of permanent easement (see below).......... 3.3 - -
Sale of RAIL (see below)......................... - 7.3 -
Other, net....................................... 1.6 .8 (1.6)
---- ---- ----
Other income (expense), net................... $6.6 $9.9 $2.7
===== ===== ====
On September 30, 1997, ICR granted a permanent easement for
development of right of way property for signboard use. On October 3, 1996, ICR
sold its investment in an industry captive insurance company which resulted in a
one-time gain of approximately $.07 per share.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Supplemental Cash Flow Information
Cash changes in components of working capital, exclusive of current
maturities of long-term debt, included in the Consolidated Statements of Cash
Flows were as follows ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Receivables, net....................... $(16.2) $ (5.1) $(14.1)
Materials and supplies................. 1.9 (2.4) .8
Other current assets................... 3.4 (5.3) .6
Accounts payable....................... (3.2) 4.9 (3.5)
Income taxes payable................... (1.8) (8.4) 13.3
Accrued redundancy reserve............. (.4) - (2.5)
Other current liabilities.............. 1.2 7.3 (2.9)
----- ----- -------
Cash changes in working capital.... $(15.1) $(9.0) $ (8.3)
======= ====== ========
ICR recorded capital leases of $4.3 million and $7.1 million covering 40
locomotives and 328 freight cars in 1997 and 1995, respectively. See Note 8 for
the present value of the minimum lease payments.
7. Materials and Supplies
Materials and supplies, valued using the average cost method, primarily
consist of track material, switches, car and locomotive parts and fuel.
As of December 31, 1997, ICR was party to three diesel fuel collar
agreements under which the Company receives or makes monthly payments based on
the monthly average price for Heating Oil Gulf Coast (Pipeline) Platt's
Oilgram("Contract Price"), which was $.482 per gallon for December 1997. Under
the agreement, ICR receives or makes monthly payments on 3,000,000 notional
gallons based on the excess of the Contract Price over $.60 per gallon or the
deficiency of the Contract Price under $.4825 to .4690 per gallon.
8. Leases
As of December 31, 1997, ICR leased 7,423 and 132 of its freight cars
and locomotives, respectively. These leases expire between 1998 and 2007. Under
the terms of many of its lease agreements, ICR has the right of first refusal to
purchase, at the end of the lease term, certain cars and locomotives at or below
fair market value. ICR also leases office facilities, computer equipment and
vehicles.
Net obligations under capital leases at December 31, 1997 and 1996,
included in the Consolidated Balance Sheets were $15.7 million and $14.4
million, respectively. The gross assets under capitalized leases were $32.6
million and $30.0 million at December 31, 1997 and 1996, respectively, and are
included in properties in the Consolidated Balance Sheets.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997, minimum rental payments under capital and
operating leases that have initial or remaining noncancellable terms in excess
of one year were as follows ($ in millions):
Capital Operating
Leases Leases
1998................................... $ 3.7 $ 38.2
1999................................... 3.7 33.3
2000................................... 3.2 19.2
2001................................... 3.0 16.9
2002................................... 2.3 15.3
Thereafter............................. 4.6 76.9
----- ------
Total minimum lease payments....... $20.5 $199.8
======
Less: Imputed interest................. 4.8
------
Present value of minimum payments.. $15.7
======
Total rent expense applicable to noncancellable operating leases
amounted to $32.6 million in 1997, $38.8 million in 1996 and $32.4 million in
1995. Most of the leases provide that ICR pay taxes, maintenance, insurance and
certain other operating expenses.
9. Long-Term Debt and Interest Expense
Long-term debt at December 31, consisted of the following ($ in
millions):
1997 1996
Equipment obligations, due annually to 2007, 6.11% to 7.7%.... $ .9 $ -
Debentures and other debt, due 1998 to 2056, 4.5% to 5.0%..... 9.6 9.9
Debentures, due 2096, 7.7%.................................... 125.0 125.0
Commercial paper, at average interest rate 5.67 in 1997
and 5.61% in 1996 - 20.0
Notes, due 2003, 6.75%........................................ 100.0 100.0
Notes, due 2005, 7.75%........................................ 100.0 100.0
Medium term notes, due 1998 to 2007, 6.72% to 7.12%........... 210.0 230.0
Capitalized leases (see Note 8)............................... 13.2 11.9
Unamortized discount, net ................................... (6.3) (6.5)
------- -------
Total long-term debt............................. $552.4 $590.3
====== ======
At December 31, 1997, the aggregate annual maturities and sinking fund
requirements for debt payments for 1998 through 2003 and thereafter were $22.7
million, $32.8 million, $32.4 million, $102.5 million, $2.0 million, $101.2
million and $281.5 million, respectively. The weighted-average interest rate for
1997 and 1996 on total debt excluding the effect of discounts, premiums and
related amortization was 7.1% and 7.1%, respectively.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In December 1996, ICR issued $125 million aggregate amount of 100-year,
7.7% debentures due September 15, 2096. These bonds may not be redeemed until
2026 and then only at a premium which declines to par in 2056.
In 1995, ICR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The monies used to
fund the prepayment were provided by commercial paper, the net proceeds of the
$100 million 7.75% 10-year notes due May 2005 and $40 million from existing
lines of credit.
ICR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The program is supported by a $250
million Revolver. (the "ICR Revolver"). See below.
The $250 million ICR Revolver expires in 2001. ICR pays an annual fee of
15 basis points on the ICR Revolver and the Eurodollar offered rate plus 22.5
basis points for any borrowings. The ICR Revolver may be used as backup for
commercial paper and for general corporate purposes. The available amount is
reduced by the outstanding amount of commercial paper borrowings and any letters
of credit issued on behalf of ICR under the facility. As of December 31, 1997,
no amounts were drawn under the ICR Revolver and no letters of credit were
issued.
Various borrowings of ICR's subsidiaries are governed by agreements
which contain certain affirmative and negative covenants customary for
facilities of this nature including restrictions on additional indebtedness,
investments, guarantees, liens, distributions, sales and leasebacks, and sales
of assets and capital stock. Some also require satisfaction of certain financial
tests, including a leverage ratio, an earnings before interest and taxes to
interest charges ratio, and minimum consolidated tangible net worth
requirements. See Note 13.
Interest expense, net consisted of the following ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Interest expense........................ $43.1 $34.3 $30.4
Less:
Interest capitalized ................ 1.5 1.7 1.3
Interest income...................... 13.4 6.1 2.8
------ ------- -------
Interest expense, net................... $28.2 $26.5 $26.3
===== ===== =====
10. Receivables
ICR had entered into a revolving agreement, which was terminated on
January 8, 1998, to sell undivided percentage interests in certain of its
accounts receivable, with recourse, to a financial institution. The agreement
allowed for sales of accounts receivable up to a maximum of $50 million at any
one time. At December 31, 1997, $45 million had been sold pursuant to the
agreement. Costs related to the agreement fluctuated with changes in prevailing
interest rates. These costs, which are included in other income (expense), net,
were $3.0 million, $2.9 million and $3.2 million for 1997, 1996 and 1995
respectively.
11. Benefit Plans
All employees of ICR are covered under the Railroad Retirement System
instead of Social Security. Additionally, various retirement plans,
postemployment benefits and postretirement benefits are provided.
Retirement Plans.
ICR has two qualified plans permitting participants to make "pre-tax"
contributions of their salary up to Internal Revenue Code limitations and each
contains a company match provision. The ICR union plan, which started in
mid-1995, allows union employees covered by local contracts to participate. ICR
matches 25% of the first 4% of salary deferral. The management employee plan
matches 50% of the first 6% of salary deferral. The management plan also
contains a separate defined contribution portion of 2% of each employee's
salary. Expenses related to both plans were $1.5 million, $1.2 million, and $1.1
million in 1997, 1996 and 1995, respectively. All ICR contributions are fully
vested upon contribution.
ICR also has a supplemental executive retirement plan ("SERP") which
covers officers and certain other management employees. The SERP provides for a
monthly benefit equal to 35% of a participant's final average compensation as
defined in the plan. The monthly benefit is subject to offsets such as employer
contributions to the 401(k) plan. The plan was adopted in 1994. The cost was not
material in the three years ended December 31, 1997.
Salary Deferral Plans. In addition to the 401(k) plan, all officers and
certain other management employees may elect to defer up to 50% of base salary
and 100% of annual bonus. Participant deferrals are fully vested and earn
interest at a specified, variable rate. Approximately $.3 million, $1.1 million
and $.5 million were deferred in 1997, 1996 and 1995, respectively.
Unfunded Plan. ICR has an unfunded plan whereby 10% of an officer's
combined salary and bonus in excess of a wage offset factor ($109,000 in 1997)
is accrued and earns interest at a specified, variable rate. Amounts accrued are
paid when the employee leaves the Company, normally at retirement. Expenses for
this plan were $.4 million in each of 1997, 1996 and 1995.
Postemployment Benefit Plans. ICR provides certain postemployment
benefits such as long-term salary continuation and waiver of medical and life
insurance co-payments while on long-term disability.
Postretirement Plans. In addition to retirement plans, ICR has three
benefit plans which provide some postretirement benefits to most former
full-time salaried employees and selected former union- represented employees.
The medical plan for salaried retirees is contributory, with retiree
contributions adjusted annually if expected medical cost inflation rate exceeds
9.5%, and contains other cost sharing features such as deductibles and
co-payments. ICR's contribution will be fixed at the 1999 year end rate for all
subsequent years. Salaried retirees are covered by a life insurance plan which
provides a nominal death benefit and is non-contributory. The medical plan for
locomotive engineers who retired under a special early retirement program in
1987 provides non-contributory coverage until age 65. All benefits under this
plan terminate in 1998. There are no plan assets and ICR funds these benefits as
claims are paid.
The accumulated postretirement benefit obligations ("APBO") of the
postretirement plans were as follows ($ in millions):
December 31,
1997 1996
--------------------- ----
Medical Life Total Total
Accumulated postretirement benefit obligation:
Retirees................................. $12.6 $2.1 $14.7 $15.1
Fully eligible active
plan participants ................... .7 - .7 .7
Other active plan participants........... 3.9 - 3.9 3.3
------- ----- ---- ----
Total APBO..................... $17.2 $2.1 19.3 19.1
===== ====
Unrecognized net gain.................... 16.5 18.3
---- -----
Accrued liability for
postretirement benefits.................. $35.8 $37.4
===== =====
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at December 31, 1996. As a result of
the change in general interest rates on high quality fixed rate investments in
1997, ICR decreased the weighted-average discount rate to 7.25% as of December
31, 1997. The change in rates resulted in approximately $.7 million actuarial
loss. The actuarial gains and losses along with actual experience gains,
primarily fewer claims and lower medical rate inflation, resulted in a total
$16.5 million unrecognized net gain as of December 31, 1997. In accordance with
SFAS No. 106, the excess gain is subject to $1.1 million annual amortization
based on an amortization period of approximately 13 years. The components of the
net periodic postretirement benefits cost were as follows ($ in millions):
Years Ending December 31,
1997 1996
----- -----
Service costs.......................... $ .2 $ .1
Interest costs......................... 1.3 1.4
Net amortization of excess gain........ (1.1) (1.2)
------ ------
Net periodic postretirement
benefit costs........................ $ .4 $ .3
===== =======
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (e.g., health care cost trend rate) for the medical
plans is 10.0% for 1998 and is assumed to decrease gradually to 6.25% by 2002
and remain at that level thereafter. The health care cost trend rate assumption
normally has a significant effect on the amounts reported; however, the plan
limits annual inflation for ICR's portion of such costs to 9.5% each year and
caps ICR's contribution at the actual 1999 level. Therefore, an increase in the
assumed health care cost trend rates by one percentage point in each year would
have no impact on ICR's accumulated postretirement benefit obligation for the
medical plans as of December 31, 1997, or the aggregate of the service and
interest cost components of net periodic postretirement benefit expense in
future years.
12. Provision for Income Taxes
The Provision for Income Taxes for continuing operations consisted of
the following ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Current income tax:
Federal............................... $27.1 $39.9 $38.1
State................................. 3.1 4.9 4.5
Deferred income taxes................... 39.9 31.5 24.5
------ ------ -----
Provision for income taxes.............. $70.1 $76.3 $67.1
===== ===== =====
The effective income tax rates for the years ended December 31, 1997,
1996 and 1995, were 34%, 38% and 34%, respectively. See Note 4 for the tax
benefits associated with the 1995 extraordinary loss.
At December 31, 1997, ICR for tax or financial reporting purposes had
no Federal net operating loss carryovers.
In 1996 and 1995 tax benefits of $1.8 million and $4.3 million,
respectively, were recorded to reflect the favorable resolution of prior-period
tax issues.
The items which gave rise to differences between the income taxes
provided for continuing operations in the Consolidated Statements of Income and
the income taxes computed at the statutory rate are summarized below ($ in
millions):
Years Ended December 31,
1997 1996 1995
-------------- ------------- -----------
Expected tax expense computed
at statutory rate............. $72.2 35% $71.0 35% $69.4 35%
Dividends received exclusion... (.2) - (.1) - (.1) -
State income taxes, net
of federal tax effect......... 5.5 3 5.9 3 5.4 3
Charitable contribution of
property...................... (4.1) (2) - - - -
Favorable resolution of
prior period tax issues....... - - (1.8) (1) (4.3) (2)
Other items, net............... (3.3) (2) 1.3 1 (3.3) (2)
------ ---- ------- ---- ------ ----
Provision for income taxes..... $70.1 34% $76.3 38% $67.1 34%
===== === ===== ==== ===== ===
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Temporary differences between book and tax income arise because the tax
laws require that certain items of income and expense be treated differently
than under generally accepted accounting principles. As a result, the book
provisions for taxes differ from the actual taxes reported on the income tax
returns. The net results of such differences are included in deferred income
taxes in the Consolidated Balance Sheets.
Deferred income taxes consisted of the following ($ in millions):
December 31,
1997 1996
---- ----
Deferred tax assets.................. $ 66.8 $ 71.7
Less: Valuation allowance............ (1.5) (1.5)
--------- --------
Deferred tax assets,
net of valuation allowance....... 65.3 70.2
Deferred tax liabilities............. (350.7) (315.6)
--------- --------
Deferred income taxes................ $(285.4) $(245.4)
======== ========
The valuation allowance is comprised of the portion of state tax net
operating loss carryforwards expected to expire before they are utilized and
non-deductible expenses incurred with the previous merger of wholly-owned
subsidiaries.
Major types of deferred tax assets are: reserves not yet deducted for
tax purposes ($56.0 million) and safe harbor leases ($10.2 million). Major types
of deferred tax liabilities are: accelerated depreciation ($324.4 million), land
basis differences ($10.7 million) and debt marked to market ($2.1 million).
The Company and its subsidiaries have a tax sharing agreement whereby
each subsidiary's federal income tax and state income tax liabilities are
determined on a separate company income tax basis as if it were not a member of
the Company's consolidated group, with no benefit for net operating losses or
credit carryovers from prior years.
13. Equity and Restrictions on Dividends
ICR paid dividends to the Corporation of $62.9 million in 1997, $103.2
million in 1996 and $107.7 million in 1995. Certain covenants of ICR's Revolver
require specific levels of tangible net worth but not a specific dividend
restriction. At December 31, 1997, ICR's tangible net worth exceeded the
required level by approximately $32.0 million. In January and March 1998, ICR
declared and paid a dividend of $19.0 and $15.6 million, respectively, to the
Corporation.
For the year ended December 31, 1995, the Corporation made a capital
contribution of $.5 million to ICR which was equivalent to the vested portion of
the restricted the Corporation common stock granted to various ICR employees.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14. Stock Based Compensation
The Corporation grants stock options to employees of ICR under the
Corporation's 1990 Long- Term Incentive Plan and the employees of ICR also
participate in two stock purchase plans to acquire the Corporation Common Stock.
ICR accounts for these plans under APB Opinion 25 under which no compensation
cost has been recognized.
Under the Corporation 1990 Long-Term Incentive Plan employees of ICR
can receive incentive options, award stock appreciation rights, restricted stock
and restricted stock units, dividend equivalents and other stock-based awards.
The exercise price of an option to employees is limited to fair market value.
Awards, vest ratably over four years and expire 10 years from date of grant.
In 1994, an employee of ICR was awarded 22,500 shares of restricted
stock. No cash payments are required by the individuals. Shares awarded may not
be sold, transferred, or used as collateral by the holders until the shares
awarded become free of the restrictions. Restrictions lapse over a four-year
period. All shares still subject to restrictions will be forfeited and returned
to the plan if the employee's relationship with ICR is terminated. No shares
were forfeited in 1996. A total of 4,125 shares and 150 shares were forfeited in
1995 and 1994, respectively. If the employee becomes disabled, or dies, or a
change in control occurs during the vesting period, the restrictions lapse at
that time. In connection with early retirements, 43 and 7,632 shares vested in
1996 and 1995, respectively. The compensation expense resulting from the award
of restricted stock is valued at the closing market price of the Corporation's
Common Stock on the date of the award, recorded as a reduction of Stockholder's
Equity, and charged to expense evenly over the vesting period. Compensation
expense, recorded by ICR, was $.2 million, $.8 million and $1.2 million in 1997,
1996 and 1995, respectively.
The Corporation has two stock purchase programs. The basic program is
open to all ICR employees and permits them to acquire the Corporation common
stock via payroll deductions. The other plan is the Discounted Stock Purchase
Plan ("Discounted Plan"). Only ICR management employees are eligible to
participate in the Discounted Plan which provides for the investment of up to
15% of an eligible employee's salary in the common stock of the Corporation at a
15% discount. A participant must continue employment with the Corporation or its
subsidiaries for two years to retain the 15% discount, and, during that period,
the shares will be held by the plan's administrator. If the employee withdraws
shares or directs the sale of shares within two years, the discount must be
repaid in cash or relinquished shares. No such repayment is required in the
event of death, retirement, disability or change of control of the Corporation.
Costs associated with these programs have been immaterial to date.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes changes in shares under options, after
giving effect to the 3-for- 2 stock split declared by the Corporation in January
1996:
Weighted Weighted Weighted
Average Average Fair Average
Exercise Value On Exercisable Exercise
Options Price Grant Date At Year End Price
Outstanding 12-31-94 780,000 $18.790 195,000 $18.790
======= =======
Granted 515,024 23.167 $9.109
======
Forfeited (a) (11,250) 20.833
--------
Outstanding 12-31-95 1,283,774 20.528 531,131 $19.886
======= =======
Granted 530,250 25.250 $9.016
======
Exercised (b) (4,125) 21.257
Forfeited (c) (3,375) 22.389
----------
Outstanding 12-31-9 1,806,524 21.909 961,105 $20.821
======= =======
Granted 476,050 34.125 $12.888
=======
Exercised (d) (277,872) 18.193
Forfeited (19,200) 24.713
-----------
Outstanding 12-31-97 1,985,502 1,248,872 $23.050
========= ========= =======
(a) Pre-1995 option awards
(b) Includes 3,375 pre-1995 option awards
(c) Includes 1,125 pre-1995 option awards
(d) Includes 232,498 pre-1995 option awards
The last date exercisable for options above is March 13, 2007.
Had ICR adopted the compensation cost recognition methods outlined in
FASB Statement No. 123 "Accounting for Stock-Based Compensation " ("SFAS 123"),
ICR's 1997, 1996 and 1995 net income would have been as follows - on a pro forma
basis - ($ in millions):
1997 1996 1995
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Income before Extra-
ordinary Item $136.2 $134.0 $126.6 $125.4 $131.2 $130.7
Net Income $136.2 $134.0 $126.6 $125.4 $119.8 $119.3
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Of the options outstanding at December 31, 1997, 1,248,872 have exercise
prices between $16.583 and $34.125, with a weighted average exercise price of
$23.050, a weighted average remaining contractual life of 8 years and all are
exercisable. The remaining 736,630 options, which are not exercisable, have
exercise prices between $23.167 and $34.125 with a weighted average price of
$29.198 and a weighted average remaining contractual life of 8 years.
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing models with the following weighted-average
assumptions:
1997 1996 1995
---- ---- ----
Risk-free interest rate(s) 6.7% 6.7% 7.2%
Dividend yields 2.7% 3.2% 2.9%
Days to expiration 3652 3652 3652
Volatility 30.18% 31.4% 33.1%
15. Contingencies, Commitments and Concentration of Risks
ICR is self-insured for the first $5 million of each loss. ICR carries
$245 million of liability insurance per occurrence, subject to an annual cap of
$385 million in the aggregate for all losses. This coverage is considered by
ICR's management to be adequate in light of ICR's safety record and claims
experience.
ICR has guaranteed repayment of certain indebtedness of a jointly owned
company aggregating $7.8 million. ICR's share of the guarantee is $1.0 million;
the remainder is the obligation of other unrelated owner companies.
ICR is one of several defendants in a New Orleans class action in which
a jury has returned a verdict against the ICR for $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment and remanded the case to the trial court for further proceedings.
ICR believes the verdict has no basis and intends to continue to challenge it
vigorously. While the final outcome of this proceeding cannot be determined, in
the opinion of management, based on present information, the ultimate resolution
of this case will not have a material adverse effect on ICR's financial
position, results of operations, cash flow or liquidity.
There are other various regulatory proceedings, claims and litigation
pending against ICR. While the ultimate amount of liability that may result
cannot be determined, in the opinion of ICR's management, based on present
information, adequate provisions for liabilities have been recorded.
Environmental Contingencies. ICR is aware of approximately 22
contaminated sites at which it is probably liable for some portion of any
required clean up. Of these, 14 involve contamination primarily by diesel fuel
which can be remediated without material cost. Five other sites are expected to
require more than $1 million in clean-up costs. At three of these sites other
parties are expected to contribute the majority of the remediation costs
incurred.
For all known sites of environmental contamination where ICR loss or
liability is probable, ICR has recorded an estimated liability at the time when
a reasonable estimate of remediation cost and ICR liability can first be
determined. Adjustments to initial estimates are recorded as necessary based
upon additional information developed in subsequent periods. Estimates of ICR`s
potential financial exposure for environmental claims or incidents are
necessarily imprecise because of the difficulty of determining in advance the
nature and extent of contamination, the varying costs of alternative methods of
remediation, the regulatory clean-up standards which will be applied, and the
appropriate allocation of liability among multiple responsible parties. At
December 31, 1997, ICR estimated the probable range of its liability to be $9.1
million to $45 million, and in accordance with the provisions of SFAS No. 5 had
a reserve of $9.1 million for environmental contingencies. This amount is not
reduced for potential insurance recoveries or third-party contributions.
The risk of incurring environmental liability in connection with both
past and current activities is inherent in railroad operations. Decades-old
railroad housekeeping practices were not always consistent with contemporary
standards. Historically ICR leased substantial amounts of property to industrial
tenants, and ICR continues to haul hazardous materials which are subject to
occasional accidental release. Because the ultimate cost of known contaminated
sites cannot be definitively established and because additional contaminated
sites yet unknown may be discovered or future operations may result in
accidental releases, no assurance can be given that ICR will not incur material
environmental liabilities in the future. However, based on its assessments of
the facts and circumstances now known, management believes that it has recorded
adequate reserves for known liabilities and does not expect future environmental
charges or expenditures, based on these known facts and circumstances, to have a
material adverse effect on ICR`s financial position, results of operations, cash
flow or liquidity.
16. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Temporary Cash Investments. The carrying amount approximates
fair value because of the short maturity of those instruments. Investments in
U.S. corporate demand notes of $25.4 million and $43.6 million included in cash
and temporary cash investments as of December 31, 1997 and 1996, respectively,
have been classified and accounted for as held to maturity securities.
Investments. ICR has investments of $5.2 million in 1997 and $5.9
million in 1996 for which there are no quoted market prices. These investments
are in joint railroad facilities, railroad terminal associations, switching
railroads and other transportation companies. For these investments, the
carrying amount is a reasonable estimate of fair value. ICR's remaining
investments ($6.9 million in 1997 and $5.8 million in 1996) are accounted for by
the equity method.
Loans to Affiliates. See Note 17
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-Term Debt. The fair value of ICR's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to ICR for debt of the same remaining maturities.
Derivative Financial Instruments. The fair value of diesel fuel collar
agreements is the estimated amount that ICR would receive or pay to terminate
the agreements as of year end, taking into account the current credit worthiness
of the agreement counterparties.
The estimated fair values of ICR's financial instruments are as follows
($ in millions):
December 31,
1997 1996
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 28.2 $ 28.2 $ 46.3 $ 59.2
Investments........................... 5.2 5.2 5.9 5.9
Fuel Hedge............................ - (.5) - .1
Loans to affiliates - short-term...... 4.9 4.9 14.9 14.9
Loans to affiliates - long-term....... 160.9 160.9 138.2 138.2
Debt.................................. (575.1) (604.3) (593.1) (586.6)
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
17. Related Party Transactions and Intercompany Advances
The Corporation and its subsidiaries maximize the consolidated group's
borrowing power and minimize the group's interest costs. If an entity requires
funds for operations or capital expenditures, the lowest cost source provides
the cash. The company that needs the funds pays interest at the borrowed rate
with no mark up or add-on fees.
The amounts outstanding at December 31, consisted of the following ($ in
millions):
1997 1996
---- ----
Advance due from:
- CCPH $ - $ 4.4
- IC - -
Loans due from:
- IC Financial Services 1.4 1.5
- IC Leasing III 3.5 9.0
------- ------
Total Short-Term Intercompany $ 4.9 $ 14.9
======= =======
Advances due from:
IC $156.3 $112.9
Loans due from:
IC Financial Services 4.6 22.5
IC Leasing III - 2.8
------ --------
Total Long-Term Intercompany $160.9 $138.2
====== =======
In 1997, the amount due from the Corporation includes $39.8 million used
to fund construction costs for IC RailMarine Terminal Company, a subsidiary of
the Corporation. Amounts due from the Corporation bears interest at prime rate
minus 2.3%. In 1996, the amount due from the Corporation includes $59.9 million
used to acquire CCPH and $25 million used by The Corporation to repay a portion
of CCPH's revolver. Because of the nature of the assets acquired these advances
are considered long-term. The loan to IC Financial Services is due in 1999 and
bears interest at LIBOR + 50 basis points. The loan to IC Leasing III is due in
1998 and bears interest at LIBOR +.625%.
Interest paid to ICR for 1997 and 1996 was $11.6 million and $5.3
million, respectively.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
18. Selected Quarterly Financial Data - (Unaudited) ($ in millions, except
share data):
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Revenues......................... $154.2 $147.9 $152.9 $167.5
Operating income................. 57.7 56.1 52.4 61.7
Net income....................... 31.9 32.9 30.8 40.6
1996
Revenues......................... $162.6 $149.4 $150.8 $154.4
Operating income................. 57.8 52.3 54.9 54.5
Net income....................... 30.2 29.5 30.2 36.7
1995
Revenues......................... $168.0 $156.5 $161.3 $159.5
Operating income................. 61.1 54.2 51.4 55.2
Income before extraordinary
item, net....................... 34.2 29.8 28.8 38.4
Net income....................... 34.2 18.4 28.8 38.4
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
I N D E X
T O
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
Schedules for the three years ended December 31, 1996:
II-Valuation and qualifying accounts...........................F-27
Pursuant to Rule 5.04 of General Rules of Regulation S-X, all other schedules
are omitted because they are not required or because the required information is
set forth in the financial statements or related notes thereto.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
($ in millions)
Year Ended December 31, 1997
Balance At Additions Payments Balance
Beginning Charged And At End
Classification of Year To Expense (Charges) Of Year
Accrued redundancy reserve..........$ 30.2 $ 1.1 $ 2.8 $ 28.5
Casualty and other reserves.......... 43.7 7.1 12.9 37.9
Environmental........................ 17.1 2.1 10.1 9.1
Bad debt reserve..................... 1.3 1.6 2.0 0.9
Taxes................................ 1.5 - - 1.5
Total.........................$ 93.8 $ 11.9 $ 27.8 $ 77.9
Year Ended December 31, 1996
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve..........$ 33.9 $ 2.1 $ 5.8 $ 30.2
Casualty and other reserves.......... 55.7 8.8 20.8 43.7
Environmental........................ 12.9 1.9 (2.3) 17.1
Bad debt reserve..................... 2.0 1.8 2.5 1.3
Taxes................................ 1.8 - 0.3 1.5
Total.........................$106.3 $ 14.6 $ 27.1 $ 93.8
Year Ended December 31, 1995
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve..........$ 38.2 $ 3.0 $ 7.3 $ 33.9
Casualty and other reserves.......... 61.7 14.3 20.3 55.7
Environmental........................ 13.3 5.3 5.7 12.9
Bad debt reserve..................... 2.1 1.9 2.0 2.0
Taxes................................ 1.8 - - 1.8
Total.........................$117.1 $ 24.5 $ 35.3 $ 106.3
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
3.1 Articles of Incorporation of Illinois
Central Railroad Company, as amended.
(Incorporated by reference to Exhibit 3.1
to the Registration Statement of Illinois
Central Railroad Company on Form S-1
dated as of September 26, 1989. (SEC File
No. 33- 29269))
3.2 By-Laws of Illinois Central Railroad
Company, as amended. (Incorporated by
reference to Exhibit 3.2 to the
Registration Statement of Illinois
Central Railroad Company on Form S-1
dated as of September 26, 1989. (SEC File
No. 33-29269))
3.3 Restated Articles of Incorporation of
Illinois Central Corporation.
(Incorporated by reference to Exhibit 3.1
to the Current Report of the Illinois
Central Corporation on Form 8-K dated
July 29, 1994. (SEC File No. 1-10720))
3.4 By-Laws of Illinois Central Corporation,
as amended. (Incorporated by reference to
Exhibit 3.4 to the Registration Statement
of Illinois Central Corporation and
Illinois Central Railroad Company on Form
S-1 dated as of August 21, 1990. (SEC
File Nos. 33-36321 and 33- 36321-01))
3.5 Certificate of Retirement of Illinois
Central Corporation (Incorporated by
reference to Exhibit 3.3 to the
Registration Statement of Illinois
Central Corporation and Illinois Central
Railroad Company on Form S-1, as amended
dated as of August 21, 1990. (SEC File
No. 33-40696 and Post-Effective
Amendments to Registration Statement Nos.
33-36321 and 33- 36321-01))
3.6 By-Laws of Illinois Central Railroad
Company, as amended. (Incorporated by
reference to Exhibit 3 to the Quarterly
Report of the Illinois Central Railroad
Company on Form 10-Q for the three months
ended June 30, 1997. (SEC File No.
1-07092))
* Used herein to identify management contracts or compensation plans or
arrangements as required by Item 14 of Form 10-K.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.1 Form of 14-1/8% Senior Subordinated
Debenture Indenture dated as of September
15, 1989 (the "Senior Subordinated
Debenture Indenture") between Illinois
Central Railroad Company and United
States Trust Company of New York, Trustee
(including the form of 14-1/8% Senior
Subordinated Debenture included as
Exhibit A therein). (Incorporated by
reference to Exhibit 4.1 to the
Registration Statement of Illinois
Central Railroad Company on Form S-1, as
amended dated as of September 26, 1989.
(SEC File No. 33-29269))
4.3 Form of Pledge Agreement dated as of
September 22, 1989, and amended and
restated as of July 23, 1991, among
Illinois Central Corporation and the
Banks named therein that are or may
become parties to the Amended and
Restated Revolving Credit and Term Loan
Agreement dated as of September 22, 1989,
and amended and restated as of July 23,
1991, among the Illinois Central Railroad
Company and the Banks named therein and
the Senior Note Purchasers that are
parties to the Note Purchase Agreement
dated as of July 23, 1991. (Incorporated
by reference to Exhibit 4.4 to the
Quarterly Report of Illinois Central
Corporation on Form 10-Q for the three
months ended September 30, 1991. (SEC
File No. 1-10720))
4.4 Form of Note Purchase Agreement dated as
of July 23, 1991, among Illinois Central
Railroad Company, as issuer, and Illinois
Central Corporation, as guarantor, for
10.02% Guaranteed Senior Secured Series A
Notes due 1999 and for 10.4% Guaranteed
Senior Secured Series B Notes due 2001
(including the Form of Series A Note and
Series B Note included as Exhibits A-1
and A-2, respectively, therein).
(Incorporated by reference to Exhibit 4.3
to the Quarterly Report of the Illinois
Central Railroad Company on Form 10-Q for
the three months ended September 30,
1991. (SEC File No. 1-7092))
4.10 Form of Commercial Paper Dealer Agreement
between Illinois Central Railroad Company
and Lehman Commercial Paper, Inc. dated
as of November 19, 1993. (Incorporated by
reference to Exhibit 4.10 to the Annual
Report on Form 10-K for the year ended
December 31, 1993 for Illinois Central
Railroad Company filed March 16, 1994.
(SEC File No. 1-7092))
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.11 Form of Issuing and Paying Agency
Agreement of the Illinois Central
Railroad Company related to the
Commercial Paper Program between Illinois
Central Railroad Company and Bank America
National Trust Company dated as of
November 19, 1993, (including Exhibit A
the Form of Certificated Commercial Paper
Note included therein). (Incorporated by
reference to Exhibit 4.11 to the Annual
Report on Form 10-K for the year ended
December 31, 1993 for Illinois Central
Railroad Company filed March 16, 1994.
(SEC File No. 1-7092))
4.14 Toronto Dominion Credit Agreement
(Incorporated by reference to Exhibit 4.1
to the Quarterly Report of the Illinois
Central Railroad Company on Form 10-Q for
the three months ended March 31, 1994.
(SEC File No. 1-7092))
4.15 Form of Receivables Purchase Agreement
dated as of March 29, 1994, between
Illinois Central Railroad Company and
Golden Gate Funding Corporation.
(Incorporated by reference to Exhibit 4.2
to the Quarterly Report of the Illinois
Central Railroad Company on Form 10-Q for
the three months ended March 31, 1994.
(SEC File No. 1-7092))
4.17 Form of Note Purchase Agreement dated as
of May 1, 1993, between Illinois Central
Railroad Company and The First National
Bank of Boston (Incorporated by reference
to Exhibit 4.1 to the Registration
Statement of Illinois Central Railroad
Company on Form S-3. (SEC File No.
33-61410))
4.18 Form of Second Amended and Restated
Revolving Credit Agreement dated as of
April 2, 1993, amended and restated as of
October 27, 1993 and further amended and
restated as of November 1, 1994, among
Illinois Central Railroad Company and the
Banks named therein (Incorporated by
reference to Exhibit 4.14 to the Annual
Report of Illinois Central Railroad
Company on Form 10-K for the year ended
December 31, 1994. (SEC File No. 1-
7092))
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.19 Form of Lease Agreement dated as of July
1, 1994, between IC Leasing Corporation
III and Illinois Central Railroad
Company. (Incorporated by reference to
Exhibit 4.10 to the Annual Report on Form
10-K for the year ended December 31,
1994, for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
4.20 Form of Lease Agreement dated as of July
1, 1994 between IC Leasing Corporation
III and Waterloo Railway Company.
(Incorporated by reference to Exhibit
4.11 to the Annual Report on Form 10-K
for the year ended December 31, 1994, for
the Illinois Central Railroad Company.
(SEC File No. 1-7092))
4.21 Form of Options Agreement dated as of
July 1, 1994, between IC Leasing
Corporation III and Illinois Central
Railroad Company. (Incorporated by
reference to Exhibit 4.12 to the Annual
Report on Form 10-K for the year ended
December 31, 1994, for the Illinois
Central Railroad Company. (SEC File No.
1-7092))
4.22 Form of Options Agreement dated as of
July 1, 1994, between IC Leasing
Corporation III and Illinois Central
Railroad Company. (Incorporated by
reference to Exhibit 4.13 to the Annual
Report on form 10-K for the year ended
December 31, 1994, for the Illinois
Central Railroad Company. (SEC File No.
1-7092))
4.23 Third Amended and Restated Revolving
Credit Agreement between Illinois Central
Railroad Company and the banks named
therein dated as of April 2, 1993,
amended and restated as of October 27,
1993, further amended and restated as of
November 1, 1994 and further amended and
restated as of April 28, 1995.
(Incorporated by reference to Exhibit 4.1
to the quarterly report of Illinois
Central Railroad Company in Form 10-Q for
the three months ended June 30, 1995.
(SEC File No. 1-7092))
4.24 Form of Indenture dated as of April 1,
1995 between Illinois Central Railroad
Company and The First National Bank of
Boston. (Incorporated by reference to
Exhibit 4.1 to Registration Statement on
Form S-3 of Illinois Central Railroad
Company dated April 12, 1995. (SEC File
No. 33-58547))
4.25 Form of Fixed Rate Medium-Term Note dated
as of May 1, 1995 between Illinois
Central Railroad Company and Lehman
Brothers Inc.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
Salomon Brothers, Inc and Smith Barney
Inc. (Incorporated by reference to
Exhibit 4.1 to the Current Report of
Illinois Central Railroad Company of Form
8-K dated May 2, 1995. (SEC File No.
1-7092))
4.26 Form of Floating Rate Medium-Term Notes
dated as of May 1, 1995 between Illinois
Central Railroad Company and Lehman
Brothers Inc, Salomon Brothers Inc and
Smith Barney Inc. (Incorporated by
reference to Exhibit 4.2 to the Current
Report of Illinois Central Railroad
Company on Form 8-K dated May 2, 1995.
(SEC File No. 1-7092))
4.27 Amendment No. 1, dated as of April 29,
1996 to the Third Amended and Restated
Revolving Credit Agreement, between
Illinois Central Railroad Company and the
First National Bank of Boston initially
dated as of April 2, 1993, amended and
restated November 1, 1994, and further
amended and restated as of April 28,
1995. (Incorporated by reference to
Exhibit 4 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1996,
for the Illinois Central Railroad Company
filed on August 13, 1996. (SEC File No.
1-7092))
4.29 Form of Indenture between the Illinois
Central Railroad Company and The Chase
Manhattan Bank, N.A., dated as of July
25, 1996. (Incorporated by reference to
Exhibit 4.1 of Form S-3 dated as of May
15, 1996 for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.30 Form of Indenture between the Illinois
Central Railroad Company and The Chase
Manhattan Bank, N.A., dated as of May
1996. (Incorporated by reference to
Exhibit 4.2 of Form S-3 dated as of May
15, 1996 for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.31 Form of Indenture between the Illinois
Central Railroad Company and The Chase
Manhattan Bank, N.A., dated as of July
25, 1996. (Incorporated by reference to
Exhibit 4.1 of Form S-4 dated as of
December 18, 1996 for the Illinois
Central Railroad Company. (SEC File No.
1-7092))
4.32 Form of First Supplemental Indenture
between the Illinois Central Railroad
Company and The Chase Manhattan Bank,
N.A. dated as of December 17, 1996.
(Incorporated by reference to Exhibit 4.2
of Form S-4 dated as of December 18, 1996
for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
4.33 Form of Registration Rights Agreement
among Illinois Central Railroad Company,
Lehman Brothers Inc. And Merrill Lynch,
Pierce, Fenner & Smith Incorporated dated
as of December 10, 1996. (Incorporated by
reference to Exhibit 4.3 of Form S-4
dated as of December 18, 1996 for the
Illinois Central Railroad Company. (SEC
File No. 1-7092))
4.34 Form of fixed and floating rate
Medium-Term Notes Series B for the
Illinois Central Railroad Company.
(Incorporated by reference to Exhibit 4.3
to the current report on Form 8-K dated
as of July 29, 1996 for the Illinois
Central Railroad Company (SEC File No. 1-
7092))
10.1 * Form of supplemental retirement and
savings plan. (Incorporated by reference
to Exhibit 10C to the Registration
Statement of Illinois Central
Transportation Co. on Form 10 filed on
October 7, 1988, as amended. (SEC File
No. 1-10085))
10.3 * Form of the Corporation 1990 Stock
Purchase Plan. (Incorporated by reference
to Exhibit 10.6 to the Registration
Statement of Illinois Central Corporation
on Form 10 filed on January 5, 1990, as
amended. (SEC File No. 1-10720))
10.4 * Form of the Corporation Long-Term
Incentive Option Plan. (Incorporated by
reference to Exhibit 10.17 to the
Registration Statement of Illinois
Central Corporation and Illinois Central
Railroad Company on Form S-1 dated as of
September 26, 1989. (SEC File Nos.
33-36321 and 33-36321-01))
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.5 * Amendments No. 1 and No. 2 to the IC
Long-Term Incentive Plan. (Incorporated
by reference to the Proxy Statement of
Illinois Central Corporation in
connection with its 1992 Annual Meeting
of Stockholders. (SEC File No. 1-10720))
10.6 Railroad Locomotive Lease Agreement
between IC Leasing Corporation I and
Illinois Central Railroad Company dated
as of September 5, 1991. (Incorporated by
reference to Exhibit 10.9 to the Annual
Report on Form 10-K for the year ended
December 31, 1991 for the Illinois
Central Railroad Company filed March 12,
1992. (SEC File No. 1-7092))
10.7 Railroad Locomotive Lease Agreement
between IC Leasing Corporation II and
Illinois Central Railroad Company dated
as of January 14, 1993. (Incorporated by
reference to Exhibit 10.6 to the Annual
Report on Form 10-K for the year ended
December 31, 1992, for the Illinois
Central Railroad Company filed March 5,
1993. (SEC File No. 1-7092))
10.13* Form of the Illinois Central Railroad
Company Executive Performance
Compensation Program (Incorporated by
reference to Exhibit 10.1 to the report
on Form 8-K of the Illinois Central
Railroad Company dated as of July 29,
1994. (SEC File No. 1- 7092))
10.14* Form of the Illinois Central Railroad
Company Supplemental Executive Retirement
Plan (Incorporated by reference to
Exhibit 10.2 to the report on Form 8-K of
the Illinois Central Railroad Company
dated as of July 29, 1994. (SEC File No.
1-7092))
10.15* Form of the Illinois Central Railroad
Company Executive Deferred Compensation
Plan (Incorporated by reference to
Exhibit 10.3 to the report on Form 8-K of
the Illinois Central Railroad Company
dated as of July 29, 1994. (SEC File No.
1-7092))
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.16* Form of Illinois Central Railroad Company
Performance Compensation Program
(Incorporated by reference to Exhibit
10.4 to the report on Form 8-K of the
Illinois Central Railroad Company dated
as of July 29, 1994. (SEC File No.
1-7092)
10.17* Illinois Central Corporation Management
Employee Discounted Stock Purchase Plan.
(Incorporated by reference to Exhibit
10.7 to the report of Form 10-K of
Illinois Central Corporation for the year
ended December 31, 1995. (SEC File No.
1-10720)
10.18 Form of Illinois Central Railroad Company
Union Employees' Savings Plan.
(Incorporated by reference to
Registration Statement of Illinois
Central Corporation on Form S-8 dated as
of July 18, 1995. (SEC File No.
33-61095))
10.20* Form of Illinois Central Railroad Company
Incentive 2000 Plan (Incorporated by
reference to Exhibit 10 to the Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1996, for the Illinois Central
Railroad Company filed on May 10, 1996.
(SEC File No. 1-7092))
21 Subsidiaries of Registrant (Included at E-9)
23 Consent of Arthur Andersen LLP (A)
27 Financial Data Schedule
99 Provisions of the Private Securities
Litigation Reform Act of 1995
(A) Included herein but not reproduced.
<PAGE>
Exhibit 21
ILLINOIS CENTRAL RAILROAD COMPANY
Subsidiaries of the Registrant
as of December 31, 1997
Name Place of Incorporation
Subsidiaries that are 100% owned by
Illinois Central Railroad Company:
Kensington and Eastern Railroad Company lllinois
Mississippi Valley Corporation Delaware
Waterloo Railroad Company Delaware
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
ILLINOIS CENTRAL RAILROAD COMPANY
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 19, 1998 (except with respect to the
matter discussed in Note 2, as to which the date is February 10, 1998) included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997, into Illinois Central Railroad Company's previously filed Form S-3
Registration Statements File Nos. 33-58547 and 333-03825.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 1998
<PAGE>
EXHIBIT 99
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. ICR
desires to take advantage of the new "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is filing this exhibit in order to
do so. The Act became law in late December 1995 and no official interpretations
of the Act's provisions have been published. Accordingly, ICR hereby identifies
the following important factors which could cause ICR's actual financial results
to differ materially from any such results which might be projected, forecast,
estimated or budgeted by ICR in forward-looking statements.
Grain traffic, in total, is subject to the supply domestically and
internationally. A key factor affecting supply is the weather. Grain traffic for
export is further impacted by changes in world supply and the agricultural and
trade policies of both U.S. and foreign governments.
Coal traffic depends on stockpiles and weather in utilities' service
territories. Deregulation in the utility industry may shift coal traffic
patterns and cause pressure on rail rates.
Chemical traffic and paper shipments are sensitive to the economic cycles. Other
forest products are also sensitive to industrial production and housing starts.
Chemical traffic could be affected if other railroads decided to build new track
into our current service territories.
Market realities for new ventures, such as the terminals, may differ from
assumptions because of changes in the economy and timing of
construction/expansion.
Because ICR's mainline track parallels the Mississippi River, barge competition
is formidable. Barge rates fluctuate partially based on water levels and
shipping conditions on the river.
The merger of SP and UP could result in the loss of the haulage moves ICR
performs for the SP.
As to expenses, the most volatile are labor costs and fuel. Negotiating locally
with the labor unions increases the risk of a strike and a strike may not be
averted via governmental intervention as is frequently the case in national
labor disputes in the transportation industry.
The variability of fuel prices can be offset via hedging but hedging also brings
risk.
Finally, mergers in the railroad industry could create traffic diversions if the
new entity routes traffic around ICR's routes or if it uses its size to block
shippers' routing options or pricing.
<PAGE>
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