UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________________ to ____________________
Commission File No. 1-9064
CONSOLIDATED RAIL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23 1989084
- -------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2001 Market Street, Two Commerce Square
Philadelphia, Pennsylvania 19101-1417
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 209-4000
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
Registrant (as of March 3, 1998): $0.
Shares of Common Stock Outstanding (as of March 15, 1998): 100 Shares, all
of which are held by the parent of the Registrant
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
TABLE OF CONTENTS
-----------------
Item Page
---- ----
Part I 1. Business....................................... 1
2. Properties..................................... 1
3. Legal Proceedings.............................. 15
4. Submission of Matters to a Vote of Security
Holders..................................... 21
Executive Officers of the Registrant........... 21
Part II 5. Market for Registrant's Common Equity and
Related Stockholder Matters................. 26
6. Selected Financial Data........................ 26
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 30
8. Financial Statements and Supplementary Data.... 38
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...... 61
Part III 10. Directors and Executive Officers of the
Registrant.................................. 62
11. Executive Compensation......................... 65
12. Security Ownership of Certain Beneficial
Owners and Management....................... 73
13. Certain Relationships and Related Transactions. 73
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................... 74
Power of Attorney............................................. 77
Signatures.................................................... 77
Exhibit Index................................................. 79
i
<PAGE>
PART I
Item 1. Business.
- ------ --------
and
Item 2. Properties.
- ------ ----------
GENERAL. Consolidated Rail Corporation ("Conrail" or "the
-------
Company") is a Pennsylvania corporation incorporated on February 10,
1976 to acquire, pursuant to the Regional Rail Reorganization Act of
1973, the rail properties of many of the railroads in the northeast
and midwest region of the United States which had gone bankrupt during
the early 1970's, the largest of which was the Penn Central
Transportation Company ("Penn Central"). On July 1, 1993, Conrail
became the wholly-owned subsidiary of Conrail Inc., a holding company.
Conrail is Conrail Inc.'s only significant subsidiary and primary
asset.
Reports on Form 10-K for years prior to 1993 were filed by
Consolidated Rail Corporation, and historic data presented therein
reflect the results of Consolidated Rail Corporation for those time
periods. From 1993 through 1996, Reports on Form 10-K were filed by
both Conrail Inc. and Conrail. With the delisting of its publicly-
listed equity securities pursuant to a Form 15 filed in June, 1997,
Conrail Inc. ceased filing reports under the Securities and Exchange
Act of 1934, as amended.
MERGER OF CONRAIL INC. On October 14, 1996, Conrail Inc., CSX
---------------------
Corporation ("CSX") and a subsidiary of CSX entered into an Agreement
and Plan of Merger (as amended, the "Merger Agreement"), pursuant to
which Conrail Inc. was to be merged with a subsidiary of CSX in a
merger-of-equals transaction.
On October 24, 1996, Norfolk Southern Corporation ("NSC")
commenced an unsolicited tender offer for all outstanding Conrail Inc.
voting stock at $100 per share in cash. NSC subsequently increased
its offer to $115 per share in cash.
On November 20, 1996, CSX concluded its first tender offer and
purchased approximately 19.9% of Conrail Inc.'s outstanding shares for
$110 per share.
On February 4, 1997, NSC purchased approximately 8.2 million
shares pursuant to a tender offer for up to 9.9% of the outstanding
shares for $115 per share.
On March 7, 1997, Conrail Inc. and CSX entered into a Third
Amendment (the "Third Amendment") to the Merger Agreement, pursuant to
which the price per share was increased from $110 to $115, and the
number of shares to be purchased in the tender offer was increased to
all outstanding shares.
<PAGE>
The Third Amendment also permitted CSX to conduct negotiations
with other railroads, including NSC, relating to competitive issues
raised by the CSX transactions, and to enter into any resulting
agreement.
On April 8, 1997, Conrail Inc. and CSX entered into the Fourth
Amendment (the "Fourth Amendment"), which facilitated CSX and NSC
entering into an agreement with respect to their joint acquisition of
Conrail Inc. as contemplated by the Third Amendment to the Merger
Agreement. The terms of the CSX-NSC Agreement are embodied in a
letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter
Agreement") and the Transaction Agreement dated as of June 10, 1997
among Conrail Inc., CSX and NSC.
The CSX/NSC Letter Agreement provided, among other things, (i)
for the termination of the NSC's outstanding offer to purchase Conrail
Inc. shares and the dismissal of litigation between CSX and NSC, (ii)
that Conrail Inc. would, after the effective time of its merger into a
wholly-owned subsidiary of CSX, become a direct or indirect jointly-
owned subsidiary of CSX and NSC, (iii) that CSX and NSC would jointly
acquire, for $115 in cash, all Conrail Inc. shares not already owned
by CSX and NSC through a tender offer that closed on May 23, 1997 and
subsequent merger, and (iv) that Conrail Inc. would continue to be
managed by its existing Board of Directors until the requisite
approval of the Surface Transportation Board is obtained, at which
time CSX and NSC will be separately allocated certain of Conrail
Inc.'s railroad assets and will jointly operate certain other railroad
activities of Conrail Inc.
On May 23, 1997, the CSX-NSC joint tender offer for the remaining
outstanding shares of Conrail Inc.'s common and ESOP stock was
concluded. On June 2, 1997, Conrail Inc. became the surviving
corporation in a merger with Green Acquisition Corp., a jointly-owned,
indirect subsidiary of CSX and NSC, as a result of which the remaining
outstanding capital stock of Conrail Inc. was acquired by NSC and CSX.
Conrail remains a wholly-owned subsidiary of Conrail Inc.
Simultaneous with the merger, Conrail Inc.'s common stock was delisted
from the New York Stock Exchange and, through the filing of a Form 15,
deregistered with the Securities and Exchange Commission. The Conrail
Inc. stock acquired by NSC and CSX is being held in a voting trust
pending approval of the joint acquisition by the Surface
Transportation Board, which is expected to occur in mid-1998.
RAIL OPERATIONS. Conrail provides freight transportation
---------------
services within the northeast and midwest United States. Conrail
interchanges freight with other United States and Canadian railroads
for transport to destinations within and outside Conrail's service
region. Conrail operates no significant line of business other than
the freight railroad business and does not provide common carrier
passenger or commuter train service.
2
<PAGE>
Conrail serves a heavily industrial region that is marked by
dense population centers which constitute a substantial market for
consumer durable and non-durable goods, and a market for raw materials
used in manufacturing and by electric utilities. Conrail's traffic
levels and, as a result, its financial performance are substantially
affected by its ability to compete with trucks and other railroads,
the economic strength of the industries and metropolitan areas that
produce and consume the freight Conrail hauls and the traffic
generated by Conrail's connecting railroads. Conrail remains dependent
on non-bulk traffic, which tends to generate higher revenues than bulk
commodities, but also involves higher costs and is more vulnerable to
truck competition.
The Service Group System
Since 1994, Conrail's marketing, sales and related operations
functions have been organized into four service groups: CORE Service,
Intermodal Service, Unit Train Service and Automotive Service.
Petrochemicals and minerals, food and agriculture products, forest and
manufactured products, and metals are handled by the CORE Service
Group. The Intermodal Service Group handles intermodal trailers and
containers. The Unit Train Service Group handles coal and ore
traffic. The Automotive Service Group handles automotive parts and
finished vehicles. Each of these groups controls the integrated
planning, pricing and operating functions that will enable them to
tailor services, develop products and make capital investments
directed toward the special requirements of their respective
customers.
3
<PAGE>
Revenues for the Service Groups for 1993 through 1997, together
with total annual traffic volumes, are set forth in the following
tables.
<TABLE>
Service Groups - Revenues ($ in Millions)
Years ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CORE Service Group(1)
Revenues(2) $1,546 $1,542 $1,557 $1,587 $1,514
Percent of total 43.3% 43.9% 44.5% 44.5% 45.9%
Intermodal Service Group
Revenues(2) 819 747 701 742 647
Percent of total 23.0% 21.3% 20.0% 20.8% 19.6%
Unit Train Service Group
Revenues(2) 654 666 659 631 583
Percent of total 18.3% 19.0% 18.8% 17.7% 17.7%
Automotive Service Group
Revenues(2) 568 543 549 558 505
Percent of total 15.9% 15.5% 15.7% 15.7% 15.3%
Total Unassigned Revenue(2) (20) 11 36 46 48
(.5%) 0.3% 1.0% 1.3% 1.5%
Total line haul revenue $3,567 $3,509 $3,502 $3,564 $3,297
Miscellaneous revenue(3) 167 175 166 152 141
------ ------ ------ ------ ------
Total freight revenue $3,734 $3,684 $3,668 $3,716 $3,438
- ---------------------------
(1)Petrochemicals and
Minerals $ 588 $ 582 $ 584 $ 603 $ 565
Food and Agriculture 336 335 353 361 351
Forest and Mfg. Products 308 318 329 326 308
Metals 314 307 291 297 290
------ ------ ------ ------ ------
Total CORE Srv. Grp. $1,546 $1,542 $1,557 $1,587 $1,514
====== ====== ====== ====== ======
(2)Revenues for the years 1993 and 1994 have been reclassified to
exclude unassigned revenue from Service Group totals to provide
more accurate comparisons to the current period.
(3) Includes switching, demurrage and other miscellaneous revenues.
</TABLE>
4
<PAGE>
SERVICE GROUPS - VOLUME IN UNITS
(FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS)
(IN THOUSANDS)
<TABLE>
Years ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CORE Service Group(1) 1,255 1,235 1,254 1,321 1,302
Intermodal Service Group 1,760 1,584 1,473 1,589 1,355
Unit Train Service Group 839 862 862 912 878
Automotive Service Group 422 392 399 396 360
----- ----- ----- ----- -----
Total Volume 4,276 4,073 3,988 4,218 3,895
===== ===== ===== ===== =====
- ------------------------
(1)Petrochemicals and
Minerals 364 350 358 376 374
Food and Agriculture 262 257 265 289 295
Forest and Mfg. Products 289 290 306 318 309
Metals 340 338 325 338 324
----- ----- ----- ----- -----
Total CORE Srv. Grp. 1,255 1,235 1,254 1,321 1,302
===== ===== ===== ===== =====
</TABLE>
CORE Service Group
------------------
In 1997, revenues and volume for this service group increased
0.3% and 1.7%, respectively, from 1996. CORE's Metals business unit
led the group, with revenue growth of 1.9% from the prior year. The
Petrochemicals and Minerals and Food and Agricultural units also
increased revenue slightly over 1996. The Forest and Manufactured
unit was down in revenue compared to 1996 (2.8%).
Petrochemicals and Minerals: This commodity group consists of a
---------------------------
wide variety of commodities, including agricultural and organic
chemicals, plastic pellets, soda ash, construction minerals, petroleum
products and waste. The majority of traffic is joint line and the
primary flows are between Louisiana and Texas, (as originating
sources), and Delaware, New Jersey, and Pennsylvania (as destination
points). This commodity group's customer base and origin/destination
pair mix are both large and diverse, with none occupying a dominant
position in terms of Conrail's traffic volume or revenues. Conrail's
traffic in this commodity group grew 4.0% in 1997 over 1996, with
revenue up 1.0%. Revenues from minerals, petroleum products and waste
all grew over 1997, while chemical revenue declined slightly due to
plant closures and shifts in traffic to short-haul moves.
The largest component of this business is chemical traffic,
accounting for approximately 44% of the revenue and 39% of the volume
in 1997. This traffic includes chlorine, smaller volumes of other
hazardous chemicals and non-hazardous substances which, if spilled or
released into the atmosphere, could be dangerous and could result in
5
<PAGE>
significant liability to Conrail. Under catastrophic circumstances,
such liability could exceed Conrail's $300 million in insurance
coverage for such accidents. It is impossible to eliminate the risk
of such liability; however, Conrail has not experienced any
significant liability as a result of an accident involving chlorine or
any other such substance. Furthermore, Conrail has safety procedures
designed to prevent the occurrence of such accidents, or limit their
impact should they occur, and works in concert with chemical
manufacturers to reduce the risks in transporting these commodities,
subscribing to the policies and procedures defined under Responsible
Care partnerships. Conrail has been a Responsible Care partner since
1996, and Conrail is on schedule in implementing its five-year
Responsible Care plan.
Increasing regulation by federal, state and local governments of
the transportation and handling of hazardous and non-hazardous
substances and waste has increased the administrative burden and cost
of transporting certain commodities in this group.
Food and Agriculture: This commodity group includes fresh and
--------------------
processed food products moving primarily in boxcars, grain, grain
products and agricultural chemicals moving in covered hopper and tank
cars. Conrail's revenue increased by 0.4% and units increased by 1.8%
in 1997 from 1996 levels. Traffic in the food segment grew slightly
in spite of lower canned goods traffic, while agriculture units grew
by 3.4%, due to strong demand for agricultural chemicals, as well as a
strong harvest.
Forest and Manufactured Products: This commodity group includes
--------------------------------
paper and wood products moving in boxcars, certain lumber and related
products moving on flatcars, and general manufactured commodities
moving in boxcars. These commodities generated $308 million in
revenue in 1997, an overall decline of 2.8% from 1996. The forest
products segment of this business (paper and wood products) accounted
for 89% of the revenue in 1997. The manufactured products segment
suffered a 17% decline in revenue in 1997 compared to 1996, as the
result of closing distribution centers and declines in the handling of
certain manufactured products.
Metals: This commodity group includes scrap ferrous products and
------
semi-finished, finished and sheet steel. In 1997, units increased
0.5%, revenue per unit rose 1.4% and revenues grew 1.9% over 1996.
Additional fleet capacity from new cars and improved freight car
utilization contributed to the year-over-year growth.
Intermodal Service Group
------------------------
Conrail continues to be one of the rail industry's leaders in
handling intermodal traffic. Volume and revenue increased 11.1% and
9.6%, respectively, in 1997 from 1996. Conrail handled 1.76 million
units of intermodal traffic in 1997.
6
<PAGE>
Conrail's intermodal traffic consists of three segments. The
first segment is Conrail's parcel/package traffic, which principally
involves shipments for the United Parcel Service, U.S. Postal Service
and less-than-truck-local companies. Revenue in this segment
increased by 8.3% in 1997.
The second segment is domestic traffic, which includes a variety
of commodities and customers. Revenue in this segment increased by
9.4% in 1997. Traffic from major truckload companies continued to
increase, as did traffic from intermodal marketing companies (or third
party freight consolidators and brokers).
International container traffic constitutes the third segment of
Conrail's intermodal traffic. International container traffic chiefly
involves goods produced in the Pacific Basin and shipped by rail from
west coast ports to east coast markets. Conrail and its western
railroad connections are able to participate in this traffic because
they have established superior transit time compared with the all-
water route through the Panama Canal. Conrail also participates in
traffic moving through Atlantic ports for import and export trade with
European and Mediterranean markets. Revenue from Conrail's
international intermodal traffic increased 11.3% in 1997.
In 1997, Conrail's major intermodal terminal improvements
included expansion at Harrisburg and Chicago 47th Street and extensive
paving at Pittsburgh and North Bergen. Also in 1997, Conrail added
1,200 containers to the EMP container program, a joint venture with
NSC and Union Pacific railroads.
Unit Train Service Group
------------------------
The Unit Train Service Group consists of coal, coke, iron ore and
aggregates. The 1997 volume and revenue for this group fell below
1996 figures by 2.7% and 1.7%, respectively. A major cause for this
reduction was an 18% decline in coke and iron ore volume, due mainly
to a prolonged strike at Wheeling-Pittsburgh Steel.
Utility coal, which makes up over 70% of Conrail's coal business,
increased in volume and revenue by approximately 5% and 9%,
respectively, over 1996 levels. Conrail moves utility coal from local
and off-line mines to electric utility generating stations. The
utility industry continues to deregulate, which will affect the
competitive nature of the utility generating stations currently served
by Conrail. Annual coal traffic volumes to these electric generating
stations fluctuate with a utility's coal inventory policy, the weather
and the competitive position of the station.
Export, industrial and metallurgical coals represent the
remaining segments of Conrail's coal traffic. Export coal traffic
volume and revenue decreased in 1997 by approximately 6% and 31%,
respectively. This decrease was the result of weaker demand for U.S.
coal by European utilities, resulting from the increased price
competition from South American and South African sources. The
7
<PAGE>
industrial coal figures remained unchanged from the 1996 levels. The
metallurgical coal volumes increased slightly, while revenue decreased
by 18%, changes due in large part to an increase in shorter haul
business in this segment.
Automotive Service Group
------------------------
Despite the closing of General Motor's Tarrytown Assembly Plant,
Conrail's Automotive Service Group revenue increased 4.6% in 1997.
Revenue for the finished vehicles segment increased 5.9%, and revenue
for the autoparts segment increased 2.6% over 1996 levels.
Additional market share, combined with a 4% increase in North
American light vehicle production, positively affected 1997 revenues.
The autoparts segment increased as a result of capturing new traffic
lanes, and finished vehicles traffic increased as the result of
gaining additional business from domestic and foreign-based domestic
manufacturers.
8
<PAGE>
Certain Statistics. The following tables provide various
------------------
measurements relating to Conrail's rail operations from 1993 through
1997:
<TABLE>
PRODUCTIVITY DATA
Years ended December 31,
-------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating ratio (1)................... 91.5% 83.8% 87.6% 83.8% 82.8%
Compensation and benefits ratio....... 32.8% 32.7% 34.0% 33.9% 35.7%
Employees (average)................... 20,675 21,280 23,510 24,833 25,406
Gross ton miles per freight employee
hour worked (2)(3)................. 5,133 4,634 4,352 4,135 3,805
Gross ton miles per freight train
hour (thousands) (2)(3)............ 119.1 113.4 118.7 113.0 119.0
Gross ton miles per locomotive in
service (millions) (2)(3)........... 119.1 114.2 110.1 104.8 102.4
Gross ton miles per gallon of fuel (2) 795 790 774 749 745
</TABLE>
(1) The Company's operating ratio for 1997 (operating expenses as a
percentage of revenues) includes the effects of a $221 million
ESOP termination charge, and $287 million in merger-related
expenses, without which the operating ratio would have been
77.9%. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 to the
Consolidated Financial Statements elsewhere in this Annual
Report. The 1996 operating ratio includes the effect of a one-
time $135 million charge for non-union voluntary separation
programs and related losses on certain non-cancelable leases, and
$16 million in merger-related expenses. Without these charges,
Conrail's operating ratio would have been 79.7%. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 3 and 11 to the Consolidated
Financial Statements elsewhere in this Annual Report. Without
the $283 million special charge in 1995, Conrail's operating
ratio would have been 79.9%. See Note 12 to the Consolidated
Financial Statements elsewhere in this Annual Report. Without an
$84 million special charge in 1994, Conrail's operating ratio
would have been 81.5%.
(2) Consolidated Rail Corporation without subsidiaries.
(3) Locomotive weight not included.
<TABLE>
QUALITY OF SERVICE DATA(1)
Years ended December 31,
-------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Miles of track under slow order....... 9 12 43 49 62
Locomotive out of service ratio....... 7.0% 9.4% 9.1% 8.7% 8.3%
Freight cars requiring heavy repairs.. 5.6% 5.6% 5.6% 4.9% 4.7%
Reportable train accidents ........... 168 180 141 160 155
Cost of loss and damage incidents
as a percent of revenue............ .48% .52% .47% .48% .39%
</TABLE>
(1) Consolidated Rail Corporation without subsidiaries.
9
<PAGE>
COMPETITION. Conrail's rail services face significant
-----------
competition from trucks, from other railroads, and from the
availability of the same or substitute goods produced at points not
served by Conrail. The trucking industry is especially competitive in
Conrail's service area because, among other reasons, freight in this
region is moved shorter distances than in the West, and the cost
characteristics of the railroad and trucking industries generally make
trucks more competitive over shorter distances.
Price and service competition from trucks, while present for all
commodities, is especially evident in the movement of intermodal
freight, auto parts, and finished steel. Competition from trucks has
been increased by the passage of legislation removing certain barriers
to entry into the trucking business and allowing the use of wider,
longer, and heavier trailers and multiple trailer combinations.
Larger trailers and multiple trailer combinations have substantially
increased productivity in the trucking industry, and any future
legislation permitting further increases in truck capacity could have
a substantial adverse effect on the competitiveness of railroads.
Conrail is also subject to competition from other railroads. In
most of Conrail's service territory, one or more other railroads can
serve customers directly. Elsewhere, the ability to provide joint
service with the many short lines whose operations have proliferated
throughout the East, and/or in partnership with trucks (for pick-up,
delivery, and draying services) allows rail competitors whose tracks
do not reach given customers or points to constrain Conrail prices and
to compete effectively for movement of the freight. In addition,
recent changes in the nature of rail service offerings and in
technology have expanded the scope of rail service beyond the physical
limitations of lines, which has resulted in increased railroad
competition.
An important influence on Conrail's competitive position is
regulation by the Federal government. Prior to 1980, regulation
significantly inhibited the ability of railroads to respond to
increasing customer demands, overall logistics needs, and changing
transportation markets. The Staggers Rail Act of 1980 ("Staggers
Act") substantially reduced the restrictions of regulation. In
particular, railroads were given more opportunity to reduce costs and
more freedom to adjust prices and service offerings, which enabled
them to compete more effectively. Under the Staggers Act, the former
Interstate Commerce Commission ("ICC") deregulated a significant
amount of railroad traffic, including intermodal and most boxcar
traffic, finished vehicles and numerous other commodities moving in
other types of equipment.
The Staggers Act further enhanced railroads' competitive options
by permitting the use of railroad-shipper contracts for traffic still
regulated, under which the parties can negotiate customer-specific
prices, service standards and terms. These contracts generally
provide prices lower than tariff rates and many do not guarantee that
any given amount of freight will be shipped during their term. As of
10
<PAGE>
December 31, 1997, Conrail was a party to 3,403 such contracts for
regulated traffic, which Conrail estimates accounted for 26% of its
line-haul revenues in 1997. Although some contracts have a term
longer than one year, most contracts are for one year or less. The
majority of Conrail's multi-year contracts are subject to cost-related
adjustments that provide for flat percentage increases. The cost-
based provisions in certain of these contracts are tied to indices
formerly under the jurisdiction of the ICC. Action to adjust these
indices for productivity gains by the railroads has had an adverse
impact on Conrail's ability to recover costs under such contracts,
which accounted for less than 1% of Conrail's line haul revenues in
1997.
Effective January 1, 1996, pursuant to the ICC Termination Act of
1995, the authority of the ICC to regulate railroads was transferred
to the Department of Transportation ("DOT") to be administered by the
Surface Transportation Board. The prior regulatory scheme remains
substantially intact, with the following significant changes: (1)
access to freight railroad tracks by rail operators (both freight and
passenger) operating on behalf of local governmental authorities has
been eased; (2) some types of abandonments may take appreciably
longer; (3) tariffs and most contracts will no longer be filed (other
mechanisms are required for advising customers of rates and rate
changes); (4) minimum rate levels will no longer be regulated; and
(5) DOT will not regulate railroad issuances of securities or
assumptions of debt. Other changes will require development of new
regulations and/or of a body of precedent before their impact can be
fully assessed.
PROPERTY. As of December 31, 1997, Conrail (excluding its
--------
subsidiaries) maintained 17,016 miles of track including track for
crossovers, turnouts, second main, other main, passing and switch
track, on its 10,801 mile route system. Of total route miles, 8,479
are owned, 191 are leased or operated under contract and 2,131 are
operated under trackage rights, including approximately 300 miles
operated pursuant to an easement over Amtrak's Northeast Corridor. As
of December 31, 1997, virtually all track over which at least 10
million gross tons moved annually (6,008 track miles) was heavy-weight
rail of at least 127 pounds per yard, and 100% of such track had
continuous welded rail. Continuous welded rail reduces track
maintenance costs and, in general, permits trains to travel at higher
speeds. As of December 31, 1997, Conrail had 8,702 miles of
continuous welded rail on track it maintained.
As of December 31, 1997, 83% of the 3,878 track miles maintained
for fast freight traffic had a maximum operating speed of 50 MPH or
more, and 70% had a maximum operating speed of at least 60 MPH. As of
December 31, 1997, approximately 96% of the track over which at least
10 million gross tons moved annually was governed by automatic signal
systems. In all, as of December 31, 1997, 7,598 miles of track were
controlled by automatic signal systems.
11
<PAGE>
Until the acquisition of Conrail Inc. by CSX and NSC, Conrail was
engaged in an ongoing process to identify certain under-utilized rail
lines and other underperforming assets to avoid future capital costs
and to improve its return on assets. Conrail recorded a $283 million
charge in 1995 to cover the expected losses upon disposition of
approximately 1,800 miles of lines and other assets not required to
support Conrail's service. See Note 12 to the Consolidated Financial
Statements elsewhere in this Annual Report.
The following table indicates the number of locomotives and
freight cars owned (or subject to capitalized leases) and includes
22,618 freight cars used by Conrail under operating leases. These
total figures are as of December 31, 1997, and include stored or
surplus units, but exclude subsidiaries which have an immaterial
number of locomotives and freight cars:
<TABLE>
LOCOMOTIVES AND FREIGHT CARS
Number of Units
---------------
Total Stored(1)
----- ---------
<S> <C> <C>
LOCOMOTIVES........................ 1,967 16
------ --
Road............................. 1,831 8
Switching........................ 136 8
Total Surplus(2)
----- ----------
FREIGHT CARS....................... 45,690 3,486
------ -----
Box.............................. 7,703 709
Covered Hopper................... 2,816 65
Open Hopper...................... 10,934 2,517
Gondola.......................... 4,408 68
Coil Steel....................... 11,387 0
Multi-Level...................... 7,043 36
Flat and Other................... 1,399 91
</TABLE>
- -----------
(1) Serviceable locomotives not required for current operations on
December 31, 1997.
(2) Freight cars which did not move during the seven days immediately
preceding December 31, 1997 and which were available for loading. The
number of surplus freight cars during 1997 fluctuated due to
variations in traffic and fleet adjustments.
On December 31, 1997, the average age of Conrail's road
locomotives, not including stored-serviceable units, was 12.1 years.
The average age of the total locomotive fleet was 16.4 years, and the
average age of the total freight car fleet was 22 years.
CAPITAL EXPENDITURES. The following tables provide information
--------------------
concerning capital expenditures from 1993 through 1997:
12
<PAGE>
<TABLE>
CAPITAL EXPENDITURES
(In Millions)
Years ended December 31,
---------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track rehabilitation...... $169 $203 $206 $221 $207
Rolling stock and transportation equipment.. 222 139 170 139 314
Other(1).................. 135 136 118 148 129
--- --- --- --- ---
Total..................... $526 $478 $494 $508 $650
==== ==== ==== ==== ====
Subsidiaries of
Consolidated Rail
Corporation (included in
Total).................... $ 9 $ 5 $ 4 $ 3 $ 3
</TABLE>
(1) Includes communications and signals, bridges and tunnels,
computers and telecommunications, and other improvements.
<TABLE>
TRACK REHABILITATION
Years ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles surfaced...... 3,702 4,685 3,162 2,749 3,154
Track miles of rail laid.. 151 241 255 207 201
Ties installed (millions). 0.7 0.9 1.1 1.1 1.0
</TABLE>
EMPLOYEES AND LABOR. Conrail (excluding subsidiaries) averaged
-------------------
19,802 employees in 1997, 86% of whom are represented by a total of 14
labor organizations and are covered by 21 separate collective
bargaining agreements.
Conrail has concluded collective bargaining agreements with all
of the organizations representing its agreement employees. These
agreements contain moratorium clauses providing that they may not be
reopened prior to January 1, 2000 or later. However, a single issue
remains outstanding with one of the above-mentioned organizations, the
Transportation Communications International Union, representing
approximately 1,950 Conrail employees. The parties are currently in
mediation under the auspices of the National Mediation Board (NMB).
If the NMB eventually concludes that its efforts to resolve the
dispute will not be successful, it will proffer binding arbitration.
If either side refuses to arbitrate, there is a 30-day "cooling-off"
period during which the NMB may make a finding that the dispute
threatens "substantially to interrupt interstate commerce to a degree
13
<PAGE>
such as to deprive any section of the country of essential
transportation service." Such finding is then presented to the
President of the United States who has the option of appointing an
Emergency Board to investigate the dispute. If the President does not
appoint an Emergency Board, the parties are free to resort to self
help at the conclusion of the above-mentioned cooling-off period.
If the President does appoint an Emergency Board, the Board has
30 days to investigate the dispute and report its findings. The
Emergency Board's findings are non-binding. Although the parties must
maintain the status quo for a period of 30 days following the issuance
of the Board's report, any party which rejects the Board's findings
may thereafter resort to self help. In the event of a strike,
Congress has the power to resolve the dispute by enacting legislation,
including legislation imposing a labor contract in accordance with the
findings of the Emergency Board.
Under a decision by the United States Supreme Court on April 28,
1987, rail unions have the right, under the Railway Labor Act and
other federal laws, to engage in secondary picketing against any
railroad. As a result, a labor dispute between one railroad and a
union can cause a strike to spread to any other railroad, or to all
other railroads, whether or not the union has a collective bargaining
agreement or a dispute with such other railroads. There is also the
potential that railroads may be subject to secondary picketing in the
event of a strike in the airline industry, which, like the railroad
industry, is subject to the Railway Labor Act.
Should Conrail or its subsidiaries be the subject of a strike or
secondary picketing, Conrail's rail operations could be stopped or
severely curtailed.
GOVERNMENT REGULATION. Conrail is subject to environmental,
---------------------
safety, and other regulations generally applicable to all businesses,
and its rail operations are also regulated by the DOT, the Federal
Railroad Administration ("FRA"), state Departments of Transportation
and some state and local regulatory agencies.
The DOT has jurisdiction over, among other things, rates charged
for certain traffic movements, service levels and freight car rents.
It also has jurisdiction over the situations and terms under which one
railroad may gain access to another railroad's traffic or facilities,
extension or abandonment of rail lines, consolidation, merger, or
acquisition of control of rail common carriers and of other carriers
by rail common carriers, and labor protection provisions in connection
with the foregoing.
14
<PAGE>
Under the Staggers Act, federal regulation of rates and services
was reduced. The regulatory scheme, now administered by the Surface
Transportation Board, continues the ICC's prior deregulation of rates
for intermodal traffic, most boxcar traffic and a series of
miscellaneous commodities, including steel and automobiles. In
addition, railroads are free to negotiate contracts with shippers
setting rates, service standards and the terms for movements of other
kinds of traffic. As a result, railroads have greater flexibility in
adjusting rates and services to meet revenue needs and competitive
conditions. For further discussion of the abolition of the ICC and
the effect of the transfer of its regulatory authority to DOT, see
"Competition."
The FRA has jurisdiction over safety and railroad equipment
standards.
Conrail's rail operations are also subject to a variety of
governmental laws and regulations relating to the protection of the
environment. In addition to being involved as a potentially
responsible party at numerous Superfund sites (see Item 3 - "Legal
Proceedings"), Conrail is subject to increasing regulation of its
transportation and handling of certain hazardous and non-hazardous
commodities and waste which has resulted in additional administrative
and operating costs. Also, on February 11, 1997, the United States
Environmental Protection Agency published in the Federal Register
Proposed Rule "Emission Standards for Locomotives and Locomotive
Engines". According to the Proposed Rule, locomotive engines (other
than those defined as new or remanufactured) may be regulated by the
states. Additional investments will likely be required to bring
other than new locomotives into compliance, although the timing and
amount of the investments will not be determinable until the Rule is
adopted. On December 17, 1997, the EPA signed the Final Rules, which
have not yet been published and are not substantially different than
the proposed Rules. Compliance with existing laws and regulations
relating to the protection of the environment has not had a material
effect on Conrail's capital expenditures, earnings or competitive
condition. (See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental
Matters," and Note 14 to the Consolidated Financial Statements
included elsewhere in this Annual Report.)
Item 3. Legal Proceedings.
- ------ -----------------
Occupational Disease Litigation. Conrail has been named as a
-------------------------------
defendant in lawsuits filed pursuant to the provisions of the Federal
Employers' Liability Act ("FELA") by persons alleging (1) personal
injury or death caused by exposure to asbestos in connection with
15
<PAGE>
railroad employment (2) complete or partial loss of hearing caused by
exposure to excessive noise in the course of railroad employment; (3)
repetitive motion injury in connection with railroad employment; and
(4) personal injury or death caused by exposure to deleterious
substances (mixed dusts, fumes, chemicals, etc.) As of December 31,
1997, Conrail was a defendant in 524 pending asbestos suits, 971
pending hearing loss suits, 2,857 repetitive motion injury suits and
215 pending deleterious substance suits, and had notice of 1,183
potential asbestosis claims, 1,265 potential hearing loss claims, 587
potential repetitive motion injury claims and 24 deleterious substance
claims.
Conrail expects to be named as a defendant in a significant
number of occupational disease cases in the future.
Punitive Damage Awards in Ohio Crossing Accident Cases. Conrail
------------------------------------------------------
has received adverse jury verdicts in three separate crossing accident
cases in Ohio: Garrett and Gollihue v. Consolidated Rail Corp.;
Wightman v. Consolidated Rail Corp.; and Moore, et al. v.
Consolidated Rail Corp. In each case, the jury awarded substantial
punitive damages in connection with property damage resulting from the
accidents. Collectively, the total punitive damage awards total
approximately $30 million, based on property damage that totals less
than $5,000. In Wightman v. Conrail, the judge reduced the punitive
damages award to $15 million, Conrail's appeal to the intermediate
Appellate Court was unsuccessful, and an appeal is pending with the
Ohio Supreme Court. Conrail has settled the Moore and Garrett cases.
Structure and Crossing Removal Disputes in Connection With Lines
----------------------------------------------------------------
Abandoned Under Northeast Rail Service Act("NERSA"). Conrail may be
- ---------------------------------------------------
responsible, in whole or in part, for the costs of removal of several
hundred overhead and underpass crossings located on railroad lines it
has abandoned under NERSA (and, in some instances, responsible for the
removal of the lines of railroad themselves as well as appurtenant
structures). Conrail's liability for the removal of such lines,
crossings and structures will be determined on a case-by-case basis,
and is dependent upon the circumstances under which each was
constructed, the nature of Conrail's property interest with respect to
such structures, the existence of contracts pertaining to such
crossings and structures, and applicable federal and state law. Some
states have imposed upon Conrail the obligation to remove certain
crossings.
16
<PAGE>
Englehart v. Conrail. In connection with the Special Voluntary
--------------------
Retirement Program offered to certain employees in late 1989 and early
1990, Conrail used surplus funds in its over-funded Supplemental
Pension Plan ("Plan") to fund certain aspects of that program. In
December 1992, certain former Conrail employees brought suit
challenging the use of surplus Plan funds (a) to pay administrative
Plan expenses previously paid by Conrail, (b) to fund the Special
Voluntary Retirement Program, and (c) to pay life insurance and
medical insurance premiums of former employees as improper and
unlawful, and alleging that employees who have made contributions to
the Plan or its predecessor plans are entitled to share in the surplus
assets of the Plan. In August 1993, the court granted Conrail's
Motion to Dismiss the majority of the counts in the complaint, but
refused to dismiss the issue of Conrail's use of Plan assets to pay
administrative expenses of the Plan. On September 16, 1996, the Judge
granted Conrail's motion for summary judgment on all of the claims,
except for one individual participant claim. The Third Circuit Court
of Appeals affirmed the District Court's decision on August 6, 1997,
and plaintiffs' writ of certiorori to the U.S. Supreme Court has been
denied.
New York Cross Harbor Railroad Terminal Corporation v.
------------------------------------------------------
Consolidated Rail Corporation. On June 5, 1997, plaintiff filed a
- -----------------------------
complaint, now amended, against Conrail in the United States District
Court for the Eastern District of New York seeking a total of $1.4
billion in compensatory, punitive and treble damages under Section 2
of the Sherman Antitrust Act. Plaintiff alleges that Conrail engaged
in anticompetitive and other unlawful acts harming plaintiff's rail
car float operation in New York Harbor between Brooklyn, NY and
Conrail's Greenville Yard in Jersey City, NJ. Conrail believes
plaintiff's legal claims to be without merit.
Bennett, et al. vs. Conrail Matched Savings Plan, Kelly, et al.
---------------------------------------------------------------
vs. Conrail Matched Savings Plan, Gale, et al. vs. Conrail Matched
- ------------------------------------------------------------------
Savings Plan, and Bunnion, et al. vs. Conrail Matched Savings Plan.
- ------------------------------------------------------------------
In August 1997, four putative class action lawsuits were filed in the
United States District Court for the Eastern District of Pennsylvania
by former Conrail non-agreement employees alleging various violations
of ERISA in connection with the Company's announced plans to
distribute surplus Employee Stock Ownership Plan assets. In addition,
the Bunnion complaint alleges that Conrail unlawfully discriminated on
the basis of age and coerced employees in connection with Conrail's
1997 Voluntary Separation Program and that former employees who
returned to Conrail as independent contractors are being denied the
benefits of full employment. By order dated October 30, 1997, the
District Court granted Conrail's Motion to Dismiss the Bennett, Kelly
and Gale complaints, which order plaintiffs have appealed. The judge
substantially denied the Motion to Dismiss the Bunnion complaint, and
discovery is proceeding in that matter.
17
<PAGE>
Environmental Litigation. Conrail is subject to various federal,
------------------------
state and local laws and regulations regarding environmental matters.
In certain instances, Conrail has received notices of violations of
such laws and regulations and either has taken or plans to take
appropriate steps to address the problems cited or to contest the
allegations of violation. As of December 31, 1997, Conrail had
received inquiries from governmental agencies or had been identified,
together with other companies, as a potentially responsible party for
cleanup and/or removal costs due to its status as an alleged
transporter, generator or property owner at 135 locations throughout
the country. However, Conrail, through its own investigations and
assessments, believes it may have some potential responsibility at
only 60 of these sites. The amounts Conrail has accrued with respect
to the proceedings listed below are included in its $48 million
accrual for estimated future environmental expenses. (See Item 7 -
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Environmental Matters" and Note 14 to the
Consolidated Financial Statements included elsewhere in this Annual
Report.) The significant environmental proceedings, including
Superfund sites, are discussed below.
United States v. Southeastern Pennsylvania Transportation
---------------------------------------------------------
Authority ("SEPTA"), National Railroad Passenger Corporation
- ------------------------------------------------------------
("Amtrak"), and Consolidated Rail Corporation. In March 1986, the
- ---------------------------------------------
United States Environmental Protection Agency ("EPA") filed an action
in the United States District Court for the Eastern District of
Pennsylvania for cost recovery, injunctive relief, and a declaratory
judgment against the Company, Southeastern Pennsylvania Transportation
Authority ("SEPTA") and National Railroad Passenger Corp. ("Amtrak")
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 ("CERCLA" or "Superfund Law"), as amended. In
1990, the Pennsylvania Department of Environmental Resources
intervened as a plaintiff. Suit is based on the release or threatened
release at the Paoli Railroad Yard, Paoli, Chester County,
Pennsylvania, of polychlorinated biphenyls ("PCBs"), a listed
hazardous substance under CERCLA.
Pursuant to a series of partial preliminary consent decrees,
defendants have performed a series of cleanup actions both on and off-
site and have conducted a Remedial Investigation/Feasibility Study
("RI/FS"). Those costs have been shared equally among the three
defendants but are subject to reallocation.
The estimated cost of the Company's portion of a remedy proposed
by the parties was included in the 1991 special charge and subsequent
adjustments to accruals. EPA and the railroad parties have entered
into a settlement agreement regarding EPA's claim for past costs, as
well as federal and state natural resource damages. As part of the
settlement, Amtrak, SEPTA and Conrail have committed to perform the on-
site remedy for the rail yard. Penn Central, which was joined as a
defendant, has filed comments with the federal court challenging the
18
<PAGE>
basis of the railroads' agreement with the government to perform only
the on-site remedy.
United States v. Conrail. The EPA has listed Conrail's Elkhart
------------------------
Yard on the National Priorities List. The EPA contends that chemicals
have migrated from the yard and contaminated drinking wells in the
area. On February 14, 1990, EPA filed a civil action against Conrail
in the U.S. District Court for the Northern District of Indiana
seeking recovery of approximately $345,000 for costs incurred in
protecting the water supply. In addition, EPA seeks a declaratory
judgment against Conrail for all future costs incurred in responding
to the release or threatened release of hazardous substances from the
site. Conrail believes it is not the sole source and may not be a
contributing source to the contamination alleged by EPA.
Conrail filed a third-party action joining Penn Central as a
defendant. Conrail and Penn Central have negotiated a cost sharing
arrangement for the cost of implementing the EPA's 1992 interim record
of decision, which is substantially complete. On May 15, 1995 EPA
issued an Administrative Order to Conrail and Penn Central requiring
the extension of public water hook-up to an additional 700 - 1,000
residences and businesses in the site area. Conrail and Penn Central
have agreed that each company would comply with the Order. The cost
for providing public water to the remaining residences is estimated to
be in excess of $6 million, which will be apportioned between Penn
Central and Conrail according to the cost sharing arrangement that has
been negotiated. Conrail and Penn Central have negotiated a
settlement with the EPA of the matter and are in the process of
performing tests that will determine the nature of any off-site remedy
that is required.
United States v. Consolidated Rail Corp., et al (Berks Superfund
----------------------------------------------------------------
Site). Conrail has been identified as the fifth largest generator of
- -----
waste oil at the Berks Associates Superfund site in Douglasville,
Pennsylvania. In addition, Conrail has become aware that it and its
predecessor, Penn Central, owned a small portion of land that was
leased to the operator of the Berks site. As such, Conrail's
liability could increase due to its questionable status as both an
owner and a generator. In August 1991, the EPA issued an
administrative order against Conrail and thirty-five other entities
mandating the implementation of an approximately $2 million partial
remedy and filed a complaint in the U.S. District Court for the
recovery of approximately $8 million in costs incurred by the
government. The parties have negotiated an administrative order with
the EPA and have filed an answer to the civil action. A group of
potentially responsible parties (including Conrail) undertook
compliance with the administrative order. Conrail and the 35 other
defendants have filed a third-party complaint against approximately
630 entities seeking contribution for the costs of the remedy and
government costs. Conrail, along with other defendants, is
negotiating a settlement with the EPA. On June 30, 1993, the EPA
issued another administrative order against Conrail and 33 other
entities, mandating the remediation of the southern portion of the
19
<PAGE>
site. The EPA has requested a feasibility study for the
implementation of a less expensive remedy for the southern portion of
the site, which remedy would range from approximately $10 to $12
million. Conrail's share of such a remedy has not yet been
determined. In addition, the Pennsylvania Department of Environmental
Resources ("PADER") has filed a complaint for the recovery of natural
resource damages.
United Scrap Lead - Troy, OH. Conrail is a potentially
----------------------------
responsible party, along with more than 50 other parties, in the
United Scrap Lead federal Superfund action in Troy, Ohio, where
substantial quantities of batteries were disposed of over a period of
several years. EPA sued Conrail and nine other parties in August 1991
for the recovery of approximately $2,000,000 in past costs. Conrail
and other PRP's have commissioned treatability studies. The parties
are negotiating over the nature of the remediation to be undertaken at
the site. EPA has selected a preferred alternative with an estimated
total cost of $33 million, which the PRP group is challenging.
Conrail's share of any remedial cost is not expected to be material.
Commonwealth of Massachusetts v. Conrail (Locomotive Emission).
--------------------------------------------------------------
On April 21, 1992, the Massachusetts Attorney General filed suit in
state court alleging Conrail's violation of the Massachusetts Clean
Air Act by allowing diesel engines to idle unnecessarily and/or in
excess of thirty (30) minutes. On May 4, 1992, the court entered a
preliminary injunction, the terms of which are substantially those
embodied in Conrail's existing idling policy. The Attorney General
has filed a complaint alleging Conrail's violation of the preliminary
injunction. On February 2, 1993, the parties entered into a partial
settlement agreement; however, the Attorney General has alleged that
Conrail has failed to comply with certain provisions of the
settlement. Conrail continues to attempt to settle the matter with
the Attorney General's office.
New York State Department of Environmental Conservation Order On
----------------------------------------------------------------
Consent (Selkirk Yard). On July 31, 1996, the New York State
- ----------------------
Department of Environmental Conservation (NYSDEC) served Conrail with
a revised draft Order on Consent requiring the payment of a penalty of
$250,000 in connection with its inspection of Selkirk Yard. A revised
Order was received by Conrail on August 6, 1996, requiring the payment
of fines in connection with the 1991 inspection, and mandates
assessment and remediation of the facility. Conrail is negotiating
the terms of the order with NYSDEC.
New York State Department of Environmental Conservation Order on
----------------------------------------------------------------
Consent (DeWitt Yard). On November 3, 1994, NYSDEC served Conrail
- ---------------------
with a Consent Order in connection with the alleged discharge of waste
water from DeWitt Yard, Onondaga County, New York into New York state
waters. On June 17, 1996, a revised Consent Order was issued to
Conrail which added American Financial Group (Penn Central Corp.) as a
named responsible party for the payment of penalties and preparation
20
<PAGE>
of a Site Assessment and Remediation Plan. Conrail and American
Financial Group are negotiating the terms of the Order with NYSDEC.
Conway Yard, Pittsburgh. In 1991, Conrail received Notices of
------------------------
Violation ("NOV") from the PADER alleging violations of the Clean
Streams Act for discharges of oil into the Ohio River. In September
1993, the PADER sent to Conrail a draft Consent Order and Agreement
requiring a comprehensive site remediation for soil, ground water,
surface waters and sediments at the Conway Railyard and requiring the
payment of civil fines in connection with violations at the yard.
Conrail and PADER continue to negotiate the extent of the
investigation and remediation to be undertaken at the yard.
Hollidaysburg Environmental Investigation. On June 23, 1997, the
-----------------------------------------
Pennsylvania Attorney General's office executed a search warrant at
Conrail's Hollidaysburg Reclamation Plant near Altoona, PA searching
for evidence of alleged illegal solid waste disposal. Since that
time, the Pennsylvania Department of Environmental Protection has
ordered the Company to address conditions discovered at the site and
has initiated inspections at numerous other Conrail facilities in
Pennsylvania. The Company is complying with the terms of the order
and is cooperating with and awaiting the results of these inspections.
Other. In addition to the above proceedings, Conrail has been
-----
named in various legal proceedings arising out of its activities as an
employer and as an operator of a freight railroad, including personal
injury actions brought by its employees under FELA, as well as
administrative proceedings with and investigation by government
agencies.
In view of the inherent difficulty of predicting the outcome of
legal proceedings, particularly in certain matters described above in
which substantial damages are or may be sought, Conrail cannot state
what the eventual outcomes of such legal proceedings will be. Certain
of these matters, if determined adversely to Conrail, could result in
the imposition of substantial damage awards against, or increased
costs to, Conrail that could have a material adverse effect on
Conrail's results of operations and financial position. Conrail's
management believes, however, based on current knowledge, that such
legal proceedings will not have a material adverse effect on Conrail's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders
during the fourth quarter of 1997.
Executive Officers of the Registrant.
- ------------------------------------
Conrail's officers are elected annually by the Board of Directors
at its first meeting held after the meeting of shareholders at which
21
<PAGE>
directors are elected, and they hold office until their successors are
elected. There are no family relationships among the officers or
directors, nor any arrangement or understanding between any officer
and any other person pursuant to which the officer was selected. The
following table sets forth certain information, as of March 15, 1998,
relating to the executive officers of Conrail.
Name, Age, Present Position Business Experience During Past 5
- --------------------------- ---------------------------------
Years
-----
David M. LeVan, 52, Chairman, Present position since May 1996.
President and Chief Executive Served as President and Chief
Officer Executive Officer between March 1995
and May 1996. Served as President
and Chief Operating Officer between
September 1994 and March 1995.
Served as Executive Vice President
between November 1993 and September
1994. Served as Senior Vice
President - Operations between July
1992 and November 1993.
Cynthia A. Archer, 44, Senior Present position since May 1995.
Vice President - Intermodal Served as General Manager -
Service Group Transportation and Customer Service
of the Harrisburg Division between
February 1994 and May 1995. Served
as Assistant Vice President - Food
and Agriculture between September
1993 and January 1994. Served as
Director - Intermodal Business
Development between September 1991
and August 1993.
Ronald J. Conway, 54, Senior Present position since November
Vice President - Operations 1994. Served as Vice President -
Operations between September 1994
and November 1994. Served as Vice
President - Transportation between
July 1994 and September 1994.
Served as Vice President -
Intermodal Service Group between
November 1993 and July 1994. Served
as Assistant Vice President -
Petrochemicals and Minerals between
April 1992 and November 1993.
22
<PAGE>
Timothy P. Dwyer, 48, Senior Present position since July 1997.
Vice President - Unit Train Served as Senior Vice President -
Service Group and Automotive Unit Train Service Group between
Service Group November 1994 and July 1997. Served
as Vice President - Unit Train
Service Group between November 1993
and November 1994. Served as General
Manager - Philadelphia Division
between April 1992 and November
1993.
John A. McKelvey, 46, Senior Present position since February
Vice President - Finance 1997. Served as Vice President-
Service Delivery between January
1996 and February 1997. Served as
Vice President - Materials and
Purchasing between April 1994 and
January 1996. Served as Vice
President - Controller between May
1993 and March 1994. Served as Vice
President - Treasurer between 1988
and May 1993.
Frank H. Nichols, 51, Senior Present position since May 1995.
Vice President - Served as Vice President - Human
Organizational Performance Resources between February 1993 and
May 1995. Served as Assistant Vice
President - Finance between November
1988 and February 1993.
Timothy T. O'Toole, 42, Senior Present position since February
Vice President - Law and 1997. Served as Senior Vice
Government Affairs President-Finance between April 1996
and February 1997. Served as Vice
President and Treasurer between
April 1994 and April 1996. Served
as Vice President and General
Counsel between May 1989 and April
1994.
John P. Sammon, 47, Senior Vice Present position since November
President - CORE Service 1994. Served as Vice President -
Group Intermodal between July 1994 and
November 1994. Served as Assistant
Vice President - Intermodal between
January 1988 and July 1994.
23
<PAGE>
George P. Turner, 56, Senior Present position since February
Vice President - Merger 1997. Served as Senior Vice
Transition President-Automotive Service Group
between November 1994 and February
1997. Served as Vice President -
Automotive Service Group between
November 1993 and November 1994.
Served as Assistant Vice President -
Automotive between April 1992 and
November 1993.
Lucy S.L. Amerman, 47, Vice Present position since July 1994.
President - Risk Management Served as Assistant Vice President -
Claims and Litigation between April
1994 and July 1994. Served as
General Counsel - Litigation between
March 1990 and March 1994.
Dennis A. Arouca, 46, Vice Present position since May 1994.
President - Labor Relations Served as Partner in the law firm of
Pepper Hamilton & Scheetz between
February 1986 and May 1994.
Craig R. MacQueen, 45, Vice Present position since June 1995.
President - Corporate Served as Assistant Vice President -
Communications Public Affairs between September
1992 and June 1995.
Donald W. Mattson, 55, Vice Present position since April 1994.
President - Controller Served as Vice President - Treasurer
between May 1993 and April 1994.
Served as Vice President -
Controller between August 1988 and
May 1993.
24
<PAGE>
Thomas J. McFadden, 43, Present position since May 1996.
Treasurer Served as Assistant Treasurer -
Investor Relations and Finance
between June 1994 and May 1996.
Served as Director - Project
Financing between July 1990 and June
1994.
James D. McGeehan, 49, Present position since May 1996.
Corporate Secretary Served as Assistant Corporate
Secretary between December 1980 and
May 1996.
William B. Newman, Jr., 47, Present position since 1981.
Vice President and
Washington Counsel
Albert M. Polinsky, 51, Vice Present position since April 1994.
President - Information Served as Assistant Vice President -
Systems Program Management between December
1993 and March 1994. Served as
Assistant Vice President - Marketing
Services between April 1992 and
December 1993.
Gary M. Spiegel, 47, Vice Present position since February
President - Service Delivery 1997. Served as Assistant-Vice
President - Train Operations between
August 1994 and February 1997.
Served as General Manager-
Transportation and Customer Service
between April 1992 and August 1994.
25
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity
- ------ -------------------------------------
and Related Stockholder Matters.
-------------------------------
Not Applicable.
Item 6. Selected Financial Data.
- ------ -----------------------
The selected consolidated financial data included in the following
tables have been derived from Consolidated Rail Corporation's Consolidated
Financial Statements. The consolidated statements of income, stockholder's
equity and cash flows for each of the three years in the period ended
December 31, 1997 and the consolidated balance sheets as of December 31,
1997 and 1996 appear elsewhere in this Annual Report and have been audited
by the Company's independent accountants, as indicated in their report
thereon.
The selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and related notes and other
financial information included elsewhere in this Annual Report.
26
<PAGE>
<TABLE>
Years ended December 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Millions)
<CAPTION>
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $3,734 $3,684 $3,668 $3,716 $3,438
Operating expenses (before one-time
charges) 2,908 2,935 2,930 3,029 2,845
One-time charges (1),(2),(3) and (4) 508 151 283 84
------ ------ ------ ------ ------
Income from operations 318 598 455 603 593
Interest expense (165) (174) (185) (178) (177)
Reserve of intercompany receivables (5) (89)
Other income, net 83 92 111 101 114
------ ------ ------ ------ ------
Income before income taxes and the
cumulative effect of changes
in accounting principles 236 516 381 526 441
Income taxes (1), (3) and (5) 230 181 125 207 207
------ ------ ------ ------ ------
Income before the cumulative
effect of changes in accounting
principles 6 335 256 319 234
Cumulative effect of changes in
accounting principles (5) (70)
------ ------ ------ ------ ------
Net income $ 6 $ 335 $ 256 $ 319 $ 164
====== ====== ====== ====== ======
</TABLE>
<TABLE>
Years ended December 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Millions)
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
temporary cash investments $ 87 $ 17 $ 58 $ 31 $ 26
Working capital (deficit) (298) (23) 14 (76) (29)
Total assets 8,464 8,353 8,387 8,283 7,910
Other noncurrent liabilities (net of
current maturities of debt) 2,441 2,373 2,440 2,480 2,434
Deferred income taxes 1,462 1,484 1,401 1,212 1,084
Special income tax obligation 283 346 440 513 575
Stockholder's equity 3,021 3,035 2,929 2,893 2,743
</TABLE>
27
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
1. As a result of the acquisition of Conrail Inc. ("Conrail"), the
Company's parent, by CSX Corporation and Norfolk Southern
Corporation in the second quarter of 1997, the Company recorded in
operating expenses costs totaling $65 million ($41 million after
income taxes) during 1997, composed primarily of fees for investment
banking, legal and consulting services. In addition, included in
1997 operating expenses is a charge of $221 million (no related
income tax effect) for the termination of the Company's Non-union
Employee Stock Ownership Plan. Also in 1997, the Company recorded
compensation costs in connection with the acquisition of Conrail
which included: a charge of $110 million ($103 million after income
taxes) in connection with employment agreements with certain
executives, which became operative upon a change in control as
defined in such agreements; $49 million ($31 million after income
taxes) representing a portion of an amount to be paid to certain non-
union employees as an incentive to continue their employment with
the Company through the effective date of the requisite Surface
Transportation Board approval of the Conrail acquisition and
subsequent transition period; and $63 million ($39 million after
income taxes) for payments to satisfy all outstanding performance
shares, unvested stock options, restricted shares and phantom shares
of Conrail which vested during 1997 as a result of the Conrail
acquisition. (See Notes 2 and 3 to the Consolidated Financial
Statements included elsewhere in this Annual Report.)
Also, in 1997, a tax law was enacted by a state in which the Company
operates which changed the Company's method of computing taxes and
resulted in an increase in a state income tax rate which increased
income tax expense by $22 million, representing the effect of an
adjustment of deferred income taxes and the special income tax
obligation for the rate increase as required by Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). (See Note 8 to the Consolidated Financial
Statements included elsewhere in this Annual Report.)
Without the above items, net income for 1997 would have been $463
million.
2. Included in 1996 operating expenses is a charge of $135 million ($83
million after income taxes) consisting of $102 million in
termination benefits to be paid to non-union employees participating
in the voluntary retirement and separation programs ("voluntary
separation programs") and losses of $33 million on non-cancelable
leases for office space no longer required as a result of the
reduction in the Company's workforce. Approximately $90 million in
benefits are being paid from the Company's overfunded pension plan.
Also included in 1996 operating expenses are costs of $16 million
($10 million after income taxes) incurred by the Company as a result
of the previously proposed Conrail merger with CSX Corporation.
Without these items, net income for 1996 would have been $428
28
<PAGE>
million. (See Notes 11 and 3, respectively, to the Consolidated
Financial Statements included elsewhere in this Annual Report.)
3. Included in 1995 operating expenses is an asset disposition charge
of $283 million, which reduced net income by $175 million. The
asset disposition charge resulted from a review of the Company's
route system and other operating assets to determine those that no
longer effectively and economically supported current and expected
operations. The Company identified and planned to sell 1,800 miles
of rail lines that were expected to provide proceeds substantially
less than net book value. In addition, other assets, principally
yards and side tracks, identified for disposition have been written
down to estimated net realizable value. Currently, the asset
disposition program is under review as a result of the Conrail
acquisition. Also, as a result of a decrease in a state income tax
rate enacted during 1995, income tax expense was reduced by $21
million representing the effect of an adjustment of deferred income
taxes and the special income tax obligation for the rate decrease as
required by SFAS 109. Without these items, net income for 1995
would have been $410 million. (See Notes 12 and 8, respectively, to
the Consolidated Financial Statements included elsewhere in this
Annual Report.)
4. In 1994, the Company recorded a charge of $84 million ($51 million
after income taxes) for a non-union employee voluntary early
retirement program and related costs. The majority of the cost of
the early retirement program is being paid from the Company's
overfunded pension plan. Without this one-time charge, net income
would have been $370 million.
5. The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), and SFAS 109 effective January 1, 1993. As
a result, in 1993, the Company recorded cumulative after-tax charges
of $22 million and $48 million, respectively. In addition, as a
result of the increase in the federal corporate income tax rate from
34% to 35%, effective January 1, 1993, income tax expense included
$34 million of a retroactive nature, primarily for the effects of
adjusting deferred income taxes and the special income tax
obligation for the rate increase as required under SFAS 109.
Also, in 1993, the Company recorded a reserve of $89 million ($58
million after income taxes) relating to uncollectible advances made
to Concord Resources Group, Inc., a former wholly-owned subsidiary
of Conrail.
Without the above items, net income for 1993 would have been $326
million.
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Overview
- --------
Consolidated Rail Corporation's ("CRC" or the "Company") net income
for 1997 was $6 million, compared with $335 million for 1996 and $256
million for 1995. Results for 1997 include an ESOP termination
charge of $221 million (no related income tax effect), merger-related
compensation costs of $222 million ($173 million after income taxes)
and merger costs of $65 million ($41 million after income taxes)
resulting from the acquisition of the Company's parent, Conrail Inc.
("Conrail"). Also included in the 1997 results is a $22 million
increase in income tax expense related to a change in a state income
tax rate enacted during the year (see Notes 2, 3 and 8 to the
Consolidated Financial Statements included elsewhere in this Annual
Report). Without these items, CRC's net income for 1997 would have
been $463 million.
Results for 1996 include a one-time charge of $135 million ($83
million after income taxes) related to voluntary separation programs
and related costs and merger-related expenses of $16 million ($10
million after income taxes) (see Notes 11 and 3, respectively, to the
Consolidated Financial Statements included elsewhere in this Annual
Report). Without these charges, net income for 1996 would have been
$428 million.
The results for 1995 include the effects of a $283 million asset
disposition charge ($175 million after income taxes) and the
recognition of a $21 million reduction in income taxes related to a
decrease in a state tax rate (see Notes 12 and 8, respectively, to the
Consolidated Financial Statements included elsewhere in this Annual
Report). Absent these one-time items, net income for 1995 would have
been $410 million.
The 1997 results were favorably affected by traffic volume (freight
cars and intermodal trailers and containers) and revenue increases of
5.0% and 1.4%, respectively, compared with 1996. However, CRC's
continued emphasis on cost control and productivity improvement was
the primary contributor to Conrail exceeding its 1997 operating ratio
(operating expenses as a percent of revenues, excluding one-time
charges) goal of 78.5%. Excluding merger-related costs and the
voluntary separation programs charge in 1996, CRC's operating ratio
was 77.9% for 1997 compared with 79.7% in 1996.
In 1996, traffic volume and operating revenues increased 2.1% and
0.4%, respectively, compared with 1995, while operating expenses,
excluding one-time charges, increased 0.2%.
30
<PAGE>
Acquisition of Conrail Inc.
- --------------------------
On April 8, 1997, the Company's parent, Conrail, and CSX
Corporation ("CSX") entered into the Fourth Amendment (the "Fourth
Amendment") to the Agreement and Plan of Merger (as amended through
the Fourth Amendment, the "Merger Agreement") which facilitated CSX
and Norfolk Southern Corporation ("NSC") entering into an agreement
with respect to their joint acquisition of Conrail as contemplated
by the Third Amendment to the Merger Agreement, dated as of March
7, 1997. The terms of the CSX-NSC Agreement are embodied in a
letter agreement dated as of April 8, 1997 (the "CSX/NSC Letter
Agreement") and the Transaction Agreement dated as of June 10,
1997 among Conrail, CSX and NSC.
The CSX/NSC Letter Agreement provided, among other things, (i) for
the termination of the NSC's outstanding offer to purchase Conrail
shares and the dismissal of litigation between CSX and NSC, (ii)
that Conrail would, after the effective time of its merger into a
wholly-owned subsidiary of CSX, become a direct or indirect jointly-
owned subsidiary of CSX and NSC, (iii) that CSX and NSC would
jointly acquire, for $115 in cash, all Conrail shares not already
owned by CSX and NSC through a tender offer that closed on May 23,
1997 and subsequent merger, and (iv) that Conrail would continue to
be managed by its existing Board of Directors until the requisite
approval of the Surface Transportation Board ("STB") is obtained,
at which time CSX and NSC will be separately allocated certain of
the Company's railroad assets and will jointly operate certain
other railroad operations of Conrail.
On May 23, 1997, the CSX-NSC joint tender offer for the remaining
outstanding shares of Conrail's common and ESOP stock was concluded.
On June 2, 1997, Conrail became the surviving corporation in a merger
with Green Acquisition Corp., a jointly-owned, indirect subsidiary of
CSX and NSC, as a result of which the remaining outstanding capital
stock of Conrail was acquired by NSC and CSX. The Company remains a
wholly-owned subsidiary of Conrail. Simultaneous with the merger,
Conrail's common stock was delisted from the New York Stock Exchange
and, through the filing of a Form 15, deregistered with the Securities
and Exchange Commission. The Conrail stock acquired by NSC and CSX is
being held in a voting trust pending approval of the joint acquisition
by the STB, which is expected to occur in the third quarter of 1998.
1998 Outlook
- ------------
CRC expects the economy to grow at a slower pace in 1998 as compared
with the growth rate experienced in 1997. CRC's 1998 plans are
based on assumptions of 2.3% growth in real gross domestic product
and 2.8% growth in industrial production. Primarily as a result of a
slower growing economy, lower expected auto production in 1998 and
the potentially adverse effects of the Conrail acquisition on the
Company's ability to obtain new customers and retain current
customers, CRC's outlook for 1998 includes the same level of line
haul revenue as that achieved in 1997. The 1998 operating ratio
goal for Conrail is 79.0%.
31
<PAGE>
Results of Operations
- ---------------------
1997 Compared with 1996
Net income for 1997 was $6 million compared with $335 million for
1996. Excluding the unusual items (see "Overview") in both years,
net income would have been $463 million in 1997 and $428 million in
1996.
Operating revenues (primarily freight line haul revenues, but also
including switching, demurrage and incidental revenue) increased $50
million, or 1.4%, to $3,734 million in 1997 from $3,684 million in
1996. A 5.0% increase in traffic volume in units resulted in a $174
million increase in revenues. A decrease in average rates reduced
revenues by $50 million, and an unfavorable traffic mix coupled with
other miscellaneous factors reduced revenues by $65 million. Traffic
volume increases for the service groups were as follows: Intermodal,
11.1%; Automotive, 7.7%; and CORE, 1.7%. Unit Train showed a volume
decline of 2.7%. Within the CORE Service Group, traffic improvements
were experienced by each of the commodity groups except for Forest and
Manufactured Products, which had flat volume. The volume increases
for the other commodity groups were as follows: Petrochemicals, 4.0%;
Food and Agriculture, 1.8%; and Metals, .5%. Other revenues decreased
by $9 million.
Operating expenses increased $330 million, or 10.7%, to $3,416
million in 1997, from $3,086 million in 1996. The following
table sets forth the operating expenses for the two years:
<TABLE>
($ In Millions) Increase
<CAPTION 1997 1996 (Decrease)
------ ------ ---------
<S> <C> <C> <C>
Compensation and benefits $1,223 $1,204 $ 19
Fuel 198 202 (4)
Material and supplies 176 175 1
Equipment rents 368 382 (14)
Depreciation and amortization 293 282 11
Casualties and insurance 145 179 (34)
Other 505 511 (6)
ESOP termination charge 221 221
Merger-related compensation 222 222
Merger costs 65 16 49
Voluntary separation programs 135 (135)
------ ------ -----
$3,416 $3,086 $ 330
====== ====== =====
</TABLE>
Compensation and benefits increased $19 million, or 1.6%, primarily as
a result of increased wage rates that became effective during the
third quarter of 1997 and increases in other employee-related costs,
including incentive compensation. These increases were partially
offset by reductions in employment levels and less weather-related
overtime costs occurring during the first quarter of 1997 as compared
with the same period of 1996. Compensation and benefits as a percent
of revenues was 32.8% in 1997 as compared with 32.7% in 1996.
32
<PAGE>
Casualties and insurance costs decreased $34 million, or 19.0%,
primarily due to reductions in the number and costs of employee
injuries.
CRC recorded an ESOP termination charge of $221 million in 1997; pre-
tax merger-related costs totaling $287 million and $16 million in 1997
and 1996, respectively, (see Note 3 to the Consolidated Financial
Statements included elsewhere in this Annual Report) and a one-time
pre-tax charge of $135 million in 1996 for the voluntary separation
programs and related costs (see Note 11 to the Consolidated Financial
Statements included elsewhere in this Annual Report).
The Company's operating ratio was 91.5% for 1997 compared with 83.8%
for 1996. Without the ESOP termination charge, the merger-related
costs and the voluntary separation programs charge, the operating
ratio would have been 77.9% for 1997 and 79.7% for 1996.
The significant difference between the effective tax rates for 1997
as compared with 1996 results from the nondeductibility for income
tax purposes of the ESOP termination charge and certain merger-
related compensation costs, as well as the aforementioned $22
million increase in income tax expense related to an increase in a
state income tax rate enacted during the third quarter of 1997 (see
Note 8 to the Consolidated Financial Statements included elsewhere
in this Annual Report).
1996 Compared with 1995
Net income for 1996 was $335 million, compared with $256 million
for 1995. Excluding the unusual items (see "Overview") in both
years, net income would have been $428 million in 1996 and $410
million in 1995.
Operating revenues increased $16 million, or 0.4%, to $3,684 million
in 1996 from $3,668 million in 1995. A 2.1% increase in traffic
volume resulted in a $74 million increase in revenues. Average
revenue per unit decreased revenues by $42 million due to an
unfavorable traffic mix. A traffic volume increase of 7.6% was
experienced by the Intermodal Service Group while traffic volume for
the Unit Train Service Group remained unchanged. The Automotive and
CORE Service Groups experienced traffic volume declines of 1.7% and
1.6%, respectively. Within the CORE Service Group, traffic volume
declines were experienced by three of the four commodity groups:
Forest and Manufactured Products, 5.3%; Food and Agriculture, 2.8%;
and Petrochemicals, 2.5%. Metals experienced a traffic increase of
4.0%.
33
<PAGE>
Operating expenses decreased $127 million, or 4.0%, from $3,213
million in 1995 to $3,086 million in 1996. The following table sets
forth the operating expenses for the two years:
<TABLE>
($ In Millions) Increase
<CAPTION> 1996 1995 (Decrease)
------ ------ ---------
<S> <C> <C> <C>
Compensation and benefits $1,204 $1,247 $ (43)
Fuel 202 168 34
Material and supplies 175 167 8
Equipment rents 382 355 27
Depreciation and amortization 282 293 (11)
Casualties and insurance 179 178 1
Other 511 522 (11)
Merger costs 16 16
Voluntary separation programs 135 135
Asset disposition charge 283 (283)
------ ------ -----
$3,086 $3,213 $(127)
====== ====== =====
</TABLE>
Compensation and benefits decreased $43 million, or 3.4%, as a result
of reductions in employment levels and other employee-related costs.
These decreases were partially offset by increased wage rates due to
new labor agreements, increased train crew costs and overtime caused
by adverse weather conditions experienced during the first quarter of
1996. Compensation and benefits as a percent of revenues was 32.7% in
1996 as compared with 34.0% in 1995.
Fuel costs increased $34 million, or 20.2%, due mostly to higher fuel
prices.
Equipment rents increased $27 million, or 7.6%, primarily as a result
of declines in equipment utilization and increased car hire rates.
In 1996, the Company recorded a one-time pre-tax charge of $135
million for the voluntary separation programs and related costs and
$16 million in merger-related costs; and in 1995, an asset disposition
charge of $283 million (see Notes 11, 3 and 12 to the Consolidated
Financial Statements included elsewhere in this Annual Report).
The Company's operating ratio was 83.8% for 1996, compared with 87.6%
for 1995. Without the one-time charges recorded in 1996 and 1995 and
the merger-related costs of $16 million incurred in 1996, the
operating ratios would have been 79.7% and 79.9%, respectively.
Other income decreased $19 million, or 17.1%, from $111 million in
1995 to $92 million in 1996, primarily due to decreases in rental
income and lesser gains from sales of property.
The Company's effective income tax rate for 1996 was 35.1% compared
with 32.8% for 1995. The lower effective rate in 1995 was primarily
caused by a $21 million reduction in income taxes as a result of a
decrease in state income taxes (see Note 8 to the Consolidated
Financial Statements included elsewhere in this Annual Report).
34
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents increased $70 million in
1997, from $17 million at December 31, 1996 to $87 million at
December 31, 1997. Cash generated from operations has been the
Company's principal source of liquidity and is used primarily for
capital expenditures, debt service and dividends. In 1997,
operating activities provided cash of $871 million compared with
$657 million in 1996 and $724 million in 1995.
The principal uses of cash were for: property and equipment
acquisitions, $439 million; payment of long-term debt, $238
million; net repayment of short-term borrowings, $99 million; and
cash dividends on common stock, $27 million.
A working capital (current assets less current liabilities)
deficiency of $298 million existed at December 31, 1997 as compared
with a $23 million deficit at December 31, 1996. Management
believes that the Company's financial position allows it sufficient
access to credit sources on investment grade terms.
The Company has recorded a $159 million short-term liability for
merger-related compensation costs and a $221 million long-term
liability for the ESOP termination charge, neither of which is
expected to require the future use of the Company's cash for
settlement (see Note 3 the Consolidated Financial Statements
included elsewhere in this Annual Report).
During 1997, CRC issued $119 million of commercial paper and repaid
$218 million, which included $100 million of commercial paper
previously classified as long-term debt. At December 31, 1997, no
commercial paper remained outstanding.
At December 31, 1997, $312 million remains available to Conrail and CRC
under a 1993 shelf registration statement whereby CRC can issue debt
securities and Conrail can issue both convertible debt and equity
securities. Restrictions arising from Conrail's acquisition may prevent
further use of the remaining amount available.
During 1997, CRC reduced its $500 million uncollaterized credit
facility by $60 million to $440 million. In addition, the annual
maximum fee has also been reduced from .125% to .110% of the
facility amounts.
In January 1997, the Company assumed $31 million of Equipment Trust
Certificates, at an interest rate of 8.31%, due 2012, to finance the
lease buyout of 20 locomotives from Locomotive Management Services, a
general partnership of which the Company holds a fifty percent
interest.
Capital Expenditures
- --------------------
Capital expenditures totaled $526 million, $478 million and
$494 million in 1997, 1996 and 1995, respectively. Of these totals,
CRC directly financed $79 million in 1997, $108 million in 1996 and
$126 million in 1995.
35
<PAGE>
Capital expenditures for 1998 are expected to be approximately $550
million.
Inflation
- ---------
Generally accepted accounting principles require the use of historical
costs in preparing financial statements. This approach does not
consider the effects of inflation on the costs of replacing assets.
The replacement cost of CRC's property and equipment is substantially
higher than its historical cost basis. Similarly, depreciation
expense on a replacement cost basis would be substantially in excess
of the amount recorded under generally accepted accounting principles.
Environmental Matters
- ---------------------
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. The Company is a
party to various proceedings brought by both regulatory agencies
and private parties under federal, state and local laws, including
Superfund laws, and has also received inquiries from governmental
agencies with respect to other potential environmental issues. At
December 31, 1997, the Company has received, together with other
companies, notices of its involvement as a potentially responsible
party or requests for information under the Superfund laws with
respect to cleanup and/or removal costs due to its status as an
alleged transporter, generator or property owner at 135 locations.
However, based on currently available information, the Company
believes that it may have some potential responsibility at only 60
of these sites. Due to the number of parties involved at many of
these sites, the wide range of costs of possible remediation
alternatives, the changing technology and the length of time over
which these matters develop, it is often not possible to estimate
the Company's liability for the costs associated with the
assessment and remediation of contaminated sites.
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period
if it were held principally liable in certain of these actions, at
December 31, 1997, the Company had accrued $48 million, an amount
it believes is sufficient to cover the probable liability and
remediation costs that will be incurred at Superfund sites and
other sites based on known information and using various
estimating techniques. The Company believes the ultimate
liability for these matters will not materially affect its
consolidated financial condition.
The Company spent $9 million in 1997, $11 million in 1996 and $14
million in 1995 for environmental remediation and related costs
and anticipates spending an amount comparable to that spent in
1997 during 1998. In addition, the Company's capital expenditures
for environmental control and abatement projects were
approximately $7 million in 1997 and $6 million in 1996 and 1995,
and are anticipated to be approximately $11 million in 1998.
The Environmental Quality Department is charged with promoting the
Company's compliance with laws and regulations affecting the
environment and instituting environmentally sound operating
practices. The department monitors the status of the sites where
36
<PAGE>
the Company is alleged to have liability and continually reviews
the information available and assesses the adequacy of the recorded
liability.
Other Matters
- -------------
The Company, currently, has not taken actions to resolve anticipated
year 2000 issues related to its computer systems since it believes
that such issues will be resolved in connection with the proposed
integration of its systems with those of CSX and NSC following the
requisite STB approval of the Conrail acquisition. In the event that
the STB does not approve the sale of Conrail, the Company is
developing a contingency plan to enable it to continue to operate into
the year 2000 and beyond. While it is not possible, at this time, to
quantify the overall cost of implementing this contingency plan, the
Company believes that it would be material to its results of
operations during the implementation period. In addition, were the
STB to disapprove the sale of Conrail, the Company believes that
failure to develop and implement such a plan could result in a
material financial risk and serious disruption in its operations.
Forward-Looking Statements
- --------------------------
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve
risks and uncertainties that cannot be predicted accurately, that may
be beyond the Company's control and that may cause actual results to
differ. Certain of these risks and uncertainties include, but are not
limited to, the effect of economic conditions, competition, regulation
and weather on Conrail's operations, customers, service and prices,
the effect of the Conrail acquisition and the pending regulatory
approval of such acquisition on the Company's operations and business
and other factors discussed elsewhere in this report and, from time to
time, in other reports filed with the Securities and Exchange
Commission.
The forward-looking statements embodied in this report speak only as
of the date of its filing, and the Company disclaims any obligation or
undertaking to disseminate updates or revisions to such statements to
reflect changes in management's expectations or any changes in events,
conditions or circumstances on which such statements are based.
37
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
Report Of Independent Accountants
The Stockholder and Board of Directors of
Consolidated Rail Corporation
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)1. and 2. present fairly, in all
material respects, the financial position of Consolidated Rail
Corporation and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 19, 1998
38
<PAGE>
<TABLE>
CONSOLIDATED RAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
---------------------------
($ In Millions) 1997 1996 1995
<CAPTION> ------ ------ ------
<S> <C> <C> <C>
Revenues $3,734 $3,684 $3,668
------ ------ ------
Operating expenses
Way and structures 458 463 486
Equipment 776 803 767
Transportation 1,365 1,361 1,311
General and administrative 309 308 366
ESOP termination charge (Note 3) 221
Merger-related compensation costs
(Note 3) 222
Merger costs (Note 3) 65 16
Voluntary separation programs (Note 11) 135
Asset disposition charge (Note 12) 283
------ ------ ------
Total operating expenses 3,416 3,086 3,213
------ ------ ------
Income from operations 318 598 455
Interest expense (165) (174) (185)
Other income, net (Note 13) 83 92 111
------ ------ ------
Income before income taxes 236 516 381
Income taxes (Note 8) 230 181 125
------ ------ ------
Net income $ 6 $ 335 $ 256
====== ====== ======
Ratio of earnings to fixed charges
(Note 1) 2.02x 3.20x 2.52x
</TABLE>
See accompanying notes.
39
<PAGE>
<TABLE>
CONSOLIDATED RAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
----------------
($ In Millions) 1997 1996
<CAPTION> ------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 87 $ 17
Accounts receivable 649 629
Deferred tax assets (Note 8) 107 285
Material and supplies 104 139
Other current assets 12 22
------ ------
Total current assets 959 1,092
Property and equipment, net (Note 5) 6,829 6,590
Other assets 676 671
------ ------
Total assets $8,464 $8,353
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Short-term borrowings - 99
Current maturities of long-term debt (Note 7) 112 130
Accounts payable 161 160
Wages and employee benefits 366 143
Casualty reserves 139 138
Accrued and other current liabilities (Note 6) 479 445
------ ------
Total current liabilities 1,257 1,115
Long-term debt (Note 7) 1,732 1,876
Casualty reserves 198 190
Deferred income taxes (Note 8) 1,462 1,484
Special income tax obligation (Note 8) 283 346
Other liabilities 511 307
------ ------
Total liabilities 5,443 5,318
------ ------
Commitments and contingencies (Note 14)
Stockholder's equity (Notes 2, 3 and 10)
Preferred stock (no par value; 25,000,000
shares authorized; 1 share issued)
Common stock ($1 par value; 250,000,000
shares authorized; 100 shares issued and
outstanding)
Additional paid-in capital 1,864 2,151
Note receivable from ESOP - (294)
Retained earnings 1,157 1,178
------ ------
Total stockholder's equity 3,021 3,035
------ ------
Total liabilities and stockholder's equity $8,464 $8,353
====== ======
</TABLE>
See accompanying notes.
40
<PAGE>
<TABLE>
CONSOLIDATED RAIL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Additional Note
Preferred Common Paid-in Receivable Retained
($ In Millions) Stock Stock Capital From ESOP Earnings
<CAPTION> -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ - $ - $2,128 $(312) $1,077
Net income 256
Common dividends (Note 4) (229)
Other 2 7
----- ----- ------ ----- ------
Balance, December 31, 1995 - - 2,130 (305) 1,104
Net income 335
Common dividends (Note 4) (261)
Other 21 11
----- ----- ------ ----- ------
Balance, December 31, 1996 - - 2,151 (294) 1,178
Net income 6
Common dividends (Note 4) (27)
Effects of Conrail acquisition
(Notes 3 and 4) (294) 294
Other 7
----- ----- ------ ----- ------
Balance, December 31, 1997 $ - $ - $1,864 $ - $1,157
===== ===== ====== ===== ======
</TABLE>
See accompanying notes.
41
<PAGE>
<TABLE>
CONSOLIDATED RAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------
($ In Millions) 1997 1996 1995
<CAPTION> ----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6 $ 335 $ 256
Adjustments to reconcile net income to
net cash provided by operating activities:
ESOP termination charge 221
Merger-related compensation costs 159
Voluntary separation programs 135
Asset disposition charge 283
Depreciation and amortization 293 282 293
Deferred income taxes 158 180 108
Special income tax obligation (63) (94) (73)
Gains from sales of property (23) (24) (27)
Pension credit (61) (46) (43)
Changes in:
Accounts receivable (20) (5) 26
Accounts and wages payable 65 (5) 17
Deferred tax assets 178 40 (84)
Settlement of tax audit 6 (39)
Other (48) (102) (32)
----- ----- -----
Net cash provided by operating
activities 871 657 724
----- ----- -----
Cash flows from investing activities
Property and equipment acquisitions (439) (387) (415)
Proceeds from disposals of properties 25 34 37
Other (31) (46) (45)
----- ----- -----
Net cash used in investing activities (445) (399) (423)
----- ----- -----
Cash flows from financing activities
Net proceeds from (repayments of)
short-term borrowings (99) 10 (23)
Proceeds from long-term debt 26 85
Payment of long-term debt (238) (184) (133)
Loans from and redemptions of
insurance policies 95
Dividends on common stock (27) (261) (229)
Other 8 15 26
----- ----- -----
Net cash used in financing
activities (356) (299) (274)
----- ----- -----
Increase(decrease) in cash and cash equivalents 70 (41) 27
Cash and cash equivalents
Beginning of year 17 58 31
----- ----- -----
End of year $ 87 $ 17 $ 58
===== ===== =====
</TABLE>
See accompanying notes.
42
<PAGE>
CONSOLIDATED RAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Industry
--------
Consolidated Rail Corporation (the "Company"), a wholly-owned
subsidiary of Conrail Inc.("Conrail"), operates a freight
railroad system within the northeast and midwest United States
and the Province of Quebec. Conrail has been acquired by CSX
Corporation ("CSX") and Norfolk Southern Corporation ("NSC"),
however, the transaction is pending the approval of the Surface
Transportation Board ("STB") (Notes 2 and 3).
Principles of Consolidation
---------------------------
The consolidated financial statements include the Company and
majority-owned subsidiaries. Investments in 20% to 50% owned
companies are accounted for by the equity method.
Cash Equivalents
----------------
Cash equivalents consist of commercial paper, certificates of
deposit and other liquid securities purchased with a maturity of
three months or less, and are stated at cost which approximates
market value.
Material and Supplies
---------------------
Material and supplies consist mainly of fuel oil and items for
maintenance of property and equipment, and are valued at the
lower of cost, principally weighted average, or market.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is
provided using the composite straight-line method. The cost (net
of salvage) of depreciable property retired or replaced in the
ordinary course of business is charged to accumulated
depreciation and no gain or loss is recognized.
Asset Impairment
----------------
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Expected future cash flows from
the use and disposition of long-lived assets are compared to the
current carrying amounts to determine the potential impairment
loss.
Revenue Recognition
-------------------
Revenue is recognized proportionally as a shipment moves on the
Company's system from origin to destination.
Ratio of Earnings to Fixed Charges
----------------------------------
Earnings used in computing the ratio of earnings to fixed charges
represent income before income taxes plus fixed charges, less
43
<PAGE>
equity in undistributed earnings of 20% to 50% owned companies.
Fixed charges represent interest expense together with interest
capitalized and a portion of rent under long-term operating
leases representative of an interest factor.
New Accounting Standards
------------------------
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The
Company has determined that adoption of these statements will not
impact its consolidated financial position, results of operations
or cash flows. Both pronouncements are effective for fiscal
years beginning after December 15, 1997.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassification of Prior-Year Data
-----------------------------------
Certain amounts have been reclassified in the consolidated
financial statements to conform to the current year presentation.
2. Acquisition of Conrail Inc.
--------------------------
On April 8, 1997, the Company's parent, Conrail, and CSX
entered into the Fourth Amendment (the "Fourth Amendment") to
the Agreement and Plan of Merger (as amended through the Fourth
Amendment, the "Merger Agreement") which facilitated CSX and
NSC entering into an agreement with respect to their joint
acquisition of Conrail as contemplated by the Third Amendment
to the Merger Agreement, dated as of March 7, 1997. The terms
of the CSX-NSC Agreement are embodied in a letter agreement
dated as of April 8, 1997 (the "CSX/NSC Letter Agreement") and
the Transaction Agreement dated as of June 10, 1997 among
Conrail, CSX and NSC.
The CSX/NSC Letter Agreement provided, among other things, (i)
for the termination of the NSC's outstanding offer to purchase
Conrail shares and the dismissal of litigation between CSX and
NSC, (ii) that Conrail would, after the effective time of its
merger into a wholly-owned subsidiary of CSX, become a direct
or indirect jointly-owned subsidiary of CSX and NSC, (iii) that
CSX and NSC would jointly acquire, for $115 in cash, all
Conrail shares not already owned by CSX and NSC through a
tender offer that closed on May 23, 1997 and subsequent merger,
and (iv) that Conrail would continue to be managed by its
existing Board of Directors until the requisite approval of the
STB is obtained, at which time CSX and NSC will be separately
44
<PAGE>
allocated certain of Conrail's railroad assets and will jointly
operate certain other railroad activities of Conrail.
On May 23, 1997, the CSX-NSC joint tender offer for the remaining
outstanding shares of Conrail's common and ESOP stock was
concluded. On June 2, 1997, Conrail became the surviving
corporation in a merger with Green Acquisition Corp., a jointly-
owned, indirect subsidiary of CSX and NSC, as a result of which
the remaining outstanding capital stock of Conrail was acquired by
NSC and CSX. The Company remains a wholly-owned subsidiary of
Conrail. Simultaneous with the merger, Conrail's common stock was
delisted from the New York Stock Exchange and, through the filing
of a Form 15, deregistered with the Securities and Exchange
Commission. The Conrail stock acquired by NSC and CSX is being
held in a voting trust pending approval of the joint acquisition
by the STB, which is expected to occur in the third quarter of
1998.
In the course of normal business, the Company interchanges freight
with both NSC and CSX for transport to destinations both within
and outside of CRC's service region. The Company shares ownership
interests with either one or both railroads in various
transportation-related entities, all of which are immaterial to
the Company's operating results and financial position.
3. Merger-Related Costs
--------------------
In connection with the joint acquisition of Conrail by NSC and
CSX, the Company has incurred pre-tax merger-related costs
totaling $65 million ($41 million after income taxes) during
1997. Merger costs of $16 million ($10 million after income
taxes) were incurred during 1996 related to the previously
proposed merger of Conrail with CSX. Merger costs incurred
during both years are composed primarily of fees for investment
banking, legal and consulting services.
In the second quarter of 1997, the Company recorded a charge of
$221 million (no related income tax effect) for the termination
of its Non-union Employee Stock Ownership Plan ("ESOP") as a
result of the repayment of the ESOP note payable of $291 million
and related accrued interest to the Company. The Company had
recorded a long-term liability of $221 million related to the
ESOP termination charge, which is not expected to require future
use of the Company's cash for settlement.
During the second quarter of 1997, the Company recorded a charge
of $110 million ($103 million after income taxes) in connection
with employment agreements with certain executives, which became
operative upon a change in control as defined in such
agreements. The agreement with CSX permits Conrail to enter
into new agreements with executives to pay some or all of these
benefits upon the earlier of the STB's approval or disapproval
of the transaction or May 31, 1998, if the executives are
employed on that date. Severance benefits to be paid to other
Company employees will be determined and accrued when the
employees adversely affected by the transaction are identified,
45
<PAGE>
which is expected to occur near the time of the STB decision.
During 1997, the Company recorded cumulative charges totaling
$49 million ($31 million after income taxes) representing a
portion of an amount to be paid to certain non-union employees
as an incentive to continue their employment with the Company
through the effective date of the requisite STB approval of the
transaction and subsequent transition period. The total amount
of these incentive payments is expected to be approximately $125
million and will continue to be accrued ratably through the
fourth quarter of 1998. The Company has recorded a short-term
liability of $159 million included in "wages and employee
benefits" on the 1997 balance sheet related to the above-
mentioned merger-related compensation costs through December 31,
1997, however, such liability is not expected to require future
use of the Company's cash for settlement as funding is expected
from other sources, including Conrail's Employee Benefits Trust.
Also, as a result of the acquisition of Conrail, all outstanding
Conrail performance shares and all outstanding unvested stock
options, restricted shares and phantom shares of Conrail vested
during the second quarter of 1997. The Company paid all of the
amounts due employees under these arrangements and recorded a $63
million charge ($39 million after income taxes).
4. Related Party Transactions
--------------------------
The Company engages in various transactions with Conrail. The
Company funds the cash requirements of Conrail primarily through
cash dividends, which totaled $27 million, $261 million and $229
million in 1997, 1996 and 1995, respectively. The Company's
dividend payment to its parent in 1997 decreased due to Conrail's
reduced cash requirements related to the discontinuance of its
dividend payments and stock repurchase program. The Company was
obligated to pay a management fee to Conrail equal to the amount
of preferred dividends declared by Conrail in connection with the
Non-union ESOP, which ceased with the repayment of the ESOP note
payable (Note 3). Management fees totaled $4 million in 1997,
$20 million in 1996 and $21 million in 1995, and are recorded in
"Other income, net" on the consolidated statements of income
(Note 13). Advances between the two companies accrue interest at
the Federal Reserve Bank's 30-day average interest rate. The
resulting interest income and interest expense on advances to and
from Conrail were immaterial to the Company's financial
statements.
46
<PAGE>
A summary of the Company's transactions with Conrail are as
follows:
<TABLE>
December 31,
--------------
1997 1996
---- ----
(In Millions)
<S> <C> <C>
Short-term receivable $ 34 $ 8
Short-term payable 48 28
Long-term payable (Note 3) 221 -
</TABLE>
5. Property and Equipment
----------------------
<TABLE>
December 31,
----------------
1997 1996
------ ------
(In Millions)
<S> <C> <C>
Roadway $ 7,166 $ 7,021
Equipment 1,396 1,229
Less: Accumulated depreciation (1,734) (1,652)
Allowance for disposition (392) (408)
------- -------
6,436 6,190
------- -------
Capital leases (primarily equipment) 869 908
Accumulated amortization (476) (508)
------- -------
393 400
------- -------
$6,829 $ 6,590
======= =======
</TABLE>
The Company acquired equipment and incurred related long-term debt
under various capital leases of $79 million in 1997, $82 million
in 1996 and $71 million in 1995. In 1995 (Note 12) and 1991, the
Company recorded allowances for disposition for the sale or
abandonment of certain under-utilized rail lines and other
facilities.
6. Accrued and Other Current Liabilities
-------------------------------------
<TABLE>
December 31,
--------------
1997 1996
---- ----
(In Millions)
<S> <C> <C>
Freight settlements due others $ 40 $ 44
Equipment rents (primarily car hire) 74 74
Unearned freight revenue 77 79
Property and corporate taxes 53 47
Other 235 201
---- ----
$479 $445
==== ====
</TABLE>
47
<PAGE>
7. Long-Term Debt
--------------
Long-term debt outstanding, including the weighted average
interest rates at December 31, 1997, is composed of the
following:
<TABLE>
December 31,
------------------
1997 1996
------ ------
(In Millions)
<S> <C> <C>
Capital leases $ 465 $ 491
Medium-term notes payable,
7.50%, due 1998 to 1999 60 109
Notes payable, 9.75%, due 2000 250 250
Debentures payable, 7.88%, due 2043 250 250
Debentures payable, 9.75%, due 2020 544 544
Equipment and other obligations, 6.66% 275 262
Commercial paper - 100
------ ------
1,844 2,006
Less current portion (112) (130)
------ ------
$1,732 $1,876
====== ======
</TABLE>
Using current market prices when available, or a valuation based
on the yield to maturity of comparable debt instruments having
similar characteristics, credit rating and maturity, the total
fair value of the Company's long-term debt, including the current
portion, but excluding capital leases, is $1,607 million and
$1,685 million at December 31, 1997 and 1996, respectively,
compared with carrying values of $1,379 million and $1,515
million at December 31, 1997 and 1996, respectively.
The Company's noncancelable long-term leases generally include
options to purchase at fair value and to extend the terms.
Capital leases have been discounted at rates ranging from 3.09%
to 14.26% and are collateralized by assets with a net book value
of $393 million at December 31, 1997.
Minimum commitments, exclusive of executory costs borne by the
Company, are:
<TABLE>
Capital Operating
Leases Leases
------- ---------
(In Millions)
<S> <C> <C>
1998 $ 107 $119
1999 99 94
2000 76 83
2001 60 74
2002 57 68
2003 - 2017 239 476
----- ----
Total 638 $914
====
Less interest portion (173)
-----
Present value $ 465
=====
</TABLE>
48
<PAGE>
Operating lease rent expense was $122 million in 1997, $127
million in 1996 and $130 million in 1995.
In June 1993, the Company and Conrail filed a shelf registration
statement on Form S-3 to enable the Company to issue up to $500
million in debt securities or Conrail to issue up to $500 million
in convertible debt and equity securities. The remaining balance
under this shelf registration was $312 million at December 31,
1997, although restrictions arising from Conrail's acquisition may
prevent its use.
In January 1997, the Company assumed $31 million of Equipment
Trust Certificates, at an interest rate of 8.31%, due 2012, to
finance the lease buyout of 20 locomotives from Locomotive
Management Services, a general partnership of which the Company
holds a fifty percent interest.
Equipment and other obligations mature in 1998 through 2043 and
are collateralized by assets with a net book value of $266 million
at December 31, 1997. Maturities of long-term debt other than
capital leases are $48 million in 1998, $48 million in 1999, $268
million in 2000, $19 million in 2001, $18 million in 2002 and $978
million in total from 2003 through 2043.
During 1997, the Company repaid all of its commercial paper, and
no commercial paper remains outstanding at December 31, 1997.
The Company maintains a $440 million uncollateralized bank credit
agreement with a group of banks which is used for general
corporate purposes and to support its commercial paper program.
The agreement matures in 2000 and requires interest to be paid on
amounts borrowed at rates based on various defined short-term
rates and an annual maximum fee of .110% of the facility amounts.
The agreement contains, among other conditions, restrictive
covenants relating to a debt ratio and consolidated tangible net
worth. During 1997, the Company had no borrowings under this
agreement.
Interest payments were $163 million in 1997, $170 million in 1996
and $177 million in 1995.
49
<PAGE>
8. Income Taxes
------------
The provisions for income taxes are composed of the following:
<TABLE>
1997 1996 1995
---- ---- -----
(In Millions)
<S> <C> <C> <C>
Current
Federal $118 $ 87 $ 75
State 17 8 15
---- ---- ----
135 95 90
---- ---- ----
Deferred
Federal 120 149 111
State 38 31 (3)
---- ---- ----
158 180 108
---- ---- ----
Special income tax obligation
Federal (54) (80) (61)
State (9) (14) (12)
---- ---- ----
(63) (94) (73)
---- ---- ----
$230 $181 $125
==== ==== ====
</TABLE>
In conjunction with the public sale in 1987 of the 85% of the
Company's common stock then owned by the U.S. Government, federal
legislation was enacted which resulted in a reduction of the tax
basis of certain of the Company's assets, particularly property
and equipment, thereby substantially decreasing tax depreciation
deductions and increasing future federal income tax payments.
Also, net operating loss and investment tax credit carryforwards
were canceled. As a result of the sale-related transactions, a
special income tax obligation was recorded in 1987 based on an
estimated effective federal and state income tax rate of 37.0%.
The nondeductibility of the ESOP termination charge and certain
merger-related compensation costs for federal and state income
tax purposes, has resulted in a significant difference between
the Company's statutory and effective tax rates for 1997 (Note
3).
A tax law was enacted during the third quarter of 1997 by a state
in which the Company operates which changed the Company's method
of computing taxes and resulted in a tax rate increase. Income
tax expense for 1997 was increased by $22 million representing
the effects of adjusting deferred income taxes and the special
income tax obligation for the rate increase as required by SFAS
109, "Accounting for Income Taxes" ("SFAS 109").
As a result of a decrease in a state income tax rate enacted
during 1995, income tax expense for that year was reduced by $21
million representing the effects of adjusting deferred income
taxes and the special income tax obligation for the rate decrease
as required by SFAS 109.
50
<PAGE>
Reconciliations of the U.S. statutory tax rates with the
effective tax rates are as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.2 3.3 3.5
ESOP termination charge 36.3
Nondeductible merger-related
compensation costs 14.9
Effect of state tax increase
(decrease) on deferred taxes 9.3 (5.5)
Other (1.2) (3.2) (.2)
---- ---- ----
Effective tax rate 97.5% 35.1% 32.8%
==== ==== ====
</TABLE>
In 1996, the Company reached a settlement with the Internal
Revenue Service ("IRS") related to the audit of the Company's
consolidated federal income tax returns for the fiscal years 1990
through 1992. The Company made a payment of $39 million pending
resolution of the final interest determination related to the
settlement, of which $6 million was refunded to the Company in
1997. The Company's consolidated federal income tax returns for
fiscal years 1993 through 1995 are currently being examined by
the IRS. Federal and state income tax payments were $120 million
in 1997, $145 million in 1996 (excluding tax settlement) and $109
million in 1995.
Significant components of the Company's special income tax
obligation and deferred income tax liabilities (assets) are as
follows:
<TABLE>
December 31,
-----------------
1997 1996
------ ------
(In Millions)
<S> <S> <S>
Current assets $ (10) $ (9)
Current liabilities (97) (245)
Miscellaneous - (31)
------ ------
Current deferred tax asset, net $ (107) $ (285)
====== ======
Noncurrent liabilities:
Property and equipment 1,877 1,939
Other long-term assets (primarily prepaid
pension asset) 90 92
Miscellaneous 130 98
------ ------
2,097 2,129
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (200) (174)
Tax benefit transfer receivable (36) (36)
Miscellaneous (116) (89)
------ ------
(352) (299)
------ ------
Special income tax obligation and
deferred income tax liabilities, net $1,745 $1,830
====== ======
</TABLE>
51
<PAGE>
9. Employee Benefits
-----------------
Pension Plans
-------------
The Company and certain subsidiaries maintain defined benefit
pension plans which are noncontributory for all non-union
employees and generally contributory for participating union
employees. Benefits are based primarily on credited years of
service and the level of compensation near retirement. Funding
is based on the minimum amount required by the Employee
Retirement Income Security Act of 1974.
Pension credits include the following components:
<TABLE>
1997 1996 1995
----- ---- ----
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 8 $ 9 $ 8
Interest cost on projected benefit obligation 50 51 51
Return on plan assets - actual (197) (138) (254)
- deferred 99 47 167
Net amortization and deferral (21) (15) (15)
----- ---- ----
$ (61) $(46) $(43)
===== ==== ====
</TABLE>
The funded status of the pension plans and the amounts
reflected in the balance sheets are as follows:
<TABLE>
1997 1996
------ -----
(In Millions)
<S> <C> <C>
Accumulated benefit obligation ($605 million
and $655 million vested, respectively) $ 610 $ 661
====== ======
Market value of plan assets 1,308 1,187
Projected benefit obligation (699) (734)
------ ------
Plan assets in excess of projected
benefit obligation 609 453
Unrecognized prior service cost 33 36
Unrecognized transition net asset (72) (90)
Unrecognized net gain (343) (231)
------ ------
Net prepaid pension cost $ 227 $ 168
====== ======
</TABLE>
The assumed weighted average discount rates used in 1997 and 1996
are 7.0% and 7.5%, respectively and the rate of increase in
future compensation levels used in determining the actuarial
present value of the projected benefit obligation as of
December 31, 1997 and 1996 is 6.0%. The expected long-term rate
of return on plan assets (primarily equity securities) in 1997
and 1996 is 9.0%.
Savings Plans
-------------
The Company and certain subsidiaries provide 401(k) savings plans
for union and non-union employees. However, in connection with
the close of the CSX-NSC joint tender offer for Conrail, the
Company's Non-union ESOP was terminated with the repayment of the
52
<PAGE>
ESOP note payable of $291 million and related accrued interest in
the second quarter of 1997, resulting in a charge of $221 million
(no related income tax effect) (Notes 2 and 3). Under the
Company's Non-union ESOP, 100% of employee contributions were
matched in the form of ESOP stock for the first 6% of a
participating employee's base pay. There is no Company match
provision under the union employee plan except for three unions
which negotiated a Company match as part of their new contract
provisions. Savings plan expense was $1 million in 1997 and $4
million in 1996 and 1995.
In connection with the formation of the Non-union ESOP in
1990, the Company issued shares of its ESOP stock to the Non-
union ESOP in exchange for a 20 year promissory note from the Non-
union ESOP in the principal amount of approximately $290 million.
In conjunction with the formation of the holding company in 1993,
each share of the Company's preferred stock, all of which were
held by the Non-union ESOP, was automatically converted into one
share of preferred stock of Conrail and the promissory note
receivable from the Non-union ESOP plus the accrued interest of
$21 million were reclassified by the Company to the stockholder's
equity section of its balance sheet. The Company received debt
service payments from the Non-union ESOP of $11 million in 1997,
$40 million in 1996 and $31 million in 1995.
Prior to the close of the joint tender offer (Notes 2 and 3)
unearned ESOP compensation was charged to the Company by Conrail
as shares of ESOP stock were allocated to participants. An
amount equivalent to the preferred dividends declared on the ESOP
stock had partially offset compensation expense of the Company
and interest expense of Conrail related to the Non-union ESOP
through the close of the joint tender offer. Compensation
expense related to the Non-union ESOP was $2 million in 1997, $11
million in 1996 and $10 million in 1995.
Prior to its acquisition, Conrail made dividend payments at a
rate of 7.51% on the ESOP stock, and the Company made additional
contributions in an aggregate amount sufficient to enable the Non-
union ESOP to make the required interest and principal payments
on its note.
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Company provides health and life insurance benefits to
certain retired non-union employees. Certain non-union employees
are eligible for retiree medical benefits, while substantially
all non-union employees are eligible for retiree life insurance
benefits. Generally, company-provided health care benefits
terminate when individuals reach age 65.
Retiree life insurance plan assets consist of a retiree life
insurance reserve held in the Company's group life insurance
policy. There are no plan assets for the retiree health benefits
plan.
53
<PAGE>
The following sets forth the plans' funded status reconciled with
amounts reported in the Company's balance sheets:
<TABLE>
1997 1996
----------------- -----------------
Life Life
Medical Insurance Medical Insurance
Plan Plan Plan Plan
(In Millions)
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $28 $20 $44 $20
Fully eligible active plan
participants 1 1
Other active plan participants 5 3
--- --- --- ---
Accumulated benefit obligation 29 25 45 23
Market value of plan assets (10) (10)
--- --- --- ---
Accumulated benefit obligation
in excess of plan assets 29 15 45 13
Unrecognized gains and (losses) 9 1 (1) 2
Accrued benefit cost recognized
in the Consolidated Balance --- --- --- ---
Sheet $38 $16 $44 $15
=== === === ===
Net periodic postretirement
benefit cost, primarily
interest cost $ 1 $ 1 $ 3 $ 1
=== === === ===
</TABLE>
An 8 percent rate of increase in per capita costs of covered
health care benefits was assumed for 1998, gradually decreasing
to 6 percent by the year 2007. Increasing the assumed health
care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1997 by $2 million and would have an immaterial
effect on the net periodic postretirement benefit cost for 1997.
Discount rates of 7.0% and 7.5% were used to determine the
accumulated postretirement benefit obligations for both the
medical and life insurance plans in 1997 and 1996, respectively.
The assumed rate of compensation increase was 6% in both 1997
1996.
Retiree medical benefits are funded by a combination of Company and
retiree contributions. Retiree life insurance benefits are
provided by insurance companies whose premiums are based on claims
paid during the year.
10. Capital Stock
-------------
The Company is authorized to issue 25 million shares of
preferred stock with no par value. The Board of Directors has
the authority to divide the preferred stock into series and to
determine the rights and preferences of each.
54
<PAGE>
Subsequent to July 1, 1993, the Company had 100 shares of common
stock outstanding, all held by Conrail. All of the Company's
long-term incentive plans were amended in 1993 to reflect the
use of Conrail's common stock. The Company has applied APB 25
"Accounting for Stock Issued to Employees" and related
interpretations in accounting for the Conrail plans.
Accordingly, no compensation cost was recognized for the Conrail
fixed stock option plans prior to Conrail's acquisition.
However, in connection with the acquisition of Conrail, all
outstanding performance shares and all outstanding unvested
stock options, restricted shares and phantom shares vested
during the second quarter of 1997. The Company paid all of the
amounts due under these arrangements and recorded a $63 million
charge ($39 million after income taxes) for the related
compensation expense.
Conrail's 1987 and 1991 Long-Term Incentive Plans authorized the
granting to officers and key employees of up to 4 million and
6.6 million shares of common stock, respectively, through stock
options, stock appreciation rights, phantom stock and awards of
restricted or performance shares. A stock option was
exercisable for a specified term commencing after grant at a
price not less than the fair market value of the stock on the
date of grant. The vesting of awards made pursuant to these
plans was contingent upon one or more of the following:
continued employment, passage of time or financial and other
performance goals.
The activity and status of stock options under the incentive
plans follow:
<TABLE>
Non-qualified Stock Options
-----------------------------------
Option Price Shares
Per Share Under Option
----------------- ------------
<S> <C> <C>
Balance, January 1, 1995 $14.000 - $ 66.938 1,363,955
Granted $50.688 - $ 68.563 516,757
Exercised $14.000 - $ 53.875 (200,940)
Canceled $42.625 - $ 53.875 (123,560)
------------
Balance, December 31, 1995 $14.000 - $ 68.563 1,556,212
Granted $68.563 - $ 96.063 551,038
Exercised $14.000 - $ 73.250 (1,268,085)
Canceled $42.625 - $ 70.031 (3,984)
------------
Balance, December 31, 1996 $14.000 - $ 96.063 835,181
Granted $42.625 - $104.438 416,190
Exercised $14.000 - $104.438 (267,294)
Canceled $42.625 - $ 50.688 (6,625)
Purchased due to Conrail
acquisition $14.000 - $104.438 (977,452)
------------
Balance, December 31, 1997 -
============
Available for future grants
December 31, 1996 3,969,317
============
December 31, 1997 -
============
</TABLE>
55
<PAGE>
The weighted average exercise prices of options granted during 1996
and 1995 were $70.130 per share and $51.204 per share,
respectively. The weighted average exercise prices of options
exercised during 1996 and 1995 were $48.32 per share and $31.16 per
share, respectively.
Pro forma disclosure of net income as if the Company had adopted
the cost recognition requirements under SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123) in 1996 and 1995 is
presented below ($ in millions):
<TABLE>
1996 1995
----- -----
<S> <C> <C>
Net income as reported $335 $256
Net income pro forma 328 254
</TABLE>
The fair value of each option granted during 1996 was estimated on
the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (1) dividend yield of
2.43%, (2) expected volatility of 25.25%, (3) risk-free interest
rate of 5.51%, and (4) expected life of 4 years. The weighted
average fair value of options granted during 1996 and 1995 was
$16.00 per share and $13.12 per share, respectively.
Prior to its acquisition, Conrail had granted phantom shares and
restricted stock under its non-union employee bonus plans to
eligible employees who elected to defer all or a portion of
their annual bonus in a given year. The number of shares
granted depended on the length of the deferral period. Grants
were made at the market price of Conrail's common stock at the
date of grant. Conrail had granted 148,749 shares and 337,329
shares of phantom and restricted stock, respectively, under its
non-union employee bonus plans through its acquisition date of
May 23, 1997. Conrail had also granted 201,945 performance
shares under its 1991 Long-Term Incentive Plan through its
acquisition date. Compensation expense related to these plans
was $2 million in 1996 and $3 million in 1995. The weighted-
average fair value for the phantom shares and restricted stock
granted during 1996 and 1995 was $68.02 per share and $52.88 per
share, respectively. As a result of the Conrail acquisition, the
Company paid all of the amounts due to employees under stock-
related compensation arrangements during the second quarter of
1997 (Note 3).
11. Voluntary Separation Programs
-----------------------------
During 1996, the Company recorded a charge of $135 million
(before tax benefits of $52 million) consisting of $102 million
in termination benefits to be paid to non-union employees
participating in the voluntary retirement and separation
programs ("voluntary separation programs") and losses of $33
million on non-cancelable leases for office space no longer
56
<PAGE>
required as a result of the reduction in the Company's workforce.
Over 840 applications were accepted from eligible employees
under the voluntary separation programs. Approximately $90
million in benefits are being paid from the Company's overfunded
pension plan.
12. Asset Disposition Charge
------------------------
Included in 1995 operating expenses is an asset disposition
charge of $283 million, which reduced net income by $175
million. The asset disposition charge resulted from a review of
the Company's route system and other operating assets to
determine those that no longer effectively and economically
supported current and expected operations. The Company
identified and planned to sell 1,800 miles of rail lines that
were expected to provide proceeds substantially less than net
book value. In addition, other assets, principally yards and
side tracks, identified for disposition were written down to
estimated net realizable value (See Note 1 "Asset Impairment").
Currently, the asset disposition program is under review as a
result of the Conrail acquisition (Note 2).
13. Other Income, Net
-----------------
<TABLE>
1997 1996 1995
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Interest income $14 $ 30 $ 33
Rental income 41 50 57
Property sales 23 23 27
Management fee (4) (20) (21)
Other, net 9 9 15
---- ---- ----
$83 $ 92 $111
==== ==== ====
</TABLE>
14. Commitments and Contingencies
-----------------------------
Environmental
-------------
The Company is subject to various federal, state and local laws
and regulations regarding environmental matters. The Company is
a party to various proceedings brought by both regulatory
agencies and private parties under federal, state and local laws,
including Superfund laws, and has also received inquiries from
governmental agencies with respect to other potential
environmental issues. At December 31, 1997, the Company has
received, together with other companies, notices of its
involvement as a potentially responsible party or requests for
information under the Superfund laws with respect to cleanup
and/or removal costs due to its status as an alleged transporter,
generator or property owner at 135 locations. However, based on
currently available information, the Company believes that it may
have some potential responsibility at only 60 of these sites.
Due to the number of parties involved at many of these sites, the
wide range of costs of possible remediation alternatives, the
changing technology and the length of time over which these
matters develop, it is often not possible to estimate the
Company's liability for the costs associated with the assessment
and remediation of contaminated sites.
57
<PAGE>
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting
period if it were held principally liable in certain of these
actions, at December 31, 1997, the Company had accrued $48
million, an amount it believes is sufficient to cover the
probable liability and remediation costs that will be incurred at
Superfund sites and other sites based on known information and
using various estimating techniques. The Company believes the
ultimate liability for these matters will not materially affect
its consolidated financial condition.
The Company spent $9 million in 1997, $11 million in 1996 and
$14 million in 1995 for environmental remediation and related
costs and anticipates spending an amount comparable to that
spent in 1997 during 1998. In addition, the Company's capital
expenditures for environmental control and abatement projects
were approximately $7 million in 1997 and $6 million in 1996
and 1995, and are anticipated to be approximately $11 million
in 1998.
The Environmental Quality Department is charged with promoting
the Company's compliance with laws and regulations affecting
the environment and instituting environmentally sound operating
practices. The department monitors the status of the sites
where the Company is alleged to have liability and continually
reviews the information available and assesses the adequacy of
the recorded liability.
Other
-----
The Company is involved in various legal actions, principally
relating to occupational health claims, personal injuries,
casualties, property damage and damage to lading. The Company
has recorded liabilities on its balance sheet for amounts
sufficient to cover the expected payments for such actions.
The Company may be contingently liable for approximately $50
million at December 31, 1997 under indemnification provisions
related to sales of tax benefits.
The Company had an average of 19,802 employees in 1997,
approximately 86% of whom are represented by 14 different labor
organizations and are covered by 21 separate collective
bargaining agreements. The Company was not engaged in any
collective bargaining at December 31, 1997.
The Company currently guarantees the principal and interest
payments in the amount of $48 million on Equipment Trust
Certificates for Locomotive Management Services, a general
partnership of which the Company holds a fifty percent interest.
58
<PAGE>
The Company has received an adverse jury verdict related to a
railroad crossing accident in Ohio that includes a significant
punitive damage award that approximates $15 million. The Company
believes the punitive damage award in this case is improper and
that it has meritorious defenses, which it is pursuing on appeal.
The Company, currently, has not taken actions to resolve
anticipated year 2000 issues related to its computer systems since
it believes that such issues will be resolved in connection with
the proposed integration of its systems with those of CSX and NSC
following the requisite STB approval of the Conrail acquisition.
In the event that the STB does not approve the sale of Conrail,
the Company is developing a contingency plan to enable it to
continue to operate into the year 2000 and beyond. While it is
not possible, at this time, to quantify the overall cost of
implementing this contingency plan, the Company believes that it
would be material to its results of operations during the
implementation period. In addition, were the STB to disapprove
the sale of Conrail, the Company believes that failure to develop
and implement such a plan could result in a material financial
risk and serious disruption in its operations.
15. Condensed Quarterly Data (Unaudited)
-----------------------------------
<TABLE>
First Second Third Fourth
------------- ------------ ----------- ------------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
($ In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $898 $884 $ 931 $943 $935 $923 $ 970 $934
Income (loss) from operations 115 68 (232) 54 217 234 218 242
Net income (loss) 60 29 (274) 23 101 137 119 146
Ratio of earnings to fixed charges 2.57x 1.73x - 1.54x 4.78x 4.76x 4.78x 4.98x
</TABLE>
The Company recorded pre-tax merger-related costs of $22 million
($14 million after income taxes), $440 million ($390 million
after income taxes), $23 million ($16 million after income taxes)
and $23 million ($15 million after income taxes) during the
first, second, third and fourth quarters of 1997, respectively.
A $221 million ESOP termination charge (no income tax effect) is
included in the second quarter of 1997 merger-related costs (Note
3). After the merger-related costs were recognized during the
second quarter of 1997, earnings available for fixed charges were
inadequate by $257 million.
A tax law was enacted during the third quarter of 1997 by a state
in which the Company operates which changed the Company's method
of computing taxes and resulted in a tax rate increase. Income
tax expense for the third quarter was increased by $22 million
representing the effects of adjusting deferred income taxes and
the special income tax obligation for the rate increase as
required by SFAS 109 (Note 8).
59
<PAGE>
During the second quarter of 1996, the Company recorded a one-
time charge of $135 million for the non-union employee voluntary
early retirement and separation programs and related costs, which
reduced net income by $83 million (Note 11). During the fourth
quarter of 1996, the Company recorded merger-related costs of $16
million ($10 million after income taxes) (Note 3).
60
<PAGE>
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None.
61
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The information regarding executive officers called for by
Item 401 of Regulation S-K is included in Part I under
"Executive Officers of the Registrant."
DIRECTORS
Name, Business Experience Prior Service As
and Other Directorships Conrail Director
----------------------- ----------------
H. Furlong Baldwin Since 1988
Chairman and Chief Executive Officer of
Mercantile Bankshares Corporation since
prior to January 1993. Director,
Mercantile Bankshares Corporation,
Baltimore Gas & Electric Company, GRC
International, Inc. and USF&G Corporation.
Age 66.
Claude S. Brinegar Since 1990
Vice Chairman of Unocal Corp., a high
technology earth resources company, from
August 1989 to June 1995. Retired from
Unocal Corp. in May 1992, where he held
the position of Executive Vice President -
Administration and Planning, since 1989.
Director, Maxicare Health Plans, Inc. Age
71.
Daniel B. Burke 1981 to 1986 and
Chairman and Owner, Portland, Maine since 1987
Baseball Inc., 1994 to present. Retired in
February 1994 from Capital Cities/ABC,
Inc. where he held the positions of
President and Chief Executive Officer
since June 1990. Director, Rohm and Haas
Co., Morgan Stanley Dean Witter, Darden
Restaurants and the Washington Post
Company. Age 69.
Kathleen Foley Feldstein Since 1993
President of Economics Studies, Inc., a
private consulting firm, since prior to
January 1, 1991. Director, Bank America
Corporation, Digital Equipment
Corporation, John Hancock Mutual Life
Insurance Company and Ionics Corporation.
Age 57.
62
<PAGE>
Name, Business Experience Prior Service As
and Other Directorships Conrail Director
----------------------- ----------------
Roger S. Hillas Since 1981
Retired in January 1993 from Meritor
Savings Bank where he held the positions
of Chairman and Chief Executive Officer
between July 1988 and December 1992.
Director, P.H. Glatfelter Company, Toll
Bros., Inc., The Bon-Ton Stores, Inc. Age
70.
E. Bradley Jones Since 1987
Retired in December 1984 from LTV Steel
Company where he held the positions
of Chairman and Chief Executive Officer
and Group Vice President of LTV Corporation.
Director, TRW, Inc., Birmingham Steel
Corporation and RPM, Inc.; Trustee,
Fidelity Group of Funds. Age 70.
David M. LeVan
Chairman, President and Chief Executive Since 1994
Officer of Conrail since May 1996.
Served as President and Chief Executive
Officer between March 1995 and May 1996.
President and Chief Operating Officer of
Conrail between September 1994 and March
1995. Executive Vice President between
November 1993 and September 1994. Senior
Vice President - Operations between July
1992 and November 1993. Age 52.
David B. Lewis Since 1989
Chairman of Lewis & Munday, P.C., a law
firm, since prior to January 1991.
Director, LG&E Energy Corp., Comerica
Bank, TRW, Inc. and M.A. Hanna Company.
Lewis & Munday provided legal services to
Conrail in 1997. Age 53.
John C. Marous Since 1991
Retired in July 1990 from Westinghouse
Electric Corporation where he held the
position of Chairman and Chief Executive
Officer between January 1988 and July
1990. Director, Mellon Bank, N.A. Age
72.
63
<PAGE>
Name, Business Experience Prior Service As
and Other Directorships Conrail Director
----------------------- ----------------
Gail J. McGovern Since 1996
Executive Vice President, Consumer Markets
of AT&T since January 1997. Executive
Vice President, Business Markets of AT&T
between November 1995 and January 1997.
Vice President, Business Services of AT&T
between April 1994 and November 1995.
Vice President, Strategy of AT&T between
August 1993 and April 1994. Vice
President, 800 Service of AT&T between
January 1992 and August 1993. Age 46.
Raymond T. Schuler Since 1981
Retired in September 1990 from the
Business Council of New York State, Inc.,
where he held the positions of Vice
Chairman, President and Chief Executive
Officer. Director, Oneida, Ltd. and
Shawmut-Fleet Bank. Age 68.
David H. Swanson Since 1989
Chairman, President and Chief Executive
Officer of Explorer Nutrition & Fiber
Group, an agri-business company, between
January 1993 and December 1995, and from
September 1997 to present. President and
Chief Executive Officer of Countrymark,
Inc., a farm supply and marketing company,
from December 1995 to September 1997.
Chairman, President and Chief Executive
Officer of Central Soya Company, Inc.,
between 1986 and January 1994. Director,
Fiduciary Trust International. Age 55.
64
<PAGE>
Item 11. Executive Compensation.
- ------- ----------------------
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors' Compensation. Directors who are not officers of
Conrail receive an annual fee of $35,000 and a fee of $1,000 for each
Board and Board committee meeting they attend. Each such director who
is a chairman of a Board Committee receives an additional annual fee
of $5,000. Directors who are officers of Conrail are not paid any
fees for service on the Board or on any Board Committees.
Conrail maintains a Retirement Plan for Non-Employee Directors
that provides each director who is not an employee or former employee
of Conrail with a retirement benefit equal to the product of
(1) one-twelfth of his or her annual retainer fee from Conrail in
effect at the time the director ceases to serve as a member of the
Board and (2) the number of full months, up to 120, he or she served
on the Board.
Benefits are payable in cash, from Conrail's general assets, in
equal monthly installments over the ten-year period beginning with the
month following the later of (1) the month in which the director
ceases to serve on the Board or (2) the month in which the director
attains age 65. Notwithstanding the foregoing, (1) the benefits of
directors who cease to serve on the Board on account of disability
commence with the month following the month in which the director
ceases to serve on the Board, and (2) after a director's death, his or
her benefits shall be paid to the director's designated beneficiary,
or in the absence of a written designation, to the director's estate,
in a lump sum, as soon as practicable following the director's death.
Benefits are forfeited in the event the director, before he or
she attains age 65, is removed from the Board for cause or voluntarily
resigns from the Board, unless the resignation is approved by the
Board on account of a conflict between the interests of the director
and the interests of Conrail.
Conrail also maintains a Board of Directors Charitable
Contributions Program pursuant to which Conrail has purchased life
insurance policies of $1 million on the life of each director. Upon
the death of an individual director, Conrail will donate $1 million in
five annual installments of $200,000 each to one or more qualifying
educational or charitable organizations designated by the director,
and will be reimbursed by the life insurance proceeds. Individual
directors derive no financial benefit from the program; all charitable
deductions accrue solely to Conrail. In 1997, a donation of $200,000
was made under the program on behalf of the late Ann F. Friedlaender.
65
<PAGE>
Compensation of Executive Officers. The following table provides
certain summary information concerning compensation awarded to, earned
by or paid in 1997 to Conrail's Chairman, President and Chief
Executive Officer, David M. LeVan, and each of the four other most
highly compensated executive officers of Conrail (determined as of the
end of the last fiscal year (December 31, 1997) and hereafter referred
to as the "named executive officers") for all services rendered in all
capacities to Conrail and its subsidiaries during the fiscal years
ended December 31, 1995, 1996 and 1997.
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
----------------------- -----------------------------
(a) (b) (c) (d) (f) (g) (i)
Restricted Securities
Name and Stock Underlying All Other
Principal Salary Bonus Award(s) Options/SARS Compensation
Position Year ($) ($) ($) (#) ($)(1)
- ------------ ---- ------ ----- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
D. M. LeVan 1997 714,609 1,606,500 1,245,350(2) 29,000 123,173
Chairman, President 1996 594,522 0 0 33,000 89,423
& CEO 1995 514,519 24,759 509,976(3) 30,746 9,000
R. J. Conway 1997 270,999 370,138 304,762(2) 5,000 123,173
Sr. Vice President- 1996 257,031 0 0 9,000 89,423
Operations 1995 223,889 101,367 27,425(3) 9,000 9,000
J. P. Sammon 1997 222,590 304,042 304,762(2) 5,000 123,173
Sr. Vice President- 1996 217,720 0 0 9,000 89,423
CORE Service Group 1995 198,334 90,104 27,425(3) 9,000 9,000
C. A. Archer 1997 213,944 290,822 293,475(2) 5,000 123,173
Sr. Vice President- 1996 193,260 0 0 9,000 89,423
Intermodal Service 1995 172,319 7,806 96,012(3) 7,873 8,860
Group
T. T. O'Toole 1997 211,623 284,213 238,843(2) 5,000 123,173
Sr. Vice President- 1996 187,426 0 0 8,123 89,423
Law & Government 1995 188,529 33,642 50,707(3) 3,750 6,919
Affairs
</TABLE>
(1) These amounts represent Conrail's contribution through a 401(k)
plan during 1997, 1996 and 1995, and amounts in 1996 and 1997
include allocations resulting from termination of the Employee
Stock Ownership Plan in connection with the acquisition of
Conrail Inc.
66
<PAGE>
(2) This figure represents the value of shares of Conrail Common
Stock awarded April 1, 1997 ($112.875) in settlement of
performance shares granted on January 1, 1995, January 1, 1996
and February 19, 1997. As of December 31, 1997, the named
executive officers held no restricted shares of Conrail Common
Stock.
(3) This figure represents the following: (i) full market value as
of the January 31, 1996 grant date of restricted shares of
Conrail Inc. Common Stock awarded to the named executive officer
as a result of a 1995 bonus deferral, and is composed of the
amount of the 1995 bonus which such officer elected to defer
($277,546, $26,171 and $60,013 for Messrs. LeVan and O'Toole and
Ms. Archer, respectively, plus a matching contribution by Conrail
in the amount of 50% for Messrs. LeVan and O'Toole and 20% for
Ms. Archer; and (ii) the value of shares of Conrail Inc. Common
Stock awarded on January 22, 1996 in settlement of performance
shares granted on January 1, 1995 based on Conrail's having met
certain predetermined financial performance goals (computed at a
fair market value of $68.5625). The number of shares of
restricted stock was determined by the fair market value of
Conrail Inc. Common Stock on January 31, 1996 ($70.3125).
67
<PAGE>
The following table contains information concerning the grant of stock
options made to the named executive officers during the fiscal year
ended December 31, 1997.
<TABLE>
Option/SAR Grants in Last Fiscal Year
Individual Grant Grant Date
Value
(a) (b) (c) (d) (e) (f)
- ---------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Employees in Base Price Present Value
Name Granted (#) Fiscal Year ($/sh) Expiration Date ($)
<S> <C> <C> <C> <C> <C>
D. M. LeVan 29,000(1) 10% $104.4375 February 19, 2007 (2)
R.J. Conway 5,000(1) 1.2% $104.4375 February 19, 2007 (2)
J.P. Sammon 5,000(1) 1.2% $104.4375 February 19, 2007 (2)
C.A. Archer 5,000(1) 1.2% $104.4375 February 19, 2007 (2)
T.T. O'Toole 5,000(1) 1.2% $104.4375 February 19, 2007 (2)
</TABLE>
(1) Exerciseable as of April, 1997.
(2) In June 1997, Conrail Inc.'s Common Stock was delisted and ceased
to be publicly traded. At such time, all outstanding unexercised
employee stock options were cashed out at $115 per share, in
connection with Conrail Inc.'s acquisition. See Notes 2 and 3 to
Consolidated Financial Statements elsewhere in this Annual
Report.
68
<PAGE>
The following table provides information concerning gains from
stock options realized during the fiscal year ended December 31, 1997,
by each of the named executive officers and the value of unexercised
stock options held by each such officer as of December 31, 1997.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#)(1) Value Realized ($) Unexercisable Unexercisable
- ---- ------------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
D. M. LeVan 127,896 6,178,136 E 0 E 0
U 0 U 0
R. J. Conway 32,375 1,714,859 E 0 E 0
U 0 U 0
J. P. Sammon 23,125 1,069,578 E 0 E 0
U 0 U 0
C. A. Archer 18,028 854,261 E 0 E 0
U 0 U 0
T. T. O'Toole 31,173 1,747,957 E 0 E 0
U 0 U 0
<FN>
(1) In June 1997, all outstanding unexercised employee stock options were cashed
out at $115 per share, in connection with Conrail Inc.'s acquisition. See
Notes 2 and 3 to Consolidated Financial Statements elsewhere in this Annual
Report.
</FN>
</TABLE>
69
<PAGE>
<TABLE>
Long-Term Incentive Plans ---Awards in Last Fiscal Year
Estimated Future Payouts
under Non-Stock Price-Based Plans
---------------------------------
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation
Name Rights (#)(1) or Payout Threshold (#) Target (#) Maximum(#)
- ---- ------------- --------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
D. M. LeVan 3,900 February 1999 3,900 3,900 3,900
R. J. Conway 700 February 1999 700 700 700
J. P. Sammon 700 February 1999 700 700 700
C. A. Archer 700 February 1999 700 700 700
T. T. O'Toole 700 February 1999 700 700 700
</TABLE>
(1) Represents performance shares granted to the named executive officers in
February 1997, all of which were settled on April 1, 1997 at $112.875, in
connection with Conrail Inc.'s acquisition. See Notes 2 and 3 to the
Consolidated Financial Statements elsewhere in this Annual Report.
70
<PAGE>
<TABLE>
Pension Plan Table and Related Disclosure
The following table shows estimated annual retirement benefits
payable under the Conrail Supplemental Pension Plan.
Years of Service
- ----------------------------------------------------------------------------------
Remuneration 15 YRS 20 YRS 25 YRS 30 YRS 35 YRS
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 20,928 $ 27,905 $ 34,881 $ 41,857 $ 48,833
150,000 26,178 34,905 43,631 52,357 61,083
175,000 31,428 41,905 52,381 62,857 73,333
200,000 36,678 48,905 61,131 73,357 85,583
225,000 41,928 55,905 69,881 83,857 97,833
250,000 47,178 62,905 78,631 94,357 110,083
300,000 57,678 76,905 96,131 115,357 134,583
400,000 78,678 104,905 131,631 157,357 183,583
450,000 89,178 118,905 148,631 178,357 208,083
500,000 99,678 132,905 166,131 199,357 232,583
600,000 120,678 160,905 201,131 241,357 281,583
700,000 141,678 188,905 236,131 283,357 330,583
750,000 152,178 202,905 253,631 304,357 355,083
1,250,000 257,178 342,905 428,631 514,357 600,083
1,500,000 309,678 412,905 516,131 619,357 722,583
</TABLE>
Messrs. LeVan, Conway, Sammon, Ms. Archer and Mr. O'Toole have
19, 28, 18, 17 and 17 years of credited service, respectively.
Compensation covered by the Pension Plan consists of an employee's
wages for federal income tax purposes (see column (c) to the Summary
Compensation Table plus any bonus paid in 1997; column (d) reflects
bonuses earned in the stated year, but not paid in such year),
excluding reimbursements, fringe benefits, gains from the exercise of
employee stock options, and contributions to deferred compensation
plans other than employee deferrals under Conrail's Matched Savings
Plan. In 1997, the covered compensation of Messrs. LeVan, Conway,
Sammon, Ms. Archer and Mr. O'Toole was $1,843,865, $387,801, $235,038,
$323,171 and $367,980, respectively. The table above shows estimated
annual retirement benefits, after application of the Pension Plan's
railroad retirement offset, payable to participants as a straight life
annuity under the Pension Plan upon normal retirement at age 65 based
upon final average compensation and years of Conrail service. The
table does not reflect statutory limits on benefits under
tax-qualified plans.
Under its Merger Agreement between Conrail Inc. and CSX, the
Conrail pension plan may be amended to provide benefits to eligible
Conrail non-union employees under the CSX pension formula. The
specific terms of that amendment have not been finalized. At normal
retirement age of 65, the CSX formula will not produce benefits
materially different from those set forth above.
71
<PAGE>
Employment Agreements and Termination of Employment and
Change in Control Arrangements
To ensure that Conrail would have the continued dedicated service
of certain executives notwithstanding the possibility, threat or
occurrence of changes in control, in 1995, Conrail entered into
severance agreements with its officers and certain key employees,
including the officers named in the Summary Compensation Table
("Change of Control Contracts"). The agreements generally provide
that if the executive is Terminated other than for Cause within three
years after a Change in Control, or within two years of regulatory
approval of such Change in Control, each as defined in the agreement,
such executive is entitled to receive severance benefits. Such
benefits would be equal to a lump sum payment equal to all previously
accrued cash compensation, three times the sum of the then-current
base salary and highest annual bonus earned within the previous three
calendar years, together with certain other payments and benefits,
including continuation of employee welfare benefits and an additional
payment to compensate the executive for certain excise taxes imposed
upon payments under such agreements. In addition, such Termination
would result in the acceleration of vesting or lapse of restricted
periods on previously granted stock-based incentive awards.
In connection with the acquisition of Conrail Inc., CSX and NS
have agreed to pay to Mr. LeVan, in lieu of any stay bonus and
severance or termination benefits, a lump sum equal to the economic
value of the employment agreement (as reasonably determined by the
parties in good faith) which CSX and Mr. LeVan had entered into in
connection with the Conrail-CSX merger as originally proposed. Under
the terms of the Merger Agreement between CSX and Conrail Inc.,
Company executives (other than Mr. LeVan) will be entitled to
compensation equal to that provided for in the Change of Control
Contracts if their employment is terminated under certain specified
circumstances or if they remain employed until May 31, 1998.
CSX Corporation has agreed to honor all obligations under
employment agreements and employee benefit plans, programs and
policies and arrangements of Conrail in accordance with the terms of
the Merger Agreement and to provide benefits to those employees of
Conrail transferred to CSX or another entity. Severance or
supplemental retirement benefits will be provided to non-union
employees (other than executive level employees) who are terminated
within three years following the regulatory approval of the merger,
equal to between six months and 24 months of salary (depending upon an
employee's service). Medical coverage will also be continued for
these employees for specified periods. A stay bonus program has also
been established that provides a lump sum cash payment to non-union
employees who remain employed until regulatory approval of the merger
with additional payments made to those employees who remain employed
for up to six months thereafter.
72
<PAGE>
Item 12. Security Ownership of Certain Beneficial
- ------- ----------------------------------------
Owners and Management.
---------------------
Outstanding Shares. One hundred percent (100%) of Conrail's
common stock is held by Conrail Inc. As of the close of business
on March 15, 1998, there were issued and outstanding 100 shares of
Conrail Inc. Common Stock. To Conrail's knowledge, the only
persons (or "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
who, as of March 15, 1998, owned beneficially more than 5% of any
class of Conrail Inc.'s voting securities are listed in the
following table.
<TABLE>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
- -------------- ------------------- -------------------- --------
<S> <C> <C> <C>
Conrail Inc. Deposit Guaranty National Bank 100 100%
Common 333 Texas Street
Stock Shreveport, LA 71101
</TABLE>
1. Held in trust on behalf of Norfolk Southern Corporation (58%) and
CSX Corporation (42%). These shares represent 100% of Conrail
Inc.'s total voting securities.
Ownership by Management of Equity Securities. As a result of the
acquisition of 100% of Conrail Inc.'s Common Stock by CSX and NSC,
Conrail management and directors hold no Conrail Inc. equity
securities.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder require that certain officers, directors and
10% beneficial owners of Conrail Common Stock file with the Securities
and Exchange Commission, within specified time periods, reports
concerning transactions in Conrail Inc. securities. Based on its
review of the filed forms or written representations that, in certain
instances, no filing is required, Conrail believes that all Section
16(a) filing requirements during 1997 were complied with.
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
None except as disclosed in Item 10.
73
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement
- ------- -----------------------------
Schedules, and Reports on Form 8-K.
----------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements:
Page
----
Report of Independent Accountants...................... 38
Consolidated Statements of Income for each of the
three years in the period ended December 31, 1997. 39
Consolidated Balance Sheets at December 31, 1997
and 1996 ......................................... 40
Consolidated Statements of Stockholder's
Equity for each of the three years in the
period ended December 31, 1997.................... 41
Consolidated Statements of Cash Flows for each of
the three years in the period ended
December 31, 1997 .............................. 42
Notes to Consolidated Financial Statements............. 43
2. Financial Statement Schedules:
The following financial statement schedules should be read
in connection with the financial statements listed in Item
14(a)1 above.
Index to Financial Statement Schedules
--------------------------------------
Page
----
Schedule II Valuation and Qualifying Accounts....... S-1
Schedules other than those listed above are omitted for
reasons that they are not required, are not applicable,
or the information is included in the financial
statements or related notes.
74
<PAGE>
3. Exhibits:
Exhibit No.
2 Agreement and Plan of Merger among Consolidated
Rail Corporation, Conrail Inc. and Conrail Subsidiary
Corporation, dated as of February 17, 1993, filed as
Appendix A to the Proxy Statement of the Registrant,
dated April 16, 1993 and incorporated herein by
reference.
3.1 Amended and Restated Articles of Incorporation of the
Registrant filed as Exhibit 3.1 to the Registrant's
Report on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the
Registrant's Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
3.3 Amendment to Bylaws of the Registrant, as of March 15,
1995, filed as Exhibit 3.3 to the Registrant's Report on
Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
4.1 Form of Certificate of Common Stock, par value $1.00 per
share, of the Registrant, filed as Exhibit 4.7 to the
Registrant's Registration Statement on Form S-8 (No. 33-
19155) and incorporated herein by reference.
4.2 Form of Indenture between the Registrant and The First
National Bank of Chicago, as Trustee, with respect to
the issuance of up to $1.25 billion aggregate principal
amount of the Registrant's debt securities, filed as
Exhibit 4 to the Registrant's Registration Statement on
Form S-3 (Registration No. 33-34040) and incorporated
herein by reference.
In accordance with Item 601(b)(4)(iii) of Regulation S-
K, copies of instruments of the Registrant with respect
to the rights of holders of certain long-term debt are
not filed herewith, or incorporated by reference, but
will be furnished to the Commission upon request.
10.1 Second Amended and Restated Northeast Corridor Freight
Operating Agreement dated October 1, 1986 between
National Railroad Passenger Corporation and Consolidated
Rail Corporation, filed as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-11995) and incorporated herein by
reference.
10.2 Letter agreements dated September 30, 1982 and July 19,
1986 between Consolidated Rail Corporation and The Penn
Central Corporation, filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1
75
<PAGE>
(Registration No. 33-11995) and incorporated herein by
reference.
10.3 Letter agreement dated March 16, 1988 between
Consolidated Rail Corporation and Penn Central
Corporation relating to hearing loss litigation, filed
as Exhibit 19.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1988 and
incorporated herein by reference.
Management Compensation Plans and Contracts
-------------------------------------------
10.4 Consolidated Rail Corporation 1997 Annual Performance
Achievement Reward Plan.
10.5 Retirement Plan for Non-employee Directors, as amended
February 21, 1990, filed as Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989 and included herein by
reference.
10.6 Amendment to Retirement Plan for Non-employee
Directors, dated as of May 21, 1997.
12 Computation of the ratio of earnings to fixed charges.
23 Consent of Independent Accountants.
24 Each of the officers and directors signing this Annual
Report on Form 10-K has signed a power of attorney,
contained on page 77 hereof, with respect to amendments
to this Annual Report.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
(c) Exhibits.
--------
The Exhibits required by Item 601 of Regulation S-K as listed
in Item 14(a)3 are filed herewith or incorporated herein by
reference.
(d) Financial Statement Schedules.
-----------------------------
Financial statement schedules and separate financial state
ments specified by this Item are included in Item 14(a)2 or
are otherwise omitted for reasons that they are not required
or are not applicable.
76
<PAGE>
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Timothy T. O'Toole and John A. McKelvey, or either
of them, to execute in the name of each such person, and to file, any
amendment to this report and hereby appoints Timothy T. O'Toole and
John A. McKelvey, or either of them, as attorneys-in-fact to sign on
his or her behalf, individually and in each capacity stated below, and
to file any and all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act 1934, Consolidated Rail Corporation has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONSOLIDATED RAIL CORPORATION
Date: March 18, 1998
By /s/ David M. LeVan
----------------------------
David M. LeVan
Chairman, President and Chief
Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on this 18th day of March,
1998, by the following persons on behalf of Consolidated Rail
Corporation and in the capacities indicated.
Signature Title
/s/ David M. LeVan Chairman, President and Chief
- ----------------------------- Executive Officer and Director
David M. LeVan (Principal Executive Officer)
/s/ John A. McKelvey Senior Vice President-Finance
- ----------------------------- (Principal Financial Officer)
John A. McKelvey
/s/ Donald W. Mattson Vice President-Controller
- ----------------------------- (Principal Accounting Officer)
Donald W. Mattson
77
<PAGE>
/s/ H. Furlong Baldwin Director
- -----------------------------
H. Furlong Baldwin
/s/ Claude S. Brinegar Director
- -----------------------------
Claude S. Brinegar
Director
- -----------------------------
Daniel B. Burke
/s/ Kathleen Foley Feldstein Director
- -----------------------------
Kathleen Foley Feldstein
/s/ Roger S. Hillas Director
- -----------------------------
Roger S. Hillas
/s/ E. Bradley Jones Director
- -----------------------------
E. Bradley Jones
/s/ David B. Lewis Director
- -----------------------------
David B. Lewis
/s/ John C. Marous Director
- -----------------------------
John C. Marous
/s/ Gail J. McGovern Director
- -----------------------------
Gail J. McGovern
Director
- -----------------------------
Raymond T. Schuler
Director
- -----------------------------
David H. Swanson
78
<PAGE>
E-1
EXHIBIT INDEX
Exhibit No.
10.4 Consolidated Rail Corporation 1997 Annual Performance
Achievement Reward Plan for Officers
10.6 Amendment to Retirement Plan for Non-employee Directors
12 Computation of the ratio of earnings
to fixed charges
23 Consent of Independent Accountants
27 Financial Data Schedule
Exhibits 2, 3.1, 3.2, 3.3, 4.1, 4.2, 10.1, 10.2, 10.3, and 10.5 are
incorporated herein by reference. Powers of attorney with respect to
amendments to this Annual Report are contained on page 77.
79
<PAGE>
Exhibit 10.4
CONSOLIDATED RAIL CORPORATION
ANNUAL PERFORMANCE ACHIEVEMENT REWARD PLAN (APAR) FOR 1997
1. Definitions
When used in this document, the following terms shall have the meanings
set forth below:
Board means the Board of Director's of Conrail.
Conrail means the Consolidated Rail Corporation.
The Company means Conrail Inc.
Operating Ratio means the percentage determined by dividing (a) operating
expenses by (b) revenues, as shown on Conrail's consolidated financial
statements.
Cost of Risk Ratio means the percentage determined by dividing (a) the sum
of the cost of risk elements (as designated by the Risk Management
Department) by (b) Conrail's railroad operating revenues.
Participant means an employee of Conrail who participates in the Plan in
accordance with Section 3.
Plan means the Consolidated Rail Corporation Annual Performance Achievement
Reward Plan for 1997, as set forth in this document and as may be amended
from time to time.
Salary means the salary earned by a Participant in 1997 from employment
with Conrail. For purposes of this Plan, Salary shall include salary
earned pursuant to any holiday, vacation, or sick leave policy of Conrail,
salary deferred pursuant to the Consolidated Rail Corporation Matched
Savings Plan, and salary contributed to the Consolidated Rail Corporation
Flexible Benefits Plan. Except as otherwise provided in the preceding
sentence, Salary shall not include any amount payable pursuant to receipt
of a Spot Award or a 1996 Selective Cash Award paid in 1997 or to an
employee benefit or incentive compensation plan.
2. Introduction
The Board has approved the implementation of this Plan. The Board expects
that the Plan will provide an incentive for enhanced individual and
corporate performance and aid Conrail in attracting and retaining capable
employees.
<PAGE>
3. Eligibility
Each non-agreement employee, and each agreement employee whose collective
bargaining agreement provides for coverage by non-agreement compensation
program(s), who is employed by Conrail during 1997 shall participate in the
Plan.
4. Prerequisite for Award
Anything in this Plan to the contrary notwithstanding, no award shall be
payable under the Plan in the event actual operating income for 1997, as
shown on Conrail's consolidated financial statements, is less than $660
million.
5. Amount of Award
(a) Under the Plan, a Participant may earn an award equal to a percentage
(or percentages) of his/her Salary. This award is the Annual Performance
Achievement Reward (APAR). The APAR percentage(s) shall depend upon the
position held by the Participant and/or the performance of Conrail, measured
by the relationship of (i) the Operating Ratio for 1997, to (ii) the
Operating Ratio goal set by the Board (or its delegate) for purposes of the
Plan and the relationship of the (iii) Cost of Risk Ratio for 1997 to (iv)
the cost of Risk Ratio goal set by the Board (or its delegate) for purposes
of the Plan, both as certified by Conrail's chief financial officer, after
taking into account any amounts payable pursuant to the Plan that are not
taken into account in the Operating Ratio goal set by the Board (or its
delegates) for purposes of the Plan. The percentage(s) shall be determined
in accordance with one or more of twelve schedules.
(b) A Participant's award shall be pro-rated, as provided in Section 7, in
the event he/she participates in the Plan for less than all of 1997 or moves
into a position covered under a different schedule of awards. The
Participant's award shall equal the sum of the partial awards computed by
multiplying (i) the Salary earned by the Participant while covered under a
schedule of awards by (ii) the percentage of Salary determined in accordance
with such schedule.
(c) Anything to the contrary in this Section 5 notwithstanding, a
Participant's award may be reduced by up to 50 percent by Conrail's Chairman,
President and Chief Executive Officer (or his delegate(s)) on the basis of
individual or group performance.
6. Time and Form of Payments
The Participant's award shall be paid to him/her in cash in a single
installment during the first quarter of 1998.
<PAGE>
7. Special Payment Rules
Anything in this Plan to the contrary notwithstanding, a Participant who is
dismissed for cause prior to receipt of any portion of his/her award shall
forfeit such portion of the award. A Participant who resigns from Conrail
during 1997 shall receive a prorated portion of his/her APAR award. The
amount of the prorated award shall be determined by applying a fraction to
Participant's Salary determined up until his/her date of termination. The
numerator of this fraction is the number of days of the year until the
termination occurred and the denominator is 365, the number of days in the
year. A Participant who resigns from Conrail after December 31, 1997, but
before the date in the first quarter of 1998 on which payments are made under
the Plan, shall receive a full APAR award. If during 1997 a Participant is
force reduced, moves from a non-agreement position to an agreement position
not covered by a non-agreement compensation program(s), or goes on leave of
absence after the end of 1997, but before payments under the Plan are made,
shall receive a full APAR award. A Participant who becomes disabled or dies
after the end of 1997, but before payments under the Plan are made, shall
receive a full APAR award. Conrail shall furnish each Participant with a
copy of the schedule(s) of awards applicable to him/her.
8. Withholding Taxes
Payments pursuant to this Plan shall be reduced by amounts sufficient to
satisfy any Federal (including railroad retirement), state, and/or local
tax withholding requirements.
9. Designation of Beneficiary
A Participant may designate a beneficiary(ies) to receive any payment
pursuant to the Plan that has not been made prior to the Participant's
death. Such designation must be submitted to Conrail's Assistant Vice
President-Compensation and Benefits on a form provided for this purpose.
Such form is available, upon request, from the Administrator-APAR, 18-B
2001 Market Street, Philadelphia, PA 19101-1418. In the absence of such
a designation, a Participant's most recent designation of beneficiary(ies)
pursuant to a prior annual performance achievement reward plan maintained
by Conrail shall be treated as his/her designation for purposes of this
Plan.
10. Duration, Amendment, and Treatment of Plan
The Plan shall take effect on January 1, 1997. Conrail by action of the
Board, may amend or terminate the Plan at any time. In addition, Conrail's
Chairman, President and Chief Executive Officer may amend the eligibility
requirements and/or the schedules of awards under the Plan, in connection
with a re-assessment of positions or changes in organization or staffing.
The Plan shall terminate automatically as of January 1, 1998, unless
terminated earlier by Conrail; provided however, that such termination shall
not preclude the subsequent payment of awards earned under the Plan.
<PAGE>
Exhibit 10.6
FIRST AMENDMENT TO
CONSOLIDATED RAIL CORPORATION
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
This is the FIRST AMENDMENT dated as of May 22,
1997, to the Consolidated Rail Corporation Retirement
Plan for Non-Employee Directors (the "Plan") dated May
18, 1988.
W I T N E S S E T H:
WHEREAS, Conrail Inc. (the "Company") has
agreed to be acquired by CSX Corporation ("CSX") and
Norfolk Southern Corporation ("NS") in accordance with
the Agreement and Plan of Merger dated as of October
14, 1996, by and among Conrail Inc., Green Acquisition
Corp. and CSX Corporation as amended through April 8,
1997 (the "Merger Agreement"), and
WHEREAS, the continued service of the
directors of the Company is important to the Company,
CSX and NS during the transition period associated with
the contemplated acquisition.
NOW, THEREFORE, in accordance with the power
reserved to it in Section 11 of the Plan, the Company
hereby amends the Plan effective June 1, 1997 by:
1. Adding the following to the second sentence
of Section 4:
; provided that Outside Directors who are
removed from the Board after June 1, 1997 and
before December 31, 1998 shall receive credit
for the number of months from the date of
their removal to December 31, 1998.
2. Deleting the first clause of Section 5(a) and
substituting the following therefor:
Except as provided in paragraphs (b) or (c),
3. Adding the following new paragraph (c) to
Section 5:
(c) Notwithstanding anything to the
contrary, an Outside Director may, on or
before December 31, 1997, irrevocably elect
to receive a lump sum payment of the
actuarial equivalent value of the benefit
<PAGE>
otherwise payable under paragraph (a), above.
The discount rate employed to determine such
value shall be the interest rate used to
calculate lump sum distributions under the
Conrail Inc. Supplemental Retirement Plan for
April 1997. The benefit determined under
this paragraph (c) shall be paid to the
Outside Director as soon as reasonably
feasible after the month in which he or she
ceases to serve as a member of the Board.
4. Deleting Section 6 and substituting the
following therefor:
An Outside Director shall forfeit the right
to any and all benefits under the Plan in the
event, prior to his or her attainment of age
sixty-five, the Outside Director is removed
from the Board for cause.
5. Deleting the first two sentences of Section
10 and substituting the following therefor:
The Plan shall be administered in accordance
with the terms of the Conrail Inc. Stock
Employee Compensation Trust.
IN WITNESS WHEREOF, the Company has caused
this First Amendment to be executed as of the date
first written above.
CONRAIL INC.,
by
/s/Frank H. Nichols
----------------------
Frank H. Nichols
Senior Vice President
Organizational Performance
- 2 -
<PAGE>
<TABLE>
Exhibit 12
----------
CONSOLIDATED RAIL CORPORATION
-----------------------------
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
--------------------------------------------------------
($ In Millions)
Quarters Ended Quarters Ended Quarters Ended Quarters Ended Years Ended
March 31, June 30, September 30, December 31, December 31,
-------------- -------------- -------------- -------------- ----------------
1997 1996 1997(1) 1996 1997 1996 1997 1996 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Pre-tax income (loss) $ 96 $ 47 $(250) $ 34 $198 $212 $192 $223 $236 $516 $381
Add:
Interest expense 42 44 42 44 41 43 40 43 165 174 185
Rental expense
interest factor 16 15 11 13 10 12 10 11 47 51 53
Less equity in
undistributed
earnings of 20-50%
owned companies (5) (4) (7) (3) (5) (5) (3) (8) (20) (20) (19)
---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ----
Earnings available for
fixed charges $149 $102 $(204) $ 88 $244 $262 $239 $269 $428 $721 $600
==== ==== ===== ==== ==== ==== ==== ==== ==== ==== ====
Fixed Charges
- -------------
Interest expense 42 44 42 44 41 43 40 43 165 174 185
Rental expense interest
factor 16 15 11 13 10 12 10 11 47 51 53
---- ---- ----- ---- ---- ---- ---- ---- ---- ---- ----
Fixed charges $ 58 $ 59 $ 53 $ 57 $ 51 $ 55 $ 50 $ 54 $212 $225 $238
==== ==== ===== ==== ==== ==== ==== ==== ==== ==== ====
Ratio of earnings to
fixed charges 2.57x 1.73x - 1.54x 4.78x 4.76x 4.78x 4.98x 2.02x 3.20x 2.52x
==== ==== ===== ==== ==== ==== ==== ==== ==== ==== ====
<FN>
Note: For the purpose of computing the ratio of earnings to fixed charges, earnings represent income before income
taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges
represent interest expense together with interest capitalized and a portion of rent under long-term operating
leases representative of an interest factor.
(1) After the merger-related costs recognized in the second quarter of 1997, earnings available for fixed charges were
inadequate by $257 million to cover fixed charges for the quarter.
</FN>
</TABLE>
<PAGE>
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration
Statements on Form S-3 (Nos. 33-34040 and 33-64670) of
Consolidated Rail Corporation and subsidiaries of our report
dated January 19, 1998, included in this Form 10-K.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 26, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
----------
CONSOLIDATED RAIL CORPORATION
FINANCIAL DATA SCHEDULE
($ In Millions)
<CAPTION>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
<S> <C>
<MULTIPLIER> 1,000,000
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 649
<ALLOWANCES> 0
<INVENTORY> 104
<CURRENT-ASSETS> 959
<PP&E> 6,829
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,464
<CURRENT-LIABILITIES> 1,257
<BONDS> 1,732
0
0
<COMMON> 0
<OTHER-SE> 3,021
<TOTAL-LIABILITY-AND-EQUITY> 8,464
<SALES> 0
<TOTAL-REVENUES> 3,734
<CGS> 0
<TOTAL-COSTS> 3,416
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 236
<INCOME-TAX> 230
<INCOME-CONTINUING> 6
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<PAGE>
</TABLE>
<TABLE>
Schedule II
CONSOLIDATED RAIL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(In Millions)
<CAPTION>
Additions
----------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description of Period Expenses Accounts Deductions of Period
- ----------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(1)
1995
Casualty reserves
Current............... $103 $ (4) (2) $107
Noncurrent............ 212 $174 $ 14 183 (3) 217
Allowance for disposition
of property and
equipment (4)(5)........ 241 261 63 439
1996
Casualty reserves
Current............... 107 (31) (2) 138
Noncurrent............ 217 168 11 206 (3) 190
Allowance for disposition
of property and
equipment (4) .......... 439 31 408
1997
Casualty reserves
Current............... 138 1 139
Noncurrent............ 190 127 14 133 (3) 198
Allowance for disposition
of property and
equipment (4)............ 408 16 392
<FN>
(1) Includes charges to property accounts in connection with construction projects and
the recording of receivables from third parties.
(2) Includes net transfers from noncurrent.
(3) Includes net transfers to current.
(4) Deductions of $63 million, $31 million and $16 million in 1995, 1996 and 1997,
respectively, represent net losses on asset dispositions.
(5) In 1995, the Company recorded an asset disposition charge, which resulted from a
review of the Company's route system and other operating assets to determine those
that no longer effectively and economically support current and expected operations.
The Company identified and planned to sell 1,800 miles of rail lines that were
expected to provide proceeds substantially less than net book value. In addition,
other assets, principally yards and side tracks, identified for disposition have been
written down to estimated net realizable value. (See Note 12 to the Consolidated
Financial Statements included elsewhere in this Annual Report.)
</FN>
</TABLE>
S-1
<PAGE>
