SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-10720
ILLINOIS CENTRAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3545405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 755-7500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of September 30, 1997, 61,427,647 common shares were outstanding.
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ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
FORM 10-Q
Three and Nine Months Ended September 30, 1997
CONTENTS
Part I - Financial Information: Page
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information:
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index E-1
2
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ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements
($ in millions, except share data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September
1997 1996 1997 1996
Revenues $ 173.6 $ 167.9 $ 511.3 $ 483.9
Operating expenses:
Labor and fringe benefits 51.8 49.3 147.6 141.9
Leases and car hire 11.1 11.8 31.5 32.8
Diesel fuel 8.6 9.5 28.7 27.1
Materials and supplies 9.0 8.8 26.2 24.8
Depreciation and amortization 11.0 10.5 31.8 28.5
Casualty, insurance and losses 4.0 4.1 11.8 9.2
Other taxes 4.7 5.5 16.7 14.1
Other 11.4 6.9 27.3 27.3
Operating expenses 111.6 106.4 321.6 305.7
Operating income 62.0 61.5 189.7 178.2
Other income (expense), net 3.9 (0.4) 5.3 0.7
Interest expense, net (10.5) (9.8) (31.0) (24.4)
Income before income taxes 55.4 51.3 164.0 154.5
Provision for income taxes 20.8 19.2 60.5 57.9
Net income $ 34.6 $ 32.1 $ 103.5 $ 96.6
Income per share $ 0.56 $ 0.52 $ 1.66 $ 1.56
Weighted average number of
shares of common stock and
common stock equivalents
outstanding 62,251,380 61,843,972 62,200,342 61,817,730
The following notes are an integral part of the consolidated financial
statements.
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ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
ASSETS September 30, December 31,
1997 1996
Current assets:
Cash and temporary cash investments $ 37.8 $ 59.2
Receivables, net of allowance for doubtful
accounts of $1.5 in 1997 and $1.3 in 1996 102.3 107.0
Secured financing receivable - 32.6
Materials and supplies, at average cost 17.9 17.3
Assets held for disposition 1.1 1.6
Deferred income taxes - current 20.3 20.3
Other current assets 7.2 10.6
Total current assets 186.6 248.6
Investments 11.9 17.5
Properties:
Transportation:
Road and structures, including land 1,478.6 1,375.0
Equipment 264.8 261.2
Other, principally land 41.3 41.5
Total properties 1,784.7 1,677.7
Accumulated depreciation (63.2) (53.6)
Net properties 1,721.5 1,624.1
Other assets 29.3 21.2
Total assets $ 1,949.3 $ 1,911.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 25.1 $ 6.3
Accounts payable 54.6 60.4
Dividends payable 14.1 14.1
Income taxes payable 9.2 1.1
Casualty and freight claims 20.8 21.1
Employee compensation and vacations 16.9 21.4
Taxes other than income taxes 13.1 17.4
Accrued redundancy reserve 4.3 4.9
Other accrued expenses 85.7 85.3
Total current liabilities 243.8 232.0
Long-term debt 572.6 633.7
Deferred income taxes 391.6 356.6
Other liabilities and reserves 126.1 133.6
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Contingencies and commitments
Stockholders' equity:
Common stock, par value $.001, authorized
100,000,000 shares, 64,417,768 shares
issued and 61,427,647 shares outstanding 0.1 0.1
Additional paid-in capital 169.3 167.1
Retained income 514.8 453.8
Treasury stock (2,990,121 shares) (69.0) (65.5)
Total stockholders' equity 615.2 555.5
Total liabilities and stockholders' equity $ 1,949.3 $ 1,911.4
The following notes are an integral part of the consolidated financial
statements.
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ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Nine Months Ended September 30,
1997 1996
Cash flows from operating activities :
Net income $ 103.5 $ 96.6
Reconciliation of net income to net cash provided
by (used for) operating activities :
Depreciation and amortization 31.8 28.5
Deferred income taxes 28.8 21.4
Equity in undistributed earnings of affiliates,
net of dividends received (0.8) (0.5)
Net gains on sales of real estate (1.1) (1.5)
Cash changes in working capital (2.7) (11.0)
Changes in other assets (3.1) (0.4)
Changes in other liabilities and reserves (8.1) (12.0)
Net cash provided by operating activities 148.3 121.1
Cash flows from investing activities :
Additions to properties (103.3) (82.0)
Acquisition of CCPH (0.2) (146.8)
Proceeds from real estate sales 2.2 2.6
Proceeds from equipment sales 2.6 2.6
Proceeds from sales of investments 0.6 -
Secured financing 32.6 -
Other (11.6) (8.0)
Net cash (used for) investing activities (77.1) (231.6)
Cash flows from financing activities :
Proceeds from issuance of debt - 210.5
Principal payments on debt (26.7) (50.4)
Net proceeds (payments) in commercial paper (20.0) 5.0
Dividends paid (42.4) (36.4)
Stock repurchases (3.5) (0.5)
Purchase of subsidiary's common stock - (0.7)
Net cash provided by (used for) financing
activities (92.6) 127.5
Changes in cash and temporary cash investments (21.4) 17.0
Cash and temporary cash investments at beginning
of period 59.2 5.0
Cash and temporary cash investments at end of period $ 37.8 $ 22.0
Supplemental disclosure of cash flow information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 33.7 $ 21.7
Income taxes $ 22.7 $ 45.4
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The following notes are an integral part of the consolidated financial
statements.
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ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
Except as described below, the accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting
policies described in the 1996 Annual Report on Form 10-K and should be
read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to
present fairly the financial position, results of operations and cash
flows for the periods presented. Interim results are not necessarily
indicative of results for the full year. Certain 1996 amounts have been
reclassified to conform with the presentation used in the 1997 financial
statements.
Income Per Share
Income per common share of the Company is based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. See also Note 4.
2. Common Stock and Dividends
On September 17, 1997, the Board of Directors approved a quarterly
dividend of $.23 per share which was paid October 8, 1997. The Board
intends to continue its policy of quarterly dividends. Future dividends
may be dependent on the ability of the Illinois Central Railroad Company
("ICRR") and CCP Holdings, Inc. ("CCPH") to pay dividends to the Company.
Covenants of ICRR's Revolver and CCPH's Revolver require specified levels
of tangible net worth. At September 30, 1997, ICRR and CCPH exceeded
their tangible net worth covenants by $26.2 million and $27.8 million,
respectively.
3. Receivables Sales Agreement
On January 1, 1997, the Company adopted SFAS 125. The accounting and
reporting of sales relating to ICRR's accounts receivable agreement was
not changed.
4. Pro-Forma Earnings Per Share under SFAS No. 128
In March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). The new standard
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is effective for interim and annual periods ending after December 15,
1997; early adoption is not permitted. Had SFAS No. 128 been effective
January 1, 1996, the effect on previously reported earnings per share
("EPS") data would have been as follows:
Three Months Nine Months
ended September 30, ended September 30,
1997 1996 1997 1996
Primary EPS as reported $.56 $.52 $1.66 $1.56
Effect of SFAS No. 128 - - .02 .01
----- ---- ----- -----
Basic EPS $.56 $.52 $1.68 $1.57
===== ====
Fully diluted EBS as reported $.56 $.52 $1.66 $1.56
Effect of SFAS No. 128 - - - -
----- ---- ----- -----
Diluted EPS $.56 $.52 $1.66 $1.56
==== ==== ===== =====
Basic EPS is computed by dividing net income for the period by the
weighted average number of shares of common stock outstanding during
the period. Diluted EPS is computed based on the assumption that
outstanding stock options are exercised during the period provided the
average common stock market price exceeds the option exercise price.
The following is a reconciliation of the shares used to calculate Basic and
Diluted EPS at:
Three Months Nine Months
ended September 30, ended September 30,
-------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Shares outstanding at
beginning of period 61,406,831 61,417,690 61,406,831 61,425,094
Effects of options
exercised in the period (a) 4,816 (736) 2,351 (3,974)
---------- ----------- ---------- ----------
Shares used in Basic EPS 61,411,647 61,416,954 61,409,182 61,421,120
Assumed exercise of
outstanding options (b) 839,733 571,810 791,160 522,109
---------- ---------- ---------- ----------
Shares used in Diluted EPS 62,251,380 61,988,764 62,200,342 61,943,229
(a) Company policy is to repurchase, in the open market, all shares
issued upon the exercise of stock options. The indicated effects on
shares result from (i) repurchases not always occurring on exact
exercise dates (positive change) or (ii) shares considered exercised
under APB No. 15 (negative change) that are ignored in Basic under SFAS
No.128.
(b) Represents net shares after application of Treasury Stock method.
The policy of actual repurchases above in (a), was not assumed.
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5. In June 1996, the Company acquired CCPH. The acquisition has been
accounted for under the purchase method of accounting. The following
pro forma results of the Company are presented to reflect the Company's
results of operations for the nine months ended September 30, 1996, as
if CCPH has been acquired on January 1, 1996, ($ in millions except per
share data):
(Unaudited)
Nine Months Ended
September 30, 1996
Revenues $523.7
Operating Income 192.5
Net Income 103.2
Net Income Per Share $ 1.67
=======
6. Litigation
ICRR is one of several defendants in a New Orleans class action in
which a jury has returned a verdict against ICRR for $125 million in
punitive damages as a result of a tank car fire. The Louisiana Supreme
Court has vacated the judgment and remanded the case to the trial court
for further proceedings. ICRR believes the verdict has no basis and
intends to continue to challenge it vigorously.
While the final outcome of this proceeding cannot be determined, in the
opinion of management, based on present information, the ultimate
resolution of this case will not have a material adverse effect on
ICRR's financial position, results of operations, cash flow or
liquidity.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
On a consolidated basis total revenues for 1997 increased from the prior
year quarter by $5.7 million or 3.4% to $173.6 million. Total freight carloads
of 258,649 were relatively flat with the mix of commodities causing revenues per
car and in total to increase compared with 1996.
Grain and Grain Mill accounted for 15% of the Company's carloads and 25% of
ton-miles in the third quarter of 1997. While 1997's rail rates were higher on
average versus last year and demand for grain domestically was strong as
processors returned to more normal production levels, the negative impact of
weak export grain traffic was only partially offset. Export grain movements
began to improve late in the quarter and are continuing in the fourth quarter of
1997.
Coal accounted for 24% of the Company's carloads and 25% of ton-miles in
the third quarter of 1997. Against 1996, carloads, ton-miles and revenues were
down 5%, 9% and 14%, respectively. Production difficulties at two shippers
(started in June 1997 ) were not resolved until late in the quarter.
Chemicals accounted for 15% of the Company's carloads and 18% of ton-miles
in 1997. Against 1996, carloads and ton-miles were up 7% and 5%, respectively,
with revenues flat.
Paper and Forest Products were 15% of 1997 carloads and 15% of ton-miles.
Carloads were up 8%, ton-miles were up 10% and revenues were up 8% versus 1996.
Bulk Commodities contributed 7% of carloads and 6% of ton-miles in 1997.
Bulk commodities are primarily stone and other construction materials and are
closely tied to state highway projects. This smaller commodity group fluctuates
with the timing of projects as well as the availability of freight cars for this
lower-margin business.
Finally, Intermodal accounted for 19% of loads and 6% of ton-miles. Versus
1996, carloads were down 2%, with ton-miles down 3% and revenues up 5%.
Operating expenses overall increased $5.2 million or 4.9% in 1997. Labor
and fringe costs were up modestly reflecting contract increases partially offset
by efficiencies. Leases and car hire returned to more normal operating levels.
Fuel expense reflects the decrease in cost per gallon (8.6%) coupled with
decreased usage (1.4%). The expense categories Casualty, Insurance and Losses
and Other taxes reflect normal operating levels. Other Expense reflects
increased costs associated with various intermodal terminal operations and the
lack of a one-time favorable adjustment reported in 1996.
Operating income for 1997 increased by $.5 million or .8% to $62.0 million
for the reasons cited above.
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Other income (expense) in 1997 includes a $3.7 million pre-tax gain for the
sale of outdoor advertising rights.
Net interest expense of $10.5 million for 1997 increased 7.1% compared to
$9.8 million in 1996 caused by higher debt levels year to year.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
On a consolidated basis total revenues for 1997 increased from the prior
year period by $27.4 million or 5.7% to $511.3 million. The 1997 period includes
CCPH for the entire year and a $7.8 million decline at ICRR.
Total freight carloads of 769,470 were up 5.5%, primarily reflecting
inclusion of CCPH which was acquired in June 1996. The traffic increase offset
weak export grain which had a negative impact on the revenue mix.
Grain and Grain Mill accounted for 17% of the Company's carloads and 29% of
ton-miles in 1997. While 1997's rail rates were higher on average versus last
year and demand for grain domestically was strong as processors returned to more
normal production levels, the negative impact of weak export grain traffic was
only partially offset. Export grain movements began to improve late in the
quarter and are continuing in the fourth quarter of 1997.
Coal accounted for 24% of the Company's carloads and 24% of ton-miles in
1997. Against 1996, carloads and ton-miles were up 11% and 2%, respectively,
with revenues down 4%. Increased one time moves and new business offset
production difficulties at several shippers' operations. These difficulties were
resolved late in the third quarter of 1997.
Chemicals accounted for 15% of the Company's carloads and 17% of ton-miles
in 1997. Against 1996, carloads, ton-miles and revenues were up 12%, 11% and 5%,
respectively, reflecting the new haulage agreement with BNSF entered into in
late 1996.
Paper and Forest Products were 14% of 1997 carloads and 14% of ton-miles.
Carloads and revenues were flat, and ton miles were up 4% versus 1996.
Bulk Commodities contributed 6% of carloads 5% of ton-miles in 1997. Bulk
commodities are primarily stone and other construction materials and are closely
tied to state highway projects. This smaller commodity group fluctuates with the
timing of projects as well as the availability of freight cars for this
lower-margin business.
Finally, Intermodal accounted for 20% of loads and 6% of ton-miles. Versus
1996, carloads were up 5%, ton-miles were up 5% and revenues up 10%.
Operating expenses overall increased $15.9 million or 5.2% in 1997. For
1997, CCPH's costs are included for the entire period. Labor and fringe costs
were up modestly. Leases and car hire returned to more normal operating levels.
Fuel expense reflects a 12.9% usage increase.
Depreciation expense rose as a result of the acquisition of CCPH.
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Operating income for 1997 increased by $11.5 million or 6.5% to $189.7
million for the reasons cited above.
Other income (expense) in 1997 includes a $3.7 million pre-tax gain for the
sale of outdoor advertising rights.
Net interest expense of $31.0 million for 1997 increased 27.0% compared to
$24.4 million in 1996. The 1997 expense includes borrowings to support the
$109.9 million transferred from ICRR in mid-June 1996 in connection with the
acquisition of CCPH.
Liquidity and Capital Resources
Operating Data ($ in millions): Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
Cash flows provided by (used for):
Operating activities....................... $148.3 $121.1
Investing activities....................... (77.1) (231.6)
Financing activities....................... (92.6) 127.5
------- -------
Net change in cash and
temporary cash investments.............. $(21.4) $ 17.0
======= ======
Cash from operating activities in 1997 and 1996 was primarily net income
before depreciation and deferred taxes.
Investing Data ($ in millions):
Additions to property were as follows:
Nine Months Ended September 30,
1997 1996
---- ----
Communications and signals................ $15.9 $ 14.2
Equipment/rolling stock................... 4.0 23.4
Track and bridges......................... 51.6 38.3
Dry bulk transfer facility................ 25.4 -
Other..................................... 6.4 6.1
----- -------
Total................................. $103.3 $82.0
====== =====
Property retirements and removals generated proceeds of $4.8 million and
$5.2 million in 1997 and 1996, respectively.
The Company still anticipates that total capital expenditures for 1997 will
be approximately $172 million. These expenditures are expected to be met from
current operations or other available sources.
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Financing Activities
The Company has a $50 million 364-day floating-rate revolving loan
agreement which expires in August 1998. At September 30, 1997, no amounts were
drawn under this agreement. IC Financial leases equipment to ICRR and has
approximately $7.5 million in long-term borrowing agreements which were used to
acquire locomotive and freight car equipment during 1993 and 1991. IC Financial
lease revenue and corresponding expense at ICRR, which is eliminated in
consolidation, was $11.1 million and $10.8 million for the first nine months of
1997 and 1996, respectively.
In October 1997 and 1996, the Company paid $14.1 million and $12.3 million,
respectively, in cash dividends on its common stock. Dividends from ICRR were
used to fund these payments.
CCPH has a revolving credit agreement with its bank lending group for an
unsecured $50 million revolving credit facility, (the "CCPH Revolver"). The CCPH
Revolver has a $5 million sublimit for letters of credit and expires in 2001.
The revolver can be used for general corporate purposes. Currently, the annual
commitment fee is 25 basis points and borrowings are at the Eurodollar offered
rate plus 62.5 basis points. At September 30, 1997, CCPH was in compliance and
does not anticipate any difficulty in maintaining compliance with the various
financial covenants contained therein. At September 30, 1997, no amounts were
drawn under the CCPH Revolver.
ICRR has a commercial paper program whereby a total of $200 million can be
issued and outstanding at any one time. The program is supported by a $250
million Revolver (see below). At September 30, 1997, no amounts were
outstanding. The average interest rate on commercial paper for the nine month
period ended September 30, 1997, was 5.68% with a range of 5.68% to 5.69%.
ICRR's public debt is rated Baa2 by Moody's and BBB by S&P.
In 1994, ICRR entered into a revolving agreement to sell undivided
percentage interests in certain of its accounts receivable, with recourse, to a
financial institution. The agreement, which expires in June 1998, allows for
sales of accounts receivable up to a maximum of $50 million at any one time.
ICRR services the accounts receivable sold under the agreement and retains the
same exposure to credit loss as existed prior to the sale. At September 30,
1997, $50 million had been sold pursuant to the agreement. Costs related to the
agreement fluctuate with changes in prevailing interest rates. These costs,
which are included in Other Income (Expense), Net, were $2.3 million each for
the nine month periods ended September 30, 1997, and 1996. ICRR's accounting and
reporting for the sale of accounts receivable was not changed by the
implementation of SFAS No. 125.
ICRR has a $250 million Revolver with its bank lending group, which expires
in 2001. Fees and borrowing spreads are predicated on ICRR's long-term credit
ratings. The Revolver is used primarily for backup for ICRR's commercial paper
program but can be used for general corporate purposes. The available amount is
reduced by the outstanding amount of commercial paper borrowings and any letters
of credit issued on behalf of ICRR under the facility. At September 30, 1997,
the full $250 million was available but undrawn.
Certain covenants of ICRR's debt agreements and CCPH's Revolver require
among others specific levels of tangible net worth but not a specific dividend
restriction. At September 30, 1997,
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ICRR and CCPH exceeded their tangible net worth covenants by $26.2 million and
$27.8 million, respectively. Both ICRR and CCPH were in compliance with all
covenants at September 30, 1997, and do not contemplate any difficulty
maintaining such compliance.
ICRR has a shelf registration from 1996 which can be used to issue an
additional $70 million in MTN's or other debt until 2000. Currently, there are
no plans to issue additional debt but capital investments in the terminal
facilities and other ventures could necessitate use.
The Company believes that its available cash, cash generated by its
operations and cash available from the facilities described above will be
sufficient to meet foreseeable liquidity requirements. Additionally, the Company
believes it has access to the public debt market if needed.
Year 2000 Conversion
The Company has entered into an agreement to replace a portion of its
"non-2000 compliant" programs. The Company is accumulating and evaluating the
costs associated with modifying the remaining software programs for the year
2000 compliance. Determination of the approach for the remaining programs has
not been finalized.
Miscellaneous
ICRR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. As a result, approximately 60% of
ICRR's short-term diesel fuel requirements through July 1998 are protected
against significant price changes.
In January 1997, the United Transportation Union ("UTU") ratified a new
agreement which settles wage and work rule issues through 2000. The UTU
agreement is similar to the nationally negotiated agreement in effect with other
Class I carriers. The main distinction is timing of the various lump sum payouts
and scheduled wage increases. In May 1997, the Brotherhood of Locomotive
Engineers ("BLE") ratified a local agreement which settles wage and work rule
issues through 2000. The BLE agreement increased wage rates approximately 4.9%
upon ratification.
Long-Term Equity Enhancement Program
The Company paid its twenty-third consecutive quarterly cash dividend on
October 8, 1997. The Board of Directors believes quarterly dividends are an
integral part of its announced Long-Term Equity Enhancement Program designed to
increase stockholder value through dividend payments and stock repurchases.
Actual dividends are declared by the Board based on profitability, capital
expenditure requirements, debt service and other factors. The Board has
determined that cash needs for the CCPH acquisition and other capital
expenditures precluded a Stock Purchase program for 1996 and to date in 1997.
Environmental Liabilities
The Company's operations are subject to comprehensive environmental
regulation by federal, state and local authorities. Compliance with such
regulation requires the Company to modify its
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operations and expend substantial manpower and financial resources.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund"), and similar state and federal laws, the
Company is potentially liable for the cost of clean-up of various contaminated
sites. The Company generally participates in the clean-up at sites where other
substantial parties share responsibility through cost-sharing arrangements, but
under Superfund and other similar laws the Company can be held jointly and
severally liable for all environmental costs associated with such sites.
The Company is aware of approximately 25 contaminated sites at which it is
probably liable for some portion of any required clean-up. Of these, 17 involve
contamination primarily by diesel fuel which can be remediated without material
cost. Five other sites are expected to require more than $1 million in clean-up
costs. At four of these sites other parties are expected to contribute the
majority of the costs incurred. The Company anticipates expenditures of
approximately $2.8 million annually for the investigation and remediation at all
sites.
For all known sites of environmental contamination where the Company's loss
or liability is probable, the Company has recorded an estimated liability at the
time when a reasonable estimate of remediation cost and Company liability can
first be determined. Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods. Estimates of
the Company`s potential financial exposure for environmental claims or incidents
are necessarily imprecise because of the difficulty of determining in advance
the nature and extent of contamination, the varying costs of alternative methods
of remediation, the regulatory clean-up standards which will be applied, and the
appropriate allocation of liability among multiple responsible parties. At
September 30, 1997, the Company estimated the probable range of its liability to
be $11 million to $50 million, and in accordance with the provisions of SFAS No.
5 had a reserve of $11 million for environmental contingencies. This amount is
not reduced for potential insurance recoveries or third-party contributions.
The risk of incurring environmental liability in connection with both past
and current activities is inherent in railroad operations. Decades-old railroad
housekeeping practices were not always consistent with contemporary standards.
Historically the Company has leased substantial amounts of property to
industrial tenants, and ICRR continues to haul hazardous materials which are
subject to occasional accidental release. Because the ultimate cost of known
contaminated sites cannot be definitively established and because additional
contaminated sites yet unknown may be discovered or future operations may result
in accidental releases, no assurance can be given that the Company will not
incur material environmental liabilities in the future. However, based on its
assessments of the facts and circumstances now known, management believes that
it has recorded adequate reserves for known liabilities and does not expect
future environmental charges or expenditures, based on these known facts and
circumstances, to have a material adverse effect on the Company`s financial
position, results of operations, cash flow or liquidity.
Litigation
ICRR is one of several defendants in a New Orleans class action
in which a jury has returned a verdict against ICRR for $125 million in
punitive damages as a result of a tank car fire. The Louisiana Supreme Court
has vacated the judgment and remanded the case to the trial court for further
proceedings. (See Part II-Other Information-Item 1.-Legal Proceedings) ICRR
believes the verdict has no basis and intends to continue to challenge it
vigorously.
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While the final outcome of this proceeding cannot be determined, in
the opinion of management, based on present information, the
ultimate resolution of this case will not have a material adverse effect on the
Company's financial position, results of operations, cash flow or liquidity.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). The new statement is effective December 15, 1997; early adoption is not
permitted. When adopted, SFAS No. 128 will require restatement of prior years'
earnings per share. See Note 4 for proforma presentations of the effect of this
new standard.
The FASB has also released Statement of Financial Accounting Standard No.
129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). The
Company complies with all the requirements of the standard which is effective
for periods ending after December 15, 1997.
In June 1997, the FASB issued two new standards which will be effective for
fiscal years beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the some prominence as other financial
statements. The Company does not expect to adopt this standard early.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This Statement supersedes FASB Statement No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to report
information about major customers. SFAS No. 131 will not apply to interim
periods until the second year of application. The Company will not adopt this
standard early.
The Company is currently assessing the impact, if any, these standards will
have on its consolidated financial statements.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
ICRR is one of several defendants in a class action stemming from the
leakage and fire from a tanker of butadiene in East New Orleans in 1987. In
August 1997 a jury in the Central District Court of Orleans Parish, Louisiana
returned a verdict of $1.9 million as compensatory damages for 20 named members
of the class. ICRR was found liable for 5% of the damages, which combined with
prejudgment interest, approximates $200,000. The compensatory claims of the rest
of the class remain unresolved. The same jury in September 1997 returned a
verdict for punitive damages against five defendants on behalf of the entire
putative class of some 8,000 individuals. The jury awarded $125 million in
punitive damages against ICRR out of a total punitive damage award exceeding
$3.4 billion. The Louisiana Supreme Court has vacated and set aside the
judgment for procedural reasons and remanded the case to the trial court for
further proceedings. Post trial motions are pending before the trial judge to
overturn or reduce both the compensatory and punitive awards. See Item 2.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index on page E-1
21
<PAGE>
ILLINOIS CENTRAL CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
ILLINOIS CENTRAL CORPORATION
/s/ John V. Mulvaney
John V. Mulvaney
Controller
Date: November 7, 1997
22
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
11 Computation of Income per Common Share E-2
27 Financial Data Schedule (This exhibit is
required to be submitted electronically
pursuant to the rules and regulations of the
Securities and Exchange Commission and
shall not be deemed filed for the purposes of
Section 11 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of
1934).
E-1
<PAGE>
EXHIBIT 11
ILLINOIS CENTRAL CORPORATION AND
SUBSIDIARIES
COMPUTATION OF INCOME PER
COMMON SHARE
($ in millions, except share data)
Three Months Nine Month
Ended September 30, Ended September 30,
1997 1996 1997 1996
Net income $ 34.6 $ 32.1 $ 103.5 $ 96.6
Calculation of average number of
shares outstanding:
Primary:
Weighted average number of
common shares outstanding 61,411,647 61,416,954 61,409,182 61,421,120
Effect of shares issuable
under stock options 839,733 571,810 791,160 522,109
62,251,380 61,988,764 62,200,342 61,943,229
Fully diluted:
Weighted average number of 61,411,647 61,416,954 61,409,182 61,421,120
common shares outstanding
Effect of shares issuable under
stock options (1) 899,690 632,243 899,690 632,243
62,311,337 62,049,197 62,308,872 62,053,363
Income per common share:
Primary:
Net income $ 0.56 $ 0.52 $ 1.66 $ 1.56
Fully diluted:
Net income $ 0.56 $ 0.52 $ 1.66 $ 1.56
(1) Such items are included in primary calculation. Additional shares
represent difference between average price of common stock for the period
and the end of period price.
E-2
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
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0
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