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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 1-10720
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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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. [ ]
As of February 27, 1998, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $2,386 million. For
purposes of the foregoing statement only, directors and executive officers of
the registrant have been assumed to be affiliates.
As of February 27, 1998, there were 61,473,222 shares of the registrant's
common stock outstanding.
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ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
FORM 10-K
Year Ended December 31, 1997
INDEX
PART I 10-K Page
Item 1. Business............................................. ..... .. 3
Item 2. Properties.......... ................................. .... .. 10
Item 3. Legal Proceedings.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............ 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 18
Item 6. Selected Financial Data........................................ 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 20
Item 8. Financial Statements and Supplementary Data.................... 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation ........................................ 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 53
Item 13. Certain Relationships and Related Transactions................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 56
SIGNATURES................................................................... 57
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PART I
Item 1. Business
Background
Illinois Central Corporation (the "Company") was incorporated under the
laws of Delaware on January 27, 1989. The principal executive office of the
Company is located at 455 North Cityfront Plaza Drive, Chicago, Illinois
60611-5504 and its telephone number is (312) 755-7500.
The Company, through its wholly-owned subsidiary, Illinois Central
Railroad Company ("ICR"), traces its origin to 1851, when ICR was incorporated
as the nation's first land-grant railroad. ICR, a Class I freight railroad,
operates 2,600 miles of main-line track between Chicago and the Gulf of Mexico,
primarily transporting chemicals, coal, paper, grain and grain products, and
intermodal trailers and containers. In 1997, ICR accounted for 90% of the
Company's total revenues.
In June 1996, the Company acquired in a purchase transaction CCP
Holdings, Inc. ("CCPH"). CCPH has two principal operating subsidiaries - the
Chicago, Central and Pacific Railroad Company ("CCPR") and the Cedar River
Railroad Company ("CRR") - which together comprise a Class II freight railroad
system operating 850 miles of track primarily transporting grain, milled grain
and coal. CCPR operates from Chicago to Omaha, Nebraska, with connecting lines
to Cedar Rapids and Sioux City, Iowa. CRR runs from Waterloo, Iowa, to Albert
Lea, Minnesota. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information on the 1996 acquisition of
CCPH.
While ICR, CCPR and CRR (jointly, the "Railroads" or the "IC system")
are legally separate railroads, they operate as a single rail system, with
centralized marketing, administration, and dispatching control.
In addition to ICR and CCPH, the Company's other wholly-owned
subsidiary, IC Financial Services Corporation ("IC Financial"), functions as the
investment vehicle by which non-rail related activities are conducted.
Initially, IC Financial was formed to finance, through various special purpose
subsidiaries, the acquisition of locomotives and freight cars which are leased
to ICR. More recently, IC Financial has invested in two terminals located south
of Baton Rouge, Louisiana. See Item 1. "Business - Terminal Operations"
Planned Growth
In the fall of 1997, the Company developed and announced a four-year
growth plan for the years 1998-2001. The plan, called "Beyond 2000," is designed
to position the Company for the next century. The plan anticipates the Company's
revenues, comprised of the existing franchise of ICR, CCPH, and IC Financial,
will be in a range of $925 million to $955 million by year-end 2001. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Significant Developments" and "Outlook", for additional information
which may effect the Company's growth plans.
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Railroad Commodities and Customers
The Railroads' customers are engaged in a wide variety of businesses
and ship a number of different products that can be classified into these seven
primary commodity groupings:
-- organic, inorganic, agricultural and other chemicals
-- grain, milled grain such as corn syrup and soybean meal, and other
agricultural/food
products
-- paper, lumber, and other forest products
-- coal
-- intermodal, comprising a wide variety of primarily consumer products
shipped in containers or truck trailers on specially designed cars
-- metals, metal products such as coiled steel, and scrap metal --
bulk commodities such as sand, stone, coke, and ores
In 1997, two customers each accounted for approximately 6% of revenues.
The ten largest customers accounted for approximately 34% of revenues.
Contributions to Total Revenues by Commodity Group
Data for 1997 is not comparable to prior years because the Company
acquired CCPH in June 1996. Consequently, 1993 through 1995 data is ICR only.
The respective percentage contributions by principal commodity group to
the Company's revenues during the past five years are set forth below:
Contributions to Total Revenues by Commodity Group
Commodity
Group 1997 1996(1) 1995 1994 1993
--------- ---- ----- ---- ---- ----
Chemicals................... 25.1% 25.4% 25.2% 24.8% 24.7%
Grain, mill & food products. 21.3 19.9 21.9 18.7 23.2
Paper....& forest products.. 15.6 16.3 16.9 18.1 18.6
Coal........................ 12.1 13.8 12.9 15.2 12.7
Intermodal.................. 8.1 7.9 7.3 6.6 4.8
All other................... 17.8 16.7 15.8 16.6 16.0
---- ------ ----- ----- -----
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
1 Includes CCPH since June 13, 1996.
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Terminal Operations
The Company currently has a number of facilities or terminal operations
which contribute to revenues and enhance the flow of rail traffic across the IC
system. Most of these facilities have been developed since 1994. Following are
descriptions of the four most significant terminals.
In December 1996, IC Financial acquired an existing liquid-bulk storage
and distribution terminal on the Mississippi River south of Baton Rouge. IC
Omnimodal Terminal Company ("ICOM") has been serving the petroleum and
petrochemical industries for more than 15 years. Since acquisition, ICOM secured
three new contracts requiring $7.1 million for the construction of new pipelines
and additional tank storage. These contracts and new facilities enhance the
long-term revenue streams from this facility.
In 1996, a subsidiary of IC Financial, IC RailMarine Terminal Company,
began construction of an import/export, dry-bulk handling terminal on the
Mississippi River near Convent, Louisiana. The majority of the construction was
completed when this terminal began operation in December 1997. Initially this
facility will handle coal, iron ore and refined iron pellets. The terminal's
primary customer, American Iron Reduction, constructed a plant adjacent to the
terminal.
In 1996, ICR constructed a 75-acre intermodal terminal for the
exclusive use of the Canadian National Railway (CN). The facility has an annual
capacity of 250,000 intermodal "lifts." An intermodal "lift" is the placement of
a container or truck trailer on or off a railcar. ICR owns the facility and
operates it on CN's behalf. ICR is compensated through fees paid for each lift.
In 1994, ICR constructed a transload facility in Harvey, Illinois. This
facility stores primarily railcars of plastic pellets. These pellets are
subsequently loaded into tanker trucks ("transloaded") for distribution to
smaller, non-rail-served manufacturers. The Company spent $1.0 million to double
the capacity of this terminal in 1997.
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Operating Statistics
Data for 1997 is not comparable to prior years because the Company
acquired CCPH in June 1996. Consequently, 1993 through 1996 data is ICR only.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Carloads (in thousands) 1,031 927 957 915 848
Freight train miles
(in thousands)1............. 9,167 7,950 7,758 7,179 5,659
Revenue ton miles of freight
traffic (in millions)2 3.... 23,843 22,511 23,773 20,582 20,080
Revenue tons per carload 78.7 71.7 74.7 76.3 79.1
Average length of haul
(in miles).................. 307 309 328 286 293
Gross freight revenue per
ton mile3 4................. $.026 $.026 $ .026 $ .028 $ .028
Net freight ton miles per
average route mile
(in millions)............... 6.9 8.2 9.0 7.6 7.4
Gallons per ton mile5......... .00256 .00236 .00234 .00248 .00251
Active locomotives............ 358 331 333 328 322
Track resurfacing (miles) 1,457 1,360 1,360 1,397 1,293
Percent resurfaced............ 28.7% 33.7% 32.2% 33.0% 29.8%
Ties laid in replacement
(including switch ties)..... 413,713 425,999 408,760 346,994 323,764
Slow order miles.............. 285.28 100.00 209.76 275.79 152.32
1 Freight train miles equals the total number of miles traveled by all
trains in the movement of freight.
2 Revenue ton miles of freight traffic equals the product of the weight
in tons of freight carried for hire and the distance in miles between
origin and destination.
3 Prior years have been restated to eliminate non-revenue ton miles.
4 Revenue per ton mile equals gross freight revenue divided by revenue
ton miles of freight traffic.
5 Gallons per ton mile equals the amount of fuel required to move one
ton of freight one mile.
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The following table summarizes operating expense-to-revenue ratios of the
Company for each of the past five years. The table analyzes the various
components of operating expenses based on the line items appearing on the income
statements. The ratio is generally used within the railroad industry as a
measure of operating efficiency; the Company has had the lowest ratio among
major railroads in the U.S. and Canada in each of the last eight years.
Ratio1 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Operating2..................... 62.3% 63.3% 64.3% 66.4% 68.2%
Labor and fringe benefits...... 29.2 29.2 30.2 31.0 31.1
Leases and car hire............ 5.9 6.8 7.2 8.2 11.9
Diesel fuel.................... 5.6 5.8 5.1 5.3 5.4
Materials and supplies......... 5.2 5.0 5.4 6.0 6.2
Depreciation and amortization.. 6.1 6.0 5.3 4.6 4.2
Casualty, insurance and losses. 2.3 1.8 2.7 4.0 3.8
Other taxes.................... 3.0 2.8 2.8 3.0 2.9
Other.......................... 5.0 5.9 5.6 4.3 2.8
1 1996 includes CCPH for six months; 1995-1993 is ICR only.
2 Operating ratio means the ratio of operating expenses before special charge
over operating revenues.
Employees; Labor Relations
Labor relations in the railroad industry are subject to extensive
governmental regulation under the Railway Labor Act. Employees in the railroad
industry are covered by the Railroad Retirement System instead of Social
Security. Employer contribution rates under the Railroad Retirement System are
currently more than double those in other industries and may rise further as the
proportion of retired employees receiving benefits increases relative to the
number of working employees. Also, railroad employees are covered by the Federal
Employer's Liability Act ("FELA") rather than by state no-fault workmen's
compensation systems. FELA is a fault-based system, with compensation for
injuries determined by individual negotiation or litigation.
Approximately 90% of all employees are represented by one of eleven
unions. The general approach to labor negotiations by Class I railroads is to
bargain on a collective national basis. For several years now, one of the
Company's guiding principles is that local -- rather than national,
industry-wide -- negotiations will result in labor agreements that better
address both employees' concerns and preferences and the Company's actual
operating environment. Therefore, beginning in late 1994, ICR began negotiating
separate distinct agreements with each of its eleven unions. To date, all of
ICR's eleven bargaining units have ratified local agreements that resolve wage
and work-rule issues through 1999 for shop crafts and through the year 2000 for
engineers and trainmen. At CCPH, labor negotiations are local as well and are
being renegotiated; until new agreements are reached, cost-of-living allowance
provisions and other terms in previous agreements will continue.
There are risks associated with negotiating locally. Presidents and
Congress have repeatedly demonstrated they will step in to avoid national
strikes, while a local dispute may not generate
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federal intervention, making an extended work stoppage potentially more likely.
The Company's management believes the potential mutual benefits of local
bargaining outweigh the risk.
The following table shows the average annual employment levels for the last five
years:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
ICR 3,295 3,238 3,268 3,250 3,306
CCPH 322 379 N/A N/A N/A
------ ------ ------ ------ ------
Total 3,617 3,617 3,268 3,250 3,306
===== ===== ===== ===== =====
N/A = Not Available
Management believes that over the next several years attrition and
retirements will be the primary source of declines in employment levels.
Increases in employment levels, particularly in train operations, are possible
in response to growth of business in accordance with the Company's growth plan.
Regulatory Matters; Freight Rates; Environmental Considerations
The Railroads, particularly ICR as a Class I railroad, are subject to
significant governmental regulation by the Surface Transportation Board ("STB")
and other federal, state and local regulatory authorities with respect to rates,
service, safety and operations.
The jurisdiction of the STB encompasses, among other things, rates
charged for certain transportation services, assumption of certain liabilities
by railroads, mergers or the acquisition of control of one carrier by another
carrier and extension or abandonment of rail lines or services.
The Federal Railroad Administration, the Occupational Safety and Health
Administration and certain state transportation agencies have jurisdiction over
railroad safety matters. These agencies prescribe and enforce regulations
concerning car and locomotive safety equipment, track safety standards, employee
work conditions and other operating practices.
ICR currently transports Southern Illinois coal which will not meet the
environmental standards of Phase II of the Clean Air Act unless blended with
lower-sulfur coal or users of the coal install air scrubbers. As a result, this
source of traffic may decline in advance of or consistent with Phase II
implementation in the year 2000. On the other hand, ICR is participating in
movements of Western coal (lower-sulfur) and certain Southern Illinois coal
which is being blended to comply with Phase II. ICR anticipates these sources of
traffic may increase. Additionally, the Company has constructed an import/export
terminal to handle the export of coal (see Item 1. "Business -Terminal
Operations"). Overall, management believes that implementation of Phase II of
the Clean Air Act is unlikely to have a material adverse effect on the results
of the Company.
Currently, the utility industry is undergoing deregulation creating
enormous pressures for change, innovation, and cost control. In the face of
increased competition caused by deregulation, utilities are attempting to reduce
costs, including rail transportation costs. Methods being investigated include
"power wheeling", "coal-by-wire", and for those utilities served by a single
railroad, re-regulation of rail rates. Some analysts have suggested that utility
deregulation may significantly reduce rail revenues through a shift in the
pattern of coal movements forcing lower rail rates. At this point, there are too
many variables to know if utility deregulation will have a neutral,
<PAGE>
modestly positive or modestly negative effect on the Company in the long-term.
However, management believes that the Company will not be materially, adversely
affected because it already provides its utility customers highly competitive
rates and service as determined through competitive bids against other railroads
and river options.
Inherent in the operations and real estate activities of the Company
and other railroads is the risk of environmental liabilities. The Company is
subject to extensive regulation under environmental laws and regulations
concerning, among other things, discharges into the environment and the
handling, storage, transportation and disposal of waste and hazardous materials.
See Item 2. "Properties - Environmental Conditions" for discussion of sites on
which the Company currently or formerly conducted operations that are subject to
governmental action in connection with environmental degradation.
Railroads' Results Influenced by Economic Conditions
In any given year, the Railroads, like other railroads, are susceptible
to changes in the economic conditions of the industries and geographic areas
that produce and consume the freight it transports. Many of the goods and
commodities carried by the Railroads experience cyclicality in demand. The
operations of the Railroads can be expected to reflect this cyclicality because
of the significant fixed costs inherent in railroad operations. The Railroads
revenues are effected by prevailing economic conditions and should an economic
slowdown or recession occur in the United States or other key markets, the
volume of rail shipments carried is likely to be reduced.
Competition
The Railroads face intense competition for freight traffic from trucks,
river barges, pipeline carriers, and other railroads. Competition is generally
based on the rates charged and the quality and reliability of the service
provided. At December 31, 1997, there were 9 railroads in the United States
classified by revenues as Class I railroads. ICR is sixth in revenues and has
the best operating ratio.
To a greater degree than other rail carriers, ICR is vulnerable to
barge competition because its main routes are parallel to the Mississippi River
system. The use of barges for some commodities, particularly coal and grain,
often represents a lower cost mode of transportation. Barge competition and
barge rates are affected by navigational interruptions from ice, floods and
droughts which can cause widely fluctuating barge rates. ICR's ability to
maintain its market share of the available freight has traditionally been
affected by the navigational conditions on the river. As a result, ICR's revenue
per ton-mile has generally been lower than industry averages for these
commodities.
Most of the Company's operations are conducted between points served by
one or more competing carriers. The consolidation in recent years of major rail
systems has resulted in strong competition in the service territory of the
Company. The mega-carriers could use their size and pricing power to block
shippers' access to efficient gateways and routing options that are currently
and have been historically available. Mergers have not had a material adverse
impact on the results or financial condition of the Company. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Significant Developments - Tender Offer."
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Adverse Factors Effecting Fuel Prices
Fuel expense represents an appreciable portion of the Railroads' annual
operating expenses. ICR currently has hedging programs in place through June
1998, to mitigate the effects of fuel price changes on its operating margins and
overall profitability. ICR has entered into several collar agreements to
mitigate the risk of fuel price volatility. ICR also monitors its hedging
positions and credit ratings of its counter parties and does not anticipate
losses due to counterparty nonperformance.
Liens on Properties
Currently 17 locomotives and 1,943 rail cars owned by IC Financial are
subject to liens by lenders. Neither the Company nor the railroads are subject
to these liens.
Liability Insurance
The Company is self-insured for the first $5 million of each loss. The
Company carries $245 million of liability insurance per occurrence, subject to
an annual cap of $385 million in the aggregate for all losses. This coverage is
considered by the Company's management to be adequate in light of the Company's
safety record and claims experience.
Item 2. Properties
Physical Plant and Equipment
System. As of December 31, 1997, ICR's total system consisted of
approximately 4,500 miles of track comprised of 2,600 miles of main line, 200
miles of secondary main line and 1,700 miles of passing, yard and switching
track. ICR owns all of the track except for 190 miles owned by other railroads.
ICR operates over this track by separate agreements. CCPH's total system
consisted of approximately 1,100 miles of track.
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Track and Structures. The following amounts have been spent during the
five years ended December 31, 1997, on track and structure to construct and
maintain rail lines and related signal equipment, and other facilities ($ in
millions):
Capital
Expenditures Maintenance Total
1997.......................... $107.4 $21.1 $128.5
19961......................... 95.4 25.6 121.0
19952......................... 66.9 33.5 100.4
19942......................... 63.2 29.1 92.3
19932......................... 50.3 25.1 75.4
Total.............. $383.2 $134.4 $517.6
1 Includes CCPH from June 13, 1996, $4.2 million, $1.9 million, $6.1 million,
respectively.
2 ICR only.
These expenditures have concentrated primarily on the routine
maintenance of the track roadway and bridges. Approximately 1,400 miles of
roadway ballast was resurfaced in each of the last three years. In 1996, a total
of $20.1 million was spent to construct an intermodal terminal facility for the
Canadian National Railway ("CN Terminal"). Other large projects include a total
of $11.4 million to complete the conversion of 198 miles of track, known as the
Yazoo District, to a single track with centralized traffic control in 1993 and
1994 and a total of $11.4 million to construct new or expanded intermodal
facilities in Chicago and Memphis in 1992 and 1994. Some of the projects at CCPH
were performed with grants from the Iowa Department of Transportation. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of future capital expenditures.
Terminal Operations. In 1997, $43.8 million was spent on the expansion
and construction of two terminals in Louisiana. (See Item 1. "Business-Terminal
Operations")
Locomotives and Freight Cars. The Company's fleet has undergone
significant rationalization and modernization since 1985 when locomotives and
cars were at their peak of 862 and 28,616, respectively. Over the last four
years purchases of 61 used SD-40-2's and 20 new SD-70's have enabled ICR to
replace older, lower horsepower and less efficient locomotives. (The 20 SD-70's
replaced 31 older, smaller locomotives.)
IC Financial acquired the SD-70's in 1995 and leases them to ICR.
Management has rationalized CCPH's locomotive fleet and instituted revised
maintenance, fueling and train assignment practices. Less-efficient,
high-maintenance locomotives are being stored, sold or scrapped.
Locomotive modernization and acquisition were part of a change in
operational philosophy concerning equipment which resulted in adoption of an
equipment ownership program in 1993. The program included lease conversions
whereby equipment was acquired outright or leased under more favorable lease
terms by the Company. Through 1996, lease conversions involved 118 locomotives
<PAGE>
and 4,228 freight cars. As a result of the new lease terms, $4.3 million, $7.1
million and $24.7 million of capital leases were recorded in 1997, 1995 and
1994, respectively. Most of these leases contain fixed price options whereby the
equipment can be acquired at or below fair market value at some point during the
lease term.
Approximately 1,840 of the cars owned by IC Financial are leased to
ICR. The remaining cars are leased to a non-affiliated company.
The equipment program also included a significant upgrade of the
highway trailer fleet used in intermodal service. In 1992, the entire fleet of
old leased trailers, approximately 880, was replaced with 800 brand new
trailers. Expanding intermodal volume necessitated the addition of another 100
trailers in 1994.
During 1994 ICR repaired and reconditioned approximately 173 cars at a
cost of $2.9 million. This equipment is being leased on a short-term basis to
other carriers until ICR anticipates it will need the equipment.
In 1996, ICR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. Over the last two years,
approximately 800 cars, operated under short-term car hire arrangements and
various leases, were returned and replaced with 900 new high capacity hoppers
which are being leased under an operating lease from an unrelated third party.
The following is the overall fleet at December 31:
Total Units: 1997 1996 1995 1994 1993
- ------------ ---- ---- ---- ---- ----
Locomotives1......... 405 435 397 417 468
Freight cars......... 17,128 16,619 15,872 16,498 16,634
Work equipment....... 696 655 654 625 745
Highway trailers..... 888 889 898 898 898
1 Approximately 27 locomotives need repair before they can be returned to
service. This equipment is either repaired, if needed on an ongoing basis,
or sold. ICR sold 32, 6, 40, 48 and 23 surplus locomotives in 1997, 1996,
1995, 1994 and 1993, respectively. The active fleet is 358 as of December
31, 1997. Also, 15 locomotives are being subleased and 5 will be returned to
active service after repainting.
<PAGE>
The components of the fleet by subsidiary and in total for 1997 and in total
for 1996 are shown below:
ICR CCPH IC Financial 1997 1996
Description1 Total(2)(3) Total Total Total Total
Locomotives:
Multipurpose 221 38 79 338 351
Switching 65 2 - 67 84
------- ----- -------- ---- ------
Total 286 40 79 405 435
====== ==== ====== === =====
Freight Cars:
Box (general service) 310 16 1,120 1,446 1,444
Box (special purpose) 2,417 145 389 2,951 2,941
Gondola 1,538 105 - 1,643 1,615
Hopper (open top) 3,407 269 434 4,110 4,263
Hopper (covered) 4,124 1,105 - 5,229 4,470
Flat 579 - - 579 610
Other 1,160 10 - 1,170 1,276
------- ------- -------- ------- -------
Total 13,535 1,650 1,943 17,128 16,619
====== ===== ===== ====== ======
Work Equipment 696 696 655
======== ======== ========
Highway trailers 888 250 1,138 889
======== ====== ======= ========
1 In addition, approximately 1,634 freight cars were being used by the Railroads
under short-term car hire agreements.
2 Includes 53 locomotives and 1,494 freight cars under capital leases.
3 Excludes equipment listed under IC Financial.
Environmental Conditions
ICR faces potential environmental cleanup costs associated with
approximately 23 contaminated sites and various fueling facilities for which a
total of $9.9 million has been reserved as of December 31, 1997. The most
significant of those sites are described below.
Mobile, Alabama
ICR owned property in Mobile prior to 1976 upon which a lessee
conducted creosoting operations. The Alabama Department of Environmental
Management has determined that the soil and groundwater are contaminated with
creosote, pentachlorophenol and possibly dioxins. ICR has been participating in
joint clean-up efforts with the current owner and ICR's former lessee. See Item
3. "Legal Proceedings."
<PAGE>
Jackson, Tennessee
A rail yard in Jackson, Tennessee, formerly owned by ICR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethane (TCE) in the adjacent municipal water well field. ICR formerly
operated a shop facility at the site and TCE is a common component of solvents
similar to those believed to have been used in the shop. ICR believes it has
demonstrated that the TCE did not come from its operation, or from this site.
See Item 3. "Legal Proceedings."
McComb, Mississippi
ICR has conducted a site assessment of a facility where car repairs
were formerly performed to determine the nature and extent of contamination,
primarily lead from removed paint, at the site. Currently, ICR is preparing a
remediation plan under the supervision of the Mississippi Bureau of Pollution
Control. Estimates of remaining clean-up costs range between $2.7 million and
$8.0 million.
Kegley, Illinois
Emergency response action has been taken by ICR at this scene of a 1994
derailment in which about 22,000 gallons of TCE were released. The spill has
been contained by construction of an impervious wall extended into the bedrock
and encircling the site. ICR has enrolled in Illinois' Pre- Notice Site Cleanup
Program and is voluntarily remediating the site. Estimates of remaining clean-up
costs range between $1.4 million and $7.0 million.
East Hazel Crest, Illinois
In 1994 ICR learned that an underground fuel line had leaked about
100,000 gallons of diesel fuel into the soil and groundwater. The Company has
replaced the fuel tank and piping, has constructed a groundwater remediation
system and has enrolled the site in Illinois' Pre-Notice Site Clean-up Program.
See Item 3. "Legal Proceedings."
Fueling Facilities
ICR has maintained fueling facilities at more than 20 locations at
various times from the 1950's to date. Many of those sites are or may be
contaminated with spilled fuel. Those stations currently in use are equipped
with drip pans and treatment facilities and ICR has initiated a program of
rebuilding all fuel lines above ground.
Waste Oil Generation
ICR has been identified as a Potentially Responsible Party ("PRP") at a
site where waste oil was allegedly processed and disposed. ICR is alleged to
have generated some of the waste oil. ICR believes any contribution it may have
made to the site contamination is de minimis. See Item 3.
"Legal Proceedings."
<PAGE>
Item 3. Legal Proceedings
Proposed settlement of purported class actions brought on behalf of stockholders
of the Company (the "Actions") filed in the Delaware Court of Chancery (Civil
Action Nos. 16184-NC, 16191-NC and 16188-NC) and the Circuit Court of Cook
County, Illinois (Civil Action No. 98CH01972), challenging,inter alia, the offer
and the transactions contemplated in the Merger Agreement. (See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Significant Developments - Canadian National Tender Offer")
On March 2, 1998, the parties to the Actions entered into a Memorandum
of Understanding (the "Memorandum of Understanding") which was signed by counsel
for the Company and its directors and attorneys from certain law firms
representing the plaintiffs in those Actions. The Memorandum of Understanding
sets forth the parties' agreement-in-principle concerning a proposed settlement
of those actions.
Among other things, the Memorandum of Understanding provides that upon,
and only upon, final court approval of the proposed settlement and other
conditions summarized below, the Merger Agreement will be modified as follows:
(i) the definition of "CN Average Closing Price" set forth in Section 2.02(c) of
the Merger Agreement will be amended to provide that if such average closing
price is less than $41.50 then the CN Average Closing Price for purposes of
determing the exchange ratio shall be $41.50; and (ii) Parent shall agree that,
if the STB shall have issued written notice disapproving the acquisition of
control of the Company by CN or advised CN of such a determination or imposed
unacceptable conditions upon such acquisition of control, and there is a
subsequent disposition of the Shares in the Voting Trust, CN shall distribute,
or cause to be distributed, to stockholders of the Company who receive payment
for their Shares pursuant to the Offer and to record holders at the Effective
Time, their pro rata share of one-third of any net profits realized upon any
disposition of Shares by or out of the Voting Trust (after deducting, inter
alia, fees and expenses, including legal and advisory fees and expenses,
associated with the acquisition and disposition of such Shares, the cost of
carrying the Shares between the acquisition and disposition of such Shares and
certain taxes relating to the acquisition, ownership and disposition of such
Shares). As defined in the Memorandum of Understanding, final court approval of
the proposed settlement means that the Delaware Court of Chancery has entered an
order approving the settlement and that such order is finally affirmed on appeal
or is no longer subject to appeal and the time for any petition for reargument,
appeal or review, by certiorari or otherwise, has expired.
The Memorandum of Understanding also provides for, among other things,
(i) the dissemination to the record holders of the Company of certain
supplemental disclosure materials, (ii) the certification, for settlement
purposes only, of a mandatory non-opt-class, (iii) the complete discharge and
dismissal with prejudice of any claims that were, or could have been, or in the
future might have been asserted in the Actions, (iv) the release of the
defendants and others and (v) the defendants' agreement that they will not
oppose an application by plaintiffs' counsel for an award of fees not to exceed,
in the aggregate, $925,000 and of expenses not to exceed, in the aggregate
$25,000. The Memorandum of Understanding shall be null and void and of no force
and effect if plaintiffs' counsel in the Actions determine that the settlement
is not fair and reasonable.
The parties to the Memorandum of Understanding contemplate submitting
filings to the Delaware Court of Chancery seeking certification of a settlement
class, final approval of the terms of the settlement upon notice in form
approved by that Court, and dismissal with prejudice of the Actions. The
agreements-in-principle in the Memorandum of Understanding are subject to a
number of conditions including, among others, (i) 50.1% of the Shares (on a
fully diluted basis) having been acquired by Parent and placed into the Voting
Trust, (ii) the dismissal of the Illinois Action, (iii) drafting and execution
of definitive settlement documents and the other agreements necessary to
effectuate the terms of the proposed settlement, (iv) completion by plaintiffs
of appropriate discovery in the Actions, and (v) final court approval.
GATX Tank Car Explosion September 9, 1987 at New Orleans (Civil District Court,
Parish of Orleans, Louisiana No. 87-16374)
ICR is one of several defendants in a New Orleans class action in which
a jury has returned a verdict against the ICR for $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment for technical reasons and remanded the case to the trial court for
further proceedings. The Company believes the plaintiff's claims have no basis
and intends to continue to challenge them vigorously.
State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc., et al.,
S.D. Ala. No. 85-0642-C
The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985
seeking damages for alleged pollution of land in Mobile, Alabama, stemming from
creosoting operations over several decades. Defendants include ICR, which owned
the land until 1976, Alabama Wood Treating Corporation, Inc., and Reilly
Industries, Inc. ("RII"), which leased the land from ICR and conducted creosote
operations on the site. In December 1976, ICR sold the premises to ASD. The
complaint sought payment for the clean-up cost together with punitive and other
damages.
In 1986, ASD, RII and ICR agreed to form a joint technical committee to
clean the site, sharing equally the cost of clean-up, and in October 1986 the
court stayed further proceedings in the suit. Under the agreement the joint
technical committee has spent approximately $6.8 million and has been authorized
to expend up to a total of $6.9 million. ICR has contributed $2.3 million.
Further clean-up activities are anticipated, the cost of which could range from
$1.8 million to $5.6 million depending upon the clean-up standards and
remediation methods ultimately required and utilized.
ASD terminated the Joint Tech Agreement on August 27, 1997 and has
threatened to reinstate the 1985 litigation - IC expects its share of remaining
clean-up cost to range between $0.6 million and $1.8 million.
In the Matter of Illinois Central Railroad Company, et al., Tennessee Division
of Superfund No. 94-0187
The Tennessee Department of Environment and Conservation, on June 6,
1994, issued a Remedial Order requiring clean-up by ICR and the current owners
of a site in Jackson, Tennessee. ICR operated a rail yard and locomotive repair
facility at the site. Trichloroethane ("TCE") has been found in several
municipal water wells near the site. TCE is a common component of solvents
similar to those believed to have been used at the shop. In addition,
concentrations of metals and organic chemicals have been identified on the
surface of the site. A remedial investigation study has been completed which
indicates the TCE in the water wells came from an adjacent municipal dump
<PAGE>
and not from operations on this site. Exclusive of ground-water clean-up, ICR
estimates total clean-up costs between $1.0 million and $7.6 million and expects
another PRP to share in the expense.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during fourth quarter.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stock-
holder Matters
The Common Stock is listed on the New York Stock Exchange, Inc. under
the symbol "IC."
The following table sets forth, for the periods indicated, (i) the high
and low sale prices of the Common Stock as reported on the New York Stock
Exchange Composite Tape and (ii) the per share amount of dividends paid. The
following table has been restated to give effect to a 3-for-2 stock split
declared in January 1996.
Stock Price Dividends Paid
High Low Per Share
1995
First Quarter........ $23.500 $20.500 $ .17
Second Quarter....... 23.750 21.833 .17
Third Quarter........ 28.000 23.000 .17
Fourth Quarter....... 28.667 24.500 .17
1996
First Quarter........ $28.750 $23.667 $ .20
Second Quarter....... 30.750 27.000 .20
Third Quarter........ 31.875 26.875 .20
Fourth Quarter....... 34.375 29.500 .20
1997
First Quarter........ $36.125 $30.500 $ .23
Second Quarter....... 37.625 30.875 .23
Third Quarter........ 37.250 33.250 .23
Fourth Quarter....... 39.000 32.438 .23
1998
First Quarter (through
February 27, 1998) $38.875 $31.125 $ .23
As of February 27, 1998, there were approximately 35,000 stockholders
based on estimates of beneficial ownership. The closing price of the Common
Stock as reported on the New York Stock Exchange Composite Tape on February 27,
1998 was $38.8125 per share.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated
financial data of the Company for the five years ended December 31, 1997, all
derived from the consolidated financial statements of the Company which were
audited by Arthur Andersen LLP. This summary should be read in conjunction with
the consolidated financial statements included elsewhere in this Report and the
schedules and notes thereto. The selected financial data for 1996 includes the
results of CCPH for the period June 13, 1996 (date of acquisition) to December
31, 1996. Therefore, data for 1996 is not directly comparable to 1997, and 1997
and 1996 are not comparable to pre-1996 data.
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
($ in millions, except share data)
Years Ended December 31,
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data (1):
Revenues.................... $ 699.8 $ 657.5 $ 645.3 $ 595.3 $ 565.9
Operating expenses.............. 435.9 416.3 414.8 395.0 386.4
Operating income................ 263.9 241.2 230.5 200.3 179.5
Other income (expense), net..... 6.0 8.6 (0.2) 1.0 1.7
Interest expense, net........... (40.0) (34.1) (29.5) (28.4) (33.1)
Income before income taxes,
extraordinary item and
cumulative effect of changes
in accounting principles..... 229.9 215.7 200.8 172.9 148.1
Provision for income taxes...... 79.7 79.1 71.0 59.0 56.4
Income before extraordinary
item and cumulative effect
of changes in accounting
principles..... 150.2 136.6 129.8 113.9 91.7
Extraordinary item, net......... - - (11.4) - (23.4)
Cumulative effect of changes in
accounting principles........ - - - - (0.1)
Net income ................. $ 150.2 $ 136.6 $ 118.4 $ 113.9 $ 68.2
Income per share-Basic (2):
Before extraordinary item
and accounting changes.. $ 2.45 $ 2.22 $ 2.07 $ 1.78 $ 1.44
Extraordinary item........... - - (0.18) - (0.37)
Accounting changes........... - - - - -
Net income per share-
Basic $ 2.45 $ 2.22 $ 1.89 $ 1.78 $ 1.07
Weighted average number of shares
of common stock outstanding
(in thousands)(2)............61,409 61,418 62,608 63,896 63,840
Income per share-Diluted (2):
Before extraordinary item
and accounting changes. $ 2.42 $ 2.20 $ 2.06 $ 1.78 $ 1.43
Extraordinary item........... - - (0.18) - (0.37)
Accounting changes........... - - - - -
Net income per share-
Diluted $ 2.42 $ 2.20 $ 1.88 $ 1.78 $ 1.06
Weighted average number of
shares of common stock and
dilutive potential common
shares (in thousands)(2).....62,107 61,978 62,969 64,089 64,105
Cash dividends declared per
<PAGE>
common share (2)......... $ 0.92 $ 0.83 $ 0.71 $ 0.59 $ 0.46
Operating ratio (3)............. 62.3% 63.3% 64.3% 66.4% 68.2%
At December 31,
1997 1996 1995 1994 1993
Balance Sheet Data (4):
Total assets............... $ 2,009.4 $ 1,911.4 $ 1,437.5 $ 1,308.7 $ 1,258.7
Long-term debt.................. 572.2 633.7 383.6 328.6 360.3
Stockholders' equity............ 642.8 555.5 470.1 454.1 377.4
Working capital (deficit)....... (55.9) 16.6 (76.1) (65.4) (32.4)
<FN>
1. Results for 1996 include results of CCPH since June 13, 1996.
2. Restated to give effect to a 3-for-2 stock split declared in January 1996.
3. Operating ratio is the ratio of operating expenses to revenues.
4. Data for 1996 includes CCPH.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Significant Developments
Canadian National Tender Offer
On February 10, 1998, the Company and Canadian National Railway
Company ("CN") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a
wholly owned subsidiary of CN, commenced a tender offer (the "Offer") to
purchase approximately 75% of the outstanding shares of the Company's Common
Stock (the "Shares") at a price of $39.00 per share. Following completion of the
Offer and subject to satisfaction of customary conditions, the Purchaser will be
merged with and into the Company (the "Merger") and each Share not purchased in
the Offer will be converted into the right to receive an amount of CN common
stock equal to the fraction obtained by dividing (1) $39.00 by (2) the average
closing price of the CN common stock (the "Average Closing Price") over the 20
day trading period ending two trading days prior to the effective time of the
Merger; provided that if such Average Closing Price is less than $43.00, then
the Average Closing Price will be deemed to be $43.00 and if such Average
Closing Price is greater than $64.50, then the Average Closing Price will be
deemed to be $64.50. Pursuant to the Merger Agreement, if less than 75% of the
shares are tendered, the Shares outstanding prior to the Merger will be
converted into the right to receive a prorated amount of stock and cash in order
to ensure that the overall aggregate consideration consists of 75% cash and 25%
stock.
Simultaneously with the purchase of shares pursuant to the Offer, the
shares purchased will be deposited in an independent, irrevocable voting trust
while CN and the Company await review of the transaction by the STB.
Pursuant to the Merger Agreement, subject to consultations with the
Company and after giving good faith consideration to the views of the Company,
CN shall have final authority over the development, presentation and conduct of
the STB case, including over decisions as to whether to agree to or acquiesce in
conditions. The Company shall take no regulatory or legal action in connection
with the STB without CN's consent. The STB could impose conditions or
restrictions as it relates to CN's acquisition of control of the Company. If the
STB does not approve CN's acquisition of control of the Company or CN deems any
conditions imposed by the STB unacceptable, CN would have the obligation to sell
all the Company common shares held by the voting trust. Neither the acquisition
of the Company shares pursuant to the tender offer nor the merger will be
subject to STB approval of the combination.
The Company's Board of Directors has unanimously approved the Merger
Agreement and the transactions contemplated and recommended that stockholders
accept the Offer and tender their shares. See Item 3. "Legal Proceedings" for
actions related to the Offer and Merger Agreement.
The Offer was successfully concluded on March 13, 1998 when the
Purchaser received tenders for in excess of 75% of outstanding shares. The
actual percentage of outstanding shares purchases has not been determined as of
the date of this filing.
Under change in control provisions of various compensation plans,
including Incentive 2000 Plan and Employment Security Agreements, the Company
will be required to make payments to certain employees under certain conditions.
The change in control payment under Incentive 2000 Plan is approximately $11
million. The amount that may be paid under Employment Security Agreements, if
any, is not determinable at the time of filing.
<PAGE>
With the change in control the Employee Stock Purchase Plan and the
Management Employee Discounted Stock Purchase Plan were terminated.
Results of Operations
1997 Compared to 1996
The discussion below takes into account the financial condition and results of
operations of the Company for the years presented in the consolidated financial
statements and includes CCPH since June 13, 1996 (date of acquisition).
Total revenues for 1997 increased from the prior year by $42 million
or 6.4% to $700 million, reflecting full year operations of CCPH, which was
acquired June 13, 1996. The respective amounts and percentage contributions by
commodity group for carloads, ton miles and carloads for 1997 and 1996 are set
forth below:
Year Ended December 31,
1997 19961 1997 19961 1997 19961
---- ----- ---- ----- ---- -----
Carloads Ton-Miles Revenue
(In Thousands) (In Millions)
Chemicals 159 143 4,106 3,682 $176 $167
Grain, mill & food products 177 173 7,479 6,640 149 131
Paper & forest products 146 143 3,255 3,067 109 107
Coal 240 230 5,284 5,686 85 91
Intermodal 200 198 1,454 1,421 57 52
Metals 33 34 923 1,107 29 33
Bulk 57 56 1,197 1,295 41 42
All Other 19 19 145 148 54 34
------- ---- ------- -------- ----- -----
Total 1,031 996 28,843 23,046 $700 $657
1 Includes CCPH since June 13, 1996.
Chemicals accounted for 16% of carloads and 17% of ton-miles in 1997.
Compared with 1996, loads and ton-miles were up 11% while revenues were up 5%.
Strength which began in the latter part of 1996 continued as expected into 1997.
Strength was across the board among most chemicals, and rail rates were strong.
Chemical loadings and revenues benefitted from a service agreement with the
Burlington Northern Santa Fe Railroad ("BNSF"). The Company believes that the
future annual benefit of the agreement will grow although it is taking longer
than expected for BNSF to penetrate the Union Pacific/Southern Pacific ("UPSP")
markets to which it gained access through the UPSP merger case.
Grain and grain mill accounted for 17% of carloads and 31% of ton-miles
in 1997. Against 1996, carloads, ton-miles and revenues were up 2%, 13% and 14%,
respectively, primarily reflecting inclusion of CCP for the full year. Weak
export demand for U.S. grains throughout 1997 curtailed the Company's 1997
revenue growth. Very strong demand for grain in 1996, coupled with meager supply
particularly of corn, resulted in abnormally high prices paid for grain in 1996
which in turn
<PAGE>
stimulated abnormally high plantings of grains by other countries. Consequently,
while the 1996 harvests of corn and soybeans in Illinois and Iowa were good,
export demand for U.S. grains was abnormally low (including wheat for which ICR
is a residual carrier) as global buyers turned to other countries' bumper crops
and lower prices. In January 1997, management lowered its grain expectations and
cautioned that weak export grain markets were likely to curtail the Company's
1997 revenue growth.
Paper and Forest Products were 14% of 1997 carloads and 14% of
ton-miles. Total carloads, ton-miles and revenues were up 2%, 6% and 2%,
respectively, versus 1996. Paper and forest products are economically sensitive
commodities that respond to industrial production, housing starts and other
basic economic indicators. Fiber and pulpboard were depressed all year as that
industry found its capacity outstripping demand following the addition of
significant new capacity in 1995/96. However, according to major manufacturers,
capacity was brought into balance with demand in the summer, leading to a
stronger second half of the year. Additionally, a plant conversion by a major
ICR producer from short-log to long-log input took several months longer than
their original expectations, resulting in less rail service than planned.
Coal accounted for 23% of carloads and 22% of ton-miles in 1997.
Against 1996, carloads, ton-miles and revenues were up 4% and down 7% and 6%,
respectively. Coal performed as expected. However, a mid-year mine fire of a
major coal producer/shipper on ICR's line and, separately, severe rail
congestion in the western U.S., which disrupted the movement of coal, resulted
in ICR losing about 18,000 loads of coal it might otherwise have carried.
Underlying demand for coal remains strong.
Intermodal accounted for 19% of the railroads' loads and 6% of
ton-miles. Versus 1996, carloads, ton-miles and revenues were up 1%, 2% and 9%,
respectively. Base intermodal business, particularly trailer business, was very
strong throughout the year. However, a major intermodal customer UPSP,
discontinued some of their business with ICR in September. There was also some
negative impact from an approximate two-week strike against another major
intermodal customer.
Metals accounted for 3% of total carloads and 4% of ton-miles in 1997.
Versus 1996, carloads, ton-miles and revenues were down 5%, 17% and 10%,
respectively. As expected, traffic of this commodity group fell short of 1996
all-time record year which mirrored exceptional strength in the steel industry
and included some large non-recurring spot moves. Also, as expected, a major
shipper took its plant down for several months in order to effectively double
its productive capacity, which resulted in near-term loss of business for ICR
but sets the stage for future growth with this customer. Birmingham Steel
completed construction of its new mill in Memphis in the fourth quarter of 1997
and began to take inbound product.
Bulk Commodities contributed 5% of carloads and ton-miles in 1997.
Carloads were up 2% while ton-miles and revenues were down 8% and 2%
respectively from the 1996 level. Bulk commodities are primarily stone and other
construction materials and are closely tied to state highway projects. This
smaller commodity group fluctuates with the timing of projects as well as the
availability of freight cars for this lower-margin business.
Operating expenses overall increased $19.6 million or 4.7% in 1997. Of
the total $435.9 million in 1997, $50.2 million was incurred at CCPH compared to
$28.3 million for the period June 13, 1996 to December 31, 1996. Increased labor
and fringe costs reflect contract increases at ICR and the inclusion of CCPH for
the full year, partially offset by operational efficiencies experienced at both
ICR and CCPH. Leases and car hire decreased $3.9 million or 8.7% in 1997
reflecting a return to more normal operating levels and lower export grain
movements. Fuel expense reflects the increase in usage (7.7%) from including a
full year of CCPH activity offset by the lower cost (4.2%). Increases in
depreciation, materials and supplies, casualty, insurance and other tax expense
results from including a full year CCPH activity. Other expense reflects the
recovery of prior period expenses in relation to costs related to a derailment.
Operating income for 1997 increased $22.7 million or 9.4% to $263.9
million for the reasons cited above.
Other income (expense), net, in 1997 includes a $3.7 million pre-tax
gain related to the grant of a permanent easement for the marketing of outdoor
advertising on ICR and CCPH rights-of-way. On October 3, 1996, ICR sold its
investments in an industry-captive insurance company, RAIL, which resulted in a
one-time gain, recorded as other income (expense), net, of approximately $7.0
million.
Net interest expense of $40.0 million for 1997 increased 17.3% compared
to $34.1 million in 1996 caused by higher debt levels year to year.
Provision for income taxes of $79.7 million for 1997 included a $4.3
million benefit from the donation of property.
1996 Compared to 1995
The discussion below takes into account the financial condition
and results of operations of the Company for the years presented in the
consolidated financial statements and includes CCPH since June 13, 1996 (date of
acquisition).
Total revenues for 1996 increased from the prior year by $12.2 million
or 1.9% to $657 million, due to the CCPH acquisition which contributed $40
million to revenues.
Year Ended December 31,
19961 1995 19961 1995 19961 1995
---- ---- ----- ---- ---- ----
Carloads Ton-Miles Revenue
(In Thousands) (In Millions)
Chemicals 143 138 3,682 3,617 $167 $163
Grain, mill & food products 173 185 6,640 8,577 131 141
Paper & forest products 143 148 3,067 3,126 107 109
Coal 230 215 5,686 4,686 91 83
Intermodal 198 175 1,421 1,279 52 47
Metals 34 30 1,107 892 33 27
Bulk 56 50 1,295 1,271 42 39
All Other 19 16 148 146 34 36
---- ---- -------- -------- ----- -----
Total 996 957 23,046 23,773 $657 $645
1 Includes CCPH since June 13, 1996
Chemicals accounted for 15% of the Company's carloads and 16% of
ton-miles in 1996. Compared with 1995, ton-miles were up 2% while carloads and
revenues were up 3%. Rail rates, under pressure in the earlier months of the
year, firmed in the second half. The softness observed in the economy,
especially in the first two quarters was reflected in the building of chemical
<PAGE>
manufacturers' inventories and softness in our customers' pricing. Our
customers' markets firmed in the latter half of the year. CCPH contributed $5
million to 1996 chemical revenue.
Grain and grain mill accounted for 17% of ICR's carloads and 29% of
ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were down 7%,
23% and 7% respectively. Grain was clearly the primary cause of the 1996 revenue
shortfall. Even though the CCPH acquisition contributed $20 million to 1996
grain and grain mill revenues the comparisons were particularly difficult
against a record grain carloading year in 1995. Illinois' 1995 corn and soybean
harvest was abnormally small so that by the third quarter 1996 grain elevators
were essentially depleted and the new harvest was still weeks away. Rail rates
were higher on average 1996 versus 1995; demand for grain was strong; the
product was just not available to move. The smaller crop also affected grain
mill since domestic processors were forced to cut back on their usual
production.
Paper and Forest Products at the Company were 14% of 1996 carloads and
13% of ton- miles. Total carloads were down 4% while ton-miles and revenues were
down 2% versus 1995. Rail rates held up reasonably well throughout the year.
Paper and forest products are economically sensitive commodities that respond to
industrial production, housing starts and other basic economic indicators. Fiber
and pulpboard were depressed all year. CCPH contributed $2 million to 1996 paper
and forest products revenue.
Coal accounted for 23% of the Company's carloads and 25% of ton-miles
in 1996. Against 1995, carloads, ton-miles and revenues were up 17%, up 6% and
9%, respectively. A large coal contract for 25,000 annual carloads was not
renewed in July 1995 as a large customer wanted more aggressive pricing and went
elsewhere. For a second year in a row, coal margins, and the return on the
assets involved, improved. CCPH contributed $8 million to 1996 coal revenues.
Intermodal accounted for 20% of the Company's loads and 6% of
ton-miles. Versus 1995, carloads were up 13%, with ton-miles and revenues up
11%. These 1996 results were achieved in an industry that saw trailer rate
weakness earlier in the year and some weakness in automotive parts traffic later
in the year. CCPH contributed $1 million to 1996 intermodal revenue.
Metals accounted for 3% of the Company's carloads and 5% of ton-miles
in 1996. For 1996, versus 1995, carloads, ton-miles and revenues were up 15%,
24% and 19%, respectively. The steel industry had another strong year, and ICR
set another record for metals loads and revenues. CCPH contributed $2 million to
1996 metals revenue.
Bulk commodities contributed 6% of carloads and ton-miles in 1996 for
ICR. This represents carload and revenue growth of approximately 4% while
ton-miles were down slightly from the 1995 level. Bulk commodities are primarily
stone and other construction materials and are closely tied to state highway
projects. This smaller commodity group fluctuates with the timing of projects as
well as the availability of freight cars for this lower-margin business. CCPH
contributed $2 million to 1996 bulk commodity revenue.
Operating expenses overall increased $1.5 million or 0.4% in 1996. Of
the total $416.3 million, $28.3 million was incurred at CCPH. Labor and fringe
costs include the wage increases of 3% negotiated with nine of the ICR's unions
and costs for CCPH for the last half of 1996. The decline in this category is
primarily the result of lower traffic levels, particularly grain, and the
elimination of the high overtime caused by the congestion experienced in 1995.
Leases and car hire also benefitted from the elimination of congestion to return
to more normal operating levels. In 1995, favorable one-time adjustments on
several capital leases were recorded. Fuel expense reflects the increase in cost
per gallon (13.8%) partially offset by decreased usage (9.4%). Increased
depreciation is a result of the acquisition of CCPH. The decrease in casualty,
insurance and losses reflects the emphasis on safety and improved claims
experience. Other expenses reflect the one-time reversal of non-revenue related
accruals to actual ($2.5 million) and favorable performance payments in joint
facilities that congestion in 1995 prevented the Company from receiving ($.7
million).
Operating income for 1996 increased by $10.7 million or 4.6% to $241.2
million for the reasons cited above.
On October 3, 1996, ICR sold its investments in an industry-captive
insurance company, RAIL, which resulted in a one-time gain, recorded as other
income expense, net, of approximately $7 million.
Net interest expense of $34.1 million for 1996 increased 15.6% compared
to $29.5 million in 1995. The 1996 expense includes $3.6 million from increased
borrowings to support the $109.9 million transferred from ICR in June 1996 in
connection with the acquisition of CCPH. In 1996, average borrowings have been
greater than 1995 and interest rates have been lower.
On June 12, 1996, ICR used proceeds it received from the issuance of
Commercial Paper to pay a $50.0 million dividend to the Company and to loan
$59.9 million (5.625% per annum) to the Company. The Company used the $109.9
million and its bank credit lines to acquire CCPH. The transaction closed June
13, 1996, following the effective date of the approval order issued by the STB.
The purchase price was $147.2 million in cash, the assumption of approximately
$2.5 million in debt and approximately $17.3 million of capitalized lease
obligations existing on the acquisition date.
On January 25, 1996, the Board declared a 3-for-2 stock split in the
form of a stock dividend to holders of record on February 14, 1996. New
certificates were issued March 14, 1996. Fractional shares were settled in cash
at a rate of $25.94 per share. When certificates were issued, the approximate
41.0 million shares outstanding increased to approximately 61.4 million. All
share counts, options outstanding, option prices and per share information
presented in this annual report have been restated to reflect the 3-for-2 split
as if it had occurred at the beginning of the earliest period presented.
Outlook
-NOTE-
This section is intended to provide an understanding of factors that
will impact the Company in 1998 and beyond. This discussion contains "forward
looking statements" within the meaning of the federal securities laws including
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements. These risks and uncertainties affecting the Company
are discussed in greater detail in EXHIBIT 99 to the Company's Form 10-K for
1997.
Illinois Central Corporation is now an operationally integrated holding
company of freight railroads and terminals which are coordinated by operating
and marketing initiatives to originate, direct and control traffic over our
service areas. The Company's principal subsidiary remains the ICR, which in 1997
accounted for 90% of the Company's revenues. See Item 1. "Business - Background"
for a more detailed description of corporate structure. Also, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Significant Developments - Canadian National Tender Offer" in this
section.
On a commodity basis:
CHEMICALS: Solid growth is expected in this commodity group for 1998 as
expansions of ICR's Harvey transload facility and of some existing plants on
ICR's system begin to produce greater volumes. Also, the Company's liquid-bulk
terminal should contribute increased revenues from new pipeline and tank
capacity which will be constructed in 1998 to serve new long-term contracts
secured in 1997.
GRAIN: 1997 corn and soybean harvests in both Illinois and Iowa were
good to excellent although export demand for these products has been weak since
the harvest. Weakness in export demand has continued into early 1998 and grain
harvests are affected by vagaries in the weather. The Company has instituted
domestic and export grain programs for the 1997/98 season (September 1997
through August 1998) which are intended to assure more efficient train
scheduling and smoother demand for rail service over the course of the season.
Per-car revenues from these programs are expected to be lower than prior years
(adjusting for changes in mix of short-haul and long-haul traffic), however,
unit costs of providing the service are expected to be lower also. Major
shippers have committed to 'super grain trains' which turns historically
on-demand rail service into scheduled service, improving management's ability to
plan and utilize manpower and locomotive resources at lower cost.
ICR and CCPH run through some of the richest and most productive
farmland in the country. Management believes the fundamental grain outlook over
the next several years is positive for us, even as we recognize the vagaries of
the weather and that export demand for U.S. grains, from year-to-year, will
always be more volatile than domestic demand and subject to the expansions and
contractions of world supply as well as international agricultural and trade
policies.
PAPER AND FOREST PRODUCTS: In the second half of 1997 this commodity
group benefitted from the reduction in excess production capacity in its
industry. This firming of traffic and the opening of several new lumber
("reload") centers should result in modest growth for these products in 1998.
COAL AND BULK: Based on our current projections, dependent on
stockpiles and weather in the service territories of the utilities we serve, the
Company expects to move more utility-coal loads in 1998 versus 1997. The Company
is marketing the newly-constructed dry-bulk terminal to potential
importers/exporters of coal and other bulk commodities and expects to see a
gradual increase of this activity as contracts are secured. Also, see Item 1.
"Business - Regulatory Matters; Freight Rates; Environmental Considerations" for
discussion of utility deregulation; at this point, there are too many variables
to know if utility deregulation will have a neutral, modestly positive or
modestly negative effect on the Company long-term.
INTERMODAL: This class of traffic is expected to continue its growth in
1998 through expanded market share of truck traffic and as a service agreement
with the BNSF grows.
METALS: We expect metals volumes and revenues to set new Company
records in 1998 as a result of the opening of a new Birmingham Steel mill in
Memphis, which is supplied with refined iron pellets from a plant adjacent to IC
Financial's dry-bulk facility in Louisiana.
<PAGE>
Other Issues:
CONSOLIDATIONS: The American railroad system has seen accelerated
consolidation in the last few years and pending transactions suggest the trend
will continue. Each rail merger presents a risk that rail traffic will be
diverted around the Company's railroads. In the aggregate rail mergers could
have a material adverse impact on revenues. Management expects to continue to
monitor developments and take actions to mitigate the impact of rail
consolidations. Of course, no assurances can be given that such consolidations
will not have a material adverse affect on the Company.
FUTURE INVESTMENTS: The Company continually considers a variety of
investment opportunities including acquisition of rail and other properties,
such as its announced interest in the Mexican government's privatization of its
rail system. (See "Liquidity and Capital Resources- Investment in Mexico").
The Company's Growth Plans
In the fall of 1997, the Company announced a four-year growth plan for
the years 1998-2001. The plan, called "Beyond 2000," is designed to position the
Company for the next century. The plan anticipates the Company's revenues,
comprised of the existing franchise of ICR, CCPH, and two terminals located
south of Baton Rouge, will be in a range of $925 million to $955 million by
year-end 2001. It is also assumed the operating ratio will fall below 60% by
year-end 1999.
Following are basic assumptions supporting revenue growth through 2001:
(a) Management believes incremental growth from increased market share, rate
increases, and U.S. industrial growth will increase the Company's base business
of existing customers at a compounded annual growth rate of about 2.5% from a
1996 base year.
(b) Management believes additional growth will occur from new plants locating
along the IC system as well as expansions of existing plants. The plan includes
industrial development projects that have a reasonably high probability of
commencing operations within the 2001 time frame.
(c) The plan is also dependent on no economic downturn occurring through 2001.
The growth plan as described does not assume a recession in the
1998-2001 timeframe because, in the fall of 1997 when the plan was formulated
and announced, the timing, depth and duration of a possible business downturn
was highly uncertain. The plan does assume we will lose some business along the
way, for example, through traffic diversion following proposed acquisition of
Conrail by the Norfolk Southern and CSX railroads. On the other hand, the plan
does not include initiatives outside the existing franchise, such as the CN
tender offer and "Investment in Mexico" see below, which, if consummated, could
be additive to the plan.
Liquidity and Capital Resources
Operating Data ($ in millions):
1997 1996 1995
---- ---- ----
Cash flows provided by (used for):
Operating activities.................. $221.5 $183.9 $177.4
Investing activities.................. (135.9) (300.6) (127.0)
Financing activities.................. (110.7) 170.9 (69.6)
------- ------ ---------
Net change in cash and temporary
cash investments..................... $(25.1) $ 54.2 $ (19.2)
======= ======= ========
Cash from operating activities in 1997, 1996 and 1995 was primarily net
income before depreciation, deferred taxes and extraordinary item.
Investing Data
<PAGE>
Additions to property were as follows ($ in millions):
1997 1996 1995
---- ---- ----
Communications and signals.. $ 16.5 $ 12.2 $ 10.7
Equipment/rolling stock..... 20.8 29.4 61.5
Track and bridges........... 73.6 57.8 47.0
Bulk transfer facility...... 43.8 - -
Other....................... 13.5 25.4 9.6
------ ------ ------
Total... ....... $168.2 $124.8 $128.8
====== ====== ======
Expenditures for CN Terminal were $2.0 million included in other for
1997 and $3.3 million and $16.8 million included in track and bridges, and
other, respectively, in 1996. In 1995, Equipment includes $25.9 million for 20
new SD-70 locomotives placed in service in the fourth quarter. In 1996 and 1995
capital expenditures exceeded original estimates as several opportunities to
acquire equipment were acted upon in accordance with the Company's strategy of
owning more of its equipment. Property retirements and removals generated
proceeds of $4.9 million, $6.9 million, and $5.4 million in 1997, 1996 and 1995,
respectively.
The Company anticipates that capital expenditures for 1998 will be
approximately $116 million. Replacement expenditures of $92 million will
concentrate on track maintenance, bridges and freight car upgrades. Productivity
and expansion expenditures will total $24 million. These expenditures are
expected to be met from current operations or other available sources.
In June 1996, following the effectiveness of the order by the STB, the
Company acquired the stock of CCPH. (See Note 18 to the Consolidated Financial
Statements.) The Company used its own bank credit lines and funds received from
ICR (a loan of $59.9 million and a $50 million dividend) to complete the $147
million transaction. The acquisition was treated as a purchase.
Financing Activities
The Company has a $50 million 364-day floating-rate revolving loan
agreement which expires in August 1998. In June 1996, the Company borrowed $40
million under this agreement to acquire CCPH (see Note 18). The $40 million was
repaid in June 1996 with proceeds from borrowings under CCPH's $50 million
revolving credit facility (see below). At December 31, 1997, no amounts were
drawn under the Company's revolving loan agreement. IC Financial leases
equipment to ICR and has approximately $1.8 million in long-term borrowing
agreements which were used to acquire locomotives during 1993. IC Financial
lease revenue and corresponding expense at ICR, which is eliminated in
consolidation, was $14.7 million for 1997.
For the three years ended December 31, 1997, the Company has paid
$147.2 million in cash dividends on its common stock. Dividends from ICR ($63.0
million in 1997, $103.2 million in 1996 and $107.7 million in 1995) were used to
fund these payments to stockholders, the acquisition of CCPH, and the $60
million stock repurchase in 1995. (See "Long-Term Equity Enhancement Program
below.") Included in the 1996 dividends to the Company is the March 1996
transfer by ICR of its ownership in the Chicago Intermodal Company ("CIC") via a
dividend of CIC stock. The book value of the CIC investment was $5.7 million.
In June 1996, CCPH entered into 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. The annual commitment fee is 25 basis points and borrowings are at the
Eurodollar offered rate plus 62.5 basis points. The credit agreement contains
various financial covenants including minimum consolidated tangible net worth,
minimum interest coverage and maximum leverage ratio. CCPH does not anticipate
any difficulty in maintaining compliance with such covenants. At December 31,
1997 this facility was undrawn. At December 31, 1996 $15.5 million of CCPH's
Revolver was outstanding. In 1996, CCPH used $5 million to repay amounts
outstanding under a predecessor revolver which was then canceled.
ICR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The program is supported by the $250
million ICR Revolver (see below). At December 31, 1997, Standard & Poor's
Corporation ("S&P"), Moody's Investor Services ("Moody's") and Fitch Investors
Service ("Fitch") have rated the commercial paper A2, P2 and F2, respectively.
At December 31, 1997, no amounts were outstanding. The average interest rate on
commercial paper outstanding for the year ended December 31, 1997, was 5.68%
with a range of 5.68% to 5.69%. ICR's public debt is rated BBB by S&P and Baa2
by Moody's. Each of S&P, Moody's and Fitch have placed ICR's debt on credit
watch negative as a result of the recently announced merger of the Company and
Canadian National Railway. (See Item 7. "Managements Discussion and Analysis of
financial conditions and Results of Operations - Significant
Developments-Canadian National Tender Offer")
In 1994, ICR entered into a revolving agreement to sell undivided
percentage interests in certain of its accounts receivable, with recourse, to a
financial institution. This agreement was terminated on January 8, 1998. At
December 31, 1997, $45 million had been sold pursuant to the agreement. Costs
related to the agreement fluctuated with changes in prevailing interest rates.
These costs, which are included in other income (expense), net, were $3.0
million, $2.9 million and $3.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.
ICR has a $250 million revolver ("ICR Revolver") with its bank lending
group which expires in 2001. Fees and borrowing spreads are predicated on ICR's
long-term credit ratings. Currently, the annual facility fee is 15 basis points
and borrowings under this agreement are at Eurodollar offered rate plus 22.5
basis points. The Revolver is used primarily for backup for ICR's commercial
paper program but can be used for general corporate purposes. The available
amount is reduced by the outstanding amount of commercial paper borrowings and
any letters of credit issued on behalf of ICR under the facility. At December
31, 1997, there were no borrowings or letters of credit issued under the ICR
Revolver.
Certain covenants of ICR's debt agreements and CCPH's Revolver require
specific levels of tangible net worth but not a specific dividend restriction.
At December 31, 1997, ICR and CCPH exceeded their tangible net worth covenants
by $32.0 million and $29.6 million, respectively. Both ICR and CCPH were in
compliance with all covenants at December 31, 1997, and do not contemplate any
difficulty maintaining such compliance.
Throughout 1996 and 1995, ICR was active in the public debt market,
issuing bonds and medium-term notes ("MTN's"). In December 1996, ICR issued $125
million aggregate amount of 100-year 7.7% debentures, due September 15, 2096.
These bonds may not be redeemed until 2026 and then only at a premium which
declines to par in 2056. In 1995, $100 million 7.75% non-callable 10-year notes
due May 2005 ("2005 Notes") were issued. (See below.) A total of $230 million in
MTN's were issued over the two years as follows ($ in millions):
Principal Year
Amount Coupon Issued Matures
$20 6.27% 1995 1998
30 6.83 1995 2000
50 6.98 1996 2007
50 7.12 1996 2001
30 6.85 1996 1999
50 6.72 1996 2001
ICR has a shelf registration from 1996 which can be used to issue an
additional $70 million in MTN's or other debt until 2000. Currently, there are
no plans to issue additional debt but replacing maturing MTN's, capital
investments in the terminal facilities and other ventures could necessitate use.
In 1995, ICR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The monies used to
fund the prepayment were provided by commercial paper, the net proceeds of the
2005 Notes and $40 million from existing lines of credit. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax
($.18 per share). The line of credit borrowings were replaced with the proceeds
of MTN's.
The Company believes that its available cash, cash generated by its
operations and cash available from the facilities described above will be
sufficient to meet foreseeable liquidity requirements. Additionally, the Company
believes it has access to the public debt market if needed.
<PAGE>
Investment in Mexico
The Company and two Mexican partners have formed a joint venture to bid
on the Ferrocarril del Sureste rail line (the "Southeast Line"). The Southeast
Line is one of the last segments of rail line being privatized by the Mexican
government. The Southeast Line stretches from Mexico City to the port cities of
Veracruz and Coatzacoalcos. The Company's participation in the partnership will
not exceed forty-nine percent.
To date the amount spent has been immaterial. The auction process began
February 1998, and bids are currently due June 11, 1998. The Mexican transport
ministry is expected to announce the successful bidder within 30 days of the
close of the auction period. If the joint venture is awarded the Southeast Line,
the Company has sufficient financing resources available to support its
investment.
Year 2000 Conversion
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Many of the
Company's computer programs that have date- sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are delayed, the Year 2000 Issue
could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be converted on a timely basis, or that a
failure to convert by another company, or a conversion that is incompatible with
the Company's systems, would not have material adverse effect on the Company.
In October 1997, the Company entered into an agreement to replace
approximately 40 percent of its non-Year 2000 compliant programs with new
software and will utilize both internal and external resources to replace and
test the software for Year 2000 modifications. The Company began converting its
remaining computer systems with internal resources in 1997. The Company expects
to spend approximately $8.5 million to $10.0 million from 1997 through 1999 to
modify and replace its computer systems. Of the total project cost,
approximately $3.0 million is attributable to the purchase of new software. The
Company plans to complete conversion of non-Year 2000 compliant programs during
1998. However, user acceptance testing will continue into 1999. Installation of
new software programs should be completed during the first quarter of 1999. The
total cost of the project is being funded through operating cash flows.
Maintenance or modification costs will be expensed as incurred, while the costs
of new software will be capitalized and amortized over the software's useful
life. Accordingly, the Company does not expect the amounts required to be
expensed over the next two years to have a material effect on its financial
position or results of operations. The amount of spending in 1997 was
approximately $2.3 million.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Miscellaneous
ICR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. As a result, approximately 50% of
the Railroad's short-term diesel fuel requirements through June 1998 are
protected against significant price changes.
The Company has paid approximately $3 million in 1996 and $6 million in
each of 1995 and 1994 for severance, lump sum signing awards and other costs
associated with various labor agreements. Under the terms of local bargaining
agreements, wages will rise 3%-4% per year.
In October 1996, the Brotherhood of Maintenance of Way Employees
membership ratified a new agreement which settles wage and work rules through
1999. In February and May 1997, the United Transportation Union ("UTU") and
Brotherhood of Locomotive Engineers, respectively, ratified new agreements which
settle wage and work rule issues through 2000. The agreements are similar to the
nationally negotiated agreements in effect with other Class I carriers. The main
distinction is timing of the various lump sum payouts and scheduled wage
increases.
Long-Term Equity Enhancement Program
The Company declared its twenty-fifth consecutive quarterly cash
dividend on February 20, 1998, payable on March 25, 1998 to shareholders of
record on March 6, 1998. The Board 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 of Directors based on profitability, capital
expenditure requirements, debt service and other factors, including the CN
tender offer. (See Item 7.
"Significant Developments - Canadian National Tender Offer".)
During 1995, the Company completed a $60 million stock repurchase
program acquiring 2,475,000 shares in open market transactions. While intended
to be an annual component of the Long-Term Equity Enhancement Program, the Board
concluded that alternative funding needs, most notably the acquisition of CCPH,
the expansion of the intermodal facility in Chicago and the construction of a
bulk transfer facility in Louisiana warranted the suspension of share
repurchases under the program for 1997 and 1996.
<PAGE>
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 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 23 contaminated sites at which it
is probably liable for some portion of any required clean-up. Of these, 15
involve contamination primarily by diesel fuel which can be remediated without
material cost. Five other sites are expected to require more than $1 million in
clean-up costs. At three of these sites other parties are expected to contribute
the majority of the costs incurred. The Company paid approximately $.6 million
toward the investigation and remediation at all sites in 1997, and anticipates
similar expenditures annually.
For all known sites of environmental contamination where Company 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
December 31, 1997, the Company estimated the probable range of its liability to
be $9.9 million to $45 million, and in accordance with the provisions of SFAS
No. 5 had a reserve of $9.9 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 leased substantial amounts of property to
industrial tenants, and ICR continues to haul hazardous materials which are
subject to occasional accidental release. Because the ultimate cost of known
contaminated sites cannot be definitively established and because additional
contaminated sites yet unknown may be discovered or future operations may result
in accidental releases, no assurance can be given that 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.
<PAGE>
Litigation
ICR is one of several defendants in a New Orleans class action in which
a jury has returned a verdict against the ICR for $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment for technical reasons and remanded the case to the trial court for
further proceedings. (See Part I. Item 3 - Legal Proceedings). The Company
believes the verdict has no basis and intends to continue to challenge it
vigorously.
While the final outcome of this proceeding cannot be determined, in the
opinion of management, based on present information, the ultimate resolution of
this case will not have a material adverse effect on the Company's financial
position, results of operations, cash flow or liquidity.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". The new statement is effective for fiscal
years beginning after December 15, 1997. When adopted, SFAS No. 130 will require
restatement of prior years' statements to report any applicable comprehensive
income.
In June 1997, the FASB released SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The new statement is
effective for fiscal years beginning after December 15, 1997. When adopted, SFAS
No. 131 will require presentation of any applicable segment information for each
year that is reported.
In February 1998, the FASB released SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The new statement
is effective for fiscal years beginning after December 15, 1997. When adopted,
SFAS No. 132 will require restatement of disclosures for each year that is
reported.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page 60 of this Report.
Item 9. Changes in and Disagreement with Accountants in Accounting
Financial Disclosures
NONE
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The directors of the Company are identified in the table below.
Name Age
Gilbert H. Lamphere 45
E. Hunter Harrison 53
George D. Gould 70
William B. Johnson 79
Alexander P. Lynch 45
Samuel F. Pryor IV 42
F. Jay Taylor 74
John V. Tunney 63
Alan H. Washkowitz 57
Biographical Information
Gilbert H. Lamphere, 45, has been a director of the Company and ICR
since 1989. He has been Chairman of the Board since 1993, and Chairman of the
Executive Committee of the Board since 1990. Mr. Lamphere is Managing Director
of the Fremont Group, a diversified investment company. He was Co-Chairman and
Chief Executive Officer of Noel, from 1991 until 1994 and was the Chairman and
Chief Executive Officer of Prospect until 1994, for which he had served in
various capacities since becoming a director in 1983. Mr. Lamphere also is a
director and Chairman of Prospect. He serves as a director of the Fremont Group
and Sequois. Mr. Lamphere is the brother-in-law of another director, Mr. Lynch.
Committee: Executive (Chairman).
E. Hunter Harrison, 53, has been a director of the Company and ICR
since 1993 and has served as President and Chief Executive Officer of the
Corporation and the Railroad since February 1993. Mr. Harrison joined the
Company and the ICR as Vice President and Chief Transportation Officer in 1989,
was elected Senior Vice President-Transportation in 1991 and was elected Senior
Vice President-Operations in July 1992. Mr. Harrison also is a director of
Wabash National Corporation, a manufacturer of truck trailers. Committee:
Executive.
George D. Gould, 70, has been a director of the Company since 1990. He
has been Vice Chairman of Klingenstein, Fields & Co., L.P., a money management
firm, since 1989. Mr. Gould is Chairman of the Hungarian American Enterprise
Fund. He previously served as Undersecretary of the United States Treasury for
Finance from 1985 to 1988. Mr. Gould also serves as a director of the Federal
Home Loan Mortgage Corporation, TIG Holdings, and the Needham Growth Fund.
Committees: Audit, Compensation (Chairman) and Finance.
William B. Johnson, 79, has been a director of the Company since 1989.
He previously served as a director, Chairman and Chief Executive Officer of IC
Industries, Inc. (now known as Whitman Corporation). Until 1989, Whitman owned
ICR. Mr. Johnson was employed by the Company as Advisor to the Chairman in 1990
and 1991. Mr. Johnson serves as a director of Webster Broadcasting, is a Trustee
of the University of Chicago and the University of Pennsylvania Law School and
is a member of the Board of Governors of Washington College, Chestertown,
Maryland. Committees: Audit and Executive.
Alexander P. Lynch, 45, has been a director of the Company since 1991.
He is a general partner of The Beacon Group Capital Services, LLC, a private
investment and strategic advisory firm. From 1995 until 1997, he was Co-Chief
Executive Officer and Co-President of The Bridgeford Group, a financial advisory
firm. From 1991 until 1995 he was a Senior Managing Director of Bridgeford. From
1985 until 1991, Mr. Lynch was a Managing Director of Lehman Brothers or its
predecessors. Mr. Lynch also serves as a director of Lincoln Snacks Company and
Patina Oil and Gas Corporation. Mr. Lynch is the brother-in-law of another
director, Mr. Lamphere. Committees: Audit (Chairman) and Finance.
Samuel F. Pryor, IV, 42, has been a director of the Company since 1989.
Mr. Pryor is President of Brazil Rail Partners, LLC. He was Managing Director of
The Noel Group, Inc. ("Noel"), a diversified company from 1991 until 1997. He
was President of The Prospect Group, Inc. ("Prospect") until 1997, for which he
has served in various capacities since 1986. Committees: Audit, Compensation and
Finance (Chairman).
F. Jay Taylor, 74, has been a director of the Company since 1994. Dr.
Taylor is a Labor- Management Arbitrator in both the public and private sectors.
He served as President of Louisiana Tech University from 1962 to 1987, and
currently serves as President Emeritus of the University. Dr. Taylor is a member
of the Board of Directors of Michael's Stores, Inc. and Pizza Inn, Inc. and a
member of the National Academy of Arbitrators and Society of Professionals in
Dispute Resolution. Committees: Audit and Compensation.
John V. Tunney, 63, has been a director of the Company since 1990. He
has been Chairman of the Board of Cloverleaf Group, Inc., a real estate
development firm, since 1980. Mr. Tunney served as United States Senator from
the State of California from 1971 to 1977 and as a member of the United States
House of Representatives from 1965 to 1971. Mr. Tunney is a director of Foamex
International, a manufacturer and fabricator of polyurethane foam and Swiss Army
Brands. Committees: Audit and Compensation.
Alan H. Washkowitz, 57, has been a director of the Company since 1991.
He has been a Managing Director of Lehman Brothers or its predecessors since
1978. Mr. Washkowitz also serves as a director of K&F Industries, Inc., a
manufacturer of aircraft wheels and brakes, McBrides, Ltd., a manufacturer of
private label household and personal care products and L3 Communications, a
merchant supplier of secure communications systems. Committees: Compensation and
Finance.
The executive officers of the Company are identified in the table
below. Each executive officer of the Company currently holds an identical
position with ICR and CCPH. Executive officers of the Company, ICR and CCPH
serve at the pleasure of the respective Boards of Directors.
<PAGE>
Executive Officers
Name Age Position(s)
E. Hunter Harrison 53 President and Chief Executive Officer, Director
John D. McPherson 51 Senior Vice President - Operations
Donald H. Skelton 54 Senior Vice President - Marketing and Sales
James M. Harrell 45 Vice President - Human Resources
David C. Kelly 53 Vice President - Maintenance
Ronald A. Lane 47 Vice President and General Counsel and Secretary
John V. Mulvaney 47 Vice President and Chief Financial Officer
Douglas A. Koman 48 Controller
Biographical Information
The following sets forth the periods during which the executive
officers of the Company have served as such and a brief account of the business
experience of such persons during the past five years. Unless otherwise stated
each individual holds a similar position at ICR and CCPH.
E. Hunter Harrison, 53, has been a director of the Company and ICR
since 1993 and has served as President and Chief Executive Officer of the
Corporation and the Railroad since February 1993. Mr. Harrison joined the
Company and the ICR as Vice President and Chief Transportation Officer in 1989,
was elected Senior Vice President-Transportation in 1991 and was elected Senior
Vice President-Operations in July 1992. Mr. Harrison also is a director of
Wabash National Corporation, a manufacturer of truck trailers. Committee:
Executive.
Mr. McPherson joined the Company in July 1993. He was named Senior Vice
President Operations in 1994. He also serves as a Director of ICR, and since
June 1996 of CCPH. Mr. McPherson is also a director of the Peoria & Pekin Union
Railroad. Prior to joining the Company he held various positions with the
Atchison, Topeka and Santa Fe Railway Company from 1966 to 1993, most recently
as Assistant Vice President - Safety.
Mr. Skelton was elected Senior Vice President-Marketing and Sales of
the Company in January 1996. He serves as a director of ICR, and since June 1996
of CCPH. He joined the Company as Vice President Marketing and Sales in October
1994. He was previously employed by Mark VII Transportation and as an
independent consulting specialist in international transportation. From 1987 to
1993 he was employed by the Atchison, Topeka and Santa Fe Railway Company
holding various executive positions including Vice President Marketing and Sales
and Vice President International/Domestic Customer Development.
Mr. Harrell joined the Company in his current position in 1992. He
served as Director of Labor Relations for The Atchison, Topeka and Santa Fe
Railway Company from 1989 to 1992.
Mr. Kelly joined the Company as Vice President and Chief Engineer in
1989. In January 1994, he was appointed Vice President - Maintenance.
Mr. Lane joined the Company as Vice President and General Counsel and
Secretary in 1990. He also serves as a Director of ICR, and since June 1996 of
CCPH.
<PAGE>
Mr. Mulvaney was appointed to his present position in the Company in
November 1997. He also serves as a director of ICR, CCPH, and Peoria & Pekin
Union Railroad. He joined the Company as Controller in June 1990.
Mr. Koman was appointed to his present position in the Company in
November 1997. He joined the Company in 1971 and served as Assistant Treasurer
from 1990 to 1991 and Treasurer from 1991 to 1997.
No family relationship exists among the officers of the Company, ICR or
CCPH.
Pursuant to Item 405 of Regulation S-K, Mr. A. P. Lynch's Form 4 for
August 1997 reflecting the sale of 20,000 shares was filed February 17, 1998,
160 days late.
Item 11. Executive Compensation
All of the cash compensation received by the Company's executive
officers during fiscal years 1997, 1996 and 1995 was paid or accrued by ICR; no
compensation was paid by the Company. The following table sets forth information
concerning the Chief Executive Officer and the four other most highly
compensated executive officers for the year ended December 31, 1997. The table
has been restated to give affect to a 3-for-2 stock split declared in January
1996. Any deferred compensation has been added back in the table.
<PAGE>
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation Long-Term Compensation
Other
Annual Restricted Securities All Other
Name and Compen- Stock Underlying Compen-
Principal Salary Bonus sation2 Award(s)3 Options sation
Positions(s) Year ($)1 ($)1 ($) ($) # ($)
- ------------ ---- ------- ------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
E. Hunter Harrison 1997 500,000 395,000 19,634 - 68,200 156,9404
President and Chief 1996 500,000 387,500 18,615 - 85,500 175,7344
Executive Officer 1995 500,000 650,000 14,857 - 90,000 156,7394
John D. McPherson 1997 232,337 150,000 12,065 - 23,400 46,5105
Senior Vice President 1996 217,420 130,920 71,5226 - 30,000 48,5205
Operations 1995 201,925 195,000 9,568 - 30,112 42,7055
Donald H. Skelton 1997 203,887 131,000 12,494 - 23,400 35,3938
Senior Vice President 1996 188,674 113,620 11,657 - 30,000 35,8748
Marketing and Sales 1995 166,984 158,000 108,8357 - 19,800 16,2858
Ronald A. Lane 1997 184,344 110,000 11,327 - 15,400 39,6929
Vice President and 1996 173,982 96,710 12,676 - 19,500 42,1729
General Counsel and 1995 164,562 158,000 11,320 - 19,800 38,0559
Secretary
James M. Harrell 1997 170,450 101,000 11,116 - 15,400 29,13410
Vice President 1996 148,996 83,035 12,366 - 19,500 28,89510
Human Resources 1995 137,379 135,000 11,621 - 19,800 25,65610
Dale W. Phillips (a) 1997 200,040 110,000 43,53712 - 3,850 35,78911
Vice President and 1996 188,674 104,880 10,808 - 19,500 44,50311
Chief Financial Officer 1995 164,562 158,000 8,863 - 19,800 37,95711
<FN>
(a) Mr. Phillips resigned effective October 31, 1997.
Notes to Summary Compensation Table
1 Bonus amounts include, but are not limited to, Performance Awards
(see "Compensation Committee Report"). Amounts shown in a given year reflect
amounts awarded with respect to that year but may have been paid the following
year. Salary and Bonus amounts, where applicable, have not been reduced by the
officers election to defer compensation pursuant to the Executive Deferred
Compensation Plan.
2 Generally includes federal and state tax "gross ups" for various
perquisites such as company cars and club dues and initiation fees, and, when
they exceeded the lesser of $50,000 or 10% of the total of annual salary and
bonus, the value of perquisites. Excludes the value of the Company paid portion
of the price for shares purchased under the Management Employee Discounted Stock
Purchase Plan as same discount is available to all management employees.
<PAGE>
3 Restricted stock awards were granted in 1994 to Mr. Skelton. Shares
awarded are restricted for a period of four years from the date of purchase or
award. On each of the first four year anniversary dates of purchase or award, if
employment has not previously been terminated, 25% of the shares originally
awarded become unrestricted. Dividends paid on unvested restricted shares are
not included in this table because they do not exceed regular dividends. As of
December 31, 1997, Mr. Skelton's unvested 5,625 shares had a current value of
$191,602. Current value is computed by multiplying the closing NYSE market price
of unrestricted stock on December 31, 1997, by the number of shares still
subject to restrictions and netting out any consideration paid by award
recipient. See "Employment Contracts and Termination of Employment and Change in
Control Arrangements."
4 Includes: (i) ICR contributions to defined contribution plan of
$3,200, for each fiscal year 1997, 1996 and 1995; (ii) ICR contributions to
401(k) plan of $4,750, $4,125, and $4,620 for each fiscal year 1997, 1996 and
1995, respectively; (iii) amounts accrued under an executive account balance
plan of $122,038, $136,680 and $124,559 for fiscal years 1997, 1996 and 1995,
respectively; and (iv) amounts accrued under an excess benefit plan of $27,152,
$31,929 and $24,560 for fiscal years 1997, 1996 and 1995, respectively.
5 Includes: (i) ICR contributions to defined contribution plan of
$3,200 for each fiscal year 1997, 1996 and 1995; (ii) ICR contributions to
401(k) plan of $4,750, $4,488 and $4,620 for fiscal years 1997, 1996 and 1995,
respectively; (iii) amounts accrued under an executive account balance plan of
$34,240, $36,408 and $31,942 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amount accrued under an excess benefit plan of $4,520, $4,624 and
$3,143 in 1997, 1996 and 1995, respectively.
6 Includes perquisites, including club dues and initiation fees of $28,774.
7 Includes perquisites, including club dues and initiation fees of $50,905.
8 Includes (i) ICR contributions to defined contribution plan of $3,200
for each fiscal 1997, 1996 and 1995, respectively; (ii) ICR contributions to
401(k) plan of $4,750, $4,541 and $4,620 for fiscal 1997, 1996 and 1995,
respectively; (iii) amounts accrued under an executive account balance plan of
$24,901, $26,117 and $7,925 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amounts accrued under the excess benefit plan of $2,742, $2,216 and
$740 in 1997, 1996 and 1995, respectively.
9 Includes: (i) ICR contributions to defined contribution plan of
$3,200 for each fiscal year 1997, 1996 and 1995; (ii) ICR contributions to
401(k) plan of $4,750, $4,551 and $4,620 for fiscal years 1997, 1996 and 1995,
respectively; (iii) amounts accrued under an executive account balance plan of
$29,990, $32,837 and $29,656 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amounts accrued under the excess benefit plan of $1,952, $1,784 and
$779 in 1997, 1996 and 1995, respectively.
10 Includes: (i) ICR contributions to defined contribution plan of
$3,200, $2,985 and $2,745 for fiscal year 1997, 1996 and 1995, respectively;
(ii) ICR contributions to 401(k) plan of $4,750, $3,415 and $3,468 for fiscal
years 1997, 1996 and 1995, respectively; (iii) amounts accrued under an
executive account balance plan of $20,939, $22,495 and $19,443 for fiscal years
1997, 1996 and 1995, respectively; and (iv) amounts accrued under the excess
benefit plan of $460 in 1997.
11 Includes: (i) ICR contributions to defined contribution plan of
$3,000 for each fiscal year 1997, 1996 and 1995; (ii) ICR contributions to
401(k) plan of $4,525, $4,462 and $4,222 for fiscal years 1997, 1996 and 1995,
respectively; (iii) amounts accrued under an executive account balance plan of
$27,207, $34,763 and $29,953 for fiscal years 1997, 1996 and 1995, respectively;
and (iv) amounts accrued under the excess benefit plan of $1,057, $2,278 and
$782 in 1997, 1996 and 1995, respectively.
12 Includes requisite, included value of car $14,231 given to employee
upon his resignation.
</FN>
</TABLE>
Options/Grants Table
<PAGE>
During 1997 following stock options awards under the Executive
Performance Compensation Program were awarded.
<TABLE>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Terms(2)
Percent
Number of of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/SH) Date(1) 5% ($) 10%($)
- ---- ------ ------ ------ --------- --------- ---------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
E. Hunter Harrison 68,200 14.33% 34.125 3/12/2007 1,463,642 3,709,157
John D. McPherson 23,400 4.92 34.125 3/12/2007 502,188 1,272,643
Donald H. Skelton 23,400 4.92 34.125 3/12/2007 502,188 1,272,643
Ronald A. Lane 15,400 3.23 34.125 3/12/2007 330,500 837,552
James M. Harrell 15,400 3.23 34.125 3/12/2007 330,500 837,552
<FN>
(1) Options vest at 25% per year on March 12 1998, March 12 1999, March 12,
2000 and March 12, 2001.
(2) Potential realizable value is reported net of the option exercise price but
before taxes associated with exercise. These amounts assume annual
compounding results in total appreciation of 63% (5% per year) and 159%
(10% per year). Actual gains, if any, on stock option exercises and common
stock are dependent on the future performance of the common stock and
overall market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.
</FN>
</TABLE>
Aggregated Option Exercises and Fiscal Year-End Option Value Table
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired on Value FY-End (#) FY-End($)2
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
E. Hunter Harrison 200,000 7,325,000 278,875 177,325 4,233,628 1,055,414
John D. McPherson 0 0 40,556 60,956 468,266 362,329
Donald H. Skelton 0 0 17,400 55,800 173,963 306,150
Ronald A. Lane 0 0 31,275 39,925 369,111 236,752
James H. Harrell 0 0 29,775 39,925 349,267 236,752
<FN>
1 Includes shares exercisable on February 17, 1997, (93,750) and March 16, 1997
(44,878) and March 8, 1997 (48,262).
2 Based on the year-end price of $32.00.
</FN>
</TABLE>
Pension and Retirement Plans
Executive Account Balance Plan. ICR's Executive Account Balance Plan
provides for a sum equivalent to 10% of an executive's combined salary and
performance awards in excess of a wage offset factor to be accrued annually (but
not funded), and is payable upon the retirement from the ICR or termination of
employment. The wage offset factor is adjusted annually by the percentage
increase in the social security wage base. For 1997, the wage offset factor was
$109,000. Amounts accrued earn interest in accordance with the plan.
Defined Contribution Plan. All management employees of the Railroad are
eligible to participate in a defined contribution plan to which the ICR
contributes 2% of each participant's earnings (as defined in the plan). All
contributions are fully vested upon contribution and are invested in various
investment funds as selected by the employees. Contributions are designated as
Employer Contributions in the Savings Plan.
Supplemental Retirement and Savings Plans. All management employees of
the ICR are eligible to participate in the Supplemental Retirement and Savings
Plan (the "Savings Plan"), which is a qualified salary reduction 401(k) plan.
Eligible employees may make "pre-tax" contributions to the Savings Plan of up to
15% of their salary subject to limitations imposed by the Internal Revenue Code.
Those contributions are partially matched by the ICR. The matching contribution
is limited to 50% of the first 6% of an employee's pre-tax salary (i.e., the
matching contribution is limited to 3% of his or her salary). All contributions
are fully vested upon contribution and are invested in various investment funds
as selected by the employees.
Excess Benefit Plan. Under the ICR's Excess Benefit Plan, amounts are
accrued for each executive officer on an unfunded basis to offset the
limitations imposed by the Internal Revenue Code with respect to certain benefit
plans as a result of the level of the recipient's compensation. Currently, the
Excess Benefit Plan provides for the accrual of a sum equivalent to the employer
matching contribution under the Supplemental Retirement and Savings Plan which
is restricted by the limits of Section 402(g) of the Internal Revenue Code. The
amounts accrued will be distributed at the same time and on the same terms as
the amounts paid under the Savings Plan.
Executive Deferred Compensation Plan. The Company established the
Illinois Central Corporation Executive Deferred Compensation Plan effective as
of January 1, 1994. The plan is available to all officers of the ICR and such
management employees as specified from time to time by the ICR. Eligible
employees may elect to defer up to 50% of base salary and 100% of annual bonus.
Participants' account balances are fully vested and earn interest at a
specified, variable rate. Distributions under the plan will be made in a lump
sum or installments after the participant's retirement or other termination of
employment. Subject to a penalty, a participant may elect to withdraw all or a
portion of his or her account under the plan in the event of an unforeseen
financial emergency.
Supplemental Executive Retirement Plan. The Company has no
tax-qualified defined benefit retirement plan for employees. However, the
Company established the Illinois Central Corporation Supplemental Executive
Retirement Plan effective as of January 1, 1994 (the "SERP"). The SERP covers
all officers of the ICR and such other management employees as specified from
time to time by the Company. The monthly benefit payable pursuant to the SERP is
equal to a maximum of 35% of the participant's final average compensation
(defined as the average annual compensation paid for the highest 36 consecutive
months out of the last 60 months prior to retirement) offset by the amount of
annual annuity that could be purchased with the sum of: (i) the portion of the
participant's account in the Savings Plan which is attributable solely to
Employer contributions and the earnings thereon; (ii) the participant's account
in the Excess Benefit Plan; and (iii) the participant's account balance in the
Executive Account Balance Plan. Participants vest after
<PAGE>
five years of participation in the SERP. The following table shows benefits
payable to those executives who are eligible for early retirement at age 55 or
above with 10 years of credited service, or upon normal retirement at age 65.
Pension Plan Table
Average Estimated Annual Benefit for Years of Credited Service
Final ------------------------------------------------------
Earnings 5 10 15 20 25
-------- - -- -- -- --
$100,000 $ 17,500 $ 35,000 $ 35,000 $ 35,000 $ 35,000
200,000 35,000 70,000 70,000 70,000 70,000
300,000 52,500 105,000 105,000 105,000 105,000
400,000 70,000 140,000 140,000 140,000 140,000
500,000 87,500 175,000 175,000 175,000 175,000
600,000 105,000 210,000 210,000 210,000 210,000
700,000 122,500 245,000 245,000 245,000 245,000
800,000 140,000 280,000 280,000 280,000 280,000
900,000 157,500 315,000 315,000 315,000 315,000
The above table sets forth the estimated annual benefits payable on a
single-life annuity basis if participant does not have a spouse at the time
payment is to commence and a joint and 50% survivor annuity basis in the event
the participant has a spouse at the time of commencement.
The number of years of credited service as of December 31, 1997, is
four (4) years for each of Messrs. Harrison, McPherson, Lane, Harrell and
Phillips. Mr. Skelton has three (3) years of credited service at December 31,
1997.
Directors' Compensation
Under the compensation program for Outside Directors the annual
retainer for the Chairman is $170,000 and the annual retainer for other Board
members is $20,000. A supplemental annual retainer of $3,000 is paid each
committee chairman. Each director receives $2,000 for each board or committee
meeting attended and is reimbursed for expenses incurred in attending those
meetings. No director fees are paid to Mr. Harrison since he is an employee. A
Directors Deferral Plan permits directors to defer up to 100% of their cash
compensation until they terminate their services as directors.
Through 1997 the Outside Directors also received an annual grant
ofstock options to purchase 2,250 shares at the fair market value on the date of
grant which was the date of each Annual Meeting. Such options are exercisable in
full six months following their grant date and expire 10 years following grant
date or if earlier, one year after termination of service as a director for any
reason other than death or disability.
For 1998, as a result of the Merger, the annual grant of stock options
has been replaced by the Black Scholes equivalent of such a grant. Thus, in
1998, the Directors are expected to receive approximately $25,000 each in lieu
of a grant of stock options.
In March 1996, each Outside Director received an option to purchase
37,500 shares which will vest on April 1, 2001 if specified Company performance
objectives are achieved in the year 2000. See "Directors Incentive 2000 Option
Plan" below.
The Company has an Indemnification Agreement with each of the
directors.
<PAGE>
Employment Contracts and Termination of Employment and Change in Control
Arrangements
The Company has entered into Employment Security Agreements with
approximately 29 senior officers which provide stated benefits in the event they
are terminated without cause or terminate their employment for good reason
within two years after a change in control. Following a covered termination, the
officer will be entitled to two or three years' base salary (depending on salary
grade) and target incentive payment for one year plus a proration of the current
year. Two or three years' credit will be granted toward the Supplementary
Executive Retirement Plan and fringe benefits will be extended. However, payment
under these agreements will be limited to 2.99 times average last five years W-2
earnings. The Merger will constitute a change of control as defined by the
Employment Security Agreements ("ESA"). Terms of the Merger Agreement provide
for amendments to the ESA's whereby if payments under the ESA's exceed 105% of
the 2.99 limit the full amount will be paid and the participant will be "grossed
up" for any excise taxes owed. In addition any unvested stock options and
restricted stock granted to participants will vest upon a Change in Control.
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The following independent directors are members of the Company's
Compensation Committee: George D. Gould (Chairman), Samuel F. Pryor, IV, John V.
Tunney and Alan H. Washkowitz. No executive officer serves as a director of any
entity whose executive officers serve on the Company's Compensation Committee.
Compensation Committee Report on Executive Compensation
Executive Compensation Philosophy
The Compensation Committee of the Board of Directors (the "Committee")
has adopted a philosophy that compensation for the management of the Company and
its subsidiaries should be tied directly to the Company's stated business
objectives and to the sustained creation of stockholder value. The Committee
believes that stockholder interests and the Company's compensation programs
should be closely aligned and integrated. Therefore, the Company's compensation
program reflects both a performance and long-term orientation. Further, the
performance measures used to determine compensation levels are the primary,
sustainable drivers of stockholder value among transportation companies
specifically and other publicly-held companies generally. As a result, the
Company's total compensation program is designed to be highly sensitive to the
Company's performance, defined in terms of stockholder value creation.
Performance Compensation Program
The Company's Performance Compensation Program consists of four
components: (1) Base Salary, (2) Performance Awards, (3) Stock Options and (4)
Incentive 2000 Plan Awards. The program is designed to emphasize risk-based
compensation which rewards Company and individual performance. Each of these
components and its respective role in total direct compensation, as well as the
basis for determining the compensation of the President and Chief Executive
Officer ("CEO"), Mr. Harrison, are described below:
(1) Base Salary
Salary levels are determined by several factors, including: the
Company's performance, the individual's contribution to that performance, the
individual's position within his/her salary grade and competitive pay levels. In
1997, the Committee reviewed the salary and compensation levels of all
management employees to ensure a consistent and competitive compensation program
with the Company's peer groups. The Committee reviews the salary of the CEO and
all other officers annually.
(2) Performance Awards and Bonuses
Approximately 500 management employees participate in the Company's
annual incentive program. Each participant is assigned a target Performance
Award according to the individual's level of responsibility (salary grade).
Target award levels range from 10% to 75% of annual base salary. Actual award
levels vary depending upon the Corporation's performance relative to
predetermined objectives for annual revenue growth and return on total capital
("ROTC"), and range from 0% to 150% of target awards. Award levels are weighted
two-thirds on ROTC and one-third on revenue growth. Performance awards under the
program for management employees other than the CEO and four other most highly
compensated officers contain a second component for individual performance for
the year as well as Company performance. The individual component of performance
awards vary from 0% to 50% of the target award.
The Company performance objectives are the same for all management
employees and relate directly to those measures which drive stockholder value --
annual return on average total capital, calculated on an after-award after-tax
basis, and annual revenue growth. Specific performance objectives are set by the
Committee annually in relation to the Company's fiscal budget after it has been
reviewed and approved by the Board. Except as to the CEO and the four other most
highly compensated individuals, the Committee has the ability to adjust the
Company payout through a discretionary factor of plus or minus 20% of target
award by evaluating other business measures (e.g., safety, operating ratio,
earnings per share, or other measures). For the CEO and the four other most
highly compensated officers, only Company performance, subject to potential
reduction by the Committee, determines the Performance Award.
The CEO's target award is 75% of base salary and the targets for the
other four most highly compensated officers range from 60% to 65%. To comply
with IRS regulations limiting the deductibility of executive compensation, the
CEO and the four other most highly compensated officers are not eligible to
receive any performance award based on individual performance. The Committee
also cannot adjust upward the Company performance award for these individuals.
However, the Committee has retained the discretion to award cash bonuses (which
are subject to the deductibility cap) to those individuals.
(3) Stock Options
The Company maintains a long-term stock option program for
approximately 90 senior managers to provide an equity-like interest in the
Company. This program is intended to motivate senior management to improve the
long-term performance of the Company's stock price and total return to
stockholders.
The number of stock options available for grant in any given year to
all eligible employees will vary between .3% and .9% of common shares
outstanding, depending on Company performance. Company performance is determined
based upon three measures: the Company's 3-year total stockholder return
relative to the S&P Midcap 400 index, its 3-year ROTC relative to Class I
railroads and its annual compound revenue growth over a 3-year period relative
to Class I railroads. The measures are weighted 50% on comparative stockholder
return, 25% on ROTC and 25% on revenue growth. Stock options are granted at fair
market value on the date of grant and vest 25% each year over four years. Actual
awards to individual participants are based upon Company performance, individual
performance and individual responsibility (salary grade) within the Company. The
maximum award which can be made in one year to a participant under this program
is options on 150,000 shares.
(4) Incentive 2000 Plan Awards
In May 1996, the stockholders approved the Illinois Central Railroad
Incentive 2000 Plan ("Incentive 2000 Plan") for key management employees. The
Incentive 2000 Plan is intended to focus senior managers on the goals of (a)
increasing operating revenue to $800 million in the year 1999 while (b)
achieving an operating ratio (operating expense divided by operating revenue)
under 60%, (c) a return on total capital of 14% and (d) earnings per share of
$4.00 for the year 2000. The Committee determined that providing significant
cash incentives to management conditioned on achieving financial measures linked
to these goals will promote the long-term interests of the Company and its
stockholders.
Employees in the Company's top ten salary grades are eligible to
receive awards under the Incentive 2000 Plan. As of March 12, 1998,
approximately 90 employees were eligible to participate in the Incentive 2000
Plan.
In connection with the merger between CN and IC, the change of control
provisions of Incentive 2000 Plan will be triggered. Therefore, upon
consummation of the Offer, the target awards under Incentive 2000 will be paid
out on a pro-rata basis in accordance with the terms of the plan.
<PAGE>
Directors Incentive 2000 Option Plan
In May 1996 the Stockholders also approved the Illinois Central
Corporation Directors Incentive 2000 Option Plan (the "Directors Option Plan").
The Directors Option Plan is intended to complement the senior management's
Incentive 2000 Plan and to link compensation of directors who are not employees
of the Company or its subsidiaries ("Outside Directors") to the same goals of
Plan 2000 and the stockholders' interests in the creation of stock value. Each
of the eight eligible Outside Directors, as of May 1996, received a one-time
grant of options to purchase 37,500 shares of Common Stock. The exercise price
for each option is $37.875, which is equal to 150% of the closing sales price of
the Common Stock on the New York Stock Exchange on March 8, 1996, the date of
grant (adjusted to reflect the 3-for-2 stock split of the Common Stock effective
March 14, 1996).
As with Incentive Plan 2000, the Merger of CN and IC will accelerate
the vesting of options in the Director Option Plan. The proratios will be based
on the number of months prior to the change of control divided by 62 (the total
months during which the plan was to be in existence.)
Results for 1997
Actual results for 1997 were below threshold for the ROTC objective of
10.5% and above the revenue growth objective of 5.0%. Actual 1997 ROTC was 10.3%
and revenue was 6.4%. However, there were significant capital expenditures
during 1997 for which associated returns were not yet realized. Considering the
impact of these investments, the committee determined that 1997 ROTC would have
been approximately 10.5% and accordingly approved incentive payouts for ROTC at
the threshold level (i.e., 50% of target). No incentive payout for revenue
growth was approved since revenue growth is only considered when ROTC is at or
above target. In aggregate, approximately $4.5 million in bonuses were paid to
all management employees for 1997.
The Company's stockholder return for the three years ending December
31, 1997 was 27% compared to 21% for the S&P Midcap 400 index. ROTC for the
three years ending 1997 was 10.8% compared to 7.1% for all Class I railroads.
The annual compound revenue growth for those years was 5.6% compared to 3.5% for
Class I railroads. Accordingly, the Committee determined that options for a
maximum of 552,600 shares, or .90% of shares outstanding on grant date, should
be awarded pursuant to the senior management stock option plan with respect to
1997 performance. These options will be awarded in 1998.
Based on the 1998 Budget and the Company's strategic plans, including
Plan 2000, the Committee established the Company's 1998 ROTC target at 10.4% and
the annual revenue growth target at 6.0%.
<PAGE>
CEO Compensation
Mr. Harrison was the highest compensated officer of the Company in
1997. Mr. Harrison's salary for 1997 was $500,000. Pursuant to the Performance
Compensation Plan, based on Company performance in 1997 and considerations cited
above, Mr. Harrison received a Performance Award of $203,595.
The Committee awarded Mr. Harrison a cash bonus of $191,405 with
respect to his individual performance in 1997 in guiding the Company through an
extremely soft export grain market and traffic congestion resulting from the
UPSP merger while improving the operating ratio by one percentage point. In
determining the amount of this bonus, the Committee considered Mr. Harrison's
individual contribution toward the achievement of significant corporate
objectives including, among others, negotiation of labor contracts, of important
growth opportunities and his participation in analysis of several strategic
opportunities, including negotiations with CN, and the southeast rail concession
in Mexico. Additionally, consideration was given to the magnitude of Mr.
Harrison's personal award in relation to other employees. Finally, the Committee
noted that since Mr. Harrison did not receive a salary increase for 1995, 1996
or 1997 and that his total direct compensation (salary plus cash bonus) was
below comparable compensation for CEO's of Class I railroads on a size-adjusted
basis the Committee increased Mr. Harrison's annual compensation to $625,000 for
1998.
Employment Security Agreements
In January 1997, the Board of Directors approved extending Employment
Security Agreements to senior management employees in recognition of the
extensive restructuring underway in the railroad industry. To retain the
Company's management and promote alignment of management's interests with the
stockholders' interests, the Company entered into Employment Security Agreements
with approximately 29 senior officers which provide stated benefits in the event
they are terminated without cause or terminate their employment for good reason
within two years after a change of control. Following a covered termination, the
officer will be entitled to two or three years base salary (depending on salary
grade) and incentive payment target for one year plus a proration of the current
year. Two or three years credit, respectively, will be granted toward the
Supplemental Executive Retirement Plan and fringe benefits will be extended.
However, payments under these agreements will be limited to 2.99 times average
last five year W-2 wages to preclude triggering "Excess Parachute Payment"
excise taxes. The Merger will constitute a change of control as defined by the
Employment Security Agreements ("ESA"). Terms of the Merger Agreement provide
for amendments to the ESA's whereby if payments under the ESA's exceed 105% of
the 2.99 limit the full amount will be paid and the participant will be "grossed
up" for any excise taxes owed.
<PAGE>
Nondeductible Compensation
The Committee does not currently anticipate that any executive
officer's nonperformance- based compensation will exceed $1 million. For 1997,
no executive officer received nonperformance-based compensation which exceeded
$1 million. It is anticipated that all executive compensation to be paid in 1998
will be fully deductible as well. However, the Committee and the Board of
Directors retain the discretion to grant nondeductible compensation if that
would be in the best interests of the Company and stockholders under the
circumstances.
Respectfully submitted,
Mr. George D. Gould, Chairman
Mr. Samuel F. Pryor, IV
Dr. F. Jay Taylor
Mr. John V. Tunney
Mr. Alan H. Washkowitz
<PAGE>
Performance Graph
The following performance graph compares the Corporation's change in
total stockholder return on its Common Stock since December 31, 1992 with the
S&P Midcap Index in which the Corporation is included and the S&P Railroad Index
which includes other Class I railroads but not the Railroad. Dividend
reinvestment has been assumed.
Stock Performance Table
S & P
Period IC Stock Midcap 400 Railroads
------ -------- ---------- -----------
12-92 100 100 100
12-93 150 114 124
12-94 132 110 107
12-95 169 144 157
12-96 218 171 195
12-97 238 227 220
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
OWNERSHIP TABLE
The following table sets forth certain information with respect
to persons known by the Company to beneficially own (as defined by the
Securities Exchange Act of 1934) as of March 4, 1998, five percent or more of
Common Stock, and with respect to each director and named executive officer of
the Company and all directors and executive officers of the Company as a group.
Name and Address Amount and Percentage of
(if applicable) of Nature of Common Stock
Beneficial Owner Beneficial Ownership1 Outstanding1
AMVESCAP PLC, et al.
11 Devonshire Square
London, EC2M 4YR England............... 6,343,9352 10.31%
MacKay Shields Financial Corporation
9 West 57th Street
New York, New York 10019.............. 3,427,3253 5.57%
George D. Gould........................ 51,000 *
William B. Johnson..................... 82,7184 *
Gilbert H. Lamphere ................... 897,8355 1.46%
Alexander P. Lynch .................... 408,2956 *
Samuel F. Pryor, IV ................... 390,5407 *
F. Jay Taylor ......................... 74,9988 *
John V. Tunney ........................ 55,7439 *
Alan H. Washkowitz .................... 96,00010 *
E. Hunter Harrison .................... 725,983 1.17%
Ronald A. Lane ........................ 235,532 *
John D. McPherson ..................... 166,705 *
James M. Harrell...................... 105,470 *
Donald H. Skelton...................... 105,217 *
Dale W. Phillips**.................... 746 -
All directors and executive officers
of the Company as a group
(16 persons).......................... 3,760,63611 5.94%
* under 1%
** Mr. Phillips resigned as an officer of the Company on October 31,
1997.
<PAGE>
Notes to Ownership Table
1 Based on 61,518,172 shares of Common Stock outstanding on March 4, 1998.
Shares issuable currently or upon exercise of options are treated as
outstanding for the purposes of stating the amount of beneficial
ownership and computing the percentage of beneficial ownership of shares
by such person (or of the group). No adjustment for the pro-rata
reduction of options issued to directors under the Incentive 2000 Plan
has been made. As of March 4, 1998, such reduction would be
approximately 22,380 per director and 179,040 in total.
2 According to a Schedule 13G dated February 9, 1998, AMVESCAP PLC and or
its United Kingdom or U.S. subsidiaries (known in US as INVESCO) have
shared voting and dispositive power for 6,343,935 shares in its capacity
as an investment advisor to several investment funds.
3 According to a Schedule 13G dated February 13, 1998, MacKay Shields
Financial Corporation, in its capacity as an investment manager for
various clients, has shared voting and shared disposition power for
3,427,325 shares.
4 Includes 225 shares held by Mr. Johnson's spouse. Mr. Johnson disclaims
beneficial ownership of these shares.
5 Excludes 209,112 shares held by a trust for the benefit of Mr.
Lamphere's descendants, of which Messrs. Alexander P. Lynch and Richard
G. Woolworth, Jr. are co-trustees. Mr. Lamphere disclaims beneficial
ownership of these shares. Includes 69,831 shares held by a trust for
benefit of Mr. Pryor's children, of which Mr. Lamphere is a co-trustee.
6 Includes 209,112 shares held by a trust for the benefit of Mr.
Lamphere's descendants, of which Messrs. Alexander P. Lynch and Richard
G. Woolworth, Jr. are co-trustees.
7 Excludes 69,831 shares held by a trust for the benefit of Mr. Pryor's
children, of which Mr. Lamphere and Mr. Samuel F. Pryor, III, Mr.
Pryor's father, are trustees. Mr. Pryor disclaims beneficial ownership
of these shares.
8 Includes 1,500 shares held by Dr. Taylor's spouse. Dr. Taylor disclaims
beneficial ownership of these shares.
9 Includes 4,500 shares held in trust for Mr. Tunney's mother, for which
Mr. Tunney is Trustee.
10 Under an arrangement with Lehman Brothers, Mr. Washkowitz must remit to
Lehman Brothers any gain upon exercise of the options for 24,750 shares
of the total.
11 See Notes (4) - (10) above.
Item 13. Certain Relationships and Related Transactions
Lehman Brothers Inc.
Mr. Washkowitz has been a Managing Director of Lehman Brothers or its
predecessors since 1978. Lehman Brothers has provided services to the Company
and ICR in the past and is expected to do so in the future. Lehman Brothers
managed (i) the public debt offerings of ICR in 1996 and 1995, (ii) the debt
tender offer and public debt offering of ICR in 1993 and (iii) is one of the
designated dealer's for ICR's commercial paper program which started in November
1993.
<PAGE>
The Bridgeford Group
Mr. Lynch is a general partner of Beacon Group Capital Services, LLC
("Beacon") and until 1997 was Co-Chief Executive Officer and Co-President of The
Bridgeford Group and served as a Senior Managing Director there from 1991 until
1995. Beacon and The Bridgeford Group have provided services to the Company and
ICR in the past and is expected to do so in the future. Beacon Group assisted in
various strategies studies in 1997, including negotiations with Canadian
National Railway. The Bridgeford Group assisted in the evaluation of and
negotiations with Kansas City Southern Industries in 1994 and the evaluation of
and negotiations with CCP Holdings, Inc. in 1995 and 1996. During 1997,
approximately $.4 million was paid to the Bridgeford Group for services
rendered.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements on page 60 of this
Report.
2. Financial Statement Schedules:
See Index to Financial Statement Schedules on page F-30 of this
Report.
3. Exhibits:
See items marked with "*" on the Exhibit Index beginning on page E-1
of this Report. Items so marked identify management contracts or
compensatory plans or arrangements as required by Item 14.
(b) 1. Reports on Form 8-K:
None
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Exhibit Index beginning on page E-1.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, there unto duly authorized.
ILLINOIS CENTRAL CORPORATION
By: /s/ JOHN V. MULVANEY
John V. Mulvaney
Vice President and Chief Financial Officer
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title(s) Date
/s/ GILBERT H. LAMPHERE Chairman of the Board and Director March 16, 1998
- ---------------------------
Gilbert H. Lamphere
/s/ E. HUNTER HARRISON President and Chief Executive Officer March 16, 1998
E. Hunter Harrison (principal executive officer), Director
/s/ JOHN V. MULVANEY Vice President March 16, 1998
- -------------------------- and Chief Financial Officer
John V. Mulvaney (principal financial officer)
/s/ DOUGLAS A. KOMAN Controller March 16, 1998
- -------------------------- (principal accounting officer)
Douglas A. Koman
/s/ GEORGE D. GOULD Director March 16, 1998
- --------------------------
George D. Gould
/s/ WILLIAM B. JOHNSON Director March 16, 1998
- -----------------------
William B. Johnson
/s/ ALEXANDER P. LYNCH Director March 16, 1998
- -----------------------
Alexander P. Lynch
/s/ SAMUEL F. PRYOR, IV Director March 16, 1998
- -----------------------
Samuel F. Pryor, IV
/s/ F. JAY TAYLOR Director March 16, 1998
- -----------------------
F. Jay Taylor
/s/ JOHN V. TUNNEY Director March 16, 1998
- -----------------------
John V. Tunney
/s/ ALAN H. WASHKOWITZ Director March 16, 1998
- -----------------------
Alan H. Washkowitz
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENTS
SUBMITTED IN RESPONSE TO ITEM 8
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants....................... F-1
Consolidated Statements of Income for the three years ended
December 31, 1997............................................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1996...... F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997............................................ F-4
Consolidated Statements of Stockholders' Equity and Retained
Income for the three years ended December 31, 1997........... F-5
Notes to Consolidated Financial Statements for the three years
ended December 31, 1997...................................... F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Illinois Central Corporation:
We have audited the accompanying consolidated balance sheets of
Illinois Central Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
cash flows and stockholders' equity and retained income for each of the three
years in the period ended December 31, 1997. These financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Illinois Central
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
Financial Statement Schedules herein are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not part of the
basic financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 19, 1998
(except with respect
to the matter discussed
in Note 2, as to which
the date is February 10, 1998)
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions, except share data)
Years Ended December 31,
1997 1996 1995
Revenues $ 699.8 $ 657.5 $ 645.3
Operating expenses:
Labor and fringe benefits 204.3 192.0 194.8
Leases and car hire 41.0 45.0 46.5
Diesel fuel 39.1 38.4 33.2
Materials and supplies 36.1 32.9 35.0
Depreciation and amortization 43.0 39.3 33.9
Casualty, insurance and losses 16.4 12.1 17.4
Other taxes 21.2 18.2 18.2
Other 34.8 38.4 35.8
Operating expenses 435.9 416.3 414.8
Operating income 263.9 241.2 230.5
Other income (expense), net 6.0 8.6 (0.2)
Interest expense, net (40.0) (34.1) (29.5)
Income before income taxes and
extraordinary item 229.9 215.7 200.8
Provision for income taxes 79.7 79.1 71.0
Income before extraordinary item 150.2 136.6 129.8
Extraordinary item, net - - (11.4)
Net income $ 150.2 $ 136.6 $ 118.4
Basic EPS:
Before extraordinary item $ 2.45 $ 2.22 $ 2.07
Extraordinary item, net - - (0.18)
Net income per share $ 2.45 $ 2.22 $ 1.89
Weighted average number of
shares of common stock 61,408,637 61,417,769 62,608,274
Diluted EPS:
Before extraordinary item $ 2.42 $ 2.20 $ 2.06
Extraordinary item, net - - (0.18)
Net income per share $ 2.42 $ 2.20 $ 1.88
Weighted average number
of shares of common
stock and dilutive
potential common shares 62,107,316 61,978,391 62,968,622
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
ASSETS December 31, 1997 December 31, 1996
Current assets:
Cash and temporary cash investments $ 34.1 $ 59.2
Receivables, net of allowance for doubtful
accounts of $1.2 in 1997 and $1.3 in 1996 122.7 107.0
Secured financing receivable - 32.6
Materials and supplies, at average cost 15.4 17.3
Assets held for disposition 1.3 1.6
Deferred income taxes - current 18.3 20.3
Other current assets 7.4 10.6
Total current assets 199.2 248.6
Investments 12.1 17.5
Properties:
Transportation:
Road and structures, including land 1,526.4 1,375.0
Equipment 270.8 261.2
Other, principally land 41.3 41.5
Total properties 1,838.5 1,677.7
Accumulated depreciation (69.7) (53.6)
Net properties 1,768.8 1,624.1
Other assets 29.3 21.2
Total assets $2,009.4 $ 1,911.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 24.5 $ 6.3
Accounts payable 65.5 60.4
Dividends payable 14.1 14.1
Income taxes payable - 1.1
Casualty and freight claims 13.0 21.1
Employee compensation and vacations 21.5 21.4
Taxes other than income taxes 19.1 17.4
Accrued redundancy reserve 3.9 4.9
Other accrued expenses 93.5 85.3
Total current liabilities 255.1 232.0
Long-term debt 572.2 633.7
Deferred income taxes 409.2 356.6
Other liabilities and reserves 130.1 133.6
Contingencies and commitments (Note 15)
Stockholders' equity:
Common stock, par value $.001,
authorized 100,000,000 shares,
64,622,956 shares issued and
61,402,347 shares outstanding 0.1 0.1
<PAGE>
Additional paid-in capital 172.7 167.1
Retained income 547.4 453.8
Treasury stock (3,220,609 shares) (77.4) (65.5)
Total stockholders' equity 642.8 555.5
Total liabilities and stockholders'
equity $ 2,009.4 $ 1,911.4
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities :
Net income $ 150.2 $ 136.6 $ 118.4
Reconciliation of net income to
net cash provided by (used for)
operating activities :
Extraordinary item, net - - 11.4
Depreciation and amortization 43.0 39.3 33.9
Deferred income taxes 47.5 36.4 30.7
Equity in undistributed earnings
of affiliates, net of dividends
received (1.0) (0.5) (0.8)
Net gains on sales of real estate (0.6) (1.6) (0.1)
Cash changes in working capital (8.5) (15.0) (8.0)
Changes in other assets (3.1) (6.1) (1.7)
Changes in other liabilities and
reserves (6.0) (5.2) (6.4)
Net cash provided by operating
activities 221.5 183.9 177.4
Cash flows from investing activities :
Additions to properties (168.2) (124.8) (128.8)
Acquisitions - (152.9) -
Proceeds from sales of real estate 2.4 3.0 2.5
Proceeds from equipment sales 2.5 3.9 2.9
Proceeds from sales of investments 0.6 2.3 0.8
Secured financing 32.6 (32.6) -
Other (5.8) 0.5 (4.4)
Net cash (used for) investing
activities (135.9) (300.6) (127.0)
Cash flows from financing activities :
Proceeds from issuance of debt 0.9 335.5 250.0
Principal payments on debt (28.5) (77.4) (259.8)
Net proceeds (payments) - Commercial Paper (20.0) (37.0) 42.0
Dividends paid (56.6) (48.7) (41.9)
Stock repurchases (11.9) (1.0) (59.8)
Proceeds from exercise of stock options and
warrants 5.4 0.2 0.1
Purchase of subsidiary's common stock - (0.7) (0.2)
Net cash provided by (used for)
financing activities (110.7) 170.9 (69.6)
Changes in cash and temporary cash investments (25.1) 54.2 (19.2)
Cash and temporary cash investments at
beginning of year 59.2 5.0 24.2
Cash and temporary cash investments at end
of year $ 34.1 $ 59.2 $ 5.0
Supplemental disclosure of cash flow
information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 40.5 $ 31.6 $ 32.1
Income taxes $ 32.9 $ 50.9 $ 31.0
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Retained Income
Shares
(000's) Equity ($ in millions)
Additional Total Stock-
Common Common Paid-in Retained Treasury holders'
Stock Stock Capital Income Stock Equity
Balance
December 31, 1994 63,915 $ 0.1 $ 165.0 $ 293.0 $(4.0)$ 454.1
Issuance of Common
Stock:
Exercise stock option 4 - - -
Restricted stock awards - - 1.3 1.3
Stock repurchased/
forfeited (2,494) (60.5) (60.5)
Dividends (43.2) (43.2)
Net income 118.4 118.4
Balance
December 31, 1995 61,425 0.1 166.3 368.2 (64.5) 470.1
Issuance of Common
Stock:
Exercise stock
options 13 - 0.2 0.2
Restricted stock
awards - - 0.6 0.6
Stock repurchased (31) (1.0) (1.0)
Dividends (51.0) (51.0)
Net income 136.6 136.6
Balance
December 31, 1996 61,407 0.1 167.1 453.8 (65.5) 555.5
Issuance of Common
Stock:
Exercise stock
options 325 - 5.4 5.4
Restricted stock
awards (5) - 0.2 0.2
Stock repurchased (325) (11.9) (11.9)
Dividends (56.6) (56.6)
Net income 150.2 150.2
<PAGE>
Balance
December 31, 1997 61,402 $ 0.1 $172.7 $ 547.4 $(77.4)$ 642.8
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The Company
Illinois Central Corporation (the "Company"), a holding company, was
incorporated under the laws of Delaware. The Company, through its wholly-owned
subsidiaries, Illinois Central Railroad Company ("ICR") and CCP Holdings, Inc.
("CCPH"), is principally engaged in the rail freight transportation business.
ICR operates 2,600 miles of main line track between Chicago and the Gulf of
Mexico, primarily transporting chemicals, grain and milled grain, coal, paper
and intermodal commodities. CCPH has two principal operating subsidiaries - the
Chicago Central and Pacific Railroad ("CCPR") and the Cedar River Railroad
("CRR") - which together comprise a Class II railroad system operating 850 miles
of track. CCPR operates from Chicago to Omaha, Nebraska, with connecting lines
to Cedar Rapids and Sioux City, Iowa. CRR runs from Waterloo, Iowa to Albert
Lea, Minnesota. IC Financial Services ("IC Financial"), the Company's remaining
direct subsidiary, conducts financing operations for railroad equipment and is
the investment vehicle for non-rail related activities including terminal
operations.
2. Subsequent Event
On February 10, 1998, the Company and Canadian National Railway
Company ("CN") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a
wholly owned subsidiary of CN, commenced a tender offer (the "Offer") to
purchase approximately 75% of the outstanding shares of the Company's Common
Stock (the "Shares") at a price of $39.00 per share. Following completion of the
Offer and subject to satisfaction of customary conditions, the Purchaser will be
merged with and into the Company (the "Merger") and each Share not purchased in
the Offer will be converted into the right to receive an amount of CN common
stock equal to the fraction obtained by dividing (1) $39.00 by (2) the average
closing price of the CN common stock (the "Average Closing Price") over the 20
day trading period ending two trading days prior to the effective time of the
Merger; provided that if such Average Closing Price is less than $43.00, then
the Average Closing Price will be deemed to be $43.00 and if such Average
Closing Price is greater than $64.50, then the Average Closing Price will be
deemed to be $64.50. Pursuant to the Merger Agreement, if less than 75% of the
shares are tendered, the Shares outstanding prior to the Merger will be
converted into the right to receive a prorated amount of stock and cash in order
to ensure that the overall aggregate consideration consists of 75% cash and 25%
stock.
Simultaneously with the purchase of shares pursuant to the Offer, the
shares purchased will be deposited in an independent, irrevocable voting trust
while CN and the Company await review of the transaction by the STB.
Pursuant to the Merger Agreement, subject to consultations with the
Company and after giving good faith consideration to the views of the Company,
CN shall have final authority over the development, presentation and conduct of
the STB case, including over decisions as to whether to agree to or acquiesce in
conditions. The Company shall take no regulatory or legal action in connection
with the STB without CN's consent. The STB could impose conditions or
restrictions as it relates to CN's acquisition of control of the Company. If the
STB does not approve CN's acquisition of control of the Company or CN deems any
conditions imposed by the STB unacceptable, CN would have the obligation to sell
all the Company common shares held by the voting trust. Neither the acquisition
of the Company shares pursuant to the tender offer nor the merger will be
subject to STB approval of the combination.
The Company's Board of Directors has unanimously approved the Merger
Agreement and the transactions contemplated and recommended that stockholders
accept the Offer and tender their shares.
The Offer was successfully concluded on March 13, 1998 when the
Purchaser received tenders for in excess of 75% of outstanding shares. The
actual percentage of outstanding shares purchases has not been determined as of
the date of this filing.
Under change in control provisions of various compensation plans,
including Incentive 2000 Plan and Employment Security Agreements, the Company
will be required to make payments to certain employees under certain conditions.
The change in control payment under Incentive 2000 Plan is approximately $11
million. The amount that may be paid under Employment Security Agreements, if
any, is not determinable at the time of filing.
<PAGE>
With the change in control the Employee Stock Purchase Plan and the
Management Employee Discounted Stock Purchase Plan were terminated.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant investments in affiliated companies
are accounted for by the equity method. Transactions between consolidated
companies have been eliminated in the accompanying consolidated financial
statements. Results for 1996 include CCPH from June 13, 1996 (date of
acquisition). See Note 18.
Properties
Depreciation is computed by the straight-line method and includes
depreciation on properties under capital leases. The depreciation rates for the
equipment owned by the Company's finance subsidiary are based on estimated
useful life and anticipated salvage value. Lives used range from 18 to 20 years.
The operating subsidiaries use the composite method of depreciation for track
structure, other road property, and equipment. In the case of routine
retirements, removal costs less salvage recovery are charged to accumulated
depreciation. Expenditures for maintenance and repairs are charged to operating
expense.
The approximate ranges of annual depreciation rates for major property
classifications for the Railroads are as follows:
Road properties............................. 1%-8%
Transportation equipment.................... 2%-5%
The rates were approved by the predecessor of the Surface
Transportation Board ("STB"), an independent agency of the Department of
Transportation.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenues
Revenues are recognized based on services performed and include
estimated amounts relating to movements in progress for which the settlement
process is not complete. Estimated revenue amounts for movements in progress are
not significant.
Income Taxes
Deferred income taxes are accounted for on the asset and liability
method by applying enacted statutory tax rates to differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. The resulting deferred tax liabilities and assets represent taxes
to be paid or collected in the future when the related assets and liabilities
are recovered and settled, respectively.
Cash and Temporary Cash Investments
Cash in excess of operating requirements is invested in certain funds
having original maturities of three months or less. These investments are stated
at cost, which approximates market value.
Income Per Share
Income per common share of the Company is calculated in accordance with
Statement of Financial Accounting Standard No. 128, "Earnings per Share," (SFAS
No. 128). In accordance with SFAS No. 128, basic income per share is based on
the weighted average number of common stock outstanding and diluted income per
share is based on the weighted average number of shares of common stock and
dilutive potential common shares for the period. See Note 14.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company has entered
into various diesel fuel collar agreements with the objective of mitigating
significant fluctuations in fuel prices. Premiums paid for the purchase of these
agreements are amortized to fuel expense over the terms of the agreements.
Unamortized premiums are included in Other Assets in the Consolidated Balance
Sheets. Amounts receivable or payable under the collar agreements are accrued as
increases or decreases to Diesel Fuel Expense.
See Note 8.
Casualty Claims
The Company accrues for injury and damage claims based on actuarially
determined estimates of the ultimate costs associated with asserted claims and
claims incurred but not reported.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
The Company has elected to adopt SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), for disclosure purposes only. The
Company accounts for compensation under its Long-Term Incentive Plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 15.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items relating to prior years have been reclassified to conform
to the presentation in the current year.
4. Stock Repurchase Program
In 1994, the Board of Directors authorized a plan for the annual
repurchase of Common Stock. For 1995, the Board authorized the purchase of $60
million of Common Stock. Purchases in 1994 and 1995 under the program, 2,475,000
shares of Common Stock, were funded by a special $60 million dividend from ICR
which was declared in 1994 and paid in 1995. The Board determined that various
capital needs such as the acquisition of CCPH in 1996 (see Note 18) precluded
stock repurchases under the program for 1997 and 1996. However, open market
purchases, in conjunction with option exercises, did occur in 1997 and 1996.
5. Extraordinary Item
In 1995, ICR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
loss resulted from the premium paid, the write-off of unamortized financing fees
and costs associated with the prepayment. See Note 10.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Other Income (Expense), Net
Other income (expense), net consisted of the following ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Rental income, net.............................. $3.4 $2.9 $3.5
Net gains (losses) on sales of real estate..... .6 1.6 (.1)
Equity in undistributed
earnings of affiliates....................... 1.6 .8 .9
Sales of accounts receivable (see Note 11).... (3.0) (2.9) (3.2)
Grant of permanent easement (see below)......... 3.7 - -
Sale of RAIL (see below)........................ - 7.3 -
Other, net...................................... (.3) (1.1) (1.3)
----- ---- ------
Other income (expense), net.................. $6.0 $8.6 $ (.2)
===== ===== ======
On September 30, 1997, ICR, CCPR and CRR granted a permanent easement
for development of right of way property for signboard use. On October 3, 1996,
ICR sold its investment in an industry captive insurance company which resulted
in a one-time gain of approximately $.07 per share.
7. Supplemental Cash Flow Information
Cash changes in components of working capital, exclusive of current
maturities of long-term debt, included in the Consolidated Statements of Cash
Flows were as follows ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Receivables, net..................... $(16.6) $ (5.1) $(17.6)
Materials and supplies............... 1.9 1.0 .8
Other current assets................. 3.7 (7.5) .7
Accounts payable..................... 5.1 (12.2) 2.2
Income taxes payable................. (1.6) (8.1) 11.1
Accrued redundancy reserve........... (1.0) .6 (2.5)
Other current liabilities............ - 16.3 (2.7)
------- ------ -------
Cash changes in working capital.. $ (8.5) $(15.0) $ (8.0)
======= ======= =======
ICR recorded capital leases of $4.3 million and $7.1 million covering 40
locomotives and 328 freight cars in 1997 and 1995, respectively. See Note 9 for
the present value of the minimum lease payments.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Materials and Supplies
Materials and supplies, valued using the average cost method, primarily
consist of track material, switches, car and locomotive parts and fuel.
As of December 31, 1997, ICR was party to three diesel fuel collar
agreements under which the Company receives or makes monthly payments based on
the monthly average price for Heating Oil Gulf Coast (Pipeline) Platt's
Oilgram("Contract Price"), which was $.482 per gallon for December 1997. Under
the agreement, ICR receives or makes monthly payments on 3,000,000 notional
gallons based on the excess of the Contract Price over $.60 per gallon or the
deficiency of the Contract Price under $.4825 to .4690 per gallon.
9. Leases
As of December 31, 1997, the Company leased 6,316 and 53 of its freight
cars and locomotives, respectively. These leases expire between 1998 and 2007.
Under the terms of many of its lease agreements, the Company has the right of
first refusal to purchase, at the end of the lease term, certain cars and
locomotives at or below fair market value. The Company also leases office
facilities, computer equipment and vehicles.
Net obligations under capital leases at December 31, 1997 and 1996,
included in the Consolidated Balance Sheets were $33.8 million and $34.5
million, respectively. The gross assets under capitalized leases were $39.9
million and $37.4 million at December 31, 1997 and 1996, respectively, and are
included in properties in the Consolidated Balance Sheets.
At December 31, 1997, minimum rental payments under capital and
operating leases that have initial or remaining noncancellable terms in excess
of one year were as follows ($ in millions):
Capital Operating
Leases Leases
1998...................................... $ 6.6 $ 24.5
1999...................................... 7.0 23.3
2000...................................... 5.9 16.6
2001...................................... 7.0 14.9
2002...................................... 4.3 13.3
Thereafter................................ 13.3 74.2
------ --------
Total minimum lease payments.......... $44.1 $166.8
======
Less: Imputed interest.................... 10.3
------
Present value of minimum payments..... $33.8
======
Total rent expense applicable to noncancellable operating leases
amounted to $26.4 million in 1997, $26.7 million in 1996 and $19.9 million in
1995. Most of the leases provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Long-Term Debt and Interest Expense
Long-term debt at December 31, consisted of the following ($ in
millions):
1997 1996
Equipment obligations, due annually to 2007, 6.11% to 7.7%.... 2.0 $ 7.8
Debentures and other debt, due 1998 to 2056, 4.5% to 5.0%..... 11.9 27.6
Debentures, due 2096, 7.7%.................................... 125.0 125.0
Commercial paper, at average interest rate 5.68 in 1997 and
5.61% in 1996 - 20.0
Notes, due 2003, 6.75%........................................ 100.0 100.0
Notes, due 2005, 7.75%........................................ 100.0 100.0
Medium term notes, due 1998 to 2007, 6.72% to 7.12%........... 210.0 230.0
Capitalized leases (see Note 9)............................... 30.1 30.4
Unamortized discount, net .................................... (6.8) (7.1)
------ ------
Total long-term debt............................ $572.2 $633.7
====== ======
At December 31, 1997, the aggregate annual maturities and sinking fund
requirements for debt payments for 1998 through 2003 and thereafter were $24.5
million, $35.4 million, $34.5 million, $105.8 million, $3.6 million, $104.2
million and $288.7 million, respectively. The weighted-average interest rate for
1997 and 1996 on total debt excluding the effect of discounts, premiums and
related amortization was 7.1% and 7.2%, respectively.
In December 1996, ICR issued $125 million aggregate amount of 100-year,
7.7% debentures due September 15, 2096. These bonds may not be redeemed until
2026 and then only at a premium which declines to par in 2056.
In 1995, ICR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The monies used to
fund the prepayment were provided by commercial paper, the net proceeds of the
$100 million 7.75% 10-year notes due May 2005 and $40 million from existing
lines of credit.
ICR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The program is supported by a $250
million Revolver. (the "ICR Revolver"). See below.
The $250 million ICR Revolver expires in 2001. ICR pays an annual fee of
15 basis points on the ICR Revolver and the Eurodollar offered rate plus 22.5
basis points for any borrowings. The ICR Revolver may be used as backup for
commercial paper and for general corporate purposes. The available amount is
reduced by the outstanding amount of commercial paper borrowings and any letters
of credit issued on behalf of ICR under the facility. As of December 31, 1997,
no amounts were drawn under the ICR Revolver and no letters of credit were
issued.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CCPH has a floating rate revolving loan agreement for an unsecured $50
million (the "CCPH Revolver"). The CCPH Revolver has a $5 million sublimit for
letters of credit and expires in 2001. The CCPH Revolver can be used for general
corporate purposes. The annual commitment fee is 25 basis points and borrowings
are at the Eurodollar offered rate plus 62.5 basis points. At December 31, 1997,
the CCPH Revolver was undrawn.
The Company has a $50 million 364-day floating-rate revolving loan
agreement which expires in August 1998. In June 1996, the Company borrowed $40
million under this agreement to acquire CCPH (see Note 18). The $40 million was
repaid in June 1996 with proceeds from borrowings under the CCPH Revolver. At
December 31, 1997, no amounts were drawn under this agreement. IC Financial has
approximately $1.8 million in long-term borrowing agreements for which the
original proceeds were used to acquire a total of 17 locomotives in 1993. Such
borrowings are secured by the locomotives which are leased to ICR and mature in
2000. IC Financial lease revenue and corresponding expense at ICR, which is
eliminated in consolidation, was $14.7 million and $14.4 million in 1997 and
1996, respectively.
Various borrowings of the Company's subsidiaries are governed by
agreements which contain certain affirmative and negative covenants customary
for facilities of this nature including restrictions on additional indebtedness,
investments, guarantees, liens, distributions, sales and leasebacks, and sales
of assets and capital stock. Some also require satisfaction of certain financial
tests, including a leverage ratio, an earnings before interest and taxes to
interest charges ratio, and minimum consolidated tangible net worth
requirements. See Note 14.
Interest Expense, Net consisted of the following ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Interest expense........................ $45.9 $37.4 $32.2
Less:
Interest capitalized ................ 1.9 1.7 1.3
Interest income...................... 4.0 1.6 1.4
------- ------- -------
Interest Expense, Net................... $40.0 $34.1 $29.5
===== ===== =====
11. Receivables
ICR had entered into a revolving agreement, which was terminated on
January 8, 1998, to sell undivided percentage interests in certain of its
accounts receivable, with recourse, to a financial institution. The agreement
allowed for sales of accounts receivable up to a maximum of $50 million at any
one time. At December 31, 1997, $45 million had been sold pursuant to the
agreement. Costs related to the agreement fluctuated with changes in prevailing
interest rates. These costs, which are included in other income (expense), net,
were $3.0 million, $2.9 million and $3.2 million for 1997, 1996 and 1995
respectively.
At December 31, 1996, the Company had a $32.6 million receivable in
connection with the secured financing of freight equipment acquired by an
unrelated third party. This amount was repaid on January 3, 1997.
12. Benefit Plans
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All employees of ICR and CCPH are covered under the Railroad Retirement
System instead of Social Security. Additionally, various retirement plans,
postemployment benefits and postretirement benefits are provided.
Retirement Plans.
ICR has two qualified plans permitting participants to make "pre-tax"
contributions of their salary up to Internal Revenue Code limitations and each
contains a company match provision. The ICR union plan, which started in
mid-1995, allows union employees covered by local contracts to participate. ICR
matches 25% of the first 4% of salary deferral. There is no CCPH union plan in
effect. The management employee plan matches 50% of the first 6% of salary
deferral. The management plan also contains a separate defined contribution
portion of 2% of each employee's salary. Expenses related to both plans were
$1.5 million, $1.2 million, and $1.1 million in 1997, 1996 and 1995,
respectively. All ICR contributions are fully vested upon contribution.
ICR also has a supplemental executive retirement plan ("SERP") which
covers officers and certain other management employees. The SERP provides for a
monthly benefit equal to 35% of a participant's final average compensation as
defined in the plan. The monthly benefit is subject to offsets such as employer
contributions to the 401(k) plan. The plan was adopted in 1994. The cost was not
material in the three years ended December 31, 1997.
The Company's former Chairman, President and Chief Executive Officer is
covered by a non-qualified, unfunded supplemental retirement benefit agreement
which provides for a defined benefit payable annually, in the amount of $250,000
per year, until the year 2008.
The Company's non-employee directors are covered by a non-qualified,
unfunded retirement plan. This plan provides an annual payment equal to the
annual retainer at the time of the director's retirement and is paid for the
number of years the director served up to a maximum of ten years. The 1997, 1996
and 1995 expenses for the plan were $.4 million, $.8 million and $.9 million,
respectively.
Salary Deferral Plans. In addition to the 401(k) plan, all officers and
certain other management employees may elect to defer up to 50% of base salary
and 100% of annual bonus. Participant deferrals are fully vested and earn
interest at a specified, variable rate. Approximately $.3 million, $1.1 million
and $.5 million were deferred in 1997, 1996 and 1995, respectively.
Beginning in 1995, the Company's non-employee directors may also defer
their annual retainer and meeting fees. All deferrals are 100% vested and earn
interest at a specified, variable rate. Approximately $.4 million was deferred
in 1997. Deferrals were not material for the two years ended December 31, 1996
and 1995.
Unfunded Plan. ICR has an unfunded plan whereby 10% of an officer's
combined salary and bonus in excess of a wage offset factor ($109,000 in 1997)
is accrued and earns interest at a specified, variable rate. Amounts accrued are
paid when the employee leaves the Company, normally at retirement. Expenses for
this plan were $.4 million in each of 1997, 1996 and 1995.
Postemployment Benefit Plans. The Company provides certain
postemployment benefits such as long-term salary continuation and waiver of
medical and life insurance co-payments while on long-term disability.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Postretirement Plans. In addition to retirement plans, ICR has three
benefit plans which provide some postretirement benefits to most former
full-time salaried employees and selected former union- represented employees.
The medical plan for salaried retirees is contributory, with retiree
contributions adjusted annually if expected medical cost inflation rate exceeds
9.5%, and contains other cost sharing features such as deductibles and
co-payments. ICR's contribution will be fixed at the 1999 year end rate for all
subsequent years. Salaried retirees are covered by a life insurance plan which
provides a nominal death benefit and is non-contributory. The medical plan for
locomotive engineers who retired under a special early retirement program in
1987 provides non-contributory coverage until age 65. All benefits under this
plan terminate in 1998. There are no plan assets and ICR funds these benefits as
claims are paid.
CCPH provides to employees of CCPR postretirement medical benefits to
age 65 if the employee attained age 60, worked for CCPR's previous owner, worked
for CCPR since it commenced operations and between the two employers rendered at
least 30 years continuous service. These benefits are subject to deductibles,
co-insurance provisions and other limitations. CCPH may amend or change the plan
periodically subject to its union labor agreements. There are no plan assets and
CCPH funds these benefits as claims are paid.
The accumulated postretirement benefit obligations ("APBO") of the
postretirement plans were as follows ($ in millions):
December 31,
1997 1996
----------------------- ------
Medical Life Total Total
Accumulated postretirement benefit obligation:
Retirees...................................... $13.2 $2.1 $15.3 $15.5
Fully eligible active
plan participants ........................ .7 - .7 1.0
Other active plan participants................ 4.7 - 4.7 5.1
----- -- ----- -------
Total APBO.......................... $18.6 $2.1 20.7 21.6
===== ====
Unrecognized net gain........................ 17.6 18.3
-----
Accrued liability for
postretirement benefits....................... $38.3 $39.9
===== =====
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at December 31, 1996. As a result of
the change in general interest rates on high quality fixed rate investments in
1997, the Company decreased the weighted-average discount rate to 7.25% as of
December 31, 1997. The change in rates resulted in approximately $.7 million
actuarial loss. The actuarial gains and losses along with actual experience
gains, primarily fewer claims and lower medical rate inflation, resulted in a
total $17.6 million unrecognized net gain as of December 31, 1997. In accordance
with SFAS No. 106, the excess gain is subject to $1.2 million annual
amortization based on an amortization period of approximately 13 years. The
components of the net periodic postretirement benefits cost were as follows ($
in millions):
Years Ending December 31,
1997 1996
----- -----
Service costs..................................... $ .2 $ .2
Interest costs.................................... 1.4 1.5
Net amortization of excess gain................... (1.2) (1.2)
------ ------
Net periodic postretirement
benefit costs................................... $ .4 $ .5
===== =======
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (e.g., health care cost trend rate) for the medical
plans is 10.0% for 1998 and is assumed to decrease gradually to 6.25% by 2002
and remain at that level thereafter. The health care cost trend rate assumption
normally has a significant effect on the amounts reported; however, the plan
limits annual inflation for ICR's portion of such costs to 9.5% each year and
caps ICR's contribution at the actual 1999 level. Therefore, an increase in the
assumed health care cost trend rates by one percentage point in each year would
have no impact on the Company's accumulated postretirement benefit obligation
for the medical plans as of December 31, 1997, or the aggregate of the service
and interest cost components of net periodic postretirement benefit expense in
future years.
13. Provision for Income Taxes
The Provision for Income Taxes for continuing operations consisted of
the following ($ in millions):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Current income tax:
Federal................... $28.3 $38.1 $35.8
State..................... 3.9 4.6 4.5
Deferred income taxes....... 47.5 36.4 30.7
------ ------ ------
Provision for income taxes.. $79.7 $79.1 $71.0
===== ===== =====
The effective income tax rates for the years ended December 31, 1997,
1996 and 1995, were 35%, 37% and 35%, respectively. See Note 5 for the tax
benefits associated with the 1995 extraordinary loss.
At December 31, 1997, the Company had no Federal net operating loss
carryovers for tax or financial reporting purposes.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1996 and 1995 tax benefits of $1.8 million and $4.3 million,
respectively, were recorded to reflect the favorable resolution of prior-period
tax issues.
The items which gave rise to differences between the income taxes
provided for continuing operations in the Consolidated Statements of Income and
the income taxes computed at the statutory rate are summarized below ($ in
millions):
Years Ended December 31,
1997 1996 1995
---------- ------------- -------------
Expected tax expense computed
at statutory rate.............. $80.5 35% $75.5 35% $70.3 35%
Dividends received exclusion.... (.2) - (.2) - (.1) -
State income taxes, net
of federal tax effect.......... 6.5 3 6.1 3 5.4 2
Charitable contribution of
property....................... (4.1) (2) - - - -
Favorable resolution of
prior period tax issues........ - - (1.8) (1) (4.3) (2)
Other items, net................ (3.0) (1) (.5) - ( .3) -
------ ---- ----- ---- ---- ----
Provision for income taxes...... $79.7 35% $79.1 37% $71.0 35%
===== === ===== ==== ===== ===
Temporary differences between book and tax income arise because the tax
laws require that certain items of income and expense be treated differently
than under generally accepted accounting principles. As a result, the book
provisions for taxes differ from the actual taxes reported on the income tax
returns. The net results of such differences are included in deferred income
taxes in the Consolidated Balance Sheets.
Deferred income taxes consisted of the following ($ in millions):
December 31,
1997 1996
---- ----
Deferred tax assets...................... $ 72.0 $ 77.6
Less: Valuation allowance................ (1.5) (1.5)
--------- ---------
Deferred tax assets,
net of valuation allowance........... 70.5 76.1
Deferred tax liabilities................. (461.5) (412.4)
--------- --------
Deferred income taxes.................... $ (391.0) $(336.3)
======== ========
The valuation allowance is comprised of the portion of state tax net
operating loss carryforwards expected to expire before they are utilized and
non-deductible expenses incurred with the previous merger of wholly-owned
subsidiaries.
Major types of deferred tax assets are: reserves not yet deducted for
tax purposes ($60.5 million) and safe harbor leases ($10.2 million). Major types
of deferred tax liabilities are: accelerated depreciation ($427.2 million), land
basis differences ($16.9 million) and debt marked to market ($2.1 million).
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company and its subsidiaries have a tax sharing agreement whereby
each subsidiary's federal income tax and state income tax liabilities are
determined on a separate company income tax basis as if it were not a member of
the Company's consolidated group, with no benefit for net operating losses or
credit carryovers from prior years.
14. Common Stock and Dividends
The Company is authorized to issue 100,000,000 shares of Common Stock,
par value $.001. At December 31, 1997, there were 61,402,347 shares of Common
Stock outstanding. Each holder of Common Stock is entitled to one vote per share
in the election of directors and on all matters submitted to a vote of
stockholders. Subject to the rights and preferences of redeemable preferred
stock, if any, each share of Common Stock is entitled to receive dividends as
may be declared by the Board of Directors out of funds legally available and to
share ratably in all assets available for distribution to stockholders upon
dissolution or liquidation. No holder of Common Stock has any preemptive right
to subscribe for any securities of the Company. No shares of preferred stock
were outstanding at December 31, 1997 and 1996.
On January 25, 1996, the Board of Directors declared a three-for-two
stock split on Common Stock. The split was effected in the form of a stock
dividend and was paid March 14, 1996. Approximately 21 million shares were
issued from declared but unissued shares. Fractional shares were settled in
cash. The effects of the stock split are presented herein as if it took place as
of the earliest period shown. In 1992, the Board of Directors also authorized a
three-for-two stock split on Common Stock.
The Board of Directors has a policy of quarterly dividends on the Common
Stock of the Company. Future dividends may be dependent on the ability of its
subsidiaries to pay dividends to the Company. Covenants of ICR's Revolver and
CCPH's Revolver require specified levels of tangible net worth. At December 31,
1997, ICR exceeded its tangible net worth covenant by $32.0 million and CCPH
exceeded its tangible net worth covenant by $29.6 million.
See Note 15 for discussion of a restricted stock award in 1994.
See Note 2 for discussion of Canadian National Tender offer.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents a reconciliation of the shares used in the
calculations of basic and diluted income per share in accordance with SFAS No.
128:
1997 1996 1995
---- ---- ----
Weighted average number
of common shares out-
standing - Basic shares 61,408,637 61,417,769 62,608,274
Plus:
Effect of shares issuable
under stock options 698,679 560,622 360,348
------------ ------------ ------------
Equals: Dilutive potential
common shares 62,107,316 61,978,391 62,968,622
15. Stock Based Compensation
The Company grants stock options to employees and directors under the
1990 Long-Term Incentive Plan and has two employee stock purchase plans. The
Company accounts for the stock option plans under APB Opinion 25 under which no
compensation cost has been recognized.
Long-Term Incentive Plan. Under the Company's 1990 Long-Term Incentive
Plan (the "Long- Term Incentive Plan") 3,101,028 shares of Common Stock are
reserved for issuance upon the exercise of incentive options that may be awarded
by the Compensation Committee to directors and selected salaried employees of
the Company and its affiliates under the Executive Compensation Plan and to
certain other individuals who possess the potential to contribute to the future
success of the Company. This amount includes 300,000 shares added following the
approval of Incentive 2000 for Outside Directors at the 1996 Annual Meeting of
Stockholders. The Compensation Committee also has the authority under the
Long-Term Incentive Plan to award stock appreciation rights, restricted stock
and restricted stock units, dividend equivalents and other stock-based awards,
and to determine the consideration to be paid by the participant for any awards,
any limits on transfer of awards, and, within certain limits, other terms of
awards. In the case of options (other than options granted to directors who are
not full-time employees of the Company ("Outside Directors"), as described
below) granted under the Long-Term Incentive Plan, the Compensation Committee
has the power to determine the exercise price of the option (which cannot be
less than 50% of the fair market value on the date of grant of the shares
subject to the option), the term of the option, the time and method of exercise
and whether the options are intended to qualify as "incentive stock options"
pursuant to Section 422A of the Internal Revenue Code. Under the Executive
Compensation Plan the grant price is limited to fair market value. The
Compensation Committee awarded stock options to employees under the Long-Term
Incentive Plan for the first time in 1993. Awards, all at the closing market
price on date of grant, vest ratably over four years and expire 10 years from
date of grant.
Outside Directors also participate in the Long-Term Incentive Plan. On
the date of each Annual Meeting, each Outside Director who serves immediately
prior to such date and who will continue to serve after such date (whether as a
result of such director's re-election or by reason of the continuation of such
director's term) is granted an option to purchase 2,250 shares of Common Stock.
Options granted to Outside Directors entitle such persons to purchase Common
Stock at the fair market value of such Common Stock on the date the option was
granted. Options held by Outside Directors expire 10 years from the date of
grant, or, if earlier, one year following termination of service as a director
for any reason other than death or disability. Such options become exercisable
in full six months after their date of grant. Options for 37,500 shares granted
in connection with the Incentive 2000 Plan are exercisable after December 31,
1999, if the Company's stock price is at least $43.000 for twenty consecutive
days from January 1, 2000 until April 30, 2001.
The Committee awarded 22,500 shares of restricted stock to an eligible
employee of ICR in 1994. No cash payments are required by the employee. Shares
awarded may not be sold, transferred, or used as collateral until the shares
become free of the restrictions. Restrictions lapse over a four-year period. All
shares still subject to restrictions will be forfeited and returned to the plan
if the employee's relationship with ICR is terminated. No shares were forfeited
in 1997 or 1996. A total of 4,125 shares were forfeited in 1995. If the employee
becomes disabled, or dies, or a change in control occurs during the vesting
period, the restrictions lapse at that time. In connection with early
retirements, 43 and 7,632 shares vested in 1996 and 1995, respectively. The
compensation expense resulting from the award of restricted stock is valued at
the closing market price of the Company's Common Stock on the date of the award,
recorded as a reduction of Stockholders' Equity, and charged to expense evenly
over the vesting period. Compensation expense was $.2 million, $.8 million and
$1.1 million in 1997, 1996 and 1995, respectively.
Stock Purchase Programs. The Company has two stock purchase programs.
The basic program is open to all employees and permits employees to acquire
Company common stock via payroll deductions. The other plan is the Discounted
Stock Purchase Plan ("Discounted Plan"). A total of 1.2 million shares are
registered for both plans. All purchases are made by the trustee in the open
market and no purchases are made directly from the Company. Only management
employees are eligible to participate in the Discounted Plan which provides for
the investment of up to 15% of an eligible employee's salary in the common stock
of the Company at a 15% discount. A participant must continue employment with
the Company or its subsidiaries for two years to retain the 15% discount, and,
during that period, the shares will be held by the plan's administrator. If the
employee withdraws shares or directs the sale of shares within two years, the
discount must be repaid in cash or relinquished shares. No such repayment is
required in the event of death, retirement, disability or change of control of
the Company. Costs associated with these programs have been immaterial to date.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes changes in shares under options, after
giving effect to the 3- for-2 stock split declared in January 1996:
Weighted Weighted
Average Fair Average
Value On Exercisable Exercise
Options Price Grant Date At Year End Price
Outstanding 12-31-94 1,063,500 $16.822 478,500 $14.417
======= =======
Granted 535,274 23.158 $ 9.105
========
Exercised (a) (4,500) 16.834
Forfeited (a) (11,250) 20.833
---------
Outstanding 12-31-95 1,583,024 18.936 812,381 $17.007
======= =======
Granted 848,250 29.803 $ 8.247
========
Exercised (b) (13,125) 22.367
Forfeited (c) (3,375) 22.389
-----------
Outstanding 12-31-96 2,414,774 22.730 1,269,355 $18.873
========= =======
Granted 494,050 34.148 $12.900
=======
Exercised (d) (325,122) 16.675
Forfeited (19,200) 24.713
----------- ------
Outstanding 12-31-97 2,564,502 1,527,872 $21.593
========= ========= =======
(a) Pre-1995 option awards
(b) Includes 7,875 pre-1995 option awards
(c) Includes 1,125 pre-1995 option awards
(d) Includes 277,498 pre-1995 option awards
The last date exercisable for options granted to Outside Directors is
May 7, 2007, and March 13, 2007, for those granted to employees.
Had the Company adopted the compensation cost recognition methods
outlined in FASB Statement No. 123 "Accounting for Stock-Based Compensation "
("SFAS 123"), the Company's 1997, 1996 and 1995 net income and earnings per
share diluted would have been as follows - on a pro forma basis - ($ in
millions, except share data):
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1997 1996 1995
---- ---- ----
Pro Forma As Pro As Pro Pro
Unaudited Reported Forma Reported Forma Actual Forma
--------- ----- ----- ------ ------ ------ -----
Income before extra-
ordinary item 150.2 $147.6 $136.6 $135.0 $129.8 $129.3
Net income 150.2 $147.6 $136.6 $135.0 $118.4 $117.9
EPS before extraordinary
item - diluted $2.42 $2 .39 $ 2.20 $ 2.17 $ 2.06 $ 2.06
EPS - net income - diluted $2.42 $2 .39 $ 2.20 $ 2.17 $ 1.88 $ 1.88
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Of the options outstanding at December 31, 1997, 1,527,872 have exercise
prices between $5.333 and $34.750, with a weighted average exercise price of
$21.593, a weighted average remaining contractual life of 8 years and all are
exercisable. The remaining 1,036,030 options, that are not exercisable, have
exercise prices between $23.167 and $37.875 with a weighted average price of
$31.709 and a weighted average remaining contractual life of 8 years.
The fair value of each option is estimated on the grant date using the
Black Scholes option pricing models with the following weighted-average
assumptions:
1997 1996 1995
---- ---- ----
Risk-free interest rate(s) 6.7% 6.7% and 7.0% 7.2% and 7.3%
Dividend yields 2.7% and 2.6% 3.2% and 2.7% 2.9% and 3.0%
Days to expiration 3652 3652 3652
Volatility 30.18% and 30.01% 31.4% 33.1% and 32.9%
16. Contingencies, Commitments and Concentration of Risks
The Company has unconditionally guaranteed IC Financial's $1.8 million
obligations via a pledge of stock of a subsidiary of IC Financial.
The Company is self-insured for the first $5 million of each loss. The
Company carries $245 million of liability insurance per occurrence, subject to
an annual cap of $385 million in the aggregate for all losses. This coverage is
considered by the Company's management to be adequate in light of the Company's
safety record and claims experience.
The Company has guaranteed repayment of certain indebtedness of a
jointly owned company aggregating $7.8 million. The Company's share of the
guarantee is $1.0 million; the remainder is the obligation of other unrelated
owner companies.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ICR is one of several defendants in a New Orleans class action in which
a jury has returned a verdict against the ICR for $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment and remanded the case to the trial court for further proceedings.
The Company believes the verdict has no basis and intends to continue to
challenge it vigorously. While the final outcome of this proceeding cannot be
determined, in the opinion of management, based on present information, the
ultimate resolution of this case will not have a material adverse effect on
ICR's financial position, results of operations, cash flow or liquidity.
There are other various regulatory proceedings, claims and litigation
pending against the Company. While the ultimate amount of liability that may
result cannot be determined, in the opinion of the Company's management, based
on present information, adequate provisions for liabilities have been recorded.
Environmental Contingencies. The Company is aware of approximately 23
contaminated sites at which it is probably liable for some portion of any
required clean up. Of these, 15 involve contamination primarily by diesel fuel
which can be remediated without material cost. Five sites are expected to
require more than $1 million in clean-up costs. At three of these sites other
parties are expected to contribute the majority of the remediation costs
incurred.
For all known sites of environmental contamination where Company 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
December 31, 1997, the Company estimated the probable range of its liability to
be $9.9 million to $45 million, and in accordance with the provisions of SFAS
No. 5 had a reserve of $9.9 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 leased substantial amounts of property to
industrial tenants, and ICR continues to haul hazardous materials which are
subject to occasional accidental release. Because the ultimate cost of known
contaminated sites cannot be definitively established and because additional
contaminated sites yet unknown may be discovered or future operations may result
in accidental releases, no assurance can be given that 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.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
17. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Temporary Cash Investments. The carrying amount approximates
fair value because of the short maturity of those instruments. Investments in
U.S. corporate demand notes of $30.1 million and $52.8 million included in cash
and temporary cash investments as of December 31, 1997 and 1996, respectively,
have been classified and accounted for as held to maturity securities.
Investments. The Company has investments of $5.2 million in 1997 and
$11.7 million in 1996 for which there are no quoted market prices. These
investments are in joint railroad facilities, railroad terminal associations,
switching railroads and other transportation companies. For these investments,
the carrying amount is a reasonable estimate of fair value. The Company's
remaining investments ($6.9 million in 1997 and $5.8 million in 1996) are
accounted for by the equity method.
Long-Term Debt. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities.
Derivative Financial Instruments. The fair value of diesel fuel collar
agreements is the estimated amount that the Company would receive or pay to
terminate the agreements as of year end, taking into account the current credit
worthiness of the agreement counterparties.
The estimated fair values of the Company's financial instruments are as
follows ($ in millions):
December 31,
1997 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 34.1 $ 34.1 $ 59.2 $ 59.2
Investments........................... 5.2 5.2 11.7 11.7
Fuel Hedge.......................... - (.5) - .1
Debt................................ (596.7) (626.0) (640.0) (634.2)
18. Acquisition of CCP Holdings, Inc.
On June 12, 1996, ICR used proceeds it received from the issuance of
Commercial Paper (average interest rate 5.52% and average maturity 30 days) to
pay a $50.0 million dividend to the Company and to loan $59.9 million (5.625%
per annum) to the Company. The Company used the $109.9 million and its bank
credit lines to acquire CCPH. The transaction closed June 13, 1996,
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
following the effective date of the approval order issued by the STB. The
purchase price was $147.1 million in cash and the assumption of approximately
$2.5 million in debt and approximately $17.3 million of capitalized lease
obligations existing on acquisition date. The acquisition has been accounted for
under the purchase method of accounting. Accordingly, the Company has allocated
the purchase cost to CCPH's assets and liabilities as of June 13, 1996.
A summary of the CCPH assets acquired and liabilities assumed at June
13, 1996, after reflecting the final purchase accounting allocations, is set
forth below ($ in millions):
Cash and Cash Equivalents $ 4.9 Accounts Payable $(16.8)
Accounts Receivable 14.5 Other Current Liabilities (12.2)
Other Current Assets 11.2 Long-Term Debt (21.3)
Properties 264.6 Deferred Income Taxes (84.6)
Other Liabilities and Reserves (13.3)
The following unaudited pro-forma results of the Company are
presented to reflect the Company's results of operations for the years ended
December 31, 1996 and 1995, as if CCPH had been acquired on January 1, 1996, and
January 1, 1995, respectively ($ in millions, except share data):
Years Ended December 31,
1996 1995
(Unaudited)
Revenues $697.3 $719.8
Operating income 255.5 251.5
------- -------
Income before extraordinary item 143.2 135.5
------- -------
Net income 143.2 124.1
======= =======
Basic income per share:
- Before extraordinary item $ 2.33 $ 2.16
- Net income $ 2.33 $ 1.98
Diluted income per share:
- - Before extraordinary item $ 2.31 $ 2.15
- - Net income $ 2.31 $ 1.97
<PAGE>
19. Selected Quarterly Financial Data - (Unaudited) ($ in millions,
except share data):
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Revenues....................... $172.1 $165.6 $173.6 $188.5
Operating income............... 64.5 63.2 62.0 74.2
Net income..................... 33.9 35.0 34.6 46.7
Basic income per share......... $ .55 $ .57 $ .56 $ .76
======== ====== ======= =======
Diluted income per share....... $ .55 $ .56 $ .56 $ .75
======== ====== ======= =======
1996
Revenues....................... $162.6 $153.4 $167.9 $173.6
Operating income............... 60.3 56.4 61.5 63.0
Net income..................... 33.1 31.4 32.1 40.0
Basic income share ..... $ .54 $ .51 $ .52 $ .65
======== ====== ======= =======
Diluted income per share....... $ .53 $ .51 $ .52 $ .65
======== ====== ======= =======
1995
Revenues....................... $167.9 $156.6 $161.3 $159.5
Operating income............... 62.5 55.9 53.1 59.0
Income before extraordinary
item, net..................... 34.3 29.6 29.2 36.7
Net income..................... 34.3 18.2 29.2 36.7
Basic income per share:
Before extraordinary item...... $ .54 $ .47 $ .47 $ .60
Extraordinary item............. - (.18) - -
--------- ------ ------- -------
Basic income per share......... $ .54 $ .29 $ .47 $ .60
======= ====== ======= =======
Diluted income per share:
Before extraordinary item...... $ .54 $ .47 $ .47 $ .59
Extraordinary item............. - (.18) - -
--------- ------- ------- --------
Diluted income per share....... $ .54 $ .29 $ .47 $ .59
======= ======= ======= =======
Per share amounts have been restated to reflect the 3-for-2 stock split that was
declared in January 1996.
Information for 1996 includes results of CCPH for the period June 13, 1996 (date
of acquisition) to December 31, 1996.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
I N D E X
T O
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
Schedules for the three years ended December 31, 1997:
I-Condensed financial information.............................F-30
II-Valuation and qualifying accounts...........................F-33
Pursuant to Rule 5.04 of General Rules of Regulation S-X, all other schedules
are omitted because they are not required or because the required information is
set forth in the financial statements or related notes thereto.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
Illinois Central Corporation--Parent Company
Condensed Statements of Income ($ in millions,
except share data)
Years Ended December 31,
1997 1996 1995
Operating expenses....................... $ 0.4 $ 0.3 $ 0.7
Operating (loss)............................. (0.4) (0.3) (0.7)
Other income (expense), net.................. (0.6) (1.9) (2.8)
Interest income (expense), net............... (9.7) (3.2) (0.5)
(Loss) before taxes and earnings
of subsidiaries.......................... (10.7) (5.4) (4.0)
Earnings of subsidiaries..................... 153.6 137.7 120.9
Provision (benefit) for income taxes......... (7.3) (4.3) (1.5)
Net income............................... $ 150.2 $ 136.6 $ 118.4
Income per share-Basic................... $ 2.45 $ 2.22 $ 1.89
Weighted average number of shares of
common stock (thousands)...............61,408.6 61,417,8 62,608.3
Income per share-Diluted................. $ 2.42 $ 2.20 $ 1.88
Weighted average number of shares of
common stock and dilutive
potential common shares (thousands).....62,107.3 61,978.4 62,968.6
The Notes to Consolidated Financial Statements beginning on page F-6 are an
integral part of this schedule.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
Illinois Central
Corporation--Parent Company
Condensed Balance Sheets
($ in millions)
December 31,
1997 1996
ASSETS
Current assets:
Cash and temporary cash investments.......... $ 0.3 $ 0.9
Receivables...................................... 12.1 49.1
Other current assets............................. 0.9 0.5
Total current assets.......................... 13.3 50.5
Investments in subsidiaries......................... 719.5 627.8
Loan to affiliate................................... 89.1 17.1
Deferred income taxes............................... 0.2 1.4
Other assets........................................ 1.0 0.2
Total assets.............................. $ 823.1 $ 697.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 5.8 $ 56.8
Dividends payable................................ 14.1 14.1
Total current liabilities..................... 19.9 70.9
Intercompany debt................................... 156.3 67.0
Other liabilities and reserves...................... 4.1 3.6
Contingencies and commitments
Stockholders' equity:
Common stock, par value $.001 authorized 100,000,000 shares,
64,622,956 shares issued and 61,402,347 shares 0.1 0.1
Additional paid-in capital....................... 172.7 167.1
Retained income.............................. 547.4 453.8
Treasury stock (3,220,609 shares)............ (77.4) (65.5)
Total stockholders' equity.................... 642.8 555.5
Total liabilities and stockholders' equity $ 823.1 $ 697.0
<PAGE>
The Notes to Consolidated Financial Statements beginning on page F-6 are an
integral part of this schedule.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
Illinois Central
Corporation--Parent Company
Condensed Statements of Cash Flows
($ in millions)
Years Ended December 31,
1997 1996 1995
Cash flows from operating activities:
Net income............................... $ 150.2 $ 136.6 $ 118.4
Reconciliation of net income to net cash
provided by (used for) operating activities:
Deferred income taxes..................... 1.2 (0.9) (1.5)
Earnings of subsidiaries..................(153.6) (137.7) (120.9)
Cash changes in working capital:
Receivables............................ 37.0 (42.6) (4.1)
Other current assets................... (0.4) (0.5) 0.1
Accounts payable....................... (51.0) 40.0 7.9
Income taxes payable................... - - (0.4)
Changes in other assets................... (0.8) 0.1 0.1
Changes in other liabilities and reserves. 0.5 2.3 2.2
Net cash provided by (used for)
operating activities (16.9) (2.7) 1.8
Cash flows from investing activities:
Acquisitions ................................ - (152.9) -
Loan to subsidiaries......................... (72.0) - (17.1)
Loan from subsidiaries....................... 89.3 67.0 -
Capital contribution to subsidiaries......... (0.8) (6.2) (0.4)
Dividends received from subsidiaries......... 62.9 143.9 107.7
Net cash provided by investing
activities 79.4 51.8 90.2
Cash flows from financing activities:
Proceeds from the issuance of debt........... - 40.0 -
Principal payments on debt................... - (40.0) -
Dividends paid............................... (56.6) (48.7) (41.9)
Stock repurchases............................ (11.9) (1.0) (59.8)
Proceeds from exercise of stock options and
warrants 5.4 0.2 -
Net cash (used for) financing activities(63.1) (49.5) (101.7)
Changes in cash and temporary cash investments.. (0.6) (0.4) (9.7)
Cash and temporary cash investments at beginning
of period.................................... 0.9 1.3 11.0
Cash and temporary cash investments at end of
period................................... $ 0.3 $ 0.9 $ 1.3
Supplemental disclosure of cash flow information:
<PAGE>
Cash paid during the year for:
Interest (net of amount capitalized).. $ - $ - $ -
Income taxes.......................... $ - $ - $ -
The Notes to Consolidated Financial Statements beginning on page F-6 are an
integral part of this schedule.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
($ IN MILLIONS)
Year Ended December 31, 1997
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve... $ 30.8 $ 1.1 $ 3.4 $ 28.5
Casualty and other reserves...... 45.0 7.7 13.2 39.5
Environmental.................... 17.2 2.4 9.7 9.9
Bad debt reserve................. 1.3 1.9 2.0 1.2
Taxes............................ 1.5 - - 1.5
Total.................. $ 95.8 $ 13.1 $ 28.3 $ 80.6
Year Ended December 31, 1996
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve... $ 33.9 $ 2.1 $ 5.2 $ 30.8
Casualty and other reserves...... 55.7 8.9 19.6 45.0
Environmental.................... 12.9 1.9 (2.4) 17.2
Bad debt reserve................. 2.0 1.8 2.5 1.3
Taxes............................ 1.8 - 0.3 1.5
Total.................. $ 106.3 $ 14.7 $ 25.2 $ 95.8
Year Ended December 31, 1995
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve... $ 38.2 $ 3.0 $ 7.3 $ 33.9
Casualty and other reserves...... 61.7 14.3 20.3 55.7
Environmental.................... 13.3 5.3 5.7 12.9
Bad debt reserve................. 2.1 1.9 2.0 2.0
Taxes............................ 1.8 - - 1.8
Total.................. $ 117.1 $ 24.5 $ 35.3 $ 106.3
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
2.1 Stock Purchase Agreement dated as of January 17, 1996
among Illinois Central Corporation, CCP Holdings, Inc.,
Donald R. Wood, Jr. and Lyle D. Reed, and the Ann L.
and Walter A. Drexel Revocable Trust and Reed
Charitable Remainder Unitrust and R. Kevin Trout, John
A. Adair and Gregory L. Amys. (Incorporated by
reference to Exhibit 2 to the current report on Form
8-K dated as of May 15, 1996 for the Illinois Central
Corporation. (SEC File No. 1-10720))
2.2 Agreement and Plan of Merger dated as of February 10,
1998 among Canadian National Railway Company and
Illinois Central Corporation, (Incorporated by
reference to Exhibit 2.2 to the current report on Form
14D-9 dated as of February 13, 1998 and as amended
February 23, 1998 and March 6, 1998 for the Illinois
Central Corporation. (SEC File No. 5-41121))
3.1 Articles of Incorporation of Illinois Central Railroad
Company, as amended. (Incorporated by reference to
Exhibit 3.1 to the Registration Statement of Illinois
Central Railroad Company on Form S-1 dated as of
September 26, 1989. (SEC File No. 33- 29269))
3.2 By-Laws of Illinois Central Railroad Company, as
amended. (Incorporated by reference to Exhibit 3.2 to
the Registration Statement of Illinois Central Railroad
Company on Form S-1 dated as of September 26, 1989.
(SEC File No. 33-29269))
3.3 Restated Articles of Incorporation of Illinois Central
Corporation. (Incorporated by reference to Exhibit 3.1
to the Current Report of the Illinois Central
Corporation on Form 8-K dated July 29, 1994. (SEC File
No. 1-10720))
* Used herein to identify management contracts or compensation plans or
arrangements as required by Item 14 of Form 10-K.
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
3.4 By-Laws of Illinois Central Corporation, as amended.
(Incorporated by reference to Exhibit 3.4 to the
Registration Statement of Illinois Central Corporation
and Illinois Central Railroad Company on Form S-1 dated
as of August 21, 1990. (SEC File Nos. 33-36321 and
33-36321-01))
3.5 Certificate of Retirement of Illinois Central
Corporation (Incorporated by reference to Exhibit 3.3
to the Registration Statement of Illinois Central
Corporation and Illinois Central Railroad Company on
Form S-1, as amended dated as of August 21, 1990. (SEC
File No. 33-40696 and Post-Effective Amendments to
Registration Statement Nos. 33-36321 and 33- 36321-01))
3.6 Certificate of Elimination of Illinois Central
Corporation. (Incorporated by reference to Exhibit 3.2
to the Quarterly Report of the Illinois Central
Corporation on Form 10-Q for the three months ended
September 30, 1991. (SEC File No. 1-10720))
3.7 By-Laws of Illinois Central Railroad Company, as
amended. (Incorporated by reference to Exhibit 3 to the
Quarterly Report of the Illinois Central Railroad
Company on Form 10-Q for the three months ended June
30, 1997. (SEC File No. 1-7092))
4.2 Restated Articles of Incorporation of Illinois Central
Corporation (included in Exhibit 3.3)
4.3 Form of Pledge Agreement dated as of September 22,
1989, and amended and restated as of July 23, 1991,
among Illinois Central Corporation and the Banks named
therein that are or may become parties to the Amended
and Restated Revolving Credit and Term Loan Agreement
dated as of September 22, 1989, and amended and
restated as of July 23, 1991, among the Illinois
Central Railroad Company and the Banks named therein
and the Senior Note Purchasers that are parties to the
Note Purchase Agreement dated as of July 23, 1991.
(Incorporated by reference to Exhibit 4.4 to the
Quarterly Report of Illinois Central Corporation on
Form 10-Q for the three months ended September 30,
1991. (SEC File No. 1-10720))
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.4 Form of Note Purchase Agreement dated as of July 23,
1991, among Illinois Central Railroad Company, as
issuer, and Illinois Central Corporation, as guarantor,
for 10.02% Guaranteed Senior Secured Series A Notes due
1999 and for 10.4% Guaranteed Senior Secured Series B
Notes due 2001 (including the Form of Series A Note and
Series B Note included as Exhibits A-1 and A-2,
respectively, therein). (Incorporated by reference to
Exhibit 4.3 to the Quarterly Report of the Illinois
Central Railroad Company on Form 10-Q for the three
months ended September 30, 1991. (SEC File No. 1-7092))
4.5 Form of the Loan and Security Agreement dated as of
December 6, 1991, between IC Leasing Corporation I and
Hitachi Credit America Corp. (including the Form of the
Initial Funding Credit Note, the Form of the
Refurbishing Credit Note, the Form of Assignment of
Lease and Agreement, the Form of the Pledge Agreement
between IC Financial Services Corporation and Hitachi
Credit America Corp. and the Form of the Guaranty
Agreement between Illinois Central Corporation and
Hitachi Credit America Corp. included as Exhibits D, E,
F, G and H, respectively, therein). (Incorporated by
reference to Exhibit 4.9 to the Annual Report on Form
10-K for the year ended December 31, 1991, for the
Illinois Central Corporation filed March 12, 1992. (SEC
File No. 1-10720))
4.6 Form of the Trust Agreement dated as of March 30, 1993,
between IC Leasing Corporation II and Wilmington Trust
Company. (Incorporated by reference to Exhibit 4.1 to
the Current Report of Illinois Central Corporation on
Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
4.7 Form of the Security Agreement and Mortgage dated as of
March 30, 1993, between IC Leasing Trust II and UNUM
Life Insurance Company of America (Including the Form
of the Promissory Note between IC Leasing Trust II and
UNUM Life Insurance Company of America included as
Exhibit A, therein). (Incorporated by reference to
Exhibit 4.2 to the Current Report of Illinois Central
Corporation on Form 8-K dated May 7, 1993. (SEC File
No. 1-10720))
4.8 Assignment of Lease and Conveyance dated March 30,
1993, between IC Leasing Corporation II and IC Leasing
Trust II. (Incorporated by reference to Exhibit 4.3 to
the Current Report of Illinois Central Corporation on
Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
4.9 Assignment of Lease and Conveyance dated March 30,
1993, between IC Leasing Trust II and UNUM Life
Insurance Company of America. (Incorporated by
reference to Exhibit 4.4 to the Current Report of
Illinois Central Corporation on Form 8-K dated May 7,
1993. (SEC File No. 1-10720))
4.10 Form of Commercial Paper Dealer Agreement between
Illinois Central Railroad Company and Lehman Commercial
Paper, Inc. dated as of November 19, 1993.
(Incorporated by reference to Exhibit 4.10 to the
Annual Report on Form 10-K for the year ended December
31, 1993 for Illinois Central Railroad Company filed
March 16, 1994. (SEC File No. 1-7092))
4.11 Form of Issuing and Paying Agency Agreement of the
Illinois Central Railroad Company related to the
Commercial Paper Program between Illinois Central
Railroad Company and Bank America National Trust
Company dated as of November 19, 1993, (including
Exhibit A the Form of Certificated Commercial Paper
Note included therein). (Incorporated by reference to
Exhibit 4.11 to the Annual Report on Form 10-K for the
year ended December 31, 1993 for Illinois Central
Railroad Company filed March 16, 1994. (SEC File No.
1-7092))
4.12 Form of Revolving Credit Agreement between Illinois
Central Corporation and Bank of America National Trust
and Saving Association Dated August 24, 1994.
(Incorporated by reference to Exhibit 4.1 to the
Quarterly Report of Illinois Central Corporation on
Form 10-Q for the three months ended September 30,
1994. (SEC File No. 1-10720))
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.13 Form of Revolving Credit and Term Loan Agreement
between IC Leasing III and the First National Bank of
Boston dated as of July 5, 1994. (Incorporated by
reference to Exhibit 4.2 to the Quarterly Report of
Illinois Central Corporation on Form 10-Q for the three
months ended September 30, 1994. (SEC File No. 1-
10720))
4.14 Toronto Dominion Credit Agreement (Incorporated by
reference to Exhibit 4.1 to the Quarterly Report of the
Illinois Central Railroad Company on Form 10-Q for the
three months ended March 31, 1994. (SEC File No.
1-7092))
4.15 Form of Receivables Purchase Agreement dated as of
March 29, 1994, between Illinois Central Railroad
Company and Golden Gate Funding Corporation.
(Incorporated by reference to Exhibit 4.2 to the
Quarterly Report of the Illinois Central Railroad
Company on Form 10-Q for the three months ended March
31, 1994. (SEC File No. 1-7092))
4.16 Form of Railcar Management Agreement between Interrail
and IC Leasing Corporation III dated December 3, 1993.
(Incorporated by reference to Exhibit 4.1 to the
Current Report of the Illinois Central Corporation on
Form 8-K dated July 29, 1994. (SEC File No. 1- 10720))
4.17 Form of Note Purchase Agreement dated as of May 1,
1993, between Illinois Central Railroad Company and The
First National Bank of Boston (Incorporated by
reference to Exhibit 4.1 to the Registration Statement
of Illinois Central Railroad Company on Form S-3. (SEC
File No. 33-61410))
4.18 Form of Second Amended and Restated Revolving Credit
Agreement dated as of April 2, 1993, amended and
restated as of October 27, 1993 and further amended and
restated as of November 1, 1994, among Illinois Central
Railroad Company and the Banks named therein
(Incorporated by reference to Exhibit 4.14 to the
Annual Report of Illinois Central Railroad Company on
Form 10-K for the year ended December 31, 1994. (SEC
File No. 1-7092))
4.19 Form of Lease Agreement dated as of July 1, 1994,
between IC Leasing Corporation III and Illinois Central
Railroad Company. (Incorporated by reference to Exhibit
4.10 to the Annual Report on Form 10-K for the year
ended December 31, 1994, for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.20 Form of Lease Agreement dated as of July 1, 1994
between IC Leasing Corporation III and Waterloo Railway
Company. (Incorporated by reference to Exhibit 4.11 to
the Annual Report on Form 10-K for the year ended
December 31, 1994, for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
4.21 Form of Options Agreement dated as of July 1, 1994,
between IC Leasing Corporation III and Illinois Central
Railroad Company. (Incorporated by reference to Exhibit
4.12 to the Annual Report on Form 10-K for the year
ended December 31, 1994, for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.22 Form of Options Agreement dated as of July 1, 1994,
between IC Leasing Corporation III and Illinois Central
Railroad Company. (Incorporated by reference to Exhibit
4.13 to the Annual Report on form 10-K for the year
ended December 31, 1994, for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.23 Third Amended and Restated Revolving Credit Agreement
between Illinois Central Railroad Company and the banks
named therein dated as of April 2, 1993, amended and
restated as of October 27, 1993, further amended and
restated as of November 1, 1994 and further amended and
restated as of April 28, 1995. (Incorporated by
reference to Exhibit 4.1 to the quarterly report of
Illinois Central Railroad Company in Form 10-Q for the
three months ended June 30, 1995. (SEC File No.
1-7092))
4.24 Form of Indenture dated as of April 1, 1995 between
Illinois Central Railroad Company and The First
National Bank of Boston. (Incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-3 of
Illinois Central Railroad Company dated April 12, 1995.
(SEC File No. 33-58547))
4.25 Form of Fixed Rate Medium-Term Note dated as of May 1,
1995 between Illinois Central Railroad Company and
Lehman Brothers Inc., Salomon Brothers, Inc and Smith
Barney Inc. (Incorporated by reference to Exhibit 4.1
to the Current Report of Illinois Central Railroad
Company of Form 8-K dated May 2, 1995. (SEC File No.
1-7092))
4.26 Form of Floating Rate Medium-Term Notes dated as of May
1, 1995 between Illinois Central Railroad Company and
Lehman Brothers Inc, Salomon Brothers Inc and Smith
Barney Inc. (Incorporated by reference to Exhibit 4.2
to the Current Report of Illinois Central Railroad
Company on Form 8-K dated May 2, 1995. (SEC File No.
1-7092))
4.27 Amendment No. 1, dated as of April 29, 1996 to the
Third Amended and Restated Revolving Credit Agreement,
between Illinois Central Railroad Company and the First
National Bank of Boston initially dated as of April 2,
1993, amended and restated November 1, 1994, and
further amended and restated as of April 28, 1995.
(Incorporated by reference to Exhibit 4 to the
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, for the Illinois Central Railroad
Company filed on August 13, 1996. (SEC File No.
1-7092))
4.28 Form of Revolving Credit Agreement between CCP
Holdings, Inc., Chicago, Central & Pacific Railroad
Company, Cedar River Railroad Company, Iron Horse
Properties, Inc., Missouri River Bridge Company and the
First National Bank of Boston and Bank of America Trust
and Savings Association dated as of June 14, 1996.
(Incorporated by reference to Exhibit 4 to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 for the Illinois Central Corporation
filed on November 8, 1996. (SEC File No. 1-10720))
4.29 Form of Indenture between the Illinois Central Railroad
Company and The Chase Manhattan Bank, N.A., dated as of
July 25, 1996. (Incorporated by reference to Exhibit
4.1 of Form S-3 dated as of May 15, 1996 for the
Illinois Central Railroad Company. (SEC File No.
1-7092))
4.30 Form of Indenture between the Illinois Central Railroad
Company and The Chase Manhattan Bank, N.A., dated as of
May 1996. (Incorporated by reference to Exhibit 4.2 of
Form S-3 dated as of May 15, 1996 for the Illinois
Central Railroad Company. (SEC File No. 1-7092))
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.31 Form of Indenture between the Illinois Central Railroad
Company and The Chase Manhattan Bank, N.A., dated as of
July 25, 1996. (Incorporated by reference to Exhibit
4.1 of Form S-4 dated as of December 18, 1996 for the
Illinois Central Railroad Company. (SEC File No.
1-7092))
4.32 Form of First Supplemental Indenture between the
Illinois Central Railroad Company and The Chase
Manhattan Bank, N.A. dated as of December 17, 1996.
(Incorporated by reference to Exhibit 4.2 of Form S-4
dated as of December 18, 1996 for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.33 Form of Registration Rights Agreement among Illinois
Central Railroad Company, Lehman Brothers Inc. And
Merrill Lynch, Pierce, Fenner & Smith Incorporated
dated as of December 10, 1996. (Incorporated by
reference to Exhibit 4.3 of Form S-4 dated as of
December 18, 1996 for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
4.34 Form of fixed and floating rate Medium-Term Notes
Series B for the Illinois Central Railroad Company.
(Incorporated by reference to Exhibit 4.3 to the
current report on Form 8-K dated as of July 29, 1996
for the Illinois Central Railroad Company (SEC File No.
1-7092))
10.1* Form of supplemental retirement and savings plan.
(Incorporated by reference to Exhibit 10C to the
Registration Statement of Illinois Central
Transportation Co. on Form 10 filed on October 7, 1988,
as amended. (SEC File No. 1-10085))
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.2 Form of indemnification agreement dated as of January
29, 1991, between Illinois Central Corporation and
certain officers and directors. (Incorporated by
reference to Exhibit 10.9 to the Annual Report on Form
10-K for the year ended December 31, 1990, for the
Illinois Central Corporation filed on April 1, 1991.
(SEC File No. 1-10720))
10.3* Form of IC 1990 Stock Purchase Plan. (Incorporated by
reference to Exhibit 10.6 to the Registration Statement
of Illinois Central Corporation on Form 10 filed on
January 5, 1990, as amended. (SEC File No. 1-10720))
10.4* Form of IC Long-Term Incentive Option Plan.
(Incorporated by reference to Exhibit 10.17 to the
Registration Statement of Illinois Central Corporation
and Illinois Central Railroad Company on Form S-1 dated
as of September 26, 1989. (SEC File Nos. 33- 36321 and
33-36321-01))
10.5* Amendments No. 1 and No. 2 to the IC Long-Term
Incentive Plan. (Incorporated by reference to the Proxy
Statement of Illinois Central Corporation in connection
with its 1992 Annual Meeting of Stockholders. (SEC File
No. 1-10720))
10.6 Railroad Locomotive Lease Agreement between IC Leasing
Corporation I and Illinois Central Railroad Company
dated as of September 5, 1991. (Incorporated by
reference to Exhibit 10.9 to the Annual Report on Form
10-K for the year ended December 31, 1991 for the
Illinois Central Railroad Company filed March 12, 1992.
(SEC File No. 1-7092))
10.7 Railroad Locomotive Lease Agreement between IC Leasing
Corporation II and Illinois Central Railroad Company
dated as of January 14, 1993. (Incorporated by
reference to Exhibit 10.6 to the Annual Report on Form
10-K for the year ended December 31, 1992, for the
Illinois Central Railroad Company filed March 5, 1993.
(SEC File No. 1-7092))
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.8* Form of Consulting and Non-Competition Agreement
between Illinois Central Corporation and Edward L.
Moyers dated as of February 18, 1993. (Incorporated by
reference to Exhibit 10.10 to Annual Report on Form
10-K for the year ended December 31, 1992, for the
Illinois Central Corporation filed March 5, 1993. (SEC
File No. 1-10720))
10.9* Form of the Note Agreement between the Illinois Central
Corporation and Edward L. Moyers dated February 18,
1993. (Incorporated by reference to Exhibit 10.11 to
Annual Report on Form 10-K for the year ended December
31, 1992, for the Illinois Central Corporation filed
March 5, 1993. (SEC File No. 1-10720))
10.10* Form of a Supplemental Retirement Benefit Agreement
dated as of August 20, 1992 between Illinois Central
Corporation and Edward L. Moyers. (Incorporated by
reference to Exhibit 10.3 to the Quarterly Report of
the Illinois Central Corporation on Form 10-Q for the
three month ended September 30, 1992. (SEC File No.
1-10720))
10.11 The Asset Sale Agreement between Allied Railcar Company
and IC Leasing Corporation III dated December 3, 1993,
(Incorporated by reference to Exhibit 10.13 to the
Annual Report on Form 10-K for the year ended December
31, 1993 for the Illinois Central Corporation field
March 16, 1994, including the Bill of Sale Agreement
and Assumption of Liabilities included as Exhibits C
and D, respectively, therein). (SEC File No. 1-10720))
10.12 The Purchase Agreement between IC Leasing Corporation
III and The First National Bank of Maryland dated
December 29, 1993. (Incorporated by reference to
Exhibit 10.15 to the Annual Report on Form 10-K for the
Illinois Central Corporation filed March 16, 1994. (SEC
File No. 1-10720))
10.13* Form of the Illinois Central Railroad Company Executive
Performance Compensation Program (Incorporated by
reference to Exhibit 10.1 to the report on Form 8-K of
the Illinois Central Railroad Company dated as of July
29, 1994. (SEC File No. 1- 7092))
10.14* Form of the Illinois Central Railroad Company
Supplemental Executive Retirement Plan (Incorporated by
reference to Exhibit 10.2 to the report on Form 8-K of
the Illinois Central Railroad Company dated as of July
29, 1994. (SEC File No. 1-7092))
10.15* Form of the Illinois Central Railroad Company Executive
Deferred Compensation Plan (Incorporated by reference
to Exhibit 10.3 to the report on Form 8-K of the
Illinois Central Railroad Company dated as of July 29,
1994. (SEC File No. 1-7092))
10.16* Form of Illinois Central Railroad Company Performance
Compensation Program (Incorporated by reference to
Exhibit 10.4 to the report on Form 8-K of the Illinois
Central Railroad Company dated as of July 29, 1994.
(SEC File No. 1-7092)
10.17* Illinois Central Corporation Management Employee
Discounted Stock Purchase Plan. (Incorporated by
reference to Exhibit 10.7 to the report of Form 10-K of
Illinois Central Corporation for the year ended
December 31, 1995. (SEC File No. 1-10720)
10.18 Form of Illinois Central Railroad Company Union
Employees' Savings Plan. (Incorporated by reference to
Registration Statement of Illinois Central Corporation
on Form S-8 dated as of July 18, 1995. (SEC File No.
33-61095))
10.19 Form of Illinois Central Corporation Directors
Incentive 2000 Option Plan (Incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, for the Illinois
Central Corporation filed on May 10, 1996. (SEC File
No. 1-10720))
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.20* Form of Illinois Central Railroad Company Incentive
2000 Plan (Incorporated by reference to Exhibit 10 to
the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, for the Illinois Central Railroad
Company filed on May 10, 1996. (SEC File No. 1-7092))
10.21 Form of Illinois Central Corporation Directors Deferred
Compensation Plan, as amended and restated effective
May 1, 1997. (Incorporated by reference to Exhibit 10
to the Quarterly Report of the Illinois Central
Corporation on Form 10-Q for the three months ended
June 30, 1997. (SEC File No. 1-10720))
10.22 Form of Illinois Central Corporation Directors
Retirement Plan adopted effective as of January 1,
1994. (A)
11 Computation of Income Per Common Share (Included at
E-13)
21 Subsidiaries of Registrant (Included at E-14)
23 Consent of Arthur Andersen LLP (A)
27 Financial Data Schedule (A)
99 Provisions of the Private Securities Litigation Reform
Act of 1995
(A) Included herein but not reproduced.
<PAGE>
Exhibit 11
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON SHARE
($ in millions, except share data)
Years Ended December 31,
1997 1996 1995
Income before extraordinary item $ 150.2 $ 136.6 $ 129.8
Extraordinary item, net - - (11.4)
Net income $ 150.2 $ 136.6 $ 118.4
Calculation of average number of shares outstanding (1):
Basic:
Weighted average number of common shares
outstanding 61,408,637 61,417,769 62,608,274
Diluted:
Weighted average number of common
shares outstanding 61,408,637 61,417,769 62,608,274
Effect of shares issuable under stock
options(2) 698,679 560,622 360,348
62,107,316 61,978,391 62,968,622
Income per common share:
Basic:
Before extraordinary item $ 2.45 $ 2.22 $ 2.07
Extraordinary item, net - - (0.18)
Net income $ 2.45 $ 2.22 $ 1.89
Diluted:
Before extraordinary item $ 2.42 $ 2.20 $ 2.06
Extraordinary item, net - - (0.18)
Net income $ 2.42 $ 2.20 $ 1.88
(1) Shares restated to reflect the 3-for-2 stock split declared in January
1996 as if it took place at the earliest period shown.
(2) The dilutive effect of outstanding stock options are calculated under the
treasury stock method using the average price of Common Stock.
<PAGE>
Exhibit 21
ILLINOIS CENTRAL CORPORATION
Subsidiaries of the Registrant
as of December 31, 1997
Name Place of Incorporation
Subsidiaries included in the financial statements, which are 100% owned:
Illinois Central Railroad Company Illinois
IC Financial Services Corporation Delaware
CCP Holdings, Inc. Delaware
Subsidiaries that are 100% owned by Illinois Central Railroad Company:
Kensington and Eastern Railroad Company Illinois
Mississippi Valley Corporation Delaware
Waterloo Railroad Company Delaware
Subsidiaries that are 100% owned by IC Financial Services Corporation:
IC Leasing Corporation I Nevada
IC Leasing Corporation II Nevada
IC Leasing Corporation III Nevada
IC Terminal Holdings Company Delaware
Subsidiaries that are 100% owned by IC Terminal Holdings Company:
IC RailMarine Terminal Company Delaware
IC Omnimodal Terminal Company of Delaware Delaware
IC Omnimodal Terminal Company Louisiana
NPC, Inc. Louisiana
Subsidiaries that are 100% owned by CCP Holdings, Inc.:
Chicago Central & Pacific Railroad Company Delaware
Cedar River Railroad Company Iowa
Iron Horse Properties, Inc. Delaware
Missouri River Bridge Company Delaware
<PAGE>
Exhibit 10.22
ILLINOIS CENTRAL CORPORATION
DIRECTORS RETIREMENT PLAN
The Illinois Central Corporation Directors Retirement Plan is adopted
effective as of January 1, 1994, for the Directors of Illinois Central
Corporation. The purpose of the Plan is to attract and retain superior talent
for the Board of Directors of Illinois Central Corporation. The Company intends
the Plan to be an unfunded plan maintained solely for the purpose of providing
deferred compensation to members of the Board of Directors who are not employees
of the Company, and not subject to the Employee Retirement Income Security Act
of 1974.
Accordingly, Illinois Central Corporation hereby adopts the Plan
pursuant to the terms and provisions set forth below:
ARTICLE I
DEFINITIONS
Wherever used herein the following terms shall have the meanings
hereinafter set forth:
1.1. "Board" means the Board of Directors of the Company.
1.2. "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any regulations relating thereto.
1.3. "Committee" means the Compensation Committee of the Board, which
is responsible for the administration of the Plan.
1.4. "Company" means Illinois Central Corporation, a Delaware
corporation, or, to the extent provided in Section 5.7 below, any successor
corporation or other entity resulting from a merger or consolidation into or
with the Company or a transfer or sale of substantially all of the assets of the
Company.
1.5. "Director" means each member of the Board who is not an employee
of the Company or any subsidiary of the Company.
1.6. "Final Annual Retainer" means the amount of annual retainer fees
paid to the Participant by the Company for services as a Director in the last
full year of the Director's service with the Board.
1.7. "Participant" means each Director of the Company who is eligible
for participation pursuant to Section 1.5, and each former Director who has
accrued a Retirement Benefit under the Plan.
<PAGE>
1.8. "Plan" means the Illinois Central Corporation Directors Retirement
Plan, as set forth herein and as hereinafter amended from time to time.
1.9. "Retirement Benefit" means the benefit accrued by a Participant
pursuant to Section 2.1, and payable after the Participant's Retirement Date.
Each Participant shall be fully vested at all times in his Retirement Benefit
accrued under this Plan.
1.10. "Retirement Date" means the later of: (i) a Participant's actual
date of retirement from service with the Board; or (ii) the date the Participant
attains age 55 years.
1.11. "Years of Credited Service" means the number of 12-month periods
of the Participant's service with the Board beginning with the date of the
Participant's service with the Board, and including service with the Board prior
to January 1, 1994.
1.12. Words in the masculine gender shall include the feminine and the
singular shall include the plural, and vice versa, unless qualified by the
context. Any headings used herein are included for ease of reference only and
are not to be construed so as to alter the terms hereof.
ARTICLE II
RETIREMENT BENEFIT
2.1. Form and Amount of Retirement Benefit. Each Participant shall be
entitled to a Retirement Benefit payable in equal annual payments, determined as
follows:
(a) The annual amount of the Participant's Retirement
Benefit shall be equal to the Participant's Final Annual Retainer; and
(b) The number of annual payments payable to a
Participant shall be equal to the lesser of: (i) ten (10); or (ii) the
Participant's number of years of Credited Service.
Notwithstanding the foregoing, no Retirement Benefit payment shall be made for
any year following the year of the Participant's death. No survivor benefits of
any kind will be paid under this Plan.
2.2. Commencement of Retirement Benefit. Payment of a Participant's
Retirement Benefit shall begin with the annual meeting following the year for
which the last annual retainer fee was paid to the Participant for service as an
active director with the Board, and shall be made at the same time as the annual
retainer fee is paid by the Company to active Directors for service with the
Board.
<PAGE>
ARTICLE III
ADMINISTRATION OF THE PLAN
3.1. Administration by the Committee. The Committee shall be
responsible for the general operation and administration of the Plan and for
carrying out the provisions thereof.
3.2. Powers and Duties of Committee. The Committee shall administer the
Plan in accordance with its terms and shall have all powers necessary to carry
out the provisions of the Plan. The Committee shall interpret the Plan and shall
determine all questions arising in the administration, interpretation, and
application of the Plan, including but not limited to, questions of eligibility
and the status and rights of Participants, Beneficiaries and other persons. Any
such determination by the Committee shall presumptively be conclusive and
binding on all persons. The regularly kept records of the Company shall be
conclusive and binding upon all persons with respect to a Participant's date and
length of service, Years of Credited Service, time and amount of compensation
and the manner of payment thereof, type and length of any absence from work and
all other matters contained therein relating to Participants. All rules and
determinations of the Committee shall be uniformly and consistently applied to
all persons in similar circumstances.
ARTICLE IV
AMENDMENT OR TERMINATION
4.1. Amendment or Termination. The Company intends the Plan to be
permanent but reserves the right to amend or terminate the Plan. Any such
amendment or termination shall be made pursuant to a resolution of the Board and
shall be effective as of the date of such resolution.
4.2 Effect of Amendment or Termination. No amendment or termination of
the Plan shall directly or indirectly deprive any Participant of all or any
portion of any Retirement Benefit accrued or payable under this Plan as of the
date of such amendment or termination, or which would be payable if the
Participant terminated service for any reason on such date. Upon termination of
the Plan, distribution of Retirement Benefits shall be made to Participants in
the manner and at the time described in Section 2 of the Plan. No additional
Retirement Benefits shall be earned or accrue after termination of the Plan.
ARTICLE V
GENERAL PROVISIONS
5.1. Participants' Rights Unsecured. The Plan at all times shall be
entirely unfunded and no provision shall at any time be made with respect to
segregating any assets of the Company for payment of any benefits hereunder. The
right of a Participant to receive a benefit hereunder shall be an unsecured
claim against the general assets of the Company, and the Participant shall not
have any rights in or against any specific assets of the Company.
<PAGE>
5.2. No Guaranty of Benefits. Nothing contained in the Plan shall
constitute a guaranty by the Company or any other person or entity that the
assets of the Company will be sufficient to pay any benefit hereunder. No
Participant shall have any right to receive a benefit or a distribution of
contributions under the Plan except in accordance with the terms of the Plan.
5.3. No Enlargement of Directors Rights. Establishment of the Plan
shall not be construed to give any Participant the right to be retained in the
service of the Board.
5.4. Spendthrift Provision. No interest of any person or entity in, or
right to receive a distribution under, the Plan shall be subject in any manner
to sale, transfer, assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of any kind; nor may such interest or right to receive
a distribution be taken, either voluntarily or involuntarily for the
satisfaction of the debts of, or other obligations or claims against, such
person or entity, including claims for alimony, support, separate maintenance
and claims in bankruptcy proceedings.
5.5. Applicable Law. The Plan shall be construed and administered under
the laws of the State of Illinois except to the extent preempted by federal law.
5.6. Incapacity of Recipient. Subject to applicable state law, if any
person entitled to a payment under the Plan is deemed by the Company to be
incapable of personally receiving and giving a valid receipt for such payment,
then, unless and until claim therefor shall have been made by a duly appointed
guardian or other legal representative of such person, the Company may provide
for such payment or any part thereof to be made to any other person or
institution then contributing toward or providing for the care and maintenance
of such person. Any such payment shall be a payment for the account of such
person and a complete discharge of any liability of the Company and the Plan
therefor.
5.7. Corporate Successors. The provisions of this Plan shall be binding
on the Company and its successors and assigns. The Plan shall not be
automatically terminated by a transfer or sale of assets of the Company, or by
the merger or consolidation of the Company into or with any other corporation or
other entity, but the Plan shall be continued after such sale, merger or
consolidation only if and to the extent that the transferee, purchaser or
successor entity agrees to continue the Plan. In the event that the Plan is not
continued by the transferee, purchaser or successor entity, the Plan shall
terminate subject to the provisions of Section 4.2.
5.8. Unclaimed Benefit. Each Participant shall keep the Company
informed of his or her current address. The Company shall not be obligated to
search for the whereabouts of any person. If the location of a Participant is
not made known to the Company within three years after the date on which payment
of the Participant's benefits under the Plan, may first be made, the Company
shall have no further obligation to pay any benefit hereunder to such
Participant or any other person, and such benefit shall be irrevocably
forfeited.
5.9. Limitations on Liability. Notwithstanding any of the preceding
provisions of the Plan, none of the Company, any member of the Committee, nor
any individual acting as an employee or agent of the Company or the Committee,
shall be liable to any Participant, former Participant, or other person for any
claim, loss, liability or expense incurred in connection with the Plan.
5.10. Claims Procedure. In the event that a Participant's claim for
benefits under the Plan is denied in whole or in part by the Committee, the
Committee will notify the Participant of the denial. Such notification will be
made in writing, within 90 days of the date the claim is received by the
Committee. The notification will include: (i) the specific reasons for the
denial; (ii) specific reference to the Plan provisions upon which the denial is
based; (iii) a description of any additional information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary; and (iv) an explanation of the applicable review
procedures.
The Participant has 60 days from the date he receive notice of a claim
denial to file a written request for review of the denial with the Committee.
The Committee will review the claim denial and inform the Participant in writing
of its decision within 60 days of the date the claim review request is received
by the Committee. This decision will be final.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
ILLINOIS CENTRAL CORPORATION
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 19, 1998 (except with
respect to the matter discussed in Note 2, as to which the date is February 10,
1998) included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, into Illinois Central Corporation's previously filed Form S-8
Registration Statements File Nos. 33-41052, 33-51924, 33-54709, 33-57757 and
33-61095.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 16, 1998
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EXHIBIT 99
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is filing this exhibit in
order to do so. The Act became law in late December 1995 and no official
interpretations of the Act's provisions have been published. Accordingly, the
Company hereby identifies the following important factors which could cause the
Company's actual financial results to differ materially from any such results
which might be projected, forecast, estimated or budgeted by the Company in
forward-looking statements.
Through 1996, the Company was behind the revenue growth rate the Company
estimated was necessary to achieve Plan 2000. Through 1997, the Company was
behind the revenue growth rate the Company estimated was necessary to achieve
the plan "Beyond 2000."
Grain traffic, in total, is subject to the supply domestically and
internationally. A key factor affecting supply is the weather. Grain traffic for
export is further impacted by changes in world supply and the agricultural and
trade policies of both U.S. and foreign governments.
Coal traffic depends on stockpiles and weather in utilities' service
territories. Deregulation in the utility industry may shift coal traffic
patterns and cause pressure on rail rates.
Chemical traffic and paper shipments are sensitive to the economic cycles. Other
forest products are also sensitive to industrial production and housing starts.
Chemical traffic could be affected if other railroads decided to build new track
into our current service territories.
Market realities for new ventures, such as the terminals, may differ from
assumptions because of changes in the economy and timing of
construction/expansion.
Because the Company's mainline track parallels the Mississippi River, barge
competition is formidable. Barge rates fluctuate partially based on water levels
and shipping conditions on the river.
The merger of SP and UP could result in the loss of the haulage moves the
Company performs for the SP.
As to expenses, the most volatile are labor costs and fuel. Negotiating locally
with the labor unions increases the risk of a strike and a strike may not be
averted via governmental intervention as is frequently the case in national
labor disputes in the transportation industry.
The variability of fuel prices can be offset via hedging but hedging also brings
risk.
Finally, mergers in the railroad industry could create traffic diversions if the
new entity routes traffic around the Company's routes or if it uses its size to
block shippers' routing options or pricing.
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