SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period from _________________ to ____________________
Commission File No. 1-12184
CONRAIL INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23 2728514
- --------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2001 Market Street, Two Commerce Square
Philadelphia, Pennsylvania 19101-1417
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 209-4000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Conrail Inc. New York Stock Exchange
Common Stock (Par Value $1.00) Philadelphia Stock Exchange
and Common Stock Purchase Rights ---------------------------
- --------------------------------
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
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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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant (as of March 3, 1997): $9,260,302,728
Shares of Common Stock outstanding (as of March 3, 1997): 83,144,397
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
TABLE OF CONTENTS
Item Page
Part I 1. Business...................................... 1
2. Properties.................................... 1
3. Legal Proceedings............................. 17
4. Submission of Matters to a Vote of Security
Holders.................................... 23
Executive Officers of the Registrant........... 23
Part II 5. Market for Registrant's Common Equity and
Related Stockholder Matters................. 28
6. Selected Financial Data........................ 28
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 31
8. Financial Statements and Supplementary Data.... 41
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...... 65
Part III 10. Directors and Executive Officers of the
Registrant.................................. 66
11. Executive Compensation......................... 69
12. Security Ownership of Certain Beneficial
Owners and Management....................... 77
13. Certain Relationships and Related Transactions. 79
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................... 80
Power of Attorney............................................. 86
Signatures.................................................... 86
Exhibit Index................................................. 88
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PART I
Item 1. Business.
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and
Item 2. Properties.
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GENERAL. Conrail Inc. was incorporated in Pennsylvania on
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February 12, 1993 and on July 1, 1993 became the holding company of
Consolidated Rail Corporation. Consolidated Rail Corporation is
Conrail Inc.'s only significant subsidiary and primary asset. Conrail
Inc.'s common stock is listed on the New York and Philadelphia Stock
Exchanges.
Consolidated Rail Corporation is a Pennsylvania corporation
incorporated on February 10, 1976 to acquire, pursuant to the Regional
Rail Reorganization Act of 1973, the rail properties of many of the
railroads in the northeast and midwest region of the United States
which had gone bankrupt during the early 1970's, the largest of which
was the Penn Central Transportation Company ("Penn Central").
Reports on Form 10-K for years prior to 1993 were filed by
Consolidated Rail Corporation, and historic data presented herein and
therein reflect the results of Consolidated Rail Corporation for those
time periods. Unless otherwise indicated, references to Conrail prior
to July 1, 1993 denote Consolidated Rail Corporation and its
consolidated subsidiaries, and references to Conrail after July 1,
1993 denote Conrail Inc. and its consolidated subsidiaries.
PROPOSED MERGER. On October 14, 1996, Conrail, CSX Corporation
---------------
("CSX") and a subsidiary of CSX entered into an Agreement and Plan of
Merger (as amended, the "Merger Agreement"), pursuant to which Conrail
was to be merged with a subsidiary of CSX in a merger-of-equals
transaction.
On October 24, 1996, Norfolk Southern Corporation ("Norfolk")
commenced an unsolicited tender offer for all outstanding Conrail
voting stock at $100 per share in cash. Norfolk has since increased
its offer to $115 per share in cash.
On November 20, 1996, CSX concluded its first tender offer and
purchased approximately 19.9% of Conrail's outstanding shares for $110
per share.
On December 18, 1996, CSX and Conrail entered into a second
amendment to the Merger Agreement (the "Second Amendment") that would,
among other things, (i) increase the consideration payable pursuant to
the merger, (ii) accelerate the consummation of the merger to
immediately following the receipt of applicable shareholder approvals
and prior to the Surface Transportation Board ("STB") approval and
(iii) extend until December 31, 1998 an exclusivity period during
which the Conrail Board agreed not to withdraw or modify its
<PAGE>
recommendations of the CSX transactions, approve or recommend any
takeover proposal or cause Conrail to enter into any agreement related
to any takeover proposal.
On January 13, 1997, Norfolk issued a press release announcing
that it would offer to purchase shares representing 9.9% of the
outstanding shares for $115 per share, in the event that Conrail
shareholders did not approve a proposal to opt out of a Pennsylvania
statute (the "Opt Out Proposal") at the meeting of shareholders to be
held on January 17, 1997 (the "Special Shareholders Meeting").
On January 17, 1997, Conrail shareholders voted at the Special
Shareholders Meeting against the Opt Out Proposal.
On February 4, 1997, the amended Norfolk tender offer expired,
and Norfolk subsequently purchased approximately 8.2 million Shares
pursuant thereto.
On March 7, 1997, Conrail and CSX entered into a Third Amendment
(the "Third Amendment") to the Merger Agreement. Pursuant to the
Third Amendment, (i) the price per share has been increased from $110
to $115, and the number of shares to be purchased in the tender offer
has been increased to all outstanding shares. The tender offer is
scheduled to close April 18, 1997 (subject to extension by CSX to June
2, 1997 whether or not the conditions have been satisfied), (ii) the
consideration paid per share in the merger for all remaining
outstanding shares following consummation of the offer has been
increased to $115 in cash and (iii) the conditions to the offer
relating to certain provisions of Pennsylvania law becoming
inapplicable to Conrail and relating pending governmental actions or
proceedings have been deleted.
The Third Amendment also provides that CSX will have sole control
over the regulatory approval process and will be free to conduct by
itself discussions with other railroads, including Norfolk, relating
to competitive issues raised by the CSX transactions, and to enter
into any resulting agreement. It is anticipated that CSX and Norfolk
will negotiate an appropriate division of Conrail's assets; however,
neither the pending CSX tender offer nor the merger is conditioned on
CSX's reaching an agreement with Norfolk.
Pursuant to the Third Amendment, three members of Conrail's Board
of Directors approved by CSX shall be invited to join the CSX Board of
Directors and a transition team will be established, the leadership of
which will include senior executive officers of CSX and Conrail to
ensure the orderly operation of Conrail during the regulatory approval
process and an orderly transition thereafter.
Under the Third Amendment, Conrail and CSX agreed to reduce from
December 31, 1998 to December 31, 1997 the period of time during which
the Conrail Board is prohibited from (i) withdrawing or modifying, or
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<PAGE>
publicly proposing to withdraw or modify, its approval or
recommendation of the CSX transactions, in a manner adverse to CSX,
(ii) approving or recommending, or publicly proposing to approve or
recommend, any competing proposal or (iii) causing Conrail to enter
into any agreement related to any such competing proposal.
Under the Merger Agreement as amended, Conrail may terminate the
Merger Agreement in the event that after June 2, 1997, CSX fails to
consummate the tender offer for any reason other than the non-
occurrence of any condition to the tender offer. In the event that
CSX fails to consummate the tender offer under such circumstances,
Conrail will be entitled to exercise any additional remedies it may
have.
The full terms and conditions of the CSX and Norfolk offers and
Conrail's position with respect to the CSX and Norfolk offers are set
forth in documents filed by Conrail with the Securities and Exchange
Commission.
RAIL OPERATIONS. Conrail, through its wholly-owned subsidiary
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Consolidated Rail Corporation, provides freight transportation
services within the northeast and midwest United States. Conrail
interchanges freight with other United States and Canadian railroads
for transport to destinations within and outside Conrail's service
region. Conrail operates no significant line of business other than
the freight railroad business and does not provide common carrier
passenger or commuter train service.
Conrail serves a heavily industrial region that is marked by
dense population centers which constitute a substantial market for
consumer durable and non-durable goods, and a market for raw materials
used in manufacturing and by electric utilities. Conrail's traffic
levels and, as a result, its financial performance are substantially
affected by its ability to compete with trucks and other railroads,
the economic strength of the industries and metropolitan areas that
produce and consume the freight Conrail hauls and the traffic
generated by Conrail's connecting railroads. Conrail remains dependent
on non-bulk traffic, which tends to generate higher revenues than bulk
commodities, but also involves higher costs and is more vulnerable to
truck competition.
The Service Group System. Beginning in 1994, Conrail's
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Marketing and Sales Department and related segments of its Operating
Department were organized into four service groups: CORE Service,
Intermodal Service, Unit Train Service and Automotive Service.
Petrochemicals and Minerals, food and agriculture products, forest and
manufactured products, and metals are handled by the CORE Service
Group. The Intermodal Service Group handles intermodal trailers and
containers. The Unit Train Service Group handles coal and ore
traffic. The Automotive Service Group handles automotive parts and
finished vehicles. Each of these groups controls the integrated
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<PAGE>
planning, pricing and operating functions that will enable them to
tailor services, develop products and make capital investments
directed toward the special requirements of their respective
customers.
Revenues for the Service Groups for 1992 through 1996, together
with total annual traffic volumes, are set forth in the following
tables.
<TABLE>
SERVICE GROUPS - REVENUES ($ in Millions)
Years ended December 31,
---------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
CORE Service Group(1)
Revenues(2) $1,542 $1,557 $1,587 $1,514 $1,468
Percent of total 43.9% 44.5% 44.5% 45.9% 46.0%
Intermodal Service Group
Revenues(2) 747 701 742 647 597
Percent of total 21.3% 20.0% 20.8% 19.6% 18.7%
Unit Train Service Group
Revenues(2) 666 659 631 583 673
Percent of total 19.0% 18.8% 17.7% 17.7% 21.1%
Automotive Service Group
Revenues(2) 543 549 558 505 443
Percent of total 15.5% 15.7% 15.7% 15.3% 13.9%
Total Unassigned Revenue(2) 11 36 46 48 10
0.3% 1.0% 1.3% 1.5% 0.3%
Total line haul revenue $3,509 $3,502 $3,564 $3,297 $3,191
Miscellaneous revenue(3) 205 184 169 156 154
------ ------ ------ ------ ------
Total freight revenue $3,714 $3,686 $3,733 $3,453 $3,345
====== ====== ====== ====== ======
</TABLE>
- ----------------------
(1) Petrochemicals and
Minerals $ 582 $ 584 $ 603 $ 565 $ 541
Food and Agriculture 335 353 361 351 347
Forest and Mfg. Products 318 329 326 308 315
Metals 307 291 297 290 265
------ ------ ------ ------ ------
Total CORE Srv. Grp. $1,542 $1,557 $1,587 $1,514 $1,468
====== ====== ====== ====== ======
(2) Revenues for the years 1992 through 1994 have been
reclassified to exclude unassigned revenue from Service Group
totals to provide more accurate comparisons to the current
period.
(3) Includes switching, demurrage and other miscellaneous
revenues.
4
<PAGE>
<TABLE>
SERVICE GROUPS - VOLUME IN UNITS
(FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS)
(In Thousands)
Years ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
CORE Service Group (1) 1,235 1,254 1,321 1,302 1,213
Intermodal Service Group 1,584 1,473 1,589 1,355 1,220
Unit Train Service Group 862 862 912 878 964
Automotive Service Group 392 399 396 360 319
----- ----- ----- ----- -----
Total Volume 4,073 3,988 4,218 3,895 3,716
===== ===== ===== ===== =====
</TABLE>
__________________________
(1) Petrochemicals and
Minerals 350 358 376 374 360
Food and Agriculture 257 265 289 295 284
Forest and Mfg. Products 290 306 318 309 290
Metals 338 325 338 324 279
----- ----- ----- ----- -----
Total CORE Srv. Grp. 1,235 1,254 1,321 1,302 1,213
===== ===== ===== ===== =====
CORE Service Group:
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In 1996, revenues and volume for this service group declined 1%
and 1.6%, respectively, from 1995. Revenue in each of the business
units comprising the CORE Service Group declined in 1996, except in
the Metals Business Group which experienced revenue growth of 5.4%
over 1995.
Petrochemicals and Minerals: This commodity group consists of a
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wide variety of commodities, including agricultural and organic
chemicals, plastic pellets, soda ash, construction minerals, petroleum
products and waste. The majority of traffic is joint-line and the
primary flows are between Louisiana and Texas, (as originating
sources), and Delaware, New Jersey, and Pennsylvania (as destination
points). This commodity group's customer base and origin/destination
pair mix are both large and diverse, with none occupying a dominant
position in terms of Conrail's traffic volume or revenues. Conrail's
traffic in this commodity group increased in 1992 and 1993, leveled
off in 1994, and declined slightly in 1995 and 1996, with revenue and
volume down 0.3% and 2.5% respectively. Revenues from mineral
products, which accounted for one-fourth of this group's volume in
1996, declined approximately 5% as the result of several plant
closings.
The largest component of this business is chemical traffic,
accounting for approximately 44% of the revenue and 38% of the volume
in 1996. This traffic includes chlorine, smaller volumes of other
hazardous chemicals and non-hazardous substances which, if spilled or
released into the atmosphere, could be dangerous and could result in
significant liability to Conrail. Under catastrophic circumstances,
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<PAGE>
such liability could exceed Conrail's $300 million in insurance
coverage for such accidents. It is impossible to eliminate the risk
of such liability; however, Conrail has not experienced any
significant liability as a result of an accident involving chlorine or
any other such substance. Furthermore, Conrail has safety procedures
designed to prevent the occurrence of such accidents, or limit their
impact should they occur, and works in concert with chemical
manufacturers to reduce the risks in transporting these commodities,
subscribing to the policies and procedures defined under Responsible
Care partnerships. The year 1996 marked Conrail's first complete year
as a Responsible Care partner.
Increasing regulation by federal, state and local governments of
the transportation and handling of hazardous and non-hazardous
substances and waste has increased the administrative burden and costs
of transporting certain commodities in this group.
Food and Agriculture: This commodity group includes fresh and
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processed food products moving primarily in boxcars, grain, grain
products and agricultural chemicals moving in covered hopper and tank
cars. Conrail's revenue declined by 5.1% and units declined by 2.8%
in 1996 from 1995 levels. In the food commodities area, market share
declines of several large customers account for the difference in
volume and revenue from 1995 levels. Agriculture volume declined as
record grain prices caused domestic users to reduce their use of grain
and grain products. The 13.8% revenue decline in grain and grain
products is primarily attributable to an increase in grain shippers'
use of private cars.
Forest and Manufactured Products: This commodity group includes
---------------------------------
paper and wood products moving in boxcars, certain lumber and related
products moving on flatcars, and general manufactured commodities
moving in boxcars. Paper products account for 57% of 1996 revenue for
this group, followed by wood products (30%), and manufactured products
(13%). A 5.3% volume decline was partially offset by increases in
revenue per unit, which yielded a net revenue decrease of 3.3%. High
inventories and product prices drove paper receivers to work off
existing inventories, reducing rail volume. Most of the inventory
adjustments have taken place and shipments are expected to return to
normal for 1997.
Metals: This commodity group includes scrap ferrous products and
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semi-finished, finished and sheet steel. In 1995, this group
experienced decreases in revenue and volume due to increased truck
competition and selective price increases on low margin business. In
1996, volume increased 4% and revenues grew 5.4% over 1995. Market
share gains from new mini-mills located on Conrail, capacity increases
due to the acquisition of new coil cars and aggressive business
development activity contributed to the year over year growth.
6
<PAGE>
Intermodal Service Group
------------------------
Conrail continues to be one of the rail industry's leaders in
handling intermodal traffic. Volume and revenue increased 7.6% and
6.6%, respectively, in 1996 from 1995. Conrail handled nearly 1.6
million units of intermodal traffic in 1996.
Conrail's intermodal traffic consists of three segments. The
first segment is Conrail's parcel/package traffic, which principally
involves shipments for the U.S. Postal Service, United Parcel Service
and less-than-truck-load companies. Revenue in this segment increased
by 7.3% in 1996.
The second segment is domestic traffic, which includes a variety
of commodities and customers. Revenue in this segment increased by
7.8% in 1996. Traffic from major truckload companies continued to
increase, as did traffic from intermodal marketing companies (or third
party freight consolidators and brokers).
International container traffic constitutes the third segment of
Conrail's intermodal traffic. International container traffic chiefly
involves goods produced in the Pacific Basin and shipped by rail from
west coast ports to east coast markets. Conrail and its western
railroad connections are able to participate in this traffic because
they have established superior transit time compared with the all-
water route through the Panama Canal. Conrail also participates in
traffic moving through Atlantic ports for import and export trade with
European and Mediterranean markets. Revenue from Conrail's
international intermodal traffic increased 4.6% in 1996.
In 1996, Conrail opened a new intermodal terminal in Pittsburgh,
PA, initiated service from the Ameriport terminal in Philadelphia and
reopened its intermodal terminal in Buffalo.
Unit Train Service Group
------------------------
In 1996, revenues for this service group increased by
approximately 1.1%, despite no increase in traffic volume.
Utility coal traffic, which makes up the majority of Conrail's
coal business, increased 10.4% with a 13.5% increase in revenue in
1996. Utility coal moves from mines located on and off Conrail's
system to electric utilities located on Conrail. Annual traffic
volumes fluctuate with the inventory practices of the electric
utilities, their use of alternative sources of energy and the weather.
The 1996 increase reflects a very cold winter with lower utilization of
nuclear units in Conrail's service area.
The utility industry is undergoing a process of deregulation
which is changing the competitive environment in this key Conrail
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<PAGE>
market. Deregulation will increase the downward pressure on utility
coal transportation rates and increase service requirements as
utilities strive to reduce their costs to remain competitive.
Deregulation, coupled with more stringent sulfur dioxide emission
limits, should help Conrail's lower cost and lower sulfur coal sources
in southwestern Pennsylvania and northern West Virginia to remain
competitive. Shipments of Conrail-served coal from these areas
increased 7.0% in 1996 over 1995.
Export, industrial/cogeneration and metallurgical coal represent
the three remaining segments of Conrail's coal traffic, with export
coal volumes being one-third greater than industrial/cogeneration
volumes and more than twice as great as metallurgical coal volumes.
Export coal traffic volume declined 6% in 1996, after having
increased 58% in 1995, due to strong domestic demand for coal which
reduced the amount of coal available for the export market.
Conrail's traffic volume and revenue for industrial/cogeneration
coal was essentially unchanged from 1995.
Conrail's traffic volume and revenue from metallurgical coal
continues to decline, having decreased 38% in 1996 after a decline of
9% in 1995. Revenue in 1996 was down approximately 44%. The large
decline in 1996 volume and revenue was due to the loss of a
significant customer in the first half of the year. Sixty percent of
this business was recovered in June of 1996, although at significantly
lower rates.
Conrail serves directly, or via short line switching carriers,
many of the nation's largest active integrated steel production
facilities. Although a significant portion of the active domestic
steel industry is along the Cleveland-Chicago corridor on Conrail's
system, the traditional domestic steel industry (using integrated
steel production facilities) continues to eliminate inefficient
production capacity, which in past years has adversely affected the
volume of raw materials for steel production handled by Conrail, and
could continue to do so. Volume in this segment is expected to
continue to decline in 1997. This trend is continuing as iron ore and
coke volume declined 12% in 1996, while revenues declined 3.5%.
Automotive Service Group
------------------------
Conrail's Automotive Service Group experienced a slight decrease
in volume and revenue in 1996, despite continued slow growth in North
American Light Vehicle Production, which increased 1% in 1996 over
1995. As a whole, the Automotive Service Group's revenues decreased
1.1%. Finished vehicles revenue increased 1%, and Autoparts
experienced a 4% revenue reduction.
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General Motors' strike in the Fall of 1996 was the major factor
contributing to the group's overall decline in volume and revenue,
with a particularly negative impact on the autoparts business.
Continued strong production by the foreign-based domestic
manufacturers, and the shift of import traffic from East coast ports
to cross-country landbridge shipments, resulted in an increase in
finished vehicles traffic, despite the mid-year closing of General
Motors' Tarrytown, NY plant and Chrysler's Newark, DE plant.
9
<PAGE>
Certain Statistics. The following tables provide various
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measurements relating to Conrail's rail operations from 1992 through
1996:
<TABLE>
PRODUCTIVITY DATA
Years ended December 31,
-------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Operating ratio (1)................... 83.8% 87.6% 83.8% 82.9% 84.0%
Compensation and benefits ratio....... 32.5% 33.9% 33.7% 35.6% 37.0%
Employees (average)................... 21,280 23,510 24,833 25,406 25,380
Gross ton miles per freight employee
hour worked (2)(3)................. 4,634 4,352 4,135 3,805 3,746
Gross ton miles per freight train
hour (thousands) (2)(3)............ 113.4 118.7 113.0 119.0 122.1
Gross ton miles per locomotive in
service (millions) (2)(3)........... 114.2 110.1 104.8 102.4 107.1
Gross ton miles per gallon of fuel (2) 773 774 749 745 770
</TABLE>
(1) The 1996 operating ratio (operating expenses as a percent of
revenues) includes the effect of a one-time $135 million charge
for non-union voluntary separation programs and related losses on
certain non-cancelable leases. Without this charge, Conrail's
operating ratio would have been 79.7%. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 3 to the Consolidated Financial
Statements elsewhere in this Annual Report. Without the $285
million special charge in 1995, Conrail's operating ratio would
have been 79.9%. See Note 10 to the Consolidated Financial
Statements elsewhere in this Annual Report. Without the $84
million special charge in 1994, Conrail's operating ratio would
have been 81.5%. See Note 11 to the Consolidated Financial
Statements elsewhere in this Annual Report.
(2) Excluding subsidiaries, except Consolidated Rail Corporation.
(3) Locomotive weight not included.
<TABLE>
QUALITY OF SERVICE DATA(1)
Years ended December 31,
-------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Miles of track under slow order....... 12 43 49 62 73
Locomotive out of service ratio....... 9.4% 9.1% 8.7% 8.3% 8.8%
Freight cars requiring heavy repairs.. 5.6% 5.6% 4.9% 4.7% 4.0%
Reportable train accidents ........... 180 141 160 155 148
Cost of loss and damage incidents
as a percent of revenue............ .52% .47% .48% .39% .39%
</TABLE>
(1) Excluding subsidiaries, except Consolidated Rail Corporation.
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COMPETITION. Conrail's rail services face significant
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competition from trucks, from other railroads, and from the
availability of the same or substitute goods produced at points not
served by Conrail. The trucking industry is especially competitive in
Conrail's service area because, among other reasons, freight in this
region is moved shorter distances than in the West, and the cost
characteristics of the railroad and trucking industries generally make
trucks more competitive over shorter distances.
Price and service competition from trucks, while present for all
commodities, is especially evident in the movement of intermodal
freight, auto parts, and finished steel. Competition from trucks has
been increased by the passage of legislation removing certain barriers
to entry into the trucking business and allowing the use of wider,
longer, and heavier trailers and multiple trailer combinations.
Larger trailers and multiple trailer combinations have substantially
increased productivity in the trucking industry, and any future
legislation permitting further increases in truck capacity could have
a substantial adverse effect on the competitiveness of railroads.
Conrail is also subject to competition from other railroads. In
most of Conrail's service territory, one or more other railroads can
serve customers directly. Elsewhere, the ability to provide joint
service with the many short lines whose operations have proliferated
throughout the east, and/or in partnership with trucks (for pick-up,
delivery, and draying services) allows rail competitors whose tracks
do not reach given customers or points to constrain Conrail prices and
to compete effectively for movement of the freight. In addition,
recent changes in the nature of rail service offerings and in
technology have expanded the scope of rail service beyond the physical
limitations of lines, which has resulted in increased railroad
competition.
An important influence on Conrail's competitive position is
regulation by the Federal government. Prior to 1980, regulation
significantly inhibited the ability of railroads to respond to
increasing customer demands, overall logistics needs, and changing
transportation markets. The Staggers Rail Act of 1980 ("Staggers
Act") substantially reduced the restrictions of regulation. In
particular, railroads were given more opportunity to reduce costs and
more freedom to adjust prices and service offerings, which enabled
them to compete more effectively. Under the Staggers Act, the former
Interstate Commerce Commission ("ICC") deregulated a significant
amount of railroad traffic, including intermodal and most boxcar
traffic, finished vehicles and numerous other commodities moving in
other types of equipment.
The Staggers Act further enhanced railroads' competitive options
by permitting the use of railroad-shipper contracts for traffic still
regulated, under which the parties can negotiate customer-specific
prices, service standards and terms. These contracts generally
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<PAGE>
provide prices lower than tariff rates and many do not guarantee that
any given amount of freight will be shipped during their term. As of
December 31, 1996, Conrail was a party to 3,362 such contracts for
regulated traffic, which Conrail estimates accounted for 29% of its
line-haul revenues in 1996. Although some contracts have a term
longer than one year, most contracts are for one year or less. The
majority of Conrail's multi-year contracts are subject to cost-related
adjustments that provide for flat percentage increases. The cost-
based provisions in certain of these contracts are tied to indices
formerly under the jurisdiction of the ICC. Action to adjust these
indices for productivity gains by the railroads has had an adverse
impact on Conrail's ability to recover costs under such contracts,
which accounted for less than 2% of Conrail's line haul revenues in
1996.
Effective January 1, 1996, pursuant to the ICC Termination Act of
1995, the authority of the ICC to regulate railroads was transferred
to the Department of Transportation ("DOT") to be administered by the
Surface Transportation Board. The prior regulatory scheme remains
substantially intact, with the following significant changes: (1)
access to freight railroad tracks by rail operators (both freight and
passenger) operating on behalf of local governmental authorities has
been eased; (2) some types of abandonments may take appreciably
longer; (3) tariffs and most contracts will no longer be filed (other
mechanisms are required for advising customers of rates and rate
changes); (4) minimum rate levels will no longer be regulated; and
(5) DOT will not regulate railroad issuances of securities or
assumptions of debt. Other changes will require development of new
regulations and/or of a body of precedent before their impact can be
fully assessed.
PROPERTY. Conrail directly holds no real property. The only
--------
significant property holdings are those of Consolidated Rail
Corporation.
As of December 31, 1996, Consolidated Rail Corporation (excluding
its subsidiaries) maintained 16,970 miles of track including track for
crossovers, turnouts, second main, other main, passing and switch
track, on its 10,543 mile route system. Of total route miles, 8,459
are owned, 87 are leased or operated under contract and 1,997 are
operated under trackage rights, including approximately 300 miles
operated pursuant to an easement over Amtrak's Northeast Corridor. As
of December 31, 1996, virtually all track over which at least 10
million gross tons moved annually (5,923 track miles) was heavy-weight
rail of at least 127 pounds per yard, and 100% of such track had
continuous welded rail. Continuous welded rail reduces track
maintenance costs and, in general, permits trains to travel at higher
speeds. As of December 31, 1996, Conrail had 8,804 miles of
continuous welded rail on track it maintained.
12
<PAGE>
As of December 31, 1996, 83% of the 3,814 track miles maintained
for fast freight traffic had a maximum operating speed of 50 MPH or
more, and 70% had a maximum operating speed of at least 60 MPH. As of
December 31, 1996, approximately 96% of the track over which at least
10 million gross tons moved annually was governed by automatic signal
systems. In all, as of December 31, 1996, 7,656 miles of track were
controlled by automatic signal systems.
Conrail is engaged in an ongoing process to identify certain
under-utilized rail lines and other underperforming assets to avoid
future capital costs and to improve its return on assets. Conrail
recorded a $285 million charge in 1995 to cover the expected losses
upon disposition of approximately 1,800 miles of lines and other
assets not required to support Conrail's service. See Note 10 to the
Consolidated Financial Statements elsewhere in this Annual Report.
The following table indicates the number of locomotives and
freight cars owned (or subject to capitalized leases) and includes
21,435 freight cars used by Conrail under operating leases. These
total figures are as of December 31, 1996, and include stored or
surplus units, but exclude subsidiaries other than Consolidated Rail
Corporation, which have an immaterial number of locomotives and
freight cars:
<TABLE>
LOCOMOTIVES AND FREIGHT CARS
Number of Units
----------------------
Total Stored(1)
------ ---------
<S> <C> <C>
LOCOMOTIVES........................ 2,006 122
------ -----
Road............................. 1,834 78
Switching........................ 172 44
Total Surplus(2)
------ ----------
FREIGHT CARS....................... 45,988 6,333
------ -----
Box.............................. 7,855 1,661
Covered Hopper................... 3,400 315
Open Hopper...................... 11,464 3,265
Gondola.......................... 4,459 638
Coil Steel....................... 11,294 0
Multi-Level...................... 6,005 165
Flat and Other................... 1,511 289
</TABLE>
- -----------------
(1) Serviceable locomotives not required for current operations on
December 31, 1996.
(2) Freight cars which did not move during the seven days immediately
preceding December 31, 1996 and which were available for loading.
The number of surplus freight cars during 1996 fluctuated due to
variations in traffic and fleet adjustments.
13
<PAGE>
On December 31, 1996, the average age of Conrail's road
locomotives, not including stored-serviceable units, was 11.1 years.
The average age of the total locomotive fleet was 15.6 years, and the
average age of the total freight car fleet was 22 years.
CAPITAL EXPENDITURES. The following tables provide information
--------------------
concerning capital expenditures from 1992 through 1996:
<TABLE>
CAPITAL EXPENDITURES
(In Millions)
Years ended December 31,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track rehabilitation...... $203 $206 $221 $207 $275
Rolling stock and
transportation equipment.. 139 170 139 314 57
Other(1).................. 136 118 148 129 159
---- ---- ---- ---- ----
Total..................... $478 $494 $508 $650 $491
==== ==== ==== ==== ====
Subsidiaries of
Consolidated Rail
Corporation (included in
Total).................... $ 5 $ 4 $ 3 $ 4 $ 12
</TABLE>
(1) Includes communications and signals, bridges and tunnels,
computers and telecommunications, and other improvements.
<TABLE>
TRACK REHABILITATION
Years ended December 31,
____________________________________
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles surfaced...... 4,685 3,162 2,749 3,154 3,671
Track miles of rail laid.. 241 255 207 201 312
Ties installed (millions). 0.9 1.1 1.1 1.0 1.4
</TABLE>
EMPLOYEES AND LABOR. Including subsidiaries, Conrail's average
-------------------
number of employees for 1996 was 21,280. Consolidated Rail
Corporation (excluding subsidiaries) averaged 20,761 employees in
1996, 87% of whom are represented by a total of 14 labor organizations
and are covered by 22 separate collective bargaining agreements.
Conrail has concluded collective bargaining agreements with
organizations representing approximately 66% of its total employees.
These agreements contain moratorium clauses providing that they may
14
<PAGE>
not be reopened prior to January 1, 2000. However, certain issues
remain outstanding with one of the above-mentioned organizations, the
Transportation Communications International Union, representing
approximately 2,250 Conrail employees. The parties are currently in
mediation under the auspices of the National Mediation Board (NMB).
In addition, the United Transportation Union, which represents
approximately 4,100 Conrail employees, contends that certain issues
remain outstanding. The Company disputes this contention and the
parties are in mediation.
Conrail is currently in negotiations with organizations
representing approximately 22% of its employees. The negotiations
with the largest of these organizations, a coalition of the
Brotherhood of Railroad Carmen and the Transport Workers Union, are
currently in mediation. The outcome of these negotiations cannot be
predicted at this time. If the NMB eventually concludes that its
efforts to resolve the dispute will not be successful, it will proffer
binding arbitration. If either side refuses to arbitrate, there is a
30-day "cooling-off" period during which the NMB may make a finding
that the dispute threatens "substantially to interrupt interstate
commerce to a degree such as to deprive any section of the country of
essential transportation service." Such finding is then presented to
the President of the United States who has the option of appointing an
Emergency Board to investigate the dispute. If the President does not
appoint an Emergency Board, the parties are free to resort to self
help at the conclusion of the above-mentioned cooling-off period.
If the President does appoint an Emergency Board, the Board has
30 days to investigate the dispute and report its findings. The
Emergency Board's findings are non-binding. Although the parties must
maintain the status quo for a period of 30 days following the issuance
of the Board's report, any party which rejects the Board's findings
may thereafter resort to self help. In the event of a strike,
Congress has the power to resolve the dispute by enacting legislation,
including legislation imposing a labor contract in accordance with the
findings of the Emergency Board.
In Conrail's negotiations with four other organizations
representing approximately 4% of its employees, the parties have not
invoked mediation.
Under a decision by the United States Supreme Court on April 28,
1987, rail unions have the right, under the Railway Labor Act and
other federal laws, to engage in secondary picketing against any
railroad. As a result, a labor dispute between one railroad and a
union can cause a strike to spread to any other railroad, or to all
other railroads, whether or not the union has a collective bargaining
agreement or a dispute with such other railroads. There is also the
potential that railroads may be subject to secondary picketing in the
event of a strike in the airline industry, which, like the railroad
industry, is subject to the Railway Labor Act.
15
<PAGE>
Should Conrail or its subsidiaries be the subject of a strike or
secondary picketing, Conrail's rail operations could be stopped or
severely curtailed.
GOVERNMENT REGULATION. Conrail is subject to environmental,
---------------------
safety, and other regulations generally applicable to all businesses,
and its rail operations are also regulated by the DOT, the Federal
Railroad Administration ("FRA"), state Departments of Transportation
and some state and local regulatory agencies.
The DOT has jurisdiction over, among other things, rates charged
for certain traffic movements, service levels and freight car rents.
It also has jurisdiction over the situations and terms under which one
railroad may gain access to another railroad's traffic or facilities,
extension or abandonment of rail lines, consolidation, merger, or
acquisition of control of rail common carriers and of other carriers
by rail common carriers, and labor protection provisions in connection
with the foregoing.
Under the Staggers Act, federal regulation of rates and services
was reduced. The regulatory scheme, now administered by the Surface
Transportation Board, continues the ICC's prior deregulation of rates
for intermodal traffic, most boxcar traffic and a series of
miscellaneous commodities, including steel and automobiles. In
addition, railroads are free to negotiate contracts with shippers
setting rates, service standards and the terms for movements of other
kinds of traffic. As a result, railroads have greater flexibility in
adjusting rates and services to meet revenue needs and competitive
conditions. For further discussion of the abolition of the ICC and
the effect of the transfer of its regulatory authority to DOT, see
"Competition."
The FRA has jurisdiction over safety and railroad equipment
standards.
Conrail's rail operations are also subject to a variety of
governmental laws and regulations relating to the protection of the
environment. In addition to being involved as a potentially
responsible party at numerous Superfund sites (see Item 3 - "Legal
Proceedings"), Consolidated Rail Corporation is subject to increasing
regulation of its transportation and handling of certain hazardous and
non-hazardous commodities and waste which has resulted in additional
administrative and operating costs. Also, on February 11, 1997, the
United States Environmental Protection Agency published in the Federal
Register Proposed Rule "Emission Standards for Locomotives and
Locomotive Engines". According to the Proposed Rule, locomotive
engines (other than those defined as new or remanufactured) may be
regulated by the states. Additional investments will likely be
required to bring other than new locomotives into compliance, although
the timing and amount of the investments will not be determinable
until the Rule is adopted. Compliance with existing laws and
16
<PAGE>
regulations relating to the protection of the environment has not had
a material effect on Conrail's capital expenditures, earnings or
competitive condition. (See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Environmental Matters," and Note 13 to the Consolidated Financial
Statements included elsewhere in this Annual Report.)
Item 3. Legal Proceedings. References to Conrail in "Item 3. Legal
- ------ -----------------
Proceedings" shall denote Consolidated Rail Corporation unless
otherwise expressly noted.
Occupational Disease Litigation. Conrail has been named as a
-------------------------------
defendant in lawsuits filed pursuant to the provisions of the Federal
Employers' Liability Act ("FELA") by persons alleging (1) personal
injury or death caused by exposure to asbestos in connection with
railroad employment; (2) complete or partial loss of hearing caused by
exposure to excessive noise in the course of railroad employment; (3)
repetitive motion injury in connection with railroad employment; and
(4) personal injury or death caused by exposure to deleterious
substances (mixed dusts, fumes, chemicals, etc.). As of December 31,
1996, Conrail was a defendant in 559 pending asbestos suits, 545
pending hearing loss suits, 1,318 repetitive motion injury suits and
374 pending deleterious substance suits, and had notice of 1,293
potential asbestosis claims, 2,734 potential hearing loss claims,
2,112 potential repetitive motion injury claims and 56 deleterious
substance claims.
Conrail expects to be named as a defendant in a significant
number of occupational disease cases in the future.
Norfolk Southern Corp., et al. v. Conrail Inc. On October 23, 1996,
---------------------------------------------
Norfolk filed a Complaint for Declaratory and Injunctive Relief (as
amended on October 30, 1996, the "Complaint"), with respect to the
transactions contemplated by the Merger Agreement, in the United
States District Court for the Eastern District of Pennsylvania.
Norfolk named CSX, Conrail and certain directors of Conrail as
defendants. The Complaint in its currently amended form alleges,
among other things, violations of: (1) fiduciary duties by the
Conrail Board; (2) Conrail's Articles of Incorporation and By-Laws;
and (3) Pennsylvania statutory law.
In addition, Norfolk alleges that the CSX tender offer is
coercive and unfair to Conrail shareholders; that certain provisions
in the Merger Agreement prohibiting Conrail from changing its
recommendation of the transaction or agreeing to a competing
transaction, is ultra vires and a breach of the Conrail Board's
fiduciary duties; and that Conrail and CSX violated disclosure
provisions of the federal securities laws relating to tender offers
and proxy solicitations through the misrepresentation and omission of
material facts.
17
<PAGE>
Norfolk has requested preliminary and permanent injunctive and
declaratory relief including, without limitation, an injunction to
prevent defendants from: (1) continuing a tender offer for the
Conrail shares, (2) taking any action to enforce certain provisions of
the Merger Agreement, and (3) failing to take actions necessary to
exempt Norfolk's proposal to acquire Conrail from certain provisions
of Pennsylvania statutory law.
Conrail believes that the claims set forth by Norfolk are
entirely without merit, and on November 12, 1996, Conrail filed a
motion to dismiss Norfolk's complaint in its entirety. The Federal
District Court and the Third Circuit Court of Appeals have denied
Norfolk's requests for the preliminary injunctions.
Punitive Damage Awards in Ohio Crossing Accident Cases.
------------------------------------------------------
Consolidated Rail Corporation has recently received adverse jury
verdicts in three separate crossing accident cases in Ohio: Garrett
and Gollihue v. Consolidated Rail Corp.; Wightman v. Consolidated
Rail Corp.; and Moore, et al. v. Consolidated Rail Corp. In each
case, the jury awarded substantial punitive damages in connection with
property damage resulting from the accidents. Collectively, the total
punitive damage awards total approximately $30 million, based on
property damage that totals less than $5,000. Conrail believes that,
ultimately, these awards should not be sustainable due to their
failure to bear a reasonable relationship to the amount of physical
property damage involved, and has appealed. Ohio law prohibits the
award of punitive damages in connection with a wrongful death action.
Structure and Crossing Removal Disputes in Connection With Lines
----------------------------------------------------------------
Abandoned Under NERSA. Conrail may be responsible, in whole or in
- ---------------------
part, for the costs of removal of several hundred overhead and
underpass crossings located on railroad lines it has abandoned under
NERSA (and, in some instances, responsible for the removal of the
lines of railroad themselves as well as appurtenant structures).
Conrail's liability for the removal of such lines, crossings and
structures will be determined on a case-by-case basis, and is
dependent upon the circumstances under which each was constructed, the
nature of Conrail's property interest with respect to such structures,
the existence of contracts pertaining to such crossings and
structures, and applicable federal and state law. Some states have
imposed upon Conrail the obligation to remove certain crossings.
18
<PAGE>
Engelhart v. Conrail. In connection with the Special Voluntary
--------------------
Retirement Program offered to certain employees in late 1989 and early
1990, Conrail used surplus funds in its over-funded Supplemental
Pension Plan ("Plan") to fund certain aspects of that program. In
December 1992, certain former Conrail employees brought suit
challenging the use of surplus Plan funds (a) to pay administrative
Plan expenses previously paid by Conrail, (b) to fund the Special
Voluntary Retirement Program, and (c) to pay life insurance and
medical insurance premiums of former employees as improper and
unlawful, and alleging that employees who have made contributions to
the Plan or its predecessor plans are entitled to share in the surplus
assets of the Plan. In August, 1993, the court granted Conrail's
Motion to Dismiss the majority of the counts in the complaint, but
refused to dismiss the issue of Conrail's use of Plan assets to pay
administrative expenses of the Plan, which are estimated to be
approximately $40 million at December 31, 1996. Conrail believes that
the use of surplus Plan assets for this purpose was lawful and proper.
On September 16, 1996, the Judge granted Conrail's motion for summary
judgment on all of the claims except for one individual participant
claim. Plaintiffs have appealed those claims as to which they
received an adverse ruling.
Environmental Litigation. Conrail is subject to various federal,
------------------------
state and local laws and regulations regarding environmental matters.
In certain instances, Conrail has received notices of violations of
such laws and regulations and either has taken or plans to take
appropriate steps to address the problems cited or to contest the
allegations of violation. As of December 31, 1996, Conrail had
received inquiries from governmental agencies or had been identified,
together with other companies, as a potentially responsible party for
cleanup and/or removal costs due to its status as an alleged
transporter, generator or property owner at 135 locations throughout
the country. However, Conrail, through its own investigations and
assessments, believes it may have some potential responsibility at
only 61 of these sites. The amounts Conrail has accrued with respect
to the proceedings listed below are included in its $55 million
accrual for estimated future environmental expenses. (See Item 7
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Environmental Matters" and Note 13 to the
Consolidated Financial Statements included elsewhere in this Annual
Report.) The significant environmental proceedings, including
Superfund sites, are discussed below.
United States v. Southeastern Pennsylvania Transportation
---------------------------------------------------------
Authority ("SEPTA"), National Railroad Passenger Corporation
- ------------------------------------------------------------
("Amtrak"), and Consolidated Rail Corporation. In March 1986, the
- ---------------------------------------------
United States Environmental Protection Agency ("EPA") filed an action
in the United States District Court for the Eastern District of
Pennsylvania for cost recovery, injunctive relief, and a declaratory
judgment against the Company, Southeastern Pennsylvania Transportation
Authority ("SEPTA") and National Railroad Passenger Corp. ("Amtrak")
19
<PAGE>
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 ("CERCLA" or "Superfund Law"), as amended. In
1990, the Pennsylvania Department of Environmental Resources
intervened as a plaintiff. Suit is based on the release or threatened
release at the Paoli Railroad Yard, Paoli, Chester County,
Pennsylvania, of polychlorinated biphenyls ("PCBs"), a listed
hazardous substance under CERCLA.
Pursuant to a series of partial preliminary consent decrees,
defendants have performed a series of cleanup actions both on and off-
site and have conducted a Remedial Investigation/Feasibility Study
("RI/FS"). Those costs have been shared equally among the three
defendants but are subject to reallocation.
The estimated cost of the Company's portion of a remedy proposed
by the parties was included in the 1991 special charge and subsequent
adjustments to accruals. EPA and the railroad parties have entered
into a tentative settlement agreement regarding EPA's claim for past
costs, as well as federal and state natural resource damages. As part
of the settlement, Amtrak, SEPTA and Conrail have committed to perform
the on-site remedy for the rail yard.
United States v. Conrail. The EPA has listed Conrail's Elkhart
------------------------
Yard on the National Priorities List. The EPA contends that chemicals
have migrated from the yard and contaminated drinking wells in the
area. On February 14, 1990, EPA filed a civil action against Conrail
in the U.S. District Court for the Northern District of Indiana
seeking recovery of approximately $345,000 for costs incurred in
protecting the water supply. In addition, EPA seeks a declaratory
judgment against Conrail for all future costs incurred in responding
to the release or threatened release of hazardous substances from the
site. Conrail believes it is not the sole source and may not be a
contributing source to the contamination alleged by EPA.
Conrail filed a third-party action joining Penn Central as a
defendant. Conrail and Penn Central have negotiated an interim cost
sharing arrangement for the cost of implementing the EPA's 1992
interim record of decision, which is substantially complete. On May
15, 1995 EPA issued an Administrative Order to Conrail and Penn
Central requiring the extension of public water hook-up to an
additional 700 - 1,000 residences and businesses in the site area.
Conrail and Penn Central have agreed that each company would comply
with the Order. The cost for providing public water to the remaining
residences is estimated to be in excess of $6 million, which will be
apportioned between Penn Central and Conrail according to the interim
cost sharing arrangement that has been negotiated. Conrail and Penn
Central are attempting to negotiate a final settlement with EPA of the
matter.
United States v. Consolidated Rail Corp., et al (Berks Superfund
----------------------------------------------------------------
Site). Conrail has been identified as the fifth largest generator of
- -----
20
<PAGE>
waste oil at the Berks Associates Superfund site in Douglasville,
Pennsylvania. In addition, Conrail has become aware that it and its
predecessor, Penn Central, owned a small portion of land that was
leased to the operator of the Berks site. As such, Conrail's
liability could increase due to its questionable status as both an
owner and a generator. In August 1991, the EPA issued an
administrative order against Conrail and thirty-five other entities
mandating the implementation of an approximately $2 million partial
remedy and filed a complaint in the U.S. District Court for the
recovery of approximately $8 million in costs incurred by the
government. The parties have negotiated an administrative order with
the EPA and have filed an answer to the civil action. A group of
potentially responsible parties (including Conrail) undertook
compliance with the administrative order. Conrail and the 35 other
defendants have filed a third-party complaint against approximately
630 entities seeking contribution for the costs of the remedy and
government costs. Conrail, along with other defendants, is
negotiating a settlement with the EPA. On June 30, 1993, the EPA
issued another administrative order against Conrail and 33 other
entities, mandating the remediation of the southern portion of the
site. The EPA has requested a feasibility study for the
implementation of a less expensive remedy for the southern portion of
the site, which remedy would range from approximately $10-$12 million.
Conrail's share of such a remedy has not yet been determined. In
addition, the PADER has filed a complaint for the recovery of natural
resource damages.
United Scrap Lead - Troy, OH. Conrail is a potentially
----------------------------
responsible party, along with more than 50 other parties, in the
United Scrap Lead federal Superfund action in Troy, Ohio, where
substantial quantities of batteries were disposed of over a period of
several years. EPA sued Conrail and nine other parties in August 1991
for the recovery of approximately $2,000,000 in past costs.
Conrail and other PRP's have commissioned treatability studies. The
parties are negotiating over the nature of the remediation to be
undertaken at the site. EPA has selected a preferred alternative with
an estimated total cost of $33 million, which the PRP group is
challenging. Conrail's estimated share of any remedial costs is 8%.
Commonwealth of Massachusetts v. Conrail (Locomotive Emission).
--------------------------------------------------------------
On April 21, 1992, the Massachusetts Attorney General filed suit in
state court alleging Conrail's violation of the Massachusetts Clean
Air Act by allowing diesel engines to idle unnecessarily and/or in
excess of thirty (30) minutes. On May 4, 1992, the court entered a
preliminary injunction, the terms of which are substantially those
embodied in Conrail's existing idling policy. The Attorney General
has filed a complaint alleging Conrail's violation of the preliminary
injunction. On February 2, 1993, the parties entered into a partial
settlement agreement; however, the Attorney General has alleged that
Conrail has failed to comply with certain provisions of the
21
<PAGE>
settlement. Conrail continues to attempt to settle the matter with
the Attorney General's office.
New York State Department of Environmental Conservation Order On
----------------------------------------------------------------
Consent (Selkirk Yard). On July 31, 1996, the New York State
- ----------------------
Department of Environmental Conservation (NYSDEC) served Conrail with
a revised draft Order on Consent requiring the payment of a penalty of
$250,000 in connection with its inspection of Selkirk Yard. A revised
Order was received by Conrail on August 6, 1996, requiring the payment
of fines in connection with the 1991 inspection and mandates
assessment and remediation of the facility. Conrail is negotiating
the terms of the order with NYSDEC.
New York State Department of Environmental Conservation Order on
----------------------------------------------------------------
Consent (DeWitt Yard). On November 3, 1994, NYSDEC served Conrail
- ---------------------
with a Consent Order in connection with the alleged discharge of waste
water from DeWitt Yard, Onondaga County, New York into New York state
waters. On June 17, 1996, a revised Consent Order was issued to
Conrail which added American Financial Group (Penn Central Corp.) as a
named responsible party for the payment of penalties and preparation
of a Site Assessment and Remediation Plan. Conrail and American
Financial Group are negotiating the terms of the Order with NYSDEC.
In the Matter of Conrail, Ashtabula, OH. On September 21, 1994,
---------------------------------------
the EPA filed an Administrative Complaint against Conrail seeking
civil penalties of $125,000 for certain alleged violations of its
National Pollutants Discharge Emissions System permit. On November
27, 1995, EPA filed a separate Administrative Complaint seeking civil
penalties for alleged violations of regulatory requirements pertaining
to on-site petroleum storage. Conrail has reached agreement with EPA
to jointly settle these matters for $150,000.
Conway Yard, Pittsburgh. In 1991, Conrail received Notices of
-----------------------
Violation ("NOV") from the Pennsylvania DER ("PADER") alleging
violations of the Clean Streams Act for discharges of oil into the
Ohio River. In September 1993, PADER sent to Conrail a draft Consent
Order and Agreement requiring a comprehensive site remediation for
soil, ground water, surface waters and sediments at the Conway
Railyard and requiring the payment of civil fines in connection with
violations at the yard. Conrail and PADER continue to negotiate the
extent of the investigation and remediation to be undertaken at the
yard.
Other. In addition to the above proceedings, Conrail has been
-----
named in various legal proceedings arising out of its activities as an
employer and as an operator of a freight railroad, including personal
injury actions brought by its employees under FELA, as well as
administrative proceedings with and investigation by government
agencies.
22
<PAGE>
In view of the inherent difficulty of predicting the outcome of
legal proceedings, particularly in certain matters described above in
which substantial damages are or may be sought, Conrail cannot state
what the eventual outcomes of such legal proceedings will be. Certain
of these matters, if determined adversely to Conrail, could result in
the imposition of substantial damage awards against, or increased
costs to, Conrail that could have a material adverse effect on
Conrail's results of operations and financial position. Conrail's
management believes, however, based on current knowledge, that such
legal proceedings will not have a material adverse effect on Conrail's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders
during the fourth quarter of 1996.
Executive Officers of the Registrant.
- ------------------------------------
Conrail's officers are elected annually by the Board of Directors
at its first meeting held after the meeting of shareholders at which
directors are elected, and they hold office until their successors are
elected. There are no family relationships among the officers or
directors, nor any arrangement or understanding between any officer
and any other person pursuant to which the officer was selected. The
following table sets forth certain information, as of March 1, 1997,
relating to the executive officers of Conrail and Consolidated Rail
Corporation. An asterisk (*) indicates that such individual is an
officer of Consolidated Rail Corporation only:
Name, Age, Present Position Business Experience During Past 5
- --------------------------- ------------------------------------
Years
-----
David M. LeVan, 51, Chairman, Present position since May 1996.
President and Chief Executive Served as President and Chief
Officer Executive Officer between March 1995
and May 1996. Served as President
and Chief Operating Officer between
September 1994 and March 1995.
Served as Executive Vice President
between November 1993 and September
1994. Served as Senior Vice
President - Operations between July
1992 and November 1993. Served as
Senior Vice President-Operating
Systems and Strategies between
November 1991 and July 1992.
23
<PAGE>
Cynthia A. Archer, 43, Senior Present position since May 1995.
Vice President - Intermodal Served as General Manager -
Service Group Transportation and Customer Service
of the Harrisburg Division between
February 1994 and May 1995. Served
as Assistant Vice President - Food
and Agriculture between September
1993 and January 1994. Served as
Director - Intermodal Business
Development between September 1991
and August 1993.
Ronald J. Conway, 53, Senior Present position since November
Vice President - Operations 1994. Served as Vice President -
Operations between September 1994
and November 1994. Served as Vice
President - Transportation between
July 1994 and September 1994.
Served as Vice President -
Intermodal Service Group between
November 1993 and July 1994. Served
as Assistant Vice President -
Petrochemicals and Minerals between
April 1992 and November 1993.
Timothy P. Dwyer, 47, Senior Present position since November
Vice President - Unit Train 1994. Served as Vice President -
Service Group Unit Train Service Group between
November 1993 and November 1994.
Served as General Manager -
Philadelphia Division between April
1992 and November 1993.
John A. McKelvey, 45, Senior Present position since February
Vice President - Finance 1997. Served as Vice President-
Service Delivery between January
1996 and February 1997. Served as
Vice President - Materials and
Purchasing between April 1994 and
January 1996. Served as Vice
President - Controller between May
1993 and March 1994. Served as Vice
President - Treasurer between 1988
and May 1993.
24
<PAGE>
Frank H. Nichols, 50, Senior Present position since May 1995.
Vice President - Served as Vice President - Human
Organizational Performance Resources between February 1993 and
May 1995. Served as Assistant Vice
President - Finance between November
1988 and February 1993.
Timothy T. O'Toole, 41, Senior Present position since February
Vice President - Law and 1997. Served as Senior Vice
Government Affairs President-Finance between April 1996
and February 1997. Served as Vice
President and Treasurer between
April 1994 and April 1996. Served
as Vice President and General
Counsel between May 1989 and April
1994.
Lester M. Passa, 43, Senior Present position since February
Vice President - Automotive 1997. Served as Vice President-
Service Group Logistics and Corporate Strategy
between March 1995 and February
1997. Served as Assistant Vice
President - Corporate Strategy
between February 1993 and March
1995. Served as Director -
Intermodal Planning between October
1991 and January 1993.
John P. Sammon, 46, Senior Vice Present position since November
President - CORE Service 1994. Served as Vice President -
Group Intermodal between July 1994 and
November 1994. Served as Assistant
Vice President- Intermodal between
January 1988 and July 1994.
George P. Turner, 55, Senior Present position since February
Vice President - Merger 1997. Served as Senior Vice
Transition President-Automotive Service Group
between November 1994 and February
1997. Served as Vice President -
Automotive Service Group between
November 1993 and November 1994.
Served as Assistant Vice President -
Automotive between April 1992
and November 1993.
25
<PAGE>
Bruce B. Wilson, 61, Senior Present position since February
Vice President - Merger 1997. Served as Senior Vice
President - Law between April 1987
and February 1997.
Lucy S.L. Amerman, 46, Vice Present position since July 1994.
President - Risk Management* Served as Assistant Vice President -
Claims and Litigation between April
1994 and July 1994. Served as
General Counsel - Litigation between
March 1990 and March 1994.
Dennis A. Arouca, 45, Vice Present position since May 1994.
President - Labor Relations* Served as Partner in the law firm of
Pepper Hamilton & Scheetz between
February 1986 and May 1994.
Gerald T. Gates, 43, Vice Present position since January 1996.
President - Customer Support* Served as Vice President -
Transportation between November 1994
and January 1996. Served as Vice
President - Mechanical between
December 1993 and November 1994.
Served as Assistant Vice President -
Operations Planning and
Administration between July 1992 and
November 1993. Served as General
Manager - Indianapolis Division
between September 1990 and July
1992.
Hugh J. Kiley, 44, Vice Present position since January 1996.
President - Service Design Served as Assistant Vice President -
& Planning* Performance and Process Management
between November 1994 and January
1996. Served as Assistant Vice
President - Program Management
between May 1994 and November 1994.
Served as General Manager - National
Customer Service Center between
November 1990 and May 1994.
Craig R. MacQueen, 44, Vice Present position since June 1995.
President - Corporate Served as Assistant Vice President -
Communications* Public Affairs between September
1992 and June 1995. Served as
Executive Director - Public Affairs
between November 1990 and August
1992.
26
<PAGE>
Donald W. Mattson, 54, Vice Present position since April 1994.
President - Controller Served as Vice President - Treasurer
between May 1993 and April 1994.
Served as Vice President -
Controller between August 1988 and
May 1993.
Thomas J. McFadden, 42, Present position since May 1996.
Treasurer* Served as Assistant Treasurer -
Investor Relations and Finance
between June 1994 and May 1996.
Served as Director - Project
Financing between July 1990 and June
1994.
James D. McGeehan, 48, Present position since May 1996.
Corporate Secretary Served as Assistant Corporate
Secretary between December 1980 and
May 1996.
William B. Newman, Jr., 46, Present position since 1981.
Vice President and
Washington Counsel*
Albert M. Polinsky, 50, Vice Present position since April 1994.
President - Information Served as Assistant Vice President -
Systems* Program Management between December
1993 and March 1994. Served as
Assistant Vice President - Marketing
Services between April 1992 and
December 1993.
John M. Samuels, 53, Vice Present position since January 1996.
President - Operating Assets* Served as Vice President -
Mechanical between November 1994 and
January 1996. Served as Vice
President - Engineering between
April 1992 and November 1994.
Gary M. Spiegel, 46, Vice Present position since February
President - Service Delivery* 1997. Served as Assistant-Vice
President - Train Operations between
August 1994 and February 1997.
Served as General Manager-
Transportation and Customer Service
between April 1992 and August 1994.
27
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity
- ------ -------------------------------------
and Related Stockholder Matters.
-------------------------------
Conrail's common stock is listed for trading on the New York
Stock Exchange and the Philadelphia Stock Exchange. The number of
holders of record of Conrail common stock on March 1, 1997 was 18,377.
For the high and low sales prices of Conrail's common stock on the New
York Stock Exchange and the frequency and amount of cash dividends for
1996 and 1995, see Note 14 to the Consolidated Financial Statements
included elsewhere in this Annual Report.
Item 6. Selected Financial Data.
- ------ -----------------------
The selected consolidated financial data included in the following
tables have been derived from Conrail's Consolidated Financial Statements.
The consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996 and the
consolidated balance sheets as of December 31, 1996 and 1995 appear
elsewhere in this Annual Report and have been audited by the Company's
independent accountants, as indicated in their report thereon. For
purposes of the following selected consolidated financial data, references
to Conrail reflect the consolidated entities of Consolidated Rail
Corporation for periods prior to July 1, 1993 and Conrail Inc. for
subsequent periods.
The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related notes
and other financial information included elsewhere in this Annual Report.
28
<PAGE>
<TABLE>
Years ended December 31,
-----------------------------------------
1996 1995 1994 1993(4) 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Millions Except Per Share Amounts)
STATEMENT OF INCOME DATA:
Revenues $3,714 $3,686 $3,733 $3,453 $3,345
Operating expenses (before one-time
charges)(1) 2,978 2,945 3,043 2,862 2,811
One-time charges (1),(2) and (3) 135 285 84
------ ------ ------ ------ ------
Income from operations 601 456 606 591 534
Interest expense (182) (194) (192) (185) (172)
Loss on disposition of subsidiary (5) (80)
Other income, net 112 130 118 114 98
------ ------ ------ ------ ------
Income before income taxes and the
cumulative effect of changes
in accounting principles 531 392 532 440 460
Income taxes (2) 189 128 208 206 178
------ ------ ------ ------ ------
Income before the cumulative
effect of changes in accounting
principles 342 264 324 234 282
Cumulative effect of changes in
accounting principles (74)
------ ------ ------ ------ ------
Net income $ 342 $ 264 $ 324 $ 160 $ 282
====== ====== ====== ====== ======
Income per common share
before the cumulative effect of
changes in accounting principles
Primary $ 4.25 $ 3.19 $ 3.90 $ 2.74 $ 3.28
Fully diluted 3.89 2.94 3.56 2.51 2.99
Cumulative effect of changes in
accounting principles
Primary (.92)
Fully diluted (.81)
Net income per common share (6)
Primary 4.25 3.19 3.90 1.82 3.28
Fully diluted 3.89 2.94 3.56 1.70 2.99
Dividends per common share (6) 1.80 1.60 1.40 1.20 1.00
</TABLE>
<TABLE>
Years ended December 31,
----------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Millions)
BALANCE SHEET DATA:
Cash, cash equivalents and
temporary cash investments $ 30 $ 73 $ 43 $ 38 $ 40
Working capital (deficit) 25 36 (76) (13) (489)
Total assets 8,402 8,424 8,322 7,948 7,315
Other noncurrent liabilities (net of
current maturities of debt) 2,379 2,444 2,480 2,433 2,075
Deferred income taxes 1,478 1,393 1,203 1,081 644
Special income tax obligation 346 440 513 575 569
Stockholders' equity 3,107 2,977 2,925 2,784 2,748
</TABLE>
29
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
1. Included in 1996 operating expenses is a charge of $135 million (before
tax benefits of $52 million) consisting of $102 million in termination
benefits to be paid to non-union employees participating in the voluntary
retirement and separation programs ("voluntary separation programs") and
losses of $33 million on non-cancelable leases for office space no longer
required as a result of the reduction in the Company's workforce. Over
840 applications were accepted from eligible employees under both
programs. Approximately $90 million of the termination benefits are
being paid from the Company's overfunded pension plan. Also included in
1996 operating expenses are expenses of $16 million (before tax benefits
of $6 million) incurred by Conrail as a result of the proposed merger
with CSX Corporation. Without these items, net income for 1996 would
have been $435 million ($5.45 per share, primary and $4.96 per share,
fully diluted). (See Notes 3 and 2, respectively to the Consolidated
Financial Statements included elsewhere in this Annual Report.)
2. Included in 1995 operating expenses is an asset disposition charge of
$285 million, which reduced net income by $176 million. The asset
disposition charge resulted from a review of the Company's route system
and other operating assets to determine those that no longer effectively
and economically support current and expected operations. The Company
identified and has committed to sell 1,800 miles of rail lines that are
expected to provide proceeds substantially less than net book value. In
addition, other assets, principally yards and side tracks, identified for
disposition have been written down to estimated net realizable value.
Also, in 1995, as a result of a decrease in a state income tax rate
enacted during the second quarter of 1995, income tax expense was reduced
by $21 million representing the effect of adjustment for the rate
decrease as required by Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Without these items,
net income for 1995 would have been $419 million ($5.16 per share,
primary and $4.69 per share, fully diluted). (See Notes 10 and 7,
respectively, to the Consolidated Financial Statements included elsewhere
in this Annual Report.)
3. In 1994, Conrail recorded a charge of $51 million (after tax benefits of
$33 million) for a non-union employee voluntary early retirement program
and related costs. The majority of the cost of the early retirement
program is being paid from Conrail's overfunded pension plan. Without
this one-time charge, net income would have been $375 million ($4.54 per
share, primary and $4.13 per share, fully diluted). (See Note 11 to the
Consolidated Financial Statements included elsewhere in this Annual
Report.)
4. Conrail adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
("SFAS 106"), and SFAS 109 effective January 1, 1993. As a result, in
the first quarter of 1993, Conrail recorded cumulative after-tax charges
of $22 million and $52 million, respectively. In addition, as a result
of the increase in the federal corporate income tax rate from 34% to 35%,
effective January 1, 1993, income tax expense includes $34 million of a
retroactive nature, primarily for the effects of adjusting deferred
income taxes and the special income tax obligation for the rate increase
as required under SFAS 109.
5. In 1993, Conrail committed to a plan for disposition of its investment in
Concord Resources Group, Inc. ("Concord"). Pursuant to this plan,
Conrail recorded an estimated loss of $80 million for the disposition of
its investment, including $19 million for operating losses expected to be
incurred during the phase-out period and disposition costs. Conrail also
recorded estimated federal tax benefits of $30 million relating to the
disposition. In June 1995, the Company completed the disposition of the
last two major waste disposal facilities of Concord. The disposition had
no financial statement impact.
6. Net income and dividends per common share include the effects of a 1992
two-for-one common stock split. The calculations of income per common
share for 1996, 1995 and 1994 are shown in Exhibit 11, Part IV included
elsewhere in this Annual Report.
30
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
Overview
- --------
Conrail's net income for 1996 was $342 million, compared with $264 million
for 1995 and $324 million for 1994. Results for 1996 include a one-time
charge of $83 million (net of $52 million of tax benefits) related to
voluntary separation programs and related costs and merger-related expenses
of $10 million (net of $6 million of tax benefits) incurred in connection
with the proposed merger with CSX Corporation ("CSX") (see Notes 3 and 2,
respectively, to the Consolidated Financial Statements included elsewhere
in this Annual Report). Without these charges, net income for 1996 would
have been $435 million.
The results for 1995 include the effects of a $285 million asset
disposition charge ($176 million after income taxes) and the recognition of
a $21 million reduction in income taxes related to a decrease in a state
tax rate (see Notes 10 and 7, respectively, to the Consolidated Financial
Statements included elsewhere in this Annual Report). Results for 1994
include a one-time charge of $51 million (net of tax benefits of $33
million) for a non-union early retirement program and related costs (see
Note 11 to the Consolidated Financial Statements included elsewhere in this
Annual Report). Absent the one-time items, Conrail's net income for 1995
and 1994 would have been $419 million and $375 million, respectively.
Traffic volumes and operating revenues increased 2.1% and .8%,
respectively, in 1996 compared with 1995. Lower than anticipated revenue
growth and higher than expected operating expenses resulted in an operating
ratio (operating expenses as a percent of revenues) of 83.8%. Excluding
the voluntary separation programs charge and merger-related costs,
Conrail's operating ratio was 79.7% compared with the Company's 1996
operating ratio goal of 77.5%. The difficult operating conditions caused
by severe weather experienced over most of the Company's service area
during the first quarter of 1996, higher fuel prices and declines in
equipment utilization all contributed to the increase in operating expenses
in 1996 as compared with those that were planned for 1996. The 1995
operating ratio, excluding the asset disposition charge, was 79.9%.
For 1995 versus 1994, traffic volume and operating revenues decreased 5.4%
and 1.3%, respectively, while operating expenses, excluding one-time
charges, decreased 3.2%.
Proposed Merger
- ----------------
On October 14, 1996, Conrail, CSX Corporation ("CSX") and a subsidiary of
CSX entered into an Agreement and Plan of Merger (as amended, the "Merger
31
<PAGE>
Agreement"), pursuant to which Conrail was to be merged with a subsidiary
of CSX in a merger-of-equals transaction.
On October 24, 1996, Norfolk Southern Corporation ("Norfolk") commenced an
unsolicited tender offer for all outstanding Conrail voting stock at $100
per share in cash. Norfolk has since increased its offer to $115 per share
in cash.
On November 20, 1996, CSX concluded its first tender offer and purchased
approximately 19.9% of Conrail's outstanding shares for $110 per share.
On December 18, 1996, CSX and Conrail entered into a second amendment to
the Merger Agreement (the "Second Amendment") that would, among other
things, (i) increase the consideration payable pursuant to the merger, (ii)
accelerate the consummation of the merger to immediately following the
receipt of applicable shareholder approvals and prior to the Surface
Transportation Board ("STB") approval and (iii) extend until December 31,
1998 an exclusivity period during which the Conrail Board agreed not to
withdraw or modify its recommendations of the CSX transactions, approve or
recommend any takeover proposal or cause Conrail to enter into any
agreement related to any takeover proposal.
On January 13, 1997, Norfolk issued a press release announcing that it
would offer to purchase shares representing 9.9% of the outstanding Shares
for $115 per share, in the event that Conrail shareholders did not approve
a proposal to opt out of a Pennsylvania statute (the "Opt Out Proposal") at
the meeting of shareholders to be held on January 17, 1997 (the "Special
Shareholders Meeting").
On January 17, 1997, Conrail shareholders voted at the Special Shareholders
Meeting against the Opt Out Proposal.
On February 4, 1997, the amended Norfolk tender offer expired, and Norfolk
subsequently purchased approximately 8.2 million Shares pursuant thereto.
On March 7, 1997, Conrail and CSX entered into a Third Amendment (the
"Third Amendment") to the Merger Agreement. Pursuant to the Third
Amendment, (i) the price per share has been increased from $110 to $115,
and the number of shares to be purchased in the tender offer has been
increased to all outstanding shares. The tender offer is scheduled to
close April 18, 1997 (subject to extension by CSX to June 2, 1997 whether
or not the conditions have been satisfied), (ii) the consideration paid per
share in the merger for all remaining outstanding shares following
consummation of the offer has been increased to $115 in cash and (iii) the
conditions to the offer relating to certain provisions of Pennsylvania law
becoming inapplicable to Conrail and relating pending governmental actions
or proceedings have been deleted.
32
<PAGE>
The Third Amendment also provides that CSX will have sole control over the
regulatory approval process and will be free to conduct by itself
discussions with other railroads, including Norfolk, relating to
competitive issues raised by the CSX transactions, and to enter into any
resulting agreement. It is anticipated that CSX and Norfolk will negotiate
an appropriate division of Conrail's assets; however, neither the pending
CSX tender offer nor the merger is conditioned on CSX's reaching an
agreement with Norfolk.
Pursuant to the Third Amendment, three members of Conrail's Board of
Directors approved by CSX shall be invited to join the CSX Board of
Directors and a transition team will be established, the leadership of
which will include senior executive officers of CSX and Conrail to ensure
the orderly operation of Conrail during the regulatory approval process and
an orderly transition thereafter.
Under the Third Amendment, Conrail and CSX agreed to reduce from December
31, 1998 to December 31, 1997 the period of time during which the Conrail
Board is prohibited from (i) withdrawing or modifying, or publicly
proposing to withdraw or modify, its approval or recommendation of the CSX
transactions, in a manner adverse to CSX, (ii) approving or recommending,
or publicly proposing to approve or recommend, any competing proposal or
(iii) causing Conrail to enter into any agreement related to any such
competing proposal.
Under the Merger Agreement as amended, Conrail may terminate the Merger
Agreement in the event that after June 2, 1997, CSX fails to consummate the
tender offer for any reason other than the non-occurrence of any condition
to the tender offer. In the event that CSX fails to consummate the tender
offer under such circumstances, Conrail will be entitled to exercise any
additional remedies it may have.
The full terms and conditions of the CSX and Norfolk offers and Conrail's
position with respect to the CSX and Norfolk offers are set forth in
documents filed by Conrail with the Securities and Exchange Commission.
1997 Outlook
- ------------
Conrail expects the economy to grow in 1997 at about the same growth rate
experienced in 1996. Conrail's 1997 plans are based on assumptions of
2.2% growth in real gross domestic product and 3.4% growth in industrial
production. Conrail's outlook for 1997 includes line haul revenue growth
of between 2.5% and 3.5%. Conrail's operating ratio goal for 1997 is
78.5%.
Voluntary Separation Programs
- -----------------------------
During the second quarter of 1996, the Company recorded a charge of $135
million (before tax benefits of $52 million) consisting of $102 million
33
<PAGE>
in termination benefits to be paid to non-union employees participating
in the voluntary retirement and separation programs ("voluntary
separation programs") and losses of $33 million on non-cancelable leases
for office space no longer required as a result of the reduction in the
Company's workforce. Over 840 applications were accepted from eligible
employees under the voluntary separation programs. Approximately $90
million of the termination benefits are being paid from the Company's
overfunded pension plan.
Results of Operations
- ---------------------
1996 Compared with 1995
Net income for 1996 was $342 million ($4.25 per share, primary and $3.89
per share, fully diluted) compared with 1995 net income of $264 million
($3.19 per share, primary and $2.94 per share, fully diluted). Excluding
the unusual items (see "Overview") in both years, Conrail's net income
would have been $435 million ($5.45 per share, primary and $4.96 per share,
fully diluted) for 1996 and $419 million ($5.16 per share, primary and
$4.69 per share, fully diluted) for 1995.
Operating revenues (primarily freight line haul revenues, but also
including switching, demurrage and incidental revenue) increased $28
million, or .8%, to $3,714 million in 1996 from $3,686 million in 1995. A
2.1% increase in traffic volume in units (freight cars and intermodal
trailers and containers) resulted in a $74 million increase in revenues.
Average revenue per unit decreased revenues by $42 million due to an
unfavorable traffic mix. A traffic volume increase of 7.6% was experienced
by the Intermodal Service Group while traffic volume for the Unit Train
Service Group remained unchanged. The Automotive and CORE Service Groups
experienced traffic volume declines of 1.7% and 1.6%, respectively. Within
the CORE Service Group, traffic volume declines were experienced by three
of the four commodity groups: Forest and Manufactured Products, 5.3%; Food
and Agriculture, 2.8%; and Petrochemicals, 2.5%. Metals experienced a
traffic increase of 4.0%.
34
<PAGE>
Operating expenses (including one-time charges and merger-related costs in
1996 and the asset disposition charge in 1995) decreased $117 million, or
3.6%, from $3,230 million in 1995 to $3,113 million in 1996. The following
table sets forth the operating expenses for the two years:
Increase
(In Millions) 1996 1995 (Decrease)
------ ------ ---------
Compensation and benefits $1,206 $1,249 $ (43)
Fuel 202 168 34
Material and supplies 175 167 8
Equipment rents 382 355 27
Depreciation and amortization 283 293 (10)
Casualties and insurance 176 175 1
Other 554 538 16
Voluntary separation programs 135 135
Asset disposition charge 285 (285)
------ ----- -----
$3,113 $3,230 $(117)
====== ====== =====
Compensation and benefits decreased $43 million, or 3.4%, as a result of
reductions in employment levels and other employee-related costs. These
decreases were partially offset by increased wage rates due to new labor
agreements, increased train crew costs and overtime caused by adverse
weather conditions experienced during the first quarter of 1996.
Compensation and benefits as a percent of revenues was 32.5% in 1996 as
compared with 33.9% in 1995.
Fuel costs increased $34 million, or 20.2%, due mostly to higher fuel
prices.
Equipment rents increased $27 million, or 7.6%, primarily as a result of
declines in equipment utilization and increased car hire rates.
Other operating expenses increased $16 million, or 3.0%, primarily due to
$16 million of costs incurred in connection with the proposed merger with
CSX (see Note 2 to the Consolidated Financial Statements included elsewhere
in this Annual Report).
Conrail recorded a one-time pre-tax charge of $135 million in 1996 for the
voluntary separation programs and related costs (see Note 3 to the
Consolidated Financial Statements included elsewhere in this Annual Report)
and an asset disposition charge of $285 million in 1995 (see Note 10 to the
Consolidated Financial Statements included elsewhere in this Annual
Report).
Conrail's operating ratio was 83.8% for 1996, compared with 87.6% for 1995.
Without the one-time charges recorded in 1996 and 1995 and the merger-
related costs incurred in 1996, the operating ratios would have been 79.7%
and 79.9%, respectively.
35
<PAGE>
Other income decreased $18 million, or 13.8%, from $130 million in 1995 to
$112 million in 1996 primarily due to decreases in rental income and lesser
gains from sales of property.
The Company's effective income tax rate for 1996 was 35.6% compared with
32.7% for 1995. The lower effective rate in 1995 is primarily caused by a
$21 million reduction in income taxes as a result of a decrease in state
income taxes (see Note 7 to the Consolidated Financial Statements included
elsewhere in this Annual Report).
1995 Compared with 1994
Net income for 1995 was $264 million ($3.19 per share, primary and $2.94
per share, fully diluted) compared with 1994 net income of $324 million
($3.90 per share, primary and $3.56 per share, fully diluted). Excluding
the one-time charges (see "Overview") in both years and the one-time tax
benefit in 1995, Conrail's net income would have been $419 million ($5.16
per share, primary and $4.69 per share, fully diluted) for 1995 and $375
million ($4.54 per share, primary and $4.13 per share, fully diluted) for
1994.
Operating revenues decreased $47 million, or 1.3%, from $3,733 million in
1994 to $3,686 million in 1995. A 5.4% decrease in traffic volume in units
resulted in a $191 million decrease in revenues which was partially offset
by an increase in average revenue per unit that increased revenues by $140
million. The improvement in average revenue per unit resulted from
increases in average rates, $117 million, and a favorable traffic mix, $23
million. Traffic volume decreases were experienced by three of the four
service groups, with only Automotive showing a slight volume increase of
.8%. Traffic volume declines for the other service groups were as follows:
Intermodal, 7.3%; Unit Train, 5.4%; and CORE, 5.1%. Within the CORE
Service Group, traffic volume declines were also experienced by each of the
commodity groups: Food and Agriculture, 8.2%; Petrochemicals, 4.6%; Metals,
4.0%; and Forest and Manufactured Products, 3.9%.
36
<PAGE>
Operating expenses increased $103 million, or 3.3%, from $3,127 million in
1994 to $3,230 million in 1995. The following table sets forth the
operating expenses for the two years:
Increase
(In Millions) 1995 1994 (Decrease)
------ ------ ---------
Compensation and benefits $1,249 $1,260 $(11)
Fuel 168 188 (20)
Material and supplies 167 203 (36)
Equipment rents 355 381 (26)
Depreciation and amortization 293 278 15
Casualties and insurance 175 184 (9)
Other 538 549 (11)
Asset disposition charge 285 285
Early retirement program 84 (84)
------ ------ ----
$3,230 $3,127 $103
====== ====== ====
Compensation and benefits costs decreased $11 million, or .9%, as a result
of a 5.3% reduction in employment levels, which exceeded the increases in
wage rates and fringe benefit costs. Compensation and benefits as a percent
of revenues was 33.9% in 1995 compared with 33.7% in 1994.
Fuel costs decreased $20 million, or 10.6%, as a result of greater use of
newer fuel efficient locomotives, lower average fuel prices and lower
traffic volume.
The decrease of $36 million, or 17.7%, in material and supplies costs was
primarily attributable to a lower level of repair and maintenance
expenditures related to lower traffic volume.
Equipment rents decreased $26 million, or 6.8%, primarily as a result of
fewer foreign cars on Conrail's lines and improved equipment utilization,
partially offset by the increased costs associated with new operating
leases for equipment.
Depreciation and amortization increased $15 million, or 5.4%, due to asset
additions and increased depreciation rates for track structure as a result
of a depreciation study required by the former Interstate Commerce
Commission.
Conrail recorded an asset disposition charge of $285 million in 1995 (see
Note 10 to the Consolidated Financial Statements included elsewhere in this
Annual Report) and a one-time pre-tax charge of $84 million in 1994 for the
non-union voluntary early retirement program and related costs (see Note 11
to the Consolidated Financial Statements included elsewhere in this Annual
Report).
Conrail's operating ratio was 87.6% for 1995, compared with 83.8% for 1994.
Without the $285 million asset disposition charge in 1995 and the $84
37
<PAGE>
million charge for the early retirement program in 1994, the operating
ratios for 1995 and 1994 would have been 79.9% and 81.5%, respectively.
Other income, net, increased $12 million, or 10.2%, primarily due to an $8
million gain from a property sale completed during the second quarter of
1995.
The Company's effective income tax rate for 1995 was 32.7% compared
with 39.1% for 1994. The lower rate reflects the effect of a $21
million reduction in income taxes resulting from a decrease in a
state income tax rate enacted during the second quarter of 1995 (see
Note 7 to the Consolidated Financial Statements included elsewhere in
this Annual Report).
Liquidity and Capital Resources
- -------------------------------
Conrail's cash and cash equivalents decreased $43 million, from $73 million
at December 31, 1995 to $30 million at December 31, 1996. Cash generated
from operations, principally from its wholly-owned subsidiary, Consolidated
Rail Corporation ("CRC"), and borrowings are Conrail's principal sources of
liquidity and are used primarily for capital expenditures, debt service,
and dividends. Operating activities provided cash of $669 million in 1996,
compared with $773 million in 1995 and $697 million in 1994. In 1996,
loans from and redemptions of insurance policies provided cash of $95
million and issuance of long-term debt provided cash of $26 million. The
principal uses of cash in 1996 were for property and equipment
acquisitions, $387 million, payment of long-term debt including capital
lease and equipment obligations, $184 million, cash dividends on preferred
and common stock, $171 million, and the repurchase of common stock, $156
million.
Working capital (current assets less current liabilities)of $25 million
existed at December 31, 1996, compared with $36 million at December 31,
1995. Management believes that Conrail's financial position allows it
sufficient access to credit sources on investment grade terms, and, if
necessary, additional intermediate or long-term debt could be issued for
additional working capital requirements.
In April 1995, the Company's Board of Directors approved a $250 million
multi-year stock repurchase program. During 1996, the Company acquired
2,225,738 shares for $156 million under this program. As a result of the
proposed merger agreement with CSX (see Note 2 to the Consolidated
Financial Statements included elsewhere in this Annual Report), the Company
will not make any additional stock repurchases under this program.
During 1996, CRC issued an additional $139 million of commercial paper and
repaid $129 million. Of the $199 million outstanding at December 31, 1996,
$100 million is classified as long-term debt since it is expected to be
refinanced through subsequent issuances of commercial paper and is
38
<PAGE>
supported by the $500 million uncollateralized bank credit agreement.
At December 31, 1996, $312 million remains available to Conrail and CRC under
a 1993 shelf registration statement whereby CRC can issue debt securities and
Conrail can issue both convertible debt and equity securities.
In April 1996, CRC issued $50 million of Pass-Through Certificates at a
rate of 6.96% to finance equipment. Although the certificates are not
direct obligations of, or guaranteed by CRC, amounts payable under
related capital leases will be sufficient to pay principal and interest
on the certificates.
In July 1996, CRC issued $26 million of 1996 Equipment Trust
Certificates, Series A, with interest rates ranging from 6.0% to 7.48%,
maturing annually from 1997 to 2011. The certificates were issued to
finance approximately 85% of the purchase price of twenty locomotives.
In June 1996, CRC borrowed $69 million against the cash surrender value of
the company-owned life insurance policies which it maintains on certain of
its non-union employees. The Company also redeemed the remaining excess
cash surrender value of $26 million. Both transactions resulted in an
increase of $95 million in cash in 1996.
Capital Expenditures
- --------------------
Capital expenditures totaled $478 million, $494 million and $508 million in
1996, 1995 and 1994, respectively. Of these totals, Conrail directly
financed $108 million in 1996, $126 million in 1995 and $57 million in
1994.
Capital expenditures for 1997 are expected to be approximately
$550 million.
Inflation
- ---------
Generally accepted accounting principles require the use of historical
costs in preparing financial statements. This approach does not consider
the effects of inflation on the costs of replacing assets. The replacement
cost of Conrail's property and equipment is substantially higher than its
historical cost basis. Similarly, depreciation expense on a replacement
cost basis would be substantially in excess of the amount recorded under
generally accepted accounting principles.
Environmental Matters
- ---------------------
Conrail's operations and property are subject to various federal, state and
local laws regulating the environment. CRC is a party to numerous
39
<PAGE>
proceedings brought by regulatory agencies and private parties under
federal, state and local laws, including Superfund laws, and has also
received inquiries from governmental agencies with respect to other
potential environmental issues. As of December 31, 1996, CRC had received,
together with other companies, notices of its involvement as a potentially
responsible party or requests for information under the Superfund laws with
respect to cleanup and/or removal costs due to its status as an alleged
transporter, generator or property owner at 135 locations throughout the
country. However, based on currently available information, Conrail
believes CRC may have some potential responsibility at only 61 of these
sites. Due to the number of parties involved at many of these sites, the
wide range of costs of the possible remediation alternatives, changing
technology and the length of time over which these matters develop, it is
not always possible to estimate CRC's liability for the costs associated
with the assessment and remediation of contaminated sites. At December 31,
1996, Conrail had accrued $55 million for estimated future environmental
expenses. Although Conrail's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period in which
CRC was held principally liable in certain of these actions, Conrail
believes the ultimate liability for these matters will not materially
affect its financial condition. (See Note 13 to the Consolidated Financial
Statements included elsewhere in this Annual Report).
Conrail spent $11 million, $14 million and $8 million in 1996, 1995 and
1994, respectively, for environmental remediation and related costs and
anticipates spending an amount comparable to that spent in 1996 during
1997. In addition, Conrail's capital expenditures for environmental
control and abatement projects were approximately $6 million in 1996 and
1995, and $5 million in 1994, and are anticipated to be approximately $10
million in 1997.
Conrail has an Environmental Quality Department, the mission of which is to
institute and promote compliance with environmentally sound operating
practices and to monitor and assess the status of sites where liability
under environmental laws may exist.
Other Matters
- -------------
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve risks
and uncertainties that may cause actual results to differ, including but
not limited to the effect of economic conditions, competition, regulation
and weather on Conrail's operations, customers, service and prices, and
other factors discussed elsewhere in this report and, from time to time, in
other reports filed with the Securities and Exchange Commission.
40
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Conrail Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) 1. and 2. present fairly, in all material
respects, the financial position of Conrail Inc. and subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 21, 1997,
except as to Note 2, which is as of March 7, 1997
41
<PAGE>
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
---------------------------
($ In Millions Except Per Share Data) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues $3,714 $3,686 $3,733
------ ------ ------
Operating expenses
Way and structures 462 485 499
Equipment 803 766 815
Transportation 1,385 1,324 1,379
General and administrative 328 370 350
Voluntary separation programs (Note 3) 135
Asset disposition charge (Note 10) 285
Early retirement program (Note 11) 84
------ ------ ------
Total operating expenses 3,113 3,230 3,127
------ ------ ------
Income from operations 601 456 606
Interest expense (182) (194) (192)
Other income, net (Note 12) 112 130 118
------ ------ ------
Income before income taxes 531 392 532
Income taxes (Note 7) 189 128 208
------ ------ ------
Net income $ 342 $ 264 $ 324
====== ====== ======
Net income per common share (Note 1)
Primary $ 4.25 $ 3.19 $ 3.90
Fully diluted 3.89 2.94 3.56
Ratio of earnings to fixed charges
(Note 1) 3.19x 2.51x 3.19x
</TABLE>
See accompanying notes.
42
<PAGE>
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31,
----------------
($ In Millions) 1996 1995
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 30 $ 73
Accounts receivable 630 614
Deferred tax assets (Note 7) 293 333
Material and supplies 139 158
Other current assets 25 28
------ ------
Total current assets 1,117 1,206
Property and equipment, net (Note 4) 6,590 6,408
Other assets 695 810
------ ------
Total assets $8,402 $8,424
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings 99 89
Current maturities of long-term debt (Note 6) 130 181
Accounts payable 135 113
Wages and employee benefits 143 183
Casualty reserves 141 110
Accrued and other current liabilities (Note 5) 444 494
------ ------
Total current liabilities 1,092 1,170
Long-term debt (Note 6) 1,876 1,911
Casualty reserves 190 217
Deferred income taxes (Note 7) 1,478 1,393
Special income tax obligation (Note 7) 346 440
Other liabilities 313 316
------ ------
Total liabilities 5,295 5,447
------ ------
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 2 and 9)
Preferred stock (no par value; 15,000,000
shares authorized; no shares issued)
Series A ESOP convertible junior preferred
stock (no par value; 10,000,000 shares
authorized; 7,303,920 and 9,770,993 shares
issued and outstanding, respectively) 211 282
Unearned ESOP compensation (222) (233)
Common stock ($1 par value; 250,000,000
shares authorized; 87,768,428 and 85,392,392
shares issued, respectively; 82,244,973 and
82,094,675 shares outstanding, respectively) 88 85
Additional paid-in capital 2,404 2,187
Employee benefits trust, at market (3,394,988
and 4,706,665 shares, respectively) (384) (329)
Retained earnings 1,357 1,176
------ ------
3,454 3,168
Treasury stock, at cost (5,523,455 and
3,297,717 shares, respectively) (347) (191)
------ ------
Total stockholders' equity 3,107 2,977
------ ------
Total liabilities and stockholders' equity $8,402 $8,424
====== ======
</TABLE>
See accompanying notes.
43
<PAGE>
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Unearned Additional Employee
Preferred ESOP Common Paid-in Benefits Retained Treasury
($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock
--------- ------------ ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $286 $(253) $80 $1,819 $ 857 $ (5)
Amortization 10
Net income 324
Common dividends, $1.40 per share (111)
Preferred dividends, $2.165 per share (21)
Common shares acquired (94)
Exercise of stock options 14
Other (3) 15 7
------ ------ ------ ------ ------ ------ ------
Balance, December 31, 1994 283 (243) 80 1,848 1,056 (99)
Amortization 10
Net income 264
Common dividends, $1.60 per share (129)
Preferred dividends, $2.165 per share (21)
Common shares acquired (92)
Exercise of stock options 6
Establishment of employee benefits trust 5 245 $(250)
Employee benefits trust transactions, net 84 (79)
Other (1) 4 6
------ ------ ------ ------ ------ ------ ------
Balance, December 31, 1995 282 (233) 85 2,187 (329) 1,176 (191)
Amortization 11
Net income 342
Common dividends, $1.80 per share (146)
Preferred dividends, $2.165 per share (20)
Common shares acquired (156)
Exercise of stock options 29 53
Employee benefits trust transactions, net 128 (116)
Effects of voluntary separation programs (8) 8
Effects of CSX tender offer (Note 2) (63) 3 60
Other 5
------ ------ ------ ------ ------ ------ ------
Balance, December 31, 1996 $211 $(222) $88 $2,404 $(384) $1,357 $(347)
====== ====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes.
44
<PAGE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years ended December 31,
------------------------
($ In Millions) 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 342 $ 264 $ 324
Adjustments to reconcile net income to
net cash provided by operating activities:
Voluntary separation programs 135
Asset disposition charge 285
Early retirement program 84
Depreciation and amortization 283 293 278
Deferred income taxes 183 108 150
Special income tax obligation (94) (73) (62)
Gains from sales of property (24) (27) (18)
Pension credit (46) (43) (46)
Changes in:
Accounts receivable (16) 32 (2)
Accounts and wages payable (18) 8 41
Settlement of tax audit (39)
Other (37) (74) (52)
----- ----- -----
Net cash provided by operating
activities 669 773 697
----- ----- -----
Cash flows from investing activities
Property and equipment acquisitions (387) (415) (490)
Proceeds from disposals of properties 34 38 32
Other (46) (59) (23)
----- ------ -----
Net cash used in investing activities (399) (436) (481)
----- ----- -----
Cash flows from financing activities
Repurchase of common stock (156) (92) (94)
Net proceeds from (repayments of)
short-term borrowings 10 (23) 33
Proceeds from long-term debt 26 85 114
Payment of long-term debt (184) (134) (158)
Loans from and redemptions of
insurance policies 95
Dividends on common stock (146) (129) (111)
Dividends on Series A preferred stock (25) (21) (16)
Proceeds from stock options and other 67 7 21
----- ----- -----
Net cash used in financing
activities (313) (307) (211)
----- ----- -----
Increase (decrease) in cash and cash equivalents (43) 30 5
Cash and cash equivalents
Beginning of year 73 43 38
----- ----- -----
End of year $ 30 $ 73 $ 43
===== ===== =====
</TABLE>
See accompanying notes.
45
<PAGE>
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Industry
--------
Conrail Inc. ("Conrail") is a holding company of which the principal
subsidiary is Consolidated Rail Corporation ("CRC"), a freight
railroad which operates within the northeast and midwest United States
and the Province of Quebec.
Principles of Consolidation
---------------------------
The consolidated financial statements include Conrail and majority-
owned subsidiaries. Investments in 20% to 50% owned companies are
accounted for by the equity method.
Cash Equivalents
----------------
Cash equivalents consist of commercial paper, certificates of deposit
and other liquid securities purchased with a maturity of three months
or less, and are stated at cost which approximates market value.
Material and Supplies
---------------------
Material and supplies consist mainly of fuel oil and items for
maintenance of property and equipment, and are valued at the lower of
cost, principally weighted average, or market.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is provided
using the composite straight-line method. The cost (net of salvage)
of depreciable property retired or replaced in the ordinary course of
business is charged to accumulated depreciation and no gain or loss is
recognized.
Asset Impairment
----------------
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Expected future cash flows from the use and
disposition of long-lived assets are compared to the current carrying
amounts to determine the potential impairment loss.
Revenue Recognition
-------------------
Revenue is recognized proportionally as a shipment moves on the
Conrail system from origin to destination.
Earnings Per Share
------------------
Primary earnings per share are based on net income adjusted for the
effects of preferred dividends net of income tax benefits, divided by
the weighted average number of shares outstanding during the period,
including the dilutive effect of stock options. Fully diluted
46
<PAGE>
earnings per share assume conversion of Series A ESOP Convertible
Junior Preferred Stock ("ESOP Stock") into Conrail common stock. Net
income amounts applicable to fully diluted earnings per share have been
adjusted by the increase, net of income tax benefits, in ESOP-related
expenses assuming conversion of all ESOP Stock to common stock.
46
<PAGE>
Shares in the Conrail Employee Benefits Trust are not considered
outstanding for computing earnings per share. The weighted
average number of shares of common stock outstanding during each
of the most recent three years are as follows:
1996 1995 1994
---------- ---------- ----------
Primary weighted
average shares 77,628,825 78,733,947 79,674,781
Fully diluted weighted
average shares 87,325,575 88,702,712 89,562,721
Ratio of Earnings to Fixed Charges
----------------------------------
Earnings used in computing the ratio of earnings to fixed charges
represent income before income taxes plus fixed charges, less equity
in undistributed earnings of 20% to 50% owned companies. Fixed
charges represent interest expense together with interest capitalized
and a portion of rent under long-term operating leases representative
of an interest factor.
New Accounting Standards
------------------------
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (SFAS 121) and SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which are both effective in 1996. The
Company has decided to adopt only the disclosure provisions of SFAS
123 in 1996 and continues to apply APB Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its stock-based compensation plans. The Company
adopted SFAS 121 in the first quarter of 1996 and determined that it
did not have a material effect on its financial statements.
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.
47
<PAGE>
2. Proposed Merger
---------------
On October 14, 1996, Conrail, CSX Corporation ("CSX") and a subsidiary
of CSX entered into an Agreement and Plan of Merger (as amended, the
"Merger Agreement"), pursuant to which Conrail was to be merged with a
subsidiary of CSX in a merger-of-equals transaction.
On October 24, 1996, Norfolk Southern Corporation ("Norfolk") commenced
an unsolicited tender offer for all outstanding Conrail voting stock at
$100 per share in cash. Norfolk has since increased its offer to $115
per share in cash.
On November 20, 1996, CSX concluded its first tender offer and
purchased approximately 19.9% of Conrail's outstanding shares for $110
per share.
On December 18, 1996, CSX and Conrail entered into a second amendment
to the Merger Agreement (the "Second Amendment") that would, among
other things, (i) increase the consideration payable pursuant to the
merger, (ii) accelerate the consummation of the merger to immediately
following the receipt of applicable shareholder approvals and prior to
the Surface Transportation Board ("STB") approval and (iii) extend
until December 31, 1998 an exclusivity period during which the Conrail
Board agreed not to withdraw or modify its recommendations of the CSX
transactions, approve or recommend any takeover proposal or cause
Conrail to enter into any agreement related to any takeover proposal.
On January 13, 1997, Norfolk issued a press release announcing that it
would offer to purchase shares representing 9.9% of the outstanding
shares for $115 per share, in the event that Conrail shareholders did
not approve a proposal to opt out of a Pennsylvania statute (the "Opt
Out Proposal") at the meeting of shareholders to be held on January 17,
1997 (the "Special Shareholders Meeting").
On January 17, 1997, Conrail shareholders voted at the Special
Shareholders Meeting against the Opt Out Proposal.
On February 4, 1997, the amended Norfolk tender offer expired, and
Norfolk subsequently purchased approximately 8.2 million shares
pursuant thereto.
On March 7, 1997, Conrail and CSX entered into a Third Amendment (the
"Third Amendment") to the Merger Agreement. Pursuant to the Third
Amendment, (i) the price per share has been increased from $110 to
$115, and the number of shares to be purchased in the tender offer has
been increased to all outstanding shares. The tender offer is
scheduled to close April 18, 1997 (subject to extension by CSX to June
2, 1997 whether or not the conditions have been satisfied), (ii) the
consideration paid per share in the merger for all remaining
outstanding shares following consummation of the offer has been
increased to $115 in cash and (iii) the conditions to the offer
48
<PAGE>
relating to certain provisions of Pennsylvania law becoming
inapplicable to Conrail and relating pending governmental actions or
proceedings have been deleted.
The Third Amendment also provides that CSX will have sole control over
the regulatory approval process and will be free to conduct by itself
discussions with other railroads, including Norfolk, relating to
competitive issues raised by the CSX transactions, and to enter into
any resulting agreement. It is anticipated that CSX and Norfolk will
negotiate an appropriate division of Conrail's assets; however,
neither the pending CSX tender offer nor the merger is conditioned on
CSX's reaching an agreement with Norfolk.
Pursuant to the Third Amendment, three members of Conrail's Board of
Directors approved by CSX shall be invited to join the CSX Board of
Directors and a transition team will be established, the leadership of
which will include senior executive officers of CSX and Conrail to
ensure the orderly operation of Conrail during the regulatory approval
process and an orderly transition thereafter.
Under the Third Amendment, Conrail and CSX agreed to reduce from
December 31, 1998 to December 31, 1997 the period of time during which
the Conrail Board is prohibited from (i) withdrawing or modifying, or
publicly proposing to withdraw or modify, its approval or
recommendation of the CSX transactions, in a manner adverse to CSX,
(ii) approving or recommending, or publicly proposing to approve or
recommend, any competing proposal or (iii) causing Conrail to enter
into any agreement related to any such competing proposal.
Under the Merger Agreement as amended, Conrail may terminate the Merger
Agreement in the event that after June 2, 1997, CSX fails to consummate
the tender offer for any reason other than the non-occurrence of any
condition to the tender offer. In the event that CSX fails to
consummate the tender offer under such circumstances, Conrail will be
entitled to exercise any additional remedies it may have.
The full terms and conditions of the CSX and Norfolk offers and
Conrail's position with respect to the CSX and Norfolk offers are set
forth in documents filed by Conrail with the Securities and Exchange
Commission.
Pending approval by the Surface Transportation Board ("STB"), 100% of
Conrail's voting stock will be held by CSX in a voting trust. The
combination of the railroad operations of the two companies is
contingent upon the approval of the merger by the STB.
49
<PAGE>
3. Voluntary Separation Programs
-----------------------------
During the second quarter of 1996, the Company recorded a charge of
$135 million (before tax benefits of $52 million) consisting of $102
million in termination benefits to be paid to non-union employees
participating in the voluntary retirement and separation programs
("voluntary separation programs") and losses of $33 million on non-
cancelable leases for office space no longer required as a result of
the reduction in the Company's workforce. Over 840 applications were
accepted from eligible employees under the voluntary separation
programs. Approximately $90 million of the termination benefits are
being paid from the Company's overfunded pension plan.
4. Property and Equipment
----------------------
December 31,
-----------------
1996 1995
------- -------
(In Millions)
Roadway $ 7,021 $ 6,828
Equipment 1,231 1,213
Less: Accumulated depreciation (1,654) (1,572)
Allowance for disposition (408) (439)
------- -------
6,190 6,030
------- -------
Capital leases (primarily equipment) 908 908
Accumulated amortization (508) (530)
------- -------
400 378
------- -------
$ 6,590 $ 6,408
======= =======
Conrail acquired equipment and incurred related long-term debt under
various capital leases of $82 million in 1996, $71 million in 1995 and
$8 million in 1994. In 1995 (Note 10) and 1991, the Company recorded
allowances for disposition for the sale or abandonment of certain
under-utilized rail lines and other facilities.
5. Accrued and Other Current Liabilities
-------------------------------------
December 31,
--------------
1996 1995
---- ----
(In Millions)
Freight settlements due others $ 48 $ 54
Equipment rents (primarily car hire) 74 71
Unearned freight revenue 79 56
Property and corporate taxes 49 66
Other 194 247
---- ----
$444 $494
==== ====
50
<PAGE>
6. Long-Term Debt
--------------
Long-term debt outstanding, including the weighted average interest
rates at December 31, 1996, is composed of the following:
December 31,
------------------
1996 1995
------ ------
(In Millions)
Capital leases $ 491 $ 489
Medium-term notes payable,
6.70%, due 1997 to 1999 109 208
Notes payable, 9.75%, due 2000 250 250
Debentures payable, 7.88%, due 2043 250 250
Debentures payable, 9.75%, due 2020 544 544
Equipment and other obligations, 6.55% 262 251
Commercial paper, 5.53% 100 100
------ ------
2,006 2,092
Less current portion (130) (181)
------ ------
$1,876 $1,911
====== ======
Using current market prices when available, or a valuation based on
the yield to maturity of comparable debt instruments having similar
characteristics, credit rating and maturity, the total fair value of
the Company's long-term debt, including the current portion, but
excluding capital leases, is $1,685 million and $1,870 million at
December 31, 1996 and 1995, respectively, compared with carrying
values of $1,515 million and $1,603 million at December 31, 1996 and
1995, respectively.
The Company's noncancelable long-term leases generally include options
to purchase at fair value and to extend the terms. Capital leases
have been discounted at rates ranging from 3.09% to 14.26% and are
collateralized by assets with a net book value of $400 million at
December 31, 1996.
Minimum commitments, exclusive of executory costs borne by the
Company, are:
Capital Operating
Leases Leases
------- ---------
(In Millions)
1997 $ 107 $115
1998 96 104
1999 86 87
2000 64 76
2001 57 68
2002 - 2017 273 523
----- ------
Total 683 $973
======
Less interest portion (192)
-----
Present value $ 491
=====
51
<PAGE>
Operating lease rent expense was $127 million in 1996, $130 million in
1995 and $118 million in 1994.
In June 1993, the Company and CRC filed a shelf registration statement
on Form S-3 to enable CRC to issue up to $500 million in debt securities
or the Company to issue up to $500 million in convertible debt and
equity securities. The remaining balance under this shelf registration
was $312 million at December 31, 1996.
In April 1996, CRC issued $50 million of Pass-Through Certificates at
a rate of 6.96% to finance equipment. Although the certificates are
not direct obligations of, or guaranteed by CRC, amounts payable under
related capital leases will be sufficient to pay principal and
interest on the certificates.
In July 1996, CRC issued $26 million of 1996 Equipment Trust
Certificates, Series A, with interest rates ranging from 6.0% to
7.48%, maturing annually from 1997 to 2011. The certificates were used
to finance approximately 85% of the purchase price of twenty
locomotives.
In June 1996, CRC borrowed $69 million against the cash surrender
value of the company-owned life insurance policies which it maintains
on certain of its non-union employees.
Equipment and other obligations mature in 1997 through 2043 and are
collateralized by assets with a net book value of $253 million at
December 31, 1996. Maturities of long-term debt other than capital
leases and commercial paper are $65 million in 1997, $46 million in
1998, $46 million in 1999, $266 million in 2000, $17 million in 2001 and
$975 million in total from 2002 through 2043.
CRC had $199 million of commercial paper outstanding at December 31,
1996. Of the total amount outstanding, $100 million is classified as
long-term since it is expected to be refinanced through subsequent
issuances of commercial paper and is supported by the long-term credit
facility mentioned below.
CRC maintains a $500 million uncollateralized bank credit agreement
with a group of banks which is used for general corporate purposes and
to support CRC's commercial paper program. The agreement matures in
2000 and requires interest to be paid on amounts borrowed at rates
based on various defined short-term rates and an annual maximum fee of
.125% of the facility amounts. The agreement contains, among other
conditions, restrictive covenants relating to a debt ratio and
consolidated tangible net worth. During 1996, CRC had no borrowings
under this agreement.
Interest payments were $170 million in 1996, $177 million in 1995 and
$174 million in 1994.
52
<PAGE>
7. Income Taxes
------------
The provisions for income taxes are composed of the following:
1996 1995 1994
---- ---- -----
(In Millions)
Current
Federal $ 90 $ 78 $104
State 10 15 16
---- ---- ----
100 93 120
---- ---- ----
Deferred
Federal 151 110 125
State 32 (2) 25
---- ---- ----
183 108 150
---- ---- ----
Special income tax obligation
Federal (80) (61) (53)
State (14) (12) (9)
---- ---- ----
(94) (73) (62)
---- ---- ----
$189 $128 $208
==== ==== ====
In conjunction with the public sale in 1987 of the 85% of the
Company's common stock then owned by the U.S. Government, federal
legislation was enacted which resulted in a reduction of the tax basis
of certain of the Company's assets, particularly property and
equipment, thereby substantially decreasing tax depreciation
deductions and increasing future federal income tax payments. Also,
net operating loss and investment tax credit carryforwards were
canceled. As a result of the sale-related transactions, a special
income tax obligation was recorded in 1987 based on an estimated
effective federal and state income tax rate of 37.0%.
As a result of a decrease in a state income tax rate enacted during
1995, income tax expense for that year was reduced by $21 million
representing the effects of adjusting deferred income taxes and the
special income tax obligation for the rate decrease as required by
SFAS 109, "Accounting for Income Taxes".
In November 1996, the Company reached a settlement with the Internal
Revenue Service related to the audit of the Company's consolidated
federal income tax returns for the fiscal years 1990 through 1992.
The Company made a payment of $39 million pending resolution of the
final interest determination related to the settlement. Federal and
state income tax payments were $145 million in 1996 (excluding tax
settlement), $109 million in 1995 and $80 million in 1994.
53
<PAGE>
Reconciliations of the U.S. statutory tax rates with the effective tax
rates are as follows:
1996 1995 1994
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.4 3.5 3.9
Effect of state tax decrease
on deferred taxes (5.3)
Other (2.8) (.5) .2
---- ---- ----
Effective tax rate 35.6% 32.7% 39.1%
==== ==== ====
Significant components of the Company's special income tax obligation
and deferred income tax liabilities and (assets) are as follows:
December 31,
-----------------
1996 1995
------ ------
(In Millions)
Current assets (primarily accounts
receivable) $ (9) $ (27)
Current liabilities (primarily accrued
liabilities and casualty reserves) (245) (265)
Tax benefits related to disposition of
subsidiary (30) (30)
Net operating loss carryforwards (9) (11)
------ ------
Current deferred tax asset, net $ (293) $ (333)
====== ======
Noncurrent liabilities:
Property and equipment 1,939 1,936
Other long-term assets (primarily prepaid
pension asset) 92 67
Miscellaneous 98 66
------ ------
2,129 2,069
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (174) (144)
Tax benefit transfer receivable (36) (33)
Alternative minimum tax credits (38)
Miscellaneous (95) (21)
------ ------
(305) (236)
------ ------
Special income tax obligation and
deferred income tax liabilities, net $1,824 $1,833
====== ======
54
<PAGE>
8. Employee Benefits
-----------------
Pension Plans
-------------
The Company and certain subsidiaries maintain defined benefit pension
plans which are noncontributory for all non-union employees and
generally contributory for participating union employees. Benefits
are based primarily on credited years of service and the level of
compensation near retirement. Funding is based on the minimum amount
required by the Employee Retirement Income Security Act of 1974.
Pension credits include the following components:
1996 1995 1994
----- ---- ----
(In Millions)
Service cost - benefits earned during the period $ 9 $ 8 $ 8
Interest cost on projected benefit obligation 51 51 48
Return on plan assets - actual (138) (254) (10)
- deferred 47 167 (77)
Net amortization and deferral (15) (15) (15)
----- ---- ----
$ (46) $(43) $(46)
===== ==== ====
The funded status of the pension plans and the amounts reflected in
the balance sheets are as follows:
1996 1995
------ -----
(In Millions)
Accumulated benefit obligation ($655 million
and $603 million vested, respectively) $ 661 $ 609
===== =====
Market value of plan assets 1,187 1,168
Projected benefit obligation (734) (726)
------ -----
Plan assets in excess of projected
benefit obligation 453 442
Unrecognized prior service cost 36 50
Unrecognized transition net asset (90) (120)
Unrecognized net gain (231) (157)
------ -----
Net prepaid pension cost $ 168 $ 215
====== =====
The assumed weighted average discount rates used in 1996 and 1995 are
7.5% and 7.0%, respectively, and the rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation as of December 31, 1996 and 1995 is
6.0%. The expected long-term rate of return on plan assets (primarily
equity securities) in 1996 and 1995 is 9.0%.
55
<PAGE>
Savings Plans
-------------
The Company and certain subsidiaries provide 401(k) savings plans for
union and non-union employees. Under the Non-union ESOP, 100% of
employee contributions are matched in the form of ESOP Stock for the
first 6% of a participating employee's base pay. There is no Company
match provision under the union employee plan. Savings plan expense
was $4 million in 1996 and 1995, and $5 million in 1994.
In connection with the Non-union ESOP, the Company issued
9,979,562 of the authorized 10 million shares of its ESOP Stock to the
Non-union ESOP in exchange for a 20 year promissory note with interest
at 9.55% from the Non-union ESOP in the principal amount of
$288 million. In addition, unearned ESOP compensation of $288 million
was recognized as a charge to stockholders' equity coincident with the
Non-union ESOP's issuance of its $288 million promissory note to the
Company. The debt of the Non-union ESOP was recorded by the Company
and offset against the promissory note from the Non-union ESOP.
Unearned ESOP compensation is charged to expense as shares of ESOP
Stock are allocated to participants. Approximately 2.7 million ESOP
shares have been cumulatively allocated to participants through
December 31, 1996, and a portion of these shares have been tendered to
CSX (Note 2). An amount equivalent to the preferred dividends
declared on the ESOP Stock partially offsets compensation and interest
expense related to the Non-union ESOP.
In 1994, the ESOP's promissory note to the Company was refinanced. As
part of the refinancing, the interest rate was decreased to 8.0%, from
the original 9.55%, and accrued interest of $21 million was
capitalized as part of the principal balance of the promissory note.
The Company is obligated to make dividend payments at a rate of 7.51%
on the ESOP Stock and additional contributions in an aggregate amount
sufficient to enable the Non-union ESOP to make the required interest
and principal payments on its note to the Company.
Interest expense incurred by the Non-union ESOP on its debt to the
Company was $24 million in 1996 and 1995, and $30 million in 1994.
Compensation expense related to the Non-union ESOP was $11 million in
1996, and $10 million in 1995 and 1994. Preferred dividends of $20
million were declared in 1996, and $21 million in 1995 and 1994.
Preferred dividend payments of $25 million, $21 million and $16
million were made in 1996, 1995 and 1994, respectively. The Company
received debt service payments from the Non-union ESOP of $40 million
in 1996, $31 million in 1995 and $21 million in 1994.
56
<PAGE>
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Company provides health and life insurance benefits to certain
retired non-union employees. Certain non-union employees are eligible
for retiree medical benefits, while substantially all non-union
employees are eligible for retiree life insurance benefits. Generally,
company-provided health care benefits terminate when individuals reach
age 65.
Retiree life insurance plan assets consist of a retiree life insurance
reserve held in the Company's group life insurance policy. There are
no plan assets for the retiree health benefits plan.
The following sets forth the plans' funded status reconciled with amounts
reported in the Company's balance sheets:
1996 1995
----------------- -----------------
Life Life
Medical Insurance Medical Insurance
Plan Plan Plan Plan
(In Millions)
Accumulated postretirement
benefit obligation:
Retirees $44 $20 $38 $19
Fully eligible active plan
participants 1 5 1
Other active plan participants 3 5
--- --- --- ---
Accumulated benefit obligation 45 23 43 25
Market value of plan assets (10) (7)
--- --- --- ---
Accumulated benefit obligation
in excess of plan assets 45 13 43 18
Unrecognized gains and (losses) (1) 2 1 (1)
Accrued benefit cost recognized
in the Consolidated Balance --- --- --- ---
Sheet $44 $15 $44 $17
=== === === ===
Net periodic postretirement
benefit cost, primarily
interest cost $ 3 $ 1 $ 4 $ 1
=== === === ===
An 8 percent rate of increase in per capita costs of covered health
care benefits was assumed for 1997, gradually decreasing to 6 percent
by the year 2007. Increasing the assumed health care cost trend rates
by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $2
million and would have an immaterial effect on the net periodic
postretirement benefit cost for 1996. Discount rates of 7.5% and
7.0% were used to determine the accumulated postretirement benefit
obligations for both the medical and life insurance plans in 1996 and
1995, respectively.
The assumed rate of compensation increase was 6.0% in 1996 and 5.0%
in 1995.
57
<PAGE>
Retiree medical benefits are funded by a combination of Company and
retiree contributions. Retiree life insurance benefits are provided by
insurance companies whose premiums are based on claims paid during the
year.
9. Capital Stock
-------------
Preferred Stock
---------------
The Company is authorized to issue 25 million shares of preferred
stock with no par value. The Board of Directors has the authority to
divide the preferred stock into series and to determine the rights
and preferences of each.
The Company cannot pay dividends on its common stock unless full
cumulative dividends have been paid on its ESOP Stock, and no
distributions can be made to the holders of common stock upon
liquidation or dissolution of the Company unless the holders of the
ESOP Stock have received a cash liquidation payment of $28.84375 per
share, plus unpaid dividends up to the date of such payment. The
ESOP Stock is convertible into an equivalent number of shares of
common stock based on their respective market values at the date of
conversion. The ESOP Stock is entitled to one vote per share, voting
together as a single class with common stock on all matters.
As a result of the CSX tender offer related to the proposed merger
(Note 2), 2.2 million shares of ESOP Stock have been converted to
common shares as a result of being removed from the Non-union ESOP
401(k) savings plan.
Employee Benefits Trust
-----------------------
In 1995, the Company issued approximately 4.7 million shares of its
common stock to the Conrail Employee Benefits Trust (the "Trust") in
exchange for a promissory note of $250 million at an interest rate of
6.9%. The Trust is being used to fund certain employee benefits and
other forms of compensation over its fifteen-year term. The amount
representing unearned employee benefits is recorded as a deduction
from stockholders' equity and is reduced as benefits and compensation
are paid through the release of shares from the Trust. The shares
owned by the Trust are valued at the closing market price as of the
end of each reporting period, with corresponding changes in the
balance of the Trust reflected in additional paid-in capital. The
Trust has sold shares of Conrail common stock in connection with the
CSX and Norfolk tender offers (Note 2) and has used the proceeds to
repurchase shares of Conrail common stock in the open market. Shares
held by the Trust are not considered outstanding for earnings per
share computations until released by the Trust, but do have voting
and dividend rights.
Common Stock Repurchase Program
-------------------------------
In April 1995, the Board of Directors approved a $250 million multi-
year stock repurchase program. During 1996, the Company acquired
2,225,738 shares for approximately $156 million under this program.
58
<PAGE>
At December 31, 1996, approximately $93 million remained available
from this authorization; however, as a result of the proposed merger
with CSX Corporation (Note 2), the Company will not make any
additional stock repurchases under this program.
The activity and status of treasury stock follow:
1996 1995 1994
---------- --------- ---------
Shares, beginning of year 3,297,717 1,789,164 83,745
Acquired 2,225,738 1,508,553 1,705,419
---------- --------- ----------
Shares, end of year 5,523,455 3,297,717 1,789,164
========== ========= ==========
Stock Plans
-----------
The Company's stock-based compensation plans as of December 31, 1996
are described below. The Company applies APB 25 and related
interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option
plans. SFAS 123 was issued in 1995 and, if fully adopted, would
change the method of recognition of costs on plans similar to those
of the Company. Adoption of SFAS 123 is optional; however, the
required pro forma disclosures as if the Company had adopted the cost
recognition requirements under SFAS 123 in 1996 and 1995 are
presented below.
The Company's 1987 and 1991 Long-Term Incentive Plans authorize the
granting to officers and key employees of up to 4 million and 6.6
million shares of common stock, respectively, through stock options,
stock appreciation rights, phantom stock and awards of restricted or
performance shares. A stock option is exercisable for a specified
term commencing after grant at a price not less than the fair market
value of the stock on the date of grant. The vesting of awards made
pursuant to these plans is contingent upon one or more of the
following: continued employment, passage of time or financial and
other performance goals.
Effective November 1996, the Company's Board of Directors authorized
the automatic vesting of all unvested stock options outstanding in
connection with the Merger Agreement between CSX and the Company
(Note 2).
59
<PAGE>
The activity and status of stock options under the incentive
plans follow:
Non-qualified Stock Options
-----------------------------------
Option Price Shares
Per Share Under Option
----------------- ------------
Balance, January 1, 1994 $14.000 - $60.500 1,966,321
Granted $52.188 - $66.938 23,988
Exercised $14.000 - $51.375 (507,450)
Canceled $42.625 - $60.500 (118,904)
------------
Balance, December 31, 1994 $14.000 - $66.938 1,363,955
Granted $50.688 - $68.563 516,757
Exercised $14.000 - $53.875 (200,940)
Canceled $42.625 - $53.875 (123,560)
------------
Balance, December 31, 1995 $14.000 - $68.563 1,556,212
Granted $68.563 - $96.063 551,038
Exercised $14.000 - $73.250 (1,268,085)
Canceled $42.625 - $70.031 (3,984)
------------
Balance, December 31, 1996 $14.000 - $96.063 835,181
============
Exercisable,
December 31, 1996 $14.000 - $74.188 831,481
============
Available for future grants
December 31, 1995 1,188,193
============
December 31, 1996 3,969,317
============
The weighted average exercise prices of options granted during 1996 and
1995 are $70.130 per share and $51.204 per share, respectively. The
weighted average exercise prices of options exercised during 1996 and
1995 are $48.32 per share and $31.16 per share, respectively. The
average remaining maximum terms of options is not considered meaningful
given the events that have occurred as a result of the proposed merger
with CSX (Note 2).
The fair value of each option granted during 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) dividend yield of 2.43%, (2)
expected volatility of 25.25%, (3) risk-free interest rate of 5.51%, and
(4) expected life of 4 years. The weighted average fair value of
options granted during 1996 and 1995 is $16.00 per share and $13.12 per
share, respectively.
Had the compensation cost for the Company's 1996 and 1995 grants for
stock-based compensation plans been determined consistent with SFAS 123,
the Company's net income, primary earnings per share and fully diluted
earnings per share for 1996 and 1995 would approximate the pro forma
60
<PAGE>
amounts below ($ in millions except per share data):
1996 1995
----- -----
Net income as reported $ 342 $ 264
Net income pro forma 335 262
Primary earnings per share $4.25 $3.19
Primary earnings per share pro forma 4.16 3.16
Fully diluted earnings per share $3.89 $2.94
Fully diluted earnings per share pro forma 3.81 2.92
The Company has granted phantom shares and restricted stock under its
non-union employee bonus plans to eligible employees who elect to
defer all or a portion of their annual bonus in a given year. The
number of shares granted depends on the length of the deferral
period. Grants are made at the market price of the Company's common
stock at the date of grant. The Company has granted 148,749 shares
and 337,329 shares of phantom and restricted stock, respectively,
under its non-union employee bonus plans through December 31, 1996.
The Company has also granted 73,344 performance shares under its 1991
Long-Term Incentive Plan through December 31, 1996. Compensation
expense related to these plans was $2 million in 1996 and $3 million
in 1995. The weighted-average fair value for the phantom shares and
restricted stock granted during 1996 and 1995 was $68.02 per share
and $52.88 per share, respectively.
Stock Rights
------------
In 1989, the Company declared a dividend of one common share purchase
right (the "Right") on each outstanding share of common stock. The
Rights are not exercisable or transferable apart from the common stock
until the occurrence of certain events arising out of an actual or
potential acquisition of 10% or more of the Company's common stock,
and would at such time provide the holder with certain additional
entitlements. However, under the terms of the Merger Agreement (Note
2) the CSX tender offer does not constitute an event that would result
in the Rights becoming exercisable. In 1995, a dividend of one Right
for each share of ESOP Stock was declared and paid. The exercise
price of the Rights is $205. The Rights may be redeemed by the
Company prior to becoming exercisable at one-half cent ($.005) per
Right and have no voting or dividend rights.
61
<PAGE>
10. Asset Disposition Charge
------------------------
Included in 1995 operating expenses is an asset disposition charge of
$285 million, which reduced net income by $176 million. The asset
disposition charge resulted from a review of the Company's route
system and other operating assets to determine those that no longer
effectively and economically supported current and expected
operations. The Company identified and has committed to sell 1,800
miles of rail lines that are expected to provide proceeds
substantially less than net book value. In addition, other assets,
principally yards and side tracks, identified for disposition were
written down to estimated net realizable value (See Note 1 "Asset
Impairment").
11. 1994 Early Retirement Program
-----------------------------
During 1994, the Company recorded a charge of $84 million, which
reduced net income by $51 million, for a non-union employee voluntary
early retirement program and related costs. The majority of the cost
of the early retirement program is being paid from the Company's
overfunded pension plan.
12. Other Income, Net
-----------------
1996 1995 1994
---- ---- ----
(In Millions)
Interest income $ 29 $ 33 $ 34
Rental income 50 57 53
Property sales 23 27 18
Other, net 10 13 13
---- ---- ----
$112 $130 $118
==== ==== ====
13. Commitments and Contingencies
-----------------------------
Environmental
-------------
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. CRC is a party to
various proceedings brought by both regulatory agencies and private
parties under federal, state and local laws, including
Superfund laws, and has also received inquiries from governmental
agencies with respect to other potential environmental issues. At
December 31, 1996, CRC has received, together with other companies,
notices of its involvement as a potentially responsible party or
requests for information under the Superfund laws with respect to
cleanup and/or removal costs due to its status as an alleged
transporter, generator or property owner at 135 locations. However,
based on currently available information, the Company believes CRC may
have some potential responsibility at only 61 of these sites. Due to
the number of parties involved at many of these sites, the wide range
of costs of possible remediation alternatives, the changing technology
and the length of time over which these matters develop, it is often
not possible to estimate CRC's liability for the costs associated with
the assessment and remediation of contaminated sites.
62
<PAGE>
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period if
CRC were held principally liable in certain of these actions, at
December 31, 1996, the Company had accrued $55 million, an amount it
believes is sufficient to cover the probable liability and remediation
costs that will be incurred at Superfund sites and other sites based
on known information and using various estimating techniques. The
Company believes the ultimate liability for these matters will not
materially affect its consolidated financial condition.
The Company spent $11 million in 1996, $14 million in 1995 and $8
million in 1994 for environmental remediation and related costs and
anticipates spending an amount comparable to that spent in 1996
during 1997. In addition, the Company's capital expenditures for
environmental control and abatement projects were approximately $6
million in 1996 and 1995, and $5 million in 1994, and are
anticipated to be approximately $10 million in 1997.
The Environmental Quality Department is charged with promoting the
Company's compliance with laws and regulations affecting the
environment and instituting environmentally sound operating
practices. The department monitors the status of the sites where
the Company is alleged to have liability and continually reviews the
information available and assesses the adequacy of the recorded
liability.
Other
-----
The Company is involved in various legal actions, principally relating
to occupational health claims, personal injuries, casualties, property
damage and damage to lading. The Company has recorded liabilities on
its balance sheet for amounts sufficient to cover the expected
payments for such actions.
The Company may be contingently liable for approximately $63 million
at December 31, 1996 under indemnification provisions related to sales
of tax benefits.
CRC had an average of 20,761 employees in 1996, approximately 87% of
whom are represented by 14 different labor organizations and are
covered by 22 separate collective bargaining agreements. The Company
was engaged in collective bargaining at December 31, 1996 with labor
organizations representing approximately 22% of its labor force.
In 1994, Locomotive Management Services, a general partnership of
which CRC holds a fifty percent interest, issued $96 million of
Equipment Trust Certificates to fund the purchase price of 60 new
locomotives. While principal and interest payments on certificates
will be fully guaranteed by CRC, through a sharing agreement with its
partner, CRC's portion of the guarantee is reduced to approximately
$48 million, effective January 1, 1997, with the Company's purchase of
twenty of the locomotives.
63
<PAGE>
CRC has received three adverse jury verdicts related to railroad
crossing accidents in Ohio that include significant punitive damage
awards that collectively approximate $30 million. CRC believes the
punitive damage awards in those cases are improper and that it has
meritorious defenses, which it plans to pursue on appeal. The Company
is not presently able to reasonably estimate the ultimate outcome of
these cases, and accordingly, no expense for such awards has been
recorded as of December 31, 1996.
As part of the Merger Agreement (Note 2), the Company may be a party to
certain stock purchase options or, under certain circumstances, be
required to pay substantial termination fees.
14. Condensed Quarterly Data (Unaudited)
-----------------------------------
<TABLE>
First Second Third Fourth
------------ ----------- ----------- ------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
($ In Millions Except Per Share)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $889 $889 $949 $923 $933 $923 $943 $951
Income (loss) from operations 69 114 54 180 235 208 243 (46)
Net income (loss) 31 55 26 123 138 116 147 (30)
Net income (loss) per common share:
Primary .36 .66 .30 1.52 1.74 1.44 1.86 (.43)
Fully diluted .35 .61 .29 1.37 1.58 1.31 1.70 (.43)
Ratio of earnings to fixed charges 1.75x 2.39x 1.57x 3.42x 4.77x 4.02x 4.91x -
Dividends per common share .425 .375 .425 .375 .475 .425 .475 .425
Market prices per common share
(New York Stock Exchange)
High 77 1/4 57 5/8 73 1/4 56 1/4 74 5/8 70 1/4 100 7/8 74 3/8
Low 67 5/8 50 1/2 66 1/4 51 1/8 63 3/4 55 1/8 68 1/2 65 1/2
</TABLE>
During the second quarter of 1996, the Company recorded a one-time
charge of $135 million for the non-union employee voluntary early
retirement and separation programs and related costs, which
reduced net income by $83 million (Note 3). Without this charge, net
income would have been $109 million for the quarter ($1.37 and $1.25
per share, primary and fully diluted, respectively).
As a result of a decrease in a state income tax rate enacted during
the second quarter of 1995, income tax expense was reduced
by $21 million representing the effects of adjusting deferred income
taxes and the special income tax obligation for the rate decrease as
required under SFAS 109 (Note 7). Without this one-time tax benefit,
the Company's net income for the quarter would have been $102 million
($1.25 and $1.14 per share, primary and fully diluted, respectively).
During the fourth quarter of 1995, an asset disposition charge reduced
income from operations by $285 million and adversely affected the
quarter's net income by $176 million (Note 10). Without the asset
disposition charge, net income would have been $146 million ($1.82 and
$1.65 per share, primary and fully diluted, respectively) for the
fourth quarter of 1995. After the asset disposition charge, earnings
were insufficient by $58 million to cover fixed charges for the
quarter.
64
<PAGE>
Item 9. Changes in and Disagreements with Accountants
- ------ ---------------------------------------------
on Accounting and Financial Disclosure.
--------------------------------------
None.
65
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The information regarding executive officers called for by Item
401 of Regulation S-K is included in Part I under "Executive
Officers of the Registrant."
CLASS I DIRECTORS - TERM EXPIRING 1997:
Name, Business Experience Prior Service As
and Other Directorships Conrail Director
------------------------- ----------------
H. Furlong Baldwin Since 1988
Chairman and Chief Executive Officer of
Mercantile Bankshares Corporation since
prior to January 1991. Director,
Mercantile Bankshares Corporation,
Baltimore Gas & Electric Company, GRC
International, Inc. and USF&G Corporation.
Age 65.
David M. LeVan Since 1994
Chairman, President and Chief Executive
Officer of Conrail since May 1996.
Served as President and Chief Executive
Officer between March 1995 and May 1996.
President and Chief Operating Officer of
Conrail between September 1994 and March
1995. Executive Vice President between
November 1993 and September 1994. Senior
Vice President - Operations between July
1992 and November 1993. Senior Vice
President - Operating Systems and Strategies
between November 1991 and June 1992. Age
51.
Gail J. McGovern Since 1996
Executive Vice President, Consumer Markets
of AT&T since January 1997. Executive
Vice President, Business Markets of AT&T
between November 1995 and January 1997.
Vice President, Business Services of AT&T
between April 1994 and November 1995.
Vice President, Strategy of AT&T between
August 1993 and April 1994. Vice
President, 800 Service of AT&T between
January 1992 and August 1993. Age 45.
66
<PAGE>
Name, Business Experience Prior Service As
and Other Directorships Conrail Director
------------------------- ----------------
David H. Swanson Since 1989
President and Chief Executive Officer of
Countrymark Cooperative, Inc., a farm
supply and marketing cooperative, since
December 1995. Chairman, President and
Chief Executive Officer of Explorer
Nutritional Group, an animal nutrition
company, and Chairman of Premiere Agri-
Technologies, Inc., an international
agricultural business, between January
1995 and December 1995. Chief Executive
Officer of Premiere Agri-Technologies,
Inc. between January 1994 and January
1995. Chairman, President and Chief
Executive Officer of Central Soya Company,
Inc. between 1986 and January 1994.
Director, Fiduciary Trust International.
Age 54.
CLASS II DIRECTORS - TERM EXPIRING 1998:
Kathleen Foley Feldstein Since 1993
President of Economics Studies, Inc., a
private consulting firm, since prior to
January 1, 1991. Director, Bank America
Corporation, Digital Equipment Corporation
and John Hancock Mutual Life Insurance
Company. Age 56.
David B. Lewis Since 1989
Chairman of Lewis, Clay & Munday, P.C., a
law firm, since prior to January 1991.
Director, LG&E Energy Corp., Comerica
Bank, and TRW, Inc. Lewis, Clay & Munday
provided legal services to Conrail in
1996. Age 52.
John C. Marous Since 1991
Retired in July 1990 from Westinghouse
Electric Corporation where he held the
position of Chairman and Chief Executive
Officer between January 1988 and July
1990. Director, Mellon Bank, N.A. Age
71.
Raymond T. Schuler Since 1981
Retired in September 1990 from the
Business Council of New York State, Inc.,
where he held the positions of Vice
Chairman, President and Chief Executive
Officer. Director, Oneida, Ltd., Northeast
Savings and NAMICVSA. Age 67.
67
<PAGE>
CLASS III DIRECTORS - TERM EXPIRING 1999:
Name, Business Experience Prior Service As
and Other Directorships Conrail Director
------------------------- ----------------
Claude S. Brinegar Since 1990
Vice Chairman of Unocal Corp., a high
technology earth resources company, from
August 1989 to June 1995. Retired from
Unocal Corp. in May 1992, where he held
the position of Executive Vice President -
Administration and Planning, since 1989.
Director, Maxicare Health Plans, Inc., and
a visiting scholar at Stanford University.
Age 70.
Daniel B. Burke 1981 to 1986 and
Chairman and Owner, Portland, Maine since 1987
Baseball Inc., 1994 to present. Retired
in February 1994 from Capital Cities/ABC,
Inc. where he held the positions of
President and Chief Executive Officer
since June 1990. Director, Capital
Cities/ABC, Inc., Rohm and Haas Co., Avon
Products, Inc., Morgan Stanley Group
Incorporated and Darden Restaurants. Age
68.
Roger S. Hillas Since 1981
Retired in January 1993 from Meritor
Savings Bank where he held the positions
of Chairman and Chief Executive Officer
between July 1988 and December 1992.
Director, P.H. Glatfelter Company, Toll
Bros., Inc., The Bon-Ton Stores, Inc. and
VF Corporation. Age 69.
E. Bradley Jones Since 1987
Retired in December 1984 from LTV Steel
Company where he held the positions of
Chairman and Chief Executive Officer and
Group Vice President of LTV Corporation.
Director, TRW, Inc., Cleveland-Cliffs,
Inc., Birmingham Steel Corporation and
RPM, Inc.; Trustee, First Union Real
Estate Equity and Mortgage Investments and
Trustee, Fidelity Group of Funds. Age 69.
68
<PAGE>
Item 11. Executive Compensation.
- ------- ----------------------
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors' Compensation. Directors who are not officers of Conrail
receive an annual fee of $25,000 and a fee of $1,000 for each Board and
Board committee meeting they attend. Each such director who is a chairman
of a Board Committee receives an additional annual fee of $2,000, except
the chairman of the Audit Committee who receives an additional annual fee
of $2,500. Directors who are officers of Conrail are not paid any fees for
service on the Board or on any Board Committees.
Conrail maintains a Retirement Plan for Non-Employee Directors that
provides each director who is not an employee or former employee of Conrail
with a retirement benefit equal to the product of (1) one-twelfth of his or
her annual retainer fee from Conrail in effect at the time the director
ceases to serve as a member of the Board and (2) the number of full months,
up to 120, he or she served on the Board, including service on the Board of
Consolidated Rail Corporation prior to July 1, 1993.
Benefits are payable in cash, from Conrail's general assets, in equal
monthly installments over the ten-year period beginning with the month
following the later of (1) the month in which the director ceases to serve
on the Board or (2) the month in which the director attains age 65.
Notwithstanding the foregoing, (1) the benefits of directors who cease to
serve on the Board on account of disability commence with the month
following the month in which the director ceases to serve on the Board, and
(2) after a director's death, his or her benefits shall be paid to the
director's designated beneficiary, or in the absence of a written
designation, to the director's estate, in a lump sum, as soon as
practicable following the director's death.
Benefits are forfeited in the event the director, before he or she
attains age 65, is removed from the Board for cause or voluntarily resigns
from the Board, unless the resignation is approved by the Board on account
of a conflict between the interests of the director and the interests of
Conrail.
Conrail also maintains a Board of Directors Charitable Contributions
Program pursuant to which Conrail has purchased life insurance policies of
$1 million on the life of each director. Upon the death of an individual
director, Conrail will donate $1 million in five annual installments of
$200,000 each to one or more qualifying educational or charitable
organizations designated by the director, and will be reimbursed by the
life insurance proceeds. Individual directors derive no financial benefit
from the program; all charitable deductions accrue solely to Conrail. In
1996, a donation of $200,000 was made under the program on behalf of the
late Ann F. Friedlaender.
69
<PAGE>
Compensation of Executive Officers. The following table provides
certain summary information concerning compensation awarded to, earned by
or paid in 1996 to Conrail's Chairman, President and Chief Executive
Officer, David M. LeVan, and each of the four other most highly compensated
executive officers of Conrail (determined as of the end of the last fiscal
year (December 31, 1996) and hereafter referred to as the "named executive
officers") for all services rendered in all capacities to Conrail and its
subsidiaries during the fiscal years ended December 31, 1994, 1995 and
1996.
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
------------------- ---------------------------
(a) (b) (c) (d) (f) (g) (i)
Restricted Securities
Name and Stock Underlying All Other
Principal Salary Bonus Award(s) Options/SARS Compensation
Position Year ($) ($) ($) (#) ($)(1)
- ----------- ---- ------ ----- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
D. M. LeVan 1996 594,522 0 0(2) 33,000 9,000
Chairman, President 1995 514,519 24,759 509,976(3) 30,746 9,000
& CEO
R. J. Conway 1996 257,031 0 0(2) 9,000 9,000
Sr. Vice President- 1995 223,889 101,367 27,425(3) 9,000 9,000
Operations 1994 166,940 88,023 0 9,000
B. B. Wilson 1996 251,840 0 0(2) 9,000 9,000
Sr. Vice President- 1995 253,026 114,792 27,425(3) 9,000 9,000
Merger 1994 245,040 122,500 0 9,000
J.P. Sammon 1996 217,720 0 0(2) 9,000 9,000
Sr. Vice President- 1995 198,334 90,104 27,425(3) 9,000 9,000
CORE Service Group 1994 135,187 54,207 0 9,000
T.P. Dwyer 1996 197,819 0 0(2) 9,000 9,000
Sr. Vice President- 1995 198,882 33,736 106,340(3) 9,000 9,000
Unit Train Service 1994 150,446 65,178 0 9,000
Group
</TABLE>
(1) These amounts represent Conrail's matching contribution in the form of
Conrail Preferred Stock of amounts deferred by the named executive
officers through a 401(k) plan during 1996, 1995 and 1994. The shares
are allocated based on the per share price set at the time the shares
were purchased by the plan.
(2) As of December 31, 1996, Messrs. LeVan, Conway, Wilson, Sammon and
Dwyer held, respectively, 15,273, 2,061, 1,230, 0 and 2,212 restricted
shares of Conrail Common Stock worth $940,411, $146,513, $122,539, $0
and $124,473, respectively, net of the payments which such officers
would have been entitled to receive absent their elections to take
restricted shares instead of cash bonuses. Valuation is based on the
closing price of Conrail Common Stock on December 31, 1996 ($99.625).
70
<PAGE>
(3) This figure represents the following: (i) full market value as of the
January 31, 1996 grant date of restricted shares of Conrail Common
Stock awarded to the named executive officer as a result of a 1995
bonus deferral, and is composed of the amount of the 1995 bonus which
such officer elected to defer ($277,546 and $56,368 for Messrs. LeVan
and Dwyer, respectively) plus a matching contribution by Conrail in
the amount of 50%; and (ii) the value of shares of Conrail Common
Stock awarded on January 22, 1996 in settlement of performance shares
granted on January 1, 1995 based on Conrail's having met certain
predetermined financial performance goals (computed at a fair market
value of $68.5625). The number of shares of restricted stock was
determined by the fair market value of Conrail Common Stock on January
31, 1996 ($70.3125). Dividends are paid on all restricted shares.
71
<PAGE>
The following table contains information concerning the grant of stock
options made to the named executive officers during the fiscal year ended
December 31, 1996.
<TABLE>
Option/SAR Grants in Last Fiscal Year
Individual Grant Grant Date
Value
(a) (b) (c) (d) (e) (f)
- -------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Employees in Base Price Present Value
Name Granted (#) Fiscal Year ($/sh) Expiration Date ($) (2)
<S> <C> <C> <C> <C> <C>
D. M. LeVan 33,000(1) 6.9% $70.0313 January 1, 2006 521,730
R.J. Conway 9,000(1) 1.9% $70.0313 January 1, 2006 142,290
B.B. Wilson 9,000(1) 1.9% $70.0313 January 1, 2006 142,290
J.P. Sammon 9,000(1) 1.9% $70.0313 January 1, 2006 142,290
T.P. Dwyer 9,000(1) 1.9% $70.0313 January 1, 2006 142,290
</TABLE>
(1) Exerciseable as of November, 1996.
(2) Based on modified Black-Scholes Option Pricing Model assuming a four
year term and that dividends are compounded quarterly and risk-free
rates are compounded continuously over the expected option term.
Dividend yield for the options is 2.43%, and the risk free rate of
return is 5.34%, using daily volatility rates of 25.30%.
72
<PAGE>
The following table provides information concerning the exercise of
stock options during the fiscal year ended December 31, 1996, by each of
the named executive officers and the value of unexercised stock options
held by each such officer as of December 31, 1996.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexercisable Unexercisable(1)
- ---- --------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
D. M. LeVan 0 0 E 98,896 E 4,357,479
U 0 U 0
R. J. Conway 0 0 E 27,375 E 1,242,867
U 0 U 0
B. B. Wilson 65,716 3,654,824 E 0 E 0
U 0 U 0
J.P. Sammon 17,375 562,867 E 18,125 E 739,226
U 0 U 0
T.P. Dwyer 30,500 1,314,437 E 0 E 0
U 0 U 0
</TABLE>
(1) This valuation is based on the fair market value of Conrail Common
Stock on December 31, 1996 ($99.6875).
73
<PAGE>
Long-Term Incentive Plans ---Awards in Last Fiscal Year
<TABLE>
Estimated Future Payouts
under Non-Stock Price-Based Plans
---------------------------------
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation
Name Rights (#)(1) or Payout Threshold (#) Target (#) Maximum(#)
<S> <C> <C> <C> <C> <C>
D. M. LeVan 4,400 January 1999 3,960 4,400 4,400
R. J. Conway 1,200 January 1999 1,080 1,200 1,200
B. B. Wilson 1,200 January 1999 1,080 1,200 1,200
J.P. Sammon 1,200 January 1999 1,080 1,200 1,200
T.P. Dwyer 1,200 January 1999 1,080 1,200 1,200
</TABLE>
(1) Represents performance shares granted to the named executive
officers in 1996. Shares will vest proportionately in January
1999 if Conrail has met 90% or more of a three-year, cumulative
cash flow goal.
74
<PAGE>
Pension Plan Table and Related Disclosure
The following table shows estimated annual retirement benefits payable
under the Supplemental Pension Plan of Consolidated Rail Corporation.
Years of Service
- ----------------------------------------------------------------------------
Remuneration 15 YRS 20 YRS 25 YRS 30 YRS 35 YRS
- ------------ ------- ------- ------- ------- -------
$ 125,000 $ 20,928 $ 27,905 $ 34,881 $ 41,857 $ 48,833
150,000 26,178 34,905 43,631 52,357 61,083
175,000 31,428 41,905 52,381 62,857 73,333
200,000 36,678 48,905 61,131 73,357 85,583
225,000 41,928 55,905 69,881 83,857 97,833
250,000 47,178 62,905 78,631 94,357 110,083
300,000 57,678 76,905 96,131 115,357 134,583
400,000 78,678 104,905 131,631 157,357 183,583
450,000 89,178 118,905 148,631 178,357 208,083
500,000 99,678 132,905 166,131 199,357 232,583
600,000 120,678 160,905 201,131 241,357 281,583
700,000 141,678 188,905 236,131 283,357 330,583
750,000 152,178 202,905 253,631 304,357 355,083
1,250,000 257,178 342,905 428,631 514,357 600,083
1,500,000 309,678 412,905 516,131 619,357 722,583
Messrs. LeVan, Conway, Wilson, Sammon and Dwyer have 18, 27, 17, 17
and 24 years of credited service, respectively. Compensation covered by the
Pension Plan consists of an employee's wages for federal income tax
purposes (see column (c) to the Summary Compensation Table plus any bonus
paid in 1996; column (d) reflects bonuses earned in the stated year, but
not paid in such year), excluding reimbursements, fringe benefits, gains
from the exercise of employee stock options, and contributions to deferred
compensation plans other than employee deferrals under Conrail's Matched
Savings Plan. In 1996, the covered compensation of Messrs. LeVan, Conway,
Wilson, Sammon and Dwyer was $625,826, $260,636, $308,554, $210,455, and
$233,707, respectively. The table above shows estimated annual retirement
benefits, after application of the Pension Plan's railroad retirement
offset, payable to participants as a straight life annuity under the
Pension Plan upon normal retirement at age 65 based upon final average
compensation and years of Conrail service. The table does not reflect
statutory limits on benefits under tax-qualified plans.
75
<PAGE>
Employment Agreements and Termination of Employment and
Change in Control Arrangements
To ensure that Conrail would have the continued dedicated service of
certain executives notwithstanding the possibility, threat or occurrence of
changes in control, in 1995, Conrail entered into severance agreements with
its officers and certain key employees, including the officers named in the
Summary Compensation Table ("Change of Control Contracts"). The agreements
generally provide that if the executive is Terminated other than for Cause
within three years after a Change in Control, or within two years of
regulatory approval of such Change in Control, each as defined in the
agreement, such executive is entitled to receive severance benefits. Such
benefits would be equal to a lump sum payment equal to all previously
accrued cash compensation, three times the sum of the then-current base
salary and highest annual bonus earned within the previous three calendar
years, together with certain other payments and benefits, including
continuation of employee welfare benefits and an additional payment to
compensate the executive for certain excise taxes imposed upon payments
under such agreements. In addition, such Termination would result in the
acceleration of vesting or lapse of restricted periods on previously granted
stock-based incentive awards.
In connection with the proposed merger with CSX Corporation, CSX has
agreed to pay to Mr. LeVan, in lieu of any stay bonus and severance or
termination benefits, a lump sum equal to the economic value of the
employment agreement (as reasonably determined by the parties in good
faith) which CSX and Mr. LeVan had entered into in connection with the
Conrail-CSX merger as originally proposed. Company executives (other than
Mr. LeVan) will be paid the value of their Change of Control Contracts in
accordance with the terms thereof if their employment is terminated under
certain specified circumstances or if they remain employed until May 31,
1998.
CSX Corporation has agreed to honor all obligations under employment
agreements and employee benefit plans, programs and policies and
arrangements of Conrail in accordance with the terms of the Merger
Agreement and to provide benefits to those employees of Conrail transferred
to CSX or another entity. Severance or supplemental retirement benefits
will be provided to non-union employees (other than executive level
employees) who are terminated within three years following the regulatory
approval of the merger, equal to between six months and 24 months of salary
(depending upon an employee's service). Medical coverage will also be
continued for these employees for specified periods. A stay bonus program
will also be established that provides a lump sum cash payment to non-union
employees who remain employed until regulatory approval of the merger with
additional payments made to those employees who remain employed for up to
six months thereafter.
76
<PAGE>
Item 12. Security Ownership of Certain Beneficial
- ------- ----------------------------------------
Owners and Management.
---------------------
Outstanding Shares. As of the close of business on March 3, 1997,
there were issued and outstanding 83,144,397 shares of Conrail Common
Stock and 6,358,470 shares of Conrail Preferred Stock. To Conrail's
knowledge, the only persons (or "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) who, as of March 3, 1997, owned beneficially more than
5% of any class of Conrail's voting securities are listed in the
following table:
<TABLE>
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
- -------------- ------------------- -------------------- --------
<S> <C> <C> <C>
Conrail Common Green Acquisition Corp., 17,775,124 (of which: sole 21.4%
Stock a wholly- owned subsidiary of voting power - 17,775,124;
CSX Corp. shared voting power - 0; sole
One James Center dispositive power -17,775,124;
901 E. Cary Street shared dispositive power - 0) (1)
Richmond, VA 23219
Conrail Common Alantic Acquisition Corp., 8,200,100 (of which: sole 9.9%
Stock a wholly-owned subsidiary of voting power - 8,200,100;
Norfolk Southrn Corp. shared voting power - 0; sole
Three Commercial Place dispositive power - 8,200,100;
Norfolk, VA 23510 shared dispositive power - 0) (2)
Conrail Preferred Fidelity Management Trust Co. 4,825,000 shares,not individually, 75.9%
Stock 82 Devonshire Street but solely in its capacity
Boston, MA 02109 as Trustee of the ESOP (3)
</TABLE>
1. Held in trust by Deposit Guaranty National Bank, One Deposit Guaranty
Plaza, Jackson, Mississippi. These shares represent 19.9% of
Conrail's total voting securities (Common Stock and Preferred Stock
voting as one class). CSX also beneficially owns an additional
15,955,477 shares of Conrail Common Stock pursuant to a Conrail Stock
Option Agreement dated as of October 14, 1996 between Conrail and CSX,
pursuant to which CSX currently has the right to purchase up to that
number of additional shares at a price of $92.50 per share. These
option shares, together with the 17,775,124 shares referred to above,
represent approximately 37.7% of Conrail's total voting securities.
2. Held in trust by First American National Bank, 300 Union Street,
Nashville, Tennessee. These shares represent 9.2% of Conrail's
total voting securities.
3. Shares of Conrail Preferred Stock are convertible into shares of
Conrail Common Stock at any time on a share-for-share basis, subject
to certain antidilution adjustments. As a result, ownership of shares
of Conrail Preferred Stock is deemed to be ownership of an equal
number of shares of Conrail Common Stock. These 4,825,000 shares of
Conrail Preferred Stock represent 5.4% of Conrail's total voting
securities.
Ownership by Management of Equity Securities. The following table sets
forth the beneficial ownership, as of March 3, 1997, of Conrail Common
77
Stock and Conrail Preferred Stock of each director and nominee, each of the
executive officers named in the Summary Compensation Table and all
directors and executive officers as a group. Unless otherwise indicated,
each such person has sole voting and investment power with respect to such
shares of Conrail Common Stock and sole voting power with respect to such
shares of Conrail Preferred Stock. The ESOP Trustee holds sole investment
power with respect to all shares of Conrail Preferred Stock. As of March
3, 1997, all Conrail directors and officers as a group owned less than one
percent (1%) of the aggregate outstanding Conrail Common Stock and Conrail
Preferred Stock.
<TABLE>
Amount and Nature
Name and Title of Beneficial
Title of Class of Beneficial Owner Ownership
- -------------- ------------------- -----------------
<S> <C> <C>
Conrail Common Stock H. Furlong Baldwin 2,000
Director
Claude S. Brinegar
Director 1,000
Daniel B. Burke
Director 2,000
Kathleen Foley Feldstein
Director 700
Roger S. Hillas
Director 2,362
E. Bradley Jones
Director 1,000
David B. Lewis
Director 919
John C. Marous
Director 612
Gail J. McGovern
Director 0
Raymond T. Schuler
Director 6,070
David H. Swanson
Director 452
David M. LeVan
Director, Chairman, President and
Chief Executive Officer 138,896(1)
78
<PAGE>
Bruce B. Wilson
Senior Vice President - Merger 28,166(1)
Ronald J. Conway
Senior Vice President - Operations 33,481(1)
John P. Sammon
Senior Vice President - CORE Service Group 23,839(1)
Timothy P. Dwyer
Senior Vice President - Unit Train
Service Group 12,252(1)
All Directors and Executive Officers 577,760
as a group(2)
(1) For Messrs. LeVan, Wilson, Conway, Sammon and Dwyer,
respectively, includes options exercisable within 60 days to acquire
98,896, 0, 27,375, 18,125 and 0 shares of Conrail Common Stock and 1,968,
1,700, 1,903, 1,673 and 1,665 shares of Conrail Preferred Stock allocated
to the accounts of the named officers pursuant to the ESOP. Shares of
Conrail Preferred Stock are convertible into shares of Conrail Common Stock
at any time on a share-for-share basis, subject to certain antidilution
adjustments. As a result, ownership of shares of Conrail Preferred Stock is
deemed to be ownership of an equal number of shares of Conrail Common
Stock.
(2) Includes options exercisable within 60 days to acquire 356,560
shares of Conrail Common Stock and 35,842 shares of Conrail Preferred Stock
allocated to the accounts of individual officers pursuant to the ESOP.
This number also includes shares held by all officers of Consolidated Rail
Corporation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Exchange Act and the rules and regulations promulgated
thereunder require that certain officers, directors and 10% beneficial
owners of Conrail Common Stock file with the Securities and Exchange
Commission, within specified time periods, reports concerning transactions
in Conrail securities. Based on its review of the filed forms or written
representations that, in certain instances, no filing is required, Conrail
believes that all Section 16(a) filing requirements during 1996 were
complied with, except that, due to administrative error, one timely-filed
report of each of Bruce B. Wilson, Senior Vice President-Merger, and Lucy
S.L. Amerman, Vice President-Risk Management, disclosed an incorrect number
of shares sold in a tender offer and stock options granted, respectively.
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
None except as disclosed in Item 10.
79
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement
- ------- -----------------------------
Schedules, and Reports on Form 8-K.
----------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements:
Page
----
Report of Independent Accountants...................... 41
Consolidated Statements of Income for each of the
three years in the period ended December 31, 1996. 42
Consolidated Balance Sheets at December 31, 1996
and 1995 ......................................... 43
Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended December 31, 1996.................... 44
Consolidated Statements of Cash Flows for each of
the three years in the period ended
December 31, 1996 .............................. 45
Notes to Consolidated Financial Statements............. 46
2. Financial Statement Schedules:
The following financial statement schedules should be read in
connection with the financial statements listed in Item 14(a)1
above.
Index to Financial Statement Schedules
--------------------------------------
Page
----
Schedule II Valuation and Qualifying Accounts....... S-1
Schedules other than those listed above are omitted for reasons
that they are not required, are not applicable, or the information
is included in the financial statements or related notes.
80
<PAGE>
3. Exhibits:
Exhibit No.
----------
2.1 Agreement and Plan of Merger among Consolidated Rail
Corporation, Conrail Inc. and Conrail Subsidiary Corporation
dated as of February 17, 1993, filed as Appendix A to the
Proxy Statement of Consolidated Rail Corporation, dated
April 16, 1993 and incorporated herein by reference.
2.2 Agreement and Plan of Merger dated October 14, 1996 among
Conrail Inc., CSX Corporation and Green Acquisition Corp.
(the "Merger Agreement") (incorporated by reference to
Exhibit (c)(1) to the Solicitation/Recommendation Statement
on Schedule 14D-1, originally filed with the Securities and
Exchange Commission ("SEC") on October 16, 1996 (the
"CSX 14D-1")).
2.3 First Amendment to the Merger Agreement, dated as of
November 5, 1996 (incorporated by reference to Exhibit
(c)(7) to the CSX 14D-1).
2.4 Second Amendment to the Merger Agreement, dated as of
December 18, 1996 (the "Second Amendment") (incorporated by
reference to Exhibit (c)(10) to the CSX 14D-1).
2.5 Third Amendment to the Merger Agreement, dated as of March
7, 1997 (the "Third Amendment") (incorporated by reference
to Exhibit (c)(12) to the CSX 14D-1).
3.1 Articles of Incorporation of the Registrant filed as
Appendix B to the Proxy Statement of Consolidated Rail
Corporation, dated April 16, 1993 and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of the Registrant filed as
Exhibit 3 to the Registrant's Report on Form 10-Q for the
quarterly period ended September 30, 1996 and incorporated
herein by reference.
4.1 Articles of Incorporation of the Registrant filed as
Appendix B to the Proxy Statement of Consolidated Rail
Corporation, dated April 16, 1993 and incorporated herein by
reference.
4.2 Form of Certificate of Common Stock, par value $1.00 per
share, of the Registrant, filed as Exhibit 3.4(i)(c) to the
Registrant's Form 8-B dated July 13, 1993 and incorporated
herein by reference.
81
<PAGE>
4.3 Form of Certificate of Series A ESOP Convertible Junior
Preferred Stock, no par value, of the Registrant filed as
Exhibit 3.4(i)(d) to the Registrant's Form 8-B dated July
13, 1993 and incorporated herein by reference.
4.4 Rights Agreement dated as of July 19, 1989, between
Consolidated Rail Corporation and First Chicago Trust
Company of New York, together with Form of Right Certificate
and Summary of Rights to Purchase Common Shares as exhibits
thereto, filed as Exhibit 1 to Consolidated Rail
Corporation's Form 8-K dated July 31, 1989 and incorporated
herein by reference.
4.5 Amendment to Rights Agreement dated as of March 21, 1990,
filed as Exhibit 4.5 to Consolidated Rail Corporation's
Report on Form 8-K dated March 27, 1990 and incorporated
herein by reference.
4.6 Amendment, Assignment and Assumption Agreement, dated as of
February 17, 1993, with respect to the Rights Agreement,
filed as Exhibit 3.4(i)(g) to the Registrant's Form 8-B
dated July 13, 1993 and incorporated herein by reference.
4.7 Amendment to Rights Agreement dated as of October 19, 1994
filed as Exhibit 4.1 to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1994 and incorporated
herein by reference.
4.8 Amendment to Rights Agreement of the Registrant dated as of
September 20, 1995, filed as Exhibit 3.4(i)(i) to the
Registrant's Form 8-B/A dated as of September 25, 1995 and
incorporated herein by reference.
4.9 Form of Indenture between Consolidated Rail Corporation and
The First National Bank of Chicago, as Trustee, with respect
to the issuance of up to $1.25 billion aggregate principal
amount of Consolidated Rail Corporation's debt securities,
filed as Exhibit 4 to Consolidated Rail Corporation's
Registration Statement on Form S-3 (Registration No. 33-
34040) and incorporated herein by reference.
In accordance with Item 601(b)(4)(iii) of Regulation S-K,
copies of instruments of the Registrant and its subsidiaries
with respect to the rights of holders of certain long-term
debt are not filed herewith, or incorporated by reference,
but will be furnished to the Commission upon request.
10.1 Second Amended and Restated Northeast Corridor Freight
Operating Agreement dated October 1, 1986 between National
Railroad Passenger Corporation and Consolidated Rail
82
<PAGE>
Corporation, filed as Exhibit 10.1 to Consolidated Rail
Corporation's Registration Statement on Form S-1
(Registration No. 33-11995) and incorporated herein by
reference.
10.2 Letter agreements dated September 30, 1982 and July 19, 1986
between Consolidated Rail Corporation and The Penn Central
Corporation, filed as Exhibit 10.5 to Consolidated Rail
Corporation's Registration Statement on Form S-1
(Registration No. 33-11995) and incorporated herein by
reference.
10.3 Letter agreement dated March 16, 1988 between Consolidated
Rail Corporation and Penn Central Corporation relating to
hearing loss litigation, filed as Exhibit 19.1 to
Consolidated Rail Corporation's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1988 and incorporated
herein by reference.
10.4 Conrail Stock Option Agreement, dated as of October 14, 1996
(incorporated by reference to Exhibit (c)(2) of the CSX 14D-
1).
Management Compensation Plans and Contracts
-------------------------------------------
10.5 Consolidated Rail Corporation 1993 Annual Performance
Achievement Reward Plan, filed as Exhibit 3.10(v) to the
Registrant's Form 8-B dated July 13, 1993 and incorporated
herein by reference.
10.6 Consolidated Rail Corporation 1994 Annual Performance
Achievement Reward Plan for Officers, filed as Exhibit 10.7
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by
reference.
10.7 Consolidated Rail Corporation 1995 Annual Performance
Achievement Reward Plan for Officers, filed as Exhibit 10.6
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by
reference.
10.8 Consolidated Rail Corporation 1996 Annual Performance
Achievement Reward Plan for Officers.
10.9 Retirement Plan for Non-employee Directors, as amended
February 21, 1990, filed as Exhibit 10.10 to Consolidated
Rail Corporation's Annual Report on Form 10-K for the year
ended December 31, 1989 and included herein by reference.
83
<PAGE>
10.10 Conrail 1987 Long-Term Incentive Plan, filed as Exhibit 4.4
to Consolidated Rail Corporation's Registration Statement on
Form S-8 (Registration No. 33-19155) and incorporated herein
by reference.
10.11 Conrail 1991 Long-Term Incentive Plan, amended and restated as
of May 15, 1996, filed as Appendix A to the Registrant's Proxy
Statement dated April 3, 1996 and incorporated herein by
reference.
10.12 Conrail Senior Executive Performance Plan, filed as Appendix
A to the Registrant's Proxy Statement for the 1995 Annual
Meeting of Shareholders, dated April 3, 1995, and
incorporated herein by reference.
10.13 Form of Severance Agreement between the Registrant and each
of the officers of Consolidated Rail Corporation, dated as
of August 1, 1995, filed as Exhibit 10.1 to the Registrant's
Report on Form 10-Q for the quarterly period ended September
30, 1995 and incorporated herein by reference.
11 Statement of earnings per share computations.
12 Computation of the ratio of earnings to fixed charges.
21 Subsidiaries of the Registrant, filed as Exhibit 21 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
23 Consent of Independent Accountants.
24 Each of the officers and directors signing this Annual
Report on Form 10-K has signed a power of attorney,
contained on page 86 hereof, with respect to amendments to
this Annual Report.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
October 22, 1996, in connection with Merger Agreement between
CSX Corporation and Consolidated Rail Corporation.
84
<PAGE>
(c) Exhibits.
--------
The Exhibits required by Item 601 of Regulation S-K as listed in Item
14(a)3 are filed herewith or incorporated herein by reference.
(d) Financial Statement Schedules.
-----------------------------
Financial statement schedules and separate financial statements
specified by this Item are included in Item 14(a)2 or are otherwise
omitted for reasons that they are not required or are not applicable.
85
<PAGE>
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES" hereby
authorizes Timothy T. O'Toole and John A. McKelvey, or either of them, to
execute in the name of each such person, and to file, any amendment to this
report and hereby appoints Timothy T. O'Toole and John A. McKelvey, or
either of them, as attorneys-in-fact to sign on his or her behalf,
individually and in each capacity stated below, and to file any and all
amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act 1934, Conrail Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONRAIL INC.
Date: March 19, 1997
By /s/ David M. LeVan
----------------------
David M. LeVan
Chairman, President and Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on this 19th day of March, 1997, by the
following persons on behalf of Conrail Inc. and in the capacities
indicated.
Signature Title
/s/ David M. LeVan
- ------------------ Chairman, President and Chief
David M. LeVan Executive Officer and Director
(Principal Executive Officer)
/s/ John A. McKelvey
- ------------------- Senior Vice President-Finance
John A. McKelvey (Principal Financial Officer)
/s/ Donald W. Mattson
- --------------------- Vice President-Controller
Donald W. Mattson (Principal Accounting Officer)
86
<PAGE>
/s/ H. Furlong Baldwin Director
- ----------------------
H. Furlong Baldwin
/s/ Claude S. Brinegar Director
- ----------------------
Claude S. Brinegar
Director
- -------------------
Daniel B. Burke
/s/ Kathleen Foley Feldstein Director
- ----------------------------
Kathleen Foley Feldstein
/s/ Roger S. Hillas Director
- -------------------
Roger S. Hillas
/s/ E. Bradley Jones Director
- --------------------
E. Bradley Jones
/s/ David B. Lewis Director
- ------------------
David B. Lewis
/s/ John C. Marous Director
- ------------------
John C. Marous
/s/ Gail J. McGovern Director
- --------------------
Gail J. McGovern
/s/ Raymond T. Schuler Director
- ----------------------
Raymond T. Schuler
Director
- --------------------
David H. Swanson
87
<PAGE>
E-1
EXHIBIT INDEX
Exhibit No.
- ----------
10.8 Consolidated Rail Corporation 1996 Annual Performance
Achievement Reward Plan for Officers
11 Statement of earnings per share
computations
12 Computation of the ratio of earnings
to fixed charges
23 Consent of Independent Accountants
27 Financial Data Schedule
Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 3.1, 3.2, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6,
4.7, 4.8, 4.9, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.9, 10.10,
10.11, 10.12, 10.13 and 21 are incorporated herein by reference. Powers of
attorney with respect to amendments to this Annual Report are contained on
page 86.
88
<PAGE>
</TABLE>
Exhibit 10.8
------------
CONSOLIDATED RAIL CORPORATION
ANNUAL PERFORMANCE ACHIEVEMENT REWARD PLAN FOR 1996
FOR OFFICERS
1. Definitions
-----------
When used in this document, the following terms shall
have the meanings set forth below:
Board means the Board of Directors of Conrail.
-----
Conrail means the Consolidated Rail Corporation.
-------
The Company means Conrail Inc.
-----------
Operating Ratio means the percentage determined by di-
---------------
viding (a) operating expenses by (b) revenues, as shown on
Conrail's consolidated financial statements.
Cost of Risk Ratio means the percentage determined by
------------------
dividing (a) the sum of the cost of risk elements (as
designated by the Risk Management Department) by (b) Conrail's
railroad operating revenues.
Participant means an officer of Conrail who participates
-----------
in the Plan in accordance with Section 3.
Phantom Shares means shares credited to a Participant's
---------------
account each of which shall be deemed equivalent to the
promise to convert one phantom share to one share of Conrail
Inc. common stock.
Plan means the Consolidated Rail Corporation Annual
----
Performance Achievement Reward Plan for 1996, as set forth in
this document and as may be amended from time to time.
<PAGE>
Salary means the salary earned by a Participant in 1996
------
from employment with Conrail. For purposes of this Plan,
Salary shall include salary earned pursuant to any holiday,
vacation, or sick leave policy of Conrail, salary deferred
pursuant to the Consolidated Rail Corporation Matched Savings
Plan, and salary contributed pursuant to the Consolidated Rail
Corporation Flexible Benefits Plan. Except as otherwise
provided in the preceding sentence, Salary shall not include
any amount payable pursuant to receipt of a Spot Award or a
1995 Selective Cash Award paid in 1996 or to an employee bene
fit or incentive compensation plan.
2. Introduction
------------
The Board has approved the implementation of this Plan.
The Board expects that the Plan will provide an incentive for
enhanced individual and corporate performance and aid Conrail
in attracting and retaining capable employees.
3. Eligibility
-----------
Each officer of Conrail, who is employed during 1996,
shall participate in the Plan.
4. Prerequisite for Award
----------------------
Anything in this Plan to the contrary notwithstanding, no
award shall be payable under the Plan in the event actual
operating income for 1996, as shown on Conrail's consolidated
financial statements, is less than $690 million.
5. Amount of Award
---------------
(a) Under the Plan, a Participant may earn an award
equal to a percentage (or percentages) of his/her Salary.
This award may consist of two parts, the Annual Performance
Achievement Reward ("APAR") and the Annual Performance
Achievement Reward Plus ("APAR Plus"). The APAR percentage(s)
shall depend upon the position held by the Participant and/or
the performance of Conrail, measured by the relationship of
(i) the Operating Ratio for 1996, to (ii) the Operating Ratio
goal set by the Board (or its delegate) for purposes of the
Plan and the relationship of (iii) the Cost of Risk Ratio for
1996 to (iv) the Cost of Risk Ratio goal set by the Board (or
its delegate) for purposes of the Plan, both as certified by
Conrail's chief financial officer, after taking into account
any amounts payable pursuant to the Plan that are not taken
into account in the Operating Ratio goal set by the Board (or
its delegate) for purposes of the Plan. The percentage(s)
shall be determined in accordance with one of three schedules.
The APAR Plus percentage shall depend upon the
performance of Conrail, as measured by the relationship of (i)
the Operating Ratio for 1996 to (ii) the Operating Ratio goal
set by the Board (or its delegate) for purposes of the Plan.
Conrail shall furnish each Participant with a copy of the
schedule(s) of awards applicable to him/her.
- 2 -
<PAGE>
(b) A Participant's award shall be pro-rated, as
provided in Section 8, in the event he/she participates in the
Plan for less than all of 1996 or moves into a position cov
ered under a different schedule of awards. The Participant's
award shall equal the sum of the partial awards computed by
multiplying (i) the Salary earned by the Participant while
covered under a schedule of awards by (ii) the percentage of
Salary determined in accordance with such schedule.
(c) Anything to the contrary in this Section 5 not
withstanding, a Participant's award may be reduced by up to 50
percent by Conrail's President and Chief Executive Officer (or
his delegate(s)) on the basis of individual or group
performance.
6. Election to Defer Awards
------------------------
(a) Each Participant shall be entitled to elect
irrevocably to defer, for a period of one, two, three, four,
or five years, all or a portion of any APAR award payable to
him/her pursuant to this Plan. The minimum deferral permitted
is 10 percent and a deferral may be made in any percentage
above this minimum. The opportunity to defer any APAR award
is available only to Participants who reside in the United
States and are subject to U.S. federal income tax withholding.
A Participant who elects to defer his/her APAR award shall be
credited with Phantom Shares in an account maintained for each
Participant. Such elections must be made no later than July
27, 1996, on forms provided by Conrail's Assistant Vice
President-Compensation and Benefits for this purpose.
(b) A Participant who elects to defer an APAR award in
Phantom Shares shall be credited with such shares equal in
value to the amount of his/her deferred award (the "Deferred
Shares"), plus additional Phantom Shares equal in value to 10
percent (10%) of his/her deferred award times the period of
deferral selected, up to a maximum of fifty percent (50%) (the
"Bonus Shares"). The number of Phantom Shares so awarded
shall be determined as of the date the non-deferred portions
of awards are or would have been paid.
(c) The dividend equivalents paid on such Deferred
Shares and Bonus Shares shall be re-invested as additional
Phantom Shares for the Participant or paid in cash based upon
the Participant's election included in the election form noted
in Section 6.(a) above. The Deferred and Bonus Shares of a
Participant shall not be entitled to voting rights.
(d) The APAR Plus award shall not be eligible for defer
ral.
7. Time and Form of Payments
-------------------------
(a) In the case of a Participant who has made an
election to defer, the Deferred Shares and the Participant's
Bonus Shares shall be paid in the form of Conrail Inc. common
stock, recorded in electronic book entry at First Chicago
Trust Company of New York, the Company's transfer agent, as
soon as practicable after expiration of the deferral period
chosen by the Participant. Such stock may be issued from
Conrail Inc.'s Stock Employee Compensation Trust or from the
Company's authorized but unissued shares. Any portion of an
APAR award not deferred by a Participant shall be paid to
him/her in cash during the first quarter of 1997.
- 3 -
<PAGE>
(b) In the case of a Participant who has made no
election to defer, the Participant's award shall be paid to
him/her in cash in a single installment during the first
quarter of 1997.
8. Special Payment Rules
---------------------
Anything in this Plan to the contrary notwithstanding, a
Participant who is dismissed for cause prior to receipt of any
portion of his/her award shall forfeit such portion of the
award. A Participant who resigns from Conrail during 1996
shall receive a prorated portion of his/her APAR and APAR Plus
awards. The amount of the prorated award shall be determined
by applying a fraction to the Participant's Salary determined
up until his/her date of termination. The numerator of this
fraction is the number of days of the year until the
termination occurred and the denominator is 366, the number of
days in the year. A Participant who resigns from Conrail
after December 31, 1996, but before the date in the first
quarter of 1997 on which payments are made under the Plan,
shall receive a full APAR and APAR Plus award. If the
Participant has elected to defer his/her award, such election
is void and the prorated or full award will be paid in cash in
the first quarter of 1997.
A Participant who defers his/her award and resigns from
Conrail during the deferral period shall receive a payment of
his/her APAR award in cash. Such payment shall be equal to
the lesser of the amount of his/her deferred award made in the
first quarter of 1997 or the number of phantom shares times
the fair market value of Conrail Inc. common stock on the date
of his/her termination. Any shares accumulated through the
election to reinvest dividend equivalents will be paid in cash
at the fair market value of Conrail Inc. common stock on the
date of his/her termination. Such Participant shall forfeit
all Bonus Shares.
If a Participant who has elected to defer all or a
portion of his/her APAR award in the form of Deferred and
Bonus Shares retires with the right to an immediate pension
under the Supplemental Pension Plan of Consolidated Rail Corpo
ration (the "Pension Plan") prior to receipt of the deferred
award, the Participant shall receive shares of Conrail Inc.
common stock representing the Participant's deferred APAR
award recorded in electronic book entry at First Chicago Trust
Company of New York. The matching or Bonus Shares shall be
prorated on the basis of a fraction, the denominator of which
shall be the number of days from the date of the award through
the end of the elected deferral period and the numerator shall
be the number of days from the date of the award through the
last day of employment. This proration factor shall be
multiplied by the number of Bonus Shares and the resulting
number of Bonus Shares shall be distributed to the
Participant. The balance of the Bonus Shares shall be
forfeited on the last day of the Participant's employment.
If during 1996, a Participant is force reduced, moves
from a non-agreement position to an agreement position, goes
on a leave of absence, becomes disabled or dies, such
- 4 -
<PAGE>
Participant's award shall be prorated and paid in the first
quarter of 1997 on the basis of a fraction applied to the
Participant's Salary, the numerator of which is the number of
days of the year until the event occurred and the denominator
of which is 366, the number of days in the year. The amount
of the award shall be paid in cash.
A Participant who is force reduced, moves from a non-
agreement position to an agreement position or goes on a leave
of absence after the end of 1996, but before payments under
the Plan are made shall receive a full APAR and APAR Plus
award. If the Participant has elected to defer his or her
APAR award, the election is void and the APAR award is payable
in cash. A Participant who becomes disabled or dies after the
end of 1996, but before payments under the Plan are made shall
receive a full APAR and APAR Plus award. If the Participant
has elected to defer his/her APAR award, such award will be
paid in cash when the award is made to the Participant or
his/her beneficiary(ies) or estate.
If, after the APAR award is made in the first quarter of
1997, a Participant is force reduced, becomes disabled or
dies, his/her Deferred and Bonus Shares shall be distributed
in full to him/her or to his/her beneficiary(ies) or estate in
the form of Conrail Inc. common stock recorded in electronic
book entry at First Chicago Trust Company of New York. If
after the APAR award is made in the first quarter of 1997 a
Participant goes on a leave of absence or to an agreement
position, his/her Deferred and Bonus shares shall be retained
in his/her account and distributed in the form of Conrail Inc.
common stock recorded in electronic book entry at First
Chicago Trust Company of New York at the end of the deferral
period selected by the Participant; unless he/she is
dismissed for cause, in which case such shares shall be
forfeited.
9. Acceleration of Awards Upon a Change of Control
-----------------------------------------------
Notwithstanding any provision of the Plan to the
contrary, upon the occurrence of a Change of Control, as
defined below, all terms and conditions with respect to
Phantom Stock then outstanding shall be deemed satisfied as of
the date of the Change of Control for all purposes hereunder,
and Conrail Inc. common stock issued in settlement of such
Phantom Stock shall be payable to Participants as soon as
practicable following such change of control.
A Change of Control hereunder shall be deemed to have
occurred on the earliest of the following dates: (i) the date
any entity, person or group (within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of
1934, as amended) other than the Company or any of its
Subsidiaries or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its
- 5 -
<PAGE>
Subsidiaries, shall have become the beneficial owner of, or
shall have obtained voting control over, outstanding
securities issued by the Company entitled to cast 20% or more
of the votes which all outstanding securities issued by the
Company are entitled to cast in an election of directors of
the Company; (ii) the date the shareholders of the Company and
the shareholders of the other constituent corporations have
approved a definitive agreement to merge or consolidate the
Company with or into another corporation other than in either
case, a merger or consolidation of the Company in which
holders of shares of common stock of Conrail Inc. immediately
prior to the merger or consolidation have at least 80% of the
ownership of common stock of the surviving corporation
immediately after the merger or consolidation, which common
stock is then held in the same proportion as such holders'
ownership of Common Stock of Conrail Inc. immediately before
the merger or consolidation; (iii) the date the shareholders
of the Company approve a definitive agreement to sell or
otherwise dispose of substantially all the assets of the
Company; or (iv) the date there shall have been a change in
the composition of the Company's Board such that a majority of
the Company's Board shall have been members thereof for less
than twelve (12) months, unless the nomination for election of
each new director who was not a director at the beginning of
such twelve (12) month period was approved by a vote of at
least two-thirds of the directors then still in office who
were directors at the beginning of such period.
To the extent a Participant hereunder is a party to an
agreement with the Company as authorized by its Board on June
21, 1995, awards hereunder shall be subject to the terms of
such agreement, in addition to the foregoing provisions of
this Section 9. In resolving any conflict between the terms
of such agreement and the terms of the Plan, the provisions
which are most favorable to the Participant shall prevail.
10. Withholding for Taxes
---------------------
Payments pursuant to this Plan shall be reduced by
amounts sufficient to satisfy any Federal, state, and/or local
tax withholding requirements. With respect to payments in the
form of stock, an amount of stock shall be withheld from the
award that is sufficient to enable Conrail to satisfy any
Federal, state, and/or local tax withholding requirements.
11. Designation of Beneficiary
A Participant may designate a beneficiary(ies) to receive
any payment pursuant to the Plan that has not been made prior
to the Participant's death. Such designation must be
submitted to Conrail's Assistant Vice President-Compensation
and Benefits, on a form provided for this purpose. Such form
is available upon request from the Administrator-APAR, 18-B
2001 Market Street, Philadelphia, PA 19101-1418. In the ab
sence of such a designation, a Participant's most recent
designation of beneficiary(ies) pursuant to a prior annual
performance achievement reward plan maintained by Conrail
shall be treated as his/her designation for purposes of this
Plan.
- 6 -
<PAGE>
12. Duration, Amendment, and Termination of Plan
--------------------------------------------
The Plan shall take effect on January 1, 1996. Conrail,
by action of the Board, may amend or terminate the Plan at any
time. In addition, Conrail's President and Chief Executive
Officer may amend the eligibility requirements and/or the
schedules of awards under the Plan, in connection with a re-
assessment of positions or changes in organization or
staffing. The Plan shall terminate automatically as of
January 1, 1997, unless terminated earlier by Conrail;
provided, however, that such termination shall not preclude
the subsequent payment of awards earned under the Plan.
- 7 -
<PAGE>
Exhibit 11
----------
CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
[CAPTION]
($ In Millions Except Per Share)
Years ended December 31,
------------------------
1996 1995 1994
[S] ---- ---- ----
Primary [C] [C] [C]
- -------
Net income $342 $264 $324
Dividends declared on Series A ESOP
convertible junior preferred stock
(ESOP Stock), net of tax benefits (12) (13) (13)
---- ---- ----
Adjusted net income $330 $251 $311
==== ==== ====
Fully Diluted
- -------------
Net income 342 264 324
Nondiscretionary adjustment (1) (2) (3) (5)
---- ---- ----
Adjusted net income $340 $261 $319
==== ==== ====
Page 1 of 3
<PAGE>
Exhibit 11
----------
CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
[CAPTION]
($ In Millions Except Per Share)
Years ended December 31,
-----------------------------------
1996 1995 1994
---------- ----------- ----------
[S] [C] [C] [C]
Weighted average number of shares (2)
Primary
Weighted average number of
common shares outstanding 76,903,665 78,144,694 79,089,464
Effect of shares issuable under
employee stock compensation
plans 725,160 589,253 585,317
---------- ---------- ----------
77,628,825 78,733,947 79,674,781
========== ========== ==========
Fully diluted
Weighted average number of
common shares outstanding 76,903,665 78,144,694 79,089,464
ESOP Stock 9,393,275 9,799,611 9,887,940
Effect of shares issuable under
employee stock compensation
plans 1,028,635 758,407 585,317
---------- --------- ----------
87,325,575 88,702,712 89,562,721
========== ========== ==========
Net income per common share
Primary $4.25 $3.19 $3.90
Fully diluted 3.89 2.94 3.56
Page 2 of 3
<PAGE>
Exhibit 11
----------
CONRAIL INC.
------------
EARNINGS PER SHARE COMPUTATIONS
-------------------------------
Notes: 1. Represents the increase, net of income tax benefits, in
ESOP-related expenses assuming conversion of all ESOP
Stock to common stock.
2. Shares held by the Employee Benefits Trust (the "Trust")
are not considered outstanding for earnings per share
computations until issued by the Trust.
Page 3 of 3
<PAGE>
Exhibit 12
----------
CONRAIL INC.
-----------
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
--------------------------------------------------------
[CAPTION]
($ In Millions)
<TABLE>
Quarters Ended Quarters Ended Quarters Ended Quarters Ended Years Ended
March 31, June 30, September 30, December 31, December 31,
-------------- -------------- -------------- -------------- -----------------
1996 1995 1996 1995 1996 1995 1996 1995(1) 1996 1995 1994
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Pre-tax income (loss) $ 50 $ 91 $38 $165 $216 $188 $227 $(52) $531 $392 $532
Add:
Interest expense 47 48 46 50 44 49 45 47 182 194 192
Rental expense
interest factor 14 14 14 16 12 12 11 11 51 53 42
Less equity in
undistributed
earnings of 20-50%
owned companies (4) (5) (4) (5) (5) (4) (8) (6) (21) (20) (17)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Earnings available for
fixed charges $107 $148 $94 $226 $267 $245 $275 $ - $743 $619 $749
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
Fixed Charges
- -------------
Interest expense 47 48 46 50 44 49 45 47 182 194 192
Rental expense interest
factor 14 14 14 16 12 12 11 11 51 53 42
Capitalized interest 1
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Fixed charges $ 61 $ 62 $60 $ 66 $ 56 $ 61 $ 56 $ 58 $233 $247 $235
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
Ratio of earnings to
fixed charges 1.75x 2.39x 1.57x 3.42x 4.77x 4.02x 4.91x - 3.19x 2.51x 3.19x
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
<FN>
Note: For the purpose of computing the ratio of earnings to fixed charges, earnings represent income before income
taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges
represent interest expense together with interest capitalized and a portion of rent under long-term operating
leases representative of an interest factor.
(1) In the fourth quarter of 1995, the Company recorded an asset disposition charge of $176 million (after tax
benefits of $109 million). After this charge, earnings were insufficient by $58 million to cover fixed charges
for the quarter.
</FN>
</TABLE>
<PAGE>
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements
on Form S-3 (Nos. 33-64670 and 33-62929) and in
the Registration Statements on Form S-8 (Nos. 33-19155, 33-
44140, 33-57717, 33-60445 and 333-6513) of Conrail Inc. and
subsidiaries of our report dated January 21, 1997, except as
to Note 2, which is as of March 7, 1997, included in this Form
10-K.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, PA 19103
March 24, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
----------
CONRAIL INC.
FINANCIAL DATA SCHEDULE
($ In Millions Except Per Share)
<CAPTION>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
<S> <C>
<MULTIPLIER> 1,000,000
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 12-MOS
<CASH> 30
<SECURITIES> 0
<RECEIVABLES> 630
<ALLOWANCES> 0
<INVENTORY> 139
<CURRENT-ASSETS> 1,117
<PP&E> 6,590
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,402
<CURRENT-LIABILITIES> 1,092
<BONDS> 1,876
0
211
<COMMON> 88
<OTHER-SE> 2,808
<TOTAL-LIABILITY-AND-EQUITY> 8,402
<SALES> 0
<TOTAL-REVENUES> 3,714
<CGS> 0
<TOTAL-COSTS> 3,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182
<INCOME-PRETAX> 531
<INCOME-TAX> 189
<INCOME-CONTINUING> 342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342
<EPS-PRIMARY> 4.25
<EPS-DILUTED> 3.89
<PAGE>
</TABLE>
Schedule II
CONRAIL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
[CAPTION]
(In Millions)
<TABLE>
Additions
----------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other At End
Description of Period Expenses Accounts Deductions of Period
- ----------- ----------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(1)
1994
Casualty reserves
Current............... $ 93 $(10) (2) $103
Noncurrent............ 132 $172 $ 12 104 (3) 212
Allowance for disposition
of property and
equipment (4)........... 256 15 241
1995
Casualty reserves
Current............... 103 3 (4) (2) 110
Noncurrent............ 212 171 14 180 (3) 217
Allowance for disposition
of property and
equipment (4) (5)....... 241 261 63 439
1996
Casualty reserves
Current............... 110 (31) (2) 141
Noncurrent............ 217 165 11 203 (3) 190
Allowance for disposition
of property and
equipment (4)............ 439 31 408
(1) Includes charges to property accounts in connection with construction
projects and the recording of receivables from third parties.
(2) Includes net transfers from noncurrent.
(3) Transfers to current.
(4) Deductions of $15 million, $63 million and $31 million in 1994, 1995
and 1996, respectively, represent net losses on asset dispositions.
(5) In 1995, the Company recorded an asset disposition charge, which
resulted from a review of the Company's route system and other operating
assets to determine those that no longer effectively and economically
support current and expected operations. The Company identified and has
committed to sell 1,800 miles of rail lines that are expected to provide
proceeds substantially less than net book value. In addition, other
assets, principally yards and side tracks, identified for disposition have
been written down to estimated net realizable value.
S-1
</TABLE>
<PAGE>
