Document/Exhibit Description Pages Size
1: 8-K Current Report 5 22K
2: EX-10 Amended and Restated Credit Agreement 79± 291K
3: EX-15 Awareness Letter of Price Waterhouse LLP 1 7K
4: EX-23 Consent of Price Waterhouse LLP 1 7K
5: EX-99.1 Joint Press Release Issued 5/27/97 2± 9K
6: EX-99.2 Joint Press Release Issued 6/3/97 1 7K
7: EX-99.3 Audited F/S of Conrail at 12/31/96 & 12/31/95 23± 98K
8: EX-99.4 Unaudited F/S of Conrail at 3/31/97 & 3/31/96 4 23K
9: EX-99.5 Pro Forma Consolidated Financial Statements 9 39K
EX-99.3 — Audited F/S of Conrail at 12/31/96 & 12/31/95
Exhibit Table of Contents
Exhibit 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Conrail Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
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.
/s/ 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
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
---------------------------
($ In Millions Except Per Share Data) 1996 1995 1994
------ ------ ------
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
See accompanying notes.
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------
($ In Millions) 1996 1995
------ ------
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 $8,424
====== ======
See accompanying notes.
[Enlarge/Download Table]
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Unearned Additional Employee
Preferred ESOP Common Paid-in Benefits Retained Treasury
($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock
--------- ------------ ------ ---------- -------- -------- --------
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 $(347)
====== ====== ====== ====== ====== ====== ======
See accompanying notes.
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------
($ In Millions) 1996 1995 1994
----- ----- -----
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
===== ===== =====
See accompanying notes.
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 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.
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.
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 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.
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
==== ====
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
=====
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.
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.
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
====== ======
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%.
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.
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.
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.
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).
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 $13.12 per share, respectively.
Had the compensation cost for the Company's 1996 and 1995 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income, primary earnings per share and fully diluted earnings
per share for 1996 and 1995 would approximate the pro forma amounts below ($
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.
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.
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.
CRC has received three adverse jury verdicts related to railroad crossing
accidents in Ohio that include significant punitive damage awards that
collectively approximate $30 million. CRC believes the punitive damage awards
in those cases are improper and that it has meritorious defenses, which it
plans to pursue on appeal. The Company is not presently able to reasonably
estimate the ultimate outcome of these cases, and accordingly, no expense for
such awards has been recorded as of December 31, 1996.
As part of the Merger Agreement (Note 2), the Company may be a party to
certain stock purchase options or, under certain circumstances, be required
to pay substantial termination fees.
14. Condensed Quarterly Data (Unaudited)
-----------------------------------
[Enlarge/Download Table]
First Second Third Fourth
------------ ------------- ------------- ------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
($ In Millions Except Per Share)
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
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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.
Dates Referenced Herein and Documents Incorporated by Reference
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